<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 23, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BIRCH TELECOM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 43-1766929
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Number) Identification No.)
</TABLE>
------------------------
2020 BALTIMORE AVENUE
KANSAS CITY, MISSOURI 64108
(816) 300-3000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------
BRADLEY A. MOLINE
CHIEF FINANCIAL OFFICER
BIRCH TELECOM, INC.
2020 BALTIMORE AVENUE
KANSAS CITY, MISSOURI 64108
(816) 300-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
KIRK A. DAVENPORT, ESQ. RISE B. NORMAN, ESQ.
LATHAM & WATKINS SIMPSON THACHER & BARTLETT
885 THIRD AVENUE 425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10017
(212) 906-1200 (212) 455-2000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(A) REGISTRATION FEE
<S> <C> <C>
Common stock, $.001 par value...................... $230,000,000 $60,720
</TABLE>
(a) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) promulgated under the Securities Act of 1933. A
portion of the proposed maximum aggregate offering price represents shares
that are to be offered outside of the United States but that may be resold
from time to time in the United States. Such shares are not being registered
for the purpose of sales outside the United States.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
SHARES
[LOGO]
COMMON STOCK
- ------------------------------------------------------------
This is our initial public offering of shares of common stock. No public market
currently exists for our shares. We are offering shares. We have made
application to have our common stock approved for listing on the Nasdaq National
Market under the symbol "BRCH." We anticipate the public offering price to be
between $ and $ per share.
INVESTING IN THE SHARES INVOLVES RISKS. RISK FACTORS BEGIN ON PAGE .
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
<S> <C> <C>
PER SHARE TOTAL
Public offering price $ $
Underwriting discount $ $
Proceeds to Birch Telecom $ $
</TABLE>
We have granted the underwriters the right to purchase up to additional
shares within 30 days to cover any over-allotments.
Lehman Brothers expects to deliver the shares on or about , 2000.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
FIRST UNION SECURITIES, INC.
J.P. MORGAN & CO.
THOMAS WEISEL PARTNERS LLC
FIDELITY CAPITAL MARKETS
A DIVISION OF NATIONAL
FINANCIAL SERVICES
CORPORATION
<PAGE>
, 2000
<PAGE>
[INSIDE FRONT COVER]
[Map of United States showing current markets and expansion regions]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 6
Use Of Proceeds....................... 18
Dividend Policy....................... 18
Capitalization........................ 19
Dilution.............................. 20
Selected Consolidated Financial and
Operating Data...................... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 32
Regulation............................ 44
Management............................ 54
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Certain Relationships and Related
Transactions........................ 64
Security Ownership of Certain
Beneficial Owners and Management.... 67
Description of Certain Indebtedness... 69
Description of Capital Stock.......... 70
Shares Eligible For Future Sale....... 73
Certain United States Federal Tax
Considerations for Non-United States
Holders............................. 75
Underwriting.......................... 77
Legal Matters......................... 80
Experts............................... 80
Where You Can Find More Information... 80
Index to Financial Statements......... F-1
</TABLE>
ABOUT THIS PROSPECTUS
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act of 1933, as amended, with respect to the shares of common stock
offered by this prospectus. This prospectus, which is a part of the registration
statement, does not contain all of the information set forth in the registration
statement. For further information about us and our common stock, you should
refer to the registration statement. This prospectus summarizes material
provisions of contracts and other documents to which we refer you. Since the
prospectus may not contain all of the information that you may find important,
you should review the full text of these documents. We have included copies of
these documents as exhibits to our registration statement.
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING US AND OUR COMMON STOCK BEING SOLD IN THE OFFERING AND OUR
FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE SPECIFICALLY STATED, INFORMATION IN THIS
PROSPECTUS GIVES PRO FORMA EFFECT TO:
- THE EXERCISE BY KOHLBERG KRAVIS ROBERTS & CO. ON MARCH 23, 2000 OF ITS
OPTIONS TO INVEST AN ADDITIONAL $50.0 MILLION IN OUR COMPANY; AND
- THE CONVERSION OF ALL OUTSTANDING SHARES OF OUR PREFERRED STOCK INTO
SHARES OF COMMON STOCK, WHICH WILL OCCUR AUTOMATICALLY UPON COMPLETION OF
THE OFFERING.
IN ADDITION, UNLESS OTHERWISE SPECIFICALLY STATED, INFORMATION IN THIS
PROSPECTUS ASSUMES THE UNDERWRITERS DO NOT EXERCISE THEIR OPTION TO PURCHASE
ADDITIONAL SHARES IN THE OFFERING.
OUR COMPANY
We are a rapidly growing integrated communications provider. We seek to
become the leading provider of telecommunications services for small and
mid-sized businesses in each of the cities we serve. We offer state-of-the-art
telecommunications services to our customers, who today are located throughout
Missouri, Kansas and Texas. These voice and data service offerings include local
and long distance telephone service, Internet access, web hosting, integrated
voice and data transmission over broadband lines and customer premises equipment
sales and services. We offer these services to our customers through a
combination of leased and owned network facilities. We are currently deploying
collocations and transmission equipment throughout our markets to deliver
digital subscriber line service, which will support dedicated high-speed
Internet access and eventually voice services. We expect to have over 130
collocations operational by the end of this year. Our revenue for the year ended
December 31, 1999 was $60.5 million, a 132% increase over 1998.
We have increased our local access lines in service to over 135,000 and now
serve over 20,000 business customers, making us one of the largest integrated
communications providers in the territory served by Southwestern Bell. We intend
to continue to grow our customer base rapidly. We currently serve 17 markets
that have populations ranging in size from 95,000 to 4.5 million. We average
6,000 lines in each of those markets. We intend to offer our services in an
additional 20 markets before the end of 2001. We expect to expand our operations
in Texas and into Oklahoma in the second quarter of this year and to commence
service in the regions served by Ameritech and BellSouth in 2001. We have
developed systems and network capabilities and have an experienced sales force
and customer service team that position us to rapidly penetrate new markets and
serve a growing number of customers. We believe that our success to date is
largely attributable to our customer-focused philosophy and our aggressive
marketing strategy.
We have developed a capital-efficient network platform to deliver voice
services to our customers. In most of our markets, we lease substantially all of
the network elements from the incumbent telephone company and use our advanced
back-office systems to combine these elements into integrated Birch-branded
voice services. This network delivery method, which we call the unbundled
network element platform, or UNE-P, has allowed us to offer voice services to
customers located virtually anywhere in our markets and achieve high gross
margins and superior returns on incremental capital invested. UNE-P allows us to
minimize current capital expenditures and maintain design flexibility for the
next generation of telecommunications technology.
We currently operate 26 data switches and a high-speed network
interconnecting these switches to carry data traffic across our region. We
intend to be one of the first carriers in our markets to deliver broadband
facilities directly to our small and mid-sized business customers. By
implementing digital subscriber line technology to transmit both data and voice
traffic over a single line, we expect to
1
<PAGE>
significantly reduce the per-line costs of providing and leasing telephone
lines. These savings should allow us to offer a more attractive package of data
and voice services to our customers and improve our gross margins. We are
beta-testing technologies provided by third-party vendors that we expect will
allow us to provide voice services over digital subscriber lines.
We offer our customers simplified packages of voice and high-speed data
services designed for small and mid-sized businesses, which are conveniently
billed on a single invoice. In each of our markets, we deploy a locally based
sales force that consults with our customers to assist them in selecting an
appropriate service package that will meet their needs. Our 170-person direct
sales force is supported by aggressive multi-media advertising campaigns
designed to enhance awareness of the Birch name. We believe that our
customer-oriented approach to small and mid-sized businesses provides us with an
advantage over incumbent telephone companies, who are not focused on these
customers.
OUR STRATEGY
We believe that our business is poised for rapid expansion and that our
experienced management team is well prepared to execute our focused business
strategy. The key elements of our strategy include:
- FOCUSING ON SMALL AND MID-SIZED BUSINESS CUSTOMERS;
- PROVIDING COMPLETE SERVICE PACKAGES THAT ARE TAILORED TO OUR CUSTOMERS;
- CREATING A STRONG BRAND PRESENCE;
- DEPLOYING A DIRECT SALES FORCE IN EACH OF OUR MARKETS;
- INVESTING IN INDUSTRY-LEADING, SCALABLE BACK OFFICE SYSTEMS;
- MAINTAINING MAXIMUM NETWORK FLEXIBILITY;
- EXPANDING OUR GEOGRAPHIC REACH; AND
- GROWING THROUGH ACQUISITIONS.
RECENT EVENTS
In August 1999, an affiliate of KKR purchased $60.0 million of our preferred
stock and, on March 23, 2000, exercised options to invest an additional
$50.0 million in our company. KKR's investment will be converted into common
stock at the closing of the offering. KKR is our largest stockholder and, after
giving effect to this exercise, KKR's investment would have represented a 51.2%
equity interest as of March 23, 2000. Upon closing of the offering, KKR will own
approximately % of our outstanding common stock.
In December 1999, we obtained a $75.0 million senior credit facility, which
was increased to $125.0 million in February 2000. This credit facility provides
for a $25.0 million reducing revolver and $100.0 million in multi-draw term
loans. The revolver is available for general corporate purposes of our
subsidiaries, and the term loans are to be used to finance telecommunications
equipment, inventory, network assets and back office systems.
------------------------
PRINCIPAL OFFICES
We were incorporated in Delaware on December 23, 1996, and our principal
executive offices are located at 2020 Baltimore Avenue, Kansas City, Missouri
64108. Our telephone number is (816) 300-3000. Our website address is
www.birch.com. Information on our website does not constitute part of this
prospectus.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......................... shares
Over-allotment option........................ shares
Common stock to be outstanding after the
offering................................... shares
Use of proceeds.............................. We estimate that our net proceeds from the
offering will be approximately $
million, based on an assumed initial public
offering price of $ per share, or
$ million if the underwriters
exercise their over-allotment option. We plan
to use the net proceeds from the offering to
fund capital expenditures and operating
losses and for general corporate purposes,
including possible future investments,
acquisitions or strategic alliances.
Proposed Nasdaq National Market symbol....... BRCH
</TABLE>
The calculation of the number of shares outstanding after the offering is
based on:
- the number of shares outstanding on March 23, 2000; and
- conversion of our preferred stock into 41,307,596 shares of common stock,
which will occur automatically upon completion of the offering.
Other than the shares issued upon exercise by KKR of its options, this total
does not reflect:
- shares that may be issued upon the exercise of outstanding options and
warrants; or
- shares that are reserved for future issuance pursuant to our employee and
director stock plans.
3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table summarizes the consolidated financial and operating data
of our business for the periods presented. Our statement of operations data and
other financial data for the years ended December 31, 1997, 1998 and 1999 and
our actual balance sheet data as of December 31, 1999, as well as the statement
of operations data, other financial data and balance sheet data for the
predecessor company as of and for the year ended December 31, 1997 have been
derived from, and is qualified by reference to, our consolidated financial
statements included elsewhere in this prospectus, which Ernst & Young LLP, our
independent auditors, have audited. The pro forma balance sheet data presented
below give effect to (1) the exercise by KKR of its options and (2) the
conversion of all outstanding shares of our preferred stock into common stock,
which will occur automatically upon completion of the offering. The pro forma as
adjusted balance sheet data presented below give effect to the pro forma items
listed above and reflect the sale of shares of common stock in the
offering at an assumed initial public offering price of $ per share. You
should read the information set forth below in conjunction with "Selected
Consolidated Financial and Operating Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and their related notes included elsewhere in this
prospectus.
EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. EBITDA is provided because it is a measure of financial
performance commonly used in the telecommunications industry. EBITDA is used by
management and some investors as an indicator of a company's historical ability
to service debt. Management believes that an increase in EBITDA is an indicator
of improved ability to service existing debt, to sustain potential future
increases in debt and to satisfy capital requirements. We have presented EBITDA
to enhance your understanding of our operating results. You should not construe
it as an alternative to operating income, as an indicator of our operating
performance nor as an alternative to cash flows from operating activities as a
measure of liquidity determined in accordance with generally accepted accounting
principles, or GAAP. We may calculate EBITDA differently from other companies.
For further information, see our consolidated financial statements and the
related notes elsewhere in this prospectus.
The predecessor company is Valu-Line Companies, Inc., which merged with us
in February 1998. Prior to February 1998, Birch had no revenues and was a
development stage company.
We acquired Boulevard Phone Company, Telesource Communications, Inc. and
TFSnet, Inc. in 1998 and American Local Telecommunications, LLC and Capital
Communications Corporation in 1999. The statement of operations data, other
financial data and operating data in the table include the operations of these
companies beginning on the dates they were acquired. These acquisitions affect
the comparability of the financial data for the periods presented.
4
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
THE PREDECESSOR BIRCH
------------------------------ ------------------------------
1995 1996 1997 1997 1998 1999
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................... $12,226 $13,217 $16,801 $ -- $ 26,087 $ 60,538
Gross margin................................ 3,942 4,468 4,959 -- 7,201 14,180
Income (loss) from operations............... 233 596 551 (1,803) (10,876) (49,693)
Net income (loss)........................... 94 289 268 (1,789) (16,208) (61,804)
Net loss applicable to common stock......... (1,789) (17,933) (65,646)
Shares used in per share calculation........ 1,235 3,809 4,956
Net loss per common share--basic and
diluted................................... (1.45) (4.71) (13.25)
Shares used in pro forma per share
calculation...............................
Pro forma net loss per common share--basic
and diluted...............................
OTHER FINANCIAL DATA:
Cash flows from operating activities........ $ (267) $ 834 $ 488 $(1,551) $(10,643) $(53,225)
Cash flows from investing activities........ (230) (513) (243) (128) (67,093) (31,796)
Cash flows from financing activities........ 259 (257) (145) 1,889 117,271 50,329
EBITDA...................................... 422 907 892 (1,776) (8,568) (38,865)
Capital expenditures........................ 230 513 243 128 21,550 41,360
OPERATING DATA:
Local customers served at end of period..... -- 14,735 38,487
Access lines in service at end of period.... -- 39,323 112,518
Circuit switches in service at end of
period.................................... 1 1 4
Data switches in service at end of period... -- 1 19
Employees at end of period.................. 14 345 935
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 5,053 $ 52,503 $
Pledged securities.......................................... 23,420 23,420 23,420
Property and equipment...................................... 70,192 70,192 70,192
Total assets................................................ 146,971 187,723
Long-term debt and capital lease obligations................ 125,785 125,785 125,785
Redeemable preferred stock.................................. 63,550 -- --
Total stockholders' equity (deficit)........................ (67,757) 39,545
</TABLE>
5
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AS WELL AS THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE INVESTING IN SHARES OF OUR
COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS COULD
BE HARMED. IN THAT CASE, THE TRADING PRICE OF THE COMMON STOCK COULD DECLINE AND
YOU MIGHT LOSE ALL OR PART OF YOUR INVESTMENT. YOU SHOULD ALSO REFER TO THE
OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL
STATEMENTS AND THE RELATED NOTES.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED HISTORY UPON WHICH YOU CAN BASE YOUR INVESTMENT DECISION.
We commenced operations in February 1998, and since that time we have grown
rapidly. As a result of our limited operating history, you have limited
operating and financial data about us upon which to base an evaluation of our
performance and an investment in our common stock. Our ability to provide an
integrated package of bundled telecommunications services on a widespread basis
and to generate operating profits and positive operating cash flow will depend
upon our ability, among other things, to:
- develop our operational support and other back office systems;
- obtain state authorizations to operate as a competitive local exchange
carrier and any other required governmental authorizations;
- increase awareness of our brand and attract and retain an adequate
customer base;
- raise additional capital;
- attract and retain qualified personnel;
- enter into and implement interconnection agreements with established
telephone companies on satisfactory terms; and
- enter into new markets and successfully compete for business in different
environments.
We cannot assure you that we will be able to achieve any of these
objectives, generate sufficient revenues to achieve or sustain profitability,
meet our working capital and debt service requirements or compete successfully
in the telecommunications industry.
WE HAVE A HISTORY OF OPERATING LOSSES, AND WE MAY NOT BE PROFITABLE IN THE
FUTURE.
We have incurred significant losses since we began operations as a
competitive telecommunications provider and expect to continue to incur losses
in the future as we build our network. For the year ended December 31, 1999, we
had operating losses of $49.7 million and a net loss of $61.8 million. As of
December 31, 1999, we had an accumulated deficit of $79.8 million. We expect to
experience losses during our network and service deployment, which will continue
for the foreseeable future. Prolonged effects of generating losses without
additional funding may restrict our ability to pursue our business strategy.
Unless our business plan is successful, your investment in our common stock may
result in a complete loss of your invested capital.
If we cannot achieve profitability from operating activities, we may not be
able to meet:
- our capital expenditure requirements;
- our debt service obligations; or
- our working capital needs.
6
<PAGE>
OUR HIGHLY LEVERAGED CAPITAL STRUCTURE LIMITS OUR ABILITY TO OBTAIN ADDITIONAL
FINANCING AND COULD ADVERSELY AFFECT OUR BUSINESS IN SEVERAL OTHER WAYS.
The level of our outstanding debt greatly exceeds the level of our revenue
and stockholders' equity. As of December 31, 1999, we had $125.8 million of
long-term indebtedness outstanding, including $10.0 million outstanding under
our senior credit facility and $114.7 million of senior notes outstanding. This
indebtedness represented 103.5% of our total capitalization at that date. We
may, and are also permitted under the terms of our debt instruments to, incur
substantial indebtedness in the future.
Our large amount of indebtedness could significantly impact our business for
the following reasons:
- it limits our ability to obtain additional financing to complete our
roll-out plan, to develop new services or to otherwise respond to
unanticipated competitive pressures;
- it means that we will need to dedicate a substantial portion of our
operating cash flow to fund interest expense on our senior credit facility
and our senior notes, thereby reducing funds available for working
capital, capital expenditures or other purposes;
- it makes us vulnerable to interest rate fluctuations because our senior
credit facility loans bear interest at variable rates;
- it limits our ability to compete with companies who are not as highly
leveraged, especially those who may be able to price their service
offerings at levels below those we can or are willing to match; and
- it limits our ability to expand into new markets and to react to changing
market conditions, changes in our industry and economic downturns.
OUR EXISTING DEBT INCLUDES RESTRICTIVE AND FINANCIAL COVENANTS THAT LIMIT OUR
OPERATING FLEXIBILITY.
Our senior credit facility and the indenture relating to our senior notes
contain covenants that, among other things, restrict our ability to take
specific actions, even if we believe them to be in our best interest. These
include restrictions on our ability to:
- incur additional debt;
- pay dividends or distributions on, or redeem or repurchase, capital stock;
- create liens or negative pledges with respect to our assets;
- make investments, loans or advances;
- issue, sell or allow distributions on capital stock of specified
subsidiaries;
- enter into sale and leaseback transactions;
- prepay or defease specified indebtedness;
- enter into transactions with affiliates;
- enter into specified hedging arrangements;
- merge, consolidate or sell our assets; or
- engage in any business other than telecommunications.
The senior notes also require us to offer to purchase these notes from the
holders at 101% if we undergo a change of control. In addition, the senior
credit facility imposes financial covenants that require us to comply with
specified financial ratios and tests, including minimum revenues, minimum
EBITDA/maximum EBITDA losses, minimum access lines, senior secured debt to total
capitalization,
7
<PAGE>
maximum capital expenditures, maximum leverage ratios, minimum interest coverage
ratios and pro forma debt service coverage ratios. We cannot assure you that we
will be able to meet these requirements or satisfy these covenants in the
future. If we fail to do so, our debts could become immediately payable at a
time when we are unable to pay them. This could adversely affect our ability to
carry out our business plan and would have a negative effect on our financial
condition.
WE EXPECT TO GROW AND CANNOT GUARANTEE THAT WE WILL BE ABLE TO EFFECTIVELY
MANAGE OUR FUTURE GROWTH.
If we successfully implement our business plan, our operations will expand
rapidly, and we will be providing packaged telecommunications services on a
widespread basis. This could place a significant strain on our management,
operational, financial and other resources and increase demands on our systems
and controls. Failure to manage our future growth effectively could adversely
affect the expansion of our customer base and service offerings. We cannot
assure you that we will successfully implement and maintain efficient
operational and financial systems, procedures and controls or successfully
obtain, integrate and manage the employees and management, operational,
financial and other resources necessary to manage a developing and expanding
business in our evolving, highly regulated and increasingly competitive
industry.
TO EXPAND AND DEVELOP OUR BUSINESS WE WILL NEED A SIGNIFICANT AMOUNT OF CASH,
WHICH WE MAY BE UNABLE TO OBTAIN.
The expansion and development of our business and the deployment of our
networks, services and systems will require significant capital expenditures,
working capital and debt service and generate negative operating cash flows.
The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of, among other things, the demand for
our services and regulatory, technological and competitive developments,
including additional market developments and new opportunities, in our industry.
Our revenue and costs may also be dependent upon factors that are not within our
control, including regulatory and legislative developments, the response of our
competitors to their loss of customers to us and to changes in technology, the
nature and penetration of services that we may offer and the number of
subscribers and the services for which they subscribe. Due to the uncertainty of
these factors, actual revenues and costs may vary from expected amounts,
possibly to a material degree, and these variations are likely to affect our
future capital requirements.
We also expect that we will require additional financing or may require
financing sooner than anticipated to complete our roll-out plan or if our
development plans change or prove to be inaccurate. We may also require
additional financing in order to develop new services or to otherwise respond to
changing business conditions or unanticipated competitive pressures. Sources of
additional financing may include commercial bank borrowings, vendor financing,
or the private or public sale of equity or debt securities. If we decide to
raise additional funds through the incurrence of debt, our interest obligations
will increase, and we may become subject to additional or more restrictive
financial covenants, which could impair our ability to develop our business. If
we decide to raise additional funds through the issuance of equity, the
ownership interests represented by the common stock will be diluted. We cannot
assure you that we will be successful in raising sufficient additional capital
on favorable terms or at all. Failure to raise sufficient funds may require us
to modify, delay or abandon some of our future expansion or expenditure plans.
RESISTANCE BY POTENTIAL CUSTOMERS TO ACCEPT US AS A NEW PROVIDER OF
TELECOMMUNICATIONS SERVICES MAY REDUCE OUR ABILITY TO INCREASE OUR REVENUE.
The success of our service offerings will depend upon, among other things,
the willingness of additional customers to accept us as a new provider of
integrated communications services. We cannot
8
<PAGE>
assure you that we will be successful in overcoming the resistance of potential
customers to change their service provider, particularly those that purchase
services from the traditional telephone companies, or that customers will buy
our services. Any lack of customer acceptance would reduce our ability to
increase our revenue.
IF WE ARE UNABLE TO DEVELOP OR INTEGRATE OUR SYSTEMS OR PROPERLY MAINTAIN AND
UPGRADE THEM, WE MAY NOT BE ABLE TO BILL OUR CUSTOMERS EFFECTIVELY OR PROVIDE
ADEQUATE CUSTOMER SERVICE.
Sophisticated back office information and processing systems are vital to
our growth and our ability to monitor costs, bill customers, provision customer
orders, achieve operating efficiencies and maintain our operating margins. Our
plans for the development and implementation of these systems rely, for the most
part, on choosing products and services offered by third party vendors and
integrating these products and services in-house to produce efficient
operational solutions. We cannot assure you that we will successfully implement
these systems on a timely basis or that we will implement them at all. We also
cannot assure you that, once implemented, these systems will perform as we
expect. Risks to our business associated with our systems include:
- failure by these vendors to deliver their products and services in a
timely and effective manner and at acceptable costs;
- failure by us to identify all of our information and processing needs
adequately;
- failure of our related processing or information systems; or
- failure by us to effectively integrate new products or services.
Furthermore, as our suppliers revise and upgrade their hardware, software
and equipment technology, we could encounter difficulties in integrating this
new technology into our business or the new systems may not be appropriate for
our business. In addition, our right to use these systems depends upon license
agreements with third party vendors. Vendors may cancel or elect not to renew
some of these agreements, which may adversely affect us.
WE MAY NEED TO RELY ON THE ESTABLISHED LOCAL TELEPHONE COMPANIES TO IMPLEMENT
OUR SERVICES SUCCESSFULLY. THEIR FAILURE TO COOPERATE WITH US COULD ADVERSELY
AFFECT THE SERVICES WE OFFER.
We are a recent entrant into the local telecommunications services industry.
The local exchange services market in most states was only recently opened to
competition. There are numerous operating complexities associated with providing
these services. We will be required to develop new products, services and
systems and will need to develop new marketing initiatives to sell these
services. We cannot assure you that we will be able to develop these products
and services.
We plan to deploy high capacity voice and data switches in most of the
markets we serve. We initially intend to rely on the networks of established
telephone companies or those of new market entrants for some aspects of
transmission. Federal law requires most of the traditional local telephone
companies to lease or "unbundle" elements of their networks and permit us to
purchase the elements we need, thereby decreasing our operating expenses. We
cannot assure you that this unbundling will continue to occur in a timely manner
or that the prices for these elements will be favorable to us. Our current
strategy depends in large part on our ability to provide service to our
customers by leasing all of the network elements necessary to provide local
telephone service from the incumbent telephone company rather than through the
use of our own equipment and facilities. UNE-P allows us to minimize capital
expenditures and permits us to enter new markets quickly, while allowing us to
maintain significant gross margins. If the incumbent local telephone companies
do not cooperate in making UNE-P available, our ability to provide service to
customers could be materially adversely affected.
9
<PAGE>
In addition, our ability to implement successfully our services will require
the negotiation of interconnection and collocation agreements with established
telephone companies and other new market entrants, which can take considerable
time, effort and expense and is subject to federal, state and local regulation.
Interconnection agreements are agreements between local telecommunications
services providers that set forth the terms and conditions governing how those
providers will interconnect their networks and/or purchase or lease network
facilities and services.
Our interconnection agreements with Southwestern Bell provide that our
connection and maintenance orders will receive the same attention as
Southwestern Bell's end-user customers and that Southwestern Bell will provide
capacity at key telecommunications intersections to keep call blockage within
industry standards. Accordingly, we depend and will continue to depend on
Southwestern Bell and, as we expand our network, we will depend on other
traditional telephone companies to assure uninterrupted service and competitive
services. Blocked calls result in customer dissatisfaction and risk the loss of
business. Interconnection agreements, such as our agreements with Southwestern
Bell, typically have short terms, requiring us to renegotiate frequently. Some
of our agreements with Southwestern Bell have one year or less remaining before
we will have to renegotiate them. We cannot assure you that we will be able to
renegotiate these interconnection agreements in our existing markets, or
negotiate new interconnection agreements in new markets, on favorable terms. In
addition, the prices set forth in our interconnection agreements may be subject
to significant rate increases at the discretion of the regulatory authority in
each state in which we operate. Our profitability partially depends on these
state-regulated rate structures. We cannot assure you that the rates charged to
us under the interconnection agreements will allow us to offer low enough usage
rates to attract a sufficient number of customers and to operate our business
profitably or at favorable gross margins.
Many new carriers have experienced difficulties in working with the
established telephone companies with respect to ordering, interconnecting,
leasing premises and implementing the systems used by these new carriers to
order and receive unbundled network elements and wholesale services. We cannot
assure you that established telephone companies will be accommodating to us. If
we are unable to obtain the cooperation of an established telephone company in a
region, our ability to offer local services in this region on a timely and
cost-effective basis would be adversely affected. In addition, both proposed and
recently completed mergers involving regional Bell operating companies and other
competitors could facilitate a combined entity's ability to provide many of the
services we offer, thereby making it more difficult to compete against them.
DIGITAL SUBSCRIBER LINE TECHNOLOGY MAY NOT OPERATE AS EXPECTED ON INCUMBENT
LOCAL CARRIER NETWORKS AND MAY INTERFERE WITH OR BE AFFECTED BY OTHER TRANSPORT
TECHNOLOGIES.
Our ability to provide digital subscriber line services to potential
customers depends on the quality, physical condition, availability and
maintenance of telephone lines within the control of the incumbent carriers. If
the telephone lines are not adequate, we may not be able to provide digital
subscriber line services to many of our target customers, and this will diminish
our expected revenue. We believe the current condition of telephone lines in
many cases may be inadequate to permit us to fully implement these services. We
also believe that the incumbent carriers may not maintain or improve the
telephone lines in a condition that will allow us to implement our digital
subscriber line services effectively. Further, the incumbent carriers may claim
their lines are not of sufficient quality to allow us to fully implement or
operate our digital subscriber line services. In addition, some customers use
technologies other than copper lines to provide telephone services, and as a
result, digital subscriber line services might not be available to these
customers.
All transport technologies using copper telephone lines have the potential
to interfere with, or to be interfered with by, other traffic on adjacent copper
telephone lines. This interference could degrade the performance of our services
or make us unable to provide service on selected lines. In addition, incumbent
carriers may claim that the potential for interference by digital subscriber
line technology
10
<PAGE>
permits them to restrict or delay our deployment of this technology. The
telecommunications industry and regulatory agencies are still developing
procedures to resolve interference issues between telecommunications providers,
and these procedures may not be effective. We may be unable to successfully
negotiate interference resolution procedures with incumbent carriers.
Interference, or claims of interference, if widespread, would adversely affect
our speed of deployment, reputation, brand image, service quality and customer
retention and satisfaction.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY MANAGEMENT AND PERSONNEL, WE MAY NOT
BE ABLE TO IMPLEMENT OUR BUSINESS PLAN.
We believe that our future success will be due, in part, to our experienced
management team, including Messrs. Scott, Goldman, Hollingsworth, Lawhon,
Moline, Shackelford and Vranicar, each of whom is party to an employment
agreement. Losing the services of one or more members of our management team
could adversely affect our business and our expansion efforts and possibly
prevent us from:
- further deploying and improving our operational, financial and information
systems and controls;
- hiring and retaining qualified sales, marketing, administrative, operating
and technical personnel; and
- training and managing new personnel.
In addition, competition for qualified employees has intensified in recent
years and may become even more intense in the future. Our ability to implement
our business plan depends on our ability to hire and retain a large number of
new employees each year. Inability to hire sufficient qualified personnel could
impair our ability to increase revenue, and customers could experience delays in
installation of service or experience lower levels of customer care.
WE MAY NOT HAVE THE ABILITY TO DEVELOP STRATEGIC ALLIANCES OR TO MAKE OR
SUCCESSFULLY INTEGRATE ACQUISITIONS NEEDED TO COMPLEMENT OUR EXISTING BUSINESS.
As part of our growth strategy, we seek to develop strategic alliances and
to make investments or acquire assets or other businesses. We regularly engage
in discussions relating to potential acquisitions. We are unable to predict
whether or when any prospective acquisitions or strategic alliances will occur
or the likelihood of a material transaction being completed on favorable terms
and conditions. Our ability to finance acquisitions and strategic alliances may
be constrained by our degree of leverage at the time of the acquisition. In
addition, our senior credit facility and senior notes may significantly limit
our ability to make acquisitions or enter into strategic alliances and to incur
indebtedness in connection with acquisitions and strategic alliances.
In addition, if we were to proceed with one or more significant strategic
alliances, acquisitions or investments in which the consideration consists of
cash, we could use a substantial portion of our available cash, including
proceeds of the offering, to consummate the strategic alliances, acquisitions or
investments. The financial impact of acquisitions, investments and strategic
alliances could cause substantial fluctuations in our quarterly and yearly
operating results. Furthermore, if we use our common stock as consideration for
acquisitions, our stockholders would experience dilution of their existing
shares.
The integration of any future acquisitions or strategic alliances would be
accompanied by the risks commonly encountered in these transactions. These risks
include, among others:
- the difficulty of assimilating the acquired operations and personnel;
- the potential disruption of our ongoing business and diversion of
resources and management time;
11
<PAGE>
- the inability of management to maximize our financial and strategic
position by the successful incorporation of licensed or acquired
technology and rights into our service offerings;
- the possible inability of management to maintain uniform standards,
controls, procedures and policies;
- the risks of entering markets in which we have little or no direct prior
experience; and
- the potential impairment of relationships with employees or customers as a
result of changes in management or otherwise arising out of these
transactions.
We cannot assure you that we will be able to integrate acquired businesses
or assets successfully.
A SYSTEM FAILURE COULD CAUSE DELAYS OR INTERRUPTIONS OF SERVICE, WHICH COULD
CAUSE US TO LOSE CUSTOMERS.
Our success will require that our networks provide competitive reliability,
capacity and security. Some of the risks to our networks and infrastructure
include:
- physical damage to access lines;
- power surges or outages;
- capacity limitations;
- software defects;
- lack of redundancy; and
- disruptions beyond our control.
These disruptions may cause interruptions in service or reduced capacity for
customers, any of which could cause us to lose customers.
ALL YEAR 2000 PROBLEMS MAY NOT HAVE BEEN ADDRESSED BY OUR SUPPLIERS, AND ANY
SERVICE INTERRUPTION WE EXPERIENCE AS A RESULT OF THESE PROBLEMS MAY CAUSE US TO
LOSE CUSTOMERS.
The Year 2000 issue generally describes the various problems that may result
from the improper processing of dates and date-sensitive transactions by
computers and other equipment as a result of computer hardware and software
using two digits, rather than four digits, to identify the year in a date. Any
computer programs or systems of our suppliers that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
While we have experienced no Year 2000 issues to date, and we are not aware of
any material issues for our suppliers, we are continuing to evaluate and
determine whether our significant suppliers are in compliance or have
appropriate plans to remedy Year 2000 issues when their systems interact with
our systems. We do not expect that this will have a material impact on our
operations. However, we cannot assure you that the systems of other companies on
which we rely are Year 2000 compliant, that another company's failure to
successfully convert, or that another company's conversion to a system
incompatible with our systems, would not have an impact on our operations. The
failure of our principal suppliers to be Year 2000 compliant could result in
delays in service deliveries from those suppliers and materially impact our
ability to do business.
RISKS RELATED TO OUR INDUSTRY
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST OTHER COMPANIES.
The telecommunications industry is highly competitive and is affected by the
introduction of new services by, and the market activities of, major industry
participants. Several of our competitors are substantially larger and have
greater financial, technical and marketing resources than we do. We have
12
<PAGE>
not achieved, and do not expect to achieve, a significant market share for any
of the broadband telecommunications services we offer in our target markets. In
particular, larger competitors have advantages over us that could cause us to
lose customers and impede our ability to attract new customers, including:
- long-standing relationships and brand recognition with customers;
- financial, technical, marketing, personnel and other resources
substantially greater than ours;
- more funds to deploy telecommunications services;
- potential to lower prices of competitive telecommunications services; and
- fully-deployed networks.
We face competition from other current and potential market entrants,
including:
- domestic and international long distance providers seeking to enter,
re-enter or expand entry into the local telecommunications marketplace;
and
- other domestic and international telecommunications providers, resellers,
cable television companies, electric utilities and Internet companies.
A continuing trend toward combinations and strategic alliances in the
telecommunications industry could give rise to significant new competitors. This
could cause us to lose customers and impede our ability to attract new
customers.
FEDERAL COMMUNICATIONS COMMISSION AND STATE REGULATIONS MAY LIMIT THE SERVICES
WE CAN OFFER OR IMPACT OUR ABILITY TO CONDUCT OUR BUSINESS.
Our networks and the provision of telecommunications services are
extensively regulated at the federal, state and local levels. Existing and
future governmental regulations may greatly influence how we operate our
business, our business strategy and ultimately, our viability. The costs of
complying with federal, state and local regulations and the delays in receiving
required regulatory approvals or the enactment of new adverse regulation or
regulatory requirements may be greater than we anticipate and divert our
resources from implementing our business plan. We cannot predict the future
regulatory framework for our business.
Our provision of telecommunications services may be subject to the
requirement that we obtain proper authorizations from the FCC or state
commissions. We cannot assure you that the FCC or state commissions will grant
the required authority or refrain from taking action against us if we are found
to have provided services without obtaining the necessary authorizations. If we
do not fully comply with the rules of the FCC or state regulatory agencies,
third parties or regulators could challenge our authority to do business. These
challenges could cause us to incur substantial legal and administrative
expenses.
Federal law governing the telecommunications industry remains in a state of
flux. The Telecommunications Act remains subject to judicial review and
additional FCC rulemaking, and thus it is difficult to predict what effect the
legislation or these FCC rules will have on us and our operations. There are
currently many regulatory actions underway and being contemplated by federal and
state authorities regarding interconnection pricing, universal service support,
access charge reform, and other issues that could result in significant changes
to the business conditions in the telecommunications industry.
Our current business strategy depends in large part on our ability to
provide service to our customers through UNE-P. Our ability to provide service
to customers through UNE-P depends in turn on FCC and state commission rulings
requiring incumbent local telephone companies to lease us the
13
<PAGE>
necessary network elements. If those rules are changed by the FCC or state
commissions, or are struck down by the courts, our ability to provide service to
our customers through UNE-P could be materially adversely affected. For example,
the FCC could remove one or more of the necessary elements from the list of
elements that the incumbent telephone companies are required to provide to us.
The FCC could also expand the scope of an existing exception in its rules that
permits incumbent telephone companies to opt not to make UNE-P available in the
highest density geographic areas within the largest 50 metropolitan statistical
areas if they meet certain conditions. If the FCC acts to expand the scope of
the geographic exception to include our target markets, our business could be
materially adversely affected. Some states in our current operating region,
including Texas and Missouri, have gone beyond the FCC's minimum requirements
and independently ordered Southwestern Bell to make UNE-P available throughout
those states under terms more favorable to new telecommunications service
providers than those required by the FCC. We cannot assure you that those
favorable state rulings will remain in place. If UNE-P does not continue to be
available on the favorable terms ordered by the states, our business could be
materially adversely affected.
The United States Court of Appeals for the Eighth Circuit is currently
considering challenges to the pricing methodology established by the FCC for
setting the rates paid by telecommunications service providers to incumbent
telephone companies for access to network elements. If the court strikes down
some or all of the FCCs's pricing methodology and that methodology is ultimately
replaced with a methodology that imposes higher rates for network elements, we
could be materially adversely affected.
Federal universal service support mechanisms could increase the costs of
providing service to our customers. We derive revenue from the provision of
interstate and international telecommunications services to end users that may
be subject to the requirement that we contribute to the FCC's Universal Service
Fund based on a percentage of this revenue. The assessment for the first quarter
of 2000 is 5.8995%, and the assessment for the second quarter of 2000 is 5.7101%
of interstate and international end user telecommunications revenue. The
contribution factor varies quarterly at a rate set by the FCC. To the extent the
contribution factor increases, our costs of providing service will increase.
Our Internet operations are not currently regulated directly by the FCC or
any other governmental agency, other than regulations applicable to businesses
generally. However, the FCC has recently indicated that the regulatory status of
some services offered over the Internet may have to be re-examined. New laws or
regulations relating to Internet services, or existing laws found to apply to
them, may adversely affect our Internet operations.
WE MAY BE UNABLE TO ADAPT TO TECHNOLOGICAL CHANGE.
The telecommunications industry is subject to rapid and significant changes
in technology, including continuing developments in digital subscriber line
technology. This technology does not presently have widely accepted standards,
and alternative technologies for providing high speed data transport and
networking may develop. The absence of widely accepted standards may delay or
increase the cost of our market entry due to changes in equipment specifications
and customer needs and expectations. We may also rely on a third party for
access to new technologies. In addition, if we acquire new technologies, we may
not be able to implement them as effectively as other companies with more
experience with those technologies and in their markets.
WE MAY FAIL TO ACHIEVE ACCEPTABLE PROFITS ON OUR LONG DISTANCE BUSINESS DUE TO
DECLINING PRICES, LOW CUSTOMER RETENTION RATES AND OUR CONTRACTUAL OBLIGATIONS.
Prices in the long distance business have declined substantially in recent
years and are expected to continue to decline. In addition, the long distance
industry has a low customer retention rate, as customers frequently change long
distance providers in response to the offering of lower rates or
14
<PAGE>
promotional incentives by competitors. We will rely on other carriers to provide
us with a major portion of our long distance transmission network. Agreements
with these carriers typically provide for the resale of long distance services
on a per-minute basis and may contain minimum volume commitments. The
negotiation of these agreements involves estimates of future supply and demand
for transmission capacity, as well as estimates of the calling patterns and
traffic levels of our future customers. In the event that we fail to meet these
minimum volume commitments, we may have to pay underutilization charges, and, in
the event we underestimate our need for transmission capacity, we may have to
obtain capacity through more expensive means.
AS A NEW DATA TRANSMISSION ENTRANT IN A MARKET, WE MAY INITIALLY GENERATE LOW OR
NEGATIVE GROSS MARGINS.
As a new entrant in the data transmission business, we expect to generate
low or negative gross margins and substantial start-up expenses as we begin to
offer data transmission services. The success of our data transmission business
will depend upon, among other things, the effectiveness of our sales personnel
in the promotion and sale of our data transmission services, the acceptance of
these services by potential customers, and our ability to hire and train
qualified personnel and further enhance our services in response to future
technological changes. We cannot assure you that we will be successful in these
endeavors.
RISKS RELATED TO THIS OFFERING
YOU MIGHT NOT BE ABLE TO SELL YOUR STOCK IF NO MARKET DEVELOPS FOR OUR STOCK.
Prior to the offering, you could not buy or sell our common stock publicly.
We have filed an application for the quotation of our common stock on The Nasdaq
National Market. However, an active public market for our common stock may not
develop or be sustained after the offering. If a market does not develop or is
not sustained, it may be difficult for you to sell your shares of common stock
at a price that is attractive to you or at all. The initial public offering
price of the common stock will be determined through negotiations between the
representatives of the underwriters and us and may not be representative of the
price that will prevail in the open market.
PROVISIONS IN OUR CHARTER DOCUMENTS MIGHT DETER ACQUISITION BIDS FOR US.
We intend to amend and restate our certificate of incorporation prior to the
closing of the offering. This amended and restated certificate of incorporation
will provide for, among other things:
- a classified board of directors;
- the inability of our stockholders to call special meetings of
stockholders, to act by written consent, to remove any director or the
entire board of directors without cause, or to fill any vacancy on the
board of directors; and
- advance notice requirements for stockholder proposals.
Our board of directors will also be permitted to authorize the issuance of
preferred stock without any vote or further action by the stockholders. These
provisions and other provisions under Delaware law could make it more difficult
for a third party to acquire us, even if doing so would benefit our
stockholders.
KKR WILL BENEFICIALLY OWN A SIGNIFICANT INTEREST IN OUR VOTING SECURITIES AFTER
THE OFFERING.
KKR will beneficially own % of our outstanding shares of common stock
following the completion of the offering and % if the underwriters'
overallotment option is exercised in full. As a result, KKR will exercise
significant control over all matters requiring stockholder approval. Under the
15
<PAGE>
terms of a purchasers' rights agreement, KKR is currently entitled to designate
a total of five out of the eleven members of the board of directors and two
members of the compensation committee of the board. The concentrated holdings of
KKR and the presence of its designees on the board of directors may result in a
delay or the deterrence of possible changes in our control, which may reduce the
market price of our common stock. In addition, KKR and its affiliates have the
right to veto many actions that we may take, including any change in our capital
stock, any payments of dividends, any change in the composition of our board,
any affiliate transactions, any consolidation, reorganization, merger or similar
transaction, any change in our governing documents or any voting or similar
agreement concerning our capital stock, as well as specified operating decision,
including, but not limited to, incremental indebtedness, investments and
geographic expansion.
OUR MANAGEMENT WILL HAVE BROAD DISCRETION IN APPLYING THE NET PROCEEDS OF THIS
OFFERING.
At an initial offering price of $ and after deducting the underwriting
discount and other expenses of the offering, we will receive net proceeds of
approximately $ . We have not yet determined the specific dollar amount of
net proceeds to be allocated to any of the possible uses indicated in "Use of
Proceeds." Accordingly, our management will have broad discretion in applying
the net proceeds of the offering. Management's allocation of the net proceeds
will affect how our business evolves. We cannot assure you that management will
choose to spend these proceeds in areas that benefit our business. In addition,
we cannot assure you that management will choose to allocate proceeds to further
our current business strategy.
FUTURE SALES OF SHARES BY EXISTING STOCKHOLDERS COULD AFFECT OUR STOCK PRICE.
If our existing stockholders sell substantial amounts of our common stock in
the public market following the offering, the market price of our common stock
could decline. Based on shares outstanding as of March 15, 2000, upon completion
of the offering we will have outstanding shares of common stock, assuming
no exercise of the underwriters' over-allotment option. Of these shares, only
the shares of common stock sold in the offering will be freely tradeable,
without restriction, in the public market. additional shares will be
eligible for sale in the public market immediately upon completion of the
offering. After the lockup agreements pertaining to the offering expire
180 days from the date of this prospectus, an additional shares will be
eligible for sale in the public market. In addition, the 4,892,259 shares
subject to outstanding options and warrants and shares reserved for
future issuance under our stock option and purchase plans are not available for
sale for 180 days from the date of this prospectus. Following the offering, we
intend to file a registration statement on Form S-8 under the Securities Act
covering approximately shares of common stock issued or issuable upon the
exercise of stock options, subject to outstanding options or reserved for
issuance under our employee and director stock plans.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price is substantially higher than the pro forma
net book value per share of the outstanding common stock. As a result, investors
purchasing common stock in the offering will incur immediate substantial
dilution in the amount of $ per share. In addition, we have issued options and
warrants to acquire common stock at prices significantly below the initial
public offering price. To the extent these outstanding options and warrants are
exercised, there will be further dilution to investors in this offering.
OUR STOCK DOES NOT HAVE A TRADING HISTORY AND MAY BE EXTREMELY VOLATILE BECAUSE
WE OPERATE IN A RAPIDLY CHANGING INDUSTRY.
The trading price of our common stock is likely to be volatile. The stock
market has experienced extreme volatility, and this volatility has often been
unrelated to the operating performance of
16
<PAGE>
particular companies. We cannot be sure that an active public market for our
common stock will develop or continue after the offering. Investors may not be
able to sell their common stock at or above our initial public offering price or
at all. Prices for the common stock will be determined in the marketplace and
may be influenced by many factors, including variations in our financial
results, changes in earnings estimates by industry research analysts, investors'
perceptions of us and general economic, industry and market conditions.
OUR OFFICERS AND DIRECTORS EXERT SUBSTANTIAL INFLUENCE OVER US.
Our executive officers, directors and entities affiliated with them together
beneficially own a substantial percentage of our outstanding common stock. As a
result, these stockholders are able to exercise substantial influence over all
matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership may also have the effect of delaying or preventing a change in our
control.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT MAY NOT BE ACCURATE
INDICATORS OF OUR FUTURE PERFORMANCE.
This prospectus contains forward-looking statements within the meaning of
the federal securities laws. Discussions containing forward-looking statements
may be found in the material set forth in this section and under "Prospectus
Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as in the prospectus generally.
The words "believe," "estimate," "expect," "intend," "anticipate," "plan," and
similar expressions and variations of these expressions identify some of these
forward-looking statements that speak only as of the dates on which they were
made. We caution you that these forward-looking statements are not guarantees of
future performance and involve risks and uncertainties. Actual events or results
may differ materially from those discussed in the forward-looking statements as
a result of various factors, including, without limitation, the risk factors set
forth above and the matters set forth in this prospectus generally. All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements included in this document. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
17
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of
common stock will be approximately $ million, or $ million if the
underwriters exercise their over-allotment option in full, after deducting the
estimated underwriting discount and estimated offering expenses of $ million
payable by us.
We expect to use the net proceeds from the offering and borrowings under our
senior credit facility to fund capital expenditures for network facilities and
back office systems, to fund operating losses and for general corporate
purposes, including possible future investments, acquisitions or strategic
alliances. Pending these uses, we plan to invest the net proceeds in investment
grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock and do
not anticipate paying cash dividends in the foreseeable future. We currently
intend to retain all future earnings, if any, for use in the operation of our
business and to fund future growth. The terms of our senior credit facility and
our senior notes indenture restrict our ability to declare and pay dividends on
our common stock.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis to give effect to (a) the exercise by KKR of its
options to invest an additional $50.0 million in our company and (b) the
conversion of all outstanding shares of our preferred stock into common
stock, which will occur automatically upon completion of the offering;
- on a pro forma as adjusted basis to give effect to the pro forma items
listed above and reflect the application of the net proceeds from the sale
of shares of common stock in the offering at an assumed
offering price of $ per share.
You should read this table in conjunction with our consolidated financial
statements and the related notes, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Use of Proceeds" included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents(1)................................ $ 28,473 $ 75,923 $
======== ======== ========
Long-term debt:
Credit facility(2)........................................ $ 10,000 $ 10,000 $ 10,000
14% senior notes.......................................... 114,715 114,715 114,715
Other..................................................... 1,070 1,070 1,070
-------- -------- --------
125,785 125,785 125,785
Series F redeemable preferred stock......................... 63,550 -- --
Stockholders' equity:
Series B preferred stock.................................. 8 -- --
Series C preferred stock.................................. 6 -- --
Series D preferred stock.................................. 2 -- --
Common stock.............................................. 5 45
Warrants.................................................. 337 337 337
Additional paid-in capital................................ 11,686 118,964
Accumulated deficit....................................... (79,801) (79,801)
-------- -------- --------
Total stockholders' (deficit) equity.................... (67,757) 39,545
-------- -------- --------
Total capitalization.................................. $121,578 $165,330 $
======== ======== ========
</TABLE>
- ------------------------
(1) Includes $23.4 million of restricted cash that has been pledged to secure
interest payments on our senior notes through June 2001.
(2) The $125 million senior credit facility provides for a $25.0 million
reducing revolver and $100.0 million in multi-draw term loans. Borrowings
under the senior credit facility to date have been made under the term
portion of the senior credit facility.
19
<PAGE>
DILUTION
Dilution is the amount by which the offering price paid by the purchasers of
the common stock to be sold in the offering will exceed the net tangible book
value per share of common stock after the offering. Net tangible book value per
share is determined at any date by subtracting our total liabilities from the
total book value of our tangible assets and dividing the difference by the
number of shares of common stock deemed to be outstanding at that date.
Our net tangible book value as of December 31, 1999, after giving pro forma
effect to (1) the exercise by KKR of its options to invest an additional
$50.0 million in our company and (2) the conversion of all outstanding shares of
our preferred stock into common stock, which will occur automatically upon
completion of the offering, would have been $ million or $ per share.
After giving effect to the receipt of approximately $ million of estimated
net proceeds from the sale of million shares of common stock in the offering
at an assumed offering price of $ per share, our pro forma net tangible
book value at December 31, 1999 would have been approximately $ million or
$ per share. This represents an immediate increase in pro forma net
tangible book value of $ per share to existing stockholders and an
immediate dilution of $ per share to investors purchasing shares of common
stock in the offering. The following table illustrates the substantial and
immediate per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value before the offering..... $
Increase per share attributable to investors in the
offering................................................
Pro forma net tangible book value after the offering........
Dilution per share to new investors......................... $
==========
</TABLE>
The following table summarizes on a pro forma as adjusted basis as of
December 31, 1999 the difference among existing stockholders and new investors
with respect to the number of shares of common stock purchased from us, the
total consideration paid and the average price paid per share at the offering
price of $ per share (before deducting the estimated underwriting discount
and offering expenses payable by us):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- --------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
-------- ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Investors in the offering.................. % $ % $
Existing investors (assuming the exercise
by KKR of its option).................... % %
------ --- ------- ---
Total.................................. % $ %
====== === ======= ===
</TABLE>
The table above assumes no exercise of stock options or warrants outstanding
as of December 31, 1999. As of December 31, 1999, there were options outstanding
to purchase a total of 1,980,850 shares of common stock at a weighted average
exercise price of $3.59 per share. We have granted 2,256,675 additional options
since that date. As of December 31, 1999, there were warrants outstanding to
purchase a total of 1,409,734 shares of common stock at an exercise price of
$0.01 per share. To the extent any of these options and warrants are exercised,
there may be further dilution to new investors.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth our selected consolidated financial and
operating data for the periods indicated. Our statement of operations data and
other financial data for the years ended December 31, 1997, 1998 and 1999 and
our balance sheet data as of December 31, 1998 and 1999, as well as the
statement of operations data, other financial data and balance sheet data for
the predecessor company as of and for the year ended December 31, 1997, have
been derived from, and is qualified by reference to, consolidated financial
statements included elsewhere in this prospectus, which Ernst & Young LLP, our
independent auditors, have audited.
EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. EBITDA is provided because it is a measure of financial
performance commonly used in the telecommunications industry. EBITDA is used by
management and some investors as an indicator of a company's historical ability
to service debt. Management believes that an increase in EBITDA is an indicator
of improved ability to service existing debt, to sustain potential future
increases in debt and to satisfy capital requirements. We have presented EBITDA
to enhance your understanding of our operating results. You should not construe
it as an alternative to operating income, as an indicator of our operating
performance nor as an alternative to cash flows from operating activities as a
measure of liquidity determined in accordance with GAAP. We may calculate EBITDA
differently from other companies. For further information, see our consolidated
financial statements and the related notes elsewhere in this prospectus.
The predecessor company is Valu-Line, which merged with us in
February 1998. Prior to February 1998, Birch had no revenues and was a
development stage company.
We acquired Boulevard, Telesource and TFSnet in 1998 and American Local and
Capital in 1999. The statement of operations data, other financial data and
operating data in the table include the operations of these companies beginning
on the dates they were acquired. These acquisitions affect the comparability of
the financial data for the periods presented.
21
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
THE PREDECESSOR THE COMPANY
------------------------------ ------------------------------
1995 1996 1997 1997 1998 1999
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................... $12,226 $13,217 $16,801 $ -- $ 26,087 $ 60,538
Cost of services............................ 8,284 8,749 11,842 -- 18,886 46,358
------- ------- ------- ------- -------- --------
Gross margin................................ 3,942 4,468 4,959 -- 7,201 14,180
Selling, general and administrative......... 3,520 3,561 4,067 1,776 15,769 53,045
Depreciation and amortization............... 189 311 341 27 2,308 10,828
------- ------- ------- ------- -------- --------
Income (loss) from operations............... 233 596 551 (1,803) (10,876) (49,693)
Interest income (expense), net.............. (58) (102) (97) 14 (5,332) (12,111)
------- ------- ------- ------- -------- --------
Income (loss) before income taxes........... 175 494 454 (1,789) (16,208) (61,804)
Provision for income taxes.................. 81 205 186 -- -- --
------- ------- ------- ------- -------- --------
Net income (loss)........................... $ 94 $ 289 $ 268 (1,789) (16,208) (61,804)
======= ======= =======
Preferred stock dividends................... -- (1,696) (3,550)
Amortization of preferred stock issuance
costs..................................... -- (29) (292)
------- -------- --------
Loss applicable to common stock............. $(1,789) $(17,933) $(65,646)
======= ======== ========
Weighted average shares outstanding
--basic and diluted....................... 1,235 3,809 4,956
Loss per common share--basic and diluted.... $ (1.45) $ (4.71) $ (13.25)
OTHER FINANCIAL DATA:
Cash flows from operating activities........ $ (267) $ 834 $ 488 $(1,551) $(10,643) $(53,225)
Cash flows from investing activities........ (230) (513) (243) (128) (67,093) (31,796)
Cash flows from financing activities........ 259 (257) (145) 1,889 117,271 50,329
EBITDA...................................... 422 907 892 (1,776) (8,568) (38,865)
Capital expenditures........................ 230 513 243 128 21,550 41,360
OPERATING DATA:
Local customers at end of period............ -- 14,735 38,487
Access lines in service at end of period.... -- 39,323 112,518
Average lines per business customer......... -- 4.73 4.48
Average lines per residential customer...... -- 1.25 1.22
Circuit switches in service at end of
period.................................... 1 1 4
Data switches in service at end of period... -- 1 19
Employees at end of period.................. 14 345 935
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------
THE PREDECESSOR THE COMPANY
------------------------------ ------------------------------
1995 1996 1997 1997 1998 1999
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 96 $ 158 $ 258 $210 $ 39,745 $ 5,053
Pledged securities............................... -- -- -- -- 37,785 23,420
Property and equipment........................... 2,265 2,721 2,964 128 26,900 70,192
Total assets..................................... 3,971 3,868 4,802 534 134,149 146,971
Long-term debt and capital lease obligations..... 1,431 792 681 -- 115,791 125,785
Redeemable preferred stock....................... -- -- -- -- 14,063 63,550
Total stockholders' equity (deficit)............. 1,108 1,397 1,665 29 (7,099) (67,757)
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS TOGETHER WITH THE FINANCIAL STATEMENTS AND RELATED NOTES
THAT ARE INCLUDED LATER IN THIS PROSPECTUS. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK
FACTORS" OR IN OTHER PARTS OF THIS PROSPECTUS.
OVERVIEW
We were organized on December 23, 1996 to become a leading provider of
telecommunications services for small and mid-sized businesses in our target
markets. From that date until the February 1998 acquisition of Valu-Line, our
predecessor, we were a development stage company with no revenue and principal
activities consisting of procuring governmental authorizations, raising capital,
hiring management and other key personnel, designing and developing our
telephone networks, acquiring equipment and facilities, negotiating resale and
interconnection agreements and pursuing acquisition opportunities. We had no
assets, liabilities or financial activity prior to January 1, 1997.
The following is a summary of our major transactions and events.
<TABLE>
<CAPTION>
DATE EVENT
- ---- ------------------------------------------------------------
<S> <C>
February 1998 Merged with Valu-Line, a provider of switched long distance,
resold services and customer premises equipment sales and
service in Kansas.
February/March 1998 Raised $13.0 million from the issuance of series B preferred
stock and convertible notes used to pay the cash portion of
the consideration in the Valu-Line merger, to repay debt and
for general corporate purposes.
March 1998 Launched St. Joseph, Missouri market.
May 1998 Acquired Boulevard, a provider of shared tenant service in
the Kansas City, Missouri metropolitan area.
May 1998 Acquired Telesource, a customer equipment sales and service
provider in the Kansas City, Missouri metropolitan area.
May 1998 Launched St. Louis and Kansas City, Missouri and Wichita and
Topeka, Kansas markets.
June 1998 Completed a $115.0 million private offering of 14% senior
notes due June 2008 and 115,000 warrants to purchase
1,409,734 shares of common stock.
September 1998 Acquired TFSnet, a provider of Internet service in the
Kansas City, Missouri metropolitan area.
February 1999 Acquired American Local, a communications provider based in
the Dallas, Texas metropolitan area.
March 1999 Acquired Capital, a customer equipment sales and service
provider based in the St. Louis, Missouri metropolitan area.
May 1999-August 1999 Launched 11 Texas markets.
July 1999/August 1999 Sold $60.0 million of series F preferred stock to an
affiliate of KKR, granted options to purchase an additional
$50.0 million of series F preferred stock, sold $10.0
million of series D preferred stock and redeemed $10.0
million of series C preferred stock and $8.6 million of
series E preferred stock.
December 1999/February 2000 Obtained a $75.0 million debt facility for general corporate
purposes of our subsidiaries and to finance
telecommunications equipment, inventory, network assets and
back office systems. The facility was increased to $125.0
million during syndication in February 2000.
March 2000 KKR exercised its options to purchase an additional
$50.0 million series F preferred stock.
</TABLE>
23
<PAGE>
FACTORS AFFECTING OPERATIONS
REVENUE. We generate most of our revenue from the sale of our voice and
data products, including local and long distance telephone service, Internet
access and customer premises equipment to small and mid-sized business customers
in various markets in Missouri, Kansas and Texas. Revenue from local services
consists of charges for basic local service and custom calling features. We
offer local telephone service at a discount to the competing incumbent provider
of telecommunications services and offer long distance service at flat
per-minute rates. We offer customer premises equipment and related services at
negotiated rates generally consistent with other competitors. We also offer data
services in select markets primarily at flat monthly rates. We expect that over
the near term these services will continue to be the principal components of our
revenue.
Our revenue consists of monthly recurring charges and usage charges. Monthly
recurring charges include the fees paid by our customers for lines in service,
additional features on those lines and collocation space. Usage charges consist
of fees paid for each call made generally measured by the minute but also
measured by the call. Additionally, revenue from customer premises equipment
sales is recognized upon project completion.
OPERATING EXPENSES. Our primary operating expenses are cost of services and
selling, general and administrative expenses.
COST OF SERVICES. Our cost of services includes the cost of leasing
unbundled network elements from the incumbent telephone company for combination
into Birch-branded voice services and purchasing the complete "bundle" of
traditional incumbent telephone company services for resale to our local service
subscribers. We lease local telephone network components to provide service for
our customers under an interconnection agreement with the incumbent telephone
company in our target markets. In markets where we have a local circuit switch,
we can avoid leasing the switch and related features from the incumbent
telephone company, which improves our gross margins.
Incumbent telephone companies typically charge both a start-up fee as well
as a monthly recurring fee for use of their central offices for collocation of
transmission equipment. Physically collocating our transmission equipment in or
near existing incumbent telephone company switching offices allows us to combine
leased digital subscriber lines with our data transmission switches to provide
high speed data services and, eventually, voice and data services over a single
digital subscriber line. We also invest in transmission and distribution
electronics equipment associated with our switches. All of these costs are
reflected in our cost of services.
Our primary long distance expenses are expenses associated with network
access and our leased long distance network. We purchase long distance capacity
from third party providers for all calls terminating outside of our network.
Our primary expense associated with providing data services to our customers
is the cost of leasing transmission facilities. Our primary expense associated
with customer premises equipment is the cost of purchasing equipment from
manufacturers and labor for service and equipment installation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses include selling and marketing costs and customer
service, billing, corporate administration, personnel and network maintenance
expenses.
We employ a direct sales force in each of our target markets. To attract and
retain a highly qualified sales force, we offer our sales personnel a
compensation package that emphasizes commissions. We expect to incur significant
selling and marketing costs as we expand our operations.
We have implemented and continue to refine tailored systems for operations
support systems and other back office systems that provision and track customer
orders from point of sale to the installation
24
<PAGE>
and testing of service. Along with the development costs of these systems, we
also incur ongoing expenses for customer service and billing systems. As our
strategy stresses the importance of personalized customer service, we expect
that our customer service department will become a larger part of our ongoing
administrative expenses. We also expect billing costs to increase as the number
of our customers and the call volume increase. We incur other costs and
expenses, including the costs associated with maintenance of our network,
administrative overhead, office leases and bad debt. We expect that these costs
will grow significantly as we expand our operations and that administrative
overhead will be a large portion of these expenses during the expansion phase of
our business. However, we expect these expenses to become a smaller percentage
of our revenue as we build our customer base.
We have experienced operating losses since inception as a result of efforts
to build our customer base, develop and construct network infrastructure, build
internal staffing, develop systems and expand into new markets. We expect to
continue to focus on increasing our customer base and geographic coverage.
Accordingly, we expect that cost of services, selling, general and
administrative expenses, and capital expenditures will continue to increase
significantly, all of which may have a negative impact on operating results. The
projected increases in capital expenditures will continue to generate negative
cash flows for at least the next several years as we develop and construct our
voice and data networks. We may also be forced to change our pricing policies to
respond to a changing competitive environment, and we cannot assure you that we
will be able to maintain our gross and operating margins. We cannot assure you
that growth in our revenue or customer base will continue or that we will be
able to achieve or sustain profitability or positive cash flows.
RESULTS OF OPERATIONS
BIRCH TELECOM, INC.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUE. Revenue increased 132.1% to $60.5 million for 1999 compared to
$26.1 million for 1998. The increase in revenue was principally a result of new
customer sales in new and existing markets and the acquisitions of Capital in
March 1999 and American Local in February 1999. As a percentage of total
revenue, communications services were 87.5% for 1999 and 83.5% for 1998, and
equipment sales were 12.5% for 1999 and 16.5% for 1998.
COST OF SERVICES. Cost of services increased 145.5% to $46.4 million for
1999 compared to $18.9 million for 1998. The increase in cost of services was
primarily the result of associated revenue increases. Gross margins increased
96.9% to $14.2 million (23.4% of revenue) for 1999 compared to $7.2 million
(27.6% of revenue) for 1998. The decline in gross margin as a percentage of
revenue was principally the result of a greater percentage of revenue being
derived from resold local service during 1999 compared to 1998. Additionally,
long distance margins declined as a result of competitive pricing pressures.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 236.4% to $53.0 million for 1999 compared to
$15.8 million for 1998. The increase in expense was primarily a result of
supporting and attracting customers in new and existing markets, market launches
in Texas and the acquisitions of Capital and American Local each of which
affected wages, rent and advertising expense. Additionally, we had 935 employees
at December 31, 1999 compared to 345 employees at December 31, 1998. EBITDA, a
commonly used measure by securities analysts of earnings before deducting
interest, taxes, depreciation and amortization, decreased 353.6% to a loss of
$38.9 million for 1999 compared to a loss of $8.6 million for 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
369.2% to $10.8 million for 1999 compared to $2.3 million for 1998. The increase
in depreciation and amortization was
25
<PAGE>
primarily attributable to the depreciation of network assets added in our
markets and the amortization of intangible assets related to acquisitions.
INTEREST. Interest expense increased 82.2% to $15.0 million for 1999
compared to $8.3 million for 1998. The increase in interest expense was
primarily a result of a full year of interest charges on our senior notes sold
in June 1998. Interest income remained virtually unchanged at $2.9 million in
1999 and 1998. Interest income is primarily derived from pledged securities
purchased in connection with our senior notes.
NET LOSS. Net loss increased 281.3% to $61.8 million for 1999 compared to
$16.2 million for 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE. Revenue was $26.1 million for 1998, resulting from the
acquisitions of Valu-Line, Boulevard, Telesource and TFSnet and new customer
sales from new markets. There was no revenue for 1997 because we were in the
developmental stage. In addition to revenue generated as a result of
acquisitions in 1998, revenue was generated from the sale of local telephone
services to new customers.
COST OF SERVICES. Cost of services and gross margin totaled $18.9 million
and $7.2 million, respectively, for 1998 as a result of the associated revenue
increases.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $14.0 million to $15.8 million for 1998
compared to $1.8 million for 1997. The increase in expense was primarily a
result of the Valu-Line, Boulevard, Telesource and TFSnet acquisitions and
opening five new markets in 1998. Additionally, we expanded our engineering and
operations staff in preparation for switch deployment. EBITDA decreased 382.4%
to a loss of $8.6 million for 1998 compared to a loss of $1.8 million for 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$2.3 million for 1998 compared to $27,000 for 1997, most of which was
attributable to the fixed and intangible assets acquired in the Valu-Line,
Boulevard, Telesource and TFSnet acquisitions.
INTEREST. Interest expense was $8.2 million for 1998 primarily from
interest charges on the senior notes. There was no interest expense in 1997.
Interest income was $2.9 million in 1998 compared to $14,000 for 1997 primarily
as a result of invested funds received from the senior notes.
NET LOSS. Net loss was $16.2 million for 1998 compared to $1.8 million for
1997.
VALU-LINE COMPANIES, INC. (PREDECESSOR COMPANY)
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUE. Revenue increased 27.1% to $16.8 million for 1997 compared to
$13.2 million for 1996. The increase was primarily a result of entering the
local service market in March 1997 and long distance volumes increasing faster
than the decline in long distance pricing. Customer premises equipment sales
were 18% of revenue, or $3.0 million, for 1997 compared to 19.1% of revenue, or
$2.5 million, for 1996.
COST OF SERVICES. Cost of services increased 35.4% to $11.8 million for
1997 compared to $8.7 million for 1996. The increase was primarily a result of
associated revenue increases. Gross margin increased 11.0% to $5.0 million, or
29.5% of revenue, for 1997 compared to $4.5 million, or 33.8% of revenue, for
1996. The decrease in gross margin as a percentage of revenue was primarily a
result of low margins on resold local service, which started in March 1997.
26
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 14.2% to $4.1 million for 1997 compared to
$3.6 million for 1996. The increase in expense was primarily a result of sales
commissions related to increased business volumes and increased customer service
expenditures associated with the commencement of local service. EBITDA decreased
1.7% to $892,000 for 1997 compared to $907,000 for 1996. The decrease in EBITDA
was primarily a result of the start-up costs associated with offering local
service.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 9.6%
to $341,000 for 1997 compared to $311,000 for 1996.
INTEREST EXPENSE. Interest expense was $97,000 for 1997 compared to
$102,000 for 1996.
INCOME TAXES. Income taxes decreased 9.3% to $186,000 for 1997 compared to
$205,000 for 1996.
NET INCOME. Net income was $268,000 for 1997 compared to $289,000 for 1996.
LIQUIDITY AND CAPITAL RESOURCES
Our total assets increased to $147.0 million at December 31, 1999 from
$134.1 million at December 31, 1998. This increase was primarily the result of
capital outlays for expansion of our local and data networks and development of
operations support systems and automated back office systems, partially offset
by the use of cash to fund operations. At December 31, 1999, our current assets
of $38.8 million exceeded current liabilities of $25.4 million, resulting in
working capital of $13.4 million, representing a decrease of $36.3 million
compared to $49.7 million at December 31, 1998. At December 31, 1998, our
current assets of $61.1 million exceeded current liabilities of $11.4 million,
resulting in working capital of $49.7 million. The decrease in working capital
was primarily attributable to the use of cash to fund operations and capital
outlays for expansion of our network, support systems and back office systems.
Pledged securities to satisfy interest payments on our senior notes amounted to
$23.4 million at December 31, 1999 and $37.8 million at December 31, 1998.
OPERATING ACTIVITIES. Net cash used in operating activities was
$53.2 million for the year ended December 31, 1999 compared to $10.6 million for
the year ended December 31, 1998. Net cash used in operating activities was
primarily used to fund our net losses of $61.8 million in 1999 and
$16.2 million in 1998.
INVESTING ACTIVITIES. Net cash used in investing activities was
$31.8 million for the year ended December 31, 1999 compared to $67.1 million for
the year ended December 31, 1998. In 1999, net cash used in investing activities
was primarily used for the purchase of property and equipment related to the
expansion of our networks, support systems and back office systems of
$41.4 million and acquisitions of $4.8 million, partially offset by net proceeds
from the sale of pledged securities of $16.1 million for the semi-annual
interest payments on the senior notes. In 1998, net cash used in investing
activities was primarily used for the purchase of pledged securities related to
our senior notes of $44.2 million, acquisitions of $7.8 million and purchases of
property and equipment related to the expansion of the network, support systems
and back office systems of $21.6 million, partially offset by net proceeds from
the sale of pledged securities of $7.7 million.
FINANCING ACTIVITIES. Net cash provided by financing activities was
$50.3 million for the year ended December 31, 1999 compared to $117.3 million
for the year ended December 31, 1998. In 1999, net cash provided by financing
activities was primarily a result of $70.0 million in proceeds from the sale of
series D and series F preferred stock and borrowings of $10.0 million under our
senior credit facility, partially offset by the redemption of series C and
series E preferred stock of $18.6 million and the payment of financing costs
related to the series D and series F preferred stock and on our senior credit
facility of $8.8 million.
27
<PAGE>
In 1998, net cash provided by financing activities was primarily a result of
proceeds of $114.7 million from the private offering of our senior notes. These
senior notes bear interest at a fixed rate of 14% per annum and are due in
June 2008. Subject to limitations, we may redeem a portion of these senior notes
prior to their maturity date if we pay a designated premium. The indenture with
respect to the senior notes contains a number of restrictive financial and
operational covenants with which we must comply.
In February 2000, we increased the capacity of our $75.0 million senior
credit facility to $125.0 million. This credit facility provides for a
$25.0 million reducing revolver and $100.0 million in multi-draw term loans. The
revolver is available for general corporate purposes of our subsidiaries and the
term loans are to be used to finance telecommunications equipment, inventory,
network assets and back office systems. The senior credit facility is secured by
a perfected first priority security interest in substantially all of our assets
and capital stock of our subsidiaries and contains a number of financial and
operational covenants with which we must comply. Among other things, the
covenants require us to maintain specified levels of revenue, EBITDA, ratio
levels and access lines and restrict our ability to incur additional
indebtedness, pay dividends, enter into related party transactions or sell our
assets.
In March 2000, KKR exercised its options to purchase an additional
$50.0 million of our series F preferred stock.
The development and expansion of our business will continue to require
significant capital to fund capital expenditures, working capital and debt
service and will generate negative operating cash flows.
Our principal capital expenditure requirements will include:
- the purchase, installation, and expansion of switches and transmission
equipment for our local and data networks; and
- the further development of operations support systems and automated back
office systems.
We do not believe that the growth of our long distance and customer premises
equipment business will require significant capital expenditures.
Our business plan calls for us to offer our services in an additional 20
markets before the end of 2001. We expect to expand our operations in Texas and
into Oklahoma in the second quarter of this year and to commence service in the
regions served by Ameritech and BellSouth in 2001. We currently estimate that
the cash required to fund these capital expenditures will be approximately
$225.0 million over the next two years. We will need additional cash to fund our
working capital needs, debt service requirements and operating losses. Until we
begin to generate positive cash flow from operations, these liquidity
requirements will need to be financed with additional debt and equity capital.
In addition, depending on prevailing capital market conditions, we may choose to
repurchase all or a portion of our senior notes. We believe that our current
resources, including availability under our senior credit facility, together
with the net proceeds from the offering, will be sufficient to satisfy our
liquidity needs for at least the next 12 months.
Thereafter, we will need substantial additional capital to finance our
business plan. If our plans or assumptions change, if our assumptions prove to
be inaccurate, or if we experience unexpected costs or competitive pricing
pressures, we will be required to seek additional capital sooner than we
currently expect. In particular, if we elect to pursue acquisition opportunities
or open additional markets, our cash needs may increase substantially. We cannot
assure you that our current projection of cash flow and losses from operations,
which will depend upon numerous future factors and conditions, many of which are
outside of our control, will be accurate. Actual results will almost certainly
vary materially from our current projections. The cost of expanding our network
services and sales efforts, funding
28
<PAGE>
other strategic initiatives and operating our business will depend on a variety
of factors, including, among other things:
- the number of subscribers and the services for which they subscribe;
- the nature and penetration of services that we may offer;
- regulatory and legislative developments; and
- the response of our competitors to their loss of customers to us and to
changes in technology.
We intend to seek additional debt and equity financing to fund our future
liquidity needs. We cannot assure you that we will be able to raise additional
capital on satisfactory terms or at all. If we decide to raise additional funds
through the incurrence of debt, our interest obligations will increase and we
may become subject to additional or more restrictive financial covenants. In
addition, the terms of our senior credit facility and our senior notes each
restrict our ability to obtain additional debt financing. If we decide to raise
additional funds through the issuance of equity, the ownership interests
represented by the common stock will be diluted. In the event that we are unable
to obtain additional capital or to obtain it on acceptable terms or in
sufficient amounts, we may be required to delay the development of our network
and business plans or take other actions that could materially and adversely
affect our business, operating results and financial condition.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue results from computer programs being written using two
digits rather than four to define the year. Any of our computer programs or
systems, or those of our suppliers, that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing the disruption of
operations, including among other things:
- a temporary inability to process transactions;
- a temporary inability to send invoices;
- a temporary inability to engage in normal business activities; and
- interruptions of customer care.
We did not experience any problems on January 1, 2000 and to date, we have
not experienced, nor are we aware of, any material Year 2000 issues with any of
our internal systems or our services, and we do not anticipate experiencing any
issues in the future. Further, we are unaware of any issues with our vendors,
suppliers or customers that will materially affect us.
We believe that we have identified all major computers, software
applications and related equipment used in connection with our internal
operations that will need to be modified, upgraded or replaced to minimize the
possibility of a material disruption to our business. We have completed
assessing the potential impact of Year 2000 issues on these computers, equipment
and applications and have modified, upgraded and replaced major systems that we
believe have Year 2000 issues.
In addition to computers and related information, operation, and network
systems, the operation of office systems, facilities and equipment, such as fax
machines, security systems and other common office devices, may have Year 2000
issues that have not yet surfaced. We will continue to monitor the performance
of these office systems, equipment and facilities.
We expect that we will be able to resolve any significant Year 2000 issues
we have identified with third party suppliers of components of
telecommunications services and our key subcontractors. However, because we have
no control over the actions of these parties, they may not remediate any or all
of the Year 2000 issues identified. Any failure of any of these third parties to
timely resolve Year
29
<PAGE>
2000 issues with either their products sold to us, or their systems could have a
material adverse effect on our business, operating results and financial
condition. In addition, the delivery of our services also depends on the
operation of the networks of many local exchange carriers and long distance
carriers with whom we must interact as part of our normal business operations,
but with whom we do not have formal contractual arrangements. Consequently,
failure of these carriers' networks to fully operate as a result of Year 2000
issues could also affect our operations. To our knowledge, none of these
networks experienced any problems on or since January 1, 2000.
Our total cost to date to proactively address our Year 2000 issues has not
been material. The cost of addressing Year 2000 issues is reported as a general
and administrative expense.
We believe we identified and resolved all Year 2000 issues that could
materially and adversely affect our business operations. However, for the
reasons discussed above, we believe that it is not possible to determine with
complete certainty that all Year 2000 issues affecting us have been identified
or corrected and we may not know that this is true for several months. As a
result, we believe that the following consequences are possible:
- operational inconveniences and inefficiencies for us that will divert our
management's time and attention and our financial and human resources from
ordinary business activities;
- business disputes and claims for pricing adjustments or penalties by our
customers due to Year 2000 issues, which we believe will be resolved in
the ordinary course of business; and
- business disputes alleging that we failed to comply with the terms and
conditions of contracts or industry standards of performance that result
in litigation or contract termination.
We developed contingency plans to be implemented if our efforts to identify
and correct Year 2000 issues affecting our internal systems were ineffective. We
have adopted the Year 2000 contingency plans as our standard operational
contingency plans. Our contingency plans are designed to minimize the
disruptions or other adverse effects. Our plans include:
- accelerated replacement of affected equipment or software;
- short to medium-term use of backup equipment and software;
- increased work hours for our personnel; and
- use of contract personnel to correct on an accelerated schedule any Year
2000 issues that arise or to provide manual workarounds for information
systems.
Our implementation of any of these contingency plans could require us to
expend additional funds and could have a material adverse effect on our
business, operating results and financial condition. Our efforts in this regard,
if necessary, will be to minimize expense associated with the implementation and
use of any contingency planning with our objective to employ the least costly
plan necessary to address the relevant operational issues.
IMPACT OF INFLATION
We do not believe that inflation has had a significant impact on our
consolidated operations.
SEASONALITY
Our business is not considered to be seasonal.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not have operations subject to risks of foreign currency fluctuations,
nor do we use derivative financial instruments in our operations or investment
portfolio. Our earnings are affected by
30
<PAGE>
changes in interest rates as our long term debt under our senior credit facility
has variable interest rates based on either the prime rate or LIBOR. Our
exposure to variable interest rate risk during 1999 was insignificant due to our
level of floating rate borrowings. However, if interest rates for our long term
debt under our senior credit facility had averaged 10% more and the full amount
available under our senior credit facility had been outstanding for the entire
year, our interest expense would have increased, and loss before taxes would
have increased by $12.5 million for the year ended December 31, 1999. These
amounts are determined by considering the impact of the hypothetical interest
rates on our borrowing cost and outstanding debt balances. These analyses do not
consider the effects of the reduced level of overall economic activity that
could existing in this environment. Further, in the event of a change of this
magnitude, management would likely take actions to further mitigate our exposure
to the change. However, due to the uncertainty of the specific actions that
would be taken and their possible effects, the sensitivity analysis assumes no
changes in our financial structure. We had $114.7 million of senior notes
outstanding as of December 31, 1999. These notes bear interest at a fixed rate
of 14% and are not subject to risk from interest rate fluctuations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which supersedes SFAS No. 80, "Accounting
for Futures Contracts," SFAS No. 105, "Disclosure of Information About Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentration of Credit Risk," and SFAS No. 119, "Disclosures about Derivative
Financial Instruments and Fair Value of Financial Instruments," and also amends
some aspects of other SFAS's previously issued. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133 is effective for our consolidated financial statements for
the year ending December 31, 2001. We do not expect the impact of SFAS No. 133
to be material in relation to our consolidated financial statements.
31
<PAGE>
BUSINESS
OVERVIEW
We are a rapidly growing integrated communications provider. We seek to
become the leading provider of telecommunications services for small and
mid-sized businesses in each of the cities we serve. We offer state-of-the-art
telecommunications services to our customers, who today are located throughout
Missouri, Kansas and Texas. These voice and data service offerings include local
and long distance telephone service, Internet access, web hosting, integrated
voice and data transmission over broadband lines and customer premises equipment
sales and services. We offer these services to our customers through a
combination of leased and owned network facilities. We are currently deploying
collocations and transmission equipment throughout our markets to deliver
digital subscriber line service, which will support dedicated high-speed
Internet access and eventually voice services. We expect to have over 130
collocations operational by the end of this year. Our revenue for the year ended
December 31, 1999 was $60.5 million, a 132% increase over 1998.
BUSINESS STRATEGY
We believe that our business is poised for rapid expansion and that our
experienced management team is well prepared to execute our focused business
strategy. The key elements of our strategy include:
FOCUSING ON SMALL AND MID-SIZED BUSINESS CUSTOMERS
We focus on meeting the needs of small and medium-sized businesses in each
of the cities we serve. Our tailored service offerings, direct sales model,
and proactive customer service approach allow us to differentiate ourselves
and achieve significant penetration into this very large, established
customer base. We believe small and medium-sized businesses have not
received a satisfying level of attention from the incumbent telephone
companies, are unaware of their telecommunications network options and value
our consultative, direct sales approach.
PROVIDING COMPLETE SERVICE PACKAGES THAT ARE TAILORED TO OUR CUSTOMERS
Our service offerings are specifically designed for the needs of our target
customers. We provide simplified, feature-rich packages of services,
superior value and a single source for all of our customers' networking
requirements, all conveniently billed on a single invoice. Our service
offerings include features offered in packages that we believe are not
generally available from other providers. Our packages are priced to offer
savings of 10% to 40% from comparable services provided by the incumbent
telephone company. Our direct sales representatives consult with our
customers in person and assist them in selecting service packages
appropriate for their needs.
CREATING A STRONG BRAND PRESENCE
We have quickly achieved a high level of brand awareness in our markets
through an aggressive multi-media advertising campaign targeted at the
incumbent telephone company. Our marketing efforts include billboard, radio
and print advertising, as well as sponsorship of major local events,
affiliations with local organizations and direct mailings. We believe we
have been able to achieve a higher level of brand awareness in our markets
than any other new market entrants. We plan to use our proven marketing and
advertising strategy to help us achieve rapid and deep penetration in each
new market we enter.
DEPLOYING A DIRECT SALES FORCE IN EACH OF OUR MARKETS
We deploy a large locally-based sales force focused on achieving a
significant market share in each of our markets. We believe that our
extensively marketed brand name, visible local presence, readily available
services and emphasis on personal customer service have enabled our
170-person sales force to achieve high levels of productivity and quickly
penetrate new markets.
32
<PAGE>
INVESTING IN INDUSTRY-LEADING, SCALABLE BACK OFFICE SYSTEMS
We believe our state-of-the-art billing and operating systems are capable of
supporting a significant number of lines. These systems, which include
Saville Convergent Billing Platform-TM-, MetaSolv Telecom Business
Solution-TM- and Harris Network Management-TM-, have already withstood the
test of high volumes and rapid growth within our operation. Over the past
year, we have expanded our provisioning capacity from 3,000 lines per month
to nearly 15,000 lines per month and believe that our existing
infrastructure can support continued capacity increases.
MAINTAINING MAXIMUM NETWORK FLEXIBILITY
- INTEGRATING DATA AND VOICE NETWORK SERVICES. By integrating both data and
voice services, we believe we will be able to deliver a broadband digital
subscriber line connection to a significant percentage of our customers.
We believe this integration will yield bandwidth flexibility to our
customers and the strategic advantage of an improved product with reduced
monthly costs.
- CAPITALIZING ON OUR UNBUNDLED NETWORK ELEMENT PLATFORM. We provide service
to a majority of our customers by leasing substantially all of the
unbundled network elements from the incumbent telephone company and using
our advanced back office systems to combine these elements into integrated
Birch-branded voice services. This platform has allowed us to offer voice
services to customers located virtually anywhere in our markets and
achieve high gross margins and superior returns on incremental capital
invested. UNE-P allows us to minimize current capital expenditures and
maintain design flexibility for the next generation of telecommunications
technology.
- POSITIONING FOR MASS DEPLOYMENT OF BROADBAND. Our network objective is to
mass-deploy broadband facilities (primarily digital subscriber lines) that
support both voice and data over a single line. We are implementing
collocations at central offices of the incumbent telephone company
throughout our markets and intend to deploy packet switches that can
handle voice and data over a single line as soon as they become available.
EXPANDING OUR GEOGRAPHIC REACH
We currently serve 17 markets that have populations ranging in size from
95,000 to 4.5 million, and we intend to offer our services in 20 additional
markets before the end of 2001. We expect to expand our operations in Texas
and into Oklahoma in the second quarter of this year and to commence service
in the regions served by Ameritech and BellSouth in 2001. We have developed
systems, network capabilities and an experienced sales force and customer
service team that position us to rapidly penetrate these new markets and
regions.
GROWING THROUGH ACQUISITIONS
We have completed six acquisitions since our inception in December 1996 for
total consideration of $27.7 million. From time to time, we consider making
additional acquisitions to further complement our service capabilities or
expand our geographic scope. We believe we have been highly successful in
integrating our acquisitions. With our diverse sources of capital and highly
sophisticated stockholders and board members, we believe we are well
positioned to continue to evaluate a variety of these opportunities and make
selected acquisitions where appropriate.
TELECOMMUNICATIONS SERVICES
OFFERED SERVICES
We design our voice and data services to appeal to small and mid-sized
businesses that value simple integrated communications service packages from a
single provider. We believe that the key to attracting and retaining our target
customers is to offer a comprehensive set of services. These services include
voice offerings of local lines, features and long distance at flat per-minute
rates, and data
33
<PAGE>
offerings including dedicated digital subscriber line and dial-up Internet
access, web hosting and other data services.
We divide our service offerings generally into three broad categories:
voice, Internet and web hosting. The chart below sets forth the different
service packages and options provided within each of these categories.
SERVICE PACKAGES
<TABLE>
<CAPTION>
VOICE
<S>
- ------------------------------------
BIRCH BASIC
A standard line
BIRCH BELLS
Birch Basic with any three non-
premium customer-selected features
BIRCH BELLS AND WHISTLES
Birch Basic with any seven
customer-selected features
VOICE MAIL
Call answering, messaging and
message waiting indicator
Optional features include fax
mail, pager notification and
extension mailboxes
LINEBACKER
Inside wire protection plan
MIGHTY MOUTH
A two-way dedicated connection to
us, a trunk level one digital
transmission link, direct inward
dialing and number identification
for inbound calls
<CAPTION>
INTERNET
- ------------------------------------
DIAL
<S>
Unlimited Internet access, two
email boxes per account, remote
access to email via the Web and
five megabytes of storage space
plus any customer-selected
features
DIAL COMPLETE
Dial plus extended period of
inactivity before disconnect
ISDN COMPLETE
A dedicated integrated services
digital network, an on-premise
integrated service digital network
router, up to 25 email boxes,
dedicated Internet protocol
addresses for public applications,
network address translation,
custom domain services, plus any
customer-selected features
DSL COMPLETE
A symmetric digital subscriber
line service, an on-premise
router, up to 100 email boxes,
Internet protocol addresses for
public applications, network
address translation, custom domain
services, plus any customer-
selected features
T1 COMPLETE
A two-way dedicated connection to
us, an on-premise router, up to
100 email boxes, Internet protocol
addresses for public applications,
network address translation,
custom domain services, plus any
customer-selected features
THE INTEGRATOR
A two-way dedicated connection to
us, an on-premise integrated
router for voice and data,
customer selection of voice and
data channels to a maximum of 48,
selected voice features, up to 50
email boxes, Internet protocol
addresses for public applications,
network address translation,
custom domain services, plus any
customer-selected features
<CAPTION>
WEB HOSTING
- ------------------------------------
SPACE GENIE
<S>
Space Genie web-building tool, 10
megabytes of storage, 1,000
megabytes of monthly traffic,
online account status report, site
submission to major search
engines, custom domain services,
10 email addresses,
autoresponders, autoforwarders and
web-based management of email
tools plus any customer-selected
features
SPACE CADET
Space Genie plus 20 additional
megabytes of storage, 1,000
additional megabytes of monthly
traffic, common gateway interface
binary access, and script library,
web-based management of common
gateway interface script
auto-install and statistics plus
any customer-selected features
Additional optional features
include encryption services
support for real audio/video and
support for Microsoft FrontPage
extensions
SPACE HOG
Space Cadet plus an additional 45
megabytes of storage, 3,000
megabytes of monthly traffic, 10
email addresses, autoresponders
and autoforwarders and support for
real audio/video
</TABLE>
34
<PAGE>
DELIVERY OF SERVICES
UNE-P
We lease all of the unbundled network elements necessary to provide service
from the incumbent local exchange carriers. We believe that our UNE-P strategy
allows us to enter into new markets more quickly than if we had initially
deployed our own network facilities. This strategy also reduces initial capital
requirements in each market, allowing us to focus our capital resources
initially on the critical areas of sales, marketing and operations support
systems. In addition, we believe UNE-P will allow us to avoid further deploying
circuit switches and maintain design flexibility for the next generation of
telecommunications technology.
BROADBAND
We intend to install digital subscriber line equipment at our collocation
sites, at our switch sites and at our customers' locations. We believe this
equipment will allow us to deliver multiple voice calls and data traffic over a
single, standard telephone line and is expected to provide us with substantial
cost savings. Using DSL technology, we believe we will increase the amount of
information we carry on a standard telephone line, which we refer to as
bandwidth, to up to 1.5 million bits per second. The bandwidth is the equivalent
of 24 regular voice telephone lines. Our digital subscriber line equipment will
be programmed to allocate the available bandwidth.
We believe this technology will reduce our costs since we will lease a
reduced number of standard telephone lines per customer from the incumbent
carrier. For example, if a customer today has eight voice lines, we must order
from and provision through the incumbent carrier eight individual standard
telephone lines. If the same customer were to buy our service which uses digital
subscriber line technology, we would only order and provision one standard
telephone line from the incumbent carrier. Also, we expect that future products
and services designed to take advantage of the increased bandwidth provided by
digital subscriber line technology will allow us to generate incremental revenue
with attractive margins.
CUSTOMER PREMISES EQUIPMENT
We offer our customers equipment that they need to run their internal phone
systems, including data routers and wiring, telephone equipment and integrated
access devices. We also sell and service standard key systems, private branch
exchanges and voice-mail systems, and provide inside-wire services for
commercial accounts, including wiring for data networking, in Kansas and
Missouri. We are an authorized equipment distributor for Northern
Telecom, Inc., Toshiba America Information Systems, Inc., NEC America, Inc.,
Executone Information Systems, Inc. and Tadiran Electronic Industries, Inc.
SALES AND MARKETING
SALES
As of March 23, 2000, we had a direct sales force of 170 representatives
operating from 23 offices throughout Missouri, Kansas and Texas. Of these
representatives, 28 were primarily selling customer premises equipment and the
remaining 142 were selling local, long-distance, data and Internet services. The
sales representatives are supported by sales managers. Over the next 12 months,
we plan to increase our sales staff in existing markets and open additional
sales offices in Texas and Oklahoma and in Ameritech's and BellSouth's regions.
We supplement our sales efforts through brand awareness efforts including local
and regional advertising, public relations and local sponsorships.
We seek to convert small to mid-sized business customers from the incumbent
provider of telecommunications services in their market and to establish a
solid, long-term relationship with them.
35
<PAGE>
Our sales representatives meet with prospective customers to gain a thorough
understanding of their business and telecommunications requirements. Sales
representatives then suggest alternatives for operation enhancements and cost
savings based on our service packages.
We compensate our sales representatives with a competitive base salary,
stock options and commissions based on sales results. We use a revenue-based
commission structure that enables us to attract productive sales people
experienced in disciplined, activity-based sales. This commission structure is
based on incremental revenue and is not subject to a cap.
We do not actively market to residential customers. Nonetheless, we have
found that our sales and promotional efforts attract residential customers, many
of whom are owners or employees of businesses using our telecommunication
services. Residential customers call our customer service center to receive
forms to apply for service. We do not pay sales commissions for residential
sales.
ADVERTISING AND PROMOTION
We conduct extensive marketing campaigns in our local markets. We make use
of advertising and public relations to attract small to mid-sized business
customers and contrast our service attributes with Southwestern Bell's. Our
marketing campaign includes billboard, radio and print advertising, as well as
sponsorship of major local events, affiliations with local organizations and
direct mailings and focuses on public relations. We also believe that our
willingness to serve residential customers--unlike many other competitive local
exchange carriers--creates greater interest in our development among the news
media and general public. In the past, our market launches have attracted
extensive local media coverage.
In keeping with our philosophy of being accessible to our customers, we
establish local sales and customer service offices in most of the cities and
towns that we serve. In many of these cities and towns, we are the only provider
of local telephone service that maintains an office. Our offices are open to
walk-in traffic and often are located in high-profile areas.
Because we are able to deliver a comprehensive set of products to our target
customers, we believe we have strong customer loyalty. Our customer churn rates
have generally been less than 1.5% per month.
PRICING
We do not intend to position ourselves as the cheapest provider of services,
especially long distance services. We target customers who value the convenience
of our service offerings and personalized customer service. Customers who have
the highest price sensitivity are likely to move frequently among providers,
driving up churn rates. However, we do set our pricing so that our local
business customers can generally save from 10% to 40% on the incumbent
provider's rates. Internet, long distance and customer premises equipment are
generally priced at rates competitive with that of other service providers.
36
<PAGE>
OUR MARKETS
The following chart sets forth the markets in which we provide service or
expect to provide service by May 2000.
<TABLE>
<CAPTION>
BIRCH LINES IN SERVICE
AS OF FEBRUARY 29,
MARKET ESTIMATED POPULATION* INITIAL SERVICE DATE 2000
- ------ --------------------- -------------------- ----------------------
<S> <C> <C> <C>
St. Joseph, Missouri..................... 97,111 March 1998 2,402
Topeka, Kansas........................... 164,932 May 1998 9,720
Wichita, Kansas.......................... 530,508 May 1998 9,098
Kansas City, Missouri.................... 1,709,273 May 1998 25,176
St. Louis, Missouri...................... 2,557,806 May 1998 17,125
Beaumont, Texas.......................... 374,991 May 1999 3,824
Fort Worth, Texas........................ 1,404,904 May 1999 8,202
Longview/Marshall, Texas................. 208,250 May 1999 742
Tyler, Texas............................. 166,723 May 1999 2,017
Waco, Texas.............................. 202,983 May 1999 3,565
Houston, Texas........................... 4,320,041 June 1999 7,985
Austin, Texas............................ 1,071,023 July 1999 4,520
Corpus Christi, Texas.................... 387,100 July 1999 2,888
Lubbock, Texas........................... 230,672 August 1999 2,705
Dallas, Texas............................ 3,278,109 February 2000 1,834
San Antonio, Texas....................... 1,511,386 February 2000 341
Amarillo, Texas.......................... 208,165 March 2000 125
Midland/Odessa, Texas.................... 243,389 April 2000 258
Wichita Falls, Texas..................... 137,103 April 2000 19
Abilene, Texas........................... 121,456 May 2000 54
El Paso, Texas........................... 701,576 May 2000 31
Other.................................... N/A N/A 32,374
</TABLE>
- ------------------------
* Population data derived from the United States Bureau of the Census, State
and Metropolitan Areas datebook 1997 to 1998.
BACK OFFICE SYSTEMS
Back office systems refer to the hardware and software systems that support
the primary functions of our operations, including:
- order entry and provisioning;
- billing;
- data center;
- trouble management; and
- sales support.
Our goal is to have a back office that allows us to convert our customers'
service from their current local providers to our networks easily and quickly.
Over time, we strive to have "flow through" provisioning capabilities, allowing
services to be implemented through a single systems interface that updates all
ordering, inventory, billing and monitoring systems.
37
<PAGE>
We have implemented the primary elements of our back office, including order
entry, provisioning, billing and network management. We believe we have selected
the best application for each function. The following table describes our key
back office systems that provide crucial operational functionality, their
purpose and timeline for implementation.
<TABLE>
<CAPTION>
SYSTEM PURPOSE IN-SERVICE DATE
- --------------------- ---------------------------------------- --------------------
<S> <C> <C>
Southwestern Bell electronic direct ordering Q1 1998
Verigate and provisioning for
local telephone service
Saville CBP(TM) billing Q1 1999
MetaSolv TBS(TM) order management Q2 1999
inventory
provisioning
trouble management
customer service
Harris HNM(TM) network management Q4 1998
DSET(TM) electronic bonding gateway to incumbent Q2 2000 (est.)
telephone company
HNC ATACS(TM) fraud management Q2 2000 (est.)
TBD enhanced call record mediation Q3 2000 (est.)
TBD application integration middleware Q4 2000 (est.)
TBD customer care Q4 2000 (est.)
sales force automation
</TABLE>
ORDER ENTRY AND PROVISIONING
Order entry involves the initial loading of customer data into our
information systems. Currently, our sales executives take orders and our
customer care and provisioning representatives load the initial customer
information into our Saville billing system and our MetaSolv provisioning
system. We intend to increase the efficiency and data accuracy of these
provisioning activities by implementing a sales force automation system to be
combined with Saville CBP and MetaSolv TBS through application integration
middleware. This system will facilitate entry of sales orders from the sales
offices and transmit relevant account and order information to Saville CBP and
MetaSolv TBS. Implementing this system will eliminate several manual steps in
the provisioning process.
We use the MetaSolv TBS-TM- system to manage and track the timely completion
of each step in the provisioning process. When MetaSolv is coupled with
capabilities of the DSET electronic bonding system, we believe we will be able
to submit orders to external business partners, including Southwestern Bell,
electronically, thereby minimizing implementation time, coordination
complexities and installation costs. Currently, we provision orders
electronically through Southwestern Bell's electronic provisioning system, or
Verigate.
In addition to the cost benefits associated with the electronic installation
of access lines and inventory management system, the MetaSolv system improves
our internal processes in various other ways, including:
- directing electronic customer orders to the appropriate employee,
prompting them to complete required provisioning tasks, including network
component assignments and management of outside vendor activities; and
38
<PAGE>
- tracking order progress and alerting operations personnel of steps
required to fulfill orders within standard work intervals.
The MetaSolv TBS system enables a customer care coordinator to keep an
installation on schedule and notify the customer of any potential delays. Once
an order has been completed, we update our billing system to initiate billing of
installed services.
BILLING
The Saville billing system provides our customers with a consolidated
invoice for all of our services. Customer calls generate billing records that
are transmitted from the call records to the Saville billing system. These
records are then processed by the billing software, which calculates usage
costs, integrates fixed monthly charges, calculates taxation and provides the
data necessary to create a simple customer invoice. We provide invoice
information to a third party printer, which prepares and distributes bills to
our customers. Our customers pay us directly.
This Saville system allows us to add advanced features such as special
discounts based on call volume, or number of services used, complex local
taxation and discrete billing options by type of service ordered. We believe
these features are exceptionally important given our sophisticated client base.
TROUBLE MANAGEMENT
We use MetaSolv TBS-TM-, a customer care and trouble management system, to
provide high quality customer service. Our trouble management system is
integrated into the operational support system. It enables our customer care
personnel to track customer problems proactively, assign repair work to the
appropriate technical teams and provide employees and management access to
comprehensive reports on the status of service activity.
NETWORK MANAGEMENT
We use the Harris Network Management system to continuously monitor and
operate our switch networks. The information provided by the Harris system
allows our network operations staff to quickly repair problems in the networks,
thereby eliminating or minimizing impacts to our customers.
SOUTHWESTERN BELL VERIGATE
Verigate is the Southwestern Bell end-user interface system that allows our
customer service, trouble management and service provisioning representatives to
access the Southwestern Bell operating systems. Verigate allows us to send local
service requests to receive order commitments back from, reserve new telephone
numbers with, view an order's status at, and test or report customer problems to
Southwestern Bell.
DATA CENTER
During the second quarter 2000, we plan to occupy an 8,000 square foot data
center in Kansas City, Missouri. We believe this center has sufficient space to
support significant increases in our access lines, customers and employees.
NETWORK FACILITIES
LEASED FACILITIES
During 1999, we began to lease substantially all of the network elements
from Southwestern Bell and combine these elements into integrated Birch-branded
voice services without deploying a switch. By
39
<PAGE>
using UNE-P, we are able to offer our services to a broader geographical area
than we can by using our own switches. Many of our competitors are limited to
serving customers that are located near their facilities. UNE-P allows us to
serve many customers in disparate geographic areas.
Where we have installed switches, we lease transmission facilities from
Southwestern Bell to connect our switches to our collocated equipment in
Southwestern Bell's central offices and to unbundled loops. Given the current
capacity of existing local networks, we do not anticipate having to build local
transmission facilities in the future. Similarly, we believe that the capacity
of existing long-distance networks renders direct ownership of long distance
transmission facilities unnecessary.
Leasing, rather than building, facilities supports our strategy of rapid
local market development because our sales activity is not constrained by
network expenditures. Moreover, by leasing transmission facilities, we can offer
our services throughout a metropolitan area and we are not constrained by the
limited number of locations in which we could build transmission facilities.
OWNED FACILITIES
We deploy data transmission packet switches in most of our markets. We use
these packet switches to transmit data over our leased transmission lines and
plan to use these packet switches to transmit our long distance voice traffic
once our conversion plan is implemented.
We currently operate local/long distance circuit switches in Kansas City and
St. Louis, Missouri and Wichita, Kansas. We do not intend to deploy more circuit
switches because we believe voice-capable packet switches will be more
economical to operate in the future. Additionally, we collocate our electronic
equipment at Southwestern Bell's central offices to support future digital
subscriber line services and existing circuit switches. Collocation allows us to
connect to transmission lines we lease from Southwestern Bell.
At the customer's premises, we connect unbundled loops directly to
customer-owned equipment. We may also deploy electronic equipment (intelligent
channel banks or access servers) that concentrate data and voice traffic. This
enables us to obtain higher capacity from the transmission line of the incumbent
local exchange carrier.
OPERATIONS
EMPORIA AND KANSAS CITY SERVICE CENTERS
Our service centers in Emporia, Kansas and Kansas City, Missouri are
critical to our ability to offer excellent service and to support growth. These
service centers process orders, interface with Southwestern Bell's operational
support systems and provide customer service, trouble resolution, billing and
collection services for our customers. These service centers provide rapid,
human assistance rather than the automated, cumbersome customer interface
currently used by many telecommunications providers.
FIELD TECHNICAL OPERATIONS
Our field technicians service our facilities and customer-owned facilities.
These technicians install, repair and maintain digital switches, transmission
equipment, private branch exchanges, key systems, data equipment and inside
wiring, including wiring for data networking. We believe field technicians are
often the most respected source of telecommunications advice for small and
mid-sized business customers. We believe that having a skilled, in-demand group
of technicians supports our customer base, provides expertise for data
deployment and strengthens customer loyalty.
40
<PAGE>
COMPETITION
The telecommunications industry is highly competitive. We believe we compete
principally on the basis of customer service, accurate billing, variety of
services and, to a lesser extent, pricing levels and less complex pricing
structures. Our ability to compete effectively depends upon our continued
ability to maintain high quality, market-driven services at prices generally
equal to or below those charged by competitors. To maintain our competitive
posture, we believe that we must be able to provide high quality integrated
communications services and be positioned to reduce our prices in response to
potential competition. Any of these reductions could adversely affect us. Many
of our current and potential competitors have financial, technical, marketing,
personnel and other resources, including brand name recognition, substantially
greater than ours, as well as other competitive advantages over us.
INCUMBENT TELEPHONE COMPANIES
In our existing markets, we compete principally with Southwestern Bell. As a
recent entrant in the telecommunications services industry, we may not achieve a
significant market share for any of our services in our markets. In particular,
Southwestern Bell and other local telephone companies have long-standing
relationships with their customers, have financial, technical and marketing
resources substantially greater than ours, have the potential to subsidize
competitive services with revenue from a variety of businesses and currently
benefit from existing regulations that favor these incumbent local exchange
carriers over us in some respects. While recent regulatory initiatives, which
allow competitive local exchange carriers such as us to interconnect with
incumbent local exchange carrier facilities, provide increased business
opportunities for us, these interconnection opportunities have been, and likely
will continue to be, accompanied by increased pricing flexibility for and
relaxation of regulatory oversight of the incumbent local exchange carriers.
Future regulatory decisions could grant incumbent local exchange carriers
increased pricing flexibility or other regulatory relief. These initiatives
could also have a material adverse effect on us.
COMPETITIVE LOCAL EXCHANGE CARRIERS/INTEREXCHANGE CARRIERS/OTHER MARKET
ENTRANTS
We also face competition from other current and potential market entrants.
These market entrants include long distance carriers that compete with our long
distance services and seek to enter, reenter or expand into the local exchange
market. AT&T, GTE, MCI WorldCom and Sprint are among these carriers. Competitive
local exchange carriers, resellers of local exchange services, competitive
access providers, cable television companies, electric utilities, microwave
carriers, wireless telephone system operators and private networks built by
large end users also compete with us. In addition, consolidation and strategic
alliances within the telecommunications industry, or the development of new
technologies could put us at a competitive disadvantage. Not only does the
Telecommunications Act impose regulatory requirements on all local
telecomunications service providers, but it also grants the FCC expanded
authority to reduce the level of regulation applicable to any telecommunications
service provider, including any incumbent telecommunications service providers.
The manner in which these provisions of the Telecommunications Act are
implemented and enforced could have a material adverse effect on our ability to
compete successfully against incumbent local exchange carriers and other
telecommunications service providers.
The changes in the Telecommunications Act radically altered the market
opportunity for new telecommunications service providers. Because the
Telecommunications Act requires local exchange carriers to unbundle their
networks, new telecommunications service providers are able to rapidly enter the
market by installing switches and leasing trunk and loop capacity. Newer
providers, like us and some competitors that we may encounter in some of our
markets, will not have to replicate existing facilities until traffic volume
justifies building them, and can be more opportunistic in designing and
implementing networks.
41
<PAGE>
In addition to the new telecommunications service providers, interexchange
carriers and other competitors listed above, we may face competition from other
market entrants such as electric utilities, cable television companies and
wireless companies. Electric utilities have existing assets and low cost access
to capital which could allow them to enter a market rapidly and accelerate
network development. Cable television companies are entering the
telecommunications market by upgrading their networks with fiber optics and
installing facilities to provide fully interactive transmission of broadband
voice, video and data communications. Finally, wireless companies intend to
develop wireless technology for deployment in the United States as a broadband
substitute for traditional wireline local telephones. Some Internet companies
are also developing applications to deliver switched voice communications over
the Internet.
LONG DISTANCE SERVICES
The long distance telecommunications industry has numerous entities
competing for the same customers and a high churn rate, as customers frequently
change long distance providers in response to offerings of lower rates or
promotional incentives. Prices in the long distance market have declined
significantly in recent years and are expected to continue to decline. Our
primary competitors are the major interexchange carriers and resellers of long
distance services. We believe that pricing levels are a principal competitive
factor in providing long distance service; however, we seek to avoid direct
price competition by packaging long distance service, local service, customer
premises equipment and Internet access service together with a simple pricing
plan.
CUSTOMER PREMISES EQUIPMENT
We compete with numerous equipment vendors and installers and
telecommunications management companies for the sale of customer premises
equipment and related services. We generally offer our products at prices
consistent with other providers and differentiate our service through our
product packages.
DATA/INTERNET SERVICES
The Internet services market is highly competitive, and we expect that
competition will continue to intensify. Internet service, meaning both Internet
access and on-line content services, is provided by Internet service providers,
satellite-based companies, long distance carriers and cable television
companies. Many of these companies provide direct access to the Internet and a
variety of supporting services to businesses and individuals. In addition, many
of these companies, such as America Online, Inc., MSN, Prodigy Services Company
and WebTV Networks, offer on-line content services consisting of access to
closed, proprietary information networks. Long distance companies, among others,
are aggressively entering the Internet access markets. Long distance carriers
have substantial transmission capabilities, traditionally carry data to large
numbers of customers and have an established billing system infrastructure that
permits them to add new services. Satellite companies are offering broadband
access to the Internet from desktop PCs. Cable companies are starting to provide
Internet services using cable modems to customers in major markets. Many of
these competitors have substantially greater financial, technological,
marketing, personnel, name-brand recognition and other resources than those
available to us.
EMPLOYEES
At December 31, 1999, we employed 935 persons. Additionally, we occasionally
hire temporary employees. We are not party to any collective bargaining
arrangements and believe that our relationship with our employees is good.
42
<PAGE>
PROPERTIES
We lease 43,783 square feet in office space in Kansas City, Missouri for our
corporate headquarters. This lease expires December 2006. Recently, we leased an
additional 64,546 square feet of office space in Kansas City to expand our
corporate headquarters. This lease expires February 2008. In Emporia, Kansas, we
own two buildings totaling 58,500 square feet for our customer care center and
provisioning divisions. In addition, we lease an aggregate of 21,175 square feet
to house our switches in Kansas City and St. Louis, Missouri and Wichita,
Kansas. These leases expire March 2003, November 2008, August 2005 and June
2008, respectively. We also lease space in 27 buildings, totaling approximately
110,823 square feet, in Missouri, Kansas, Texas and Oklahoma for our sales
offices and customer premises equipment sites. These leases are generally leased
on a month-to-month or annual basis.
LEGAL PROCEEDINGS
From time to time, we may be involved in claims or litigation that arise in
the normal course of business. We are not a party to any legal proceedings
which, if decided adversely, would have a material adverse effect on our
business or financial condition or results of operations.
43
<PAGE>
REGULATION
REGULATORY OVERVIEW
We are subject to regulation by federal, state and local government
agencies. Historically, the FCC had jurisdiction over interstate long distance
services and international services, while state regulatory commissions had
jurisdiction over local and intrastate long distance services.
In 1996, Congress passed the Telecommunications Act of 1996, opening the
local market to competition and allowing the Bell operating companies to compete
for the first time in the long distance market within their local service
regions once specified conditions were met. The Telecommunications Act
fundamentally changed the way telecommunications is regulated in this country.
The FCC was given a major role in writing and enforcing the rules under which
new competitors could compete in the local marketplace. Those rules, coupled
with additional rules and decisions promulgated by the various state regulatory
commissions, form the core of the regulatory framework under which we operate in
providing local exchange service.
With a few limited exceptions, the FCC continues to retain exclusive
jurisdiction over our provision of interstate and international long distance
service, and the state regulatory commissions regulate our provision of
intrastate local and long distance service. Additionally, municipalities and
other local government agencies may regulate limited aspects of our business,
such as use of government-owned rights-of-way, and may require permits such as
zoning approvals and building permits.
In the aftermath of the Telecommunications Act, the regulation of the
telecommunications industry has been in a state of flux. The FCC and state
regulatory commissions have adopted many new rules to implement this legislation
and encourage competition, but that implementation is ongoing. The following
summary of regulatory developments does not purport to describe all current and
proposed federal, state and local regulations and legislation affecting the
telecommunications industry. Many of these are currently the subject of judicial
proceedings, legislative hearings and administrative proposals, any of which
could change, in varying degrees, the manner in which this industry operates. We
cannot predict at this time the outcome of these proceedings or their impact
upon the telecommunications industry or on us.
THE TELECOMMUNICATIONS ACT
THE TELECOMMUNICATIONS ACT'S LOCAL COMPETITION FRAMEWORK
One of the key goals of the Telecommunications Act is to encourage
competition in local telephone service. To do this, the Telecommunications Act
provides three means by which telecommunications service providers can enter the
local phone service marketplace. The three modes of entry are as follows:
- RESALE. Incumbent telephone companies are required to permit new
telecommunications service providers to purchase their services for resale
to the public at a wholesale rate that is less than the rate charged by
the incumbent telephone companies to their retail customers.
- ACCESS TO NETWORK ELEMENTS. Incumbent telephone companies are required to
lease to new telecommunications service providers the various elements in
their network that are used to provide local telephone service. The leased
parts of the incumbent telephone companies' networks are known as
unbundled network elements. The incumbent telephone companies must make
unbundled network elements available at rates that are based on their
forward-looking economic costs.
- CONSTRUCTION OF NEW FACILITIES. New telecommunications service providers
may also enter the local phone service market by building entirely new
facilities. The incumbent telephone companies are required to allow new
telecommunications service providers to interconnect their
44
<PAGE>
facilities with the incumbent telephone company's, so each carrier's
customers can reach the other's.
To facilitate new telecommunications service providers' entry into local
telephone markets using one or more or some combination of these three methods,
the Telecommunications Act imposes on incumbent telephone companies the
obligation to open their networks and markets to competition. When requested by
competitors, incumbent telephone companies are required to negotiate, in good
faith, agreements that lay out terms governing the interconnection of their
network, access to unbundled network elements and resale. Incumbent telephone
companies must also allow competing carriers to "collocate," or place their own
equipment in incumbents' central offices.
In addition, all local exchange carriers, including both incumbent and new
telecommunications service providers, are subject to the following requirements:
- INTERCONNECTION. All local telecommunications service providers must
permit their competitors to interconnect with their facilities either
directly or indirectly. Incumbent telephone companies are additionally
obligated to permit interconnection at any technically feasible point
within their networks, on nondiscriminatory terms, at prices based on cost
(which may include a reasonable profit);
- NUMBER PORTABILITY. All local telecommunications service providers must
implement number portability technology that allows a customer to retain
its existing phone number if it switches from one local exchange carrier
to a competitor. This technology primarily benefits new telecommunications
service providers, which can gather market share more easily if customers
can switch to these carriers without changing telephone numbers;
- RECIPROCAL COMPENSATION. All local telecommunications service providers
must complete local calls originated by other telecommunications service
providers under reciprocal compensation arrangements. That is, the local
provider terminating a local call is entitled to payment from the local
provider originating a call. Charges assessed by the incumbent telephone
company for terminating calls originated on a new telecommunications
service provider's network must be based on a reasonable approximation of
additional cost. The FCC recently determined that Internet service
provider-bound traffic is interstate in nature, not local, and is
therefore outside the scope of the Telecommunications Act's reciprocal
compensation provisions. The FCC has initiated a proceeding to determine
appropriate carrier-to-carrier compensation for Internet service
provider-bound traffic. At the same time, the FCC has declined to overturn
a multitude of state decisions requiring incumbent telephone companies to
pay new telecommunications service providers compensation for delivering
Internet traffic to Internet service providers that had selected a new
telecommunications service provider as their local service provider. The
FCC's decision is on appeal, and incumbent telephone companies are also
expected to ask states or federal courts to reverse the existing state
determinations;
- DIALING PARITY. Requires all local telecommunications service providers
to provide nondiscriminatory access to telephone numbers, operator
services, directory assistance and directory listing with no unreasonable
dialing delays. Local dialing parity ensures that customers on one local
exchange carrier do not have to dial extra digits to reach customers on a
different local or toll carrier's network; and
- ACCESS TO RIGHTS-OF-WAY. Requires all local telecommunications service
providers to permit competing providers access to poles, ducts, conduits
and rights-of-way at reasonable and nondiscriminatory rates, terms and
conditions. The FCC has opened a proceeding seeking to define in greater
detail the scope of the incumbent telephone company's obligation to
provide access to rights-of-way that it owns or controls, including those
within its own central offices and other buildings, and buildings owned by
private third parties.
45
<PAGE>
Executing an interconnection agreement does not guarantee a new
telecommunications service provider unfettered access to the incumbent telephone
company's market. Interconnection agreements between incumbent telephone
companies and new telecommunications service providers may have short terms,
requiring the new telecommunications service provider to renegotiate the
agreements on a regular basis. Incumbent telephone companies may not provide
timely provisioning or adequate service quality, thereby impairing a new
telecommunications service provider's reputation with customers who can easily
switch back to the incumbent telephone company. In addition, the prices set in
the agreements or through state regulatory commission arbitration proceedings
may be subject to changes mandated by state regulatory commissions as they
develop permanent rules governing interconnection and may not in all instances
be set at levels that allow new telecommunications service providers to compete
effectively.
THE FCC'S RULES IMPLEMENTING THE TELECOMMUNICATIONS ACT'S LOCAL COMPETITION
PROVISIONS
In August 1996, the FCC issued an order implementing the local competition
provisions of the Telecommunications Act. The FCC established rules about how
interconnection and collocation were to be provided, put forth a method that
state commissions should use to establish prices for interconnection and
unbundled network elements, and specified which parts of an incumbent's network
must be made available as unbundled network elements to competing carriers. The
FCC also held that incumbent telephone companies must provide new
telecommunications service providers with "combinations" of unbundled network
elements, making it possible for new telecommunications service providers, in
many instances, to provide service to customers by leasing all of the component
unbundled network elements from the incumbent telephone company. This method of
providing service is known as the unbundled network element platform, or UNE-P.
Specifically, among other rules, the FCC established a list of seven network
elements, comprising most of the significant facilities, features,
functionalities or capabilities of the network, that the incumbent telephone
companies must unbundle. In addition, the FCC mandated a particular
forward-looking pricing methodology for these network elements that produces
relatively low element prices that are favorable to competitors.
After the FCC released its rules, numerous parties challenged the rules
before the U.S. Court of Appeals for the Eighth Circuit. The Eighth Circuit
overturned many of the FCC's rules on the grounds that the agency had exceeded
its authority and misinterpreted the law.
On January 25, 1999, the United States Supreme Court largely reversed the
Eighth Circuit's decision, holding that the FCC has general jurisdiction to
implement the local competition provisions of the Telecommunications Act and
reestablishing the validity of many of the FCC's interconnection rules. In so
doing, the Supreme Court stated that the FCC has authority to set pricing
guidelines for unbundled network elements, to prevent incumbent telephone
companies from separating existing combinations of network elements, and to
establish "pick and choose" rules regarding interconnection agreements. "Pick
and choose" rules would permit a carrier seeking interconnection to pick and
choose among the terms of service from other interconnection agreements between
the incumbent and various new telecommunications service providers.
Although it upheld the FCC's jurisdiction to establish unbundled network
element pricing guidelines, the Supreme Court did not evaluate the specific
"forward-looking" pricing methodology adopted by the FCC, and the case has been
remanded to the Eighth Circuit for further consideration of that specific
pricing methodology. Some incumbent telephone companies have argued that this
pricing methodology does not allow adequate compensation for the provision of
unbundled network elements. The Eighth Circuit heard oral arguments on this
pricing issue on September 16, 1999, but has not yet issued a ruling. We cannot
predict the outcome of this proceeding. If the Eighth Circuit fails to uphold
the FCC's forward-looking pricing methodology, it may materially adversely
affect our business.
46
<PAGE>
Additionally, the Supreme Court vacated the FCC rules defining what network
elements must be unbundled and made available to the new telecommunications
service providers by the incumbents. The Supreme Court held that the FCC must
provide a stronger rationale to support the degree of unbundling ordered.
On November 5, 1999, in response to the Supreme Court's ruling, the FCC
released new rules specifying which portions of the incumbent telephone
companies' networks must be made available as unbundled network elements. The
FCC reaffirmed that incumbent telephone companies must provide unbundled access
to the following six network elements:
- loops, including loops used to provide high-capacity and advanced
telecommunications services such as digital subscriber lines;
- network interface devices;
- local circuit switching;
- dedicated and shared transport;
- signaling and call-related databases; and
- operations support systems.
The FCC removed from the list of unbundled network elements operator service
and directory assistance. The FCC concluded that the market has developed
sufficiently that new telecommunications service providers can and do
self-provide these services, or acquire them from alternative sources. The FCC
also noted that incumbent telephone companies remain obligated under the
non-discrimination requirements of the Communications Act of 1934 to comply with
the reasonable request of a new telecommunications service provider that
purchases these services from the incumbent telephone companies to rebrand or
unbrand those services, and to provide directory assistance listings and updates
in daily electronic batch files. In addition, the competitive checklist
contained in section 271 of the Communications Act of 1934 requires Bell
operating companies to provide nondiscriminatory access to these services.
The FCC also modified the local switching unbundled network element,
concluding that incumbents need not provide access to unbundled local circuit
switching for customers with four or more lines that are located in the densest
parts of the top 50 metropolitan statistical areas so long as the incumbent
makes available an alternative arrangement for reaching customers, known as the
enhanced extended link. The enhanced extended link allows new telecommunications
service providers to gain access to customers without collocating in every
central office, because it combines the local loop with a multiplexer and
transport to the new telecommunications service provider's local existing
collocated facilities or switch. Notwithstanding the FCC's ruling, unrestricted
access to unbundled switching is available in Texas, where state rulings require
incumbent telephone companies to make switching available as an unbundled
network element.
In addition to these changes, the FCC also:
- Limited the scope of the shared transport unbundled network element,
holding that the incumbent must only offer shared transport as a unbundled
network element where unbundled local circuit switching is provided.
- Held that incumbents are not required to offer packet switching as a
unbundled network element in most cases.
- Held that both the loop and transport unbundled network elements include
access to "dark fiber." Dark fiber is distinguished from "lit fiber"
transmission capacity in that dark fiber is sold independently from the
electronics necessary to "light" the fiber and transmit information. The
47
<PAGE>
availability of dark fiber from incumbents as a unbundled network element
could create an additional source of dark fiber in the market.
- Ordered "sub-loop unbundling," which will allow new telecommunications
service providers to connect at any feasible point along the local loop,
and not just at the central office. In some incumbent networks, subloop
unbundling will make it easier for new telecommunications service
providers to use portions of the unbundled network element loop to offer
advanced services, such as digital subscriber lines. In a separate order,
the FCC also ordered the unbundling of the "high-frequency" portion of the
loop, which also makes it easier and less expensive for new
telecommunications service providers to use unbundled network elements to
offer advanced services, such as digital subscriber lines.
The FCC's decision regarding unbundled network elements is currently the
subject of petitions for reconsideration filed at the FCC by various parties,
including us. Some incumbent telephone companies have asked the FCC to expand
the limitation on switching by, among other things, extending its geographic
scope. We and other new telecommunications service providers have asked the FCC
to either do away with the limitation or make it applicable to only larger
customers. We cannot predict the outcome of this proceeding. If the FCC further
restricts the availability of unbundled switching, it could adversely affect our
ability to serve customers efficiently.
Another open question is whether incumbent telephone companies are required
to combine network elements not currently combined in their networks for
requesting new telecommunications service providers. The FCC's rules requiring
the incumbent telephone companies to do so were vacated by the Eighth Circuit,
but the FCC and the new telecommunications service provider industry have asked
that court to reinstate the rules in the wake of the Supreme Court's decision.
If the rules are reinstated, it will significantly expand the ability of new
telecommunications service providers to provide service to customers using
network elements purchased from the incumbent telephone companies. Also
unsettled is the scope of the FCC's rule requiring incumbent telephone companies
to provide requesting new telecommunications service providers with combinations
of network elements that are "currently combined" in the incumbent telephone
company's network. The new telecommunications service provider industry has
taken a broad view of this requirement, interpreting it to mean that new
telecommunications service providers are entitled to purchase network element
combinations so long as they are combined anywhere in the incumbent telephone
company's network. The incumbent telephone companies, by contrast, have taken a
much narrower view, arguing that the rule requires the incumbent telephone
companies only to provide combinations of network elements that are currently in
service to a particular customer. The ultimate resolution of this question could
expand or restrict our ability to provide service to our customers using network
elements purchased from the incumbent telephone company.
The Eighth Circuit is expected to rule on the pricing issue in the next
several months and may also rule on the incumbent telephone companies'
obligation to provide new network element combinations in the same decision. It
is not clear when the FCC or the courts will act to define the scope of
"currently combined." The possible impact of the resolution of these open issues
on existing interconnection agreements between incumbent telephone companies and
new telecommunications service providers or on agreements that may be negotiated
in the future cannot be determined at this time.
In addition to its rulings regarding interconnection and unbundled network
elements, the FCC has issued a series of orders on the ability of new
telecommunications service providers to provide digital subscriber lines and
other high-bandwidth services to their customers for, among other things,
Internet access. Those orders have made clear that new telecommunications
service providers are entitled to collocate the equipment necessary to provide
those services in incumbent telephone companies' central offices; that incumbent
telephone companies must, where technically feasible, provide new
48
<PAGE>
telecommunications service providers with high-quality loops capable of
supporting digital subscriber lines and that the incumbent telephone companies
must provide new telecommunications service providers with information
concerning the make-up of their networks to allow the new telecommunications
service provider to determine if a particular customer can be served with
digital subscriber line service. However, many of the details of the orders'
implementation are unsettled and we cannot assure you that the rules are
sufficient to ensure that the incumbent telephone companies meet their
obligations.
THE STATES' ROLE IN IMPLEMENTING THE LOCAL COMPETITION PROVISIONS
Although the FCC establishes nationwide guidelines governing entry by new
telecommunications service providers under the Telecommunications Act, state
regulatory commissions also have major roles in implementing the local
competition provisions of the act. Among other things, state regulatory
commissions must approve or reject interconnection agreements, and they have
chief responsibility for arbitrating and mediating these agreements if the
negotiating carriers cannot reach an understanding on the agreement's terms.
State regulatory commissions are also charged with developing and implementing
cost-based prices for interconnection and unbundled network elements, in
accordance with the Telecommunications Act and the forward-looking pricing
guidelines set by the FCC. State regulatory commissions are also permitted to
establish additional unbundled network elements consistent with federal law and
policy.
BELL OPERATING COMPANIES ENTRY INTO LONG DISTANCE
The Telecommunications Act also seeks to encourage local competition by
requiring the regional Bell operating companies to demonstrate on a
state-by-state basis that they have adequately opened their network and market
to competitors before they can provide long distance service to end users in
their own local service areas. Specifically, the Telecommunications Act lays out
a 14-point checklist which generally requires a regional Bell operating company
to prove to the FCC that it has complied with the interconnection and network
access obligations discussed above and that it faces effective competition in
the state where it seeks to provide long distance service. While the FCC has
ultimate responsibility for deciding whether the checklist conditions have been
met, the FCC is required to first consult with the appropriate state regulatory
commission.
Southwestern Bell is in the process of applying for authority to provide
long distance service in Texas. The FCC is expected to rule on Southwestern
Bell's application in April 2000. Southwestern Bell has also begun the process
of applying for long distance authority in Kansas by making a preliminary filing
with the Kansas state regulatory commission. If Southwestern Bell receives
approval from the FCC as described above, Southwestern Bell will be able to
provide in-region long distance services, which will enable it to provide
customers with a full range of local and long distance telecommunications
services. The ability of Southwestern Bell to provide long distance services is
expected to be an additional source of competition for us.
OTHER FEDERAL REGULATION
The FCC regulates our interstate and international service offerings. Those
services include our provision of interstate and international long distance
service and our provision of interstate access service. The FCC has established
different levels of regulation for dominant carriers and non-dominant carriers.
Incumbent telephone companies, such as the Bell operating companies and GTE, are
currently considered dominant carriers, and are subject to extensive rate and
operational regulation, while new telecommunications service providers such as
we are considered non-dominant carriers, and are subject to substantially less
regulation.
49
<PAGE>
INTERSTATE AND INTERNATIONAL LONG DISTANCE SERVICES
Interstate and international long distance services of non-dominant carriers
are subject to relatively little regulation by the FCC. Our provision of
international long distance services requires prior authorization by the FCC
under Section 214 of the Telecommunications Act, which we have obtained. We are
also required to file tariffs with the FCC for international long distance
service on an ongoing basis.
Under the FCC's streamlined regulation of non-dominant carriers, we may
install and operate facilities for the transmission of domestic interstate
communications without prior FCC authorization.
In addition, in October 1996, the FCC adopted an order in which it
eliminated the requirements that non-dominant interstate interexchange carriers
maintain tariffs on file with the FCC for domestic interstate services. The
order does not apply to the switched and special access services of the Bell
operating companies or other local exchange carriers. The FCC order was issued
under authority granted to the FCC in the 1996 Act to "forbear" from regulating
any telecommunications services provider under some circumstances. After a
nine-month transition period, relationships between interstate carriers and
their customers would be set by contract. At that point, long distance companies
would be prohibited from filing tariffs with the FCC for interstate, domestic,
interexchange services. Several parties filed notices for reconsideration of the
FCC order and other parties appealed the decision. On February 13, 1997, the
United States Court of Appeals for the District of Columbia Circuit stayed the
implementation of the FCC order pending its review of the order on its merits.
Currently, that stay remains in effect and interstate long distance telephony
companies are therefore still required to file tariffs.
The D.C. Circuit heard oral argument on the merits of the FCC's detariffing
order on March 14, 2000, but has not yet issued an order. If the stay is lifted
and the FCC order becomes effective, telecommunications carriers will no longer
be able to rely on the filing of tariffs with the FCC as a means of providing
notice to customers of prices, terms and conditions on which they offer their
interstate services. The FCC has required that non-dominant interexchange
carriers post their rates, terms and conditions for all their interstate,
domestic services on their Internet web sites if they have one; this rule is
effective once the FCC's mandatory detariffing order takes effect. This may
result in significant administrative expenses for us. The obligation to provide
non-discriminatory, just and reasonable prices remains unchanged under the
Communications Act of 1934. Tariffs also allow a carrier to limit its liability
to its customers, including in connection with service interruptions. If tariffs
are eliminated, we may become liable for costs that we would have been able to
limit through tariff filings, and we cannot assure you that the potential
liabilities will not have a material adverse effect on our results of operations
and financial condition.
ACCESS SERVICES
Unlike dominant carriers, which are subject to extensive rate regulation, we
and other non-dominant carriers are subject to relatively little regulation of
our interstate access services. The FCC has eliminated the requirement that
non-dominant carriers must file tariffs for their access services. While no
longer mandatory, carriers may continue to file access tariffs. We have chosen
to continue to do so.
In August 1999, the FCC granted incumbent telephone companies subject to
price cap rate regulation, including the regional Bell operating companies,
substantial pricing flexibility with regard to some interstate access services.
Among other things, the FCC's new rules permit incumbent telephone companies,
upon a showing that the services in question are subject to sufficient levels of
competition, to offer volume and term discounts and contract tariffs for
particular access services. The new rules also allow incumbent telephone
companies, upon meeting a higher competitive standard, to file tariffs for their
access services free from many rate structure requirements. To the extent these
regulatory
50
<PAGE>
initiatives enable or require incumbent telephone companies to offer selectively
reduced rates for some access services, the rates we may charge for these access
services will likely be constrained. In addition, the FCC has recently initiated
a proceeding to examine whether to regulate the rates that new
telecommunications service providers charge for their access services. While the
FCC has received considerable opposition from the new telecommunications service
provider industry and others to doing so, we cannot assure you that the FCC will
not adopt some form of regulation for new telecommunications service provider
access charges. The timing of the FCC's decision is uncertain.
In addition to the pricing flexibility described above, the FCC is currently
considering a joint proposal from AT&T, Bell Atlantic, BellSouth, GTE, SBC
Communications and Sprint to lower significantly and deaverage interstate access
charges for participating price cap local exchange carriers. The FCC could issue
an order on this proposal in the first half of 2000. If adopted, these pricing
reforms could increase competition among carriers offering local exchange and
exchange access service in our operating area.
ADDITIONAL FEDERAL ISSUES
ACCESS TO POLES, DUCTS, CONDUITS AND RIGHTS-OF-WAY. An area of the law that
remains in flux concerns the extent of a carrier's obligations to provide access
to poles, ducts, conduits and rights-of-way. We are obligated under Section 224
of the Communications Act to permit other carriers reasonable access to our
poles, ducts, conduits and rights-of-way and the FCC has adopted comprehensive
rules governing how access is to be provided. The FCC is also currently
considering additional rules, including whether access to rooftops and space
inside buildings, including buildings owned by utilities, should be mandated
under the Telecommunications Act.
EEO REPORT. The FCC requires us to file an annual employment report to
comply with the FCC's Equal Employment Opportunity policies.
TRUTH IN BILLING. The FCC has adopted new rules designed to make it easier
for customers to understand the bills of telecommunications carriers. These new
rules establish requirements regarding the formatting of bills and the
information that must be included on bills. These rules have been appealed in
federal court.
ANTI-SLAMMING RULES. The FCC implemented the so-called "anti-slamming"
rules, which protect consumers whose pre-subscribed carriers have been switched
without their consent. Under the rules, a carrier found to have slammed a
customer is subject to substantial fines and must remove from the consumer's
bill all charges incurred within 30 days of the slamming. While we do not engage
in these practices, a slamming fine, if levied, could have a material impact on
our business in the future.
CUSTOMER PROPRIETARY NETWORK INFORMATION. In February 1998, the FCC adopted
rules implementing Section 222 of the Communications Act of 1934, which governs
the use of customer proprietary network information by telecommunications
carriers. Customer proprietary network information generally includes any
information regarding a subscriber's use of a telecommunications service, where
it is obtained by a carrier solely by virtue of the carrier-customer
relationship. The FCC has clarified that customer proprietary network
information does not include a subscriber's name, telephone number, and address,
as this information is generally not derived from the carrier's provision of a
telecommunications service to a customer. Under the FCC's rules, a carrier may
only use a customer's proprietary network information to market services that
are "necessary to, or used in," the provision of a service that the carrier
already provides to the customer, unless it receives the customer's prior oral
or written consent to use that information to market other services. In
December 1999, the Court of Appeals for the Tenth Circuit vacated the FCC's
original and modified customer proprietary network information rules on the
grounds that they violate the First Amendment. However, Section 222 of the
Communications Act remains the law and that section, in addition to the FCC's
now-vacated rules,
51
<PAGE>
provides some guidance on the use of customer proprietary network information
rules. Uncertainty regarding restrictions on the use of customer proprietary
network information rules may impede our ability to market integrated packages
of services effectively and to expand existing customers' use of our services.
UNIVERSAL SERVICE. Under the Telecommunications Act of 1996, on May 8,
1997, the FCC released an order establishing a significantly expanded federal
universal service subsidy regime. The universal service program provides support
to carriers serving low-income customers and customers who live in areas where
the cost of providing telecommunications services is high. In addition, the FCC
established new subsidies for telecommunications and some information services
provided to qualifying schools and libraries and for services provided to rural
health care providers. Providers of interstate telecommunications services, as
well as other entities, such as private carriers offering excess capacity to end
user customers, must pay for these programs. Our contribution to the federal
support funds would be calculated based on a percentage of our gross end-user
interstate and international telecommunications revenues. The assessment rate
for the second quarter of 2000 is 5.7101 percent of interstate and international
end-user telecommunications revenues. The contribution factor issued by the FCC
varies quarterly. The amounts contributed may be billed to customers. Currently,
the FCC is calculating assessments based on the prior year's revenues. Assuming
that the FCC continues to calculate contributions based on the prior year's
revenues, we believe that we will not be liable to contribute any material
amount to these programs during 2000 because we had limited interstate and
international end user revenues in 1999. The threshold before we are required to
contribute is a $10,000 contribution, which translates into roughly $175,000 in
interstate end user telecommunications revenues. With respect to subsequent
years, however, we are currently unable to quantify the amount of any
contributions that we will be required to make or the effect that these required
contributions will have on our financial condition.
The FCC has recently adopted the cost model which it will use to determine
the support needed in high-cost areas and the inputs for the model. The new
high-cost support mechanism, which went into effect on January 1, 2000 for
non-rural carriers, substantially increases the amount of high-cost support
provided to non-rural carriers. The U.S. Court of Appeals for the Fifth Circuit
recently issued an order upholding in part, and reversing in part, the
May 8(th) FCC order implementing these funds. Numerous FCC orders revising these
funds are subject to petitions for reconsideration and further petitions for
appeal. The outcome of these proceedings or their effect cannot be predicted.
In addition to the universal service mechanisms described above, the FCC is
currently considering a joint proposal from Bell Atlantic, BellSouth, GTE, SBC
Communications, AT&T, and Sprint to create a $650 million fund to provide
universal service support for interstate access charges. If adopted, this
proposal could significantly increase the contribution obligations of other
telecommunications carriers.
COMMUNICATIONS ASSISTANCE FOR LAW ENFORCEMENT ACT. Under this act,
telecommunications carriers are required to: (1) provide law enforcement
officials with call content and call identifying information under a valid
electronic surveillance warrant, and (2) reserve a sufficient number of circuits
for use by law enforcement officials in executing court authorized electronic
surveillance. If we provide facilities-based services, we may incur costs in
meeting both of these requirements. In particular, regarding the requirements
related to call content and identification, except in very limited circumstances
the government is required to compensate carriers only for the costs of making
equipment installed or deployed before January 1, 1995 compliant with this act.
While the telecommunications industry is attempting to negotiate legislative and
administrative changes to this reimbursement cut-off date, as it stands today,
we will be financially responsible for ensuring that our post-1995 equipment is
in compliance. Regarding the circuit capacity requirements, the government will
finance any necessary increases in capacity for equipment that we have
specifically identified as installed or deployed prior to September 8, 1998, and
we are responsible for paying only for any necessary increases in capacity for
equipment installed or deployed after that date.
52
<PAGE>
STATE AND LOCAL REGULATION
In general, state regulatory commissions have regulatory jurisdiction over
us when our facilities and services are used to provide local and other
intrastate services. Under the Telecommunications Act, state commissions
continue to set the requirements for providers of local and intrastate services,
including quality of services criteria. State regulatory commissions also can
regulate the rates charged by new telecommunications service providers for
intrastate and local services and can set prices for interconnection by new
telecommunications service providers with the incumbent telephone company
networks, in accordance with guidelines set by the FCC. In addition, state
regulatory commissions in many instances have authority under state law to adopt
additional regulations governing local competition, so long as the state's
actions are not inconsistent with federal law or regulation.
Most state regulatory commissions require companies that wish to provide
intrastate common carrier services to register or be certified to provide these
services. These certifications generally require a showing that the carrier has
adequate financial, managerial and technical resources to offer the proposed
services in a manner consistent with the public interest. In most states, we are
also required to file tariffs setting forth the terms, conditions and prices for
services that are classified as intrastate, and to update or amend our tariffs
as rates change or new products are added. We may also be subject to various
reporting and record-keeping requirements.
We are currently certified by the Missouri Public Service Commission, the
Kansas Corporation Commission, the Texas Public Utilities Commission and the
Oklahoma Corporation Commission to provide both local and intrastate long
distance service in those states. We have tariffs on file in each of these
states.
If we choose to install our own transmission facilities, we may be required,
in some cities, to obtain street opening and construction permits, permission to
use rights-of-way, zoning variances and other approvals from municipal
authorities. We also may be required to obtain a franchise to place facilities
in public rights of way. In some areas, we may be required to pay license or
franchise fees for these approvals. We cannot assure you that fees will remain
at current levels, or that our competitors will face the same expenses, although
the Telecommunications Act does require that any fees charged by municipalities
be reasonable and non-discriminatory as among telecommunications carriers.
53
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table sets forth information concerning our directors,
executive officers and other key personnel, including their ages as of the date
of this prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Richard A. Jalkut...................... 56 Chairman of the Board
David E. Scott......................... 40 President, Chief Executive Officer and Director
Donald H. Goldman...................... 40 Executive Vice President and Chief Operating Officer
David M. Hollingsworth................. 35 Senior Vice President of Financial Operations
Gregory C. Lawhon...................... 40 Senior Vice President of Public Policy and General
Counsel
Bradley A. Moline...................... 33 Senior Vice President of Finance and Chief Financial
Officer
Jeffrey D. Shackelford................. 39 Senior Vice President of Sales
David W. Vranicar...................... 41 Senior Vice President and Chief Information Officer
Henry H. Bradley....................... 54 Director
Adam H. Clammer........................ 29 Director
Mory Ejabat............................ 49 Director
James H. Greene, Jr.................... 49 Director
Henry R. Kravis........................ 55 Director
Alexander Navab, Jr.................... 33 Director
Thomas R. Palmer....................... 33 Director
George R. Roberts...................... 56 Director
</TABLE>
RICHARD A. JALKUT is our chairman of the board and has been a director since
March 2000. Since 1997, he has been president and chief executive officer of
Pathnet, a privately held telecom company. From 1994 to 1997, Mr. Jalkut was the
president, chief executive officer and chairman of the board of Nynex
Telecommunications Group. From 1991 to 1994, he was the president, chief
executive officer and chairman of the board of New York Telephone Company, and
from 1990 to 1991, he was the executive vice president and chief operating
officer.
DAVID E. SCOTT, a co-founder and director, is also our president and chief
executive officer. Mr. Scott has 17 years of managerial experience in the
telecommunications industry. Prior to joining us, Mr. Scott was president and
general manager of Kansas City FiberNet, a competitive local exchange carrier
owned jointly by the country's two largest cable operators, TCI and Time Warner.
Prior to his tenure at Kansas City FiberNet, Mr. Scott was vice president of
strategic development for Sprint, responsible for developing investment plans in
the competitive local exchange, wireless (PCS) and international marketplaces.
Mr. Scott also served as director of strategic planning for Sprint from 1988 to
1991. Mr. Scott also serves as a director of BizSpace, Inc., an Internet
publishing and E-commerce company he co-founded with Donald H. Goldman.
BizSpace, Inc. produces web sites that serve as on-line trade publications.
Their first website, clec.com, serves the competitive local exchange carrier
industry. Mr. Scott holds a Bachelor of Science degree in electrical
engineering, SUMMA CUM LAUDE, from the University of Missouri and a Master of
Business Administration degree from the University of Chicago.
DONALD H. GOLDMAN joined us in March 1998 as senior vice president of
Internet services and is currently our executive vice president and chief
operating officer. Mr. Goldman has over 15 years of managerial experience in the
telecommunications industry. Prior to joining us, Mr. Goldman served as vice
president, corporate development at Sprint where he developed strategy and
managed the
54
<PAGE>
acquisition of companies in the areas of systems integration, Internet
telephony, and wireless (PCS) services among others. While at Sprint,
Mr. Goldman led the team that founded Sprint PCS. Mr. Goldman also serves as
chairman of the board of BizSpace, Inc. Mr. Goldman holds a Bachelor of Arts
degree, with honors, from Johns Hopkins University and a Master of Business
Administration degree from the University of Chicago.
DAVID M. HOLLINGSWORTH joined us in February 2000 as senior vice president
of financial operations. Prior to joining us, from 1998 to February 2000,
Mr. Hollingsworth was the vice president of finance and corporate development
for GST Telecommunications. From 1997 to 1998, Mr. Hollingsworth was a
telecommunications analyst at George K. Baum and Company. From 1993 through
1996, Mr. Hollingsworth served as director of finance and administration for
Kansas City FiberNet. Before FiberNet, Mr. Hollingworth was a mergers and
acquisitions manager for Sprint Corporation. Mr. Hollingsworth holds a Bachelor
of Arts in Business Administration, cum laude, from Washington State University.
GREGORY C. LAWHON joined us in January 1997 as senior vice president of
public policy and general counsel. Prior to joining us, Mr. Lawhon practiced law
for twelve years with the 90-lawyer Kansas City firm of Spencer Fane Britt &
Browne. A partner in the firm since 1990, he was head of the firm's
communications and media group and a member of its business group. Mr. Lawhon's
areas of practice were mergers and acquisitions, with an emphasis on
communications industry acquisitions, cable television franchising, and
commercial and regulatory issues with respect to the telecommunications
industry. Mr. Lawhon holds a Bachelor of Arts degree in Economics, MAGNA CUM
LAUDE, from Vanderbilt University, and a law degree from Columbia University,
where he was a Harlan Fiske Stone Scholar.
BRADLEY A. MOLINE joined us in July 1997 as senior vice president of finance
and chief financial officer. From 1994 to 1997, Mr. Moline was the treasurer and
chief financial officer of Covenant Transport, Inc., a transportation company in
Chattanooga, Tennessee that became publicly traded during his tenure. Prior to
joining Covenant Transport, Mr. Moline worked for Ernst & Young LLP in Kansas
City, Missouri and Grant Thornton in Lincoln, Nebraska, providing customer
services in the auditing and consulting areas. Mr. Moline holds a Bachelor of
Administration degree in Business Administration, with distinction, from the
University of Nebraska and is a certified public accountant.
JEFFREY D. SHACKELFORD, a co-founder, is senior vice president of sales.
Mr. Shackelford has 13 years of experience in the telecommunications industry.
Prior to joining us, Mr. Shackelford served as director of sales and marketing
for Kansas City FiberNet. Prior to joining Kansas City FiberNet,
Mr. Shackelford was the Branch Manager for Sprint's commercial sales office in
Kansas City and was responsible for sales and service of small to large business
customers. During his tenure at Sprint, which began in 1988, Mr. Shackelford
also developed the long distance industry's first PC-based call management
system, FONVIEW. Mr. Shackelford holds a Bachelor of Science degree in Computer
Science from the University of Kansas.
DAVID W. VRANICAR joined us in March 1997 and serves as senior vice
president and chief information officer. Prior to joining us, Mr. Vranicar was
vice president, international business development, at Sprint. Before joining
Sprint in 1992, Mr. Vranicar was vice president, Asia/Pacific operations, at
MPSI Systems Private Ltd., based in Singapore. MPSI is a software and
information services company that develops and markets decisions-support
software and databases to major retail companies. Mr. Vranicar was the company's
senior executive in the Asia/Pacific division, directing a staff of
approximately 80 engaged in software development, computer graphics, and
customer technical support. Mr. Vranicar holds a Bachelor of Business degree in
Marketing, with honors, from the University of Texas at Austin, and a Master of
Business Administration degree, with distinction, from the University of
Michigan at Ann Arbor.
55
<PAGE>
HENRY H. BRADLEY has been a director since January 1997. He is the chairman
of the board of News-Press & Gazette Company, or NPG, one of our co-founders.
NPG is a family-owned company that owns and operates a daily newspaper, cable
television systems, network affiliate broadcast television stations and FM and
AM radio stations. Mr. Bradley has held a number of other positions with NPG
since joining NPG in 1971, including terms as the editor and publisher of the
St. Joseph News-Press. Mr. Bradley holds a Bachelor's degree from the University
of Missouri.
ADAM H. CLAMMER has been a director since August 1999. Prior to joining KKR
in 1995, he was with Morgan Stanley & Co. in its mergers and acquisitions
department. At KKR, Mr. Clammer has been involved in investments in Intermedia
Communications, Inc., CAIS Internet, Inc., Zhone Technologies, RELTEC and
Borden. He is also a director of AEP Industries, Inc. and a number of private
companies.
MORY EJABAT has been a director since March 2000. Since September 1999,
Mr. Ejabat has been the chairman and chief executive officer of Zhone
Technologies, Inc. Prior to joining Zhone, Mr. Ejabat served as the president
and chief executive officer of Ascend Communications, Inc. from June 1995 to
June 1999. Before becoming the president and chief executive officer of Ascend
in 1995, Mr. Ejabat had served as vice president, operations from 1990 to 1992
and as executive vice president from 1992 to 1995.
JAMES H. GREENE, JR. has been a director since August 1999 and is a member
of the limited liability company which serves as the general partner of KKR and
a general partner of KKR Associates. He is also a director of Accuride
Corporation, Owens-Illinois, Inc., Safeway Inc., Shoppers Drug Mart, Inc.,
Intermedia Communications, Inc., CAIS Internet, Inc., Tenovis, formerly a
division of Bosch Telecom, and Zhone Technologies.
HENRY R. KRAVIS has been a director since March 2000. He is a founding
partner of KKR and since January 1996 a managing member of the executive
committee of the limited liability company that serves as the general partner of
Kohlberg Kravis Roberts & Co., L.P. He is also a director of Accuride
Corporation, Borden, Inc., The Boyds Collection, Ltd., Evenflo Company Inc., The
Gillette Company, IDEX Corporation, KinderCare Learning Centers, Inc., KSL
Recreation Group, Inc., Owens-Illinois, Inc., PRIMEDIA Inc., Regal Cinemas,
Inc., Safeway, Inc., Sotheby's Holdings, Inc., Spalding Holdings Corporation,
and TI Group plc. Messrs. Kravis and Roberts are first cousins.
ALEXANDER NAVAB, JR. has been a director since August 1999. He has been an
executive of KKR and a limited partner of KKR Associates since 1993. From 1991
to 1993, Mr. Navab was an associate at James D. Wolfensohn, Inc. He is also a
director of Borden, Inc., KSL Recreation Group, Inc., Intermedia Communications,
Inc., CAIS Internet, Inc., Tenovis, formerly a division of Bosch Telecom, and
Zhone Technologies.
THOMAS R. PALMER has been a director since April 1999. Since June 1997,
Mr. Palmer has been a general partner at Kansas City Equity Partners, and
focuses on investments in the telecommunications and information technology
sector. He joined the firm in August 1995. Prior to joining Kansas City Equity
Partners, he held positions at Ameritech and Trans National Group. Mr. Palmer
also serves on the boards of Net Sales, Vroom and several other private
companies. Mr. Palmer is a graduate of Dartmouth College and the Kellogg School
of Management at Northwestern University.
GEORGE R. ROBERTS has been a director since March 2000. He is a founding
partner of KKR and since January 1996 a managing member of the executive
committee of the limited liability company that serves as the general partner of
Kohlberg Kravis Roberts & Co., L.P. He is also a director of Accuride
Corporation, Borden, Inc., The Boyds Collection, Ltd., Evenflo Company Inc.,
IDEX Corporation, KinderCare Learning Center, Inc., KSL Recreation Group, Inc.,
Owens-Illinois, Inc., PRIMEDIA Inc., Regal Cinemas, Inc., Safeway, Inc. and
Spalding Holdings Corporation. Messrs. Kravis and Roberts are first cousins.
56
<PAGE>
BOARD COMPOSITION
The number of directors is set at 11. In accordance with the terms of our
certificate of incorporation, as amended and restated prior to the closing of
this offering, the terms of the office of the board of directors will be divided
into three classes, with each class holding office for staggered three year
terms:
- Class I directors' terms will expire at the annual meeting of stockholders
to be held in 2001;
- Class II directors' term will expire at the annual meeting of stockholders
to be held in 2002; and
- Class III directors' term will expire at the annual meeting of
stockholders to be held in 2003.
The Class I directors will be Messrs. Clammer, Ejabat and Palmer. The
Class II directors will be Messrs. Bradley, Kravis and Roberts. The Class III
directors will be Messrs. Greene, Jalkut, Navab and Scott. Currently, there is
one vacancy on the board. When this vacancy is filled, we intend for the new
director to be a Class I director. At each annual meeting of stockholders after
the initial classification of the board of directors, the successors to
directors whose term will then expire will be elected to serve from the time of
election and qualification until the third annual meeting following election.
Any additional directorships resulting from an increase in the number of
directors will be distributed among the three classes so that, as nearly
possible, each class will consist of one-third of the directors. This
classification of the board of directors may have the effect of delaying or
preventing changes in our control or management. Directors may be removed for
cause by the affirmative vote of the holders of a majority of the common stock.
BOARD COMMITTEES
AUDIT COMMITTEE. The audit committee is responsible for, among other
things, making recommendations concerning the engagement of our independent
public accountants, reviewing with the independent public accountants the plans
and results of the audit engagement, approving professional services provided by
the independent public accountants, reviewing the independence of the
independent public accountants, considering the range of audit and non-audit
fees and reviewing the adequacy of our internal accounting controls. Upon
completion of the offering, the audit committee will consist of
Messrs. Bradley, Ejabat and Jalkut.
COMPENSATION COMMITTEE. The compensation committee is responsible for
determining compensation for our executive officers and administering the 1998
Employee Stock Option Plan and the 2000 Equity Participation Plan. Since
August 1999, the compensation committee consists of Messrs. Navab, Bradley and
Greene.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee of the board of directors
is currently or has been, at any time since our formation, our officer or
employee.
DIRECTOR COMPENSATION
Directors who are also our executive officers do not receive any additional
compensation for serving as members of the board of directors or any of its
committees. Non-employee directors are expected to receive a cash stipend of
$5,000 payable annually and reimbursement of expenses for serving on the board
of directors and any committees of the board, as well as an annual option to
purchase 5,000 shares of common stock under the 2000 Equity Participation Plan.
Each non-employee director currently on the board will receive an option to
purchase 10,000 shares of common stock upon completion of the offering at the
offering price. These options will vest in equal annual installments over the
next four years. In addition, Messrs. Ejabat and Jalkut each received on
March 22, 2000 an
57
<PAGE>
additional option to purchase 30,000 shares of common stock at an exercise price
of $7.50 per share. These options will vest in equal annual installments over
the next two years.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the cash and non-cash compensation paid or
incurred on our behalf to our chief executive officer and each of the four other
most highly compensated executive officers that earned more than $100,000 during
1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------------
-------------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND OTHER ANNUAL OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) (#)(1) ($)(2)
- ------------------ -------- --------- -------- --------------- --------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
David E. Scott................ 1999 203,846 -- -- 200,000 8,153
President and Chief 1998 175,000 -- -- 1,052,362 7,000
Executive Officer(3) 1997 164,904 -- -- -- --
Donald H. Goldman............. 1999 192,892 -- -- 150,000 7,716
Executive Vice President 1998 101,346 -- -- 263,750 --
and Chief 1997 -- -- -- -- --
Operating Officer(4)
Gregory C. Lawhon............. 1999 184,615 -- -- 75,000 7,385
Senior Vice President of 1998 175,000 -- -- 328,863 5,386
Public Policy and General 1997 164,904 -- -- -- --
Counsel(3)
David W. Vranicar............. 1999 177,331 -- -- 75,000 7,093
Senior Vice President 1998 150,000 -- -- 274,052 6,000
and Chief Information 1997 118,269 -- -- -- --
Officer(5)
Stephen L. Sauder............. 1999 216,561 -- -- -- 8,663
Vice President(6) 1998 226,471 128,667 -- -- --
1997 134,577 -- -- --
</TABLE>
58
<PAGE>
- ------------------------
(1) Includes options to purchase shares of our common stock, which were issued
under our 1998 employee stock option plan. Prior to the private placement of
our series B preferred stock, we were a party to various stock option
agreements with our employees, all of which were governed by our 1997 stock
option plan. In connection with the 1998 private placement of series B
preferred stock, the 1997 stock option plan was replaced with the 1998 stock
option plan, and all stock option agreements governed by the 1997 stock
option plan were terminated. Options issued to the members of management
during 1998 were granted under our 1998 employee stock option plan and were
exercisable immediately on grant at an exercise price of $0.001 per share.
The shares issued under these options vest over a four-year period, at a
rate of 6.25% per quarter. Options issued during 1999 were also granted
under our 1998 stock option plan and vest 25% at the first anniversary of
the grant, then 6.25% per quarter thereafter. All stock options have been
adjusted to reflect a stock dividend made on June 23, 1998. Holders of
exercised options have voting power with respect to all shares of common
stock underlying the options. Upon termination of employment, we have the
right to repurchase all options which have not vested as of that date,
subject to some exceptions.
(2) Reflects matching contributions made by us under our 401(k) plan.
(3) Reflects compensation paid to Messrs. Scott and Lawhon commencing in
January 1997.
(4) Mr. Goldman joined us in March 1998 as senior vice president of Internet
services. In August 1999 Mr. Goldman was named senior vice president of
operations and chief operating officer.
(5) Reflects compensation paid to Mr. Vranicar commencing in March 1997.
(6) Mr. Sauder joined us after the Valu-Line acquisition and currently serves as
vice president. Compensation listed was paid by Valu-Line from January 1997
to February 1998.
59
<PAGE>
OPTIONS GRANTS
The following table sets forth summary information regarding option grants
made during 1999 to our chief executive officer and each of our four other
highly paid executive officers. The exercise price per share is equal to the
fair market value of our common stock on the date of grant as determined by our
board of directors:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF STOCK
--------------------------------------------------------- PRICE
NUMBER OF % OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM(3)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED(#)(1) FISCAL YEAR(2) ($/SHARE) DATE 5%($) 10%($)
- ---- ------------- -------------- ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
David E. Scott.................. 200,000 11.5% 4.50 10/7/09 566,005 1,434,368
Donald H. Goldman............... 150,000 8.6% 4.50 10/7/09 424,504 1,075,776
Gregory C. Lawhon............... 75,000 4.3% 4.50 10/7/09 212,252 537,888
David W. Vranicar............... 75,000 4.3% 4.50 10/7/09 212,252 537,888
Stephen L. Sauder............... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Options granted to purchase shares of our common stock were made under our
1998 employee stock option plan. In the event that a purchaser ceases to
provide service to us and our affiliates, we have the right to repurchase
any of that person's unvested shares of common stock at the original option
exercise price. These options vest 25% on the first anniversary of the grant
date and quarterly thereafter at a rate of 6.25%.
(2) The percentage of total options was calculated based on options to purchase
an aggregate of 1,744,800 shares of common stock granted to employees under
the 1998 stock option plan in 1999.
(3) The potential realizable value was calculated based on the ten-year term of
the options and assumed rates of stock appreciation of 5% and 10%,
compounded annually from the date the options were granted to their
expiration date based on the fair market value of the common stock on the
date of grant.
1998 EMPLOYEE STOCK OPTION PLAN
Under our 1998 employee stock option plan, as amended, options to purchase
shares of our common stock in the form of both incentive stock options and
nonqualified stock options were granted to our employees or employees of certain
of our subsidiaries. A total of 7,720,845 shares of our common stock were
reserved for issuance under this option plan. As of December 31, 1999, options
to acquire 1,980,850 shares were issued and outstanding with a weighted average
exercise price of $3.59 per share. These options generally vest 25% per year
over four years from the date of grant. Under a resolution of our board of
directors, no new options may be granted under this option plan.
2000 EQUITY PARTICIPATION PLAN
We intend to adopt prior to the closing of the offering the 2000 Equity
Participation Plan, which we also refer to as the Equity Plan. The principal
purpose of the Equity Plan is to attract, retain and motivate select officers,
employees, consultants and directors through the granting of stock-based
compensation awards. The Equity Plan will provide for a variety of these awards,
including non-qualified stock options, incentive stock options (within the
meaning of Section 422 of the Internal Revenue Code), stock appreciation rights,
restricted stock, deferred stock, dividend equivalents, performance awards,
stock payments, and other stock-related benefits. A total of shares of
common stock will be reserved for issuance under the Equity Plan. The maximum
number of shares
60
<PAGE>
that may be subject to awards granted under the Equity Plan to any individual in
any calendar year cannot exceed .
The Equity Plan will provide that the committee has the authority to select
the employees and consultants to whom awards are to be made, to determine the
number of shares to be subject to the Equity Plan and the terms and conditions
of the awards and the Equity Plan, and to make all other determinations and to
take all other actions necessary or advisable for the administration of the
Equity Plan for employees or consultants.
The Equity Plan also provides that at specified times our non-employee
directors will automatically be granted options to purchase shares of our common
stock. All options granted to our non-employee directors will have an exercise
price per share equal to the fair market value per share of our common stock as
of the date of grant and all of these options will become exercisable in equal
annual installments of 25% on each of the first four anniversaries of the date
of grant. Each individual who is a non-employee director at the time of the
offering will be granted an option to purchase 10,000 shares of our common stock
at the time of the offering. After the offering, each non-employee director who
becomes a member of the board will initially receive an option to purchase
10,000 shares of our common stock upon becoming a member. In addition, all
non-employee directors will be granted an option to purchase an additional 5,000
shares of our common stock at each annual meeting of our stockholders after the
offering at which he or she is reelected to our board of directors.
Each of the committee and the board will be authorized to adopt, amend and
rescind rules relating to the administration of the Equity Plan, and to amend,
suspend and terminate the Equity Plan. We have attempted to structure the Equity
Plan in a manner such that remuneration attributable to stock options and other
awards will not be subject to the deduction limitation contained in
Section 162(m) of the Internal Revenue Code.
2000 EMPLOYEE STOCK PURCHASE PLAN
We intend to adopt prior to the closing of the offering the 2000 Employee
Stock Purchase Plan, or the Purchase Plan. The Purchase Plan is intended to be
an "employee stock purchase plan" as described in Section 423 of the Code. The
Purchase Plan will be administered by the compensation committee of our board of
directors. A total of shares of our common stock will be reserved and
available for purchase under the Purchase Plan, subject to antidilution and
other adjustment provisions.
The Purchase Plan will permit eligible employee participants to purchase our
common stock through payroll deductions at a price per share which is equal to
the lesser of 85% of the fair market value of the common stock on the first or
the last day of an offering period. The Purchase Plan will provide for two
offering periods each calendar year. The first is March 1 through August 31 and
the second is September 1 through February 28 or, in a leap year, February 29,
except that the first offering period under the Purchase Plan will begin on the
closing of the offering. On the last day of each offering period, each
participant's accrued payroll deductions will be automatically applied to the
purchase of common stock.
Employees eligible to participate in the Purchase Plan consist of all
persons employed for at least 180 days by us or by the subsidiaries described in
the Purchase Plan, except that the Purchase Plan will exclude from participation
any employee whose customary employment is for less than 32 hours per week or
for not more than 1,000 hours during a calendar year and any employee who owns
stock representing 5% or more of the total combined voting power or value of all
classes of our stock or the stock of our subsidiaries. No participant will be
permitted to purchase shares of common stock in any calendar year under the
Purchase Plan with an aggregate fair market value (generally determined as of
the beginning of the plan year) in excess of $25,000.
61
<PAGE>
401(K) PLAN
We have adopted a tax-qualified employee savings and retirement plan, or
401(k) plan, covering all of our full-time employees. Under the 401(k) plan,
employees may elect to reduce their current compensation up to the statutorily
prescribed annual limit and have the amount of the reduction contributed to the
401(k) plan. The 401(k) plan is intended to qualify under Section 401 of the
Code so that contributions by employees to the 401(k) plan and income earned on
plan contributions are not taxable to employees until withdrawn from the 401(k)
plan. The trustees under the 401(k) plan, at the direction of each participant,
invest the participant's assets in the 401(k) plan in selected investment
options.
1999 OPTION VALUES
The following table shows for the fiscal year ended December 31, 1999,
information regarding options granted to, exercised by, and held at year end by,
our Chief Executive Officer and each of our four other most highly paid
executive officers during 1999:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS(#) IN-THE-MONEY OPTIONS($)
SHARES VALUE ------------------------------ ----------------------------
ACQUIRED ON REALIZED UNEXERCISABLE
NAME EXERCISE(#)(1) ($)(2) EXERCISABLE UNEXERCISABLE(3) EXERCISABLE (2)(3)
- ---- -------------- --------- ----------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
David E. Scott........... 263,091 -- 791,953 --
Donald H. Goldman........ 65,938 -- 298,359 --
Gregory C. Lawhon........ 82,216 -- 259,985 --
David W. Vranicar........ 68,513 -- 229,154 --
Stephen L. Sauder........ -- -- -- -- -- --
</TABLE>
- ------------------------
(1) For purposes of this table alone, "exercise" means an employee's acquisition
of shares of common stock which have already vested, "exercisable" means
options to purchase shares of common stock which are subject to exercise and
"unexercisable" means all other options to purchase shares of common stock.
(2) Amounts shown under the "Value Realized" and "Value of Unexercised
In-the-Money Options" are based upon an assumed initial public offering
price of $ per share minus the per share exercise price multiplied by
the number of shares underlying the option.
(3) Includes options to purchase shares of common stock, which were issued under
the 1998 employee stock option plan. Options issued during 1998 under the
1998 employee stock option plan were granted at an exercise price of $0.001
per share. Options issued during 1999 under the 1998 stock option plan were
granted at an exercise price of $4.50 per share. All options vest 25% on the
first anniversary of the grant date and quarterly thereafter at a rate of
6.25%.
EMPLOYMENT AGREEMENTS
Each of Messrs. Scott, Goldman, Lawhon, Moline, Shackelford and Vranicar
entered into an amended and restated employment agreement with us in October
1999. In addition, Mr. Sauder entered into an employment agreement with us in
February 1998, and Mr. Hollingsworth entered into an employment agreement with
us in February 2000.
The base salary under each of these agreements is $200,000 per year, except
that Mr. Scott's base salary is $250,000 per year, Mr. Goldman's is $225,000 per
year and Mr. Sauder's is $213,000 per year.
62
<PAGE>
Each of the executives is eligible for a bonus based on achievement of
performance criteria established by the board for that executive.
Each of the employment agreements provides that upon termination of
employment by us, other than for cause, disability or death, or termination of
the employment by the executive for good reason, we will pay the executive the
following severance. We will pay the executive's salary for the remainder, if
any, of the calendar month in which the termination is effective and, in the
case of each of Messrs. Scott, Vranicar, Shackelford and Goldman, 24 calendar
months thereafter and, in the case of each of Messrs. Lawhon, Sauder,
Hollingsworth and Moline, 12 calendar months thereafter. In addition, we will
pay each executive his prorated targeted incentive compensation for the year
during which the termination is effective plus, in the case of each of
Messrs. Scott, Vranicar, Shackelford and Goldman, two times the executive's
targeted incentive compensation for that year, and, in the case of each of
Messrs. Lawhon, Hollingsworth and Moline, the full amount of the executive's
targeted incentive compensation for that year. Upon termination of employment
for disability, we will pay the employee's salary through the remainder of the
calendar month during which the termination is effective and for the lesser of
(1) six calendar months thereafter or (2) the period until disability insurance
benefits commence. Upon termination of employment from death, we will pay the
employee's salary through the end of the calendar month in which his death
occurs. Each agreement provides for noncompetition, nonsolicitation and
nondisclosure covenants.
63
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERIES D PREFERRED STOCK OFFERING
In July 1999, we completed a private placement of 2,222,222 shares of
series D preferred stock at a purchase price of $4.50 per share for aggregate
proceeds of approximately $10.0 million. The transaction was consummated
pursuant to the purchasers rights agreement described below and the series D
preferred stock purchase agreement. Under the series D preferred stock purchase
agreement, NPG, a stockholder that owned in excess of 5% of our voting
securities at the time of the series D preferred stock offering, purchased
$1.0 million of series D preferred stock, and parties affiliated with NPG,
including Henry H. Bradley, chairman of our board of directors and of NPG,
purchased $500,000 of series D preferred stock. Advantage Capital Missouri
Partners I, L.P., a stockholder that owned in excess of 5% of our voting
securities at the time of the series D preferred stock offering, purchased
$655,000 of the series D preferred stock. In addition, Ian R. N. Bund, one of
our directors at the time of the series D preferred stock offering, purchased
$82,000 of the series D preferred stock. Affiliates of KCEP I and KCEP II also
purchased $3.0 million of our series D preferred stock. Mr. Palmer, one of our
directors at the time of the series D preferred stock offering, holds voting
power of KCEP I and KCEP II.
SERIES F PREFERRED STOCK OFFERING
In August 1999, we issued and sold 13,333,334 shares of our series F
preferred stock at a purchase price of $4.50 per share to BTI Ventures, L.L.C.,
an affiliate of KKR, for aggregate proceeds of $60.0 million. KKR received three
seats on our then seven-seat board of directors. Additionally, on March 23,
2000, KKR exercised its options to purchase 5,263,158 shares of series F
preferred stock at $4.75 per share and 5,000,000 shares of series F preferred
stock at $5.00 per share. Giving effect to this exercise KKR's investment would
have represented a 51.2% equity interest as of March 23, 2000. In connection
with their exercise of these options, KKR received two additional seats on our
eleven-seat board of directors.
In connection with the series F preferred stock offering, we repurchased
2,222,222 shares of our series C preferred stock from Stephen L. Sauder, a
stockholder who owned more than 5% of our voting securities at the time of the
series F preferred stock offering, for $10.0 million.
Also, in connection with the series F preferred stock offering, we converted
each outstanding share of our series B preferred stock into one share of amended
and restated series B preferred stock. In addition, the holders of series B
preferred stock surrendered their existing redemption and participating
liquidation preference in exchange for 0.2222 shares of our series E preferred
stock. We redeemed the series E preferred stock issued to the series B preferred
stock holders for a total of $8.6 million. The rights and preferences of the
series B preferred stock were amended and restated to remove mandatory
redemption rights and change the liquidation rights.
In connection with the series F preferred stock offering, NPG, a stockholder
that owned in excess of 5% of our voting securities at the time of the series F
preferred stock offering, received 366,320 shares of series E preferred stock,
which were redeemed for an aggregate total of $1.6 million, and parties
affiliated with NPG, including Henry H. Bradley, chairman of our board of
directors and of NPG, received 73,264 shares of series E preferred stock, which
were redeemed for an aggregate total of $329,690. Advantage Capital Missouri
Partners I, L.P., a stockholder which owned in excess of 5% of our voting
securities at the time of the series F preferred stock offering, received
293,056 shares of the of the series E preferred stock, which were redeemed for
an aggregate total of $1.3 million. Bradley A. Moline, our senior vice president
of finance and chief financial officer, received 15,385 shares of series E
preferred stock, which were redeemed for an aggregate total of $69,234. Pacific
Capital, L.P., a stockholder which owned in excess of 5% of our voting
securities at the time of the series F preferred stock offering, received
271,095 shares of the of the series E preferred stock, which were redeemed for
an aggregate total of $1.2 million. Steven L. Sauder, our vice president,
together with his father,
64
<PAGE>
Earl W. Sauder, received an aggregate of 19,048 shares of series E preferred
stock, which were redeemed for an aggregate total of $85,718. KCEP I and
KCEP II together received an aggregate of 210,022 shares of series E preferred
stock, which were redeemed for an aggregate total of $945,099.
PURCHASERS RIGHTS AGREEMENT
Our current stockholders are parties to the purchasers rights agreement,
which provides that they vote their respective shares in a manner as to elect
persons specified in the agreement to serve as directors. The holders of
series F preferred stock have agreed to vote their shares to elect
Messrs. Greene, Navab and Clammer. The two additional designees of the holders
of series F preferred stock are Messrs. Kravis and Roberts. In addition, the
holders of series B preferred stock, series C preferred stock and series D
preferred stock have agreed to vote their shares to elect Henry H. Bradley and
Thomas R. Palmer. The holders of common stock have agreed to vote their shares
for the election of David E. Scott. So long as the purchasers rights agreement
is in effect, these investors will effectively control the election of our board
of directors.
REGISTRATION RIGHTS
The parties to the purchasers rights agreement, subject to some conditions,
have registration rights with respect to shares of common stock, including
shares of common stock issuable upon conversion or redemption of shares of
series F preferred stock or upon conversion of shares of series B preferred
stock, series C preferred stock, or series D preferred stock. These purchasers
have, subject to some conditions, demand and "piggy-back" registration rights.
The purchasers rights agreement provides that each purchaser of stock is subject
to lock-up restrictions in the event of a public offering of our securities.
RESTRICTIONS ON TRANSFER
Our outstanding common stock (including shares issued pursuant to options)
and each series of preferred stock are subject to restrictions on transfer.
Holders of common stock and each series of preferred stock that are parties to
the purchasers rights agreement, subject to some exceptions, may not transfer
their shares without first giving us the opportunity to purchase the shares. In
addition, subject to some exceptions, the holders of common stock or any series
of preferred stock that are parties to the purchasers rights agreement may not
transfer their shares without first giving the other purchasers under the
purchasers rights agreement the opportunity to participate in the transfer.
PRE-EMPTIVE RIGHTS
Holders of our common stock and each series of preferred stock that are
parties to the purchasers rights agreement have the right to purchase a pro rata
portion of any common stock or preferred stock that we propose to sell and
issue, subject to some exceptions.
SIZE OF THE BOARD OF DIRECTORS
The purchasers rights agreement provides that so long as at least 6,666,667
shares of series F preferred stock remain outstanding, the holders of series F
preferred stock are entitled to elect and remove directors in accordance with
our restated certificate. In the event that less than 6,666,667 shares of
series F preferred stock remain outstanding, but BTI Ventures L.L.C. and its
affiliates, which include KKR, beneficially own at least 10% of our outstanding
common stock, BTI has the right to designate the number of persons to serve as
members of the board determined in accordance with a formula set forth in the
purchasers rights agreement. Currently there are five BTI nominees sitting on
our eleven seat board of directors.
For so long as at least 8,532,394 shares of series B preferred stock,
series C preferred stock and series D preferred stock remain outstanding, the
holders of this stock, voting together as a class, are entitled to elect and
remove directors pursuant to our restated certificate.
65
<PAGE>
BTI DRAG-ALONG RIGHTS
Holders of common stock and each series of preferred stock that are parties
to the purchasers rights agreement are required to sell their shares in the
event that BTI Ventures L.L.C. or its affiliates agree to sell or transfer their
shares, or to sell all or substantially all of our assets, to a third party.
BTI VETO RIGHTS
The purchasers rights agreement provides that for so long as BTI or any of
its affiliates beneficially owns at least 6,666,667 shares of our common stock
or series F preferred stock, the approval of at least one BTI nominee on our
board will be required for our board of directors to approve and authorize any
of the following: any changes in our capital structure, such as increases or
decreases in the total authorized shares of our common stock and issuances of
our capital stock; any payment of dividends or distributions on our capital
stock; subject to limited exceptions, any reclassification, combination, split,
redemption or other acquisition of any shares of our capital stock; any
incurrence of indebtedness exceeding $5.0 million; any change in the size or
composition of our board or any board committee or creation of any board
committee; subject to limited exceptions, any affiliate transaction; any hiring
or termination of a chief executive officer or other key officer; any adoption
or modification of our annual budget and business plan; any amendment or
modification of any material provision of our senior notes indenture, senior
credit facility or any other material contract; any adoption, renewal or
material modification of any material compensation or benefit plan or
arrangement; any authorization of entering into a new line of business or the
expansion outside of Missouri, Kansas and Texas; any consolidation,
reorganization, recapitalization, merger or similar transaction; any transfer of
our assets, including by pledge, in excess of $5.0 million; subject to limited
exceptions, any acquisition of assets or securities for more than $5.0 million;
any amendment to our certificate of incorporation or bylaws; any voting or
similar arrangement regarding our capital stock; any payment, discharge or
satisfaction of any material claim or liability or the commencement of a
material suit; any joint venture involving material assets or the payment or
receipt of more than $5.0 million; any material license, contract or agreement;
or any liquidation, dissolution or winding up of our company.
OTHER TRANSACTIONS WITH AFFILIATES
VALU-LINE LOANS
As of December 31, 1997, Valu-Line of Kansas, Inc., which merged into us on
February 10, 1998, had notes payable of $240,000 in the aggregate from Stephen
L. Sauder and Mr. Sauder's father. Mr. Sauder was the president and principal
stockholder of Valu-Line at the time the loan was made and currently owns more
than 5% of our voting securities. The loans were due on demand. As of
December 31, 1998, the amounts outstanding under these loans were fully repaid.
DEALINGS WITH VALU-BROADCASTING, INC.
In 1999, 1998, and 1997 we, and our predecessor, Valu-Line, provided
services principally related to rent and operating costs to
Valu-Broadcasting, Inc., an affiliate of Valu-Line, which is owned by Stephen L.
Sauder, one of our stockholders who owned more than 5% of our voting securities
at the time of the transactions, in the amounts of $29,187, $30,000 and $81,000,
respectively. Valu-Line also received services principally related to
advertising from Valu-Broadcasting in the amounts of $30,360, $40,000 and
$41,000 in 1999, 1998 and 1997, respectively.
SHARES ISSUANCES TO DIRECTORS
In March 1999, Mr. Jalkut, chairman of our board of directors, agreed to
purchase 26,667 shares of our common stock for $200,000, and Mr. Ejabat, a
member of our board of directors, agreed to purchase 66,667 shares of our common
stock for $500,000.
66
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides summary information regarding the beneficial
ownership of our outstanding capital stock as of March 23, 2000 for:
- each person or group who beneficially owns more than 5% of our capital
stock on a fully diluted basis;
- each of the executive officers and the former executive officer named in
the Summary Compensation Table;
- each of our directors; and
- all of our directors and executive officers as a group.
Beneficial ownership of shares is determined under the rules of the
Securities and Exchange Commission and generally includes any shares over which
a person exercises sole or shared voting or investment power. Except as
indicated by footnote, and subject to applicable community property laws, each
person identified in the table possesses sole voting and investment power with
respect to all shares of common stock held by him. Shares of common stock
subject to options currently exercisable or exercisable within 60 days of
March 23, 2000 and not subject to repurchase as of that date are deemed
outstanding for calculating the percentage of outstanding shares of the person
holding these options, but are not deemed outstanding for calculating the
percentage of any other person. Unless otherwise noted, the address for each
director and executive officer is c/o Birch Telecom, Inc., 2020 Baltimore
Avenue, Kansas City, Missouri 64108.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES -------------------------------------
NAME OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED PRIOR TO OFFERING AFTER OFFERING
- --------------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C>
Richard A. Jalkut(2)............................... 26,667 *
David E. Scott..................................... 1,380,668 3.00
Donald H. Goldman.................................. 263,750 *
Gregory C. Lawhon.................................. 429,590 *
Bradley A. Moline(3)............................... 372,441 *
Jeffrey D. Shackelford............................. 920,762 2.00
David W. Vranicar.................................. 353,046 *
Henry H. Bradley(4)................................ 3,893,961 8.45%
Adam H. Clammer(5)(6).............................. 23,596,492 51.20
Mory Ejabat(2)..................................... 66,667 *
James H. Greene, Jr.(5)(6)......................... 23,596,492 51.20
Henry R. Kravis(5)(6).............................. 23,596,492 51.20
Alexander Navab, Jr.(5)(6)......................... 23,596,492 51.20
Thomas R. Palmer(7)................................ 1,611,775 3.50
George R. Roberts(5)(6)............................ 23,596,492 51.20
Stephen L. Sauder(8)............................... 4,175,294 9.06
All directors and executive officers as a group
(16 persons)..................................... 37,091,112 80.48
5% OWNERS:
News-Press & Gazette Company(9).................... 3,453,160 7.49
BTI Ventures L.L.C.(5)(6).......................... 23,596,492 51.20
</TABLE>
- ------------------------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the SEC's rules and
includes voting and investment power with respect to the shares.
67
<PAGE>
(2) In March 1999, Mr. Jalkut, chairman of our board of directors, agreed to
purchase 26,667 shares of our common stock for $200,000, and Mr. Ejabat, a
member of our board of directors, agreed to purchase 66,667 shares of our
common stock for $500,000.
(3) Includes 19,275 shares of common stock held by members of Mr. Moline's
immediate family.
(4) Includes 3,453,160 shares of common stock held by News-Press & Gazette
Company. Mr. Bradley and his brother hold voting power of News-Press &
Gazette Company. Also includes 440,801 shares of common stock held by
various trusts and relatives of the Bradley family.
(5) All of the shares indicated are owned of record by BTI Ventures L.L.C. and
are included because of Messrs. Clammer's, Greene's, Kravis', Navab's and
Roberts' affiliation with BTI Ventures L.L.C. These individuals disclaim
beneficial ownership of the shares within the meaning of Rule 13d-3 under
the Exchange Act.
(6) The principal business address of BTI Ventures L.L.C. is 9 West 57th Street,
Suite 4200, New York, New York 10019.
(7) Includes 1,056,219 shares of common stock held by KCEP I and 555,556 shares
of common stock held by KCEP II. Mr. Palmer holds voting power of KCEP I and
KCEP II. The principal business address of KCEP is 233 West 47(th) Street,
Kansas City, Missouri 64112. Mr. Palmer disclaims beneficial ownership of
the shares within the meaning of Rule 13d-3 under the Exchange Act.
(8) Includes 65,937 shares of common stock held by Mr. Sauder's father,
1,544,787 shares of common stock held in trust by his wife and 1,000,000
shares of common stock held in trust by S.L. Sauder LTP. L.L.P.
(9) The principal business address of News-Press & Gazette Company is 825 Edmond
Street, St. Joseph, Missouri 64501.
68
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR CREDIT FACILITY
In December 1999, we entered into a credit agreement with a syndicate of
banks, financial institutions and other entities arranged by Lehman Commercial
Paper, Inc. The agreement includes a seven year, $50.0 million term loan
facility and a seven year $25.0 million revolving credit loan facility.
In February 2000, we amended these term loan and revolving credit loan
facilities, resulting in a stated principal amount of $125.0 million, of which
$25.0 million is provided for a reducing revolver and $100.0 million for
multi-draw term loans. The revolver is available for general corporate purposes
of our subsidiaries and the term loans are to be used to finance
telecommunications equipment, inventory, network assets and back office systems.
These senior credit facilities are secured by a perfected first priority
security interest in substantially all of our assets and capital stock and
contain a number of financial and operational covenants with which we must
comply. Among other things, the covenants require us to comply with specified
financial ratios and tests, including minimum revenues, minimum EBITDA/maximum
EBITDA losses, minimum access lines, senior secured debt to total capitalization
ratio, maximum capital expenditures, maximum leverage ratios, minimum fixed
charge coverage ratios and pro forma debt service coverage ratios. The covenants
restrict our ability to incur additional debt, make distributions on or redeem
our capital stock, create liens or negative pledges with respect to our assets,
make investments, issue, sell or allow distributions on capital stock of our
subsidiaries, prepay or defease specified indebtedness, enter into transactions
with affiliates, enter into specified hedging arrangements, merge, consolidate
or sell our assets or engage in any business other than telecommunications.
The loans must be repaid over a seven-year period commencing in
December 2003. Interest payments are due, at our option, either quarterly in the
case of base rate (prime based) draws or at the end of the relevant interest
period in the case of eurodollar draws. Interest will accrue at a lower rate if
we meet specified financial tests. In addition, we must pay a fee based on the
average daily unused committed portion of the credit facilities. This fee is
payable quarterly in arrears and is calculated at a rate of between 0.75% and
1.25% per annum depending upon the percentage of unused credit in the
facilities.
14% SENIOR NOTES DUE 2008
In June 1998 we issued senior notes with a principal of $115 million along
with warrants to purchase 1,409,734 shares of common stock at $0.01 per share.
These notes, which are senior obligations, bear interest at the rate of 14% per
annum, payable semi-annually in arrears on June 15 and December 15. Payments on
these notes began on December 15, 1998.
The senior notes are not redeemable at our option prior to June 15, 2003,
except that prior to June 15, 2003 we may redeem up to 35% of the originally
issued aggregate principal amount of the notes at a rate of 114% of the
principal amount thereof on the redemption date, plus accrued and unpaid
interest and liquidated damages, if any, with the net cash proceeds of one or
more public or private sales of common stock or preferred stock, provided that
at least 65% of the senior notes remain outstanding after the redemption. At any
time on or after June 15, 2003, the senior notes are redeemable at our option,
in whole or in part, at a premium declining ratably to par on June 15, 2006.
The senior note indenture provides that, in the event of a change of control
of us, we will be required to make an offer to purchase in cash all or any part
of the outstanding senior notes at a price of 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and liquidated damages, if any.
The senior notes indenture contains restrictive covenants that, among other
things, impose on our ability and our restricted subsidiaries' ability to incur
additional indebtedness, merge, consolidate, sell
69
<PAGE>
or dispose of all or substantially all of our assets, issue some kinds of
preferred stock, pay cash dividends or make other distributions on account of
our equity interests, repurchase equity interests or subordinated indebtedness
and make other restricted payments, create liens, enter into transactions with
affiliates, engage in any business other than telecommunications, enter into
sale and leaseback transactions and sell assets.
DESCRIPTION OF CAPITAL STOCK
Upon completion of the offering, our authorized capital stock will consist
of shares of common stock, $.001 par value.
COMMON STOCK
As of December 31, 1999 without giving effect to the exercise by KKR of its
options to invest an additional $50.0 million in our company or to the
conversion of all outstanding shares of our preferred stock into shares of
common stock, there were 4,687,767 shares of common stock outstanding held of
record by 81 stockholders. After giving effect to KKR's exercise of its options
and the conversion of our preferred stock, as of December 31, 1999, there were
45,995,363 shares of common stock held of record by 250 stockholders. The
holders of common stock are entitled to one vote for each share held of record
on all matters submitted to a vote of the stockholders. Subject to preferences
that may be applicable to any outstanding shares of preferred stock, the holders
of common stock are entitled to receive ratably those dividends as may be
declared by the board of directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up, holders of the common
stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preferences of any outstanding shares of
preferred stock. Holders of common stock have no preemptive rights and no right
to convert their common stock into any other securities. There are no redemption
or sinking fund provisions applicable to the common stock. All outstanding
shares of common stock are, and all shares of common stock to be outstanding
upon completion of the offering will be, fully-paid and nonassessable.
PREFERRED STOCK
There will be no shares of preferred stock outstanding upon completion of
the offering. Our certificate of incorporation, as amended and restated prior to
the closing of the offering, will provide our board of directors with the
authority, without further action by the stockholders, to issue up to
10,000,000 shares of preferred stock, $.001 par value, in one or more series and
to fix the powers, preferences, privileges, rights and qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of the series, without any further vote or action by stockholders. We believe
that the board of directors' authority to set the terms of, and our ability to
issue, preferred stock will provide flexibility in connection with possible
financing transactions in the future. The issuance of preferred stock, however,
could adversely affect the voting power of holders of common stock, and the
likelihood that the holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control in us. We have no present plan to issue any shares of
preferred stock.
WARRANTS
We have outstanding warrants to purchase up to 1,409,734 shares of common
stock at an exercise price of $0.01 per share. These warrants are currently
exercisable and expire on June 15, 2008. The warrant agreement governing these
warrants provides the holders of the warrants with customary antidilution
protections. In addition, holders of these warrants have demand and piggyback
registration rights with respect to the exercise of their warrants and the
resale of the underlying shares. Prior to exercising their warrants, the warrant
holders do not have any voting rights relating to our company.
70
<PAGE>
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
DELAWARE GENERAL CORPORATION LAW
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS AND
DELAWARE GENERAL CORPORATION LAW. Prior to the completion of the offering, we
will amend and restate our certificate of incorporation and bylaws. Certain
provisions of Delaware law and our amended and restated certificate of
incorporation and bylaws could make the following more difficult:
- the acquisition of us by means of a tender offer;
- acquisition of us by means of a proxy contest or otherwise; or
- the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain types
of coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of us to first
negotiate with our board. We believe that the benefits of increased protection
of the potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweigh the disadvantages of
discouraging these proposals because negotiation of these proposals could result
in an improvement of their terms. Moreover, each of the provisions summarized
below cannot be amended or removed from our amended and restated certificate of
incorporation or our bylaws without the vote of a supermajority of our
stockholders.
ELECTION AND REMOVAL OF DIRECTORS. Our board of directors will be divided
into three classes. The directors in each class will serve for a three-year
term, one class being elected each year by our stockholders. This system of
electing and removing directors may tend to discourage a third party from making
a tender offer or otherwise attempting to obtain control of us because it
generally makes it more difficult for stockholders to replace a majority of the
directors.
In addition, our bylaws will provide that, except as otherwise provided by
law or our certificate of incorporation, newly created directorships resulting
from an increase in the authorized number of directors or vacancies on the board
may be filled only by a majority of the directors then in office, though less
than a quorum is then in office. Our certificate of incorporation will also
provide that the authorized number of directors may be changed only by a
resolution of our board.
STOCKHOLDER MEETINGS. Under our certificate of incorporation and bylaws,
only the chairman of the board, the chief executive officer, the president or a
majority of the board of directors will be permitted to call special meetings of
stockholders.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws will establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.
DELAWARE ANTI-TAKEOVER LAW. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203 prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless the "business combination"
or the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Generally, a "business combination" includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. Generally, an "interested stockholder" is
a person who, together with affiliates and associates, owns or within three
years prior to the determination of interested stockholder status, did own, 15%
or more of a corporation's voting stock. The existence of this provision may
have an anti-takeover effect with respect to transactions not approved in
advance by the board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held by
stockholders.
71
<PAGE>
ELIMINATION OF STOCKHOLDER ACTION BY WRITTEN CONSENT. Upon the completion
of the offering, our certificate of incorporation will eliminate the right of
stockholders to act by written consent without a meeting, unless the consent is
unanimous. This provision may have the effect of discouraging, delaying or
making more difficult a change in control of our company or preventing the
removal of incumbent directors even if a majority of our stockholders were to
deem such an action to be in our best interests.
TRANSFER AGENT AND REGISTRAR
UMB Bank, N.A. has been appointed as the transfer agent and registrar for
our common stock.
72
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options or warrants, in the
public market following the offering, the market price of our common stock could
decline. These sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate.
Upon completion of the offering, we will have outstanding an aggregate of
shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. Of
these shares, all of the shares sold in the offering will be freely tradeable
without restriction or further registration under the Securities Act, unless the
shares are purchased by "affiliates" as that term is defined in Rule 144 under
the Securities Act. This leaves shares eligible for sale in the
public market as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES DATE
--------- ----
<S> <C>
After 180 days from the date of this
prospectus (subject, in some cases,
to volume limitations).
At various times after 180 days from
the date of this prospectus as
described below under "Lock-up
Agreements."
</TABLE>
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately shares immediately after the offering; or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
REGISTRATION RIGHTS
On or after the date that is 180 days after completion of the offering,
holders of 45,527,135 shares of our common stock will have demand registration
rights under the Securities Act at our expense of all or a portion of the shares
of common stock they own pursuant to the purchasers rights agreement. These
holders also have "piggy-back" registration rights. In addition, holders of
warrants to purchase up to 1,409,734 shares of our common stock have piggy-back
and demand registration rights with respect to the exercise of their warrants
and the resale of the underlying shares.
73
<PAGE>
LOCK-UP AGREEMENTS
All of our officers, directors and stockholders have entered into lock-up
agreements under which they agreed not to transfer or dispose of, directly or
indirectly, any shares of our common stock or any securities convertible into or
exercisable or exchangeable for shares of our common stock, for a period of
180 days after the date of this prospectus, without the prior written consent of
Lehman Brothers Inc. and Bear, Stearns & Co. Inc. on behalf of the underwriters.
In addition to the 180-day lock-up described above, all of our stockholders
with the exception of persons who became stockholders through the exercise of
employee stock options, all of whom held in the aggregate less than 2% of our
outstanding common stock as of March 15, 2000, have entered into the purchasers
rights agreement, which limits their ability to pledge or transfer their shares
of our stock until August 5, 2002. In addition, Messrs. David E. Scott,
Jeffrey D. Shackelford, Gary L. Chesser, David W. Vranicar, Donald M. Goldman,
Bradley A. Moline and Gregory C. Lawhon, may not transfer shares issued or
issuable upon the exercise of stock options held by them for a period of five
years from the date their respective options were granted. This five-year
limitation is subject to exceptions, including the following:
- If KKR requests registration for some or all of its shares, then those
holders subject to the five-year limitation may register and transfer the
same fraction of their fully vested option shares as KKR registers of its
shares.
- Following the offering, the holders subject to the five-year limitation
may each transfer up to 10% of their fully vested option shares per year,
provided that they never transfer more than a total of 25% of those
shares.
In addition, 20 other key employees have each entered into a management
stockholders agreement, under which they have agreed not to transfer shares
received upon exercise of their respective options for a period of five years
from the date their respective options were granted. These limitations are
subject to exceptions, including the following:
- If KKR requests registration for some or all of its shares, then the
subject employees may register and transfer the same fraction of their
fully vested option shares as KKR registers of its shares.
- Following the offering, subject employees may each transfer up to 25% of
their fully vested option shares per year, provided that they never
transfer more than a total of 50% of those shares.
All of our employees who have been granted stock options under our employee
benefits plans have each agreed in their option agreements that they will not
transfer any shares of our common stock for a period of 180 days after our
completion of a public offering of our stock if we request. We intend to make
this request.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchases shares of our common
stock in connection with a compensatory stock or option plan or other written
agreement is eligible to resell those shares 90 days after we became a reporting
company under the Securities Exchange Act of 1934 in reliance on Rule 144, but
without compliance with some of the restrictions, including the holding period,
contained in Rule 144. We have been a reporting company under the Securities
Exchange Act since March 1999.
Following the offering, we intend to file a registration statement on
Form S-8 under the Securities Act covering approximately shares of
common stock issued or issuable upon the exercise of stock options, subject to
outstanding options or reserved for issuance under our employee and director
stock benefit plans. Accordingly, shares registered under the registration
statement will, subject to Rule 144 provisions applicable to affiliates, be
available for sale in the open market, except to the extent that the shares are
subject to vesting restrictions or the contractual restrictions described above.
74
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR
NON-UNITED STATES HOLDERS
This is a general discussion of certain United States federal tax
consequences of the acquisition, ownership, and disposition of our common stock
by a holder that, for U.S. federal income tax purposes, is not a U.S. person as
we define that term below. A holder of our common stock who is not a U.S. person
is a non-U.S. holder. We assume in this discussion that you will hold our common
stock issued pursuant to the offering as a capital asset (generally, property
held for investment). We do not discuss all aspects of U.S. federal taxation
that may be important to you in light of your individual investment
circumstances, such as special tax rules that would apply to you, for example,
if you are a dealer in securities, financial institution, bank, insurance
company, tax-exempt organization, partnership or owner of more than 5% of our
common stock. Our discussion is based on current provisions of the Internal
Revenue Code of 1986, as amended, Treasury regulations, judicial opinions,
published positions of the U.S. Internal Revenue Service and other applicable
authorities, all as in effect on the date of this prospectus and all of which
are subject to differing interpretations or change, possibly with retroactive
effect. We have not sought, and will not seek, any ruling from the Internal
Revenue Service or opinion of counsel with respect to the tax consequences
discussed in this prospectus, and there can be no assurance that the Internal
Revenue Service will not take a position contrary to the tax consequences
discussed below or that any position taken by the Internal Revenue Service would
not be sustained. We urge you to consult your tax advisor about the U.S. federal
tax consequences of acquiring, holding, and disposing of our common stock, as
well as any tax consequences that may arise under the laws of any foreign,
state, local, or other taxing jurisdiction.
For purposes of this discussion, a U.S. person means any one of the
following:
- a citizen or resident of the U.S.
- a corporation, partnership, or other entity created or organized in the
U.S. or under the laws of the U.S. or of any political subdivision of the
U.S.
- an estate, the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source.
- a trust, the administration of which is subject to the primary supervision
of a U.S. court and that has one or more U.S. persons who have the
authority to control all substantial decisions of the trust.
DIVIDENDS
Dividends paid to a non-U.S. holder will generally be subject to withholding
of U.S. federal income tax at the rate of 30%. If, however, the dividend is
effectively connected with the conduct of a trade or business of the U.S. by the
non-U.S. holder, the dividend will be subject to U.S. federal income tax imposed
on net income on the same basis that applies to U.S. persons generally, and, for
corporate holders under certain circumstances, the branch profits tax. Non-U.S.
holders should consult any applicable income tax treaties that may provide for a
reduction of, or exemption from, withholding taxes. For purposes of determining
whether tax is to be withheld at a reduced rate as specified by a treaty, we
generally will presume that dividends we pay on or before December 31, 2000, to
an address in a foreign country are paid to a resident of that country.
Under recently finalized Treasury regulations, which in general apply to
dividends that we pay after December 31, 2000, to obtain a reduced rate of
withholding under a treaty, a non-U.S. holder generally will be required to
provide certification as to that non-U.S. holder's entitlement to treaty
benefits. These regulations also provide special rules to determine whether, for
purposes of applying a treaty, dividends that we pay a non-U.S. holder that is
an entity should be treated as paid to holders of interests in that entity.
75
<PAGE>
GAIN ON DISPOSITION
A non-U.S. holder will generally not be subject to United States federal
income tax, including by way of withholding, on gain recognized on a sale or
other disposition of our common stock unless any one of the following is true:
- the gain is effectively connected with the conduct of a trade or business
in the U.S. by the non-U.S. holder
- the non-U.S. holder is a nonresident alien individual present in the U.S.
for 183 or more days in the taxable year of the disposition and certain
other requirements are met
- the non-U.S. holder is subject to tax pursuant to provisions of the U.S.
federal income tax law applicable to certain U.S. expatriates
- we are or have been during certain periods a "United States real property
holding corporation" for U.S. federal income tax purposes.
We believe that we are not currently and will not become a United States
real property holding corporation.
Gain that is effectively connected with the conduct of a trade or business
in the U.S. by the non-U.S. holder will be subject to the U.S. federal income
tax imposed on net income on the same basis that applies to U.S. persons
generally, and, for corporate holders under certain circumstances, the branch
profits tax, but will generally not be subject to withholding. Non-U.S. holders
should consult any applicable income tax treaties that may provide for different
rules.
UNITED STATES FEDERAL ESTATE TAXES
Our common stock that is owned or treated as owned by an individual who is
not a citizen or resident of the U.S., as specially defined for U.S. federal
estate tax purposes, on the date of that person's death will be included in his
or her estate for U.S. federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, we must report annually to the Internal Revenue Service and to
each non-U.S. holder the amount of dividends that we paid to a holder, and the
amount of tax that we withheld on those dividends. This information may also be
made available to the tax authorities of a county in which the non-U.S. holder
resides.
Under current U.S. Treasury regulations, U.S. information reporting
requirements and backup withholding tax will generally not apply to dividends
that we pay on our common stock to a non-U.S. holder at an address outside the
U.S. Payments of the proceeds of a sale or other taxable disposition of our
common stock by a U.S. office of a broker are subject to both backup withholding
at a rate of 31% and information reporting, unless the holder certifies as to
its non-U.S. holder status under penalties of perjury or otherwise establishes
an exemption. Information reporting requirements, but not backup withholding
tax, will also apply to payments of the proceeds of a sale or other taxable
disposition of our common stock by foreign offices of U.S. brokers or foreign
brokers with certain types of relationships to the U.S. unless the broker has
documentary evidence in its records that the holder is a non-U.S. holder and
certain other conditions are met or the holder otherwise established an
exemption.
Backup withholding is not an additional tax. Any amounts that we withhold
under the backup withholding rules will be refunded or credited against the
non-U.S. holder's U.S. federal income tax liability if certain required
information is furnished to the Internal Revenue Service.
The U.S. Treasury Department has promulgated final regulations regarding the
withholding and information reporting rules discussed above. In general, those
regulations do not significantly alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. The final regulations are generally
effective for payments made after December 31, 2000, subject to transition
rules.
76
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement to this prospectus, each of the underwriters named below,
for whom Lehman Brothers Inc., Bear, Stearns & Co. Inc., Donaldson, Lufkin &
Jenrette Securities Corporation, First Union Securities, Inc., J.P. Morgan
Securities Inc., Thomas Weisel Partners LLC and Fidelity Capital Markets, a
division of National Financial Services Corporation, are acting as
representatives, has agreed to purchase from us the number of shares of common
stock shown opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ---------
<S> <C>
Lehman Brothers Inc.........................................
Bear, Stearns & Co. Inc.....................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
First Union Securities, Inc.................................
J.P. Morgan Securities Inc..................................
Thomas Weisel Partners LLC..................................
Fidelity Capital Markets, a division of National
Financial.................................................
Services Corporation......................................
------
Total.....................................................
======
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of common
stock are purchased by the underwriters under the underwriting agreement, then
all of the shares of common stock the underwriters have agreed to purchase under
the underwriting agreement must be purchased. The conditions contained in the
underwriting agreement include that:
- the representations and warranties made by us to the underwriters are
true;
- there is no material change in the financial markets; and
- we deliver customary closing documents to the underwriters.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to selected dealers, who may
include the underwriters, at such public offering price less a selling
concession not in excess of $ per share. The underwriters may allow, and the
selected dealers may reallow, a concession not in excess of $ per share to
brokers and dealers. After the offering, the underwriters may change the
offering price and other selling terms.
We estimate that our share of the total expenses of the offering, excluding
the underwriting discount will be approximately $ .
We have granted to the underwriters an option to purchase up to an aggregate
of additional shares of common stock, exercisable to cover any
over-allotments, if any, at the public offering price less the underwriting
discount shown on the cover page of this prospectus. The underwriters may
exercise this option at any time, and from time to time, until 30 days after the
date of the underwriting agreement. To the extent that the underwriters exercise
this option, each underwriter will be committed, so long as the conditions of
the underwriting agreement are satisfied, to purchase a number of additional
shares of common stock proportionate to that underwriter's initial commitment as
indicated in the preceding table, and we will be obligated, under such
over-allotment option, to sell the shares of common stock to the underwriters.
77
<PAGE>
We and our directors, officers, and all current stockholders have agreed not
to offer to sell, sell or otherwise dispose of, directly or indirectly, any
shares of capital stock or any securities that may be converted into or
exchanged for any shares of capital stock for a period of 180 days period from
the date of the prospectus without the prior written consent of Lehman
Brothers Inc. and Bear, Stearns & Co. Inc., except that we may issue, and grant
options to purchase, shares of common stock under our option plans.
Before this offering, there has been no public market for the shares of
common stock. The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives will consider, among other things and in
addition to prevailing market conditions:
- our historical performance and capital structure;
- estimates of our business potential and earning prospects;
- an overall assessment of our management; and
- the consideration of the above factors in relation to market valuations of
companies in related businesses.
Thomas Weisel Partners LLC, one of the representatives, was organized and
registered as a broker/dealer in December 1998. Since December 1998, Thomas
Weisel Partners has acted as a lead or co-manager on numerous public offerings
of equity securities. Thomas Weisel Partners does not have any material
relationship with us or any of our officers, directors or other controlling
persons, except with respect to its contractual relationship with us under the
underwriting agreement entered into in connection with this offering.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter in this offering, and will be
facilitating electronic distribution of information through the Internet,
intranet and other proprietary technology.
We have applied to list our common stock on the Nasdaq National Market under
the trading symbol "BRCH."
We have agreed to indemnify the underwriters against liabilities related to
the offering, including liabilities under the Securities Act and liabilities
incurred in connection with the directed share program referred to below, and to
contribute to payments that the underwriters may be required to make for these
liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of common stock. These transactions may
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering. This means that they may sell more shares of
common stock than are shown on the cover page of this prospectus. If the
underwriters create a short position, then the representatives may reduce that
short position by purchasing common stock in the open market. The
representatives also may elect to reduce any short position by exercising all or
part of the over-allotment option. The underwriters have informed us that the
they do not intend to confirm sales to discretionary accounts that exceed 5% of
the total number of shares of common stock offered by them.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that, if the representatives purchase shares
of common stock in the open market to reduce the underwriters' short position or
to stabilize the price of the common stock, they may reclaim the
78
<PAGE>
amount of the selling concession from the underwriters and selling group members
who sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid could have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor any
of the underwriters makes any representation that the representatives will
engage in these stabilizing transactions or that any transaction, once
commenced, will not be discontinued without notice.
At our request, has reserved up to shares of the
common stock, % of the common stock offered by this prospectus, for sale
pursuant to a directed share program to our employees, directors and friends at
the initial public offering price set forth on the cover page of this
prospectus. These persons must commit to purchase no later than the close of
business on the day following the date of this prospectus. The number of shares
available for sale to the general public will be reduced to the extent these
persons purchase the reserved shares.
Certain of the representatives have from time to time provided investment
banking, financial advisory and other services to us for which these
representatives received customary fees and commissions. Lehman Brothers Inc.
acted as lead arranger of our senior credit facility and its affiliate, Lehman
Commercial Paper Inc., is the administrative agent of the senior credit
facility. In addition, First Union Securities, Inc. is a lender under our senior
credit facility. Lehman Brothers Inc. was an initial purchaser of our senior
notes. In addition, Lehman Brothers Inc. acted as placement agent in connection
with the private placement of shares of our series F preferred stock in
August 1999. Lehman Brothers Inc. has also served as the solicitation agent in
connection with the related solicitation of consents from holders of our senior
notes.
79
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by our counsel, Latham & Watkins, 885 Third Avenue, New York, New
York 10022. At the time of completion of the offering, attorneys of Latham &
Watkins are expected to indirectly own in the aggregate less than 1% of our
common stock. Various regulatory matters in connection with the offering are
being passed upon for us by Dickstein Shapiro Morin & Oshinsky LLP, 2101 L
Street, NW, Washington, D.C. 20037. Various legal matters relating to the common
stock will be passed upon for the underwriters by Simpson Thacher & Bartlett 425
Lexington Avenue, New York, New York 10017. Certain partners of Simpson Thacher
& Bartlett, members of their families, related persons and others, have an
indirect interest, through limited partnerships, through KKR 1996 Fund L.P., in
less than 1% of our common stock. In addition, Simpson Thacher & Bartlett has in
the past provided, and may continue to provide, legal services to KKR and its
affiliates, including KKR 1996 Fund L.P.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1999 and 1998, and for each of
the three years in the period ended December 31, 1999 and the consolidated
financial statements of Valu-Line, our predecessor company, as of December 31,
1997 and for the year then ended, as set forth in their reports. We have
included our financial statements and schedule and the financial statements of
Valu-Line in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's reports, given on their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act
of 1934, and we file reports and other information with the SEC. We have also
filed with the SEC a registration statement on Form S-1 under the Securities Act
relating to the offer and sale of common stock under this prospectus. This
prospectus, filed as a part of the registration statement, does not contain all
of the information set forth in the registration statement or the exhibits and
schedules to the registration statement as permitted by the rules and
regulations of the SEC. You should read these exhibits for a more complete
description of the matters involved. Our reports, the registration statement and
the exhibits and schedules to the registration statement filed with the SEC may
be inspected, without charge, and copies may be obtained at prescribed rates, at
the public reference facility maintained by the SEC at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
SEC located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60621-2511. The public may obtain information regarding the SEC's public
reference facility by calling 1-800-SEC-0330. Our reports, the registration
statement and other information filed by us with the SEC are also available at
the SEC's World Wide Web site on the internet at http://www.sec.gov. We have
applied to have our common stock approved for quotation on the Nasdaq National
Market, and our reports and information statements and other information also
can be inspected at the office of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
We will furnish our stockholders with annual reports containing audited
financial statements certified by independent auditors and quarterly reports
containing unaudited financial statements for the first three quarters of each
fiscal year.
80
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
BIRCH TELECOM, INC.
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1997, 1998 and 1999...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
VALU-LINE COMPANIES, INC.
Report of Independent Auditors.............................. F-21
Consolidated Balance Sheet as of December 31, 1997.......... F-22
Consolidated Statement of Income and Retained Earnings for
the year ended December 31, 1997.......................... F-23
Consolidated Statement of Cash Flows for the year ended
December 31, 1997......................................... F-24
Notes to Consolidated Financial Statements.................. F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
BIRCH TELECOM, INC.
We have audited the accompanying consolidated balance sheets of Birch
Telecom, Inc. (Birch) as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of Birch'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. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Birch
Telecom, Inc. at December 31, 1998 and 1999, and the consolidated results of its
operations and its 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.
Ernst & Young LLP
Kansas City, Missouri
February 17, 2000, except for note 19, as to
which the date is March 23, 2000
F-2
<PAGE>
BIRCH TELECOM, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 39,745 $ 5,053
Pledged securities........................................ 15,888 15,936
Accounts receivable, net.................................. 4,039 11,612
Inventory................................................. 916 3,735
Prepaid expenses and other................................ 526 2,443
-------- --------
Total current assets........................................ 61,114 38,779
Property and equipment...................................... 26,900 70,192
Less: accumulated depreciation.............................. 747 8,080
-------- --------
Property and equipment, net................................. 26,153 62,112
Pledged securities--noncurrent.............................. 21,897 7,484
Goodwill, net............................................... 16,863 19,316
Other intangibles, net...................................... 7,620 16,911
Other assets................................................ 502 2,369
-------- --------
Total assets................................................ $134,149 $146,971
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt and capital lease
obligations............................................... $ 335 $ 1,300
Accounts payable.......................................... 8,503 13,300
Accrued expenses.......................................... 2,556 10,793
-------- --------
Total current liabilities................................... 11,394 25,393
Senior credit facility...................................... -- 10,000
14% senior notes............................................ 114,681 114,715
Capital lease obligations, net of current maturities........ 778 836
Other long-term debt, net of current maturities............. 332 234
Series B redeemable preferred stock, 8,572,039 shares issued
and outstanding in 1998 (stated at redemption and
aggregate liquidation value).............................. 14,063 --
Series F redeemable preferred stock, 13,333,334 shares
issued and outstanding in 1999 (stated at redemption and
aggregate liquidation value).............................. -- 63,550
Stockholders' deficit:
Series B preferred stock, 8,572,039 shares issued and
outstanding in 1999..................................... -- 8
Series C preferred stock, 8,492,749 and 6,270,527 shares
issued and outstanding.................................. 8 6
Series D preferred stock, 2,222,222 shares issued and
outstanding in 1999..................................... -- 2
Common stock, $.001 par value, 80,000,000 shares
authorized, 5,016,889 and 4,687,767 shares issued and
outstanding............................................. 5 5
Warrants.................................................. 337 337
Additional paid-in capital................................ 10,548 11,686
Accumulated deficit....................................... (17,997) (79,801)
-------- --------
Total stockholders' deficit................................. (7,099) (67,757)
-------- --------
Total liabilities and stockholders' deficit................. $134,149 $146,971
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
BIRCH TELECOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
REVENUE:
Communications services................................... $ -- $ 21,783 $ 52,980
Equipment sales........................................... -- 4,304 7,558
------- -------- --------
Total revenue............................................... -- 26,087 60,538
Cost of services:
Cost of communications services........................... -- 16,339 41,870
Cost of equipment sales................................... -- 2,547 4,488
------- -------- --------
Total cost of services...................................... -- 18,886 46,358
------- -------- --------
Gross margin................................................ -- 7,201 14,180
Selling, general and administrative expenses................ 1,776 15,769 53,045
Depreciation and amortization expense....................... 27 2,308 10,828
------- -------- --------
Loss from operations........................................ (1,803) (10,876) (49,693)
Interest expense............................................ -- (8,254) (15,036)
Interest income............................................. 14 2,922 2,925
------- -------- --------
Net loss.................................................... (1,789) (16,208) (61,804)
Preferred stock dividends................................... -- (1,696) (3,550)
Amortization of preferred stock issuance costs.............. -- (29) (292)
------- -------- --------
Loss applicable to common stock............................. $(1,789) $(17,933) $(65,646)
======= ======== ========
Loss per common share--basic and diluted.................... $ (1.45) $ (4.71) $ (13.25)
======= ======== ========
Weighted average number of common shares outstanding........ 1,235 3,809 4,956
</TABLE>
See accompanying notes.
F-4
<PAGE>
BIRCH TELECOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E COMMON COMMON
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED STOCK WARRANTS STOCK
STOCK STOCK STOCK STOCK STOCK $.01 PAR $.01 PAR $.001 PAR
--------- --------- --------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 23, 1996
(date of inception) and
December 31, 1996............. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock and
warrants...................... -- -- -- -- -- 18 18 --
Net loss and comprehensive
loss.......................... -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Balance at December 31, 1997.... -- -- -- -- -- 18 18 --
Recapitalization................ -- -- 2 -- -- (18) (18) --
Merger with Valu-Line........... 3 -- 6 -- -- -- -- --
Issuance of warrants in
connection with 14% senior
notes......................... -- -- -- -- -- -- -- --
Redemption of series A preferred
stock......................... (3) -- -- -- -- -- -- --
Stock dividend.................. -- -- -- -- -- -- -- 1
Option exercise................. -- -- -- -- -- -- -- 4
Restatement of series B
preferred stock dividends..... -- -- -- -- -- -- -- --
Amortization of series B
preferred stock issuance
costs......................... -- -- -- -- -- -- -- --
Series A preferred stock
dividends..................... -- -- -- -- -- -- -- --
Accretion of series B preferred
stock dividends............... -- -- -- -- -- -- -- --
Net loss and comprehensive
loss.......................... -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Balance at December 31, 1998.... -- -- 8 -- -- -- -- 5
<CAPTION>
ADDITIONAL
WARRANTS PAID-IN ACCUMULATED
$.001 PAR CAPITAL DEFICIT TOTAL
--------- ---------- ------------ --------
<S> <C> <C> <C> <C>
Balance at December 23, 1996
(date of inception) and
December 31, 1996............. $-- $ -- $ -- $ --
Issuance of common stock and
warrants...................... -- 1,782 -- 1,818
Net loss and comprehensive
loss.......................... -- -- (1,789) (1,789)
--- -------- -------- --------
Balance at December 31, 1997.... -- 1,782 (1,789) 29
Recapitalization................ -- 34 -- --
Merger with Valu-Line........... -- 14,741 -- 14,750
Issuance of warrants in
connection with 14% senior
notes......................... 337 -- -- 337
Redemption of series A preferred
stock......................... -- (4,747) -- (4,750)
Stock dividend.................. -- (1) -- --
Option exercise................. -- -- -- 4
Restatement of series B
preferred stock dividends..... -- 464 -- 464
Amortization of series B
preferred stock issuance
costs......................... -- (29) -- (29)
Series A preferred stock
dividends..................... -- (168) -- (168)
Accretion of series B preferred
stock dividends............... -- (1,528) -- (1,528)
Net loss and comprehensive
loss.......................... -- -- (16,208) (16,208)
--- -------- -------- --------
Balance at December 31, 1998.... 337 10,548 (17,997) (7,099)
</TABLE>
F-5
<PAGE>
BIRCH TELECOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E COMMON COMMON
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED STOCK WARRANTS STOCK
STOCK STOCK STOCK STOCK STOCK $.01 PAR $.01 PAR $.001 PAR
--------- --------- --------- --------- --------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998........................ $ -- $-- $ 8 $-- $-- $ -- $ -- $ 5
Issuance of series D preferred
stock....................... -- -- -- 2 -- -- -- --
Issuance of series E preferred
stock....................... -- -- -- -- 2 -- -- --
Issuance of common stock...... -- -- -- -- -- -- -- --
Restatement of series B
preferred stock............. -- 8 -- -- -- -- -- --
Redemption of series C
preferred stock............. -- -- (2) -- -- -- -- --
Redemption of series E
preferred stock............. -- -- -- -- (2) -- -- --
Retirement of common stock.... -- -- -- -- -- -- -- --
Amortization of series F
preferred stock issuance
costs....................... -- -- -- -- -- -- -- --
Accretion of series F
preferred stock dividends... -- -- -- -- -- -- -- --
Net loss and comprehensive
loss........................ -- -- -- -- -- -- -- --
---- --- --- --- --- ---- ---- ---
Balance at December 31,
1999........................ $ -- $ 8 $ 6 $ 2 $-- $ -- $ -- $ 5
==== === === === === ==== ==== ===
<CAPTION>
WARRANTS ADDITIONAL
$.001 PAID-IN ACCUMULATED
PAR CAPITAL DEFICIT TOTAL
--------- ---------- ------------ --------
<S> <C> <C> <C> <C>
Balance at December 31,
1998........................ $337 $ 10,548 $(17,997) $ (7,099)
Issuance of series D preferred
stock....................... -- 9,998 -- 10,000
Issuance of series E preferred
stock....................... -- (2) -- --
Issuance of common stock...... -- 211 -- 211
Restatement of series B
preferred stock............. -- 13,760 -- 13,768
Redemption of series C
preferred stock............. -- (9,998) -- (10,000)
Redemption of series E
preferred stock............. -- (8,570) -- (8,572)
Retirement of common stock.... -- (449) -- (449)
Amortization of series F
preferred stock issuance
costs....................... -- (262) -- (262)
Accretion of series F
preferred stock dividends... -- (3,550) -- (3,550)
Net loss and comprehensive
loss........................ -- -- (61,804) (61,804)
---- -------- -------- --------
Balance at December 31,
1999........................ $337 $ 11,686 $(79,801) $(67,757)
==== ======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
BIRCH TELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(1,789) $(16,208) $(61,804)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 27 720 7,948
Amortization.............................................. -- 1,588 2,880
Provision for losses on accounts receivable............... -- 140 561
Other..................................................... 50 16 34
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable..................................... -- (1,905) (7,633)
Inventory............................................... -- (300) (989)
Prepaid expenses........................................ (7) (370) (1,907)
Other intangibles....................................... -- -- (2,065)
Other assets............................................ (87) (198) (2,357)
Accounts payable........................................ 255 3,888 4,592
Accrued expenses........................................ -- 1,986 7,515
------- -------- --------
Net cash used in operating activities..................... (1,551) (10,643) (53,225)
INVESTING ACTIVITIES
Purchase of property and equipment........................ (128) (21,550) (41,360)
Business acquisitions, net of cash acquired............... -- (7,757) (4,801)
Amortization of discount on pledged securities............ -- (1,231) (1,725)
Maturity of pledged securities............................ -- 7,692 16,100
Purchase of pledged securities............................ -- (44,247) (10)
------- -------- --------
Net cash used in investing activities..................... (128) (67,093) (31,796)
FINANCING ACTIVITIES
Proceeds from long-term debt.............................. -- 123 10,000
Proceeds from 14% senior notes............................ -- 114,663 --
Proceeds from convertible notes........................... -- 3,500 --
Proceeds from issuance of preferred stock................. -- 9,500 70,000
Proceeds from issuance of common stock and warrants....... 1,768 342 --
Payment of financing costs................................ (129) (4,922) (8,804)
Repayment of long-term debt............................... -- (321) (773)
Repayment of capital lease obligations.................... -- (172) (1,073)
Payment of series A preferred stock dividends............. -- (168) --
Borrowing (repayment) of notes payable to stockholders.... 250 (524) --
Redemption of preferred stock............................. -- (4,750) (18,572)
Redemption of common stock................................ -- -- (449)
------- -------- --------
Net cash provided by financing activities................. 1,889 117,271 50,329
------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 210 39,535 (34,692)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. -- 210 39,745
------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 210 $ 39,745 $ 5,053
======= ======== ========
Supplementary schedule of non-cash investing and financing
activities:
Amounts recorded in connection with acquisitions:
Fair value of net assets acquired, net of cash
acquired............................................... $ -- $ 5,064 $ 2,693
Fair value of intangible assets......................... -- 20,900 4,130
Assumption of liabilities............................... -- (2,430) (939)
Assumption of long-term debt and capital lease
obligations............................................ -- (1,027) (872)
Issuance of series A preferred stock.................... -- (4,750) --
Issuance of series C preferred stock.................... -- (10,000) --
Issuance of common stock................................ -- -- (211)
Common stock issued in exchange for other assets.......... 50 -- --
Property and equipment additions acquired through capital
lease................................................... -- 728 2,099
Property and equipment additions included in accounts
payable................................................. -- 2,157 5,873
Supplemental disclosure of cash flow information:
Cash payment for interest, net of interest capitalized of
$436 in 1998 and $1,324 in 1999......................... -- 7,725 13,690
</TABLE>
See accompanying notes.
F-7
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Birch Telecom, Inc. was incorporated on December 23, 1996, as a Delaware
corporation for the purpose of providing local, long distance, Internet access,
and other communications services to business and residential customers. The
consolidated financial statements of Birch Telecom, Inc. include the accounts of
Birch Telecom, Inc. and the accounts of its wholly-owned subsidiaries
(collectively, Birch). Birch currently serves certain markets in Missouri,
Kansas and Texas. Birch's business is highly competitive and is subject to
various federal, state and local regulations.
Birch was in the development stage for the period from December 23, 1996
(date of inception) to February 10, 1998. Accordingly, Birch had no operating
revenue and incurred operating losses and operating cash flow deficits during
that period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, Birch includes as cash and cash
equivalents highly liquid investments with original maturities of three months
or less.
REVENUE RECOGNITION
Revenue for communications services is recognized when customers use the
associated services. Equipment revenue is recognized when systems or services
are substantially complete. Revenue on billings to customers in advance of
providing services is deferred and recognized when earned. Customers are not
charged fees to activate initial service.
COST OF SERVICES
Cost of services includes local and long-distance services purchased from
incumbent local exchange carriers, interexchange carriers and certain providers
of fiber optic telephone networks. Cost of services also includes costs
associated with the sale and installation of telephone systems.
INVENTORY
Inventory is carried at the lower of average cost or market determined on a
first-in, first-out basis and consists primarily of parts and equipment used in
the maintenance and installation of telephone systems.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $895,000 in 1998 and
$3.0 million in 1999. There were no advertising costs in 1997.
F-8
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the
straight-line method over the following estimated useful lives of the assets:
<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Communications network...................................... 2-10
Buildings, furniture, fixtures and equipment................ 2-40
</TABLE>
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of the purchase price paid over the fair
value of the net assets acquired in Birch's acquisitions. Goodwill is being
amortized over 25 years using the straight-line method. Accumulated amortization
on goodwill totaled $599,000 at December 31, 1998 and $1.4 million at
December 31, 1999.
Other intangibles consist primarily of customer lists related to Birch's
acquisitions, deferred financing costs and deferred line installation costs.
Customer lists are amortized over 5 years using the straight-line method. The
deferred financing costs are amortized over 5 to 10 years, the term of the
associated financing, using the straight-line method. Deferred line installation
costs are being amortized over 2 years, the approximate average life of customer
contracts, using the straight-line method (see Note 6).
Birch reviews its long-lived assets in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-lived Assets and Long-lived Assets to be Disposed of," for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If such events or changes in circumstances are
present, a loss is recognized if the carrying value of the asset is in excess of
the sum of the undiscounted cash flows expected to result from the use of the
asset and its eventual disposition. An impairment loss is measured as the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
INCOME TAXES
Birch accounts for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes. Birch recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Net
deferred tax assets are reduced by a valuation allowance when appropriate (see
Note 14). Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
STOCK OPTIONS
Birch has adopted the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, which establishes a fair value based method for the
financial reporting of its stock-based employee compensation plans. However, as
allowed by SFAS No. 123, Birch has elected to continue to measure compensation
using the intrinsic value based method as prescribed by Accounting Principles
F-9
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Board Opinion No. 25, Accounting for Stock Issued to Employees. Under this
method, compensation is measured as the difference between the market value of
the stock on the grant date, less the amount required to be paid for the stock.
The difference, if any, is charged to expense over the vesting period of the
options. The estimated market value used for the stock options granted was
determined on a periodic basis by Birch's board of directors. In accordance with
APB No. 25, Birch has recorded no compensation expense related to options
granted because the exercise price is equal to the estimated market value of the
stock on the date of grant (see Note 15).
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair value due
to the short maturity of the instruments. The fair value of Birch's pledged
securities was $38 million at December 31, 1998 and $23.3 million at
December 31, 1999. The fair value of Birch's senior notes is estimated to be
$106 million at December 31, 1998 and $115 million at December 31, 1999 based on
the quoted market rates for the debt. The fair value of other long-term debt,
accounts receivable, accounts payable and accrued expenses approximates the
recorded value.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
LOSS PER SHARE
The net loss per share amount reflected on the consolidated statement of
operations is based on the weighted-average number of common shares outstanding.
Stock options and convertible preferred stock are anti-dilutive, and therefore
excluded from the computation of earnings per share. In the future, these stock
equivalents may become dilutive.
RECLASSIFICATIONS
Certain items in the 1997 and 1998 consolidated financial statements have
been reclassified to be consistent with the classification in the 1999
consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
supersedes SFAS No. 80, Accounting for Futures Contracts, SFAS No. 105,
Disclosure of Information About Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentration of Credit Risk, and SFAS
No. 119, Disclosures about Derivative Financial Instruments and Fair Value of
Financial Instruments, and also amends certain aspects of other SFAS's
previously issued. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. SFAS No. 133 is effective for our
consolidated financial statements for the
F-10
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
year ending December 31, 2001. We do not expect the impact of SFAS No. 133 to be
material in relation to its consolidated financial statements.
3. ACQUISITIONS
In February 1998, Birch merged with Valu-Line Companies, Inc. (Valu-Line) in
a transaction valued at $19.5 million, consisting of $4.75 million in cash,
2,968,750 shares of series A preferred stock having an aggregate liquidation
preference of $4.75 million and 6,250,000 shares of series C preferred stock
having an aggregate liquidation preference of $10.0 million. Since 1982,
Valu-Line has been primarily providing switched long distance services, customer
premises equipment (CPE) sales and services and, since March 1997, local
service.
In May 1998, Birch acquired Boulevard Phone Company (Boulevard), a shared
tenant service provider in the Kansas City metropolitan area, for $300,000 in
cash and Telesource Communications, Inc. (Telesource), a CPE provider in the
Kansas City metropolitan area, for $325,000 in cash.
In September 1998, Birch acquired TFSnet, Inc. (TFSnet), an Internet service
provider based in the Kansas City metropolitan area, for $2.65 million.
In February 1999, Birch acquired American Local Telecommunications, LLC
(ALT), a competitive local exchange carrier based in the Dallas, Texas
metropolitan area. The acquisition included substantially all assets of ALT. The
total purchase price was approximately $1.6 million in cash and $211,000 in
common stock.
In March 1999, Birch acquired the stock of Capital Communications
Corporation (Capital), a telecommunications equipment provider based in the St.
Louis, Missouri metropolitan area. The total purchase price was approximately
$3.0 million plus additional cash consideration, recorded as additional purchase
price, based on local service lines converted to Birch's service from Capital's
existing customer base, which totaled approximately $161,000 through
December 31, 1999.
All of the acquisitions referenced above were recorded using the purchase
method of accounting. Accordingly, the operations of each are included in the
consolidated statements of operations and cash flows from the date of
acquisition.
The following is unaudited pro forma information reflecting the effect of
the 1998 acquisitions on the results as though they had been completed effective
January 1, 1997 and 1998:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1997 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenue................................................... $18,847 $29,193
Net loss.................................................. 19,325 28,921
Loss per common share..................................... 15.65 8.05
</TABLE>
The impact of the 1999 acquisitions was not material to our results of
operations.
F-11
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACCOUNTS RECEIVABLE
The composition of accounts receivable, net as of December 31, 1998 and 1999
is as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Billed..................................................... $3,144 $ 9,312
Unbilled................................................... 1,129 2,756
------ -------
4,273 12,068
Less allowance for doubtful accounts....................... 234 456
------ -------
$4,039 $11,612
====== =======
</TABLE>
5. PROPERTY AND EQUIPMENT
The composition of property and equipment as of December 31, 1998 and 1999
is as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Communications network.................................... $ 5,966 $28,525
Buildings, furniture, fixtures and equipment.............. 6,529 38,662
Construction in progress.................................. 14,405 3,005
------- -------
26,900 70,192
Less accumulated depreciation and amortization............ 747 8,080
------- -------
Property and equipment, net............................... $26,153 $62,112
======= =======
</TABLE>
6. OTHER INTANGIBLES
The composition of other intangible assets, net as of December 31, 1998 and
1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Customer lists............................................. $3,525 $ 4,225
Preferred stock issuance costs............................. 325 6,989
Deferred financing costs................................... 4,630 6,412
Deferred interconnection costs............................. -- 2,363
Other...................................................... 153 330
------ -------
8,633 20,319
Less accumulated amortization.............................. 1,013 3,408
------ -------
Other intangibles, net..................................... $7,620 $16,911
====== =======
</TABLE>
7. DEBT, PLEDGED SECURITIES AND WARRANTS
During December 1999, Birch completed a $75 million senior credit facility
which increased to $125 million during syndication in February 2000. The
financing provides for a $25 million reducing revolver and $100 million in
multi-draw term loans. The revolver is available for general corporate
F-12
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT, PLEDGED SECURITIES AND WARRANTS (CONTINUED)
purposes of Birch's subsidiaries and the term loans are to be used to finance
the development, design, installation and acquisition of telecommunications
equipment, inventory network assets and back office systems. At Birch's
election, the borrowings bear interest at either the Prime Rate plus a margin
ranging from 1.50% to 2.50% or the London Interbank Offered Rate (LIBOR) plus a
margin ranging from 2.75% to 3.75%. The applicable margins are based upon
Birch's debt to EBITDA ratio, as defined by the senior credit facility. Interest
is paid quarterly in arrears for loans bearing interest based upon Prime and/or
on the last day of each relevant interest period, for periods not in excess of
three months, for LIBOR loans. For LIBOR loans with interest periods of longer
than three months, interest is paid each day which is three months after the
first day of such interest period and the last day of such interest period.
Commitment fees are paid quarterly in arrears on the average unused committed
portion of the Facility, ranging from 0.75% to 1.25%. The applicable percentages
are based upon Birch's average borrowings in relation to the average borrowing
availability, as defined by the senior credit facility. For the year ended
December 31, 1999 commitment fees totaled $25,174. Principal payments begin
March 2003 and the credit facility matures December 30, 2006. The senior credit
facility is secured by a perfected first priority security interest in
substantially all of Birch's assets and capital stock. Deferred financing costs
incurred amounting to $1.5 million at December 31, 1999 are being amortized over
the life of the credit facility using the straight-line method. Amortization for
the year ended December 31, 1999 was not significant.
During June 1998, Birch completed a $115 million private offering of 14%
senior notes due June 2008 and 115,000 warrants to purchase 1,409,734 shares of
common stock. Interest on the senior notes is payable semi-annually in arrears
on June 15 and December 15 of each year. Warrants are exercisable at $0.01 per
share and expire June 2008. Birch received net proceeds from the senior notes of
$110.2 million and concurrently purchased pledged securities of $44.2 million.
The pledged securities are restricted for interest payments on the senior notes
and, together with the interest accruing thereon, will be used to satisfy such
interest payments through June 2001. Birch classifies its pledged securities,
consisting of $37.8 million at December 31, 1998 and $23.4 million at
December 31, 1999 of U.S. Treasury securities, as held to maturity recorded at
amortized cost and maturing between six and eighteen months. A portion of the
proceeds from the senior notes, $337,000, was allocated to the warrants, and the
resulting debt discount is being amortized over the life of the debt on the
straight-line method, which does not differ materially from the effective
interest method. Unamortized discount was $319,000 at December 31, 1998 and
$285,000 at December 31, 1999. The amount allocated to the warrants represents
the estimated fair value of the warrants at the date of issuance. Deferred
financing costs incurred amounting to $4.9 million at December 31, 1999 are
being amortized over the life of the senior notes using the straight-line
method. Accumulated amortization on the financing costs totaled $1.5 million at
December 31, 1999. The senior notes rank pari pasu in right of payment to all
existing and future senior indebtedness of Birch and rank senior in the right of
payment to all existing and future subordinated indebtedness of Birch.
A Registration Statement on Form S-4, registering Birch's 14% senior notes
and exchanging the outstanding senior notes for exchange notes, was declared
effective by the Securities and Exchange Commission (SEC) in March 1999. The
terms and conditions of the exchange notes are identical to those of the senior
notes in all material respects.
The senior credit facility and the senior notes indenture contain certain
covenants which, among other things, restrict the ability of Birch to incur
additional indebtedness, pay dividends or make
F-13
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT, PLEDGED SECURITIES AND WARRANTS (CONTINUED)
distributions of Birch's or its subsidiaries' stock, enter into sale and
leaseback transactions, create liens, enter into transactions with affiliates or
related persons, consolidate, merge or sell all of its assets. Birch was in
compliance with these covenants at December 31, 1999.
Birch's debt consisted of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
14% senior notes........................................ $114,681 $114,715
======== ========
Senior credit facility:
Equipment term loans.................................. $ -- $ 10,000
-------- --------
Total senior credit facility........................ $ -- $ 10,000
======== ========
Other long-term debt, interest accruing between 8.6% and
9.8%, maturing through 2013, secured by buildings..... $ 345 $ 244
Less current maturities................................. 13 10
-------- --------
$ 332 $ 234
======== ========
</TABLE>
Assets securing the other long-term debt totaled $814,000 at December 31,
1998 and $766,237 at December 31, 1999, net of accumulated depreciation of
$19,000 at December 31, 1998 and $35,037 at December 31, 1999.
Principal payments required on the outstanding debt during each of the next
five years are as follows (IN THOUSANDS):
<TABLE>
<S> <C>
2000........................................................ $ 10
2001........................................................ 10
2002........................................................ 11
2003........................................................ 5,012
2004........................................................ 5,014
Thereafter.................................................. 114,902
---------
$ 124,959
=========
</TABLE>
8. CAPITAL LEASE OBLIGATIONS
Birch leases telecommunications equipment, computer equipment and
automobiles under capital leases with imputed interest between 8.0% and 12.0%.
Assets under capital leases totaled $1.5 million at December 31, 1998 and
$3.6 million at December 31, 1999, net of accumulated amortization of $210,000
at December 31, 1998 and $1.1 million at December 31, 1999. The future minimum
lease
F-14
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL LEASE OBLIGATIONS (CONTINUED)
payments under the capital leases and the present value of the net minimum lease
payments as of December 31, 1999 are as follows (IN THOUSANDS):
<TABLE>
<S> <C>
2000........................................................ $1,528
2001........................................................ 545
2002........................................................ 92
2003........................................................ 57
2004........................................................ --
------
Total minimum lease payments................................ 2,222
Less amount representing interest........................... 96
------
Present value of net minimum lease payments................. 2,126
Less current maturities..................................... 1,290
------
$ 836
======
</TABLE>
Amortization expense for assets under capital leases was $157,000 for 1998
and $974,165 for 1999.
9. CAPITAL STRUCTURE
During 1997, $1.8 million of common stock and $18,000 of warrants were sold
to management and equity investors for $1.00 and $0.01 per share, respectively.
The warrants entitled the holders to purchase an additional 1.8 million shares
of common stock at $1.00 per share.
During February and March 1998, Birch issued $9.5 million of series B
preferred stock at $4.50 per share and $3.5 million of convertible notes
generating net proceeds of $12.4 million, converted all existing common stock to
series C preferred stock, terminated common stock warrants, canceled the 1997
stock option plan, created the 1998 stock option plan and issued 474,750 shares
of common stock to employees of Birch. Also during February 1998, Birch issued
$4.75 million of series A preferred stock and $10.0 million of series C
preferred stock in connection with the Valu-Line merger. Birch redeemed the
series A preferred stock in June 1998. Also in June 1998, the convertible notes
were converted into series B preferred stock.
During July and August 1999, Birch issued $10 million of series D preferred
stock and $60 million of series F preferred stock at $4.50 per share. Options
were granted to purchase $25 million of series F preferred stock at $4.75 per
share and $25 million of series F preferred stock at $5.00 per share which
expire on April 13, 2000. Additionally, Birch repurchased $10 million of
series C preferred stock at $4.50 and recapitalized the series B preferred stock
converting it into a new series B preferred stock and a new series E preferred
stock. The series E preferred stock was then redeemed for $8.6 million. Net
proceeds generated from these transactions totaled $44.4 million.
AUTHORIZED SHARES
At December 31, 1999, Birch had shares authorized totaling 80 million shares
of common stock and 55 million shares of preferred stock. The preferred stock
has designations of 8.75 million shares of series B, 8.5 million shares of
series C, 2.2 million shares of series D, 1.9 million shares of series E and
30 million shares of series F.
F-15
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CAPITAL STRUCTURE (CONTINUED)
RIGHTS
All classes of preferred stock are convertible and contain certain voting
rights. The common stock also has voting rights similar to the series C
preferred stock. The series B, series D and series F preferred stock have
additional voting rights in certain circumstances. Additionally, the series F
preferred stock contains mandatory redemption rights based on certain senior
management retention. In the event of mandatory redemption, the shares are
redeemable for amounts similar to the liquidation preference discussed below.
LIQUIDATION RIGHTS
Birch's series D and series F preferred stock have a liquidation preference
over the series B and series C preferred stock and common stock at the greater
of (i) the purchase price plus accrued but unpaid dividends or (ii) the amount
the holders would have received upon liquidation if such shares of series D and
series F preferred stock had been converted to common stock immediately prior to
liquidation. Birch's series B preferred stock has a liquidation preference only
over series C preferred stock and common stock at an amount equal to the sum of
the purchase price plus accrued but unpaid dividends. series C preferred stock
has preference only over common stock at an amount equal to the sum of the
purchase price plus accrued but unpaid dividends.
DIVIDENDS
The series B preferred stock accrued cumulative compounding dividends at 15%
per annum until the series B was converted and restated into new series B. At
that time, the rights and preferences were amended and restated to remove the
mandatory dividend rights and now the series B cumulates cash dividends at 15%
per annum, amounting to $814,000 at December 31, 1999. The series C preferred
stock has a 10% non-cumulative cash dividend and the series D preferred stock
cumulates cash dividends at a rate of 15% per annum, totaling $750,000 at
December 31, 1999. Only the series F preferred stock contains mandatory dividend
rights. Accrued cash dividends on series F preferred stock totaled $3.6 million
at December 31, 1999, as reflected in stockholders' equity. Common stock
dividends, if any, will be declared at the discretion of Birch's board of
directors. Birch has not paid any cash dividends on common stock since inception
and does not intend to pay any in the foreseeable future. Restrictions contained
in the senior credit facility agreement and the senior notes indenture prohibit
Birch from paying certain dividends on its capital stock.
On June 23, 1998, Birch paid a stock dividend, in the amount of 0.055 shares
per share, to the holders of Birch's series B preferred stock, series C
preferred stock and common stock as of June 15, 1998. Dividends paid on
series A preferred stock in 1998 totaled $168,000.
F-16
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED-PARTY TRANSACTIONS
During December 1997, Birch borrowed $250,000 from Birch's principal
stockholder under a note payable. The note payable was fully repaid in
February 1998.
Birch acquired notes payable to Valu-Line shareholders totaling $274,000 in
the Valu-Line merger. These notes were fully repaid during 1998.
A broadcasting company owned by one of the Birch's shareholders rented
office space from Birch for $30,000 during 1998 and $29,187 during 1999. Birch
purchased advertising from the broadcasting company totaling $40,000 in 1998 and
$30,360 in 1999.
A real estate company owned by the President of Birch's equipment division
was paid $3,588 for building maintenance in 1998 and $12,587 in 1999.
11. COMMITMENTS AND CONTINGENCIES
Future minimum rental commitments at December 31, 1999 for all noncancelable
operating leases, consisting mainly of leases for office space and equipment,
are as follows (IN THOUSANDS):
<TABLE>
<S> <C>
2000........................................................ $ 2,766,794
2001........................................................ 3,042,829
2002........................................................ 2,925,940
2003........................................................ 2,567,295
2004........................................................ 2,443,322
Thereafter.................................................. 7,769,655
-----------
Total....................................................... $21,515,835
===========
</TABLE>
Total rent expense was $81,000 in 1997, $485,000 in 1998 and $1.5 million in
1999. Birch may renew leases on its corporate offices in terms ranging from
three to ten years at rates approximating the prevailing market. Renewal rentals
are excluded from the table.
Various suits arising in the ordinary course of business are pending against
Birch. Management cannot predict the final outcome of the actions, but believes
they will not be material to Birch's financial statements.
12. EMPLOYEE BENEFIT PLAN
Birch sponsors a 401(k) profit-sharing plan covering substantially all
employees under which employees can contribute up to 15% of their annual salary
subject to annual maximum limitations. Employees can participate after meeting
the plan's eligibility requirements. Birch may also make discretionary
contributions. Birch contributions to the plan were $148,000 in 1998 and
$594,925 in 1999.
13. EMPLOYMENT AGREEMENTS
Birch has entered into employment agreements with certain executive
employees which provide for payments to be made in connection with certain
termination of employment or change of control. The benefits include cash
compensation, immediate vesting of outstanding stock options and coverage under
Birch's group health plan.
F-17
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES
Net deferred taxes consist of the following as of December 31, 1998 and
1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 5,528 $ 28,770
Accruals and reserves not currently deductible......... 91 182
Other.................................................. 668 614
------- --------
6,287 29,566
Valuation allowance.................................... (5,799) (28,741)
------- --------
488 825
Deferred tax liabilities:
Property and equipment................................. 488 825
------- --------
$ -- $ --
======= ========
</TABLE>
Net income tax benefits of approximately $5.1 million in 1998 and $22.9 in
1999 have been offset by increases in the valuation allowance. At December 31,
1999, Birch had operating loss carryforwards for federal income tax purposes of
approximately $71.9 million, expiring in 2013 and 2014.
The primary difference that caused the effective tax rate to vary from the
statutory federal income tax rate of 35% was the valuation allowance.
15. STOCK OPTION PLAN
At December 31, 1997, Birch had granted options to purchase common stock
under the 1997 stock option plan. The options granted had a term of 10 years and
vested over a four-year period. This plan was terminated and superseded in 1998
by the 1998 employee stock option plan. No options were or ever will be
exercised and no shares were or will ever be issued under the terminated and
superseded 1997 stock option plan.
Stock option activity under the 1997 stock option plan was as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE PER
SHARE EXERCISE
SHARES PRICE
---------- --------------
<S> <C> <C>
Granted............................................. 2,783,000 $ 1.00
Exercised........................................... -- --
Forfeited........................................... -- --
----------
Outstanding at December 31, 1997.................... 2,783,000 1.00
Terminated.......................................... (2,783,000) 1.00
----------
Outstanding at December 31, 1998.................... -- --
==========
</TABLE>
F-18
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK OPTION PLAN (CONTINUED)
Stock option activity under the 1998 employee stock option plan was as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE PER
SHARE EXERCISE
SHARES PRICE
--------- --------------
<S> <C> <C>
Granted............................................. 5,093,064 $0.242
Exercised........................................... 4,566,889 0.001
Forfeited........................................... 14,250 2.500
---------
Outstanding at December 31, 1998.................... 511,925 2.334
Granted............................................. 1,744,800 3.869
Exercised........................................... -- --
Forfeited........................................... 275,875 3.038
---------
Outstanding at December 31, 1999.................... 1,980,850 3.588
=========
</TABLE>
At December 31, 1999, 107,468 options were exercisable with a weighted
average exercise price of $2.175. At December 31, 1998, 5,363 options were
exercisable with a weighted average exercise price of $0.001.
The 1998 employee stock option plan authorized the grant of options for up
to 6,195,845 shares of Birch's common stock. The options have a term of
10 years and vest over a four-year period. All options exercised during 1998
were for options granted with an early exercise provision. The shares from
exercised options continue to be subject to the four-year vesting period. No
options expired during 1998 or 1999.
Options granted in 1998 and 1999 had exercise prices approximating the
market value of the common stock. Exercise prices for options outstanding at
December 31, 1999 ranged from $0.001 to $4.50. The weighted-average remaining
contractual life of those options is 9.4 years. The weighted-average fair values
of options granted during the years ended December 31, 1998 and 1999 equaled
$0.05 and $0.73, respectively. At December 31, 1999, Birch has reserved
1,628,956 shares of common stock for issuance under the 1998 stock option plan.
Birch estimated the fair value of each option grant using the minimum value
method permitted by SFAS No. 123 for entities not publicly traded. Birch used
the following assumptions in the calculation: risk-free interest rate of 5.25%,
expected life of four years and no dividends being paid over the life of the
options. Under the minimum value method, the volatility factor is excluded. Had
compensation cost for the stock based compensation plan been determined as
prescribed by SFAS No. 123, the net loss and loss per common share would have
been as follows for the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net loss--as reported........................... $(1,789) $(16,208) $(61,804)
Net loss--pro forma............................. (1,921) (16,384) (62,411)
Loss per share--Basic and Diluted--Pro Forma.... (1.56) (4.75) (13.36)
</TABLE>
F-19
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SIGNIFICANT SUPPLIERS
Birch purchased telephone services from Southwestern Bell Telephone
amounting to 35% of cost of services in 1998 and 65% in 1999. Birch is dependent
upon incumbent telephone companies, such as Southwestern Bell, for the supply of
fiber optic networks that we use. Birch purchased switches and other network
equipment and software from Lucent Technologies amounting to $12.9 million in
1998 and $9.9 million in 1999.
17. YEAR 2000 ISSUE--UNAUDITED
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of Birch's
computer programs that have date-sensitive software may recognize the date using
"00" as the year 1900 rather than the year 2000. Birch completed all Year 2000
readiness work and experienced no significant problems as a result of the new
year. Birch does not believe it has continued exposure to the Year 2000 problem
and does not expect further costs incurred in relation to the Year 2000 issue to
be substantial.
18. QUARTERLY DATA--UNAUDITED
The following table includes summarized quarterly financial data for the
years ended December 31:
<TABLE>
<CAPTION>
QUARTERS
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998:
Revenue............................................... $ 3,705 $ 6,060 $ 7,478 $ 8,844
Gross margin.......................................... 1,063 1,628 2,305 2,205
Loss from operations.................................. (567) (1,486) (2,996) (5,827)
Net loss.............................................. (623) (1,766) (5,468) (8,351)
Loss per common share--basic and diluted.............. (0.79) (0.55) (1.19) (1.76)
1999:
Revenue............................................... $10,636 $ 13,975 $ 17,022 $ 18,905
Gross margin.......................................... 2,711 3,574 3,753 4,142
Loss from operations.................................. (7,128) (9,525) (13,710) (19,330)
Net loss.............................................. (9,936) (12,639) (16,690) (22,539)
Loss per common share--basic and diluted.............. (2.06) (2.59) (3.43) (5.30)
</TABLE>
19. SUBSEQUENT EVENTS
Since December 31, 1999, Birch has borrowed an additional $40 million
through March 23, 2000 under the term loan portion of the senior credit
facility.
On March 23, 2000 an affiliate of Kohlberg Kravis Roberts & Co. exercised
its options to purchase an additional $50.0 million of Birch's series F
preferred stock (see note 9).
F-20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Valu-Line Companies, Inc.
We have audited the accompanying consolidated balance sheet of the Valu-Line
Companies, Inc. (the Company) as of December 31, 1997, and the related
consolidated statements of income and retained earnings, and cash flows for the
year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Valu-Line
Companies, Inc. at December 31, 1997 and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
Ernst & Young LLP
Kansas City, Missouri
May 15, 1998
F-21
<PAGE>
VALU-LINE COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 258
Accounts receivable, net of allowance of $70.............. 1,790
Other receivables--related parties........................ 97
Inventories............................................... 530
Prepaid expenses.......................................... 37
Income taxes receivable................................... 30
Other assets.............................................. 60
Deferred income taxes..................................... 71
------
Total current assets........................................ 2,873
Property and equipment, net................................. 1,612
Other assets................................................ 317
------
Total assets................................................ $4,802
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease
obligation.............................................. $ 110
Notes payable--related parties............................ 240
Accounts payable.......................................... 1,262
Accrued expenses.......................................... 225
Customer deposits......................................... 39
Accrued salaries and commissions.......................... 266
Deferred revenue.......................................... 287
------
Total current liabilities................................... 2,429
Long-term debt, net of current maturities................... 345
Capital lease obligation, net of current maturities......... 336
Deferred income taxes....................................... 27
STOCKHOLDERS' EQUITY
Common stock, no par value, 100,000 shares authorized;
10,360 issued and outstanding............................. 181
Retained earnings........................................... 1,484
------
Total stockholders' equity.................................. 1,665
------
Total liabilities and stockholders' equity.................. $4,802
======
</TABLE>
See accompanying notes.
F-22
<PAGE>
VALU-LINE COMPANIES, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<S> <C>
Revenue:
Communications services, net.............................. $13,785
Equipment sales, net...................................... 3,016
-------
Total revenue............................................... 16,801
Cost of services:
Cost of communications services........................... 9,859
Cost of equipment sales................................... 1,983
-------
Total cost of services...................................... 11,842
-------
Gross margin................................................ 4,959
Selling, general and administrative......................... 4,067
Depreciation and amortization............................... 341
-------
Income from operations...................................... 551
Interest expense............................................ 97
-------
Income before income taxes.................................. 454
Income tax expense.......................................... 186
-------
Net income.................................................. 268
Retained earnings, beginning of year........................ 1,216
-------
Retained earnings, end of year.............................. $ 1,484
=======
Earnings per share--basic and diluted....................... $ 25.87
=======
Common shares outstanding--basic and diluted................ 10,360
</TABLE>
See accompanying notes.
F-23
<PAGE>
VALU-LINE COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income.................................................. $268
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization............................. 341
Deferred income taxes..................................... (14)
Income tax expense........................................ 73
Changes in operating assets and liabilities:
Accounts receivable..................................... (660)
Other receivables--related parties...................... (52)
Inventory............................................... (94)
Income taxes receivable/payable......................... (56)
Accounts payable........................................ 520
Accrued expenses and other current liabilities.......... 304
Other................................................... (142)
----
Net cash provided by operating activities................... 488
INVESTING ACTIVITIES
Purchase of property and equipment.......................... (243)
----
Net cash used in investing activities....................... (243)
FINANCING ACTIVITIES
Payment of notes payable.................................... (11)
Payment of notes payable--related parties................... (44)
Payment of capital lease obligation......................... (90)
----
Net cash used in financing activities....................... (145)
----
Net increase in cash and cash equivalents................... 100
Cash and cash equivalents, beginning of year................ 158
----
Cash and cash equivalents, end of year...................... $258
====
</TABLE>
See accompanying notes.
F-24
<PAGE>
VALU-LINE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
1. THE COMPANY
These consolidated financial statements include the accounts of Valu-Line
Companies, Inc., a Kansas Corporation, and its wholly-owned subsidiaries
(collectively, the "Company"), Valu-Line of Kansas, Inc. and IS Advertising. The
Company was acquired by Birch Telecom, Inc. in February 1998 (see NOTE 10). The
accounts of Valu Broadcasting, Inc. and Steve Sauder Real Estate, respectively,
a wholly-owned subsidiary of and a division of Valu-Line Companies, Inc., both
of which were spun off in December 1997, have been excluded for all periods from
these consolidated financial statements in order to reflect financial position
and operating results on a basis consistent with the businesses acquired by
Birch Telecom, Inc. All intercompany balances and transactions have been
eliminated in consolidation.
The Company provides local, long distance, Internet, customer premises
equipment and other communications services to business and residential
customers in the state of Kansas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company includes as cash and cash
equivalents, cash and marketable securities with original maturities of three
months or less.
REVENUE RECOGNITION
Revenue from communications services is recognized when the services are
provided. Revenue on billings to customers in advance of providing services is
deferred and recognized when earned.
CONCENTRATION OF CREDIT RISK
The Company is exposed to concentrations of credit risk principally from
customer accounts receivable. At December 31, 1997, the Company's customers are
located in the state of Kansas. The Company performs ongoing credit evaluations
of its customers as a means to reduce credit risk.
FAIR VALUES OF FINANCIAL INSTRUMENTS
As of December 31, 1997, the fair values of the Company's financial
instruments, including cash equivalents and notes payable--related parties,
approximate their carrying value.
INVENTORIES
Inventories, which consist of customer premises communications equipment
held for sale and supplies, are valued at lower of average cost or market.
PROPERTY AND EQUIPMENT
Property and equipment, including assets held under capital leases, are
stated at cost and are depreciated using the straight-line method over the
estimated useful lives of the related assets or lease term.
F-25
<PAGE>
VALU-LINE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. PROPERTY AND EQUIPMENT
The components of property and equipment at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1997
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
Telecommunications and other equipment............ 5 years $ 1,103
Office equipment, furniture and other............. 3-7 years 1,178
Buildings and improvements........................ 40 years 683
--------------
2,964
Accumulated depreciation and amortization......... (1,352)
--------------
$ 1,612
==============
</TABLE>
Telecommunication equipment under capital lease was $607,000 at
December 31, 1997. Accumulated amortization totaled $194,000 as of December 31,
1997. Amortization of assets under capital lease is included in depreciation and
amortization expense. Interest expense associated with the obligations under
these leases amounted to $47,000 in 1997.
4. CAPITAL LEASE OBLIGATION
The Company leases telecommunications equipment under a capital lease. The
future minimum lease payments under the capitalized lease and the present value
of the net minimum lease payments as of December 31, 1997 are as follows (IN
THOUSANDS):
<TABLE>
<S> <C>
1998........................................................ $137
1999........................................................ 137
2000........................................................ 137
2001........................................................ 57
2002........................................................ 57
2003........................................................ 57
----
Total minimum lease payments................................ 582
Less amount representing interest........................... (147)
----
Present value of net minimum lease payments with interest at
10.0%..................................................... 435
Less current maturities..................................... (99)
----
$336
====
</TABLE>
F-26
<PAGE>
VALU-LINE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
5. LONG TERM DEBT AND NOTES PAYABLE
The Company entered into a note payable with a financial institution in the
amount of $300,000 in 1992 to finance the remodeling of a building. The note is
payable in monthly installments through 2007. Interest is payable at prime plus
1 1/2% (10.0% at December 31, 1997). The note is secured by the building and the
deposit accounts of the Company with the financial institution. The outstanding
principal balance on the note was $262,000 at December 31, 1997.
In 1996, the Company issued a note payable of $100,000 to finance the
purchase of an office building. The note is payable in monthly installments
through 2011. Interest is payable at a variable rate (8.90% at December, 31,
1997). The note is secured by the building. The outstanding principal balance on
the note was $94,000 at December 31, 1997.
Maturities on the aforementioned notes payable are as follows (IN
THOUSANDS):
<TABLE>
<S> <C>
1998........................................................ $ 11
1999........................................................ 13
2000........................................................ 14
2001........................................................ 15
2002........................................................ 17
Thereafter.................................................. 286
----
Total....................................................... $356
====
</TABLE>
The Company also has notes payable to officers of the Company and members of
their families. The notes are unsecured and payable on demand. Interest is
payable at the treasury rate (5.85% at December 31, 1997). The outstanding
principal balance on these notes was $240,000 at December 31, 1997. Principal
and interest payments were $128,000 in 1997.
Total interest paid in 1997 was $97,000.
6. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) profit-sharing plan covering substantially all
employees under which employees can contribute up to 15% of their annual salary
subject to annual Internal Revenue Code maximum limitations. Employees can
participate after meeting the plan's eligibility requirements. The Company may
make a discretionary contribution. Company contributions to the plan were
$81,000 in 1997.
F-27
<PAGE>
VALU-LINE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
7. INCOME TAXES
The income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
Current:
Federal................................................. $175
State................................................... 25
----
Total Current............................................. 200
Deferred:
Federal................................................. (12)
State................................................... (2)
----
Total deferred............................................ (14)
----
Income tax expense........................................ $186
====
</TABLE>
The differences between the amount computed by applying the statutory
federal income tax rate to income before income taxes and the provision for
income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
Tax computed at statutory rate............................ $159
State taxes, net of federal effect........................ 22
Other, net................................................ 5
----
Income tax expense........................................ $186
====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for federal and state income tax purposes.
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1997 are as follows (IN THOUSANDS):
<TABLE>
<S> <C>
Deferred tax assets (current):
Accrued liabilities....................................... $32
Allowance for doubtful accounts........................... 28
Inventory capitalization.................................. 11
---
71
Deferred tax liability (noncurrent):
Depreciation.............................................. 27
---
Net deferred tax assets..................................... $44
===
</TABLE>
Net cash paid for income taxes for the year ended December 31, 1997 was
$225,000.
F-28
<PAGE>
VALU-LINE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
8. ADDITIONAL FINANCIAL INFORMATION
RELATED PARTIES
In 1997 Valu-Line provided services principally related to rent and
operating costs to Valu-Broadcasting, Inc., an affiliate of Valu-Line at the
time of the transactions, in the amount of $81,000. Valu-Line also received
services principally related to advertising from Valu-Broadcasting, Inc. in the
amount of $41,000 in 1997. In February 1998, Valu-Line merged with and into the
Company pursuant to the Merger.
MAJOR SUPPLIER INFORMATION
Cost of communications services provided by Southwestern Bell approximated
40% of the total cost of communication services for the year ended December 31,
1997. Equipment purchases from Toshiba approximated 59% of cost of equipment
sales for the year ended December 31, 1997.
9. COMMITMENTS AND CONTINGENCIES
Minimum rental commitments at year-end 1997 for all noncancelable operating
leases, consisting mainly of leases for office space and vehicles, are as
follows (IN THOUSANDS):
<TABLE>
<S> <C>
1998........................................................ $30
1999........................................................ 19
2000........................................................ 9
---
Thereafter.................................................. $58
===
</TABLE>
Total rent expense for 1997 was $56,000.
10. SUBSEQUENT EVENT
In February 1998, the Company was acquired by Birch Telecom, Inc. for
$19,500,000. Shareholders of the Company received $4,750,000 of cash and
$14,750,000 of preferred stock in Birch Telecom, Inc.
11. YEAR 2000 COMPLIANCE--UNAUDITED
Year 2000 issues arise from computer programs written using two digits
rather than four to define the applicable year. Any of the Company's computer
programs that have time-sensitive software may recognize a date using 00 as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculation causing disruptions of operations, including, among other things,
a temporary inability to process transactions, send invoices or engage in
similar normal business activities.
Based on ongoing assessments, the Company determined that it will be
required to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The Company presently believes that with modifications to existing
software and conversions to new software, the year 2000 issue will not pose
significant operational problems for its computer systems. The Company estimates
it will incur minimal expenses to modify and convert its systems and anticipates
completing the year 2000 project by the year ending December 31, 1998.
F-29
<PAGE>
VALU-LINE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
11. YEAR 2000 COMPLIANCE--UNAUDITED (CONTINUED)
While the Company believes that its systems will be year 2000 compliant,
there can be no assurance until the year 2000 occurs that all systems will
function adequately. In addition, the Company interconnects and uses various
local exchange companies' facilities to service its customers, and such
facilities currently utilize numerous, date-sensitive computer applications. If
these facilities are not year 2000 compliant, or if the systems of other local
exchange companies, long distance carriers and others upon which the Company
relies are not year 2000 compliant, it could have a material effect on the
Company's business, operating results and financial condition.
F-30
<PAGE>
SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
FIRST UNION SECURITIES, INC.
J.P. MORGAN & CO.
THOMAS WEISEL PARTNERS LLC
FIDELITY CAPITAL MARKETS
A DIVISION OF NATIONAL FINANCIAL SERVICES CORPORATION
, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is a table of the registration fee for the Securities and
Exchange Commission, the filing fee for the National Association of Securities
Dealers, Inc., the listing fee for the Nasdaq National Market and estimates of
all other expenses to be incurred in connection with the issuance and
distribution of the securities described in the Registration Statement, other
than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC registration fee........................................ $60,720
NASD filing fee............................................. 23,500
Nasdaq listing fee.......................................... *
Blue Sky fee................................................ 5,000
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
-------
Total..................................................... $
=======
</TABLE>
- ------------------------
* To be completed by amendments.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
We are a Delaware corporation. Reference is made to Section 102(b)(7) of the
Delaware General Corporation Law (the "DGCL"), which enables a corporation in
its original certificate of incorporation or an amendment thereto to eliminate
or limit the personal liability of a director for violations of the director's
fiduciary duty, except (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the DGCL (providing for liability of directors
for unlawful payments of dividends of unlawful stock purchase or redemptions),
or (iv) for any transaction from which a director derived an improper personal
benefit.
Reference is also made to Section 145 of the DGCL, which provides that a
corporation may indemnify any person, including an officer or director, who is,
or is threatened to be made, party to any threatened, pending or completed legal
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person was an officer, director, employee or agent
of such corporation or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such officer,
director, employee or agent acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the corporation's best interest and, for
criminal proceedings, had no reasonable cause to believe that his conduct was
unlawful. A Delaware corporation may indemnify any officer or director in an
action by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses that
such officer or director actually and reasonably incurred.
II-1
<PAGE>
Article V of our amended and restated by-laws (filed as Exhibit 3.2)
provides for indemnification of the officers and directors to the full extent
permitted by applicable law.
The underwriting agreement (Exhibit 1.1) provides for indemnification by the
underwriters of the registrant and its officers and directors for certain
liabilities arising under the Securities Act, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a description of all securities that we have sold within
the past three years without registering the securities under the Securities
Act:
On February 10, 1998, as part of the consideration for our acquisition of
Value-Line, we paid to the principal stockholder of Valu-Line, 2,968,750 shares
of our series A preferred stock and 5,982,746 shares of our series C preferred
stock. These issuances were exempt from registration pursuant to Section 4(2) of
the Securities Act. In June 1998, we repurchased all of the outstanding shares
of our Series A preferred held by Valu-Line's former principal stockholder.
On March 13, 1998, we completed a private placement to approximately 70
accredited investors of 5,937,500 shares of our series B preferred stock
comprised of shares with an aggregate liquidation preference of $9.5 million and
convertible notes in the aggregate principal amount of $3.5 million. On
June 18, 1998, we converted those notes to 2,307,965 shares of series B
preferred stock. These issuances were exempt from registration pursuant to
Section 4(2) of the Securities Act.
In connection with this series B preferred stock offering, one stockholder
surrendered 1,500,000 shares of common stock and 1,500,000 warrants exercisable
into shares of common stock in exchange for 1,582,500 shares of series C
preferred stock. One of our officers surrendered 180,000 shares of common stock
and 180,000 warrants exercisable into shares of common stock in exchange for
189,900 shares of series C preferred stock. Another of our officers surrendered
120,000 shares of common stock and 120,000 warrants exercisable into shares of
common stock in exchange for 126,600 shares of series C preferred stock. We then
cancelled the exchanged shares and warrants exercisable into shares of common
stock. These issuances were exempt from registration pursuant to Section 4(2) of
the Securities Act.
On July 23, 1999, we completed a private placement to approximately 55 of
our existing investors in Series B of 2,222,222 shares of series D preferred
stock at a purchase price of $4.50 per share for aggregate net proceeds of
approximately $10 million. This issuance was exempt from registration pursuant
to Section 4(2) of the Securities Act.
On August 5, 1999, BTI Ventures, L.L.C. an affiliate of KKR, purchased
13,333,334 shares of our series F preferred stock at a purchase price of $4.50
per share for aggregate net proceeds of $60.0 million. On March 23, 2000, KKR
exercised its options to purchase an additional 5,263,158 shares of series F
preferred stock at $4.75 per share and 5,000,000 shares of series F preferred
stock at $5.00 per share. In connection with the private placement of the
series F preferred stock to BTI Ventures, L.L.C., which closed on August 5,
1999, and the related exercise of the KKR options, Lehman Brothers Inc. earned
compensation which included 646,300 shares of our series D preferred stock.
These issuances were exempt from registration pursuant to Section 4(2) of the
Securities Act.
On August 5, 1999, in connection with the series F Stock offering, we
repurchased 2,222,222 shares of our Series C preferred stock for $10 million
from a board member. This issuance was exempt from registration pursuant to
Section 4(2) of the Securities Act.
On August 5, 1999, in connection with the series F stock offering, we
converted each outstanding share of series B preferred stock into one share of
amended and restated series B preferred stock. The holders of series B preferred
stock, approximately 70 accredited investors, surrendered their existing
II-2
<PAGE>
redemption and participating liquidation preference in exchange for 0.2222
shares of our series E preferred stock. These issuances were exempt from
registration pursuant to Section 4(2) of the Securities Act. We redeemed the
series E preferred stock for a total of $8.6 million.
From 2/10/98 to 3/23/00, we granted stock options to purchase up to
8,339,539 shares of our common stock pursuant to our stock option plan, with a
weighted average exercise price of $2.31 per share. These issuances were exempt
from registration pursuant to Rule 701 under the Securities Act.
In connection with our sale of $115,000,000 of 14% senior notes due 2008 to
qualified institutional buyers, in June 1998 we granted warrants to purchase up
to 1,409,734 shares of our common stock at an exercise price of $0.01 per share.
These issuances were exempt from registration pursuant to Section 4(2) of the
Securities Act.
In March 1999, Mr. Jalkut, a member of our board of directors, agreed to
purchase 26,667 shares of our common stock for $200,000, and Mr. Ejabat, a
member of our board of directors, agreed to purchase 66,667 shares of our common
stock for $500,000.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ------------------------------------------------------------
<S> <C>
1.1 ** Form of Underwriting Agreement.
2.1 Agreement and plan of merger among Birch Telecom, Inc.,
Valu-Line Companies, Inc., Stephen L. Sauder, Paula K.
Sauder, Richard L. Tidwell, Sarah J. Tidwell, Stormy Supiran
and Carla S. Supiran. (incorporated by reference to Exhibit
2.1 to Birch Telecom, Inc.'s registration statement on Form
S-4, as amended (SEC File No. 333-62797), originally filed
September 3, 1998 (Form S-4)).
3.1 * Restated certificate of incorporation of Birch Telecom, Inc.
3.2 Restated bylaws of Birch Telecom, Inc. (incorporated by
reference to Exhibit 3.2 to the Form S-4).
3.3 ** Form of restated bylaws of Birch Telecom, Inc. (to become
effective immediately prior to completion of the offering).
3.4 ** Form of restated Certificate of Incorporation of Birch
Telecom, Inc. (to be filed in Delaware immediately prior to
completion of the offering).
4.1 ** Specimen stock certificate.
5.1 ** Opinion of Latham & Watkins.
10.1 Birch Telecom, Inc. securities purchase agreement
(incorporated by reference to Exhibit 10.1 to the Form S-4).
10.2 Birch Telecom, Inc. amended and restated purchasers rights
agreement, dated August 5, 1999 (incorporated by reference
to Exhibit 10.2 to the Form 10-Q).
10.3 * Amended employment agreement dated as of October 7, 1999
between Birch Telecom, Inc. and David E. Scott.
10.4 * Amended employment agreement dated as of October 7, 1999
between Birch Telecom, Inc. and Gregory C. Lawhon.
10.5 * Amended employment agreement dated as of October 7, 1999
between Birch Telecom, Inc. and Donald H. Goldman.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ------------------------------------------------------------
<S> <C>
10.6 * Amended employment agreement dated as of October 7, 1999
between Birch Telecom, Inc. and David W. Vranicar.
10.7 Employment agreement dated as of February 10, 1998 between
Birch Telecom, Inc. and Stephen L. Sauder (incorporated by
reference to Exhibit 10.7 to the Form S-4).
10.8 General agreement between Birch Telecom, Inc. and Lucent
Technologies Inc. (incorporated by reference to Exhibit
10.12 to the Form S-4).
10.9 Interconnection agreement under Sections 251 and 252 of the
Telecommunications Act of 1996 by and between Southwestern
Bell Telephone Company and Birch Telecom of Missouri, Inc.
(Missouri Interconnection Agreement) (incorporated by
reference to Exhibit 10.13 to the Form S-4).
10.10 Amendment No. 1 dated May 27, 1998 to Missouri
interconnection agreement (incorporated by reference to
Exhibit 10.10 to Birch Telecom, Inc.'s annual report on form
10-K for the fiscal year ended December 31, 1998, originally
filed on March 31, 1999 (Form 10-K)).
10.11 + Software license agreement between Birch Telecom, Inc. and
Saville Systems Inc. (incorporated by reference to Exhibit
10.14 to the Form S-4).
10.12 Interconnection agreement under Sections 251 and 252 of the
Telecommunications Act of 1996 by and between Southwestern
Bell Telephone Company and Birch Telecom of Kansas, Inc.
(incorporated by reference to Exhibit 10.12 to the Form
10-K).
10.13 Interconnection agreement under Sections 251 and 252 of the
Telecommunications Act of 1996 by and between Southwestern
Bell Telephone Company and Birch Telecom of Texas Ltd., LLP.
(incorporated by reference to the Exhibit 10.13 to the Form
10-K).
10.14 1998 stock option plan (incorporated by reference to Exhibit
10.14 to Birch Telecom Inc.'s annual report on Form 10-K for
the fiscal year ended December 31, 1998, as amended, filed
on May 7, 1999 (Form 10-K/A)).
10.15 Form of incentive stock option agreement under 1998 stock
option plan (incorporated by reference to Exhibit 10.15 to
the Form 10-K/A).
10.16 Form of nonstatutory stock option agreement under 1998 stock
option plan (incorporated by reference to Exhibit 10.16 to
the Form 10-K/A).
10.17 Lease agreement between Francor, L.L.C. and Birch Telecom,
Inc. dated July 20, 1998 (incorporated by reference to
Exhibit 10.17 to the Form 10-K/A).
10.18 Series D preferred stock purchase agreement, dated July 2,
1999 (incorporated by reference to Exhibit 10.18 to the Form
10-Q).
10.19 Series F preferred stock purchase agreement, dated July 13,
1999 (incorporated by reference to Exhibit 10.19 to the Form
10-Q).
10.20 * Amended and restated credit agreement among Birch Telecom
Finance, Inc., Birch Telecom, Inc., Lehman Brothers Inc.,
Lehman Commercial Paper Inc., Bankers Trust Company and Bank
of America, Inc., as agents and lenders, and the other
lenders party thereto dated February 2, 2000.
10.21 * Amended and restated guarantee and collateral agreement,
dated as of February 2, 2000, among Birch Telecom Finance,
Inc., Birch Telecom, Inc. and Lehman Commercial Paper, Inc.,
as collateral agent (included as Exhibit A to Exhibit 10.20
filed with this S-1).
10.22 * Amended employment agreement dated as of October 7, 1999
between Birch Telecom, Inc. and Bradley A. Moline.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ------------------------------------------------------------
<S> <C>
10.23 * Amended employment agreement dated as of October 7, 1999
between Birch Telecom, Inc. and Jeffrey D. Shackelford.
10.24 * Employment agreement dated as of February 2000 between Birch
Telecom, Inc. and David M. Hollingsworth.
10.25 ** Form of 2000 Equity Participation Plan.
10.26 ** Form of 2000 Employee Stock Purchase Plan.
10.27 Indenture, dated as of June 23, 1998, between Birch Telecom,
Inc. and Norwest Bank Minnesota, National Association, as
trustee, relating to $115,000,000 aggregate principal amount
of 14% senior notes due 2008 (incorporated by reference to
Exhibit 4.1 to the Form S-4).
10.28 Specimen certificate of 14% senior notes due 2008 (Exchange
Notes) (included in Exhibit 4.1, which is incorporated by
reference to Exhibit 4.1 to the Form S-4).
10.29 Collateral pledge and security agreement, dated as of June
23, 1998 from Birch Telecom, Inc., Pledgor, to Norwest Bank
Minnesota, National Association, Trustee (incorporated by
reference to Exhibit 4.5 to the Form S-4).
10.30 * Letter agreement dated as of March 22, 2000 between Birch
Telecom, Inc. and Mory Ejabat.
10.31 * Letter agreement dated as of March 22, 2000 between Birch
Telecom, Inc. and Richard A. Jalkut.
10.32 * Amendment number one dated as of March 23, 2000 to the
amended and restated purchasers rights agreement.
21.1 Subsidiaries of Birch Telecom, Inc. (incorporated by
reference to Exhibit 21.1 to the Form S-4).
23.1 ** Consent of Latham A. Watkins (included in Exhibit 5.1).
23.2 * Consent of independent auditors.
24.1 * Power of attorney (included on the signature page).
27.1 * Financial data schedule.
</TABLE>
- ------------------------
* Filed herewith.
** To be filed by amendment.
+ Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. Such portions have been filed separately with the
Commission.
(b) Financial Statement Schedules
II-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Birch Telecom, Inc.
We have audited the consolidated financial statements of Birch Telecom, Inc.
(Birch) as of December 31, 1998 and 1999, and for each of the three years in the
period ended December 31, 1999, and have issued our report thereon dated
February 17, 2000 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule included in Item 16(b) of
this Registration Statement. This schedule is the responsibility of the
management of Birch. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Kansas City, Missouri
February 17, 2000
II-6
<PAGE>
BIRCH TELECOM, INC.
SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
ADDITIONS
---------------------
BALANCE CHARGED CHARGED TO BALANCE
BEGINNING TO OTHER OTHER END OF
OF YEAR INCOME ACCOUNTS DEDUCTIONS YEAR
--------- -------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997
Valuation allowance--deferred income tax
assets................................... $ 0 $ 681 $ 0 $ 0 $ 681
------ ------- ---- ----- -------
1998
Allowance for doubtful accounts............ $ 0 $ 140 $133 $ (39)(1) $ 234
------ ------- ---- ----- -------
Valuation allowance--deferred income tax
assets................................... $ 681 $ 5,118 $ 0 $ 0 $ 5,799
------ ------- ---- ----- -------
1999
Allowance for doubtful accounts............ $ 234 $ 561 $125 $(464)(1) $ 456
------ ------- ---- ----- -------
Valuation allowance--deferred income tax
assets................................... $5,799 $22,942 $ 0 $ 0 $28,741
------ ------- ---- ----- -------
</TABLE>
- ------------------------
(1) Accounts written off, net of recoveries.
All other schedules are omitted because they are not applicable or because
the required information is contained in the consolidated financial statements
or notes thereto included in this Registration Statement.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issues.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York on March 23, 2000.
<TABLE>
<S> <C> <C>
BIRCH TELECOM, INC.
By: /s/ BRADLEY A. MOLINE
-----------------------------------------
Bradley A. Moline
CHIEF FINANCIAL OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Gregory C. Lawhon and Bradley A. Moline,
or any of them, each acting alone, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for such person and
in his name, place and stead, in any and all capacities, in connection with the
Registrant's Registration Statement on Form S-1 under the Securities Act of
1933, including to sign the Registration Statement in the name and on behalf of
the Registrant or on behalf of the undersigned as a director or officer of the
Registrant, and any and all amendments or supplements to the Registration
Statement, including any and all stickers and post-effective amendments to the
Registration Statement and to sign any and all additional registration
statements relating to the same offering of securities as those that are covered
by the Registration Statement that are filed pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission and any applicable securities exchange or securities self-regulatory
body, granting unto said attorneys-in-fact and agents, each acting alone, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 23RD DAY OF MARCH, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID E. SCOTT
------------------------------------------- President and Chief March 23, 2000
David E. Scott Executive Officer
/s/ DONALD H. GOLDMAN
------------------------------------------- Executive Vice President March 23, 2000
Donald H. Goldman and Chief Operating Officer
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Senior Vice President of
/s/ BRADLEY A. MOLINE Finance and Chief Financial
------------------------------------------- Officer (chief accounting March 23, 2000
Bradley A. Moline and financial officer)
/s/ HENRY H. BRADLEY
------------------------------------------- Director March 23, 2000
Henry H. Bradley
/s/ ADAM H. CLAMMER
------------------------------------------- Director March 23, 2000
Adam H. Clammer
/s/ JAMES H. GREENE, JR.
------------------------------------------- Director March 23, 2000
James H. Greene, Jr.
/s/ ALEXANDER NAVAB, JR.
------------------------------------------- Director March 23, 2000
Alexander Navab, Jr.
/s/ THOMAS R. PALMER
------------------------------------------- Director March 23, 2000
Thomas R. Palmer
</TABLE>
II-9
<PAGE>
Exhibit 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
BIRCH TELECOM, INC.
BIRCH TELECOM, INC., a corporation organized and existing under the laws
of the State of Delaware, certifies as follows:
1. The original Certificate of Incorporation of Birch Telecom, Inc. was
filed with the Delaware Secretary of State on December 23, 1996.
2. This Restated Certificate of Incorporation amends and restates the
provisions of the Certificate of Incorporation of this Corporation, and was duly
adopted in accordance with Sections 245 and 228 of the General Corporation Law
of the State of Delaware by the directors and stockholders of the Corporation.
3. The text of the Certificate of Incorporation is amended and restated to
read in its entirety as set forth below:
First: The name of the Corporation is Birch Telecom, Inc. (the
"Corporation").
Second: The address of the Corporation's initial registered office in the
State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New
Castle, and the name of its initial registered agent at such address is the
Corporation Service Company.
Third: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
Fourth:
A. The aggregate number of shares which the Corporation shall have authority to
issue shall be 135,000,000 shares, divided into 80,000,000 shares of common
stock ("Common Stock"), and 55,000,000 shares of preferred stock ("Preferred
Stock"). The Preferred Stock shall have a par value of one-tenth of one cent
($.001) each, and the Common Stock shall have a par value of one-tenth of one
cent ($.001) each.
B. The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized, within the limitations and
restrictions stated in this Restated Certificate of Incorporation, to fix or
alter the dividend rights, dividend rate, conversion rate, voting rights, rights
and terms of redemption (including sinking fund provisions), the redemption
price or prices, the liquidation preferences of any wholly unissued series of
Preferred Stock, and the number of shares constituting any such series and the
designation thereof, or any of them; and to increase or decrease the number of
shares of any series subsequent to the issue of shares of that series, but
1
<PAGE>
not below the number of shares of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such series.
Of the authorized shares of Preferred Stock, 8,750,000 shares are hereby
designated "Series B Preferred Stock"; 8,500,000 shares are hereby designated
"Series C Preferred Stock"; 3,000,000 shares are hereby designated "Series D
Preferred Stock"; 1,904,898 shares are hereby designated "Series E Preferred
Stock"; and 30,000,000 shares are hereby designated "Series F Preferred Stock."
C. The powers, preferences, rights, restrictions and other matters relating to
the Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock are as follows:
(1) Dividends.
(a) Series B Preferred Stock. The holders of Series B Preferred
Stock shall be entitled to receive dividends in cash at the rate of
fifteen percent (15%) per annum on an amount equal to $1.52 plus all
unpaid dividends accrued on such shares of Series B Preferred Stock, on
each outstanding share of Series B Preferred Stock (as adjusted for any
stock dividends, combinations, splits and the like with respect to such
shares), when and as declared by the Board of Directors out of the funds
legally available for that purpose. Such dividends shall be cumulative
from the date of issuance of the Series B Preferred Stock, whether or not
earned, whether or not funds of the Corporation are legally available for
the payment of dividends and whether or not declared by the Board, but
such dividends shall be payable only when, as, and if declared by the
Board. So long as any shares of Series B Preferred Stock shall be
outstanding, no dividend, whether in cash, stock or property, shall be
paid or declared, nor shall any other distribution be made, on any shares
of Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock or Common Stock, nor shall more than 2,225,000 shares of Series C
Preferred Stock or any shares of Series D Preferred Stock or Common Stock
be purchased, redeemed or otherwise acquired for value by the Corporation
(except for acquisitions of Common Stock by the Corporation pursuant to
agreements which permit the Corporation to repurchase such shares upon
termination of services to the Corporation or in exercise of the
Corporation's right of first refusal upon a proposed transfer) until all
dividends set forth in this Section (1)(a) on the Series B Preferred Stock
shall have been paid or declared and set apart.
(b) Series C Preferred Stock. The holders of Series C Preferred
Stock shall be entitled to receive dividends in cash at the rate of ten
percent (10%) per annum on an amount equal to $1.52 on each outstanding
share of Series C Preferred Stock (as adjusted for any stock dividends,
combinations, splits and the like with respect to such shares), when and
as declared by the Board of Directors out of funds legally available for
that purpose. Notwithstanding anything to the contrary herein, such
dividends shall be payable only when, as and if declared by the Board of
Directors and shall not be cumulative. So long as any shares of Series C
Preferred Stock shall be outstanding, no dividend, whether in cash, stock
or property, shall be paid or declared, nor shall any other distribution
be made, on any shares of Common Stock, nor shall any shares of Common
Stock be purchased, redeemed or
2
<PAGE>
otherwise acquired for value by the Corporation (except for acquisitions
of Common Stock by the Corporation pursuant to agreements which permit the
Corporation to repurchase such shares upon termination of services to the
Corporation or in exercise of the Corporation's right of first refusal
upon a proposed transfer) until all dividends set forth in this Section
(1)(b) on the Series C Preferred Stock shall have been paid or declared
and set apart.
(c) Series D Preferred Stock. The holders of Series D Preferred
Stock shall be entitled to receive dividends in cash at the rate of
fifteen percent (15%) per annum on an amount equal to $4.50 plus all
unpaid dividends accrued on such shares of Series D Preferred Stock, on
each outstanding share of Series D Preferred Stock (as adjusted for any
stock dividends, combinations, splits and the like with respect to such
shares), when and as declared by the Board of Directors out of the funds
legally available for that purpose. Such dividends shall be cumulative
from the date of issuance of the Series D Preferred Stock, whether or not
earned, whether or not funds of the Corporation are legally available for
the payment of dividends and whether or not declared by the Board, but
such dividends shall be payable only when, as, and if declared by the
Board. So long as any shares of Series D Preferred Stock shall be
outstanding, no dividend, whether in cash, stock or property, shall be
paid or declared, nor shall any other distribution be made, on any shares
of Series B Preferred Stock (other than in shares of Series E Preferred
Stock), Series C Preferred Stock, Series E Preferred Stock or Common
Stock, nor shall more than 2,225,000 shares of Series C Preferred Stock or
any shares of Series B Preferred Stock or Common Stock be purchased,
redeemed or otherwise acquired for value by the Corporation (except for
acquisitions of Common Stock by the Corporation pursuant to agreements
which permit the Corporation to repurchase such shares upon termination of
services to the Corporation or in exercise of the Corporation's right of
first refusal upon a proposed transfer) until all dividends set forth in
this Section (1)(c) on the Series D Preferred Stock shall have been paid
or declared and set apart.
(d) Series E Preferred Stock. The holders of Series E Preferred
Stock shall be entitled to receive dividends in cash at the rate of
fifteen percent (15%) per annum on an amount equal to $4.50 plus all
unpaid dividends accrued on such shares of Series E Preferred Stock, on
each outstanding share of Series E Preferred Stock (as adjusted for any
stock dividends, combinations, splits and the like with respect to such
shares), when and as declared by the Board of Directors out of the funds
legally available for that purpose. Such dividends shall be cumulative
from the date of issuance of the Series E Preferred Stock, whether or not
earned, whether or not funds of the Corporation are legally available for
the payment of dividends and whether or not declared by the Board, but
such dividends shall be payable only when, as, and if declared by the
Board. So long as any shares of Series E Preferred Stock shall be
outstanding, no dividend, whether in cash, stock or property, shall be
paid or declared, nor shall any other distribution be made, on any shares
of Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Common Stock, nor shall more than 2,225,000 shares of Series C
Preferred Stock or any shares of Series B Preferred Stock, Series D
Preferred Stock or Common Stock be purchased, redeemed or otherwise
acquired for value by the Corporation (except for acquisitions of Common
Stock by the Corporation pursuant to agreements which permit the
Corporation to repurchase such shares upon termination of services to the
Corporation or in exercise of the Corporation's
3
<PAGE>
right of first refusal upon a proposed transfer) until all dividends set
forth in this Section (1)(d) on the Series E Preferred Stock shall have
been paid or declared and set apart.
(e) Series F Preferred Stock. The holders of Series F Preferred
Stock shall be entitled to receive dividends in cash at the rate of
fifteen percent (15%) per annum on an amount equal to the purchase price
for such shares (the "Purchase Price") plus all unpaid dividends accrued
on such shares of Series F Preferred Stock, on each outstanding share of
Series F Preferred Stock (as adjusted for any stock dividends,
combinations, splits and the like with respect to such shares), payable on
March 31, June 30, September 30 and December 31 of each year, when and as
declared by the Board of Directors out of the funds legally available for
that purpose. Such dividends shall be cumulative from the date of issuance
of the Series F Preferred Stock, whether or not earned, whether or not
funds of the Corporation are legally available for the payment of
dividends and whether or not declared by the Board, but such dividends
shall be payable only when, as, and if declared by the Board. The Purchase
Price for the Series F Preferred Stock is $4.50 per share for the initial
purchase of 13,333,334 shares by BTI Ventures L.L.C. or its affiliates
("BTI"). In addition, BTI retains the option (the "Option") to acquire
5,263,158 shares of Series F Preferred Stock at a Purchase Price of $4.75
per share and 5,000,000 shares of Series F Preferred Stock at a Purchase
Price of $5.00 per share. So long as any shares of Series F Preferred
Stock shall be outstanding, no dividend, whether in cash or property,
shall be paid or declared, nor shall any other distribution be made, on
any shares of Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Common Stock or any other class
or series of capital stock of the Corporation, nor shall more than
2,225,000 shares of Series C Preferred or any shares of Series B Preferred
Stock, Series D Preferred Stock, Common Stock or any other class or series
of capital stock of the Corporation be purchased, redeemed or otherwise
acquired for value by the Corporation (except for the redemption of the
Series E Preferred Stock or acquisitions of Common Stock by the
Corporation pursuant to agreements which permit the Corporation to
repurchase such shares upon termination of services to the Corporation)
until all dividends set forth in this Section (1)(e) on the Series F
Preferred Stock shall have been paid or declared and set apart. In
addition to the 15% quarterly dividend payable on the Series F Preferred
Stock, the shares of Series F Preferred Stock shall be entitled to receive
the amount of any cash or non-cash dividends or distributions declared and
paid on the shares of Common Stock, as if the shares of Series F Preferred
Stock had been converted immediately prior to the record date for the
payment of such dividend or distribution.
(2) Liquidation Rights.
(a) Series F Preferred Stock. Upon any liquidation, dissolution, or
winding up of the Corporation, and before any distribution or payment
shall be made to the holders of Series B Preferred Stock, Series C
Preferred Stock or Common Stock, the holders of Series F Preferred Stock
shall be entitled to be paid out of the assets of the Corporation an
amount equal to the greater of (i) the sum of (a) the applicable Purchase
Price per share of Series F Preferred Stock (as adjusted for any stock
dividends, combinations, splits and the like with respect to such shares)
plus (b) an amount equal to all unpaid dividends accrued on such shares of
Series F Preferred Stock to the date of payment of such preference,
whether or not earned, whether or not funds of the Corporation are legally
available for the payment of
4
<PAGE>
dividends and whether or not such dividends have been declared by the
Board; or (ii) the amount the holders of Series F Preferred Stock would
have received upon liquidation, dissolution or winding up of the
Corporation had such shares of Series F Preferred Stock and all shares of
Series D Preferred Stock and Series E Preferred Stock been converted to
Common Stock immediately prior to such liquidation, dissolution or winding
up (such greater amount, the "Series F Liquidation Preference"), for each
share of Series F Preferred Stock held by them. If the assets of the
Corporation shall be insufficient to make payment in full to all holders
of Series F Preferred Stock, Series E Preferred Stock and Series D
Preferred Stock of the liquidation preference set forth in Sections (2)(a)
through (c), inclusive, then such assets shall be distributed among the
holders of Series F Preferred Stock, Series E Preferred Stock and Series D
Preferred Stock at the time outstanding ratably in proportion to the full
amounts to which they would otherwise be respectively entitled.
(b) Series E Preferred Stock. Upon any liquidation, dissolution, or
winding up of the Corporation, and before any distribution or payment
shall be made to the holders of Series B Preferred Stock, Series C
Preferred Stock or Common Stock, the holders of Series E Preferred Stock
shall be entitled to be paid out of the assets of the Corporation an
amount equal to the greater of (i) the sum of (a) $4.50 per share of
Series E Preferred Stock (as adjusted for any stock dividends,
combinations, splits and the like with respect to such shares) plus (b) an
amount equal to all unpaid dividends accrued on such shares of Series E
Preferred Stock to the date of payment of such preference, whether or not
earned, whether or not funds of the Corporation are legally available for
the payment of dividends and whether or not such dividends have been
declared by the Board; or (ii) the amount the holders of Series E
Preferred Stock would have received upon liquidation, dissolution or
winding up of the Corporation had such shares of Series E Preferred Stock
and all shares of Series D Preferred Stock and Series F Preferred Stock
been converted to Common Stock immediately prior to such liquidation,
dissolution or winding up (such greater amount, the "Series E Liquidation
Preference"), for each share of Series E Preferred Stock held by them. If
the assets of the Corporation shall be insufficient to make payment in
full to all holders of Series F Preferred Stock, Series E Preferred Stock
and Series D Preferred Stock of the liquidation preference set forth in
Sections (2)(a) through (c), inclusive, then such assets shall be
distributed among the holders of Series F Preferred Stock, Series E
Preferred Stock and Series D Preferred Stock at the time outstanding
ratably in proportion to the full amounts to which they would otherwise be
respectively entitled.
(c) Series D Preferred Stock. Upon any liquidation, dissolution, or
winding up of the Corporation, and before any distribution or payment
shall be made to the holders of Series B Preferred Stock, Series C
Preferred Stock or Common Stock, the holders of Series D Preferred Stock
shall be entitled to be paid out of the assets of the Corporation an
amount equal to the greater of (i) the sum of (a) $4.50 per share of
Series D Preferred Stock (as adjusted for any stock dividends,
combinations, splits and the like with respect to such shares) plus (b) an
amount equal to all unpaid dividends accrued on such shares of Series D
Preferred Stock to the date of payment of such preference, whether or not
earned, whether or not funds of the Corporation are legally available for
the payment of dividends and whether or not such dividends have been
declared by the Board; or (ii) the amount the holders of Series D
Preferred Stock would have received upon liquidation, dissolution or
5
<PAGE>
winding up of the Corporation had such shares of Series D Preferred Stock
and all shares of Series E Preferred Stock and Series F Preferred Stock
been converted to Common Stock immediately prior to such liquidation,
dissolution or winding up (such greater amount the "Series D Liquidation
Preference"), for each share of Series D Preferred Stock held by them. If
the assets of the Corporation shall be insufficient to make payment in
full to all holders of Series F Preferred Stock, Series E Preferred Stock
and Series D Preferred Stock of the liquidation preference set forth in
Sections (2)(a)-(c), then such assets shall be distributed among the
holders of Series F Preferred Stock, Series E Preferred Stock and Series D
Preferred Stock at the time outstanding ratably in proportion to the full
amounts to which they would otherwise be respectively entitled.
(d) Series B Preferred Stock. Upon any liquidation, dissolution, or
winding up of the Corporation, and after the payment of the full
liquidation preference of the Series F Preferred Stock as set forth in
Section 2(a) above, the Series E Preferred Stock as set forth in Section
2(b) above, and the Series D Preferred Stock as set forth in Section
(2)(c) above, and before any distribution or payment shall be made to the
holders of Series C Preferred Stock or Common Stock, the holders of Series
B Preferred Stock shall be entitled to be paid out of the assets of the
Corporation an amount equal to the sum of (i) $1.52 for each share of
Series B Preferred Stock held by them (as adjusted for any stock
dividends, combinations, splits and the like with respect to such shares)
plus (ii) an amount equal to all unpaid dividends accrued on such shares
of Series B Preferred Stock to the date of payment of such preference,
whether or not earned, whether or not funds of the Corporation are legally
available for the payment of dividends and whether or not such dividends
have been declared by the Board (the "Series B Liquidation Preference"),
for each share of Series B Preferred Stock held by them. If the remaining
assets of the Corporation shall be insufficient to make payment in full to
all holders of Series B Preferred Stock of the liquidation preference set
forth in this Section (2)(d), then such remaining assets shall be
distributed among the holders of Series B Preferred Stock at the time
outstanding ratably in proportion to the full amounts to which they would
otherwise be respectively entitled.
(e) Series C Preferred Stock. Upon any liquidation, dissolution, or
winding up of the Corporation, and after the payment of the full
liquidation preference of the Series F Preferred Stock as set forth in
Section 2(a) above, the Series E Preferred Stock as set forth in Section
2(b) above, and the Series D Preferred Stock as set forth in Section
(2)(c) above and the Series B Preferred Stock as set forth in Section
(2)(d) above, and before any distribution or payment shall be made to the
holders of Common Stock, the holders of Series C Preferred Stock shall be
entitled to be paid out of the assets of the Corporation an amount equal
to the sum of (i) $1.52 per share of Series C Preferred Stock (as adjusted
for any stock dividends, combinations, splits and the like with respect to
such shares), plus (ii) an amount equal to all declared and unpaid
dividends for each share of Series C Preferred Stock held by them (the
"Series C Liquidation Preference"). If the remaining assets of the
Corporation shall be insufficient to make payment in full to all holders
of Series C Preferred Stock of the liquidation preference set forth in
this Section (2)(e), then such remaining assets shall be distributed among
the holders of Series C Preferred Stock at the time outstanding ratably in
proportion to the full amounts to which they would otherwise be
respectively entitled.
6
<PAGE>
(f) Common Stock. Upon any liquidation, dissolution, or winding up
of the Corporation, and after the payment in full of the Series F
Liquidation Preference, Series E Liquidation Preference, Series D
Liquidation Preference, the Series B Liquidation Preference and the Series
C Liquidation Preference, then the remaining assets of the Corporation
legally available for distribution, if any, shall be distributed ratably
to the holders of the Common Stock.
(g) Deemed Liquidations. The following events will be deemed a
liquidation under this section: (i) consolidation, reorganization, share
exchange, recapitalization, business combination, merger or similar
transaction involving the Corporation in which the stockholders of the
Corporation immediately prior to such transaction in the aggregate cease
to own at least 50% of the voting securities of the entity surviving or
resulting from such transaction (or the ultimate parent thereof), or any
transaction or series of related transactions in which in excess of 50% of
the Corporation's voting power is transferred (in any case, an
"Acquisition"), but not including the purchase of Series F Preferred Stock
by BTI; and (ii) the sale, lease, transfer or other disposition of all or
substantially all of the assets of the Corporation (an "Asset Transfer").
(h) Payments in Property. Whenever the distribution provided for in
this Section (2) shall be payable in securities or other property other
than cash, the value of that distribution shall be the fair market value
of those securities or other property.
(i) Determinations of Fair Market Value. Whenever a determination of
fair market value is required under this Restated Certificate of
Incorporation, the fair market value shall be determined based upon the
price that would be paid by a willing buyer of the assets or shares at
issue, in a sale process designed to attract all possible participants and
to maximize value. The determination of fair market value shall be made
(i) by the Board of Directors or (ii) if a majority in interest of the
Series F Preferred Stock object to such determination by the Board of
Directors, by a nationally recognized investment banking firm mutually
agreeable to the Corporation and a majority in interest of the shares of
Series F Preferred Stock. The fees and expenses of such investment banking
firm shall be paid by the Corporation.
(3) Voting Rights.
(a) Series B, C, D, E and F Preferred Stock. Except as set forth in
Sections (3)(b) and (3)(c), the holders of Series B Preferred Stock shall
be entitled to cast one vote for each share of Series B Preferred Stock
held by them on an as-converted basis, the holders of Series C Preferred
Stock shall be entitled to cast one vote for each share of Series C
Preferred Stock held by them on an as-converted basis, the holders of
Series D Preferred Stock shall be entitled to cast one vote for each share
of Series D Preferred Stock held by them on an as-converted basis, the
holders of Series E Preferred Stock shall be entitled to cast one vote for
each share of Series E Preferred Stock held by them on an as-converted
basis, and the holders of Series F Preferred Stock shall be entitled to
cast one vote for each share of Series F Preferred Stock held by them on
an as-converted basis. Such votes shall be cast together with those cast
by the holders of Common Stock and not as a separate class, except as
otherwise provided herein or required by applicable law. The Series B
Preferred Stock, the
7
<PAGE>
Series C Preferred Stock, the Series D Preferred Stock, the Series E
Preferred Stock and the Series F Preferred Stock shall not have cumulative
voting rights.
(b) Restrictions and Limitations.
(i) So long as the outstanding shares of Series B Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock
represent at least five percent (5%) or more of the outstanding
shares of Common Stock of the Corporation (on an as-converted to
Common Stock basis), the approval by the vote or written consent of
the holders of at least a majority of the then outstanding shares of
Series B Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock, voting together as a single class, shall be
necessary for effecting or validating the following actions:
(A) Any action that results in the payment or
declaration of a dividend on any shares of Common Stock; or
(B) The purchase or other acquisition (or payment into
or set aside for a sinking fund for such purpose) of any
Series C Preferred Stock or Common Stock; provided, however,
that this restriction shall not apply to: (x) the repurchase
of shares of Common Stock by the Corporation pursuant to
agreements which permit the Corporation to repurchase such
shares upon termination of services to the Corporation; or (y)
the exercise of the Corporation's right of first refusal with
the approval of the Board of Directors upon a proposed
transfer.
(ii) So long as the outstanding shares of Series B Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock,
represents at least five percent (5%) or more of the outstanding
shares of Common Stock of the Corporation (on an as-converted to
Common Stock basis), the approval by the vote or written consent of
the holders of at least seventy-five percent (75%) of the then
outstanding shares of Series B Preferred Stock, Series D Preferred
Stock, and Series E Preferred Stock, voting together as a single
class, shall be necessary for effecting or validating the following
actions:
(A) Any amendment, alteration, or repeal of any
provision of the Restated Certificate of Incorporation or
Bylaws of the Corporation (including the filing of a
Certificate of Designation), that adversely affects the voting
powers, preferences or other special rights or privileges,
qualifications, limitations, or restrictions of the Series B
Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock, or
(B) Any amendment, alteration, or repeal of Section
(3)(b)(i) or Section 3(b)(ii).
(iii) So long as the outstanding shares of Series F Preferred
Stock represents at least five percent (5%) or more of the
outstanding shares of Common Stock of the Corporation (on an
as-converted to Common Stock basis), the approval by the vote or
written consent of the holders of at least seventy-five percent
(75%)
8
<PAGE>
of the then outstanding shares of Series F Preferred Stock shall be
necessary for effecting or validating the following actions with
respect to the Corporation:
(A) Any amendment, alteration, or repeal of any
provision of the Restated Certificate of Incorporation or
Bylaws of the Corporation (including the filing of a
Certificate of Designation), that adversely affects the voting
powers, preferences or other special rights or privileges,
qualifications, limitations, or restrictions of the Series F
Preferred Stock;
(B) Any authorization, creation, or increase in the
authorized number of any class or series of capital stock
ranking senior to or on parity with the Series F Preferred
Stock as to dividends, voting rights or liquidation, or any
issuance of any shares of such class or series of capital
stock (or any securities convertible into, or exchangeable or
exerciseable for such shares);
(C) Any payment of any cash or non-cash dividends or
other distributions with respect to its capital stock;
(D) Any reclassification, combination, split,
subdivision, redemption, repurchase or other acquisition of
any shares of capital stock (except for (x) acquisitions of
Common Stock by the Corporation pursuant to agreements which
permit the Corporation to repurchase such shares upon the
termination of services to the Corporation or in exercise of
the Corporation's right of first refusal upon a proposed
transfer, (y) any redemption of the Series E Preferred Stock
pursuant to Section (5)(b) and (z) the redemption by the
Corporation of up to 2,225,000 shares of Series C Preferred
Stock);
(E) Any agreement by the Corporation or its stockholders
regarding an Acquisition or an Asset Transfer (as defined in
Section 2(g));
(F) Any acquisition of assets or securities of any other
person or entity, except for acquisitions involving cash with
an aggregate value of less than five percent (5%) of the
Corporation's assets for any single acquisition or series of
related transactions;
(G) Any joint venture or similar profit sharing
arrangement involving material assets or the payment or
receipt of more than five percent (5%) of the Corporation's
assets;
(H) Any liquidation, dissolution or winding up of the
Corporation; or
(I) An amendment, alteration, or repeal of this Section
(3)(b).
(c) Election of Board of Directors.
9
<PAGE>
(i) For so long as at least 6,666,667 shares of Series F Preferred
Stock remain outstanding (subject to adjustment for any stock split,
reverse stock split and the like), the holders of Series F Preferred
Stock, voting as a separate class, shall be entitled to elect that number
of directors to the Corporation's Board of Directors equal to (A) the
authorized size of the Corporation's Board of Directors, multiplied by (B)
(I) the total number of shares of the Corporation's Common Stock
represented by the shares of Series F Preferred Stock then outstanding (on
an as-converted basis), divided by (II) the total number of shares of the
Corporation's Common Stock then outstanding (assuming conversion of all
Preferred Stock then outstanding), rounding up so that the nominees of the
holders of Series F Preferred Stock will not represent less than such
proportionate interest in (B) above, at each meeting or pursuant to each
consent of the Corporation's shareholders for the election of directors;
provided, however, that for purposes of this Section (3)(c)(i) only, the
calculation of the total number of shares outstanding shall exclude any
equity securities issued by the Company after the Series F Original Issue
Date (other than the shares issued pursuant to the Option) if at such time
(x) BTI has not exercised any part of the Option and the outstanding
shares of Series F Preferred Stock represent twenty percent (20%) or more
of the outstanding Common Stock of the Company (on an as-converted to
Common Stock basis), or (y) BTI has exercised any part of the Option and
the outstanding shares of Series F Preferred Stock represent thirty
percent (30%) or more of the outstanding Common Stock of the Company (on
an as-converted to Common Stock basis). Only the holders of the Series F
Preferred Stock shall be entitled to remove from office such directors or
to fill any vacancy caused by the resignation, death or removal of such
directors.
(ii) For so long as at least 8,532,394 shares of Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock remain outstanding (subject to adjustment for any stock
split, reverse stock split and the like), the holders of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock, voting together as a single class, shall be
entitled to elect two (2) members of the Board of Directors at each
meeting or pursuant to each consent of the Corporation's shareholders for
the election of directors, and only the holders of the of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock, voting together a single class, shall be
entitled to remove from office such directors or to fill any vacancy
caused by the resignation, death or removal of such directors.
(iii) For so long as the conditions set forth in 3(c)(i) and (ii)
are satisfied the holders of Common Stock, voting as a separate class,
shall be entitled to elect one (1) member of senior management of the
Corporation to the Board of Directors at each meeting or pursuant to each
consent of the Corporation's shareholders for the election of directors,
and only the holders of the Common Stock shall be entitled to remove from
office such director and to fill any vacancy caused by the resignation,
death or removal of such director.
(iv) Except as provided in 3(c)(i), (ii) and (iii) above, the
holders of Common
10
<PAGE>
Stock and Preferred Stock, voting together as a single class, shall be
entitled to elect all members of the Board of Directors.
(4) Conversion Rights. The holders of the Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock shall have the following rights with
respect to the conversion of the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock into shares of Common Stock (the "Conversion
Rights"):
(a) Optional Conversion. Subject to and in compliance with the
provisions of this Section (4), any shares of Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series F Preferred
Stock may, at the option of the holder, be converted at any time into
fully paid and nonassessable shares of Common Stock. Subject to and in
compliance with the provisions of this Section (4), any shares of Series E
Preferred Stock may, at the option of the holder, be converted at any time
after October 1, 1999 into fully paid and nonassessable shares of Common
Stock. The number of shares of Common Stock to which a holder of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, or Series F Preferred Stock shall be entitled
upon conversion shall be the product obtained by multiplying the
applicable Preferred Stock Rate then in effect (determined as provided in
Section (4)(c)) by the number of shares of Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, or Series F Preferred Stock being converted by such holder.
(b) Automatic Conversion. Subject to and in compliance with the
provisions of this Section (4), all outstanding shares of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock shall be
automatically converted into shares of Common Stock immediately prior to
the closing of a firmly underwritten public offering pursuant to an
effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for the account of
the Company in which the gross proceeds to the Corporation (before
underwriting discounts, commissions and fees) are at least $60,000,000.
The number of shares of Common Stock to which a holder of Series B
Preferred Stock shall be entitled upon conversion shall be the product
obtained by multiplying the applicable Preferred Stock Rate then in effect
by the number of shares of Series B Preferred Stock being converted by
such holder. The number of shares of Common Stock to which a holder of
Series C Preferred Stock shall be entitled upon conversion shall be the
product obtained by multiplying the applicable Preferred Stock Rate then
in effect by the number of shares of Series C Preferred Stock being
converted by such holder. The number of shares of Common Stock to which a
holder of Series D Preferred Stock shall be entitled upon conversion shall
be the product obtained by multiplying the applicable Preferred Stock Rate
then in effect by the number of shares of Series D Preferred Stock being
converted by such holder. The number of shares of Common Stock to which a
holder of Series E Preferred Stock shall be entitled upon conversion shall
be the product obtained by multiplying the applicable Preferred Stock Rate
then in effect by the number of shares of Series E Preferred Stock being
converted by such holder. The number of shares of Common Stock to which a
holder of Series F Preferred Stock shall be entitled upon conversion shall
be the product obtained by multiplying the applicable Preferred Stock Rate
then in effect by the
11
<PAGE>
number of shares of Series F Preferred Stock being converted by such
holder.
(c) Preferred Stock. The conversion rate of the applicable series of
Preferred Stock in effect at any time for conversion of the Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, or Series F Preferred Stock (the "Preferred
Stock Rate") shall be the quotient obtained by dividing the Original Issue
Price of the applicable series of Preferred Stock by the applicable
Preferred Stock Price, calculated as provided in Section (4)(d). The
"Original Issue Price" for the Series B Preferred Stock and Series C
Preferred Stock shall initially equal $1.52 per share. The "Original Issue
Price" of the Series D Preferred Stock and Series E Preferred Stock shall
initially equal $4.50 per share. The "Original Issue Price" of the Series
F Preferred Stock shall initially equal the Purchase Price with respect to
each share.
(d) Conversion Price. The conversion price for the applicable series
of Preferred Stock shall initially be the Original Issue Price of the
applicable series of Preferred Stock (the "Preferred Stock Price"). Such
initial Preferred Stock Price shall be adjusted from time to time after
the Series F Original Issue Date (as defined below) in accordance with
this Section (4). All references to the Preferred Stock Price herein shall
mean the Preferred Stock Price as applicable and as so adjusted.
(e) Mechanics of Conversion. Each holder of Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, or Series F Preferred Stock who desires to convert the
same into shares of Common Stock pursuant to this Section (4) shall
surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or any transfer agent for the Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, or Series F Preferred Stock, and shall give written
notice to the Corporation at such office that such holder elects to
convert the same. Such notice shall state the number of shares of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, or Series F Preferred Stock being converted.
Thereupon, the Corporation shall promptly issue and deliver at such office
to such holder a certificate or certificates for the number of shares of
Common Stock to which such holder is entitled. Such conversion shall be
deemed to have been made at the close of business on the date of such
surrender of the certificates representing the shares of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, or Series F Preferred Stock to be converted, and
the person entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder of
such shares of Common Stock on such date.
(f) Adjustment for Stock Splits and Combinations. If the Corporation
shall at any time or from time to time after August 5, 1999 (the "Series F
Original Issue Date") effect a subdivision of the outstanding Common Stock
without a corresponding subdivision of the Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, or Series F Preferred Stock, the Preferred Stock Price for each
series of Preferred Stock in effect immediately before that subdivision
shall be proportionately decreased. Conversely, if the Corporation shall
at any time or from time to time after the Series F Original Issue Date
combine the outstanding shares of Common Stock into a smaller number of
shares without a corresponding combination of the Series B Preferred
Stock, Series C Preferred Stock, Series
12
<PAGE>
D Preferred Stock, Series E Preferred Stock, or Series F Preferred Stock,
the Preferred Stock Price for each series of Preferred Stock in effect
immediately before the combination shall be proportionately increased. Any
adjustment under this Section (4)(f) shall become effective at the close
of business on the date the subdivision or combination becomes effective.
(g) Adjustment for Common Stock Dividends and Distributions. If the
Corporation at any time or from time to time makes, or fixes a record date
for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in additional shares of Common
Stock, in each such event the Preferred Stock Price of each applicable
series of Preferred Stock that is then in effect shall be decreased as of
the time of such issuance or, in the event such record date is fixed, as
of the close of business on such record date, by multiplying the Preferred
Stock Price for each applicable series of Preferred Stock then in effect
by a fraction (i) the numerator of which is the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and (ii) the
denominator of which is the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the
close of business on such record date plus the number of shares of Common
Stock issuable in payment of such dividend or distribution; provided,
however, that if such record date is fixed and such dividend is not fully
paid or if such distribution is not fully made on the date fixed therefor,
the applicable Preferred Stock Price shall be recomputed accordingly as of
the close of business on such record date and thereafter the applicable
Preferred Stock Price shall be adjusted pursuant to this Section (4)(g) to
reflect the actual payment of such dividend or distribution.
(h) Adjustments for Other Dividends and Distributions. If the
Corporation at any time or from time to time makes, or fixes a record date
for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in securities of the Corporation
other than shares of Common Stock, in each such event provision shall be
made so that the holders of the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock shall receive upon conversion thereof, in
addition to the number of shares of Common Stock receivable thereupon, the
amount of other securities of the Corporation which they would have
received had their Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, or Series F Preferred
Stock been converted into Common Stock on the date of such event and had
they thereafter, during the period from the date of such event to and
including the conversion date, retained such securities receivable by them
as aforesaid during such period, subject to all other adjustments called
for during such period under this Section (4)(h) with respect to the
rights of the holders of the Preferred Stock or with respect to such other
securities by their terms.
(i) Adjustment for Reclassification, Exchange and Substitution. If
at any time or from time to time after the Series F Original Issue Date,
the Common Stock issuable upon the conversion of the Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock is changed into the same or a
different number of shares of any class or classes of stock, whether by
recapitalization, reclassification or otherwise (other than an Acquisition
or Asset Transfer as defined in Section (2)(g) or a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets provided for elsewhere in this Section
(4)), in any such event
13
<PAGE>
each holder of Series B Preferred Stock, Series C Preferred Stock, Series
D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock
shall have the right thereafter to convert such stock into the kind and
amount of stock and other securities and property receivable upon such
recapitalization, reclassification or other change by holders of the
maximum number of shares of Common Stock into which such shares of Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, or Series F Preferred Stock could have been
converted immediately prior to such recapitalization, reclassification or
change, all subject to further adjustment as provided herein or with
respect to such other securities or property by the terms thereof.
(j) Reorganizations, Mergers, Consolidations or Sales of Assets. If
at any time or from time to time after the Series F Original Issue Date,
there is a capital reorganization of the Common Stock, merger,
consolidation or sale of assets (other than an Acquisition or Asset
Transfer as defined in Section (2)(g) or a recapitalization, subdivision,
combination, reclassification, exchange or substitution of shares provided
for elsewhere in this Section (4)), as a part of such capital
reorganization, merger, consolidation or sale of assets, provision shall
be made so that the holders of the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock shall thereafter be entitled to receive upon
conversion of the Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock the number of shares of stock or other securities or property of the
Corporation or third party entity to which a holder of the number of
shares of Common Stock deliverable upon conversion would have been
entitled on such capital reorganization, merger, consolidation or sale of
assets, subject to adjustment in respect of such stock or securities by
the terms thereof. In any such case, appropriate adjustment shall be made
in the application of the provisions of this Section (4) with respect to
the rights of the holders of Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock after the capital reorganization, merger, consolidation or
sale of assets to the end that the provisions of this Section (4)
(including adjustment of the Preferred Stock Price then in effect and the
number of shares issuable upon conversion of the Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock) shall be applicable after that event
and be as nearly equivalent as practicable.
(k) Sale of Shares Below Preferred Stock Price.
(i) If at any time or from time to time after the Series F
Original Issue Date, the Corporation issues or sells, or is deemed
by the express provisions of this Section (4)(k) to have issued or
sold, Additional Shares of Common Stock (as defined in Section
(4)(k)(iv) below), other than as a dividend or other distribution on
any class of stock as provided in Section (4)(g) above, and other
than a subdivision or combination of shares of Common Stock as
provided in Section (4)(f) above, for an Effective Price (as defined
in Section (4)(k)(iv) below) less than the then effective Preferred
Stock Price with respect to the applicable series of Preferred
Stock, then and in each such case the then existing Preferred Stock
Price with respect to the applicable series of Preferred Stock shall
be reduced, as of the opening of business on the date of such issue
or sale, to a price determined by multiplying the applicable
Preferred Stock Price by a fraction (i) the numerator of which shall
be (A) the number of shares of Common Stock
14
<PAGE>
deemed outstanding (as defined below) immediately prior to such
issue or sale, plus (B) the number of shares of Common Stock which
the aggregate consideration received (as defined in Section
(4)(k)(ii) below) by the Corporation for the total number of
Additional Shares of Common Stock so issued would purchase at such
applicable Preferred Stock Price, and (ii) the denominator of which
shall be the number of shares of Common Stock deemed outstanding (as
defined below) immediately prior to such issue or sale plus the
total number of Additional Shares of Common Stock so issued. For the
purposes of the preceding sentence, the number of shares of Common
Stock deemed to be outstanding as of a given date shall be the sum
of (A) the number of shares of Common Stock actually outstanding,
(B) the number of shares of Common Stock into which the then
outstanding shares of Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series
F Preferred Stock could be converted if fully converted on the day
immediately preceding the given date, and (C) the number of shares
of Common Stock which could be obtained through the exercise or
conversion of all other rights, options and convertible securities
on the day immediately preceding the given date.
(ii) For the purpose of making any adjustment required under
this Section (4)(k), the consideration received by the Corporation
for any issue or sale of securities shall (A) to the extent it
consists of cash, be computed at the net amount of cash received by
the Corporation after deduction of any underwriting or similar
commissions, compensation or concessions paid or allowed by the
Corporation in connection with such issue or sale but without
deduction of any expenses payable by the Corporation, (B) to the
extent it consists of property other than cash, be computed at the
fair value of that property as determined in good faith by the Board
of Directors, and (C) if Additional Shares of Common Stock,
Convertible Securities (as defined in Section (4)(k)(iii) below) or
rights or options to purchase either Additional Shares of Common
Stock or Convertible Securities are issued or sold together with
other stock or securities or other assets of the Corporation for a
consideration which covers both, be computed as the portion of the
consideration so received that may be reasonably determined in good
faith by the Board of Directors to be allocable to such Additional
Shares of Common Stock, Convertible Securities or rights or options.
(iii) For the purpose of the adjustment required under this
Section (4)(k), if the Corporation issues or sells any rights or
options for the purchase of, or stock or other securities
convertible into, Additional Shares of Common Stock (such
convertible stock or securities being herein referred to as
"Convertible Securities") and if the Effective Price of such
Additional Shares of Common Stock is less than the applicable
Preferred Stock Price, in each case the Corporation shall be deemed
to have issued at the time of the issuance of such rights or options
or Convertible Securities the maximum number of Additional Shares of
Common Stock issuable upon exercise or conversion thereof and to
have received as consideration for the issuance of such shares an
amount equal to the total amount of the consideration, if any,
received by the Corporation for the issuance of such rights or
options or Convertible Securities, plus, in the case of such rights
or options, the minimum amounts of consideration, if any, payable to
the Corporation upon the exercise of such rights or options, plus,
in the case of Convertible Securities, the minimum amounts of
consideration, if any, payable to the Corporation
15
<PAGE>
(other than by cancellation of liabilities or obligations evidenced
by such Convertible Securities) upon the conversion thereof;
provided that if in the case of Convertible Securities the minimum
amounts of such consideration cannot be ascertained, but are a
function of antidilution or similar protective clauses, the
Corporation shall be deemed to have received the minimum amounts of
consideration without reference to such clauses; provided further
that if the minimum amount of consideration payable to the
Corporation upon the exercise or conversion of rights, options or
Convertible Securities is reduced over time or on the occurrence or
non-occurrence of specified events other than by reason of
antidilution adjustments, the Effective Price shall be recalculated
using the figure to which such minimum amount of consideration is
reduced; provided further that if the minimum amount of
consideration payable to the Corporation upon the exercise or
conversion of such rights, options or Convertible Securities is
subsequently increased, the Effective Price shall be again
recalculated using the increased minimum amount of consideration
payable to the Corporation upon the exercise or conversion of such
rights, options or Convertible Securities. No further adjustment of
the applicable Preferred Stock Price, as adjusted upon the issuance
of such rights, options or Convertible Securities, shall be made as
a result of the actual issuance of Additional Shares of Common Stock
on the exercise of any such rights or options or the conversion of
any such Convertible Securities. If any such rights or options or
the conversion privilege represented by any such Convertible
Securities shall expire without having been exercised, the
applicable Preferred Stock Price as adjusted upon the issuance of
such rights, options or Convertible Securities shall be readjusted
to the applicable Preferred Stock Price which would have been in
effect had an adjustment been made on the basis that the only
Additional Shares of Common Stock so issued were the Additional
Shares of Common Stock, if any, actually issued or sold on the
exercise of such rights or options or rights of conversion of such
Convertible Securities, and such Additional Shares of Common Stock,
if any, were issued or sold for the consideration actually received
by the Corporation upon such exercise, plus the consideration, if
any, actually received by the Corporation for the granting of all
such rights or options, whether or not exercised, plus the
consideration received for issuing or selling the Convertible
Securities actually converted, plus the consideration, if any,
actually received by the Corporation (other than by cancellation of
liabilities or obligations evidenced by such Convertible Securities)
on the conversion of such Convertible Securities, provided that such
readjustment shall not apply to prior conversions of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, or Series F Preferred Stock.
(iv) "Additional Shares of Common Stock" shall mean all shares
of Common Stock issued by the Corporation or deemed to be issued
pursuant to this Section (4)(k), whether or not subsequently
reacquired or retired by the Corporation other than (A) shares of
Series E Preferred Stock,; (B) shares of Common Stock issued upon
conversion of the Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, or Series
F Preferred Stock; (C) Common Stock and/or options, warrants or
other Common Stock purchase rights, and the Common Stock issued
pursuant to such options, warrants or other rights to employees,
officers or directors of, or consultants or advisors to the
Corporation or any subsidiary
16
<PAGE>
pursuant to stock purchase or stock option plans or other
arrangements that are approved by the Board; (D) shares of Common
Stock issued pursuant to the exercise of options, warrants or
convertible securities outstanding as of the Series F Original Issue
Date; and (E) warrants to purchase Common Stock, and the Common
Stock issued pursuant to such warrants, that are issued to holders
of the Senior Notes due 2008 issued by the Corporation pursuant to
an indenture between the Corporation and Norwest Bank, N.A. (the
"Senior Notes"). The "Effective Price" of Additional Shares of
Common Stock shall mean the quotient determined by dividing the
total number of Additional Shares of Common Stock issued or sold, or
deemed to have been issued or sold by the Corporation under this
Section (4)(k), into the aggregate consideration received, or deemed
to have been received by the Corporation for such issue under this
Section (4)(k), for such Additional Shares of Common Stock.
(l) Certificate of Adjustment. In each case of an adjustment or
readjustment of the applicable Preferred Stock Price for the number of
shares of Common Stock or other securities issuable upon conversion of the
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, or Series F Preferred Stock, if the
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, or Series F Preferred Stock is then
convertible pursuant to this Section (4), the Corporation, at its expense,
shall compute such adjustment or readjustment in accordance with the
provisions hereof and prepare a certificate showing such adjustment or
readjustment, and shall mail such certificate, by first class mail,
postage prepaid, to each registered holder of Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, or Series F Preferred Stock at the holder's address as shown in the
Corporation's books. The certificate shall set forth such adjustment or
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based, including a statement of (i) the consideration
received or deemed to be received by the Corporation for any Additional
Shares of Common Stock issued or sold or deemed to have been issued or
sold, (ii) the Preferred Stock Price at the time in effect, (iii) the
number of Additional Shares of Common Stock and (iv) the type and amount,
if any, of other property which at the time would be received upon
conversion of the Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, or Series F Preferred
Stock.
(m) Notices of Record Date. Upon (i) any taking by the Corporation
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend
or other distribution, or (ii) any Acquisition (as defined in Section
(2)(g)) or other capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the
Corporation, any merger or consolidation of the Corporation with or into
any other corporation, or any Asset Transfer (as defined in Section
(2)(g)), or any voluntary or involuntary dissolution, liquidation or
winding up of the Corporation, the Corporation shall mail to each holder
of Preferred Stock at least twenty (20) calendar days prior to the record
date specified therein a notice specifying (A) the date on which any such
record is to be taken for the purpose of such dividend or distribution and
a description of such dividend or distribution, (B) the date on which any
such Acquisition, reorganization, reclassification, transfer,
consolidation, merger, Asset Transfer, dissolution, liquidation or winding
up is expected to become effective, and (C) the date, if any, that is to
be fixed as to when the holders of record of Common Stock (or other
securities) shall be entitled
17
<PAGE>
to exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such Acquisition,
reorganization, reclassification, transfer, consolidation, merger, Asset
Transfer, dissolution, liquidation or winding up.
(n) Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, or Series F
Preferred Stock. All shares of Common Stock (including fractions thereof)
issuable upon conversion of more than one share of Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, or Series F Preferred Stock by a holder thereof shall be
aggregated for purposes of determining whether the conversion would result
in the issuance of any fractional share. If, after the aforementioned
aggregation, the conversion would result in the issuance of any fractional
share, the Corporation shall, in lieu of issuing any fractional share, pay
cash equal to the product of such fraction multiplied by the Common
Stock's fair market value (as determined in accordance with Section
(2)(i)) on the date of conversion.
(o) Reservation of Stock. The Corporation shall at all times reserve
and keep available out of its authorized but unissued shares of Common
Stock such number of its shares of Common Stock as shall from time to time
be sufficient to effect the conversion of all outstanding shares of Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock and the exercise of
all outstanding options and warrants of the Corporation. If at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock or the
exercise of all outstanding options and warrants, the Corporation will
take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock
to such number of shares as shall be sufficient for such purposes.
(p) Notices. Any notice required by the provisions of this Section
(4) shall be in writing and shall be deemed effectively given: (i) upon
personal delivery to the party to be notified, (ii) when sent by confirmed
telex or facsimile if sent during normal business hours of the recipient;
if not, then on the next business day, (iii) five (5) business days after
having been sent by registered or certified mail, return receipt
requested, postage prepaid, or (iv) one (1) business day after deposit
with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt. All notices shall be
addressed to each holder of record at the address of such holder appearing
on the books of the Corporation.
(q) Payment of Taxes. The Corporation will pay all taxes (other than
taxes based upon income) and other governmental charges that may be
imposed with respect to the issue or delivery of shares of Common Stock
upon conversion of shares of Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, or Series F
Preferred Stock, excluding any tax or other charge imposed in connection
with any transfer involved in the issue and delivery of shares of Common
Stock in a name other than that in which the shares of Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, or Series F Preferred Stock so converted were registered.
18
<PAGE>
(5) Redemption.
(a) Series F Preferred Stock.
(i) Generally. In the event of (a) a breach by the Corporation of
any of the terms of this Restated Certificate of Incorporation, the Bylaws
of the Corporation, or the Amended and Restated Purchaser's Rights
Agreement, dated July 2, 1999 by and among the Corporation and certain
holders of its capital stock, as the same may be amended from time to time
(including in connection with the issuance of Series F Preferred Stock),
which has a material adverse effect on the holders of the Series F
Preferred Stock that is not cured within fifteen (15) days of receipt of
written notice by the Corporation from a holder of Series F Preferred
Stock, or (b) the voluntary resignation (other than due to death or
disability) prior to February 10, 2001 of (i) David E. Scott or (ii) any
two of Jeffrey D. Shackelford, Bradley A. Moline, or Gregory C. Lawhon
within six (6) months of one another (in the case of (a) or (b), a
"Redemption Event"), a majority in interest of the Series F Preferred
Stock may elect to demand in writing ("Redemption Demand") the redemption
of all or any portion of the shares of Series F Preferred Stock, from any
source of funds legally available therefor, at a redemption price per
share (the "Series F Redemption Price") equal to the amount of the Series
F Liquidation Preference. The redemption under this Section (5)(a) shall
take place on a date (the "Series F Redemption Date") that is no later
than thirty (30) days after the receipt by the Corporation of the
Redemption Demand.
(ii) Indenture Restriction. Notwithstanding the foregoing, the
Corporation shall not be obligated to redeem the shares of Series F
Preferred Stock for cash pursuant to Section (5)(a)(i), if such redemption
or the existence of the redemption provision would violate the terms of
the Indenture, dated as of June 23, 1998, by and between the Corporation
and Norwest Bank Minnesota, National Association (as trustee), as amended,
pursuant to which the Senior Notes were issued, until 91 days after the
date on which the Senior Notes mature. If the Corporation is unable to
redeem the Series F Preferred Stock for cash as set forth above, a
majority in interest of the Series F Preferred Stock may elect to receive
shares of Common Stock with a fair market value (as determined in
accordance with Section (2)(i)) equal to the Series F Redemption Price.
(iii) Procedure. At least 15 days prior to a Series F Redemption
Date, written notice shall be mailed, first class postage prepaid, to each
holder of record (at the close of business on the business day next
preceding the day on which notice is given) of the Series F Preferred
Stock to be redeemed, at the address last shown on the records of the
Corporation for such holder, notifying such holder of the redemption to be
effected, specifying the number of shares to be redeemed from such holder,
the Series F Redemption Date, the Series F Redemption Price, whether or
not the Corporation may redeem the shares for cash, or if not, the number
of shares of Common Stock issuable in lieu of cash as set forth in Section
(5)(a)(ii) above, the place at which payment or delivery may be obtained
and calling upon such holder to surrender to the Corporation, in the
manner and at the place designated, his
19
<PAGE>
certificate or certificates representing the shares to be redeemed (the
"Series F Company Redemption Notice"). Except as provided in Section
(5)(c), on or after the applicable Series F Redemption Date, each holder
of Series F Preferred Stock to be redeemed shall surrender to the
Corporation the certificate or certificates representing such shares, in
the manner and at the place designated in the Series F Redemption Notice,
and thereupon the Series F Redemption Price of such shares (in cash or
shares of Common Stock, as applicable) shall be payable to the order of
the person whose name appears on such certificate or certificates as the
owner thereof and each surrendered certificate shall be canceled. In the
event less than all the shares represented by any such certificate are
redeemed, a new certificate shall be issued representing the unredeemed
shares.
(iv) Deposit of Redemption Price or Shares of Common Stock. Subject
to the provisions set forth above, on or prior to each Series F Redemption
Date, the Corporation shall deposit the Series F Redemption Price of all
shares of Series F Preferred Stock designated for redemption in the Series
F Redemption Notice and not yet redeemed with a bank or trust corporation
as a trust fund for the benefit of the respective holder or holders of the
shares designated for redemption and not yet redeemed, with irrevocable
instructions and authority to the bank or trust corporation to pay the
Series F Redemption Price for such shares to their respective holder or
holders on or after the applicable Series F Redemption Date upon receipt
of notification from the Corporation that such holder has surrendered his
share certificate to the Corporation pursuant to Section (5)(a)(iii). As
of the applicable Series F Redemption Date, the deposit shall constitute
full payment of the shares to the holder or holders, and from and after
the applicable Series F Redemption Date the shares so called for
redemption shall be redeemed and shall be deemed to be no longer
outstanding, and the holder or holders thereof shall cease to be
stockholders with respect to such shares and shall have no rights with
respect thereto except the rights to receive from the bank or trust
corporation payment of the Series F Redemption Price of the shares,
without interest, upon surrender of their certificates therefor. The
balance of any moneys deposited by the Corporation pursuant to this
Section (5)(a)(iv) remaining unclaimed at the expiration of two years
following the applicable Series F Redemption Date shall thereafter be
returned to the Corporation upon its request expressed in a resolution of
its Board of Directors. In the event that the Corporation must issue new
shares of Common Stock instead of cash pursuant to the provisions set
forth in Section (5)(a)(ii), shares of Common Stock shall be delivered to
the bank or trust corporation in lieu of such cash.
(b) Series E Preferred Stock.
(i) Generally. The Corporation, at any time and from time to time
(each a "Series E Redemption Date"), may redeem all or any portion of the
shares of Series E Preferred Stock, from any source of funds legally
available therefor, at a redemption price per share (the "Series E
Redemption Price") equal to (A) $4.50 per share for shares of Series E
Preferred Stock redeemed pursuant to a Series E Redemption Date occurring
on or before October 1, 1999, or (B) the Series E Liquidation Preference
for shares of Series E Preferred Stock redeemed pursuant to
20
<PAGE>
a Series E Redemption Date occurring after October 1, 1999.
(ii) Procedure. On each Series E Redemption Date, written notice
shall be mailed, first class postage prepaid, to each holder of record (at
the close of business on the business day next preceding the day on which
notice is given) of the Series E Preferred Stock to be redeemed, at the
address last shown on the records of the Corporation for such holder,
notifying such holder of the redemption to be effected, specifying the
number of shares to be redeemed from such holder, the Series E Redemption
Date and the Series E Redemption Price (the "Series E Company Redemption
Notice").
(iii) Deposit of Redemption Price. As of the applicable Series E
Redemption Date, the Corporation shall deposit the Series E Redemption
Price of all shares of Series E Preferred Stock designated for redemption
in the Series E Redemption Notice with a bank or trust corporation as a
trust fund for the benefit of the respective holder or holders of the
shares designated for redemption, with irrevocable instructions and
authority to the bank or trust corporation to pay to the holders of record
of the Series E Preferred Stock to be redeemed As of the applicable Series
E Redemption Date, the deposit shall constitute full payment of the shares
to the holder or holders, and from and after the applicable Series E
Redemption Date the shares so called for redemption shall be redeemed and
shall be deemed to be no longer outstanding, and the holder or holders
thereof shall cease to be stockholders with respect to such shares and
shall have no rights with respect thereto except the rights to receive
from the bank or trust corporation payment of the Series E Redemption
Price of the shares, without interest. The balance of any moneys deposited
by the Corporation pursuant to this Section (5)(b)(iii) remaining
unclaimed at the expiration of two years following the applicable Series E
Redemption Date shall thereafter be returned to the Corporation upon its
request expressed in a resolution of its Board of Directors.
(c) Rights of Redeemed Stock; Default.
(i) From and after the applicable Redemption Date, unless there
shall have been a default in payment of the applicable Redemption Price
(in cash or shares of Common Stock, as applicable), all rights of the
holders of shares of Preferred Stock designated for redemption in the
Company Redemption Notice as holders of Series E Preferred Stock or Series
F Preferred Stock, as applicable (except the right to receive the
applicable Redemption Price without interest upon surrender of their
certificate or certificates) shall cease with respect to such shares, and
such shares shall not thereafter be transferred on the books of the
Corporation or be deemed to be outstanding for any purpose whatsoever.
(ii) If the Corporation fails to redeem for any reason, including,
but not limited to, the insufficiency of funds legally available for the
redemption of shares, the total number of shares of Preferred Stock to be
redeemed on such Redemption Date, those funds which are legally available
will be used to redeem the maximum possible number of such shares ratably
among the holders of such shares to be
21
<PAGE>
redeemed based upon their holdings of Series E Preferred Stock or
Series F Preferred Stock, as applicable. The shares of Preferred
Stock not redeemed shall remain outstanding and be entitled to all
the rights and preferences provided herein or, with respect to the
Series F Preferred Stock, may be otherwise converted into shares of
Common Stock pursuant to the provisions set forth in Section
(5)(a)(ii). At any time thereafter when additional funds of the
Corporation are legally available for the redemption such shares of
Preferred Stock such funds will immediately be used to redeem the
balance of the shares which the Corporation has become obliged to
redeem on any applicable Redemption Date, but which it has not
redeemed.
(6) Increasing Common Stock. Subject to the provisions of this
Restated Certificate of Incorporation, the number of authorized shares of
Common Stock may be increased or decreased (but not below the number of
shares of Common Stock then outstanding, issuable upon the conversion of
the Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock and any other
convertible securities of the Corporation, and issuable upon the exercise
of all outstanding options and warrants), by the affirmative vote of the
holders of a majority of the Common Stock and Preferred Stock, voting
together as a single class.
(7) No Reissuance of Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock or Series F
Preferred Stock. No share or shares of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, or
Series F Preferred Stock acquired by the Corporation by reason of
redemption, purchase, or otherwise shall be reissued, and all such shares
shall be canceled, retired and eliminated from the shares which the
Corporation shall be authorized to issue.
Fifth: The number of directors which shall constitute the whole Board of
Directors of the Corporation shall be no less than seven (7) nor more than
eleven (11), which number shall be fixed by the Board of Directors of the
Corporation from time to time.
Sixth: The Board of Directors shall have power to make, and from time to
time alter, amend, or repeal the Bylaws of the Corporation; provided, however,
that (a) the stockholders shall have the paramount power to alter, amend and
repeal the Bylaws or adopt new Bylaws, exercisable by a majority vote of the
stockholders present in person or by proxy at any annual or special meeting of
stockholders, and (b) if and to the extent the stockholders exercise such power,
the Board of Directors shall not thereafter suspend, alter, amend or repeal the
Bylaws, or portions thereof, adopted by the stockholders, unless, in adopting
such Bylaws, or portions thereof, the stockholders otherwise provide.
Seventh: A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (a) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under the provisions of Section 174 of the Delaware
General Corporation Law and
22
<PAGE>
amendments thereto, or (d) for any transaction from which the director derived
an improper personal benefit. If the Delaware General Corporation Law is amended
to authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended. No amendment, repeal or adoption of any
provision of this Restated Certificate of Incorporation inconsistent with this
Article Seventh shall apply or have any effect on the liability of any director
of the Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment, repeal, or adoption of any inconsistent
provision.
Eighth: The directors of the Corporation need not be elected by written
ballot.
Ninth:
(a) Subject only to the exclusions set forth in paragraph (c) of this
Article Ninth, the Corporation shall hold harmless and indemnify, to the fullest
extent permitted by applicable law as it presently exists or may hereafter be
amended, each director or officer of the Corporation (each, an "Indemnitee")
against any and all liability and loss suffered and expenses (including
attorneys' fees), judgments, fines, excise taxes assessed with respect to any
employee benefit plan, or penalties and amounts paid in settlement actually and
reasonably incurred by Indemnitee in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (including an action by or in the right of the Corporation), to
which Indemnitee is, was or at any time becomes a party, or is threatened to be
made a party, by reason of the fact that Indemnitee is, was or at any time
becomes a director or officer of the Corporation, or is, or was serving, or at
any time serves at the request of the Corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise.
(b) The expenses (including attorneys' fees) actually and reasonably
incurred by Indemnitee in defending any proceeding and any judgments, fines or
amounts to be paid in settlement shall be advanced by the Corporation at the
request of the Indemnitee and upon delivery to the Corporation of an undertaking
by such Indemnitee to repay all amounts so advanced if it shall ultimately be
determined that Indemnitee was not entitled to be indemnified or was not to be
fully indemnified.
(c) No indemnity pursuant to this Article Ninth shall be paid by the
Corporation (i) for which payment is actually made to Indemnitee under a valid
and collectible insurance policy, except in respect of any excess beyond the
amount of payment under such insurance; (ii) for which Indemnitee is indemnified
by the Corporation pursuant to applicable law or otherwise than pursuant to this
Article Ninth; (iii) for an accounting of profits made from the purchase or sale
by Indemnitee of securities of the Corporation within the meaning of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any state statutory law or common law; (iv) on account of
Indemnitee's conduct which is finally adjudged by a court to have been knowingly
fraudulent, deliberately dishonest or willful misconduct; or (v) if a final
decision by a court having jurisdiction in the matter shall determine that such
indemnity is not lawful.
23
<PAGE>
(d) All obligations of the Corporation contained herein shall continue
during the period Indemnitee is a director or officer of the Corporation (or is,
or was serving at the request of the Corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise) and
shall continue thereafter so long as Indemnitee shall be subject to any possible
claim or threatened, pending or completed action, suit or proceeding, whether
civil, criminal or investigative, by reason of the fact that Indemnitee was a
director or officer of the Corporation or serving in any other capacity referred
to herein.
(e) Promptly after receipt by Indemnitee of notice of the commencement of
any action, suit or proceeding, Indemnitee will, if a claim in respect thereof
is to be made against the Corporation under this Article Ninth, notify the
Corporation of the commencement thereof; but the omission so to notify the
Corporation will not relieve it from any liability which it may have to
Indemnitee otherwise than under this Article Ninth. With respect to any such
action, suit or proceeding as to which Indemnitee notifies the Corporation of
the commencement thereof, the Corporation will be entitled to participate
therein at its own expense.
(f) Except as otherwise provided below, to the extent that it may wish,
the Corporation jointly with any other indemnifying party similarly notified
will be entitled to assume the defense thereof with counsel reasonably
satisfactory to the Indemnitee. After notice from the Corporation to Indemnitee
of its election so to assume the defense thereof, the Corporation will not be
liable to Indemnitee under this Article Ninth for any legal or other expenses
subsequently incurred by Indemnitee in connection with the defense thereof other
than reasonable costs of investigation or as otherwise provided below.
Indemnitee shall have the right to employ its counsel in such action, suit or
proceeding, but the fees and expenses of such counsel, incurred after notice
from the Corporation of its assumption of the defense thereof, shall be at the
expense of Indemnitee unless (i) the employment of counsel by Indemnitee has
been authorized by the Corporation, (ii) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Corporation and
Indemnitee in the conduct of the defense of such, subject to the approval of the
Corporation, which approval shall not be unreasonably withheld, or (iii) the
Corporation shall not in fact have employed counsel to assume the defense of
such action, in each of which cases the fees and expenses of counsel shall be at
the expense of the Corporation. The Corporation shall not be entitled to assume
the defense of any action, suit or proceeding brought by or on behalf of the
Corporation or as to which Indemnitee shall have made the conclusion provided
for in (ii) above.
(g) The Corporation shall not be liable to indemnify Indemnitee under this
Article Ninth for any amounts paid in settlement of any action or claim effected
without its written consent. The Corporation shall not settle any action or
claim in any manner which would impose any penalty or limitation on Indemnitee
without Indemnitee's written consent. Neither the Corporation nor Indemnitee
will unreasonably withhold their consent to any proposed settlement.
(h) In the event Indemnitee is required to bring any action to enforce
rights or to collect moneys due under this Article Ninth and is successful in
such action, the Corporation shall promptly
24
<PAGE>
reimburse Indemnitee for all of Indemnitee's reasonable fees and expenses in
bringing and pursuing such action.
(i) The provisions of this Article Ninth shall inure to the benefit of and
be enforceable by the Indemnitee's personal or legal representatives, executors,
administrators, heirs, devises and legatees.
(j) The Corporation shall have power to purchase and maintain insurance,
at its expense, on behalf of any person who is or was an officer, director,
employee or agent of the Corporation or a subsidiary thereof, or is or was
serving at the request of the Corporation as an officer, director, partner,
member, employee, trustee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including any employee benefit plan, against
any expense, liability or loss asserted against such person and incurred by such
person in any such capacity, or arising out of such person's status as such,
whether or not the Corporation would have the power to indemnify such person
against such expense, liability or loss under the Bylaws, the provisions of this
Article Ninth or the Delaware General Corporation Law.
(k) The indemnification provided by this Article Ninth shall not be deemed
exclusive of any other rights to which a person seeking indemnification may be
entitled under any statute, the Bylaws, other provisions of this Restated
Certificate of Incorporation, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in such person's official capacity and
as to action in any other capacity while holding such office, and shall continue
as to a person who has ceased to be an officer or director of the Corporation or
a subsidiary thereof or an officer, director, partner, member, employee, trustee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, including any employee benefit plan, and shall inure to the benefit
of the heirs, executors and administrators of such person.
(l) This Article Ninth may be hereafter amended or repealed; provided,
however, that no amendment or repeal shall reduce, terminate, or otherwise
adversely affect the right of a person entitled to obtain indemnification
hereunder with respect to acts or omissions of such person occurring prior to
the effective date of such amendment or repeal.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
executed on behalf of the Corporation this 17th day of March, 2000.
BIRCH TELECOM, INC.
By: /s/ Gregory C. Lawhon
________________________________________
Gregory C. Lawhon, Senior Vice President
25
<PAGE>
Exhibit 10.3
AMENDED EMPLOYMENT AGREEMENT
THIS AMENDED EMPLOYMENT AGREEMENT (this "Agreement") is made as of October
7, 1999 by BIRCH TELECOM, INC., a Delaware corporation (the "Company"), and
DAVID E. SCOTT, an individual (the "Employee").
The Company and the Employee desire for the Employee to be employed by the
Company upon the terms and conditions set forth in this Agreement. This
Agreement further amends and restates the Employment Agreement dated February
10, 1998, as amended by the Amendment to Employment Agreement dated August 5,
1999.
The parties, intending to be legally bound, agree as follows:
1. Definitions
For the purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1.
1.1 "Agreement" shall mean this Employment Agreement, as amended from time
to time.
1.2 "Affiliate" shall mean:
(a) any partnership, limited liability company, corporation or other
entity if the Company owns more than 25% of the equity securities or
interests of such entity; or
(b) any such entity which owns more than 25% of the equity
securities of the Company (and, for the purpose of this Section 1.2, any
options to acquire equity securities shall be treated as having been fully
exercised, and any securities convertible into equity securities shall be
treated as having been fully converted).
1.3 "Benefits" shall mean as defined in Section 3.1(b).
1.4 "Board of Directors" shall mean the board of directors of the Company.
1.5 "Competitive Business" shall mean any business which directly or
indirectly provides any local exchange telecommunications service that is the
same as or substantially similar to any local exchange telecommunications
service provided by the Company.
1.6 "Cause" shall mean as defined in Section 6.3.
1.7 "Change in Control" means any of the following: (i) the sale of all or
substantially all of the Company's (or its Affiliates') assets that results in
the liquidation of the Company and the payment of liquidating distributions to
the stockholders of the Company; (ii) the acquisition of the Company by another
entity by means of a merger or consolidation resulting in the exchange of the
1
<PAGE>
outstanding shares of the Company's capital stock for securities or
consideration issued or paid or caused to be issued or paid by the acquiring
entity or its subsidiary; or (iii) the acquisition from one
or more of the stockholders of the Company of more than 50% of the voting stock
of the Company by a single person or group of persons acting together.
1.8 "Confidential Information" shall mean any and all:
(a) trade secrets concerning the business and affairs of the
Company, the Company's product and service specifications, data, formulae,
compositions, processes, designs, sketches, photographs, maps, engineering
studies, graphs, drawings, samples, inventions and ideas, past, current,
and planned research and development, current and planned methods and
processes, customer and supplier lists, current and anticipated customer
requirements, price lists, bid information, market studies, business
plans, computer software and programs (including object code and source
code), computer software and database technologies, systems, structures,
and architectures (and related formulae, compositions, processes,
improvements, devices, inventions, discoveries, concepts, ideas, designs,
methods and information), and any other information, however documented,
that is a trade secret within the meaning of the Missouri Uniform Trade
Secrets Act; and
(b) information concerning the business and affairs of the Company
(which includes without limitation, historical financial statements,
financial projections and budgets, historical and projected sales, capital
spending budgets and plans, the names and backgrounds of key personnel and
personnel training techniques and materials), however documented; and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for the Company containing or based, in whole or
in part, on any information included in the foregoing.
1.9 "Disability" shall mean as defined in Section 6.2.
1.10 "Employee Invention" shall mean any idea, invention, technique,
modification, process, or improvement (whether patentable or not), any
industrial design (whether registerable or not), any mask work, however fixed or
encoded, that is suitable to be fixed, embedded or programmed in a semiconductor
product (whether recordable or not), and any work of authorship (whether or not
copyright protection may be obtained for it) created, conceived, or developed by
the Employee, either solely or in conjunction with others, during the Employment
Period, or a period that includes a portion of the Employment Period, that
relates in any way to, or is useful in any manner in, the business then being
conducted or proposed to be conducted by the Company, and any such item created
by the Employee, either solely or in conjunction with others, following
termination of the Employee's employment with the Company, that is based upon or
uses Confidential Information, but shall not include any of the foregoing with
respect to the Internet-based information services business of DNS Publishing,
Inc., in which the Employee holds a substantial equity interest.
1.11 "Employment Period" shall mean the term of the Employee's employment
under this Agreement.
2
<PAGE>
1.12 "Good Reason" shall mean as defined in Section 6.4.
1.13 "Person" shall mean any individual, corporation (including any
non-profit corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization, or
governmental body.
1.14 "Post-Employment Period" shall mean the two-year period beginning on
the date of termination of the Employee's employment with the Company.
1.15 "Proprietary Items" shall mean as defined in Section 7.2(a)(iv).
1.16 "Salary" shall mean as defined in Section 3.1(a).
1.17 "Territory" shall mean
(a) the states of Missouri and Kansas; and
(b) any metropolitan areas outside of Missouri and Kansas, if at the
time the Employee ceases to be employed by the Company (i) the Company or
any Affiliate is providing a local exchange telecommunications service
within the metropolitan area, or (ii) a detailed business development plan
has been prepared, or is in the process of being prepared, by or on behalf
of the Company, in order to evaluate whether the Company should provide
local exchange telecommunications services within the metropolitan area
within twelve months after the date Employee ceases to be employed by the
Company, and the Board of Directors has not formally resolved against
providing such services in such metropolitan area.
2. Employment Terms and Duties
2.1 Employment. The Company hereby employs the Employee, and the Employee
hereby accepts employment by the Company, upon the terms and conditions set
forth in this Agreement.
2.2 Term. Subject to the provisions of Section 6, the term of this
Agreement shall be three (3) years, commencing on February 10, 1998. Thereafter,
this Agreement shall be renewed automatically from year to year unless either
party shall have given written notice of termination to the other party at least
ninety (90) days prior to the end of the current term of this Agreement.
2.3 Duties. The Employee will have such duties as are assigned or
delegated to the Employee by the Board of Directors and will serve as the
President of the Company. The Employee will devote substantially all his
business time and attention to the business of the Company, will act in good
faith to promote the success of the Company's business, and will cooperate fully
with the Board of Directors in the advancement of the best interests of the
Company. Nothing in this Section 2.3, however, will prevent the Employee from
engaging in additional activities in connection
3
<PAGE>
with personal investments and community affairs that are not inconsistent with
the Employee's duties under this Agreement (which community affairs shall be
disclosed to and approved by the Chairman of the Board). If the Employee serves
as a director of the Company or as a director or officer of any of its
Affiliates, the Employee will fulfill his duties as such director or officer
without additional compensation.
3. Compensation
3.1 Basic Compensation.
(a) Salary. The Employee will be paid a minimum base annual salary
of $250,000 (the "Salary"), which will be payable in equal periodic
installments according to the Company's customary payroll practices, but
no less frequently than monthly. The Salary may be increased by the
Compensation Committee or Board of Directors of the Company during the
term of this Agreement, and when increased, such higher amount shall then
be the minimum base annual salary under this Agreement. The Salary shall
not be reduced below the highest minimum base annual salary fixed from
time to time by the Compensation Committee or Board of Directors of the
Company without the Employee's written consent. When increased or
decreased in accordance with the terms of this Agreement, the new minimum
base annual salary shall be deemed the Employee's "Salary" for all
purposes of this Agreement.
(b) Benefits. The Employee will, during the Employment Period, be
permitted to participate in such pension, profit sharing, bonus, life
insurance, disability insurance, hospitalization, major medical, and other
employee benefit plans of the Company that may be in effect from time to
time, to the extent the Employee is eligible under the terms of such plans
(collectively, the "Benefits").
3.2 Incentive Compensation. The Employee shall be entitled to participate
in an incentive bonus program established by the Board of Directors or the
Compensation Committee of the Board of Directors to measure and reward
management for the financial performance of the Company. The Employee's initial
annual targeted incentive compensation shall be $150,000; provided, however,
that the payment of any incentive compensation shall be at the discretion of the
Compensation Committee of the Board of Directors, which may consider any factors
it deems relevant, including the assessment of the performance of the Employee
and the Company during the relevant time period.
4. Facilities and Expenses
The Company will furnish the Employee office space, equipment, supplies, and
such other facilities and personnel as the Company deems necessary or
appropriate for the performance of the Employee's duties under this Agreement.
The Company will pay the Employee's dues in such professional societies and
organizations as the Chairman of the Board deems appropriate, and will pay on
behalf of the Employee (or reimburse the Employee for) reasonable expenses
incurred by the
4
<PAGE>
Employee at the request of, or on behalf of, the Company in the performance of
the Employee's duties pursuant to this Agreement, and in accordance with the
Company's employment policies, including reasonable expenses incurred by the
Employee in attending conventions, seminars, and other business meetings, in
appropriate business entertainment activities, and for promotional expenses.
5. Vacations and Holidays
The Employee will be entitled to paid vacation in accordance with the vacation
policies of the Company in effect for its employee officers from time to time.
Vacation must be taken by the Employee at such time or times as approved by the
Chairman of the Board. The Employee will also be entitled to the paid holidays
set forth in the Company's policies.
6. Termination
6.1 Events of Termination. The Employment Period, the Employee's Salary,
Benefits, and Incentive Compensation, and any and all other rights of the
Employee under this Agreement will terminate (except as otherwise provided in
this Section 6):
(a) upon the death of the Employee;
(b) upon the Disability of the Employee (as defined in Section 6.2)
immediately upon notice from either party to the other;
(c) for Cause (as defined in Section 6.3), immediately upon notice
from the Company to the Employee, or at such later time as such notice may
specify;
(d) for Good Reason (as defined in Section 6.4) upon not less than
thirty days' prior notice from the Employee to the Company; or
(e) without Cause upon not less than thirty days' notice from the
Company to the Employee.
6.2 Definition of "Disability." For purposes of Section 6.1, the Employee
will be deemed to have a "Disability" if, for physical or mental reasons, the
Employee is unable to perform the Employee's duties under this Agreement for 120
consecutive days, or 180 days during any twelve month period, as determined in
accordance with this Section 6.2. The Disability of the Employee will be
determined by a medical doctor selected by written agreement of the Company and
the Employee upon the request of either party by notice to the other. If the
Company and the Employee cannot agree on the selection of a medical doctor, each
of them will select a medical doctor and the two medical doctors will select a
third medical doctor who will determine whether the Employee has a Disability.
The determination of the medical doctor selected under this Section 6.2 will be
binding on both parties. The Employee must submit to a reasonable number of
examinations by the medical doctor making the determination of Disability under
this Section 6.2, and to other specialists designated by such medical doctor,
and the Employee hereby authorizes the
5
<PAGE>
disclosure and release to the Company of such determination and all supporting
medical records. If the Employee is not legally competent, the Employee's legal
guardian or duly authorized attorney-in-fact will act in the Employee's stead
under this Section 6.2 for the purposes of submitting the Employee to the
examinations, and providing the authorization of disclosure, required under this
Section 6.2.
6.3 Definition of "Cause." For purposes of Section 6.1, the term "Cause"
means: (a) the Employee's breach of a material obligation under this Agreement;
(b) the Employee's failure to adhere in any material respect to any written
Company policy if such policy is material to the effective performance by the
Employee of his duties under this Agreement, and if the Employee has been given
a reasonable opportunity to cure his failure to comply within the thirty-day
period preceding termination of this Agreement, provided that if the Employee
cures his failure to comply with such a policy and then fails again to comply
with the same policy, no further opportunity to cure that failure shall be
required; (c) the appropriation (or attempted appropriation) of a material
business opportunity of the Company, including attempting to secure or securing
any personal profit in connection with any transaction entered into on behalf of
the Company (other than through stock options, bonuses and other incentives
provided by the Company to the Employee); (d) the misappropriation (or attempted
misappropriation) of any of the Company's funds or property; or (e) the
conviction of, or the entering of a guilty plea or plea of no contest with
respect to, a felony, or a crime involving moral turpitude, dishonesty, or
fraud.
6.4 Definition of "Good Reason." For purposes of Section 6.1, the term
"Good Reason" shall mean (a) a substantial reduction in the Employee's duties or
responsibilities, (b) any reduction in Employee's Salary, or (c) relocation of
the Employee's primary workplace to a location that is greater than 35 miles
from the Employee's current workplace, in each case which is not cured within 30
days following the Company's receipt of written notice from the Employee
describing the event constituting Good Reason.
6.5 Termination Pay. Effective upon the expiration or termination of this
Agreement, the Company will be obligated to pay the Employee (or, in the event
of his death, his designated beneficiary as defined below) only such
compensation as is provided in this Section 6.5. For purposes of this Section
6.5 the Employee's designated beneficiary will be such individual beneficiary or
trust, located at such address, as the Employee may designate by notice to the
Company from time to time or, if the Employee fails to give notice to the
Company of such a beneficiary, the Employee's estate. Notwithstanding the
preceding sentence, the Company will have no duty, in any circumstances, to
attempt to open an estate on behalf of the Employee, to determine whether any
beneficiary designated by the Employee is alive or to ascertain the address of
any such beneficiary, to determine the existence of any trust, to determine
whether any Person purporting to act as the Employee's personal representative
(or the trustee of a trust established by the Employee) is duly authorized to
act in that capacity, or to locate or attempt to locate any beneficiary,
personal representative, or trustee.
(a) Termination by the Employee for Good Reason or by the Company without
Cause. If the Employee terminates this Agreement for Good Reason, or if
the Company terminates
6
<PAGE>
this Agreement other than for Cause (but not because of the Disability or
death of the Employee), or if the Company notifies the Employee in
accordance with Section 2.2 that this Agreement will not be renewed as of
an applicable expiration date, the Company will pay the Employee (i) the
Employee's Salary for the remainder, if any, of the calendar month in
which such termination is effective and for twenty-four consecutive
calendar months thereafter, (ii) the amount of the Employee's targeted
incentive compensation for the year during which the termination is
effective (prorated for the period from the beginning of the year until
the effective date of termination), and (iii) the sum of two times the
amount of the Employee's targeted incentive compensation for the year in
which the termination was effective (such amount to be determined as if
the Employee had been employed for the entire year and not prorated as
described in clause (ii) above), payable in equal monthly installments
over the Post-Employment Period. Notwithstanding the preceding sentence,
if the Employee obtains other employment prior to the end of the
twenty-four months following the month in which the termination or
expiration is effective, he must promptly give notice thereof to the
Company, and the payments under this Agreement for any period after the
Employee obtains other employment will be reduced by the amount of the
cash compensation received and to be received by the Employee from the
Employee's other employment for services performed during such period.
(b) Termination by the Company for Cause. If the Company terminates
this Agreement for Cause, the Employee will be entitled to receive his
Salary only through the date such termination is effective.
(c) Termination upon Disability. If this Agreement is terminated by
either party as a result of the Employee's Disability, as determined under
Section 6.2, the Company will pay the Employee his Salary through the
remainder of the calendar month during which such termination is effective
and for the lesser of (i) six consecutive months thereafter, or (ii) the
period until disability insurance benefits commence under any disability
insurance coverage furnished by the Company to the Employee.
(d) Termination upon Death. If this Agreement is terminated because
of the Employee's death, the Employee will be entitled to receive his
Salary through the end of the calendar month in which his death occurs.
(e) Benefits. Except as otherwise required by law, the Employee's
accrual of, or participation in plans providing for, the Benefits will
cease at the effective date of the termination of this Agreement, and the
Employee will be entitled to accrued Benefits pursuant to such plans only
as provided in such plans.
7. Non-Disclosure Covenant; Employee Inventions
7.1 Acknowledgments by the Employee. The Employee acknowledges that (a)
during the Employment Period and as a part of his employment, the Employee will
be afforded access to Confidential Information; (b) public disclosure of such
Confidential Information could have an
7
<PAGE>
adverse effect on the Company and its business; (c) because the Employee
possesses substantial technical expertise and skill with respect to the
Company's business, the Company desires to obtain exclusive ownership of each
Employee Invention, and the Company will be at a substantial competitive
disadvantage if it fails to acquire exclusive ownership of each Employee
Invention; and (d) the provisions of this Section 7 are reasonable and necessary
to prevent the improper use or disclosure of Confidential Information and to
provide the Company with exclusive ownership of all Employee Inventions.
7.2 Agreements of the Employee. In consideration of the compensation and
benefits to be paid or provided to the Employee by the Company under this
Agreement, the Employee covenants as follows:
(a) Confidentiality.
(i) During and following the Employment Period, the Employee
will hold in confidence the Confidential Information and will not
disclose it to any Person except with the specific prior written
consent of the Company or except as otherwise expressly permitted by
the terms of this Agreement.
(ii) Any trade secrets of the Company will be entitled to all
of the protections and benefits under the Missouri Uniform Trade
Secrets Act and any other applicable law. If any information that
the Company deems to be a trade secret is found by a court of
competent jurisdiction not to be a trade secret for purposes of this
Agreement, such information will, nevertheless, be considered
Confidential Information for purposes of this Agreement. The
Employee hereby waives any requirement that the Company submit proof
of the economic value of any trade secret or post a bond or other
security.
(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information that the
Employee demonstrates was or became generally available to the
public other than as a result of a disclosure by the Employee or by
any other Person bound by a confidentiality obligation to the
Company in respect of such Confidential Information.
(iv) The Employee will not remove from the Company's premises
(except to the extent such removal is for purposes of the
performance of the Employee's duties at home or while traveling, or
except as otherwise specifically authorized by the Company) any
Company document, record, notebook, plan, model, component, device,
or computer software or code, whether embodied in a disk or in any
other form (collectively, the "Proprietary Items"). The Employee
recognizes that, as between the Company and the Employee, all of the
Proprietary Items, whether or not developed by the Employee, are the
exclusive property of the Company. Upon termination of this
Agreement by either party, or upon the request of the Company during
the Employment Period, the Employee will return to the Company all
of the Proprietary Items in the Employee's possession or subject to
the Employee's control,
8
<PAGE>
and the Employee shall not retain any copies, abstracts, sketches,
or other physical embodiment of any of the Proprietary Items.
(b) Employee Inventions. Each Employee Invention will belong
exclusively to the Company. The Employee acknowledges that all Employee
Inventions are works made for hire and are the property of the Company,
including any copyrights, patents, or other intellectual property rights
pertaining thereto. If it is determined that any such works are not works
made for hire, the Employee hereby assigns to the Company all of the
Employee's right, title, and interest, including all rights of copyright,
patent, and other intellectual property rights, to or in such Employee
Inventions. The Employee will promptly:
(i) disclose to the Company in writing any Employee Invention;
(ii) assign to the Company or to a party designated by the
Company, at the Company's request and without additional
compensation, all of the Employee's right to the Employee Invention
for the United States and all foreign jurisdictions;
(iii) execute and deliver to the Company such applications,
assignments, and other documents as the Company may request in order
to apply for and obtain patents or other registrations with respect
to any Employee Invention in the United States and any foreign
jurisdictions;
(iv) sign all other papers necessary to carry out the above
obligations; and
(v) give testimony and render any other assistance in support
of the Company's rights to any Employee Invention.
Notwithstanding anything to the contrary herein, provisions otherwise
requiring the Employee to assign to the Company any invention conceived by
the Employee shall not apply to an invention for which no equipment,
supplies, facilities or trade secret information of the Company was used
and which was developed entirely on the Employee's own time, unless the
invention relates to the business of the Company or to the Company's
actual or demonstrably anticipated research or development, or the
invention results from any work performed by the Employee for the Company.
7.3 Disputes or Controversies. The Employee recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Company, the Employee, and their respective attorneys and experts, who will
agree, in advance and in writing, to receive and maintain all such information
in secrecy, except as may be limited by them in writing.
8. Non-Competition and Non-Interference
9
<PAGE>
8.1 Acknowledgments by the Employee. The Employee acknowledges that: (a)
the services to be performed by him under this Agreement are of a special,
unique, unusual, extraordinary, and intellectual character; (b) the Company
competes with other businesses that are or could be located in any part of the
Territory; and (c) the provisions of this Section 8 are reasonable and necessary
to protect the Company's business.
8.2 Covenants of the Employee. In consideration of the acknowledgments by
the Employee, and in consideration of the compensation and benefits to be paid
or provided to the Employee by the Company, the Employee covenants that he will
not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post-Employment Period, engage or
invest in, own, manage, operate, finance, control, or participate in the
ownership, management, operation, financing, or control of, be employed
by, associated with, or in any manner connected with, lend the Employee's
name or any similar name to, lend Employee's credit to or render services
or advice to, any Competitive Business within the Territory; provided,
however, that the Employee may purchase or otherwise acquire up to (but
not more than) one percent of any class of securities of any enterprise
(but without otherwise participating in the activities of such enterprise)
if such securities are listed on any national or regional securities
exchange or have been registered under Section 12(g) of the Securities
Exchange Act of 1934;
(b) whether for the Employee's own account or for the account of any
other Person, at any time during the Employment Period and the
Post-Employment Period, solicit business of the same or similar type being
carried on by the Company, from any Person known by the Employee to be a
customer of the Company, whether or not the Employee had personal contact
with such Person during and by reason of the Employee's employment with
the Company;
(c) whether for the Employee's own account or the account of any
other Person at any time during the Employment Period and the
Post-Employment Period, solicit, employ, or otherwise engage as an
employee, independent contractor, or otherwise, any person who is or was
an employee of the Company at any time during the Employment Period or in
any manner induce or attempt to induce any employee of the Company to
terminate his or her employment with the Company; or at any time during
the Employment Period and the Post-Employment Period, interfere with the
Company's relationship with any person, including any person who at any
time during the Employment Period was an employee, contractor, supplier,
or customer of the Company;
(d) at any time during the Employment Period and the Post-Employment
Period, disparage the Company or any of its shareholders, directors,
officers, employees, or agents.
8.3 Divisible Covenants. If any covenant in Section 8.2 is held to be
unreasonable, arbitrary, or against public policy, such covenant will be
considered to be divisible with respect to scope, time, and geographic area, and
such lesser scope, time, or geographic area, or all of them, as
10
<PAGE>
a court of competent jurisdiction may determine to be reasonable, not arbitrary,
and not against public policy, will be effective, binding, and enforceable
against the Employee.
8.4 Extension of Covenants. The period of time applicable to any covenant
in Section 8.2 will be extended by the duration of any violation by the Employee
of such covenant.
8.5 Notices. The Employee will, while the covenants under Section 8.2 are
in effect, give notice to the Company, within ten days after accepting any other
employment, of the identity of the Employee's new employer. The Company may
notify such new employer that the Employee is bound by this Agreement and, at
the Company's election, furnish such new employer with a copy of this Agreement
or relevant portions thereof.
9. General Provisions
9.1 Injunctive Relief and Additional Remedy. The Employee acknowledges
that the injury that would be suffered by the Company as a result of a breach of
the provisions of this Agreement (including any provision of Sections 7 and 8)
would be irreparable and that an award of monetary damages to the Company for
such a breach would be an inadequate remedy. Consequently, the Company will have
the right, in addition to any other rights it may have, to obtain injunctive
relief to restrain any breach or threatened breach or otherwise to specifically
enforce any provision of this Agreement, and the Company will not be obligated
to post bond or other security in seeking such relief. Without limiting the
Company's rights under this Section 9 or any other remedies of the Company, if
the Employee breaches any of the provisions of Section 7 or 8, the Company will
have the right to cease making any payments otherwise due to the Employee under
this Agreement.
9.2 Covenants of Sections 7 and 8 are Essential and Independent Covenants.
The covenants by the Employee in Sections 7 and 8 are essential elements of this
Agreement, and without the Employee's agreement to comply with such covenants,
the Company would not have entered into this Agreement or employed the Employee.
The Company and the Employee have independently consulted their respective
counsel and have been advised in all respects concerning the reasonableness and
propriety of such covenants, with specific regard to the nature of the business
conducted by the Company. The Employee's covenants in Sections 7 and 8 are
independent covenants and the existence of any claim by the Employee against the
Company, under this Agreement or otherwise, will not excuse the Employee's
breach of any covenant in Section 7 or 8. If the Employee's employment hereunder
expires or is terminated, this Agreement will continue in full force and effect
as is necessary or appropriate to enforce the covenants and agreements of the
Employee in Sections 7 and 8.
9.3 Representations and Warranties by the Employee. The Employee
represents and warrants to the Company that the execution and delivery by the
Employee of this Agreement do not, and the performance by the Employee of the
Employee's obligations hereunder will not, with or without the giving of notice
or the passage of time, or both: (a) violate any judgment, writ, injunction, or
order of any court, arbitrator, or governmental agency applicable to the
Employee; or (b) conflict with, result in the breach of any provisions of or the
termination of, or constitute a
11
<PAGE>
default under, any agreement to which the Employee is a party or by which the
Employee is or may be bound.
9.4 Obligations Contingent on Performance. The obligations of the Company
hereunder, including its obligation to pay the compensation provided for herein,
are contingent upon the Employee's performance of the Employee's obligations
hereunder.
9.5 Waiver. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by either
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
(a) no claim or right arising out of this Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim or right
unless in writing signed by the other party; (b) no waiver that may be given by
a party will be applicable except in the specific instance for which it is
given; and (c) no notice to or demand on one party will be deemed to be a waiver
of any obligation of such party or of the right of the party giving such notice
or demand to take further action without notice or demand as provided in this
Agreement.
9.6 Binding Effect; Delegation of Duties Prohibited. This Agreement shall
inure to the benefit of, and shall be binding upon, the parties hereto and their
respective successors, assigns, heirs, and legal representatives, including any
entity with which the Company may merge or consolidate or to which all or
substantially all of its assets may be transferred. The duties and covenants of
the Employee under this Agreement, being personal, may not be delegated.
9.7 Notices. All notices and other communications under this Agreement
must be in writing and will be deemed to have been duly given when (a) delivered
by hand (with written confirmation of receipt), (b) sent by facsimile (with
written confirmation of receipt), provided that a copy is mailed by registered
mail, return receipt requested, or (c) when received by the addressee, if sent
by a nationally recognized overnight delivery service (receipt requested), in
the case of the Company to the attention of the Chairman of the Board with
respect to David E. Scott's Agreement at the Company's principal business office
and in the case of the Employee to the address or facsimile number set forth
below (or to such other address or facsimile number as the Employee may
designate by notice to the Company):
73 Janssen Place
Kansas City, MO 64109
9.8 Entire Agreement; Amendments. This Agreement contains the entire
agreement between the parties with respect to its subject matter and supersedes
all prior agreements and understandings, oral or written, between the parties
with respect to its subject matter. This Agreement may not be amended orally,
but only by an agreement in writing signed by each of the parties to this
Agreement.
12
<PAGE>
9.9 Governing Law. This Agreement will be governed by the laws of the
State of Missouri without regard to conflicts of laws principles.
9.10 Jurisdiction. Any action or proceeding seeking to enforce any
provision of, or based on any right arising out of, this Agreement may be
brought against either of the parties in the courts of the State of Missouri,
County of Jackson, or, if it has or can acquire jurisdiction, in the United
States District Court for the Western District of Missouri, and each of the
parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection to
venue laid therein. Process in any action or proceeding referred to in the
preceding sentence may be served on either party anywhere in the world.
9.11 Section Headings, Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement unless otherwise specified.
All words used in this Agreement will be construed to be of such gender or
number as the circumstances require. Unless otherwise expressly provided, the
word "including" does not limit the preceding words or terms.
9.12 Severability. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
9.13 Counterparts; Execution by Facsimile Signatures. This Agreement may
be executed in one or more counterparts, each of which will be deemed to be an
original copy of this Agreement and all of which, when taken together, will be
deemed to constitute one and the same agreement. This Agreement may be executed
by facsimile signatures.
9.14 Waiver of Jury Trial. THE PARTIES HERETO HEREBY WAIVE A JURY TRIAL IN
ANY LITIGATION WITH RESPECT TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date above first written above.
BIRCH TELECOM, INC.
By: /s/ Henry H. Bradley
_______________________________________
Henry H. Bradley, Chairman of the Board
/s/ David E. Scott
__________________________________________
David E. Scott
13
<PAGE>
Exhibit 10.4
AMENDED EMPLOYMENT AGREEMENT
THIS AMENDED EMPLOYMENT AGREEMENT (this "Agreement") is made as of October
7, 1999 by BIRCH TELECOM, INC., a Delaware corporation (the "Company"), and
GREGORY C. LAWHON, an individual (the "Employee").
The Company and the Employee desire for the Employee to be employed by the
Company upon the terms and conditions set forth in this Agreement. This
Agreement further amends and restates the Employment Agreement dated February
10, 1998, as amended by the Amendment to Employment Agreement dated August 5,
1999.
The parties, intending to be legally bound, agree as follows:
1. Definitions
For the purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1.
1.1 "Agreement" shall mean this Employment Agreement, as amended from time
to time.
1.2 "Affiliate" shall mean:
(a) any partnership, limited liability company, corporation or other
entity if the Company owns more than 25% of the equity securities or
interests of such entity; or
(b) any such entity which owns more than 25% of the equity
securities of the Company (and, for the purpose of this Section 1.2, any
options to acquire equity securities shall be treated as having been fully
exercised, and any securities convertible into equity securities shall be
treated as having been fully converted).
1.3 "Benefits" shall mean as defined in Section 3.1(b).
1.4 "Board of Directors" shall mean the board of directors of the Company.
1.5 "Competitive Business" shall mean any business which directly or
indirectly provides any local exchange telecommunications service that is the
same as or substantially similar to any local exchange telecommunications
service provided by the Company.
1.6 "Cause" shall mean as defined in Section 6.3.
1.7 "Change in Control" means any of the following: (i) the sale of all or
substantially all of the Company's (or its Affiliates') assets that results in
the liquidation of the Company and the payment of liquidating distributions to
the stockholders of the Company; (ii) the acquisition of the
1
<PAGE>
Company by another entity by means of a merger or consolidation resulting in the
exchange of the outstanding shares of the Company's capital stock for securities
or consideration issued or paid or caused to be issued or paid by the acquiring
entity or its subsidiary; or (iii) the acquisition from one or more of the
stockholders of the Company of more than 50% of the voting stock of the Company
by a single person or group of persons acting together.
1.8 "Confidential Information" shall mean any and all:
(a) trade secrets concerning the business and affairs of the
Company, the Company's product and service specifications, data, formulae,
compositions, processes, designs, sketches, photographs, maps, engineering
studies, graphs, drawings, samples, inventions and ideas, past, current,
and planned research and development, current and planned methods and
processes, customer and supplier lists, current and anticipated customer
requirements, price lists, bid information, market studies, business
plans, computer software and programs (including object code and source
code), computer software and database technologies, systems, structures,
and architectures (and related formulae, compositions, processes,
improvements, devices, inventions, discoveries, concepts, ideas, designs,
methods and information), and any other information, however documented,
that is a trade secret within the meaning of the Missouri Uniform Trade
Secrets Act; and
(b) information concerning the business and affairs of the Company
(which includes without limitation, historical financial statements,
financial projections and budgets, historical and projected sales, capital
spending budgets and plans, the names and backgrounds of key personnel and
personnel training techniques and materials), however documented; and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for the Company containing or based, in whole or
in part, on any information included in the foregoing.
1.9 "Disability" shall mean as defined in Section 6.2.
1.10 "Employee Invention" shall mean any idea, invention, technique,
modification, process, or improvement (whether patentable or not), any
industrial design (whether registerable or not), any mask work, however fixed or
encoded, that is suitable to be fixed, embedded or programmed in a semiconductor
product (whether recordable or not), and any work of authorship (whether or not
copyright protection may be obtained for it) created, conceived, or developed by
the Employee, either solely or in conjunction with others, during the Employment
Period, or a period that includes a portion of the Employment Period, that
relates in any way to, or is useful in any manner in, the business then being
conducted or proposed to be conducted by the Company, and any such item created
by the Employee, either solely or in conjunction with others, following
termination of the Employee's employment with the Company, that is based upon or
uses Confidential Information.
2
<PAGE>
1.11 "Employment Period" shall mean the term of the Employee's employment
under this Agreement.
1.12 "Good Reason" shall mean as defined in Section 6.4.
1.13 "Person" shall mean any individual, corporation (including any
non-profit corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization, or
governmental body.
1.14 "Post-Employment Period" shall mean the one-year period beginning on
the date of termination of the Employee's employment with the Company.
1.15 "Proprietary Items" shall mean as defined in Section 7.2(a)(iv).
1.16 "Salary" shall mean as defined in Section 3.1(a).
1.17 "Territory" shall mean
(a) the states of Missouri and Kansas; and
(b) any metropolitan areas outside of Missouri and Kansas, if at the
time the Employee ceases to be employed by the Company (i) the Company or
any Affiliate is providing a local exchange telecommunications service
within the metropolitan area, or (ii) a detailed business development plan
has been prepared, or is in the process of being prepared, by or on behalf
of the Company, in order to evaluate whether the Company should provide
local exchange telecommunications services within the metropolitan area
within twelve months after the date Employee ceases to be employed by the
Company, and the Board of Directors has not formally resolved against
providing such services in such metropolitan area.
2. Employment Terms and Duties
2.1 Employment. The Company hereby employs the Employee, and the Employee
hereby accepts employment by the Company, upon the terms and conditions set
forth in this Agreement.
2.2 Term. Subject to the provisions of Section 6, the term of this
Agreement shall be one year, commencing on February 10, 1998. Thereafter, this
Agreement shall be renewed automatically from year to year unless either party
shall have given written notice of termination to the other party at least
ninety (90) days prior to the end of the current term of this Agreement.
2.3 Duties. The Employee will have such duties as are assigned or
delegated to the Employee by the Board of Directors and President and will serve
as the Senior Vice President of Public Policy and General Counsel of the
Company. The Employee will devote substantially all his business time and
attention to the business of the Company, will act in good faith to promote the
success of the Company's business, and will cooperate fully with the Board of
Directors and
3
<PAGE>
President in the advancement of the best interests of the Company. Nothing in
this Section 2.3, however, will prevent the Employee from engaging in additional
activities in connection with personal investments and community affairs that
are not inconsistent with the Employee's duties under this Agreement (which
community affairs shall be disclosed to and approved by the President). If the
Employee serves as a director of the Company or as a director or officer of any
of its Affiliates, the Employee will fulfill his duties as such director or
officer without additional compensation.
3. Compensation
3.1 Basic Compensation.
(a) Salary. The Employee will be paid a minimum base annual salary
of $200,000 (the "Salary"), which will be payable in equal periodic
installments according to the Company's customary payroll practices, but
no less frequently than monthly. The Salary may be increased by the
Compensation Committee or Board of Directors of the Company during the
term of this Agreement, and when increased, such higher amount shall then
be the minimum base annual salary under this Agreement. The Salary shall
not be reduced below the highest minimum base annual salary fixed from
time to time by the Compensation Committee or Board of Directors of the
Company without the Employee's written consent. When increased or
decreased in accordance with the terms of this Agreement, the new minimum
base annual salary shall be deemed the Employee's "Salary" for all
purposes of this Agreement.
(b) Benefits. The Employee will, during the Employment Period, be
permitted to participate in such pension, profit sharing, bonus, life
insurance, disability insurance, hospitalization, major medical, and other
employee benefit plans of the Company that may be in effect from time to
time, to the extent the Employee is eligible under the terms of such plans
(collectively, the "Benefits").
3.2 Incentive Compensation. The Employee shall be entitled to participate
in an incentive bonus program established by the Board of Directors or the
Compensation Committee of the Board of Directors to measure and reward
management for the financial performance of the Company. The Employee's initial
annual targeted incentive compensation shall be $50,000; provided, however, that
the payment of any incentive compensation shall be at the discretion of the
Compensation Committee of the Board of Directors, which may consider any factors
it deems relevant, including the assessment of the performance of the Employee
and the Company during the relevant time period.
4. Facilities and Expenses
The Company will furnish the Employee office space, equipment, supplies, and
such other facilities and personnel as the Company deems necessary or
appropriate for the performance of the Employee's duties under this Agreement.
The Company will pay the Employee's dues in such professional societies and
organizations as the President deems appropriate, and will pay on behalf of the
Employee (or reimburse the Employee for) reasonable expenses incurred by the
Employee at
4
<PAGE>
the request of, or on behalf of, the Company in the performance of the
Employee's duties pursuant to this Agreement, and in accordance with the
Company's employment policies, including reasonable expenses incurred by the
Employee in attending conventions, seminars, and other business meetings, in
appropriate business entertainment activities, and for promotional expenses.
5. Vacations and Holidays
The Employee will be entitled to paid vacation in accordance with the vacation
policies of the Company in effect for its employee officers from time to time.
Vacation must be taken by the Employee at such time or times as approved by the
President. The Employee will also be entitled to the paid holidays set forth in
the Company's policies.
6. Termination
6.1 Events of Termination. The Employment Period, the Employee's Salary,
Benefits, and Incentive Compensation, and any and all other rights of the
Employee under this Agreement will terminate (except as otherwise provided in
this Section 6):
(a) upon the death of the Employee;
(b) upon the Disability of the Employee (as defined in Section 6.2)
immediately upon notice from either party to the other;
(c) for Cause (as defined in Section 6.3), immediately upon notice
from the Company to the Employee, or at such later time as such notice may
specify;
(d) for Good Reason (as defined in Section 6.4) upon not less than
thirty days' prior notice from the Employee to the Company; or
(e) without Cause upon not less than thirty days' notice from the
Company to the Employee.
6.2 Definition of "Disability." For purposes of Section 6.1, the Employee
will be deemed to have a "Disability" if, for physical or mental reasons, the
Employee is unable to perform the Employee's duties under this Agreement for 120
consecutive days, or 180 days during any twelve month period, as determined in
accordance with this Section 6.2. The Disability of the Employee will be
determined by a medical doctor selected by written agreement of the Company and
the Employee upon the request of either party by notice to the other. If the
Company and the Employee cannot agree on the selection of a medical doctor, each
of them will select a medical doctor and the two medical doctors will select a
third medical doctor who will determine whether the Employee has a Disability.
The determination of the medical doctor selected under this Section 6.2 will be
binding on both parties. The Employee must submit to a reasonable number of
examinations by the medical doctor making the determination of Disability under
this Section 6.2, and to other specialists designated by such medical doctor,
and the Employee hereby authorizes the disclosure and release to the Company of
such determination and all supporting medical records. If
5
<PAGE>
the Employee is not legally competent, the Employee's legal guardian or duly
authorized attorney-in-fact will act in the Employee's stead under this Section
6.2 for the purposes of submitting the Employee to the examinations, and
providing the authorization of disclosure, required under this Section 6.2.
6.3 Definition of "Cause." For purposes of Section 6.1, the term "Cause"
means: (a) the Employee's breach of a material obligation under this Agreement;
(b) the Employee's failure to adhere in any material respect to any written
Company policy if such policy is material to the effective performance by the
Employee of his duties under this Agreement, and if the Employee has been given
a reasonable opportunity to cure his failure to comply within the thirty-day
period preceding termination of this Agreement, provided that if the Employee
cures his failure to comply with such a policy and then fails again to comply
with the same policy, no further opportunity to cure that failure shall be
required; (c) the appropriation (or attempted appropriation) of a material
business opportunity of the Company, including attempting to secure or securing
any personal profit in connection with any transaction entered into on behalf of
the Company (other than through stock options, bonuses and other incentives
provided by the Company to the Employee); (d) the misappropriation (or attempted
misappropriation) of any of the Company's funds or property; or (e) the
conviction of, or the entering of a guilty plea or plea of no contest with
respect to, a felony, or a crime involving moral turpitude, dishonesty, or
fraud.
6.4 Definition of "Good Reason." For purposes of Section 6.1, the term
"Good Reason" shall mean (a) a substantial reduction in the Employee's duties or
responsibilities, (b) any reduction in Employee's Salary, or (c) relocation of
the Employee's primary workplace to a location that is greater than 35 miles
from the Employee's current workplace, in each case which is not cured within 30
days following the Company's receipt of written notice from the Employee
describing the event constituting Good Reason.
6.5 Termination Pay. Effective upon the expiration or termination of this
Agreement, the Company will be obligated to pay the Employee (or, in the event
of his death, his designated beneficiary as defined below) only such
compensation as is provided in this Section 6.5. For purposes of this Section
6.5 the Employee's designated beneficiary will be such individual beneficiary or
trust, located at such address, as the Employee may designate by notice to the
Company from time to time or, if the Employee fails to give notice to the
Company of such a beneficiary, the Employee's estate. Notwithstanding the
preceding sentence, the Company will have no duty, in any circumstances, to
attempt to open an estate on behalf of the Employee, to determine whether any
beneficiary designated by the Employee is alive or to ascertain the address of
any such beneficiary, to determine the existence of any trust, to determine
whether any Person purporting to act as the Employee's personal representative
(or the trustee of a trust established by the Employee) is duly authorized to
act in that capacity, or to locate or attempt to locate any beneficiary,
personal representative, or trustee.
(a) Termination by the Employee for Good Reason or by the Company without
Cause. If the Employee terminates this Agreement for Good Reason, or if
the Company terminates this Agreement other than for Cause (but not
because of the Disability or death of the Employee), or if the Company
notifies the Employee in accordance with Section 2.2 that
6
<PAGE>
this Agreement will not be renewed as of an applicable expiration date,
the Company will pay the Employee (i) the Employee's Salary for the
remainder, if any, of the calendar month in which such termination is
effective and for twelve consecutive calendar months thereafter, (ii) the
amount of the Employee's targeted incentive compensation for the year
during which the termination is effective (prorated for the period from
the beginning of the year until the effective date of termination), and
(iii) with respect to the Post-Employment Period, an additional amount
equal to the full amount of the Employee's targeted incentive compensation
for the year in which the termination was effective (such amount to be
7
<PAGE>
determined as if the Employee had been employed for the entire year and
not prorated as described in clause (ii) above), payable in equal monthly
installments over the Post-Employment Period. Notwithstanding the
preceding sentence, if the Employee obtains other employment prior to the
end of the Post-Employment Period or any extension thereof, he must
promptly give notice thereof to the Company, and the payments under this
Agreement for any period after the Employee obtains other employment will
be reduced by the amount of the cash compensation received and to be
received by the Employee from the Employee's other employment for services
performed during such period.
(b) Termination by the Company for Cause. If the Company terminates
this Agreement for Cause, the Employee will be entitled to receive his
Salary only through the date such termination is effective.
(c) Termination upon Disability. If this Agreement is terminated by
either party as a result of the Employee's Disability, as determined under
Section 6.2, the Company will pay the Employee his Salary through the
remainder of the calendar month during which such termination is effective
and for the lesser of (i) six consecutive months thereafter, or (ii) the
period until disability insurance benefits commence under any disability
insurance coverage furnished by the Company to the Employee.
(d) Termination upon Death. If this Agreement is terminated because
of the Employee's death, the Employee will be entitled to receive his
Salary through the end of the calendar month in which his death occurs.
(e) Benefits. Except as otherwise required by law, the Employee's
accrual of, or participation in plans providing for, the Benefits will
cease at the effective date of the termination of this Agreement, and the
Employee will be entitled to accrued Benefits pursuant to such plans only
as provided in such plans.
7. Non-Disclosure Covenant; Employee Inventions
7.1 Acknowledgments by the Employee. The Employee acknowledges that (a)
during the Employment Period and as a part of his employment, the Employee will
be afforded access to Confidential Information; (b) public disclosure of such
Confidential Information could have an adverse effect on the Company and its
business; (c) because the Employee possesses substantial technical expertise and
skill with respect to the Company's business, the Company desires to obtain
exclusive ownership of each Employee Invention, and the Company will be at a
substantial competitive disadvantage if it fails to acquire exclusive ownership
of each Employee Invention; and (d) the provisions of this Section 7 are
reasonable and necessary to prevent the improper use or disclosure of
Confidential Information and to provide the Company with exclusive ownership of
all Employee Inventions.
8
<PAGE>
7.2 Agreements of the Employee. In consideration of the compensation and
benefits to be paid or provided to the Employee by the Company under this
Agreement, the Employee covenants as follows:
(a) Confidentiality.
(i) During and following the Employment Period, the Employee
will hold in confidence the Confidential Information and will not
disclose it to any Person except with the specific prior written
consent of the Company or except as otherwise expressly permitted by
the terms of this Agreement.
(ii) Any trade secrets of the Company will be entitled to all
of the protections and benefits under the Missouri Uniform Trade
Secrets Act and any other applicable law. If any information that
the Company deems to be a trade secret is found by a court of
competent jurisdiction not to be a trade secret for purposes of this
Agreement, such information will, nevertheless, be considered
Confidential Information for purposes of this Agreement. The
Employee hereby waives any requirement that the Company submit proof
of the economic value of any trade secret or post a bond or other
security.
(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information that the
Employee demonstrates was or became generally available to the
public other than as a result of a disclosure by the Employee or by
any other Person bound by a confidentiality obligation to the
Company in respect of such Confidential Information.
(iv) The Employee will not remove from the Company's premises
(except to the extent such removal is for purposes of the
performance of the Employee's duties at home or while traveling, or
except as otherwise specifically authorized by the Company) any
Company document, record, notebook, plan, model, component, device,
or computer software or code, whether embodied in a disk or in any
other form (collectively, the "Proprietary Items"). The Employee
recognizes that, as between the Company and the Employee, all of the
Proprietary Items, whether or not developed by the Employee, are the
exclusive property of the Company. Upon termination of this
Agreement by either party, or upon the request of the Company during
the Employment Period, the Employee will return to the Company all
of the Proprietary Items in the Employee's possession or subject to
the Employee's control, and the Employee shall not retain any
copies, abstracts, sketches, or other physical embodiment of any of
the Proprietary Items.
(b) Employee Inventions. Each Employee Invention will belong
exclusively to the Company. The Employee acknowledges that all Employee
Inventions are works made for hire and are the property of the Company,
including any copyrights, patents, or other intellectual property rights
pertaining thereto. If it is determined that any such works are not
9
<PAGE>
works made for hire, the Employee hereby assigns to the Company all of the
Employee's right, title, and interest, including all rights of copyright,
patent, and other intellectual property rights, to or in such Employee
Inventions. The Employee will promptly:
(i) disclose to the Company in writing any Employee Invention;
(ii) assign to the Company or to a party designated by the
Company, at the Company's request and without additional
compensation, all of the Employee's right to the Employee Invention
for the United States and all foreign jurisdictions;
(iii) execute and deliver to the Company such applications,
assignments, and other documents as the Company may request in order
to apply for and obtain patents or other registrations with respect
to any Employee Invention in the United States and any foreign
jurisdictions;
(iv) sign all other papers necessary to carry out the above
obligations; and
(v) give testimony and render any other assistance in support
of the Company's rights to any Employee Invention.
Notwithstanding anything to the contrary herein, provisions otherwise
requiring the Employee to assign to the Company any invention conceived by
the Employee shall not apply to an invention for which no equipment,
supplies, facilities or trade secret information of the Company was used
and which was developed entirely on the Employee's own time, unless the
invention relates to the business of the Company or to the Company's
actual or demonstrably anticipated research or development, or the
invention results from any work performed by the Employee for the Company.
7.3 Disputes or Controversies. The Employee recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Company, the Employee, and their respective attorneys and experts, who will
agree, in advance and in writing, to receive and maintain all such information
in secrecy, except as may be limited by them in writing.
8. Non-Competition and Non-Interference
8.1 Acknowledgments by the Employee. The Employee acknowledges that: (a)
the services to be performed by him under this Agreement are of a special,
unique, unusual, extraordinary, and intellectual character; (b) the Company
competes with other businesses that are or could be located in any part of the
Territory; and (c) the provisions of this Section 8 are reasonable and necessary
to protect the Company's business.
10
<PAGE>
8.2 Covenants of the Employee. In consideration of the acknowledgments by
the Employee, and in consideration of the compensation and benefits to be paid
or provided to the Employee by the Company, the Employee covenants that he will
not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post-Employment Period, engage or
invest in, own, manage, operate, finance, control, or participate in the
ownership, management, operation, financing, or control of, be employed
by, associated with, or in any manner connected with, lend the Employee's
name or any similar name to, lend Employee's credit to or render services
or advice to, any Competitive Business within the Territory; provided,
however, that (i) the Employee may purchase or otherwise acquire up to
(but not more than) one percent of any class of securities of any
enterprise (but without otherwise participating in the activities of such
enterprise) if such securities are listed on any national or regional
securities exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934, and (ii) no restriction in this Agreement
shall apply to the extent that it would violate or cause the Employee to
violate any provision of the rules of professional conduct applicable to
attorneys of any state where the Employee is licensed to practice law;
(b) whether for the Employee's own account or for the account of any
other Person, at any time during the Employment Period and the
Post-Employment Period, solicit business of the same or similar type being
carried on by the Company, from any Person known by the Employee to be a
customer of the Company, whether or not the Employee had personal contact
with such Person during and by reason of the Employee's employment with
the Company;
(c) whether for the Employee's own account or the account of any
other Person at any time during the Employment Period and the
Post-Employment Period, solicit, employ, or otherwise engage as an
employee, independent contractor, or otherwise, any person who is or was
an employee of the Company at any time during the Employment Period or in
any manner induce or attempt to induce any employee of the Company to
terminate his or her employment with the Company; or at any time during
the Employment Period and the Post-Employment Period, interfere with the
Company's relationship with any person, including any person who at any
time during the Employment Period was an employee, contractor, supplier,
or customer of the Company;
(d) at any time during the Employment Period and the Post-Employment
Period, disparage the Company or any of its shareholders, directors,
officers, employees, or agents.
8.3 Divisible Covenants. If any covenant in Section 8.2 is held to be
unreasonable, arbitrary, or against public policy, such covenant will be
considered to be divisible with respect to scope, time, and geographic area, and
such lesser scope, time, or geographic area, or all of them, as a court of
competent jurisdiction may determine to be reasonable, not arbitrary, and not
against public policy, will be effective, binding, and enforceable against the
Employee.
11
<PAGE>
8.4 Extension of Covenants. The period of time applicable to any covenant
in Section 8.2 will be extended by the duration of any violation by the Employee
of such covenant. In addition, the period of time applicable to the covenants in
Section 8.2 may be extended, at the option of the Company, for a period of one
year after the expiration of the Post-Employment Period, provided that all of
the following conditions have been satisfied: (a) the Company has, within sixty
days of the effective date of termination of Employee's employment, provided
notice to the Employee of the Company's election to extend the period applicable
to the covenants in Section 8.2 for an additional year, (b) the Company has paid
all termination payments it is obligated to pay Employee relating to the
Employment Period and the Post-Employment Period, and (c) for such additional
year after the Post-Employment Period, the Company pays the Employee the sum of
the Employee's Salary plus an amount equal to the full amount of the Employee's
targeted incentive compensation for the year in which the termination was
effective, payable in equal monthly installments over that year.
8.5 Notices. The Employee will, while the covenants under Section 8.2 are
in effect, give notice to the Company, within ten days after accepting any other
employment, of the identity of the Employee's new employer. The Company may
notify such new employer that the Employee is bound by this Agreement and, at
the Company's election, furnish such new employer with a copy of this Agreement
or relevant portions thereof.
9. General Provisions
9.1 Injunctive Relief and Additional Remedy. The Employee acknowledges
that the injury that would be suffered by the Company as a result of a breach of
the provisions of this Agreement (including any provision of Sections 7 and 8)
would be irreparable and that an award of monetary damages to the Company for
such a breach would be an inadequate remedy. Consequently, the Company will have
the right, in addition to any other rights it may have, to obtain injunctive
relief to restrain any breach or threatened breach or otherwise to specifically
enforce any provision of this Agreement, and the Company will not be obligated
to post bond or other security in seeking such relief. Without limiting the
Company's rights under this Section 9 or any other remedies of the Company, if
the Employee breaches any of the provisions of Section 7 or 8, the Company will
have the right to cease making any payments otherwise due to the Employee under
this Agreement.
9.2 Covenants of Sections 7 and 8 are Essential and Independent Covenants.
The covenants by the Employee in Sections 7 and 8 are essential elements of this
Agreement, and without the Employee's agreement to comply with such covenants,
the Company would not have entered into this Agreement or employed the Employee.
The Company and the Employee have independently consulted their respective
counsel and have been advised in all respects concerning the reasonableness and
propriety of such covenants, with specific regard to the nature of the business
conducted by the Company. The Employee's covenants in Sections 7 and 8 are
independent covenants and the existence of any claim by the Employee against the
Company, under this Agreement or otherwise, will not excuse the Employee's
breach of any covenant in Section 7 or 8. If the Employee's employment hereunder
expires or is terminated, this Agreement will continue in
12
<PAGE>
full force and effect as is necessary or appropriate to enforce the covenants
and agreements of the Employee in Sections 7 and 8.
9.3 Representations and Warranties by the Employee. The Employee
represents and warrants to the Company that the execution and delivery by the
Employee of this Agreement do not, and the performance by the Employee of the
Employee's obligations hereunder will not, with or without the giving of notice
or the passage of time, or both: (a) violate any judgment, writ, injunction, or
order of any court, arbitrator, or governmental agency applicable to the
Employee; or (b) conflict with, result in the breach of any provisions of or the
termination of, or constitute a default under, any agreement to which the
Employee is a party or by which the Employee is or may be bound.
9.4 Obligations Contingent on Performance. The obligations of the Company
hereunder, including its obligation to pay the compensation provided for herein,
are contingent upon the Employee's performance of the Employee's obligations
hereunder.
9.5 Waiver. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by either
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
(a) no claim or right arising out of this Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim or right
unless in writing signed by the other party; (b) no waiver that may be given by
a party will be applicable except in the specific instance for which it is
given; and (c) no notice to or demand on one party will be deemed to be a waiver
of any obligation of such party or of the right of the party giving such notice
or demand to take further action without notice or demand as provided in this
Agreement.
9.6 Binding Effect; Delegation of Duties Prohibited. This Agreement shall
inure to the benefit of, and shall be binding upon, the parties hereto and their
respective successors, assigns, heirs, and legal representatives, including any
entity with which the Company may merge or consolidate or to which all or
substantially all of its assets may be transferred. The duties and covenants of
the Employee under this Agreement, being personal, may not be delegated.
9.7 Notices. All notices and other communications under this Agreement
must be in writing and will be deemed to have been duly given when (a) delivered
by hand (with written confirmation of receipt), (b) sent by facsimile (with
written confirmation of receipt), provided that a copy is mailed by registered
mail, return receipt requested, or (c) when received by the addressee, if sent
by a nationally recognized overnight delivery service (receipt requested), in
the case of the Company to the attention of the President at the Company's
principal business office and in the case of the Employee to the address or
facsimile number set forth below (or to such other address or facsimile number
as the Employee may designate by notice to the Company):
1215 West 70th Street
Kansas City, MO 64113
13
<PAGE>
9.8 Entire Agreement; Amendments. This Agreement contains the entire
agreement between the parties with respect to its subject matter and supersedes
all prior agreements and understandings, oral or written, between the parties
with respect to its subject matter. This Agreement may not be amended orally,
but only by an agreement in writing signed by each of the parties to this
Agreement.
9.9 Governing Law. This Agreement will be governed by the laws of the
State of Missouri without regard to conflicts of laws principles.
9.10 Jurisdiction. Any action or proceeding seeking to enforce any
provision of, or based on any right arising out of, this Agreement may be
brought against either of the parties in the courts of the State of Missouri,
County of Jackson, or, if it has or can acquire jurisdiction, in the United
States District Court for the Western District of Missouri, and each of the
parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection to
venue laid therein. Process in any action or proceeding referred to in the
preceding sentence may be served on either party anywhere in the world.
9.11 Section Headings, Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement unless otherwise specified.
All words used in this Agreement will be construed to be of such gender or
number as the circumstances require. Unless otherwise expressly provided, the
word "including" does not limit the preceding words or terms.
9.12 Severability. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
9.13 Counterparts; Execution by Facsimile Signatures. This Agreement may
be executed in one or more counterparts, each of which will be deemed to be an
original copy of this Agreement and all of which, when taken together, will be
deemed to constitute one and the same agreement. This Agreement may be executed
by facsimile signatures.
9.14 Waiver of Jury Trial. THE PARTIES HERETO HEREBY WAIVE A JURY TRIAL IN
ANY LITIGATION WITH RESPECT TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date above first written above.
14
<PAGE>
BIRCH TELECOM, INC.
By: /s/ David E. Scott
_____________________________________
David E. Scott, President
/s/ Gregory C. Lawhon
________________________________________
Gregory C. Lawhon
15
<PAGE>
Exhibit 10.5
AMENDED EMPLOYMENT AGREEMENT
THIS AMENDED EMPLOYMENT AGREEMENT (this "Agreement") is made as of October
7, 1999 by BIRCH TELECOM, INC., a Delaware corporation (the "Company"), and
DONALD H. GOLDMAN, an individual (the "Employee").
The Company and the Employee desire for the Employee to be employed by the
Company upon the terms and conditions set forth in this Agreement. This
Agreement further amends and restates the Employment Agreement dated April 29,
1998, as amended by the Amendment to Employment Agreement dated August 5, 1999.
The parties, intending to be legally bound, agree as follows:
1. Definitions
For the purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1.
1.1 "Agreement" shall mean this Employment Agreement, as amended from time
to time.
1.2 "Affiliate" shall mean:
(a) any partnership, limited liability company, corporation or other
entity if the Company owns more than 25% of the equity securities or
interests of such entity; or
(b) any such entity which owns more than 25% of the equity
securities of the Company (and, for the purpose of this Section 1.2, any
options to acquire equity securities shall be treated as having been fully
exercised, and any securities convertible into equity securities shall be
treated as having been fully converted).
1.3 "Benefits" shall mean as defined in Section 3.1(b).
1.4 "Board of Directors" shall mean the board of directors of the Company.
1.5 "Competitive Business" shall mean any business which directly or
indirectly provides any local exchange telecommunications service that is the
same as or substantially similar to any local exchange telecommunications
service provided by the Company.
1.6 "Cause" shall mean as defined in Section 6.3.
1.7 "Change in Control" means any of the following: (i) the sale of all or
substantially all of the Company's (or its Affiliates') assets that results in
the liquidation of the Company and the payment of liquidating distributions to
the stockholders of the Company; (ii) the acquisition of the Company by another
entity by means of a merger or consolidation resulting in the exchange of the
1
<PAGE>
outstanding shares of the Company's capital stock for securities or
consideration issued or paid or caused to be issued or paid by the acquiring
entity or its subsidiary; or (iii) the acquisition from one or more of the
stockholders of the Company of more than 50% of the voting stock of the Company
by a single person or group of persons acting together.
1.8 "Confidential Information" shall mean any and all:
(a) trade secrets concerning the business and affairs of the
Company, the Company's product and service specifications, data, formulae,
compositions, processes, designs, sketches, photographs, maps, engineering
studies, graphs, drawings, samples, inventions and ideas, past, current,
and planned research and development, current and planned methods and
processes, customer and supplier lists, current and anticipated customer
requirements, price lists, bid information, market studies, business
plans, computer software and programs (including object code and source
code), computer software and database technologies, systems, structures,
and architectures (and related formulae, compositions, processes,
improvements, devices, inventions, discoveries, concepts, ideas, designs,
methods and information), and any other information, however documented,
that is a trade secret within the meaning of the Missouri Uniform Trade
Secrets Act; and
(b) information concerning the business and affairs of the Company
(which includes without limitation, historical financial statements,
financial projections and budgets, historical and projected sales, capital
spending budgets and plans, the names and backgrounds of key personnel and
personnel training techniques and materials), however documented; and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for the Company containing or based, in whole or
in part, on any information included in the foregoing.
1.9 "Disability" shall mean as defined in Section 6.2.
1.10 "Employee Invention" shall mean any idea, invention, technique,
modification, process, or improvement (whether patentable or not), any
industrial design (whether registerable or not), any mask work, however fixed or
encoded, that is suitable to be fixed, embedded or programmed in a semiconductor
product (whether recordable or not), and any work of authorship (whether or not
copyright protection may be obtained for it) created, conceived, or developed by
the Employee, either solely or in conjunction with others, during the Employment
Period, or a period that includes a portion of the Employment Period, that
relates in any way to, or is useful in any manner in, the business then being
conducted or proposed to be conducted by the Company, and any such item created
by the Employee, either solely or in conjunction with others, following
termination of the Employee's employment with the Company, that is based upon or
uses Confidential Information, but shall not include any of the foregoing with
respect to the Internet-based information services business of DNS Publishing,
Inc., in which the Employee holds a substantial equity interest.
2
<PAGE>
1.11 "Employment Period" shall mean the term of the Employee's employment
under this Agreement.
1.12 "Good Reason" shall mean as defined in Section 6.4.
1.13 "Person" shall mean any individual, corporation (including any
non-profit corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization, or
governmental body.
1.14 "Post-Employment Period" shall mean the two-year period beginning on
the date of termination of the Employee's employment with the Company.
1.15 "Proprietary Items" shall mean as defined in Section 7.2(a)(iv).
1.16 "Salary" shall mean as defined in Section 3.1(a).
1.17 "Territory" shall mean
(a) the states of Missouri and Kansas; and
(b) any metropolitan areas outside of Missouri and Kansas, if at the
time the Employee ceases to be employed by the Company (i) the Company or
any Affiliate is providing a local exchange telecommunications service
within the metropolitan area, or (ii) a detailed business development plan
has been prepared, or is in the process of being prepared, by or on behalf
of the Company, in order to evaluate whether the Company should provide
local exchange telecommunications services within the metropolitan area
within twelve months after the date Employee ceases to be employed by the
Company, and the Board of Directors has not formally resolved against
providing such services in such metropolitan area.
2. Employment Terms and Duties
2.1 Employment. The Company hereby employs the Employee, and the Employee
hereby accepts employment by the Company, upon the terms and conditions set
forth in this Agreement.
2.2 Term. Subject to the provisions of Section 6, the term of this
Agreement shall be one year, commencing on May 25, 1998. Thereafter, this
Agreement shall be renewed automatically from year to year unless either party
shall have given written notice of termination to the other party at least
ninety (90) days prior to the end of the current term of this Agreement.
2.3 Duties. The Employee will have such duties as are assigned or
delegated to the Employee by the Board of Directors and President and will serve
as the Executive Vice President and Chief Operating Officer of the Company. The
Employee will devote substantially all his business time and attention to the
business of the Company, will act in good faith to promote the
3
<PAGE>
success of the Company's business, and will cooperate fully with the Board of
Directors and President in the advancement of the best interests of the Company.
Nothing in this Section 2.3, however, will prevent the Employee from engaging in
additional activities in connection with personal investments and community
affairs that are not inconsistent with the Employee's duties under this
Agreement (which community affairs shall be disclosed to and approved by the
President). If the Employee serves as a director of the Company or as a director
or officer of any of its Affiliates, the Employee will fulfill his duties as
such director or officer without additional compensation.
3. Compensation
3.1 Basic Compensation.
(a) Salary. The Employee will be paid a minimum base annual salary
of $225,000 (the "Salary"), which will be payable in equal periodic
installments according to the Company's customary payroll practices, but
no less frequently than monthly. The Salary may be increased by the
Compensation Committee or Board of Directors of the Company during the
term of this Agreement, and when increased, such higher amount shall then
be the minimum base annual salary under this Agreement. The Salary shall
not be reduced below the highest minimum base annual salary fixed from
time to time by the Compensation Committee or Board of Directors of the
Company without the Employee's written consent. When increased or
decreased in accordance with the terms of this Agreement, the new minimum
base annual salary shall be deemed the Employee's "Salary" for all
purposes of this Agreement.
(b) Benefits. The Employee will, during the Employment Period, be
permitted to participate in such pension, profit sharing, bonus, life
insurance, disability insurance, hospitalization, major medical, and other
employee benefit plans of the Company that may be in effect from time to
time, to the extent the Employee is eligible under the terms of such plans
(collectively, the "Benefits").
3.2 Incentive Compensation. The Employee shall be entitled to participate
in an incentive bonus program established by the Board of Directors or the
Compensation Committee of the Board of Directors to measure and reward
management for the financial performance of the Company. The Employee's initial
annual targeted incentive compensation shall be $100,000; provided, however,
that the payment of any incentive compensation shall be at the discretion of the
Compensation Committee of the Board of Directors, which may consider any factors
it deems relevant, including the assessment of the performance of the Employee
and the Company during the relevant time period.
4. Facilities and Expenses
The Company will furnish the Employee office space, equipment, supplies, and
such other facilities and personnel as the Company deems necessary or
appropriate for the performance of the Employee's duties under this Agreement.
The Company will pay the Employee's dues in such
4
<PAGE>
professional societies and organizations as the President deems appropriate, and
will pay on behalf of the Employee (or reimburse the Employee for) reasonable
expenses incurred by the Employee at the request of, or on behalf of, the
Company in the performance of the Employee's duties pursuant to this Agreement,
and in accordance with the Company's employment policies, including reasonable
expenses incurred by the Employee in attending conventions, seminars, and other
business meetings, in appropriate business entertainment activities, and for
promotional expenses.
5. Vacations and Holidays
The Employee will be entitled to paid vacation in accordance with the vacation
policies of the Company in effect for its employee officers from time to time.
Vacation must be taken by the Employee at such time or times as approved by the
President. The Employee will also be entitled to the paid holidays set forth in
the Company's policies.
6. Termination
6.1 Events of Termination. The Employment Period, the Employee's Salary,
Benefits, and Incentive Compensation, and any and all other rights of the
Employee under this Agreement will terminate (except as otherwise provided in
this Section 6):
(a) upon the death of the Employee;
(b) upon the Disability of the Employee (as defined in Section 6.2)
immediately upon notice from either party to the other;
(c) for Cause (as defined in Section 6.3), immediately upon notice
from the Company to the Employee, or at such later time as such notice may
specify;
(d) for Good Reason (as defined in Section 6.4) upon not less than
thirty days' prior notice from the Employee to the Company; or
(e) without Cause upon not less than thirty days' notice from the
Company to the Employee.
6.2 Definition of "Disability." For purposes of Section 6.1, the Employee
will be deemed to have a "Disability" if, for physical or mental reasons, the
Employee is unable to perform the Employee's duties under this Agreement for 120
consecutive days, or 180 days during any twelve month period, as determined in
accordance with this Section 6.2. The Disability of the Employee will be
determined by a medical doctor selected by written agreement of the Company and
the Employee upon the request of either party by notice to the other. If the
Company and the Employee cannot agree on the selection of a medical doctor, each
of them will select a medical doctor and the two medical doctors will select a
third medical doctor who will determine whether the Employee has a Disability.
The determination of the medical doctor selected under this Section 6.2 will be
binding on both parties. The Employee must submit to a reasonable number of
examinations by the medical doctor making the determination of Disability under
this Section 6.2,
5
<PAGE>
and to other specialists designated by such medical doctor, and the Employee
hereby authorizes the disclosure and release to the Company of such
determination and all supporting medical records. If the Employee is not legally
competent, the Employee's legal guardian or duly authorized attorney-in-fact
will act in the Employee's stead under this Section 6.2 for the purposes of
submitting the Employee to the examinations, and providing the authorization of
disclosure, required under this Section 6.2.
6.3 Definition of "Cause." For purposes of Section 6.1, the term "Cause"
means: (a) the Employee's breach of a material obligation under this Agreement;
(b) the Employee's failure to adhere in any material respect to any written
Company policy if such policy is material to the effective performance by the
Employee of his duties under this Agreement, and if the Employee has been given
a reasonable opportunity to cure his failure to comply within the thirty-day
period preceding termination of this Agreement, provided that if the Employee
cures his failure to comply with such a policy and then fails again to comply
with the same policy, no further opportunity to cure that failure shall be
required; (c) the appropriation (or attempted appropriation) of a material
business opportunity of the Company, including attempting to secure or securing
any personal profit in connection with any transaction entered into on behalf of
the Company (other than through stock options, bonuses and other incentives
provided by the Company to the Employee); (d) the misappropriation (or attempted
misappropriation) of any of the Company's funds or property; or (e) the
conviction of, or the entering of a guilty plea or plea of no contest with
respect to, a felony, or a crime involving moral turpitude, dishonesty, or
fraud.
6.4 Definition of "Good Reason." For purposes of Section 6.1, the term
"Good Reason" shall mean (a) a substantial reduction in the Employee's duties or
responsibilities, (b) any reduction in Employee's Salary, or (c) relocation of
the Employee's primary workplace to a location that is greater than 35 miles
from the Employee's current workplace, in each case which is not cured within 30
days following the Company's receipt of written notice from the Employee
describing the event constituting Good Reason.
6.5 Termination Pay. Effective upon the expiration or termination of this
Agreement, the Company will be obligated to pay the Employee (or, in the event
of his death, his designated beneficiary as defined below) only such
compensation as is provided in this Section 6.5. For purposes of this Section
6.5 the Employee's designated beneficiary will be such individual beneficiary or
trust, located at such address, as the Employee may designate by notice to the
Company from time to time or, if the Employee fails to give notice to the
Company of such a beneficiary, the Employee's estate. Notwithstanding the
preceding sentence, the Company will have no duty, in any circumstances, to
attempt to open an estate on behalf of the Employee, to determine whether any
beneficiary designated by the Employee is alive or to ascertain the address of
any such beneficiary, to determine the existence of any trust, to determine
whether any Person purporting to act as the Employee's personal representative
(or the trustee of a trust established by the Employee) is duly authorized to
act in that capacity, or to locate or attempt to locate any beneficiary,
personal representative, or trustee.
(a) Termination by the Employee for Good Reason or by the Company without
Cause. If
6
<PAGE>
the Employee terminates this Agreement for Good Reason, or if the Company
terminates this Agreement other than for Cause (but not because of the
Disability or death of the Employee), or if the Company notifies the
Employee in accordance with Section 2.2 that this Agreement will not be
renewed as of an applicable expiration date, the Company will pay the
Employee (i) the Employee's Salary for the remainder, if any, of the
calendar month in which such termination is effective and for twenty-four
consecutive calendar months thereafter, (ii) the amount of the Employee's
targeted incentive compensation for the year during which the termination
is effective (prorated for the period from the beginning of the year until
the effective date of termination), and (iii) the sum of two times the
amount of the Employee's targeted incentive compensation for the year in
which the termination was effective (such amount to be determined as if
the Employee had been employed for the entire year and not prorated as
described in clause (ii) above), payable in equal monthly installments
over the Post-Employment Period. Notwithstanding the preceding sentence,
if the Employee obtains other employment prior to the end of the
twenty-four months following the month in which the termination or
expiration is effective, he must promptly give notice thereof to the
Company, and the payments under this Agreement for any period after the
Employee obtains other employment will be reduced by the amount of the
cash compensation received and to be received by the Employee from the
Employee's other employment for services performed during such period.
(b) Termination by the Company for Cause. If the Company terminates
this Agreement for Cause, the Employee will be entitled to receive his
Salary only through the date such termination is effective.
(c) Termination upon Disability. If this Agreement is terminated by
either party as a result of the Employee's Disability, as determined under
Section 6.2, the Company will pay the Employee his Salary through the
remainder of the calendar month during which such termination is effective
and for the lesser of (i) six consecutive months thereafter, or (ii) the
period until disability insurance benefits commence under any disability
insurance coverage furnished by the Company to the Employee.
(d) Termination upon Death. If this Agreement is terminated because
of the Employee's death, the Employee will be entitled to receive his
Salary through the end of the calendar month in which his death occurs.
(e) Benefits. Except as otherwise required by law, the Employee's
accrual of, or participation in plans providing for, the Benefits will
cease at the effective date of the termination of this Agreement, and the
Employee will be entitled to accrued Benefits pursuant to such plans only
as provided in such plans.
7. Non-Disclosure Covenant; Employee Inventions
7.1 Acknowledgments by the Employee. The Employee acknowledges that (a)
during the Employment Period and as a part of his employment, the Employee will
be afforded access to
7
<PAGE>
Confidential Information; (b) public disclosure of such Confidential Information
could have an adverse effect on the Company and its business; (c) because the
Employee possesses substantial technical expertise and skill with respect to the
Company's business, the Company desires to obtain exclusive ownership of each
Employee Invention, and the Company will be at a substantial competitive
disadvantage if it fails to acquire exclusive ownership of each Employee
Invention; and (d) the provisions of this Section 7 are reasonable and necessary
to prevent the improper use or disclosure of Confidential Information and to
provide the Company with exclusive ownership of all Employee Inventions.
7.2 Agreements of the Employee. In consideration of the compensation and
benefits to be paid or provided to the Employee by the Company under this
Agreement, the Employee covenants as follows:
(a) Confidentiality.
(i) During and following the Employment Period, the Employee
will hold in confidence the Confidential Information and will not
disclose it to any Person except with the specific prior written
consent of the Company or except as otherwise expressly permitted by
the terms of this Agreement.
(ii) Any trade secrets of the Company will be entitled to all
of the protections and benefits under the Missouri Uniform Trade
Secrets Act and any other applicable law. If any information that
the Company deems to be a trade secret is found by a court of
competent jurisdiction not to be a trade secret for purposes of this
Agreement, such information will, nevertheless, be considered
Confidential Information for purposes of this Agreement. The
Employee hereby waives any requirement that the Company submit proof
of the economic value of any trade secret or post a bond or other
security.
(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information that the
Employee demonstrates was or became generally available to the
public other than as a result of a disclosure by the Employee or by
any other Person bound by a confidentiality obligation to the
Company in respect of such Confidential Information.
(iv) The Employee will not remove from the Company's premises
(except to the extent such removal is for purposes of the
performance of the Employee's duties at home or while traveling, or
except as otherwise specifically authorized by the Company) any
Company document, record, notebook, plan, model, component, device,
or computer software or code, whether embodied in a disk or in any
other form (collectively, the "Proprietary Items"). The Employee
recognizes that, as between the Company and the Employee, all of the
Proprietary Items, whether or not developed by the Employee, are the
exclusive property of the Company. Upon termination of this
Agreement by either party, or upon the request of the Company during
the Employment Period, the Employee will return to the Company all
of the
8
<PAGE>
Proprietary Items in the Employee's possession or subject to
the Employee's control, and the Employee shall not retain any
copies, abstracts, sketches, or other physical embodiment of any of
the Proprietary Items.
(b) Employee Inventions. Each Employee Invention will belong
exclusively to the Company. The Employee acknowledges that all Employee
Inventions are works made for hire and are the property of the Company,
including any copyrights, patents, or other intellectual property rights
pertaining thereto. If it is determined that any such works are not works
made for hire, the Employee hereby assigns to the Company all of the
Employee's right, title, and interest, including all rights of copyright,
patent, and other intellectual property rights, to or in such Employee
Inventions. The Employee will promptly:
(i) disclose to the Company in writing any Employee
Invention;
(ii) assign to the Company or to a party designated by the
Company, at the Company's request and without additional
compensation, all of the Employee's right to the Employee Invention
for the United States and all foreign jurisdictions;
(iii) execute and deliver to the Company such applications,
assignments, and other documents as the Company may request in order
to apply for and obtain patents or other registrations with respect
to any Employee Invention in the United States and any foreign
jurisdictions;
(iv) sign all other papers necessary to carry out the above
obligations; and
(v) give testimony and render any other assistance in support
of the Company's rights to any Employee Invention.
Notwithstanding anything to the contrary herein, provisions otherwise
requiring the Employee to assign to the Company any invention conceived by
the Employee shall not apply to an invention for which no equipment,
supplies, facilities or trade secret information of the Company was used
and which was developed entirely on the Employee's own time, unless the
invention relates to the business of the Company or to the Company's
actual or demonstrably anticipated research or development, or the
invention results from any work performed by the Employee for the Company.
7.3 Disputes or Controversies. The Employee recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Company, the Employee, and their respective attorneys and experts, who will
agree, in advance and in writing, to receive and maintain all such information
in secrecy, except as may be limited by them in writing.
8. Non-Competition and Non-Interference
9
<PAGE>
8.1 Acknowledgments by the Employee. The Employee acknowledges that: (a)
the services to be performed by him under this Agreement are of a special,
unique, unusual, extraordinary, and intellectual character; (b) the Company
competes with other businesses that are or could be located in any part of the
Territory; and (c) the provisions of this Section 8 are reasonable and necessary
to protect the Company's business.
8.2 Covenants of the Employee. In consideration of the acknowledgments by
the Employee, and in consideration of the compensation and benefits to be paid
or provided to the Employee by the Company, the Employee covenants that he will
not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post-Employment Period, engage or
invest in, own, manage, operate, finance, control, or participate in the
ownership, management, operation, financing, or control of, be employed
by, associated with, or in any manner connected with, lend the Employee's
name or any similar name to, lend Employee's credit to or render services
or advice to, any Competitive Business within the Territory; provided,
however, that the Employee may purchase or otherwise acquire up to (but
not more than) one percent of any class of securities of any enterprise
(but without otherwise participating in the activities of such enterprise)
if such securities are listed on any national or regional securities
exchange or have been registered under Section 12(g) of the Securities
Exchange Act of 1934;
(b) whether for the Employee's own account or for the account of any
other Person, at any time during the Employment Period and the
Post-Employment Period, solicit business of the same or similar type being
carried on by the Company, from any Person known by the Employee to be a
customer of the Company, whether or not the Employee had personal contact
with such Person during and by reason of the Employee's employment with
the Company;
(c) whether for the Employee's own account or the account of any
other Person at any time during the Employment Period and the
Post-Employment Period, solicit, employ, or otherwise engage as an
employee, independent contractor, or otherwise, any person who is or was
an employee of the Company at any time during the Employment Period or in
any manner induce or attempt to induce any employee of the Company to
terminate his or her employment with the Company; or at any time during
the Employment Period and the Post-Employment Period, interfere with the
Company's relationship with any person, including any person who at any
time during the Employment Period was an employee, contractor, supplier,
or customer of the Company;
(d) at any time during the Employment Period and the Post-Employment
Period, disparage the Company or any of its shareholders, directors,
officers, employees, or agents.
8.3 Divisible Covenants. If any covenant in Section 8.2 is held to be
unreasonable, arbitrary, or against public policy, such covenant will be
considered to be divisible with respect to scope, time, and geographic area, and
such lesser scope, time, or geographic area, or all of them, as
10
<PAGE>
a court of competent jurisdiction may determine to be reasonable, not arbitrary,
and not against public policy, will be effective, binding, and enforceable
against the Employee.
8.4 Extension of Covenants. The period of time applicable to any covenant
in Section 8.2 will be extended by the duration of any violation by the Employee
of such covenant.
8.5 Notices. The Employee will, while the covenants under Section 8.2 are
in effect, give notice to the Company, within ten days after accepting any other
employment, of the identity of the Employee's new employer. The Company may
notify such new employer that the Employee is bound by this Agreement and, at
the Company's election, furnish such new employer with a copy of this Agreement
or relevant portions thereof.
9. General Provisions
9.1 Injunctive Relief and Additional Remedy. The Employee acknowledges
that the injury that would be suffered by the Company as a result of a breach of
the provisions of this Agreement (including any provision of Sections 7 and 8)
would be irreparable and that an award of monetary damages to the Company for
such a breach would be an inadequate remedy. Consequently, the Company will have
the right, in addition to any other rights it may have, to obtain injunctive
relief to restrain any breach or threatened breach or otherwise to specifically
enforce any provision of this Agreement, and the Company will not be obligated
to post bond or other security in seeking such relief. Without limiting the
Company's rights under this Section 9 or any other remedies of the Company, if
the Employee breaches any of the provisions of Section 7 or 8, the Company will
have the right to cease making any payments otherwise due to the Employee under
this Agreement.
9.2 Covenants of Sections 7 and 8 are Essential and Independent Covenants.
The covenants by the Employee in Sections 7 and 8 are essential elements of this
Agreement, and without the Employee's agreement to comply with such covenants,
the Company would not have entered into this Agreement or employed the Employee.
The Company and the Employee have independently consulted their respective
counsel and have been advised in all respects concerning the reasonableness and
propriety of such covenants, with specific regard to the nature of the business
conducted by the Company. The Employee's covenants in Sections 7 and 8 are
independent covenants and the existence of any claim by the Employee against the
Company, under this Agreement or otherwise, will not excuse the Employee's
breach of any covenant in Section 7 or 8. If the Employee's employment hereunder
expires or is terminated, this Agreement will continue in full force and effect
as is necessary or appropriate to enforce the covenants and agreements of the
Employee in Sections 7 and 8.
9.3 Representations and Warranties by the Employee. The Employee
represents and warrants to the Company that the execution and delivery by the
Employee of this Agreement do not, and the performance by the Employee of the
Employee's obligations hereunder will not, with or without the giving of notice
or the passage of time, or both: (a) violate any judgment, writ, injunction, or
order of any court, arbitrator, or governmental agency applicable to the
Employee; or (b) conflict with, result in the breach of any provisions of or the
termination of, or constitute a
11
<PAGE>
default under, any agreement to which the Employee is a party or by which the
Employee is or may be bound.
9.4 Obligations Contingent on Performance. The obligations of the Company
hereunder, including its obligation to pay the compensation provided for herein,
are contingent upon the Employee's performance of the Employee's obligations
hereunder.
9.5 Waiver. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by either
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
(a) no claim or right arising out of this Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim or right
unless in writing signed by the other party; (b) no waiver that may be given by
a party will be applicable except in the specific instance for which it is
given; and (c) no notice to or demand on one party will be deemed to be a waiver
of any obligation of such party or of the right of the party giving such notice
or demand to take further action without notice or demand as provided in this
Agreement.
9.6 Binding Effect; Delegation of Duties Prohibited. This Agreement shall
inure to the benefit of, and shall be binding upon, the parties hereto and their
respective successors, assigns, heirs, and legal representatives, including any
entity with which the Company may merge or consolidate or to which all or
substantially all of its assets may be transferred. The duties and covenants of
the Employee under this Agreement, being personal, may not be delegated.
9.7 Notices. All notices and other communications under this Agreement
must be in writing and will be deemed to have been duly given when (a) delivered
by hand (with written confirmation of receipt), (b) sent by facsimile (with
written confirmation of receipt), provided that a copy is mailed by registered
mail, return receipt requested, or (c) when received by the addressee, if sent
by a nationally recognized overnight delivery service (receipt requested), in
the case of the Company to the attention of the President at the Company's
principal business office and in the case of the Employee to the address or
facsimile number set forth below (or to such other address or facsimile number
as the Employee may designate by notice to the Company):
6225 Overhill Road
Mission Hills, KS 66208
9.8 Entire Agreement; Amendments. This Agreement contains the entire
agreement between the parties with respect to its subject matter and supersedes
all prior agreements and understandings, oral or written, between the parties
with respect to its subject matter. This Agreement may not be amended orally,
but only by an agreement in writing signed by each of the parties to this
Agreement.
12
<PAGE>
9.9 Governing Law. This Agreement will be governed by the laws of the
State of Missouri without regard to conflicts of laws principles.
9.10 Jurisdiction. Any action or proceeding seeking to enforce any
provision of, or based on any right arising out of, this Agreement may be
brought against either of the parties in the courts of the State of Missouri,
County of Jackson, or, if it has or can acquire jurisdiction, in the United
States District Court for the Western District of Missouri, and each of the
parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection to
venue laid therein. Process in any action or proceeding referred to in the
preceding sentence may be served on either party anywhere in the world.
9.11 Section Headings, Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement unless otherwise specified.
All words used in this Agreement will be construed to be of such gender or
number as the circumstances require. Unless otherwise expressly provided, the
word "including" does not limit the preceding words or terms.
9.12 Severability. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
9.13 Counterparts; Execution by Facsimile Signatures. This Agreement may
be executed in one or more counterparts, each of which will be deemed to be an
original copy of this Agreement and all of which, when taken together, will be
deemed to constitute one and the same agreement. This Agreement may be executed
by facsimile signatures.
9.14 Waiver of Jury Trial. THE PARTIES HERETO HEREBY WAIVE A JURY TRIAL IN
ANY LITIGATION WITH RESPECT TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date above first written above.
BIRCH TELECOM, INC.
By: /s/ David E. Scott
_________________________
David E. Scott, President
/s/ Donald H. Goldman
____________________________
Donald H. Goldman
13
<PAGE>
Exhibit 10.6
AMENDED EMPLOYMENT AGREEMENT
THIS AMENDED EMPLOYMENT AGREEMENT (this "Agreement") is made as of October
7, 1999 by BIRCH TELECOM, INC., a Delaware corporation (the "Company"), and
DAVID W. VRANICAR, an individual (the "Employee").
The Company and the Employee desire for the Employee to be employed by the
Company upon the terms and conditions set forth in this Agreement. This
Agreement further amends and restates the Employment Agreement dated February
10, 1998, as amended by the Amendment to Employment Agreement dated August 5,
1999.
The parties, intending to be legally bound, agree as follows:
1. Definitions
For the purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1.
1.1 "Agreement" shall mean this Employment Agreement, as amended from time
to time.
1.2 "Affiliate" shall mean:
(a) any partnership, limited liability company, corporation or other
entity if the Company owns more than 25% of the equity securities or
interests of such entity; or
(b) any such entity which owns more than 25% of the equity
securities of the Company (and, for the purpose of this Section 1.2, any
options to acquire equity securities shall be treated as having been fully
exercised, and any securities convertible into equity securities shall be
treated as having been fully converted).
1.3 "Benefits" shall mean as defined in Section 3.1(b).
1.4 "Board of Directors" shall mean the board of directors of the Company.
1.5 "Competitive Business" shall mean any business which directly or
indirectly provides any local exchange telecommunications service that is the
same as or substantially similar to any local exchange telecommunications
service provided by the Company.
1.6 "Cause" shall mean as defined in Section 6.3.
1.7 "Change in Control" means any of the following: (i) the sale of all or
substantially all of the Company's (or its Affiliates') assets that results in
the liquidation of the Company and the payment of liquidating distributions to
the stockholders of the Company; (ii) the acquisition of the Company by another
entity by means of a merger or consolidation resulting in the exchange of the
1
<PAGE>
outstanding shares of the Company's capital stock for securities or
consideration issued or paid or caused to be issued or paid by the acquiring
entity or its subsidiary; or (iii) the acquisition from one or more of the
stockholders of the Company of more than 50% of the voting stock of the Company
by a single person or group of persons acting together.
1.8 "Confidential Information" shall mean any and all:
(a) trade secrets concerning the business and affairs of the
Company, the Company's product and service specifications, data, formulae,
compositions, processes, designs, sketches, photographs, maps, engineering
studies, graphs, drawings, samples, inventions and ideas, past, current,
and planned research and development, current and planned methods and
processes, customer and supplier lists, current and anticipated customer
requirements, price lists, bid information, market studies, business
plans, computer software and programs (including object code and source
code), computer software and database technologies, systems, structures,
and architectures (and related formulae, compositions, processes,
improvements, devices, inventions, discoveries, concepts, ideas, designs,
methods and information), and any other information, however documented,
that is a trade secret within the meaning of the Missouri Uniform Trade
Secrets Act; and
(b) information concerning the business and affairs of the Company
(which includes without limitation, historical financial statements,
financial projections and budgets, historical and projected sales, capital
spending budgets and plans, the names and backgrounds of key personnel and
personnel training techniques and materials), however documented; and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for the Company containing or based, in whole or
in part, on any information included in the foregoing.
1.9 "Disability" shall mean as defined in Section 6.2.
1.10 "Employee Invention" shall mean any idea, invention, technique,
modification, process, or improvement (whether patentable or not), any
industrial design (whether registerable or not), any mask work, however fixed or
encoded, that is suitable to be fixed, embedded or programmed in a semiconductor
product (whether recordable or not), and any work of authorship (whether or not
copyright protection may be obtained for it) created, conceived, or developed by
the Employee, either solely or in conjunction with others, during the Employment
Period, or a period that includes a portion of the Employment Period, that
relates in any way to, or is useful in any manner in, the business then being
conducted or proposed to be conducted by the Company, and any such item created
by the Employee, either solely or in conjunction with others, following
termination of the Employee's employment with the Company, that is based upon or
uses Confidential Information.
1.11 "Employment Period" shall mean the term of the Employee's employment
under this Agreement.
2
<PAGE>
1.12 "Good Reason" shall mean as defined in Section 6.4.
1.13 "Person" shall mean any individual, corporation (including any
non-profit corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization, or
governmental body.
1.14 "Post-Employment Period" shall mean the two-year period beginning on
the date of termination of the Employee's employment with the Company.
1.15 "Proprietary Items" shall mean as defined in Section 7.2(a)(iv).
1.16 "Salary" shall mean as defined in Section 3.1(a).
1.17 "Territory" shall mean
(a) the states of Missouri and Kansas; and
(b) any metropolitan areas outside of Missouri and Kansas, if at the
time the Employee ceases to be employed by the Company (i) the Company or
any Affiliate is providing a local exchange telecommunications service
within the metropolitan area, or (ii) a detailed business development plan
has been prepared, or is in the process of being prepared, by or on behalf
of the Company, in order to evaluate whether the Company should provide
local exchange telecommunications services within the metropolitan area
within twelve months after the date Employee ceases to be employed by the
Company, and the Board of Directors has not formally resolved against
providing such services in such metropolitan area.
2. Employment Terms and Duties
2.1 Employment. The Company hereby employs the Employee, and the Employee
hereby accepts employment by the Company, upon the terms and conditions set
forth in this Agreement.
2.2 Term. Subject to the provisions of Section 6, the term of this
Agreement shall be one year, commencing on February 10, 1998. Thereafter, this
Agreement shall be renewed automatically from year to year unless either party
shall have given written notice of termination to the other party at least
ninety (90) days prior to the end of the current term of this Agreement.
2.3 Duties. The Employee will have such duties as are assigned or
delegated to the Employee by the Board of Directors and President and will serve
as the Senior Vice President of Business Development of the Company. The
Employee will devote substantially all his business time and attention to the
business of the Company, will act in good faith to promote the success of the
Company's business, and will cooperate fully with the Board of Directors and
President in the advancement of the best interests of the Company. Nothing in
this Section 2.3, however, will prevent
3
<PAGE>
the Employee from engaging in additional activities in connection with personal
investments and community affairs that are not inconsistent with the Employee's
duties under this Agreement (which community affairs shall be disclosed to and
approved by the President). If the Employee serves as a director of the Company
or as a director or officer of any of its Affiliates, the Employee will fulfill
his duties as such director or officer without additional compensation.
3. Compensation
3.1 Basic Compensation.
(a) Salary. The Employee will be paid a minimum base annual salary
of $200,000 (the "Salary"), which will be payable in equal periodic
installments according to the Company's customary payroll practices, but
no less frequently than monthly. The Salary may be increased by the
Compensation Committee or Board of Directors of the Company during the
term of this Agreement, and when increased, such higher amount shall then
be the minimum base annual salary under this Agreement. The Salary shall
not be reduced below the highest minimum base annual salary fixed from
time to time by the Compensation Committee or Board of Directors of the
Company without the Employee's written consent. When increased or
decreased in accordance with the terms of this Agreement, the new minimum
base annual salary shall be deemed the Employee's "Salary" for all
purposes of this Agreement.
(b) Benefits. The Employee will, during the Employment Period, be
permitted to participate in such pension, profit sharing, bonus, life
insurance, disability insurance, hospitalization, major medical, and other
employee benefit plans of the Company that may be in effect from time to
time, to the extent the Employee is eligible under the terms of such plans
(collectively, the "Benefits").
3.2 Incentive Compensation. The Employee shall be entitled to participate
in an incentive bonus program established by the Board of Directors or the
Compensation Committee of the Board of Directors to measure and reward
management for the financial performance of the Company. The Employee's initial
annual targeted incentive compensation shall be $50,000; provided, however, that
the payment of any incentive compensation shall be at the discretion of the
Compensation Committee of the Board of Directors, which may consider any factors
it deems relevant, including the assessment of the performance of the Employee
and the Company during the relevant time period.
4. Facilities and Expenses
The Company will furnish the Employee office space, equipment, supplies, and
such other facilities and personnel as the Company deems necessary or
appropriate for the performance of the Employee's duties under this Agreement.
The Company will pay the Employee's dues in such professional societies and
organizations as the President deems appropriate, and will pay on behalf of the
Employee (or reimburse the Employee for) reasonable expenses incurred by the
Employee at
4
<PAGE>
the request of, or on behalf of, the Company in the performance of the
Employee's duties pursuant to this Agreement, and in accordance with the
Company's employment policies, including reasonable expenses incurred by the
Employee in attending conventions, seminars, and other business meetings, in
appropriate business entertainment activities, and for promotional expenses.
5. Vacations and Holidays
The Employee will be entitled to paid vacation in accordance with the vacation
policies of the Company in effect for its employee officers from time to time.
Vacation must be taken by the Employee at such time or times as approved by the
President. The Employee will also be entitled to the paid holidays set forth in
the Company's policies.
6. Termination
6.1 Events of Termination. The Employment Period, the Employee's Salary,
Benefits, and Incentive Compensation, and any and all other rights of the
Employee under this Agreement will terminate (except as otherwise provided in
this Section 6):
(a) upon the death of the Employee;
(b) upon the Disability of the Employee (as defined in Section 6.2)
immediately upon notice from either party to the other;
(c) for Cause (as defined in Section 6.3), immediately upon notice
from the Company to the Employee, or at such later time as such notice may
specify;
(d) for Good Reason (as defined in Section 6.4) upon not less than
thirty days' prior notice from the Employee to the Company; or
(e) without Cause upon not less than thirty days' notice from the
Company to the Employee.
6.2 Definition of "Disability." For purposes of Section 6.1, the Employee
will be deemed to have a "Disability" if, for physical or mental reasons, the
Employee is unable to perform the Employee's duties under this Agreement for 120
consecutive days, or 180 days during any twelve month period, as determined in
accordance with this Section 6.2. The Disability of the Employee will be
determined by a medical doctor selected by written agreement of the Company and
the Employee upon the request of either party by notice to the other. If the
Company and the Employee cannot agree on the selection of a medical doctor, each
of them will select a medical doctor and the two medical doctors will select a
third medical doctor who will determine whether the Employee has a Disability.
The determination of the medical doctor selected under this Section 6.2 will be
binding on both parties. The Employee must submit to a reasonable number of
examinations by the medical doctor making the determination of Disability under
this Section 6.2, and to other specialists designated by such medical doctor,
and the Employee hereby authorizes the disclosure and release to the Company of
such determination and all supporting medical records. If
5
<PAGE>
the Employee is not legally competent, the Employee's legal guardian or duly
authorized attorney-in-fact will act in the Employee's stead under this Section
6.2 for the purposes of submitting the Employee to the examinations, and
providing the authorization of disclosure, required under this Section 6.2.
6.3 Definition of "Cause." For purposes of Section 6.1, the term "Cause"
means: (a) the Employee's breach of a material obligation under this Agreement;
(b) the Employee's failure to adhere in any material respect to any written
Company policy if such policy is material to the effective performance by the
Employee of his duties under this Agreement, and if the Employee has been given
a reasonable opportunity to cure his failure to comply within the thirty-day
period preceding termination of this Agreement, provided that if the Employee
cures his failure to comply with such a policy and then fails again to comply
with the same policy, no further opportunity to cure that failure shall be
required; (c) the appropriation (or attempted appropriation) of a material
business opportunity of the Company, including attempting to secure or securing
any personal profit in connection with any transaction entered into on behalf of
the Company (other than through stock options, bonuses and other incentives
provided by the Company to the Employee); (d) the misappropriation (or attempted
misappropriation) of any of the Company's funds or property; or (e) the
conviction of, or the entering of a guilty plea or plea of no contest with
respect to, a felony, or a crime involving moral turpitude, dishonesty, or
fraud.
6.4 Definition of "Good Reason." For purposes of Section 6.1, the term
"Good Reason" shall mean (a) a substantial reduction in the Employee's duties or
responsibilities, (b) any reduction in Employee's Salary, or (c) relocation of
the Employee's primary workplace to a location that is greater than 35 miles
from the Employee's current workplace, in each case which is not cured within 30
days following the Company's receipt of written notice from the Employee
describing the event constituting Good Reason.
6.5 Termination Pay. Effective upon the expiration or termination of this
Agreement, the Company will be obligated to pay the Employee (or, in the event
of his death, his designated beneficiary as defined below) only such
compensation as is provided in this Section 6.5. For purposes of this Section
6.5 the Employee's designated beneficiary will be such individual beneficiary or
trust, located at such address, as the Employee may designate by notice to the
Company from time to time or, if the Employee fails to give notice to the
Company of such a beneficiary, the Employee's estate. Notwithstanding the
preceding sentence, the Company will have no duty, in any circumstances, to
attempt to open an estate on behalf of the Employee, to determine whether any
beneficiary designated by the Employee is alive or to ascertain the address of
any such beneficiary, to determine the existence of any trust, to determine
whether any Person purporting to act as the Employee's personal representative
(or the trustee of a trust established by the Employee) is duly authorized to
act in that capacity, or to locate or attempt to locate any beneficiary,
personal representative, or trustee.
(a) Termination by the Employee for Good Reason or by the Company
without Cause. If the Employee terminates this Agreement for Good Reason,
or if the Company terminates this Agreement other than for Cause (but not
because of the Disability or death
6
<PAGE>
of the Employee), or if the Company notifies the Employee in accordance
with Section 2.2 that this Agreement will not be renewed as of an
applicable expiration date, the Company will pay the Employee (i) the
Employee's Salary for the remainder, if any, of the calendar month in
which such termination is effective and for twenty-four consecutive
calendar months thereafter, (ii) the amount of the Employee's targeted
incentive compensation for the year during which the termination is
effective (prorated for the period from the beginning of the year until
the effective date of termination), and (iii) the sum of two times the
amount of targeted incentive compensation for the year in which the
termination was effective (such amount to be determined as if the Employee
had been employed for the entire year and not be prorated as described in
clause (ii) above), payable in equal monthly installments over the
Post-Employment Period. Notwithstanding the preceding sentence, if the
Employee obtains other employment prior to the end of the twenty-four
months following the month in which the termination or expiration is
effective, he must promptly give notice thereof to the Company, and the
payments under this Agreement for any period after the Employee obtains
other employment will be reduced by the amount of the cash compensation
received and to be received by the Employee from the Employee's other
employment for services performed during such period.
(b) Termination by the Company for Cause. If the Company terminates
this Agreement for Cause, the Employee will be entitled to receive his
Salary only through the date such termination is effective.
(c) Termination upon Disability. If this Agreement is terminated by
either party as a result of the Employee's Disability, as determined under
Section 6.2, the Company will pay the Employee his Salary through the
remainder of the calendar month during which such termination is effective
and for the lesser of (i) six consecutive months thereafter, or (ii) the
period until disability insurance benefits commence under any disability
insurance coverage furnished by the Company to the Employee.
(d) Termination upon Death. If this Agreement is terminated because
of the Employee's death, the Employee will be entitled to receive his
Salary through the end of the calendar month in which his death occurs.
(e) Benefits. Except as otherwise required by law, the Employee's
accrual of, or participation in plans providing for, the Benefits will
cease at the effective date of the termination of this Agreement, and the
Employee will be entitled to accrued Benefits pursuant to such plans only
as provided in such plans.
7. Non-Disclosure Covenant; Employee Inventions
7.1 Acknowledgments by the Employee. The Employee acknowledges that (a)
during the Employment Period and as a part of his employment, the Employee will
be afforded access to Confidential Information; (b) public disclosure of such
Confidential Information could have an adverse effect on the Company and its
business; (c) because the Employee possesses substantial technical expertise and
skill with respect to the Company's business, the Company desires to obtain
7
<PAGE>
exclusive ownership of each Employee Invention, and the Company will be at a
substantial competitive disadvantage if it fails to acquire exclusive ownership
of each Employee Invention; and (d) the provisions of this Section 7 are
reasonable and necessary to prevent the improper use or disclosure of
Confidential Information and to provide the Company with exclusive ownership of
all Employee Inventions.
7.2 Agreements of the Employee. In consideration of the compensation and
benefits to be paid or provided to the Employee by the Company under this
Agreement, the Employee covenants as follows:
(a) Confidentiality.
(i) During and following the Employment Period, the Employee
will hold in confidence the Confidential Information and will not
disclose it to any Person except with the specific prior written
consent of the Company or except as otherwise expressly permitted by
the terms of this Agreement.
(ii) Any trade secrets of the Company will be entitled to all
of the protections and benefits under the Missouri Uniform Trade
Secrets Act and any other applicable law. If any information that
the Company deems to be a trade secret is found by a court of
competent jurisdiction not to be a trade secret for purposes of this
Agreement, such information will, nevertheless, be considered
Confidential Information for purposes of this Agreement. The
Employee hereby waives any requirement that the Company submit proof
of the economic value of any trade secret or post a bond or other
security.
(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information that the
Employee demonstrates was or became generally available to the
public other than as a result of a disclosure by the Employee or by
any other Person bound by a confidentiality obligation to the
Company in respect of such Confidential Information.
(iv) The Employee will not remove from the Company's premises
(except to the extent such removal is for purposes of the
performance of the Employee's duties at home or while traveling, or
except as otherwise specifically authorized by the Company) any
Company document, record, notebook, plan, model, component, device,
or computer software or code, whether embodied in a disk or in any
other form (collectively, the "Proprietary Items"). The Employee
recognizes that, as between the Company and the Employee, all of the
Proprietary Items, whether or not developed by the Employee, are the
exclusive property of the Company. Upon termination of this
Agreement by either party, or upon the request of the Company during
the Employment Period, the Employee will return to the Company all
of the Proprietary Items in the Employee's possession or subject to
the Employee's control, and the Employee shall not retain any
copies, abstracts, sketches, or other physical embodiment of any of
the Proprietary Items.
8
<PAGE>
(b) Employee Inventions. Each Employee Invention will belong
exclusively to the Company. The Employee acknowledges that all Employee
Inventions are works made for hire and are the property of the Company,
including any copyrights, patents, or other intellectual property rights
pertaining thereto. If it is determined that any such works are not works
made for hire, the Employee hereby assigns to the Company all of the
Employee's right, title, and interest, including all rights of copyright,
patent, and other intellectual property rights, to or in such Employee
Inventions. The Employee will promptly:
(i) disclose to the Company in writing any Employee Invention;
(ii) assign to the Company or to a party designated by the
Company, at the Company's request and without additional
compensation, all of the Employee's right to the Employee Invention
for the United States and all foreign jurisdictions;
(iii) execute and deliver to the Company such applications,
assignments, and other documents as the Company may request in order
to apply for and obtain patents or other registrations with respect
to any Employee Invention in the United States and any foreign
jurisdictions;
(iv) sign all other papers necessary to carry out the above
obligations; and
(v) give testimony and render any other assistance in support
of the Company's rights to any Employee Invention.
Notwithstanding anything to the contrary herein, provisions otherwise
requiring the Employee to assign to the Company any invention conceived by
the Employee shall not apply to an invention for which no equipment,
supplies, facilities or trade secret information of the Company was used
and which was developed entirely on the Employee's own time, unless the
invention relates to the business of the Company or to the Company's
actual or demonstrably anticipated research or development, or the
invention results from any work performed by the Employee for the Company.
7.3 Disputes or Controversies. The Employee recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Company, the Employee, and their respective attorneys and experts, who will
agree, in advance and in writing, to receive and maintain all such information
in secrecy, except as may be limited by them in writing.
8. Non-Competition and Non-Interference
8.1 Acknowledgments by the Employee. The Employee acknowledges that: (a)
the services to be performed by him under this Agreement are of a special,
unique, unusual,
9
<PAGE>
extraordinary, and intellectual character; (b) the Company competes with other
businesses that are or could be located in any part of the Territory; and (c)
the provisions of this Section 8 are reasonable and necessary to protect the
Company's business.
8.2 Covenants of the Employee. In consideration of the acknowledgments by
the Employee, and in consideration of the compensation and benefits to be paid
or provided to the Employee by the Company, the Employee covenants that he will
not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post-Employment Period, engage or
invest in, own, manage, operate, finance, control, or participate in the
ownership, management, operation, financing, or control of, be employed
by, associated with, or in any manner connected with, lend the Employee's
name or any similar name to, lend Employee's credit to or render services
or advice to, any Competitive Business within the Territory; provided,
however, that the Employee may purchase or otherwise acquire up to (but
not more than) one percent of any class of securities of any enterprise
(but without otherwise participating in the activities of such enterprise)
if such securities are listed on any national or regional securities
exchange or have been registered under Section 12(g) of the Securities
Exchange Act of 1934;
(b) whether for the Employee's own account or for the account of any
other Person, at any time during the Employment Period and the
Post-Employment Period, solicit business of the same or similar type being
carried on by the Company, from any Person known by the Employee to be a
customer of the Company, whether or not the Employee had personal contact
with such Person during and by reason of the Employee's employment with
the Company;
(c) whether for the Employee's own account or the account of any
other Person at any time during the Employment Period and the
Post-Employment Period, solicit, employ, or otherwise engage as an
employee, independent contractor, or otherwise, any person who is or was
an employee of the Company at any time during the Employment Period or in
any manner induce or attempt to induce any employee of the Company to
terminate his or her employment with the Company; or at any time during
the Employment Period and the Post-Employment Period, interfere with the
Company's relationship with any person, including any person who at any
time during the Employment Period was an employee, contractor, supplier,
or customer of the Company;
(d) at any time during the Employment Period and the Post-Employment
Period, disparage the Company or any of its shareholders, directors,
officers, employees, or agents.
8.3 Divisible Covenants. If any covenant in Section 8.2 is held to be
unreasonable, arbitrary, or against public policy, such covenant will be
considered to be divisible with respect to scope, time, and geographic area, and
such lesser scope, time, or geographic area, or all of them, as a court of
competent jurisdiction may determine to be reasonable, not arbitrary, and not
against public policy, will be effective, binding, and enforceable against the
Employee.
10
<PAGE>
8.4 Extension of Covenants. The period of time applicable to any covenant
in Section 8.2 will be extended by the duration of any violation by the Employee
of such covenant.
8.5 Notices. The Employee will, while the covenants under Section 8.2 are
in effect, give notice to the Company, within ten days after accepting any other
employment, of the identity of the Employee's new employer. The Company may
notify such new employer that the Employee is bound by this Agreement and, at
the Company's election, furnish such new employer with a copy of this Agreement
or relevant portions thereof.
9. General Provisions
9.1 Injunctive Relief and Additional Remedy. The Employee acknowledges
that the injury that would be suffered by the Company as a result of a breach of
the provisions of this Agreement (including any provision of Sections 7 and 8)
would be irreparable and that an award of monetary damages to the Company for
such a breach would be an inadequate remedy. Consequently, the Company will have
the right, in addition to any other rights it may have, to obtain injunctive
relief to restrain any breach or threatened breach or otherwise to specifically
enforce any provision of this Agreement, and the Company will not be obligated
to post bond or other security in seeking such relief. Without limiting the
Company's rights under this Section 9 or any other remedies of the Company, if
the Employee breaches any of the provisions of Section 7 or 8, the Company will
have the right to cease making any payments otherwise due to the Employee under
this Agreement.
9.2 Covenants of Sections 7 and 8 are Essential and Independent Covenants.
The covenants by the Employee in Sections 7 and 8 are essential elements of this
Agreement, and without the Employee's agreement to comply with such covenants,
the Company would not have entered into this Agreement or employed the Employee.
The Company and the Employee have independently consulted their respective
counsel and have been advised in all respects concerning the reasonableness and
propriety of such covenants, with specific regard to the nature of the business
conducted by the Company. The Employee's covenants in Sections 7 and 8 are
independent covenants and the existence of any claim by the Employee against the
Company, under this Agreement or otherwise, will not excuse the Employee's
breach of any covenant in Section 7 or 8. If the Employee's employment hereunder
expires or is terminated, this Agreement will continue in full force and effect
as is necessary or appropriate to enforce the covenants and agreements of the
Employee in Sections 7 and 8.
9.3 Representations and Warranties by the Employee. The Employee
represents and warrants to the Company that the execution and delivery by the
Employee of this Agreement do not, and the performance by the Employee of the
Employee's obligations hereunder will not, with or without the giving of notice
or the passage of time, or both: (a) violate any judgment, writ, injunction, or
order of any court, arbitrator, or governmental agency applicable to the
Employee; or (b) conflict with, result in the breach of any provisions of or the
termination of, or constitute a default under, any agreement to which the
Employee is a party or by which the Employee is or may be bound.
11
<PAGE>
9.4 Obligations Contingent on Performance. The obligations of the Company
hereunder, including its obligation to pay the compensation provided for herein,
are contingent upon the Employee's performance of the Employee's obligations
hereunder.
9.5 Waiver. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by either
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
(a) no claim or right arising out of this Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim or right
unless in writing signed by the other party; (b) no waiver that may be given by
a party will be applicable except in the specific instance for which it is
given; and (c) no notice to or demand on one party will be deemed to be a waiver
of any obligation of such party or of the right of the party giving such notice
or demand to take further action without notice or demand as provided in this
Agreement.
9.6 Binding Effect; Delegation of Duties Prohibited. This Agreement shall
inure to the benefit of, and shall be binding upon, the parties hereto and their
respective successors, assigns, heirs, and legal representatives, including any
entity with which the Company may merge or consolidate or to which all or
substantially all of its assets may be transferred. The duties and covenants of
the Employee under this Agreement, being personal, may not be delegated.
9.7 Notices. All notices and other communications under this Agreement
must be in writing and will be deemed to have been duly given when (a) delivered
by hand (with written confirmation of receipt), (b) sent by facsimile (with
written confirmation of receipt), provided that a copy is mailed by registered
mail, return receipt requested, or (c) when received by the addressee, if sent
by a nationally recognized overnight delivery service (receipt requested), in
the case of the Company to the attention of the President at the Company's
principal business office and in the case of the Employee to the address or
facsimile number set forth below (or to such other address or facsimile number
as the Employee may designate by notice to the Company):
12116 Westgate
Overland Park, KS 66213
9.8 Entire Agreement; Amendments. This Agreement contains the entire
agreement between the parties with respect to its subject matter and supersedes
all prior agreements and understandings, oral or written, between the parties
with respect to its subject matter. This Agreement may not be amended orally,
but only by an agreement in writing signed by each of the parties to this
Agreement.
9.9 Governing Law. This Agreement will be governed by the laws of the
State of Missouri without regard to conflicts of laws principles.
12
<PAGE>
9.10 Jurisdiction. Any action or proceeding seeking to enforce any
provision of, or based on any right arising out of, this Agreement may be
brought against either of the parties in the courts of the State of Missouri,
County of Jackson, or, if it has or can acquire jurisdiction, in the United
States District Court for the Western District of Missouri, and each of the
parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection to
venue laid therein. Process in any action or proceeding referred to in the
preceding sentence may be served on either party anywhere in the world.
9.11 Section Headings, Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement unless otherwise specified.
All words used in this Agreement will be construed to be of such gender or
number as the circumstances require. Unless otherwise expressly provided, the
word "including" does not limit the preceding words or terms.
9.12 Severability. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
9.13 Counterparts; Execution by Facsimile Signatures. This Agreement may
be executed in one or more counterparts, each of which will be deemed to be an
original copy of this Agreement and all of which, when taken together, will be
deemed to constitute one and the same agreement. This Agreement may be executed
by facsimile signatures.
9.14 Waiver of Jury Trial. THE PARTIES HERETO HEREBY WAIVE A JURY TRIAL IN
ANY LITIGATION WITH RESPECT TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date above first written above.
BIRCH TELECOM, INC.
By: /s/ David E. Scott
____________________________________
David E. Scott, President
/s/ David W. Vranicar
_______________________________________
David W. Vranicar
13
<PAGE>
Exhibit 10.20
EXECUTION COPY
================================================================================
AMENDED AND RESTATED
CREDIT AGREEMENT
dated as of
February 2, 2000
--------------
BIRCH TELECOM, INC.,
BIRCH TELECOM FINANCE, INC.
--------------
the Several Lenders
from time to time Parties Hereto,
--------------
LEHMAN BROTHERS INC.,
as Advisor, Lead Arranger and Book Manager
--------------
BANKERS TRUST COMPANY,
as Syndication Agent
--------------
BANK OF AMERICA, N.A.,
as Documentation Agent
--------------
LEHMAN COMMERCIAL PAPER INC.,
as Administrative Agent
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. DEFINITIONS......................................................1
1.1 Defined Terms.........................................................1
1.2 Other Definitional Provisions........................................26
SECTION 2. AMOUNT AND TERMS OF COMMITMENTS.................................26
2.1 Term Loan Commitments...............................................26
2.2 Procedure for Term Loan Borrowing...................................26
2.3 Repayment of Term Loans.............................................27
2.4 Revolving Credit Commitments........................................28
2.5 Procedure for Revolving Credit Borrowing............................29
2.6 Swing Line Commitment...............................................29
2.7 Procedure for Swing Line Borrowing; Refunding of Swing Line Loans...30
2.8 Repayment of Loans; Evidence of Debt................................31
2.9 Commitment Fees, etc................................................32
2.10 Termination or Reduction of Commitments.............................32
2.11 Optional Prepayments................................................33
2.12 Mandatory Prepayments and Commitment Reductions.....................33
2.13 Conversion and Continuation Options.................................34
2.14 Minimum Amounts and Maximum Number of Eurodollar Tranches...........34
2.15 Interest Rates and Payment Dates....................................35
2.16 Computation of Interest and Fees....................................35
2.17 Inability to Determine Interest Rate................................35
2.18 Pro Rata Treatment and Payments.....................................36
2.19 Requirements of Law.................................................38
2.20 Taxes...............................................................39
2.21 Indemnity...........................................................40
2.22 Illegality..........................................................41
2.23 Change of Lending Office............................................41
2.24 Replacement of Lenders under Certain Circumstances..................41
SECTION 3. REPRESENTATIONS AND WARRANTIES..................................42
3.1 Financial Condition..................................................42
3.2 No Change............................................................43
3.3 Corporate Existence; Compliance with Law.............................43
3.4 Corporate Power; Authorization; Enforceable Obligations..............43
3.5 No Legal Bar.........................................................43
3.6 No Material Litigation...............................................44
3.7 No Default...........................................................44
3.8 Ownership of Property; Liens.........................................44
3.9 Intellectual Property................................................44
3.10 Taxes................................................................44
<PAGE>
ii
3.11 Federal Regulations.................................................44
3.12 ERISA...............................................................44
3.13 Investment Company Act; Public Utility Holding Company Act; Other
Regulations.........................................................45
3.14 Capitalization; Subsidiaries; Certain Investments...................45
3.15 Purpose of Loans....................................................45
3.16 Environmental Matters...............................................46
3.17 Accuracy of Information, etc........................................47
3.18 Security Documents..................................................47
3.19 Solvency............................................................48
3.20 Real Property.......................................................48
3.21 Year 2000 Matters...................................................48
3.22 Restricted Subsidiary...............................................48
3.23 Network.............................................................48
SECTION 4. CONDITIONS PRECEDENT............................................48
4.1 Effectiveness.......................................................48
4.2 Conditions to Each Extension of Credit..............................51
4.3 Conditions to Each Term Loan........................................51
SECTION 5. AFFIRMATIVE COVENANTS...........................................51
5.1 Financial Statements................................................51
5.2 Certificates; Other Information.....................................52
5.3 Payment of Obligations..............................................53
5.4 Conduct of Business and Maintenance of Existence, etc...............54
5.5 Maintenance of Property; Insurance..................................54
5.6 Inspection of Property; Books and Records; Discussions..............54
5.7 Notices.............................................................55
5.8 Environmental Laws..................................................55
5.9 Additional Collateral, etc..........................................56
5.10 Further Assurances..................................................57
SECTION 6. NEGATIVE COVENANTS..............................................57
6.1 Financial Condition Covenants.......................................57
6.2 Limitation on Indebtedness..........................................61
6.3 Limitation on Liens.................................................62
6.4 Limitation on Fundamental Changes...................................64
6.5 Limitation on Disposition of Property...............................64
6.6 Limitation on Restricted Payments...................................65
6.7 Limitation on Investments...........................................66
6.8 Limitation on Optional Payments and Modifications of Instruments
and Agreements, etc.............................................67
6.9 Limitation on Transactions with Affiliates..........................67
6.10 Limitation on Sales and Leasebacks..................................68
6.11 Limitation on Changes in Fiscal Periods.............................68
6.12 Limitation on Negative Pledge Clauses...............................68
<PAGE>
iii
6.13 Limitation on Restrictions on Subsidiary Distributions..............68
6.14 Limitation on Lines of Business.....................................69
6.15 Limitation on Capital Expenditures..................................69
6.16 Hedge Agreements; Equity Forward Agreements.........................69
6.17 Limitation on Activities of the Company.............................69
SECTION 7. EVENTS OF DEFAULT...............................................70
SECTION 8. THE AGENTS......................................................73
8.1 Appointment..........................................................73
8.2 Delegation of Duties.................................................73
8.3 Exculpatory Provisions...............................................73
8.4 Reliance by Agents...................................................73
8.5 Notice of Default....................................................74
8.6 Non-Reliance on Agents and Other Lenders.............................74
8.7 Indemnification......................................................75
8.8 Agent in Its Individual Capacity.....................................75
8.9 Successor Agents.....................................................75
8.10 Authorization to Release Liens......................................76
8.11 The Arranger, Documentation Agent and Syndication Agent.............76
SECTION 9. MISCELLANEOUS...................................................76
9.1 Amendments and Waivers...............................................76
9.2 Notices..............................................................77
9.3 No Waiver; Cumulative Remedies.......................................78
9.4 Survival of Representations and Warranties...........................78
9.5 Payment of Expenses..................................................78
9.6 Successors and Assigns; Participations and Assignments...............79
9.7 Adjustments; Set-off.................................................82
9.8 Counterparts.........................................................82
9.9 Severability.........................................................82
9.10 Integration.........................................................83
9.11 Governing Law.......................................................83
9.12 Submission to Jurisdiction; Waivers.................................83
9.13 Acknowledgments.....................................................83
9.14 Confidentiality.....................................................84
9.15 Accounting Changes..................................................84
9.16 Delivery of Lender Addenda..........................................85
9.17 Waivers of Jury Trial...............................................85
<PAGE>
iv
SCHEDULES:
I Pricing Grid
1.1 Permitted Investors
3.1(a) Contingent Liabilities, etc.
3.4 Consents, Authorizations, Filings and Notices
3.14 Capitalization, Subsidiaries and Investments
3.18 UCC Filing Jurisdictions
3.20 Real Property
3.23 Network
6.2(d) Existing Indebtedness
6.3(f) Existing Liens
EXHIBITS:
A Form of Guarantee and Collateral Agreement
B Form of Compliance Certificate
C Form of Closing Certificate
D Form of Assignment and Acceptance
E-1 Form of Legal Opinion of Simpson Thacher & Bartlett,
special counsel to the Credit Parties E-2 Form of Legal Opinion
of the General Counsel of the Company E-3 Form of Legal Opinion
of Milbank, Tweed, Hadley & McCloy LLP, special counsel to LCPI
F-1 Form of Term Note
F-2 Form of Revolving Credit Note
F-3 Form of Swing Line Note
G Form of Non-U.S. Lender Certificate
H Form of Lender Addendum
I Form of Notice of Borrowing
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT, dated as of February 2,
2000 among BIRCH TELECOM, INC., a Delaware corporation (the "Company"), BIRCH
TELECOM FINANCE, INC., a Delaware corporation (the "Borrower"), the several
banks and other financial institutions or entities from time to time parties to
this Agreement (the "Lenders") and LEHMAN COMMERCIAL PAPER INC. ("LCPI"), as
administrative agent (in such capacity, the "Administrative Agent").
The Company, the Borrower, the lenders named therein (including
certain of the Lenders hereunder), Lehman Brothers Inc., as advisor, lead
arranger and book manager, Lehman Commercial Paper Inc., as syndication agent,
and the Administrative Agent are party to a Credit Agreement dated as of
December 20, 1999 (as in effect on the date hereof immediately before giving
effect to the amendment and restatement contemplated hereby, the "Existing
Credit Agreement"). The Borrower has requested that the Lenders party hereto
amend the Existing Credit Agreement to provide for (i) the extension of credit
to it in an aggregate amount not exceeding $125,000,000 and (ii) the addition of
certain lenders thereunder.
In that connection, the parties wish to amend and restate the
Existing Credit Agreement and, accordingly, the parties hereto agree that the
Existing Credit Agreement shall be amended and restated as of the date hereof
(but subject to Section 4.1) in its entirety as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the terms listed in
this Section shall have the respective meanings set forth in this Section.
"Adjustment Date": the fifth day following the date on which the
financial statements for the most recently completed fiscal period furnished
pursuant to Section 5.1(a) or (b), as the case may be, and the compliance
certificate with respect to such financial statements furnished pursuant to
Section 5.2(b) are delivered to the Administrative Agent.
"Administrative Agent": as defined in the preamble hereto.
"Affiliate": as to any Person, any other Person which, directly or
indirectly, is in control of, is controlled by, or is under common control
with, such Person. For purposes of this definition, "control" of a Person
means the power, directly or indirectly, either to (a) vote 10% or more of
the securities having ordinary voting power for the election of directors
(or persons performing similar functions) of such Person or (b) direct or
cause the direction of the management and policies of such Person, whether
by contract or otherwise.
"Agents": the collective reference to the Administrative Agent, the
Documentation Agent and the Syndication Agent.
<PAGE>
2
"Aggregate Exposure": with respect to any Lender at any time, an
amount equal to the sum of (i) the amount of such Lender's Term Loan
Commitment then in effect or, if the Term Loan Commitments have been
terminated, the aggregate then unpaid principal amount of such Lender's
Term Loans and (ii) the amount of such Lender's Revolving Credit
Commitment then in effect or, if the Revolving Credit Commitments have
been terminated, the amount of such Lender's Revolving Extensions of
Credit then outstanding.
"Aggregate Exposure Percentage": with respect to any Lender at any
time, the ratio (expressed as a percentage) of such Lender's Aggregate
Exposure at such time to the Aggregate Exposure of all Lenders at such
time.
"Agreement": this Credit Agreement, as amended, supplemented or
otherwise modified from time to time.
"Annualized Consolidated EBITDA": (a) during Stage 1, Consolidated
EBITDA for the most recently completed fiscal quarter times four and (b)
during Stage 2, Consolidated EBITDA for the most recently completed two
fiscal quarters times two.
"Applicable Margin": for each Type of Loan, the rate per annum set
forth on the Pricing Grid under the relevant column heading opposite the
level of the Total Leverage Ratio most recently determined; provided that
(a) the Applicable Margin for each Type of Loan commencing on the Closing
Date shall be that set forth on the Pricing Grid under the relevant column
opposite a Total Leverage Ratio captioned "> 8.0 to 1" until the first
Adjustment Date, (b) the Applicable Margin for each Type of Loan
determined for any Adjustment Date (including the first Adjustment Date)
shall remain in effect until a subsequent Adjustment Date for which the
Total Leverage Ratio falls within a different level and (c) if the
financial statements and related compliance certificate for any fiscal
period are not delivered by the date due pursuant to Section 5.1 and 5.2,
the Applicable Margin for each Type of Loan shall be (i) for the first 35
days subsequent to such due date, the Applicable Margin for such Type of
Loan in effect prior to such due date and (ii) thereafter, that set forth
on the Pricing Grid under the relevant column opposite a Total Leverage
Ratio captioned "> 8.0 to 1", in either case, until the date of delivery
of such financial statements and compliance certificate.
"Arranger": Lehman Brothers Inc.
"Asset Sale": any Disposition of Property or series of related
Dispositions of Property (excluding any such Disposition permitted by
clause (a), (b), (c) or (d) of Section 6.5) which yields gross proceeds to
the Company or any of its Subsidiaries in excess of $1,000,000.
"Assignee": as defined in Section 9.6(c).
"Assignor": as defined in Section 9.6(c).
<PAGE>
3
"Available Amount": on any date (each, a "Reference Date"), an
amount equal to (a) the sum of (i) an amount equal to (x) the cumulative
amount of Excess Cash Flow for all complete fiscal years ended after the
Original Closing Date and prior to such Reference Date minus (y) the
portion of such Excess Cash Flow that has been on or prior to (or will be
on) such Reference Date applied to the prepayment of Loans in accordance
with Section 2.12, (ii) the amount of any capital contributions made in
cash to the Company (and contributed by the Company as cash equity to the
Borrower and/or any Subsidiary Guarantors) from and including the Business
Day immediately following the Original Closing Date through and including
such Reference Date, (iii) an amount equal to the Net Cash Proceeds
received by the Company on or prior to such Reference Date from any
issuance of its Capital Stock (and contributed by the Company as cash
equity to the Borrower and/or any Subsidiary Guarantors) and (iv) the
aggregate amount of all cash dividends, cash distributions or other
returns of capital (including proceeds of any Disposition) to the extent
received in respect of any Investment made pursuant to Section 6.7(j)
received by the Company or any Subsidiary on or prior to such Reference
Date (other than the portion of any such dividends and other distributions
used by the Company or any Subsidiary to pay taxes) minus (b) sum of (i)
the aggregate amount of any Investments made by the Company or any
Subsidiary pursuant to Section 6.7(j) on or prior to such Reference Date
and (ii) the aggregate amount of Capital Expenditures made by the Company
or any Subsidiary pursuant to Section 6.15 on or prior to such Reference
Date, in each case to the extent made with the Available Amount.
"Available Commitment": (a) as to any Revolving Credit Lender at any
time, an amount equal to the excess, if any, of (i) such Lender's
Revolving Credit Commitment then in effect over (ii) such Lender's
Revolving Extensions of Credit then outstanding, provided that in
calculating any Lender's Revolving Extensions of Credit for the purpose of
determining such Lender's Available Revolving Credit Commitment pursuant
to Section 2.9(a), the aggregate principal amount of Swing Line Loans then
outstanding shall be deemed to be zero; and (b) as to any Term Lender at
any time, an amount equal to the excess, if any, of (i) such Lender's Term
Loan Commitment then in effect over (ii) the aggregate principal amount of
such Lender's Term Loans then outstanding.
"Base CD Rate": as defined in the definition of "Base Rate" in this
Section.
"Base Rate": for any day, a rate per annum (rounded upwards, if
necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime
Rate in effect on such day, (b) the Base CD Rate in effect on such day
plus 1.00% and (c) the Federal Funds Effective Rate in effect on such day
plus 0.50%. For purposes hereof, "Prime Rate" shall mean the rate of
interest per annum publicly announced from time to time by the Reference
Lender as its prime or base rate in effect at its principal office in New
York City (the Prime Rate not being intended to be the lowest rate of
interest charged by the Reference Lender in connection with extensions of
credit to debtors); "Base CD Rate" shall mean the sum of (a) the product
of (i) the Three-Month Secondary CD Rate and (ii) a fraction, the
numerator of which is one and the denominator of which is one minus the
C/D Reserve
<PAGE>
4
Percentage and (b) the C/D Assessment Rate; and "Three-Month Secondary CD
Rate" shall mean, for any day, the secondary market rate for three-month
certificates of deposit reported as being in effect on such day (or, if
such day shall not be a Business Day, the next preceding Business Day) by
the Board through the public information telephone line of the Federal
Reserve Bank of New York (which rate will, under the current practices of
the Board, be published in Federal Reserve Statistical Release H.15(519)
during the week following such day), or, if such rate shall not be so
reported on such day or such next preceding Business Day, the average of
the secondary market quotations for three-month certificates of deposit of
major money center banks in New York City received at approximately 10:00
A.M., New York City time, on such day (or, if such day shall not be a
Business Day, on the next preceding Business Day) by the Reference Lender
from three New York City negotiable certificate of deposit dealers of
recognized standing selected by it. Any change in the Base Rate due to a
change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal
Funds Effective Rate shall be effective as of the opening of business on
the effective day of such change in the Prime Rate, the Three-Month
Secondary CD Rate or the Federal Funds Effective Rate, respectively.
"Base Rate Loans": Loans the rate of interest applicable to which is
based upon the Base Rate.
"Benefitted Lender": as defined in Section 9.7.
"Board": the Board of Governors of the Federal Reserve System of the
United States (or any successor).
"Borrower": as defined in the preamble hereto.
"Borrowing Date": any Business Day specified by the Borrower as a
date on which the Borrower requests the relevant Lenders to make Loans
hereunder.
"Business Day": (a) for all purposes other than as covered by clause
(b) below, a day other than a Saturday, Sunday or other day on which
commercial banks in New York City are authorized or required by law to
close and (b) with respect to all notices and determinations in connection
with, and payments of principal and interest on, Eurodollar Loans, any day
which is a Business Day described in clause (a) and which is also a day
for trading by and between banks in Dollar deposits in the interbank
eurodollar market.
"Capital Expenditures": for any period, with respect to any Person,
the aggregate of all expenditures by such Person and its Subsidiaries for
the acquisition or leasing (pursuant to a capital lease) of fixed or
capital assets or additions to equipment (including replacements,
capitalized repairs and improvements during such period) which are
capitalized in accordance with GAAP on a consolidated balance sheet of
such Person and its Subsidiaries.
<PAGE>
5
"Capital Lease Obligations": as to any Person, the obligations of
such Person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are classified and accounted for as
capital leases on a balance sheet of such Person in accordance with GAAP,
and, for the purposes of this Agreement, the amount of such obligations at
any time shall be the capitalized amount thereof at such time determined
in accordance with GAAP.
"Capital Stock": any and all shares, interests, participations or
other equivalents (however designated) of capital stock of a corporation,
any and all equivalent ownership interests in a Person (other than a
corporation) and any and all warrants, rights or options to purchase any
of the foregoing.
"Cash Equivalents": (a) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by
any agency thereof and backed by the full faith and credit of the United
States, in each case maturing within one year from the date of
acquisition; (b) certificates of deposit, time deposits, eurodollar time
deposits or overnight bank deposits having maturities of one year or less
from the date of acquisition issued by any Lender or by any commercial
bank organized under the laws of the United States of America or any state
thereof having combined capital and surplus of not less than $500,000,000;
(c) commercial paper of a domestic issuer rated at least A-2 by Standard &
Poor's Ratings Services ("S&P") or P-2 by Moody's Investors Service, Inc.
("Moody's"), or carrying an equivalent rating by a nationally recognized
rating agency, if both of the two named rating agencies cease publishing
ratings of commercial paper issuers generally; (d) repurchase obligations
of any Lender or of any commercial bank satisfying the requirements of
clause (b) of this definition, having a term of not more than 90 days with
respect to securities issued or fully guaranteed or insured by the United
States government; (e) securities with maturities of one year or less from
the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States, by any political
subdivision or taxing authority of any such state, commonwealth or
territory or by any foreign government, the securities of which state,
commonwealth, territory, political subdivision, taxing authority or
foreign government (as the case may be) are rated at least A by S&P or A
by Moody's; (f) securities with maturities of one year or less from the
date of acquisition backed by standby letters of credit issued by any
Lender or any commercial bank satisfying the requirements of clause (b) of
this definition; or (g) shares of money market mutual or similar funds
which invest exclusively in assets satisfying the requirements of clauses
(a) through (f) of this definition.
"C/D Assessment Rate": for any day as applied to any Base Rate Loan,
the annual assessment rate in effect on such day which is payable by a
member of the Bank Insurance Fund maintained by the Federal Deposit
Insurance Corporation (the "FDIC") classified as well-capitalized and
within supervisory subgroup "B" (or a comparable successor assessment risk
classification) within the meaning of 12 C.F.R. ss. 327.4 (or any
<PAGE>
6
successor provision) to the FDIC (or any successor) for the FDIC's (or
such successor's) insuring time deposits at offices of such institution in
the United States.
"C/D Reserve Percentage": for any day as applied to any Base Rate
Loan, that percentage (expressed as a decimal) which is in effect on such
day, as prescribed by the Board, for determining the maximum reserve
requirement for a Depositary Institution (as defined in Regulation D of
the Board as in effect from time to time) in respect of new non-personal
time deposits in Dollars having a maturity of 30 days or more.
"Change in Control": the occurrence of any of the following events:
(a) Permitted Investors shall at any time not own, in the aggregate,
directly or indirectly, beneficially and of record, at least 35% of the
outstanding voting interests in the Capital Stock of the Company (other
than as a result of one or more widely distributed offerings of common
stock of the Company, in each case whether by the Company or by Permitted
Investors); (b) any person, entity or "group" (within the meaning of
Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended)
shall at any time have acquired direct or indirect beneficial ownership of
a percentage of the outstanding voting interests in the Capital Stock of
the Company that exceeds the percentage of such voting interests then
beneficially owned, in the aggregate, by Permitted Investors; (c)
Permitted Investors shall at any time not have the right or the ability by
voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors of the Company; (d) the board of
directors of the Company shall cease to consist of a majority of
Continuing Directors; or (e) the Company shall cease to own and control,
of record and beneficially, directly, 100% of each class of outstanding
Capital Stock of the Borrower free and clear of all Liens (except Liens
created by the Guarantee and Collateral Agreement).
"Class": when used in reference to any Loans, refers to whether such
Loan is a Term Loan, a Revolving Credit Loan or a Swing Line Loan and,
when used in reference to any Commitment, refers to whether such
Commitment is a Term Loan Commitment or a Revolving Credit Commitment.
"Closing Date": the date on which the conditions precedent set forth
in Section 4.1 shall have been satisfied, and the initial Loans hereunder
shall be made.
"Code": the Internal Revenue Code of 1986, as amended from time to
time.
"Collateral": all Property of the Credit Parties, now owned or
hereafter acquired, upon which a Lien is purported to be created by any
Security Document.
"Collocation Sites": the central office premises of a local exchange
carrier on which a Subsidiary of the Borrower has located
telecommunications transmission equipment.
<PAGE>
7
"Commitment": as to any Lender, the sum of the Term Loan Commitment
and the Revolving Credit Commitment of such Lender.
"Commitment Fee Rate": (a) a rate of 1.25% per annum if the Facility
Usage shall be equal to or less than 33-1/3%, (b) a rate of 1.00% per
annum if the Facility Usage shall be greater than 33-1/3% but equal to or
less than 66-2/3% and (c) a rate of 0.75% per annum if the Facility Usage
shall be greater than 66-2/3%.
"Commitment Reduction Dates": the last Business Day of March, June,
September and December of each year, commencing with such day falling on
or nearest to March 31, 2003.
"Commonly Controlled Entity": an entity, whether or not
incorporated, which is under common control with the Company within the
meaning of Section 4001 of ERISA or is part of a group which includes the
Company and which is treated as a single employer under Section 414 of the
Code.
"Company": as defined in the preamble hereto.
"Compliance Certificate": a certificate duly executed by a
Responsible Officer substantially in the form of Exhibit B.
"Confidential Information Memorandum": the Confidential Information
Memorandum dated December 1999 and furnished to the initial Lenders.
"Consolidated Current Assets": at any date, all amounts (other than
cash and Cash Equivalents) which would, in conformity with GAAP, be set
forth opposite the caption "total current assets" (or any like caption) on
a consolidated balance sheet of the Company and its Subsidiaries at such
date.
"Consolidated Current Liabilities": at any date, all amounts which
would, in conformity with GAAP, be set forth opposite the caption "total
current liabilities" (or any like caption) on a consolidated balance sheet
of the Company and its Subsidiaries at such date, but excluding (a) the
current portion of any Funded Debt of the Company and its Subsidiaries and
(b) without duplication of clause (a) above, all Indebtedness consisting
of Revolving Credit Loans or Swing Line Loans to the extent otherwise
included therein.
"Consolidated EBITDA": for any period, Consolidated Net Income for
such period plus, without duplication and to the extent reflected as a
charge in the statement of such Consolidated Net Income for such period,
the sum of (a) income tax expense, (b) Consolidated Interest Expense,
amortization or writeoff of debt discount and debt issuance costs and
commissions, discounts and other fees and charges associated with
Indebtedness (including the Loans), (c) depreciation and amortization
expense, (d) amortization of intangibles (including,
<PAGE>
8
but not limited to, goodwill) and organization costs, (e) any
extraordinary, unusual or non-recurring expenses or losses (including,
whether or not otherwise includable as a separate item in the statement of
such Consolidated Net Income for such period, losses on sales of assets
outside of the ordinary course of business), (f) any other non-cash
charges or reserves, (g) transaction expenses directly related to the
Preferred Stock Purchase Agreement and this Agreement and (h) transaction
expenses directly related to acquisitions permitted under Section 6.7(j),
and minus, to the extent included in the statement of such Consolidated
Net Income for such period, the sum of (a) interest income (except to the
extent deducted in determining Consolidated Interest Expense), (b) any
extraordinary, unusual or non-recurring income or gains (including,
whether or not otherwise includable as a separate item in the statement of
such Consolidated Net Income for such period, gains on the sales of assets
outside of the ordinary course of business) and (c) any other non-cash
income, all as determined on a consolidated basis.
Notwithstanding the foregoing, for purposes of calculating
Consolidated EBITDA of the Company and its Subsidiaries for any period,
the Consolidated EBITDA of any Person or assets constituting a business
unit acquired by the Company or its Subsidiaries during such period shall
be included on a pro forma basis for such period (assuming the
consummation of such acquisition and the incurrence or assumption of any
Indebtedness in connection therewith occurred on the first day of such
period) if the consolidated balance sheet of such acquired Person and its
consolidated Subsidiaries or such acquired assets as at the end of the
period preceding the acquisition of such Person or such assets and the
related consolidated statements of income and stockholders' equity and of
cash flows for the period in respect of which Consolidated EBITDA is to be
calculated (i) have been previously provided to the Administrative Agent
and the Lenders and (ii) either (A) have been reported on without a
qualification arising out of the scope of the audit by independent
certified public accountants of nationally recognized standing or (B) are
acceptable to the Administrative Agent.
"Consolidated Interest Expense": for any period, total cash interest
expense (including that attributable to Capital Lease Obligations) of the
Company and its Subsidiaries for such period (whether paid or past due)
with respect to all outstanding Indebtedness of the Company and its
Subsidiaries (including, without limitation, all commissions, discounts
and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing and net costs under Hedge Agreements in
respect of interest rates to the extent such net costs are allocable to
such period in accordance with GAAP) net of cash interest income for such
period.
Notwithstanding the foregoing, for purposes of calculating
Consolidated Interest Expense of the Company and its Subsidiaries for any
period, the Consolidated Interest Expense of any Person or assets
constituting a business unit acquired by the Company or its Subsidiaries
during such period shall be included on a pro forma basis for such period
(assuming the consummation of such acquisition and the incurrence or
assumption of any Indebtedness in connection therewith occurred on the
first day of such period), but only if Consolidated EBITDA of such Person
or assets is included for purposes of calculating
<PAGE>
9
Consolidated EBITDA for such period pursuant to the last paragraph of the
definition of "Consolidated EBITDA".
"Consolidated Net Income": for any period, the consolidated net
income (or loss) of the Company and its Subsidiaries, determined on a
consolidated basis in accordance with GAAP; provided that there shall be
excluded (a) the income (or deficit) of any Person accrued prior to the
date it becomes a Subsidiary of the Company or is merged into or
consolidated with the Company or any of its Subsidiaries, (b) the income
(or deficit) of any Person (other than a Subsidiary of the Company) in
which the Company or any of its Subsidiaries has an ownership interest,
except to the extent that any such income is actually received by the
Company or such Subsidiary in the form of dividends or similar
distributions and (c) the undistributed earnings of any Subsidiary of the
Company to the extent that the declaration or payment of dividends or
similar distributions by such Subsidiary is not at the time permitted by
the terms of any Contractual Obligation (other than under any Credit
Document) or Requirement of Law applicable to such Subsidiary.
"Consolidated Total Assets": at any date, all assets of the Company
and its Subsidiaries as determined according to the consolidated balance
sheet most recently delivered pursuant to Section 5.1 or, if no such
balance sheet has yet been delivered pursuant to Section 5.1, the most
recent consolidated balance sheet referred to in Section 3.1(a).
"Consolidated Total Debt": at any date, the aggregate principal
amount of all Funded Debt of the Company and its Subsidiaries on such
date, determined on a consolidated basis in accordance with GAAP minus,
other than for purposes of calculating Total Capitalization, the aggregate
amount of Cash Equivalents pledged (i) under the Existing Senior Notes or
(ii) as security for mandatory cash payments of interest in respect of
Indebtedness permitted by Section 6.2(h) (but, in the case of clause (ii),
only so long as such pledge of Cash Equivalents is permitted by Section
6.3(k)), in each case on such date.
"Consolidated Working Capital": at any date, the excess of
Consolidated Current Assets on such date over Consolidated Current
Liabilities on such date.
"Continuing Directors": the directors of the Company on the Original
Closing Date and each other director, if, in each case, (i) such other
director's nomination for election to the board of directors of the
Company is recommended by at least a majority of the then Continuing
Directors or (ii) such other director receives the vote of the Permitted
Investors in his or her election by the shareholders of the Company.
"Contractual Obligation": as to any Person, any provision of any
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
Property is bound.
<PAGE>
10
"Control Investment Affiliate": as to any Person, any other Person
which (a) directly or indirectly, is in control of, is controlled by, or
is under common control with, such Person and (b) is organized by such
Person primarily for the purpose of making equity or debt investments in
one or more companies. For purposes of this definition, "control" of a
Person means the power, directly or indirectly, to direct or cause the
direction of the management and policies of such Person whether by
contract or otherwise.
"Credit Documents": collectively, this Agreement, the Security
Documents and the Notes.
"Credit Parties": collectively, the Company, the Borrower and each
other Subsidiary which is a party to a Credit Document.
"Default": any of the events specified in Section 7, whether or not
any requirement for the giving of notice, the lapse of time, or both, has
been satisfied.
"Disposition": with respect to any Property, any sale, lease, sale
and leaseback, assignment, conveyance, transfer or other disposition
thereof; the terms "Dispose" and "Disposed of" shall have correlative
meanings.
"Documentation Agent": Bank of America, N.A.
"Dollars" and "$": dollars in lawful currency of the United States
of America.
"ECF Percentage": with respect to any fiscal year, 75%; provided
that the ECF Percentage with respect to any fiscal year shall be 50% if
the Total Leverage Ratio as of the last day of such fiscal year is not
greater than 5.5 to 1.0.
"Environmental Laws": any and all laws, rules, orders, regulations,
statutes, ordinances, guidelines, codes, decrees, or other legally
enforceable requirements (including, without limitation, common law) of
any international authority, foreign government, the United States, or any
state, local, municipal or other governmental authority, regulating,
relating to or imposing liability or standards of conduct concerning
protection of the environment or of human health, or employee health and
safety, as has been, is now, or may at any time hereafter be, in effect.
"Environmental Permits": any and all permits, licenses, approvals,
registrations, notifications, exemptions and/or other authorization
required under any applicable Environmental Law.
"ERISA": the Employee Retirement Income Security Act of 1974, as
amended from time to time.
<PAGE>
11
"Eurocurrency Reserve Requirements": for any day as applied to a
Eurodollar Loan, the aggregate (without duplication) of the maximum rates
(expressed as a decimal fraction) of reserve requirements in effect on
such day (including, without limitation, basic, supplemental, marginal and
emergency reserves under any regulations of the Board or other
Governmental Authority having jurisdiction with respect thereto) dealing
with reserve requirements prescribed for eurocurrency funding (currently
referred to as "Eurocurrency Liabilities" in Regulation D of the Board)
maintained by a member bank of the Federal Reserve System.
"Eurodollar Rate": with respect to each day during each Interest
Period pertaining to a Eurodollar Loan, the rate per annum (rounded
upward, if necessary, to the nearest 1/100 of 1%) determined on the basis
of the rate for deposits in Dollars for a period equal to such Interest
Period commencing on the first day of such Interest Period appearing on
Page 3750 of the Telerate screen as of 11:00 A.M., London time, two
Business Days prior to the beginning of such Interest Period. In the event
that such rate does not appear on Page 3750 of the Telerate screen (or
otherwise on such screen), the "Eurodollar Rate" for purposes of this
definition shall be determined by reference to such other comparable
publicly available service for displaying eurodollar rates as may be
selected by the Administrative Agent or, in the absence of such
availability, by reference to the rate at which the Reference Lender is
offered Dollar deposits at or about 11:00 A.M., New York City time, two
Business Days prior to the beginning of such Interest Period in the
interbank eurodollar market where its eurodollar and foreign currency and
exchange operations are then being conducted for delivery on the first day
of such Interest Period for the number of days comprised therein.
"Eurodollar Loans": Loans the rate of interest applicable to which
is based upon the Eurodollar Rate.
"Eurodollar Tranche": the collective reference to Eurodollar Loans
the then current Interest Periods with respect to all of which begin on
the same date and end on the same later date (whether or not such Loans
shall originally have been made on the same day).
"Event of Default": any of the events specified in Section 7;
provided that any requirement for the giving of notice, the lapse of time,
or both, has been satisfied.
"Excess Cash Flow": for any fiscal year of the Company, the excess,
if any, of (a) the sum, without duplication, of (i) Consolidated Net
Income for such fiscal year, (ii) an amount equal to the amount of all
non-cash charges (including depreciation and amortization) deducted in
arriving at such Consolidated Net Income, (iii) an amount equal to the
aggregate net non-cash loss on the Disposition of Property by the Company
and its Subsidiaries during such fiscal year (other than sales of
inventory in the ordinary course of business), to the extent deducted in
arriving at such Consolidated Net Income and (iv) the net increase during
such fiscal year (if any) in deferred tax accounts of the Company over (b)
the sum, without duplication, of (i) an amount equal to the amount of
<PAGE>
12
all non-cash credits included in arriving at such Consolidated Net Income,
(ii) the aggregate amount actually paid by the Company and its
Subsidiaries in cash during such fiscal year on account of Capital
Expenditures (excluding (x) the principal amount of Indebtedness incurred
in connection with such expenditures and any such expenditures financed
with the proceeds of any Reinvestment Deferred Amount except to the extent
such proceeds are included in Consolidated Net Income and (y) any such
expenditures to the extent made with the Available Amount), (iii) the
aggregate amount of all prepayments of Revolving Credit Loans and Swing
Line Loans during such fiscal year to the extent accompanying permanent
optional reductions of the Revolving Credit Commitments and all optional
prepayments of the Term Loans during such fiscal year, (iv) the aggregate
amount of all principal payments of Funded Debt (including, without
limitation, the Term Loans) of the Company and its Subsidiaries made
during such fiscal year (other than (A) in respect of any revolving credit
facility to the extent there is not an equivalent permanent reduction in
commitments thereunder or (B) any such principal payment prohibited
hereby), (v) increases in Consolidated Working Capital for such fiscal
year, (vi) an amount equal to the aggregate net non-cash gain on the
Disposition of Property by the Company and its Subsidiaries during such
fiscal year (other than sales of inventory in the ordinary course of
business), to the extent included in arriving at such Consolidated Net
Income, (vii) the net decrease during such fiscal year (if any) in
deferred tax accounts of the Company and (viii) the amount of Investments
made during such period pursuant to Section 6.7 to the extent that such
Investments were financed with internally generated cash flow of the
Company and its Subsidiaries.
"Excess Cash Flow Application Date": as defined in Section 2.12(b).
"Existing Senior Notes": the 14% Senior Notes Due 2008 of the
Company issued pursuant to the Existing Senior Notes Indenture in an
aggregate principal amount of $115,000,000 outstanding on the date hereof.
"Existing Senior Notes Documents": the collective reference to the
Existing Senior Notes Indenture and the Existing Senior Notes.
"Existing Senior Notes Indenture": the Indenture dated as of June
23, 1998 among the Company and Norwest Bank Minnesota, National
Association, as Trustee, as amended, supplemented or otherwise modified
from time to time in accordance with Section 6.8.
"FCC": the U.S. Federal Communications Commission.
"Facility": each of (a) the Term Loan Commitments and the Term Loans
made thereunder (the "Term Loan Facility") and (b) the Revolving Credit
Commitments and the extensions of credit made thereunder (the "Revolving
Credit Facility").
"Facility Usage": a fraction, calculated as of the last day of each
fiscal quarter, the numerator of which is equal to the average daily
aggregate principal amount of the
<PAGE>
13
Revolving Extensions of Credit and the Term Loans (or, after the Term Loan
Commitment Termination Date, the Revolving Extensions of Credit) during
such fiscal quarter, and the denominator of which is equal to the average
daily aggregate Commitments (or, after the Term Loan Commitment
Termination Date, the Revolving Credit Commitments) for all Lenders during
such fiscal quarter.
"Federal Funds Effective Rate": for any day, the weighted average of
the rates on overnight federal funds transactions with members of the
Federal Reserve System arranged by federal funds brokers, as published on
the next succeeding Business Day by the Federal Reserve Bank of New York,
or, if such rate is not so published for any day which is a Business Day,
the average of the quotations for the day of such transactions received by
the Reference Lender from three federal funds brokers of recognized
standing selected by it.
"Funded Debt": as to any Person, all Indebtedness of such Person of
the type described in clauses (a), (c), (e) and (to the extent that such
Indebtedness would be included in determining total liabilities as shown
on the liability side of a consolidated balance sheet of the Company and
its Subsidiaries prepared in accordance with GAAP) (b) and (d) of the
definition of "Indebtedness" that matures more than one year from the date
of its creation or matures within one year from such date but is renewable
or extendible, at the option of such Person, to a date more than one year
from such date or arises under a revolving credit or similar agreement
that obligates the lender or lenders to extend credit during a period of
more than one year from such date, including, without limitation, all
current maturities and current sinking fund payments in respect of such
Indebtedness whether or not required to be paid within one year from the
date of its creation and, in the case of the Borrower, Indebtedness in
respect of the Loans.
"Funding Office": the office specified from time to time by the
Administrative Agent as its funding office by notice to the Borrower and
the Lenders.
"GAAP": generally accepted accounting principles in the United
States of America as in effect from time to time, except that for purposes
of Section 6.1, GAAP shall be determined on the basis of such principles
in effect on the date hereof and consistent with those used in the
preparation of the most recent audited financial statements delivered
pursuant to Section 3.1(b).
"Governmental Authority": any nation or government, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government (including, without limitation, the FCC).
"Guarantee and Collateral Agreement": the Amended and Restated
Guarantee and Collateral Agreement to be executed and delivered by the
Company, the Borrower and each Subsidiary Guarantor, substantially in the
form of Exhibit A, as the same may be amended, supplemented or otherwise
modified from time to time.
<PAGE>
14
"Guarantee Obligation": as to any Person (the "guaranteeing
person"), any obligation of (a) the guaranteeing person or (b) another
Person (including, without limitation, any bank under any letter of
credit) to induce the creation of which the guaranteeing person has issued
a reimbursement, counterindemnity or similar obligation, in either case
guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends
or other obligations (the "primary obligations") of any other third Person
(the "primary obligor") in any manner, whether directly or indirectly,
including, without limitation, any obligation of the guaranteeing person,
whether or not contingent, (i) to purchase any such primary obligation or
any Property constituting direct or indirect security therefor, (ii) to
advance or supply funds (1) for the purchase or payment of any such
primary obligation or (2) to maintain working capital or equity capital of
the primary obligor or otherwise to maintain the net worth or solvency of
the primary obligor, (iii) 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 (iv) otherwise to assure or hold harmless the owner
of any such primary obligation against loss in respect thereof; provided,
however, that the term Guarantee Obligation shall not include endorsements
of instruments for deposit or collection in the ordinary course of
business. The amount of any Guarantee Obligation of any guaranteeing
person shall be deemed to be the lower of (a) an amount equal to the
stated or determinable amount of the primary obligation in respect of
which such Guarantee Obligation is made and (b) the maximum amount for
which such guaranteeing person may be liable pursuant to the terms of the
instrument embodying such Guarantee Obligation, unless such primary
obligation and the maximum amount for which such guaranteeing person may
be liable are not stated or determinable, in which case the amount of such
Guarantee Obligation shall be such guaranteeing person's maximum
reasonably anticipated liability in respect thereof as determined by the
Borrower in good faith.
"Guarantors": the collective reference to the Company and the
Subsidiary Guarantors.
"Hedge Agreements": all interest rate swaps, caps or collar
agreements or similar arrangements entered into by the Company or the
Borrower providing for protection against fluctuations in interest rates
or currency exchange rates or the exchange of nominal interest
obligations, either generally or under specific contingencies.
"Indebtedness": of any Person at any date, without duplication, (a)
all indebtedness of such Person for borrowed money, (b) all obligations of
such Person for the deferred purchase price of Property or services, (c)
all obligations of such Person evidenced by notes, bonds, debentures or
other similar instruments, (d) all indebtedness created or arising under
any conditional sale or other title retention agreement with respect to
Property acquired by such Person (even though the rights and remedies of
the seller or lender under such agreement in the event of default are
limited to repossession or sale of such Property), (e) all Capital Lease
Obligations of such Person, (f) all obligations
<PAGE>
15
of such Person, contingent or otherwise, as an account party under
acceptance, letter of credit or similar facilities, (g) all obligations of
such Person, contingent or otherwise, to purchase, redeem, retire or
otherwise acquire for value any Capital Stock of such Person (other than
obligations of such Person to purchase Capital Stock from present or
former officers or employees of such Person upon the death, disability or
termination of employment of such officer or employee) prior to the date
that is 91 days after the final scheduled maturity date of the Loans, (h)
all Guarantee Obligations of such Person in respect of obligations of the
kind referred to in clauses (a) through (h) above and (i) all obligations
of the kind referred to in clauses (a) through (i) above secured by (or
for which the holder of such obligation has an existing right, contingent
or otherwise, to be secured by) any Lien on Property (including, without
limitation, accounts and contract rights) owned by such Person, whether or
not such Person has assumed or become liable for the payment of such
obligation; provided that Indebtedness shall not include trade payables or
accrued expenses incurred in the ordinary course of such Person's
business.
"Indemnified Liabilities": as defined in Section 9.5.
"Indemnitee": as defined in Section 9.5.
"Insolvency": with respect to any Multiemployer Plan, the condition
that such Plan is insolvent within the meaning of Section 4245 of ERISA.
"Insolvent": pertaining to a condition of Insolvency.
"Intellectual Property": the collective reference to all rights,
priorities and privileges relating to intellectual property, whether
arising under United States, multinational or foreign laws or otherwise,
including, without limitation, copyrights, copyright licenses, patents,
patent licenses, trademarks, trademark licenses, technology, know-how and
processes, and all rights to sue at law or in equity for any infringement
or other impairment thereof, including the right to receive all proceeds
and damages therefrom.
"Interest Coverage Ratio": the ratio as of the last day of any
fiscal quarter of (a) Annualized Consolidated EBITDA to (b) Consolidated
Interest Expense for the period of four consecutive fiscal quarters then
ended.
"Interest Payment Date": (a) as to any Base Rate Loan, the last day
of each March, June, September and December to occur while such Loan is
outstanding and the final maturity date of such Loan, (b) as to any
Eurodollar Loan having an Interest Period of three months or less, the
last day of such Interest Period, (c) as to any Eurodollar Loan having an
Interest Period longer than three months, each day which is three months,
or a whole multiple thereof, after the first day of such Interest Period
and the last day of such Interest Period and (d) as to any Loan (other
than any Revolving Credit Loan that is a Base Rate Loan and any Swing Line
Loan), the date of any repayment or prepayment made in respect thereof.
<PAGE>
16
"Interest Period": as to any Eurodollar Loan, (a) initially, the
period commencing on the borrowing or conversion date, as the case may be,
with respect to such Eurodollar Loan and ending one, two, three or six
months (or nine or twelve months, if approved by all Lenders) thereafter,
as selected by the Borrower in its Notice of Borrowing or notice of
conversion, as the case may be, given with respect thereto; and (b)
thereafter, each period commencing on the last day of the next preceding
Interest Period applicable to such Eurodollar Loan and ending one, two,
three or six months (or nine or twelve months, if approved by all Lenders)
thereafter, as selected by the Borrower by irrevocable notice to the
Administrative Agent not less than three Business Days prior to the last
day of the then current Interest Period with respect thereto; provided
that all of the foregoing provisions relating to Interest Periods are
subject to the following:
(i) if any Interest Period would otherwise end on a day that
is not a Business Day, such Interest Period shall be extended to the
next succeeding Business Day unless the result of such extension
would be to carry such Interest Period into another calendar month
in which event such Interest Period shall end on the immediately
preceding Business Day;
(ii) any Interest Period that would otherwise extend beyond
the Scheduled Revolving Credit Termination Date or beyond the date
final payment is due on the Term Loans shall end on the Revolving
Credit Termination Date or such due date, as applicable; and
(iii) any Interest Period that begins on the last 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 Interest
Period) shall end on the last Business Day of a calendar month.
"Investments": as defined in Section 6.7.
"LCPI": as defined in the preamble hereto.
"Lender Addendum": with respect to any initial Lender, a Lender
Addendum, substantially in the form of Exhibit H, to be executed and
delivered by such Lender on the Closing Date as provided in Section 9.16.
"Lenders": as defined in the preamble hereto.
"Lien": any mortgage, pledge, hypothecation, assignment in the
nature of a security interest, deposit arrangement, lien (statutory or
other), charge or other security interest or any similar encumbrance or
other security agreement or similar arrangement of any kind or nature
whatsoever (including, without limitation, any conditional sale or other
title retention agreement and any capital lease having substantially the
same economic effect as any of the foregoing).
<PAGE>
17
"Line": a line (whether switched, resale, UNE-P or any other type)
in service made available by the Borrower or any of its Subsidiaries to a
bona fide customer for telecommunications services which have been
provisioned and have been provided by the Borrower and its Subsidiaries.
"Loan": any loan made by any Lender pursuant to this Agreement.
"Majority Facility Lenders": with respect to any Facility, the
holders of more than 50% of the aggregate unpaid principal amount of the
Total Revolving Extensions of Credit or the Term Loans, as the case may
be, outstanding under such Facility (or (i) in the case of the Revolving
Credit Facility, prior to any termination of the Revolving Credit
Commitments, the holders of more than 50% of the Total Revolving Credit
Commitments or (ii) in the case of the Term Loan Facility, prior to any
termination of the Term Loan Commitments, the holders of more than 50% of
the Term Loan Commitments).
"Material Adverse Effect": a material adverse effect on (a) the
business, properties, assets or financial condition of the Company and its
Subsidiaries taken as a whole or (b) the validity or enforceability of
this Agreement and the other Credit Documents or the rights or remedies of
the Agents or the Lenders hereunder or thereunder, in each case taken as a
whole.
"Materials of Environmental Concern": any gasoline or petroleum
(including crude oil or any fraction thereof) or petroleum products,
polychlorinated biphenyls, urea-formaldehyde insulation, asbestos,
pollutants, contaminants, radioactivity, and any other substances or
forces of any kind, whether or not any such substance or force is defined
as hazardous or toxic under any Environmental Law, that is regulated
pursuant to or could give rise to liability under any Environmental Law.
"Mortgaged Properties": any real property acquired after the
Original Closing Date that is required to be subject to a Mortgage
pursuant to Section 5.9(b), and ancillary rights relating thereto, as to
which the Administrative Agent for the benefit of the Lenders shall be
granted a Lien pursuant to the Mortgages.
"Mortgages": each of the mortgages and deeds of trust made by any
Credit Party in favor of, or for the benefit of, the Administrative Agent
(and/or one or more trustees or other Persons designated therein) for the
benefit of the Lenders, in form and substance satisfactory to the
Administrative Agent, executed and delivered by the Borrower or one of its
Subsidiaries pursuant to Section 5.9(b), as the same may be amended,
supplemented or otherwise modified from time to time.
"Multiemployer Plan": a Plan which is a multiemployer plan as
defined in Section 4001(a)(3) of ERISA.
<PAGE>
18
"Net Cash Proceeds": (a) in connection with any Asset Sale or any
Recovery Event, the proceeds thereof in the form of cash and Cash
Equivalents (including any such proceeds received by way of deferred
payment of principal pursuant to a note or installment receivable or
purchase price adjustment receivable or otherwise, but only as and when
received) of such Asset Sale or Recovery Event, net of attorneys' fees,
accountants' fees, investment banking fees, amounts required to be applied
to the repayment of Indebtedness as a result of such event, including
Indebtedness secured by a Lien expressly permitted hereunder on any asset
which is the subject of such Asset Sale or Recovery Event (other than any
Lien pursuant to a Security Document) and other customary fees and
expenses actually incurred in connection therewith and net of taxes paid
or reasonably estimated to be payable as a result thereof (after taking
into account any available tax credits or deductions and any tax sharing
arrangements) and (b) in connection with any issuance or sale of equity
securities or debt securities or instruments or the incurrence of loans,
the cash proceeds received from such issuance or incurrence, net of
attorneys' fees, investment banking fees, accountants' fees, underwriting
discounts and commissions and other customary fees and expenses actually
incurred in connection therewith.
"Non-Excluded Taxes": as defined in Section 2.20(a).
"Non-U.S. Lender": as defined in Section 2.20(d).
"Notes": the collective reference to any promissory note evidencing
Loans.
"Notice of Borrowing": a request by the Borrower that the relevant
Lenders make Loans hereunder, substantially in the form of Exhibit I.
"Obligations": the unpaid principal of and interest on (including,
without limitation, interest accruing after the maturity of the Loans and
interest accruing after the filing of any petition in bankruptcy, or the
commencement of any insolvency, reorganization or like proceeding,
relating to the Borrower, whether or not a claim for post-filing or
post-petition interest is allowed in such proceeding) the Loans and all
other obligations and liabilities of the Borrower and the other Credit
Parties to the Administrative Agent or to any Lender (or, in the case of
Hedge Agreements, any Affiliate of any Lender), whether direct or
indirect, absolute or contingent, due or to become due, or now existing or
hereafter incurred, which may arise under, out of, or in connection with,
this Agreement, any other Credit Document, any Hedge Agreement entered
into with any Lender or any Affiliate of any Lender or any other document
made, delivered or given in connection herewith or therewith, whether on
account of principal, interest, reimbursement obligations, fees,
indemnities, costs, expenses (including, without limitation, all fees,
charges and disbursements of counsel to the Administrative Agent or to any
Lender that are required to be paid by the Borrower pursuant hereto or
thereto) or otherwise.
"Original Closing Date": December 20, 1999.
<PAGE>
19
"Other Taxes": any and all present or future stamp or documentary
taxes or any other excise or property taxes, charges or similar levies
arising from any payment made hereunder or from the execution, delivery or
enforcement of, or otherwise with respect to, this Agreement or any other
Credit Document.
"Participant": as defined in Section 9.6(b).
"Payment Office": the office specified from time to time by the
Administrative Agent as its payment office by notice to the Borrower and
the Lenders.
"PBGC": the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA (or any successor).
"Permitted Equipment Financing": one or more purchase money, vendor
or similar equipment financing facilities (including leases) (i) in an
aggregate principal amount not in excess of $25,000,000 outstanding at any
time, (ii) pursuant to which the Company or any of its Subsidiaries may be
advanced funds principally for, and substantially concurrent with, the
purchase or lease of network equipment or services, or such type of
financing existing in respect of such Property at the time of the
acquisition thereof, (iii) which may be secured only by the assets being
financed thereby and (iv) the terms of which are reasonably satisfactory
to the Administrative Agent (and not objected to by the Required Lenders
within five Business Days after the Borrower notifies the Lenders of the
terms thereof in reasonable detail).
"Permitted Investors": the collective reference to (i) Kohlberg
Kravis Roberts & Co. L.P. and its Control Investment Affiliates and (ii)
each Person listed in Schedule 1.1.
"Person": an individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated
association, joint venture, Governmental Authority or other entity of
whatever nature.
"Plan": at a particular time, any employee benefit plan which is
covered by ERISA and in respect of which the Company or a Commonly
Controlled Entity is (or, if such plan were terminated at such time, would
under Section 4069 of ERISA be deemed to be) an "employer" as defined in
Section 3(5) of ERISA.
"Pledged Stock": all Capital Stock or other equity interests, now
owned or hereafter acquired, upon which a Lien is purported to be created
by a Security Document.
"Preferred Stock Purchase Agreement": the Series F Preferred Stock
Purchase Agreement dated as of July 13, 1999 by and among the Company and
BTI Ventures L.L.C.
"Pricing Grid": the pricing grid attached hereto as Schedule I.
<PAGE>
20
"Prime Rate": as defined in the definition of "Base Rate" in this
Section.
"Principal Payment Dates": the last Business Day of March, June,
September and December of each year, commencing with such day falling on
or nearest to March 31, 2003.
"Pro Forma Consolidated Debt Service": at any date, the sum, without
duplication, of (a) Consolidated Interest Expense and (b) all scheduled
amortization (including any payment or prepayment of principal of,
premium, if any, or interest on, or redemption, purchase, retirement,
defeasance (including in-substance or legal defeasance), sinking, fund or
similar payment) in respect of Indebtedness; in each case payable by the
Company and its Subsidiaries during the next four consecutive fiscal
quarters.
"Pro Forma Debt Service Coverage Ratio": the ratio as of the last
day of any fiscal quarter of (a) Annualized Consolidated EBITDA to (b) Pro
Forma Consolidated Debt Service for the next four consecutive fiscal
quarters.
"Projected Financial Statements": as defined in Section 3.1(b).
"Projections": as defined in Section 5.2(c).
"Property": any right or interest in or to property of any kind
whatsoever, whether real, personal or mixed and whether tangible or
intangible, including, without limitation, Capital Stock.
"Recovery Event": any settlement of or payment in respect of any
property or casualty insurance claim or any condemnation proceeding
relating to any asset of the Company or any of its Subsidiaries.
"Reference Lender": Bankers Trust Company (or such other commercial
bank designated as such by the Administrative Agent with the consent of
the Borrower, such consent not to be unreasonably withheld).
"Refunded Swing Line Loans": as defined in Section 2.7.
"Refunding Date": as defined in Section 2.7.
"Register": as defined in Section 9.6(d).
"Regulation U": Regulation U of the Board as in effect from time to
time.
"Reinvestment Deferred Amount": with respect to any Reinvestment
Event, the aggregate Net Cash Proceeds received by the Company or any of
its Subsidiaries in
<PAGE>
21
connection therewith which are not applied to prepay the Term Loans or
reduce the Revolving Credit Commitments or the Term Loan Commitments
pursuant to Section 2.12(b) as a result of the delivery of a Reinvestment
Notice.
"Reinvestment Event": any Asset Sale or Recovery Event in respect of
which the Borrower has delivered a Reinvestment Notice.
"Reinvestment Notice": a written notice executed by a Responsible
Officer stating that no Default or Event of Default has occurred and is
continuing and that the Company (indirectly through a Subsidiary) intends
and expects to use all or a specified portion of the Net Cash Proceeds of
an Asset Sale or Recovery Event to acquire assets useful in the business
of the Company and its Subsidiaries.
"Reinvestment Prepayment Amount": with respect to any Reinvestment
Event, the Reinvestment Deferred Amount relating thereto less any amount
expended prior to the relevant Reinvestment Prepayment Date to acquire
assets useful in the business of the Company and its Subsidiaries.
"Reinvestment Prepayment Date": with respect to any Reinvestment
Event, the earlier of (a) the date occurring one year after such
Reinvestment Event and (b) the date on which the Company shall have
determined not to, or shall have otherwise ceased to, acquire assets
useful in the business of the Company and its Subsidiaries with all or any
portion of the relevant Reinvestment Deferred Amount.
"Reorganization": with respect to any Multiemployer Plan, the
condition that such plan is in reorganization within the meaning of
Section 4241 of ERISA.
"Reportable Event": any of the events set forth in Section 4043(c)
of ERISA, other than those events as to which the thirty day notice period
is waived under subsections .27, .28, .29, .30, .31, .32, .34 or .35 of
PBGC Reg. ss.4043.
"Required Lenders": at any time, the holders of more than 50% of the
sum of (i) the Term Loan Commitments then in effect or, if the Term Loan
Commitments have been terminated, the aggregate unpaid principal amount of
the Term Loans then outstanding and (ii) the Total Revolving Credit
Commitments then in effect or, if the Revolving Credit Commitments have
been terminated, the Total Revolving Extensions of Credit then
outstanding.
"Requirement of Law": as to any Person, the Certificate of
Incorporation and By-Laws or other organizational or governing 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 Property or to
which such Person or any of its Property is subject.
<PAGE>
22
"Responsible Officer": the chief executive officer, president,
senior vice president or chief financial officer of the Company and the
Borrower, but in any event, with respect to financial matters, the chief
financial officer of the Company and the Borrower or senior officer
fulfilling equivalent duties.
"Restricted Payments": as defined in Section 6.6.
"Revenues": for any period, the gross revenues of the Company and
its Subsidiaries on a consolidated basis for such period determined in
accordance with GAAP.
"Revolving Credit Commitment": as to any Lender, the obligation of
such Lender, if any, to make Revolving Credit Loans and participate in
Swing Line Loans, in an aggregate principal amount not to exceed the
amount set forth under the heading "Revolving Credit Commitment" opposite
such Lender's name on Schedule I to the Lender Addendum delivered by such
Lender, or, as the case may be, in the Assignment and Acceptance pursuant
to which such Lender became a party hereto, as the same may be changed
from time to time pursuant to the terms hereof. The original amount of the
Total Revolving Credit Commitments is $25,000,000.
"Revolving Credit Commitment Period": the period from and including
the Closing Date to the Revolving Credit Termination Date.
"Revolving Credit Facility": as defined in the definition of
"Facility" in this Section.
"Revolving Credit Lender": each Lender which has a Revolving Credit
Commitment or which is the holder of Revolving Credit Loans.
"Revolving Credit Loans": as defined in Section 2.4.
"Revolving Credit Note": any Note evidencing a Lender's Revolving
Credit Commitment and Revolving Credit Loans made thereunder,
substantially in the form of Exhibit F-2.
"Revolving Credit Percentage": as to any Revolving Credit Lender at
any time, the percentage which such Lender's Revolving Credit Commitment
then constitutes of the Total Revolving Credit Commitments (or, at any
time after the Revolving Credit Commitments shall have expired or
terminated, the percentage which the aggregate principal amount of such
Lender's Revolving Credit Loans then outstanding constitutes of the
aggregate principal amount of the Revolving Credit Loans then
outstanding).
"Revolving Credit Termination Date": the earlier of (a) the
Scheduled Revolving Credit Termination Date and (b) the date on which the
Term Loans shall be paid in full.
<PAGE>
23
"Revolving Extensions of Credit": as to any Revolving Credit Lender
at any time, an amount equal to the sum of (a) the aggregate principal
amount of all Revolving Credit Loans made by such Lender then outstanding
and (b) such Lender's Revolving Credit Percentage of the aggregate
principal amount of Swing Line Loans then outstanding.
"Scheduled Revolving Credit Termination Date": December 31, 2006.
"SEC": the Securities and Exchange Commission (or successors thereto
or an analogous Governmental Authority).
"Security Documents": the collective reference to the Guarantee and
Collateral Agreement, the Mortgages and all other security documents
hereafter delivered to the Administrative Agent granting a Lien on any
Property of any Person to secure the obligations and liabilities of any
Credit Party under any Credit Document.
"Senior Leverage Ratio": the ratio as of the last day of any fiscal
quarter of (i) Senior Secured Debt on such day to (ii) Annualized
Consolidated EBITDA.
"Senior Secured Debt": an amount equal to the sum of aggregate
principal amount of all outstanding Loans and the outstanding principal
amount of all Permitted Equipment Financings and all Capital Lease
Obligations of, in each case, the Company and its Subsidiaries.
"Single Employer Plan": any Plan which is covered by Title IV of
ERISA, but which is not a Multiemployer Plan.
"Solvent": as of any date of determination, (a) the amount of the
"present fair saleable value" of the assets of the Company and its
Subsidiaries, taken as a whole, will, as of such date, exceed the amount
of all "liabilities, contingent or otherwise" of the Company and its
Subsidiaries, taken as a whole, as of such date, as such quoted terms are
determined in accordance with applicable federal and state laws governing
determinations of the insolvency of debtors, (b) the present fair saleable
value of the assets of the Company and its Subsidiaries, taken as a whole,
will, as of such date, be greater than the amount that will be required to
pay the liability of the Company and its Subsidiaries, taken as a whole,
on their respective debts as such debts become absolute and matured, (c)
the Company and each of its Subsidiaries will not have, as of such date,
an unreasonably small amount of capital with which to conduct its
business, and (d) the Company and each of its Subsidiaries will be able to
pay its debts as they mature. For purposes of this definition, (i) "debt"
means liability on a "claim", and (ii) "claim" means any (x) right to
payment, whether or not such a right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed,
legal, equitable, secured or unsecured or (y) right to an equitable remedy
for breach of performance if such breach gives rise to a right to payment,
whether or not such right to an equitable remedy is reduced to judgment,
fixed, contingent, matured or unmatured, disputed, undisputed, secured or
unsecured.
<PAGE>
24
"Stage 1": the period from the Original Closing Date to June 30,
2001.
"Stage 2": the period from and after June 30, 2001.
"Subsidiary": as to any Person, a corporation, partnership, limited
liability company or other entity of which shares of stock or other
ownership interests having ordinary voting power (other than stock or such
other ownership interests having such power only by reason of the
happening of a contingency) to elect a majority of the board of directors
or other managers of such corporation, partnership or other entity are at
the time owned, or the management of which is otherwise controlled,
directly or indirectly through one or more intermediaries, or both, by
such Person. Unless otherwise qualified, all references to a "Subsidiary"
or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or
Subsidiaries of the Company.
"Subsidiary Guarantor": each Subsidiary of the Company other than
the Borrower.
"Swing Line Commitment": the obligation of the Swing Line Lender to
make Swing Line Loans pursuant to Section 2.6 in an aggregate principal
amount at any one time outstanding not to exceed $5,000,000.
"Swing Line Lender": LCPI, in its capacity as the lender of Swing
Line Loans.
"Swing Line Loans": as defined in Section 2.6.
"Swing Line Note": the Note evidencing the Swing Line Lender's Swing
Line Commitment and each Swing Line Loan made thereunder, substantially in
the form of Exhibit F-3.
"Swing Line Participation Amount": as defined in Section 2.7.
"Syndication Agent": Bankers Trust Company.
"Term Loans": as defined in Section 2.1.
"Term Loan Facility": as defined in the definition of "Facility" in
this Section.
"Term Loan Commitment": as to any Lender, the obligation of such
Lender, if any, to make one or more Term Loans to the Borrower hereunder
in an aggregate principal amount not to exceed the amount set forth under
the heading "Term Loan Commitment" opposite such Lender's name on Schedule
I to the Lender Addendum delivered by such Lender, or, as the case may be,
in the Assignment and Acceptance pursuant to which such Lender became a
party hereto, as the same may be changed from
<PAGE>
25
time to time pursuant to the terms hereof. The original aggregate amount
of the Term Loan Commitments is $100,000,000.
"Term Loan Commitment Period": the period from and including the
Closing Date to the Term Loan Commitment Termination Date.
"Term Loan Commitment Termination Date": December 20, 2000.
"Term Loan Lender": each Lender which has a Term Loan Commitment or
is the holder of a Term Loan.
"Term Loan Maturity Date": December 31, 2006.
"Term Loan Percentage": as to a Term Loan Lender at any time, the
percentage which such Lender's Term Loan Commitment then constitutes of
the aggregate Term Loan Commitments (or, at any time after the Term Loan
Commitments shall have expired or terminated, the percentage which the
aggregate principal amount of such Lender's Term Loans then outstanding
constitutes of the aggregate principal amount of the Term Loans then
outstanding).
"Term Note": any Note evidencing a Lender's Term Loan Commitment and
Term Loans of any Class, substantially in the form of Exhibit F-1.
"Three-Month Secondary CD Rate": as defined in the definition of
"Base Rate" in this Section.
"Total Capitalization": the sum of (a) Consolidated Total Debt and
(b) paid-in-equity capital of the Company (including preferred stock but
excluding additional equity issued as pay-in-kind dividends on issued and
outstanding equity securities) and excluding any accumulated deficits
resulting from operations, determined on a consolidated basis in
accordance with GAAP.
"Total Leverage Ratio": the ratio as at the last day of any fiscal
quarter of (a) Consolidated Total Debt on such day to (b) Annualized
Consolidated EBITDA.
"Total Revolving Credit Commitments": at any time, the aggregate
amount of the Revolving Credit Commitments then in effect.
"Total Revolving Extensions of Credit": at any time, the aggregate
amount of the Revolving Extensions of Credit of the Revolving Credit
Lenders outstanding at such time.
"Transferee": as defined in Section 9.14.
"Type": as to any Loan, its nature as a Base Rate Loan or a
Eurodollar Loan.
<PAGE>
26
"Wholly Owned Subsidiary": as to any Person, any other Person all of
the Capital Stock of which (other than directors' qualifying shares
required by law) is owned by such Person directly and/or through other
Wholly Owned Subsidiaries.
1.2 Other Definitional Provisions. (a) Unless otherwise specified
therein, all terms defined in this Agreement shall have the defined meanings
when used in the other Credit Documents or any certificate or other document
made or delivered pursuant hereto or thereto.
(b) As used herein and in the other Credit Documents, and any
certificate or other document made or delivered pursuant hereto or thereto,
accounting terms relating to the Company and its Subsidiaries not defined in
Section 1.1 and accounting terms partly defined in Section 1.1, to the extent
not defined, shall have the respective meanings given to them under GAAP. As
used herein, "fiscal quarter" or "fiscal year" shall refer to the relevant
fiscal quarter or fiscal year, respectively, of the Company.
(c) The words "hereof", "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 provision of this Agreement, and Section,
Schedule and Exhibit references are to this Agreement unless otherwise
specified.
(d) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
SECTION 2. AMOUNT AND TERMS OF COMMITMENTS
2.1 Term Loan Commitments. (a) Subject to the terms and conditions
hereof, each Term Loan Lender severally agrees to make term loans ("Term Loans")
to the Borrower during the Term Loan Commitment Period in an aggregate amount
not exceeding the amount of the Term Loan Commitment of such Lender. The Term
Loans may from time to time be Eurodollar Loans or Base Rate Loans, as
determined by the Borrower and notified to the Administrative Agent in
accordance with Sections 2.2 and 2.13.
(b) Any unused portion of the Term Loan Commitments shall
automatically terminate at 5:00 p.m. (New York City time) on the Term Loan
Commitment Termination Date.
2.2 Procedure for Term Loan Borrowing. The Borrower may borrow under
the Term Loan Commitments during the Term Loan Commitment Period on any Business
Day; provided that the Borrower shall give the Administrative Agent irrevocable
notice (by delivering to the Administrative Agent a Notice of Borrowing, which
Notice of Borrowing must be received by the Administrative Agent prior to 12:00
Noon, New York City time, (a) three Business Days prior to the requested
Borrowing Date, in the case of Eurodollar Loans, or (b) one Business Day prior
to the requested Borrowing Date, in the case of Base Rate Loans), specifying (i)
the amount and Type of Term Loans to be borrowed, (ii) the requested Borrowing
Date and (iii) in the case
<PAGE>
27
of Eurodollar Loans, the length of the initial Interest Period therefor. Each
borrowing under the Term Loan Commitments shall be in an amount equal to (x) in
the case of Base Rate Loans, $1,000,000 or a whole multiple of $100,000 in
excess thereof (or, if the then aggregate Available Term Loan Commitments are
less than $1,000,000, such lesser amount) and (y) in the case of Eurodollar
Loans, $1,000,000 or a whole multiple of $100,000 in excess thereof; provided
that, notwithstanding the foregoing, the Borrower may borrow Base Rate Loans
under the Term Loan Commitments on the Closing Date so long as the Notice of
Borrowing with respect thereto is delivered to the Administrative Agent prior to
12:00 Noon, New York time on such date. Upon receipt of such notice the
Administrative Agent shall promptly notify each Term Loan Lender thereof. Each
Term Lender will make the amount of its pro rata share of each borrowing
available to the Administrative Agent for the account of the Borrower at the
Funding Office prior to 12:00 Noon, New York City time, on the Borrowing Date
requested by the Borrower in funds immediately available to the Administrative
Agent. Such borrowing will then be made available to the Borrower, upon its
instructions, by the Administrative Agent in like funds as received by the
Administrative Agent.
2.3 Repayment of Term Loans. The Term Loan(s) of each Term Loan
Lender shall mature in 16 consecutive quarterly installments on the Principal
Payment Dates specified below, each of which shall be in an amount equal to such
Lender's Term Loan Percentage multiplied by the percentage set forth below
opposite such day of the aggregate principal amount of the Term Loans
outstanding on the Term Loan Commitment Termination Date:
Principal Payment
Date Falling on or
Nearest to Percentage
------------------- ----------
March 31, 2003 2.5%
June 30, 2003 2.5%
September 30, 2003 2.5%
December 31, 2003 2.5%
March 31, 2004 5.0%
June 30, 2004 5.0%
September 30, 2004 5.0%
December 31, 2004 5.0%
March 31, 2005 7.5%
June 30, 2005 7.5%
September 30, 2005 7.5%
December 31, 2005 7.5%
March 31, 2006 10.0%
June 30, 2006 10.0%
September 30, 2006 10.0%
December 31, 2006 10.0%
<PAGE>
28
To the extent not previously paid, all Term Loans shall be due and payable on
the Term Loan Maturity Date.
2.4 Revolving Credit Commitments. (a) Subject to the terms and
conditions hereof, each Revolving Credit Lender severally agrees to make
revolving credit loans ("Revolving Credit Loans") to the Borrower from time to
time during the Revolving Credit Commitment Period in an aggregate principal
amount at any one time outstanding which, when added to such Lender's Revolving
Credit Percentage of the aggregate principal amount of the Swing Line Loans then
outstanding, does not exceed the amount of such Lender's Revolving Credit
Commitment. During the Revolving Credit Commitment Period the Borrower may use
the Revolving Credit Commitments by borrowing, prepaying the Revolving Credit
Loans in whole or in part, and reborrowing, all in accordance with the terms and
conditions hereof. The Revolving Credit Loans may from time to time be
Eurodollar Loans or Base Rate Loans, as determined by the Borrower and notified
to the Administrative Agent in accordance with Sections 2.5 and 2.13.
(b) The Borrower shall repay all outstanding Revolving Credit Loans
on the Revolving Credit Termination Date.
(c) The Total Revolving Credit Commitments shall be automatically
reduced on each Commitment Reduction Date specified below to the aggregate
amount set forth opposite such date (unless the Revolving Credit Commitments
shall theretofore have been reduced to or below such amount):
Commitment Reduction Reduced
Date Falling or Commitment
Nearest to Amount
- -------------------- ------------
March 31, 2003 $24,375,000
June 30, 2003 $23,750,000
September 30, 2003 $23,125,000
December 31, 2003 $22,500,000
March 31, 2004 $21,875,000
June 30, 2004 $21,250,000
September 30, 2004 $20,625,000
December 31, 2004 $20,000,000
March 31, 2005 $19,375,000
June 30, 2005 $18,750,000
September 30, 2005 $18,125,000
December 31, 2005 $17,500,000
March 31, 2006 $13,125,000
<PAGE>
29
June 30, 2006 $8,750,000
September 30, 2006 $4,375,000
December 31, 2006 $0
; provided that if upon any date after giving effect to such reduction the Total
Revolving Extensions of Credit shall exceed the amount of the Total Revolving
Credit Commitments as so reduced, the Borrowers shall prepay Revolving Credit
Loans and/or Swing Line Loans, if any, to the extent of such excess (such
prepayment to be applied, first, to Base Rate Loans and, second, on Eurodollar
Loans).
2.5 Procedure for Revolving Credit Borrowing. The Borrower may
borrow under the Revolving Credit Commitments during the Revolving Credit
Commitment Period on any Business Day; provided that the Borrower shall give the
Administrative Agent irrevocable notice (by delivering to the Administrative
Agent a Notice of Borrowing, which Notice of Borrowing must be received by the
Administrative Agent prior to 12:00 Noon, New York City time, (a) three Business
Days prior to the requested Borrowing Date, in the case of Eurodollar Loans, or
(b) one Business Day prior to the requested Borrowing Date, in the case of Base
Rate Loans), specifying (i) the amount and Type of Revolving Credit Loans to be
borrowed, (ii) the requested Borrowing Date and (iii) in the case of Eurodollar
Loans, the length of the initial Interest Period therefor. Each borrowing under
the Revolving Credit Commitments shall be in an amount equal to (x) in the case
of Base Rate Loans, $1,000,000 or a whole multiple of $100,000 in excess thereof
(or, if the then aggregate Available Revolving Credit Commitments are less than
$1,000,000, such lesser amount) and (y) in the case of Eurodollar Loans,
$1,000,000 or a whole multiple of $100,000 in excess thereof; provided that (i)
the Swing Line Lender may request, on behalf of the Borrower, borrowings under
the Revolving Credit Commitments which are Base Rate Loans in other amounts
pursuant to Section 2.7 and (ii) the Borrower may borrow Base Rate Loans under
the Revolving Credit Commitments on the Closing Date so long as the Notice of
Borrowing with respect thereto is delivered to the Administrative Agent prior to
12:00 Noon, New York time, on such date. Upon receipt of any such notice from
the Borrower, the Administrative Agent shall promptly notify each Revolving
Credit Lender thereof. Each Revolving Credit Lender will make the amount of its
pro rata share of each borrowing available to the Administrative Agent for the
account of the Borrower at the Funding Office prior to 12:00 Noon, New York City
time, on the Borrowing Date requested by the Borrower in funds immediately
available to the Administrative Agent. Such borrowing will then be made
available to the Borrower, upon its instructions, by the Administrative Agent in
like funds as received by the Administrative Agent.
2.6 Swing Line Commitment. (a) Subject to the terms and conditions
hereof, the Swing Line Lender agrees to make a portion of the credit otherwise
available to the Borrower under the Revolving Credit Commitments from time to
time during the Revolving Credit Commitment Period by making swing line loans
("Swing Line Loans") to the Borrower; provided that (i) the aggregate principal
amount of Swing Line Loans outstanding at any time shall not exceed the Swing
Line Commitment then in effect (notwithstanding that the Swing Line Loans
outstanding at any time, when aggregated with the Swing Line Lender's other
outstanding Revolving Credit Loans hereunder, may exceed the Swing Line
Commitment then in effect) and
<PAGE>
30
(ii) the Borrower shall not request, and the Swing Line Lender shall not make,
any Swing Line Loan if, after giving effect to the making of such Swing Line
Loan, the aggregate amount of the Available Revolving Credit Commitments would
be less than zero. During the Revolving Credit Commitment Period, the Borrower
may use the Swing Line Commitment by borrowing, repaying and reborrowing, all in
accordance with the terms and conditions hereof. Swing Line Loans shall be Base
Rate Loans only.
(b) The Borrower shall repay all outstanding Swing Line Loans on the
Revolving Credit Termination Date.
2.7 Procedure for Swing Line Borrowing; Refunding of Swing Line
Loans. (a) Whenever the Borrower desires that the Swing Line Lender make Swing
Line Loans it shall give the Swing Line Lender irrevocable telephonic notice
confirmed promptly in writing (which telephonic notice must be received by the
Swing Line Lender not later than 1:00 P.M., New York City time, on the proposed
Borrowing Date), specifying (i) the amount to be borrowed and (ii) the requested
Borrowing Date (which shall be a Business Day during the Revolving Credit
Commitment Period). Each borrowing under the Swing Line Commitment shall be in
an amount equal to $500,000 or a whole multiple of $100,000 in excess thereof.
Not later than 3:00 P.M., New York City time, on the Borrowing Date specified in
a notice in respect of Swing Line Loans, the Swing Line Lender shall make
available to the Administrative Agent at the Funding Office an amount in
immediately available funds equal to the amount of the Swing Line Loan to be
made by the Swing Line Lender. The Administrative Agent shall make the proceeds
of such Swing Line Loan available to the Borrower, upon its instructions, on
such Borrowing Date in immediately available funds.
(b) The Swing Line Lender, at any time and from time to time in its
sole and absolute discretion may, on behalf of the Borrower (which hereby
irrevocably directs the Swing Line Lender to act on its behalf), on one Business
Day's notice given by the Swing Line Lender no later than 12:00 Noon, New York
City time, request each Revolving Credit Lender to make, and each Revolving
Credit Lender hereby agrees to make, a Revolving Credit Loan, in an amount equal
to such Revolving Credit Lender's Revolving Credit Percentage of the aggregate
amount of the Swing Line Loans (the "Refunded Swing Line Loans") outstanding on
the date of such notice, to repay the Swing Line Lender. Each Revolving Credit
Lender shall make the amount of such Revolving Credit Loan available to the
Administrative Agent at the Funding Office in immediately available funds, not
later than 10:00 A.M., New York City time, one Business Day after the date of
such notice. The proceeds of such Revolving Credit Loans shall be immediately
made available by the Administrative Agent to the Swing Line Lender for
application by the Swing Line Lender to the repayment of the Refunded Swing Line
Loans.
(c) If prior to the time a Revolving Credit Loan would have
otherwise been made pursuant to Section 2.7(b), one of the events described in
Section 7(f) shall have occurred and be continuing with respect to the Borrower
or if for any other reason, as determined by the Swing Line Lender in its sole
discretion, Revolving Credit Loans may not be made as contemplated by Section
2.7(b), each Revolving Credit Lender shall, on the date such Revolving Credit
Loan was to have been made pursuant to the notice referred to in Section 2.7(b)
(the "Refunding Date"),
<PAGE>
31
purchase for cash an undivided participating interest in the then outstanding
Swing Line Loans by paying to the Swing Line Lender an amount (the "Swing Line
Participation Amount") equal to (i) such Revolving Credit Lender's Revolving
Credit Percentage times (ii) the sum of the aggregate principal amount of Swing
Line Loans then outstanding which were to have been repaid with such Revolving
Credit Loans.
(d) Whenever, at any time after the Swing Line Lender has received
from any Revolving Credit Lender such Lender's Swing Line Participation Amount,
the Swing Line Lender receives any payment on account of the Swing Line Loans,
the Swing Line Lender will distribute to such Lender its Swing Line
Participation Amount (appropriately adjusted, in the case of interest payments,
to reflect the period of time during which such Lender's participating interest
was outstanding and funded and, in the case of principal and interest payments,
to reflect such Lender's pro rata portion of such payment if such payment is not
sufficient to pay the principal of and interest on all Swing Line Loans then
due); provided, however, that in the event that such payment received by the
Swing Line Lender is required to be returned, such Revolving Credit Lender will
return to the Swing Line Lender any portion thereof previously distributed to it
by the Swing Line Lender.
(e) Each Revolving Credit Lender's obligation to make the Loans
referred to in Section 2.7(b) and to purchase participating interests pursuant
to Section 2.7(c) shall be absolute and unconditional and shall not be affected
by any circumstance, including, without limitation, (i) any setoff,
counterclaim, recoupment, defense or other right which such Revolving Credit
Lender or the Borrower may have against the Swing Line Lender, the Borrower or
any other Person for any reason whatsoever, (ii) the occurrence or continuance
of a Default or an Event of Default or the failure to satisfy any of the other
conditions specified in Section 4, (iii) any adverse change in the condition
(financial or otherwise) of the Borrower, (iv) any breach of this Agreement or
any other Credit Document by the Borrower, any other Credit Party or any other
Revolving Credit Lender, or (v) any other circumstance, happening or event
whatsoever, whether or not similar to any of the foregoing.
2.8 Repayment of Loans; Evidence of Debt. (a) The Borrower hereby
unconditionally promises to pay to the Administrative Agent for the account of
the appropriate Revolving Credit Lender or Term Loan Lender, as the case may be,
(i) the then unpaid principal amount of each Revolving Credit Loan of such
Revolving Credit Lender on the Revolving Credit Termination Date (or such
earlier date on which the Loans become due and payable pursuant to Section 7),
(ii) the then unpaid principal amount of each Swing Line Loan of such Swing Line
Lender on the Revolving Credit Termination Date (or such earlier date on which
the Loans become due and payable pursuant to Section 7) and (iii) the principal
amount of each Term Loan of such Term Loan Lender in installments according to
the amortization schedule set forth in Section 2.3 (or on such earlier date on
which the Loans become due and payable pursuant to Section 7). The Borrower
hereby further agrees to pay interest on the unpaid principal amount of the
Loans from time to time outstanding from the date hereof until payment in full
thereof at the rates per annum, and on the dates, set forth in Section 2.15.
<PAGE>
32
(b) Each Lender shall maintain in accordance with its usual practice
an account or accounts evidencing indebtedness of the Borrower to such Lender
resulting from each Loan of such Lender from time to time, including the amounts
of principal and interest payable and paid to such Lender from time to time
under this Agreement.
(c) The Administrative Agent, on behalf of the Borrower, shall
maintain the Register pursuant to Section 9.6(d), and a subaccount therein for
each Lender, in which shall be recorded (i) the amount of each Loan made
hereunder and any Note evidencing such Loan, the Type thereof and each Interest
Period applicable thereto, (ii) the amount of any principal or interest due and
payable or to become due and payable from the Borrower to each Lender hereunder
and (iii) both the amount of any sum received by the Administrative Agent
hereunder from the Borrower and each Lender's share thereof.
(d) The entries made in the Register and the accounts of each Lender
maintained pursuant to Section 2.8(b) shall, to the extent permitted by
applicable law, be prima facie evidence of the existence and amounts of the
obligations of the Borrower therein recorded; provided, however, that the
failure of any Lender or the Administrative Agent to maintain the Register or
any such account, or any error therein, shall not in any manner affect the
obligation of the Borrower to repay (with applicable interest) the Loans made to
such Borrower by such Lender in accordance with the terms of this Agreement.
(e) The Borrower agrees that, upon the request to the Administrative
Agent by any Lender, the Borrower will execute and deliver to such Lender a
promissory note of the Borrower evidencing any Term Loans, Revolving Credit
Loans or Swing Line Loans, as the case may be, of such Lender, substantially in
the forms of Exhibit F-1, F-2 or F-3, respectively, with appropriate insertions
as to date and principal amount.
2.9 Commitment Fees, etc. (a) The Borrower agrees to pay to the
Administrative Agent for the account of each Lender a commitment fee equal to
the Commitment Fee Rate multiplied by the average daily amount of the respective
Available Commitment of such Lender during the fiscal quarter then ended (or, if
applicable, shorter period commencing with the date upon which such Lender's
Commitment was in effect), payable quarterly in arrears on the last day of each
March, June, September and December and on (in the case of the Revolving Credit
Lenders) the Revolving Credit Termination Date or (in the case of the Term
Lenders) the Term Loan Commitment Termination Date, commencing on the first of
such dates to occur after the date hereof.
(b) The Borrower agrees to pay to the Administrative Agent the fees
in the amounts and on the dates from time to time agreed to in writing by the
Borrower and the Administrative Agent.
2.10 Termination or Reduction of Commitments. The Borrower shall
have the right, upon not less than three Business Days' notice to the
Administrative Agent, to terminate the Commitments or, from time to time, to
reduce the amount of the Commitments; provided that no such termination or
reduction of Revolving Credit Commitments shall be permitted if, after
<PAGE>
33
giving effect thereto and to any prepayments of the Revolving Credit Loans and
Swing Line Loans made on the effective date thereof, the Total Revolving
Extensions of Credit would exceed the Total Revolving Credit Commitments. Any
such reduction shall be in an amount equal to $1,000,000, or a whole multiple
thereof, and shall reduce permanently the relevant Commitments then in effect.
2.11 Optional Prepayments. The Borrower may at any time and from
time to time prepay the Loans, in whole or in part, without premium or penalty,
upon irrevocable notice delivered to the Administrative Agent at least three
Business Days prior thereto in the case of Eurodollar Loans and at least one
Business Day prior thereto in the case of Base Rate Loans, which notice shall
specify the date and amount of prepayment and whether the prepayment is of
Eurodollar Loans or Base Rate Loans; provided that if a Eurodollar Loan is
prepaid on any day other than the last day of the Interest Period applicable
thereto, the Borrower shall also pay any amounts owing pursuant to Section 2.21.
Upon receipt of any such notice the Administrative Agent shall promptly notify
each relevant Lender thereof. If any such notice is given, the amount specified
in such notice shall be due and payable on the date specified therein, together
with (except in the case of Revolving Credit Loans which are Base Rate Loans and
Swing Line Loans) accrued interest to such date on the amount prepaid. Partial
prepayments of Revolving Credit Loans and Term Loans shall be in an aggregate
principal amount of $1,000,000 or a whole multiple thereof. Partial prepayments
of Swing Line Loans shall be in an aggregate principal amount of $100,000 or a
whole multiple thereof.
2.12 Mandatory Prepayments and Commitment Reductions. (a) If on any
date the Company or any of its Subsidiaries shall receive Net Cash Proceeds from
any Asset Sale or Recovery Event then, unless a Reinvestment Notice shall be
delivered in respect thereof, such Net Cash Proceeds shall be applied on such
date toward the prepayment of the Term Loans and the reduction of the Revolving
Credit Commitments as set forth in Section 2.12(c); provided that,
notwithstanding the foregoing, on each Reinvestment Prepayment Date, an amount
equal to the Reinvestment Prepayment Amount with respect to the relevant
Reinvestment Event shall be applied toward the prepayment of the Term Loans and
the reduction of the Commitments as set forth in Section 2.12(c).
(b) If, for any fiscal year ending on or after December 31, 2003,
there shall be Excess Cash Flow, the Borrower shall, on the relevant Excess Cash
Flow Application Date, apply the ECF Percentage of such Excess Cash Flow toward
the prepayment of the Term Loans and the reduction of the Revolving Credit
Commitments as set forth in Section 2.12(c). Each such prepayment and commitment
reduction shall be made on a date (an "Excess Cash Flow Application Date") no
later than five days after the earlier of (i) the latest date on which the
financial statements of the Company referred to in Section 5.1(a), for the
fiscal year with respect to which such prepayment is made, are required to be
delivered to the Lenders and (ii) the date such financial statements are
actually delivered.
(c) Amounts to be applied in connection with prepayments and
Commitment reductions made pursuant to this Section shall be applied, first, to
reduce permanently the unused portion (if any) of Term Loan Commitments, second,
to the prepayment of the Term Loans and,
<PAGE>
34
finally, to reduce permanently the Revolving Credit Commitments. Any such
reduction of the Revolving Credit Commitments shall be accompanied by prepayment
of the Revolving Credit Loans and/or Swing Line Loans to the extent, if any,
that the Total Revolving Extensions of Credit exceed the amount of the Total
Revolving Credit Commitments as so reduced. The application of any prepayment
pursuant to this Section shall be made, first, to Base Rate Loans and, second,
to Eurodollar Loans. Each prepayment of the Loans under this Section (except in
the case of Revolving Credit Loans that are Base Rate Loans and Swing Line
Loans) shall be accompanied by accrued interest to the date of such prepayment
on the amount prepaid.
2.13 Conversion and Continuation Options. (a) The Borrower may elect
from time to time to convert Eurodollar Loans to Base Rate Loans by giving the
Administrative Agent at least two Business Days' prior irrevocable notice of
such election; provided that any such conversion of Eurodollar Loans may only be
made on the last day of an Interest Period with respect thereto. The Borrower
may elect from time to time to convert Base Rate Loans to Eurodollar Loans by
giving the Administrative Agent at least three Business Days' prior irrevocable
notice of such election (which notice shall specify the length of the initial
Interest Period therefor); provided that no Base Rate Loan under a particular
Facility may be converted into a Eurodollar Loan when any Event of Default has
occurred and is continuing and the Administrative Agent or the Majority Facility
Lenders in respect of such Facility have determined in its or their sole
discretion not to permit such conversion. Upon receipt of any such notice the
Administrative Agent shall promptly notify each relevant Lender thereof.
(b) Any Eurodollar Loan may be continued as such upon the expiration
of the then current Interest Period with respect thereto by the Borrower giving
irrevocable notice to the Administrative Agent, in accordance with the
applicable provisions of the term "Interest Period" set forth in Section 1.1, of
the length of the next Interest Period to be applicable to such Loans; provided
that no Eurodollar Loan under a particular Facility may be continued as such (i)
when any Event of Default has occurred and is continuing and the Administrative
Agent has or the Majority Facility Lenders in respect of such Facility have
determined in its or their sole discretion not to permit such continuations or
(ii) after the date that is one month prior to the final scheduled termination
or maturity date of such Facility, and provided, further, that if the Borrower
shall fail to give any required notice as described above in this paragraph or
if such continuation is not permitted pursuant to the preceding proviso such
Loans shall be automatically converted to Base Rate Loans on the last day of
such then expiring Interest Period. Upon receipt of any such notice the
Administrative Agent shall promptly notify each relevant Lender thereof.
2.14 Minimum Amounts and Maximum Number of Eurodollar Tranches.
Notwithstanding anything to the contrary in this Agreement, all borrowings,
conversions, continuations and optional prepayments of Eurodollar Loans
hereunder and all selections of Interest Periods hereunder shall be in such
amounts and be made pursuant to such elections so that, (a) after giving effect
thereto, the aggregate principal amount of the Eurodollar Loans comprising each
Eurodollar Tranche shall be equal to $5,000,000 or a whole multiple of $100,000
in excess thereof and (b) no more than 15 Eurodollar Tranches shall be
outstanding at any one time.
<PAGE>
35
2.15 Interest Rates and Payment Dates. (a) Each Eurodollar Loan
shall bear interest for each day during each Interest Period with respect
thereto at a rate per annum equal to the Eurodollar Rate determined for such day
plus the Applicable Margin.
(b) Each Base Rate Loan shall bear interest at a rate per annum
equal to the Base Rate plus the Applicable Margin.
(c) (i) If all or a portion of the principal amount of any Loan
shall not be paid when due (whether at the stated maturity, by acceleration or
otherwise), such overdue amount shall bear interest at a rate per annum which is
equal to the rate that would otherwise be applicable thereto pursuant to the
foregoing provisions of this Section plus 2% and (ii) if all or a portion of any
interest payable on any Loan or any commitment fee or other amount payable
hereunder shall not be paid when due (whether at the stated maturity, by
acceleration or otherwise), such overdue amount shall bear interest at a rate
per annum equal to the rate then applicable to Base Rate Loans under the
relevant Facility plus 2%, in each case, with respect to clauses (i) and (ii)
above, from the date of such non-payment until such amount is paid in full (as
well after as before judgment).
(d) Interest shall be payable in arrears on each Interest Payment
Date; provided that interest accruing pursuant to paragraph (c) of this Section
shall be payable from time to time on demand.
2.16 Computation of Interest and Fees. (a) Interest, fees and
commissions payable pursuant hereto shall be calculated on the basis of a
360-day year for the actual days elapsed, except that, with respect to Base Rate
Loans the rate of interest on which is calculated on the basis of the Prime
Rate, the interest thereon shall be calculated on the basis of a 365- (or 366-,
as the case may be) day year for the actual days elapsed. The Administrative
Agent shall as soon as practicable notify the Borrower and the relevant Lenders
of each determination of a Eurodollar Rate. Any change in the interest rate on a
Loan resulting from a change in the Base Rate or the Eurocurrency Reserve
Requirements shall become effective as of the opening of business on the day on
which such change becomes effective. The Administrative Agent shall as soon as
practicable notify the Borrower and the relevant Lenders of the effective date
and the amount of each such change in interest rate.
(b) Each determination of an interest rate by the Administrative
Agent pursuant to any provision of this Agreement shall be conclusive and
binding on the Borrower and the Lenders in the absence of manifest error. The
Administrative Agent shall, at the request of the Borrower, deliver to the
Borrower a statement showing the quotations used by the Administrative Agent in
determining any interest rate pursuant to Section 2.15(a).
2.17 Inability to Determine Interest Rate. If prior to the first day
of any Interest Period:
(a) the Administrative Agent shall have determined (which
determination shall be conclusive and binding upon the Borrower) that, by
reason of circumstances affecting the
<PAGE>
36
interbank eurodollar market arising after the date hereof, adequate and
reasonable means do not exist for ascertaining the Eurodollar Rate for
such Interest Period, or
(b) the Administrative Agent shall have received notice from the
Majority Facility Lenders in respect of the relevant Facility that, by
reason of circumstances arising after the date hereof affecting the
interbank eurodollar market, the Eurodollar Rate determined or to be
determined for such Interest Period will not adequately and fairly reflect
the cost to such Lenders (as conclusively certified by such Lenders) of
making or maintaining their affected Loans during such Interest Period,
the Administrative Agent shall give telecopy or telephonic notice thereof to the
Borrower and the relevant Lenders as soon as practicable thereafter. If such
notice is given (x) any Eurodollar Loans under the relevant Facility requested
to be made on the first day of such Interest Period shall be made as Base Rate
Loans, (y) any Loans under the relevant Facility that were to have been
converted on the first day of such Interest Period to Eurodollar Loans shall be
continued as Base Rate Loans and (z) any outstanding Eurodollar Loans under the
relevant Facility shall be converted, on the last day of the then current
Interest Period with respect thereto, to Base Rate Loans. Until such notice has
been withdrawn by the Administrative Agent, no further Eurodollar Loans under
the relevant Facility shall be made or continued as such, nor shall the Borrower
have the right to convert Loans under the relevant Facility to Eurodollar Loans.
2.18 Pro Rata Treatment and Payments. (a) Each borrowing by the
Borrower from the Lenders hereunder, each payment by the Borrower on account of
any commitment fee and any reduction of the Commitments of the Lenders shall be
made pro rata according to the respective Term Loan Percentages or Revolving
Credit Percentages, as the case may be, of the relevant Lenders. Each payment
(other than prepayments) in respect of principal or interest in respect of the
Loans, each payment in respect of fees payable hereunder shall be applied to the
amounts of such obligations owing to the Lenders pro rata according to the
respective amounts then due and owing to the Lenders.
(b) Each optional prepayment pursuant to Section 2.11 in respect of
the Term Loans shall be applied to the installments of such Loans, in each case
as the Borrower shall specify.
(c) Each payment (including each prepayment) of the Loans
outstanding under the Term Loan Facility shall be allocated among the Lenders
holding such Loans pro rata based on the principal amount of such Loans held by
such Lenders, and shall be applied to the installments of such Loans pro rata
based on the remaining outstanding principal amount of such installments.
Amounts prepaid on account of the Term Loans may not be reborrowed.
(d) Each payment (including each prepayment) by the Borrower on
account of principal of and interest on the Revolving Credit Loans shall be made
pro rata according to the respective outstanding principal amounts of the
Revolving Credit Loans then held by the Revolving Credit Lenders.
<PAGE>
37
(e) All payments (including prepayments) to be made by the Borrower
hereunder, whether on account of principal, interest, fees or otherwise, shall
be made without setoff or counterclaim and shall be made prior to 12:00 Noon,
New York City time, on the due date thereof to the Administrative Agent, for the
account of the respective Lenders, at the Payment Office, in Dollars and in
immediately available funds. The Administrative Agent shall distribute such
payments to the respective Lenders promptly upon receipt in like funds as
received. If any payment hereunder (other than payments on the Eurodollar Loans)
becomes due and payable on a day other than a Business Day, such payment shall
be extended to the next succeeding Business Day. If any payment on a Eurodollar
Loan becomes due and payable on a day other than a Business Day, the maturity
thereof shall be extended to the next succeeding Business Day unless the result
of such extension would be to extend such payment into another calendar month,
in which event such payment shall be made on the immediately preceding Business
Day. In the case of any extension of any payment of principal pursuant to the
preceding two sentences, interest thereon shall be payable at the then
applicable rate during such extension.
(f) Unless the Administrative Agent shall have been notified in
writing by any Lender prior to a borrowing that such Lender will not make the
amount that would constitute its share of such borrowing available to the
Administrative Agent, the Administrative Agent may assume that such Lender is
making such amount available to the Administrative Agent, and the Administrative
Agent may, in reliance upon such assumption, make available to the Borrower a
corresponding amount. If such amount is not made available to the Administrative
Agent by the required time on the Borrowing Date therefor, such Lender shall pay
to the Administrative Agent, on demand, such amount with interest thereon at a
rate equal to the daily average Federal Funds Effective Rate for the period
until such Lender makes such amount immediately available to the Administrative
Agent. A certificate of the Administrative Agent submitted to any Lender with
respect to any amounts owing under this paragraph shall be conclusive in the
absence of manifest error. If such Lender's share of such borrowing is not made
available to the Administrative Agent by such Lender within three Business Days
of such Borrowing Date, the Administrative Agent shall also be entitled to
recover such amount with interest thereon at the rate per annum applicable to
Base Rate Loans under the relevant Facility, on demand, from the Borrower.
(g) Unless the Administrative Agent shall have been notified in
writing by the Borrower prior to the date of any payment being made hereunder
that the Borrower will not make such payment to the Administrative Agent, the
Administrative Agent may assume that the Borrower is making such payment, and
the Administrative Agent may, but shall not be required to, in reliance upon
such assumption, make available to the Lenders their respective pro rata shares
of a corresponding amount. If such payment is not made to the Administrative
Agent by the Borrower within three Business Days of such required date, the
Administrative Agent shall be entitled to recover, on demand, from each Lender
to which any amount which was made available pursuant to the preceding sentence,
such amount with interest thereon at the rate per annum equal to the daily
average Federal Funds Effective Rate. Nothing herein shall be deemed to limit
the rights of the Administrative Agent or any Lender against the Borrower.
<PAGE>
38
2.19 Requirements of Law. (a) If the adoption of or any change in
any Requirement of Law or in the interpretation or application thereof or
compliance by any Lender with any request or directive (whether or not having
the force of law) from any central bank or other Governmental Authority, in each
case occurring or made subsequent to the date hereof:
(i) shall subject any Lender to any tax of any kind whatsoever with
respect to this Agreement or any Eurodollar Loan made by it, or change the
basis of taxation of payments to such Lender in respect thereof (except
for Non-Excluded Taxes covered by Section 2.20 and changes in the rate of
tax on the overall net income of such Lender);
(ii) shall impose, modify or hold applicable any reserve, special
deposit, compulsory loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances, loans or
other extensions of credit by, or any other acquisition of funds by, any
office of such Lender which is not otherwise included in the determination
of the Eurodollar Rate hereunder (including, without limitation, any
Eurocurrency Reserve Requirement); or
(iii) shall impose on such Lender any other condition;
and the result of any of the foregoing is to increase the cost to such Lender,
by an amount which such Lender deems to be material, of making, converting into,
continuing or maintaining Eurodollar Loans, or to reduce any amount receivable
hereunder in respect thereof, then, in any such case, the Borrower shall
promptly pay such Lender, upon its demand, any additional amounts necessary to
compensate such Lender for such increased cost or reduced amount receivable. If
any Lender becomes entitled to claim any additional amounts pursuant to this
Section, it shall promptly notify the Borrower (with a copy to the
Administrative Agent) of the event by reason of which it has become so entitled.
(b) If any Lender shall have determined that the adoption of or any
change in any Requirement of Law regarding capital adequacy or in the
interpretation or application thereof or compliance by such Lender or any
corporation controlling such Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) from any Governmental
Authority, in each case occurring or made subsequent to the date hereof, shall
have the effect of reducing the rate of return on such Lender's or such
corporation's capital as a consequence of its obligations hereunder to a level
below that which such Lender or such corporation could have achieved but for
such adoption, change or compliance (taking into consideration such Lender's or
such corporation's policies with respect to capital adequacy) by an amount
deemed by such Lender to be material, then from time to time, after submission
by such Lender to the Borrower (with a copy to the Administrative Agent) of a
written request therefor, the Borrower shall pay to such Lender such additional
amount or amounts as will compensate such Lender for such reduction; provided
that the Borrower shall not be required to compensate a Lender pursuant to this
paragraph for any increased costs or reductions incurred more than 120 days
prior to the date that such Lender notifies the Borrower of the Requirement of
Law giving rise to such increased costs or reductions and of such Lender's
intention to claim compensation therefor; and provided, further, that, if the
circumstances giving rise to such claim have a
<PAGE>
39
retroactive effect, then such 120 day period shall be extended to include the
period of such retroactive effect.
(c) A certificate as to any additional amounts payable pursuant to
this Section submitted by any Lender to the Borrower (with a copy to the
Administrative Agent) shall be conclusive in the absence of manifest error. The
obligations of the Borrower pursuant to this Section shall survive the
termination of this Agreement and the payment of the Loans and all other amounts
payable hereunder.
2.20 Taxes. (a) All payments made by the Borrower under this
Agreement shall be made free and clear of, and without deduction or withholding
for or on account of, any present or future income, stamp or other taxes,
levies, imposts, duties, charges, fees, deductions or withholdings, now or
hereafter imposed, levied, collected, withheld or assessed by any Governmental
Authority, excluding net income taxes and franchise taxes (imposed in lieu of
net income taxes) imposed on any Agent or any Lender as a result of a present or
former connection between such Agent or such Lender and the jurisdiction of the
Governmental Authority imposing such tax or any political subdivision or taxing
authority thereof or therein (other than any such connection arising solely from
such Agent or such Lender having executed, delivered or performed its
obligations or received a payment under, or enforced, this Agreement or any
other Credit Document). If any such non-excluded taxes, levies, imposts, duties,
charges, fees, deductions or withholdings ("Non-Excluded Taxes") or Other Taxes
are required to be withheld from any amounts payable to any Agent or any Lender
hereunder, the amounts so payable to such Agent or such Lender shall be
increased to the extent necessary to yield to such Agent or such Lender (after
payment of all Non-Excluded Taxes and Other Taxes) interest or any such other
amounts payable hereunder at the rates or in the amounts specified in this
Agreement; provided, however, that the Borrower shall not be required to
increase any such amounts payable to any Lender with respect to any Non-Excluded
Taxes (i) that are attributable to such Lender's failure to comply with the
requirements of paragraph (d) or (e) of this Section or (ii) that are United
States withholding taxes imposed on amounts payable to such Lender at the time
the Lender becomes a party to this Agreement, except to the extent that such
Lender's assignor (if any) was entitled, at the time of assignment, to receive
additional amounts from the Borrower with respect to such Non-Excluded Taxes
pursuant to Section 2.20(a).
(b) In addition, the Borrower shall pay any Other Taxes to the
relevant Governmental Authority in accordance with applicable law.
(c) Whenever any Non-Excluded Taxes or Other Taxes are payable by
the Borrower, as promptly as possible thereafter the Borrower shall send to the
Administrative Agent for the account of the Administrative Agent or Lender, as
the case may be, a certified copy of an original official receipt received by
the Borrower showing payment thereof. If the Borrower fails to pay any
Non-Excluded Taxes or Other Taxes when due to the appropriate taxing authority
or fails to remit to the Administrative Agent the required receipts or other
required documentary evidence, the Borrower shall indemnify the Administrative
Agent and the Lenders for any incremental taxes, interest or penalties that may
become payable by any Agent or any Lender as a
<PAGE>
40
result of any such failure. The agreements in this Section shall survive the
termination of this Agreement and the payment of the Loans and all other amounts
payable hereunder.
(d) Each Lender (or Transferee) that is not U.S. person as defined
in Section 7701(a)(30) of the Code (a "Non-U.S. Lender") shall deliver to the
Borrower and the Administrative Agent (or, in the case of a Participant, to the
Lender from which the related participation shall have been purchased) two
copies of either U.S. Internal Revenue Service Form W-8 BEN or Form W-8 ECI, or,
in the case of a Non-U.S. Lender claiming exemption from U.S. federal
withholding tax under Section 871(h) or 881(c) of the Code with respect to
payments of "portfolio interest" a statement substantially in the form of
Exhibit G and a Form W-8 BEN, or any subsequent versions thereof or successors
thereto properly completed and duly executed by such Non-U.S. Lender claiming
complete exemption from, or a reduced rate of, U.S. federal withholding tax on
all payments by the Borrower under this Agreement and the other Credit
Documents. Such forms shall be delivered by each Non-U.S. Lender on or before
the date it becomes a party to this Agreement (or, in the case of any
Participant, on or before the date such Participant purchases the related
participation). In addition, each Non-U.S. Lender shall deliver such forms
promptly upon the obsolescence or invalidity of any form previously delivered by
such Non-U.S. Lender. Each Non-U.S. Lender shall promptly notify the Borrower at
any time it determines that it is no longer in a position to provide any
previously delivered certificate to the Borrower (or any other form of
certification adopted by the U.S. taxing authorities for such purpose).
Notwithstanding any other provision of this paragraph, a Non-U.S. Lender shall
not be required to deliver any form pursuant to this paragraph that such
Non-U.S. Lender is not legally able to deliver.
(e) A Lender that is entitled to an exemption from or reduction of
non-U.S. withholding tax, with respect to payments under this Agreement shall
deliver to the Borrower (with a copy to the Administrative Agent), at the time
or times reasonably requested by the Borrower, such properly completed and
executed documentation prescribed by applicable law as will permit such payments
to be made without withholding or at a reduced rate; provided that such Lender
is legally entitled to complete, execute and deliver such documentation and in
such Lender's reasonable judgment such completion, execution or submission would
not materially prejudice the legal position of such Lender.
2.21 Indemnity. The Borrower agrees to indemnify each Lender and to
hold each Lender harmless from any loss or expense which such Lender may sustain
or incur as a consequence of (a) default by the Borrower in making a borrowing
of, conversion into or continuation of Eurodollar Loans after the Borrower has
given a notice requesting the same in accordance with the provisions of this
Agreement, (b) default by the Borrower in making any prepayment after the
Borrower has given a notice thereof in accordance with the provisions of this
Agreement or (c) the making of a prepayment or conversion of Eurodollar Loans on
a day which is not the last day of an Interest Period with respect thereto. Such
indemnification may include an amount equal to the excess, if any, of (i) the
amount of interest which would have accrued on the amount so prepaid, or not so
borrowed, converted or continued, for the period from the date of such
prepayment or of such failure to borrow, convert or continue to the last day of
such Interest Period (or, in the case of a failure to borrow, convert or
continue, the Interest
<PAGE>
41
Period that would have commenced on the date of such failure) in each case at
the applicable rate of interest for such Loans provided for herein (excluding,
however, the Applicable Margin included therein, if any) over (ii) the amount of
interest (as reasonably determined by such Lender) which would have accrued to
such Lender on such amount by placing such amount on deposit for a comparable
period with leading banks in the interbank eurodollar market. A certificate as
to any amounts payable pursuant to this Section submitted to the Borrower by any
Lender shall be conclusive in the absence of manifest error. This covenant shall
survive the termination of this Agreement and the payment of the Loans and all
other amounts payable hereunder.
2.22 Illegality. Notwithstanding any other provision herein, if the
adoption of or any change in any Requirement of Law or in the interpretation or
application thereof shall make it unlawful for any Lender to make or maintain
Eurodollar Loans as contemplated by this Agreement, (a) the commitment of such
Lender hereunder to make Eurodollar Loans, continue Eurodollar Loans as such and
convert Base Rate Loans to Eurodollar Loans shall forthwith be cancelled and (b)
such Lender's Loans then outstanding as Eurodollar Loans, if any, shall be
converted automatically to Base Rate Loans on the respective last days of the
then current Interest Periods with respect to such Loans or within such earlier
period as required by law. If any such conversion of a Eurodollar Loan occurs on
a day which is not the last day of the then current Interest Period with respect
thereto, the Borrower shall pay to such Lender such amounts, if any, as may be
required pursuant to Section 2.21.
2.23 Change of Lending Office. Each Lender agrees that, upon the
occurrence of any event giving rise to the operation of Section 2.19, 2.20(a) or
2.22 with respect to such Lender, it will, if requested by the Borrower, use
reasonable efforts (subject to overall policy considerations of such Lender) to
designate another lending office for any Loans affected by such event with the
object of avoiding the consequences of such event; provided that such
designation is made on terms that, in the sole judgment of such Lender, cause
such Lender and its lending office(s) to suffer no economic, legal or regulatory
disadvantage, and provided, further, that nothing in this Section shall affect
or postpone any of the obligations of any Borrower or the rights of any Lender
pursuant to Section 2.19, 2.20(a) or 2.22.
2.24 Replacement of Lenders under Certain Circumstances. The
Borrower shall be permitted to replace any Lender which (a) requests
reimbursement for amounts owing pursuant to Section 2.19 or 2.20 or (b) defaults
in its obligation to make Loans hereunder, with a replacement financial
institution; provided that (i) such replacement does not conflict with any
Requirement of Law, (ii) no Event of Default shall have occurred and be
continuing at the time of such replacement, (iii) prior to any such replacement,
such Lender shall have taken no action under Section 2.22 so as to eliminate the
continued need for payment of amounts owing pursuant to Section 2.19 or 2.20,
(iv) the replacement financial institution shall purchase, at par, all Loans and
other amounts owing to such replaced Lender on or prior to the date of
replacement, (v) the Borrower shall be liable to such replaced Lender under
Section 2.21 (as though Section 2.21 were applicable) if any Eurodollar Loan
owing to such replaced Lender shall be purchased other than on the last day of
the Interest Period relating thereto, (vi) the replacement financial
institution, if not already a Lender, shall be reasonably satisfactory to the
Administrative Agent,
<PAGE>
42
(vii) the replaced Lender shall be obligated to make such replacement in
accordance with the provisions of Section 9.6 (provided that the Borrower shall
be obligated to pay the registration and processing fee referred to therein),
(viii) until such time as such replacement shall be consummated, the Borrower
shall pay all additional amounts (if any) required pursuant to Section 2.19 or
2.20, as the case may be, and (ix) any such replacement shall not be deemed to
be a waiver of any rights which the Borrower, the Administrative Agent or any
other Lender shall have against the replaced Lender.
SECTION 3. REPRESENTATIONS AND WARRANTIES
To induce the Agents and the Lenders to enter into this Agreement
and to make the Loans, the Company and the Borrower hereby jointly and severally
represent and warrant to each Agent and each Lender that:
3.1 Financial Condition. (a) The audited consolidated balance sheets
of the Company and its consolidated Subsidiaries as at December 31, 1998 and
December 31, 1997 and the related consolidated statements of income and of cash
flows for the fiscal years ended on such dates, reported on by and accompanied
by an unqualified report from Ernst & Young LLP present fairly the consolidated
financial condition of the Company and its consolidated Subsidiaries as at each
such date, and the consolidated results of its operations and its consolidated
cash flows for the respective fiscal years then ended. The unaudited
consolidated balance sheets of the Company and its consolidated Subsidiaries as
at September 30, 1999, and the related unaudited consolidated statements of
income and cash flows for the nine-month period ended on such date, present
fairly the consolidated financial condition of the Company and its consolidated
Subsidiaries as at each such date, and the consolidated results of its
operations and its consolidated cash flows for the three-month period then ended
(subject to normal year-end audit adjustments). All such financial statements,
including the related schedules and notes thereto, have been prepared in
accordance with GAAP applied consistently throughout the periods involved
(except as approved by the aforementioned firm of accountants and disclosed
therein). The Company and its Subsidiaries do not have any material Guarantee
Obligations, contingent liabilities and liabilities for taxes, or any material
long-term leases or unusual forward or long-term commitments, including, without
limitation, any interest rate or foreign currency swap or exchange transaction
or other obligation in respect of derivatives, which are not reflected in the
most recent financial statements referred to in this paragraph or set forth on
Schedule 3.1(a). During the period from December 31, 1998 to and including the
date hereof there has been no Disposition by the Company or any of its
Subsidiaries of any material part of its business or Property.
(b) The consolidated balance sheet projections, the consolidated
statements of income projections and the consolidated statements of cash flow
projections of the Company and its consolidated Subsidiaries for the 1999
through 2007 fiscal years (the "Projected Financial Statements"), copies of
which have heretofore been furnished to each Lender requesting the same, have
been prepared giving effect (as if such events had occurred on September 30,
1999) to (i) the Loans to be made on the Original Closing Date and the use of
proceeds thereof, (ii) the
<PAGE>
43
payment of fees and expenses in connection with the
foregoing and (iii) the purchase of equity of the Company contemplated by
Preferred Stock Purchase Agreement.
3.2 No Change. Since December 31, 1998 there has been no development
or event which has had or would have a Material Adverse Effect.
3.3 Corporate Existence; Compliance with Law. The Company and its
each of Subsidiaries (a) is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization, (b) has the
corporate power and authority, and the legal right, to own and operate its
Property, to lease the Property it operates as lessee and to conduct the
business in which it is currently engaged, (c) is duly qualified as a foreign
corporation and in good standing under the laws of each jurisdiction where its
ownership, lease or operation of Property or the conduct of its business
requires such qualification and (d) is in compliance with all Requirements of
Law (including, without limitation, the obtaining and maintaining all
authorizations, licenses and permits from any Governmental Authority that are
required or necessary for the conduct of the business of the Company and its
Subsidiaries), except, in the case of clauses (c) and (d), to the extent that
the failure to be so qualified or to comply therewith would not, in the
aggregate, reasonably be expected to have a Material Adverse Effect.
3.4 Corporate Power; Authorization; Enforceable Obligations. Each
Credit Party has the corporate power and authority, and the legal right, to
make, deliver and perform the Credit Documents to which it is a party and, in
the case of the Borrower, to borrow hereunder. Each Credit Party has taken all
necessary corporate action to authorize the execution, delivery and performance
of the Credit Documents to which it is a party and, in the case of the Borrower,
to authorize the borrowings on the terms and conditions of this Agreement. No
consent or authorization of, filing with, notice to or other act by or in
respect of, any Governmental Authority or any other Person is required in
connection with the borrowings hereunder or with the execution, delivery,
performance, validity or enforceability of this Agreement or any of the Credit
Documents, except (i) consents, authorizations, filings and notices described in
Schedule 3.4, which consents, authorizations, filings and notices have been
obtained or made and are in full force and effect and (ii) the filings referred
to in Section 3.18. Each Credit Document has been duly executed and delivered on
behalf of each Credit Party party thereto. This Agreement constitutes, and each
other Credit Document upon execution will constitute, a legal, valid and binding
obligation of each Credit Party party thereto, enforceable against each such
Credit Party in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles (whether enforcement is sought by proceedings in
equity or at law).
3.5 No Legal Bar. The execution, delivery and performance of this
Agreement and the other Credit Documents, the borrowings hereunder and the use
of the proceeds thereof will not violate any Requirement of Law or any
Contractual Obligation of the Company or any of its Subsidiaries and will not
result in, or require, the creation or imposition of any Lien on any of their
respective properties or revenues pursuant to any Requirement of Law or any such
Contractual Obligation (other than the Liens created by the Security Documents).
As of the
<PAGE>
44
Closing Date, no Requirement of Law or Contractual Obligation applicable to the
Company or any of its Subsidiaries would reasonably be expected to have a
Material Adverse Effect.
3.6 No Material Litigation. No litigation, investigation or
proceeding of or before any arbitrator or Governmental Authority is pending or,
to the knowledge of the Company or the Borrower, threatened by or against the
Company or any of its Subsidiaries or against any of their respective properties
or revenues (a) with respect to any of the Credit Documents or any of the
transactions contemplated hereby or thereby or (b) that would reasonably be
expected, individually or in the aggregate, to have a Material Adverse Effect.
3.7 No Default. No Default or Event of Default has occurred and is
continuing.
3.8 Ownership of Property; Liens. Each of the Company and its
Subsidiaries has title in fee simple to, or a valid leasehold interest in, all
its real property, and good title to, or a valid leasehold interest in, all its
other Property, and none of such Property is subject to any Lien except as
permitted by Section 6.3, except for such defects in title which, individually
or in the aggregate, would not reasonably be expected to have a Material Adverse
Effect.
3.9 Intellectual Property. Each of the Company and its Subsidiaries
owns, or is licensed to use, all Intellectual Property necessary for the conduct
of its business as currently conducted. No material claim has been asserted and
is pending by any Person challenging or questioning the use of any Intellectual
Property or the validity or effectiveness of any Intellectual Property, nor does
the Company or the Borrower know of any valid basis for any such claim. The use
of Intellectual Property by the Company and its Subsidiaries does not infringe
on the rights of any Person in any material respect.
3.10 Taxes. Each of the Company and its Subsidiaries has filed or
caused to be filed all Federal, state and other material tax returns which are
required to be filed and has paid all taxes shown to be due and payable on said
returns or on any assessments made against it or any of its Property and all
other taxes, fees or other charges imposed on it or any of its Property by any
Governmental Authority (other than any the amount or validity of which are
currently being contested in good faith by appropriate proceedings and with
respect to which any reserves necessary in accordance with GAAP have been
provided on the books of the Company or its Subsidiaries, as the case may be);
no material tax Lien has been filed, and, to the knowledge of the Company and
the Borrower, no material claim is being asserted, with respect to any such tax,
fee or other charge.
3.11 Federal Regulations. No part of the proceeds of any Loans will
be used for "purchasing" or "carrying" any "margin stock" within the respective
meanings of each of the quoted terms under Regulation U as now and from time to
time hereafter in effect or for any purpose which violates the provisions of the
Regulations of the Board.
3.12 ERISA. During the five-year period prior to the date on which
this representation is made or deemed made with respect to any Plan, except as
would not reasonably be expected to have a Material Adverse Effect, (i) none of
(x) a Reportable Event, (y) an
<PAGE>
45
"accumulated funding deficiency" (within the meaning of Section 412 of the Code
or Section 302 of ERISA) or (z) a termination of a Single-Employer Plan has
occurred, (ii) each Plan has complied in all material respects with the
applicable provisions of ERISA and the Code and (iii) no Lien in favor of the
PBGC or a Plan has arisen. The present value of all accrued benefits under each
Single Employer Plan (based on those assumptions used to fund such Plans) did
not, as of the last annual valuation date prior to the date on which this
representation is made or deemed made, exceed the value of the assets of such
Plan allocable to such accrued benefits by an amount that would not reasonably
be expected to have a Material Adverse Effect. Neither the Company nor any
Commonly Controlled Entity has had a complete or partial withdrawal from any
Multiemployer Plan which has resulted or would reasonably be expected to result
in a material liability under ERISA, and neither the Company nor any Commonly
Controlled Entity would become subject to any liability under ERISA that would
reasonably be expected to have a Material Adverse Effect if the Company or any
such Commonly Controlled Entity were to withdraw completely from all
Multiemployer Plans as of the valuation date most closely preceding the date on
which this representation is made or deemed made. No such Multiemployer Plan is
in Reorganization or Insolvent.
3.13 Investment Company Act; Public Utility Holding Company Act;
Other Regulations. No Credit Party is (a) an "investment company" as defined in,
or subject to regulation under, the Investment Company Act of 1940, as amended
or (b) a "holding company" as defined in, or subject to regulation under, the
Public Utility Holding Company Act of 1935, as amended.
3.14 Capitalization; Subsidiaries; Certain Investments. (a) As of
the Closing Date, (i) Part A of Schedule 3.14 sets forth a complete and correct
list of the authorized Capital Stock of the Company, together with the number of
such shares that are duly and validly issued and outstanding, and each of which
shares is fully paid and nonassessable and (ii) Part B of Schedule 3.14 contains
a complete and correct list of each of record and beneficial owner of issued and
outstanding Capital Stock of the Company, together with, for each such owner,
the percentage of such Capital Stock owned by them.
(b) Set forth on Part C of Schedule 3.14 is a complete and correct
list of all of the direct and indirect Subsidiaries of the Company as of the
Closing Date, together with, for each such Subsidiary, the jurisdiction of
incorporation of each such Subsidiary and the percentage of each class of
Capital Stock owned by any Credit Party.
(c) Set forth on Part D of Schedule 3.14 is a complete and correct
list of all Investments (other than Investments disclosed in Part C of Schedule
3.14 and other than Investments of the types referred to in Sections 6.7(a),
(b), (c), (d) and (f)) held by the Company or any of its Subsidiaries in any
Person as of the Closing Date, together with, for each such Investment, the
identity of the Person or Persons holding such Investment and the nature of such
Investment.
3.15 Purpose of Loans. The proceeds of the Term Loans shall be used
to finance or reimburse the cost of development, design, installation and
acquisition of telecommunications
<PAGE>
46
equipment, inventory and/or network assets and back office systems for the
business of the Subsidiaries of the Company and for purposes reasonably related
thereto. The proceeds of the Revolving Extensions of Credit shall be used to
finance the general corporate purposes of the Subsidiaries of the Company.
3.16 Environmental Matters. Other than exceptions to any of the
following that would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect:
(a) The Company and its Subsidiaries: (i) are, and at all times have
been, in compliance with all applicable Environmental Laws; (ii) hold all
Environmental Permits (each of which is in full force and effect) required
for any of their current or intended operations or for any property owned,
leased, or otherwise operated by any of them; (iii) are, and at all times
have been, in compliance with all of their Environmental Permits; and (iv)
reasonably believe that: each of their Environmental Permits will be
timely renewed and complied with, without material expense; any additional
Environmental Permits that may be required of any of them will be timely
obtained and complied with, without material expense; and compliance with
any Environmental Law that is or is expected to become applicable to any
of them will be timely attained and maintained, without material expense.
(b) Materials of Environmental Concern are not present at, on,
under, in, or about any real property now or formerly owned, leased or
operated by the Company or any of its Subsidiaries, or at any other
location (including, without limitation, any location to which Materials
of Environmental Concern have been sent for re-use or recycling or for
treatment, storage, or disposal) which would reasonably be expected to (i)
give rise to liability of the Company or any of its Subsidiaries under any
applicable Environmental Law or otherwise result in costs to the Company
or any of its Subsidiaries, or (ii) interfere with the Company's or any of
its Subsidiaries' continued operations, or (iii) impair the fair saleable
value of any real property owned or leased by the Company or any of its
Subsidiaries.
(c) There is no judicial, administrative, or arbitral proceeding
(including any notice of violation or alleged violation) under or relating
to any Environmental Law to which the Company or any of its Subsidiaries
is, or to the knowledge of the Company or any of its Subsidiaries will be,
named as a party that is pending or, to the knowledge of the Company or
any of its Subsidiaries, threatened.
(d) Neither the Company nor any of its Subsidiaries has received any
written request for information, or been notified that it is a potentially
responsible party under or relating to the federal Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 or any
similar Environmental Law, or with respect to any Materials of
Environmental Concern.
<PAGE>
47
(e) Neither the Company nor any of its Subsidiaries has entered into
or agreed to any consent decree, order, or settlement or other agreement,
or is subject to any judgment, decree, or order or other agreement, in any
judicial, administrative, arbitral, or other forum for dispute resolution,
relating to compliance with or liability under any Environmental Law.
(f) Neither the Company nor any of its Subsidiaries has assumed or
retained, by contract or operation of law, any liabilities of any kind,
fixed or contingent, known or unknown, under any Environmental Law,
relating to noncompliance with any Environmental Law or with respect to
any Material of Environmental Concern.
3.17 Accuracy of Information, etc. No statement or information
contained in this Agreement, any other Credit Document or any other document,
certificate or written statement (including, without limitation, the
Confidential Offering Memorandum) furnished to the Administrative Agent or the
Lenders or any of them, by or on behalf of any Credit Party for use in
connection with the transactions contemplated by this Agreement or the other
Credit Documents, contained, as of the date such statement, information,
document or certificate was so furnished and when taken as a whole with other
such statements and information theretofore so furnished, any untrue statement
of a material fact or omitted to state a material fact necessary in order to
make the statements contained herein or therein not misleading. The projections
and pro forma financial information contained in the materials referenced above
(including, without limitation, the Projected Financial Statements) are based
upon good faith estimates and assumptions believed by management of the Company
to be reasonable at the time made, it being recognized by the Lenders that such
financial information as it relates to future events is not to be viewed as fact
and that actual results during the period or periods covered by such financial
information may differ from the projected results set forth therein by a
material amount. There is no fact known to any Credit Party that would
reasonably be expected to have a Material Adverse Effect that has not been
expressly disclosed herein, in the other Credit Documents, in the Confidential
Information Memorandum or in any other documents, certificates and statements
furnished to the Administrative Agent and the Lenders for use in connection with
the transactions contemplated hereby and by the other Credit Documents.
3.18 Security Documents. The Guarantee and Collateral Agreement is
effective to create in favor of the Administrative Agent, for the benefit of the
Lenders, a legal, valid and enforceable security interest in the Collateral
described therein and proceeds thereof. In the case of the Pledged Stock covered
by the Guarantee and Collateral Agreement, when any stock certificate
representing such Pledged Stock is delivered to the Administrative Agent, and in
the case of the other Collateral described in the Guarantee and Collateral
Agreement, when financing statements in appropriate form are filed in the
offices specified on Schedule 3.18 (which financing statements have been duly
completed and executed and delivered to the Administrative Agent) and such other
filings as are specified on applicable Schedules, if any, to the Guarantee and
Collateral Agreement (all of which filings have been duly completed), the
Guarantee and Collateral Agreement shall constitute a fully perfected Lien on,
and security interest in, all right, title and interest of the Credit Parties in
such Collateral and the proceeds thereof, as security for the Obligations (as
defined in the Guarantee and Collateral Agreement), prior and superior in
<PAGE>
48
right to any other Person (except, in the case of Collateral other than Pledged
Stock, Liens permitted by Section 6.3).
3.19 Solvency. On the Closing Date, assuming that Indebtedness in an
amount equal to the aggregate amount of the Commitments is incurred hereunder on
such date, the Company will be Solvent.
3.20 Real Property. Set forth on Schedule 3.20 is complete and
correct list, as of the Closing Date, of all of the real property interests held
by the Company and its Subsidiaries, indicating in each case whether the
respective property is owned or leased, the identity of the owner or lessee and
the location of the respective property.
3.21 Year 2000 Matters. Any reprogramming required to permit the
proper functioning, in and following the year 2000, of (i) the Company's and its
Subsidiaries' computer systems and (ii) equipment containing embedded microchips
(including systems and equipment supplied by others or with which Company's or
any of its Subsidiaries' systems interface) and the testing of all such systems
and equipment, as so reprogrammed, has been completed in all material respects.
The cost to the Company or its Subsidiaries of the reasonably foreseeable
consequences of year 2000 to the Company and its Subsidiaries (including,
without limitation, reprogramming errors and the failure of others' systems or
equipment) would not reasonably be expected to result in a Default or a Material
Adverse Effect. The computer and management information systems of the Company
and its Subsidiaries are and, with ordinary course upgrading and maintenance,
will continue for the term of this Agreement to be, sufficient to permit the
Company and its Subsidiaries to conduct their respective business, other than
any insufficiency that would not reasonably be expected to have a Material
Adverse Effect.
3.22 Restricted Subsidiary. Each of the Borrower and each Subsidiary
Guarantor is, and at all times shall remain, a "Restricted Subsidiary" under and
as defined in the Existing Senior Notes Indenture.
3.23 Network. Schedule 3.23 sets forth, as of the Closing Date, (i)
the location of each switch owned by the Company or any of its Subsidiaries and
the switch's make and model and (ii) the location of each Collocation Site. As
of the Closing Date, the Company's and its Subsidiaries' switches are (i) fully
installed, (ii) interconnected to the incumbent telephone company's local
network and (iii) capable of commercial traffic. As of the Closing Date, each
Collocation Site possesses all the necessary equipment to carry commercial
traffic and is linked via leased or owned transmission cable to a switch owned
by the Company or one of its Subsidiaries.
SECTION 4. CONDITIONS PRECEDENT
4.1 Effectiveness. The effectiveness of this Agreement (and the
amendment and restatement of the Existing Credit Agreement to be effected
hereby) and of the obligations of the
<PAGE>
49
Lenders to make extensions of credit hereunder is subject to the conditions
precedent that each of the following conditions shall have been satisfied:
(a) Credit Documents. The Administrative Agent shall have received
(i) this Agreement, executed and delivered by a duly authorized officer of
the Company and the Borrower, (ii) the Guarantee and Collateral Agreement,
executed and delivered by a duly authorized officer of the Company, the
Borrower and each Subsidiary Guarantor, and (iii) for the account of each
requesting Lender, Notes conforming to the requirements hereof and
executed and delivered by a duly authorized officer of the Borrower.
(b) Pro Forma Financial Statements; Financial Statements;
Projections. The Lenders shall have received (i) the Pro Forma Financial
Statements, (ii) audited consolidated financial statements of the Company
and its consolidated Subsidiaries for the 1997 and 1998 fiscal years,
(iii) unaudited interim consolidated financial statements of the Company
and its consolidated Subsidiaries as at September 30, 1999 and (iv) the
Projected Financial Statements, and such financial statements or
projections shall not, in the reasonable judgment of the Lenders, reflect
any material adverse change in the consolidated financial condition of the
Company and its consolidated Subsidiaries.
(c) Approvals. All authorizations and approvals referred to in
Section 3.4, and all material governmental and third party approvals
(including landlords' and other consents) necessary in connection with the
continuing operations of the Company and its Subsidiaries, shall have been
obtained and be in full force and effect, and all applicable waiting
periods shall have expired without any action being taken or threatened by
any competent authority which would restrain, prevent or otherwise impose
adverse conditions on the financing contemplated hereby.
(d) Solvency. The Administrative Agent shall have received a
reasonably satisfactory certificate of the chief financial officer of the
Company as to the solvency of the Company and its Subsidiaries after
giving effect to the transactions contemplated hereby.
(e) Closing Certificate. The Administrative Agent shall have
received a certificate of each Credit Party, dated the Closing Date,
substantially in the form of Exhibit C, with appropriate insertions and
attachments (or such other evidence satisfactory to the Administrative
Agent that none of the organizational documents of such Credit Party has
been modified since the Original Closing Date).
(f) Legal Opinions. The Administrative Agent shall have received the
following executed legal opinions:
(i) the legal opinion of Simpson Thacher & Bartlett, special counsel
to the Company and its Subsidiaries, substantially in the form of Exhibit
E-1;
<PAGE>
50
(ii) the legal opinion of the General Counsel of the Company,
substantially in the form of Exhibit E-2; and
(iii) the legal opinion of Milbank, Tweed, Hadley & McCloy LLP,
special New York counsel to the Administrative Agent, substantially in the
form of Exhibit E-3.
Each such legal opinion shall cover such other matters incident to the
transactions contemplated by this Agreement as the Administrative Agent
may reasonably require.
(g) Pledged Stock; Stock Powers; Pledged Notes. The Administrative
Agent shall have received (i) the certificates representing the shares of
Capital Stock pledged pursuant to the Guarantee and Collateral Agreement,
together with an undated stock power for each such certificate executed in
blank by a duly authorized officer of the pledgor thereof and (ii) each
promissory note pledged to the Administrative Agent pursuant to the
Guarantee and Collateral Agreement endorsed (without recourse) in blank
(or accompanied by an executed transfer form in blank satisfactory to the
Administrative Agent) by the pledgor thereof.
(h) Filings, Registrations and Recordings. Each document (including,
without limitation, any Uniform Commercial Code financing statement)
required by the Security Documents or under law or reasonably requested by
the Administrative Agent to be filed, registered or recorded in order to
create in favor of the Administrative Agent, for the benefit of the
Lenders, a perfected Lien on the Collateral described therein, prior and
superior in right to any other Person (other than with respect to Liens
expressly permitted by Section 6.3), shall be in proper form for filing,
registration or recordation.
(i) Insurance. The Administrative Agent shall have received
insurance certificates satisfying the requirements of Section 5.5(b).
(j) Existing Credit Agreement. All extensions of credit outstanding
under the Existing Credit Agreement immediately prior to the Closing Date,
together with any accrued and unpaid interest thereon and any accrued and
unpaid fees under the Existing Credit Agreement, shall have been paid in
full. No Default or Event of Default under and as defined in the Existing
Credit Agreement shall have occurred and be continuing on the Closing
Date.
(k) Fees and Expenses The Administrative Agent shall have received
all fees and other amounts due and payable on or prior to the Closing
Date, including, to the extent invoiced, reimbursement or payment of all
out of pocket expenses required to be reimbursed or paid by the Borrower
hereunder.
(l) Other Documents, etc. The Administrative Agent shall have
received such other certificates, legal opinions and documents as the
Administrative Agent or any Lender may reasonably request.
<PAGE>
51
4.2 Conditions to Each Extension of Credit. The agreement of each
Lender to make any extension of credit requested to be made by it on any date
(including, without limitation, its initial extension of credit) is subject to
the satisfaction of the following conditions precedent:
(a) Representations and Warranties. Each of the representations and
warranties made by any Credit Party in or pursuant to the Credit Documents
shall be true and correct on and as of such date as if made on and as of
such date (or if any such representation or warranty is expressly stated
to have been made as of a specific date, as of such specific date).
(b) No Default. No Default or Event of Default shall have occurred
and be continuing on such date or after giving effect to the extensions of
credit requested to be made on such date.
Each borrowing by the Borrower hereunder shall constitute a representation and
warranty by the Borrower as of the date of such extension of credit that the
conditions contained in this Section have been satisfied.
4.3 Conditions to Each Term Loan. The agreement of each Term Lender
to make a Term Loan requested to be made by it on any date (including, without
limitation, its initial Term Loan) are subject to the satisfaction of the
conditions precedent that on or prior to the date of such Term Loan, the Company
shall have received cash from the issuance of equity on or after August 3, 1999
and shall have contributed such amount as cash equity to the Borrower or any
Subsidiary Guarantor in an aggregate amount at least equal to the aggregate
principal amount of the Term Loans after giving effect to the making of such
Term Loan, and the Borrower shall have delivered to the Administrative Agent a
certificate of a Responsible Officer to that effect.
SECTION 5. AFFIRMATIVE COVENANTS
The Company and the Borrower hereby jointly and severally agree
that, so long as the Commitments remain in effect or any Loan or other amount is
owing to any Lender or any Agent hereunder, each of the Company and the Borrower
shall and shall cause each of its Subsidiaries to:
5.1 Financial Statements. Furnish to each Agent and each Lender:
(a) as soon as available, but in any event within 90 days after the
end of each fiscal year, a copy of the audited consolidated balance sheet
of the Company and its consolidated Subsidiaries as at the end of such
year and the related audited consolidated statements of income and of cash
flows for such year, setting forth in each case in comparative form the
figures for the previous year, reported on without a "going concern"
<PAGE>
52
or like qualification or exception, or qualification arising out of the
scope of the audit, by Ernst & Young LLP or other independent certified
public accountants of nationally recognized standing; and
(b) as soon as available, but in any event not later than 45 days
after the end of each of the first three quarterly periods of each fiscal
year, the unaudited consolidated balance sheet of the Company and its
consolidated Subsidiaries as at the end of such quarter and the related
unaudited consolidated statements of income and of cash flows for such
quarter and the portion of the fiscal year through the end of such
quarter, setting forth in each case in comparative form the figures for
the previous year, certified by a Responsible Officer as being fairly
stated in all material respects (subject to normal year-end audit
adjustments).
All such financial statements shall be complete and correct in all material
respects and shall be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein and with the
periods reflected in the financial statements referred to in Section 4.1(b)
(except as approved by such accountants or officer, as the case may be, and
disclosed therein).
5.2 Certificates; Other Information. Furnish to the Administrative
Agent and each Lender, or, in the case of clause (g), to the relevant Lender:
(a) concurrently with the delivery of the financial statements
referred to in Section 5.1(a), a certificate of the independent certified
public accountants reporting on such financial statements stating, in
performing their audit, nothing came to their attention that caused them
to believe that the Company and the Borrower failed to comply with the
provisions of Section 6.1, except as specified in such certificate;
(b) concurrently with the delivery of any financial statements
pursuant to Section 5.1, (i) a certificate of a Responsible Officer
stating that, to the best of each such Responsible Officer's knowledge,
each Credit Party during such period has observed or performed all of its
covenants and other agreements, and satisfied every condition, contained
in this Agreement and the other Credit Documents to which it is a party to
be observed, performed or satisfied by it, and that such Responsible
Officer has obtained no knowledge of any Default or Event of Default
except as specified in such certificate and (ii) in the case of quarterly
or annual financial statements, (x) a Compliance Certificate containing
all information and calculations necessary for determining compliance by
the Company and its Subsidiaries with the provisions of this Agreement
referred to therein as of the last day of the fiscal quarter or fiscal
year, as the case may be (which Compliance Certificate shall, during Stage
1, contain a breakdown of the number of Lines by type of Line), and (y) to
the extent not previously disclosed to the Administrative Agent, a listing
of any county or state within the United States where any Credit Party
keeps inventory or equipment and of any Intellectual Property acquired by
any Credit Party since the date of the most recent list delivered pursuant
to this clause (y) (or, in the case of the first such list so delivered,
since the Closing Date);
<PAGE>
53
(c) as soon as available, and in any event prior to 60 days after
the commencement of each fiscal year, a detailed consolidated budget for
such fiscal year (including a projected consolidated balance sheet of the
Company as of the end of such fiscal year, and the related consolidated
statements of projected cash flow, projected changes in financial position
and projected income), and, as soon as available, significant revisions,
if any, of such budget and projections with respect to such fiscal year
(collectively, the "Projections");
(d) (i) concurrently with the delivery of any financial statements
pursuant to Section 5.1(a), a narrative discussion and analysis of the
financial condition and results of operations of the Company and its
Subsidiaries for such fiscal year and (ii) concurrently with the delivery
of any financial statements pursuant to Section 5.1(b), a narrative
discussion and analysis of the financial condition and results of
operations of the Company and its Subsidiaries for such fiscal quarter,
and for the period from the beginning of the then current fiscal year to
the end of such fiscal quarter (it being understood that delivery to the
Administrative Agent and each Lender of the Company's Report on Form 10-K
or 10-Q, as applicable, filed with the SEC shall satisfy the requirements
of this Section so long as the information required to be contained in the
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" section of such Report is substantially the same as that
required under this Section);
(e) within five days after the same are sent or filed, copies of all
financial statements and reports which the Company or the Borrower sends
to the holders of any class of its debt securities (including, without
limitation, the holders of the Existing Senior Notes but excluding any
debt securities held by fewer than three holders) or public equity
securities and all periodic financial statements, final registration
statements (excluding exhibits) and reports which the Company or the
Borrower may make to, or file with, the SEC;
(f) as soon as possible and in any event within five days of
obtaining knowledge thereof: (i) any development, event, or condition
that, individually or in the aggregate with other developments, events or
conditions, would reasonably be expected to result in the payment by the
Company and its Subsidiaries, in the aggregate, of a Material
Environmental Amount; and (ii) any notice that any governmental authority
may deny any application for an Environmental Permit sought by, or revoke
or refuse to renew any Environmental Permit held by, the Company or any of
its Subsidiaries; and
(g) promptly, such additional financial and other information as any
Lender may from time to time reasonably request.
5.3 Payment of Obligations. Pay, discharge or otherwise satisfy at
or before maturity or before they become delinquent, as the case may be, all its
material obligations of
<PAGE>
54
whatever nature, except to the extent the failure to do so would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
5.4 Conduct of Business and Maintenance of Existence, etc. (a) (i)
Preserve, renew and keep in full force and effect its corporate existence and
(ii) take all reasonable action to maintain all rights, privileges and
franchises (including, without limitation, renewing and keeping in full force
and effect all collocation and interconnection agreements) necessary or
desirable in the normal conduct of its business, except, in each case, as
otherwise permitted by Section 6.4 and except, in the case of clauses (i) (other
than with respect to the Company and the Borrower) and (ii) above, to the extent
that failure to do so would not reasonably be expected to have a Material
Adverse Effect; and (b) comply with all Contractual Obligations and Requirements
of Law except to the extent that failure to comply therewith would not, in the
aggregate, reasonably be expected to have a Material Adverse Effect.
5.5 Maintenance of Property; Insurance. (a) Keep all Property and
systems useful and necessary in its business in good working order and
condition, ordinary wear and tear excepted, except to the extent failure to do
so would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
(b) Maintain with financially sound and reputable insurance
companies insurance on all its Property in at least such amounts and against at
least such risks (but including in any event public liability and business
interruption) as are usually insured against in the same general area by
companies engaged in the same or a similar business; and furnish to the
Administrative Agent with copies for each Lender, upon written request, full
information as to the insurance carried. The Administrative Agent and the
Lenders shall be named as additional insureds in respect of all public liability
insurance maintained by the Company or its Subsidiaries and the Administrative
Agent shall be named as loss payee in respect of all property and casualty
insurance maintained by the Company or its Subsidiaries on their respective
Property. All insurance shall provide that no cancellation, material reduction
in amount or material change in coverage thereof shall be effective until at
least 30 days after receipt by the Administrative Agent of written notice
thereof.
5.6 Inspection of Property; Books and Records; Discussions. (a) Keep
proper books of records and account in which full, true and correct entries in
conformity with GAAP and all Requirements of Law shall be made and (b) permit
representatives of the Required Lenders or the Administrative Agent (or, upon
the occurrence and during the continuation of any Default or Event of Default,
any Lender) to visit and inspect any of its properties and examine and make
abstracts from any of its books and records (except to the extent any such
access is restricted by a Requirement of Law) at any reasonable time and as
often as may reasonably be desired and to discuss the business, operations,
properties and financial and other condition of the Company and its Subsidiaries
with officers of the Company and its Subsidiaries and with its independent
certified public accountants; provided that (x) the Borrower shall notify the
Administrative Agent of any such visits, inspections or discussions by or with
any Lender prior to the occurrence thereof and (y) any request by a Lender for
any visit, inspection or discussion shall be made through the Administrative
Agent.
<PAGE>
55
5.7 Notices. Promptly after any Credit Party obtains knowledge
thereof, give notice to the Administrative Agent and each Lender of:
(a) the occurrence of any Default or Event of Default;
(b) any (i) default or event of default under any Contractual
Obligation of the Company or any of its Subsidiaries that would reasonably
be expected to have a Material Adverse Effect or (ii) litigation,
investigation or proceeding which may exist at any time between the
Company or any of its Subsidiaries and any Governmental Authority, which
in either case, if not cured or if adversely determined, as the case may
be, would reasonably be expected to have a Material Adverse Effect;
(c) any other litigation or proceeding affecting the Company or any
of its Subsidiaries in which the amount involved is $2,000,000 or more and
not covered by insurance or in which injunctive or similar relief is
sought;
(d) the following events, as soon as possible and in any event
within 30 days after the Borrower knows or has reason to know thereof: (i)
the occurrence of any Reportable Event with respect to any Plan, a failure
to make any required contribution to a Plan, the creation of any Lien in
favor of the PBGC or a Plan or any withdrawal from, or the termination,
Reorganization or Insolvency of, any Multiemployer Plan or (ii) the
institution of proceedings or the taking of any other action by the PBGC
or the Company or any Commonly Controlled Entity or any Multiemployer Plan
with respect to the withdrawal from, or the termination, Reorganization or
Insolvency of, any Plan; and
(e) any development or event which has had or would reasonably be
expected to have a Material Adverse Effect.
Each notice pursuant to this Section shall be accompanied by a statement of a
Responsible Officer setting forth details of the occurrence referred to therein
and stating what action the Company or the relevant Subsidiary proposes to take
with respect thereto.
5.8 Environmental Laws. (a) Comply in all material respects with,
and ensure compliance in all material respects by all tenants and subtenants, if
any, with, all applicable Environmental Laws, and obtain and comply in all
material respects with and maintain, and ensure that all tenants and subtenants
obtain and comply in all material respects with and maintain, any and all
Environmental Permits required by applicable Environmental Laws.
(b) Conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under
Environmental Laws and, except as being challenged by appropriate legal
proceedings, promptly comply in all material respects with all lawful orders and
directives of all Governmental Authorities regarding Environmental Laws.
<PAGE>
56
5.9 Additional Collateral, etc. (a) With respect to any Property of
the type covered by the Security Documents acquired after the Closing Date by
the Company or any of its Subsidiaries (other than any real property or the
Capital Stock of any new Subsidiary) as to which the Administrative Agent, for
the benefit of the Lenders, does not have a perfected Lien, promptly (but in any
event within 30 days after the acquisition thereof) (i) execute and deliver to
the Administrative Agent such amendments to the relevant Security Documents or
such other documents as the Administrative Agent deems necessary or advisable to
grant to the Administrative Agent, for the benefit of the Lenders, a security
interest in such Property, (ii) take all actions necessary or advisable to grant
to the Administrative Agent, for the benefit of the Lenders, a perfected first
priority security interest in such Property, including without limitation, the
filing of Uniform Commercial Code financing statements in such jurisdictions as
may be required by such Security Documents or by law or as may be requested by
the Administrative Agent and (iii) if requested by the Administrative Agent,
deliver to the Administrative Agent legal opinions as to the matters described
in clauses (i) and (ii) of this Section, which opinions shall be in form and
substance, and from counsel, reasonably satisfactory to the Administrative
Agent.
(b) With respect to any fee interest in any real property having a
value (together with improvements thereof) of at least $1,000,000 acquired after
the Closing Date by the Company or any of its Subsidiaries, promptly (but in any
event within 30 days after the acquisition thereof), to the extent permitted by
any mortgage covering such real property, (i) execute and deliver a first
priority Mortgage in favor of the Administrative Agent, for the benefit of the
Lenders, covering such real property, (ii) if requested by the Administrative
Agent, provide the Lenders with (x) title and extended coverage insurance
covering such real property in an amount at least equal to the purchase price of
such real estate (or such other amount as shall be reasonably specified by the
Administrative Agent) as well as a current ALTA survey thereof, together with a
surveyor's certificate and (y) any consents or estoppels reasonably deemed
necessary or advisable by the Administrative Agent in connection with such
mortgage or deed of trust, each of the foregoing in form and substance
reasonably satisfactory to the Administrative Agent and (iii) if requested by
the Administrative Agent, deliver to the Administrative Agent legal opinions
relating to the matters described above, which opinions shall be in form and
substance, and from counsel, reasonably satisfactory to the Administrative
Agent.
(c) With respect to any new Subsidiary created or acquired after the
Closing Date, by the Company or any of its Subsidiaries, promptly (but in any
event within 30 days after the acquisition thereof) (i) execute and deliver to
the Administrative Agent such amendments to the relevant Security Documents or
such other documents as the Administrative Agent deems necessary or advisable to
grant to the Administrative Agent, for the benefit of the Lenders, a perfected
first priority security interest in the Capital Stock of such new Subsidiary
which is owned by the Company or any of its Subsidiaries, (ii) deliver to the
Administrative Agent the certificates representing such Capital Stock, together
with undated stock powers, in blank, executed and delivered by a duly authorized
officer of the Company or such Subsidiary, as the case may be, (iii) cause such
new Subsidiary (A) to become a party to such Security Documents and (B) to take
such actions necessary or advisable to grant to the Administrative Agent for the
benefit of the Lenders a perfected first priority security interest in the
Collateral described in such
<PAGE>
57
Security Documents with respect to such new Subsidiary, including, without
limitation, the filing of Uniform Commercial Code financing statements in such
jurisdictions as may be required by such Security Documents or by law or as may
be requested by the Administrative Agent, and (iv) if requested by the
Administrative Agent, deliver to the Administrative Agent legal opinions
relating to the matters described above, which opinions shall be in form and
substance, and from counsel, reasonably satisfactory to the Administrative
Agent.
5.10 Further Assurances. From time to time execute and deliver, or
cause to be executed and delivered, such additional instruments, certificates or
documents, and take all such actions, as the Administrative Agent may reasonably
request, for the purposes of more fully perfecting or renewing the rights of the
Administrative Agent and the Lenders with respect to the Collateral (or with
respect to any additions thereto or replacements or proceeds thereof or with
respect to any other property or assets hereafter acquired by the Borrower which
may be deemed to be part of the Collateral) pursuant hereto or thereto. Upon the
exercise by the Administrative Agent or any Lender of any power, right,
privilege or remedy pursuant to this Agreement or the other Credit Documents
which requires any consent, approval, recording, qualification or authorization
of any Governmental Authority, the Borrower will execute and deliver, or will
cause the execution and delivery of, all applications, certifications,
instruments and other documents and papers that the Administrative Agent or such
Lender may be required to obtain from the Company or any of its Subsidiaries for
such governmental consent, approval, recording, qualification or authorization.
SECTION 6. NEGATIVE COVENANTS
The Company and the Borrower hereby jointly and severally agree
that, so long as the Commitments remain in effect or any Loan or other amount is
owing to any Lender or any Agent hereunder, each of the Company and the Borrower
shall not, and shall not permit any of its Subsidiaries to, directly or
indirectly:
6.1 Financial Condition Covenants.
I. Stage 1 Financial Covenants. During Stage 1:
(a) Revenues. Permit the Revenues for any fiscal quarter set forth
below to be less than the amount set forth below opposite such fiscal quarter:
Fiscal Quarter Ending Minimum Revenues
--------------------- ---------------------
March 31, 2000 $22,300,000
June 30, 2000 $30,100,000
September 30, 2000 $39,700,000
December 31, 2000 $48,000,000
March 31, 2000 $57,700,000
June, 30, 2001 $66,600,000
<PAGE>
58
(b) Consolidated EBITDA for any fiscal quarter set forth below to be
less than the amount (or, if the amount specified below is a negative number, to
be greater than such amount) set forth below opposite such fiscal quarter:
Fiscal Quarter Ending EBITDA
--------------------- --------------
March 31, 2000 ($14,900,000)
June 30, 2000 ($11,600,000)
September 30, 2000 ($5,300,000)
December 31, 2000 ($100,000)
March 31, 2001 $5,200,000
June, 30, 2001 $10,300,000
(c) Lines. Permit the aggregate number of Lines as at the last day
of any fiscal quarter set forth below to be less than the amount set forth below
opposite such fiscal quarter:
Fiscal Quarter Ending Minimum Number of Lines
--------------------- -----------------------
March 31, 2000 120,000
June 30, 2000 150,000
September 30, 2000 185,000
December 31, 2000 220,000
March 31, 2001 250,000
June, 30, 2001 285,000
(d) Senior Secured Debt to Total Capitalization Ratio. Permit, as at
the last day of any fiscal quarter, the ratio of (a) Senior Secured Debt on such
day to (b) Total Capitalization on such day to exceed 0.50 to 1 at any time
during Stage 1.
II. Stage 2 Financial Covenants. During Stage 2:
(a) Senior Leverage Ratio. Permit the Senior Leverage Ratio as at
the last day of any fiscal quarter set forth below to exceed the ratio set forth
below opposite such fiscal quarter:
Fiscal Quarter Ending Senior Leverage Ratio
--------------------- ---------------------
September 30, 2001 5.0 to 1
December 31, 2001 5.0 to 1
March 31, 2002 5.0 to 1
June 30, 2002 5.0 to 1
<PAGE>
59
September 30, 2002 4.5 to 1
December 31, 2002 4.5 to 1
March 31, 2003 4.0 to 1
June 30, 2003 4.0 to 1
September 30, 2003 3.5 to 1
December 31, 2003 3.0 to 1
March 31, 2004 2.5 to 1
June 30, 2004 2.0 to 1
September 30, 2004 2.0 to 1
December 31, 2004 2.0 to 1
March 31, 2005 2.0 to 1
June 30, 2005 2.0 to 1
September 30, 2005 2.0 to 1
December 31, 2005 2.0 to 1
March 31, 2006 2.0 to 1
June 30, 2006 2.0 to 1
September 30, 2006 2.0 to 1
December 31, 2006 2.0 to 1
(b) Total Leverage Ratio. Permit the Total Leverage Ratio as at the
last day of any fiscal quarter set forth below to exceed the ratio set forth
below opposite such fiscal quarter:
Fiscal Quarter Ending Total Leverage Ratio
--------------------- --------------------
September 30, 2001 10.0 to 1
December 31, 2001 10.0 to 1
March 31, 2002 10.0 to 1
June 30, 2002 10.0 to 1
September 30, 2002 9.0 to 1
December 31, 2002 9.0 to 1
March 31, 2003 8.0 to 1
June 30, 2003 8.0 to 1
September 30, 2003 8.0 to 1
December 31, 2003 8.0 to 1
March 31, 2004 7.0 to 1
June 30, 2004 7.0 to 1
September 30, 2004 7.0 to 1
December 31, 2004 7.0 to 1
<PAGE>
60
March 31, 2005 6.0 to 1
June 30, 2005 6.0 to 1
September 30, 2005 6.0 to 1
December 31, 2005 6.0 to 1
March 31, 2006 6.0 to 1
June 30, 2006 6.0 to 1
September 30, 2006 6.0 to 1
December 31, 2006 6.0 to 1
(c) Interest Coverage Ratio. Permit the Interest Coverage Ratio as
of the last day of any fiscal quarter set forth below to be less than the ratio
set forth below opposite such fiscal quarter:
Fiscal Quarter Ending Interest Coverage Ratio
--------------------- -----------------------
September 30, 2001 1.50 to 1
December 31, 2001 1.50 to 1
March 31, 2002 1.75 to 1
June 30, 2002 1.75 to 1
September 30, 2002 2.0 to 1
December 31, 2002 2.0 to 1
March 31, 2003 2.0 to 1
June 30, 2003 2.0 to 1
September 30, 2003 2.5 to 1
December 31, 2003 2.5 to 1
March 31, 2004 2.5 to 1
June 30, 2004 2.75 to 1
September 30, 2004 2.75 to 1
December 31, 2004 2.75 to 1
March 31, 2005 2.75 to 1
June 30, 2005 2.75 to 1
September 30, 2005 2.75 to 1
December 31, 2005 2.75 to 1
March 31, 2006 2.75 to 1
June 30, 2006 2.75 to 1
September 30, 2006 2.75 to 1
December 31, 2006 2.75 to 1
<PAGE>
61
(d) Pro Forma Debt Service Coverage. Permit the Pro Forma Debt
Service Coverage Ratio as of the last day of any fiscal quarter set forth below
to be less than the ratio set forth below opposite such fiscal quarter:
Fiscal Quarter Ending Pro Forma Debt Service
--------------------- ----------------------
Coverage Ratio
--------------
September 30, 2001 1.5 to 1
December 31, 2001 1.5 to 1
March 31, 2002 1.75 to 1
June 30, 2002 1.75 to 1
September 30, 2002 1.75 to 1
December 31, 2002 1.75 to 1
March 31, 2003 1.75 to 1
June 30, 2003 1.75 to 1
September 30, 2003 1.75 to 1
December 31, 2003 1.75 to 1
March 31, 2004 1.75 to 1
June 30, 2004 2.0 to 1
September 30, 2004 2.0 to 1
December 31, 2004 2.0 to 1
March 31, 2005 2.0 to 1
June 30, 2005 2.0 to 1
September 30, 2005 2.0 to 1
December 31, 2005 2.0 to 1
March 31, 2006 2.0 to 1
June 30, 2006 2.0 to 1
September 30, 2006 2.0 to 1
December 31, 2006 2.0 to 1
6.2 Limitation on Indebtedness. Create, incur, assume or suffer to
exist any Indebtedness, except:
(a) Indebtedness of any Credit Party pursuant to any Credit
Document;
(b) Indebtedness of the Borrower to the Company or any Subsidiary
and of any Subsidiary Guarantor to the Company, the Borrower or any other
Subsidiary;
(c) Permitted Equipment Financing;
<PAGE>
62
(d) Indebtedness outstanding on the Original Closing Date and listed
on Schedule 6.2(d) and any refinancings, refundings, renewals or
extensions thereof (without any increase in the principal amount thereof
or any shortening of the maturity of any principal amount thereof);
(e) Guarantee Obligations made by the Company or any of its
Subsidiaries of obligations of the Borrower or any Subsidiary Guarantor;
and
(f) Indebtedness in respect of any bankers' acceptance, letter of
credit, warehouse receipt or similar facilities entered into in the
ordinary course of business in an aggregate principal amount not to exceed
$5,000,000;
(g) Indebtedness in respect of Hedge Agreements permitted under
Section 6.16;
(h) Indebtedness of the Company in an aggregate amount not to exceed
the Net Cash Proceeds received by the Company from the issuance on or
after August 3, 1999 of any Capital Stock (but only to the extent such
proceeds are invested in the business of the Borrower and its
Subsidiaries) times two, so long as (i) at the time of incurrence (after
giving effect thereto), (x) no Default or Event of Default exists and (y)
the Company shall be in pro forma compliance with the covenants set forth
in Section 6.1 as if such Indebtedness had been outstanding on the date of
determination under the relevant financial covenant tests and (ii) such
Indebtedness shall (x) have a maturity no earlier than (and shall not
contain any amortization or prepayment requirements prior to) the maturity
of the Existing Senior Notes, (y) not provide for mandatory cash payments
of interest prior to the third anniversary of the Closing Date (other
than, in connection with the issuance by the Company of "overfund" notes,
cash payments of interest made by applying Cash Equivalents purchased with
a portion of the proceeds of such Indebtedness and pledged as security for
such Indebtedness in accordance with the terms thereof) and (z) otherwise
contain terms and conditions (including, without limitation, covenants and
events of default) not (in the opinion of the Administrative Agent, acting
reasonably) more restrictive that the terms of the Existing Senior Notes;
and
(i) additional Indebtedness; provided that the aggregate amount of
Indebtedness incurred and remaining outstanding pursuant to this clause
(i) shall not at any time exceed $10,000,000 in the aggregate.
6.3 Limitation on Liens. Create, incur, assume or suffer to exist
any Lien upon any of its Property, whether now owned or hereafter acquired,
except for:
(a) Liens for taxes not yet due or which are being contested in good
faith by appropriate proceedings; provided that adequate reserves with
respect thereto are maintained on the books of the Company or any of its
Subsidiaries, as the case may be, in conformity with GAAP;
<PAGE>
63
(b) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business
which are not overdue for a period of more than 60 days or which are being
contested in good faith by appropriate proceedings;
(c) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation and deposits
securing liability to insurance carriers under insurance or self-insurance
arrangements;
(d) deposits to secure the performance of bids, trade contracts
(other than for borrowed money), leases (other than Capital Lease
Obligations), statutory obligations, surety and appeal bonds, performance
bonds and other obligations of a like nature incurred in the ordinary
course of business;
(e) easements, rights-of-way, zoning restrictions, other
restrictions and other similar encumbrances incurred in the ordinary
course of business which, in the aggregate, are not substantial in amount
and which do not in any case materially detract from the value of the
Property subject thereto or materially interfere with the ordinary conduct
of the business of the Subsidiaries or which are set forth in any title
insurance policy delivered to the Administrative Agent pursuant to the
terms of this Agreement;
(f) Liens in existence on the Original Closing Date and listed on
Schedule 6.3(f), securing Indebtedness permitted by Section 6.2(d);
(g) Liens securing Indebtedness of the Borrower or any other
Subsidiary permitted by Section 6.2(c); provided that (i) such Liens shall
be created within 90 days of the acquisition of such fixed or capital
assets, (ii) such Liens do not at any time encumber any Property other
than the Property financed by such Indebtedness (other than after acquired
title in or on such Property and proceeds of the existing collateral in
accordance with the instrument creating such Lien) and (iii) the principal
amount of Indebtedness secured by any such Lien shall at no time exceed
100% of the original purchase price of such Property at the time it was
acquired;
(h) Liens created pursuant to this Agreement and the Security
Documents;
(i) any interest or title of a lessor under any lease entered into
by the Borrower or any other Subsidiary in the ordinary course of its
business and covering only the assets so leased;
(j) so long as no Default or Event of Default shall have occurred
and be continuing under clause (h) of Section 7, Liens arising from
judgments or decrees in respect of which judgments or decrees that have
been satisfied, vacated, discharged, stayed or bonded pending appeal
within 60 days from the entry thereof or Liens arising from judgments or
decrees in an aggregate amount outstanding at any one time not in excess
of $2,000,000 (to the extent not paid or fully covered by insurance as to
which the
<PAGE>
64
relevant insurance company has not denied in writing coverage above
applicable deductibles);
(k) Cash Equivalents purchased with a portion of the proceeds of
Indebtedness of the Company permitted by Section 6.2(h) and pledged as
security for (and to be applied toward) mandatory payments of cash
interest in accordance with the terms of such Indebtedness; and
(l) additional Liens so long as the aggregate person principal
amount of the obligations so secured does not exceed $10,000,000 at any
time outstanding.
6.4 Limitation on Fundamental Changes. Enter into any merger,
consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or Dispose of all or substantially all
of its Property or business, except that:
(a) any Subsidiary of the Company may be merged or consolidated with
or into the Borrower (provided that the Borrower shall be the continuing
or surviving corporation) or with or into any Subsidiary Guarantor
(provided that a Subsidiary Guarantor shall be the continuing or surviving
corporation);
(b) any Subsidiary of the Company may Dispose of any or all of its
assets (upon voluntary liquidation or otherwise) to the Borrower or any
Subsidiary Guarantor; and
(c) any transaction permitted by Section 6.5, 6.7 or 6.8 may be
consummated as contemplated thereby.
6.5 Limitation on Disposition of Property. Dispose of any of its
Property (including, without limitation, receivables and leasehold interests),
whether now owned or hereafter acquired, or, in the case of any Subsidiary,
issue or sell any shares of such Subsidiary's Capital Stock to any Person,
except:
(a) the Disposition of obsolete or worn out property in the ordinary
course of business;
(b) the sale of inventory, cash or Cash Equivalents, in each case in
the ordinary course of business;
(c) Dispositions permitted by Sections 6.4(a) and (b);
(d) the sale or issuance of any Subsidiary's Capital Stock to the
Company, the Borrower or any Subsidiary Guarantor;
(e) the Disposition of other assets having a fair market value not
to exceed $10,000,000 (or, if greater at the time of any such Disposition,
10% of the consolidated total assets of the Company and its Subsidiaries
at such time, determined in accordance
<PAGE>
65
with GAAP) in the aggregate during the term of this Agreement; provided
that the requirements of Section 2.12(a) are complied with in connection
therewith; and
(f) the Disposition of non-core assets or businesses acquired in
connection with any acquisition permitted by Section 6.7; provided that
(x) each such Disposition shall occur not more than 120 days following
such acquisition, (y) each such Disposition shall be in an amount equal to
the fair market value thereof and (z) the requirements of Section 2.12(a)
are complied with in connection therewith.
6.6 Limitation on Restricted Payments. Declare or pay any dividend
(other than dividends payable solely in common stock of the Person making such
dividend) on, or make any payment on account of, or set apart assets for a
sinking or other analogous fund for, the purchase, redemption, defeasance,
retirement or other acquisition of, any Capital Stock of the Company or any
Subsidiary, whether now or hereafter outstanding, or make any other distribution
in respect thereof, either directly or indirectly, whether in cash or property
or in obligations of the Company or any Subsidiary (collectively, "Restricted
Payments"), except that:
(a) any Subsidiary may make Restricted Payments to the Borrower or
any Subsidiary Guarantor;
(b) so long as no Default or Event of Default shall have occurred
and be continuing, the Borrower or any other Subsidiary may pay dividends
to the Company to permit the Company to (and the Company may) repurchase
shares of its Capital Stock (and/or options or warrants in respect
thereof) from present or former directors, officers or employees of the
Company, the Borrower or any other Subsidiary upon the death, disability
or termination of employment of such director, officer or employee or
otherwise pursuant to, and in accordance with the terms of, stock option
plans, stock subscription agreements or shareholder agreements; provided
that the aggregate amount of payments under this clause (b) shall not
exceed $1,000,000 in any fiscal year;
(c) the Borrower or any other Subsidiary may pay dividends to the
Company to permit the Company to (i) pay operating expenses incurred in
the ordinary course of business (and other similar corporate overhead
costs and expenses) not to exceed $1,000,000 in any fiscal year and (ii)
pay any taxes which are due and payable by the Company as part of a
consolidated group;
(d) so long as no Default or Event of Default shall have occurred
and be continuing, the Borrower or any other Subsidiary may pay dividends
to the Company in an amount sufficient for the Company pay regularly
scheduled interest on Existing Senior Notes (and the proceeds of such
dividends shall be used only for such purpose);
(e) so long as no Event of Default specified in clause (i), (ii),
(iv) or (v) of Section 7(f) with respect to the Company shall have
occurred and be continuing, any Subsidiary may pay dividends to the
Company; provided that the amount of such
<PAGE>
66
dividend is, immediately upon receipt by the Company, contributed as cash
equity to the Borrower or any Subsidiary Guarantor;
(f) the Company may redeem in whole or in part any Capital Stock of
the Company for another class of Capital Stock or rights to acquire
Capital Stock of the Company or with proceeds from substantially
concurrent equity contributions or issuances of new shares of Capital
Stock; provided that the terms and conditions of such other class of
Capital Stock shall (in the reasonable judgment of the Administrative
Agent) be no less favorable to the Lenders than those contained in the
Capital Stock redeemed thereby; and
(g) the Company and its Subsidiaries may make Investments permitted
by Section 6.7.
6.7 Limitation on Investments. Make any advance, loan, extension of
credit (by way of guaranty or otherwise) or capital contribution to, or purchase
any Capital Stock, bonds, notes, debentures or other debt securities of, or any
assets constituting an ongoing business from, or make any other investment in,
any other Person (all of the foregoing, "Investments"), except:
(a) extensions of trade credit in the ordinary course of business;
(b) Investments in Cash Equivalents;
(c) Investments arising in connection with the incurrence of
Indebtedness permitted by Section 6.2(b) or Guarantee Obligations
permitted by Section 6.2(e);
(d) loans and advances to employees of the Company or any
Subsidiaries in the ordinary course of business (including, without
limitation, for travel, entertainment and relocation expenses) in an
aggregate amount for the Company and its Subsidiaries not to exceed
$1,000,000 at any one time outstanding;
(e) Investments (other than those relating to the incurrence of
Indebtedness permitted by Section 6.7(c)) by the Company or any of its
Subsidiaries in the Borrower or any Person that, prior to such investment,
is a Subsidiary Guarantor;
(f) Investments in existence on the Original Closing Date set forth
in Part D of Schedule 3.14 and extensions, renewals, modifications,
restatements or replacements thereof; provided that no such extension,
renewal, modification or replacement shall increase the original amount of
such Investment;
(g) Investments in Hedge Agreements permitted by Section 6.16;
(h) Investments received in connection with the bankruptcy or
reorganization of suppliers or customers and in settlement of delinquent
obligations of, and other disputes with, customers arising in the ordinary
course of business;
<PAGE>
67
(i) Investments constituting non-cash proceeds of sales, transfers
and other Dispositions of Property to the extent permitted by Section 6.5;
and
(j) Investments made to acquire all of the Capital Stock, or all or
substantially all of the assets (or all or substantially all of the assets
of any division or business unit), of any Person that is engaged in a
business permitted under Section 6.14; provided that (a) if such
Investment is an acquisition of the voting Capital Stock of any Person,
such Person's board of directors or similar governing body shall have
approved such acquisition, (b) at the time of each such Investment (both
immediately prior to and after giving effect to such Investment), (i)
there shall exist no Default or Event of Default and (ii) the aggregate
consideration paid (regardless of form, including in the case of an
acquisition of assets, the amount of any assumed obligations, but
excluding consideration paid with Capital Stock of the Company, which
shall be permitted in an unlimited amount) in connection with (x) all
Investments made pursuant to this paragraph (j) during the term of this
Agreement shall not exceed the lesser of (1) $10,000,000 plus the
Available Amount at the time of such Investment and (2) $50,000,000 and
(y) any one Investment shall not exceed $25,000,000 and (c) at least five
Business Days prior to each such Investment, the Administrative Agent
shall have received a certificate of a Responsible Officer certifying as
to the foregoing and containing calculations, in form and substance
reasonably satisfactory to the Administrative Agent, demonstrating in
reasonable detail compliance with this paragraph (j) and Section 6.1
(calculated on a pro forma basis after giving effect to such Investment).
6.8 Limitation on Optional Payments and Modifications of Instruments
and Agreements, etc. (a) (i) Make or offer to make any optional or voluntary
payment, prepayment, repurchase or redemption of, or otherwise voluntarily or
optionally defease, the Existing Senior Notes or any Indebtedness permitted by
Section 6.2(h), or segregate funds for any such payment, prepayment, repurchase,
redemption or defeasance or (ii) amend, modify or otherwise change, or consent
or agree to any amendment, modification, waiver or other change to, any of the
terms of the Existing Senior Notes (other than any such amendment, modification,
waiver or other change which (x) would extend the maturity or reduce the amount
of any payment of principal thereof, reduce the rate or extend the date for
payment of interest thereon or relax any covenant or other restriction
applicable to the Company or any of its Subsidiaries and (y) does not involve
the payment of a consent fee); provided that, so long as no Default or Event of
Default exists at the time thereof, the Company may redeem, repurchase or
otherwise acquire Existing Senior Notes with the proceeds of substantially
concurrent equity contributions from, or issuances of new shares of Capital
Stock to, Permitted Investors.
(b) Amend its certificate of incorporation in any manner which would
reasonably be expected to adversely affect the rights of the Lenders under the
Credit Documents or their ability to enforce such rights.
6.9 Limitation on Transactions with Affiliates. Enter into any
transaction, including, without limitation, any purchase, sale, lease or
exchange of Property, the rendering of
<PAGE>
68
any service or the payment of any management, advisory or similar fees, with any
Affiliate (other than the Company, the Borrower or any Subsidiary Guarantor)
unless such transaction is (a) otherwise permitted under this Agreement, (b) in
the ordinary course of business of the Company or such Subsidiary, as the case
may be, and (c) upon fair and reasonable terms no less favorable to the Company
or such Subsidiary, as the case may be, than it would obtain in a comparable
arm's length transaction with a Person which is not an Affiliate.
6.10 Limitation on Sales and Leasebacks. Enter into any arrangement
with any Person providing for the leasing by the Company or any Subsidiary of
real or personal property which has been or is to be sold or transferred by the
Company or such Subsidiary to such Person or to any other Person to whom funds
have been or are to be advanced by such Person on the security of such property
or rental obligations of the Company or such Subsidiary, except for any such
leasing arrangement that is permitted by Section 6.5(e).
6.11 Limitation on Changes in Fiscal Periods. Permit the fiscal year
of the Company or any of its Subsidiaries to end on a day other than December 31
or change the Company's or any such Subsidiary's method of determining fiscal
quarters; provided that the Company and its Subsidiaries may change their
respective fiscal year ends if the Borrower enters into such amendments to this
Agreement as the Administrative Agent and the Borrower shall reasonably agree as
necessary to reflect such change, including modifications to Section 6.1, such
that the covenants affected by such change shall have the same effect (or, in
any case, be substantively no less favorable to the Lenders, in the
determination of the Administrative Agent) after giving effect thereto as if
such change were not made. The Lenders hereby authorize the Administrative Agent
to enter into such amendments to effect such modifications, if any, in
accordance with the provisions of this Section.
6.12 Limitation on Negative Pledge Clauses. Enter into or suffer to
exist or become effective any agreement which prohibits or limits the ability of
the Company or any of its Subsidiaries to create, incur, assume or suffer to
exist any Lien upon any of its Property or revenues, whether now owned or
hereafter acquired, to secure the Obligations or, in the case of any Guarantor,
its obligations under the Guarantee and Collateral Agreement, other than (a)
this Agreement and the other Credit Documents, (b) the Existing Senior Notes
Indenture, (c) any agreements governing any purchase money Liens or Capital
Lease Obligations otherwise permitted hereby (in which case, any prohibition or
limitation shall only be effective against the assets financed thereby), (d)
agreements relating to the Disposition, acquisition or lease of Property, in
each case otherwise permitted under this Agreement, so long as such restrictions
relate only to the assets subject to such transaction, (e) agreements relating
to Liens permitted by this Agreement or Liens on Property not purported to be
covered by the Security Documents or required by this Agreement to be so covered
and (f) agreements entered into in the ordinary course of business containing
restrictions customary for such agreements that do not materially affect the
rights or remedies of the Agents or the Lenders under the Credit Documents with
respect to the Collateral or otherwise.
6.13 Limitation on Restrictions on Subsidiary Distributions. Enter
into or suffer to exist or become effective any consensual encumbrance or
restriction on the ability of any
<PAGE>
69
Subsidiary of the Company to make Restricted Payments in respect of any Capital
Stock of such Subsidiary held by, or pay any Indebtedness owed to, the Borrower
or any other Subsidiary, except for such encumbrances or restrictions existing
under or by reason of (i) any restrictions existing under the Credit Documents
or the Existing Senior Notes Indenture and (ii) any restrictions with respect to
a Subsidiary imposed pursuant to an agreement which has been entered into in
connection with the Disposition of all or substantially all of the Capital Stock
or assets of such Subsidiary.
6.14 Limitation on Lines of Business. Enter into any business,
either directly or through any Subsidiary, except for those businesses in which
the Company and its Subsidiaries are engaged on the date of this Agreement, the
data or telecommunications business or any businesses which are reasonably
related to any of the foregoing.
6.15 Limitation on Capital Expenditures. Make or commit to make any
Capital Expenditure, except Capital Expenditures of the Company and its
Subsidiaries in the ordinary course of business not exceeding $75,000,000 in the
aggregate for the Company and its Subsidiaries during any fiscal year; provided
that (i) up to 25% of any such amount referred to above, if not so expended in
the fiscal year for which it is permitted, may be carried over for expenditure
in the next succeeding fiscal year, (ii) up to 25% of the amount referred to
above for any fiscal year may be expended in the immediately prior fiscal year
(but any amount so expended in any such prior fiscal year may not be expended in
such fiscal year) and (iii) Capital Expenditures made pursuant to this Section
during any fiscal year shall be deemed made, first, in respect of amounts
permitted for such fiscal year as provided above and, second, in respect of
amounts carried over from the prior fiscal year pursuant to subclause (i) above;
and provided, further, that no more than 20% of Capital Expenditures in any
fiscal year may be incurred for expenditures not related to the Company's and
its Subsidiaries' core CLEC switched access business as conducted as of the
Closing Date and similar or related businesses. Notwithstanding the foregoing
limitations, the Company and its Subsidiaries may make Capital Expenditures with
(i) the proceeds of any Reinvestment Deferred Amount received in connection with
a Recovery Event and (ii) the Available Amount at the time any such Capital
Expenditure is made.
6.16 Hedge Agreements; Equity Forward Agreements. Enter into or
suffer to exist or become effective (a) any Hedge Agreement, other than Hedge
Agreements entered into and for non-speculative purposes or (b) any equity
exchange or forward agreement or similar derivative contract or any option to
enter into any such agreement or contract.
6.17 Limitation on Activities of the Company. In the case of the
Company, notwithstanding anything to the contrary in this Agreement or any other
Credit Document, (a) conduct, transact or otherwise engage in, or commit to
conduct, transact or otherwise engage in, any business or operations other than
those incidental to its ownership of the Capital Stock of the Borrower and the
other Subsidiaries of the Company, (b) incur, create, assume or suffer to exist
any Indebtedness or other liabilities or financial obligations, except (i)
nonconsensual obligations imposed by operation of law, (ii) pursuant to the
Credit Documents to which it is a party, (iii) Indebtedness permitted under
Section 6.2 and (iv) obligations with respect to its Capital Stock, or (c) own,
lease, manage or otherwise operate any properties or assets (including
<PAGE>
70
cash (other than cash received in connection with dividends made by the Borrower
and the other Subsidiaries of the Company in accordance with Section 6.6 pending
application in the manner contemplated by said Section) and cash equivalents)
other than the ownership of shares of Capital Stock of the Borrower and the
other Subsidiaries of the Company.
SECTION 7. EVENTS OF DEFAULT
If any of the following events shall occur and be continuing:
(a) the Borrower shall fail to pay any principal of any Loan when
due in accordance with the terms hereof; or the Borrower shall fail to pay
any interest on any Loan, or any other amount payable hereunder or under
any other Credit Document, within five days after any such interest or
other amount becomes due in accordance with the terms hereof; or
(b) any representation or warranty made or deemed made by any Credit
Party herein or in any other Credit Document or which is contained in any
certificate, document or financial or other statement furnished by it at
any time under or in connection with this Agreement or any other Credit
Document shall prove to have been inaccurate in any material respect on or
as of the date made or deemed made; or
(c) (i) any Credit Party shall default in the observance or
performance of any agreement contained in clause (i) or (ii) of Section
5.4(a) (with respect to the Company and the Borrower only), Section
5.7(a), Section 6 (other than Section 6.10, Section 6.16 and Section 6.17)
or Section 2 of the Guarantee and Collateral Agreement; or
(d) any Credit Party shall default in the observance or performance
of any other agreement contained in this Agreement or any other Credit
Document (other than as provided in paragraphs (a) through (c) of this
Section), and such default shall continue unremedied for a period of 30
days; or
(e) the Company or any of its Subsidiaries shall (i) default in
making any payment of any principal of any Indebtedness (including,
without limitation, any Guarantee Obligation, but excluding the Loans) on
the scheduled or original due date with respect thereto; or (ii) default
in making any payment of any interest on any such Indebtedness beyond the
period of grace, if any, provided in the instrument or agreement under
which such Indebtedness was created; or (iii) default in the observance or
performance of any other agreement or condition relating to any such
Indebtedness or contained in any instrument or agreement evidencing,
securing or relating thereto, or any other event shall occur or condition
exist, the effect of which default or other event or condition is to
cause, or to permit the holder or beneficiary of such Indebtedness (or a
trustee or agent on behalf of such holder or beneficiary) to cause, with
the giving of notice if required, such Indebtedness to become due prior to
its stated maturity or (in the case of any such Indebtedness constituting
a Guarantee Obligation) to become payable;
<PAGE>
71
provided that a default, event or condition described in clause (i), (ii)
or (iii) of this paragraph (e) shall not at any time constitute an Event
of Default unless, at such time, one or more defaults, events or
conditions of the type described in clauses (i), (ii) and (iii) of this
paragraph (e) shall have occurred and be continuing with respect to
Indebtedness the outstanding principal amount of which exceeds in the
aggregate $3,000,000; or
(f) (i) the Company or any of its Subsidiaries shall commence any
case, proceeding or other action (A) under any existing or future law of
any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief
entered with respect to it, or seeking to adjudicate it a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief with respect to it
or its debts, or (B) seeking appointment of a receiver, trustee,
custodian, conservator or other similar official for it or for all or any
substantial part of its assets, or the Company or any of its Subsidiaries
shall make a general assignment for the benefit of its creditors; or (ii)
there shall be commenced against the Company or any of its Subsidiaries
any case, proceeding or other action of a nature referred to in clause (i)
above which (A) results in the entry of an order for relief or any such
adjudication or appointment or (B) remains undismissed, undischarged or
unbonded for a period of 60 days; or (iii) there shall be commenced
against the Company or any of its Subsidiaries any case, proceeding or
other action seeking issuance of a warrant of attachment, execution,
distraint or similar process against all or any substantial part of its
assets which results in the entry of an order for any such relief which
shall not have been vacated, discharged, or stayed or bonded pending
appeal within 60 days from the entry thereof; or (iv) the Company or any
of its Subsidiaries shall take any action in furtherance of, or indicating
its consent to, approval of, or acquiescence in, any of the acts set forth
in clause (i), (ii), or (iii) above; or (v) the Company or any of its
Subsidiaries shall generally not, or shall be unable to, or shall admit in
writing its inability to, pay its debts as they become due; or
(g) (i) any Person shall engage in any "prohibited transaction" (as
defined in Section 406 of ERISA or Section 4975 of the Code) involving any
Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302
of ERISA), whether or not waived, shall exist with respect to any Plan or
any Lien in favor of the PBGC or a Plan shall arise on the assets of the
Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall
occur with respect to, or proceedings shall commence to have a trustee
appointed, or a trustee shall be appointed, to administer or to terminate,
any Single Employer Plan, which Reportable Event or commencement of
proceedings or appointment of a trustee is, in the reasonable opinion of
the Required Lenders, likely to result in the termination of such Plan for
purposes of Title IV of ERISA, (iv) any Single Employer Plan shall
terminate for purposes of Title IV of ERISA, (v) the Borrower or any
Commonly Controlled Entity shall, or in the reasonable opinion of the
Required Lenders is likely to, incur any liability in connection with a
withdrawal from, or the Insolvency or Reorganization of, a Multiemployer
Plan or (vi) any other event or condition shall occur or exist with
respect to a Plan; and in each case in clauses (i) through (vi) above,
such event or condition, together with all other such events or
<PAGE>
72
conditions, if any, could, in the sole judgment of the Required Lenders,
reasonably be expected to have a Material Adverse Effect; or
(h) one or more judgments or decrees shall be entered against the
Company or any of its Subsidiaries involving for the Company and its
Subsidiaries taken as a whole a liability (to the extent not paid or fully
covered by insurance as to which the relevant insurance company has not
denied in writing coverage) of $3,000,000 or more, and all such judgments
or decrees shall not have been satisfied, vacated, discharged, stayed or
bonded pending appeal within 60 days from the entry thereof; or
(i) (i) any provision of the Security Documents shall cease, for any
reason, to be in full force and effect (unless released by the
Administrative Agent at the direction of the requisite Lenders or as
otherwise permitted under this Agreement or the other Credit Documents),
or any Credit Party or any Affiliate of any Credit Party shall so assert,
or (ii) any Lien created by any of the Security Documents shall cease
(with respect to Collateral having a value, in the reasonable judgment of
the Administrative Agent, of at least $1,500,000) to be enforceable and of
the same effect and priority purported to be created thereby (unless
released by the Administrative Agent at the direction of the requisite
Lenders or as otherwise permitted under this Agreement or the other Credit
Documents); or
(j) the guarantee of any Credit Party contained in Section 2 of the
Guarantee and Collateral Agreement shall cease, for any reason, to be in
full force and effect or any Credit Party or any Affiliate of any Credit
Party shall deny or disaffirm its obligation in respect of such guarantee;
or
(k) a Change in Control shall occur;
then, and in any such event, (A) if such event is an Event of Default specified
in clause (i) or (ii) of paragraph (f) above with respect to the Borrower,
automatically the Commitments shall immediately terminate and the Loans
hereunder (with accrued interest thereon) and all other amounts owing under this
Agreement and the other Credit Documents shall immediately become due and
payable, and (B) if such event is any other Event of Default, either or both of
the following actions may be taken: (i) with the consent of the Required
Lenders, the Administrative Agent may, or upon the request of the Required
Lenders, the Administrative Agent shall, by notice to the Borrower declare the
Commitments to be terminated forthwith, whereupon the Commitments shall
immediately terminate; and (ii) with the consent of the Required Lenders, the
Administrative Agent may, or upon the request of the Required Lenders, the
Administrative Agent shall, by notice to the Borrower, declare the Loans
hereunder (with accrued interest thereon) and all other amounts owing under this
Agreement and the other Credit Documents to be due and payable forthwith,
whereupon the same shall immediately become due and payable.
<PAGE>
73
SECTION 8. THE AGENTS
8.1 Appointment. Each Lender hereby irrevocably designates and
appoints the Agents as the agents of such Lender under this Agreement and the
other Credit Documents, and each such Lender irrevocably authorizes each Agent,
in such capacity, to take such action on its behalf under the provisions of this
Agreement and the other Credit Documents and to exercise such powers and perform
such duties as are expressly delegated to the such Agent by the terms of this
Agreement and the other Credit Documents, together with such other powers as are
reasonably incidental thereto. Notwithstanding any provision to the contrary
elsewhere in this Agreement, no Agent shall have any duties or responsibilities,
except those expressly set forth herein, or any fiduciary relationship with any
Lender, and no implied covenants, functions, responsibilities, duties,
obligations or liabilities shall be read into this Agreement or any other Credit
Document or otherwise exist against any Agent.
8.2 Delegation of Duties. Each Agent may execute any of its duties
under this Agreement and the other Credit Documents by or through agents or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. No Agent shall be responsible for the
negligence or misconduct of any agents or attorneys in-fact selected by it with
reasonable care.
8.3 Exculpatory Provisions. Neither any Agent nor any of their
respective officers, directors, employees, agents, attorneys-in-fact or
affiliates shall be (i) liable for any action lawfully taken or omitted to be
taken by it or such Person under or in connection with this Agreement or any
other Credit Document (except to the extent that any of the foregoing are found
by a final and nonappealable decision of a court of competent jurisdiction to
have resulted from its or such Person's own gross negligence or willful
misconduct) or (ii) responsible in any manner to any of the Lenders for any
recitals, statements, representations or warranties made by any Credit Party or
any officer thereof contained in this Agreement or any other Credit Document or
in any certificate, report, statement or other document referred to or provided
for in, or received by the Agents under or in connection with, this Agreement or
any other Credit Document or for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement or any other Credit
Document or for any failure of any Credit Party a party thereto to perform its
obligations hereunder or thereunder. The Agents shall not be under any
obligation to any Lender to ascertain or to inquire as to the observance or
performance of any of the agreements contained in, or conditions of, this
Agreement or any other Credit Document, or to inspect the properties, books or
records of any Credit Party.
8.4 Reliance by Agents. Each Agent shall be entitled to rely, and
shall be fully protected in relying, upon any instrument, writing, resolution,
notice, consent, certificate, affidavit, letter, telecopy, telex or teletype
message, statement, order or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons and upon advice and statements of legal counsel (including, without
limitation, counsel to any of the Credit Parties), independent accountants and
other experts selected by the Administrative Agent. The Agents may deem and
treat the payee of any Note as the owner thereof for all purposes unless a
written notice of assignment, negotiation or transfer
<PAGE>
74
thereof shall have been filed with the Administrative Agent. Each Agent shall be
fully justified in failing or refusing to take any action under this Agreement
or any other Credit Document unless it shall first receive such advice or
concurrence of the Required Lenders (or, if so specified by this Agreement, all
Lenders) as it deems appropriate or it shall first be indemnified to its
satisfaction by the Lenders against any and all liability and expense which may
be incurred by it by reason of taking or continuing to take any such action.
Each Agent shall in all cases be fully protected in acting, or in refraining
from acting, under this Agreement and the other Credit Documents in accordance
with a request of the Required Lenders (or, if so specified by this Agreement,
all Lenders), and such request and any action taken or failure to act pursuant
thereto shall be binding upon all the Lenders and all future holders of the
Loans.
8.5 Notice of Default. No Agent shall be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default hereunder unless
such Agent has received notice from a Lender, the Company or the Borrower
referring to this Agreement, describing such Default or Event of Default and
stating that such notice is a "notice of default". In the event that the
Administrative Agent receives such a notice, the Administrative Agent shall give
notice thereof to the Lenders. The Administrative Agent shall take such action
with respect to such Default or Event of Default as shall be reasonably directed
by the Required Lenders (or, if so specified by this Agreement, all Lenders);
provided that unless and until the Administrative Agent shall have received such
directions, the Administrative Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, with respect to such Default or
Event of Default as it shall deem advisable in the best interests of the
Lenders.
8.6 Non-Reliance on Agents and Other Lenders. Each Lender expressly
acknowledges that neither the Agents nor any of their respective officers,
directors, employees, agents, attorneys-in-fact or affiliates have made any
representations or warranties to it and that no act by any Agent hereinafter
taken, including any review of the affairs of a Credit Party or any affiliate of
a Credit Party, shall be deemed to constitute any representation or warranty by
any Agent to any Lender. Each Lender represents to the Agents that it has,
independently and without reliance upon any Agent or any other Lender, and based
on such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, operations, property,
financial and other condition and creditworthiness of the Credit Parties and
their affiliates and made its own decision to make its Loans hereunder and enter
into this Agreement. Each Lender also represents that it will, independently and
without reliance upon any 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 analysis, appraisals and decisions in taking or not taking action
under this Agreement and the other Credit Documents, and to make such
investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition and creditworthiness of the
Credit Parties and their affiliates. Except for notices, reports and other
documents expressly required to be furnished to the Lenders by the
Administrative Agent hereunder, no Agent shall have any duty or responsibility
to provide any Lender with any credit or other information concerning the
business, operations, property, condition (financial or otherwise), prospects or
creditworthiness of any Credit Party or any affiliate of a Credit Party which
may come into the possession of such Agent or any of its officers, directors,
employees, agents, attorneys-in-fact or affiliates.
<PAGE>
75
8.7 Indemnification. The Lenders agree to indemnify each Agent in
its capacity as such (to the extent not reimbursed by the Company or the
Borrower and without limiting the obligation of the Company or the Borrower to
do so), ratably according to their respective Aggregate Exposure Percentages in
effect on the date on which indemnification is sought under this Section (or, if
indemnification is sought after the date upon which the Commitments shall have
terminated and the Loans shall have been paid in full, ratably in accordance
with such Aggregate Exposure Percentages immediately prior to such date), from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind
whatsoever which may at any time (including, without limitation, at any time
following the payment of the Loans) be imposed on, incurred by or asserted
against such Agent in any way relating to or arising out of, the Commitments,
this Agreement, any of the other Credit Documents or any documents contemplated
by or referred to herein or therein or the transactions contemplated hereby or
thereby or any action taken or omitted by such Agent under or in connection with
any of the foregoing; provided that no Lender shall be liable for the payment of
any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements which are found by a
final and nonappealable decision of a court of competent jurisdiction to have
resulted from such Agent's gross negligence or willful misconduct. The
agreements in this Section shall survive the payment of the Loans and all other
amounts payable hereunder.
8.8 Agent in Its Individual Capacity. Each Agent and its affiliates
may make loans to, accept deposits from and generally engage in any kind of
business with any Credit Party as though such Agent was not an Agent. With
respect to its Loans made or renewed by it, each Agent shall have the same
rights and powers under this Agreement and the other Credit Documents as any
Lender and may exercise the same as though it were not an Agent, and the terms
"Lender" and "Lenders" shall include each Agent in its individual capacity.
8.9 Successor Agents. The Administrative Agent may resign as
Administrative Agent upon 10 days' notice to the Lenders and the Borrower. If
the Administrative Agent shall resign as Administrative Agent under this
Agreement and the other Credit Documents, then the Required Lenders shall
appoint from among the Lenders a successor agent for the Lenders, which
successor agent shall (unless an Event of Default under Section 7(a) or Section
7(f) with respect to the Borrower shall have occurred and be continuing) be
subject to approval by the Borrower (which approval shall not be unreasonably
withheld or delayed), whereupon such successor agent shall succeed to the
rights, powers and duties of the Administrative Agent, and the term
"Administrative Agent" shall mean such successor agent effective upon such
appointment and approval, and the former Administrative Agent's rights, powers
and duties as Administrative Agent shall be terminated, without any other or
further act or deed on the part of such former Administrative Agent or any of
the parties to this Agreement or any holders of the Loans. If no successor agent
has accepted appointment as Administrative Agent by the date that is 10 days
following a retiring Administrative Agent's notice of resignation, the retiring
Administrative Agent's resignation shall nevertheless thereupon become
effective, and the Lenders shall assume and perform all of the duties of the
Administrative Agent hereunder until such time, if any, as the Required Lenders
appoint a successor agent as provided for above.
<PAGE>
76
After the retiring Administrative Agent's resignation as Administrative Agent,
the provisions of this Section 8 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 Credit Documents.
8.10 Authorization to Release Liens. The Administrative Agent is
hereby irrevocably authorized by each of the Lenders to release any Lien
covering any Property of the Borrower or any of its Subsidiaries that is the
subject of a Disposition which is permitted by this Agreement or which has been
consented to in accordance with Section 9.1.
8.11 The Arranger, Documentation Agent and Syndication Agent. The
Arranger, the Documentation Agent and the Syndication Agent listed on the cover
page hereof shall have no duties or responsibilities, and shall incur no
liability, under this Agreement and the other Credit Documents, except in their
capacity, if any, as Lenders hereunder.
SECTION 9. MISCELLANEOUS
9.1 Amendments and Waivers. Neither this Agreement or any other
Credit Document, nor any terms hereof or thereof may be amended, supplemented or
modified except in accordance with the provisions of this Section. The Required
Lenders and each Credit Party party to the relevant Credit Document may, or
(with the written consent of the Required Lenders) the Administrative Agent and
each Credit Party party to the relevant Credit Document may, from time to time,
(a) enter into written amendments, supplements or modifications hereto and to
the other Credit Documents (including amendments and restatements hereof or
thereof) for the purpose of adding any provisions to this Agreement or the other
Credit Documents or changing in any manner the rights of the Lenders or of the
Credit Parties hereunder or thereunder or (b) waive, on such terms and
conditions as may be specified in the instrument of waiver, any of the
requirements of this Agreement or the other Credit Documents or any Default or
Event of Default and its consequences; provided, however, that no such waiver
and no such amendment, supplement or modification shall (i) forgive the
principal amount or extend the final scheduled date of maturity of any Loan,
extend the scheduled date of any amortization payment in respect of any Loan,
reduce the stated rate of any interest or fee payable hereunder or extend the
scheduled date of any payment thereof, in each case without the consent of each
Lender directly and adversely affected thereby, or increase the amount or extend
the expiration date of any Commitment of any Lender, without the consent of such
Lender; (ii) amend, modify or waive any provision of this Section or reduce any
percentage specified in the definition of Required Lenders, or consent to the
assignment or transfer by the Company or the Borrower of any of its rights and
obligations under this Agreement and the other Credit Documents, in each case
without the consent of all Lenders; (iii) release all or substantially all of
the Collateral or release all or substantially all of the Guarantors from their
guarantee obligations under the Credit Documents (except as otherwise expressly
permitted under the Credit Documents), in each case without the consent of all
Lenders; (iv) reduce the percentage specified in the definition of Majority
Facility Lenders with respect to any Facility without the written consent of all
Lenders under such Facility; (v) amend, modify or waive any provision of Section
8 without the consent of any Agent directly affected thereby; or (vi) amend,
modify or waive any provision of Section 2.6 or 2.7 without the written consent
of the Swing Line Lender.
<PAGE>
77
Notwithstanding anything to the contrary contained herein or in any
Security Document, upon request of the Borrower, the Administrative Agent shall
(without notice to or vote or consent of any Lender) take action having the
effect of releasing any Collateral and/or guarantee obligations provided for in
such Security Document to the extent necessary to permit consummation, by the
relevant Person in accordance with the terms of this Agreement and the other
Credit Documents, of any transaction not prohibited hereunder. Any waiver and
any amendment, supplement or modification of a type referred to above shall
apply equally to each of the Lenders and shall be binding upon the Credit
Parties, the Lenders, the Administrative Agent and all future holders of the
Loans. In the case of any waiver, the Credit Parties, the Lenders and the
Administrative Agent shall be restored to their former position and rights
hereunder and under the other Credit Documents, and any Default or Event of
Default waived shall be deemed to be cured and not continuing; but no such
waiver shall extend to any subsequent or other Default or Event of Default, or
impair any right consequent thereon. Any such waiver, amendment, supplement or
modification shall be effected by a written instrument signed by the parties
required to sign pursuant to the foregoing provisions of this Section; provided
that delivery of an executed signature page of any such instrument by facsimile
transmission shall be effective as delivery of a manually executed counterpart
thereof.
9.2 Notices. All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing (including by
telecopy), and, unless otherwise expressly provided herein, shall be deemed to
have been duly given or made when delivered, or three Business Days after being
deposited in the mail, postage prepaid, or, in the case of telecopy notice, when
received, addressed (a) in the case of the Company, the Borrower and the Agents,
as follows and (b) in the case of the Lenders, as set forth on Schedule I to the
Lender Addendum to which such Lender is a party or, in the case of a Lender
which becomes a party to this Agreement pursuant to an Assignment and
Acceptance, in such Assignment and Acceptance or (c) in the case of any party,
to such other address as such party may hereafter notify to the other parties
hereto:
The Company: Birch Telecom, Inc.
2020 Baltimore Avenue
Kansas City, MO 64108
Attention: General Counsel
Telecopy: (816) 300-3291
Telephone: (816) 300-3000
The Borrower: Birch Telecom Finance, Inc.
2020 Baltimore Avenue
Kansas City, MO 64108
Attention: General Counsel
Telecopy: (816) 300-3291
Telephone: (816) 300-3000
<PAGE>
78
The Administrative Agent: Lehman Commercial Paper Inc.
3 World Financial Center
New York, New York 10285
Attention: Michael O'Brien
Telecopy: (212) 526-7691
Telephone: (212) 526-0437
provided that any notice, request or demand to or upon the Administrative Agent
or any Lender shall not be effective until received.
9.3 No Waiver; Cumulative Remedies. No failure to exercise and no
delay in exercising, on the part of any Agent or any Lender, any right, remedy,
power or privilege hereunder or under the other Credit Documents shall operate
as a waiver thereof; nor shall any single or partial exercise of any right,
remedy, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, remedy, power or privilege. The
rights, remedies, powers and privileges herein provided are cumulative and not
exclusive of any rights, remedies, powers and privileges provided by law.
9.4 Survival of Representations and Warranties. All representations
and warranties made hereunder, in the other Credit Documents and in any
document, certificate or statement delivered pursuant hereto or in connection
herewith shall survive the execution and delivery of this Agreement and the
making of the Loans and other extensions of credit hereunder.
9.5 Payment of Expenses. The Borrower agrees (a) to pay or reimburse
the Administrative Agent for all their reasonable out-of-pocket costs and
expenses incurred in connection with the syndication of the Facilities (other
than fees payable to syndicate members) and the development, preparation and
execution of, and any amendment, supplement or modification to, this Agreement
and the other Credit Documents and any other documents prepared in connection
herewith or therewith, and the consummation and administration of the
transactions contemplated hereby and thereby, including, without limitation, the
reasonable fees and disbursements and other charges of counsel to the
Administrative Agent, (b) to pay or reimburse each Lender and the Agents for all
its costs and expenses incurred in connection with the enforcement or
preservation of any rights under this Agreement, the other Credit Documents and
any such other documents, including, without limitation, the fees and
disbursements of counsel (including the allocated fees and disbursements and
other charges of in-house counsel) to each Lender and of counsel to the Agents,
(c) to pay, indemnify, and hold each Lender and the Agents harmless from, any
and all recording and filing fees and any and all liabilities with respect to,
or resulting from any delay in paying, stamp, excise and other taxes, if any,
which may be payable or determined to be payable in connection with the
execution and delivery of, or consummation or administration 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, the other
Credit Documents and any such other documents, and (d) to pay, indemnify, and
hold each Lender and the Agents and their respective officers, directors,
trustees, employees, affiliates, agents, controlling persons, attorneys and
advisers (each, an "Indemnitee") harmless
<PAGE>
79
from and against any and all other liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever with respect to the execution, delivery, enforcement,
performance and administration of this Agreement, the other Credit Documents and
any such other documents, including, without limitation, any of the foregoing
relating to the use of proceeds of the Loans or the violation of, noncompliance
with or liability under, any Environmental Law applicable to the operations of
the Company or any of its Subsidiaries or any of the Properties and the fees and
disbursements and other charges of legal counsel in connection with claims,
actions or proceedings by any Indemnitee against the Borrower hereunder (all the
foregoing in this clause (d), collectively, the "Indemnified Liabilities");
provided that the Borrower shall have no obligation hereunder to any Indemnitee
with respect to Indemnified Liabilities to the extent such Indemnified
Liabilities are found by a final and nonappealable decision of a court of
competent jurisdiction to have resulted from the gross negligence or willful
misconduct of such Indemnitee. Without limiting the foregoing, and to the extent
permitted by applicable law, the Company agrees not to assert and to cause its
Subsidiaries not to assert, and hereby waives and agrees to cause its
Subsidiaries so to waive, all rights for contribution or any other rights of
recovery with respect to all claims, demands, penalties, fines, liabilities,
settlements, damages, costs and expenses of whatever kind or nature, under or
related to Environmental Laws, that any of them might have by statute or
otherwise against any indemnitee. The agreements in this Section shall survive
repayment of the Loans and all other amounts payable hereunder.
9.6 Successors and Assigns; Participations and Assignments. (a) This
Agreement shall be binding upon and inure to the benefit of the Company, the
Borrower, the Lenders, the Agents, all future holders of the Loans and their
respective successors and assigns, except that neither the Company nor the
Borrower may assign or transfer any of its respective rights or obligations
under this Agreement without the prior written consent of the Administrative
Agent and each Lender.
(b) Any Lender may, without the consent of the Borrower, in
accordance with applicable law, at any time sell to one or more banks, financial
institutions or other entities (each, a "Participant") participating interests
in any Loan owing to such Lender, any Commitment of such Lender or any other
interest of such Lender hereunder and under the other Credit Documents. In the
event of any such sale by a Lender of a participating interest to a Participant,
such Lender's obligations under this Agreement to the other parties to this
Agreement shall remain unchanged, such Lender shall remain solely responsible
for the performance thereof, such Lender shall remain the holder of any such
Loan for all purposes under this Agreement and the other Credit Documents, and
the Borrower and the Agents shall continue to deal solely and directly with such
Lender in connection with such Lender's rights and obligations under this
Agreement and the other Credit Documents. In no event shall any Participant
under any such participation have any right to approve any amendment or waiver
of any provision of any Credit Document, or any consent to any departure by any
Credit Party therefrom, except for those matters specified in clauses (i), (ii)
and (iii) of the proviso in Section 9.1. The Borrower agrees that if amounts
outstanding under this Agreement and the Loans are due or unpaid, or shall have
been declared or shall have become due and payable upon the occurrence of an
Event of Default, each Participant shall, to the maximum extent permitted by
applicable law, be deemed to have
<PAGE>
80
the right of setoff in respect of its participating interest in amounts owing
under this Agreement to the same extent as if the amount of its participating
interest were owing directly to it as a Lender under this Agreement; provided
that, in purchasing such participating interest, such Participant shall be
deemed to have agreed to share with the Lenders the proceeds thereof as provided
in Section 9.7(a) as fully as if it were a Lender hereunder. The Borrower also
agrees that each Participant shall be entitled to the benefits of Sections 2.19,
2.20 and 2.21 with respect to its participation in the Commitments and the Loans
outstanding from time to time as if it was a Lender; provided that, in the case
of Section 2.20, such Participant shall have complied with the requirements of
Section 2.20 and provided, further, that no Participant shall be entitled to
receive any greater amount pursuant to any such Section than the transferor
Lender would have been entitled to receive in respect of the amount of the
participation transferred by such transferor Lender to such Participant had no
such transfer occurred.
(c) Any Lender (an "Assignor") may, in accordance with applicable
law and upon written notice to the Administrative Agent, at any time and from
time to time assign to any Lender or any Affiliate thereof or, with the written
consent of the Borrower and the Administrative Agent and, in the case of any
assignment of Revolving Credit Commitments and Revolving Credit Loans only, the
written consent of the Swing Line Lender (which, in each case, shall not be
unreasonably withheld or delayed and shall not be required in connection with an
assignment involving LCPI or any of its Affiliates) to an additional bank,
financial institution or other entity (an "Assignee") all or any part of its
rights and obligations under this Agreement pursuant to an Assignment and
Acceptance, substantially in the form of Exhibit D, executed by such Assignee
and such Assignor (and, where the consent of the Borrower, the Administrative
Agent or the Swing Line Lender is required pursuant to the foregoing provisions,
by the Borrower and such other Persons) and delivered to the Administrative
Agent for its acceptance and recording in the Register; provided that (i) no
such assignment to an Assignee (other than any Lender or any Affiliate thereof,
including, without limitation, in the case of any Lender that is an investment
fund which is regularly engaged in making, purchasing or investing in loans or
securities, any other such fund which is under common (or affiliated) management
with such Lender) shall (other than in the case of an assignment of all of a
Lender's rights under this Agreement) be in an aggregate principal amount of
less than $5,000,000 (or such lesser amount as may be agreed to by the Borrower
and the Administrative Agent) and (ii) each partial assignment of any Class of
Commitment and/or Loans shall be made as an assignment or a proportionate part
of all the assigning Lender's rights and obligations of such Class of
Commitments and Loans under this Agreement. Any such assignment need not be
ratable as among the Facilities. Upon such execution, delivery, acceptance and
recording, from and after the effective date determined pursuant to such
Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto
and, to the extent provided in such Assignment and Acceptance, have the rights
and obligations of a Lender hereunder with a Commitment and/or Loans as set
forth therein, and (y) the Assignor thereunder shall, to the extent provided in
such Assignment and Acceptance, be released from its obligations under this
Agreement (and, in the case of an Assignment and Acceptance covering all of an
Assignor's rights and obligations under this Agreement, such Assignor shall
cease to be a party hereto). Notwithstanding any provision of this Section, the
consent of the Borrower shall not be required for any assignment which occurs at
any time when any Event of Default shall have occurred and be continuing.
<PAGE>
81
(d) The Administrative Agent shall, on behalf of the Borrower,
maintain at its address referred to in Section 9.2 a copy of each Assignment and
Acceptance delivered to it and a register (the "Register") for the recordation
of the names and addresses of the Lenders and the Commitment of, and principal
amount of the Loans owing to, each Lender from time to time. The entries in the
Register shall be conclusive, in the absence of manifest error, and the
Borrower, the Administrative Agent and the Lenders shall treat each Person whose
name is recorded in the Register as the owner of the Loans and any Notes
evidencing such Loans recorded therein for all purposes of this Agreement. Any
assignment of any Loan, whether or not evidenced by a Note, shall be effective
only upon appropriate entries with respect thereto being made in the Register
(and each Note shall expressly so provide). Any assignment or transfer of all or
part of a Loan evidenced by a Note shall be registered on the Register only upon
surrender for registration of assignment or transfer of the Note evidencing such
Loan, accompanied by a duly executed Assignment and Acceptance; thereupon one or
more new Notes in the same aggregate principal amount shall be issued to the
designated Assignee, and the old Notes shall be returned by the Administrative
Agent to the Borrower marked "cancelled". The Register shall be available for
inspection by the Borrower or any Lender at any reasonable time and from time to
time upon reasonable prior notice.
(e) Upon its receipt of an Assignment and Acceptance executed by an
Assignor and an Assignee (and, in any case where the consent of any other Person
is required by Section 9.6(c), by each such other Person) together with payment
to the Administrative Agent of a registration and processing fee of $3,500
(except that no such registration and processing fee shall be payable (y) in
connection with an assignment by or to LCPI or any of its Affiliates or (z) in
the case of an Assignee which is already a Lender or is an Affiliate of a Lender
(including, without limitation in the case of any Lender that is an investment
fund which is regularly engaged in making, purchasing or investing in loans or
securities, any other such fund which is under common (or affiliated) management
with such Lender), the Administrative Agent shall (i) promptly accept such
Assignment and Acceptance and (ii) on the effective date determined pursuant
thereto record the information contained therein in the Register and give notice
of such acceptance and recordation to the Lenders and the Borrower. On or prior
to such effective date, the Borrower, at its own expense, upon request, shall
execute and deliver to the Administrative Agent (in exchange for the Revolving
Credit Note and/or Term Note, as the case may be, of the assigning Lender) a new
Revolving Credit Note and/or Term Note, as the case may be, to the order of such
Assignee in an amount equal to the Revolving Credit Commitment and/or Term
Commitment or Term Loans, as the case may be, assumed or acquired by it pursuant
to such Assignment and Acceptance and, if the Assignor has retained a Revolving
Credit Commitment and/or Term Commitment or Term Loans, as the case may be, upon
request, a new Revolving Credit Note and/or Term Notes, as the case may be, to
the order of the Assignor in an amount equal to the Revolving Credit Commitment
and/or applicable Term Commitment or Term Loans, as the case may be, retained by
it hereunder. Such new Note or Notes shall be dated the Closing Date and shall
otherwise be in the form of the Note or Notes replaced thereby.
(f) For avoidance of doubt, the parties to this Agreement
acknowledge that the provisions of this Section concerning assignments of Loans
and Notes relate only to absolute
<PAGE>
82
assignments and that such provisions do not prohibit assignments creating
security interests, including, without limitation, any pledge or assignment by a
Lender of any Loan or Note to any Person including, without limitation, any
Federal Reserve Bank in accordance with applicable law.
9.7 Adjustments; Set-off. (a) Except to the extent that this
Agreement provides for payments to be allocated to a particular Lender or to the
Lenders under a particular Facility, if any Lender (a "Benefitted Lender") shall
at any time receive any payment of all or part of the Obligations owing to it,
or receive any collateral in respect thereof (whether voluntarily or
involuntarily, by set-off, pursuant to events or proceedings of the nature
referred to in Section 7(f), or otherwise), in a greater proportion than any
such payment to or collateral received by any other Lender, if any, in respect
of such other Lender's Obligations, such Benefitted Lender shall purchase for
cash from the other Lenders a participating interest in such portion of each
such other Lender's Obligations, or shall provide such other Lenders with the
benefits of any such collateral, as shall be necessary to cause such Benefitted
Lender to share the excess payment or benefits of such collateral ratably with
each of the Lenders; provided, however, that if all or any portion of such
excess payment or benefits is thereafter recovered from such Benefitted Lender,
such purchase shall be rescinded, and the purchase price and benefits returned,
to the extent of such recovery, but without interest.
(b) In addition to any rights and remedies of the Lenders provided
by law, each Lender shall have the right, without prior notice to the Company or
the Borrower, any such notice being expressly waived by the Company and the
Borrower to the extent permitted by applicable law, upon any amount becoming due
and payable by the Company or the Borrower hereunder (whether at the stated
maturity, by acceleration or otherwise), to set off and appropriate and apply
against such amount any and all deposits (general or special, time or demand,
provisional or final), in any currency, and any other credits, indebtedness or
claims, in any currency, in each case whether direct or indirect, absolute or
contingent, matured or unmatured, at any time held or owing by such Lender or
any branch or agency thereof to or for the credit or the account of the Company
or the Borrower, as the case may be. Each Lender agrees promptly to notify the
Borrower and the Administrative Agent after any such setoff and application made
by such Lender; provided that the failure to give such notice shall not affect
the validity of such setoff and application.
9.8 Counterparts. This Agreement may be executed by one or more of
the parties to this Agreement on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. Delivery of an executed signature page of this Agreement by
facsimile transmission shall be effective as delivery of a manually executed
counterpart hereof. A set of the copies of this Agreement signed by all the
parties shall be lodged with the Borrower and the Administrative Agent.
9.9 Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any
<PAGE>
83
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
9.10 Integration. This Agreement and the other Credit Documents
represent the agreement of the Company, the Borrower, the Administrative Agent
and the Lenders with respect to the subject matter hereof, and there are no
promises, undertakings, representations or warranties by the Administrative
Agent or any Lender relative to subject matter hereof not expressly set forth or
referred to herein or in the other Credit Documents.
9.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
9.12 Submission to Jurisdiction; Waivers. Each of the Company and
the Borrower hereby irrevocably and unconditionally:
(a) submits for itself and its Property in any legal action or
proceeding relating to this Agreement and the other Credit Documents to
which it is a party, or for recognition and enforcement of any judgment in
respect thereof, to the non-exclusive general jurisdiction of the courts
of the State of New York, the courts of the United States of America for
the Southern District of New York, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in
such courts and waives any objection that it may now or hereafter have to
the venue of any such action or proceeding in any such court or that such
action or proceeding was brought in an inconvenient court and agrees not
to plead or claim the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail
(or any substantially similar form of mail), postage prepaid, to the
Company or the Borrower, as the case may be, at its address set forth in
Section 9.2 or at such other address of which the Administrative Agent
shall have been notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the
right to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any right
it may have to claim or recover in any legal action or proceeding referred
to in this Section any special, exemplary, punitive or consequential
damages.
9.13 Acknowledgments. Each of the Company and the Borrower hereby
acknowledges that:
<PAGE>
84
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Agreement and the other Credit Documents;
(b) neither the Administrative Agent nor any Lender has any
fiduciary relationship with or duty to the Company or the Borrower arising
out of or in connection with this Agreement or any of the other Credit
Documents, and the relationship between Administrative Agent and Lenders,
on one hand, and the Company and the Borrower, on the other hand, in
connection herewith or therewith is solely that of debtor and creditor;
and
(c) no joint venture is created hereby or by the other Credit
Documents or otherwise exists by virtue of the transactions contemplated
hereby among the Lenders or among the Company, the Borrower and the
Lenders.
9.14 Confidentiality. Each of the Agents and the Lenders agrees to
keep confidential all non-public information provided to it by any Credit Party
pursuant to this Agreement that is designated by such Credit Party as
confidential (including any such information already in the possession of such
Lender or provided to such Lender by a third party not in violation of this
Agreement which, in either case, is not, to the knowledge of such Lender,
subject to a confidentiality agreement); provided that nothing herein shall
prevent any Agent or any Lender from disclosing any such information (a) to any
Agent or any other Lender or any of its Affiliates, (b) to any Participant or
Assignee (each, a "Transferee") or prospective Transferee or to any direct or
indirect contractual counterparties in swap agreements or such contractual
counterparties' professional advisors which receives such information and agrees
to comply with the provisions of this Section, (c) any of its employees,
directors, agents, attorneys, accountants and other professional advisors, (d)
upon the request or demand of any Governmental Authority having jurisdiction
over it, (e) in response to any order of any court or other Governmental
Authority or as may otherwise be required pursuant to any Requirement of Law,
(f) if requested or required to do so in connection with any litigation or
similar proceeding, (g) which has been publicly disclosed other than in breach
of this Section, (h) to the National Association of Insurance Commissioners or
any similar organization or any nationally recognized rating agency that
requires access to information about a Lender's investment portfolio in
connection with ratings issued with respect to such Lender or (i) in connection
with the exercise of any remedy hereunder or under any other Credit Document.
9.15 Accounting Changes. In the event that any "Accounting Changes"
(as defined below) shall occur and such changes result in a change in the method
of calculation of financial covenants, standards or terms in this Agreement,
then the Company, the Borrower and the Administrative Agent agree to enter into
negotiations in order to amend such provisions of this Agreement so as to
equitably reflect such Accounting Changes with the desired result that the
criteria for evaluating the Company's and the Borrower's financial condition
shall be the same after such Accounting Changes as if such Accounting
Changes had not been made. Until such time as such an amendment shall have been
executed and delivered by the Company, the Borrower, the Administrative Agent
and the Required Lenders, all financial covenants, standards and terms in this
Agreement shall continue to be calculated or construed as if such Accounting
<PAGE>
85
Changes had not occurred. "Accounting Changes" refers to changes in accounting
principles required by the promulgation of any rule, regulation, pronouncement
or opinion by the Financial Accounting Standards Board of the American Institute
of Certified Public Accountants or, if applicable, the SEC.
9.16 Delivery of Lender Addenda. Each initial Lender shall become a
party to this Agreement by delivering to the Administrative Agent a Lender
Addendum duly executed by such Lender, the Borrower and the Administrative
Agent.
9.17 WAIVERS OF JURY TRIAL. THE COMPANY, THE BORROWER, THE
ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT
OR ANY OTHER CREDIT DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
<PAGE>
86
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
BIRCH TELECOM, INC.
By:
_______________________________
Name:
Title:
BIRCH TELECOM FINANCE, INC.
By:
_______________________________
Name:
Title:
<PAGE>
87
LEHMAN COMMERCIAL PAPER INC.,
as Administrative Agent
By:_______________________________
Name:
Title:
<PAGE>
SCHEDULE I
PRICING GRID
=================== ========================== =========================
Term Loan Facility
Term Loan Facility and
and Revolving Credit
Revolving Credit Facility Facility
Total Leverage Applicable Margin for Applicable Margin for
Ratio Eurodollar Loans Base Rate Loans
------------------- -------------------------- -------------------------
> 8.01:1 (or 3.75% 2.50%
negative EBITDA)
------------------- -------------------------- -------------------------
> 7.00: 1 < 8:00.1 3.50% 2.25%
-
------------------- -------------------------- -------------------------
> 6.00:1 < 7.00:1 3.25% 2.00%
-
------------------- -------------------------- -------------------------
> 5.00:1 < 6.00:1 3.00% 1.75%
-
------------------- -------------------------- -------------------------
< 5.00:1 2.75% 1.50%
-
=================== ========================== =========================
<PAGE>
Schedule 6.2(d)
EXISTING INDEBTEDNESS
1. The Company has the following mortgage:
Mortgage dated June 23, 1992 between Valu-Line Companies, Inc. and Bank IV
for the property at 1420 C of E Drive, Emporia, Kansas in the amount of
$244,460.
2. Birch Telecom of Kansas, Inc., f/k/a Valu-Line of Kansas, Inc., is a party
to that certain Capital Lease dated December 14, 1995, by and between Bank
IV and Valu-Line of Kansas, Inc. for the switch equipment located at 155
North Market, Wichita, Kansas in the amount of $237,363.
3. The Company is a party to a Capital Lease with Lewis Leasing for service
vehicles in the amount of $341,258.
4. Master Lease Agreement dated March 5, 1999, by and between the Company and
Cisco Systems Capital Corporation in the amount of $744,555.
5. Master Lease Agreement dated January 5, 1999, by and between the Company
and Ascend Credit Corporation in the amount of $213,688.
6. Master Lease dated July 14, 1998, by and between Mike Collin & Associates,
Inc. and the Company in the amount of $378,013.
7. Indebtedness under the Existing Senior Notes.
<PAGE>
EXHIBIT A
FORM OF AMENDED AND RESTATED
GUARANTEE AND COLLATERAL AGREEMENT
- -------------------------------------------------------------------------------
AMENDED AND RESTATED
GUARANTEE AND COLLATERAL AGREEMENT
made by
BIRCH TELECOM, INC.
BIRCH TELECOM FINANCE, INC.
and certain other Subsidiaries of Birch Telecom, Inc.
in favor of
LEHMAN COMMERCIAL PAPER INC.,
as Administrative Agent
Dated as of February 2, 2000
- -----------------------------------
- --------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. DEFINED TERMS....................................................1
1.1 Definitions......................................................1
1.2 Other Definitional Provisions....................................5
SECTION 2. GUARANTEE........................................................6
2.1 Guarantee........................................................6
2.2 Right of Contribution............................................6
2.3 No Subrogation...................................................7
2.4 Amendments, etc. with respect to the Borrower Obligations........7
2.5 Guarantee Absolute and Unconditional.............................7
2.6 Reinstatement....................................................8
2.7 Payments.........................................................9
SECTION 3. GRANT OF SECURITY INTEREST.......................................9
SECTION 4. REPRESENTATIONS AND WARRANTIES...................................9
4.1 Representations in Credit Agreement.............................10
4.2 Title; No Other Liens...........................................10
4.3 Perfected First Priority Liens..................................10
4.4 Chief Executive Office..........................................10
4.5 Inventory and Equipment.........................................10
4.6 Farm Products...................................................10
4.7 Pledged Securities..............................................11
4.8 Receivables.....................................................11
4.9 Intellectual Property...........................................11
SECTION 5. COVENANTS.......................................................12
5.1 Covenants in Credit Agreement...................................12
5.2 Delivery of Instruments and Chattel Paper.......................12
5.3 Maintenance of Insurance........................................12
5.4 Payment of Obligations..........................................13
5.5 Maintenance of Perfected Security Interest; Further
Documentation...................................................13
5.6 Changes in Locations, Name, etc.................................13
5.7 Notices.........................................................14
5.9 Receivables.....................................................15
5.10 Intellectual Property...........................................16
5.11 Vehicles........................................................17
SECTION 6. REMEDIAL PROVISIONS.............................................17
6.1 Certain Matters Relating to Receivables.........................17
Guarantee and Collateral Agreement
<PAGE>
ii
6.2 Communications with Obligors; Grantors Remain Liable............18
6.3 Pledged Stock...................................................19
6.4 Proceeds to be Turned Over to Administrative Agent..............19
6.5 Application of Proceeds.........................................20
6.6 Code and Other Remedies.........................................20
6.7 Waiver; Deficiency..............................................21
SECTION 7. THE ADMINISTRATIVE AGENT........................................21
7.1 Administrative Agent's Appointment as Attorney-in-Fact, etc.....21
7.2 Duty of Administrative Agent....................................23
7.3 Execution of Financing Statements...............................23
7.4 Authority of Administrative Agent...............................24
SECTION 8. MISCELLANEOUS...................................................24
8.1 Amendments in Writing...........................................24
8.2 Notices.........................................................24
8.3 No Waiver by Course of Conduct; Cumulative Remedies.............24
8.4 Enforcement Expenses; Indemnification...........................24
8.5 Successors and Assigns..........................................25
8.6 Set-Off.........................................................25
8.7 Counterparts....................................................25
8.8 Severability....................................................25
8.9 Section Headings................................................26
8.10 Integration.....................................................26
8.11 GOVERNING LAW...................................................26
8.12 Submission to Jurisdiction; Waivers.............................26
8.13 Acknowledgements................................................27
8.14 Additional Guarantors...........................................27
8.15 Releases........................................................27
8.16 WAIVER OF JURY TRIAL............................................28
8.17 Governmental Approvals..........................................28
Guarantee and Collateral Agreement
<PAGE>
AMENDED AND RESTATED
GUARANTEE AND COLLATERAL AGREEMENT
AMENDED AND RESTATED GUARANTEE AND COLLATERAL AGREEMENT, dated as of
February 2, 2000, made by each of the signatories hereto (together with any
other entity that may become a party hereto as provided herein, the "Grantors"),
in favor of LEHMAN COMMERCIAL PAPER INC., as Administrative Agent (in such
capacity, the "Administrative Agent") for the banks and other financial
institutions (the "Lenders") from time to time parties to the Amended and
Restated Credit Agreement, dated as of February 2, 2000 (as amended,
supplemented or otherwise modified from time to time, the "Credit Agreement"),
among BIRCH TELECOM, INC., a Delaware corporation (the "Company"), BIRCH TELECOM
FINANCE, INC., a Delaware corporation (the "Borrower"), the Lenders and LEHMAN
COMMERCIAL PAPER INC. as Administrative Agent.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, pursuant to the Credit Agreement, the Lenders have
severally agreed to make extensions of credit to the Borrower upon the terms and
subject to the conditions set forth therein;
WHEREAS, the Borrower is a member of an affiliated group of
companies that includes each other Grantor;
WHEREAS, the Borrower and the other Grantors are engaged in related
businesses, and each Grantor will derive substantial direct and indirect benefit
from the making of the extensions of credit under the Credit Agreement; and
WHEREAS, it is a condition precedent to the obligation of the
Lenders to make their respective extensions of credit to the Borrower under the
Credit Agreement that the Grantors shall have executed and delivered this
Agreement to the Administrative Agent for the ratable benefit of the Lenders;
NOW, THEREFORE, in consideration of the premises and to induce the
Agents and the Lenders to enter into the Credit Agreement and to induce the
Lenders to make their respective extensions of credit to the Borrower
thereunder, each Grantor hereby agrees with the Administrative Agent, for the
ratable benefit of the Lenders, as follows:
SECTION 1. DEFINED TERMS
1.1. Definitions.
(a) Unless otherwise defined herein, terms defined in the Credit
Agreement and used herein shall have the meanings given to them in the Credit
Agreement, and the following terms which are defined in the Uniform Commercial
Code in effect in the State of
Guarantee and Collateral Agreement
<PAGE>
2
New York on the date hereof are used herein as so defined: Accounts, Chattel
Paper, Documents, Equipment, Farm Products, Instruments, Inventory and
Investment Property.
(b) The following terms shall have the following meanings:
"Agreement": this Guarantee and Collateral Agreement, as the same
may be amended, supplemented or otherwise modified from time to time.
"Borrower Obligations": the collective reference to the unpaid
principal of and interest on the Loans and all other obligations and liabilities
of the Borrower (including, without limitation, interest accruing at the then
applicable rate provided in the Credit Agreement after the maturity of the Loans
and interest accruing at the then applicable rate provided in the Credit
Agreement after the filing of any petition in bankruptcy, or the commencement of
any insolvency, reorganization or like proceeding, relating to the Borrower,
whether or not a claim for post-filing or post-petition interest is allowed in
such proceeding) to any Agent or any Lender (or, in the case of any Hedge
Agreement referred to below, any Affiliate of any Lender), whether direct or
indirect, absolute or contingent, due or to become due, or now existing or
hereafter incurred, which may arise under, out of, or in connection with, the
Credit Agreement, this Agreement, the other Credit Documents, any Letter of
Credit or any Hedge Agreement entered into by the Borrower with any Lender (or
any Affiliate of any Lender) or any other document made, delivered or given in
connection therewith, in each case whether on account of principal, interest,
reimbursement obligations, fees, indemnities, costs, expenses or otherwise
(including, without limitation, all fees and disbursements of counsel to the
Administrative Agent or to the Lenders that are required to be paid by the
Borrower pursuant to the terms of any of the foregoing agreements).
"Collateral": as defined in Section 3.
"Collateral Account": any collateral account established by the
Administrative Agent as provided in Section 6.1 or 6.4.
"Copyrights": (i) all copyrights arising under the laws of the
United States, any other country or any political subdivision thereof, whether
registered or unregistered and whether published or unpublished (including,
without limitation, those listed in Schedule 6), all registrations and
recordings thereof, and all applications in connection therewith, including,
without limitation, all registrations, recordings and applications in the United
States Copyright Office, and (ii) the right to obtain all renewals thereof.
"Copyright Licenses": any written agreement naming any Grantor as
licensor or licensee (including, without limitation, those listed in Schedule
6), granting any right under any Copyright, including, without limitation, the
grant of rights to manufacture, distribute, exploit and sell materials derived
from any Copyright.
"General Intangibles": all "general intangibles" as such term is
defined in Section 9-106 of the Uniform Commercial Code in effect in the State
of New York on the date hereof and, in any event, including, without limitation,
with respect to any Grantor, (a) all contracts, agreements, instruments and
indentures in any form, and portions thereof, to which such Grantor is a party
or under which
Guarantee and Collateral Agreement
<PAGE>
3
such Grantor has any right, title or interest or to which such Grantor or any
property of such Grantor is subject, as the same may from time to time be
amended, supplemented or otherwise modified, including, without limitation, (i)
all rights of such Grantor to receive moneys due and to become due to it
thereunder or in connection therewith, (ii) all rights of such Grantor to
damages arising thereunder and (iii) all rights of such Grantor to perform and
to exercise all remedies thereunder, in each case to the extent the grant by
such Grantor of a security interest pursuant to this Agreement in its right,
title and interest in such contract, agreement, instrument or indenture is not
prohibited by such contract, agreement, instrument or indenture without the
consent of any other party thereto, would not give any other party to such
contract, agreement, instrument or indenture the right to terminate its
obligations thereunder, or is permitted with consent if all necessary consents
to such grant of a security interest have been obtained from the other parties
thereto (it being understood that the foregoing shall not be deemed to obligate
such Grantor to obtain such consents), provided that the foregoing limitation
shall not affect, limit, restrict or impair the grant by such Grantor of a
security interest pursuant to this Agreement in any Receivable or any money or
other amounts due or to become due under any such contract, agreement,
instrument or indenture; and (b) all rights of such Grantor under or relating to
any license, permit, consent, certificate of compliance, franchise, approval,
waiver or authorization granted or issued by any Governmental Authority (each a
"Governmental Approval") and the proceeds from the sale of any such Governmental
Approval or any goodwill or other intangible rights or benefits associated
therewith, provided that such security interest does not include at any time any
Governmental Approval to the extent (but only to the extent) that at such time
the Administrative Agent may not validly possess a security interest therein
under applicable law and regulations, as in effect at such time, but such
security interest does include, to the maximum extent permitted by law, all
rights incident or appurtenant to Governmental Approvals and the right to
receive all proceeds derived from or in connection with the sale, assignment or
transfer thereof.
"Governmental Approval": as defined in the definition of "General
Intangibles" in this Section 1.1.
"Guarantor Obligations": with respect to any Guarantor, all
obligations and liabilities of such Guarantor which may arise under or in
connection with this Agreement (including, without limitation, Section 2) or any
other Credit Document to which such Guarantor is a party, in each case whether
on account of guarantee obligations, reimbursement obligations, fees,
indemnities, costs, expenses or otherwise (including, without limitation, all
fees and disbursements of counsel to the Administrative Agent or to the Lenders
that are required to be paid by such Guarantor pursuant to the terms of this
Agreement or any other Credit Document).
"Guarantors": the collective reference to each Grantor other
than the Borrower.
"Hedge Agreements": as to any Person, all interest rate swaps, caps
or collar agreements or similar arrangements entered into by such Person
providing for protection against fluctuations in interest rates or currency
exchange rates or the exchange of nominal interest obligations, either generally
or under specific contingencies.
"Intellectual Property": the collective reference to all rights,
priorities and privileges relating to intellectual property, whether arising
under United States, multinational or foreign laws or otherwise, including,
without limitation, the Copyrights, the Copyright Licenses, the Patents, the
Patent Licenses, the Trademarks and the Trademark Licenses, and all rights to
Guarantee and Collateral Agreement
<PAGE>
4
sue at law or in equity for any infringement or other impairment thereof,
including the right to receive all proceeds and damages therefrom, in the case
of any Copyright Licenses, Patent Licenses or Trademark Licenses to the extent
the grant by such Grantor of a security interest pursuant to this Agreement in
its right, title and interest therein is not prohibited by such Copyright
License, Patent License or Trademark License without the consent of any other
party thereto, would not give any other party to such Copyright License, Patent
License or Trademark License the right to terminate its obligations thereunder,
or is permitted with consent if all necessary consents to such grant of a
security interest have been obtained from the other parties thereto (it being
understood that the foregoing shall not be deemed to obligate such Grantor to
obtain such consents); provided that the foregoing limitation shall not affect,
limit, restrict or impair the grant by such Grantor of a security interest
pursuant to this Agreement in any Receivable or any money or other amounts due
or to become due under any such Copyright License, Patent License or Trademark
License.
"Intercompany Note": any promissory note evidencing loans made by
any Grantor to the Company or any of its Subsidiaries.
"Issuers": the collective reference to each issuer of a Pledged
Security.
"New York UCC": the Uniform Commercial Code as from time to time in
effect in the State of New York.
"Obligations": (i) in the case of the Borrower, the Borrower
Obligations, and (ii) in the case of each Guarantor, its Guarantor Obligations.
"Patents": (i) all letters patent of the United States, any other
country or any political subdivision thereof, all reissues and extensions
thereof and all goodwill associated therewith, including, without limitation,
any of the foregoing referred to in Schedule 6, (ii) all applications for
letters patent of the United States or any other country and all divisions,
continuations and continuations-in-part thereof, including, without limitation,
any of the foregoing referred to in Schedule 6, and (iii) all rights to obtain
any reissues or extensions of the foregoing.
"Patent License": all agreements, whether written or oral, providing
for the grant by or to any Grantor of any right to manufacture, use or sell any
invention covered in whole or in part by a Patent, including, without
limitation, any of the foregoing referred to in Schedule 6.
"Pledged Notes": all promissory notes listed on Schedule 2, all
Intercompany Notes at any time issued to any Grantor and all other promissory
notes issued to or held by any Grantor (other than promissory notes issued in
connection with extensions of trade credit by any Grantor in the ordinary course
of business).
"Pledged Securities": the collective reference to the Pledged Notes
and the Pledged Stock.
"Pledged Stock": the shares of Capital Stock listed on Schedule 2,
together with any other shares, stock certificates, options or rights of any
nature whatsoever in respect of
Guarantee and Collateral Agreement
<PAGE>
5
the Capital Stock of any Person that may be issued or granted to, or held by,
any Grantor while this Agreement is in effect.
"Proceeds": all "proceeds" as such term is defined in Section
9-306(l) of the Uniform Commercial Code in effect in the State of New York on
the date hereof and, in any event, shall include, without limitation, all
dividends or other income from the Pledged Securities, collections thereon or
distributions or payments with respect thereto.
"Receivable": any right to payment for goods sold or leased or for
services rendered, whether or not such right is evidenced by an Instrument or
Chattel Paper and whether or not it has been earned by performance (including,
without limitation, any Account).
"Trademarks": (i) all trademarks, trade names, corporate names,
company names, business names, fictitious business names, trade styles, service
marks, logos and other source or business identifiers, and all goodwill
associated therewith, now existing or hereafter adopted or, acquired, all
registrations and recordings thereof, and all applications in connection
therewith, whether in the United States Patent and Trademark Office or in any
similar office or agency of the United States, any State thereof or any other
country or any political subdivision thereof, or otherwise, and all common-law
rights related thereto, including, without limitation, any of the foregoing
referred to in Schedule 6, and (ii) the right to obtain all renewals thereof.
"Trademark License": any agreement, whether written or oral,
providing for the grant by or to any Grantor of any right to use any Trademark,
including, without limitation, any of the foregoing referred to in Schedule 6.
"Vehicles": all cars, trucks, trailers, construction and earth
moving equipment and other vehicles covered by a certificate of title law of any
state and, in any event including, without limitation all tires and other
appurtenances to any of the foregoing.
1.2. Other Definitional Provisions.
(a) The words "hereof," "herein", "hereto" 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 provision of this Agreement, and Section and
Schedule references are to this Agreement unless otherwise specified.
(b)The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
(c) Where the context requires, terms relating to the Collateral
or any part thereof, when used in relation to a Grantor, shall refer to such
Grantor's Collateral or the relevant part thereof.
SECTION 2. GUARANTEE
2.1 Guarantee.
Guarantee and Collateral Agreement
<PAGE>
6
(a) Each of the Guarantors hereby, jointly and severally,
unconditionally and irrevocably, guarantees to the Administrative Agent, for the
ratable benefit of the Lenders and their respective successors, indorsees,
transferees and assigns, the prompt and complete payment and performance by the
Borrower when due (whether at the stated maturity, by acceleration or otherwise)
of the Borrower Obligations.
(b) Anything herein or in any other Credit Document to the
contrary notwithstanding, the maximum liability of each Guarantor hereunder and
under the other Credit Documents shall in no event exceed the amount which can
be guaranteed by such Guarantor under applicable federal and state laws relating
to the insolvency of debtors (after giving effect to the right of contribution
established in Section 2.2).
(c) Each Guarantor agrees that the Borrower Obligations may at any
time and from time to time exceed the amount of the liability of such Guarantor
hereunder without impairing the guarantee contained in this Section 2 or
affecting the rights and remedies of the Administrative Agent or any Lender
hereunder.
(d) The guarantee contained in this Section 2 shall remain in full
force and effect until all the Borrower Obligations and the obligations of each
Guarantor under the guarantee contained in this Section 2 shall have been
satisfied by payment in full, no Letter of Credit shall be outstanding and the
Commitments shall be terminated, notwithstanding that from time to time during
the term of the Credit Agreement the Borrower may be free from any Borrower
Obligations.
(e) No payment made by the Borrower, any of the Guarantors, any
other guarantor or any other Person or received or collected by the
Administrative Agent or any Lender from the Borrower, any of the Guarantors, any
other guarantor or any other Person by virtue of any action or proceeding or any
set-off or appropriation or application at any time or from time to time in
reduction of or in payment of the Borrower Obligations shall be deemed to
modify, reduce, release or otherwise affect the liability of any Guarantor
hereunder which shall, notwithstanding any such payment (other than any payment
made by such Guarantor in respect of the Borrower Obligations or any payment
received or collected from such Guarantor in respect of the Borrower
Obligations), remain liable for the Borrower Obligations up to the maximum
liability of such Guarantor hereunder until the Borrower Obligations are paid in
full, no Letter of Credit shall be outstanding and the Commitments are
terminated.
2.2 Right of Contribution. Each Subsidiary Guarantor hereby agrees
that to the extent that a Subsidiary Guarantor shall have paid more than its
proportionate share of any payment made hereunder, such Subsidiary Guarantor
shall be entitled to seek and receive contribution from and against any other
Subsidiary Guarantor hereunder which has not paid its proportionate share of
such payment. Each Subsidiary Guarantor's right of contribution shall be subject
to the terms and conditions of Section 2.3. The provisions of this Section 2.2
shall in no respect limit the obligations and liabilities of any Subsidiary
Guarantor to the Administrative Agent and the Lenders, and each Subsidiary
Guarantor shall remain liable to the Administrative Agent and the Lenders for
the full amount guaranteed by such Subsidiary Guarantor hereunder.
2.3 No Subrogation. Notwithstanding any payment made by any
Guarantor hereunder or any set-off or application of funds of any Guarantor by
the
Guarantee and Collateral Agreement
<PAGE>
7
Administrative Agent or any Lender, no Guarantor shall be entitled to be
subrogated to any of the rights of the Administrative Agent or any Lender
against the Borrower or any other Guarantor or any collateral security or
guarantee or right of offset held by the Administrative Agent or any Lender for
the payment of the Borrower Obligations, nor shall any Guarantor seek or be
entitled to seek any contribution or reimbursement from the Borrower or any
other Guarantor in respect of payments made by such Guarantor hereunder, until
all amounts owing to the Administrative Agent and the Lenders by the Borrower on
account of the Borrower Obligations are paid in full, no Letter of Credit shall
be outstanding and the Commitments are terminated. If any amount shall be paid
to any Guarantor on account of such subrogation rights at any time when all of
the Borrower Obligations shall not have been paid in full, such amount shall be
held by such Guarantor in trust for the Administrative Agent and the Lenders,
segregated from other funds of such Guarantor, and shall, forthwith upon receipt
by such Guarantor, be turned over to the Administrative Agent in the exact form
received by such Guarantor (duly indorsed by such Guarantor to the
Administrative Agent, if required), to be applied against the Borrower
Obligations, whether matured or unmatured, in such order as the Administrative
Agent may determine.
2.4 Amendments, etc. with respect to the Borrower Obligations.
Each Guarantor shall remain obligated hereunder notwithstanding that, without
any reservation of rights against any Guarantor and without notice to or further
assent by any Guarantor, any demand for payment of any of the Borrower
Obligations made by the Administrative Agent or any Lender may be rescinded by
the Administrative Agent or such Lender and any of the Borrower Obligations
continued, and the Borrower Obligations, or the liability of any other Person
upon or for any part thereof, or any collateral security or guarantee therefor
or right of offset with respect thereto, may, from time to time, in whole or in
part, be renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered or released by the Administrative Agent or any Lender, and the
Credit Agreement and the other Credit Documents and any other documents executed
and delivered in connection therewith may be amended, modified, supplemented or
terminated, in whole or in part, as the Administrative Agent (or the Required
Lenders or all Lenders, as the case may be) may deem advisable from time to
time, and any collateral security, guarantee or right of offset at any time held
by the Administrative Agent or any Lender for the payment of the Borrower
Obligations may be sold, exchanged, waived, surrendered or released. Neither the
Administrative Agent nor any Lender shall have any obligation to protect,
secure, perfect or insure any Lien at any time held by it as security for the
Borrower Obligations or for the guarantee contained in this Section 2 or any
property subject thereto.
2.5 Guarantee Absolute and Unconditional. Each Guarantor waives
any and all notice of the creation, renewal, extension or accrual of any of the
Borrower Obligations and notice of or proof of reliance by the Administrative
Agent or any Lender upon the guarantee contained in this Section 2 or acceptance
of the guarantee contained in this Section 2; the Borrower Obligations, and any
of them, shall conclusively be deemed to have been created, contracted or
incurred, or renewed, extended, amended or waived, in reliance upon the
guarantee contained in this Section 2; and all dealings between the Borrower and
any of the Guarantors, on the one hand, and the Administrative Agent and the
Lenders, on the other hand, likewise shall be conclusively presumed to have been
had or consummated in reliance upon the guarantee contained in this Section 2.
Each Guarantor waives diligence, presentment, protest,
Guarantee and Collateral Agreement
<PAGE>
8
demand for payment and notice of default or nonpayment to or upon the Borrower
or any of the Guarantors with respect to the Borrower Obligations. Each
Guarantor understands and agrees that the guarantee contained in this Section 2
shall be construed as a continuing, absolute and unconditional guarantee of
payment without regard to (a) the validity or enforceability of the Credit
Agreement or any other Credit Document, any of the Borrower Obligations or any
other collateral security therefor or guarantee or right of offset with respect
thereto at any time or from time to time held by the Administrative Agent or any
Lender, (b) any defense, set-off or counterclaim (other than a defense of
payment or performance) which may at any time be available to or be asserted by
the Borrower or any other Person against the Administrative Agent or any Lender,
or (c) any other circumstance whatsoever (with or without notice to or knowledge
of the Borrower or such Guarantor) which constitutes, or might be construed to
constitute, an equitable or legal discharge of the Borrower for the Borrower
Obligations, or of such Guarantor under the guarantee contained in this Section
2, in bankruptcy or in any other instance. When making any demand hereunder or
otherwise pursuing its rights and remedies hereunder against any Guarantor, the
Administrative Agent or any Lender may, but shall be under no obligation to,
make a similar demand on or otherwise pursue such rights and remedies as it may
have against the Borrower, any other Guarantor or any other Person or against
any collateral security or guarantee for the Borrower Obligations or any right
of offset with respect thereto, and any failure by and Agent or any Lender to
make any such demand, to pursue such other rights or remedies or to collect any
payments from the Borrower, any other Guarantor or any other Person or to
realize upon any such collateral security or guarantee or to exercise any such
right of offset, or any release of the Borrower, any other Guarantor or any
other Person or any such collateral security, guarantee or right of offset,
shall not relieve any Guarantor of any obligation or liability hereunder, and
shall not impair or affect the rights and remedies, whether express, implied or
available as a matter of law, of any Agent or any Lender against any Guarantor.
For the purposes hereof "demand" shall include the commencement and continuance
of any legal proceedings.
2.6 Reinstatement. The guarantee contained in this Section 2 shall
continue to be effective, or be reinstated, as the case may be, if at any time
payment, or any part thereof, of any of the Borrower Obligations is rescinded or
must otherwise be restored or returned by the Administrative Agent or any Lender
upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of
the Borrower or any Guarantor, or upon or as a result of the appointment of a
receiver, intervenor or conservator of, or trustee or similar officer for, the
Borrower or any Guarantor or any substantial part of its property, or otherwise,
all as though such payments had not been made.
2.7 Payments. Each Guarantor hereby guarantees that payments
hereunder will be paid to the Administrative Agent without set-off or
counterclaim in Dollars at the office of the Administrative Agent located at the
Payment Office specified in the Credit Agreement.
SECTION 3. GRANT OF SECURITY INTEREST
Each Grantor hereby assigns and transfers to the Administrative
Agent, and hereby grants to the Administrative Agent, for the ratable benefit of
the Lenders, a security interest in, all of the following property now owned or
at any time hereafter acquired by such
Guarantee and Collateral Agreement
<PAGE>
9
Grantor or in which such Grantor now has or at any time in the future may
acquire any right, title or interest (collectively, the "Collateral"), as
collateral security for the prompt and complete payment and performance when due
(whether at the stated maturity, by acceleration or otherwise) of such Grantor's
Obligations,:
(a) all Accounts;
(b) all Chattel Paper;
(c) all Documents;
(d) all Equipment;
(e) all General Intangibles;
(f) all Instruments;
(g) all Intellectual Property;
(h) all Inventory;
(i) all Pledged Securities;
(j) all Vehicles;
(k) all Investment Property;
(l) all deposit accounts and other bank accounts;
(m) all books and records pertaining to the Collateral; and
(n) to the extent not otherwise included, all Proceeds and products
of any and all of the foregoing and all collateral security and guarantees
given by any Person with respect to any of the foregoing.
SECTION 4. REPRESENTATIONS AND WARRANTIES
To induce the Agents and the Lenders to enter into the Credit
Agreement and to induce the Lenders to make their respective extensions of
credit to the Borrower thereunder, each Grantor hereby represents and warrants
to the Agents and each Lender that:
4.1 Representations in Credit Agreement. In the case of each
Guarantor, the representations and warranties set forth in Section 4 of the
Credit Agreement as they relate to such Guarantor or to the Credit Documents to
which such Guarantor is a party, each of which is hereby incorporated herein by
reference, are true and correct, and the Agents and each Lender shall be
entitled to rely on each of them as if they were fully set forth herein,
provided that each reference in each such representation and warranty to the
Borrower's
Guarantee and Collateral Agreement
<PAGE>
10
knowledge shall, for the purposes of this Section 4.1, be deemed to be a
reference to such Guarantor's knowledge.
4.2 Title; No Other Liens. Except for the security interest
granted to the Administrative Agent for the ratable benefit of the Lenders
pursuant to this Agreement and the other Liens permitted to exist on the
Collateral by the Credit Agreement, such Grantor owns each item of the
Collateral free and clear of any and all Liens or claims of others. No financing
statement or other public notice with respect to all or any part of the
Collateral is on file or of record in any public office, except such as have
been filed in favor of the Administrative Agent, for the ratable benefit of the
Lenders, pursuant to this Agreement or as are permitted by the Credit Agreement.
4.3 Perfected First Priority Liens. The security interests granted
pursuant to this Agreement (a) upon completion of the filings and other actions
specified on Schedule 3 (which, in the case of all filings and other documents
referred to on said Schedule, have been delivered to the Administrative Agent in
completed and duly executed form) will constitute valid perfected security
interests in all of the Collateral (to the extent perfection of a security
interest in such Collateral can be obtained by such filings and other actions)
in favor of the Administrative Agent, for the ratable benefit of the Lenders, as
collateral security for such Grantor's Obligations, enforceable in accordance
with the terms hereof against all creditors of such Grantor and any Persons
purporting to purchase any Collateral from such Grantor and (b) are prior to all
other Liens on the Collateral in existence on the date hereof except for (i)
Liens permitted by the Credit Agreement and (ii) Liens described on Schedule 7.
4.4 Chief Executive Office. On the date hereof, such Grantor's
jurisdiction of organization and the location of such Grantor's chief executive
office or sole place of business are specified on Schedule 4.
4.5 Inventory and Equipment. On the date hereof, the Inventory and
the Equipment (other than mobile goods) are kept at the locations listed on
Schedule 5.
4.6 Farm Products. None of the Collateral constitutes, or is the
Proceeds of, Farm Products.
4.7 Pledged Securities.
(a) The shares of Pledged Stock pledged by such Grantor hereunder
constitute all of the issued and outstanding shares of all classes of the
Capital Stock of each Issuer owned by such Grantor.
(b) All the shares of the Pledged Stock have been duly and validly
issued and are fully paid and nonassessable.
(c) Each of the Pledged Notes constitutes the legal, valid and
binding obligation of the obligor with respect thereto, enforceable in
accordance with its terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, general equitable
principles
Guarantee and Collateral Agreement
<PAGE>
11
(whether considered in a proceeding in equity or at law) and an implied covenant
of good faith and fair dealing.
(d) Such Grantor is the record and beneficial owner of, and has
good and marketable title to, the Pledged Securities pledged by it hereunder,
free of any and all Liens or options in favor of, or claims of, any other
Person, except the security interest created by this Agreement.
4.8 Receivables.
(a) No amount payable to such Grantor under or in connection with
any Receivable is evidenced by any Instrument or Chattel Paper which has not
been delivered to the Administrative Agent, other than such Instrument or
Chattel Paper received by such Grantor in the ordinary course of its business.
(b) None of the obligors on any material Receivable is a
Governmental Authority.
(c) The amounts represented by such Grantor to the Lenders from
time to time as owing to such Grantor in respect of the Receivables will at such
times be accurate in all material respects.
4.9 Intellectual Property.
(a) Schedule 6 lists all material Intellectual Property owned by
such Grantor in its own name on the date hereof that is material to the conduct
of its business, including, without limitation, all Intellectual Property that
is registered in the United States Patent and Trademark Office or the United
States Copyright Office in the name of such Grantor on the date hereof.
(b) On the date hereof, all material Intellectual Property is
valid, subsisting, unexpired and enforceable, has not been abandoned and does
not infringe the intellectual property rights of any other Person.
(c) Except as set forth in Schedule 6, on the date hereof, none of
the Intellectual Property is the subject of any licensing or franchise agreement
pursuant to which such Grantor is the licensor or franchisor.
SECTION 5. COVENANTS
Each Grantor covenants and agrees with the Administrative Agent and
the Lenders that, from and after the date of this Agreement until the
Obligations shall have been paid in full, no Letter of Credit shall be
outstanding and the Commitments shall have terminated:
5.1 Covenants in Credit Agreement. In the case of each Guarantor,
such Guarantor shall take, or shall refrain from taking, as the case may be,
each action that is necessary to be taken or not taken, as the case may be, so
that no Default or Event of Default is
Guarantee and Collateral Agreement
<PAGE>
12
caused by the failure to take such action or to refrain from taking such action
by such Guarantor or any of its Subsidiaries.
5.2 Delivery of Instruments and Chattel Paper. If any amount
payable under or in connection with any of the Collateral shall be or become
evidenced by any Instrument or Chattel Paper, such Instrument or Chattel Paper
shall be immediately delivered to the Administrative Agent, duly indorsed in a
manner satisfactory to the Administrative Agent to be held as Collateral
pursuant to this Agreement; provided that so long as no Event of Default shall
have occurred and be continuing, the relevant Grantor may retain for collection
in the ordinary course of its business any Instruments or Chattel Paper received
by such Grantor in the ordinary course of its business.
5.3 Maintenance of Insurance.
(a) Such Grantor will maintain, with financially sound and
reputable companies, insurance policies (i) insuring the Inventory, Equipment
and Vehicles against loss by fire, explosion, theft and such other casualties as
may be reasonably satisfactory to the Administrative Agent and (ii) to the
extent requested by the Administrative Agent, insuring such Grantor, the Agents
and the Lenders against liability for personal injury and property damage
relating to such Inventory, Equipment and Vehicles, such policies to be in such
form and amounts and having such coverage as may be reasonably satisfactory to
the Administrative Agent and the Lenders.
(b) All such insurance shall (i) provide that no cancellation,
material reduction in amount or material change in coverage thereof shall be
effective until at least 30 days after receipt by the Administrative Agent of
written notice thereof, (ii) name the Administrative Agent as insured party or
loss payee, (iii) if reasonably requested by the Administrative Agent, include a
breach of warranty clause and (iv) be reasonably satisfactory in all other
respects to the Administrative Agent.
(c) The Borrower shall deliver to the Administrative Agent and the
Lenders a report of a reputable insurance broker with respect to such insurance
as the Administrative Agent may from time to time reasonably request.
5.4 Payment of Obligations. Such Grantor will pay and discharge or
otherwise satisfy at or before maturity or before they become delinquent, as the
case may be, all taxes, assessments and government charges or levies imposed
upon the Collateral or in respect of income or profits therefrom, as well as all
claims of any kind (including, without limitation, claims for labor, materials
and supplies) against or with respect to the Collateral, except that no such
charge need be paid if the amount or validity thereof is currently being
contested in good faith by appropriate proceedings, reserves in conformity with
GAAP with respect thereto have been provided on the books of such Grantor and
such proceedings could not reasonably be expected to result in the sale,
forfeiture or loss of any material portion of the Collateral or any interest
therein.
Guarantee and Collateral Agreement
<PAGE>
13
5.5 Maintenance of Perfected Security Interest; Further
Documentation.
(a) Such Grantor shall maintain the security interest created by
this Agreement as a perfected security interest having at least the priority
described in Section 4.3 and shall defend such security interest against the
claims and demands of all Persons whomsoever.
(b) Such Grantor will furnish to the Administrative Agent and the
Lenders from time to time statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as the Administrative Agent may reasonably request, all in reasonable
detail.
(c) At any time and from time to time, upon the written request of
the Administrative Agent, and at the sole expense of such Grantor, such Grantor
will promptly and duly execute and deliver, and have recorded, such further
instruments and documents and take such further actions as the Administrative
Agent may reasonably request for the purpose of obtaining or preserving the full
benefits of this Agreement and of the rights and powers herein granted,
including, without limitation, the filing of any financing or continuation
statements under the Uniform Commercial Code (or other similar laws) in effect
in any jurisdiction with respect to the security interests created hereby.
5.6 Changes in Locations, Name, etc. Such Grantor will not, except
upon 15 days' prior written notice to the Administrative Agent and delivery to
the Administrative Agent of (a) all additional executed financing statements and
other documents reasonably requested by the Agents to maintain the validity,
perfection and priority of the security interests provided for herein, and (b)
if applicable, a written supplement to Schedule 5 showing any additional
location at which Inventory or Equipment shall be kept:
(i) permit any of the Inventory or Equipment (other than Equipment
that has been temporarily removed from any such location for maintenance
or repair and goods which are mobile and which are of a type normally used
in more than one jurisdiction) to be kept at a location other than those
listed on Schedule 5 under its name or in transit from one of such
locations to another;
(ii) change the location of its chief executive office or sole place
of business from that referred to in Section 4.4; or
(iii) change its name, identity or corporate structure to such an
extent that any financing statement filed by the Administrative Agent in
connection with this Agreement would become misleading.
5.7 Notices. Such Grantor will advise the Administrative Agent and
the Lenders promptly, in reasonable detail, of:
(a) any Lien (other than security interests created hereby or Liens
permitted under the Credit Agreement) on any of the Collateral which would
adversely affect the ability of the Agents to exercise any of its remedies
hereunder; and
Guarantee and Collateral Agreement
<PAGE>
14
(b) of the occurrence of any other event which could reasonably be
expected to have a material adverse effect on the aggregate value of the
Collateral or on the security interests created hereby.
5.8 Pledged Securities.
(a) If such Grantor shall become entitled to receive or shall
receive any stock certificate (including, without limitation, any certificate
representing a stock dividend or a distribution in connection with any
reclassification, increase or reduction of capital or any certificate issued in
connection with any reorganization), option or rights in respect of the Capital
Stock of any Issuer, whether in addition to, in substitution of, as a conversion
of, or in exchange for, any shares of the Pledged Stock, or otherwise in respect
thereof, such Grantor shall accept the same as the agent of the Administrative
Agent and the Lenders, hold the same in trust for the Administrative Agent and
the Lenders and deliver the same forthwith to the Administrative Agent in the
exact form received, duly indorsed by such Grantor to the Administrative Agent,
if required, together with an undated stock power covering such certificate duly
executed in blank by such Grantor and with, if the Administrative Agent so
requests, signature guaranteed, to be held by the Administrative Agent, subject
to the terms hereof, as additional collateral security for the Obligations. Any
sums paid upon or in respect of the Pledged Securities upon the liquidation or
dissolution of any Issuer shall be paid over to the Administrative Agent to be
held by it hereunder as additional collateral security for the Obligations, and
in case any distribution of capital shall be made on or in respect of the
Pledged Securities or any property shall be distributed upon or with respect to
the Pledged Securities pursuant to the recapitalization or reclassification of
the capital of any Issuer or pursuant to the reorganization thereof, the
property so distributed shall, unless otherwise subject to a perfected security
interest in favor of the Administrative Agent, be delivered to the
Administrative Agent to be held by it hereunder as additional collateral
security for the Obligations. If any sums of money or property so paid or
distributed in respect of the Pledged Securities shall be received by such
Grantor, such Grantor shall, until such money or property is paid or delivered
to the Administrative Agent, hold such money or property in trust for the
Lenders, segregated from other funds of such Grantor, as additional collateral
security for the Obligations.
(b) Except pursuant to a transaction permitted by the Credit
Agreement, without the prior written consent of the Administrative Agent, such
Grantor will not (i) vote to enable, or take any other action to permit, any
Issuer to issue any stock or other equity securities of any nature or to issue
any other securities convertible into or granting the right to purchase or
exchange for any stock or other equity securities of any nature of any Issuer,
(ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any
option with respect to, the Pledged Securities or Proceeds thereof, (iii)
create, incur or permit to exist any Lien or option in favor of, or any claim of
any Person with respect to, any of the Pledged Securities or Proceeds thereof,
or any interest therein, except for the security interests created by this
Agreement or (iv) enter into any agreement or undertaking restricting the right
or ability of such Grantor or the Administrative Agent to sell, assign or
transfer any of the Pledged Securities or Proceeds thereof.
(c) In the case of each Grantor which is an Issuer, such Issuer
agrees that (i) it will be bound by the terms of this Agreement relating to the
Pledged Securities issued by it and will comply with such terms insofar as such
terms are applicable to it, (ii) it will notify the
Guarantee and Collateral Agreement
<PAGE>
15
Administrative Agent promptly in writing of the occurrence of any of the events
described in Section 5.8(a) with respect to the Pledged Securities issued by it
and (iii) the terms of Section 6.3(c) shall apply to it, mutatis mutandis, with
respect to all actions that may be required of it pursuant to Section 6.3(c)
with respect to the Pledged Securities issued by it.
(d) Birch Texas Holdings, Inc., as the sole General Partner, and
Birch Telecom Inc., as the sole Limited Partner, of Birch Telecom of Texas Ltd.,
L.L.P. (the "Partnership"), pursuant to the Limited Partnership Agreement dated
as of August 26, 1998 (as amended and in effect from time to time, the
"Partnership Agreement"), (i) unconditionally consents to the creation of the
security interests in all of the partnership interests in the Partnership (the
"Partnership Interests") in favor of the Administrative Agent pursuant to this
Agreement, (ii) unconditionally consents to any subsequent transfer of the
Partnership Interests by the Administrative Agent pursuant to this Agreement and
(iii) agrees that (x) any such transfer shall not be subject to any of the terms
and conditions of, and shall be given full force and effect for the purposes of,
the Partnership Agreement and (y) this Section 5.8(d) shall constitute an
amendment to the Partnership Agreement to the extent provided herein, and such
amendment shall continue in full force and effect for the term of this
Agreement.
5.9 Receivables.
(a) Other than in the ordinary course of business consistent with
its past practice, such Grantor will not (i) grant any extension of the time of
payment of any Receivable, (ii) compromise or settle any Receivable for less
than the full amount thereof, (iii) release, wholly or partially, any Person
liable for the payment of any Receivable, (iv) allow any credit or discount
whatsoever on any Receivable or (v) amend, supplement or modify any Receivable
in any manner that could adversely affect the value thereof, in each case
involving a material amount of Receivables.
(b) Such Grantor will deliver to the Administrative Agent a copy
of each material demand, notice or document received by it that questions or
calls into doubt the validity or enforceability of more than 5% of the aggregate
amount of the then outstanding Receivables.
5.10 Intellectual Property.
(a) Except as would not reasonably be expected to have a Material
Adverse Effect:
(i) such Grantor (either itself or through licensees) will (i)
continue to use each material Trademark on each and every trademark class
of goods applicable to its current line as reflected in its current
catalogs, brochures and price lists in order to maintain such Trademark in
full force free from any claim of abandonment for non-use, (ii) maintain
as in the past the quality of products and services offered under such
Trademark, (iii) use such Trademark with the appropriate notice of
registration and all other notices and legends required by applicable
Requirements of Law, (iv) not adopt or use any mark which is confusingly
similar or a colorable imitation of such Trademark unless the
Administrative Agent, for the ratable benefit of the Lenders, shall obtain
a perfected security interest in such mark pursuant to this Agreement, and
(v) not (and not
Guarantee and Collateral Agreement
<PAGE>
16
permit any licensee or sublicensee thereof to) do any act or knowingly
omit to do any act whereby such Trademark may become invalidated or
impaired in any way;
(ii) such Grantor (either itself or through licensees) will
not do any act, or, omit to do any act, whereby any material Patent may
become forfeited, abandoned or dedicated to the public;
(iii) such Grantor (either itself or through licensees) (i)
will employ each material Copyright and (ii) will not (and will not permit
any licensee or sublicensee thereof to) do any act or knowingly omit to do
any act whereby any material portion of the Copyrights may become
invalidated or otherwise impaired, and such Grantor will not (either
itself or through licensees) do any act whereby any material portion of
the Copyrights may fall into the public domain; and
(iv) such Grantor (either itself or through licensees) will
not do any act that knowingly uses any material Intellectual Property to
infringe the intellectual property rights of any other Person.
(b) Such Grantor will notify the Administrative Agent and the
Lenders immediately if it knows, or has reason to know, that any application or
registration relating to any material Intellectual Property may become
forfeited, abandoned or dedicated to the public, or of any adverse determination
or development (including, without limitation, 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 or tribunal in
any country) regarding such Grantor's ownership of, or the validity of, any
material Intellectual Property or such Grantor's right to register the same or
to own and maintain the same.
(c) Whenever such Grantor, either by itself or through any agent,
employee, licensee or designee, shall file an application for the registration
of any Intellectual Property with the United States Patent and Trademark Office,
the United States Copyright Office or any similar office or agency in any other
country or any political subdivision thereof, such Grantor shall report such
filing to the Administrative Agent within five Business Days after the last day
of the fiscal quarter in which such filing occurs. Upon request of the
Administrative Agent, such Grantor shall execute and deliver, and have recorded,
any and all agreements, instruments, documents, and papers as the Administrative
Agent may request to evidence the Administrative Agent's and the Lenders'
security interest in any Copyright, Patent or Trademark and the goodwill and
general intangibles of such Grantor relating thereto or represented thereby.
(d) Such Grantor will take all reasonable and necessary steps,
including, without limitation, in any proceeding before the United States Patent
and Trademark Office, the United States Copyright Office or any similar office
or agency in any other country or any political subdivision thereof, to maintain
and pursue each application (and to obtain the relevant registration) and to
maintain each registration of the material Intellectual Property, including,
without limitation, filing of applications for renewal, affidavits of use and
affidavits of incontestability.
(e) In the event that any material Intellectual Property is
infringed, misappropriated or diluted by a third party, such Grantor shall (i)
take such actions as such
Guarantee and Collateral Agreement
<PAGE>
17
Grantor shall reasonably deem appropriate under the circumstances to protect
such Intellectual Property and (ii) if such Intellectual Property is of material
economic value, promptly notify the Agents after it learns thereof and sue for
infringement, misappropriation or dilution, to seek injunctive relief where
appropriate and to recover any and all damages for such infringement,
misappropriation or dilution.
5.11 Vehicles. Upon the request of the Administrative Agent, all
applications for certificates of title in respect of Vehicles having a fair
market value in excess of $100,000, indicating the Administrative Agent's first
priority security interest in the Vehicles covered by such certificate, and any
other necessary documentation, shall be filed in each office in each
jurisdiction which the Administrative Agent shall deem advisable to perfect its
security interest in the Vehicles.
SECTION 6. REMEDIAL PROVISIONS
6.1 Certain Matters Relating to Receivables.
(a) At any time an Event of Default has occurred and is
continuing, the Administrative Agent shall have the right to make test
verifications of the Receivables in any manner and through any medium that it
reasonably considers advisable, and each Grantor shall furnish all such
assistance and information as the Administrative Agent may require in connection
with such test verifications. At any time an Event of Default has occurred and
is continuing, upon the Administrative Agent's request and at the expense of the
relevant Grantor, such Grantor shall cause independent public accountants or
others satisfactory to the Administrative Agent to furnish to the Administrative
Agent reports showing reconciliations, aging and test verifications of, and
trial balances for, the Receivables.
(b) The Administrative Agent hereby authorizes each Grantor to
collect such Grantor's Receivables, subject to the Administrative Agent's
direction and control at any time an Event of Default has occurred and is
continuing, and the Administrative Agent may curtail or terminate said authority
at any time after the occurrence and during the continuance of an Event of
Default. If required by the Administrative Agent at any time after the
occurrence and during the continuance of an Event of Default, any payments of
Receivables, when collected by any Grantor, (i) shall be forthwith (and, in any
event, within two Business Days) deposited by such Grantor in the exact form
received, duly indorsed by such Grantor to the Administrative Agent if required,
in a Collateral Account maintained under the sole dominion and control of the
Administrative Agent, subject to withdrawal by the Administrative Agent for the
account of the Lenders only as provided in Section 6.5, and (ii) until so turned
over, shall be held by such Grantor in trust for the Administrative Agent and
the Lenders, segregated from other funds of such Grantor. Each such deposit of
Proceeds of Receivables shall be accompanied by a report identifying in
reasonable detail the nature and source of the payments included in the deposit.
(c) At the Administrative Agent's request at any time an Event of
Default has occurred and is continuing, each Grantor shall deliver to the
Administrative Agent all original and other documents evidencing, and relating
to, the agreements and transactions which gave rise to the Receivables,
including, without limitation, all original orders, invoices and shipping
receipts.
Guarantee and Collateral Agreement
<PAGE>
18
6.2 Communications with Obligors; Grantors Remain Liable.
(a) The Administrative Agent in its own name or in the name of
others may at any time after the occurrence and during the continuance of an
Event of Default communicate with obligors under the Receivables and the General
Intangibles to verify with them to the Administrative Agent's satisfaction the
existence, amount and terms of any Receivables or General Intangible.
(b) Upon the request of the Administrative Agent at any time after
the occurrence and during the continuance of an Event of Default, each Grantor
shall notify obligors on the Receivables and the General Intangibles that the
Receivables and the General Intangibles have been assigned to the Administrative
Agent for the ratable benefit of the Lenders and that payments in respect
thereof shall be made directly to the Administrative Agent.
(c) Anything herein to the contrary notwithstanding, each Grantor
shall remain liable under each of the Receivables and General Intangibles to
observe and perform all the conditions and obligations to be observed and
performed by it thereunder, all in accordance with the terms of any agreement
giving rise thereto. Neither the Administrative Agent nor any Lender shall have
any obligation or liability under any Receivable (or any agreement giving rise
thereto) or General Intangible by reason of or arising out of this Agreement or
the receipt by the Administrative Agent or any Lender of any payment relating
thereto, nor shall the Administrative Agent or any Lender be obligated in any
manner to perform any of the obligations of any Grantor under or pursuant to any
Receivable (or any agreement giving rise thereto) or General Intangible, to make
any payment, to make any inquiry as to the nature or the sufficiency of any
payment received by it or as to the sufficiency of any performance by any party
thereunder, to present or file any claim, to take any action to enforce any
performance or to collect the payment of any amounts which may have been
assigned to it or to which it may be entitled at any time or times.
6.3 Pledged Stock.
(a) Unless an Event of Default shall have occurred and be
continuing and the Administrative Agent shall have given notice to the relevant
Grantor of the Administrative Agent's intent to exercise its corresponding
rights pursuant to Section 6.3(b), each Grantor shall be permitted to receive
all cash dividends paid in respect of the Pledged Stock and all payments made in
respect of the Pledged Notes, in each case paid in the normal course of business
of the relevant Issuer and consistent with past practice, to the extent
permitted in the Credit Agreement, and to exercise all voting and corporate
rights with respect to the Pledged Securities; provided, however, that no vote
shall be cast or corporate right exercised or other action taken which, in the
Administrative Agent's reasonable judgment, would impair the Collateral in any
material respect or which is inconsistent with or results in any violation of
any provision of the Credit Agreement, this Agreement or any other Credit
Document.
(b) If an Event of Default shall occur and be continuing and the
Administrative Agent shall give notice of its intent to exercise such rights to
the relevant Grantor or Grantors, (i) the Administrative Agent shall have the
right to receive any and all cash dividends, payments or other Proceeds paid in
respect of the Pledged Securities and make application thereof to the
Obligations in the order set forth in Section 6.5, and (ii) any or all of
Guarantee and Collateral Agreement
<PAGE>
19
the Pledged Securities shall be registered in the name of the Administrative
Agent or its nominee, and the Administrative Agent or its nominee may thereafter
exercise (x) all voting, corporate and other rights pertaining to such Pledged
Securities at any meeting of shareholders of the relevant Issuer or issuers or
otherwise and (y) any and all rights of conversion, exchange and subscription
and any other rights, privileges or options pertaining to such Pledged
Securities as if it were the absolute owner thereof (including, without
limitation, the right to exchange at its discretion any and all of the Pledged
Securities upon the merger, consolidation, reorganization, recapitalization or
other fundamental change in the corporate structure of any Issuer, or upon the
exercise by any Grantor or the Administrative Agent of any right, privilege or
option pertaining to such Pledged Securities, and in connection therewith, the
right to deposit and deliver any and all of the Pledged Securities with any
committee, depositary, transfer agent, registrar or other designated agency upon
such terms and conditions as the Administrative Agent may determine), all
without liability except to account for property actually received by it, but
the Administrative Agent shall have no duty to any Grantor to exercise any such
right, privilege or option and shall not be responsible for any failure to do so
or delay in so doing.
(c) Each Grantor hereby authorizes and instructs each Issuer of
any Pledged Securities pledged by such Grantor hereunder to (i) comply with any
instruction received by it from the Administrative Agent in writing that (x)
states that an Event of Default has occurred and is continuing and (y) is
otherwise in accordance with the terms of this Agreement, without any other or
further instructions from such Grantor, and each Grantor agrees that each Issuer
shall be fully protected in so complying, and (ii) unless otherwise expressly
permitted hereby, pay any dividends or other payments with respect to the
Pledged Securities directly to the Administrative Agent.
6.4 Proceeds to be Turned Over to Administrative Agent. In
addition to the rights of the Administrative Agent and the Lenders specified in
Section 6.1 with respect to payments of Receivables, if an Event of Default
shall occur and be continuing, all Proceeds received by any Grantor consisting
of cash, checks and other near-cash items shall be held by such Grantor in trust
for the Administrative Agent and the Lenders, segregated from other funds of
such Grantor, and shall, forthwith upon receipt by such Grantor, be turned over
to the Administrative Agent in the exact form received by such Grantor (duly
indorsed by such Grantor to the Administrative Agent, if required). All Proceeds
received by the Administrative Agent hereunder shall be held by the
Administrative Agent in a Collateral Account maintained under its sole dominion
and control. All Proceeds while held by the Administrative Agent in a Collateral
Account (or by such Grantor in trust for the Administrative Agent and the
Lenders) shall continue to be held as collateral security for all the
Obligations and shall not constitute payment thereof until applied as provided
in Section 6.5.
6.5 Application of Proceeds. At such intervals as may be agreed
upon by the Borrower and the Administrative Agent, or, if an Event of Default
shall have occurred and be continuing, at any time at the Agents' election, the
Administrative Agent may apply all or any part of Proceeds constituting
Collateral, whether or not held in any Collateral Account, and any proceeds of
the guarantee set forth in Section 2, in payment of the Obligations in the
following order:
Guarantee and Collateral Agreement
<PAGE>
20
First, to pay incurred and unpaid fees and expenses of the
Administrative Agent under the Credit Documents;
Second, to the Administrative Agent, for application by it towards
payment of amounts then due and owing and remaining unpaid in respect of
the Obligations, pro rata among the Lenders according to the amounts of
the Obligations then due and owing and remaining unpaid to the Lenders;
Third, to the Administrative Agent, for application by it towards
prepayment of the Obligations, pro rata among the Lenders according to the
amounts of the Obligations then held by the Lenders; and
Fourth, any balance of such Proceeds remaining after the Obligations
shall have been paid in full, no Letters of Credit shall be outstanding
and the Commitments shall have terminated shall be paid over to the
Borrower or to whomsoever may be lawfully entitled to receive the same.
6.6 Code and Other Remedies. If an Event of Default shall occur and
be continuing, the Administrative Agent, on behalf of the Lenders, may exercise,
in addition to all other rights and remedies granted to them in this Agreement
and in any other instrument or agreement securing, evidencing or relating to the
Obligations, all rights and remedies of a secured party under the New York UCC
or any other applicable law. Without limiting the generality of the foregoing,
the Administrative Agent, without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
required by law referred to below) to or upon any Grantor or any other Person
(all and each of which demands, defenses, advertisements and notices are hereby
waived), may in such circumstances forthwith collect, receive, appropriate and
realize upon the Collateral, or any part thereof, and/or may forthwith sell,
lease, assign, give option or options to purchase, or otherwise dispose of and
deliver the Collateral or any part thereof (or contract to do any of the
foregoing), in one or more parcels at public or private sale or sales, at any
exchange, broker's board or office of the Administrative Agent or any Lender or
elsewhere upon such terms and conditions as it may deem advisable and at such
prices as it may deem best, for cash or on credit or for future delivery without
assumption of any credit risk. The Administrative Agent or any Lender shall have
the right upon any such public sale or sales, and, to the extent permitted by
law, upon any such private sale or sales, to purchase the whole or any part of
the Collateral so sold, free of any right or equity of redemption in any
Grantor, which right or equity is hereby waived and released. Each Grantor
further agrees, at the Administrative Agent's request to assemble the Collateral
and make it available to the Administrative Agent at places which the
Administrative Agent shall reasonably select, whether at such Grantor's premises
or elsewhere. The Administrative Agent shall apply the net proceeds of any
action taken by it pursuant to this Section 6.6, after deducting all reasonable
costs and expenses of every kind incurred in connection therewith or incidental
to the care or safekeeping of any of the Collateral or in any way relating to
the Collateral or the rights of the Administrative Agent and the Lenders
hereunder, including, without limitation, reasonable attorneys' fees and
disbursements, to the payment in whole or in part of the Obligations, in such
order as the Administrative Agent may elect, and only after such application and
after the payment by the Administrative Agent of any other amount required by
any provision of law, including, without limitation, Section 9-504(l)(c) of the
New York UCC, need
Guarantee and Collateral Agreement
<PAGE>
21
the Administrative Agent account for the surplus, if any, to any Grantor. To the
extent permitted by applicable law, each Grantor waives all claims, damages and
demands it may acquire against the Administrative Agent or any Lender arising
out of the exercise by them of any rights hereunder. If any notice of a proposed
sale or other disposition of Collateral shall be required by law, such notice
shall be deemed reasonable and proper if given at least 10 days before such sale
or other disposition.
6.7 Waiver; Deficiency. Each Grantor waives and agrees not to
assert any rights or privileges which it may acquire under Section 9-112 of the
New York UCC. Each Grantor shall remain liable for any deficiency if the
proceeds of any sale or other disposition of the Collateral are insufficient to
pay its Obligations and the fees and disbursements of any attorneys employed by
the Agents or any Lender to collect such deficiency.
SECTION 7. THE ADMINISTRATIVE AGENT
7.1 Administrative Agent's Appointment as Attorney-in-Fact, etc.
(a) Without limiting any rights or powers granted by this
Agreement to the Administrative Agent while no Event of Default has occurred and
is continuing, each Grantor hereby irrevocably constitutes and appoints the
Administrative Agent and any officer or agent thereof, with full power of
substitution, as its true and lawful attorney-in-fact with full irrevocable
power and authority in the place and stead of such Grantor and in the name of
such Grantor or in its own name at any time an Event of Default has occurred and
is continuing, for the purpose of carrying out the terms of this Agreement, to
take any and all appropriate action and to execute any and all documents and
instruments which may be necessary or desirable to accomplish the purposes of
this Agreement, and, without limiting the generality of the foregoing, each
Grantor hereby gives the Administrative Agent the power and right, on behalf of
such Grantor, without notice to or assent by such Grantor, to do any or all of
the following at any time an Event of Default has occurred and is continuing:
(i) in the name of such Grantor or its own name, or otherwise, take
possession of and indorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys due under any
Receivable or General Intangible or with respect to any other Collateral
and file any claim or take any other action or proceeding in any court of
law or equity or otherwise deemed appropriate by the Administrative Agent
for the purpose of collecting any and all such moneys due under any
Receivable or General Intangible or with respect to any other Collateral
whenever payable;
(ii) in the case of any Intellectual Property, execute and deliver,
and have recorded, any and all agreements, instruments, documents and
papers as the Administrative Agent may request to evidence the
Administrative Agent's and the Lenders' security interest in such
Intellectual Property and the goodwill and general intangibles of such
Grantor relating thereto or represented thereby;
Guarantee and Collateral Agreement
<PAGE>
22
(iii) pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral, effect any repairs or any insurance
called for by the terms of this Agreement and pay all or any part of the
premiums therefor and the costs thereof,
(iv) execute, in connection with any sale provided for in Section
6.6, any endorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral; and
(v) (1) direct any party liable for any payment under any of the
Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Administrative Agent or as the Administrative
Agent shall direct; (2) ask or demand for, collect, and receive payment of
and receipt for, any and all moneys, claims and other amounts due or to
become due at any time in respect of or arising out of any Collateral; (3)
sign and indorse any invoices, freight or express bills, bills of lading,
storage or warehouse receipts, drafts against debtors, assignments,
verifications, notices and other documents in connection with any of the
Collateral; (4) commence and prosecute any suits, actions or proceedings
at law or in equity in any court of competent jurisdiction to collect the
Collateral or any portion thereof and to enforce any other right in
respect of any Collateral; (5) defend any suit, action or proceeding
brought against such Grantor with respect to any Collateral; (6) settle,
compromise or adjust any such suit, action or proceeding and, in
connection therewith, give such discharges or releases as the
Administrative Agent may deem appropriate; (7) assign any Copyright,
Patent or Trademark (along with the goodwill of the business to which any
such Copyright, Patent or Trademark pertains), throughout the world for
such term or terms, on such conditions, and in such manner, as the
Administrative Agent shall in its sole discretion determine; and (8)
generally, sell, transfer, pledge and make any agreement with respect to
or otherwise deal with any of the Collateral as fully and completely as
though the Administrative Agent were the absolute owner thereof for all
purposes, and do, at the Administrative Agent's option and such Grantor's
expense, at any time, or from time to time, all acts and things which the
Administrative Agent deems necessary to protect, preserve or realize upon
the Collateral and the Administrative Agent's and the Lenders' security
interests therein and to effect the intent of this Agreement, all as fully
and effectively as such Grantor might do.
Anything in this Section 7.1(a) to the contrary notwithstanding, the
Administrative Agent agrees that it will not exercise any rights under the power
of attorney provided for in this Section 7.1(a) unless an Event of Default shall
have occurred and be continuing.
(b) If any Grantor fails to perform or comply with any of its
agreements contained herein, the Administrative Agent, at its option, but
without any obligation so to do, may perform or comply, or otherwise cause
performance or compliance, with such agreement.
(c) The expenses of the Administrative Agent incurred in
connection with actions undertaken as provided in this Section 7.1, together
with interest thereon at a rate per annum equal to the rate per annum at which
interest would then be payable on past due Revolving Credit Loans that are Base
Rate Loans under the Credit Agreement, from the date of
Guarantee and Collateral Agreement
<PAGE>
23
payment by the Administrative Agent to the date reimbursed by the relevant
Grantor, shall be payable by such Grantor to the Administrative Agent on demand.
(d) Each Grantor hereby ratifies all that said attorneys shall
lawfully do or cause to be done by virtue hereof. All powers, authorizations and
agencies contained in this Agreement are coupled with an interest and are
irrevocable until this Agreement is terminated and the security interests
created hereby are released.
7.2 Duty of Administrative Agent. The Administrative Agent's sole
duty with respect to the custody, safekeeping and physical preservation of the
Collateral in its possession, under Section 9-207 of the New York UCC or
otherwise, shall be to deal with it in the same manner as the Administrative
Agent deals with similar property for its own account. Neither the
Administrative Agent, any Lender nor any of their respective officers,
directors, employees or agents shall be liable for failure to demand, collect or
realize upon any of the Collateral or for any delay in doing so or shall be
under any obligation to sell or otherwise dispose of any Collateral upon the
request of any Grantor or any other Person or to take any other action
whatsoever with regard to the Collateral or any part thereof. The powers
conferred on the Administrative Agent and the Lenders hereunder are solely to
protect the Administrative Agent's and the Lenders' interests in the Collateral
and shall not impose any duty upon the Administrative Agent or any Lender to
exercise any such powers. The Administrative Agent and the Lenders shall be
accountable only for amounts that they actually receive as a result of the
exercise of such powers, and neither they nor any of their officers, directors,
employees or agents shall be responsible to any Grantor for any act or failure
to act hereunder, except for their own gross negligence or willful misconduct.
7.3 Execution of Financing Statements. Pursuant to Section 9-402
of the New York UCC and any other applicable law, each Grantor authorizes the
Administrative Agent to file or record financing statements and other filing or
recording documents or instruments with respect to the Collateral without the
signature of such Grantor in such form and in such offices as the Administrative
Agent reasonably determines appropriate to perfect the security interests of the
Administrative Agent under this Agreement. A photographic or other reproduction
of this Agreement shall be sufficient as a financing statement or other filing
or recording document or instrument for filing or recording in any jurisdiction.
7.4 Authority of Administrative Agent. Each Grantor acknowledges
that the rights and responsibilities of the Administrative Agent under this
Agreement with respect to any action taken by the Administrative Agent or the
exercise or non-exercise by the Administrative Agent of any option, voting
right, request, judgment or other right or remedy provided for herein or
resulting or arising out of this Agreement shall, as between the Administrative
Agent and the Grantors, the Administrative Agent shall be conclusively presumed
to be acting as agent for the Lenders with full and valid authority so to act or
refrain from acting, and no Grantor shall be under any obligation, or
entitlement, to make any inquiry respecting such authority.
Guarantee and Collateral Agreement
<PAGE>
24
SECTION 8. MISCELLANEOUS
8.1 Amendments in Writing. None of the terms or provisions of this
Agreement may be waived, amended, supplemented or otherwise modified except in
accordance with Section 8.1 of the Credit Agreement.
8.2 Notices. All notices, requests and demands to or upon the
Administrative Agent or any Grantor hereunder shall be effected in the manner
provided for in Section 8.2 of the Credit Agreement; provided that any such
notice, request or demand to or upon any Guarantor shall be addressed to such
Guarantor at its notice address set forth on Schedule 1.
8.3 No Waiver by Course of Conduct; Cumulative Remedies. Neither
the Agents nor any Lender shall by any act (except by a written instrument
pursuant to Section 8.1 of the Credit Agreement), delay, indulgence, omission or
otherwise be deemed to have waived any right or remedy hereunder or to have
acquiesced in any Default or Event of Default. No failure to exercise, nor any
delay in exercising, on the part of any Agent or any Lender, any right, power or
privilege hereunder shall operate as a waiver thereof. No single or partial
exercise of any right, power or privilege hereunder shall preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
A waiver by any Agent or any Lender of any right or remedy hereunder on any one
occasion shall not be construed as a bar to any right or remedy which such Agent
or such Lender would otherwise have on any future occasion. The rights and
remedies herein provided are cumulative, may be exercised singly or concurrently
and are not exclusive of any other rights or remedies provided by law.
8.4 Enforcement Expenses; Indemnification.
(a) Each Guarantor agrees to pay or reimburse each Lender and the
Administrative Agent for all its costs and expenses incurred in collecting
against such Guarantor under the guarantee contained in Section 2 or otherwise
enforcing or preserving any rights under this Agreement and the other Credit
Documents to which such Guarantor is a party, including, without limitation, the
fees and disbursements of counsel (including the allocated fees and expenses of
in-house counsel) to each Lender and of counsel to the Administrative Agent.
(b) Each Guarantor agrees to pay, and to save the Administrative
Agent and the Lenders harmless from, any and all liabilities with respect to, or
resulting from any delay in paying, any and all stamp, excise, sales or other
taxes which may be payable or determined to be payable with respect to any of
the Collateral or in connection with any of the transactions contemplated by
this Agreement.
(c) Each Guarantor agrees to pay, and to save the Administrative
Agent and the Lenders harmless from, any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever with respect to the execution,
delivery, enforcement, performance and administration of this Agreement to the
extent the Borrower would be required to do so pursuant to Section 9.5 of the
Credit Agreement.
Guarantee and Collateral Agreement
<PAGE>
25
(d) The agreements in this Section 8.4 shall survive repayment of
the Obligations and all other amounts payable under the Credit Agreement and the
other Credit Documents.
8.5 Successors and Assigns. This Agreement shall be binding upon
the successors and assigns of each Grantor and shall inure to the benefit of the
Agents and the Lenders and their successors and assigns; provided that no
Grantor may assign, transfer or delegate any of its rights or obligations under
this Agreement without the prior written consent of the Agents.
8.6 Set-Off. In addition to any rights and remedies of the
Administrative Agent and the Lenders provided by law, the Administrative Agent
and each Lender shall have the right, without prior notice to any Grantor, any
such notice being expressly waived by each Grantor to the extent permitted by
applicable law, upon any amount becoming due and payable by such Grantor under
the Credit Agreement or any other Credit Document (whether at the stated
maturity, by acceleration or otherwise), to set off and appropriate and apply
against such amount any and all deposits (general or special, time or demand,
provisional or final), in any currency, and any other credits, indebtedness or
claims, in any currency, in each case whether direct or indirect, absolute or
contingent, matured or unmatured, at any time held or owing by the
Administrative Agent or such Lender or any branch or agency thereof to or for
the credit or the account of such Grantor, as the case may be. Each Lender
agrees promptly to notify the relevant Grantor and the Administrative Agent
after any such setoff and application made by such Lender; provided that the
failure to give such notice shall not affect the validity of such setoff and
application.
8.7 Counterparts. This Agreement may be executed by one or more of
the parties to this Agreement on any number of separate counterparts (including
by telecopy), and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.
8.8 Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
8.9 Section Headings. The Section headings used in this Agreement
are for convenience of reference only and are not to affect the construction
hereof or be taken into consideration in the interpretation hereof.
Guarantee and Collateral Agreement
<PAGE>
26
8.10 Integration. This Agreement and the other Credit Documents
represent the agreement of the Grantors, the Agents and the Lenders with respect
to the subject matter hereof and thereof, and there are no promises,
undertakings, representations or warranties by the Agents or any Lender relative
to subject matter hereof and thereof not expressly set forth or referred to
herein or in the other Credit Documents.
8.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
8.12 Submission to Jurisdiction; Waivers. Each Grantor hereby
irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Credit Documents to
which it is a party, or for recognition and enforcement of any judgment in
respect thereof, to the non-exclusive general jurisdiction of the Courts
of the State of New York, the courts of the United States of America for
the Southern District of New York, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in
such courts and waives any objection that it may now or hereafter have to
the venue of any such action or proceeding in any such court or that such
action or proceeding was brought in an inconvenient court and agrees not
to plead or claim the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail
(or any substantially similar form of mail), postage prepaid, to such
Grantor at its address referred to in Section 8.2 or at such other address
of which the Administrative Agent shall have been notified pursuant
thereto;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the
right to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any right
it may have to claim or recover in any legal action or proceeding referred
to in this Section 8.12 any special, exemplary, punitive or consequential
damages.
8.13 Acknowledgements. Each Grantor hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Agreement and the other Credit Documents to which it is a
party;
(b) neither the Agents nor any Lender has any fiduciary relationship
with or duty to any Grantor arising out of or in connection with this
Agreement or any of the other Credit Documents, and the relationship
between the Grantors, on the one hand, and
Guarantee and Collateral Agreement
<PAGE>
27
the Agents and Lenders, on the other hand, in connection herewith or
therewith is solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Credit
Documents or otherwise exists by virtue of the transactions contemplated
hereby among the Lenders or among the Grantors and the Lenders.
8.14 Additional Guarantors. Each Subsidiary of the Company that is
required to become a party to this Agreement pursuant to Section 5.9(c) of the
Credit Agreement shall become a Guarantor (and, thereby a Grantor) for all
purposes of this Agreement upon execution and delivery by such Subsidiary of an
Assumption Agreement in the form of Annex I hereto.
8.15 Releases.
(a) At such time as the Loans and the other Obligations shall have
been paid in full, the Commitments have been terminated and no Letters of Credit
shall be outstanding, the Collateral shall be released from the Liens created
hereby, and this Agreement and all obligations (other than those expressly
stated to survive such termination) of the Agents and each Grantor hereunder
shall terminate, all without delivery of any instrument or performance of any
act by any party, and all rights to the Collateral shall revert to the Grantors.
At the request and sole expense of any Grantor following any such termination,
the Administrative Agent shall deliver to such Grantor any Collateral held by
the Administrative Agent hereunder, and execute and deliver to such Grantor such
documents as such Grantor shall reasonably request to evidence such termination.
(b) If any of the Collateral shall be sold, transferred or
otherwise disposed of by any Grantor in a transaction permitted by the Credit
Agreement, then the Administrative Agent, at the request and sole expense of
such Grantor, shall execute and deliver to such Grantor all releases or other
documents reasonably necessary or desirable for the release of the Liens created
hereby on such Collateral. At the request and sole expense of the Borrower, a
Guarantor shall be released from its obligations hereunder in the event that
such Guarantor ceases to be a Subsidiary of the Company by virtue of being sold,
transferred or otherwise disposed of in a transaction permitted by the Credit
Agreement; provided that the Borrower shall have delivered to the Administrative
Agent at least ten Business Days prior to the date of the proposed release, a
written request for release identifying the relevant Guarantor and the terms of
the sale or other disposition in reasonable detail, including the price thereof
and any expenses in connection therewith, together with a certification by the
Borrower stating that such transaction is in compliance with the Credit
Agreement and the other Credit Documents.
8.16 WAIVER OF JURY TRIAL. EACH GRANTOR HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING
TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
8.17 Governmental Approvals. Notwithstanding anything to the
contrary contained herein or in the other Credit Documents, no action shall be
taken by the Administrative Agent pursuant to this Agreement, the Credit
Agreement or any other Credit
Guarantee and Collateral Agreement
<PAGE>
28
Document with respect to any item of Collateral that would constitute or result
in any assignment of any Governmental Approval or any change of control of the
holder of such Governmental Approval without first obtaining the prior approval
of the relevant Governmental Authority, if, under the existing law, such
assignment of any such Governmental Approval or change of control would require
the prior approval of such Governmental Authority. Prior to the exercise by the
Administrative Agent of any power, right, privilege or remedy pursuant to this
Agreement which requires any consent, approval, recording, qualification or
authorization of any Governmental Authority, each Grantor will execute and
deliver, or will cause the execution and delivery of, all applications,
certificates, instruments and other documents and papers as the Administrative
Agent may reasonably request in order to obtain such governmental consent,
approval, recording, qualification or authorization. Without limiting the
generality of the foregoing, each Grantor will use its best efforts upon the
reasonable request of the Administrative Agent to obtain from the appropriate
Governmental Authorities the necessary consents and approvals, if any (i) for
the granting to the Administrative Agent pursuant hereto of the security
interests provided for in this Agreement to the extent, if any, such security
interests may be granted under existing statutes or regulations and (ii) for the
assignment or transfer of any such Governmental Approval to the Administrative
Agent or its designee upon or following acceleration of the payment of the Loans
in accordance with the provisions of the Credit Agreement.
Guarantee and Collateral Agreement
<PAGE>
29
IN WITNESS WHEREOF, each of the undersigned has caused this
Guarantee and Collateral Agreement to be duly executed and delivered as of the
date first above written.
BIRCH TELECOM, INC.
By: ____________________________
Name:
Title:
BIRCH TELECOM FINANCE, INC.
By: ____________________________
Name:
Title:
AMERICAN LOCAL TELECOMMUNICATIONS, LLC
By: ____________________________
Name:
Title:
BIRCH EQUIPMENT, INC.
By: ____________________________
Name:
Title:
BIRCH INTERNET SERVICES, INC.
By: ____________________________
Name:
Title:
Guarantee and Collateral Agreement
<PAGE>
30
BIRCH TELECOM OF ARIZONA, INC.
By: ____________________________
Name:
Title:
BIRCH TELECOM OF ARKANSAS, INC.
By: ____________________________
Name:
Title:
BIRCH TELECOM OF KANSAS, INC.
By: ____________________________
Name:
Title:
BIRCH TELECOM OF NEBRASKA, INC.
By: ____________________________
Name:
Title:
BIRCH TELECOM OF OKLAHOMA, INC.
By: ____________________________
Name:
Title:
Guarantee and Collateral Agreement
<PAGE>
31
BIRCH TELECOM OF TEXAS LTD., LLP
By: ____________________________
Name:
Title:
BIRCH TEXAS HOLDINGS, INC.
By: ____________________________
Name:
Title:
CAPITAL COMMUNICATIONS CORPORATION
By: ____________________________
Name:
Title:
DUNN & ASSOCIATES, INC.
By: ____________________________
Name:
Title:
G.B.S. COMMUNICATIONS, INC.
By: ____________________________
Name:
Title:
I.S. ADVERTISING, INC.
By: ____________________________
Name:
Title:
Guarantee and Collateral Agreement
<PAGE>
32
M.B.S. LEASING, INC.
By: ____________________________
Name:
Title:
TELESOURCE COMMUNICATIONS, INC.
By: ____________________________
Name:
Title:
BIRCH TELECOM OF MISSOURI, INC.
By: ____________________________
Name:
Title:
BIRCH KANSAS HOLDINGS, INC.
By: ____________________________
Name:
Title:
BIRCH MANAGEMENT CORPORATION
By: ____________________________
Name:
Title:
BIRCH TELECOM OF MICHIGAN, INC.
By: ____________________________
Name:
Title:
Guarantee and Collateral Agreement
<PAGE>
33
BIRCH TELECOM OF WISCONSIN, INC.
By: ____________________________
Name:
Title:
BIRCH TELECOM OF ILLINOIS, INC.
By: ____________________________
Name:
Title:
BIRCH TELECOM OF OHIO, INC.
By: ____________________________
Name:
Title:
BIRCH TELECOM OF INDIANA, INC.
By: ____________________________
Name:
Title:
Guarantee and Collateral Agreement
<PAGE>
34
LEHMAN COMMERCIAL PAPER INC.,
as Administrative Agent
By: ____________________________
Name:
Title:
Guarantee and Collateral Agreement
<PAGE>
Schedule 1
NOTICE ADDRESSES OF GUARANTORS
Schedule 1 to Guarantee and Collateral Agreement
<PAGE>
Schedule 2
DESCRIPTION OF PLEDGED SECURITIES
Pledged Stock:
Stock Certificate
Issuer Class of Stock No. No. of Shares
- ------------------ ------------------- ------------------- -----------------
Pledged Notes:
Issuer Payee Principal Amount
- ------------------------- ----------------------- ---------------------------
Schedule 2 to Guarantee and Collateral Agreement
<PAGE>
Schedule 3
FILINGS AND OTHER ACTIONS
REQUIRED TO PERFECT SECURITY INTERESTS
Uniform Commercial Code Filings
[List each office where a financing statement is to be filed]
Patent and Trademark Filings
[List all filings]
Actions with respect to Pledged Stock
Other Actions
[Describe other actions to be taken]
Schedule 3 to Guarantee and Collateral Agreement
<PAGE>
Schedule 4
LOCATION OF JURISDICTION OF ORGANIZATION AND CHIEF EXECUTIVE OFFICE
Grantor Location
------- --------
Schedule 4 to Guarantee and Collateral Agreement
<PAGE>
Schedule 5
LOCATION OF INVENTORY AND EQUIPMENT
Grantor Locations
Schedule 5 to Guarantee and Collateral Agreement
<PAGE>
Schedule 6
COPYRIGHTS AND COPYRIGHT LICENSES
PATENTS AND PATENT LICENSES
TRADEMARKS AND TRADEMARK LICENSES
Schedule 6 to Guarantee and Collateral Agreement
<PAGE>
Schedule 7
EXISTING PRIOR LIENS
Schedule 7 to Guarantee and Collateral Agreement
<PAGE>
Annex I to
Amended and Restated Guarantee
and Collateral Agreement
ASSUMPTION AGREEMENT, dated as of ______ __, ____made by
___________________________, a ____________ corporation (the "Additional
Guarantor"), in favor of LEHMAN COMMERCIAL PAPER INC., as administrative agent
(in such capacity, the "Administrative Agent") for the banks and other financial
institutions (the "Lenders") parties to the Credit Agreement referred to below.
All capitalized terms not defined herein shall have the meaning ascribed to them
in such Credit Agreement.
W I T N E S S E T H:
WHEREAS, BIRCH TELECOM, INC., a corporation duly organized and
validly existing under the law of the State of Delaware (the "Company"), BIRCH
TELECOM FINANCE, INC., a corporation duly organized and validly existing under
the law of the State of Delaware (the "Borrower"), the Lenders and the
Administrative Agent have entered into an Amended and Restated Credit Agreement,
dated as of February 2, 2000 (as amended, supplemented or otherwise modified
from time to time, the "Credit Agreement");
WHEREAS, in connection with the Credit Agreement, the Company, the
Borrower and certain other Subsidiaries of the Company (other than the
Additional Guarantor) have entered into the Amended and Restated Guarantee and
Collateral Agreement, dated as of February 2, 2000 (as amended, supplemented or
otherwise modified from time to time, the "Guarantee and Collateral Agreement")
in favor of the Administrative Agent for the benefit of the Lenders;
WHEREAS, the Credit Agreement requires the Additional Guarantor to
become a party to the Guarantee and Collateral Agreement as a "Guarantor" (and
thereby a "Grantor") thereunder; and
WHEREAS, the Additional Guarantor has agreed to execute and deliver
this Assumption Agreement in order to become a party to the Guarantee and
Collateral Agreement;
NOW, THEREFORE, IT IS AGREED:
1. Guarantee and Collateral Agreement. By executing and delivering
this Assumption Agreement, the Additional Guarantor, as provided in Section 8.14
of the Guarantee and Collateral Agreement, hereby becomes a party to the
Guarantee and Collateral Agreement as a Guarantor (and thereby a Grantor)
thereunder with the same force and effect as if originally named therein as a
Guarantor (and a Grantor) and, without limiting the generality of the foregoing,
hereby expressly assumes all obligations and liabilities of a Guarantor (and a
Grantor) thereunder. The information set forth in Annex I-A hereto is hereby
added to the information set
Assumption Agreement
<PAGE>
2
forth in Schedules _______________1**** to the Guarantee and Collateral
Agreement. The Additional Guarantor hereby represents and warrants that each of
the representations and warranties contained in Section 4 of the Guarantee and
Collateral Agreement is true and correct on and as the date hereof (after giving
effect to this Assumption Agreement) as if made on and as of such date.
2. GOVERNING LAW. THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW
YORK.
IN WITNESS WHEREOF, the undersigned has caused this Assumption
Agreement to be duly executed and delivered as of the date first above written.
[ADDITIONAL GUARANTOR]
By: ___________________________
Name:
Title:
Assumption Agreement
<PAGE>
Annex I-A to
Assumption Agreement
[Insert information updating schedules, if any]
Assumption Agreement
<PAGE>
EXHIBIT B
[FORM OF COMPLIANCE CERTIFICATE]
This Compliance Certificate is delivered to you pursuant to Section
5.2(6) of the Amended and Restated Credit Agreement, dated as of February 2,
2000, as amended, supplemented or modified from time to time (the "Credit
Agreement"), among BIRCH TELECOM, INC., a corporation duly organized and validly
existing under the law of the State of Delaware corporation (the "Company"),
BIRCH TELECOM FINANCE, INC., a corporation duly organized and validly existing
under the law of the State of Delaware (the "Borrower"), the several banks and
other financial institutions or entities from time to time parties thereto (the
"Lenders") and LEHMAN COMMERCIAL PAPER INC., as administrative agent (in such
capacity, the "Administrative Agent"). Terms defined in the Credit Agreement and
not otherwise defined herein are used herein with the meanings so defined.
1. I am the duly elected, qualified and acting [Chief Financial
Officer] [Vice President - Finance] of the Borrower.
2. I have reviewed and am familiar with the contents of this
Certificate.
3. I have reviewed the terms of the Credit Agreement and the other
Credit Documents and have made or caused to be made under my supervision, a
review in reasonable detail of the transactions and condition of the Borrower
during the accounting period covered by the financial statements attached hereto
as Attachment 1 (the "Financial Statements"). Such review did not disclose the
existence during or at the end of the accounting period covered by the Financial
Statements, and I have no knowledge of the existence, as of the date of this
Certificate, of any condition or event which constitutes a Default or Event of
Default [, except as set forth below].
4. Attached hereto as Attachment 2 are the computations showing
compliance with the covenants set forth in Section 6.1, 6.2, 6.5, 6.6, 6.7 and
6.8 of the Credit Agreement.
IN WITNESS WHEREOF, I execute this Certificate this ___ day of ____
, 200_.
BIRCH TELECOM FINANCE, INC.
By:_________________________
Name:
Title:
Compliance Certificate
<PAGE>
Attachment 1
to Compliance Certificate
The information described herein is as of ____________,200_, and
pertains to the period from ____________, 200_ to _____________, 200_.
Compliance Certificate
<PAGE>
Attachment 2
to Compliance Certificate
[Set forth Covenant Calculations]
Compliance Certificate
<PAGE>
EXHIBIT C
[FORM OF CLOSING CERTIFICATE]
Pursuant to Section 4.1(f) of the Amended and Restated Credit
Agreement dated as of February 2, 2000 as amended, supplemented or modified from
time to time (the "Credit Agreement"), among BIRCH TELECOM, INC., a corporation
duly organized and validly existing under the law of the State of Delaware (the
"Company"), BIRCH TELECOM FINANCE, INC., a corporation duly organized and
validly existing under the law of the State of Delaware (the "Borrower"), the
several banks and other financial institutions or entities from time to time
parties thereto (the "Lenders") and LEHMAN COMMERCIAL PAPER INC., as
administrative agent (in such capacity, the "Administrative Agent"), the
undersigned [INSERT TITLE OF OFFICER] of [INSERT NAME OF COMPANY] (the
"Company") hereby certifies as follows:
1. The representations and warranties of the Company set forth in
each of the Credit Documents to which it is a party are true and correct on and
as of the date hereof with the same effect as if made on the date hereof, except
for representations and warranties expressly stated to relate to a specific
earlier date, in which case such representations and warranties were true and
correct in all material respects as of such earlier date.
2. _______________ is the duly elected and qualified Corporate
Secretary of the Company and the signature set forth for such officer below is
such officer's true and genuine signature.
3. No Default or Event of Default has occurred and is continuing as
of the date hereof or will have occurred and be continuing after giving effect
to the Loans to be made on the Closing Date. [Borrower only]
4. The conditions precedent set forth in Section 4.1 of the Credit
Agreement have been satisfied as of the Closing Date. [Borrower only]
The undersigned Corporate Secretary of the Company certifies as
follows:
5. There are no liquidation or dissolution proceedings pending or to
my knowledge threatened against the Company, nor has any other event occurred
adversely affecting or threatening the continued corporate existence of the
Company.
6. The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the jurisdiction of its organization.
7. Attached hereto as Annex 1 is a true and complete copy of
resolutions duly adopted by the Board of Directors of the Company on
_______________; such resolutions have not in any way been amended, modified,
revoked or rescinded, have been in full force and effect since their adoption to
and including the date hereof and are now in full force and effect
Closing Certificate
<PAGE>
2
and are the only corporate proceedings of the Company now in force relating to
or affecting the matters referred to therein.
8. Attached hereto as Annex 2 is a true and complete copy of the
By-Laws of the Company as in effect on the date hereof.
9. Attached hereto as Annex 3 is a true and complete copy of the
Certificate of Incorporation of the Company as in effect on the date hereof, and
such certificate has not been amended, repealed, modified or restated.
10. The following persons are now duty elected and qualified
officers of the Company holding the offices indicated next to their respective
names below, and such officers have held such offices with the Company at all
times since the date indicated next to their respective titles to and including
the date hereof, and the signatures appearing opposite their respective names
below are the true and genuine signatures of such officers, and each of such
officers is duly authorized to execute and deliver on behalf of the Company each
of the Credit Documents to which it is a party and any certificate or other
document to be delivered by the Company pursuant to the Credit Documents to
which it is a party:
Name Office Date Signature
---- ------ ---- ---------
IN WITNESS WHEREOF, the undersigned have hereunto set our names as
of the date set forth below.
By: By:
____________________ __________________________
Name: Name:
Title: Title:
Date: ______ __, 2000
Closing Certificate
<PAGE>
EXHIBIT D
[ASSIGNMENT AND ACCEPTANCE]
Reference is made to the Amended and Restated Credit Agreement dated
as of February 2, 2000 (as amended, supplemented or otherwise modified from time
to time, the "Credit Agreement"), among BIRCH TELECOM, INC., a corporation duly
organized and validly existing under the law of the State of Delaware (the
"Company"), BIRCH TELECOM FINANCE, INC., a corporation duly organized and
validly existing under the law of the State of Delaware (the "Borrower"), the
several banks and other financial institutions or entities from time to time
parties thereto (the "Lenders") and LEHMAN COMMERCIAL PAPER INC., as
administrative agent (in such capacity, the "Administrative Agent"). Unless
otherwise defined herein, terms defined in the Credit Agreement and used herein
shall have the meanings given to them in the Credit Agreement.
The Assignor identified on Schedule I hereto (the "Assignor") and
the Assignee identified on Schedule I hereto (the "Assignee") agree as follows:
1. The Assignor hereby irrevocably sells and assigns to the Assignee
without recourse to the Assignor, and the Assignee hereby irrevocably purchases
and assumes from the Assignor without recourse to the Assignor, as of the
Assignment Effective Date (as defined below), the interest described in Schedule
I hereto (the "Assigned Interest") in and to the Assignor's rights and
obligations under the Credit Agreement with respect to those credit facilities
contained in the Credit Agreement as are set forth on Schedule I hereto
(individually, an "Assigned Facility"; collectively, the "Assigned Facilities"),
in a principal amount for each Assigned Facility as set forth on Schedule I
hereto.
2. The Assignor (a) makes no representation or warranty and assumes
no responsibility with respect to any statements, warranties or representations
made in or in connection with the Credit Agreement or with respect to the
execution, legality, validity, enforceability, genuineness, sufficiency or value
of the Credit Agreement, any other Credit Document or any other instrument or
document furnished pursuant thereto, other than that the Assignor has not
created any adverse claim upon the interest being assigned by it hereunder and
that such interest is free and clear of any such adverse claim; (b) makes no
representation or warranty and assumes no responsibility with respect to the
financial condition of the Borrower, any of its Subsidiaries or any other
obligor or the performance or observance by the Borrower, any of its
Subsidiaries or any other obligor of any of their respective obligations under
the Credit Agreement or any other Credit Document or any other instrument or
document furnished pursuant hereto or thereto; and (c) attaches any Notes held
by it evidencing the Assigned Facilities and (i) requests that the
Administrative Agent, upon request by the Assignee, exchange the attached Notes
for a new Note or Notes payable to the Assignee and (ii) if the Assignor has
retained any interest in the Assigned Facility, requests that the Administrative
Agent exchange the attached Notes for a new Note or Notes payable to the
Assignor, in each case in amounts
Assignment and Acceptance
<PAGE>
- 2 -
which reflect the assignment being made hereby (and after giving effect to any
other assignments which have become effective on the Assignment Effective Date).
3. The Assignee (a) represents and warrants that it is legally
authorized to enter into this Assignment and Acceptance; (b) confirms that it
has received a copy of the Credit Agreement, together with copies of the
financial statements delivered pursuant to Section 3.1 thereof and such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into this Assignment and Acceptance; (c) agrees
that it will, independently and without reliance upon the Assignor, the Agents
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 the Credit Agreement, the other Credit Documents or any
other instrument or document furnished pursuant hereto or thereto; (d) appoints
and authorizes the Agents to take such action as agent on its behalf and to
exercise such powers and discretion under the Credit Agreement, the other Credit
Documents or any other instrument or document furnished pursuant hereto or
thereto as are delegated to the Agents by the terms thereof, together with such
powers as are incidental thereto; and (e) agrees that it will be bound by the
provisions of the Credit Agreement and will perform in accordance with its terms
all the obligations which by the terms of the Credit Agreement are required to
be performed by it as a Lender including, if it is organized under the laws of a
jurisdiction outside the United States, its obligation pursuant to Section
2.20(d) of the Credit Agreement.
4. The effective date of this Assignment and Acceptance shall be the
Assignment Effective Date of Assignment described in Schedule I hereto (the
"Assignment Effective Date"). Following the execution of this Assignment and
Acceptance, it will be delivered to the Administrative Agent for acceptance by
it and recording by the Administrative Agent pursuant to the Credit Agreement,
effective as of the Assignment Effective Date (which shall not, unless otherwise
agreed to by the Administrative Agent, be earlier than five Business Days after
the date of such acceptance and recording by the Administrative Agent).
5. Upon such acceptance and recording, from and after the Assignment
Effective Date, the Administrative Agent shall make all payments in respect of
the Assigned Interest (including payments of principal, interest, fees and other
amounts) [to the Assignor for amounts which have accrued to the Assignment
Effective Date and to the Assignee for amounts which have accrued subsequent to
the Assignment Effective Date] [to the Assignee whether such amounts have
accrued prior to the Assignment Effective Date or accrue subsequent to the
Assignment Effective Date. The Assignor and the Assignee shall make all
appropriate adjustments in payments by the Agent for periods prior to the
Assignment Effective Date or with respect to the making of this assignment
directly between themselves.]
6. From and after the Assignment Effective Date, (a) the Assignee
shall be a party to the Credit Agreement and, to the extent provided in this
Assignment and Acceptance, have the rights and obligations of a Lender
thereunder and under the other Credit Documents and shall be bound by the
provisions thereof and (b) the Assignor shall, to the extent provided in this
Assignment and Acceptance, relinquish its rights and be released from its
obligations under the Credit Agreement.
Assignment and Acceptance
<PAGE>
- 3 -
7. This Assignment and Acceptance shall be governed by and construed in
accordance with the law of the State of New York
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and
Acceptance to be executed as of the date first above written by their respective
duly authorized officers on Schedule I hereto.
<PAGE>
Schedule I
to Assignment and Acceptance
Name of Assignor:_____________________________
Name of Assignee:_____________________________
Assignment Effective Date:____________________
Credit Principal
Facility Assigned Amount Assigned Commitment Percentage Assigned(1)
_________________ _______________ _________________________________
$______________ _____________%
[Name of Assignee] [Name of Assignor]
By:__________________________________ By:_________________________
Title: Title:
______________________
1 Calculate the Commitment Percentage that is assigned to at least 15
decimal places and show as a percentage of the aggregate commitments of
all Lenders
Assignment and Acceptance
<PAGE>
Accepted: Consented To:
LEHMAN COMMERCIAL PAPER INC. [BIRCH TELECOM FINANCE, INC.](2)
as Administrative Agent
By:_______________________________ By:____________________________
Title: Title:
DEUTSCHE BANK SECURITIES INC.,
as Syndication Agent
By:____________________________
Title:
[SWINGLINE LENDER](2)
By:____________________________
Title:
[ISSUER LENDER](2)
By:____________________________
Title:
_______________
2 Include if applicable consent is required pursuant to Section 9.6(c) of
the Credit Agreement.
Assignment and Acceptance
<PAGE>
EXHIBIT E-1
<PAGE>
EXHIBIT E-2
<PAGE>
EXHIBIT E-3
[FORM OF LEGAL OPINION OF MILBANK, TWEED,
HADLEY & McCLOY LLP]
February 2, 2000
To the Administrative Agent and
each of the Lenders party to the
Credit Agreement referred to below:
Re: Birch Telecom, Inc.
Ladies and Gentlemen:
We have acted as special New York counsel to Lehman Commercial Paper
Inc. in connection with (i) that certain Amended and Restated Credit Agreement
dated as of February 2, 2000 (the "Credit Agreement") among BIRCH TELECOM, INC.,
a Delaware corporation (the "Company"), BIRCH TELECOM FINANCE, INC., a Delaware
corporation (the "Borrower"), the several banks and other financial institutions
or entities from time to time parties thereto (the "Lenders") and LEHMAN
COMMERCIAL PAPER INC., as administrative agent (in such capacity, the
"Administrative Agent"), providing for, among other things, extensions of credit
to be made by the Lenders to the Borrower in an aggregate principal amount not
exceeding $125,000,000 and (ii) the various agreements and instruments referred
to in the next following paragraph. Except where indicated, capitalized terms
used in this opinion and not otherwise defined herein shall have the meanings
given them by the Credit Agreement. This opinion letter is being delivered
pursuant to Section 4.1(f)(iii) of the Credit Agreement.
In rendering the opinions expressed below, we have examined the
Credit Agreement and the Guarantee and Collateral Agreement (collectively, the
"Credit Documents"), and have made such examination of laws as we have deemed
relevant for the purposes hereof. In our examination, we have assumed the
authenticity of all documents submitted to us as originals and the conformity
with authentic original documents of all documents submitted to us as copies.
When relevant facts were not independently established, we have relied upon
representations made in or pursuant to the Credit Documents.
Legal Opinion of Milbank, Tweed, Hadley & McCloy LLP
<PAGE>
- 2 -
In rendering the opinions expressed below, we have assumed, with
respect to the Credit Documents, that:
(i) the Credit Documents have been duly authorized by, have been
duly executed and delivered by, and (except to the extent set
forth in the opinions expressed below as to the Credit
Parties) constitute legal, valid, binding and enforceable
obligations of, all of the parties thereto;
(ii) all signatories to the Credit Documents have been duly
authorized; and
(iii) all of the parties to the Credit Documents are duly organized
and validly existing and have the power and authority
(corporate or other) to execute, deliver and perform the
Credit Documents.
Based upon and in reliance on the foregoing, and subject to the
assumptions and qualifications hereinafter set forth, we are of the opinion
that:
1. Each Credit Document constitutes the legal, valid and binding
obligation of each Credit Party party thereto, enforceable against such
Credit Party in accordance with its respective terms, except as may be
limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other similar laws relating to or affecting the rights of
creditors generally and except as the enforceability of the Credit
Documents is subject to the application of general principles of equity
(regardless of whether considered in a proceeding in equity or at law),
including (a) the possible unavailability of specific performance,
injunctive relief or any other equitable remedy and (b) concepts of
materiality, reasonableness, good faith and fair dealing.
2. The Guarantee and Collateral Agreement is effective to create, in
favor of the Administrative Agent for the benefit of the Administrative
Agent and the Lenders, a valid security interest under the Uniform
Commercial Code as in effect in the State of New York (the "Uniform
Commercial Code") in all of the right, title and interest of each Credit
Party party thereto in, to and under the Collateral (as defined in the
Guarantee and Collateral Agreement) as collateral security for the payment
of the Obligations (as so defined).
3. The security interest referred to in paragraph 2 above in that
portion of the Collateral consisting of Pledged Stock (as defined in the
Guarantee and Collateral Agreement) represented by certificates in bearer
form or in registered form indorsed (as provided in Section 8-102(a)(11)
of the Uniform Commercial Code) to the Administrative Agent or in blank by
an effective indorsement (as so provided) or registered in the name of the
Administrative Agent will, upon the creation of such
Legal Opinion of Milbank, Tweed, Hadley & McCloy LLP
<PAGE>
- 3 -
security interest, be perfected by the Administrative Agent taking
possession thereof in the State of New York, and such perfected security
interest will remain perfected thereafter so long as such certificates are
retained by the Administrative Agent in its possession in the State of New
York. If such security interest therein is perfected by the Administrative
Agent in the manner specified in the immediately preceding sentence for
value without notice (within the meaning of Section 8-105 of the Uniform
Commercial Code) of any adverse claim (within the meaning of Section
8-102(a)(1) of the Uniform Commercial Code) to the Pledged Stock so
represented by certificates, then the Administrative Agent will acquire
such security interest free of any adverse claim (as so defined).
The foregoing opinions are subject to the following comments and
qualifications:
A. The enforceability of Section 9.5 of the Credit Agreement (and
any similar provisions in any of the other Credit Documents) may be
limited by laws restricting the enforceability of provisions exculpating
or exempting a party, or requiring indemnification of a party for,
liability for its own action or inaction, to the extent the action or
inaction involves gross negligence, recklessness, willful misconduct or
unlawful conduct.
B. The enforceability of provisions in the Credit Documents to the
effect that terms may not be waived or modified except in writing may be
limited under certain circumstances.
C. Sections 2.1(c), 2.4 and 2.5 of the Guarantee and Collateral
Agreement may not be enforceable to the extent that the Obligations (as
defined in the Guarantee and Collateral Agreement) are materially
modified.
D. We express no opinion as to (i) the effect of the laws of any
jurisdiction in which any Lender is located (other than the State of New
York) that limit the interest, fees or other charges such Lender may
impose, (ii) the penultimate sentence of Section 9.6(b) of the Credit
Agreement and (iii) Section 9.12(a) of the Credit Agreement, insofar as
such section relates to the subject matter jurisdiction of the United
States District Court for the Southern District of New York to adjudicate
any controversy related to any of the Credit Documents.
E. We express no opinion as to the applicability to the obligations
of any Credit Party of Section 548 of the Bankruptcy Code of 1978, as
amended (the "Bankruptcy Code"), Article 10 of the New York Debtor and
Creditor Law or any other provision of law relating to fraudulent
conveyances, transfers or obligations.
Legal Opinion of Milbank, Tweed, Hadley & McCloy LLP
<PAGE>
- 4 -
F. We wish to point out that the obligations of the Credit Parties,
and the rights and remedies of the Administrative Agent and the Lenders,
under the Guarantee and Collateral Agreement may be subject to possible
limitations upon the exercise of remedial or procedural provisions
contained in the Guarantee and Collateral Agreement, provided that such
limitations do not, in our opinion (but subject to the other comments and
qualifications set forth in this opinion letter), make the remedies and
procedures that will be afforded to the Administrative Agent and the
Lenders inadequate for the practical realization of the substantive
benefits purported to be provided to the Administrative Agent and the
Lenders by the Guarantee and Collateral Agreement.
G. With respect to the security interests referred to in paragraph 2
above, (i) such security interest will continue in the relevant Collateral
after its sale, exchange or other disposition only to the extent provided
in Sections 9-306, 9-307 and 9-308 of the Uniform Commercial Code and (ii)
such security interest in Collateral in which any Credit Party acquires
rights after the commencement of a case under the Bankruptcy Code in
respect of such Credit Party may be limited by Section 552 of the
Bankruptcy Code.
H. With respect to paragraphs 2 and 3 above, we express no opinion
as to the creation, perfection or priority of any security interest in (or
other lien on) any Collateral (as defined in the Guarantee and Collateral
Agreement) (i) to the extent that, pursuant to Section 9-104 of the
Uniform Commercial Code, Article 9 of the Uniform Commercial Code does not
apply thereto, (ii) consisting of uncertificated securities (as defined in
Section 8-102(a)(18) of the Uniform Commercial Code), (iii) consisting of
fixtures, timber to be cut or minerals (including oil and gas), (iv)
covered by a certificate of title or (v) consisting of the proceeds of a
letter of credit.
I. We wish to point out that the acquisition by any Credit Party
after the initial extension of credit under the Credit Agreement of an
interest in Property that becomes subject to the Lien of the Guarantee and
Collateral Agreement may constitute a voidable preference under Section
547 of the Bankruptcy Code.
J. We express no opinion as to the existence of, or the right, title
or interest of the Credit Parties in, to or under, any of the Collateral
(as defined in the Guarantee and Collateral Agreement).
K. Except as expressly provided in paragraphs 2 and 3 above, we
express no opinion as to the creation, perfection or priority of any
security interest in, or other Lien on, the Collateral (as defined in the
Guarantee and Collateral Agreement).
Legal Opinion of Milbank, Tweed, Hadley & McCloy LLP
<PAGE>
- 5 -
The foregoing opinions are limited to matters involving the Federal
laws of the United States and the law of the State of New York, and we do not
express any opinion as to the laws of any other jurisdiction nor do we express
any opinion as to the applicability to the transactions under the agreements
referred to herein, or the effect upon such transactions, of the Communications
Act of 1935, and the rules, regulations and policies of the FCC thereunder.
At the request of our client, this opinion letter is, pursuant to
Section 4.1(f)(iii) of the Credit Agreement, provided to you by us in our
capacity as special New York counsel to LCPI and may not be relied upon by any
Person for any purpose other than in connection with the transactions
contemplated by the Credit Agreement without, in each instance, our prior
written consent.
Very truly yours,
WJM/RJW
Legal Opinion of Milbank, Tweed, Hadley & McCloy LLP
<PAGE>
EXHIBIT F-1
[FORM OF TERM NOTE]
THIS NOTE AND THE OBLIGATIONS REPRESENTED HEREBY MAY NOT BE TRANSFERRED EXCEPT
IN COMPLIANCE WITH THE TERMS AND PROVISIONS OF THE CREDIT AGREEMENT REFERRED TO
BELOW. TRANSFERS OF THIS NOTE AND THE OBLIGATIONS REPRESENTED HEREBY MUST BE
RECORDED IN THE REGISTER MAINTAINED BY THE ADMINISTRATIVE AGENT PURSUANT TO THE
TERMS OF SUCH CREDIT AGREEMENT.
$___________ New York, New York
FOR VALUE RECEIVED, the undersigned, BIRCH TELECOM FINANCE, INC., a
corporation duly organized and validly existing under the law of the State of
Delaware (the "Borrower"), hereby unconditionally promises to pay to __________
(the "Lender") or its registered assigns at the Payment Office specified in the
Credit Agreement (as hereinafter defined) in lawful money of the United States
and in immediately available funds, the principal amount of (a) ___________
($________) or, if less, (b) the unpaid principal amount of all Term Loans made
by the Lender pursuant to Section 2.1 of the Credit Agreement. The principal
amount shall be paid in the amounts and on the dates specified in Section 2.3 of
the Credit Agreement. The Borrower further agrees to pay interest in like money
at such office on the unpaid principal amount hereof from time to time
outstanding at the rates and on the dates specified in Section 2.15 of the
Credit Agreement.
The holder of this Note is authorized to endorse on the schedules
annexed hereto and made a part hereof or on a continuation thereof which shall
be attached hereto and made a part hereof the date, Type and amount of each Term
Loan and the date and amount of each payment or prepayment of principal with
respect thereto, each conversion of all or a portion thereof to another Type,
each continuation of all or a portion thereof as the same Type and, in the case
of Eurodollar Loans, the length of each Interest Period with respect thereto.
Each such endorsement shall constitute prima facie evidence of the accuracy of
the information endorsed. The failure to make any such endorsement or any error
in any such endorsement shall not affect the obligations of the Borrower in
respect of any Term Loan.
This Note (a) is one of the Term Notes referred to in the Amended
and Restated Credit Agreement dated as of February 2, 2000 (as amended,
supplemented or otherwise modified from time to time, the "Credit Agreement"),
among BIRCH TELECOM, INC., the Borrower, the several banks and other financial
institutions or entities from time to time parties thereto (the "Lenders"), and
LEHMAN COMMERCIAL PAPER INC., as administrative agent (in such capacity, the
"Administrative Agent"), (b) is subject to the provisions of the Credit
Agreement and (c) is subject to optional and mandatory prepayment in whole or in
part as provided in the Credit Agreement. This Note is secured and guaranteed as
provided in the Credit Documents. Reference is hereby made to the Credit
Documents for a description of the properties and assets in which a security
interest has been granted, the nature and extent of the
Term Note
<PAGE>
- 2 -
security and the guarantees, the terms and conditions upon which the security
interests and each guarantee were granted and the rights of the holder of this
Note in respect thereof.
Upon the occurrence of any one or more of the Events of Default, all
principal and all accrued interest then remaining unpaid on this Note shall
become, or may be declared to be, immediately due and payable, all as provided
in the Credit Agreement.
All parties now and hereafter liable with respect to this Note,
whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive
presentment, demand, protest and all other notices of any kind.
Unless otherwise defined herein, terms defined in the Credit
Agreement and used herein shall have the meanings given to them in the Credit
Agreement
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN OR IN THE
CREDIT AGREEMENT, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AND IN
ACCORDANCE WITH THE REGISTRATION AND OTHER PROVISIONS OF SECTION 9.6 OF THE
CREDIT AGREEMENT.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
BIRCH TELECOM FINANCE, INC.
By:___________________________
Name:
Title:
Term Note
<PAGE>
Schedule A
to Term Note
<TABLE>
<CAPTION>
LOANS, CONVERSIONS AND REPAYMENT OF BASE RATE LOANS
- ------------------------------------------------------------------------------------------------------------------
Amount of Amount of Base Unpaid
Amount Principal of Rate Loans Principal
Amount of Base Converted to Base Rate Loans Converted to Balance of
Date Rate Loans Base Rate Loans Repaid Eurodollar Loans Base Rate Loans Notation Made By
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Term Note
<PAGE>
Schedule B
to Term Note
<TABLE>
<CAPTION>
LOANS, CONVERSIONS AND REPAYMENT OF EURODOLLAR LOANS
- ----------------------------------------------------------------------------------------------------------------------
Interest Amount of Unpaid
Amount Period and Amount of Eurodollar Principal
Amount of Converted to Eurodollar Principal of Loans Balance of
Eurodollar Eurodollar Rate with Eurodollar Converted to Eurodollar Notation
Date Loans Loans Respect Thereto Loans Repaid Base Rate Loans Loans Made By
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Term Note
<PAGE>
EXHIBIT F-2
[FORM OF REVOLVING CREDIT NOTE]
THIS NOTE AND THE OBLIGATIONS REPRESENTED HEREBY MAY NOT BE TRANSFERRED EXCEPT
IN COMPLIANCE WITH THE TERMS AND PROVISIONS OF THE CREDIT AGREEMENT REFERRED TO
BELOW. TRANSFERS OF THIS NOTE AND THE OBLIGATIONS REPRESENTED HEREBY MUST BE
RECORDED IN THE REGISTER MAINTAINED BY THE ADMINISTRATIVE AGENT PURSUANT TO THE
TERMS OF SUCH CREDIT AGREEMENT.
$_____________ New York, New York
FOR VALUE RECEIVED, the undersigned, BIRCH TELECOM FINANCE, INC., a
corporation duly organized and validly existing under the law of the State of
Delaware (the "Borrower"), hereby unconditionally promises to pay to ___________
(the "Lender") or its registered assigns at the Payment Office specified in the
Credit Agreement (as hereinafter defined) in lawful money of the United States
and in immediately available funds, on the Revolving Credit Termination Date the
principal amount of (a) ___________ ($________), or, if less, (b) the aggregate
unpaid principal amount of all Revolving Credit Loans made by the Lender to the
Borrower pursuant to Section 2.4 of the Credit Agreement. The Borrower further
agrees to pay interest in like money at such Payment Office on the unpaid
principal amount hereof from time to time outstanding at the rates and on the
dates specified in Section 2.15 of the Credit Agreement.
The holder of this Note is authorized to endorse on the schedules
annexed hereto and made a part hereof or on a continuation thereof which shall
be attached hereto and made a part hereof the date, Type and amount of each
Revolving Credit Loan made pursuant to the Credit Agreement and the date and
amount of each payment or prepayment of principal thereof, each continuation
thereof, each conversion of all or a portion thereof to another Type and, in the
case of Eurodollar Loans, the length of each Interest Period with respect
thereto. Each such endorsement shall constitute prima facie evidence of the
accuracy of the information endorsed. The failure to make any such endorsement
or any error in any such endorsement shall not affect the obligations of the
Borrower in respect of any Revolving Credit Loan.
This Note (a) is one of the Revolving Credit Notes referred to in
the Amended and Restated Credit Agreement dated as of February 2, 2000 (as
amended, supplemented or otherwise modified from time to time, the "Credit
Agreement"), among BIRCH TELECOM, INC., the Borrower, the several banks and
other financial institutions or entities from time to time parties thereto (the
"Lenders"), and LEHMAN COMMERCIAL PAPER INC., as administrative agent (in such
capacity, the "Administrative Agent"), (b) is subject to the provisions of the
Credit Agreement and (c) is subject to optional and mandatory prepayment in
whole or in part as provided in the Credit Agreement. This Note is secured and
guaranteed as provided in the Credit Documents. Reference is hereby made to the
Credit Documents for a
Revolving Credit Note
<PAGE>
- 2 -
description of the properties and assets in which a security interest has been
granted, the nature and extent of the security and the guarantees, the terms and
conditions upon which the security interests and each guarantee were granted and
the rights of the holder of this Note in respect thereof.
Upon the occurrence of any one or more of the Events of Default, all
principal and all accrued interest then remaining unpaid on this Note shall
become, or may be declared to be, immediately due and payable, all as provided
in the Credit Agreement.
All parties now and hereafter liable with respect to this Note,
whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive
presentment, demand, protest and all other notices of any kind.
Unless otherwise defined herein, terms defined in the Credit
Agreement and used herein shall have the meanings given to them in the Credit
Agreement.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN OR IN THE
CREDIT AGREEMENT, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AND IN
ACCORDANCE WITH THE REGISTRATION AND OTHER PROVISIONS OF SECTION 9.6 OF THE
CREDIT AGREEMENT.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
BIRCH TELECOM FINANCE, INC.
By:___________________________
Name:
Title:
Revolving Credit Note
<PAGE>
Schedule A
to Revolving Credit Note
<TABLE>
<CAPTION>
LOANS, CONVERSIONS AND REPAYMENT OF BASE RATE LOANS
- ------------------------------------------------------------------------------------------------------------------
Amount of Amount of Base Unpaid
Amount Principal of Rate Loans Principal
Amount of Base Converted to Base Rate Loans Converted to Balance of
Date Rate Loans Base Rate Loans Repaid Eurodollar Loans Base Rate Loans Notation Made By
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Revolving Credit Note
<PAGE>
Schedule B
to Revolving Credit Note
<TABLE>
<CAPTION>
LOANS, CONVERSIONS AND REPAYMENT OF EURODOLLAR LOANS
- ----------------------------------------------------------------------------------------------------------------------
Interest Amount of Unpaid
Amount Period and Amount of Eurodollar Principal
Amount of Converted to Eurodollar Principal of Loans Balance of
Eurodollar Eurodollar Rate with Eurodollar Converted to Eurodollar Notation
Date Loans Loans Respect Thereto Loans Repaid Base Rate Loans Loans Made By
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Revolving Credit Note
<PAGE>
EXHIBIT F-3
[FORM OF SWING LINE NOTE]
THIS NOTE AND THE OBLIGATIONS REPRESENTED HEREBY MAY NOT BE TRANSFERRED EXCEPT
IN COMPLIANCE WITH THE TERMS AND PROVISIONS OF THE CREDIT AGREEMENT REFERRED TO
BELOW. TRANSFERS OF THIS NOTE AND THE OBLIGATIONS REPRESENTED HEREBY MUST BE
RECORDED IN THE REGISTER MAINTAINED BY THE ADMINISTRATIVE AGENT PURSUANT TO THE
TERMS OF SUCH CREDIT AGREEMENT.
$___________ New York, New York
FOR VALUE RECEIVED, BIRCH TELECOM FINANCE, INC., a corporation duly
organized and validly existing under the law of the State of Delaware (the
"Borrower"), hereby unconditionally promises to pay to ___________ (the "Swing
Line Lender") or its registered assigns at the Payment Office specified in the
Credit Agreement (as hereinafter defined) in lawful money of the United States
and in immediately available funds, on the Revolving Credit Termination Date the
principal amount of (a) ___________ ($________), or, if less, (b) the aggregate
unpaid principal amount of all Swing Line Loans made by the Swing Line Lender to
the Borrower pursuant to Section 2.6 of the Credit Agreement, as hereinafter
defined. The Borrower further agrees to pay interest in like money at such
office on the unpaid principal amount hereof from time to time outstanding at
the rates and on the dates specified in Section 2.15 of such Credit Agreement.
The holder of this Note is authorized to endorse on the schedules
annexed hereto and made a part hereof or on a continuation thereof which shall
be attached hereto and made a part hereof the date and amount of each Swing Line
Loan made pursuant to the Credit Agreement and the date and amount of each
payment or prepayment of principal thereof. Each such endorsement shall
constitute prima facie evidence of the accuracy of the information endorsed. The
failure to make any such endorsement or any error in any such endorsement shall
not affect the obligations of the Borrower in respect of any Swing Line Loan.
This Note (a) is the Swing Line Note referred to in the Amended and
Restated Credit Agreement dated as of February 2, 2000 (as amended, supplemented
or otherwise modified from time to time, the "Credit Agreement"), among BIRCH
TELECOM, INC., the Borrower, the several banks and other financial institutions
or entities from time to time parties thereto (the "Lenders"), and LEHMAN
COMMERCIAL PAPER INC., as administrative agent (in such capacity, the
"Administrative Agent"), (b) is subject to the provisions of the Credit
Agreement and (c) is subject to optional and mandatory prepayment in whole or in
part as provided in the Credit Agreement. This Note is secured and guaranteed as
provided in the Credit Documents. Reference is hereby made to the Credit
Documents for a description of the properties and assets in which a security
interest has been granted, the nature and extent of the security and the
guarantees, the terms and conditions upon which the security interests and each
guarantee were granted and the rights of the holder of this Note in respect
thereof.
Swing Line Note
<PAGE>
- 2 -
Upon the occurrence of any one or more of the Events of Default, all
principal and all accrued interest then remaining unpaid on this Note shall
become, or may be declared to be, immediately due and payable, all as provided
in the Credit Agreement.
All parties now and hereafter liable with respect to this Note,
whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive
presentment, demand, protest and all other notices of any kind.
Unless otherwise defined herein, terms defined in the Credit
Agreement and used herein shall have the meanings given to them in the Credit
Agreement.
NOTWITHSTANDING ANYTHING TO TIRE CONTRARY CONTAINED HEREIN OR IN THE
CREDIT AGREEMENT, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AND IN
ACCORDANCE WITH THE REGISTRATION AND OTHER PROVISIONS OF SECTION 9.6 OF THE
CREDIT AGREEMENT.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK
BIRCH TELECOM FINANCE, INC.
By:___________________________
Name:
Title:
Swing Line Note
<PAGE>
Schedule A
to Swing Line Note
<TABLE>
<CAPTION>
LOANS, CONVERSIONS AND REPAYMENT OF BASE RATE LOANS
`
- ----------------------------------------------------------------------------------------------
Amount of Principal Unpaid Principal
Amount of of Swing Line Loans Balance of Swing Notation Made
Date Swing Line Loans Repaid Line Loans By
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
Swing Line Note
<PAGE>
EXHIBIT G
[FORM OF NON-U.S. LENDER CERTIFICATE]
Reference is made to the Amended and Restated Credit Agreement,
dated as of February 2, 2000 (as amended, supplemented or otherwise modified
from time to time, the "Credit Agreement") among BIRCH TELECOM, INC., a
corporation duly organized and validly existing under the law of the State of
Delaware (the "Company"), BIRCH TELECOM FINANCE, INC., a corporation duly
organized and validly existing under the law of the State of Delaware (the
"Borrower"), the several banks and other financial institutions or entities from
time to time parties thereto (the "Lenders") and LEHMAN COMMERCIAL PAPER INC.,
as administrative agent (in such capacity, the "Administrative Agent").
Capitalized terms used herein that are not defined herein shall have the
meanings ascribed to them in the Credit Agreement.
_____________ (the "Non-U.S. Lender") is providing this certificate
pursuant to Section 2.20(d) of the Credit Agreement. The Non-U.S. Lender hereby
represents and warrants that:
1. The Non-U.S. Lender is the sole record and beneficial owner of
the Loans or the obligations evidenced by Note(s) in respect of which it
is providing this certificate;
2. The Non-U.S. Lender is not a "bank" for purposes of Section
881(c)(3)(A) of the Internal Revenue Code of 1986, as amended (the
"Code"). In this regard, the Non-U.S. Lender further represents and
warrants that:
(a) the Non-U.S. Lender is not subject to regulatory or other
legal requirements as a bank in any jurisdiction; and
(b) the Non-U.S. Lender has not been treated as a bank for
purposes of any tax, securities law or other filing or
submission made to any Governmental Authority, any application
made to a rating agency or qualification for any exemption
from tax, securities law or other legal requirements;
3. The Non-U.S. Lender is not a 10-percent shareholder of the
Borrower within the meaning of Section 881(c)(3)(B) of the Code; and
Non-U.S. Lender Certificate
<PAGE>
- 2 -
4. The Non-U.S. Lender is not a controlled foreign corporation
receiving interest from a related person within the meaning of Section
881(c)(3)(C) of the Code.
IN WITNESS WHEREOF, the undersigned has duly executed this
certificate.
[NAME OF NON-U.S. LENDER]
By:___________________________
Name:
Title:
Date: ________________
Non-U.S. Lender Certificate
<PAGE>
EXHIBIT H
[FORM OF LENDER ADDENDUM]
Reference is made to the Amended and Restated Credit Agreement,
dated as of February 2, 2000 (as amended, supplemented or otherwise modified
from time to time, the "Credit Agreement"), among BIRCH TELECOM, INC., a
corporation duly organized and validly existing under the law of the State of
Delaware (the "Company"), BIRCH TELECOM FINANCE, INC., a corporation duly
organized and validly existing under the law of the State of Delaware (the
"Borrower"), the several banks and other financial institutions or entities from
time to time parties thereto (the "Lenders") and LEHMAN COMMERCIAL PAPER INC.,
as administrative agent (in such capacity, the "Administrative Agent"). Unless
otherwise defined herein, terms defined in the Credit Agreement and used herein
shall have the meanings given to them in the Credit Agreement.
Upon execution and delivery of this Lender Addendum by the parties
hereto as provided in Section 9.16 of the Credit Agreement, the undersigned
hereby becomes a Lender thereunder having the Commitments set forth in Schedule
I hereto, effective as of the Closing Date.
THIS LENDER ADDENDUM SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
This Lender Addendum may be executed by one or more of the parties
hereto on any number of separate counterparts, and all of said counterparts
taken together shall be deemed to constitute one and the same instrument.
Delivery of an executed signature page hereof by facsimile transmission shall be
effective as delivery of a manually executed counterpart hereof.
Lender Addendum
<PAGE>
- 2 -
IN WITNESS WHEREOF, the parties hereto have caused this Lender
Addendum to be duly executed and delivered by their proper and duly authorized
officers as of this ___ day of February, 2000.
[NAME OF LENDER]
By:___________________________
Name:
Title:
Accepted and agreed:
BIRCH TELECOM FINANCE, INC.
By:___________________________
Name:
Title:
LEHMAN COMMERCIAL PAPER INC.,
as Administrative Agent
By:___________________________
Name:
Title:
Lender Addendum
<PAGE>
Schedule I
to
Lender Addendum
Name of Lender Revolving Credit Commitment Term Loan Commitment
- -------------- --------------------------- --------------------
<PAGE>
EXHIBIT I
FORM OF NOTICE OF BORROWING
[DATE]
Lehman Commercial Paper Inc.,
as Administrative Agent for the
Lenders party to the Credit Agreement
referred to below
Ladies and Gentlemen:
The undersigned refers to the Amended and Restated Credit Agreement,
dated as of February 2, 2000 (as amended, supplemented or otherwise modified
from time to time, the "Credit Agreement"; the terms defined therein being used
herein as therein defined), among BIRCH TELECOM, INC., a corporation duly
organized and validly existing under the law of the State of Delaware (the
"Company"), BIRCH TELECOM FINANCE, INC., a corporation duly organized and
validly existing under the law of the State of Delaware (the "Borrower"), the
several banks and other financial institutions or entities from time to time
parties thereto (the "Lenders") and LEHMAN COMMERCIAL PAPER INC., as
administrative agent (in such capacity, the "Administrative Agent"), and hereby
gives you irrevocable notice, pursuant to Section [2.2/2.5] of the Credit
Agreement, that the undersigned hereby requests a Borrowing under the Credit
Agreement, and in that connection sets forth below the information relating to
such Borrowing (the "Proposed Borrowing") as required by Section [2.2/2.5] of
the Credit Agreement:
(i) The requested Borrowing Date of the Proposed Borrowing is
__________, ____.1
(ii) The aggregate principal amount of the Proposed Borrowing is
$_______.
(iii) The Proposed Borrowing is to consist of [Base Rate Loans]
[Eurodollar Loans.]
[(iv) The initial Interest Period for the Proposed Borrowing is
______ months.]2
The undersigned hereby certifies that the following statements are
true on the date hereof, and will be true on the date of the Proposed Borrowing:
- --------------------
1 A notice of Borrowing must be given no later than 12:00 Noon (New York City
time) one Business Day prior to the Proposed Borrowing in the case of a Base
Rate Borrowing and no later than 12:00 noon (New York City time) three Business
Days prior to the date of the Proposed Borrowing in the case of a Eurodollar
Borrowing.
2 To be included for a Proposed Borrowing of Eurodollar Loans.
Notice of Borrowing
<PAGE>
- 2 -
(A) the representations and warranties contained in the Credit Agreement
or the other Credit Documents are and will be true and correct,
before and after giving effect to the Proposed Borrowing and to the
application of the proceeds thereof, as though made on and as of
such date, unless stated to relate to a specific earlier date, in
which case such representations and warranties shall be true and
correct as of such earlier date; and
(B) no Default or Event of Default has occurred and is continuing, or
would result from the Proposed Borrowing or from the application of
the proceeds thereof.
Very truly yours,
BIRCH TELECOM FINANCE, INC.
By_______________________________
Name:
Title:
Notice of Borrowing
<PAGE>
Exhibit 10.22
AMENDED EMPLOYMENT AGREEMENT
THIS AMENDED EMPLOYMENT AGREEMENT (this "Agreement") is made as of October
7, 1999 by BIRCH TELECOM, INC., a Delaware corporation (the "Company"), and
BRADLEY A. MOLINE, an individual (the "Employee").
The Company and the Employee desire for the Employee to be employed by the
Company upon the terms and conditions set forth in this Agreement. This
Agreement further amends and restates the Employment Agreement dated February
10, 1998, as amended by the Amendment to Employment Agreement dated August 5,
1999.
The parties, intending to be legally bound, agree as follows:
1. Definitions
For the purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1.
1.1 "Agreement" shall mean this Employment Agreement, as amended from time
to time.
1.2 "Affiliate" shall mean:
(a) any partnership, limited liability company, corporation or other
entity if the Company owns more than 25% of the equity securities or
interests of such entity; or
(b) any such entity which owns more than 25% of the equity
securities of the Company (and, for the purpose of this Section 1.2, any
options to acquire equity securities shall be treated as having been fully
exercised, and any securities convertible into equity securities shall be
treated as having been fully converted).
1.3 "Benefits" shall mean as defined in Section 3.1(b).
1.4 "Board of Directors" shall mean the board of directors of the Company.
1.5 "Competitive Business" shall mean any business which directly or
indirectly provides any local exchange telecommunications service that is the
same as or substantially similar to any local exchange telecommunications
service provided by the Company.
1.6 "Cause" shall mean as defined in Section 6.3.
1.7 "Change in Control" means any of the following: (i) the sale of all or
substantially all of the Company's (or its Affiliates') assets that results in
the liquidation of the Company and the payment of liquidating distributions to
the stockholders of the Company; (ii) the acquisition of the Company by another
entity by means of a merger or consolidation resulting in the exchange of the
1
<PAGE>
outstanding shares of the Company's capital stock for securities or
consideration issued or paid or caused to be issued or paid by the acquiring
entity or its subsidiary; or (iii) the acquisition from one or more of the
stockholders of the Company of more than 50% of the voting stock of the Company
by a single person or group of persons acting together.
1.8 "Confidential Information" shall mean any and all:
(a) trade secrets concerning the business and affairs of the
Company, the Company's product and service specifications, data, formulae,
compositions, processes, designs, sketches, photographs, maps, engineering
studies, graphs, drawings, samples, inventions and ideas, past, current,
and planned research and development, current and planned methods and
processes, customer and supplier lists, current and anticipated customer
requirements, price lists, bid information, market studies, business
plans, computer software and programs (including object code and source
code), computer software and database technologies, systems, structures,
and architectures (and related formulae, compositions, processes,
improvements, devices, inventions, discoveries, concepts, ideas, designs,
methods and information), and any other information, however documented,
that is a trade secret within the meaning of the Missouri Uniform Trade
Secrets Act; and
(b) information concerning the business and affairs of the Company
(which includes without limitation, historical financial statements,
financial projections and budgets, historical and projected sales, capital
spending budgets and plans, the names and backgrounds of key personnel and
personnel training techniques and materials), however documented; and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for the Company containing or based, in whole or
in part, on any information included in the foregoing.
1.9 "Disability" shall mean as defined in Section 6.2.
1.10 "Employee Invention" shall mean any idea, invention, technique,
modification, process, or improvement (whether patentable or not), any
industrial design (whether registerable or not), any mask work, however fixed or
encoded, that is suitable to be fixed, embedded or programmed in a semiconductor
product (whether recordable or not), and any work of authorship (whether or not
copyright protection may be obtained for it) created, conceived, or developed by
the Employee, either solely or in conjunction with others, during the Employment
Period, or a period that includes a portion of the Employment Period, that
relates in any way to, or is useful in any manner in, the business then being
conducted or proposed to be conducted by the Company, and any such item created
by the Employee, either solely or in conjunction with others, following
termination of the Employee's employment with the Company, that is based upon or
uses Confidential Information.
1.11 "Employment Period" shall mean the term of the Employee's employment
under this Agreement.
2
<PAGE>
1.12 "Good Reason" shall mean as defined in Section 6.4.
1.13 "Person" shall mean any individual, corporation (including any
non-profit corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization, or
governmental body.
1.14 "Post-Employment Period" shall mean the one-year period beginning on
the date of termination of the Employee's employment with the Company.
1.15 "Proprietary Items" shall mean as defined in Section 7.2(a)(iv).
1.16 "Salary" shall mean as defined in Section 3.1(a).
1.17 "Territory" shall mean
(a) the states of Missouri and Kansas; and
(b) any metropolitan areas outside of Missouri and Kansas, if at the
time the Employee ceases to be employed by the Company (i) the Company or
any Affiliate is providing a local exchange telecommunications service
within the metropolitan area, or (ii) a detailed business development plan
has been prepared, or is in the process of being prepared, by or on behalf
of the Company, in order to evaluate whether the Company should provide
local exchange telecommunications services within the metropolitan area
within twelve months after the date Employee ceases to be employed by the
Company, and the Board of Directors has not formally resolved against
providing such services in such metropolitan area.
2. Employment Terms and Duties
2.1 Employment. The Company hereby employs the Employee, and the Employee
hereby accepts employment by the Company, upon the terms and conditions set
forth in this Agreement.
2.2 Term. Subject to the provisions of Section 6, the term of this
Agreement shall be one year, commencing on February 10, 1998. Thereafter, this
Agreement shall be renewed automatically from year to year unless either party
shall have given written notice of termination to the other party at least
ninety (90) days prior to the end of the current term of this Agreement.
2.3 Duties. The Employee will have such duties as are assigned or
delegated to the Employee by the Board of Directors and President and will serve
as the Senior Vice President of Finance and Chief Financial Officer of the
Company. The Employee will devote substantially all his business time and
attention to the business of the Company, will act in good faith to promote the
success of the Company's business, and will cooperate fully with the Board of
Directors and President in the advancement of the best interests of the Company.
Nothing in this Section 2.3,
3
<PAGE>
however, will prevent the Employee from engaging in additional activities in
connection with personal investments and community affairs that are not
inconsistent with the Employee's duties under this Agreement (which community
affairs shall be disclosed to and approved by the President). If the Employee
serves as a director of the Company or as a director or officer of any of its
Affiliates, the Employee will fulfill his duties as such director or officer
without additional compensation.
3. Compensation
3.1 Basic Compensation.
(a) Salary. The Employee will be paid a minimum base annual salary
of $200,000 (the "Salary"), which will be payable in equal periodic
installments according to the Company's customary payroll practices, but
no less frequently than monthly. The Salary may be increased by the
Compensation Committee or Board of Directors of the Company during the
term of this Agreement, and when increased, such higher amount shall then
be the minimum base annual salary under this Agreement. The Salary shall
not be reduced below the highest minimum base annual salary fixed from
time to time by the Compensation Committee or Board of Directors of the
Company without the Employee's written consent. When increased or
decreased in accordance with the terms of this Agreement, the new minimum
base annual salary shall be deemed the Employee's "Salary" for all
purposes of this Agreement.
(b) Benefits. The Employee will, during the Employment Period, be
permitted to participate in such pension, profit sharing, bonus, life
insurance, disability insurance, hospitalization, major medical, and other
employee benefit plans of the Company that may be in effect from time to
time, to the extent the Employee is eligible under the terms of such plans
(collectively, the "Benefits").
3.2 Incentive Compensation. The Employee shall be entitled to participate
in an incentive bonus program established by the Board of Directors or the
Compensation Committee of the Board of Directors to measure and reward
management for the financial performance of the Company. The Employee's initial
annual targeted incentive compensation shall be $50,000; provided, however, that
the payment of any incentive compensation shall be at the discretion of the
Compensation Committee of the Board of Directors, which may consider any factors
it deems relevant, including the assessment of the performance of the Employee
and the Company during the relevant time period.
4. Facilities and Expenses
The Company will furnish the Employee office space, equipment, supplies, and
such other facilities and personnel as the Company deems necessary or
appropriate for the performance of the Employee's duties under this Agreement.
The Company will pay the Employee's dues in such professional societies and
organizations as the President deems appropriate, and will pay on behalf of the
Employee (or reimburse the Employee for) reasonable expenses incurred by the
Employee at the request of, or on behalf of, the Company in the performance of
the Employee's duties pursuant
4
<PAGE>
to this Agreement, and in accordance with the Company's employment policies,
including reasonable expenses incurred by the Employee in attending conventions,
seminars, and other business meetings, in appropriate business entertainment
activities, and for promotional expenses.
5. Vacations and Holidays
The Employee will be entitled to paid vacation in accordance with the vacation
policies of the Company in effect for its employee officers from time to time.
Vacation must be taken by the Employee at such time or times as approved by the
President. The Employee will also be entitled to the paid holidays set forth in
the Company's policies.
6. Termination
6.1 Events of Termination. The Employment Period, the Employee's Salary,
Benefits, and Incentive Compensation, and any and all other rights of the
Employee under this Agreement will terminate (except as otherwise provided in
this Section 6):
(a) upon the death of the Employee;
(b) upon the Disability of the Employee (as defined in Section 6.2)
immediately upon notice from either party to the other;
(c) for Cause (as defined in Section 6.3), immediately upon notice
from the Company to the Employee, or at such later time as such notice may
specify;
(d) for Good Reason (as defined in Section 6.4) upon not less than
thirty days' prior notice from the Employee to the Company; or
(e) without Cause upon not less than thirty days' notice from the
Company to the Employee.
6.2 Definition of "Disability." For purposes of Section 6.1, the Employee
will be deemed to have a "Disability" if, for physical or mental reasons, the
Employee is unable to perform the Employee's duties under this Agreement for 120
consecutive days, or 180 days during any twelve month period, as determined in
accordance with this Section 6.2. The Disability of the Employee will be
determined by a medical doctor selected by written agreement of the Company and
the Employee upon the request of either party by notice to the other. If the
Company and the Employee cannot agree on the selection of a medical doctor, each
of them will select a medical doctor and the two medical doctors will select a
third medical doctor who will determine whether the Employee has a Disability.
The determination of the medical doctor selected under this Section 6.2 will be
binding on both parties. The Employee must submit to a reasonable number of
examinations by the medical doctor making the determination of Disability under
this Section 6.2, and to other specialists designated by such medical doctor,
and the Employee hereby authorizes the disclosure and release to the Company of
such determination and all supporting medical records. If the Employee is not
legally competent, the Employee's legal guardian or duly authorized
5
<PAGE>
attorney-in-fact will act in the Employee's stead under this Section 6.2 for the
purposes of submitting the Employee to the examinations, and providing the
authorization of disclosure, required under this Section 6.2.
6.3 Definition of "Cause." For purposes of Section 6.1, the term "Cause"
means: (a) the Employee's breach of a material obligation under this Agreement;
(b) the Employee's failure to adhere in any material respect to any written
Company policy if such policy is material to the effective performance by the
Employee of his duties under this Agreement, and if the Employee has been given
a reasonable opportunity to cure his failure to comply within the thirty-day
period preceding termination of this Agreement, provided that if the Employee
cures his failure to comply with such a policy and then fails again to comply
with the same policy, no further opportunity to cure that failure shall be
required; (c) the appropriation (or attempted appropriation) of a material
business opportunity of the Company, including attempting to secure or securing
any personal profit in connection with any transaction entered into on behalf of
the Company (other than through stock options, bonuses and other incentives
provided by the Company to the Employee); (d) the misappropriation (or attempted
misappropriation) of any of the Company's funds or property; or (e) the
conviction of, or the entering of a guilty plea or plea of no contest with
respect to, a felony, or a crime involving moral turpitude, dishonesty, or
fraud.
6.4 Definition of "Good Reason." For purposes of Section 6.1, the term
"Good Reason" shall mean (a) a substantial reduction in the Employee's duties or
responsibilities, (b) any reduction in Employee's Salary, or (c) relocation of
the Employee's primary workplace to a location that is greater than 35 miles
from the Employee's current workplace, in each case which is not cured within 30
days following the Company's receipt of written notice from the Employee
describing the event constituting Good Reason.
6.5 Termination Pay. Effective upon the expiration or termination of this
Agreement, the Company will be obligated to pay the Employee (or, in the event
of his death, his designated beneficiary as defined below) only such
compensation as is provided in this Section 6.5. For purposes of this Section
6.5 the Employee's designated beneficiary will be such individual beneficiary or
trust, located at such address, as the Employee may designate by notice to the
Company from time to time or, if the Employee fails to give notice to the
Company of such a beneficiary, the Employee's estate. Notwithstanding the
preceding sentence, the Company will have no duty, in any circumstances, to
attempt to open an estate on behalf of the Employee, to determine whether any
beneficiary designated by the Employee is alive or to ascertain the address of
any such beneficiary, to determine the existence of any trust, to determine
whether any Person purporting to act as the Employee's personal representative
(or the trustee of a trust established by the Employee) is duly authorized to
act in that capacity, or to locate or attempt to locate any beneficiary,
personal representative, or trustee.
(a) Termination by the Employee for Good Reason or by the Company without
Cause. If the Employee terminates this Agreement for Good Reason, or if
the Company terminates this Agreement other than for Cause (but not
because of the Disability or death of the Employee), or if the Company
notifies the Employee in accordance with Section 2.2 that this Agreement
will not be renewed as of an applicable expiration date, the Company will
6
<PAGE>
pay the Employee (i) the Employee's Salary for the remainder, if any, of
the calendar month in which such termination is effective and for twelve
consecutive calendar months thereafter, (ii) the amount of the Employee's
targeted incentive compensation for the year during which the termination
is effective (prorated for the period from the beginning of the year until
the effective date of termination), and (iii) with respect to the
Post-Employment Period, an additional amount equal to the full amount of
the Employee's targeted incentive compensation for the year in which the
termination was effective (such amount to be determined as if the Employee
had been employed for the entire year and not prorated as described in
clause (ii) above), payable in equal monthly installments over the
Post-Employment Period. Notwithstanding the preceding sentence, if the
Employee obtains other employment prior to the end of the Post-Employment
Period or any extension thereof, he must promptly give notice thereof to
the Company, and the payments under this Agreement for any period after
the Employee obtains other employment will be reduced by the amount of the
cash compensation received and to be received by the Employee from the
Employee's other employment for services performed during such period.
(b) Termination by the Company for Cause. If the Company terminates
this Agreement for Cause, the Employee will be entitled to receive his
Salary only through the date such termination is effective.
(c) Termination upon Disability. If this Agreement is terminated by
either party as a result of the Employee's Disability, as determined under
Section 6.2, the Company will pay the Employee his Salary through the
remainder of the calendar month during which such termination is effective
and for the lesser of (i) six consecutive months thereafter, or (ii) the
period until disability insurance benefits commence under any disability
insurance coverage furnished by the Company to the Employee.
(d) Termination upon Death. If this Agreement is terminated because
of the Employee's death, the Employee will be entitled to receive his
Salary through the end of the calendar month in which his death occurs.
(e) Benefits. Except as otherwise required by law, the Employee's
accrual of, or participation in plans providing for, the Benefits will
cease at the effective date of the termination of this Agreement, and the
Employee will be entitled to accrued Benefits pursuant to such plans only
as provided in such plans.
7. Non-Disclosure Covenant; Employee Inventions
7.1 Acknowledgments by the Employee. The Employee acknowledges that (a)
during the Employment Period and as a part of his employment, the Employee will
be afforded access to Confidential Information; (b) public disclosure of such
Confidential Information could have an adverse effect on the Company and its
business; (c) because the Employee possesses substantial technical expertise and
skill with respect to the Company's business, the Company desires to obtain
exclusive ownership of each Employee Invention, and the Company will be at a
substantial
7
<PAGE>
competitive disadvantage if it fails to acquire exclusive ownership of each
Employee Invention; and (d) the provisions of this Section 7 are reasonable and
necessary to prevent the improper use or disclosure of Confidential Information
and to provide the Company with exclusive ownership of all Employee Inventions.
7.2 Agreements of the Employee. In consideration of the compensation and
benefits to be paid or provided to the Employee by the Company under this
Agreement, the Employee covenants as follows:
(a) Confidentiality.
(i) During and following the Employment Period, the Employee
will hold in confidence the Confidential Information and will not
disclose it to any Person except with the specific prior written
consent of the Company or except as otherwise expressly permitted by
the terms of this Agreement.
(ii) Any trade secrets of the Company will be entitled to all
of the protections and benefits under the Missouri Uniform Trade
Secrets Act and any other applicable law. If any information that
the Company deems to be a trade secret is found by a court of
competent jurisdiction not to be a trade secret for purposes of this
Agreement, such information will, nevertheless, be considered
Confidential Information for purposes of this Agreement. The
Employee hereby waives any requirement that the Company submit proof
of the economic value of any trade secret or post a bond or other
security.
(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information that the
Employee demonstrates was or became generally available to the
public other than as a result of a disclosure by the Employee or by
any other Person bound by a confidentiality obligation to the
Company in respect of such Confidential Information.
(iv) The Employee will not remove from the Company's premises
(except to the extent such removal is for purposes of the
performance of the Employee's duties at home or while traveling, or
except as otherwise specifically authorized by the Company) any
Company document, record, notebook, plan, model, component, device,
or computer software or code, whether embodied in a disk or in any
other form (collectively, the "Proprietary Items"). The Employee
recognizes that, as between the Company and the Employee, all of the
Proprietary Items, whether or not developed by the Employee, are the
exclusive property of the Company. Upon termination of this
Agreement by either party, or upon the request of the Company during
the Employment Period, the Employee will return to the Company all
of the Proprietary Items in the Employee's possession or subject to
the Employee's control, and the Employee shall not retain any
copies, abstracts, sketches, or other physical embodiment of any of
the Proprietary Items.
8
<PAGE>
(b) Employee Inventions. Each Employee Invention will belong
exclusively to the Company. The Employee acknowledges that all Employee
Inventions are works made for hire and are the property of the Company,
including any copyrights, patents, or other intellectual property rights
pertaining thereto. If it is determined that any such works are not works
made for hire, the Employee hereby assigns to the Company all of the
Employee's right, title, and interest, including all rights of copyright,
patent, and other intellectual property rights, to or in such Employee
Inventions. The Employee will promptly:
(i) disclose to the Company in writing any Employee Invention;
(ii) assign to the Company or to a party designated by the
Company, at the Company's request and without additional
compensation, all of the Employee's right to the Employee Invention
for the United States and all foreign jurisdictions;
(iii) execute and deliver to the Company such applications,
assignments, and other documents as the Company may request in order
to apply for and obtain patents or other registrations with respect
to any Employee Invention in the United States and any foreign
jurisdictions;
(iv) sign all other papers necessary to carry out the above
obligations; and
(v) give testimony and render any other assistance in support
of the Company's rights to any Employee Invention.
Notwithstanding anything to the contrary herein, provisions otherwise
requiring the Employee to assign to the Company any invention conceived by
the Employee shall not apply to an invention for which no equipment,
supplies, facilities or trade secret information of the Company was used
and which was developed entirely on the Employee's own time, unless the
invention relates to the business of the Company or to the Company's
actual or demonstrably anticipated research or development, or the
invention results from any work performed by the Employee for the Company.
7.3 Disputes or Controversies. The Employee recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Company, the Employee, and their respective attorneys and experts, who will
agree, in advance and in writing, to receive and maintain all such information
in secrecy, except as may be limited by them in writing.
8. Non-Competition and Non-Interference
8.1 Acknowledgments by the Employee. The Employee acknowledges that: (a)
the services to be performed by him under this Agreement are of a special,
unique, unusual, extraordinary, and intellectual character; (b) the Company
competes with other businesses that are
9
<PAGE>
or could be located in any part of the Territory; and (c) the provisions of this
Section 8 are reasonable and necessary to protect the Company's business.
8.2 Covenants of the Employee. In consideration of the acknowledgments by
the Employee, and in consideration of the compensation and benefits to be paid
or provided to the Employee by the Company, the Employee covenants that he will
not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post-Employment Period, engage or
invest in, own, manage, operate, finance, control, or participate in the
ownership, management, operation, financing, or control of, be employed
by, associated with, or in any manner connected with, lend the Employee's
name or any similar name to, lend Employee's credit to or render services
or advice to, any Competitive Business within the Territory; provided,
however, that the Employee may purchase or otherwise acquire up to (but
not more than) one percent of any class of securities of any enterprise
(but without otherwise participating in the activities of such enterprise)
if such securities are listed on any national or regional securities
exchange or have been registered under Section 12(g) of the Securities
Exchange Act of 1934;
(b) whether for the Employee's own account or for the account of any
other Person, at any time during the Employment Period and the
Post-Employment Period, solicit business of the same or similar type being
carried on by the Company, from any Person known by the Employee to be a
customer of the Company, whether or not the Employee had personal contact
with such Person during and by reason of the Employee's employment with
the Company;
(c) whether for the Employee's own account or the account of any
other Person at any time during the Employment Period and the
Post-Employment Period, solicit, employ, or otherwise engage as an
employee, independent contractor, or otherwise, any person who is or was
an employee of the Company at any time during the Employment Period or in
any manner induce or attempt to induce any employee of the Company to
terminate his or her employment with the Company; or at any time during
the Employment Period and the Post-Employment Period, interfere with the
Company's relationship with any person, including any person who at any
time during the Employment Period was an employee, contractor, supplier,
or customer of the Company;
(d) at any time during the Employment Period and the Post-Employment
Period, disparage the Company or any of its shareholders, directors,
officers, employees, or agents.
8.3 Divisible Covenants. If any covenant in Section 8.2 is held to be
unreasonable, arbitrary, or against public policy, such covenant will be
considered to be divisible with respect to scope, time, and geographic area, and
such lesser scope, time, or geographic area, or all of them, as a court of
competent jurisdiction may determine to be reasonable, not arbitrary, and not
against public policy, will be effective, binding, and enforceable against the
Employee.
10
<PAGE>
8.4 Extension of Covenants. The period of time applicable to any covenant
in Section 8.2 will be extended by the duration of any violation by the Employee
of such covenant. In addition, the period of time applicable to the covenants in
Section 8.2 may be extended, at the option of the Company, for a period of one
year after the expiration of the Post-Employment Period, provided that all of
the following conditions have been satisfied: (a) the Company has, within sixty
days of the effective date of termination of Employee's employment, provided
notice to the Employee of the Company's election to extend the period applicable
to the covenants in Section 8.2 for an additional year, (b) the Company has paid
all termination payments it is obligated to pay Employee relating to the
Employment Period and the Post-Employment Period, and (c) for such additional
year after the Post-Employment Period, the Company pays the Employee the sum of
the Employee's Salary plus an amount equal to the full amount of the Employee's
targeted incentive compensation for the year in which the termination was
effective, payable in equal monthly installments over that year.
8.5 Notices. The Employee will, while the covenants under Section 8.2 are
in effect, give notice to the Company, within ten days after accepting any other
employment, of the identity of the Employee's new employer. The Company may
notify such new employer that the Employee is bound by this Agreement and, at
the Company's election, furnish such new employer with a copy of this Agreement
or relevant portions thereof.
9. General Provisions
9.1 Injunctive Relief and Additional Remedy. The Employee acknowledges
that the injury that would be suffered by the Company as a result of a breach of
the provisions of this Agreement (including any provision of Sections 7 and 8)
would be irreparable and that an award of monetary damages to the Company for
such a breach would be an inadequate remedy. Consequently, the Company will have
the right, in addition to any other rights it may have, to obtain injunctive
relief to restrain any breach or threatened breach or otherwise to specifically
enforce any provision of this Agreement, and the Company will not be obligated
to post bond or other security in seeking such relief. Without limiting the
Company's rights under this Section 9 or any other remedies of the Company, if
the Employee breaches any of the provisions of Section 7 or 8, the Company will
have the right to cease making any payments otherwise due to the Employee under
this Agreement.
9.2 Covenants of Sections 7 and 8 are Essential and Independent Covenants.
The covenants by the Employee in Sections 7 and 8 are essential elements of this
Agreement, and without the Employee's agreement to comply with such covenants,
the Company would not have entered into this Agreement or employed the Employee.
The Company and the Employee have independently consulted their respective
counsel and have been advised in all respects concerning the reasonableness and
propriety of such covenants, with specific regard to the nature of the business
conducted by the Company. The Employee's covenants in Sections 7 and 8 are
independent covenants and the existence of any claim by the Employee against the
Company, under this Agreement or otherwise, will not excuse the Employee's
breach of any covenant in Section 7 or 8. If the Employee's employment hereunder
expires or is terminated, this Agreement will continue in full force and effect
as is necessary or appropriate to enforce the covenants and agreements of the
Employee in Sections 7 and 8.
11
<PAGE>
9.3 Representations and Warranties by the Employee. The Employee
represents and warrants to the Company that the execution and delivery by the
Employee of this Agreement do not, and the performance by the Employee of the
Employee's obligations hereunder will not, with or without the giving of notice
or the passage of time, or both: (a) violate any judgment, writ, injunction, or
order of any court, arbitrator, or governmental agency applicable to the
Employee; or (b) conflict with, result in the breach of any provisions of or the
termination of, or constitute a default under, any agreement to which the
Employee is a party or by which the Employee is or may be bound.
9.4 Obligations Contingent on Performance. The obligations of the Company
hereunder, including its obligation to pay the compensation provided for herein,
are contingent upon the Employee's performance of the Employee's obligations
hereunder.
9.5 Waiver. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by either
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
(a) no claim or right arising out of this Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim or right
unless in writing signed by the other party; (b) no waiver that may be given by
a party will be applicable except in the specific instance for which it is
given; and (c) no notice to or demand on one party will be deemed to be a waiver
of any obligation of such party or of the right of the party giving such notice
or demand to take further action without notice or demand as provided in this
Agreement.
9.6 Binding Effect; Delegation of Duties Prohibited. This Agreement shall
inure to the benefit of, and shall be binding upon, the parties hereto and their
respective successors, assigns, heirs, and legal representatives, including any
entity with which the Company may merge or consolidate or to which all or
substantially all of its assets may be transferred. The duties and covenants of
the Employee under this Agreement, being personal, may not be delegated.
9.7 Notices. All notices and other communications under this Agreement
must be in writing and will be deemed to have been duly given when (a) delivered
by hand (with written confirmation of receipt), (b) sent by facsimile (with
written confirmation of receipt), provided that a copy is mailed by registered
mail, return receipt requested, or (c) when received by the addressee, if sent
by a nationally recognized overnight delivery service (receipt requested), in
the case of the Company to the attention of the President at the Company's
principal business office and in the case of the Employee to the address or
facsimile number set forth below (or to such other address or facsimile number
as the Employee may designate by notice to the Company):
7653 Canterbury
Prairie Village, KS 66208
12
<PAGE>
9.8 Entire Agreement; Amendments. This Agreement contains the entire
agreement between the parties with respect to its subject matter and supersedes
all prior agreements and understandings, oral or written, between the parties
with respect to its subject matter. This Agreement may not be amended orally,
but only by an agreement in writing signed by each of the parties to this
Agreement.
9.9 Governing Law. This Agreement will be governed by the laws of the
State of Missouri without regard to conflicts of laws principles.
9.10 Jurisdiction. Any action or proceeding seeking to enforce any
provision of, or based on any right arising out of, this Agreement may be
brought against either of the parties in the courts of the State of Missouri,
County of Jackson, or, if it has or can acquire jurisdiction, in the United
States District Court for the Western District of Missouri, and each of the
parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection to
venue laid therein. Process in any action or proceeding referred to in the
preceding sentence may be served on either party anywhere in the world.
9.11 Section Headings, Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement unless otherwise specified.
All words used in this Agreement will be construed to be of such gender or
number as the circumstances require. Unless otherwise expressly provided, the
word "including" does not limit the preceding words or terms.
9.12 Severability. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
9.13 Counterparts; Execution by Facsimile Signatures. This Agreement may
be executed in one or more counterparts, each of which will be deemed to be an
original copy of this Agreement and all of which, when taken together, will be
deemed to constitute one and the same agreement. This Agreement may be executed
by facsimile signatures.
9.14 Waiver of Jury Trial. THE PARTIES HERETO HEREBY WAIVE A JURY TRIAL IN
ANY LITIGATION WITH RESPECT TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date above first written above.
BIRCH TELECOM, INC.
By:_____________________________________
David E. Scott, President
13
<PAGE>
________________________________________
Bradley A. Moline
14
<PAGE>
Exhibit 10.23
AMENDED EMPLOYMENT AGREEMENT
THIS AMENDED EMPLOYMENT AGREEMENT (this "Agreement") is made as of October
7, 1999 by BIRCH TELECOM, INC., a Delaware corporation (the "Company"), and
JEFFREY D. SHACKELFORD, an individual (the "Employee").
The Company and the Employee desire for the Employee to be employed by the
Company upon the terms and conditions set forth in this Agreement. This
Agreement further amends and restates the Employment Agreement dated February
10, 1998, as amended by the Amendment to Employment Agreement dated August 5,
1999.
The parties, intending to be legally bound, agree as follows:
1. Definitions
For the purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1.
1.1 "Agreement" shall mean this Employment Agreement, as amended from time
to time.
1.2 "Affiliate" shall mean:
(a) any partnership, limited liability company, corporation or other
entity if the Company owns more than 25% of the equity securities or
interests of such entity; or
(b) any such entity which owns more than 25% of the equity
securities of the Company (and, for the purpose of this Section 1.2, any
options to acquire equity securities shall be treated as having been fully
exercised, and any securities convertible into equity securities shall be
treated as having been fully converted).
1.3 "Benefits" shall mean as defined in Section 3.1(b).
1.4 "Board of Directors" shall mean the board of directors of the Company.
1.5 "Competitive Business" shall mean any business which directly or
indirectly provides any local exchange telecommunications service that is the
same as or substantially similar to any local exchange telecommunications
service provided by the Company.
1.6 "Cause" shall mean as defined in Section 6.3.
1.7 "Change in Control" means any of the following: (i) the sale of all or
substantially all of the Company's (or its Affiliates') assets that results in
the liquidation of the Company and the payment of liquidating distributions to
the stockholders of the Company; (ii) the acquisition of the Company by another
entity by means of a merger or consolidation resulting in the exchange of the
1
<PAGE>
outstanding shares of the Company's capital stock for securities or
consideration issued or paid or caused to be issued or paid by the acquiring
entity or its subsidiary; or (iii) the acquisition from one or more of the
stockholders of the Company of more than 50% of the voting stock of the Company
by a single person or group of persons acting together.
1.8 "Confidential Information" shall mean any and all:
(a) trade secrets concerning the business and affairs of the
Company, the Company's product and service specifications, data, formulae,
compositions, processes, designs, sketches, photographs, maps, engineering
studies, graphs, drawings, samples, inventions and ideas, past, current,
and planned research and development, current and planned methods and
processes, customer and supplier lists, current and anticipated customer
requirements, price lists, bid information, market studies, business
plans, computer software and programs (including object code and source
code), computer software and database technologies, systems, structures,
and architectures (and related formulae, compositions, processes,
improvements, devices, inventions, discoveries, concepts, ideas, designs,
methods and information), and any other information, however documented,
that is a trade secret within the meaning of the Missouri Uniform Trade
Secrets Act; and
(b) information concerning the business and affairs of the Company
(which includes without limitation, historical financial statements,
financial projections and budgets, historical and projected sales, capital
spending budgets and plans, the names and backgrounds of key personnel and
personnel training techniques and materials), however documented; and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for the Company containing or based, in whole or
in part, on any information included in the foregoing.
1.9 "Disability" shall mean as defined in Section 6.2.
1.10 "Employee Invention" shall mean any idea, invention, technique,
modification, process, or improvement (whether patentable or not), any
industrial design (whether registerable or not), any mask work, however fixed or
encoded, that is suitable to be fixed, embedded or programmed in a semiconductor
product (whether recordable or not), and any work of authorship (whether or not
copyright protection may be obtained for it) created, conceived, or developed by
the Employee, either solely or in conjunction with others, during the Employment
Period, or a period that includes a portion of the Employment Period, that
relates in any way to, or is useful in any manner in, the business then being
conducted or proposed to be conducted by the Company, and any such item created
by the Employee, either solely or in conjunction with others, following
termination of the Employee's employment with the Company, that is based upon or
uses Confidential Information.
1.11 "Employment Period" shall mean the term of the Employee's employment
under this Agreement.
2
<PAGE>
1.12 "Good Reason" shall mean as defined in Section 6.4.
1.13 "Person" shall mean any individual, corporation (including any
non-profit corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization, or
governmental body.
1.14 "Post-Employment Period" shall mean the two-year period beginning on
the date of termination of the Employee's employment with the Company.
1.15 "Proprietary Items" shall mean as defined in Section 7.2(a)(iv).
1.16 "Salary" shall mean as defined in Section 3.1(a).
1.17 "Territory" shall mean
(a) the states of Missouri and Kansas; and
(b) any metropolitan areas outside of Missouri and Kansas, if at the
time the Employee ceases to be employed by the Company (i) the Company or
any Affiliate is providing a local exchange telecommunications service
within the metropolitan area, or (ii) a detailed business development plan
has been prepared, or is in the process of being prepared, by or on behalf
of the Company, in order to evaluate whether the Company should provide
local exchange telecommunications services within the metropolitan area
within twelve months after the date Employee ceases to be employed by the
Company, and the Board of Directors has not formally resolved against
providing such services in such metropolitan area.
2. Employment Terms and Duties
2.1 Employment. The Company hereby employs the Employee, and the Employee
hereby accepts employment by the Company, upon the terms and conditions set
forth in this Agreement.
2.2 Term. Subject to the provisions of Section 6, the term of this
Agreement shall be one year, commencing on February 10, 1998. Thereafter, this
Agreement shall be renewed automatically from year to year unless either party
shall have given written notice of termination to the other party at least
ninety (90) days prior to the end of the current term of this Agreement.
2.3 Duties. The Employee will have such duties as are assigned or
delegated to the Employee by the Board of Directors and President and will serve
as the Senior Vice President of Marketing and Sales of the Company. The Employee
will devote substantially all his business time and attention to the business of
the Company, will act in good faith to promote the success of the Company's
business, and will cooperate fully with the Board of Directors and President in
the advancement of the best interests of the Company. Nothing in this Section
2.3, however, will prevent
3
<PAGE>
the Employee from engaging in additional activities in connection with personal
investments and community affairs that are not inconsistent with the Employee's
duties under this Agreement (which community affairs shall be disclosed to and
approved by the President). If the Employee serves as a director of the Company
or as a director or officer of any of its Affiliates, the Employee will fulfill
his duties as such director or officer without additional compensation.
3. Compensation
3.1 Basic Compensation.
(a) Salary. The Employee will be paid a minimum base annual salary
of $200,000 (the "Salary"), which will be payable in equal periodic
installments according to the Company's customary payroll practices, but
no less frequently than monthly. The Salary may be increased by the
Compensation Committee or Board of Directors of the Company during the
term of this Agreement, and when increased, such higher amount shall then
be the minimum base annual salary under this Agreement. The Salary shall
not be reduced below the highest minimum base annual salary fixed from
time to time by the Compensation Committee or Board of Directors of the
Company without the Employee's written consent. When increased or
decreased in accordance with the terms of this Agreement, the new minimum
base annual salary shall be deemed the Employee's "Salary" for all
purposes of this Agreement.
(b) Benefits. The Employee will, during the Employment Period, be
permitted to participate in such pension, profit sharing, bonus, life
insurance, disability insurance, hospitalization, major medical, and other
employee benefit plans of the Company that may be in effect from time to
time, to the extent the Employee is eligible under the terms of such plans
(collectively, the "Benefits").
3.2 Incentive Compensation. The Employee shall be entitled to participate
in an incentive bonus program established by the Board of Directors or the
Compensation Committee of the Board of Directors to measure and reward
management for the financial performance of the Company. The Employee's initial
annual targeted incentive compensation shall be $75,000; provided, however, that
the payment of any incentive compensation shall be at the discretion of the
Compensation Committee of the Board of Directors, which may consider any factors
it deems relevant, including the assessment of the performance of the Employee
and the Company during the relevant time period.
4. Facilities and Expenses
The Company will furnish the Employee office space, equipment, supplies, and
such other facilities and personnel as the Company deems necessary or
appropriate for the performance of the Employee's duties under this Agreement.
The Company will pay the Employee's dues in such professional societies and
organizations as the President deems appropriate, and will pay on behalf of the
Employee (or reimburse the Employee for) reasonable expenses incurred by the
Employee at
4
<PAGE>
the request of, or on behalf of, the Company in the performance of the
Employee's duties pursuant to this Agreement, and in accordance with the
Company's employment policies, including reasonable expenses incurred by the
Employee in attending conventions, seminars, and other business meetings, in
appropriate business entertainment activities, and for promotional expenses.
5. Vacations and Holidays
The Employee will be entitled to paid vacation in accordance with the vacation
policies of the Company in effect for its employee officers from time to time.
Vacation must be taken by the Employee at such time or times as approved by the
President. The Employee will also be entitled to the paid holidays set forth in
the Company's policies.
6. Termination
6.1 Events of Termination. The Employment Period, the Employee's Salary,
Benefits, and Incentive Compensation, and any and all other rights of the
Employee under this Agreement will terminate (except as otherwise provided in
this Section 6):
(a) upon the death of the Employee;
(b) upon the Disability of the Employee (as defined in Section 6.2)
immediately upon notice from either party to the other;
(c) for Cause (as defined in Section 6.3), immediately upon notice
from the Company to the Employee, or at such later time as such notice may
specify;
(d) for Good Reason (as defined in Section 6.4) upon not less than
thirty days' prior notice from the Employee to the Company; or
(e) without Cause upon not less than thirty days' notice from the
Company to the Employee.
6.2 Definition of "Disability." For purposes of Section 6.1, the Employee
will be deemed to have a "Disability" if, for physical or mental reasons, the
Employee is unable to perform the Employee's duties under this Agreement for 120
consecutive days, or 180 days during any twelve month period, as determined in
accordance with this Section 6.2. The Disability of the Employee will be
determined by a medical doctor selected by written agreement of the Company and
the Employee upon the request of either party by notice to the other. If the
Company and the Employee cannot agree on the selection of a medical doctor, each
of them will select a medical doctor and the two medical doctors will select a
third medical doctor who will determine whether the Employee has a Disability.
The determination of the medical doctor selected under this Section 6.2 will be
binding on both parties. The Employee must submit to a reasonable number of
examinations by the medical doctor making the determination of Disability under
this Section 6.2, and to other specialists designated by such medical doctor,
and the Employee hereby authorizes the disclosure and release to the Company of
such determination and all supporting medical records. If
5
<PAGE>
the Employee is not legally competent, the Employee's legal guardian or duly
authorized attorney-in-fact will act in the Employee's stead under this Section
6.2 for the purposes of submitting the Employee to the examinations, and
providing the authorization of disclosure, required under this Section 6.2.
6.3 Definition of "Cause." For purposes of Section 6.1, the term "Cause"
means: (a) the Employee's breach of a material obligation under this Agreement;
(b) the Employee's failure to adhere in any material respect to any written
Company policy if such policy is material to the effective performance by the
Employee of his duties under this Agreement, and if the Employee has been given
a reasonable opportunity to cure his failure to comply within the thirty-day
period preceding termination of this Agreement, provided that if the Employee
cures his failure to comply with such a policy and then fails again to comply
with the same policy, no further opportunity to cure that failure shall be
required; (c) the appropriation (or attempted appropriation) of a material
business opportunity of the Company, including attempting to secure or securing
any personal profit in connection with any transaction entered into on behalf of
the Company (other than through stock options, bonuses and other incentives
provided by the Company to the Employee); (d) the misappropriation (or attempted
misappropriation) of any of the Company's funds or property; or (e) the
conviction of, or the entering of a guilty plea or plea of no contest with
respect to, a felony, or a crime involving moral turpitude, dishonesty, or
fraud.
6.4 Definition of "Good Reason." For purposes of Section 6.1, the term
"Good Reason" shall mean (a) a substantial reduction in the Employee's duties or
responsibilities, (b) any reduction in Employee's Salary, or (c) relocation of
the Employee's primary workplace to a location that is greater than 35 miles
from the Employee's current workplace, in each case which is not cured within 30
days following the Company's receipt of written notice from the Employee
describing the event constituting Good Reason.
6.5 Termination Pay. Effective upon the expiration or termination of this
Agreement, the Company will be obligated to pay the Employee (or, in the event
of his death, his designated beneficiary as defined below) only such
compensation as is provided in this Section 6.5. For purposes of this Section
6.5 the Employee's designated beneficiary will be such individual beneficiary or
trust, located at such address, as the Employee may designate by notice to the
Company from time to time or, if the Employee fails to give notice to the
Company of such a beneficiary, the Employee's estate. Notwithstanding the
preceding sentence, the Company will have no duty, in any circumstances, to
attempt to open an estate on behalf of the Employee, to determine whether any
beneficiary designated by the Employee is alive or to ascertain the address of
any such beneficiary, to determine the existence of any trust, to determine
whether any Person purporting to act as the Employee's personal representative
(or the trustee of a trust established by the Employee) is duly authorized to
act in that capacity, or to locate or attempt to locate any beneficiary,
personal representative, or trustee.
(a) Termination by the Employee for Good Reason or by the Company
without Cause. If the Employee terminates this Agreement for Good Reason,
or if the Company terminates this Agreement other than for Cause (but not
because of the Disability or death
6
<PAGE>
of the Employee), or if the Company notifies the Employee in accordance
with Section 2.2 that this Agreement will not be renewed as of an
applicable expiration date, the Company will pay the Employee (i) the
Employee's Salary for the remainder, if any, of the calendar month in
which such termination is effective and for twenty-four consecutive
calendar months thereafter, (ii) the amount of the Employee's targeted
incentive compensation for the year during which the termination is
effective (prorated for the period from the beginning of the year until
the effective date of termination), and (iii) the sum of two times the
amount of the Employee's targeted incentive compensation for the year in
which the termination was effective (such amount to be determined as if
the Employee had been employed for the entire year and not prorated as
described in clause (ii) above), payable in equal monthly installments
over the Post-Employment Period. Notwithstanding the preceding sentence,
if the Employee obtains other employment prior to the end of the
twenty-four months following the month in which the termination or
expiration is effective, he must promptly give notice thereof to the
Company, and the payments under this Agreement for any period after the
Employee obtains other employment will be reduced by the amount of the
cash compensation received and to be received by the Employee from the
Employee's other employment for services performed during such period.
(b) Termination by the Company for Cause. If the Company terminates
this Agreement for Cause, the Employee will be entitled to receive his
Salary only through the date such termination is effective.
(c) Termination upon Disability. If this Agreement is terminated by
either party as a result of the Employee's Disability, as determined under
Section 6.2, the Company will pay the Employee his Salary through the
remainder of the calendar month during which such termination is effective
and for the lesser of (i) six consecutive months thereafter, or (ii) the
period until disability insurance benefits commence under any disability
insurance coverage furnished by the Company to the Employee.
(d) Termination upon Death. If this Agreement is terminated because
of the Employee's death, the Employee will be entitled to receive his
Salary through the end of the calendar month in which his death occurs.
(e) Benefits. Except as otherwise required by law, the Employee's
accrual of, or participation in plans providing for, the Benefits will
cease at the effective date of the termination of this Agreement, and the
Employee will be entitled to accrued Benefits pursuant to such plans only
as provided in such plans.
7. Non-Disclosure Covenant; Employee Inventions
7.1 Acknowledgments by the Employee. The Employee acknowledges that (a)
during the Employment Period and as a part of his employment, the Employee will
be afforded access to Confidential Information; (b) public disclosure of such
Confidential Information could have an adverse effect on the Company and its
business; (c) because the Employee possesses substantial
7
<PAGE>
technical expertise and skill with respect to the Company's business, the
Company desires to obtain exclusive ownership of each Employee Invention, and
the Company will be at a substantial competitive disadvantage if it fails to
acquire exclusive ownership of each Employee Invention; and (d) the provisions
of this Section 7 are reasonable and necessary to prevent the improper use or
disclosure of Confidential Information and to provide the Company with exclusive
ownership of all Employee Inventions.
7.2 Agreements of the Employee. In consideration of the compensation and
benefits to be paid or provided to the Employee by the Company under this
Agreement, the Employee covenants as follows:
(a) Confidentiality.
(i) During and following the Employment Period, the Employee
will hold in confidence the Confidential Information and will not
disclose it to any Person except with the specific prior written
consent of the Company or except as otherwise expressly permitted by
the terms of this Agreement.
(ii) Any trade secrets of the Company will be entitled to all
of the protections and benefits under the Missouri Uniform Trade
Secrets Act and any other applicable law. If any information that
the Company deems to be a trade secret is found by a court of
competent jurisdiction not to be a trade secret for purposes of this
Agreement, such information will, nevertheless, be considered
Confidential Information for purposes of this Agreement. The
Employee hereby waives any requirement that the Company submit proof
of the economic value of any trade secret or post a bond or other
security.
(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information that the
Employee demonstrates was or became generally available to the
public other than as a result of a disclosure by the Employee or by
any other Person bound by a confidentiality obligation to the
Company in respect of such Confidential Information.
(iv) The Employee will not remove from the Company's premises
(except to the extent such removal is for purposes of the
performance of the Employee's duties at home or while traveling, or
except as otherwise specifically authorized by the Company) any
Company document, record, notebook, plan, model, component, device,
or computer software or code, whether embodied in a disk or in any
other form (collectively, the "Proprietary Items"). The Employee
recognizes that, as between the Company and the Employee, all of the
Proprietary Items, whether or not developed by the Employee, are the
exclusive property of the Company. Upon termination of this
Agreement by either party, or upon the request of the Company during
the Employment Period, the Employee will return to the Company all
of the Proprietary Items in the Employee's possession or subject to
the Employee's control,
8
<PAGE>
and the Employee shall not retain any copies, abstracts, sketches,
or other physical embodiment of any of the Proprietary Items.
(b) Employee Inventions. Each Employee Invention will belong
exclusively to the Company. The Employee acknowledges that all Employee
Inventions are works made for hire and are the property of the Company,
including any copyrights, patents, or other intellectual property rights
pertaining thereto. If it is determined that any such works are not works
made for hire, the Employee hereby assigns to the Company all of the
Employee's right, title, and interest, including all rights of copyright,
patent, and other intellectual property rights, to or in such Employee
Inventions. The Employee will promptly:
(i) disclose to the Company in writing any Employee Invention;
(ii) assign to the Company or to a party designated by the
Company, at the Company's request and without additional
compensation, all of the Employee's right to the Employee Invention
for the United States and all foreign jurisdictions;
(iii) execute and deliver to the Company such applications,
assignments, and other documents as the Company may request in order
to apply for and obtain patents or other registrations with respect
to any Employee Invention in the United States and any foreign
jurisdictions;
(iv) sign all other papers necessary to carry out the above
obligations; and
(v) give testimony and render any other assistance in support
of the Company's rights to any Employee Invention.
Notwithstanding anything to the contrary herein, provisions otherwise
requiring the Employee to assign to the Company any invention conceived by
the Employee shall not apply to an invention for which no equipment,
supplies, facilities or trade secret information of the Company was used
and which was developed entirely on the Employee's own time, unless the
invention relates to the business of the Company or to the Company's
actual or demonstrably anticipated research or development, or the
invention results from any work performed by the Employee for the Company.
7.3 Disputes or Controversies. The Employee recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Company, the Employee, and their respective attorneys and experts, who will
agree, in advance and in writing, to receive and maintain all such information
in secrecy, except as may be limited by them in writing.
8. Non-Competition and Non-Interference
9
<PAGE>
8.1 Acknowledgments by the Employee. The Employee acknowledges that: (a)
the services to be performed by him under this Agreement are of a special,
unique, unusual, extraordinary, and intellectual character; (b) the Company
competes with other businesses that are or could be located in any part of the
Territory; and (c) the provisions of this Section 8 are reasonable and necessary
to protect the Company's business.
8.2 Covenants of the Employee. In consideration of the acknowledgments by
the Employee, and in consideration of the compensation and benefits to be paid
or provided to the Employee by the Company, the Employee covenants that he will
not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post-Employment Period, engage or
invest in, own, manage, operate, finance, control, or participate in the
ownership, management, operation, financing, or control of, be employed
by, associated with, or in any manner connected with, lend the Employee's
name or any similar name to, lend Employee's credit to or render services
or advice to, any Competitive Business within the Territory; provided,
however, that the Employee may purchase or otherwise acquire up to (but
not more than) one percent of any class of securities of any enterprise
(but without otherwise participating in the activities of such enterprise)
if such securities are listed on any national or regional securities
exchange or have been registered under Section 12(g) of the Securities
Exchange Act of 1934;
(b) whether for the Employee's own account or for the account of any
other Person, at any time during the Employment Period and the
Post-Employment Period, solicit business of the same or similar type being
carried on by the Company, from any Person known by the Employee to be a
customer of the Company, whether or not the Employee had personal contact
with such Person during and by reason of the Employee's employment with
the Company;
(c) whether for the Employee's own account or the account of any
other Person at any time during the Employment Period and the
Post-Employment Period, solicit, employ, or otherwise engage as an
employee, independent contractor, or otherwise, any person who is or was
an employee of the Company at any time during the Employment Period or in
any manner induce or attempt to induce any employee of the Company to
terminate his or her employment with the Company; or at any time during
the Employment Period and the Post-Employment Period, interfere with the
Company's relationship with any person, including any person who at any
time during the Employment Period was an employee, contractor, supplier,
or customer of the Company;
(d) at any time during the Employment Period and the Post-Employment
Period, disparage the Company or any of its shareholders, directors,
officers, employees, or agents.
8.3 Divisible Covenants. If any covenant in Section 8.2 is held to be
unreasonable, arbitrary, or against public policy, such covenant will be
considered to be divisible with respect to scope, time, and geographic area, and
such lesser scope, time, or geographic area, or all of them, as
10
<PAGE>
a court of competent jurisdiction may determine to be reasonable, not arbitrary,
and not against public policy, will be effective, binding, and enforceable
against the Employee.
8.4 Extension of Covenants. The period of time applicable to any covenant
in Section 8.2 will be extended by the duration of any violation by the Employee
of such covenant.
8.5 Notices. The Employee will, while the covenants under Section 8.2 are
in effect, give notice to the Company, within ten days after accepting any other
employment, of the identity of the Employee's new employer. The Company may
notify such new employer that the Employee is bound by this Agreement and, at
the Company's election, furnish such new employer with a copy of this Agreement
or relevant portions thereof.
9. General Provisions
9.1 Injunctive Relief and Additional Remedy. The Employee acknowledges
that the injury that would be suffered by the Company as a result of a breach of
the provisions of this Agreement (including any provision of Sections 7 and 8)
would be irreparable and that an award of monetary damages to the Company for
such a breach would be an inadequate remedy. Consequently, the Company will have
the right, in addition to any other rights it may have, to obtain injunctive
relief to restrain any breach or threatened breach or otherwise to specifically
enforce any provision of this Agreement, and the Company will not be obligated
to post bond or other security in seeking such relief. Without limiting the
Company's rights under this Section 9 or any other remedies of the Company, if
the Employee breaches any of the provisions of Section 7 or 8, the Company will
have the right to cease making any payments otherwise due to the Employee under
this Agreement.
9.2 Covenants of Sections 7 and 8 are Essential and Independent Covenants.
The covenants by the Employee in Sections 7 and 8 are essential elements of this
Agreement, and without the Employee's agreement to comply with such covenants,
the Company would not have entered into this Agreement or employed the Employee.
The Company and the Employee have independently consulted their respective
counsel and have been advised in all respects concerning the reasonableness and
propriety of such covenants, with specific regard to the nature of the business
conducted by the Company. The Employee's covenants in Sections 7 and 8 are
independent covenants and the existence of any claim by the Employee against the
Company, under this Agreement or otherwise, will not excuse the Employee's
breach of any covenant in Section 7 or 8. If the Employee's employment hereunder
expires or is terminated, this Agreement will continue in full force and effect
as is necessary or appropriate to enforce the covenants and agreements of the
Employee in Sections 7 and 8.
9.3 Representations and Warranties by the Employee. The Employee
represents and warrants to the Company that the execution and delivery by the
Employee of this Agreement do not, and the performance by the Employee of the
Employee's obligations hereunder will not, with or without the giving of notice
or the passage of time, or both: (a) violate any judgment, writ, injunction, or
order of any court, arbitrator, or governmental agency applicable to the
Employee; or (b) conflict with, result in the breach of any provisions of or the
termination of, or constitute a
11
<PAGE>
default under, any agreement to which the Employee is a party or by which the
Employee is or may be bound.
9.4 Obligations Contingent on Performance. The obligations of the Company
hereunder, including its obligation to pay the compensation provided for herein,
are contingent upon the Employee's performance of the Employee's obligations
hereunder.
9.5 Waiver. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by either
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
(a) no claim or right arising out of this Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim or right
unless in writing signed by the other party; (b) no waiver that may be given by
a party will be applicable except in the specific instance for which it is
given; and (c) no notice to or demand on one party will be deemed to be a waiver
of any obligation of such party or of the right of the party giving such notice
or demand to take further action without notice or demand as provided in this
Agreement.
9.6 Binding Effect; Delegation of Duties Prohibited. This Agreement shall
inure to the benefit of, and shall be binding upon, the parties hereto and their
respective successors, assigns, heirs, and legal representatives, including any
entity with which the Company may merge or consolidate or to which all or
substantially all of its assets may be transferred. The duties and covenants of
the Employee under this Agreement, being personal, may not be delegated.
9.7 Notices. All notices and other communications under this Agreement
must be in writing and will be deemed to have been duly given when (a) delivered
by hand (with written confirmation of receipt), (b) sent by facsimile (with
written confirmation of receipt), provided that a copy is mailed by registered
mail, return receipt requested, or (c) when received by the addressee, if sent
by a nationally recognized overnight delivery service (receipt requested), in
the case of the Company to the attention of the President at the Company's
principal business office and in the case of the Employee to the address or
facsimile number set forth below (or to such other address or facsimile number
as the Employee may designate by notice to the Company):
14122 West 115th Street
Overland Park, KS 66062
9.8 Entire Agreement; Amendments. This Agreement contains the entire
agreement between the parties with respect to its subject matter and supersedes
all prior agreements and understandings, oral or written, between the parties
with respect to its subject matter. This Agreement may not be amended orally,
but only by an agreement in writing signed by each of the parties to this
Agreement.
12
<PAGE>
9.9 Governing Law. This Agreement will be governed by the laws of the
State of Missouri without regard to conflicts of laws principles.
9.10 Jurisdiction. Any action or proceeding seeking to enforce any
provision of, or based on any right arising out of, this Agreement may be
brought against either of the parties in the courts of the State of Missouri,
County of Jackson, or, if it has or can acquire jurisdiction, in the United
States District Court for the Western District of Missouri, and each of the
parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection to
venue laid therein. Process in any action or proceeding referred to in the
preceding sentence may be served on either party anywhere in the world.
9.11 Section Headings, Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement unless otherwise specified.
All words used in this Agreement will be construed to be of such gender or
number as the circumstances require. Unless otherwise expressly provided, the
word "including" does not limit the preceding words or terms.
9.12 Severability. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
9.13 Counterparts; Execution by Facsimile Signatures. This Agreement may
be executed in one or more counterparts, each of which will be deemed to be an
original copy of this Agreement and all of which, when taken together, will be
deemed to constitute one and the same agreement. This Agreement may be executed
by facsimile signatures.
9.14 Waiver of Jury Trial. THE PARTIES HERETO HEREBY WAIVE A JURY TRIAL IN
ANY LITIGATION WITH RESPECT TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date above first written above.
BIRCH TELECOM, INC.
By: /s/ David E. Scott
_________________________
David E. Scott, President
/s/ Jeffrey D. Shackelford
____________________________
Jeffrey D. Shackelford
13
<PAGE>
Exhibit 10.24
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made as of February ___,
2000 by BIRCH TELECOM, INC., a Delaware corporation (the "Company"), and DAVID
M. HOLLINGSWORTH, an individual (the "Employee").
The Company and the Employee desire for the Employee to be employed by the
Company upon the terms and conditions set forth in this Agreement.
The parties, intending to be legally bound, agree as follows:
1. Definitions
For the purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1.
1.1 "Agreement" shall mean this Employment Agreement, as amended from time
to time.
1.2 "Affiliate" shall mean:
(a) any partnership, limited liability company, corporation or other
entity if the Company owns more than 25% of the equity securities or
interests of such entity; or
(b) any such entity which owns more than 25% of the equity
securities of the Company (and, for the purpose of this Section 1.2, any
options to acquire equity securities shall be treated as having been fully
exercised, and any securities convertible into equity securities shall be
treated as having been fully converted).
1.3 "Benefits" shall mean as defined in Section 3.1(b).
1.4 "Board of Directors" shall mean the board of directors of the
Company.
1.5 "Competitive Business" shall mean any business which directly or
indirectly provides any local exchange telecommunications service that is the
same as or substantially similar to any local exchange telecommunications
service provided by the Company.
1.6 "Cause" shall mean as defined in Section 6.3.
1.7 "Change in Control" means any of the following: (i) the sale of all or
substantially all of the Company's (or its Affiliates') assets that results in
the liquidation of the Company and the payment of liquidating distributions to
the stockholders of the Company; (ii) the acquisition of the Company by another
entity by means of a merger or consolidation resulting in the exchange of the
<PAGE>
outstanding shares of the Company's capital stock for securities or
consideration issued or paid or caused to be issued or paid by the acquiring
entity or its subsidiary; or (iii) the acquisition from one or more of the
stockholders of the Company of more than 50% of the voting stock of the Company
by a single person or group of persons acting together.
1.8 "Confidential Information" shall mean any and all:
(a) trade secrets concerning the business and affairs of the
Company, the Company's product and service specifications, data, formulae,
compositions, processes, designs, sketches, photographs, maps, engineering
studies, graphs, drawings, samples, inventions and ideas, past, current,
and planned research and development, current and planned methods and
processes, customer and supplier lists, current and anticipated customer
requirements, price lists, bid information, market studies, business
plans, computer software and programs (including object code and source
code), computer software and database technologies, systems, structures,
and architectures (and related formulae, compositions, processes,
improvements, devices, inventions, discoveries, concepts, ideas, designs,
methods and information), and any other information, however documented,
that is a trade secret within the meaning of the Missouri Uniform Trade
Secrets Act; and
(b) information concerning the business and affairs of the Company
(which includes without limitation, historical financial statements,
financial projections and budgets, historical and projected sales, capital
spending budgets and plans, the names and backgrounds of key personnel and
personnel training techniques and materials), however documented; and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for the Company containing or based, in whole or
in part, on any information included in the foregoing.
1.9 "Disability" shall mean as defined in Section 6.2.
1.10 "Employee Invention" shall mean any idea, invention, technique,
modification, process, or improvement (whether patentable or not), any
industrial design (whether registerable or not), any mask work, however fixed or
encoded, that is suitable to be fixed, embedded or programmed in a semiconductor
product (whether recordable or not), and any work of authorship (whether or not
copyright protection may be obtained for it) created, conceived, or developed by
the Employee, either solely or in conjunction with others, during the Employment
Period, or a period that includes a portion of the Employment Period, that
relates in any way to, or is useful in any manner in, the business then being
conducted or proposed to be conducted by the Company, and any such item created
by the Employee, either solely or in conjunction with others, following
termination of the Employee's employment with the Company, that is based upon or
uses Confidential Information.
1.11 "Employment Period" shall mean the term of the Employee's employment
under this Agreement.
2
<PAGE>
1.12 "Good Reason" shall mean as defined in Section 6.4.
1.13 "Person" shall mean any individual, corporation (including any
non-profit corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization, or
governmental body.
1.14 "Post-Employment Period" shall mean the one-year period beginning on
the date of termination of the Employee's employment with the Company.
1.15 "Proprietary Items" shall mean as defined in Section 7.2(a)(iv).
1.16 "Salary" shall mean as defined in Section 3.1(a).
1.17 "Territory" shall mean
(a) the states of Missouri and Kansas; and
(b) any metropolitan areas outside of Missouri and Kansas, if at the
time the Employee ceases to be employed by the Company (i) the Company or
any Affiliate is providing a local exchange telecommunications service
within the metropolitan area, or (ii) a detailed business development plan
has been prepared, or is in the process of being prepared, by or on behalf
of the Company, in order to evaluate whether the Company should provide
local exchange telecommunications services within the metropolitan area
within twelve months after the date Employee ceases to be employed by the
Company, and the Board of Directors has not formally resolved against
providing such services in such metropolitan area.
2. Employment Terms and Duties
2.1 Employment. The Company hereby employs the Employee, and the Employee
hereby accepts employment by the Company, upon the terms and conditions set
forth in this Agreement.
2.2 Term. Subject to the provisions of Section 6, the term of this
Agreement shall be one year. Thereafter, this Agreement shall be renewed
automatically from year to year unless either party shall have given written
notice of termination to the other party at least ninety (90) days prior to the
end of the current term of this Agreement.
2.3 Duties. The Employee will have such duties as are assigned or
delegated to the Employee by the Board of Directors and President and will serve
asSenior Vice President of the Company. The Employee will devote substantially
all his business time and attention to the business of the Company, will act in
good faith to promote the success of the Company's business, and will cooperate
fully with the Board of Directors and President in the advancement of the best
interests of the Company. Nothing in this Section 2.3, however, will prevent the
Employee from engaging
3
<PAGE>
in additional activities in connection with personal investments and community
affairs that are not inconsistent with the Employee's duties under this
Agreement (which community affairs shall be disclosed to and approved by the
President). If the Employee serves as a director of the Company or as a director
or officer of any of its Affiliates, the Employee will fulfill his duties as
such director or officer without additional compensation.
3. Compensation
3.1 Basic Compensation.
(a) Salary. The Employee will be paid a minimum base annual salary
of $200,000 (the "Salary"), which will be payable in equal periodic
installments according to the Company's customary payroll practices, but
no less frequently than monthly. The Salary may be increased by the
Compensation Committee or Board of Directors of the Company during the
term of this Agreement, and when increased, such higher amount shall then
be the minimum base annual salary under this Agreement. The Salary shall
not be reduced below the highest minimum base annual salary fixed from
time to time by the Compensation Committee or Board of Directors of the
Company without the Employee's written consent. When increased or
decreased in accordance with the terms of this Agreement, the new minimum
base annual salary shall be deemed the Employee's "Salary" for all
purposes of this Agreement.
(b) Benefits. The Employee will, during the Employment Period, be
permitted to participate in such pension, profit sharing, bonus, life
insurance, disability insurance, hospitalization, major medical, and other
employee benefit plans of the Company that may be in effect from time to
time, to the extent the Employee is eligible under the terms of such plans
(collectively, the "Benefits").
3.2 Incentive Compensation. The Employee shall be entitled to participate in an
incentive bonus program established by the Board of Directors or the
Compensation Committee of the Board of Directors to measure and reward
management for the financial performance of the
Company. The Employee's initial annual targeted incentive compensation
shall be $75,000; provided, however, that the payment of any incentive
compensation shall be at the discretion of the Compensation Committee of the
Board of Directors, which may consider any factors it deems relevant, including
the assessment of the performance of the Employee and the Company during the
relevant time period.
4. Facilities and Expenses
The Company will furnish the Employee office space, equipment, supplies, and
such other facilities and personnel as the Company deems necessary or
appropriate for the performance of the Employee's duties under this Agreement.
The Company will pay the Employee's dues in such professional societies and
organizations as the President deems appropriate, and will pay on behalf of the
Employee (or reimburse the Employee for) reasonable expenses incurred by the
Employee at
4
<PAGE>
the request of, or on behalf of, the Company in the performance of the
Employee's duties pursuant to this Agreement, and in accordance with the
Company's employment policies, including reasonable expenses incurred by the
Employee in attending conventions, seminars, and other business meetings, in
appropriate business entertainment activities, and for promotional expenses.
5. Vacations and Holidays
The Employee will be entitled to paid vacation in accordance with the vacation
policies of the Company in effect for its employee officers from time to time.
Vacation must be taken by the Employee at such time or times as approved by the
President. The Employee will also be entitled to the paid holidays set forth in
the Company's policies.
6. Termination
6.1 Events of Termination. The Employment Period, the Employee's Salary,
Benefits, and Incentive Compensation, and any and all other rights of the
Employee under this Agreement will terminate (except as otherwise provided in
this Section 6):
(a) upon the death of the Employee;
(b) upon the Disability of the Employee (as defined in Section 6.2)
immediately upon notice from either party to the other;
(c) for Cause (as defined in Section 6.3), immediately upon notice
from the Company to the Employee, or at such later time as such notice may
specify;
(d) for Good Reason (as defined in Section 6.4) upon not less than
thirty days' prior notice from the Employee to the Company; or
(e) without Cause upon not less than thirty days' notice from the
Company to the Employee.
6.2 Definition of "Disability." For purposes of Section 6.1, the Employee
will be deemed to have a "Disability" if, for physical or mental reasons, the
Employee is unable to perform the Employee's duties under this Agreement for 120
consecutive days, or 180 days during any twelve month period, as determined in
accordance with this Section 6.2. The Disability of the Employee will be
determined by a medical doctor selected by written agreement of the Company and
the Employee upon the request of either party by notice to the other. If the
Company and the Employee cannot agree on the selection of a medical doctor, each
of them will select a medical doctor and the two medical doctors will select a
third medical doctor who will determine whether the Employee has a Disability.
The determination of the medical doctor selected under this Section 6.2 will be
binding on both parties. The Employee must submit to a reasonable number of
examinations by the medical doctor making the determination of Disability under
this Section 6.2, and to other specialists designated by such medical doctor,
and the Employee hereby authorizes the disclosure and release to the Company of
such determination and all supporting medical records. If
5
<PAGE>
the Employee is not legally competent, the Employee's legal guardian or duly
authorized attorney-in-fact will act in the Employee's stead under this Section
6.2 for the purposes of submitting the Employee to the examinations, and
providing the authorization of disclosure, required under this Section 6.2.
6.3 Definition of "Cause." For purposes of Section 6.1, the term "Cause"
means: (a) the Employee's breach of a material obligation under this Agreement;
(b) the Employee's failure to adhere in any material respect to any written
Company policy if such policy is material to the effective performance by the
Employee of his duties under this Agreement, and if the Employee has been given
a reasonable opportunity to cure his failure to comply within the thirty-day
period preceding termination of this Agreement, provided that if the Employee
cures his failure to comply with such a policy and then fails again to comply
with the same policy, no further opportunity to cure that failure shall be
required; (c) the appropriation (or attempted appropriation) of a material
business opportunity of the Company, including attempting to secure or securing
any personal profit in connection with any transaction entered into on behalf of
the Company (other than through stock options, bonuses and other incentives
provided by the Company to the Employee); (d) the misappropriation (or attempted
misappropriation) of any of the Company's funds or property; or (e) the
conviction of, or the entering of a guilty plea or plea of no contest with
respect to, a felony, or a crime involving moral turpitude, dishonesty, or
fraud.
6.4 Definition of "Good Reason." For purposes of Section 6.1, the term
"Good Reason" shall mean (a) a substantial reduction in the Employee's duties or
responsibilities, (b) any reduction in Employee's Salary, or (c) relocation of
the Employee's primary workplace to a location that is greater than 35 miles
from the Employee's current workplace, in each case which is not cured within 30
days following the Company's receipt of written notice from the Employee
describing the event constituting Good Reason.
6.5 Termination Pay. Effective upon the expiration or termination of this
Agreement, the Company will be obligated to pay the Employee (or, in the event
of his death, his designated beneficiary as defined below) only such
compensation as is provided in this Section 6.5. For purposes of this Section
6.5 the Employee's designated beneficiary will be such individual beneficiary or
trust, located at such address, as the Employee may designate by notice to the
Company from time to time or, if the Employee fails to give notice to the
Company of such a beneficiary, the Employee's estate. Notwithstanding the
preceding sentence, the Company will have no duty, in any circumstances, to
attempt to open an estate on behalf of the Employee, to determine whether any
beneficiary designated by the Employee is alive or to ascertain the address of
any such beneficiary, to determine the existence of any trust, to determine
whether any Person purporting to act as the Employee's personal representative
(or the trustee of a trust established by the Employee) is duly authorized to
act in that capacity, or to locate or attempt to locate any beneficiary,
personal representative, or trustee.
(a) Termination by the Employee for Good Reason or by the Company
without Cause. If the Employee terminates this Agreement for Good Reason,
or if the Company terminates this Agreement other than for Cause (but not
because of the Disability or death
6
<PAGE>
of the Employee), or if the Company notifies the Employee in accordance
with Section 2.2 that this Agreement will not be renewed as of an
applicable expiration date, the Company will pay the Employee (i) the
Employee's Salary for the remainder, if any, of the calendar month in
which such termination is effective and for twelve consecutive calendar
months thereafter, (ii) the amount of the Employee's targeted incentive
compensation for the year during which the termination is effective
(prorated for the period from the beginning of the year until the
effective date of termination), and (iii) with respect to the
Post-Employment Period, an additional amount equal to the full amount of
the Employee's targeted incentive compensation for the year in which the
termination was effective (such amount to be determined as if the Employee
had been employed for the entire year and not prorated as described in
clause (ii) above), payable in equal monthly installments over the
Post-Employment Period. Notwithstanding the preceding sentence, if the
Employee obtains other employment prior to the end of the Post-Employment
Period or any extension thereof, he must promptly give notice thereof to
the Company, and the payments under this Agreement for any period after
the Employee obtains other employment will be reduced by the amount of the
cash compensation received and to be received by the Employee from the
Employee's other employment for services performed during such period.
(b) Termination by the Company for Cause. If the Company terminates
this Agreement for Cause, the Employee will be entitled to receive his
Salary only through the date such termination is effective.
(c) Termination upon Disability. If this Agreement is terminated by
either party as a result of the Employee's Disability, as determined under
Section 6.2, the Company will pay the Employee his Salary through the
remainder of the calendar month during which such termination is effective
and for the lesser of (i) six consecutive months thereafter, or (ii) the
period until disability insurance benefits commence under any disability
insurance coverage furnished by the Company to the Employee.
(d) Termination upon Death. If this Agreement is terminated because
of the Employee's death, the Employee will be entitled to receive his
Salary through the end of the calendar month in which his death occurs.
(e) Benefits. Except as otherwise required by law, the Employee's
accrual of, or participation in plans providing for, the Benefits will
cease at the effective date of the termination of this Agreement, and the
Employee will be entitled to accrued Benefits pursuant to such plans only
as provided in such plans.
7. Non-Disclosure Covenant; Employee Inventions
7.1 Acknowledgments by the Employee. The Employee acknowledges that (a)
during the Employment Period and as a part of his employment, the Employee will
be afforded access to Confidential Information; (b) public disclosure of such
Confidential Information could have an adverse effect on the Company and its
business; (c) because the Employee possesses substantial
7
<PAGE>
technical expertise and skill with respect to the Company's business, the
Company desires to obtain exclusive ownership of each Employee Invention, and
the Company will be at a substantial competitive disadvantage if it fails to
acquire exclusive ownership of each Employee Invention; and (d) the provisions
of this Section 7 are reasonable and necessary to prevent the improper use or
disclosure of Confidential Information and to provide the Company with exclusive
ownership of all Employee Inventions.
7.2 Agreements of the Employee. In consideration of the compensation and
benefits to be paid or provided to the Employee by the Company under this
Agreement, the Employee covenants as follows:
(a) Confidentiality.
(i) During and following the Employment Period, the Employee
will hold in confidence the Confidential Information and will not
disclose it to any Person except with the specific prior written
consent of the Company or except as otherwise expressly permitted by
the terms of this Agreement.
(ii) Any trade secrets of the Company will be entitled to all
of the protections and benefits under the Missouri Uniform Trade
Secrets Act and any other applicable law. If any information that
the Company deems to be a trade secret is found by a court of
competent jurisdiction not to be a trade secret for purposes of this
Agreement, such information will, nevertheless, be considered
Confidential Information for purposes of this Agreement. The
Employee hereby waives any requirement that the Company submit proof
of the economic value of any trade secret or post a bond or other
security.
(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information that the
Employee demonstrates was or became generally available to the
public other than as a result of a disclosure by the Employee or by
any other Person bound by a confidentiality obligation to the
Company in respect of such Confidential Information.
(iv) The Employee will not remove from the Company's premises
(except to the extent such removal is for purposes of the
performance of the Employee's duties at home or while traveling, or
except as otherwise specifically authorized by the Company) any
Company document, record, notebook, plan, model, component, device,
or computer software or code, whether embodied in a disk or in any
other form (collectively, the "Proprietary Items"). The Employee
recognizes that, as between the Company and the Employee, all of the
Proprietary Items, whether or not developed by the Employee, are the
exclusive property of the Company. Upon termination of this
Agreement by either party, or upon the request of the Company during
the Employment Period, the Employee will return to the Company all
of the Proprietary Items in the Employee's possession or subject to
the Employee's control,
8
<PAGE>
and the Employee shall not retain any copies, abstracts, sketches,
or other physical embodiment of any of the Proprietary Items.
(b) Employee Inventions. Each Employee Invention will belong
exclusively to the Company. The Employee acknowledges that all Employee
Inventions are works made for hire and are the property of the Company,
including any copyrights, patents, or other intellectual property rights
pertaining thereto. If it is determined that any such works are not works
made for hire, the Employee hereby assigns to the Company all of the
Employee's right, title, and interest, including all rights of copyright,
patent, and other intellectual property rights, to or in such Employee
Inventions. The Employee will promptly:
(i) disclose to the Company in writing any Employee Invention;
(ii) assign to the Company or to a party designated by the
Company, at the Company's request and without additional
compensation, all of the Employee's right to the Employee Invention
for the United States and all foreign jurisdictions;
(iii) execute and deliver to the Company such applications,
assignments, and other documents as the Company may request in order
to apply for and obtain patents or other registrations with respect
to any Employee Invention in the United States and any foreign
jurisdictions;
(iv) sign all other papers necessary to carry out the above
obligations; and
(v) give testimony and render any other assistance in support
of the Company's rights to any Employee Invention.
Notwithstanding anything to the contrary herein, provisions otherwise
requiring the Employee to assign to the Company any invention conceived by
the Employee shall not apply to an invention for which no equipment,
supplies, facilities or trade secret information of the Company was used
and which was developed entirely on the Employee's own time, unless the
invention relates to the business of the Company or to the Company's
actual or demonstrably anticipated research or development, or the
invention results from any work performed by the Employee for the Company.
7.3 Disputes or Controversies. The Employee recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Company, the Employee, and their respective attorneys and experts, who will
agree, in advance and in writing, to receive and maintain all such information
in secrecy, except as may be limited by them in writing.
8. Non-Competition and Non-Interference
9
<PAGE>
8.1 Acknowledgments by the Employee. The Employee acknowledges that: (a)
the services to be performed by him under this Agreement are of a special,
unique, unusual, extraordinary, and intellectual character; (b) the Company
competes with other businesses that are or could be located in any part of the
Territory; and (c) the provisions of this Section 8 are reasonable and necessary
to protect the Company's business.
8.2 Covenants of the Employee. In consideration of the acknowledgments by
the Employee, and in consideration of the compensation and benefits to be paid
or provided to the Employee by the Company, the Employee covenants that he will
not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post-Employment Period, engage or
invest in, own, manage, operate, finance, control, or participate in the
ownership, management, operation, financing, or control of, be employed
by, associated with, or in any manner connected with, lend the Employee's
name or any similar name to, lend Employee's credit to or render services
or advice to, any Competitive Business within the Territory; provided,
however, that the Employee may purchase or otherwise acquire up to (but
not more than) one percent of any class of securities of any enterprise
(but without otherwise participating in the activities of such enterprise)
if such securities are listed on any national or regional securities
exchange or have been registered under Section 12(g) of the Securities
Exchange Act of 1934;
(b) whether for the Employee's own account or for the account of any
other Person, at any time during the Employment Period and the
Post-Employment Period, solicit business of the same or similar type being
carried on by the Company, from any Person known by the Employee to be a
customer of the Company, whether or not the Employee had personal contact
with such Person during and by reason of the Employee's employment with
the Company;
(c) whether for the Employee's own account or the account of any
other Person at any time during the Employment Period and the
Post-Employment Period, solicit, employ, or otherwise engage as an
employee, independent contractor, or otherwise, any person who is or was
an employee of the Company at any time during the Employment Period or in
any manner induce or attempt to induce any employee of the Company to
terminate his or her employment with the Company; or at any time during
the Employment Period and the Post-Employment Period, interfere with the
Company's relationship with any person, including any person who at any
time during the Employment Period was an employee, contractor, supplier,
or customer of the Company;
(d) at any time during the Employment Period and the Post-Employment
Period, disparage the Company or any of its shareholders, directors,
officers, employees, or agents.
8.3 Divisible Covenants. If any covenant in Section 8.2 is held to be
unreasonable, arbitrary, or against public policy, such covenant will be
considered to be divisible with respect to scope, time, and geographic area, and
such lesser scope, time, or geographic area, or all of them, as
10
<PAGE>
a court of competent jurisdiction may determine to be reasonable, not arbitrary,
and not against public policy, will be effective, binding, and enforceable
against the Employee.
8.4 Extension of Covenants. The period of time applicable to any covenant
in Section 8.2 will be extended by the duration of any violation by the Employee
of such covenant.
8.5 Notices. The Employee will, while the covenants under Section 8.2 are
in effect, give notice to the Company, within ten days after accepting any other
employment, of the identity of the Employee's new employer. The Company may
notify such new employer that the Employee is bound by this Agreement and, at
the Company's election, furnish such new employer with a copy of this Agreement
or relevant portions thereof.
9. General Provisions
9.1 Injunctive Relief and Additional Remedy. The Employee acknowledges
that the injury that would be suffered by the Company as a result of a breach of
the provisions of this Agreement (including any provision of Sections 7 and 8)
would be irreparable and that an award of monetary damages to the Company for
such a breach would be an inadequate remedy. Consequently, the Company will have
the right, in addition to any other rights it may have, to obtain injunctive
relief to restrain any breach or threatened breach or otherwise to specifically
enforce any provision of this Agreement, and the Company will not be obligated
to post bond or other security in seeking such relief. Without limiting the
Company's rights under this Section 9 or any other remedies of the Company, if
the Employee breaches any of the provisions of Section 7 or 8, the Company will
have the right to cease making any payments otherwise due to the Employee under
this Agreement.
9.2 Covenants of Sections 7 and 8 are Essential and Independent Covenants.
The covenants by the Employee in Sections 7 and 8 are essential elements of this
Agreement, and without the Employee's agreement to comply with such covenants,
the Company would not have entered into this Agreement or employed the Employee.
The Company and the Employee have independently consulted their respective
counsel and have been advised in all respects concerning the reasonableness and
propriety of such covenants, with specific regard to the nature of the business
conducted by the Company. The Employee's covenants in Sections 7 and 8 are
independent covenants and the existence of any claim by the Employee against the
Company, under this Agreement or otherwise, will not excuse the Employee's
breach of any covenant in Section 7 or 8. If the Employee's employment hereunder
expires or is terminated, this Agreement will continue in full force and effect
as is necessary or appropriate to enforce the covenants and agreements of the
Employee in Sections 7 and 8.
9.3 Representations and Warranties by the Employee. The Employee
represents and warrants to the Company that the execution and delivery by the
Employee of this Agreement do not, and the performance by the Employee of the
Employee's obligations hereunder will not, with or without the giving of notice
or the passage of time, or both: (a) violate any judgment, writ, injunction, or
order of any court, arbitrator, or governmental agency applicable to the
Employee; or (b) conflict with, result in the breach of any provisions of or the
termination of, or constitute a
11
<PAGE>
default under, any agreement to which the Employee is a party or by which the
Employee is or may be bound.
9.4 Obligations Contingent on Performance. The obligations of the Company
hereunder, including its obligation to pay the compensation provided for herein,
are contingent upon the Employee's performance of the Employee's obligations
hereunder.
9.5 Waiver. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by either
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
(a) no claim or right arising out of this Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim or right
unless in writing signed by the other party; (b) no waiver that may be given by
a party will be applicable except in the specific instance for which it is
given; and (c) no notice to or demand on one party will be deemed to be a waiver
of any obligation of such party or of the right of the party giving such notice
or demand to take further action without notice or demand as provided in this
Agreement.
9.6 Binding Effect; Delegation of Duties Prohibited. This Agreement shall
inure to the benefit of, and shall be binding upon, the parties hereto and their
respective successors, assigns, heirs, and legal representatives, including any
entity with which the Company may merge or consolidate or to which all or
substantially all of its assets may be transferred. The duties and covenants of
the Employee under this Agreement, being personal, may not be delegated.
9.7 Notices. All notices and other communications under this Agreement
must be in writing and will be deemed to have been duly given when (a) delivered
by hand (with written confirmation of receipt), (b) sent by facsimile (with
written confirmation of receipt), provided that a copy is mailed by registered
mail, return receipt requested, or (c) when received by the addressee, if sent
by a nationally recognized overnight delivery service (receipt requested), in
the case of the Company to the attention of the President at the Company's
principal business office and in the case of the Employee to the address or
facsimile number set forth below (or to such other address or facsimile number
as the Employee may designate by notice to the Company):
2524 NW Bliss Road
Vancouver, WA 98685
9.8 Entire Agreement; Amendments. This Agreement contains the entire
agreement between the parties with respect to its subject matter and supersedes
all prior agreements and understandings, oral or written, between the parties
with respect to its subject matter. This Agreement may not be amended orally,
but only by an agreement in writing signed by each of the parties to this
Agreement.
12
<PAGE>
9.9 Governing Law. This Agreement will be governed by the laws of the
State of Missouri without regard to conflicts of laws principles.
9.10 Jurisdiction. Any action or proceeding seeking to enforce any
provision of, or based on any right arising out of, this Agreement may be
brought against either of the parties in the courts of the State of Missouri,
County of Jackson, or, if it has or can acquire jurisdiction, in the United
States District Court for the Western District of Missouri, and each of the
parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection to
venue laid therein. Process in any action or proceeding referred to in the
preceding sentence may be served on either party anywhere in the world.
9.11 Section Headings, Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement unless otherwise specified.
All words used in this Agreement will be construed to be of such gender or
number as the circumstances require. Unless otherwise expressly provided, the
word "including" does not limit the preceding words or terms.
9.12 Severability. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
9.13 Counterparts; Execution by Facsimile Signatures. This Agreement may
be executed in one or more counterparts, each of which will be deemed to be an
original copy of this Agreement and all of which, when taken together, will be
deemed to constitute one and the same agreement. This Agreement may be executed
by facsimile signatures.
9.14 Waiver of Jury Trial. THE PARTIES HERETO HEREBY WAIVE A JURY TRIAL IN
ANY LITIGATION WITH RESPECT TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date above first written above.
BIRCH TELECOM, INC.
By:_____________________________________
David E. Scott, President
----------------------------------------
David M. Hollingsworth
13
<PAGE>
Exhibit 10.30
March 22, 2000
DELIVERED VIA FACSIMILE AND FEDERAL EXPRESS
Mr. Mory Ejabat
Zhone Technologies
7677 Oakport Street, Suite 1040
Oakland, CA 94621
Dear Mory,
On behalf of Birch Telecom, I am pleased and excited to offer you the position
of Member of the Board.
The position's term length will be initially one year and thereafter three years
if Birch adopts a staggered Board structure. If Birch does not adopt a staggered
Board structure, all terms will be one-year terms. Additional details of the
offer are as follows:
o An annual retainer fee in the amount of $5,000 and expense
reimbursement for Board meetings.
o An initial grant of 30,000 stock options to be made at the exercise
price of $7.50 per share. This grant has a four-year vesting schedule.
o An initial grant of 10,000 stock options to occur at the time of an
Initial Public Offering (exercise at IPO strike price).
o Yearly grants of 5,000 stock options made each year at the time of the
annual meeting.
o You have agreed to purchase $500,000 in common shares at $7.50 per
share. You agree to execute customary lock-up agreements with
underwriters in connection with any public offering, and we will grant
you registration and other rights commensurate with the rights of other
purchasers of our capital stock.
o Directors and officers insurance in the amount of $25,000,000.
o You represent to us that you are an "accredited investor" as defined in
Regulation D of the Securities Act of 1933 and that you are acquiring
these shares for investment and without a view to making a
distribution.
<PAGE>
The Board meetings are held on a quarterly basis (typically once in New York,
once in California and twice in Missouri). The remaining board meetings for 2000
are tentatively scheduled for April 26, August 16 and October 25. The upcoming
April 26 Board meeting will be held in New York.
Please indicate your acceptance of this offer by signing both copies in the
space provided. Retain one copy for your records and return the other in the
enclosed envelope for our files. Welcome to Birch, we're very happy to have you
aboard.
Sincerely,
David E. Scott
President and Chief Executive Officer
Offer accepted by:
/s/ Mory Ejabat
_____________________ ________________________
Mory Ejabat Date
<PAGE>
Exhibit 10.31
March 22, 2000
DELIVERED VIA FACSIMILE AND FEDERAL EXPRESS
Mr. Richard A. Jalkut
27 Captain Theale Road
Bedford, NY 10506
Dear Dick,
On behalf of Birch Telecom, I am pleased and excited to offer you the position
of Non-Executive Chairman of the Board.
The position's term length will be three years if Birch adopts a staggered Board
structure, and one year if it does not. If Birch does not adopt a staggered
Board structure, all terms will be one-year terms.
Additional details of the offer are as follows:
o An annual retainer fee in the amount of $5,000 and expense
reimbursement for Board meetings.
o An initial grant of 30,000 stock options to be made at the exercise
price of $7.50 per share. This grant has a four-year vesting schedule.
o An initial grant of 10,000 stock options to occur at the time of an
Initial Public Offering (exercise at IPO strike price).
o Yearly grants of 5,000 stock options made each year at the time of the
annual meeting.
o You have agreed to purchase $200,000 in common shares at $7.50 per
share. You agree to execute customary lock-up agreements with
underwriters in connection with any public offering, and we will grant
you registration and other rights commensurate with the rights of other
purchasers of our capital stock.
o Directors and officers insurance in the amount of $25,000,000.
o You represent to us that you are an "accredited investor" as defined in
Regulation D of the Securities Act of 1933 and that you are acquiring
these shares for investment and without a view to making a
distribution.
<PAGE>
The Board meetings are held on a quarterly basis (typically once in New York,
once in California and twice in Missouri). The remaining board meetings for 2000
are tentatively scheduled for April 26, August 16 and October 25. The upcoming
April 26 Board meeting will be held in New York.
Please indicate your acceptance of this offer by signing both copies in the
space provided. Retain one copy for your records and return the other in the
enclosed envelope for our files. Welcome to Birch, we're very happy to have you
aboard.
Sincerely,
David E. Scott
President and Chief Executive Officer
Offer accepted by:
/s/ Richard A. Jalkut
_____________________ ________________________
Richard A. Jalkut Date
<PAGE>
Exhibit 10.32
AMENDMENT NUMBER 1
TO THE
AMENDED AND RESTATED PURCHASERS RIGHTS AGREEMENT
Reference is made to the Amended and Restated Purchasers Rights
Agreement (the "Agreement"), dated as of August 5, 1999, by and among Birch
Telecom, Inc., a Delaware corporation (the "Company"), and certain purchasers of
the Company's Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock
(together, the "Series Preferred"), and of the Company's Common Stock (the
"Common Stock") (including the purchasers of the Common Shares), and certain
holders of stock options, each as set forth on Exhibit A to the Agreement.
Capitalized terms used herein but not otherwise defined shall have the meanings
assigned to them in the Agreement. This is the first amendment (the "Amendment")
to the Agreement.
WHEREAS, the Agreement may be amended or modified only upon the written
consent of the Company and the Purchasers holding (i) at least 50% of the Common
Shares, voting together as a single class, (ii) at least 50% of the Series B
Preferred Stock, voting together as a single class, (iii) at least 50% of the
Series C Preferred Stock, voting together as a single class, (iv) at least 50%
of the Series D Preferred Stock, voting together as a single class, (v) at least
50% of the Series E Preferred Stock, voting together as a single class and (vi)
at least 50% of the Series F Preferred Stock, voting together as a single class
(collectively, the "Amending Purchasers");
WHEREAS, the Amending Purchasers have determined that it is in the best
interests of the Company to increase the size of the Company's Board of
Directors to 11 members; and
WHEREAS, the Amending Purchasers wish to amend the Agreement as herein
provided;
NOW, THEREFORE, it is agreed:
1. Section 8.1 of the Agreement is hereby amended by deleting clause
(a) and inserting the following clause (a) in lieu thereof:
(a) SIZE. Commencing on March 23, 2000, the Company and the
Purchasers agree to take any actions necessary so that the Board will
be comprised of eleven (11) directors. The Company and the Purchasers
agree to take any actions necessary so that, as of March 23, 2000, the
Series F Directors shall consist of Adam H. Clammer, James H. Greene,
Jr., Henry R. Kravis, Alexander Navab, Jr. and George R. Roberts, the
Other Series Preferred Directors shall consist of Henry H. Bradley and
Thomas R. Palmer, the Common Director shall be David E. Scott, the
Other Directors shall be Mory Ejabat and Richard A. Jalkut, and there
shall be one vacancy. The Company and the Purchasers also agree to take
any actions necessary so that, as soon as practicable, an independent
director nominated by Mr. Scott and approved by the Series F Directors
(such approval not to be unreasonably withheld) is appointed or elected
to the Board.
<PAGE>
2. This Amendment may be executed in any number of counterparts, each
of which shall be an original, but all of which together shall constitute one
agreement. This Amendment may be executed by facsimile signature(s).
3. This Amendment, together with the Agreement and the exhibits
thereto, constitutes the full and entire understanding and agreement between the
parties with regard to the subjects hereof and thereof; PROVIDED that the
parties to this Amendment acknowledge and agree that the rights, restrictions
and obligations set forth in this Amendment and in the Agreement are in addition
to, and not in replacement of, the rights, restrictions and obligations set
forth in the Purchase Agreement, Restated Certificate and the Management
Stockholder Agreements.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
WHITE PINES LIMITED PARTNERSHIP I
By: /s/ AUTHORIZED SIGNATORY
-------------------------------
Name: _____________________________
Title: ____________________________
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 989,128
Series C Preferred Stock: -0-
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
PACIFIC CAPITAL, L.P.
By: /s/ AUTHORIZED SIGNATORY
-------------------------------
Name: _____________________________
Title: ____________________________
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 1,219,925
Series C Preferred Stock: -0-
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
ADVANTAGE CAPITAL MISSOURI
PARTNERS I, L.P.
By: /s/ AUTHORIZED SIGNATORY
-------------------------------
Name: _____________________________
Title: ____________________________
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 1,318,750
Series C Preferred Stock: -0-
Series D Preferred Stock: 145,550
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
ADVANTAGE CAPITAL MISSOURI
PARTNERS II, L.P.
By: /s/ AUTHORIZED SIGNATORY
-------------------------------
Name: _____________________________
Title: ____________________________
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: -0-
Series C Preferred Stock: -0-
Series D Preferred Stock: 417,450
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
/s/ BRADLEY A. MOLINE
-------------------------------
Bradley A. Moline
Number of shares held:
Common Stock: 297,932
Series B Preferred Stock: 69,234
Series C Preferred Stock: -0-
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
NEWS-PRESS & GAZETTE COMPANY
By: /s/ AUTHORIZED SIGNATORY
-------------------------------
Name: _____________________________
Title: ____________________________
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 1,648,438
Series C Preferred Stock: 1,582,500
Series D Preferred Stock: 222,222
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
/s/ HENRY H. BRADLEY
----------------------------------------
Henry H. Bradley, as custodian for
Katherine Elizabeth Bradley under the
Missouri Uniform Transfers to Minors Act
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 32,969
Series C Preferred Stock: -0-
Series D Preferred Stock: 11,111
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
/s/ HENRY H. BRADLEY
-------------------------------------------
Henry H. Bradley, as custodian for Stephane
Suzanne Bradley under the Missouri
Uniform Transfers to Minors Act.
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 32,969
Series C Preferred Stock: -0-
Series D Preferred Stock: 11,111
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
/s/ HENRY H. BRADLEY
----------------------------------------
Henry H. Bradley, as custodian for David
Bradley, III under the Missouri Uniform
Transfers to Minors Act.
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 32,969
Series C Preferred Stock: -0-
Series D Preferred Stock: 11,111
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
BTI Ventures L.L.C.
By: /s/ AUTHORIZED SIGNATORY
-------------------------------
Name: _____________________________
Title: ____________________________
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: -0-
Series C Preferred Stock: -0-
Series D Preferred Stock: -0-
Series F Preferred Stock 13,333,334
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
BTI Ventures L.L.C.
By: /s/ AUTHORIZED SIGNATORY
-------------------------------
Name: _____________________________
Title: ____________________________
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: -0-
Series C Preferred Stock: -0-
Series D Preferred Stock: -0-
Series F Preferred Stock 13,333,334
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
/s/ DAVID E. SCOTT
------------------------------
David E. Scott
Number of shares held:
Common Stock: 1,190,768
Series B Preferred Stock: -0-
Series C Preferred Stock: 189,900
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
/s/ DAVID W. VRANICAR
------------------------------
David W. Vranicar
Number of shares held:
Common Stock: 316,780
Series B Preferred Stock: 36,266
Series C Preferred Stock: -0-
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
/s/ GREGORY C. LAWHON
----------------------------
Gregory C. Lawhon
Number of shares held:
Common Stock: 380,137
Series B Preferred Stock: -0-
Series C Preferred Stock: -0-
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
/s/ JEFFREY D. SHACKELFORD
---------------------------------
Jeffrey D. Shackelford
Number of shares held:
Common Stock: 794,162
Series B Preferred Stock: -0-
Series C Preferred Stock: 126,600
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
KCEP I, L.P.
By: /s/ AUTHORIZED SIGNATORY
-------------------------------
Name: _____________________________
Title: ____________________________
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 945,108
Series C Preferred Stock: -0-
Series D Preferred Stock: 111,111
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
KCEP VENTURES II, L.P.
By: /s/ AUTHORIZED SIGNATORY
-------------------------------
Name: _____________________________
Title: ____________________________
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: -0-
Series C Preferred Stock: -0-
Series D Preferred Stock: 555,556
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
STEPHEN LOCKWOOD SAUDER REVOCABLE
TRUST DTD MARCH 1, 1976
/s/ STEPHEN L. SAUDER
----------------------------------
Stephen L. Sauder, Trustee
/s/ PAULA KAY FRIESEN SAUDER
----------------------------------
Paula Kay Friesen Sauder, Trustee
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: -0-
Series C Preferred Stock: 1,544,788
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
PAULA KAY FRIESEN SAUDER REVOCABLE
TRUST DTD MARCH 1, 1976
/s/ STEPHEN L. SAUDER
----------------------------------
Stephen L. Sauder, Trustee
/s/ PAULA KAY FRIESEN SAUDER
----------------------------------
Paula Kay Friesen Sauder, Trustee
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: -0-
Series C Preferred Stock: 1,544,787
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 23rd day of March, 2000.
/s/ STEPHEN L. SAUDER
-----------------------------
Stephen L. Sauder
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 19,781
Series C Preferred Stock: -0-
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions 'Summary
Consolidated Financial and Operating Data', 'Selected Consolidated Financial and
Operating Data' and 'Experts' and to the use of our reports dated February 17,
2000 (except for Note 19, as to which the date is March 23, 2000), with respect
to the consolidated financial statements and schedule of Birch Telecom, Inc.,
and May 15, 1998, with respect to the consolidated financial statements of
Valu-Line Companies, Inc., in the Registration Statement (Forms S-1) and related
Prospectus of Birch Telecom, Inc. dated March 23, 2000.
Ernst & Young LLP
Kansas City, Missouri
March 23, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF BIRCH TELECOM, INC. AS OF, AND FOR THE YEAR
ENDING DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL REPORT ON FORM 10-K OF
BIRCH TELECOM, INC.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 5,053
<SECURITIES> 15,936
<RECEIVABLES> 12,068
<ALLOWANCES> 456
<INVENTORY> 3,735
<CURRENT-ASSETS> 38,779
<PP&E> 70,192
<DEPRECIATION> 8,080
<TOTAL-ASSETS> 146,971
<CURRENT-LIABILITIES> 25,393
<BONDS> 125,785
63,550
16
<COMMON> 5
<OTHER-SE> (67,778)
<TOTAL-LIABILITY-AND-EQUITY> 146,971
<SALES> 60,538
<TOTAL-REVENUES> 60,538
<CGS> 46,358
<TOTAL-COSTS> 46,358
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 561
<INTEREST-EXPENSE> 15,036
<INCOME-PRETAX> (61,804)
<INCOME-TAX> 0
<INCOME-CONTINUING> (61,804)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61,804)
<EPS-BASIC> (13.25)
<EPS-DILUTED> (13.25)
</TABLE>
