<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 20, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
KMC TELECOM HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 22-3545325
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
1545 ROUTE 206, SUITE 300
BEDMINSTER, NEW JERSEY 07921
(908) 470-2100
(Address, including ZIP Code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
MICHAEL A. STERNBERG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
KMC TELECOM HOLDINGS, INC.
1545 ROUTE 206, SUITE 300
BEDMINSTER, NJ 07921
(908) 470-2100
(Name and address, including ZIP Code and telephone number,
including area code, of agent for service)
------------------------------
WITH A COPY TO:
BRIAN J. CALVEY, ESQ.
KELLEY DRYE & WARREN LLP
101 PARK AVENUE
NEW YORK, NEW YORK 10178
(212) 808-7800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED TO BE REGISTERED PER NOTE PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
12 1/2% Senior Discount Notes due 2008........... $238,967,391(2) 100% $238,967,391 $70,495
</TABLE>
(1) Estimated solely for purposes of calculating the amount of the registration
fee pursuant to Rule 457(f).
(2) Equals the aggregate principal amount of the securities being registered
which were issued with original issue discount.
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>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 20, 1998
PROSPECTUS
KMC TELECOM HOLDINGS, INC.
OFFER TO EXCHANGE 12 1/2%
SENIOR DISCOUNT NOTES DUE 2008 FOR
ANY AND ALL OUTSTANDING 12 1/2%
SENIOR DISCOUNT NOTES DUE 2008
---------------------
The Exchange Offer will expire at 5:00 p.m., New York City time, on ,
1998 unless extended.
------------------------
KMC Telecom Holdings, Inc., a Delaware corporation (the "Company"), hereby
offers to exchange (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus (the "Prospectus") and the accompanying
Letter of Transmittal (the "Letter of Transmittal"), its 12 1/2% Senior Discount
Notes due 2008 (the "Exchange Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this Prospectus forms a part (together with all
amendments and exhibits thereto, the "Registration Statement"), for a like
principal amount at maturity of its 12 1/2% Senior Discount Notes due 2008 (the
"Original Notes" and, together with the Exchange Notes, the "Notes").
------------------------
The Original Notes were issued by the Company in an offering (the "Initial
Offering") of 460,800 Units (the "Units") exempt from the registration
requirements of the Securities Act, which was consummated on January 29, 1998
(the "Closing Date"). Each Unit issued in the Initial Offering consisted of one
Original Note and one warrant (each a "Warrant" and, collectively, the
"Warrants") to purchase 0.21785 shares of common stock, par value $.01 per
share, of the Company (the "Common Stock"). The Original Notes and the Warrants
will become separately tradeable upon the effectiveness of the Registration
Statement.
------------------------
The terms of the Exchange Notes are identical in all material respects
(including principal amount at maturity, interest rate and maturity) to the
terms of the Original Notes for which they may be exchanged pursuant to the
Exchange Offer, except that the Exchange Notes will generally be freely
transferable by holders thereof (each, a "Holder" and, collectively, the
"Holders") (except as provided herein), and are not subject to any covenant of
the Company regarding registration. The Exchange Notes will evidence the same
indebtedness as the Original Notes (which they replace) and will be entitled to
the benefits of the Indenture, dated as of January 29, 1998, governing the
Original Notes and the Exchange Notes (the "Indenture"). For a description of
the principal terms of the Exchange Notes, see "Description of the Exchange
Notes."
------------------------
Interest on the Exchange Notes will be payable semi-annually on February 15
and August 15 of each year, commencing August 15, 2003. The Notes are redeemable
at the option of the Company, in whole or in part, at any time on or after
February 15, 2003, at the redemption prices set forth herein. In addition, at
any time prior to April 15, 2000, the Company may redeem up to 35% of the
aggregate principal amount at maturity of the Notes from the proceeds of one or
more public or private Equity Offerings (as defined herein) at the redemption
price set forth herein; provided that after any such redemption at least 65% of
the aggregate principal amount at maturity of the Notes remains outstanding.
------------------------
SEE "RISK FACTORS," COMMENCING ON PAGE 16, FOR A DESCRIPTION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN CONNECTION WITH THE
EXCHANGE OFFER AND AN INVESTMENT IN THE EXCHANGE NOTES.
COVER CONTINUED ON NEXT PAGE
The date of this Prospectus is , 1998.
2
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
3
<PAGE>
COVER CONTINUED FROM PRECEDING PAGE
The Exchange Notes will be unsubordinated, unsecured indebtedness of the
Company, will rank PARI PASSU in right of payment with all existing and future
unsubordinated, unsecured indebtedness of the Company and senior in right of
payment to all subordinated indebtedness of the Company. After giving PRO FORMA
effect to the Initial Offering, as of December 31, 1997, the Company (on an
unconsolidated basis) would not have had any indebtedness outstanding other than
the Original Notes. However, the Company is a holding company and the Exchange
Notes will be effectively subordinated to all existing and future liabilities
(including trade payables) of the Company's subsidiaries. As of December 31,
1997, on the same PRO FORMA basis, the Company's subsidiaries would have had
approximately $53.9 million of liabilities (excluding intercompany payables),
including approximately $40.5 million of secured indebtedness.
The Exchange Notes are being offered hereunder in order to satisfy certain
of the obligations of the Company under a registration rights agreement, dated
January 26, 1998 (the "Registration Rights Agreement") between the Company and
the Placement Agent (as defined herein) relating to the Original Notes. See "The
Exchange Offer--Purpose of the Exchange Offer." The Company is making the
Exchange Offer in reliance upon an interpretation by the staff of the Securities
and Exchange Commission (the "Commission") set forth in a series of no-action
letters issued to third parties, although the Company has not sought, and does
not intend to seek, its own no-action letter and there can be no assurance that
the staff of the Commission would make a similar determination with respect to
the Exchange Offer. Based upon the Commission's interpretations, the Company
believes that the Exchange Notes issued pursuant to the Exchange Offer in
exchange for Original Notes may be offered for resale, resold and otherwise
transferred by Holders thereof (other than any Holder that is (i) an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act (an
"Affiliate"), (ii) a broker-dealer who acquired Original Notes directly from the
Company or (iii) a broker-dealer who acquired Original Notes as a result of
market-making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act; provided,
that such Exchange Notes are acquired in the ordinary course of such Holders'
business and such Holders are not participating in, do not intend to participate
in, and have no arrangement or understanding with any person to participate in,
a distribution of such Exchange Notes. Any Holder that cannot rely upon such
interpretations must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. See "The Exchange Offer--Procedures For Tendering."
Each broker-dealer who receives Exchange Notes pursuant to the Exchange
Offer in exchange for Original Notes acquired for its own account as a result of
market-making activities or other trading activities may be a statutory
underwriter and must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. Broker-dealers who
acquired Original Notes as a result of market-making or other trading activities
may use this Prospectus, as supplemented or amended, in connection with resales
of the Exchange Notes.
The Original Notes are designated eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages ("PORTAL") market. The
Company does not intend to apply for listing of the Exchange Notes on any
securities exchange or to seek approval through any automated quotation system.
There can be no assurance regarding the future development of a market for the
Exchange Notes, or the ability of Holders of the Exchange Notes to sell their
Exchange Notes or the price at which such Holders may be able to sell their
Exchange Notes. See "Risk Factors--Absence of Public Market."
Any Original Notes not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all of the rights and preferences,
and will be subject to the limitations, applicable thereto under the Indenture.
Following consummation of the Exchange Offer, the Holders of Original Notes will
continue to be subject to the existing restrictions on transfer thereof and the
Company will have no further obligation to such Holders to provide for the
registration under the Securities Act of the Original Notes held by them.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount at maturity of Original Notes being tendered for exchange but is
otherwise subject to customary conditions. The Company will accept for exchange
any and all validly tendered Original Notes not withdrawn prior to 5:00 p.m.,
New York City time, on ,1998, unless the Exchange Offer is extended
by the Company in its sole discretion (the "Expiration Date"). Original Notes
tendered pursuant to the Exchange Offer may be withdrawn at any time prior to
the Expiration Date; otherwise such tenders are irrevocable. Original Notes may
only be tendered in integral multiples of $1,000 at maturity. See "The Exchange
Offer."
The Company will not receive any proceeds from, and has agreed to bear all
registration expenses of, the Exchange Offer.
4
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE EXCHANGE NOTES TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION
TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE SECURITIES ACT. ALL STATEMENTS REGARDING THE COMPANY'S AND ITS SUBSIDIARIES'
EXPECTED FINANCIAL POSITION, BUSINESS AND FINANCING PLANS ARE FORWARD-LOOKING
STATEMENTS. ALTHOUGH THE COMPANY AND ITS SUBSIDIARIES BELIEVE THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, THERE
CAN BE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH
EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS,
INCLUDING UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO THE COMPANY, ITS SUBSIDIARIES OR PERSONS ACTING ON
THEIR BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY
STATEMENTS. NOTHING CONTAINED IN THIS PROSPECTUS IS OR SHOULD BE RELIED UPON AS
A PROMISE OR REPRESENATION AS TO FUTURE RESULTS OR EVENTS.
------------------------
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B WITH THE STATE OF NEW HAMPSHIRE NOR
THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN
THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER
ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
3
<PAGE>
AVAILABLE INFORMATION
This Prospectus constitutes part of an exchange offer Registration Statement
on Form S-4 filed by the Company with the Commission under the Securities Act
with respect to the Exchange Notes. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which have been omitted in accordance
with the rules and regulations of the Commission. Reference is made to such
Registration Statement and to the exhibits relating thereto for further
information with respect to the Company and the Exchange Notes. Statements made
in this Prospectus as to any contract, agreement or other document are summaries
of the material terms of such contracts, agreements or other documents and are
not necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement is qualified in its entirety by such reference.
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a
result of the filing of the Registration Statement with the Commission, however,
the Company will become subject to the informational requirements of the
Exchange Act and in accordance therewith will be required to file with, or
furnish to, the Commission certain reports and other information. The
Registration Statement, the exhibits and schedules thereto, reports and other
information filed with or furnished to the Commission by the Company may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the regional
offices of the Commission at 7 World Trade Center, 13th Floor, New York, New
York 10048 and at Northwestern Atrium Center, 500 West Madison Street (Suite
1400), Chicago, Illinois 60661. Copies of such materials may also be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. In addition, the Commission
maintains a Web site on the Internet that contains reports and other information
regarding registrants that submit electronic filings to the Commission,
including the Company. The address of the Commission's Web site is HTTP://
WWW.SEC.GOV.
Pursuant to the Indenture, the Company has agreed, whether or not required
by the rules and regulations of the Commission, to file with the Commission and
to furnish to the Trustee and to registered Holders of the Notes, such reports
and other information as it would be required to file with the Commission by
Sections 13(a) or 15(d) of the Exchange Act if it were subject thereto.
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING RISK FACTORS AND FINANCIAL STATEMENTS, INCLUDING THE
NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT
OTHERWISE REQUIRES, THE TERM "COMPANY" MEANS KMC TELECOM HOLDINGS, INC. ("KMC")
AND, WHERE APPROPRIATE, ITS SUBSIDIARIES. INDUSTRY FIGURES WERE OBTAINED FROM
REPORTS PUBLISHED BY THE FEDERAL COMMUNICATIONS COMMISSION (THE "FCC"). SEE
"GLOSSARY OF SELECTED TERMS" BEGINNING AT PAGE G-1 FOR THE DEFINITIONS OF
CERTAIN TERMS USED IN THIS PROSPECTUS.
THE COMPANY
The Company is a competitive local exchange carrier ("CLEC") providing
telecommunications and data services in Tier III Markets. The Company currently
provides on-net special access and private line and Internet access services and
switch-based local and long distance services primarily on a resale basis. The
Company's objective is to provide its customers with a complete solution for
their communications needs. Over the next year, the Company intends to
transition its resale customers to on-net switched services, Centrex-type and
frame relay, ISDN and ATM services for applications including LAN-to-LAN
interconnect, Internet access, WAN, and high speed video conferencing. The
Company targets business, government and institutional end users, as well as
Internet service providers ("ISPs"), long distance companies ("IXCs") and
wireless service providers.
The Company currently operates in eight Tier III Markets. The Company
entered each of these markets, after completing construction of a fiber optic
network backbone, by selling on-net dedicated services and reselling ILEC
switched services to its customers. The Company has installed, or intends to
install, Lucent Technologies Series 5ESS-Registered Trademark--2000 switches (or
Lucent derivatives of the 5ESS-Registered Trademark-) in each of its existing
and future markets. Switches are currently in commercial operation in seven of
the Company's eight markets. The Company expects to construct 10 additional
networks and install 11 additional switches by the end of 1998. In addition, the
Company expects to construct 5 additional networks and install 5 additional
switches in 1999.
Through December 31, 1997, the Company had invested $73.8 million in
connection with the construction of its networks. For the year ended December
31, 1997, revenues totaled $3.4 million, composed of $2.3 million from resale of
switched services and $1.1 million from special access and private line
services. As the Company's switches become commercially operational and
additional fiber optic facilities are installed, the Company expects to
transition the majority of its customers to its own networks.
The following table presents information, as of March 31, 1998, concerning
the Company's existing networks:
<TABLE>
<CAPTION>
NETWORK SWITCH OWNED ADDRESSABLE COMMERCIAL
COMMERCIALLY COMMERCIALLY OPERATIONAL COMMERCIAL BUILDINGS
LOCATION OPERATIONAL(1) OPERATIONAL(2) ROUTE MILES BUILDINGS(3) ON ROUTE(4)
- ------------------------------------ -------------- ---------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Huntsville, AL...................... March 1996 November 1997 68 992 244
Baton Rouge, LA..................... March 1997 November 1997 28 1,393 319
Shreveport, LA...................... March 1997 December 1997 20 642 217
Corpus Christi, TX.................. May 1997 December 1997 28 895 204
Savannah, GA........................ June 1997 December 1997 24 666 152
Melbourne, FL (5)................... July 1997 May 1998 22 620 111
Madison, WI......................... August 1997 December 1997 32 1,101 375
Augusta, GA......................... October 1997 March 1998 30 720 166
<CAPTION>
COMMERCIAL
BUILDINGS ON APPROXIMATE
LOCATION THE NETWORK POPULATION
- ------------------------------------ --------------- ------------
<S> <C> <C>
Huntsville, AL...................... 59 320,000
Baton Rouge, LA..................... 4 560,000
Shreveport, LA...................... 8 380,000
Corpus Christi, TX.................. 2 384,000
Savannah, GA........................ 8 282,000
Melbourne, FL (5)................... 10 455,000
Madison, WI......................... 21 396,000
Augusta, GA......................... 1 462,000
</TABLE>
- ------------------------
(1) The Company considers a network to be commercially operational when its
fiber optic cable and related electronics permit the Company to commence
service. All of the networks listed are currently carrying customer traffic.
(2) Refers to the date on which testing is completed and the switch is first
available to carry customer traffic. Generally, the Company believes that
the actual transition of customers to on-net switched services should be
complete within six to nine months or less following the date on which the
switch becomes commercially operational. However, there can be no assurance
regarding when switches will be commercially operational or when customers
will be transitioned to on-net services.
5
<PAGE>
(3) Addressable by either ILEC unbundled network elements or a direct connection
to the Company's network. The Company expects collocation in all targeted
central offices in such markets to be completed by June 30, 1998.
(4) A commercial building is considered to be on a network route if it is
located within three miles of the Company's fiber optic backbone cable. The
Company defines a commercial building as one with greater than fifty
employees.
(5) The Melbourne, Florida network (the "Melbourne System") was already
commercially operational when it was acquired in July 1997.
The Company was founded in 1994 by its Chairman, Harold N. Kamine, who
invested approximately $6.3 million in Common Stock of the Company. Mr. Kamine
is Chairman and Chief Executive Officer of Kamine Development Corp., a major
developer of electric cogeneration plants. Additional financing for the Company
has been provided by:
- Nassau Capital Partners L.P. ("Nassau"), an affiliate of the firm that
manages Princeton University's endowment's private investment program, has
invested $14.9 million in preferred stock of the Company.
- AT&T Credit Corporation ("AT&T Credit") had invested $10.0 million in the
Company's Common Stock as of December 31, 1997 and purchased an additional
$10.0 million of Common Stock upon completion of the Initial Offering. In
addition, AT&T Commercial Finance Corporation ("AT&T Finance") has
provided financing for the Company in the form of a senior secured line of
credit pursuant to which AT&T Finance has agreed to make available,
subject to certain conditions, up to a total of $70.0 million, on a
project by project basis, for the construction and development of the
Company's networks (the "AT&T Facility"). Approximately $40.5 million was
outstanding under the AT&T Facility immediately after the closing of the
Initial Offering. AT&T Credit and AT&T Finance are not affiliated with
AT&T Corp.
- General Electric Capital Corporation ("GECC") has invested $10.0 million
in preferred stock of the Company and is a participating lender, to the
extent of $25.0 million, in the AT&T Facility.
- CoreStates Bank, N.A. ("CoreStates") has invested $5.0 million in
preferred stock of the Company and is a participating lender, to the
extent of $15.0 million, in the AT&T Facility.
Total equity invested in, and committed debt available to, the Company as of
December 31, 1997 were $46.1 million and $80.0 million (of which $61.3 million
was outstanding), respectively.
BUSINESS STRATEGY
The principal elements of the Company's business strategy include:
TIER III MARKET FOCUS. The Company intends to operate in Tier III Markets.
The Company believes that many Tier III Markets offer attractive demographic,
economic, competitive and demand characteristics. In addition, network
construction is less expensive in Tier III Markets than in Tier I and Tier II
Markets. Generally, labor costs and the costs of obtaining rights of way are
lower in Tier III Markets. In addition, many Tier III Markets permit significant
aerial deployment of fiber optic cable which is less expensive than the buried
deployment required in many Tier I and Tier II Markets.
EARLY TO MARKET ADVANTAGE. The Company strives to be the first CLEC in a
geographic area to actively market and provide services. The Company believes
that by effecting early entry into Tier III Markets it will be able to limit
significant competition from other CLECs which may focus on Tier III Markets
where no CLEC has yet established operations, although there can be no assurance
in this regard. See "Risk Factors--Competition."
COMPREHENSIVE NETWORKS. The Company builds geographically extensive, full
service networks. The Company believes that such networks provide greater
operating leverage, facilitate the capture of market share, and are likely to
deter other CLECs from attempting to penetrate its markets. In each of its
existing eight markets, the Company has completed its backbone construction
connecting the market's central
6
<PAGE>
business district with outlying office parks, large institutions and IXC Points
of Presence ("POPs"). In addition, the Company will continue to expand its
existing networks in response to anticipated customer demand.
LOCAL PRESENCE. The Company intends to capture and retain customers through
effective, personalized sales, marketing and customer service programs. The
Company establishes sales offices in each market in which it operates a network,
relies on a face-to-face selling approach for its customers and will support its
sales staff with locally based customer service and technical support personnel.
The Company believes that its "Creative Solutions with a Hometown Touch"-TM-
sales approach is very important to customers in Tier III Markets, who do not
typically receive local customer support from the ILEC.
LOW COST CONSTRUCTION. The Company uses innovative "switch-in-a-box"
construction and deployment techniques for many of its networks. Using these
techniques, lightwave, switching and power equipment are pre-installed by Lucent
Technologies Inc. ("Lucent") under controlled factory conditions in
weatherproof, storm-proof concrete buildings delivered to the Lucent facility by
a Company contractor. The completed buildings are then shipped to the
appropriate city for final installation, reducing costs, installation risks and
time to market.
EXPERIENCED EXECUTIVE TEAM. The Company's executive team is led by Harold
N. Kamine, Chairman of the Board of Directors, and Michael A. Sternberg, the
Company's President and Chief Executive Officer. Other members of the team
include Gary E. Lasher, Vice Chairman of the Board, Roscoe C. Young II, Chief
Operating Officer, Cynthia Worthman, Vice President and Chief Financial Officer,
Secretary and Treasurer, and James L. Barwick, Senior Vice President-Technology.
These executives, collectively, have over 130 years of experience in the
telecommunications industry.
The Company is a Delaware corporation with its principal executive offices
located at 1545 Route 206, Suite 300, Bedminster, New Jersey 07921 and its
telephone number at that location is (908) 470-2100.
7
<PAGE>
SUMMARY OF THE EXCHANGE OFFER
<TABLE>
<S> <C>
THE EXCHANGE OFFER..................... The Company is offering to exchange $1,000
principal amount at maturity of Exchange Notes that
have been registered under the Securities Act for
each $1,000 principal amount at maturity of the
Original Notes. In order to be exchanged, an
Original Note must be properly tendered and
accepted. All Original Notes that are validly
tendered and not validly withdrawn will be
exchanged. As of this date, there is approximately
$460.8 million aggregate principal amount at
maturity of Original Notes outstanding. The Company
will issue registered Exchange Notes on, or
promptly after, the Expiration Date. Each of the
Original Notes was originally issued as part of a
Unit consisting of one Original Note and a Warrant
to purchase 0.21785 shares of Common Stock. These
Warrants will become separately tradeable on the
commencement of the Exchange Offer and the Company
is not offering to exchange them.
RESALES................................ Based on interpretations by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that the
Exchange Notes may be offered for resale, resold
and otherwise transferred by Holders without
compliance with the registration and prospectus
delivery provisions of the Securities Act;
provided, that:
(i) the Holder is acquiring Exchange Notes in the
ordinary course of the Holder's business;
(ii) the Holder is not participating, does not
intend to participate, and has no arrangement or
understanding with any person to participate,
in the distribution of the Exchange Notes; and
(iii) the Holder is not an Affiliate of the
Company.
If the Company's belief is inaccurate and a Holder
transfers any Exchange Note without delivering a
prospectus meeting the requirements of the
Securities Act or without an exemption from such
requirements, such Holder may incur liability under
the Securities Act. The Company does not assume or
indemnify Holders against such liability.
Each broker-dealer that is issued Exchange Notes
for its own account in exchange for Original Notes
which were acquired by such broker-dealer as a
result of market-making or other trading activities
must acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in
connection with any resale of the Exchange Notes
issued in the Exchange Offer. This Prospectus, as
it may be amended or supplemented from
</TABLE>
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<TABLE>
<S> <C>
time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received
in exchange for Original Notes acquired by such
broker-dealer as a result of market-making
activities or other trading activities. The Letter
of Transmittal that accompanies this Prospectus
states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act.
REGISTRATION RIGHTS.................... The Original Notes were sold by the Company on
January 29, 1998 to Morgan Stanley & Co.
Incorporated (the "Placement Agent") pursuant to a
Placement Agreement, dated January 26, 1998 (the
"Placement Agreement"), between the Company and the
Placement Agent. Pursuant to the Placement
Agreement, the Company entered into the
Registration Rights Agreement with the Placement
Agent, which agreement grants the Holders of
Original Notes certain exchange and registration
rights. The Exchange Offer is intended to satisfy,
as to all Notes, such rights, which will terminate
upon consummation of the Exchange Offer. The
Holders of the Exchange Notes will not be entitled
to any exchange or registration rights with respect
to the Exchange Notes. Holders of Original Notes
who do not participate in the Exchange Offer may
thereafter hold a less liquid security. See "The
Exchange Offer--Termination of Certain Rights."
EXPIRATION DATE........................ The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1998, unless the
Exchange Offer is extended by the Company in its
sole discretion, in which case the term "Expiration
Date" shall mean the latest date and time to which
the Exchange Offer is extended.
PROCEDURES FOR
TENDERING ORIGINAL NOTES............. Each Holder of Original Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with such Original Notes and any other required
documentation to The Chase Manhattan Bank, as
Exchange Agent (the "Exchange Agent"), at the
address set forth herein. By executing the Letter
of Transmittal, the Holder will represent to and
agree with the Company that, among other things,
(i) the Exchange Notes to be acquired by such
Holder of Original Notes in connection with the
Exchange Offer are being acquired by such Holder in
the ordinary course of its business, (ii) such
Holder is not participating, does not intend to
participate and has no
</TABLE>
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<S> <C>
arrangement or understanding with any person to
participate, in a distribution of the Exchange
Notes, and (iii) such Holder is not an Affiliate of
the Company. If the Holder is a broker-dealer that
will receive Exchange Notes for its own account in
exchange for Original Notes that were acquired as a
result of market-making or other trading
activities, such Holder will be required to
acknowledge in the Letter of Transmittal that such
Holder will deliver a prospectus in connection with
any resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus, such
Holder will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities
Act. See "The Exchange Offer--Procedures for
Tendering."
SPECIAL PROCEDURES
FOR BENEFICIAL OWNERS................ Any beneficial owner whose Original Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender such Original Notes in the
Exchange Offer should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal
and delivering such owner's Original Notes, either
make appropriate arrangements to register ownership
of the Original Notes in such owner's name or
obtain a properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time and may not be
able to be completed prior to the Expiration Date.
See "The Exchange Offer--Procedures for Tendering."
GUARANTEED DELIVERY PROCEDURES......... Holders of Original Notes who wish to tender their
Original Notes and whose Original Notes are not
immediately available or who cannot deliver their
Original Notes, the Letter of Transmittal or any
other documentation required by the Letter of
Transmittal, to the Exchange Agent prior to the
Expiration Date must tender their Original Notes
according to the guaranteed delivery procedures set
forth under "The Exchange Offer--Guaranteed
Delivery Procedures."
WITHDRAWAL RIGHTS...................... Holders may withdraw the tender of their Original
Notes at any time prior to 5:00 p.m. New York City
time on the Expiration Date.
CERTAIN U.S. FEDERAL INCOME TAX
CONSEQUENCES......................... The exchange of Original Notes for Exchange Notes
will not be a taxable exchange for United States
federal income tax purposes. Holders will not
recognize any taxable gain or loss or any interest
income as a result of such exchange.
</TABLE>
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<S> <C>
USE OF PROCEEDS........................ The Company will not receive any proceeds from the
issuance of the Exchange Notes pursuant to the
Exchange Offer. The Company will pay all expenses
incident to the Exchange Offer.
EXCHANGE AGENT......................... The Chase Manhattan Bank is serving as the Exchange
Agent in connection with the Exchange Offer. The
Chase Manhattan Bank also serves as trustee (the
"Trustee") under the Indenture.
</TABLE>
THE NOTES
The Exchange Offer applies to the approximately $460.8 million aggregate
principal amount at maturity of the Original Notes. The form and terms of the
Exchange Notes are the same in all material respects as the form and terms of
the Original Notes, except that the Exchange Notes will be registered under the
Securities Act and, therefore, will not bear legends restricting their transfer
and Holders of the Exchange Notes will not be entitled to any of the
registration rights of Holders of the Original Notes under the Registration
Rights Agreement, which rights will terminate upon consummation of the Exchange
Offer. The Exchange Notes will evidence the same indebtedness as the Original
Notes (which they replace) and both the Original Notes and the Exchange Notes
are governed by the same Indenture.
<TABLE>
<S> <C>
NOTES.................................. $460,800,000 aggregate principal amount at maturity
($249,965,568 original issue price) of 12 1/2%
Senior Discount Notes due 2008.
MATURITY............................... February 15, 2008.
YIELD AND INTEREST..................... The Original Notes were sold at a substantial
discount from their principal amount at maturity,
and there will not be any payment of interest on
the Notes prior to August 15, 2003. For a
discussion of the U.S. federal income tax treatment
of the Notes under the original issue discount
rules, see "Certain United States Federal Income
Tax Considerations." The Notes will fully accrete
to face value on February 15, 2003. From and after
February 15, 2003, the Notes will bear interest,
which will be payable in cash, at a rate of 12 1/2%
per annum on each February 15 and August 15,
commencing August 15, 2003.
OPTIONAL REDEMPTION.................... The Notes will be redeemable at the option of the
Company, in whole or in part, at any time or from
time to time, on or after February 15, 2003, at the
redemption prices set forth herein. In addition, at
any time prior to April 15, 2000, the Company may
redeem up to 35% of the aggregate principal amount
at maturity of the Notes from the proceeds of one
or more public or private Equity Offerings (as
defined) at 112.5% of their Accreted Value (as
defined) on the redemption date; provided, that
after any such redemption at least 65% of the
aggregate principal amount at maturity of the Notes
remains outstanding. See "Description of the
Exchange Notes-- Optional Redemption."
</TABLE>
11
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<S> <C>
RANKING................................ The Notes will be unsubordinated, unsecured
indebtedness of the Company, will rank PARI PASSU
in right of payment with all existing and future
unsubordinated, unsecured indebtedness of the
Company and will be senior in right of payment to
any future subordinated indebtedness of the
Company. As of December 31, 1997, after giving PRO
FORMA effect to the Initial Offering, the Company
(on an unconsolidated basis) would not have had any
indebtedness outstanding other than the Original
Notes. However, the Company is a holding company
and the Exchange Notes will be effectively
subordinated to all existing and future
indebtedness (including the AT&T Facility) and
liabilities (including trade payables and any
subordinated indebtedness) of the Company's
subsidiaries. As of December 31, 1997, on the same
PRO FORMA basis, the subsidiaries of the Company
would have had approximately $53.9 million of
liabilities (excluding intercompany payables),
including approximately $40.5 million of secured
indebtedness. See "Risk Factors-- Substantial
Indebtedness; Debt Service Requirements;
Refinancing Risks," "--Holding Company's Reliance
on Subsidiaries' Funds; Priority of Other
Creditors" and "Description of Certain
Indebtedness."
CERTAIN COVENANTS...................... The Indenture contains covenants that, among other
things, restrict the ability of the Company and its
Restricted Subsidiaries to incur additional
indebtedness, create liens, engage in
sale-leaseback transactions, pay dividends or make
distributions in respect of their capital stock,
make investments or certain other restricted
payments, sell assets, redeem capital stock, issue
or sell stock of Restricted Subsidiaries, enter
into transactions with stockholders or affiliates
or, with respect to the Company, effect a
consolidation or merger. However, these limitations
will be subject to a number of important
qualifications and exceptions. See "Description of
the Exchange Notes--Covenants."
CHANGE OF CONTROL...................... In the event of a Change of Control (as defined
herein), the Company will be required to make an
offer to purchase all of the Notes outstanding at a
purchase price in cash equal to 101% of their
Accreted Value on the date of purchase, plus
accrued interest. See "Description of the Exchange
Notes--Repurchase of Notes Upon a Change of
Control."
BOOK ENTRY; DELIVERY AND FORM.......... It is expected that delivery of the Exchange Notes
will be made in book-entry or certificated form.
The Company expects that Exchange Notes exchanged
for Original Notes currently represented by Global
Notes (as defined under "Description of the
Exchange Notes") deposited with, or on behalf of
The Depository Trust Company (the
</TABLE>
12
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<S> <C>
"Depository" or "DTC") and registered in the name
of Cede & Co., its nominee, will be represented by
Global Notes and deposited upon issuance with the
Depository and registered in its name or the name
of its nominee. Beneficial interests in Global
Notes will be shown on, and transfers thereof will
be effected through, records maintained by the
Depository and its participants.
</TABLE>
For additional information regarding the Notes, see "Description of the
Exchange Notes" and "Certain United States Federal Income Tax Considerations."
RISK FACTORS
See "Risk Factors," immediately following this Prospectus Summary, for a
discussion of certain factors relating to an investment in the Notes, including
risks relating to competition in local markets, the Company's limited operating
history, historical and anticipated operating losses and negative cash flow.
13
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The summary historical financial data for the years ended December 31, 1995,
1996 and 1997 and PRO FORMA consolidated statement of operations data for the
year ended December 31, 1997 presented below were derived from the audited
financial statements and pro forma consolidated financial statement of the
Company. The summary historical and pro forma consolidated financial data should
be read in conjunction with "Selected Financial Data," "Unaudited Pro Forma
Consolidated Statement of Operations," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical financial
statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
PRO FORMA
1995 1996 1997 1997(A)(B)
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................ $ -- $ 205,087 $ 3,417,441 $ 3,655,254
Operating expenses:
Network operating costs.......................... -- 448,672 7,735,849 7,830,179
Selling, general and administrative.............. 1,591,159 3,128,972 9,922,804 10,348,286
Stock option compensation expense................ -- 240,000 13,869,346 13,869,346
Depreciation and amortization.................... 5,770 286,509 2,505,875 2,616,913
------------- ------------- -------------- --------------
Total operating expenses....................... 1,596,929 4,104,153 34,033,874 34,664,724
------------- ------------- -------------- --------------
Loss from operations............................... (1,596,929) (3,899,066) (30,616,433) (31,009,470)
Interest expense, net(c)........................... 23,463 596,248 2,068,730 2,202,670
------------- ------------- -------------- --------------
Net loss........................................... (1,620,392) (4,495,314) (32,685,163) (33,212,140)
Dividends and accretion on redeemable preferred
stock............................................ -- -- (8,904,403) (8,904,403)
------------- ------------- -------------- --------------
Net loss applicable to common shareholders......... $ (1,620,392) $ (4,495,314) $ (41,589,566) $ (42,116,543)
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Net loss per common share.......................... $ (2.70) $ (7.49) $ (64.93) $ (65.75)
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Weighted average common shares outstanding......... 600,000 600,000 640,568 640,568
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
OTHER DATA:
Capital expenditures............................... $ 3,498,458 $ 9,110,989 $ 59,145,924 $ 59,145,924
EBITDA(d).......................................... (1,591,159) (3,612,557) (28,110,558) (28,394,707)
Ratio of earnings to fixed charges(e).............. -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------
ACTUAL AS ADJUSTED(F)
-------------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................ $ 15,552,903 $ 235,768,119
Networks and equipment, net...................................................... 71,371,063 71,371,063
Total assets..................................................................... 95,943,307 333,211,914
Long-term debt................................................................... 61,276,933 279,443,540
Redeemable preferred stock....................................................... 35,925,384 35,925,384
Redeemable common stock and warrants............................................. 11,726,305 21,226,305
Total nonredeemable equity (deficiency).......................................... (26,673,279) (16,821,279)
</TABLE>
(accompanying notes are on the following page)
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- ------------------------
(a) Pro forma consolidated statement of operations data and other data gives
effect to the acquisition of the Melbourne System in July 1997 (the
"Melbourne Acquisition") as if the Melbourne Acquisition had occurred as of
January 1, 1997. See "Use of Proceeds," "Selected Financial Data,"
"Unaudited Pro Forma Consolidated Statement of Operations" and the
historical financial statements and notes thereto included elsewhere in this
Prospectus.
(b) Except for the as adjusted balance sheet data, the pro forma financial data
does not give effect to the Initial Offering and the initial application of
the net proceeds therefrom. Assuming that the Initial Offering had been
consummated as of the beginning of the respective years ended December 31,
1996 and 1997, pro forma interest expense for such years would have been
$34.7 million and $35.9 million, respectively.
(c) Excludes capitalized interest of (i) $36,940 for 1995, (ii) $103,000 for
1996, and (iii) $854,000 for 1997. During the construction of the Company's
networks, the interest costs related to construction expenditures are
capitalized.
(d) EBITDA consists of earnings (loss) before net interest, income taxes,
depreciation and amortization, excluding loss on impairment of long-lived
assets. EBITDA is provided because it is a measure commonly used in the
telecommunications industry. It is presented to enhance an understanding of
the Company's operating results and is not intended to represent cash flow
or results of operations in accordance with generally accepted accounting
principles ("GAAP"). EBITDA is not calculated under GAAP and is not
necessarily comparable to similarly titled measures of other companies. For
a presentation of cash flows calculated under GAAP, see the Company's
historical financial statements contained elsewhere in this Prospectus.
(e) The ratio of earnings to fixed charges is computed by dividing pretax income
from continuing operations before fixed charges (other than capitalized
interest) by fixed charges. Fixed charges consist of interest charges and
amortization of debt expense and discount or premium related to
indebtedness, whether expensed or capitalized, and that portion of rental
expense the Company believes to be representative of interest. For 1995,
1996 and 1997, earnings were insufficient to cover fixed charges by $1.7
million, $4.6 million, and $33.5 million, respectively. After giving PRO
FORMA effect to the increase in interest expense resulting from the
Melbourne Acquisition and the Initial Offering as of the beginning of each
period, earnings would have been insufficient to cover fixed charges by
$41.0 million and $67.8 million for 1996 and 1997, respectively.
(f) Adjusted to give effect to the repayment of the Supplemental AT&T Facility
(as defined herein); the exercise by AT&T Credit of a warrant to purchase
91,268 shares of redeemable Common Stock for an aggregate purchase price of
$10.0 million; the deposit of $5.0 million as a nonrefundable downpayment
under the Company's agreement with Lucent for future purchases of switching
equipment; the payment of dividend arrearages on the Series A Cumulative
Convertible Preferred Stock of KMC Telecom Inc.; and the Initial Offering;
as if such transactions had occurred on December 31, 1997. Approximately
$226.4 million of the proceeds of the Initial Offering has been allocated to
the Notes and approximately $10.4 million of the proceeds has been allocated
to the Warrants, after deducting underwriting discounts and commissions and
other expenses related to the Notes and Warrants of $12.6 million and
$554,000, respectively. See "Use of Proceeds," "Selected Financial Data,"
"Unaudited Pro Forma Consolidated Statement of Operations" and the
historical financial statements and notes thereto included elsewhere in this
Prospectus.
15
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE NOTES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
THE FOLLOWING RISK FACTORS, TOGETHER WITH THE OTHER INFORMATION SET FORTH IN
THIS PROSPECTUS, SHOULD BE CONSIDERED WHEN EVALUATING AN INVESTMENT IN THE
NOTES.
LIMITED OPERATING HISTORY; NEGATIVE GROSS PROFITS, OPERATING LOSSES AND NEGATIVE
CASH FLOW
The Company was formed in September 1997 as a holding company. The Company's
subsidiaries commenced operations in 1994 and, as a result, the Company has a
limited operating history and limited revenues. The Company has incurred and
expects to continue to incur significant and increasing negative gross margins,
operating losses and negative EBITDA while it expands its business and builds
its customer base. There can be no assurance that an adequate customer base with
respect to any or all of its services will be obtained or sustained. For 1996
and 1997, the Company had revenues of $205,000 and $3.4 million, respectively,
negative gross profits of $244,000 and $4.3 million, respectively, operating
losses of $3.9 million and $30.6 million, respectively, and negative EBITDA of
$3.6 million and $28.1 million, respectively. On a PRO FORMA basis giving effect
to the increase in interest expense resulting from the Melbourne Acquisition and
the Initial Offering as of the beginning of each period, the Company's free cash
flow (EBITDA minus capital expenditures and interest expense) for 1996 and 1997
would have been negative $48.2 million and negative $123.4 million,
respectively. The Company's negative gross profits, operating losses, negative
EBITDA and capital expenditures are expected to increase as a result of the
continuation of the Company's expansion strategy. There can be no assurance that
the Company will achieve or sustain profitability or generate positive EBITDA or
at any time have sufficient resources to meet its capital expenditure and
working capital requirements or make payments on its indebtedness, including the
Notes. The Company must significantly increase its revenues and cash flows to
meet its debt service obligations, including its obligations on the Notes. See
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SIGNIFICANT CAPITAL REQUIREMENTS
The Company's current plans for expansion of existing networks, the
development of new networks, the further development of the Company's products
and services and the continued funding of operating losses will require
substantial additional cash from outside sources. The Company anticipates that
its capital expenditures for 1998 will be approximately $150.0 million, that it
will have substantial net losses to fund in 1998 and that its substantial cash
requirements will continue into the foreseeable future. The Company believes
that the net proceeds of the Initial Offering, the issuance of the Company's
Series C Preferred Stock to GECC and CoreStates on November 5, 1997 (the "Series
C Placement") and the issuance of the Company's Series D Preferred Stock to
Nassau on November 5, 1997 (the "Series D Placement"), together with available
cash and borrowings expected to be available under the AT&T Facility, will
provide sufficient funds for the Company to expand its business as currently
planned and to fund its currently anticipated expenses through the completion of
its eight existing networks, the ten new networks currently planned for
completion by the end of 1998 and the five additional networks planned for
completion in 1999, and to fund its working capital requirements for 1999.
Thereafter, the Company will require additional financing. However, in the event
that the Company's plans change, the assumptions upon which the Company's plans
are based prove inaccurate, the Company expands or accelerates its business plan
or the Company determines to consummate additional acquisitions, the foregoing
sources of funds may prove to be insufficient to complete all such networks, and
the Company may be required to seek additional financing. In this regard, the
Company has begun preliminary consideration of entering San Juan and other
markets in Puerto Rico. The Company has not determined (i) whether to proceed in
such markets, (ii) if it proceeds, whether it would proceed through a subsidiary
or as a minority investor in another enterprise, or (iii) if it proceeds, the
amount of capital it would invest in Puerto Rican markets. Additional sources of
financing may include public or private equity or debt financings by the
Company,
16
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capitalized leases and other financing arrangements. Pursuant to the
Certificates of the Powers, Designations, Preferences and Rights of the Series A
and Series C Preferred Stock, the Company may not increase the authorized number
of shares of preferred stock or Common Stock without the consent of the holders
of two-thirds of the shares of both the Series A Preferred Stock and the Series
C Preferred Stock. The Company has only three million shares of Common Stock
authorized. There can be no assurance that additional financing will be
available to the Company or, if available, that it can be obtained on a timely
basis and on acceptable terms or within the limitations contained in the AT&T
Facility, the Indenture or in any future financing arrangements. Failure to
obtain such financing could result in the delay or abandonment of some or all of
the Company's development and expansion plans and expenditures, which would have
a material adverse effect on its business prospects and the Company's ability to
make principal and interest payments on the Notes. See "--Substantial
Indebtedness; Debt Service Requirements; Refinancing Risks," "Use of Proceeds,"
"Unaudited Pro Forma Consolidated Statement of Operations" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
SUBSTANTIAL INDEBTEDNESS; DEBT SERVICE REQUIREMENTS; REFINANCING RISKS
At December 31, 1997, after giving PRO FORMA effect to the Initial Offering,
the Company would have had outstanding approximately $279.4 million of
indebtedness and its total redeemable and nonredeemable equity would have been
$40.3 million. AT&T Finance, together with participating lenders GECC and
CoreStates, had previously agreed to provide the Company's subsidiaries, KMC
Telecom Inc., the owner of the Company's existing eight networks ("KMC Telecom")
and KMC Telecom II, Inc., the company that will own and operate nine of the ten
new networks currently planned for completion in 1998 ("KMC Telecom II") with up
to an aggregate of $70.0 million of financing under the AT&T Facility, subject
to certain conditions. All amounts previously borrowed by KMC Telecom II under
the AT&T Facility (approximately $10.8 million), however, were repaid on the
Closing Date of the Initial Offering and KMC Telecom II will no longer be a
borrower or an obligor under the AT&T Facility. KMC Telecom is now permitted to
borrow up to the full $70.0 million amount of the AT&T Facility. See
"Description of Certain Indebtedness." The Indenture limits, but does not
prohibit, the incurrence of additional indebtedness by the Company. In
particular, the Indenture permits the Company and its subsidiaries to incur an
unlimited amount of purchase money indebtedness. See "Description of the
Exchange Notes--Covenants." There can be no assurance that any additional
financing will be available to the Company on acceptable terms. In the absence
of such financing, the Company could be forced to dispose of assets in order to
make up for any shortfall in payments due on its indebtedness under
circumstances that might not be favorable to realizing the highest price for
such assets. There can be no assurance that the Company's assets could be sold
quickly enough or for sufficient amounts to enable the Company to meet its
obligations, including its obligations with respect to the Notes. Although the
net proceeds from the Initial Offering have enhanced the Company's liquidity and
improved its financial flexibility in the near term, the Company's total
indebtedness and interest expense have been significantly increased as a result
of the Initial Offering. After giving PRO FORMA effect to the increase in
interest expense resulting from the Melbourne Acquisition and the Initial
Offering as of the beginning of each period, revenue, EBITDA and interest
expense for 1996 would have been $558,000, negative $3.9 million and $34.7
million, respectively, and for 1997 would have been $3.7 million, negative $28.4
million and $35.9 million, respectively. The level of the Company's indebtedness
could have important consequences to its future prospects, including the
following: (i) limiting the ability of the Company to obtain any necessary
financing in the future for working capital, capital expenditures, debt service
requirements or other purposes; (ii) requiring that a substantial portion of the
Company's cash flow from operations, if any, be dedicated to the payment of
principal of and interest on its indebtedness and other obligations; (iii)
limiting its flexibility in planning for, or reacting to changes in, its
business; (iv) making the Company more highly leveraged than some of its
competitors, which may place it at a competitive disadvantage; (v) making it
more difficult for the Company to make payments on the Notes; and (vi)
increasing its vulnerability in the event of a downturn in its business.
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Failure by the Company to meet its obligations could result in a default on its
indebtedness which would permit the holders of substantially all of the
Company's indebtedness to accelerate the maturity thereof. In such event, the
Company may not be able to meet its obligations on the Notes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In connection with the buildup of its networks and expansion of its CLEC
services, the Company has been experiencing increasing negative EBITDA and the
Company's earnings were insufficient to cover fixed charges for 1996 and 1997.
For 1996 and 1997 after giving PRO FORMA effect to the increase in interest
expense resulting from the Melbourne Acquisition and the Initial Offering as of
the beginning of each year, the Company's earnings would have been insufficient
to cover fixed charges by $41.0 million and $67.8 million, respectively. There
can be no assurance that the Company will be able to improve its earnings before
fixed charges or EBITDA or that it will be able to meet its debt service
obligations.
Cash flow from operations may be insufficient to repay the Company's
indebtedness, including the Notes and the AT&T Facility, in full and a
substantial portion of its indebtedness will need to be refinanced. The AT&T
Facility matures prior to the Notes and any additional indebtedness incurred in
the future may mature prior to the Notes and may need to be refinanced. There
can be no assurance that the Company will be able to effect such refinancings.
The ability of the Company to meet its debt service requirements and to effect
refinancings will be dependent upon, among other things, the future performance
of the Company, which will be subject to prevailing economic conditions and to
financial, business, regulatory and other factors, including factors beyond the
control of the Company.
Under the AT&T Facility, the Company's subsidiaries are required to meet
certain financial tests at the end of each quarter. See "Description of Certain
Indebtedness." Failure to comply with these covenants could limit the ability of
the Company to make further borrowings, or could result in a default, under the
AT&T Facility, allowing AT&T Finance to accelerate the maturity of the loans
made thereunder. There can be no assurance that the Company will be able to
comply with such covenants in the future.
HOLDING COMPANY'S RELIANCE ON SUBSIDIARIES' FUNDS; PRIORITY OF OTHER CREDITORS
KMC is a holding company whose sole material asset is the common stock of
its subsidiaries. The common stock of KMC Telecom and the ownership interests in
its wholly-owned limited liability company, which own the Company's eight
existing networks, have been pledged to AT&T Finance under the AT&T Facility.
The Company loaned or contributed a substantial portion of the net proceeds from
the Initial Offering to certain of its subsidiaries. See "Use of Proceeds." The
Company must rely upon dividends and other payments from its subsidiaries to
generate the funds necessary to meet its obligations, including the payment of
principal and interest on the Notes. The subsidiaries are legally distinct from
the Company and have no obligation, contingent or otherwise, to pay amounts due
with respect to the Notes or to make funds available for such payments, except
to the extent that they may be obliged to repay loans made to them by the
Company. The Company's subsidiaries will not guarantee the Notes. The ability of
the Company's subsidiaries to make such payments to the Company will be subject
to, among other things, the availability of funds, the terms of each
subsidiary's indebtedness and applicable state laws. In particular, the AT&T
Facility prohibits the Company's subsidiaries which are Borrowers thereunder
from paying dividends and principal and interest on intercompany borrowings
unless, among other things, for the preceding four quarters, EBITDA (as defined
in the AT&T Facility) met certain existing target levels and the Fixed Charge
Coverage Ratio (as defined in the AT&T Facility) was at least 1.25:1. See
"Description of Certain Indebtedness." Accordingly, there can be no assurance
that the Company will be able to obtain any funds from its subsidiaries. Claims
of creditors of the Company's subsidiaries, including trade creditors, will
generally have priority as to the assets of such subsidiaries over the claims of
the Company and the holders of the Company's indebtedness, including the Notes.
Accordingly, the Notes will be effectively subordinated to the liabilities
(including the AT&T Facility and trade payables) of the Company's subsidiaries.
At December 31, 1997, after giving PRO FORMA effect to the Initial Offering, the
Company's subsidiaries would have had approximately $53.9 million of liabilities
(excluding intercompany payables),
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including $40.5 million of secured indebtedness and $29.5 million available for
borrowing under the AT&T Facility, subject to certain conditions. The Company
has unconditionally guaranteed the repayment of the AT&T Facility when such
repayment is due, whether at maturity, upon acceleration, or otherwise. The
Company has agreed to pay all amounts outstanding under the AT&T Facility, on
demand, upon the occurrence and during the continuation of any Event of Default
(as defined therein).
The Notes will be unsubordinated, unsecured indebtedness of the Company. At
December 31, 1997, after giving PRO FORMA effect to the Initial Offering, the
Company would have had, on a consolidated basis, an aggregate of approximately
$40.5 million of secured indebtedness. Such indebtedness is secured by a pledge
of all of the Company's stock in its subsidiary KMC Telecom and all of the
ownership interests in KMC Telecom's wholly-owned limited liability company and
substantially all of the assets of KMC Telecom and KMC Telecom's wholly-owned
limited liability company. In the event such secured indebtedness goes into
default and the holders thereof foreclose on the collateral, the holders of
secured indebtedness will be entitled to payment out of the proceeds of their
collateral prior to any holders of general unsecured indebtedness, including the
Notes, notwithstanding the existence of any event of default with respect to the
Notes. In the event of bankruptcy, liquidation or reorganization of the Company,
holders of secured indebtedness will have a claim, prior to the claim of the
holders of the Notes, on the assets of the Company securing such indebtedness.
In addition, to the extent that the value of such collateral is insufficient to
satisfy such secured indebtedness, holders of amounts remaining outstanding on
such secured indebtedness would be entitled to share PARI PASSU with the Notes
with respect to any other assets of the Company. Assets remaining after
satisfaction of the claims of holders of secured indebtedness may not be
sufficient to pay amounts due on any or all of the Notes then outstanding.
COMPETITION
In all of its markets, the Company faces competition from the ILEC, which is
generally one of the Regional Bell Operating Companies (the "RBOCs"), GTE
Corporation or one of its affiliated companies (the "GTE Companies") or Sprint
Corporation or one of its affiliated companies ("Sprint"). The ILECs have
long-standing relationships with their customers, have financial, technical and
marketing resources substantially greater than those of the Company, have the
potential to fund competitive services with revenues from a variety of
businesses and currently benefit from certain existing regulations that favor
the ILECs over the Company in certain respects.
The Company does not believe that Tier III Markets can profitably support
more than two competitors to the ILEC. Accordingly, the Company believes that
once it has completed backbone construction and switch installation in a given
market, potential new entrants in that market are likely to seek to deploy their
capital elsewhere. The Company generally will continue to build in its markets
after initial backbone construction and switch installation. This demonstration
of its commitment to its markets is expected to further deter new entrants.
However, it is likely that in one or more of its markets the Company will
face competition from two or more facilities-based CLECs. After the investment
and expense of establishing a network and support services in a given market,
the marginal cost of carrying an additional call is negligible. Accordingly, in
Tier III Markets where there are three or more facilities-based CLECs, the
Company expects substantial price competition. The Company believes that
operations in such markets are likely to be unprofitable for one or more
operators.
The CLEC competitors which have started either construction or solicitation
activities in the Company's eight existing markets include, among others:
American Communications Services Inc. ("ACSI") has constructed, or is
constructing, networks in Baton Rouge, Corpus Christi, Madison, Savannah and
Shreveport. Brooks Fiber Properties, Inc. ("Brooks") has also commenced
construction activities in Corpus Christi and three of the markets in which the
Company plans to complete networks by the end of 1998. CSW/ChoiceCom L.P.
("CSW/ChoiceCom"), a subsidiary of Central and South West Corporation
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(an electric utility) with a strategic relationship with ICG Communications,
Inc., has announced that it will provide services in Corpus Christi. Hyperion
Telecommunications, Inc. has announced its intention to offer services using the
fiber optic facilities of Entergy Corporation, a utility, in Baton Rouge. ITC
Deltacom offers services in Huntsville. LDS Corp. (a privately owned company
that has agreed to be acquired by Intermedia Communications, Inc.) has fiber
optic networks in Huntsville and Shreveport, has resale operations in Baton
Rouge, Melbourne and Savannah and has announced plans to build fiber optic
facilities in Savannah and Baton Rouge. McLeodUSA, Inc. is engaged in reselling
in Madison. Mid-Plains, Inc., an ILEC in Wisconsin, has announced plans to offer
services in Madison. TDS Metrocom ("TDS Metro"), a subsidiary of TDS Telecom,
has announced plans to build a 54 mile fiber optic network in Madison and to
commence services in early 1998. Time Warner Telecom, Inc. has announced its
intention to offer services in Melbourne and Winston-Salem. Including the
Company, there are four CLECs, that intend to operate in Corpus Christi. The
Company believes that there may be additional competitors that have formulated
plans to enter its markets, including the 10 additional markets it plans to
enter in 1998.
Potential competitors in the Company's markets include microwave and
satellite carriers, wireless telecommunications providers, cable television
companies, utilities and RBOCs seeking to operate outside their current local
service areas. In particular, utilities and cable companies are likely
competitors given their existing rights of way. In addition, there may be future
competition from large long distance carriers, such as AT&T Corp. ("AT&T"), MCI
Communications Corporation ("MCI") and WorldCom Inc. ("WorldCom"), which have
begun to offer integrated local and long distance telecommunications services.
AT&T also recently announced its intention to offer local services using a new
wireless technology. Consolidation of telecommunications companies and the
formation of strategic alliances within the telecommunications industry, as well
as the development of new technologies, could give rise to significant new
competitors to the Company. One of the primary purposes of the
Telecommunications Act of 1996 (the "Telecommunications Act") is to promote
competition, particularly in local markets. The Company believes that Tier III
Markets will also see more agent and distributor resale initiatives.
While recent regulatory initiatives, which allow CLECs such as the Company
to interconnect with ILEC facilities, provide increased business opportunities
for the Company, such regulatory initiatives have been accompanied by increased
pricing flexibility for, and relaxation of regulatory oversight of, the ILECs.
If the ILECs engage in increased volume and discount pricing practices or charge
CLECs increased fees for interconnection to their networks, or if the ILECs
delay implementation of interconnection to their networks, the Company's
business, financial condition and results of operations and its ability to make
payments on the Notes could be adversely affected. To the extent the Company
interconnects with and uses ILEC networks to service its customers, the Company
will be dependent upon the technology and capabilities of the ILECs to provide
services and to maintain its service standards. The Company will become
increasingly dependent on interconnection with ILECs as switched services become
a greater percentage of the Company's business. The Telecommunications Act
imposes interconnection obligations on ILECs, but there can be no assurance that
the Company will be able to obtain the interconnections it requires at rates,
and on terms and conditions, that permit the Company to offer switched services
at rates that are both competitive and profitable. See "--Implementation Risks."
In the event that the Company experiences difficulties in obtaining high
quality, reliable and reasonably priced service from the ILECs, the
attractiveness of the Company's services to its customers could be impaired.
Both the long distance business and the data transmission business are
extremely competitive. Prices in both businesses have declined significantly in
recent years and are expected to continue to decline. In the long distance
business the Company will face competition from large carriers such as AT&T,
MCI, Sprint and WorldCom. The Company will rely on other carriers to provide
transmission and termination for its long distance traffic and therefore will be
dependent on such carriers. See "--Risks of Entry into Long Distance Business"
and "--Risks of Entry into Data Transmission Business."
The Company expects to experience declining prices and increasing price
competition. There can be no assurance that the Company will be able to achieve
or maintain adequate market share or revenue, or
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compete effectively, in any of its markets. Any of the foregoing factors could
have a material adverse effect on the Company's business, financial condition
and results of operations and its ability to make payments on the Notes. See
"Business--Competition."
DEVELOPMENT AND EXPANSION RISK; NEED TO MANAGE GROWTH
The Company must achieve substantial growth in order to meet its payment
obligations under its indebtedness, including the Notes. The Company's networks
have only recently become commercially operational and it has only recently
deployed switches in its networks. The success of the Company will depend, among
other things, upon its ability to assess potential markets, design fiber optic
backbone routes that provide ready access to a substantial customer base,
achieve a sufficient customer base, secure financing, install facilities, obtain
required rights-of-way, building access and governmental permits, implement
interconnection and collocation with facilities owned by ILECs and obtain
unbundled network elements from ILECs, and upon subsequent developments in state
and federal regulations. In addition, the Company may make additional
acquisitions of existing operating systems, such as the potential acquisition of
the Winston-Salem Network (as defined herein), an existing network of
approximately 13 fiber route miles located in Winston-Salem, North Carolina,
with respect to which the Company has entered into a letter of intent. See
"Business--Systems Construction and Development." Any such acquisitions could
divert the resources and management time of the Company and will require
integration with the Company's management information, payroll and other
systems, existing networks and service offerings. There can be no assurance that
any networks to be developed or further developed will be completed on schedule,
at a commercially reasonable cost or within the Company's specifications. The
Company's growth may place a significant strain on the Company's financial,
management and operational resources. The Company's future performance will
depend, in part, upon its ability to manage its growth effectively, monitor
operations, control costs and maintain effective quality control which will
require it to continue to implement and improve its operating, financial and
accounting systems, to expand, train and manage its employee base and to
effectively manage the integration of acquired businesses. These factors could
adversely affect the expansion of the Company's customer base and service
offerings. The Company's inability either to expand in accordance with its plans
or to manage its growth could have a material adverse effect on its business,
financial condition and results of operations. In addition, the establishment of
new operations or acquisitions will involve significant expenses in advance of
anticipated revenues and may cause fluctuations in the Company's operating
results. Any of the foregoing risks could have a material adverse effect on the
Company's ability to make payments on the Notes. See "Business."
IMPLEMENTATION RISKS
The Company is deploying high capacity digital switches in its markets. This
will enable the Company to offer a variety of switched access services, enhanced
services and local dial tone. The Company expects to incur negative gross
profits and negative EBITDA from its switched services in any given market
during the 24 to 36 month period after the switch is deployed. The Company
expects operating margins to improve as each network is expanded and larger
volumes of traffic are carried on the Company's network. In each of its markets,
the Company relies on ILECs to originate and terminate all of its switched
services traffic until its own switch becomes operational. Although under the
Telecommunications Act the ILECs will be required to unbundle local network
elements and to permit the Company to purchase only the origination and
termination services it needs, thereby decreasing operating expenses, there can
be no assurance that such unbundling will be effected in a timely manner and
result in prices favorable to the Company.
In August 1996, the FCC released a decision implementing the interconnection
portions of the Telecommunications Act (the "Interconnection Decision"). The
Interconnection Decision sought to establish national rules for negotiating
interconnection agreements and guidelines for review of such agreements by state
public utilities commissions, which rules, in general, are favorable to new
competitive
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entrants. In July 1997, the U.S. Court of Appeals for the Eighth Circuit found
much of the Interconnection Decision to be beyond the scope of the FCC's legal
authority. The court ruled that the state public service commissions, not the
FCC, have jurisdiction over the pricing of interconnection, unbundled network
elements and resale services. The Eighth Circuit Court also ruled that the FCC's
interpretation of Section 252(i) of the Telecommunications Act, the so-called
"pick and choose" provision, was incorrect. The Eighth Circuit Court held that
the Telecommunications Act allows CLECs to adopt whole interconnection
agreements negotiated by other competitors, but not to "pick and choose" pieces
of existing agreements. On October 14, 1997, the Eighth Circuit Court issued a
decision vacating additional FCC rules that will likely have the effect of
increasing the costs of obtaining the use of ILEC unbundled network elements. In
November 1997, the FCC filed a petition for a writ of certiorari with the United
States Supreme Court challenging the decisions of the Eighth Circuit Court of
Appeals. On January 26, 1998, the United States Supreme Court granted all
petitions and cross petitions for certiorari of the Eighth Circuit decisions.
See "--Government Regulation"
On December 31, 1997, the U.S. District Court for the Northern District of
Texas issued a decision (the "SBC Decision") finding that Sections 271 to 275 of
the Telecommunications Act are unconstitutional. These sections of the
Telecommunications Act impose restrictions on the lines of business in which the
RBOCs may engage, including establishing the conditions the RBOCs must satisfy
before they may provide in-region inter-LATA long distance telecommunications
services. Under the SBC Decision, the RBOCs would be able to provide in-region
inter-LATA long distance services immediately without satisfying the statutory
conditions. The District Court stayed its own decision, pending an appeal to the
U.S. Fifth Circuit Court of Appeals. The Company believes that the factual
assumptions and legal reasoning in the SBC Decision are erroneous and therefore
the decision will likely be reversed on appeal, although there can be no
assurance of this outcome. If the SBC Decision is upheld on appeal it would
likely have an unfavorable effect on the Company's business for at least two
reasons. First, RBOCs currently have an incentive to foster competition within
their service areas so that they can qualify to offer inter-LATA long distance
services. The SBC Decision removes this incentive by allowing RBOCs to offer
inter-LATA long distance service without regard to their progress in opening
their local markets to competition. Second, the Company is legally able to offer
its customers both long distance and local exchange services, which the RBOCs
currently may not do. This ability to offer "one-stop shopping" gives the
Company a marketing advantage that it would no longer enjoy if the SBC Decision
were upheld on appeal.
The Company is a recent entrant into the newly created competitive local
telecommunications services industry. The local dial tone services market was
opened to competition by the Telecommunications Act in 1996, and related
regulatory rulings. There are numerous operating complexities associated with
providing these services. The Company will be required to develop new products,
services and systems and will need to develop new marketing initiatives to sell
these services.
The Company's services may not be profitable due to, among other factors,
lack of customer demand, inability to secure access to ILEC facilities at
acceptable rates, competition and pricing pressure from other CLECs and the
ILECs and cost overruns in connection with network build-outs. The Company
expects to face significant competitive product and pricing pressure from the
ILECs in its markets. The Company has very limited experience providing switched
access and local dial tone services and there can be no assurance that the
Company will be able to successfully implement its switched and enhanced
services strategy. Implementation of the Company's switched and enhanced
services is also subject to equipment manufacturers' ability to meet the
Company's switch deployment schedule. There can be no assurance that all of such
switches will be deployed on the schedule contemplated by the Company or that,
if deployed, such switches will be utilized to the degree contemplated by the
Company. Any of the foregoing risks could have a material adverse effect on the
Company's ability to make payments on the Notes.
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Franchises obtained by the Company may require the Company to complete the
build-out of its network within a period specified in the franchise grant. If
the Company is unable to complete the build-out of a network within the
specified period, or obtain an extension of time in which to complete the build-
out, its franchise agreement may be terminable by the local authority. Any such
termination of a franchise agreement could have a material adverse effect on the
Company's business, financial condition and results of operations and the
Company's ability to make payments on the Notes.
RISKS OF ENTRY INTO LONG DISTANCE BUSINESS
In order to offer its end user customers a complete package of
telecommunications services, the Company intends to offer long distance
services. Although the Company has an executive team with telecommunications,
sales, marketing and management expertise, the Company itself has no direct
experience providing long distance services. As a new entrant in the long
distance business, the Company expects to generate low gross margins and
substantial start-up expenses as it rolls out its long distance service
offerings.
Long distance telecommunications services will involve the origination of
traffic from end user customers, either directly connected to the Company's
network or through facilities leased from the ILEC, to the Company's
telecommunications switches. The Company will rely on other carriers to provide
transmission and termination services for its long distance traffic and will
therefore be dependent on such carriers. The Company expects to enter into
resale agreements with long distance carriers to provide it with long distance
transmission services. Such agreements typically provide for the resale of long
distance services on a per minute basis (some with minimum volume commitments or
volume discounts). The negotiation of these agreements involves estimates of
future supply and demand for long distance telecommunications transmission
capacity as well as estimates of the calling pattern and traffic levels of the
Company's future long distance customers. Should the Company fail to meet its
minimum volume commitments, if any, pursuant to these resale agreements, it may
be obligated to pay underutilization charges. Likewise, the Company may
underestimate its need for long distance facilities and therefore be required to
obtain the necessary transmission capacity through more expensive means. There
can be no assurance that the Company will acquire long distance capacity on
favorable terms or that the Company can accurately predict long distance prices
and volumes so that it can generate favorable gross margins from its long
distance business. The success of the Company's entry into the long distance
business will be dependent upon, among other things, the Company's ability to
select new equipment and software and integrate these into its networks, hire
and train qualified personnel, enhance its billing, back-office and information
systems to accommodate long distance services and the acceptance by potential
customers of the Company's long distance service offerings. If the Company's
long distance transmission business fails to generate favorable gross margins or
if the Company fails in any of the foregoing respects, such failure may have a
material adverse effect on the Company's business, financial condition and
results of operations and its ability to make payments on the Notes.
RISKS OF ENTRY INTO DATA TRANSMISSION BUSINESS
To complement its telecommunications services offerings, the Company began
offering data transmission services in certain of its markets in 1997. These
services, which include frame relay and ATM, are targeted at large and medium
sized businesses with substantial data communications requirements. As a new
entrant in the data transmission business, the Company expects to generate low
or negative gross margins and substantial start-up expenses as it begins to
offer data transmission services. The Company does not expect data transmission
services to generate a material portion of its revenues over the near term. In
providing these services, the Company will be dependent upon vendors for
assistance in the planning and deployment of its initial data product offerings,
as well as ongoing training and support. The success of the Company's entry into
the data transmission business will be dependent upon, among other things, the
Company's ability to select new equipment and software and integrate these into
its networks,
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hire and train qualified personnel, enhance its billing, back-office and
information systems to accommodate data transmission services and the acceptance
by potential customers of the Company's service offerings. No assurance can be
given that the Company will be successful with respect to these matters. If the
Company is not successful with respect to these matters, there may be a material
adverse effect on the Company's business, financial condition and results of
operations and its ability to make payments on the Notes.
GOVERNMENT REGULATION
The Company's networks and the provision of switched and private line
services are subject to significant regulation at the federal, state and local
levels. The telecommunications industry in general, and the CLEC industry in
particular, is undergoing substantial regulatory change and uncertainty. Delays
in receiving required regulatory approvals, new court decisions or the enactment
of new adverse regulations or regulatory requirements may have a material
adverse effect on the Company's business, financial condition and results of
operations and its ability to make payments on the Notes.
The Telecommunications Act provides for a significant deregulation of the
domestic telecommunications industry, including the local exchange, long
distance and cable television industries. The Telecommunications Act remains
subject to judicial review and additional FCC and state public service
commission rulemaking, and thus it is difficult to predict what effect the
legislation will have on the Company and its operations. There are currently
many regulatory actions underway and being contemplated by federal and state
authorities regarding interconnection pricing and other issues that could result
in significant changes to the business conditions in the telecommunications
industry. The Company may be required to cancel its federal interstate tariff
filings at the FCC and implement replacement contractual arrangements, which
could result in substantial legal and administrative expenses. There can be no
assurance that these changes will not have a material adverse effect on the
Company's business, financial condition and results of operations and its
ability to make payments on the Notes.
In addition to requirements placed on ILECs, the Telecommunications Act
subjects the Company to certain federal regulatory requirements regarding the
provision of local exchange services. All ILECs and CLECs must offer reciprocal
compensation for termination of traffic and provide dialing parity. However,
negotiations with ILECs have sometimes involved considerable delays and the
agreements may not be on terms and conditions that are favorable to the Company.
In May 1997, the FCC adopted a rule that will require the Company and other
CLECs to contribute to a universal service fund provided for in the
Telecommunications Act. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Regulation--Universal
Service Reform." At the same time, the FCC adopted rules that will change how
access charges are calculated. These changes will reduce access charge levels
closer to their cost and will shift certain charges currently based on minutes
to flat-rate, monthly per-line charges. As a result, the aggregate access
revenue paid to access providers in the United States is expected to decrease.
In addition, the FCC has also adopted rules that will give ILECs pricing
flexibility with respect to access charges. No assurance can be given that the
changes to current regulations or the adoption of new regulations (pursuant to
the Telecommunications Act or otherwise) by the FCC or state public service
commissions will not have a material adverse effect on the Company's business,
financial condition and results of operations and its ability to make payments
on the Notes.
On December 31, 1997, the U.S. District Court for the Northern District of
Texas issued the SBC Decision finding that Sections 271 to 275 of the
Telecommunications Act are unconstitutional. These sections of the
Telecommunications Act impose restrictions on the lines of business in which the
RBOCs may engage, including establishing the conditions the RBOCs must satisfy
before they may provide inter-LATA long distance telecommunications services.
Under the SBC Decision, the RBOCs would be able to provide inter-LATA long
distance services immediately without satisfying the statutory conditions. The
SBC Decision has been stayed pending review by the U.S. Fifth Circuit Court of
Appeals. Further, the Company believes that the factual assumptions and legal
reasoning in the SBC Decision are erroneous and
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therefore the decision will likely be reversed on appeal, although there can be
no assurance of this outcome. If the SBC Decision were upheld on appeal it would
likely have an unfavorable effect on the Company's business for at least two
reasons. First, RBOCs currently have an incentive to foster competition within
their service areas so that they can qualify to offer in-region inter-LATA long
distance services. The SBC Decision removes this incentive by allowing RBOCs to
offer in-region inter-LATA long distance service without regard to their
progress in opening their local markets to competition. Second, the Company is
legally able to offer its customers both long distance and local exchange
services, which the RBOCs currently may not do. This ability to offer "one-stop
shopping" gives the Company a marketing advantage that it would no longer enjoy
if the SBC Decision were upheld on appeal.
State regulatory commissions exercise jurisdiction over the Company to the
extent it provides intrastate services. As such a provider, the Company is
required to obtain regulatory authorization and/or file tariffs or rate
schedules at state agencies in all of the states in which it operates. Local
authorities regulate the Company's access to municipal rights-of-way. The
networks are also subject to numerous local regulations such as building codes
and licensing. Such regulations vary on a city by city and county by county
basis. See "Business--Regulation." If authority is not obtained or if tariffs
are not filed, or are not updated, or otherwise do not fully comply with the
tariff filing rules of the FCC or state regulatory agencies, third parties or
regulators could challenge these actions. Such challenges could cause an
interruption or termination of the Company's services and could cause the
Company to incur substantial legal and administrative expenses.
Many states also regulate transfers of control or assets, and issuances of
stock or debt instruments, by authorized carriers. Accordingly, the Company may
be subject to prior approval or other filing requirements for such transactions.
The Company is in the process of seeking retroactive approval for certain
transactions. The Company cannot predict whether such approval will be granted
and whether, and to what extent, state commissions may impose fines or license
conditions, commence revocation proceedings or otherwise exercise their
authority to address violations of state statutes and regulations with respect
to the Company's failure to obtain prior approval for such transactions. See
"--Implementation Risks" and "Business--Regulation."
DEPENDENCE ON RIGHTS-OF-WAY AND OTHER THIRD PARTY AGREEMENTS
The Company must obtain easements, rights-of-way, entry to premises,
franchises and licenses from various private parties, actual and potential
competitors and state and local governments in order to construct and operate
its networks, some of which may be terminated upon 30 or 60 days' notice to the
Company. There can be no assurance that the Company will obtain rights-of-way
and franchise agreements on acceptable terms or that current or potential
competitors will not obtain similar rights-of-way and franchise agreements that
will allow them to compete against the Company. If any of the existing franchise
or license agreements were terminated or not renewed and the Company were forced
to remove its fiber optic cables or abandon its networks in place, such
termination could have a material adverse effect on the Company's business,
financial condition and results of operations and its ability to make payments
on the Notes. See "Business--Systems Construction and Development,"
"--Regulation" and "--Legal and Administrative Proceedings."
DEPENDENCE ON KEY CUSTOMERS
The Company's five largest customers accounted for approximately 92% of the
Company's revenue in 1996 and 32% in 1997. This customer concentration will
decrease as the Company expands into new markets and begins full scale marketing
of an integrated service package. However, the loss of, or decrease of business
from, one or more of the Company's principal customers could have a material
adverse effect on the business, financial condition and results of operations of
the Company and its ability to make payments on the Notes. Although the Company
actively markets its products and services, there can be no
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assurance that the Company will be able to attract new customers or retain its
existing customers. See "Business--Sales and Marketing" and "--Competition."
DEPENDENCE ON BILLING, CUSTOMER SERVICES AND INFORMATION SYSTEMS
Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. The Company's existing billing and
information systems have been produced largely in-house with partial reliance on
third-party vendors. These systems have generally met the Company's needs due in
part to the Company's low volume of bills and orders. As the Company commences
providing dial tone services, the need for sophisticated billing and information
systems is increased significantly. Recently, the Company entered into an
agreement with ACE*COMM Corporation ("ACE*COMM") to provide the Company with
comprehensive billing, order processing and customer care software for all
existing and contemplated services the Company will market. Additionally, the
Company is developing customer service centers to provision orders. Information
systems are vital to the success of these centers, and the information systems
for these centers are largely being developed by third party vendors. The
failure of (i) these vendors to deliver proposed products and services in a
timely and effective manner, (ii) the Company to adequately identify all of its
information and processing needs, or (iii) the Company to upgrade systems as
necessary, could have a material adverse effect on the Company's business,
financial condition and results of operations and its ability to make payments
on the Notes.
While the Company believes that its software applications are year 2000
compliant, there can be no assurance until the year 2000 occurs that all systems
will then function adequately. Further, if the software applications of local
exchange carriers, long distance carriers or others on whose services the
Company depends or with whom the Company's systems interface are not year 2000
compliant, it could affect the Company's systems, which would have a material
adverse effect on the Company's business, financial condition and results of
operations and its ability to make payments on the Notes.
RAPID TECHNOLOGICAL CHANGE
The telecommunications industry is subject to rapid and significant changes
in technology, with the Company relying on third parties for the development of
and access to new technology. The effect of technological changes on the
business of the Company cannot be predicted. The Company believes its future
success will depend, in part, on its ability to anticipate or adapt to such
changes and to offer, on a timely basis, services that meet customer demands.
There can be no assurance that the Company will be able to anticipate or adapt
to such changes and to offer, on a timely basis, services that meet customers'
demands. A failure to do so would have a material adverse effect on the
Company's business, financial condition and results of operations and its
ability to make payments on the Notes.
DEPENDENCE ON KEY PERSONNEL
The efforts of a small number of key management and operating personnel will
largely determine the Company's success and the loss of any of such persons
could adversely affect the Company. The Company has an employment agreement with
Mr. Sternberg, its President and Chief Executive Officer, which currently runs
through July 29, 1999, with a Company option to extend for two additional years.
The success of the Company also depends in part upon its ability to hire and
retain highly skilled and qualified operating, marketing, financial and
technical personnel. The competition for qualified personnel in the
telecommunications industry is intense and, accordingly, there can be no
assurance that the Company will be able to hire or retain necessary personnel. A
failure by the Company to hire or retain necessary personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations and its ability to make payments on the Notes. See
"Management."
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CONTROL BY PRINCIPAL STOCKHOLDERS
Harold N. Kamine, Chairman of the Board of the Company, presently owns
approximately 68.5% of the outstanding shares of Common Stock of the Company. If
all outstanding shares of the Company's preferred stock were to be converted,
all outstanding warrants (other than the Warrants) were to be exercised, and the
options (the "Company Options") expected to be granted to employees of the
Company and certain affiliated companies during the second quarter of 1998 (See
"Management--Stock Option Grants") were to be exercised, Nassau and Mr. Kamine
would own approximately 32.4% and 28.1% of the outstanding shares of Common
Stock, respectively. The Company, Mr. Kamine, Nassau, AT&T Credit, GECC and
CoreStates are parties to an Amended and Restated Stockholders Agreement, dated
as of October 31, 1997, as amended (the "Stockholders Agreement"). Pursuant to
provisions contained in both the Company's certificate of incorporation and the
Stockholders Agreement, so long as Mr. Kamine and Nassau retain certain minimum
levels of ownership of the Company, Mr. Kamine and Nassau are entitled to elect
all of the Company's seven directors with each entitled to nominate three
directors, and the seventh to be nominated by agreement of Mr. Kamine, Nassau
and either AT&T Credit or the holders of a majority of the outstanding shares of
the Company's Series C Preferred Stock. Certain decisions concerning the
operations or financial structure of the Company may present conflicts of
interest between Mr. Kamine and Nassau and the holders of the Notes. Pursuant to
the Certificates of the Powers, Designations, Preferences and Rights of the
Series A and Series C Preferred Stock, the Company may not increase the
authorized number of shares of preferred stock or Common Stock, without the
consent of the holders of two-thirds of the shares of both the Series A
Preferred Stock and the Series C Preferred Stock. The Company has only three
million shares of Common Stock authorized.
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Original Notes were issued with original issue discount for U.S. federal
income tax purposes. The Exchange Notes should be treated as a continuation of
the Original Notes. Consequently, Holders of the Exchange Notes generally will
be required to include amounts in gross income for U.S. federal income tax
purposes in advance of receipt of the cash payments to which the income is
attributable. The Exchange Notes will be subject to the applicable high-yield
discount obligation rules, which will defer and will, in part, eliminate the
Company's ability to deduct for U.S. federal income tax purposes the original
issue discount attributable to the Exchange Notes. Accordingly, the Company's
after-tax cash flow might be less than if the original issue discount on the
Exchange Notes was deductible when it accrued. See "Certain United States
Federal Income Tax Considerations" for a more detailed discussion of the U.S.
federal income tax consequences resulting from the Exchange Offer.
If a bankruptcy case is commenced by or against the Company under the U.S.
Bankruptcy Code, the claim of an owner of the Notes with respect to the
principal amount thereof may be limited to an amount equal to the sum of (i) the
initial offering price and (ii) that portion of the original issue discount that
is not deemed to constitute "unmatured interest" for purposes of the U.S.
Bankruptcy Code. Any original issue discount that was not amortized as of any
such bankruptcy filing would constitute "unmatured interest."
ABSENCE OF PUBLIC MARKET
The NASD has designated the Original Notes as securities eligible for
trading in the PORTAL market of the NASD. However, the Exchange Notes will be
new securities for which there is currently no public market. The Company does
not intend to list the Exchange Notes on any national securities exchange or for
quotation through the Nasdaq National Market. There can be no assurance that an
active trading market for the Exchange Notes will develop, or if one does
develop, that it will be sustained. Accordingly, no assurance can be made as to
the liquidity of the trading market for the Exchange Notes. If a market for the
Exchange Notes does not develop, purchasers may be unable to resell such
Exchange Notes for an extended period of time, if at all. Historically, the
market for non-investment grade debt has been subject to disruptions that have
caused substantial volatility in the prices of securities similar to the
Exchange
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Notes. There can be no assurance that, if a market for the Exchange Notes were
to develop, such market would not be subject to similar disruptions.
CONSEQUENCES OF FAILURE TO EXCHANGE
The issuance of the Exchange Notes in exchange for the Original Notes
pursuant to the Exchange Offer will be made only after timely receipt by the
Exchange Agent of such Original Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents. Therefore, holders of
Original Notes desiring to tender such Original Notes in exchange for Exchange
Notes should allow sufficient time to ensure timely delivery. Neither the
Exchange Agent nor the Company is under any duty to give notification of defects
or irregularities with respect to tenders of Original Notes for exchange.
Original Notes that are not validly tendered will, following the
consummation of the Exchange Offer, continue to be subject to the existing
restrictions upon transfer thereof and the Company will have no further
obligation to provide for the registration under the Securities Act of such
Original Notes. In addition, any holder of Original Notes who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes may be deemed to have received restricted securities and, if so,
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction. To
the extent that Original Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Original Notes
could be adversely affected. Each broker or dealer that receives Exchange Notes
for its own account in exchange for Original Notes where such Original Notes
were acquired by such broker or dealer as a result of market-making activities
or other trading activities must acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange Notes. See "Plan of
Distribution."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Certain statements in this Prospectus, including under "Prospectus Summary,"
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," including statements regarding the anticipated
development and expansion of the Company's business, the markets in which the
Company's services are currently offered, or will be offered in the future,
anticipated capital expenditures and regulatory reform, the intent, belief or
current expectations of the Company, its directors or its officers with respect
to the Company's future financial performance and other matters, and other
statements regarding matters that are not historical facts, are
"forward-looking" statements (within the meaning of the Private Securities
Litigation Reform Act of 1995). Such "forward-looking" statements are subject to
various risks and uncertainties. Accordingly, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Important factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements include the risk
factors set forth herein.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Original Notes were initially issued and sold by the Company on the
Closing Date to the Placement Agent pursuant to the Placement Agreement. The
Placement Agent subsequently resold the Original Notes to (i) "qualified
institutional buyers" ("QIBs") as defined in Rule 144A under the Securities Act
("Rule 144A"), in reliance on Rule 144A, (ii) non-U.S. persons in off-shore
transactions in reliance on Regulation S under the Securities Act, and (iii) a
limited number of institutional "accredited investors," as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act. Pursuant to the Placement
Agreement, the Company and the Placement Agent entered into a Registration
Rights Agreement. Pursuant to the Registration Rights Agreement, the Company
agreed to use its best efforts to consummate the Exchange Offer on or prior to
July 29, 1998. A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part and the
description of the terms of the Registration Rights Agreement is qualified in
its entirety by reference thereto. The Registration Statement of which this
Prospectus is a part is intended to satisfy the Company's obligations with
respect to the registration of Original Notes in accordance with the terms of
the Registration Rights Agreement.
Following the consummation of the Exchange Offer, Holders of Original Notes
not validly tendered in the Exchange Offer and Holders of Exchange Notes will
not have any further registration rights. In addition, Holders of Original Notes
will continue to be subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for Original Notes could be adversely affected. See
"Risk Factors --Consequences of Failure to Exchange."
The Original Notes were issued in Units together with the Warrants. Upon the
effectiveness of the Registration Statement, the Warrants will become separately
tradeable from the Original Notes and the Warrants are not part of the Exchange
Offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept any and
all Original Notes validly tendered and not withdrawn prior to 5:00 p.m., New
York City time on , 1998 or such later time and date to which the Exchange
Offer is extended by the Company in its sole discretion, which time and date, as
indicated herein or as extended, is referred to herein as the "Expiration Date".
The Company will issue $1,000 principal amount at maturity of Exchange Notes in
exchange for each $1,000 principal amount at maturity of Original Notes validly
tendered pursuant to the Exchange Offer and not withdrawn prior to the
Expiration Date.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the Exchange Notes will have been
registered under the Securities Act and, therefore, will not bear legends
restricting their transfer and (ii) the Holders of the Exchange Notes will not
be entitled to any of the registration rights of Holders of Original Notes under
the Registration Rights Agreement, which rights, in any event, will terminate
with respect to the Original Notes upon consummation of the Exchange Offer. The
Exchange Notes will evidence the same indebtedness as the Original Notes (which
they replace) and will be issued under, and be entitled to the benefits of, the
Indenture, which also authorized the issuance of the Original Notes, such that
both the Exchange Notes and the Original Notes will be treated as a single class
of debt securities under the Indenture.
As of the date of this Prospectus, approximately $460.8 million in aggregate
principal amount at maturity of Original Notes was outstanding. Only a
registered Holder of Original Notes (or such Holder's legal representative or
attorney-in-fact), as reflected on the records of the Trustee under the
Indenture, may participate in the Exchange Offer. Solely for reasons of
administration, the Company has fixed the
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close of business on , 1998 as the record date for purposes of determining
the persons to whom this Prospectus and the Letter of Transmittal will be mailed
initially. There will be no fixed record date for determining Holders of the
Original Notes entitled to participate in the Exchange Offer. Holders of the
Original Notes do not have any appraisal or dissenters' rights under the General
Corporation Law of Delaware or the Indenture in connection with the Exchange
Offer. The Company intends to conduct the Exchange Offer in accordance with the
applicable provisions of the Registration Rights Agreement and the applicable
requirements of the Securities Act and the rules and regulations of the
Commission thereunder.
The Company shall be deemed to have accepted validly tendered Original Notes
when, and if, the Company has given oral or written notice thereof to The Chase
Manhattan Bank, as Exchange Agent. The Exchange Agent will act as agent for the
tendering Holders of Original Notes for the purposes of receiving the Exchange
Notes from the Company.
Holders who tender Original Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Original
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXTENSION; AMENDMENTS
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice (oral notice being promptly
confirmed in writing) and will make public announcement thereof, each prior to
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Original Notes, (ii) to extend the Exchange Offer, or (iii) to
amend the terms of the Exchange Offer in any manner, by giving oral or written
notice of such delay, extension or amendment to the Exchange Agent. Any such
delay in acceptance, extension or amendment will be followed as promptly as
practicable by a public announcement thereof. If the Exchange Offer is amended
in a manner determined by the Company to constitute a material change, the
Company will promptly disclose such amendment or amendments by means of a
prospectus supplement that will be distributed to registered Holders and the
Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered Holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension or amendment of the Exchange Offer, the
Company shall have no obligation to publish, advertise or otherwise communicate
any such public announcement, other than by making a timely release to an
appropriate news agency.
PROCEDURES FOR TENDERING
Only a registered Holder of Original Notes may tender such Original Notes in
the Exchange Offer. To tender in the Exchange Offer, a Holder of Original Notes
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile to
the Exchange Agent at the address set forth below under "--Exchange Agent" for
receipt prior to the Expiration Date. In addition, either (i) certificates for
such Original Notes must be received by the Exchange Agent along with the Letter
of Transmittal, (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Original Notes, if such procedure is
available, into the Exchange Agent's account at the Depository pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date (see, "--Book-Entry Transfer") or
(iii) the Holder must
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comply with the guaranteed delivery procedures described below (see,
"--Guaranteed Delivery Procedures").
A tender by a Holder that is not withdrawn prior to the Expiration Date will
constitute an agreement between such Holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF ORIGINAL NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. DO NOT SEND THE LETTER OF TRANSMITTAL OR ANY
ORIGINAL NOTES TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS,
DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE
TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner of Original Notes whose Original Notes are registered
in the name of a broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender should contact the registered Holder promptly and
instruct such registered Holder to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such owner's own behalf, such owner
must, prior to completing and executing the Letter of Transmittal and delivering
such owner's Original Notes, either make appropriate arrangements to register
ownership of the Original Notes in such owner's name or obtain a properly
completed bond power from the registered Holder. The transfer of registered
ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed by
an Eligible Institution (as defined below) unless the Original Notes tendered
pursuant thereto are tendered (i) by a registered Holder who has not completed
the box titled "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be made by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution"
(within the meaning of Rule 17Ad-15 under the Exchange Act) that is a member of
one of the recognized signature guarantee programs identified in the Letter of
Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Original Notes listed therein, such Original Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered Holder exactly as such registered Holder's name appears on such
Original Notes.
If the Letter of Transmittal or any Original Notes are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Original Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Original Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Original Notes not
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properly tendered or any Original Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Original Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Original Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify Holders of defects or irregularities with respect to tenders
of Original Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Original Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
While the Company has no present plan to acquire any Original Notes that are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any Original Notes that are not tendered pursuant to the Exchange
Offer, the Company reserves the right in its sole discretion to purchase or make
offers for any Original Notes that remain outstanding subsequent to the
Expiration Date and, to the extent permitted by applicable law, purchase
Original Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the terms
of the Exchange Offer.
By tendering, each Holder of Original Notes will represent to the Company
that, among other things, (i) the Exchange Notes to be acquired by such Holder
of Original Notes in connection with the Exchange Offer are being acquired by
such Holder in the ordinary course of business of such Holder, (ii) such Holder
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iii) such Holder acknowledges and agrees
that any person who is participating in the Exchange Offer for the purposes of
distributing the Exchange Notes must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction of the Exchange Notes acquired by such person and cannot rely
on the position of the staff of the Commission set forth in certain no-action
letters, (iv) such Holder understands that a secondary resale transaction
described in clause (iii) above and any resales of Exchange Notes obtained by
such Holder in exchange for Original Notes acquired by such Holder directly from
the Company should be covered by an effective registration statement containing
the selling security holder information required by Item 507 or Item 508, as
applicable, of Regulation S-K of the Commission and (v) such Holder is not an
Affiliate of the Company. If the Holder is a broker-dealer that will receive
Exchange Notes for such Holder's own account in exchange for Original Notes that
were acquired as a result of market-making activities or other trading
activities, such Holder will be required to acknowledge in the Letter of
Transmittal that such Holder will deliver a prospectus in connection with any
resale of such Exchange Notes; however, by so acknowledging and by delivering a
prospectus, such Holder will not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act.
ACCEPTANCE OF ORIGINAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Original Notes
properly tendered and will issue the Exchange Notes promptly after acceptance of
the Original Notes. For purposes of the Exchange Offer, the Company shall be
deemed to have accepted properly tendered Original Notes for exchange when, and
if, the Company has given oral or written notice thereof to the Exchange Agent.
RETURN OF ORIGINAL NOTES
If any tendered Original Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Original Notes are
withdrawn, then such unaccepted, withdrawn or non-exchanged Original Notes will
be returned without expense to the tendering Holder thereof (or, in the case of
Original Notes tendered by book-entry transfer into the Exchange Agent's account
at the Depository
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pursuant to the book-entry transfer procedures described below, such Original
Notes will be credited to an account maintained with the Depository) as promptly
as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Original Notes with the Depository for purposes of the Exchange Offer
promptly after the date of this Prospectus. Any financial institution that is a
participant in the Depository's Book-Entry Transfer Facility system may make
book-entry delivery of the Original Notes by causing the Depository to transfer
such Original Notes into the Exchange Agent's account and to deliver an "Agent's
Message" (as defined below) on or prior to the Expiration Date in accordance
with the Depository's procedures for such transfer and delivery. If delivery of
Original Notes is effected through book-entry transfer into the Exchange Agent's
account at the Depository and an Agent's Message is not delivered, the Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other required documents must be transmitted to and received or confirmed by
the Exchange Agent at its address set forth herein under "--Exchange Agent"
prior to 5:00 p.m., New York City time on the Expiration Date or pursuant to the
guaranteed delivery procedures described below. DELIVERY OF DOCUMENTS TO THE
DEPOSITORY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE
EXCHANGE AGENT.
The term "Agent's Message" means a message transmitted by the Depository to
and received by the Exchange Agent and forming a part of a Book-Entry
Confirmation which states that the Depository has received an express
acknowledgment from the tendering participant, which acknowledgment states that
such participant has received and agrees to be bound by, and makes the
representations and warranties contained in the Letter of Transmittal and that
the Company may enforce the Letter of Transmittal against such participant.
GUARANTEED DELIVERY PROCEDURES
If a Holder of Original Notes desires to tender such Original Notes and time
will not permit such Holder's required documents to reach the Exchange Agent on
or prior to the Expiration Date, a tender may be effected if (i) the tender is
made through an Eligible Institution, (ii) on or prior to the Expiration Date,
the Exchange Agent receives from such Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery, substantially in the form
provided by the Company (by facsimile transmission, mail or hand delivery),
setting forth the name and address of such Holder of Original Notes and the
amount of Original Notes tendered, stating that the tender is being made thereby
and guaranteeing that within three business days after the Expiration Date, a
Book-Entry Confirmation or the certificates relating to the Original Notes, the
Letter of Transmittal (or a facsimile thereof) and all other documents required
by the Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent, and (iii) a Book-Entry Confirmation or the certificates
relating to the Original Notes, a properly executed Letter of Transmittal (or
facsimile thereof) and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within three business days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Original Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
A tender of Original Notes may be withdrawn any time prior to the Expiration
Date.
For a withdrawal to be effective, (i) a written notice of withdrawal must be
received by the Exchange Agent at the address set forth below under "--Exchange
Agent" prior to the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Original Notes to be
withdrawn and (ii) identify the Original Notes to be withdrawn (including the
certificate number and principal amount at maturity of Original Notes). Any such
written withdrawal must be signed by the
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Holder in the same manner as the original signature on the Letter of Transmittal
by which such Original Notes were tendered (including required signature
guarantees). All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, in its sole
discretion and whose determination shall be final and binding on all parties.
Any Original Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer, and no Exchange Notes will be
issued with respect thereto unless the Original Notes so withdrawn are validly
retendered. Properly withdrawn Original Notes may be retendered by following one
of the procedures described above at any time on or prior to the Expiration
Date.
TERMINATION OF CERTAIN RIGHTS
All registration rights under the Registration Rights Agreement accorded to
holders of the Original Notes (and all rights to receive additional interest on
the Notes to the extent and in the circumstances specified therein) will
terminate upon consummation of the Exchange Offer except with respect to the
Company's duty to keep the Registration Statement effective until the closing of
the Exchange Offer and, for a period of 180 days after the closing of the
Exchange Offer, to provide copies of the latest version of the Prospectus to any
broker-dealer that requests copies of such Prospectus in the Letter of
Transmittal for use in connection with any resale by such broker-dealer of
Exchange Notes received for its own account pursuant to the Exchange Offer in
exchange for Original Notes acquired for its own account as a result of
market-making or other trading activities.
EXCHANGE AGENT
The Chase Manhattan Bank has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notices of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
BY REGISTERED OR CERTIFIED MAIL, BY OVERNIGHT COURIER OR BY HAND:
The Chase Manhattan Bank
55 Water Street
Room 234, North Building
New York, New York 10041
Attention: Carlos Esteves
or:
BY FACSIMILE TRANSMISSION:
The Chase Manhattan Bank
Facsimile Number: (212) 638-7375 or (212) 344-9367
Confirm by Telephone: (212) 638-0828
In addition, Letters of Transmittal and any other required documentation
should be sent to the Exchange Agent at the address set forth above, except
where facsimile transmission is specifically authorized (e.g., withdrawals and
Notices of Guaranteed Delivery). DELIVERY OF THE LETTER OF TRANSMITTAL TO AN
ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN
AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
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FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, facsimile transmission, telephone or in person by
officers and regular employees of the Company and its Affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
its reasonable out-of-pocket expenses in connection therewith.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Original Notes pursuant to the Exchange Offer. If, however, a transfer
tax is imposed for any reason other than the exchange of the Original Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to the tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Original
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
Original Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain "restricted securities" within the meaning of Rule
144 of the Securities Act. Accordingly, such Original Notes may be resold only
(i) to the Company or any subsidiary thereof, (ii) so long as the Original Notes
are eligible for resale pursuant to Rule 144A, to a person whom the seller
reasonably believes is a "qualified institutional buyer" within the meaning of
Rule 144A under the Securities Act, purchasing for its own account or for the
account of a qualified institutional buyer, to whom notice is given that the
resale, pledge or other transfer is being made in reliance on Rule 144A, (iii)
outside the United States to non-U.S. Persons in an offshore transaction in
compliance with Rule 904 under the Securities Act, (iv) pursuant to an exemption
from registration under the Securities Act in accordance with Rule 144 (if
available), (v) to an institutional "accredited investor" that, prior to such
transfer, furnishes to the Trustee a signed letter containing certain
representations and agreements relating to the restrictions on transfer of the
Original Notes and, if such transfer is in respect of a principal amount at
maturity of Original Notes at the time of transfer of less than $500,000, an
opinion of counsel acceptable to the Company that such transfer is in compliance
with the Securities Act, or (vi) pursuant to an effective registration statement
under the Securities Act, in each case in accordance with any applicable
securities laws of any state of the United States and subject to certain
requirements of the Trustee being met. The liquidity of the Original Notes could
be adversely affected by the Exchange Offer. See "Risk Factors--Consequences of
Failure to Exchange."
RESALES OF THE EXCHANGE NOTES
Based on interpretations by the staff of the Commission set forth in certain
no-action letters issued to third parties, the Company believes that the
Exchange Notes or interests therein issued pursuant to the Exchange Offer in
exchange for Original Notes or interests therein may be offered for resale,
resold and otherwise transferred by a Holder thereof (other than (i) a
broker-dealer who purchases such Exchange Notes directly from the Company to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an Affiliate of the Company), without
compliance with the registration and prospectus delivery requirements of the
Securities Act; provided, that the Holder is acquiring the Exchange Notes in the
ordinary course of its business and is not participating, does not intend to
participate, and has no arrangement or understanding with any person to
participate, in the distribution of Exchange Notes. However, if any Holder
acquires Exchange Notes in the Exchange Offer
35
<PAGE>
for the purpose of distributing or participating in the distribution of the
Exchange Notes, such Holder cannot rely on the position of the staff of the
Commission in the no-action letters issued to third parties and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Original Notes must represent that the Original Notes
tendered in the Exchange Offer were acquired by such broker-dealer as a result
of market-making activities or other trading activities and must acknowledge
that it will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of such Exchange Notes. By so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time or time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Original Notes where such Original Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. Pursuant to
the Registration Rights Agreement, the Company has indicated its intention to
make this Prospectus (as it may be amended or supplemented) available to any
broker-dealer for use in connection with any such resale for a period not to
exceed 180 days after the closing of the Exchange Offer. See "Plan of
Distribution."
36
<PAGE>
USE OF PROCEEDS
The Exchange Offer is being effected to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any cash proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes in the Exchange Offer, the Company
will receive, in exchange, an equal aggregate principal amount at maturity of
Original Notes. Original Notes that are properly tendered in the Exchange Offer
and not validly withdrawn will be accepted, canceled and retired and cannot be
reissued. Accordingly, the issuance of the Exchange Notes will not result in any
increase in the outstanding indebtedness of the Company.
The net proceeds to the Company from the Initial Offering were approximately
$236.9 million, after deducting underwriting discounts, commissions and other
expenses paid by the Company. The Company used $10.8 million of the proceeds of
the Initial Offering to repay all amounts borrowed by KMC Telecom II under the
AT&T Facility (approximately $40.5 million borrowed by KMC Telecom remained
outstanding). The Company used $10.1 million of the proceeds of the Initial
Offering to repay on the Closing Date all amounts due (including accrued
interest) in connection with a $10.0 million Subordinated Loan and Security
Agreement, dated September 22, 1997 (the "Supplemenal AT&T Facility"), between
AT&T Finance, KMC Telecom and KMC Telecom II. AT&T Credit exercised a warrant to
purchase shares of the Company's Common Stock for an aggregate purchase price of
$10.0 million upon repayment of the Supplemental AT&T Facility (the "AT&T Stock
Investment"). The Company used $5.0 million of the proceeds of the Initial
Offering as a nonrefundable downpayment under its agreement with Lucent for
future purchases of switching equipment. The Company used approximately $600,000
of the proceeds of the Initial Offering to pay dividend arrearages to the former
holders of Series A Cumulative Convertible Preferred Stock of KMC Telecom.
The Company has used and intends to continue to use the remaining net
proceeds of the Offering (approximately $210.4 million), together with the $10.0
million from the AT&T Stock Investment and funds available under the AT&T
Facility, to finance the planned expansion and further development of the
Company's networks, including through acquisitions, and for other general
corporate purposes, including to fund operating losses. Expected capital
expenditures for expansion and further development of the Company's networks
primarily include the purchase and installation of switches, electronic
components, fiber optic cable and additional equipment, and to a lesser extent,
acquisitions. Expected expenditures for general corporate and working capital
purposes include (i) expenditures with respect to the Company's management
information system and customer service support infrastructure, (ii) operating
and administrative expenses, primarily those associated with sales and
marketing, with respect to the development and operation of existing and new
networks, and (iii) the funding of operating losses. Pending the foregoing uses,
the net proceeds of the Initial Offering are invested in short-term, interest
bearing investment-grade securities. The Company's investment objectives are
safety, liquidity and yield, in that order.
37
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1997, the capitalization
of the Company (i) on a historical basis and (ii) pro forma, as adjusted to
reflect the Initial Offering and the initial application of the net proceeds
therefrom, the repayment of the Supplemental AT&T Facility, the AT&T Stock
Investment, the deposit of $5.0 million as a nonrefundable downpayment under its
agreement with Lucent for future purchases of switching equipment, and the
payment of approximately $600,000 of dividend arrearages on the Series A
Cumulative Convertible Preferred Stock of KMC Telecom. This table should be read
in conjunction with "Use of Proceeds," "Selected Financial Data," "Unaudited Pro
Forma Consolidated Statement of Operations," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------
<S> <C> <C>
PRO FORMA,
ACTUAL AS ADJUSTED(A)
-------------- --------------
Cash and cash equivalents........................................................ $ 15,552,903 $ 235,768,119
-------------- --------------
-------------- --------------
Long-term debt:
AT&T Facility.................................................................. $ 51,276,933 $ 40,476,149
Supplemental AT&T Facility..................................................... 10,000,000 --
Notes, net of original issue discount.......................................... -- 238,967,391
-------------- --------------
Total long-term debt......................................................... 61,276,933 279,443,540
-------------- --------------
Redeemable equity:
Redeemable cumulative convertible preferred stock, par value $.01 per share;
authorized: 498,800 shares; issued and outstanding: 298,800 shares actual and
pro forma, as adjusted....................................................... 35,925,384 35,925,384
Redeemable common stock; issued and outstanding: 132,773 shares actual, 224,041
shares pro forma, as adjusted................................................ 11,186,705 20,686,705
Redeemable common stock warrants............................................... 539,600 539,600
-------------- --------------
Total redeemable equity...................................................... 47,651,689 57,151,689
-------------- --------------
Nonredeemable equity (deficiency):
Common stock, par value $.01 per share; authorized: 3,000,000 shares; issued
and outstanding: 613,835 shares actual and pro forma, as adjusted............ 6,138 6,138
Additional paid-in capital..................................................... 18,647,276 29,091,276
Unearned compensation.......................................................... (6,521,349) (6,521,349)
Accumulated deficit............................................................ (38,805,344) (39,397,344)
-------------- --------------
Total nonredeemable equity (deficiency)...................................... (26,673,279) (16,821,279)
-------------- --------------
Total capitalization....................................................... $ 82,255,343 $ 319,773,950
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(a) Approximately $226.4 million of the proceeds of the Initial Offering has
been allocated to the Notes and approximately $10.4 million of the proceeds
has been allocated to the Warrants, after deducting underwriting discounts
and commissions and other expenses related to the Notes and Warrants of
$12.6 million and $554,000, respectively.
38
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below were derived from the audited
financial statements of the Company and its predecessors. The selected financial
data should be read in conjunction with "Unaudited Pro Forma Consolidated
Statement of Operations," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and the notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MAY 10, 1994
(DATE OF YEAR ENDED DECEMBER 31,
INCEPTION) ----------------------------------------------------------
TO PRO FORMA
DECEMBER 31, 1994 1995 1996 1997 1997(A)(B)
----------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................ $ -- $ -- $ 205,087 $ 3,417,441 $ 3,655,254
Operating expenses:
Network operating costs...................... -- -- 448,672 7,735,849 7,830,179
Selling, general and administrative.......... 4,475 1,591,159 3,128,972 9,922,804 10,348,286
Stock option compensation expense............ -- -- 240,000 13,869,346 13,869,346
Depreciation and amortization................ -- 5,770 286,509 2,505,875 2,616,913
-------- ------------ ------------ -------------- --------------
Total operating expenses................... 4,475 1,596,929 4,104,153 34,033,874 34,664,724
-------- ------------ ------------ -------------- --------------
Loss from operations........................... (4,475) (1,596,929) (3,899,066) (30,616,433) (31,009,470)
Interest expense, net(c)....................... -- 23,463 596,248 2,068,730 2,202,670
-------- ------------ ------------ -------------- --------------
Net loss....................................... (4,475) (1,620,392) (4,495,314) (32,685,163) (33,212,140)
Dividends and accretion on redeemable preferred
stock........................................ -- -- -- (8,904,403) (8,904,403)
-------- ------------ ------------ -------------- --------------
Net loss applicable to common shareholders..... $ (4,475) $ (1,620,392) $ (4,495,314) $ (41,589,566) $ (42,116,543)
-------- ------------ ------------ -------------- --------------
-------- ------------ ------------ -------------- --------------
Net loss per common share...................... $ (.01) $ (2.70) $ (7.49) $ (64.93) $ (65.75)
-------- ------------ ------------ -------------- --------------
-------- ------------ ------------ -------------- --------------
Weighted average common shares outstanding..... 600,000 600,000 600,000 640,568 640,568
-------- ------------ ------------ -------------- --------------
-------- ------------ ------------ -------------- --------------
OTHER DATA:
Capital expenditures........................... $ -- $ 3,498,458 $ 9,110,989 $ 59,145,924 $ 59,145,924
EBITDA(d)...................................... (4,475) (1,591,159) (3,612,557) (28,110,558) (28,394,707)
Ratio of earnings to fixed charges(e).......... -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1997
AS ADJUSTED
1994 1995 1996 1997 (F)
--------- ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 5,091 $ 34,370 $ 1,486,514 $ 15,552,903 $235,768,119
Networks and equipment, net............................. -- 3,496,277 12,347,216 71,371,063 71,371,063
Total assets............................................ 7,700 3,703,721 16,715,209 95,943,307 333,211,914
Long-term debt.......................................... -- 2,727,400 12,330,006 61,276,933 279,443,540
Redeemable preferred stock.............................. -- -- -- 35,925,384 35,925,384
Redeemable common stock and warrants.................... -- -- -- 11,726,305 21,226,305
Total nonredeemable equity (deficiency)................. (3,475) (1,622,867) 388,882 (26,673,279) (16,821,279)
</TABLE>
(accompanying notes are on the following page)
39
<PAGE>
- ------------------------------
(a) Pro forma consolidated statement of operations data and other data gives
effect to the Melbourne Acquisition in July 1997 as if the Melbourne
Acquisition had occurred as of January 1, 1997. See "Use of Proceeds,"
"Unaudited Pro Forma Consolidated Statement of Operations" and the
historical financial statements and notes thereto included elsewhere in this
Prospectus.
(b) Except for the as adjusted balance sheet data, the pro forma financial data
does not give effect to the Initial Offering and the initial application of
the net proceeds therefrom. Assuming that the Initial Offering had been
consummated as of the beginning of the respective years ended December 31,
1996 and 1997, pro forma interest expense for such years would have been
$34.7 million and $35.9 million, respectively.
(c) Excludes capitalized interest of (i) $36,940 for 1995, (ii) $103,000 for
1996, and (iii) $854,000 for 1997. During the construction of the Company's
networks, the interest costs related to construction expenditures are
capitalized.
(d) EBITDA consists of earnings (loss) before net interest, income taxes,
depreciation and amortization, excluding loss on impairment of long-lived
assets. EBITDA is provided because it is a measure commonly used in the
telecommunications industry. It is presented to enhance an understanding of
the Company's operating results and is not intended to represent cash flow
or results of operations in accordance with GAAP. EBITDA is not calculated
under GAAP and is not necessarily comparable to similarly titled measures of
other companies. For a presentation of cash flows calculated under GAAP, see
the Company's historical financial statements contained elsewhere in this
Prospectus.
(e) The ratio of earnings to fixed charges is computed by dividing pretax income
from continuing operations before fixed charges (other than capitalized
interest) by fixed charges. Fixed charges consist of interest charges and
amortization of debt expense and discount or premium related to
indebtedness, whether expensed or capitalized, and that portion of rental
expense the Company believes to be representative of interest. For 1994,
1995, 1996, and 1997, earnings were insufficient to cover fixed charges by
$4,475, $1.7 million, $4.6 million, and $33.5 million, respectively. After
giving PRO FORMA effect to the increase in interest expense resulting from
the Melbourne Acquisition and the Initial Offering as of the beginning of
each period, earnings would have been insufficient to cover fixed charges by
$41.0 million and $67.8 million for 1996 and 1997, respectively.
(f) Adjusted to give effect to the repayment of the Supplemental AT&T Facility;
the exercise by AT&T Credit of a warrant to purchase 91,268 shares of
redeemable Common Stock for an aggregate purchase price of $10.0 million;
the deposit of $5.0 million as a nonrefundable downpayment under the
Company's agreement with Lucent for future purchases of switching equipment;
the payment of dividend arrearages on the Series A Cumulative Convertible
Preferred Stock of KMC Telecom; and the Initial Offering; as if such
transactions had occurred on December 31, 1997. Approximately $226.4 million
of the proceeds of the Initial Offering has been allocated to the Notes and
approximately $10.4 million of the proceeds has been allocated to the
Warrants, after deducting underwriting discounts and commissions and other
expenses related to the Notes and the Warrants of $12.6 million and
$554,000, respectively. See "Use of Proceeds," "Unaudited Pro Forma
Consolidated Statement of Operations" and the historical financial
statements and notes thereto included elsewhere in this Prospectus.
40
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The accompanying unaudited pro forma consolidated statement of operations
for the year ended December 31, 1997 is based upon the historical statements of
operations of the Company and the Melbourne System, which the Company acquired
from ICG Communications, Inc. in July 1997. The unaudited pro forma consolidated
statement of operations has been prepared assuming the Melbourne Acquisition was
consummated as of January 1, 1997, and after giving effect to the pro forma
adjustments. See "Notes to Unaudited Pro Forma Consolidated Statement of
Operations."
This unaudited pro forma consolidated statement of operations and notes
thereto should be read in conjunction with "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements and notes thereto of the Company and the
Melbourne System included elsewhere in this Prospectus. The unaudited pro forma
consolidated statement of operations is based upon certain assumptions and
estimates of management which are subject to change. This unaudited pro forma
consolidated statement of operations and the notes thereto is provided for
informational purposes only and does not purport to be indicative of the results
of operations that would actually have been attained had the Melbourne
Acquisition been completed as of January 1, 1997, or that may be expected to
occur in the future.
The unaudited pro forma consolidated statement of operations does not give
effect to the Initial Offering.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------
PRO FORMA
KMC TELECOM MELBOURNE PRO FORMA CONSOLIDATED
HOLDINGS, INC. SYSTEM ADJUSTMENTS AMOUNTS(4)
-------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue........................................... $ 3,417,441 $ 237,813 $ -- $ 3,655,254
Operating expenses:
Network operating costs......................... 7,735,849 63,080 31,250(1) 7,830,179
Selling, general and administrative............. 9,922,804 384,857 40,625(1) 10,348,286
Stock option compensation expense............... 13,869,346 -- -- 13,869,346
Depreciation and amortization................... 2,505,875 138,884 (27,846 (2) 2,616,913
-------------- ----------- ------------- --------------
Total operating expenses.................... 34,033,874 586,821 44,029 34,664,724
-------------- ----------- ------------- --------------
Loss from operations.............................. (30,616,433) (349,008) (44,029) (31,009,470)
Interest expense.................................. 2,068,730 26,940 107,000(3) 2,202,670
-------------- ----------- ------------- --------------
Net loss.......................................... (32,685,163) $ (375,948) $ (151,029) (33,212,140)
----------- -------------
----------- -------------
Dividends and accretion on redeemable preferred
stock........................................... (8,904,403) (8,904,403)
-------------- --------------
Net loss applicable to common shareholders........ $ (41,589,566) $ (42,116,543)
-------------- --------------
-------------- --------------
Net loss per common share......................... $ (64.93) $ (65.75)
-------------- --------------
-------------- --------------
Weighted average common shares outstanding........ 640,568 640,568
-------------- --------------
-------------- --------------
</TABLE>
(accompanying notes are on the following page)
41
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
The unaudited pro forma consolidated statement of operations for the year
ended December 31, 1997 gives effect to the following pro forma adjustments:
(1) To give retroactive effect to the increase in operating expenses estimated
by the Company attributable to additional management and customer care staff
deployed to operate the Melbourne System.
(2) To reflect depreciation of the acquired network and electronics based upon
revised asset values and estimated useful lives of 20 years and 10 years,
respectively.
(3) To reflect additional interest expense incurred on $2.0 million of
borrowings under the AT&T Facility to fund the Melbourne Acquisition.
(4) The unaudited pro forma consolidated statement of operations does not give
effect to the Initial Offering and the initial application of the net
proceeds therefrom. Assuming that the Initial Offering had been consummated
as of the beginning of the year, pro forma interest expense for the year
ended December 31, 1997 would have been $35.9 million.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS REFLECTS THE HISTORICAL RESULTS OF THE COMPANY. DUE TO THE LIMITED
OPERATING HISTORY, STARTUP NATURE AND RAPID GROWTH OF THE COMPANY,
PERIOD-TO-PERIOD COMPARISONS OF FINANCIAL DATA ARE NOT NECESSARILY INDICATIVE,
AND SHOULD NOT BE RELIED UPON AS AN INDICATOR, OF THE FUTURE PERFORMANCE OF THE
COMPANY. THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS. FOR A
DISCUSSION OF IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS, SEE "RISK FACTORS."
OVERVIEW
GENERAL. The Company is a CLEC providing telecommunications and data
services in Tier III Markets. The Company currently provides on-net special
access and private line and Internet access services and switch-based local and
long distance services primarily on a resale basis. The Company's objective is
to provide its customers with a complete solution for their communications
needs. Over the next year, the Company intends to transition its resale
customers to on-net switched services, Centrex-type and frame relay, ISDN and
ATM services for applications including LAN-to-LAN interconnect, Internet
access, WAN, and high speed video conferencing. The Company targets business,
government and institutional end users, as well as ISPs, IXCs and wireless
service providers.
The Company has invested significant capital and effort in developing its
telecommunications business. This capital has been invested in the development
of the Company's networks, the hiring of an experienced management team, the
development and installation of operating systems, the introduction of services,
marketing and sales efforts, and acquisitions. The Company expects to make
increasing capital expenditures to build additional networks, to expand current
networks to additional customer buildings, IXC POPs and ILEC central offices,
and to broaden its service offerings, and may consummate additional
acquisitions. Proper management of the Company's growth will require the Company
to maintain cost controls, continue to assess market potential, ensure quality
control in implementing its services as well as to expand the Company's internal
management, customer care and billing and information systems, all of which will
require substantial investment. See "--Liquidity and Capital Resources" and
"Risk Factors-- Significant Capital Requirements," "--Development and Expansion
Risk; Need to Manage Growth" and "--Dependence on Billing, Customer Services and
Information Systems."
The development, construction and expansion of the Company's networks
requires significant capital, a large portion of which is invested before any
revenue is generated. See "Risk Factors--Significant Capital Requirements." The
Company has incurred, and expects to continue to incur, significant and
increasing negative gross margins, operating losses and negative EBITDA while it
expands its network operations and builds its customer base. See "Risk
Factors--Limited Operating History; Negative Gross Profits, Operating Losses and
Negative Cash Flow." None of the Company's existing networks is generating
EBITDA. Based on its experience to date and that of its competitors, the Company
estimates that a new network will begin to generate positive EBITDA within 24 to
36 months after commencement of commercial operations. Construction periods and
operating results will vary from network to network. There can be no assurance
that the Company will be able to establish a sufficient revenue-generating
customer base or gross margins in any particular market or on a consolidated
basis.
The CLEC business is capital intensive. The Company estimates that the total
initial costs associated with the purchase and installation of fiber optic cable
and transmission and switching equipment, including capitalized engineering
costs, will range from $8.0 million to $10.0 million per network, depending upon
the size of the market served, the scope and complexity of the network, and the
proportion of aerial to underground fiber deployment. Actual costs could vary
significantly from this range. The amounts and timing of these expenditures are
subject to a variety of factors that may vary significantly with the geographic
and demographic characteristics of each market. In addition to equipment and
construction
43
<PAGE>
expenditure requirements, upon commencement of the construction phase of a
network, the Company begins to incur direct operating costs for such items as
salaries and rent. As network construction progresses, the Company incurs costs
associated with construction, including preparation of rights-of-way, and
increased sales, marketing, operating and administrative expenses. Certain
direct costs related to network planning and construction costs for new networks
are capitalized.
The initial construction of a network takes approximately six months,
depending upon the size and complexity of the network. The time required during
the construction phase is also significantly influenced by the number of route
miles involved, the mix of aerial versus underground fiber deployment, possible
delays in preparing rights-of-way, provisioning fiber optic cable and electronic
equipment, and required construction permits and other factors, including
weather.
LOCAL SERVICES. To facilitate its entry into local services, the Company
plans to install switching equipment in all of its networks. Switches are
currently in commercial operation in seven of the Company's eight markets.
Generally, the Company believes that the transition of customers to on-net
switched services should be complete within six to nine months or less following
the date on which a switch becomes commercially operational. The Company expects
to have switches in commercial operation in all 18 of the networks currently
planned to be completed by the end of 1998. Once a switch is commercially
operational, where regulatory conditions permit, the Company offers local dial
tone, in addition to enhanced services such as ISDN, Centrex, voice mail and
other custom calling features and switched data services. Until such time, the
Company will rely on the ILEC to originate and terminate its switched traffic.
The Company expects operating margins to improve as switching becomes
operational and switched services are provided on-net, the network is expanded
(primarily by adding buildings to the network), and larger volumes of traffic
are carried on the Company's network. Although under the Telecommunications Act
the ILECs will be required to unbundle local network elements, decreasing
operating expenses by permitting the Company to purchase only the origination
and termination services it needs, there can be no assurance that such
unbundling will be effected in a timely manner and result in prices favorable to
the Company. See "Risk Factors--Implementation Risks."
REVENUE AND OPERATING EXPENSES. The Company currently derives its revenue
primarily from resale of switched services, and special access and private line
and Internet access services provided on the Company's facilities. In addition,
future revenue will include on-net switch-based local services, including
Centrex-type and frame relay, ISDN and ATM services for applications including
LAN-to-LAN interconnect, Internet access, WAN, and high speed video
conferencing. The Company expects to experience declining unit prices and costs
for a substantial portion of its services; however, the Company expects that
these declines will not be as pronounced as those which might be expected in
Tier I and Tier II Markets, due to its expectation that there will be a more
limited number of competitors in the average Tier III Market. The Company's
principal operating expenses consist of network operating costs, selling,
general and administrative expenses, stock option compensation expense,
depreciation and amortization, and interest expense. Network operating costs
include charges from ILECs for resale services, charges from IXCs for resale of
long distance services, salaries and benefits associated with network operations
and customer care personnel, franchise fees (some of which are calculated as a
percentage of revenues in the applicable market, ranging from 3% to 5%,
depending upon the market involved) and other costs, including direct city
administration costs. In the future, the Company anticipates that network
operating costs will include origination charges and unbundled network element
charges from the ILECs. Further, in 1998 the Company expects to pay a percentage
of both its intrastate and interstate revenues as universal service fund
charges. The contribution factors for first quarter 1998 contributions were
3.19% of the Company's estimated quarterly interstate and international gross
end user telecommunications revenue and .72% of the Company's estimated
quarterly intrastate, interstate and international gross end user
telecommunications revenue. Contribution factors for second quarter 1998 are
3.14% and .76%, respectively. The Company cannot predict the amount of its
universal service fund contributions for the remaining quarters of 1998, or
thereafter, until the FCC issues contribution factors for such periods. These
44
<PAGE>
universal service charges will be accounted for as network operating costs. See
"Business --Regulation-- Universal Service Reform." Selling, general and
administrative expenses consists of sales personnel and supporting costs,
corporate and finance personnel and supporting costs, legal and accounting
expenses, and initial consulting efforts for billing, customer care and
information services. In the future, ongoing efforts for billing, customer care
and information services will be included in network operating costs as costs of
providing ongoing services. Depreciation and amortization includes charges
related to plant, property and equipment and amortization of intangible assets,
including franchise acquisition costs. The Company expects depreciation and
amortization expense to increase as the Company places additional networks into
service. Interest expense includes interest charges on the AT&T Facility as well
as on the initial debt financing provided to the Company by Nassau and Harold N.
Kamine. Interest expense also includes amortization of deferred financing costs.
Interest expense will increase substantially in future periods as a result of
the issuance of the Notes and additional borrowings under the AT&T Facility to
finance network build-out.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
REVENUE. Revenue increased from $205,000 for 1996 to $3.4 million for 1997.
Revenue increased primarily because the Company began aggressively marketing its
services in its first market, Huntsville, Alabama ("Huntsville"), which
generated $1.6 million of revenue for 1997. In addition, four other networks
became commercially operational and one network was purchased during 1997,
generating revenue of $1.7 million during 1997. Furthermore, the Company
initiated marketing efforts in May 1997 in all of the markets in which its
networks had become commercially operational or in which it was constructing
networks. For 1997, out of total revenues of $3.4 million, $2.3 million was
derived from resale of switched services and $1.1 million was derived from
special access and private line services.
NETWORK OPERATING COSTS. Network operating costs increased from $449,000
for 1996 to $7.7 million for 1997. The increase was due primarily to hiring
personnel and staffing local offices. Costs associated with providing on-net
services were greater than revenue generated from on-net services because the
Company was required to hire personnel and staff local offices prior to
generating revenue and obtaining sufficient revenue volume to cover such fixed
operating costs.
Costs associated with providing resale services are greater than the
revenues currently generated because of narrow discounts on ongoing resale
services provided by the ILEC and because initial installation charges by the
ILEC to the Company are greater than the Company's installation charges to its
customers. ILEC costs for resale services initiated in May 1997 were $2.2
million for 1997. Resale is primarily an interim strategy for the Company to
create a backlog of customers to be transitioned to the Company's on-net
switched facilities once the Company's own switches become commercially
operational.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $3.1 million for 1996 to $9.9 million for
1997. The increase was due primarily to hiring additional personnel in all
categories, particularly in senior management and sales and marketing, increased
legal expenditures (primarily incurred in connection with vendor contracts and
regulatory activities), and expenditures for consulting services for billing,
customer care and information services. The Company expects that selling,
general and administrative expenses will continue to increase in absolute terms
as the Company continues to expand its network services and marketing
activities, but that they will decline as an overall percentage of revenue.
STOCK OPTION COMPENSATION EXPENSE. Stock option compensation expense, a
non-cash charge, increased from $240,000 in 1996 to $13.9 million in 1997. The
increase was due primarily to an increase in the fair value of KMC Telecom's
common stock.
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DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased from $287,000 for 1996 to $2.5 million for 1997. The increase
reflected the five networks that became commercially operational and the one
network that was purchased during 1997 as well as higher amortization of
intangible assets.
INTEREST EXPENSE. Interest expense increased from $596,000 for 1996 to $2.1
million for 1997, primarily reflecting borrowings under the AT&T Facility in
1997, as well as amortization of deferred financing costs of $561,000. The
Company capitalized interest of $854,000 related to network construction
projects during 1997. Interest expense will continue to increase as a result of
the issuance of the Notes and to the extent that the Company increases its
borrowings under the AT&T Facility.
NET LOSS. For the reasons stated above, net loss increased from $4.5
million for 1996 to $32.7 million for 1997.
1996 COMPARED TO 1995
REVENUE. Revenue increased from $0 for 1995 to $205,000 for 1996. The
increase in revenue was due to the commencement of the Huntsville network
operations in 1996.
NETWORK OPERATING COSTS. Network operating costs increased from $0 for 1995
to $449,000 for 1996, reflecting the commencement of the Huntsville network
operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $1.6 million for 1995 to $3.1 million for
1996. The increase was due primarily to the hiring of additional senior
management personnel and development of network construction and implementation
plans. Of these amounts, approximately $568,000 for 1996 was incurred by the
Company from affiliated companies owned by Harold N. Kamine for services
(including rent) which the Company shared with such affiliated companies. See
"Certain Relationships and Related Transactions."
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$6,000 for 1995 to $287,000 for 1996. This increase was due primarily to the
completion of construction of the Huntsville network and the amortization of
financing costs on the convertible debt provided by Nassau in 1996.
INTEREST EXPENSE. Interest expense increased from $23,000 for 1995 to
$596,000 for 1996. This increase was due primarily to the increase in loans from
stockholders in 1996 and the convertible debt provided by Nassau in 1996.
NET LOSS. For the reasons stated above, net loss increased from $1.6
million for 1995 to $4.5 million for 1996.
1995 COMPARED TO 1994
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $4,000 for 1994 to $1.6 million for 1995.
The increase was due primarily to expenses incurred in connection with business
planning and initiating Company activities, including hiring personnel. Of these
amounts, approximately $859,000 for 1995 was incurred by the Company from
affiliated companies owned by Harold N. Kamine for services which the Company
shared with such affiliated companies.
INTEREST EXPENSE. Interest expense increased from $0 for 1994 to $23,000
for 1995, due primarily to the incurrence by the Company in 1995 of a loan made
by a stockholder of the Company.
NET LOSS. For the reasons stated above, net loss increased from $4,000 in
1994 to $1.6 million in 1995.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses as a result of
the development and operation of its networks. The Company expects that such
losses will continue as the Company emphasizes the development, construction and
expansion of its networks and builds its customer base and that cash provided by
operations will not be sufficient to fund the expansion of its networks and
service capabilities.
On January 29, 1998, the Company issued the Units at an original issue price
of approximately $250.0 million (including $460.8 million aggregate principal
amount at maturity of Notes). On the same date, the Company repaid all amounts
outstanding under the Supplemental AT&T Facility in full ($10.1 million,
including accrued interest) and AT&T Credit exercised a warrant to purchase
91,268 shares of Common Stock of the Company for an aggregate purchase price of
$10.0 million. On January 29, 1998, the Company also repaid $10.8 million
previously borrowed by KMC Telecom II under the AT&T Facility. As a result, KMC
Telecom II is no longer eligible to borrow under the AT&T Facility (nor is it an
obligor thereunder) and KMC Telecom is now permitted to borrow up to the full
$70.0 million amount of the AT&T Facility. On January 29, 1998, the Company
deposited $5.0 million as a non-refundable downpayment under an agreement with
Lucent for future purchases of switching equipment and paid approximately
$600,000 in dividend arrearages to the former holders of Series A Cumulative
Convertible Preferred Stock of KMC Telecom. See "Use of Proceeds."
Net cash provided by financing activities from borrowings and equity
issuances was $2.7 million for 1995, $14.3 million for 1996 and $85.7 million
for 1997. The Company's net cash used in operating and investment activities was
$2.7 million for 1995, $12.9 million for 1996 and $71.7 million for 1997.
The Company made capital expenditures of $9.1 million in 1996 and $59.1
million during 1997. The Company currently plans to make capital expenditures of
approximately $150.0 million in 1998. Continued significant capital expenditures
are expected to be made thereafter. The majority of these expenditures is
expected to be made for network construction and the purchase of switches and
related equipment to facilitate the offering of the Company's services. In
addition, the Company expects to continue to incur operating losses while it
expands its business and builds its customer base. Actual capital expenditures
and operating losses will depend on numerous factors, including the nature of
future expansion and acquisition opportunities and factors beyond the Company's
control, including economic conditions, competition, regulatory developments and
the availability of capital. See "Risk Factors--Limited Operating History;
Negative Gross Profits, Operating Losses and Negative Cash Flow" and
"--Significant Capital Requirements."
In addition to the Company's capital expenditures in 1997, the Company
acquired the Melbourne System for a purchase price of $2.0 million.
The Company has entered into an agreement with ACE*COMM pursuant to which
ACE*COMM will provide the Company with comprehensive billing, order processing
and customer care software for all existing and contemplated services the
Company will market. At December 31, 1997, the Company had outstanding an
aggregate of approximately $850,000 of obligations under this agreement. In
addition, as of December 31, 1997, the Company had accrued $1.1 million with
respect to the payment of commissions in connection with the purchase of Common
Stock by AT&T Credit, as well as the Series C Placement and the Series D
Placement.
At December 31, 1997 the Company had outstanding commitments aggregating
approximately $52.3 million related to the purchase of fiber optic cable and
telecommunications equipment as well as engineering services, principally under
the Company's agreements with Lucent.
On November 5, 1997, the Company issued 100,000 shares of Series C Preferred
Stock to GECC for an aggregate purchase price of $10.0 million and 50,000 shares
of Series C Preferred Stock to CoreStates for an aggregate purchase price of
$5.0 million. The Company also issued 25,000 shares of Series D Preferred Stock
to Nassau for an aggregate purchase price of $2.5 million on the same date. On
January 6,
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1998, Nassau converted its 25,000 shares of Series D Preferred Stock into an
equal number of shares of Series C Preferred Stock.
At December 31, 1997, the Company had $51.3 million of indebtedness
outstanding under the AT&T Facility, and had $18.7 million in borrowing capacity
available under the AT&T Facility, subject to certain conditions. Under the AT&T
Facility, KMC Telecom II was then permitted to borrow up to $15.0 million
(approximately $10.8 million of which had been borrowed as of December 31, 1997)
all of which, as discussed above, was repaid on the Closing Date of the Initial
Offering. In addition, the Company borrowed $10.0 million of subordinated debt
under the Supplemental AT&T Facility in September 1997 which was repaid in full
without any prepayment premium on the Closing Date of the Initial Offering. AT&T
Credit agreed that, upon repayment of the Supplemental AT&T Facility, it would
exercise a warrant to purchase 91,268 shares of Common Stock of the Company for
an aggregate purchase price of $10.0 million.
The AT&T Facility restricts the ability of KMC Telecom to pay dividends to,
or to pay principal or interest on loans from, KMC Holdings. Such restrictions
could adversely affect the Company's liquidity and ability to meet its cash
requirements, including its ability to repay the Notes in full at maturity. See
"Risk Factors--Holding Company's Reliance on Subsidiaries' Funds; Priority of
Other Creditors," and "Description of Certain Indebtedness."
The AT&T Facility requires that the Company purchase interest rate cap
agreements under which, if the Commercial Paper Rate (as defined therein) or
LIBOR rises above 12%, the Company will receive payments to offset the higher
interest rates due on the debt. As a result, the Company has entered into an
interest rate cap agreement with The Chase Manhattan Bank which expires on
December 1, 1998, to hedge the Company's interest expense on $35.0 million of
its indebtedness under the AT&T Facility. During 1997, the Company expanded the
AT&T Facility to increase its borrowing capacity thereunder from $35.0 million
to $70.0 million. In addition, during 1997, the Company obtained equity
financing of $10.0 million from AT&T Credit and debt financing of $10.0 million
from the Supplemental AT&T Facility.
During 1996, KMC Telecom issued to Nassau an aggregate of $12.0 million in
convertible notes in two tranches. On January 21, 1997, the aggregate principal
amount of convertible notes, together with accrued interest, was converted into
Series A Cumulative Convertible Preferred Stock of KMC Telecom which, in turn,
was exchanged for Series A Preferred Stock of the Company in September 1997.
During 1995, Mr. Kamine loaned the Company $2.7 million. In 1996, he loaned
the Company an additional $3.4 million. In November 1996, $4.0 million principal
amount of the loan was repaid and the remaining loan balance of $2.1 million,
together with accrued but unpaid interest, was converted into shares of Common
Stock. At the same time, KMC Telecommunications L.P., which was owned by Mr.
Kamine and affiliates, purchased $4.0 million of Common Stock from the Company.
At December 31, 1997, the Company had cash, cash equivalents and marketable
securities of approximately $15.6 million. The Company believes that the net
proceeds of the Initial Offering, the Series C Placement and the Series D
Placement, together with available cash and borrowings expected to be available
under the AT&T Facility, will provide sufficient funds for the Company to expand
its business as currently planned and to fund its currently anticipated expenses
through the completion of its eight existing networks, the ten new networks
currently planned for completion by the end of 1998 and the five additional
networks planned for completion in 1999, and to fund its working capital
requirements for 1999. Thereafter, the Company will require additional
financing. However, in the event that the Company's plans change, the
assumptions upon which the Company's plans are based prove inaccurate, the
Company expands or accelerates its business plan or the Company determines to
consummate additional acquisitions, the foregoing sources of funds may prove to
be insufficient to complete all such networks, and the Company may be required
to seek additional financing. In this regard, the Company has begun preliminary
consideration of entering San Juan and other markets in Puerto Rico. The Company
has not determined (i) whether to proceed in such markets, (ii) if it proceeds,
whether it would proceed through a subsidiary or
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as a minority investor in another enterprise, or (iii) if it proceeds, the
amount of capital it would invest in Puerto Rican markets. Additional sources of
financing may include public or private equity or debt financings by the
Company, capitalized leases and other financing arrangements. Pursuant to the
Certificates of the Powers, Designations, Preferences and Rights of the Series A
and Series C Preferred Stock, the Company may not increase the authorized number
of shares of preferred stock or Common Stock without the consent of the holders
of two-thirds of the shares of both the Series A Preferred Stock and the Series
C Preferred Stock. The Company has only three million shares of Common Stock
authorized. There can be no assurance that additional financing will be
available to the Company or, if available, that it can be obtained on a timely
basis and on acceptable terms or within the limitations contained in the AT&T
Facility, the Indenture or in any future financing arrangements. Failure to
obtain such financing could result in the delay or abandonment of some or all of
the Company's development and expansion plans and expenditures, which would have
a material adverse effect on the Company's business, financial condition and
results of operations. Such a failure could also limit the ability of the
Company to make principal and interest payments on its outstanding indebtedness,
including the Notes. The Company has no working capital or other credit facility
under which it may borrow for working capital and other general corporate
purposes. There can be no assurance that such financing will be available to the
Company in the future or that, if such financing were available, it would be
available on terms and conditions acceptable to the Company. See "Risk
Factors--Significant Capital Requirements," "Use of Proceeds" and "Unaudited Pro
Forma Consolidated Statement of Operations."
For 1997, after giving PRO FORMA effect to the increase in interest expense
resulting from the Melbourne Acquisition and the Initial Offering as of the
beginning of the year, the Company's earnings would have been insufficient to
cover fixed charges by $67.8 million. The Company's liquidity has improved as a
result of the Initial Offering because the Notes do not require payment of
principal until maturity in 2008. However, the indebtedness under the AT&T
Facility will mature prior to 2008. The Company anticipates that cash from
operations will not be sufficient to repay the amounts owing under the AT&T
Facility. Accordingly, the Company may need to refinance a substantial amount of
indebtedness. The ability of the Company to effect such refinancings will be
dependent upon the future performance of the Company, which will be subject to
prevailing economic conditions and to financial, business, regulatory and other
factors, including factors beyond the control of the Company. There can be no
assurance that the Company will be able to improve its earnings before fixed
charges or that the Company will be able to meet its debt service obligations,
including its obligations under the AT&T Facility or the Notes. See "Risk
Factors--Significant Capital Requirements" and "--Substantial Indebtedness; Debt
Service Requirements; Refinancing Risks."
By letter dated August 29, 1997, the Company notified I-Net, Inc. ("I-NET")
that the Company considered I-NET to be in default under a Master
Telecommunications System Rollout Agreement dated as of October 1, 1996 (the
"I-NET Agreement"). By letter dated October 27, 1997, I-NET demanded payment of
all amounts it alleged were due under the I-NET Agreement and a related
agreement (aggregating $4.1 million) and stated that it would invoke the
arbitration provisions under the I-NET Agreement if the parties could not agree
as to the amount due and payment terms on or before November 27, 1997. By letter
dated December 1, 1997, I-NET extended its deadline for reaching agreement to
December 15, 1997. Although the Company and I-NET conducted discussions they
were unable to reach an agreement and on February 12, 1998, the Company received
a demand for arbitration from Wang Laboratories, Inc. ("Wang"), the successor to
I-NET. The demand seeks at least $4.1 million. The Company believes that it has
meritorious defenses to Wang's claims and has asserted counterclaims seeking in
excess of $2.5 million as a result of I-NET's defaults under the I-NET
Agreement. The Company believes that resolution of this matter will not have a
material adverse impact on its financial condition. No assurance can be given,
however, as to the ultimate resolution of this matter. See "Business--Legal and
Administrative Proceedings."
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As of December 31, 1997, the Company and its subsidiaries had consolidated
net operating loss carryforwards for United States income tax purposes ("NOLs")
of approximately $22.8 million which expire through 2012. Under Section 382 of
the Internal Revenue Code of 1986, as amended, if the Company undergoes an
"ownership change," its ability to use its pre-ownership change NOLs (NOLs
accrued through the date of the ownership change) would generally be limited
annually to an amount equal to the product of (i) the long-term tax-exempt rate
for ownership changes prescribed monthly by the Treasury Department and (ii) the
value of the Company's outstanding equity immediately before the ownership
change excluding certain capital contributions (the "Section 382 Limitation").
Any allowable portion of the pre-ownership change NOLs that is not used in a
particular taxable year following the ownership change could be carried forward
to subsequent taxable years until the NOLs expire, usually 15 years after they
are generated.
As a result of the cumulative effect of issuances of preferred and common
stock through September 22, 1997, KMC Telecom has undergone an ownership change.
For financial reporting purposes, the Company has an aggregate of
approximately $38.2 million of loss carryforwards and net temporary differences
at December 31, 1997. At existing tax rates the future benefit of these items
approximates $13.0 million. A valuation allowance has been established equal to
the entire net tax benefit associated with all carryforwards and temporary
differences at December 31, 1997 as their realization is uncertain.
BUSINESS
THE COMPANY
The Company is a CLEC providing telecommunications and data services in Tier
III Markets (population from 100,000 to 750,000). The Company currently provides
on-net special access and private line and Internet access services and
switch-based local and long distance services primarily on a resale basis. The
Company's objective is to provide its customers with a complete solution for
their communications needs. Over the next year, the Company intends to
transition its resale customers to on-net switched services, Centrex-type and
frame relay, ISDN and ATM services for applications including LAN-to-LAN
interconnect, Internet access, WAN, and high speed video conferencing. The
Company targets business, government and institutional end users, as well as
ISPs, IXCs and wireless service providers.
The Company currently operates in eight Tier III Markets. The Company
entered each of these markets, after completing construction of a fiber optic
network backbone, by selling on-net dedicated services and reselling ILEC
switched services to its customers. The Company has installed, or intends to
install, Lucent Technologies Series 5ESS-Registered Trademark--2000 switches (or
Lucent derivatives of the 5ESS-Registered Trademark-) in each of its existing
and future markets. Switches are currently in commercial operation in seven of
the Company's eight markets. The Company expects to construct 10 additional
networks and install 11 additional switches by the end of 1998. In addition, the
Company expects to construct 5 additional networks and install 5 additional
switches in 1999.
INDUSTRY OVERVIEW
According to the FCC's Statistics of Communications Common Carriers, ILECs
in the United States generated approximately $100.7 billion in revenue in 1996
from the provision of local exchange services. Local exchange services consist
of a number of service components and are defined by specific regulatory
classifications. For 1996, total revenue by service was (i) interstate dedicated
access service (i.e., connecting a customer to a long distance carrier's
facilities) revenues of $3.6 billion; (ii) interstate switched access service
(i.e., originating and terminating calls from a long distance carrier) revenues
of $12.4 billion; (iii) end-user fees (i.e., access charges paid by the consumer
for the use of the ILEC's networks) of $7.3 billion; (iv) basic local service
(including dial tone, local area charges, dedicated point-to-point intra-LATA
service and enhanced calling features) revenues of $49.5 billion; (v) intra-LATA
toll call revenues of $10.4
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billion; (vi) intrastate switched access (i.e., local origination and
termination for long distance carriers for calls within a state) revenues of
$7.6 billion; and (vii) miscellaneous (including provision of directories,
billing and collection services and corporate operations) revenues of $9.8
billion. In addition, the FCC reported that total toll service revenues in the
United States in 1996 were $99.7 billion.
Until recently, the CAP/CLEC industry has generally been limited to
providing special access services and private line services to corporations and
government agencies physically located on the network of the CAP/CLEC. The
Telecommunications Act opens local service markets to competition by preempting
state and local laws, to the extent that they prevent competitive entry with
respect to the provision of any telecommunications service, and imposes a
variety of new duties on ILECs in order to promote competition in local exchange
and access services.
In May 1997, the FCC adopted rules that will change how access charges are
calculated. These changes will reduce access charges and will shift certain
charges currently based on minutes to flat-rate, monthly per-line charges. In
addition, the FCC has also adopted rules that will give ILECs pricing
flexibility with respect to access charges.
BUSINESS STRATEGY
The principal elements of the Company's business strategy include:
TIER III MARKET FOCUS. The Company intends to operate in Tier III Markets.
The Company believes that many Tier III Markets offer attractive demographic,
economic, competitive and demand characteristics. In addition, network
construction is less expensive in Tier III Markets than in Tier I and Tier II
Markets. Generally, labor costs and the costs of obtaining rights of way are
lower in Tier III Markets. In addition, many Tier III Markets permit significant
aerial deployment of fiber optic cable which is less expensive than the buried
deployment required in many Tier I and Tier II Markets. The Company selects the
markets in which it proposes to develop networks from among the approximately
300 Tier III Markets by first identifying those markets that do not yet have
significant, established competitors to the existing ILEC, and by then reviewing
the demographic, economic, competitive and telecommunications demand
characteristics of such markets to determine their suitability for the types of
services offered by the Company. Market demand is estimated on the basis of the
concentration of potential business, government and institutional end user
customers and the general economic prospects for the area.
EARLY TO MARKET ADVANTAGE. The Company strives to be the first CLEC in a
geographic area to actively market and provide services. The Company believes
that by effecting early entry into Tier III Markets it will be able to limit
significant competition from other CLECs which may focus on Tier III Markets
where no CLEC has yet established operations, although there can be no assurance
in this regard. See "Risk Factors--Competition."
COMPREHENSIVE NETWORKS. The Company builds geographically extensive, full
service networks. The Company believes that such networks provide greater
operating leverage, facilitate the capture of market share, and are likely to
deter other CLECs from attempting to penetrate its markets. Prior to both
initial backbone construction and subsequent to any network expansion or
overbuild, the Company performs detailed rate of return analyses to justify such
capital expenditures. In each of its existing eight markets, the Company has
completed its backbone construction connecting the market's central business
district with outlying office parks, large institutions and IXC POPs. In
addition, the Company will continue to expand its existing networks in response
to anticipated customer demand.
LOCAL PRESENCE. The Company intends to capture and retain customers through
effective, personalized sales, marketing and customer service programs. The
Company establishes sales offices in each market in which it operates a network,
relies on a face-to-face selling approach for its customers and will support its
sales staff with locally based customer service and technical support personnel.
The Company believes that its "Creative Solutions with a Hometown Touch"-TM-
sales approach is very important to
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customers in Tier III Markets, who do not typically receive local customer
support from the ILEC. The Company seeks to build long-term relationships with
its customers by responding rapidly and creatively to their telecommunications
needs. The Company recently entered into an agreement with ACE*COMM to provide
the Company with comprehensive billing, order processing and customer care
software for all existing and contemplated services the Company will market.
LOW COST CONSTRUCTION. The Company uses innovative "switch-in-a-box"
construction and deployment techniques for many of its networks. Using these
techniques, lightwave, switching and power equipment are pre-installed by Lucent
under controlled factory conditions in weatherproof, storm-proof concrete
buildings delivered to the Lucent facility by a Company contractor. The
completed buildings are then shipped to the appropriate city for final
installation, reducing costs, installation risks and time to market. These
techniques also afford the Company the option of upgrading the switch in place
or moving the switch to a new city in its existing building if growth in the
network where the switch was originally installed requires that a switch with
greater capacity be installed.
EXPERIENCED EXECUTIVE TEAM. The Company's executive team is led by Harold
N. Kamine, Chairman of the Board of Directors, and Michael A. Sternberg, the
Company's President and Chief Executive Officer. Other members of the team
include Gary E. Lasher, Vice Chairman of the Board, Roscoe C. Young II, Chief
Operating Officer, Cynthia Worthman, Vice President and Chief Financial Officer,
Secretary and Treasurer, and James L. Barwick, Senior Vice President-Technology.
These executives, collectively, have over 130 years of experience in the
telecommunications industry.
SERVICES
SPECIAL ACCESS AND PRIVATE LINE SERVICES. The Company has generally
provided dedicated access service and resold switched services which it
purchased from ILECs. In December 1997, the Company began providing its own
on-net switched services to several of its customers. See "--Switch-Based
Services." The Company currently provides the following types of on-net
dedicated service:
- POP-to-POP Special Access --Communications circuits linking two or more
POPs of one IXC or the POPs of different IXCs in a market, allowing these
POPs to exchange traffic for transport to its final destination.
- End-User / IXC Special Access --Communications circuits between an end
user, such as a large business, and the local POP of its pre-subscribed
IXC.
- Private Line --Communications circuits connecting various customer
locations for transmitting internal voice and data traffic.
- Collocated Special Access --A dedicated high capacity line carrying
switched transmissions at a non-usage sensitive rate from an end user to
the IXC POP, through the Company's facilities.
- Collocated POP-to-ILEC Switched Access Transport --A dedicated high
capacity line carrying switched transmissions of multiple end users from
the Company's facilities to and from the Company's collocation points with
the ILEC to the public switched network at a usage sensitive rate.
SWITCH-BASED SERVICES. The Company has added and is continuing to add
capabilities to provide local dial tone and switched access termination and
origination services to its networks. Switches are currently in commercial
operation in seven of the Company's eight markets. Generally, the Company
believes that the transition of customers to on-net switched services should be
complete within six to nine months or less following the date on which a switch
becomes commercially operational. The Company expects to have switches in
commercial operation in all eighteen of the networks currently planned to be
completed by the end of 1998. The Company has entered into interconnection
agreements with ILECs for all networks anticipated to be built in 1997 and 1998.
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LONG DISTANCE. The Company intends to offer its customers long distance
service by purchasing long distance service in bulk from IXCs and reselling the
service to its customers. The Company believes that many of its customers will
prefer the option of purchasing long distance services from the Company as part
of a one-stop telecommunications solution.
CENTREX-TYPE SERVICES. The Company intends to provide Centrex-type services
to certain of its customers. By using Centrex-type services instead of a private
branch exchange ("PBX") to direct their telecommunications traffic, customers
can avoid the large investment in equipment required and the fixed costs
associated with maintaining a PBX network infrastructure. The Company's digital
Centrex-type service will allow medium to small business customers who lack the
size or resources to support their own PBX to benefit from a sophisticated
telecommunications system. In addition, the Company can provide supplementary
services to businesses which operate their own PBX.
ENHANCED DATA SERVICES. The Company is expanding its capabilities to
provide enhanced services. The Company believes that these services will enhance
its ability to provide an integrated turnkey solution to its customer's voice,
data and video transmission requirements. These enhanced services include frame
relay, ISDN and ATM services for applications including LAN-to-LAN interconnect,
Internet access, WAN and high speed video conferencing.
SYSTEMS CONSTRUCTION AND DEVELOPMENT
As part of determining the economic viability of a network in a particular
market, the Company's corporate development staff reviews the demographic,
economic, competitive and telecommunications demand characteristics of the
market. Market demand is estimated, using data gathered from IXCs, the FCC,
local sources, site visits and specific market studies commissioned by the
Company, on the basis of the concentration of potential business, government and
institutional end user customers and the economic prospects for the area.
Once a market is targeted for development, a network is designed to provide
access to a significant number of the key customers in that market. Typically,
the Company constructs a 20-30 mile "self-healing" synchronous optical network
("SONET") architecture backbone ring to provide coverage of the major business
districts, government offices, hospitals, office parks and universities, the
principal IXC POPs and the ILEC's central office(s). Following construction of
the backbone network, the Company expects to build additional loops to increase
the size of the Company's addressable market.
The following table presents information, as of March 31, 1998, concerning
the Company's existing networks:
<TABLE>
<CAPTION>
NETWORK SWITCH
COMMERCIALLY COMMERCIALLY OWNED OPERATIONAL ADDRESSABLE COMMERCIAL COMMERCIAL BUILDINGS
OPERATIONAL OPERATIONAL ROUTE COMMERCIAL BUILDINGS ON ON THE
LOCATION (1) (2) MILES BUILDINGS(3) ROUTE (4) NETWORK
- ------------------ -------------- -------------- ----------------- --------------- ----------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Huntsville, AL March 1996 November 1997 68 992 244 59
Baton Rouge, LA March 1997 November 1997 28 1,393 319 4
Shreveport, LA March 1997 December 1997 20 642 217 8
Corpus Christi, TX May 1997 December 1997 28 895 204 2
Savannah, GA June 1997 December 1997 24 666 152 8
Melbourne, FL (5) July 1997 May 1998 22 620 111 10
Madison, WI August 1997 December 1997 32 1,101 375 21
Augusta, GA October 1997 March 1998 30 720 166 1
<CAPTION>
APPROXIMATE
LOCATION POPULATION
- ------------------ -------------
<S> <C>
Huntsville, AL 320,000
Baton Rouge, LA 560,000
Shreveport, LA 380,000
Corpus Christi, TX 384,000
Savannah, GA 282,000
Melbourne, FL (5) 455,000
Madison, WI 396,000
Augusta, GA 462,000
</TABLE>
- ------------------------
(1) The Company considers a network to be commercially operational when its
fiber optic cable and related electronics permit the Company to commence
service. All of the networks listed are currently carrying customer traffic.
(2) Refers to the date on which testing is completed and the switch is first
available to carry customer traffic. Generally, the Company believes that
the actual transition of customers to on-net switched services should be
complete within six to nine months or less following the date on which the
switch becomes commercially operational. However, there can be no assurance
regarding when switches will be commercially operational or when customers
will be transitioned to on-net services.
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(3) Addressable by either ILEC unbundled network elements or a direct connection
to the Company's network. The Company expects collocation in all targeted
central offices in such markets to be completed by June 30, 1998.
(4) A commercial building is considered to be on a network route if it is
located within three miles of the Company's fiber optic backbone cable. The
Company defines a commercial building as one with greater than fifty
employees.
(5) The Melbourne System was already commercially operational when it was
acquired in July 1997.
On October 1, 1997, the Company entered into a letter of intent to acquire
from FiberCap Digital Inc. an existing network of approximately 13 fiber route
miles located in Winston-Salem, North Carolina (the "Winston-Salem Network").
The Winston-Salem Network presently serves primarily Wake Forest University. The
acquisition is subject to the receipt of any and all necessary board,
shareholder, governmental, financing or other approvals and the negotiation and
execution of a definitive purchase agreement.
The construction of a network requires the Company to obtain municipal
franchises and other permits. These rights are typically the subject of
non-exclusive agreements of finite duration providing for the payment of fees or
the provision of services by the Company to the municipality without
compensation. In addition, the Company must secure rights-of-way and other
access rights which are typically provided under non-exclusive multi-year
agreements, which generally contain renewal options. Generally, these rights are
obtained from utilities, ILECs, other CLECs, railroads and IXCs. The
Telecommunications Act requires most utilities to afford access to rights-of-way
to CLECs on non-discriminatory terms and conditions and at reasonable rates.
However, there can be no assurance that delays and disputes will not occur. The
Company's agreements for rights-of-way and similar matters generally require the
Company to indemnify the party providing such rights. Such indemnities could
make the Company liable for actions (including negligence) of the other party.
See "Risk Factors--Dependence on Rights-of-Way and Other Third Party
Agreements."
The Company's requirements for a planned network are communicated to an
engineering firm that finalizes the route and completes the network's design.
Independent construction and installation contractors are selected through a
competitive bidding process. The Company's own personnel supervise the
construction, negotiate required contracts, and test and verify the network
components prior to commencing commercial service. Cable, equipment and supplies
required for the networks are available from a variety of sources at competitive
rates. The construction period for a new network varies depending upon such
factors as the number of backbone route miles to be installed, the relative use
of aerial as opposed to buried cable deployment, the initial number of buildings
targeted for connection to the network backbone and other factors. Based upon
the Company's experience with its operational networks, the Company believes
that a new fiber optic network can be made commercially operational within
approximately six months after construction commences.
In a typical Tier III Market, office buildings are connected by network
backbone extensions to one of a number of physical rings of fiber optic cable,
which originate and terminate at the Company's local central office. Within each
building, customer equipment is connected to Company-provided electronic
equipment which is generally located on the customer's premises where customer
transmissions are digitized, combined and converted to an optical signal. The
traffic is then transmitted through the network backbone to the Company's local
central office where it can be routed to its ultimate destination on the
network.
The Company's networks consist of digital fiber optic communications paths
which allow for high speed, high quality transmission of voice, data and video
communications. The Company typically installs backbone fiber optic cables
containing 48 to 144 fiber strands which have significantly greater bandwidth
carrying capacity than other media. The Company's OC-48 SONET networks support
up to 32,256 simultaneous voice conversations over a single pair of glass
fibers. The Company expects that continuing developments in compression
technology and multiplexing equipment will increase the capacity of each fiber,
thereby providing more bandwidth carrying capacity at relatively low incremental
costs.
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The Company currently offers end-to-end fully protected fiber services
utilizing SONET ring architecture which routes customer traffic simultaneously
in both directions around the ring to provide protection against fiber cuts.
Back-up electronics become operational in the event of failure of the primary
components, adding further redundancy to the Company's systems.
The Company monitors its fiber optic networks and electronics seven days per
week, 24 hours per day using its own local network control centers. Lucent
monitors the Company's switches seven days per week, 24 hours per day, pursuant
to a contractual agreement. The Company may in the future develop its own
national control center to monitor all aspects of network operations.
SALES AND MARKETING
The Company plans to leverage its networks through sales and marketing
activities targeted at two separate customer groups: retail and wholesale.
Retail customers are composed of business, government and institutional
telecommunications and data services customers. Wholesale customers will consist
of IXCs, wireless providers and ISPs.
RETAIL CUSTOMERS. The Company targets retail customer segments such as
business, government, healthcare and educational institutions which have high
volume telecommunications and data services requirements. The Company is
currently providing these customers private line services and is reselling
switched services which it purchases from ILECs. As the Company introduces
switching, local dial tone and long distance services, it will have the
capability to provide a full telecommunications service bundle to its customers.
In addition to these services, the Company will provide data services, including
frame relay, ISDN and ATM. These services are currently experiencing
significantly higher growth rates than voice services. The Company intends to
deliver and support a full range of advanced data services in a cost-effective
manner through the selective use, where appropriate, of third-party vendors for
both marketing and support.
The Company establishes local sales offices in each market that it serves.
Initially, each local sales office is staffed by a City Director and two or
three salespersons with the number of sales personnel expected to increase to
between four and six as the Company's operations in the market expand. All sales
personnel will be hired locally since the Company believes that knowledge of,
and contacts in, a local market are key factors for competitive differentiation
and commercial success in a Tier III Market. The Company believes that this
local focus will help to set the Company apart from its competitors.
WHOLESALE CUSTOMERS. The Company currently targets the major IXCs such as
AT&T, MCI, Sprint and WorldCom and ISPs. The Company believes that it can
effectively compete to provide access to these customers based on price,
reliability, technology, route diversity, ease-of-ordering and customer service.
Historically, IXCs have paid significant charges to ILECs to access their
networks. The Company provides these services at a discount. In addition, to the
extent that ILECs begin to compete with IXCs for long distance services, IXCs
have a competitive incentive to move access business away from ILECs to CLECs.
Revenues from access services may decline in future years due to a change in
pricing proposed by the FCC. See "--Industry Overview."
SUPPLIERS
LUCENT. The Company has contracted with Lucent, as its primary supplier, to
purchase switching, transport and digital cross connect products. Lucent has
also agreed to implement and test the Company's switches and related equipment.
In addition, Lucent and the Company have entered into an agreement pursuant to
which Lucent has agreed to monitor the Company's switches on an on-going basis.
See "--Systems Construction and Development."
ACE*COMM. The Company has entered into an agreement with ACE*COMM pursuant
to which ACE*COMM will provide the Company with comprehensive billing, order
processing and customer care
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software for all existing and contemplated services the Company will market. The
Company anticipates that this software package will allow it to provide its
customers with a single bill for all of the services provided to them, whether
resold or on-net. The Company has begun implementation of the ACE*COMM software
package in certain markets and the implementation will be completed as switches
become commercially operational and customers are transitioned to on-net
switched services.
COMPETITION
OVERVIEW. The telecommunications industry is highly competitive. The
Company's principal competitors in Tier III Markets will be the ILECs; in most
instances one of the RBOCs, one of the GTE Companies or Sprint. ILECs presently
have almost 100% of the market share in those areas the Company considers its
market areas. Because of their relatively small size, the Company does not
believe that Tier III Markets can profitably support more than two competitors
to the ILEC.
ILECS. The Company's principal competitors for local exchange services are
the RBOCs, the GTE Companies or Sprint. Other competitors may include other
CLECs, microwave and satellite carriers, wireless telecommunications providers
and private networks built by large end-users. Potential competitors (using
similar or different technologies) include cable television companies, utilities
and RBOCs seeking to operate outside their current local service areas. In
addition, there may be future competition from large long distance carriers,
such as AT&T, MCI and WorldCom, which have begun to offer integrated local and
long distance telecommunications services. AT&T also recently announced its
intention to offer local services using a new wireless technology. Consolidation
of telecommunications companies and the formation of strategic alliances within
the telecommunications industry, as well as the development of new technologies,
could give rise to significant new competitors to the Company.
As a recent entrant in the integrated telecommunications services industry,
the Company has not achieved a significant market share for any of its services.
In particular, the ILECs have long-standing relationships with their customers,
have financial, technical and marketing resources substantially greater than
those of the Company, have the potential to fund competitive services with
revenues from a variety of businesses and currently benefit from certain
existing regulations that favor the ILECs over the Company in certain respects.
While recent regulatory initiatives, which allow CLECs such as the Company to
interconnect with ILEC facilities, provide increased business opportunities for
the Company, such regulatory initiatives have been accompanied by increased
pricing flexibility for, and relaxation of regulatory oversight of, the ILECs.
If the ILECs engage in increased volume and discount pricing practices or charge
CLECs increased fees for interconnection to their networks, or if the ILECs seek
to delay implementation of interconnection to their networks, the Company's
business, financial condition and results of operations and its ability to make
payments on the Notes could be adversely affected.
To the extent the Company interconnects with and uses ILEC networks to
service its customers, the Company will be dependent upon the technology and
capabilities of the ILECs to meet certain telecommunications needs of the
Company's customers and to maintain its service standards. The Company will
become increasingly dependent on interconnection with ILECs as switched services
become a greater percentage of the Company's business. The Telecommunications
Act imposes interconnection obligations on ILECs, but there can be no assurance
that the Company will be able to obtain the interconnections it requires at
rates, and on terms and conditions, that permit the Company to offer switched
services at rates that are both competitive and profitable. See "Risk
Factors--Competition" and "--Implementation Risks." In the event that the
Company experiences difficulties in obtaining high quality, reliable and
reasonably priced service from the ILECs, the attractiveness of the Company's
services to its customers could be impaired.
CLECS AND OTHER COMPETITORS. The Company will compete from time to time
with other CLECs. However, the Company believes that these competitors will not
pose a major threat due to the Company's focus on Tier III Markets, where there
are generally fewer CLEC competitors.
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However, it is likely that in one or more of its markets the Company will
face competition from two or more facilities-based CLECs. After the investment
and expense of establishing a network and support services in a given market,
the marginal cost of carrying an additional call is negligible. Accordingly, in
Tier III Markets where there are three or more facilities-based CLECs, the
Company expects substantial price competition. The Company believes that
operations in such markets are likely to be unprofitable for one or more
operators.
The CLEC competitors which have started either construction or solicitation
activities in the Company's eight existing markets include, among others: ACSI
has constructed, or is constructing, networks in Baton Rouge, Corpus Christi,
Madison, Savannah and Shreveport. Brooks has also commenced construction
activities in Corpus Christi and three of the markets in which the Company plans
to complete networks by the end of 1998. CSW/ChoiceCom has announced that it
will provide services in Corpus Christi. Hyperion Telecommunications, Inc. has
announced its intention to offer services using the fiber optic facilities of
Entergy Corporation, a utility, in Baton Rouge. ITC Deltacom offers services in
Huntsville. LDS Corp. (a privately owned company that has agreed to be acquired
by Intermedia Communications, Inc.) has fiber optic networks in Huntsville and
Shreveport, has resale operations in Baton Rouge, Melbourne and Savannah and has
announced plans to build fiber optic facilities in Savannah and Baton Rouge.
McLeodUSA, Inc. is engaged in reselling in Madison. Mid-Plains, Inc., an ILEC in
Wisconsin, has announced plans to offer services in Madison. TDS Metro has
announced plans to build a 54 mile fiber optic network in Madison and to
commence services in early 1998. Time Warner Telecom, Inc. has announced its
intention to offer services in Melbourne and Winston-Salem. Including the
Company, there are four CLECs that intend to operate in Corpus Christi. The
Company believes that there may be additional competitors that have formulated
plans to enter its markets, including the ten additional markets it plans to
enter in 1998.
The Company expects to face competition in each of its markets. The Company
believes that its commitment to build a significant network, deploy switches and
establish local sales and support facilities at the outset in each of the Tier
III Markets which it targets should reduce the number of facilities-based
competitors and drive other entrants to focus on the resale of ILEC service or
the Company's services or search for other market opportunities. The Company
believes that each market will also see more agent and distributor resale
initiatives.
Both the long distance business and the data transmission business are
extremely competitive. Prices in both businesses have declined significantly in
recent years and are expected to continue to decline. In the long distance
business, the Company will face competition from large carriers such as AT&T,
MCI, Sprint and WorldCom. The Company will rely on other carriers to provide
transmission and termination for its long distance traffic and therefore will be
dependent on such carriers. See "Risk Factors--Risks of Entry into Long Distance
Business" and "--Risks of Entry into Data Transmission Business."
The Company expects to experience declining prices and increasing price
competition. There can be no assurance that the Company will be able to achieve
or maintain adequate market share or revenue, or compete effectively, in any of
its markets. See "Risk Factors--Competition."
REGULATION
The Company's services are subject to varying degrees of federal, state and
local regulation. The FCC exercises jurisdiction over all facilities of, and
services offered by, telecommunications common carriers to the extent those
facilities are used to provide, originate or terminate interstate or
international communications. The state regulatory commissions retain
jurisdiction over the same facilities and services to the extent they are used
to originate or terminate intrastate communications. Local governments sometimes
impose franchise or licensing requirements on CLECs.
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FEDERAL REGULATION
The Company is regulated at the federal level as a nondominant common
carrier subject to minimal regulation under Title II of the Communications Act
of 1934. The Communications Act of 1934 was substantially amended by the
Telecommunications Act, which was signed into law by the President on February
8, 1996. This legislation provides for comprehensive reform of the nation's
telecommunications laws and is designed to enhance competition in, among other
markets, the local telecommunications marketplace by: (i) removing state and
local entry barriers, (ii) requiring ILECs to provide interconnections to their
facilities, (iii) facilitating the end users' choice to switch service providers
from ILECs to CLECs such as the Company and (iv) requiring access to
rights-of-way. The legislation also is designed to enhance the competitive
position of the CLECs and increase local competition by newer competitors such
as IXCs, CATVs and public utility companies. Under the Telecommunications Act,
RBOCs have the opportunity to provide inter-LATA long distance services if
certain conditions are met and are no longer prohibited from providing certain
cable TV services. In addition, the Telecommunications Act eliminates certain
restrictions on utility holding companies, thus clearing the way for them to
diversify into telecommunications services. See "Risk Factors--Competition."
The Telecommunications Act specifically requires all telecommunications
carriers (including ILECs and CLECs (such as the Company)): (i) not to prohibit
or unduly restrict resale of their services; (ii) to provide dialing parity and
nondiscriminatory access to telephone numbers, operator services, directory
assistance and directory listings; (iii) to afford access to poles, ducts,
conduits and rights-of-way; and (iv) to establish reciprocal compensation
arrangements for the transport and termination of telecommunications. It also
requires CLECs and ILECs to provide interconnection for the transmission and
routing of telephone exchange service and exchange access. It requires ILECs to
provide such interconnection (a) at any technically feasible point within the
ILEC's network, (b) that is at least equal in quality to that provided by the
ILEC to itself, its affiliates or any other party to which the ILEC provides
interconnection, and (c) at rates, terms and conditions that are just,
reasonable and nondiscriminatory. ILECs also are required under the new law to
provide nondiscriminatory access to network elements on an unbundled basis at
any technically feasible point, to offer their local telephone services for
resale at wholesale rates, and to facilitate collocation of equipment necessary
for competitors to interconnect with or access the unbundled network elements.
The Telecommunications Act also removed on a prospective basis most
restrictions from AT&T and RBOCs resulting from the Modified Final Judgement,
which was the consent decree entered in 1982 providing for divestiture of the
RBOCs from AT&T in 1984. The Telecommunications Act establishes procedures under
which an RBOC can enter the market for "in-region" inter-LATA (I.E., long
distance between specified areas) services, within the area where it provides
local exchange service. The Telecommunications Act permitted the RBOCs to enter
the out-of-region long distance market immediately upon enactment, and RBOCs can
provide intra-LATA long distance services. Before the RBOC can provide in-region
inter-LATA services, it must obtain FCC approval upon a showing that
facilities-based competition is present in its market, that the RBOC has entered
into interconnection agreements in the states where it seeks authority, that the
interconnection agreements satisfy a 14-point "checklist" of competitive
requirements, and that such entry is in the public interest. To date, such
authority has not been granted, but requests by RBOCs are the subject of pending
petitions and appeals. The provision of inter-LATA services by RBOCs is expected
to reduce the market share of major IXCs, and consequently, may have an adverse
effect on the ability of CLECs to generate access revenues from the IXCs.
FCC RULES IMPLEMENTING THE LOCAL COMPETITION PROVISIONS OF THE
TELECOMMUNICATIONS ACT. On August 8, 1996, the FCC released the Interconnection
Decision which established a framework of minimum, national rules enabling state
public service commissions ("PSCs") and the FCC to begin implementing many of
the local competition provisions of the Telecommunications Act. The
Interconnection Decision promulgated rules to implement Congress' statutory
directive concerning the interconnection obligations of all telecommunications
carriers, including obligations of CLEC and ILEC networks.
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The FCC prescribed certain minimum points of interconnection necessary to permit
competing carriers to choose the most efficient points at which to interconnect
with the ILECs' networks. The FCC also adopted a minimum list of unbundled
network elements that ILECs must make available to competitors upon request and
a methodology for states to use in establishing rates for interconnection and
the purchase of unbundled network elements. The FCC also adopted a methodology
for states to use when applying the Telecommunications Act's "avoided cost
standard" for setting wholesale prices with respect to retail services.
On July 18, 1997, the U.S. Court of Appeals for the Eighth Circuit vacated
certain portions of the Interconnection Decision, ruling that, among other
things:
- The FCC's pricing rules should be vacated because the FCC had exceeded its
jurisdiction in establishing rules governing the prices that ILECs may
charge competitors for interconnection, unbundled access and resale.
- The FCC's "pick and choose" rule, which allows competitors to select terms
of previously approved interconnection agreements for their own use,
conflicts with the purposes of the Telecommunications Act, and should be
vacated.
- The FCC lacks authority to hear formal complaints which involve the review
and/or enforcement of certain terms of local interconnection agreements
approved by State commissions.
- The FCC may not adopt a blanket requirement that State interconnection
rules must be consistent with the FCC's regulations.
- The FCC correctly concluded that ILEC operations support systems, operator
services and vertical switching features qualify as network elements that
are subject to the unbundling requirements of the Telecommunications Act.
- The FCC erred in deciding that ILECs could be required by competitors to
provide interconnection and unbundled network elements at levels of
quality which exceed those levels at which ILECs provide such services to
themselves.
- The FCC cannot require ILECs to recombine network elements for
competitors, but competitors may recombine such network elements
themselves as necessary to provide telecommunications services.
- FCC rules and policies regarding the ILECs' duty to provide for physical
collocation of equipment were upheld.
A companion appeal was decided on June 27, 1997 in which the court upheld
the FCC's decision that the term "interconnection" as used in the
Telecommunications Act relates to physical access, and does not include
transmission and routing services as well. Several parties have sought rehearing
of portions of the panel decisions by the full Eighth Circuit or review of the
appellate decisions by the U.S. Supreme Court. The Company cannot predict
whether the Eighth Circuit decisions will stand, or what further actions the FCC
may or may not take in response to these appellate decisions. However, in its
August 19, 1997, decision denying Ameritech's application to provide in-region
inter-LATA services, the FCC indicated that it would not grant such requests
unless its pricing rules vacated by the 8th Circuit are followed. That FCC
ruling is now being appealed to the U.S. Court of Appeals.
On October 14, 1997, the Eighth Circuit issued a decision vacating
additional FCC rules that will likely have the effect of increasing the costs of
obtaining the use of combinations of an ILEC's unbundled network elements. The
Court ruled that ILECs need not provide combinations of network elements to
CLECs, even when the ILEC has already combined such elements within its network.
The Court's decision does not undermine the ILEC's obligation to provide
unbundled network elements, but clarifies that the
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ILECs are not obligated to offer bundled elements. The decisions create
uncertainty about the rules governing pricing, terms and conditions of
interconnection agreements and could make negotiating and enforcing such
agreements more difficult and protracted and may require renegotiation of
existing agreements, to the extent that existing agreements include provisions
requiring ILECs to bundle elements. In November 1997, the FCC filed a petition
for a writ of certiorari with the United States Supreme Court challenging the
decisions of the Eighth Circuit Court of Appeals. On January 26, 1998, the
United States Supreme Court granted all petitions and cross petitions for
certiorari of the Eighth Circuit decisions. There can be no assurance that the
Company will be able to obtain or enforce interconnection agreements on terms
acceptable to the Company.
On December 31, 1997, the U.S. District Court for the Northern District of
Texas issued the SBC Decision finding that Sections 271 to 275 of the
Telecommunications Act are unconstitutional. These sections of the
Telecommunications Act impose restrictions on the lines of business in which the
RBOCs may engage, including establishing the conditions the RBOCs must satisfy
before they may provide inter-LATA long distance telecommunications services.
Under the SBC Decision, the RBOCs would be able to provide inter-LATA long
distance telecommunications services immediately without satisfying the
statutory conditions. The SBC Decision has been stayed until it can be reviewed
by the U.S. Fifth Circuit Court of Appeals. The Company believes that the
factual assumptions and legal reasoning in the SBC Decision are erroneous and
therefore the decision will likely be reversed on appeal, although there can be
no assurance of this outcome. If the SBC Decision were upheld on appeal it would
likely have an unfavorable effect on the Company's business for at least two
reasons. First, RBOCs currently have an incentive to foster competition within
their service areas so that they can qualify to offer in-region inter-LATA long
distance services. The SBC Decision removes this incentive by allowing RBOCs to
offer in-region inter-LATA long distance service without regard to their
progress in opening their local markets to competition. Second, the Company is
legally able to offer its customers both long distance and local exchange
services, which the RBOCs currently may not do. This ability to offer "one-stop
shopping" gives the Company a marketing advantage that it would no longer enjoy
if the SBC Decision were upheld on appeal.
OTHER REGULATION. In general, the FCC has a policy of encouraging the entry
of new competitors, such as the Company, in the telecommunications industry and
preventing anti-competitive practices. Therefore, the FCC has established
different levels of regulation for dominant carriers and nondominant carriers.
For domestic common carrier telecommunications regulation, large ILECs such as
GTE and the RBOCs are currently considered dominant carriers, while CLECs such
as the Company are considered nondominant carriers. As a nondominant carrier,
the Company is subject to relatively minimal FCC regulation.
- TARIFF. As a nondominant carrier, the Company may install and operate
facilities for the transmission of domestic interstate communications
without prior FCC authorization. Services of nondominant carriers have been
subject to relatively limited regulation by the FCC, primarily consisting
of the filing of tariffs and periodic reports concerning the carrier's
interstate circuits and deployment of network facilities. However,
nondominant carriers like the Company must offer interstate services on a
nondiscriminatory basis, at just and reasonable rates, and remain subject
to FCC complaint procedures.
In October 1996, the FCC adopted an order (the "Detariffing Order") which
eliminated the requirement that nondominant interstate carriers maintain
tariffs on file with the FCC for domestic interstate services, and
providing that after a nine-month transition period, relationships between
interstate carriers and their customers would be set by contract. Several
parties requested reconsideration and/or filed appeals of the Detariffing
Order. On February 13, 1997, the United States Court of Appeals for the
District of Columbia Circuit stayed implementation of the Detariffing
Order. If the Detariffing Order becomes effective, nondominant interstate
services providers 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 under which they offer their interstate services. If the
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Company cancels its FCC tariffs as a result of the Detariffing Order it
will need to implement replacement contracts which could result in
substantial legal and administrative expense.
- ILEC PRICE CAP REGULATION REFORM. In 1991, the FCC replaced traditional
rate of return regulation for large ILECs with price cap regulation. Under
price caps, ILECs can change prices for certain services, including
interconnection services provided to CLECs, only within certain
parameters. On September 14, 1995, the FCC proposed a three-stage plan
that would substantially reduce ILEC price cap regulation as local markets
become increasingly competitive and ultimately would result in granting
ILECs nondominant status. Adoption of the FCC's proposal to reduce
significantly its regulation of ILEC pricing would greatly enhance the
ability of ILECs to compete against the Company and could have a material
adverse effect on the Company. The FCC released an order on December 24,
1996 which adopted certain of these proposals, including the elimination
of the lower service band index limits on price reductions within the
access service category. The FCC's December 1996 order also eased the
requirements necessary for the introduction of new services. On May 7,
1997, the FCC took further action in its CC Docket No. 94-1 updating and
reforming its price cap plan for ILECs. The changes require price cap
ILECs to reduce their price cap indices by 6.5 percent annually, less an
adjustment for inflation. The FCC also eliminated rules that require ILECs
earning more than certain specified rates of return to "share" portions of
the excess with their access customers during the next year in the form of
lower access rates. These actions could have a significant impact on the
interstate access prices charged by the ILECs with which the Company
competes. Review of these FCC decisions is currently pending before the
U.S. Court of Appeals.
- ACCESS CHARGES. The FCC has granted ILECs significant flexibility in
pricing their interstate special and switched access services on a
specific central office by central office basis. Under this pricing
scheme, ILECs may establish pricing zones based on access traffic density
and charge different prices for each zone. The Company anticipates that
this pricing flexibility will result in ILECs lowering their prices in
high traffic density areas, the probable area of competition with the
Company. The Company also anticipates that the FCC will grant ILECs
increasing pricing flexibility as the number of interconnections and
competitors increases. On May 16, 1997, the FCC took action in its CC
Docket No. 96-262 to reform the current interstate access charge system.
The FCC adopted an order which makes various reforms to the existing rate
structure for interstate access that are designed to move access charges,
over time, to more cost based rate levels and structures. These changes
will reduce access charges and will shift charges currently based on
minutes to flat-rate, monthly per line charges. As a result, the aggregate
amount of access charges paid by long distance carriers to access
providers in the United States may decrease.
The FCC also announced that it intends in the future to issue a Report and
Order providing detailed rules for implementing a market-based approach to
further access charge reform. That process will give ILECs progressively greater
flexibility in setting rates as competition develops, gradually replacing
regulation with competition as the primary means of setting prices. The FCC also
adopted a "prescriptive safeguard" to bring access rates to competitive levels
in the absence of competition.
This series of decisions is likely to have a significant impact on the
operations, expenses, pricing and revenue of the Company. On June 18, 1997, the
FCC denied petitions filed by several ILECs asking the FCC to stay the
effectiveness of its access charge reform decision. The access charge order has
been appealed to the U.S. Court of Appeals and could be set aside or revised.
UNIVERSAL SERVICE REFORM. On May 8, 1997, the FCC issued an order to
implement the provisions of the Telecommunications Act relating to the
preservation and advancement of universal telephone service. The Universal
Service order affirmed Congress' policy principles for universal telephone
service, including quality service, affordable rates, access to advanced
services, access in rural and high-cost areas, equitable and nondiscriminatory
contributions, specific and predictable support mechanisms and access to
advanced
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telecommunications services for schools, health care providers and libraries.
The order added "competitive neutrality" to the FCC's universal service
principles by providing that universal service support mechanisms and rules
should not unfairly advantage or disadvantage one provider or technology over
another. All telecommunications carriers providing interstate telecommunications
services, including the Company, must contribute to the universal service
support fund. Several parties have appealed the May 8th order. The appeals have
been consolidated in the U.S. Court of Appeals for the Fifth Circuit. In
addition, a number of ILECs filed a petition for stay with the FCC. That
petition is pending. The contribution factors for first quarter 1998
contributions were 3.19% for the high cost and low income fund (to be derived
from the Company's estimated quarterly interstate and international gross end
user telecommunications revenue) and .72% for the schools and libraries and
healthcare fund (to be derived from the Company's estimated quarterly
intrastate, interstate and international gross end user telecommunications
revenue). The contribution factors for the second quarter of 1998 are 3.14% and
.76%, respectively. The Company cannot predict the amount of its universal
service fund contributions for the remaining quarters of 1998, or thereafter,
until the FCC issues contribution factors for such periods.
STATE REGULATION
The Company believes that most, if not all, states in which it proposes to
operate will require a certification or other authorization to offer intrastate
services. Many of the states in which the Company operates or intends to operate
are in the process of addressing issues relating to the regulation of CLECs. The
Company will also be subject to tariff filing requirements.
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.
As of March 31, 1998, the Company, through its subsidiaries, KMC Telecom and
KMC Telecom II, had obtained intrastate authority for the provision of dedicated
services and a full range of local switched services in Alabama, Florida,
Georgia, Illinois, Indiana, Kansas, Louisiana, Maryland, Michigan, Minnesota,
New Hampshire, North Carolina, Puerto Rico, South Carolina, Texas, Virginia and
Wisconsin. In addition, the Company has obtained PSC certification to provide
inter-LATA services in Alabama, Florida, Illinois, Indiana, Kansas, Maryland,
Minnesota, North Carolina, South Carolina and Wisconsin and will seek such
authority in other states. There can be no assurance that the Company will
receive the authorizations it may seek in the future to the extent it expands
into other states or seeks to provide additional services. In most states, the
Company is required to file tariffs setting forth the terms, conditions and
prices for services that are classified as intrastate. The Company, through its
subsidiaries, KMC Telecom and KMC Telecom II, plans to obtain additional state
authorities to accommodate its business and network expansion.
Some states impose, in addition to tariff filing requirements, reporting,
customer service, and quality requirements, as well as unbundling and universal
service requirements. In addition, the Company will be subject to the outcome of
generic proceedings held by state utility commissions to determine state
regulatory policies with respect to ILEC and CLEC competition, geographic
build-out, mandatory detariffing, etc. Certain states have adopted specific
universal service funding obligations. For example, the Kansas commission has
ordered telecommunications companies to pay approximately 9% of their intrastate
retail revenues to the Kansas Universal Service Fund. Proceedings to adopt state
universal service funding obligations rules are pending or contemplated in other
states in which the Company operates.
In addition to obtaining state certifications, the Company must negotiate
terms of interconnection with the ILEC before it can begin providing switched
services. Under the Telecommunications Act, the FCC has adopted interconnection
requirements, certain portions of which have been overturned by the Eighth
Circuit. To date, the Company through its subsidiaries, has negotiated and
executed interconnection agreements with Bell South (8 states), Ameritech (4
states), NYNEX (4 states), US WEST (1 state), SouthWestern Bell (1 state), Bell
Atlantic (1 state), GTE (1 state) and the Puerto Rico Telephone
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<PAGE>
Company (Commonwealth of Puerto Rico). Under the Telecommunications Act, if the
Company and the negotiating ILEC are unable to reach an agreement 135 days after
submitting a request for interconnection to the ILEC, the negotiations may be
submitted to arbitration under the supervision of the state public utility
commission. At this time, the Company is involved in arbitration proceedings
with GTE in Indiana and Illinois. Those proceedings are currently dormant. The
Company's executed agreements are subject to the approval of the state
commissions. Eleven state commissions have approved the Company's agreements.
The Company anticipates state commission approval of its other interconnection
agreements.
The Company believes that, as the degree of intrastate competition
increases, the states will offer the ILECs increasing pricing flexibility. This
flexibility may present the ILECs with an opportunity to subsidize services that
compete with the Company's services with revenues generated from non-competitive
services, thereby allowing ILECs to offer competitive services at prices below
the cost of providing the service. The Company cannot predict the extent to
which this may occur, but it could have a material adverse effect on the
Company's business.
The Company actively participates in various regulatory proceedings before
the states, the outcome of which may establish policies that affect the
competitive and/or economic position of the Company in the local and other
telecommunications services markets. The Company has, for instance, filed
complaints or intervened in proceedings against ILECs in certain states
challenging the ILECs' refusal to pay reciprocal compensation to a CLEC with
respect to telephone services from the ILEC's customer to an ISP served by a
CLEC, such as the Company.
The Company is also subject to requirements in certain states to obtain
prior approval for, or notify the state commission of, any transfers of control,
sales of assets, corporate reorganizations, issuances of stock or debt
instruments and related transactions. The Company did not obtain prior approval
for its September 22, 1997 corporate reorganization to create a holding company
structure whereby KMC became the holding company of KMC Telecom and KMC Telecom
II, or for the Series C Placement and the Series D Placement on November 5,
1997, the execution of the Stockholders Agreement and certain related
transactions, which had the effect of reducing Mr. Kamine's voting control on a
fully diluted basis to less than 50%. The Company has filed the necessary papers
at relevant state commissions seeking NUNC PRO TUNC (retroactive) approval of
the transactions on the grounds that the transactions serve certain important
business needs of the Company and enhance the Company's ability to market and
provide services more efficiently. There can be no assurance that the state
commissions will grant the Company's requests for retroactive approval and/or
will not impose fines, license conditions, commence revocation proceedings or
otherwise exercise their authority to address violations of state statutes and
regulations.
LOCAL GOVERNMENT AUTHORIZATIONS. The Company is required to obtain street
use and construction permits and licenses and/or franchises to install and
expand its fiber optic networks using municipal rights of way. In some
municipalities where the Company has installed or anticipates constructing
networks, it will be required to pay license or franchise fees based on a
percentage of gross revenues or on a per linear foot basis, as well as post
performance bonds or letters of credit. The Company is actively pursuing in a
number of cities, permits, franchises and other relevant authorities for use of
rights-of-way and utility facilities.
LEGAL AND ADMINISTRATIVE PROCEEDINGS
On June 24, 1997, the Public Service Commission of Wisconsin ("PSCW")
authorized KMC Telecom to provide facilities-based local exchange services in
the territory in which Mid-Plains, Inc. ("Mid-Plains") is the ILEC, which
comprises a small portion (approximately 10%) of the Company's Madison,
Wisconsin market (the "June 24 Order"). On July 28, 1997, Mid-Plains filed a
Petition for Judicial Review in Dane County Circuit Court, seeking judicial
review of the June 24 Order, claiming that the PSCW did not properly provide a
hearing in issuing the June 24 Order. The Petition pertains to the right of KMC
Telecom to provide facilities-based and switched local exchange service in the
territory served by Mid-
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<PAGE>
Plains and not the entire Madison, Wisconsin market. An unfavorable outcome
would not preclude KMC Telecom from providing service in the territory served by
Mid-Plains. KMC Telecom would be able to provide all authorized
telecommunications services in the territory served by Mid-Plains, other than
facilities-based local exchange services. KMC Telecom has completed construction
of a fiber optic network in the territory served by Mid-Plains. On January 8,
1998, the Circuit Court issued an order remanding the June 24 Order to the PSCW
for a hearing on, among other things, whether Mid-Plains consented to the entry
of competitors, such as KMC Telecom, in its service territory. On March 25,
1998, the Circuit Court issued a second order reversing and remanding the June
24 Order. In compliance with the Circuit Court orders, the PSCW held a hearing
on March 30 through April 1, 1998, including on all issues related to the
certification of KMC Telecom to provide facilities-based local exchange service
in the territory served by Mid-Plains (the "Certification Hearing"). The PSCW is
expected to issue a determination on the grounds for certification of KMC
Telecom to provide facilities-based local exchange service in the territory
served by Mid-Plains on or before May 15, 1998. On April 7, 1998, the PSCW
issued an interim certification to KMC Telecom authorizing KMC Telecom to
provide facilities-based local exchange services in the territory served by
Mid-Plains until the decision in the Certification Hearing is final, or for a
period of one year, whichever occurs first. It is expected that Mid-Plains will
continue to challenge the PSCW actions.
By letter dated August 29, 1997, the Company notified I-NET that the Company
considered I-NET to be in default under the I-NET Agreement. By letter dated
October 27, 1997, I-NET demanded payment of all amounts it alleged were due
under the I-NET Agreement and a related agreement (aggregating $4.1 million) and
stated that it would invoke the arbitration provisions under the I-NET Agreement
if the parties could not agree as to the amount due and payment terms on or
before November 27, 1997. By letter dated December 1, 1997, I-NET extended its
deadline for reaching agreement to December 15, 1997. Although the Company and
I-NET conducted discussions they were unable to reach an agreement and on
February 12, 1998, the Company received a demand for arbitration from Wang, the
successor to I-Net. The demand seeks at least $4.1 million. The Company believes
that it has meritorious defenses to Wang's claims and has asserted counterclaims
seeking in excess of $2.5 million as a result of I-Net's defaults under the
I-Net Agreement. The Company believes that resolution of this matter will not
have a material adverse impact on its financial condition. No assurance can be
given, however, as to the ultimate resolution of this matter.
The Company is not a party to any other material litigation or proceedings.
EMPLOYEES
As of March 31, 1998, the Company had approximately 200 full time employees.
None of the Company's employees are represented by a labor union or subject to a
collective bargaining agreement, nor has the Company experienced any work
stoppage due to labor disputes. The Company believes that its relations with its
employees are good.
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<PAGE>
PROPERTIES
The Company is headquartered in Bedminster, New Jersey and owns or leases
additional properties for its field operations.
The table below lists the Company's current facilities:
<TABLE>
<CAPTION>
LOCATION OWNED/LEASED LEASE EXPIRATION SQUARE FOOTAGE
- -------------------------------------------------------------- ------------- ------------------ ---------------
<S> <C> <C> <C>
Bedminster, New Jersey........................................ Leased January 2007 7,241
Roswell, Georgia.............................................. Leased September 1999 1,820
Duluth, Georgia............................................... Leased February 2003 7,608
Duluth, Georgia............................................... Leased February 2003 12,050
Duluth, Georgia............................................... Leased March 2002 10,751
Eden Prairie, Minnesota....................................... Leased November 1998 345
Greensboro, North Carolina.................................... Leased March 1999 175
Greensboro, North Carolina.................................... Owned N/A (1)
Winston-Salem, North Carolina................................. Owned N/A (2)
Libertyville, Illinois........................................ Leased November 1999 785
Huntsville, Alabama........................................... Leased October 2004 1,500
Huntsville, Alabama........................................... Leased August 2005 3,500
Huntsville, Alabama........................................... Leased December 2002 3,749
Baton Rouge, Louisiana........................................ Leased July 2011 6,000
Shreveport, Louisiana......................................... Leased June 2006 3,300
Shreveport, Louisiana......................................... Leased January 2003 3,647
Corpus Christi, Texas......................................... Leased January 2005 4,061
Corpus Christi, Texas......................................... Leased July 2006 3,750
Corpus Christi, Texas......................................... Owned N/A 33,106
Madison, Wisconsin............................................ Leased December 2006 6,404
Melbourne, Florida............................................ Leased December 1998 1,100
Melbourne, Florida............................................ Leased October 2004 4,100
Savannah, Georgia............................................. Owned N/A (3)
Savannah, Georgia............................................. Leased January 2003 3,450
Augusta, Georgia.............................................. Leased December 2006 5,650
Augusta, Georgia.............................................. Leased September 2001 3,000
Roanoke, Virginia............................................. Owned N/A (4)
</TABLE>
- ------------------------
(1) This property is comprised of approximately 0.42 acres.
(2) This property is comprised of approximately 5.26 acres.
(3) This property is comprised of approximately 0.418 acres.
(4) This property is comprised of approximately 0.881 acres.
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<PAGE>
MANAGEMENT
The following table sets forth certain information concerning the executive
officers and directors of the Company, including their ages as of March 31,
1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Harold N. Kamine..................................... 41 Chairman of the Board of Directors
Gary E. Lasher....................................... 62 Vice Chairman of the Board of Directors
Michael A. Sternberg................................. 53 President, Chief Executive Officer and Director
Roscoe C. Young II................................... 47 Chief Operating Officer
Cynthia Worthman..................................... 44 Vice President and Chief Financial Officer, Secretary
and Treasurer
Charles Rosenblum.................................... 47 Senior Vice President--Human Resources
James L. Barwick..................................... 65 Senior Vice President--Technology
Tricia Breckenridge.................................. 51 Senior Vice President--Business Development
John G. Quigley...................................... 44 Director
Richard H. Patterson................................. 39 Director
Randall A. Hack...................................... 50 Director
William H. Stewart................................... 31 Director
</TABLE>
HAROLD N. KAMINE is the Chairman of the Board of the Company and its founder
and has been a director of the Company since 1994. He is also chief executive
officer and sole owner of Kamine Development Corp. and associated companies in
the independent power industry. Mr. Kamine has successfully financed a number of
unregulated non-utility power generation projects. At the present time,
companies owned by Mr. Kamine own substantial interests in and manage the
operation of six power generation plants in the Northeastern United States. Mr.
Kamine and Mr. Rosenblum are first cousins.
GARY E. LASHER joined the Company as its Vice Chairman of the Board
effective November 1, 1997. He was the founder, Chief Executive Officer and
President of Eastern TeleLogic Corporation ("ETC") from 1987 to 1997. ETC was a
leading CLEC operating in greater Philadelphia, Delaware and southern New Jersey
before its purchase by TCG (Teleport Communications Group) in October 1996.
Prior to ETC, from 1984-1986, Mr. Lasher was Chief Operating Officer of Private
Satellite Network, a company which built and operated video satellite networks
for major corporations. Mr. Lasher spent 20 years with Continental Telephone
("Contel") holding various positions including Corporate Vice President,
President of the International Engineering and Construction Company, and various
senior positions with Contel's regulated subsidiaries. Mr. Lasher is one of the
founding members of the Association for Local Telecommunications Services
("ALTS") and served for three years as Chairman of the Association.
MICHAEL A. STERNBERG has spent 28 years in telecommunications, including
business development, marketing, sales and general management. Prior to joining
the Company in July 1996 as President and Chief Executive Officer, Mr. Sternberg
was a co-founder and Chief Operating Officer, from April 1991 to July 1996, of
RimSat, a privately owned satellite company which from January 1993 to July 1996
owned and operated two Russian-built satellites which provided television, voice
and data capacity to Asian operators. From March 1990 to April 1991, Mr.
Sternberg served as Chief Executive Officer of Sternberg & Associates, Inc., a
company he founded. From 1988 to 1990 Mr. Sternberg served as Senior Vice
President--Marketing and Sales with MFS Communications. Previously, Mr.
Sternberg had served as President of Stantel Telecommunications, a division of
STC, a digital telecommunications transmissions
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<PAGE>
products company based in Falls Church, Virginia; Senior Vice
President--Marketing and Corporate Development at CIT-Alcatel in Reston,
Virginia; Vice President-Marketing at General Dynamics Communications Company in
St. Louis; Executive Vice President-Marketing and Sales of OKI Electronics of
America in Fort Lauderdale; and Chief Operating Officer of National Telephone
Company in Hartford, Connecticut. He has served as a director of the Company
since August 1996. Mr. Sternberg is a member of the Executive Committee of ALTS.
ROSCOE C. YOUNG II has approximately 20 years experience in the field of
telecommunications with both new venture and Fortune 500 companies. Prior to
joining the Company in November 1996, Mr. Young served as Vice President,
Network Component Services for Ameritech Corporation from June 1994 to October
1996. From March 1988 to June 1994, Mr. Young served as Senior Vice President,
Network Services for MFS Communications. From October 1977 to March 1988, Mr.
Young served in a number of senior operations, sales and marketing, engineering,
financial management, and human resource positions for AT&T Corp.
CYNTHIA WORTHMAN joined the Company in September 1996 as Chief Financial
Officer, Secretary and Treasurer. Prior to joining the Company, Ms. Worthman
served as Chief Financial Officer, Director and a co-founder of Best Digital,
Inc., a personal communications services company (formerly known as QuestCom,
Inc.) from May 1995 to September 1996. From April 1993 to May 1995, she served
as Managing Director, Business Development and Finance of FutureVision of
America. From February 1984 to April 1993, she had served in a number of
progressively responsible roles in Bell Atlantic Corporation ("Bell Atlantic"),
including, Executive Director-Corporate Treasury of Bell Atlantic and Vice
President and Chief Financial Officer of Bell Atlanticom Systems, Inc., an
unregulated subsidiary of Bell Atlantic specializing in customer premise
equipment and supporting software. Ms. Worthman began her professional career
with Deloitte Haskins & Sells, where she held positions in the consulting and
audit practices.
CHARLES ROSENBLUM has over 20 years experience in human resources, primarily
in human resources planning, staffing and development. He joined the Company in
January 1997. From May 1995 to January 1997 he served as Vice President--Human
Resources of Kamine Development Corp. Previously he had held the positions of
Director, Management Development with KPMG Peat Marwick and Manager of
Management Education with Dun & Bradstreet Corporation. Earlier he had served in
various human resource positions with Allstate Insurance Company. Mr. Rosenblum
and Mr. Kamine are first cousins.
JAMES L. BARWICK has 38 years of experience in the telecommunications
industry. Mr. Barwick joined the Company in March 1997. Prior to joining the
Company, Mr. Barwick had been self-employed since 1986 as a telecommunications
consultant with expertise in equipment application engineering, radio path
engineering, analog and digital Mux, switching and transport systems in the IXC
and ILEC areas, technical writing, project management and computer assisted
design systems.
TRICIA BRECKENRIDGE joined the Company in April 1995. From January 1993 to
April 1995 she was Vice President and General Manager of FiberNet USA's
Huntsville, Alabama operations. Previously she had served as Vice President,
External Affairs and later Vice President, Sales and Marketing of Diginet, Inc.
She was co-founder of Chicago Fiber Optic Corporation, the predecessor of
Metropolitan Fiber Systems. Earlier she was Director of Regulatory Affairs for
Telesphere Corporation.
JOHN G. QUIGLEY has served as a director of the Company since August 1996.
Mr. Quigley is a founding member of Nassau Capital L.L.C., which is the general
partner of Nassau Capital Partners L.P. From 1992 to January 1995, Mr. Quigley
was a partner of Clipper Capital Partners. Mr. Quigley was a partner at Adler &
Shaykin from 1984 to 1989. From 1980 to 1984, Mr. Quigley was an attorney with
the law firm of Kirkland & Ellis in Chicago.
RICHARD H. PATTERSON has served as a director of the Company since May 1997.
Since May 1986, Mr. Patterson has served as a Senior Vice President and Partner
of Waller Capital Corporation, a media and
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<PAGE>
communications investment banking firm. In addition, since August 1997, he has
served as a Vice President of Waller-Sutton Media LLC and Vice President of
Waller-Sutton Management Group, Inc., two entities which manage a media and
telecommunications private equity fund.
RANDALL A. HACK has served as a director of the Company since August 1996.
Since January 1995, Mr. Hack has been a member of Nassau Capital L.L.C., an
investment management firm. From 1990 to 1994, he was the President and Chief
Executive Officer of Princeton University Investment Company, which manages the
endowment for Princeton University. Mr. Hack also serves on the Boards of
Directors of Sweetwater, Inc., OmniCell Technologies, Inc., Castle Tower Holding
Corp., Mezzanine Capital Property Investors, Inc. and Shape Global Technologies,
Inc.
WILLIAM H. STEWART has served as a director of the Company since August
1997. Mr. Stewart is a Principal of Nassau Capital L.L.C. and joined that firm
in June 1995. From 1989 until joining Nassau, Mr. Stewart was a portfolio
manager and equity analyst at the Bank of New York. He is a Chartered Financial
Analyst and a member of the New York Society of Security Analysts.
Until the holdings of Mr. Kamine and Nassau are reduced below certain
thresholds, pursuant to the Stockholders Agreement, Mr. Kamine and Nassau are
entitled to elect all of the Directors, three of whom are nominated by Mr.
Kamine (one of whom must be the President and Chief Executive Officer), three of
whom are nominated by Nassau and one of whom is nominated by agreement of Mr.
Kamine, Nassau and either AT&T Credit or the holders of a majority of the
outstanding shares of the Company's Series C Preferred Stock. If a default
relating to payment occurs under the AT&T Facility, and continues uncured for 90
days, the holders of Series C Preferred Stock (currently Nassau, NAS, GECC and
CoreStates) will be entitled to elect two additional Directors, who will serve
until the default is cured.
Kamine/Besicorp Allegany L.P., an independent power company 50% owned by
corporations which Mr. Kamine owns, filed a voluntary petition to reorganize its
business under Chapter 11 of the Federal Bankruptcy Code in November 1995. The
proceeding is ongoing. The United States Bankruptcy Court for the Northern
District of Indiana appointed a receiver for RimSat, a company which Mr.
Sternberg co-founded and for which he formerly served as Chief Operating
Officer, and a petition for bankruptcy under Chapter 11 of the Federal
Bankruptcy Code with respect to RimSat was filed in 1996. That proceeding is
ongoing.
COMMITTEES OF THE BOARD
The Board of Directors of the Company has authorized a Compensation
Committee to be composed of three members. The present members of the
Compensation Committee are Messrs. Kamine, Quigley and Patterson. The Board of
Directors has created an Executive Committee consisting of Mr. Kamine and Mr.
Quigley, or, in Mr. Quigley's absence, Mr. Stewart. The Board of Directors has
also created an Audit Committee consisting of Messrs. Lasher, Patterson and
Quigley.
SUMMARY COMPENSATION TABLE
The following table discloses compensation paid by the Company during 1997
to the Company's Chief Executive Officer and the four next most highly
compensated executive officers who earned more than $100,000 during 1997 (the
"Named Executive Officers").
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ---------------
---------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION ($) OPTIONS (#)(1)
- --------------------------------------------------- --------- ---------- ---------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Michael A. Sternberg............................... 1997 $ 240,385 $ 187,500 $ 45,909(2) 9,228
President and Chief Executive Officer
Roscoe C. Young II................................. 1997 $ 180,000 $ 182,046 $ 198,180(3) 2,309
Chief Operating Officer
Cynthia Worthman................................... 1997 $ 175,000 $ 200,000 -- 3,461
Vice President, Chief Financial Officer
Secretary and Treasurer
Charles Rosenblum.................................. 1997 $ 150,000 $ 77,500 -- 691
Senior Vice President--Human Resources
James L. Barwick(4)................................ 1997 $ 89,038 $ 75,000 -- 5,000
Senior Vice President--Technology
</TABLE>
- ------------------------
(1) The options granted in 1997 were options to purchase shares of common stock
of the Company's principal operating subsidiary KMC Telecom. See "--Stock
Option Grants."
(2) Includes relocation related expenses of $39,662 and personal use of a
Company automobile of $6,247.
(3) Includes relocation related expenses of $196,029 and personal use of a
Company automobile of $2,151.
(4) Mr. Barwick joined the Company on March 3, 1997 and the compensation
disclosed is for the period from that date until December 31, 1997.
STOCK OPTION GRANTS
The Company was formed as a holding company in September 1997. Prior to the
establishment of the present holding company structure, during 1996 and 1997,
KMC Telecom (now the Company's principal operating subsidiary) granted options
to purchase shares of its common stock, par value $.01 per share ("KMC Telecom
Common Stock"), to employees, including Messrs. Sternberg, Young, Rosenblum and
Barwick and Ms. Worthman and selected employees of certain affiliated companies
owned by Mr. Kamine pursuant to the 1996 Stock Purchase and Option Plan for Key
Employees of KMC Telecom Inc. and Affiliates (the "KMC Telecom Stock Option
Plan").
In order to reflect the establishment of the Company's holding company
structure, the Company is presently preparing a new stock option plan which will
authorize the grant of options to purchase Common Stock of the Company (the "KMC
Holdings Stock Option Plan"). All of the options reflected in the preceding and
following tables are options to purchase shares of KMC Telecom Common Stock
granted under the KMC Telecom Stock Option Plan. It is currently anticipated
that the KMC Holdings Stock Option Plan will be adopted during the second
quarter of 1998. Once the KMC Holdings Stock Option Plan is adopted, the Company
expects to replace the options to purchase KMC Telecom Common Stock previously
granted under the KMC Telecom Stock Option Plan, with options to purchase Common
Stock of the Company granted under the KMC Holdings Stock Option Plan and to
grant options to additional employees of the Company, including Mr. Lasher,
under the KMC Holdings Stock Option Plan. The options for Common Stock of the
Company which replace the options previously granted under the KMC Telecom Stock
Option Plan, or which are granted to the additional employees, will entitle the
recipients to
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<PAGE>
purchase an aggregate of no more than 260,000 shares of the Company's Common
Stock at an average exercise price of not less than $26.00 per share. The
Company may subsequently grant additional options, although it has no specific
plans in this regard.
The following table sets forth information regarding grants of options to
purchase shares of KMC Telecom Common Stock made by KMC Telecom during 1997 to
each of the Named Executive Officers.
OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM (2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------------------
NAME GRANTED (#)(1) FISCAL 1997 ($/SHARE) DATE (0%) (5%) (10%)
- ------------------------------- --------------- ------------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael A. Sternberg........... 5,536 $ 50.00 1/21/07 $ 155,008 $ 426,570 $ 843,199
1,846 16.7% $ 75.00 1/21/07 $ 5,538 $ 96,091 $ 235,018
1,846 $ 100.00 1/21/07 $ -- $ 49,941 $ 188,868
Roscoe C. Young II............. 1,385 $ 50.00 1/21/07 $ 38,780 $ 106,719 $ 210,952
462 4.2% $ 75.00 1/21/07 $ 1,386 $ 24,049 $ 58,818
462 $ 100.00 1/21/07 $ -- $ 12,499 $ 47,268
Cynthia Worthman............... 2,077 $ 50.00 1/21/07 $ 58,156 $ 160,041 $ 316,352
692 6.2% $ 75.00 1/21/07 $ 2,076 $ 36,021 $ 88,100
692 $ 100.00 1/21/07 $ -- $ 18,721 $ 70,800
Charles Rosenblum.............. 415 $ 50.00 1/21/07 $ 11,620 $ 31,977 $ 63,209
138 1.2% $ 75.00 1/21/07 $ 414 $ 7,183 $ 17,569
138 $ 100.00 1/21/07 $ -- $ 3,733 $ 14,119
James L. Barwick............... 3,000 $ 50.00 3/3/07 $ 84,000 $ 231,161 $ 456,936
1,000 9.0% $ 75.00 3/3/07 $ 3,000 $ 52,054 $ 127,312
1,000 $ 100.00 3/3/07 $ -- $ 27,054 $ 102,312
</TABLE>
- ------------------------
(1) 10% of the aggregate amount of each such option vests on each subsequent
six-month anniversary of the date of grant with options with the lowest
exercise price vesting first followed by others in ascending order of
exercise price.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (0%, 5% and 10%) on
KMC Telecom Common Stock over the term of the options. These assumptions are
based on rules promulgated by the Commission and do not reflect the
Company's estimate of future stock price appreciation. Actual gains, if any,
on the stock option exercises and KMC Telecom Common Stock holdings are
dependent on the timing of such exercises and the future value of KMC
Telecom Common Stock. There can be no assurance that the rates of
appreciation assumed in this table can be achieved or that the amounts
reflected will be received by the option holder.
OPTION EXERCISES AND OPTION YEAR-END VALUE TABLE
No options to purchase shares of KMC Telecom Common Stock were exercised in
Fiscal 1997 by any of the Named Executive Officers. The following table sets
forth information regarding the number and year-end value of unexercised options
to purchase shares of KMC Telecom Common Stock held at December 31, 1997 by each
of the Named Executive Officers.
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<PAGE>
FISCAL 1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES "IN-THE-MONEY"
UNDERLYING UNEXERCISED OPTIONS AT
SHARES VALUE OPTIONS AT DECEMBER 31, 1997
ACQUIRED ON REALIZED DECEMBER 31, 1997 EXERCISABLE/
NAME EXERCISE(#) ($) EXERCISABLE/UNEXERCISABLE UNEXERCISABLE(1)
- ------------------------------------ ------------ --------- ------------------------ -------------------------
<S> <C> <C> <C> <C>
Michael A. Sternberg................ -- -- 8,000/32,000 $ 1,486,817/$5,347,270
Roscoe C. Young II.................. -- -- 2,000/8,000 $371,699/$1,336,795
Cynthia Worthman.................... -- -- 3,000/12,000 $557,559/$2,005,237
Charles Rosenblum................... -- -- 600/2,400 $111,499/$400,994
James L. Barwick.................... -- -- 500/4,500 $81,546/$658,913
</TABLE>
- ------------------------
(1) Options are "In-the-Money" if the fair market value of the underlying
securities exceeds the exercise price of the options.
EXECUTIVE EMPLOYMENT CONTRACTS
The Company has an employment contract with Michael A. Sternberg its
President and Chief Executive Officer. The Company's employment agreement with
Mr. Sternberg provides for an initial term of three years, which began on July
29, 1996 and which may be continued for two additional years at the option of
the Company. Under the agreement, Mr. Sternberg's base salary is $275,000 per
annum and he is entitled to a bonus in an amount up to an aggregate of $250,000.
Mr. Sternberg is entitled to receive benefits generally received by Company
officers, including options to purchase Company stock, reimbursement of expenses
incurred on behalf of the Company, and a leased automobile. Upon termination of
the agreement, Mr. Sternberg is subject to a confidentiality covenant and an 18
month non-competition agreement. If the Company terminates Mr. Sternberg's
employment without cause, he is entitled to a severance payment in an amount
equal to his annual base salary.
In connection with his employment in November 1996, the Company agreed to
pay to Roscoe C. Young II, its Chief Operating Officer, a severance payment
equal to one year's base salary if his employment with the Company were to be
terminated without cause during the second or third years of his employment. Mr.
Young's current base salary is $225,000 per annum.
EMPLOYEE PLANS
Certain of the Company's employees are eligible to participate in the KMC
Telecom Stock Option Plan. The KMC Telecom Stock Option Plan is administered by
the Compensation Committee of the Board of Directors of KMC Telecom (the
"Committee"). The Committee is authorized to grant (i) options intended to
qualify as Incentive Stock Options ("Incentive Options") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, to employees,
directors or other persons having a unique relationship with KMC Telecom or any
of its affiliates, and (ii) options not intended to so qualify ("Nonqualified
Options," and together with the Incentive Options, "Options"). However, neither
Mr. Kamine nor any person employed by Nassau or any affiliate of Nassau is
eligible for grants under the Plan.
The number of shares of KMC Telecom Common Stock available for grants under
the Plan is 150,000. No participant may receive more than 40,000 shares of KMC
Telecom Common Stock under the KMC Telecom Stock Option Plan.
The Committee has the power and authority to designate recipients of
Options, to determine the terms, conditions and limitations of Options and to
interpret the provisions of the KMC Telecom Stock
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<PAGE>
Option Plan. The exercise price of all Incentive Options granted under the KMC
Telecom Stock Option Plan must be at least equal to the Fair Market Value (as
defined in the plan) of KMC Telecom Common Stock on the date the options are
granted and the exercise price of all Nonqualified Options granted under the KMC
Telecom Stock Option Plan must be at least equal to 50% of the Fair Market Value
of the KMC Telecom Common Stock on the date the options are granted. The maximum
term of each Option granted pursuant to the KMC Telecom Stock Option Plan was
ten years. Options become exercisable at such times and in such installments as
the Committee provided in the terms of each individual Option.
As discussed above under "--Stock Option Grants," it is currently
anticipated that the KMC Telecom Stock Option Plan will be replaced by a new KMC
Holdings Stock Option Plan, the specific terms of which have not yet been
established.
DIRECTOR COMPENSATION
The Company's Directors do not currently receive any compensation for their
services in such capacity, except that Mr. Lasher receives $40,000 per year in
connection with his services as Vice Chairman of the Board. Pursuant to an
agreement among the Company, Mr. Kamine and Nassau, Nassau is paid an annual fee
of $100,000, which includes reimbursement to Nassau for the services of Messrs.
Hack, Quigley and Stewart as Directors. From May 1, 1996 through January 29,
1998, Kamine Development Corp. was paid a fee at an annual rate of $266,000 for
the services of Mr. Kamine as Chairman of the Board. The amount of this fee was
reduced to $100,000 per annum as of January 29, 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and certain affiliated companies owned by Harold N. Kamine, its
Chairman of the Board, share certain administrative services, such as personnel,
utilities, and supplies. The entity which bears the cost of the service is
reimbursed by the other for the other's proportionate share of such expenses.
Prior to effectiveness of the lease referred to in the next paragraph, these
shared services included rent paid by the Company for its headquarters offices
to an affiliate of Mr. Kamine. The Company reimbursed Kamine-affiliated
companies for these shared services an aggregate of approximately $571,000 and
$488,000, respectively, for 1996 and 1997.
Effective June 1, 1996, the Company entered into a lease agreement with
Cogeneration Services, Inc. (an entity controlled by Mr. Kamine) pursuant to
which the Company leases its headquarters office in Bedminster, New Jersey. The
lease expires in January 2007. The lease provides for a base annual rental of
approximately $207,000 (adjusted periodically for changes in the consumer price
index), plus operating expenses.
In 1996, Mr. Kamine received interest payments totaling $120,000 on loans he
made to the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
From May 1, 1996 through January 29, 1998, Kamine Development Corp., an
affiliate of the Company, was paid a fee at an annual rate of $266,000 as
reimbursement for the services of Mr. Kamine as Chairman of the Board of the
Company. The amount of this fee was reduced to $100,000 per annum as of January
29, 1998. The amount of the fee paid in 1996 and 1997 is included in the
respective shared services payments for those years described in the first
paragraph above.
Pursuant to Mr. G. Scott Brodey Sr.'s termination of employment with the
Company on March 3, 1997, the Company agreed to pay Mr. Brodey severance of
$150,000 payable over the course of a year. Mr. Brodey had been Executive Vice
President--Construction of the Company.
In February, 1998, the Company loaned to Roscoe C. Young II, the Company's
Chief Operating Officer, the principal sum of $350,000. The loan is evidenced by
a promissory note which bears interest at the rate of 6% per annum. Interest and
principal are payable at maturity on February 13, 2003.
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<PAGE>
In March, 1998, the Company made a bridge loan to Tricia Breckenridge in the
principal amount of $150,000. Mrs. Breckenridge is Senior Vice
President--Business Development of the Company. The loan is evidenced by a
promissory note which bears interest at the rate of 6% per annum, and is secured
by a second mortgage on property located in Gurnee, Illinois. Interest and
principal are due upon the sale of the property.
The Company believes that the above transactions were on terms no less
favorable to the Company than could have been obtained in transactions with
independent third parties. All future transactions between the Company and its
officers, directors, principal stockholders or their respective affiliates, will
be on terms no less favorable to the Company than can be obtained from
unaffiliated third parties.
Pursuant to agreements entered into in September and October 1997 (the
"Dividend Agreements"), between the Company and each of the holders of Series A
Preferred Stock and Series C Preferred Stock (collectively, the "Preferred
Holders") each Preferred Holder has agreed to forego the payment of accumulated
dividends on its shares of preferred stock of the Company from the date of such
Dividend Agreement through the date on which such Preferred Holder disposes of
its interest in the Company; provided, that, upon such disposition, such
Preferred Holder realizes not less than a ten percent (10%) compound rate of
return on its investment for the period from the date of such Dividend Agreement
to the date of such disposition.
Upon closing of the Initial Offering, the Company paid to Nassau
approximately $600,000 for dividend arrearages on the Series A Cumulative
Convertible Preferred Stock of KMC Telecom which Nassau had exchanged for its
shares of Series A Preferred Stock of the Company.
Pursuant to an Agreement among the Company, Mr. Kamine and Nassau, Nassau is
entitled to an annual payment of $100,000 as a financial advisory fee and as
compensation for the Nassau designees who serve on the Board of Directors of the
Company.
Mr. Kamine, KMC Telecommunications L.P., Nassau, AT&T Credit, CoreStates and
GECC are parties to the Stockholders Agreement pursuant to which, so long as Mr.
Kamine and Nassau retain certain minimum levels of ownership of the Company, Mr.
Kamine and Nassau are entitled to elect all of the Company's seven directors,
with each entitled to nominate three directors, and the seventh to be nominated
by agreement of Mr. Kamine, Nassau and either AT&T Credit or the holders of a
majority of the outstanding shares of the Company's Series C Preferred Stock.
See "Principal Stockholders-- Stockholders Agreement."
AT&T Finance (an affiliate of AT&T Credit) has provided financing for the
Company in the form of the AT&T Facility. Pursuant to the AT&T Facility, AT&T
Finance has agreed to make available, subject to certain conditions, up to a
total of $70.0 million, on a project by project basis, for construction and
development of the Company's networks. GECC and CoreStates are participating
lenders in the AT&T Facility to the extent of $25.0 million and $15.0 million,
respectively. See "Description of Certain Indebtedness."
AT&T Finance also entered into the Supplemental AT&T Facility with the
Company pursuant to which AT&T Finance loaned the Company $10.0 million. The
Supplemental AT&T Facility was repaid in full upon the consummation of the
Initial Offering. Upon repayment of the Supplemental AT&T Facility, AT&T Credit
exercised a warrant for the purchase of 91,268 shares of Common Stock, for an
aggregate purchase price of $10.0 million.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of February 28, 1998
with respect to the beneficial ownership of shares of Common Stock by (i) each
person known to the Company to be a beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii) the
Named Executive Officers, and (iv) all executive officers and directors as a
group.
The Company was formed as a holding company in September 1997. Prior to the
establishment of the present holding company structure, during 1996 and 1997,
KMC Telecom (now the Company's principal operating subsidiary) granted options
to purchase shares of KMC Telecom Common Stock to employees, including Messrs.
Sternberg, Young, Rosenblum and Barwick and Ms. Worthman and selected employees
of certain affiliated companies owned by Mr. Kamine. During the second quarter
of 1998, the Company expects to replace those options with options to purchase
Common Stock of the Company and to grant options to additional employees of the
Company, including Mr. Lasher. The options for Common Stock of the Company which
replace the options previously granted under the KMC Telecom Stock Option Plan,
or which are granted to the additional employees, will entitle the recipients to
purchase an aggregate of no more than 260,000 shares of the Company's Common
Stock at an average exercise price of not less than $26.00 per share. The
Company may subsequently grant additional options, although it has no specific
plans in this regard. See "Management --Stock Option Grants". The existing
options to purchase shares of KMC Telecom Common Stock are described in the
footnotes to the following table.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES (1) OWNERSHIP(1)
- -------------------------------------------------------------------------------------- ----------- ---------------
<S> <C> <C>
Harold N. Kamine...................................................................... 573,835 68.5%
c/o Kamine Development Corp.
1545 Route 206
Bedminster, NJ 07921
Nassau Capital Partners L.P........................................................... 661,454 (2) 44.5%
c/o Nassau Capital L.L.C.
22 Chambers Street
Princeton, NJ 08542
AT&T Credit Corporation............................................................... 203,288.5 24.3%
44 Whippany Road
Morristown, NJ 07962-1983
CoreStates Holdings, Inc.............................................................. 102,155.5 (3) 10.9%
1339 Chestnut St.
Philadelphia, PA 19107
General Electric Capital Corporation.................................................. 200,476 (4) 19.3%
120 Long Ridge Road
Stamford, CT 06927
Michael A. Sternberg.................................................................. --(5) --
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, New Jersey 07921
Gary E. Lasher........................................................................ -- --
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, New Jersey 07921
John G. Quigley....................................................................... 661,454 (6) 44.5%
c/o Nassau Capital L.L.C.
22 Chambers Street
Princeton, NJ 08542
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES (1) OWNERSHIP(1)
- -------------------------------------------------------------------------------------- ----------- ---------------
<S> <C> <C>
Richard H. Patterson................................................. -- --
c/o Waller Capital Corporation
30 Rockefeller Center
Suite 4350
New York, NY 10112
Randall A. Hack...................................................... 661,454 (6) 44.5%
c/o Nassau Capital L.L.C.
22 Chambers Street
Princeton, NJ 08542
William H. Stewart................................................... 661,454 (7) 44.5%
c/o Nassau Capital L.L.C.
22 Chambers Street
Princeton, NJ 08542
Roscoe C. Young II................................................... --(8) --
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07921
Cynthia Worthman..................................................... --(9) --
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07921
Charles Rosenblum.................................................... -- 10) --
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07925
James A. Barwick..................................................... -- 11) --
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07921
Directors and Officers of the Company as a Group (11 persons)........ 1,235,289(2) 83.2%
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a person
and the percentage ownership of that person, shares subject to options,
warrants and convertible securities held by that person that are currently
exercisable or exercisable within 60 days of February 28, 1998 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of any other person. Except
as indicated in the footnotes to this table, each shareholder named in the
table has sole voting and investment power with respect to the shares set
forth opposite such shareholder's name.
(2) Includes 600,000 shares of Common Stock which Nassau and NAS Partners I
L.L.C. ("NAS"), of which Messrs. Quigley, Hack and Stewart are members, have
the right to acquire upon conversion of 122,708 and 1,092 shares of Series A
Preferred Stock, respectively, and 47,619 shares of Common Stock which
Nassau and NAS have the right to acquire upon conversion of 24,778 and 222
shares of Series C Preferred Stock, respectively. These are the same shares
listed for Messrs. Quigley, Hack and Stewart.
(3) Includes 95,238 shares of Common Stock which CoreStates has the right to
acquire upon conversion of 50,000 shares of Series C Preferred Stock of the
Company.
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<PAGE>
(4) Includes 190,476 shares of Common Stock which GECC has the right to acquire
upon conversion of 100,000 shares of Series C Preferred Stock of the Company
and 10,000 shares of Common Stock which GECC has the right to acquire upon
exercise of a warrant.
(5) Mr. Sternberg does not presently own any shares of Common Stock of the
Company. However, he does hold 8,000 currently exercisable options to
acquire shares of KMC Telecom Common Stock.
(6) Messrs. Quigley and Hack, Directors of the Company, are members of Nassau
Capital L.L.C., the general partner of Nassau; accordingly Messrs. Quigley
and Hack may be deemed to be beneficial owners of such shares and for
purposes of this table they are included. Messrs. Quigley and Hack disclaim
beneficial ownership of all such shares within the meaning of Rule 13d-3
under the Exchange Act. Messrs. Quigley and Hack are also members of NAS;
accordingly Messrs. Quigley and Hack may be deemed to be beneficial owners
of such shares and for purposes of this table they are included. Messrs.
Quigley and Hack disclaim beneficial ownership of all such shares within the
meaning of Rule 13d-3 under the Exchange Act.
(7) All of the shares indicated as owned by Mr. Stewart are owned directly or
indirectly by Nassau and are included because of Mr. Stewart's affiliation
with Nassau. Mr. Stewart is also a member of NAS; accordingly, Mr. Stewart
may be deemed to be the beneficial owner of such shares and for purposes of
this table they are included. Mr. Stewart disclaims beneficial ownership of
all of these shares within the meaning of Rule 13d-3 under the Exchange Act.
(8) Mr. Young does not presently beneficially own any shares of Common Stock of
the Company. However, he does hold 2,000 currently exercisable options to
acquire shares of KMC Telecom Common Stock.
(9) Ms. Worthman does not presently beneficially own any shares of Common Stock
of the Company. However, she does hold 3,000 currently exercisable options
to acquire shares of KMC Telecom Common Stock.
(10) Mr. Rosenblum does not presently beneficially own any shares of Common
Stock of the Company. However, he does hold 600 currently exercisable
options to acquire shares of KMC Telecom Common Stock.
(11) Mr. Barwick does not presently beneficially own any shares of Common Stock
of the Company. However, he does hold 500 currently exercisable options to
acquire shares of KMC Telecom Common Stock.
STOCKHOLDERS AGREEMENT. The Stockholders Agreement restricts the ability of
the current stockholders to transfer shares in the Company to persons not
affiliated with or related to the current stockholders. Until the holdings of
Mr. Kamine and Nassau are reduced below certain thresholds, Mr. Kamine and
Nassau are entitled to elect all of the Directors, three of whom are nominated
by Mr. Kamine (one of whom must be the President and Chief Executive Officer),
three of whom are nominated by Nassau and one of whom is nominated by agreement
of Mr. Kamine, Nassau and either AT&T Credit or the holders of a majority of the
outstanding shares of the Company's Series C Preferred Stock. If a default
relating to payment occurs under the AT&T Facility, and continues uncured for 90
days, the holders of Series C Preferred Stock (currently Nassau, NAS, GECC and
CoreStates) will be entitled to elect two additional Directors, who will serve
until the default is cured.
Each of Nassau, NAS, CoreStates, GECC and AT&T Credit has a "put right"
entitling it to have the Company repurchase its shares for the fair market value
of such shares if no Liquidity Event (defined as (i) an initial public offering
with gross proceeds of at least $40.0 million, (ii) the sale of substantially
all of the stock or assets of the Company or (iii) the merger or consolidation
of the Company with one or more other corporations) has taken place by the later
of (x) October 22, 2003 or (y) 90 days after the final
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<PAGE>
maturity date of the Notes. CoreStates, GECC and AT&T Credit may not exercise
such put rights unless Nassau has exercised its put right. The Indenture limits
the Company's ability to repurchase such shares.
The current stockholders have demand registration rights with respect to
their shares of Common Stock of the Company commencing on the earlier of June 5,
2000 (in the case of Mr. Kamine or Nassau) and the date on which the Company
completes an initial public offering of Common Stock (and any related holdback
period expires). Each of the holders of registrable securities also has certain
piggyback registration rights. The parties to the Stockholders Agreement have
agreed not to effect any public sale or distribution of Common Stock of the
Company, or securities convertible into such Common Stock, within 180 days of
the effective date of any demand or piggyback registration.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
AT&T FACILITY
The following summary of the material provisions of the documents comprising
the AT&T Facility does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all the provisions of such documents,
including the definitions of certain terms therein. Terms used and not defined
herein have the meanings given to them in the documents described herein. Copies
of such documents are available from the Company upon request.
GENERAL
Under the AT&T Facility, AT&T Finance agreed to lend the Company's
subsidiaries, KMC Telecom and KMC Telecom II and two limited liability
companies, one of which is wholly-owned by KMC Telecom and one of which is
wholly-owned by KMC Telecom II, up to an aggregate of $70.0 million (the
"Commitment Amount") to be used for the construction of fiber optic
telecommunications networks ("Systems") in certain markets, subject to certain
conditions. Disbursements under the AT&T Facility are available to KMC Telecom
for engineering, design and backbone construction, with additional amounts to
finance expansion of Systems operated by KMC Telecom (which comprise the
Company's eight existing networks), and were available to KMC Telecom II prior
to the Closing Date of the Initial Offering for up to 55% of the invoice price
of switches and electronic equipment purchased under the agreement with Lucent
for the nine Systems proposed to be put into operation in 1998 which are to be
operated by KMC Telecom II (with the tenth system to be operated by a separate
subsidiary, KMC Telecom of Virginia, Inc. ("KMC Virginia")). The total amount
loaned for any System may not exceed the total invoice price property, plant and
equipment plus, without duplication, the capitalized construction costs for such
System.
Loans to KMC Telecom under the AT&T Facility will mature no later than
October 1, 2005. All loans to KMC Telecom II were repaid on the Closing Date of
the Initial Offering and KMC Telecom II is no longer entitled to borrow, and is
no longer an obligor, under the AT&T Facility. KMC Telecom and its subsidiary
limited liability company (collectively, the "Borrowers"), however, are now
permitted to borrow up to the full $70.0 million amount of the AT&T Facility.
Borrowings under the AT&T Facility will bear interest prior to October 1, 1999,
at the Commercial Paper Rate (as defined in the AT&T Facility) plus 5%. After
October 1, 1999, the interest rate will be either a fixed rate equal to the
average rate of U.S. Treasury Notes maturing the same month in which the
remaining average life of the loans ends plus 5.5%, or a variable rate equal to
either the Commercial Paper Rate plus 5%, or the LIBOR rate plus 5%, at the
Borrowers' option. If a Borrower defaults on any payment due under the AT&T
Facility, the interest rate will increase by four percentage points.
The Company has unconditionally guaranteed the repayment of the AT&T
Facility when such repayment is due, whether at maturity, upon acceleration, or
otherwise. The Company has agreed to pay all amounts outstanding under the AT&T
Facility, on demand, upon the occurrence and during the continuation of any
Event of Default (as defined therein). The Company has pledged the shares of KMC
Telecom to AT&T Finance to secure its obligations under the guaranty. KMC
Telecom has pledged its ownership interest in its subsidiary limited liability
company to AT&T Finance. In addition, KMC Telecom and its subsidiary limited
liability company have each pledged all of their assets to AT&T Finance.
PAYMENTS. Interest under the AT&T Facility is payable quarterly in arrears.
The outstanding principal balance of all loans made to the Borrowers under the
AT&T Facility is payable in 24 consecutive quarterly installments beginning on
January 1, 2000. AT&T Finance will receive an annual fee of $100,000 on the
first payment date of each year (interest or principal) beginning January 1,
1998.
MANDATORY PREPAYMENTS. AT&T Finance has the right to require prepayment of
all loans made under the AT&T Facility in the event of a Change in Control (as
defined in the AT&T Facility). Events
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<PAGE>
triggering a Change in Control include the Company ceasing to own 100% of the
outstanding capital stock of each of the Borrowers, directly or indirectly
(except as a result of the exercise of warrants by AT&T Finance or its
affiliates, successors or assigns). At the Closing of the Initial Offering, AT&T
Finance was paid all amounts previously borrowed by KMC Telecom II under the
AT&T Facility ($10.8 million). Amounts borrowed by KMC Telecom ($40.5 million as
of December 31, 1997) remain outstanding.
The AT&T Facility contains a number of negative covenants including, among
others, covenants restricting the ability of the Borrowers to consolidate or
merge with any person, sell or lease assets not in the ordinary course of
business, sell or enter into long term leases of dark fiber, redeem stock, pay
dividends or make any other payments (including payments of principal or
interest on loans) to the Company, create Subsidiaries, transfer any permits or
licenses, or incur additional indebtedness or act as guarantor for the debt of
any person. The AT&T Facility also contains a number of affirmative covenants
including, among others, covenants requiring the Borrowers to preserve and
maintain corporate existence, comply with laws, maintain their properties,
maintain insurance, pay taxes, furnish AT&T Finance with copies of financial
statements, and inform AT&T Finance of litigation. After repayment of all
amounts borrowed by KMC Telecom II on the Closing Date of the Initial Offering,
KMC Telecom II and its subsidiary limited liability company are no longer
Borrowers or obligors or subject to these covenants and restrictions.
The Borrowers are required to comply with certain financial tests and
maintain certain financial ratios, including, among others, a requirement that
at the end of each fiscal quarter of each of the Borrowers commencing with the
fiscal quarter ending September 30, 1997 through and including the fiscal
quarter ending December 31, 1999 the ratio of Available Cash (defined as cash
available plus the amount available under the AT&T Facility for which all
conditions precedent have been fulfilled) plus, only if positive, EBITDA to
Lender Debt Service (as defined below) shall equal at least 1.00 to 1.00. Lender
Debt Service shall be measured on the last day of each fiscal quarter and shall
equal the sum of (i) cash interest expense for the immediately succeeding four
fiscal quarters, to be calculated by giving effect to the total debt outstanding
to AT&T Finance on the last day of such fiscal quarter, with such debt deemed to
be accruing interest over the next four fiscal quarters at an interest rate
equal to the interest rate in effect on such last day of such fiscal quarter,
and (ii) scheduled principal payments for the immediately succeeding four fiscal
quarters. At the end of each fiscal quarter ending March 31, 2000 through June
30, 2001, inclusive, the ratio of the sum of Available Cash, plus, only if
positive, EBITDA to Lender Debt Service must equal at least 1.25 to 1.00.
At the end of each fiscal quarter during each period set forth below, the
ratio of EBITDA for the immediately preceding four fiscal quarters to Lender
Debt Service shall equal at least the ratio set forth below:
<TABLE>
<CAPTION>
FISCAL YEAR RATIO
- ------------------------------------------------------------------------------- -------------
<S> <C>
July 1, 2001 -- December 31, 2001.............................................. 1.25 to 1.00
January 1, 2002 -- December 31, 2002........................................... 1.35 to 1.00
January 1, 2003 -- and each fiscal quarter thereafter.......................... 1.75 to 1.00
</TABLE>
Failure to satisfy any of the financial covenants will constitute an Event
of Default under the AT&T Facility, permitting AT&T Finance, after notice, to
terminate the commitment and/or accelerate payment of outstanding indebtedness.
The AT&T Facility also includes other customary events of default, including,
without limitation, a cross-default to other indebtedness, material undischarged
judgments and bankruptcy.
The Company's subsidiaries KMC Telecom and its subsidiary limited liability
company are currently obligors under the AT&T Facility. Such subsidiaries have
no obligation to holders of the Notes. Accordingly, if there were an Event of
Default under the AT&T Facility, the lenders thereunder would be entitled
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<PAGE>
to payment in full and could foreclose on the assets of such subsidiaries and
the holders of Notes would have no right to share in such assets.
AT&T Finance has entered into a participation agreement with GECC and
CoreStates providing for the participation of GECC and CoreStates in the AT&T
Facility.
FINANCED PROJECTS
At December, 1997, the AT&T Facility had been drawn against to finance
backbone construction for networks in Huntsville, Baton Rouge, Shreveport,
Corpus Christi, Savannah, and Madison, for the Melbourne Acquisition, and the
purchase of switches and electronic equipment, in the aggregate amount of $51.3
million.
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DESCRIPTION OF THE EXCHANGE NOTES
The Original Notes were, and the Exchange Notes will be, issued under the
Indenture, dated as of January 29, 1998, between the Company, as issuer, and The
Chase Manhattan Bank (the "Trustee"). A copy of the Indenture has been filed as
an Exhibit to the Registration Statement of which this Prospectus is a part. The
following summary of certain provisions of the Indenture does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all of the provisions of the Indenture, including the definitions of certain
terms therein and those terms made a part thereof by the Trust Indenture Act of
1939, as amended. Whenever particular defined terms of the Indenture not
otherwise defined herein are referred to, such defined terms are incorporated
herein by reference. For definitions of certain capitalized terms used in the
following summary, see "--Certain Definitions."
GENERAL
The Exchange Notes will be unsubordinated, unsecured obligations of the
Company, initially limited to $460,800,000 aggregate principal amount at
maturity, and will mature on February 15, 2008. Although for federal income tax
purposes, a significant amount of original issue discount, taxable as ordinary
income, will be recognized by a Holder as such discount accrues from the issue
date of the Exchange Notes, no interest will be payable on the Exchange Notes
prior to August 15, 2003. From and after February 15, 2003, interest on the
Exchange Notes will accrue at the rate indicated on the cover page of this
Prospectus from February 15, 2003, or from the most recent Interest Payment Date
to which interest has been paid or provided for, payable semiannually (to
Holders of record at the close of business on the February 1 or August 1
immediately preceding the Interest Payment Date) on February 15 and August 15 of
each year, commencing August 15, 2003.
Principal of, premium, if any, and interest on the Exchange Notes will be
payable, and the Exchange Notes may be exchanged or transferred, at the office
or agency of the Company in the Borough of Manhattan, the City of New York
(which initially will be the corporate trust office of the Trustee at 450 West
33rd Street, New York, New York 10001), or at the option of the Company, payment
of interest may be made by check mailed to the Holders at their addresses as
they appear in the Security Register; PROVIDED that all payments of principal,
premium, if any, and interest with respect to Notes represented by one or more
permanent global Notes registered in the name of or held by the Depository or
its nominee will be made by wire transfer of immediately available funds to the
accounts specified by the Holder or Holders thereof.
Subject to the covenants described below under "--Covenants" and applicable
law, the Company may issue additional Notes under the Indenture. The Exchange
Notes offered hereby and any additional Notes subsequently issued would be
treated as a single class for purposes of the Indenture.
BOOK-ENTRY; DELIVERY AND FORM
Exchange Notes issued in exchange for the Original Notes currently
represented by one or more fully registered global notes will be represented by
one or more fully registered global notes (collectively, the "Global Note"), and
will be deposited upon issuance with the Depository or an agent of the
Depository and registered in the name of the Depository or a nominee of the
Depository (the "Global Note Registered Owner"). Except as set forth below, the
Global Note may be transferred, in whole and not in part, only to another
nominee of the Depository or to a successor of the Depository or its nominee.
Exchange Notes issued in exchange for other Original Notes will be issued in
registered, certificated form without interest coupons.
The Depository has advised the Company that the Depository is a
limited-purpose trust company created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the clearance
and settlement of transactions in those securities between Participants through
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electronic book-entry changes in the accounts of its Participants. The
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Access to the
Depository's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants or Indirect
Participants may beneficially own securities held by or on behalf of the
Depository only through the Participants or the Indirect Participants. The
ownership interests and transfer of ownership interests of such persons held by
or on behalf of the Depository are recorded on the records of the Participants
and Indirect Participants.
The Depository has also advised the Company that pursuant to procedures
established by it, (i) upon deposit of the Global Note, the Depository will
credit the accounts of its Participants with portions of the principal amount of
the Global Note representing the Exchange Notes issued in exchange for the
Original Notes that each such Participant has instructed the Depository to
surrender for exchange and (ii) ownership of such interests in the Global Note
will be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by the Depository (with respect to the Participants)
or by the Participants and the Indirect Participants (with respect to other
owners of beneficial interests in the Global Note).
Under the terms of the Indenture, the Company and the Trustee will treat the
persons in whose names the Exchange Notes, including the Global Note, are
registered as the owners thereof for the purpose of receiving payments in
respect of the principal of and premium, if any, and interest on any Exchange
Notes and for any and all other purposes whatsoever. Payments on any Exchange
Notes registered in the name of the Global Note Registered Owner will be payable
by the Trustee to the Global Note Registered Owner in its capacity as the
registered holder under the Indenture. Consequently, neither the Company, the
Trustee nor any agent of the Company or the Trustee has or will have any
responsibility or liability for (i) any aspect of the Depository's records or
the records of any Participant or Indirect Participant relating to or payments
made on account of beneficial ownership interests in the Global Note, or for
maintaining, supervising or reviewing any of the Depository's records or records
of any Participant or Indirect Participant relating to the beneficial ownership
interests in the Global Note or (ii) any other matter relating to the actions
and practices of the Depository or any of its Participants or Indirect
Participants. The Depository has advised the Company that its current practice,
upon receipt of any payment in respect of securities such as the Exchange Notes
(including principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in principal amount of beneficial interests in the
relevant security as shown on the records of the Depository unless the
Depository has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the
beneficial owners of Exchange Notes will be governed by standing instructions
and customary practices and will be the responsibility of the Participants or
the Indirect Participants and will not be the responsibility of the Depository,
the Trustee or the Company. Neither the Company nor the Trustee will be liable
for any delay by the Depository or any of its Participants or Indirect
Participants in identifying the beneficial owners of the Exchange Notes, and the
Company and the Trustee may conclusively rely on and will be protected in
relying on instructions from the Global Note Registered Owner for all purposes.
OPTIONAL REDEMPTION
The Exchange Notes will be redeemable, at the Company's option, in whole or
in part, at any time or from time to time, on or after February 15, 2003 and
prior to maturity, upon not less than 30 nor more than 60 days' prior notice
mailed by first-class mail to each Holder's last address as it appears in the
Security Register, at the following prices (the "Redemption Prices") (expressed
in percentages of principal amount at maturity), plus accrued and unpaid
interest, if any, to the Redemption Date (subject to the right of Holders of
record on the relevant Regular Record Date that is on or prior to the Redemption
Date to
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receive interest due on an Interest Payment Date), if redeemed during the
12-month period commencing February 15, of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- -------------------------------------------------------------------------------- ----------------
<S> <C>
2003............................................................................ 106.2500%
2004............................................................................ 104.1666
2005............................................................................ 102.0832
2006 and thereafter............................................................. 100.0000
</TABLE>
In addition, at any time or from time to time, on or prior to April 15,
2000, the Company may, at its option, redeem up to 35% of the aggregate
principal amount at maturity of the Notes with the proceeds of one or more
public or private Equity Offerings, at a Redemption Price equal to 112.5% of
Accreted Value on the Redemption Date; provided that at least 65% of the
aggregate principal amount at maturity of the Notes remains outstanding after
each such redemption.
In the case of any partial redemption, selection of the Exchange Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Exchange Notes
are listed or, if the Exchange Notes are not listed on a national securities
exchange, by lot or by such other method as the Trustee in its sole discretion
shall deem to be fair and appropriate; provided that no Note of $1,000 in
principal amount at maturity or less shall be redeemed in part. If any Note is
to be redeemed in part only, the notice of redemption relating to such Note
shall state the portion of the principal amount thereof to be redeemed. A new
Note in principal amount equal to the unredeemed portion thereof will be issued
in the name of the Holder thereof upon cancellation of the original Note.
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, the Company agreed, for the
benefit of the Holders, that it would use its best efforts, at its cost, to
consummate this Exchange Offer. In satisfaction of this obligation, the Company
is hereby offering the Exchange Notes in return for surrender of the Original
Notes. It is intended by the Company that the Exchange Offer will satisfy these
registration rights, which will terminate upon the consummation of the Exchange
Offer. For each Original Note surrendered to the Company pursuant to the
Exchange Offer, the Holder will receive an Exchange Note of equal principal
amount at maturity. The Accreted Value of each Exchange Note shall be identical
to, and shall be determined in the same manner as, the Accreted Value of the
Original Notes so surrendered and exchanged therefor. Interest on each Exchange
Note shall be calculated and paid in the same manner as interest on the Original
Notes so surrendered and exchanged therefor.
RANKING
The Exchange Notes will be unsubordinated, unsecured indebtedness of the
Company, will rank PARI PASSU in right of payment with all existing and future
unsubordinated, unsecured indebtedness of the Company and will be senior in
right of payment to any future subordinated indebtedness of the Company. As of
December 31, 1997, after giving PRO FORMA effect to the Initial Offering, the
Company (on an unconsolidated basis) would not have had any indebtedness
outstanding other than the Original Notes. However, the Company is a holding
company and the Exchange Notes will be effectively subordinated to all existing
and future indebtedness (including the AT&T Facility) and liabilities (including
trade payables and any subordinated indebtedness) of the Company's subsidiaries.
As of December 31, 1997, on the same PRO FORMA basis, the subsidiaries of the
Company would have had approximately $53.9 million of liabilities (excluding
intercompany payables), including approximately $40.5 million of secured
indebtedness. See "Risk Factors--Substantial Indebtedness; Debt Service
Requirements; Refinancing Risks"; "--Holding Company's Reliance on Subsidiaries'
Funds; Priority of Other Creditors" and "Description of Certain Indebtedness."
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for which
no definition is provided.
"Accreted Value" is defined to mean, for any Specified Date, the amount
calculated pursuant to (i), (ii), (iii) or (iv) for each $1,000 principal amount
at maturity of Notes:
(i) if the Specified Date occurs on one of the following dates (each a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRETED
ACCRUAL DATE VALUE
- --------------------------------------------------------------------------------- ----------
<S> <C>
August 15, 1998.................................................................. $ 579.48
February 15, 1999................................................................ $ 615.70
August 15, 1999.................................................................. $ 654.18
February 15, 2000................................................................ $ 695.07
August 15, 2000.................................................................. $ 738.51
February 15, 2001................................................................ $ 784.67
August 15, 2001.................................................................. $ 833.71
February 15, 2002................................................................ $ 885.81
August 15, 2002.................................................................. $ 941.18
February 15, 2003................................................................ $ 1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) $542.46 and (b) an amount
equal to the product of (1) the Accreted Value for the first Semi-Annual
Accrual Date less $542.46 MULTIPLIED by (2) a fraction, the numerator of
which is the number of days from January 29, 1998 to the Specified Date,
using a 360-day year of twelve 30-day months, and the denominator of which
is the number of days elapsed from January 29, 1998 to the first Semi-Annual
Accrual Date, using a 360-day year of twelve 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the Accreted Value will equal the sum of (a) the Accreted Value for the
Semi-Annual Accrual Date immediately preceding such Specified Date and (b)
an amount equal to the product of (1) the Accreted Value for the immediately
following Semi-Annual Accrual Date less the Accreted Value for the
immediately preceding Semi-Annual Accrual Date multiplied by (2) a fraction,
the numerator of which is the number of days from the immediately preceding
Semi-Annual Accrual Date to the Specified Date, using a 360-day year of
twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition; PROVIDED that Indebtedness of such Person which is
redeemed, defeased, retired or otherwise repaid at the time of or immediately
upon consummation of the transactions by which such Person becomes a Restricted
Subsidiary or upon consummation of such Asset Acquisition shall not be Acquired
Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; PROVIDED that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income (or loss) of any Person that is not a Restricted Subsidiary
(or is an
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Unrestricted Subsidiary), except to the extent of the amount of dividends or
other distributions actually paid to the Company or any of its Restricted
Subsidiaries by such Person or an Unrestricted Subsidiary during such period;
(ii) solely for the purposes of calculating the amount of Restricted Payments
that may be made pursuant to clause (C) of the first paragraph of the
"Limitation on Restricted Payments" covenant described below (and in such case,
except to the extent includable pursuant to clause (i) above), the net income
(or loss) of any Person accrued prior to the date it becomes a Restricted
Subsidiary or is merged into or consolidated with the Company or any of its
Restricted Subsidiaries or all or substantially all of the property and assets
of such Person are acquired by the Company or any of its Restricted
Subsidiaries; (iii) the net income of any Restricted Subsidiary to the extent
that the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by the
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to such
Restricted Subsidiary (except to the extent such restriction has been legally
waived); (iv) any gains or losses (on an after-tax basis) attributable to Asset
Sales or the termination of discontinued operations; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below, any amount paid or accrued as dividends on Preferred
Stock of the Company or any Restricted Subsidiary owned by Persons other than
the Company and any of its Restricted Subsidiaries; (vi) all extraordinary gains
and extraordinary losses; (vii) the cumulative effect of a change in accounting
principles since the Closing Date; and (viii) at the irrevocable election of the
Company for each occurrence, any net after-tax income (loss) from discontinued
operations; PROVIDED that for purposes of any subsequent Investment in the
entity conducting such discontinued operations under the "Restricted Payments"
covenant, such entity shall be treated as an Unrestricted Subsidiary until such
discontinued operations have actually been disposed of.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of the Company and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles, all as set
forth on the most recent quarterly or annual consolidated balance sheet of the
Company and its Restricted Subsidiaries, prepared in conformity with GAAP and
filed with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries or (ii) an acquisition by the
Company or any of its Restricted Subsidiaries of the property and assets of any
Person other than the Company or any of its Restricted Subsidiaries that
constitute substantially all of a division or line of business of such Person.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction) in one transaction or a
series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any
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other property and assets (other than the Capital Stock or other Investment in
an Unrestricted Subsidiary) of the Company or any of its Restricted Subsidiaries
outside the ordinary course of business of the Company or such Restricted
Subsidiary and, in each case, that is not governed by the provisions of the
Indenture applicable to mergers, consolidations and sales of all or
substantially all of the assets of the Company; PROVIDED that "Asset Sale" shall
not include (a) sales or other dispositions of inventory, receivables and other
current assets, (b) sales or other dispositions of assets for consideration at
least equal to the fair market value of the assets sold or disposed of, to the
extent that the consideration received would constitute property or assets of
the kind described in clause (B) of the "Limitation on Asset Sales" covenant,
(c) a disposition of cash or Temporary Cash Investments, (d) any Restricted
Payment that is permitted to be made, and is made, under the "Limitation on
Restricted Payments" covenant, (e) sales or other dispositions of assets with a
fair market value (as certified in an Officers' Certificate) not in excess of
$500,000 (provided that any series of related sales or dispositions in excess of
$500,000 shall be considered "Asset Sales"), (f) the lease, assignment of a
lease or sub-lease of any real or personal property in the ordinary course of
business, (g) foreclosures on assets, (h) pledges of assets or stock by the
Company or any of its Restricted Subsidiaries otherwise permitted under the
Indenture, including such pledges securing Indebtedness under the AT&T Facility
and (i) the exercise of common stock warrants by AT&T Finance in respect of KMC
Telecom.
"AT&T Facility" means the Amended and Restated Loan and Security Agreement
dated as of September 22, 1997 among KMC Telecom, KMC Telecom II, and AT&T
Finance and any other lenders or borrowers from time to time party thereto,
collateral documents, instruments and agreements executed in connection
therewith and any amendments, supplements, modifications, extensions, renewals,
restatements, refinancings or refundings thereof.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock, Preferred Stock, partnership or membership interests and any other right
to receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the amount of the liability in respect
of a Capitalized Lease that would at such time be required to be capitalized and
reflected as a liability on a balance sheet prepared in accordance with GAAP.
"Change of Control" means such time as (i) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more
than 35% of the total voting power of the Voting Stock of the Company on a fully
diluted basis and such ownership represents a greater percentage of the total
voting power of the Voting Stock of the Company, on a fully diluted basis, than
is held by the Existing Stockholders on such date; or (ii) individuals who on
the Closing Date constitute the Board of Directors (together with any new
directors whose election by the Board of Directors or whose nomination by the
Board of Directors for election by the Company's stockholders was approved by a
vote of at least a majority of the members of the Board of Directors then in
office who either were members of the Board of Directors on the Closing Date or
whose election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the members of the Board of Directors
then in office.
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"Closing Date" means January 29, 1998, the date on which the Notes were
originally issued under the Indenture.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses or
sales of assets), (iii) depreciation expense, (iv) amortization expense and (v)
all other non-cash items reducing Adjusted Consolidated Net Income (other than
items that will require cash payments and for which an accrual or reserve is, or
is required by GAAP to be, made), less all non-cash items increasing (or, in the
case of a loss, decreasing) Adjusted Consolidated Net Income, determined, with
respect to clauses (ii), (iii) and (iv), on a consolidated basis for the Company
and its Restricted Subsidiaries in conformity with GAAP; PROVIDED that, if any
Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated
EBITDA shall be reduced (to the extent not otherwise reduced in accordance with
GAAP) by an amount equal to (A) the amount of the Adjusted Consolidated Net
Income attributable to such Restricted Subsidiary multiplied by (B) the
percentage ownership interest in the income of such Restricted Subsidiary not
owned on the last day of such period by the Company or any of its Restricted
Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
(without duplication) of interest in respect of Indebtedness (including, without
limitation, amortization of original issue discount on any Indebtedness and the
interest portion of any deferred payment obligation, calculated in accordance
with the effective interest method of accounting; all commissions, discounts and
other fees and charges owed with respect to letters of credit and bankers'
acceptance financing; the net costs associated with Interest Rate Agreements;
and Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and the interest component of Capitalized Lease
Obligations paid, accrued or scheduled to be paid or to be accrued by the
Company and its Restricted Subsidiaries during such period; EXCLUDING,
HOWEVER,(i) any amount of such interest of any Restricted Subsidiary if the net
income of such Restricted Subsidiary is excluded in the calculation of Adjusted
Consolidated Net Income pursuant to clause (iii) of the definition thereof (but
only in the same proportion as the net income of such Restricted Subsidiary is
excluded from the calculation of Adjusted Consolidated Net Income pursuant to
clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses
(and any amortization thereof) payable in connection with the offering of the
Notes, all as determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant described below (such four fiscal
quarter period being the "Four Quarter Period"); PROVIDED that, in making the
foregoing calculation, PRO FORMA effect shall be given to the following events
which occur from the beginning of the Four Quarter Period through the
Transaction Date (the "Reference Period"): (i) the Incurrence of the
Indebtedness with respect to which the computation is being made and (if
applicable) the application of the net proceeds therefrom, including to
refinance other Indebtedness, as if such Indebtedness was incurred, and the
application of such proceeds occurred, at the beginning of the Four Quarter
Period; (ii) the Incurrence, repayment or retirement of any other Indebtedness
by the Company and its Restricted Subsidiaries since the first day of the Four
Quarter Period as if such Indebtedness was incurred, repaid or retired at the
beginning of the Four Quarter Period; (iii) in the case of Acquired
Indebtedness, the related acquisition, as if such acquisition occurred at the
beginning of the Four Quarter Period; (iv) any acquisition or disposition by the
Company and its Restricted Subsidiaries of any company or any business or any
assets out of the ordinary course of business, whether by merger, stock purchase
or sale or asset purchase or sale or any related repayment of Indebtedness, in
each case since the first day of
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the Four Quarter Period, assuming such acquisition or disposition had been
consummated on the first day of the Four Quarter Period and after giving PRO
FORMA effect to net cost savings that the Company reasonably believes in good
faith could have been achieved during the Four Quarter Period as a result of
such acquisition or disposition (PROVIDED that both (A) such cost savings were
identified and quantified in an Officers' Certificate delivered to the Trustee
at the time of the consummation of the acquisition or disposition and (B) with
respect to each acquisition or disposition completed prior to the 90th day
preceding such date of determination, actions were commenced or initiated by the
Company within 90 days of such acquisition or disposition to effect such cost
savings identified in such Officers' Certificate and with respect to any other
acquisition or disposition, such Officers' Certificate sets forth the specific
steps to be taken within the 90 days after such acquisition or disposition to
accomplish such cost savings); and PROVIDED FURTHER that (x) in making such
computation, the Consolidated Interest Expense attributable to interest on any
Indebtedness computed on a PRO FORMA basis and (A) bearing a floating interest
rate shall be computed as if the rate in effect on the date of computation had
been the applicable rate for the entire period and (B) which was not outstanding
during the period for which the computation is being made but which bears, at
the option of the Company, a fixed or floating rate of interest shall be
computed by applying, at the option of the Company, either the fixed or floating
rate, and (y) in making such computation, the Consolidated Interest Expense of
the Company attributable to interest on any Indebtedness under a revolving
credit facility computed on a PRO FORMA basis shall be computed based upon the
PRO FORMA average daily balance of such Indebtedness during the applicable
period; and (v) the occurrence of any of the events described in clauses
(i)-(iv) above by any Person that has become a Restricted Subsidiary or has been
merged with or into the Company or any Restricted Subsidiary during such
Reference Period.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; PROVIDED that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock (or the security for which such Capital Stock is convertible
into or exchangeable for) upon the occurrence of an "asset sale" or "change of
control" occurring prior to the Stated Maturity of the Notes shall not
constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock (or the security for which such
Capital Stock is convertible into or exchangeable for) are no more favorable to
the holders of such Capital Stock (or the security for which such Capital Stock
is convertible into or exchangeable for) than the provisions contained in the
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control"
covenants described below and such Capital Stock (or the security for which such
Capital Stock is convertible into or exchangeable for) specifically provides
that such Person will not repurchase or redeem
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any such stock pursuant to such provision prior to the Company's repurchase of
such Notes as are required to be repurchased pursuant to the "Limitation on
Asset Sales" and "Repurchase of Notes upon a Change of Control" covenants
described below.
"Equity Offering" means any public or private sale of common stock or
preferred stock of the Company (excluding Disqualified Stock), other than public
offerings with respect to the Company's Common Stock registered on Form S-8.
"Existing Stockholders" means Harold N. Kamine, his Affiliates and Nassau.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution; PROVIDED that for purposes of clause (ix) of
the second paragraph of the "Limitation on Indebtedness" covenant, (x) the fair
market value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the sale of Capital Stock and (y)
in the event the aggregate fair market value of any other property (other than
cash or cash equivalents) received by the Company exceeds $10 million, the fair
market value of such property shall be determined by a nationally recognized
investment banking firm or a nationally recognized firm having expertise in the
specific area which is the subject of such determination and set forth in their
written opinion which shall be delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the Notes and the Company's Series C and Series
D Preferred Stock and (ii) except as otherwise provided, the amortization of any
amounts required or permitted by Accounting Principles Board Opinion Nos. 16 and
17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); PROVIDED that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; PROVIDED that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
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"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding trade letters of
credit), (iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due more than
six months after the date of placing such property in service or taking delivery
and title thereto or the completion of such services, except Trade Payables and
accrued current liabilities arising in the ordinary course of business, (v) all
Capitalized Lease Obligations of such Person, (vi) all Indebtedness referred to
in clauses (i) through (v) hereof of other Persons secured by a Lien on any
asset of such Person, whether or not such Indebtedness is assumed by such
Person; PROVIDED that the amount of such Indebtedness shall be the lesser of (A)
the fair market value of such asset at such date of determination and (B) the
amount of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed
by such Person to the extent such Indebtedness is Guaranteed by such Person and
(viii) to the extent not otherwise included in this definition, obligations
under Currency Agreements and Interest Rate Agreements. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date (or, in the case of a revolving credit or other similar facility, the total
amount of funds outstanding on the date of determination) of all unconditional
obligations as described above and, with respect to contingent obligations, the
maximum liability upon the occurrence of the contingency giving rise to the
obligation of the types described above, PROVIDED (A) that the amount
outstanding at any time of any Indebtedness issued with original issue discount
is the original issue price of such Indebtedness, (B) that money borrowed and
set aside at the time of the Incurrence of any Indebtedness in order to prefund
the payment of the interest on such Indebtedness shall not be deemed to be
"Indebtedness" and (C) that Indebtedness shall not include any liability for
federal, state, local or other taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" means, with respect to any Person, all investments by such
Person in other Persons in the form of any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries and
commissions, travel and similar advances to officers and employees made in the
ordinary course of business) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition of
Capital Stock, bonds, notes, debentures or other similar instruments issued by,
such other Person and shall include (i) the designation of a Restricted
Subsidiary as an Unrestricted Subsidiary and (ii) the fair market value of the
Capital Stock (or any other Investment), held by the Company or any of its
Restricted Subsidiaries, of (or in) any Person that has ceased to be a
Restricted Subsidiary, including without limitation, by reason of any
transaction permitted by clause (iii) of the "Limitation on the Issuance and
Sale of Capital Stock of Restricted Subsidiaries" covenant; PROVIDED that the
fair market value of the Investment remaining in any Person that has ceased to
be a Restricted Subsidiary shall not exceed the aggregate amount of Investments
previously made in such Person valued at the time such Investments were made
less the net reduction of such Investments. For purposes of the definition of
"Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant
described below, (i) "Investment" shall include the fair market value of the
assets (net of liabilities (other than liabilities to the Company or any of its
Restricted Subsidiaries)) of any Restricted Subsidiary at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair
market value of the assets (net of liabilities (other than liabilities to the
Company or any of its Restricted Subsidiaries)) of any Unrestricted Subsidiary
at the time that such Unrestricted Subsidiary is designated a Restricted
Subsidiary
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shall be considered a reduction in outstanding Investments and (iii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer.
"Investment Grade Securities" means (i) securities issued or directly and
fully guaranteed or insured by the United States government or any agency or
instrumentality thereof (other than Cash Equivalents), (ii) debt securities or
debt instruments with a rating of BBB+ or higher by S&P or Baa1 or higher by
Moody's or the equivalent of such rating by such rating organization, or, if no
rating of S&P or Moody's then exists, the equivalent of such rating by any other
nationally recognized securities rating agency, but excluding any debt
securities or instruments constituting loans or advances among the Company and
its Subsidiaries, and (iii) investment in any fund that invests exclusively in
investments of the type described in clauses (i) and (ii) which fund may also
hold cash pending investment and/or distribution.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Nassau" means Nassau Capital Partners L.P., NAS Partners I L.L.C. or their
respective successors, and their Affiliates.
"Net Cash Proceeds" means (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other commissions, fees and
expenses (including fees and expenses of counsel, accountants and investment
bankers) related to such Asset Sale and any relocation expenses incurred as a
result thereof, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (b) with respect
to any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorney's fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase Notes by the Company from the
Holders commenced by mailing a notice to the Trustee and each Holder stating:
(i) the covenant pursuant to which the offer is being made and that all Notes
validly tendered will be accepted for payment on a pro rata basis; (ii) the
purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest pursuant to its terms; (iv) that, unless the Company defaults in the
payment of the purchase price, any Note accepted for payment pursuant to the
Offer to Purchase shall cease to accrue interest on and after the Payment Date;
(v) that Holders electing to have a Note purchased
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pursuant to the Offer to Purchase will be required to surrender the Note,
together with the form entitled "Option of the Holder to Elect Purchase" on the
reverse side of the Note completed, to the Paying Agent at the address specified
in the notice prior to the close of business on the Business Day immediately
preceding the Payment Date; (vi) that Holders will be entitled to withdraw their
election if the Paying Agent receives, not later than the close of business on
the third Business Day immediately preceding the Payment Date, a telegram,
facsimile transmission or letter setting forth the name of such Holder, the
principal amount of Notes delivered for purchase and a statement that such
Holder is withdrawing his election to have such Notes purchased; and (vii) that
Holders whose Notes are being purchased only in part will be issued new Notes
equal in principal amount at maturity to the unpurchased portion of the Notes
surrendered; PROVIDED that each Note purchased and each new Note issued shall be
in a principal amount of $1,000 or an integral multiple thereof. On the Payment
Date, the Company shall (i) accept for payment on a pro rata basis Notes or
portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with
the Paying Agent money sufficient to pay the purchase price of all Notes or
portions thereof so accepted; and (iii) deliver, or cause to be delivered, to
the Trustee all Notes or portions thereof so accepted together with an Officers'
Certificate specifying the Notes or portions thereof accepted for payment by the
Company. The Paying Agent shall promptly mail to the Holders of Notes so
accepted payment in an amount equal to the purchase price (or, if the Notes are
represented by one or more permanent global Notes registered in the name of The
Depository Trust Company or its nominee, by such other method as required
thereby), and the Trustee shall promptly authenticate and mail to such Holders a
new Note equal in principal amount at maturity to any unpurchased portion of the
Note surrendered; PROVIDED that each Note purchased and each new Note issued
shall be in a principal amount at maturity of $1,000 or an integral multiple
thereof. The Company will publicly announce the results of an Offer to Purchase
as soon as practicable after the Payment Date. The Trustee shall act as the
Paying Agent for an Offer to Purchase. The Company will comply with Rule 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations are applicable, in the event that the
Company is required to repurchase Notes pursuant to an Offer to Purchase.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; PROVIDED that such Person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments and Investment Grade Securities; (iii) payroll, travel and similar
advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses in accordance with GAAP and reasonable
advances to sales representatives; (iv) any Investment acquired by the Company
or any of its Restricted Subsidiaries (x) in exchange for any other Investment
or accounts receivable held by the Company or any such Restricted Subsidiary in
connection with or as a result of a bankruptcy, workout, reorganization or
recapitalization of the issuer of such other Investment or accounts receivable
or (y) as a result of a foreclosure by the Company or any of its Restricted
Subsidiaries with respect to any secured Investment or other transfer of title
with respect to any secured Investment in default; (v) any Investment acquired
in consideration for the issuance of Capital Stock (other than Disqualified
Stock) or the proceeds of the issuance of Capital Stock (other than Disqualified
Stock) to the extent such amounts have not been previously applied to a
Restricted Payment pursuant to clause (C)(2) of the first paragraph of the
"Limitation on Restricted Payments" covenant or clause (iii) or (iv) of the
second paragraph of the "Limitation on Restricted Payments" covenant or used to
support the Incurrence of Indebtedness pursuant to clause (x) under the
"Limitation on Indebtedness" covenant and Investments acquired as a capital
contribution; (vi) Guarantees permitted by the "Limitation on Indebtedness"
covenant; (vii) loans or advances to employees of the Company or any Restricted
Subsidiary that do not in the aggregate exceed at any one time outstanding $5.0
million; (viii) Currency Agreements and Interest Rate Agreements permitted under
the "Limitation on Indebtedness" covenant; (ix) Investments in prepaid
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expenses, negotiable instruments held for collection and lease, utility and
workers' compensation, performance and other similar deposits; (x) Investments
in debt securities or other evidences of Indebtedness that are issued by
companies engaged in the Telecommunications Business; provided that when each
Investment pursuant to this clause (x) is made, the aggregate amount of
Investments outstanding under this clause (x) does not exceed $3.0 million; (xi)
Strategic Investments and Investments in Permitted Joint Ventures in an amount
not to exceed $20.0 million at any one time outstanding; (xii) an Investment in
any Person the primary business of which is related, ancillary or complementary
to the business of the Company and its Subsidiaries on the date of such
Investments in an amount not to exceed at any time outstanding the sum of (x)
$23.0 million plus (y) 10% of the Company's Consolidated EBITDA, if positive,
for the immediately preceding four fiscal quarters (valued in each case as
provided in the definition of "Investments"); (xiii) securities received in
connection with Asset Sales to the extent constituting non-cash consideration
permitted under the "Asset Sale" covenant; and (xiv) Investments in an amount
not to exceed $5.0 million at any time outstanding.
"Permitted Joint Venture" means any Unrestricted Subsidiary or any other
Person in which the Company or a Restricted Subsidiary owns, directly or
indirectly, an ownership interest (other than a Restricted Subsidiary) and whose
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries at the time of determination.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen, landlord
or other similar Liens arising in the ordinary course of business and with
respect to amounts not yet delinquent or that are bonded or being contested in
good faith by appropriate legal proceedings promptly instituted and diligently
conducted and for which a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made; (iii) Liens
incurred or deposits made in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other types of social
security; (iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, licenses, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, trade or government contracts, performance
and return-of-money bonds and other obligations of a similar nature incurred in
the ordinary course of business (exclusive of obligations for the payment of
borrowed money); (v) easements (including reciprocal easement agreements),
rights-of-way, municipal, building and zoning ordinances and similar charges,
utility agreements, covenants, reservations, restrictions, encroachments,
charges, encumbrances, title defects or other irregularities that do not
materially interfere with the ordinary course of business of the Company or any
of its Restricted Subsidiaries; (vi) Liens (including extensions and renewals
thereof) upon real or personal property acquired after the Closing Date;
PROVIDED that (a) such Lien is created solely for the purpose of securing Trade
Payables that the Company reasonably expects to pay within 90 days or
Indebtedness Incurred, in accordance with the "Limitation on Indebtedness"
covenant described below, to finance the cost (including the cost of
improvements or construction) of the item of property or assets subject thereto
and such Lien is created prior to, at the time of or within six months after the
later of the acquisition, the completion of construction or the commencement of
full operation of such property, (b) the principal amount of the Trade Payables
or Indebtedness secured by such Lien does not exceed 100% of such cost and (c)
any such Lien shall not extend to or cover any property or assets other than
such item of property or assets and any improvements on such item; (vii) leases
or subleases granted to others that do not materially interfere with the
ordinary course of business of the Company and its Restricted Subsidiaries,
taken as a whole; (viii) Liens encumbering property or assets under construction
arising from progress or partial payments by a customer of the Company or its
Restricted Subsidiaries relating to such property or assets; (ix) any interest
or title of a lessor in the property subject to any Capitalized Lease or
operating lease; (x) Liens arising from filing Uniform Commercial Code financing
statements regarding leases; (xi) Liens on property of, or on shares of Capital
Stock or Indebtedness of, any Person existing at
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the time such Person becomes, or becomes a part of, any Restricted Subsidiary;
PROVIDED that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets acquired;
(xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens
arising from the rendering of a final judgment or order against the Company or
any Restricted Subsidiary that does not give rise to an Event of Default; (xiv)
Liens securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof; (xv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvi) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are within the
general parameters customary in the industry and incurred in the ordinary course
of business, in each case, securing Indebtedness under Interest Rate Agreements
and Currency Agreements and forward contracts, options, future contracts,
futures options or similar agreements or arrangements designed solely to protect
the Company or any of its Restricted Subsidiaries from fluctuations in interest
rates, currencies or the price of commodities; (xvii) Liens arising out of
conditional sale, title retention, consignment or similar arrangements for the
sale of goods entered into by the Company or any of its Restricted Subsidiaries
in the ordinary course of business in accordance with the past practices of the
Company and its Restricted Subsidiaries prior to the Closing Date; and (xviii)
Liens on or sales of receivables.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means, any Subsidiary that would be a "significant
subsidiary" as defined in 17 CFR Part 210.1-01(w), promulgated pursuant to the
Securities Act, as such regulation is in effect on the date hereof.
"Specified Date" means any Redemption Date, any Payment Date for an Offer to
Purchase or any date on which the Notes first become due and payable after an
Event of Default.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Stated Maturity" means (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Strategic Investments" means (A) Investments that the Board of Directors
has determined in good faith will enable the Company or any of its Restricted
Subsidiaries to obtain additional business that it might not be able to obtain
without making such Investment and (B) Investments in entities the principal
function of which is to perform research and development with respect to
products and services that may be used or useful in the Telecommunications
Business; PROVIDED that the Company or one of its Restricted Subsidiaries is
entitled or otherwise reasonably expected to obtain rights to such products or
services as a result of such Investment.
"Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance the acquisition of a Person engaged in the
Telecommunications Business that by its terms, or by the terms of any agreement
or instrument pursuant to which such Indebtedness is outstanding, (i) is
expressly made subordinate in right of payment to the Notes and (ii) provides
that no payment of principal, premium or interest on, or any other payment with
respect to, such Indebtedness may be made prior to the payment in full of all of
the Company's obligations under the Notes; PROVIDED that such Indebtedness may
provide for and be repaid at any time from the proceeds of the sale of Capital
Stock (other than Disqualified Stock) of the Company after the Incurrence of
such Indebtedness.
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"Subsidiary" means, with respect to any Person, (i) any corporation,
association, or other business entity (other than a partnership) of which more
than 50% of the total voting power of shares of Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time of determination owned or
controlled, directly or indirectly, by such Person or one or more of the other
Subsidiaries of such Person or a combination thereof and (ii) any partnership,
joint venture, limited liability company or similar entity of which (x) more
than 50% of the capital accounts, distribution rights, total equity and voting
interests or general or limited partnership interests, as applicable, are owned
or controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of such Person or a combination thereof whether in the form
of membership, general, special or limited partnership or otherwise and (y) such
Person or any Wholly Owned Restricted Subsidiary of such Person is a general
partner or otherwise controls such entity.
"Telecommunications Business" means the development, ownership or operation
of one or more telephone, telecommunications or information systems or the
provision of telephony, telecommunications or information services (including,
without limitation, any voice, video transmission, data or Internet services)
and any related, ancillary or complementary business.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency or instrumentality thereof, (ii) time deposit accounts, certificates of
deposit, eurodollar time deposits and money market deposits maturing within 180
days or less of the date of acquisition thereof issued by a bank or trust
company which is organized under the laws of the United States of America, any
state thereof or any foreign country recognized by the United States of America,
and which bank or trust company has capital, surplus and undivided profits
aggregating in excess of $50 million (or the foreign currency equivalent
thereof) and has outstanding debt which is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clauses (i) and (ii) above
entered into with a bank meeting the qualifications described in clause (ii)
above, (iv) commercial paper, maturing not more than 90 days after the date of
acquisition, issued by a corporation (other than an Affiliate of the Company)
organized and in existence under the laws of the United States of America, any
state thereof or any foreign country recognized by the United States of America
with a rating at the time as of which any investment therein is made of "P-1"
(or higher) according to Moody's or "A-1" (or higher) according to S&P, (v)
securities with maturities of six months or less from the date of acquisition
issued or fully and unconditionally guaranteed by any state, commonwealth or
territory of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by S&P or Moody's, and (vi)
investment funds investing 95% of their assets in securities of the type
described in clauses (i)-(v) above.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by the Company or any of its Restricted Subsidiaries, the date such Indebtedness
is to be Incurred and, with respect to any Restricted Payment, the date such
Restricted Payment is to be made.
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"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below; and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; PROVIDED that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (A) of this proviso would
be permitted under the "Limitation on Indebtedness" and "Limitation on
Restricted Payments" covenants described below. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED
that (i) no Default or Event of Default shall have occurred and be continuing at
the time of or after giving effect to such designation and (ii) all Liens and
Indebtedness of such Unrestricted Subsidiary outstanding immediately after such
designation would, if Incurred at such time, have been permitted to be Incurred
(and shall be deemed to have been Incurred) for all purposes of the Indenture.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Warrant Agreement" means the warrant agreement, dated the Closing Date,
between the Company and The Chase Manhattan Bank, as warrant agent.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of 95% or more of the outstanding Capital Stock of such Subsidiary
(other than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) by such Person or one or more Wholly Owned
Subsidiaries of such Person.
COVENANTS
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); PROVIDED that the Company may Incur Indebtedness
if, after giving effect to the Incurrence of such Indebtedness and the receipt
and application of the proceeds therefrom, the Consolidated Leverage Ratio would
be greater than zero and less than 6:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness of the Company or its Restricted Subsidiaries outstanding at any
time in an aggregate principal amount not to exceed $100.0 million of
unsubordinated Indebtedness and $100.0 million of subordinated Indebtedness,
less any amount of such Indebtedness permanently repaid as provided under the
"Limitation on Asset Sales" covenant described below (and any Guarantees thereof
by the Company or its Restricted Subsidiaries); (ii) the Incurrence by the
Company of Indebtedness represented by the Notes; (iii) Indebtedness in
existence on the Closing Date; (iv) Indebtedness of the Company to a Restricted
Subsidiary and Indebtedness of a Restricted Subsidiary to the Company or another
Restricted Subsidiary; PROVIDED that such Indebtedness is made pursuant to an
intercompany note (which, in the case of Indebtedness owed to the Company, shall
be
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unsubordinated) and any event which results in any such Restricted Subsidiary
ceasing to be a Restricted Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Company or another Restricted Subsidiary) shall
be deemed, in each case, to constitute an Incurrence of such Indebtedness not
permitted by this clause (iv); (v) Indebtedness issued in exchange for, or the
net proceeds of which are used to refinance or refund, then outstanding
Indebtedness (other than Indebtedness Incurred under clauses (i), (iv), (vi),
(viii) or (xi) of this paragraph) and any refinancings thereof in an amount not
to exceed the amount so refinanced or refunded (plus premiums, accrued interest,
fees and expenses); PROVIDED that Indebtedness the proceeds of which are used to
refinance or refund Indebtedness that is subordinated in right of payment to the
Notes shall only be permitted under this clause (v) if (A) such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is issued or remains outstanding, is
expressly made subordinate in right of payment to the Notes at least to the
extent that the Indebtedness to be refinanced is subordinated to the Notes and
(B) such new Indebtedness, determined as of the date of Incurrence of such new
Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness
to be refinanced or refunded, and the Average Life of such new Indebtedness is
at least equal to the remaining Average Life of the Indebtedness to be
refinanced or refunded; and PROVIDED FURTHER that in no event may Indebtedness
of the Company be refinanced by means of any Indebtedness of any Restricted
Subsidiary pursuant to this clause (v); (vi) Indebtedness (A) in respect of
performance, surety, appeal bonds and completion guarantees provided in the
ordinary course of business, (B) under Currency Agreements and Interest Rate
Agreements; PROVIDED that such agreements (a) are designed solely to protect the
Company or its Restricted Subsidiaries against fluctuations in foreign currency
exchange rates or interest rates and (b) do not increase the Indebtedness of the
obligor outstanding at any time (except to the extent Incurred under another
clause hereof) other than as a result of fluctuations in foreign currency
exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder; and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries pursuant to
such agreements, in each case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary (other than Guarantees of Indebtedness
Incurred by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition), in a
principal amount not to exceed the gross proceeds actually received by the
Company or any Restricted Subsidiary in connection with such disposition; (vii)
Indebtedness of the Company, to the extent the net proceeds thereof are promptly
(A) used to purchase Notes tendered in an Offer to Purchase made as a result of
a Change in Control or (B) deposited to defease the Notes as described below
under "Defeasance"; (viii) Guarantees of the Notes and Guarantees of
Indebtedness of the Company by any Restricted Subsidiary provided the Guarantee
of such Indebtedness is permitted by and made in accordance with the "Limitation
on Issuance of Guarantees by Restricted Subsidiaries" covenant described below
and any Guarantee by the Company of Indebtedness or other obligations of any of
its Restricted Subsidiaries so long as the incurrence of such Indebtedness
Incurred by such Restricted Subsidiary is permitted under the terms of this
covenant; (ix) Indebtedness Incurred to finance the cost (including the cost of
design, development, acquisition, construction, installation, improvement,
transportation or integration) to acquire equipment, inventory or network assets
(including acquisitions by way of acquisitions of real property, leasehold
improvements, Capitalized Leases and acquisitions of the Capital Stock of a
Person that becomes a Restricted Subsidiary to the extent of the fair market
value of the equipment, inventory or network assets so acquired) by the Company
or a Restricted Subsidiary after the Closing Date; (x) Indebtedness of the
Company not to exceed, at any one time outstanding, two times the sum of (A) the
Net Cash Proceeds received by the Company after the Closing Date from the
issuance and sale of its Capital Stock (other than Disqualified Stock) to a
Person that is not a Subsidiary of the Company, to the extent such Net Cash
Proceeds have not been used pursuant to clause (C)(2) of the first paragraph or
clause (iii) or (iv) of the second paragraph of the "Limitation on Restricted
Payments" covenant described below or clause (v) of the definition of "Permitted
Investments" to make a Restricted Payment and (B) 80% of the fair market value
of property (other
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than cash and cash equivalents) received by the Company after the Closing Date
from the sale of its Capital Stock (other than Disqualified Stock) to a Person
that is not a Subsidiary of the Company, to the extent such sale of Capital
Stock has not been used pursuant to clause (iii) or (iv) of the second paragraph
of the "Limitation on Restricted Payments" covenant described below to make a
Restricted Payment; PROVIDED that such Indebtedness does not mature prior to the
Stated Maturity of the Notes and has an Average Life longer than the Notes; (xi)
Indebtedness Incurred by the Company or any of its Restricted Subsidiaries
constituting reimbursement obligations with respect to letters of credit in the
ordinary course of business, including, without limitation, letters of credit in
respect of workers' compensation claims or self insurance, or other Indebtedness
with respect to reimbursement type obligations regarding workers' compensation
claims; PROVIDED, HOWEVER, that upon the drawing of such letters of credit or
the Incurrence of such Indebtedness, such obligations are reimbursed within 30
days following such drawing or Incurrence; (xii) Indebtedness of Persons that
are acquired by the Company or any of its Restricted Subsidiaries or merged into
a Restricted Subsidiary in accordance with the terms of the Indenture; PROVIDED
that such Indebtedness is not incurred in contemplation of such acquisition or
merger; and PROVIDED FURTHER that after giving effect to such acquisition or
merger, either (x) the Company would be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Consolidated Leverage Ratio test set
forth in the first sentence of this covenant or (y) the Consolidated Leverage
Ratio is lower (if greater than zero) or higher (if less than zero) than
immediately prior to such acquisition; and (xiii) Strategic Subordinated
Indebtedness.
(b) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant
shall not be deemed to be exceeded, with respect to any outstanding Indebtedness
due solely to the result of fluctuations in the exchange rates of currencies.
Accretion on an instrument issued at a discount will not be deemed to constitute
an Incurrence of Indebtedness.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included and (2) any
Liens granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders) held by Persons other
than the Company or any of its Restricted Subsidiaries, (ii) purchase, redeem,
retire or otherwise acquire for value any shares of Capital Stock of (A) the
Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person or (B) a
Restricted Subsidiary other than a Wholly Owned Restricted Subsidiary (including
options, warrants or other rights to acquire such shares of Capital Stock) held
by any Affiliate of the Company (other than a Wholly Owned Restricted
Subsidiary), (iii) make any voluntary or optional principal payment, or
voluntary or optional redemption, repurchase, defeasance, or other acquisition
or retirement for value, of Indebtedness of the Company that is subordinated in
right of payment to the Notes (other than the purchase,
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redemption, repurchase or other acquisition of such subordinated Indebtedness
purchased in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within six months of the date of
acquisition) or (iv) make any Investment, other than a Permitted Investment, in
any Person (such payments or any other actions described in clauses (i) through
(iv) above being collectively "Restricted Payments") if, at the time of, and
after giving effect to, the proposed Restricted Payment: (A) a Default or Event
of Default shall have occurred and be continuing, (B) the Company could not
Incur at least $1.00 of Indebtedness under the first paragraph of the
"Limitation on Indebtedness" covenant or (C) the aggregate amount of all
Restricted Payments (the amount, if other than in cash, to be determined in good
faith by the Board of Directors, whose determination shall be conclusive and
evidenced by a Board Resolution) made after the Closing Date shall exceed the
sum of (1) 50% of the aggregate amount of the Adjusted Consolidated Net Income
(or, if the Adjusted Consolidated Net Income is a loss, minus 100% of the amount
of such loss) (determined by excluding income resulting from transfers of assets
by the Company or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued
on a cumulative basis during the period (taken as one accounting period)
beginning on the first day of the fiscal quarter immediately following the
Closing Date and ending on the last day of the last fiscal quarter preceding the
Transaction Date for which reports have been filed with the Commission or
provided to the Trustee pursuant to the "Commission Reports and Reports to
Holders" covenant plus (2) 100% of the aggregate Net Cash Proceeds and the
actual market value of marketable securities (on the date the calculation
hereunder is made) received by the Company after the Closing Date from the
issuance and sale permitted by the Indenture of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of the Company,
including an issuance or sale permitted by the Indenture of Indebtedness of the
Company for cash subsequent to the Closing Date upon the conversion of such
Indebtedness into Capital Stock (other than Disqualified Stock) of the Company,
or from the issuance to a Person who is not a Subsidiary of the Company of any
options, warrants or other rights to acquire Capital Stock of the Company (in
each case, exclusive of any Disqualified Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the Notes), and the Net Cash Proceeds
from any capital contributions to the Company after the Closing Date from
Persons other than Subsidiaries of the Company, in each case excluding such Net
Cash Proceeds to the extent used to Incur Indebtedness pursuant to clause (x) of
the second paragraph under the "Limitation on Indebtedness" covenant and
excluding Net Cash Proceeds from the issuance of Capital Stock to the extent
used to make a Permitted Investment in accordance with clause (v) of such
defined term, PLUS (3) amounts received from Investments (other than Permitted
Investments) in any Person resulting from payments of interest on Indebtedness,
dividends, repayments of loans or advances, or other transfers of assets, in
each case to the Company or any Restricted Subsidiary or from the Net Cash
Proceeds from the sale of any such Investment (except, in each case, to the
extent any such payment or proceeds are included in the calculation of Adjusted
Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed, in each case, the amount of Investments
previously made by the Company or any Restricted Subsidiary in such Person or
Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (v) of the second
paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of the Company or
an Unrestricted Subsidiary (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a substantially
concurrent offering of, shares of Capital Stock (other than Disqualified Stock)
of the Company (or options, warrants or other rights to acquire such Capital
Stock); (iv) the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of
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Indebtedness of the Company which is subordinated in right of payment to the
Notes in exchange for, or out of the proceeds of, a substantially concurrent
offering of, shares of the Capital Stock (other than Disqualified Stock) of the
Company (or options, warrants or other rights to acquire such Capital Stock);
(v) payments or distributions, to dissenting stockholders pursuant to applicable
law, pursuant to or in connection with a consolidation, merger or transfer of
assets that complies with the provisions of the Indenture applicable to mergers,
consolidations and transfers of all or substantially all of the property and
assets of the Company; (vi) the declaration or payment of dividends on the
Common Stock of the Company following a Public Equity Offering of such Common
Stock, of up to 6% per annum of the Net Cash Proceeds received by the Company in
such Public Equity Offering; (vii) the repurchase, retirement or other
acquisition or retirement for value of Capital Stock of the Company that is not
registered under the Exchange Act and is held by any current or former employee,
director or consultant (or their estates or the beneficiaries of such estates)
of the Company or any Subsidiary, not to exceed (A) in any calendar year $2.0
million or (B) $5.0 million in the aggregate; (viii) repurchases of Capital
Stock deemed to occur upon exercise of stock options if such Capital Stock
represents a portion of the exercise price of such options; (ix) repurchases of
fractional shares of Capital Stock in connection with the exercise of Warrants
in accordance with the Warrant Agreement; and (x) other Restricted Payments in
an aggregate amount not to exceed $2.0 million; PROVIDED that, except in the
case of clauses (i), (ii), (iii) and (iv), no Default or Event of Default shall
have occurred and be continuing or occur as a consequence of the actions or
payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clauses (ii) or (viii) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof and an Investment referred to in clause (vi)
thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred
to in clauses (iii) and (iv), shall be included in calculating whether the
conditions of clause (C) of the first paragraph of this "Limitation on
Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, or Indebtedness that is PARI PASSU with the Notes, then the Net Cash
Proceeds of such issuance shall be included in clause (C) of the first paragraph
of this "Limitation on Restricted Payments" covenant only to the extent such
proceeds are not used for such redemption, repurchase or other acquisition of
Indebtedness.
Any Restricted Payments made other than in cash shall be valued at fair
market value. The amount of any Investment "outstanding" at any time shall be
deemed to be equal to the amount of such Investment on the date made, less the
return of capital to the Company and its Restricted Subsidiaries with respect to
such Investment by distribution, sale or otherwise (up to the amount of such
Investment on the date made).
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the AT&T Facility, the
Indenture or any other agreements in effect on the Closing Date, and any
extensions, refinancings, renewals or replacements of such agreements; PROVIDED
that the encumbrances and restrictions in any such extensions, refinancings,
renewals or replacements are no less favorable in any material respect to the
Holders than those encumbrances or restrictions that are then in effect and that
are
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being extended, refinanced, renewed or replaced; (ii) existing under or by
reason of applicable law, rule, regulation or order; (iii) existing with respect
to any Person or the property or assets of such Person acquired by the Company
or any Restricted Subsidiary, existing at the time of such acquisition and not
incurred in contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other than such
Person or the property or assets of such Person so acquired; (iv) in the case of
clause (iv) of the first paragraph of this "Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A) that
restrict in a customary manner the subletting, assignment or transfer of any
property or asset that is a lease, license, conveyance or contract or similar
property or asset, (B) existing by virtue of any transfer of, agreement to
transfer, option or right with respect to, or Lien on, any property or assets of
the Company or any Restricted Subsidiary not otherwise prohibited by the
Indenture, (C) arising or agreed to in the ordinary course of business, not
relating to any Indebtedness, and that do not, individually or in the aggregate,
detract from the value of property or assets of the Company or any Restricted
Subsidiary in any manner material to the Company or any Restricted Subsidiary or
(D) purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature discussed in clause (iv) above
on the property so acquired; (v) with respect to the Company or a Restricted
Subsidiary and imposed pursuant to an agreement that has been entered into for
the sale of assets, including, without limitation, customary restrictions on the
disposition of all or substantially all of the Capital Stock of, or property and
assets of, such Restricted Subsidiary or the Company; (vi) contained in the
terms of any Indebtedness or any agreement pursuant to which such Indebtedness
was issued (in each case other than Indebtedness incurred under the AT&T
Facility) if (A) the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant contained in
such Indebtedness or agreement, (B) the encumbrance or restriction is not
materially more disadvantageous to the Holders of the Notes than is customary in
comparable financings (as determined by the Company) and (C) the Company
determines that any such encumbrance or restriction will not materially affect
the Company's ability to make principal or interest payments on the Notes; (vii)
restrictions on cash or other deposits or net worth imposed by customers under
contracts entered into in the ordinary course of business; (viii) customary
provisions in joint venture agreements and other similar agreements entered into
in the ordinary course of business; and (ix) any encumbrances or restrictions of
the type referred to in clauses (i)-(iv) of the first paragraph of this covenant
imposed by any amendments, modifications, renewals, restatements, increases,
supplements, refundings, replacements or refinancings of the contracts referred
to in clauses (i) through (viii) above; PROVIDED that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are, in the good faith judgment of the Company, not
materially more disadvantageous to the Holders than those contained in the
restriction prior to such amendment, modification, restatement, renewal,
increase, supplement, refunding, replacement or refinancing. Nothing contained
in this "Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries" covenant shall prevent the Company or any Restricted
Subsidiary from (1) creating, incurring, assuming or suffering to exist any
Liens otherwise permitted in the "Limitation on Liens" covenant or (2)
restricting the sale or other disposition of property or assets of the Company
or any of its Restricted Subsidiaries that secure Indebtedness of the Company or
any of its Restricted Subsidiaries.
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LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been permitted
to be made under the "Limitation on Restricted Payments" covenant if made on the
date of such issuance or sale; or (iv) issuances or sales of common stock of a
Restricted Subsidiary, PROVIDED that the Company or any Restricted Subsidiary
applies an amount equal to the Net Cash Proceeds thereof in accordance with the
"Limitation on Asset Sales" covenant.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is PARI PASSU
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary
and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever
claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its Subsidiary Guarantee; PROVIDED that this paragraph shall not be
applicable to any Guarantee of any Restricted Subsidiary (x) that existed at the
time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary or (y) of the Indebtedness Incurred under the AT&T Facility existing
on the Closing Date. If the Guaranteed Indebtedness is (A) PARI PASSU in right
of payment with the Notes, then the Guarantee of such Guaranteed Indebtedness
shall be PARI PASSU in right of payment with, or subordinated to, the Subsidiary
Guarantee or (B) subordinated in right of payment to the Notes, then the
Guarantee of such Guaranteed Indebtedness shall be subordinated in right of
payment to the Subsidiary Guarantee at least to the extent that the Guaranteed
Indebtedness is subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any Affiliate of the Company or any
Restricted Subsidiary, except upon fair and reasonable terms no less favorable
to the Company or such Restricted Subsidiary than could be obtained, at the time
of such transaction or, if such transaction is pursuant to a written agreement,
at the time of the execution of the agreement providing therefor, in a
comparable arm's-length transaction with a Person that is not such a holder or
an Affiliate.
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The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm or a nationally recognized firm having expertise in the specific
area which is the subject of such determination stating that the transaction is
fair to the Company or such Restricted Subsidiary from a financial point of
view; (ii) any transaction solely between the Company and any of its Restricted
Subsidiaries or solely between Restricted Subsidiaries; (iii) the payment of
reasonable and customary regular fees to, and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or its Restricted
Subsidiaries; (iv) any payments or other transactions pursuant to any
tax-sharing agreement between the Company and any other Person with which the
Company files a consolidated tax return or with which the Company is part of a
consolidated group for tax purposes; (v) any agreement as in effect as of the
Closing Date or any amendment thereto (so long as any such amendment is not
disadvantageous to the Holders in any material respect); (vi) the existence of,
or the performance by the Company or any of its Restricted Subsidiaries of its
obligations under the terms of, any stockholders agreement (including any
registration rights agreement or purchase agreement related thereto) to which it
is a party as of the Closing Date and any similar agreements which it may enter
into thereafter (so long as any such amendment is not disadvantageous to the
Holders in any material respect); or (vii) any Permitted Investments and
Restricted Payments not prohibited by the "Limitation on Restricted Payments"
covenant. Notwithstanding the foregoing, any transaction or series of related
transactions covered by the first paragraph of this "Limitation on Transactions
with Shareholders and Affiliates" covenant and not covered by clauses (ii)
through (vii) of this paragraph the aggregate amount of which exceeds $3.0
million in value, must be approved or determined to be fair in the manner
provided for in clause (i)(A) or (B) above.
LIMITATION ON LIENS
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character (including, without limitation, licenses), or any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without
making effective provision for all of the Notes and all other amounts due under
the Indenture to be directly secured equally and ratably with (or, if the
obligation or liability to be secured by such Lien is subordinated in right of
payment to the Notes, prior to) the obligation or liability secured by such
Lien.
The foregoing limitation does not apply to (i) Liens existing on the Closing
Date or required on the Closing Date to be provided in the future; (ii) Liens
securing obligations under the AT&T Facility (including Liens pursuant to
after-acquired clauses); (iii) Liens granted after the Closing Date on any
assets or Capital Stock of the Company or its Restricted Subsidiaries created in
favor of the Holders; (iv) Liens with respect to the assets of a Restricted
Subsidiary granted by such Restricted Subsidiary to the Company or a Restricted
Subsidiary to secure Indebtedness owing to the Company or such other Restricted
Subsidiary; (v) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under clause (v) of the
second paragraph of the "Limitation on Indebtedness" covenant; PROVIDED that
such Liens do not extend to or cover any property or assets of the Company or
any Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced; (vi) Liens on any property or assets of a
Restricted Subsidiary securing Indebtedness of such Restricted Subsidiary
permitted under the "Limitation on Indebtedness" covenant; or (vii) Permitted
Liens.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or
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such Restricted Subsidiary, as the case may be, intends to use for substantially
the same purpose or purposes as the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
LIMITATION ON ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 75% of the consideration received
consists of cash or Temporary Cash Investments. For purposes of this covenant,
the following are deemed to be cash: (x) the principal amount or accreted value
(whichever is larger) of Indebtedness of the Company or any Restricted
Subsidiary with respect to which the Company or such Restricted Subsidiary has
either (A) received a written release or (B) been released by operation of law,
in either case, from all liability on such Indebtedness in connection with such
Asset Sale and (y) securities received by the Company or any Restricted
Subsidiary from the transferee that are promptly converted by the Company or
such Restricted Subsidiary into cash. In the event and to the extent that the
Net Cash Proceeds received by the Company or any of its Restricted Subsidiaries
from one or more Asset Sales occurring on or after the Closing Date in any
period of 12 consecutive months exceed 10% of Adjusted Consolidated Net Tangible
Assets (determined as of the date closest to the commencement of such 12-month
period for which a consolidated balance sheet of the Company and its
Subsidiaries has been filed with the Commission or provided to the Trustee
pursuant to the "Commission Reports and Reports to Holders" covenant), then the
Company shall or shall cause the relevant Restricted Subsidiary to (i) within 12
months after the date Net Cash Proceeds so received exceed 10% of Adjusted
Consolidated Net Tangible Assets (A) apply an amount equal to such excess Net
Cash Proceeds to permanently repay unsubordinated Indebtedness of the Company,
or any Restricted Subsidiary providing a Subsidiary Guarantee pursuant to the
"Limitation on Issuances of Guarantees by Restricted Subsidiaries" covenant
described above or Indebtedness of any other Restricted Subsidiary, in each case
owing to a Person other than the Company or any of its Restricted Subsidiaries
or (B) invest an equal amount, or the amount not so applied pursuant to clause
(A) (or enter into a definitive agreement committing to so invest within 12
months after the date of such agreement), in property or assets (other than
current assets) of a nature or type or that are used in a business (or in a
Person (other than a natural person) having property and assets of a nature or
type, or engaged in a business) similar or related to the nature or type of the
property and assets of, or the business of, the Company and its Restricted
Subsidiaries existing on the date of such investment (as determined in good
faith by the Board of Directors, whose determination shall be conclusive and
evidenced by a Board Resolution) and (ii) apply (no later than the end of the
12-month period referred to in clause (i)) such excess Net Cash Proceeds (to the
extent not applied pursuant to clause (i)) as provided in the following
paragraph of this "Limitation on Asset Sales" covenant. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds."
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If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis, and an
offer to purchase any outstanding Indebtedness with similar provisions requiring
the Company to make an offer to purchase such Indebtedness, in an aggregate
principal amount at maturity of Notes (or, if prior to February 15, 2003, the
Accreted Value of the Notes) and such PARI PASSU Indebtedness equal to (A) with
respect to the Notes, the product of such Excess Proceeds multiplied by a
fraction, the numerator of which is the outstanding principal amount at maturity
of the Notes (or, if prior to February 15, 2003, the Accreted Value of the
Notes) and the denominator of which is the sum of the outstanding principal
amount at maturity of the Notes (or, if prior to February 15, 2003, the Accreted
Value of the Notes) and such PARI PASSU Indebtedness (the product hereinafter
referred to as the "Note Amount"), and (B) with respect to the PARI PASSU
Indebtedness, the excess of the Excess Proceeds over the Note Amount, at a
purchase price equal to 100% of the Accreted Value of the Notes or such PARI
PASSU Indebtedness, as the case may be, on the relevant Payment Date or such
other date set forth in the documentation governing the PARI PASSU Indebtedness,
plus, in each case, accrued interest (if any) to the Payment Date or such other
date set forth in the documentation governing the PARI PASSU Indebtedness. If
the aggregate purchase price of the Notes tendered pursuant to the Offer to
Purchase is less than the Excess Proceeds, the remaining will be available for
use by the Company for general corporate purposes. Upon the consummation of any
Offer to Purchase in accordance with the terms of the Indenture, the amount of
Net Cash Proceeds from Asset Sales subject to any future Offer to Purchase shall
be deemed to be zero.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the Accreted Value thereof on the relevant
Payment Date, PLUS accrued interest (if any) to the Payment Date; PROVIDED,
HOWEVER, that notwithstanding the occurrence of a Change of Control, the Company
shall not be obligated to purchase the Notes pursuant to this covenant in the
event that it has irrevocably committed to, within 90 days of such Change of
Control, redeem all the Notes in accordance with the terms hereof.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless consents are obtained, require the Company to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
At all times from and after the date of the commencement of this Exchange
Offer the Company shall deliver for filing to the Commission all such reports
and other information as it would be required to file with the Commission by
Sections 13(a) or 15(d) under the Exchange Act if it were subject thereto. The
Company shall supply the Trustee and each Holder, or shall supply to the Trustee
for forwarding to each such Holder, without cost to such Holder, copies of such
reports and other information.
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the Indenture:
(a) default in the payment of principal of (or premium, if any, on) any Note
when the same becomes due and payable at maturity, upon acceleration, redemption
or otherwise; (b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30 days; (c)
the Company defaults in the performance of or breaches any other covenant or
agreement of the Company in the
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Indenture or under the Notes (other than a default specified in clause (a) or
(b) above) and such default or breach continues for a period of 30 consecutive
days after written notice by the Trustee or the Holders of 25% or more in
aggregate principal amount of the Notes; (d) the Company shall have failed to
make or consummate an Offer to Purchase in accordance with the "Limitation on
Asset Sales" covenant above; (e) the Company shall have failed to make or
consummate an Offer to Purchase in accordance with the provisions of "Repurchase
of Notes upon a Change of Control" above; (f) there occurs with respect to any
issue or issues of Indebtedness of the Company or any Significant Subsidiary
having an outstanding principal amount of $5 million or more in the aggregate
for all such issues of all such Persons, whether such Indebtedness now exists or
shall hereafter be created, (I) an event of default that has caused the holder
thereof to declare such Indebtedness to be due and payable prior to its Stated
Maturity and such Indebtedness has not been discharged in full or such
acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (II) the failure to make a principal payment at the final
(but not any interim) fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of such payment default; (g) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $5 million in the aggregate (treating any deductibles, self-insurance
or retention as not so covered) shall be rendered against the Company or any
Significant Subsidiary and shall not be paid or discharged, and there shall be
any period of 30 consecutive days following entry of the final judgment or order
that causes the aggregate amount for all such final judgments or orders
outstanding and not paid or discharged against the Company or any of its
Significant Subsidiaries to exceed $5 million during which a stay of enforcement
of such final judgment or order, by reason of a pending appeal or otherwise,
shall not be in effect; (h) a court having jurisdiction in the premises enters a
decree or order for (A) relief in respect of the Company or any Significant
Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, (B) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Company or any Significant Subsidiary or for all or substantially all of the
property and assets of the Company or any Significant Subsidiary or (C) the
winding up or liquidation of the affairs of the Company or any Significant
Subsidiary and, in each case, such decree or order shall remain unstayed and in
effect for a period of 30 consecutive days; or (i) the Company or any
Significant Subsidiary (A) commences a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
consents to the entry of an order for relief in an involuntary case under any
such law, (B) consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Company or any Significant Subsidiary or for all or substantially all of the
property and assets of the Company or any Significant Subsidiary or (C) effects
any general assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clause
(h) or (i) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes then outstanding, by written notice to
the Company (and to the Trustee if such notice is given by the Holders), may,
and the Trustee at the request of such Holders shall, declare the Accreted Value
of, premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such Accreted Value of, premium, if
any, and accrued interest shall be immediately due and payable. In the event of
a declaration of acceleration because an Event of Default set forth in clause
(f) above has occurred and is continuing, such declaration of acceleration shall
be automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (f) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (h) or (i) above
occurs with respect to the Company, the Accreted Value of, premium, if any, and
accrued interest on the Notes then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder. The Holders of at least a majority in principal
amount at maturity of the outstanding Notes by written notice to the Company and
to the
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Trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences if (i) all existing Events of Default, other
than the nonpayment of the Accreted Value of, premium, if any, and interest on
the Notes that have become due solely by such declaration of acceleration, have
been cured or waived and (ii) the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction. For information as to
the waiver of defaults, see "--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount at maturity of
outstanding Notes make a written request to the Trustee to pursue the remedy;
(iii) such Holder or Holders offer the Trustee indemnity satisfactory to the
Trustee against any costs, liability or expense; (iv) the Trustee does not
comply with the request within 60 days after receipt of the request and the
offer of indemnity; and (v) during such 60-day period, the Holders of a majority
in aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a Note to receive payment of the
principal of, premium, if any, or interest on, such Note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Notes, which right shall not be impaired or affected without the consent of the
Holder.
The Indenture will require certain officers of the Company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into the Company unless: (i) the Company shall be the continuing Person,
or the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property and assets
of the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, all of the obligations of the Company on all of the Notes and under the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; (iii) immediately
after giving effect to such transaction on a PRO FORMA basis, (A) the Company or
any Person becoming the successor obligor of the Notes, as the case may be,
shall have a Consolidated Net Worth equal to or greater than the Consolidated
Net Worth of the Company immediately prior to such transaction or (B) the
Company or any Person becoming the successor obligor of the Notes, as the case
may be, shall have a Consolidated Leverage Ratio no more than the greater of (I)
6:1 and (II) the Consolidated Leverage Ratio of the Company immediately prior to
such transaction; PROVIDED that this clause (iii) shall not apply to a
consolidation or merger with or into a Wholly Owned Restricted Subsidiary with a
positive net worth; PROVIDED that, in connection with any
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such merger or consolidation, no consideration (other than Capital Stock (other
than Disqualified Stock) in the surviving Person or the Company) shall be issued
or distributed to the stockholders of the Company; and (iv) the Company delivers
to the Trustee an Officers' Certificate (attaching the arithmetic computations
to demonstrate compliance with clause (iii) above) and an Opinion of Counsel, in
each case stating that such consolidation, merger or transfer and such
supplemental indenture complies with this provision and that all conditions
precedent provided for herein relating to such transaction have been complied
with; PROVIDED, HOWEVER, that clause (iii) above does not apply if, in the good
faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal purpose of
such transaction is to change the state of incorporation of the Company; and
that any such transaction shall not have as one of its purposes the evasion of
the foregoing limitations.
DEFEASANCE
DEFEASANCE AND DISCHARGE. The Indenture provides that the Company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, (B) the Company has delivered to the
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of its option under this "Defeasance" provision and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
the Closing Date such that a ruling is no longer required or (y) a ruling
directed to the Trustee received from the Internal Revenue Service to the same
effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days following the
deposit, the trust fund will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law, (C) immediately after giving effect to such deposit on a pro forma basis,
no Event of Default, or event that after the giving of notice or lapse of time
or both would become an Event of Default, shall have occurred and be continuing
on the date of such deposit or during the period ending on the 123rd day after
the date of such deposit, and such deposit shall not result in a breach or
violation of, or constitute a default under, any other agreement or instrument
to which the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound and (D) if at such time the Notes
are listed on a national securities exchange, the Company has delivered to the
Trustee an Opinion of Counsel to the effect that the Notes will not be delisted
as a result of such deposit, defeasance and discharge, PROVIDED that if
simultaneously with the deposit of the money and/or U.S. Government Obligations
referred to in (A) above, the Company has caused an irrevocable, transferable,
standby letter of credit to be issued by a bank with capital and surplus
exceeding the principal amount of the Notes then outstanding, expiring not
earlier than 180 days from its issuance, in favor of the Trustee which permits
the Trustee to draw an amount equal to the principal, premium, if any, and
accrued interest on the Notes through the expiry date of the letter of credit,
then the Company will be deemed to have paid and discharged any and all
obligations in respect of the Notes on the date of the deposit and issuance of
the letter of credit.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clause (iii) under "Consolidation,
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Merger and Sale of Assets" and all the covenants described herein under
"Covenants," clause (c) under "Events of Default" with respect to such other
covenants and clauses (c), (d), (e), (f) and (g) under "Events of Default" shall
be deemed not to be Events of Default upon, among other things, the deposit with
the Trustee, in trust, of money and/or U.S. Government Obligations that through
the payment of interest and principal in respect thereof in accordance with
their terms will provide money in an amount sufficient to pay the principal of,
premium, if any, and accrued interest on the Notes on the Stated Maturity of
such payments in accordance with the terms of the Indenture and the Notes, the
satisfaction of the provisions described in clauses (B)(ii), (C) and (D) of the
preceding paragraph and the delivery by the Company to the Trustee of an Opinion
of Counsel to the effect that, among other things, the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and defeasance of certain covenants and Events of Default and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount at maturity of the outstanding Notes; PROVIDED,
HOWEVER, that no such modification or amendment may, without the consent of each
Holder affected thereby, (i) change the Stated Maturity of the principal of, or
any installment of interest on, any Note, (ii) reduce the Accreted Value or
principal amount of, or premium, if any, or interest on, any Note, (iii) change
the place or currency of payment of principal of, or premium, if any, or
interest on, any Note, (iv) impair the right to institute suit for the
enforcement of any payment on or after the Stated Maturity (or, in the case of a
redemption, on or after the Redemption Date) of any Note, (v) reduce the
above-stated percentage of outstanding Notes the consent of whose Holders is
necessary to modify or amend the Indenture, (vi) waive a default in the payment
of principal of, premium, if any, or interest on the Notes or (vii) reduce the
percentage or aggregate principal amount of outstanding Notes the consent of
whose Holders is necessary for waiver of compliance with certain provisions of
the Indenture or for waiver of certain defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Notes or for any claim based thereon
or otherwise in respect thereof, and no recourse under or upon any obligation,
covenant or agreement of the Company in the Indenture, or in any of the Notes or
because of the creation of any Indebtedness represented thereby, shall be had
against any incorporator, stockholder, officer, director, employee or
controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise
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of the rights and powers invested in it under the Indenture as a prudent person
would exercise under the circumstances in the conduct of such person's own
affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases or to realize on certain property received by it in respect of
any such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; provided, however, that if it acquires any conflicting
interest, it must eliminate such conflict or resign.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material U.S. federal income tax
consequences of an exchange of the Original Notes for the Exchange Notes and the
ownership and disposition of the Exchange Notes under U.S. federal income tax
law as of the date hereof. This summary is based on current provisions of the
U.S. Internal Revenue Code of 1986, as amended (the "Code"), applicable final,
temporary and proposed Treasury Regulations ("Treasury Regulations"), judicial
authority, and current administrative rulings and pronouncements of the Internal
Revenue Service (the "Service") and upon the facts concerning the Company as of
the date hereof. There can be no assurance that the Service will not take a
contrary view, and no ruling from the Service has been or will be sought by the
Company. Legislative, judicial, or administrative changes or interpretations may
be forthcoming that could alter or modify the statements and conclusions set
forth herein. Any such changes or interpretations may or may not be retroactive
and could affect the tax consequences to Holders.
This summary does not purport to deal with all aspects of taxation that may
be relevant to particular holders of the Exchange Notes in light of their
personal investment or tax circumstances, or to certain types of investors
(including individual retirement accounts and other tax deferred accounts,
insurance companies, financial institutions, broker-dealers or tax-exempt
organizations) subject to special treatment under the U.S. federal income tax
laws. This discussion does not deal with special tax situations, such as the
holding of the Exchange Notes as part of a straddle with other investments, or
situations in which the functional currency of a holder is not the U.S. dollar.
In addition, this discussion deals only with Exchange Notes held as capital
assets within the meaning of Section 1221 of the Code.
For purposes of this discussion, the term "U.S. Holder" means a citizen or
resident of the U.S., a corporation, limited liability company or partnership
created or organized in the U.S. or under the law of the U.S. or any state
thereof (including the District of Columbia), an estate the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source, or a trust if a court within the U.S. is able to exercise primary
supervision over the administration of the trust and one or more U.S. persons
has the authority to control all substantial decisions of the trust (or, under
certain circumstances, a trust the income of which is includible in gross income
for U.S. federal income tax purposes regardless of its source). The term
"Non-U.S. Holder" means any person other than a U.S. Holder.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. THE TAX TREATMENT
MAY VARY DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF
PURCHASING, HOLDING AND DISPOSING OF THE EXCHANGE NOTES INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
THE ORIGINAL NOTES--UNITS
For U.S. federal income tax purposes, the Original Notes were originally
issued and sold as part of a Unit, comprised of one Original Note and one
Warrant to purchase 0.21785 shares of Common Stock. The issue price of a Unit
was allocated between the Original Notes and the Warrants based on the Company's
best judgment of the relative fair market values of each such component of the
Unit on the issue date. The Company allocated $518.59 to each Note and $23.87 to
each Warrant. Under regulations issued under provisions of the Code relating to
original issue discount (the "OID Regulations"), each Holder will be bound by
such allocation for U.S. federal income tax purposes unless such Holder
discloses on a statement attached to its tax return for the taxable year that
includes the acquisition date of such Unit that its allocation differs from that
of the Company. No assurance can be given that the Service will accept the
Company's allocation. If the Company's allocation were successfully challenged
by the Service, the issue price, original issue discount accrual on the Note and
gain or loss on the sale or disposition of a Note would be different from that
resulting under the allocation determined by the Company.
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The exchange of Original Notes for Exchange Notes pursuant to the Exchange
Offer will not be a taxable event for U.S. federal income tax purposes. As a
result, there will not be any material U.S. federal income tax consequences to a
holder exchanging Original Notes for the Exchange Notes pursuant to the Exchange
Offer.
Because each Exchange Note is a continuation of the corresponding Original
Note, the remainder of this discussion of certain federal income tax
consideration generally refers only to "Notes."
THE NOTES
Under applicable authorities, the Notes should be treated as indebtedness
for U.S. federal income tax purposes. In the unlikely event the Notes are
treated as equity, the amount of any actual or constructive distributions on any
such Note would first be taxable to the holder as dividend income to the extent
of the issuer's current and accumulated earnings and profits, and next would be
treated as a return of capital to the extent of the holder's tax basis in the
Note, with any remaining amount treated as gain from the sale of a Note. As a
result, until such time as the issuer has earnings and profits as determined for
U.S. federal income tax purposes, distributions on any Note treated as equity
will be a nontaxable return of capital and will be applied against and reduce
the adjusted tax basis of such Note in the hands of its holder (but not below
zero) and any excess will be treated as gain from the sale of the Note. Further,
payments on the Notes treated as equity to Non-U.S. Holders would not be
eligible for the portfolio interest exception from U.S. withholding tax, and
dividends thereon would be subject to U.S. withholding tax at a flat rate of 30%
(or lower applicable treaty rate) and gain from their sale or other taxable
disposition might also be subject to U.S. tax. In addition, in the event of
equity treatment, the Company would not be entitled to deduct interest on the
Notes for U.S. federal income tax purposes. The remainder of this discussion
assumes that the Notes will constitute indebtedness of the Company for such tax
purposes.
ORIGINAL ISSUE DISCOUNT
GENERAL. The Notes will be issued with original issue discount ("OID"), and
each U.S. Holder will be required to include in income (regardless of whether
such U.S. Holder is a cash or accrual basis taxpayer) in each taxable year, in
advance of the receipt of corresponding cash payments on such Notes, that
portion of the OID, computed on a constant yield basis, attributable to each day
during such year on which the U.S. Holder held the Notes. See "--Taxation of
Original Issue Discount."
The amount of OID with respect to each Note will be equal to the excess of
(i) its "stated redemption price at maturity" over (ii) its issue price. Under
the OID Regulations, the "stated redemption price at maturity" of each Note will
include all payments to be made in respect thereof, including any stated
interest payments, other than "qualified stated interest." Payments of qualified
stated interest are payments of interest which are unconditionally payable in
cash or property (other than debt instruments of the issuer) at least annually
at a qualifying rate, including a single fixed rate. The "issue price" of a Note
is determined in the manner described under "The Original Notes--Units."
TAXATION OF ORIGINAL ISSUE DISCOUNT. A U.S. Holder of a debt instrument
issued with OID is required to include in gross income for U.S. federal income
tax purposes an amount equal to the sum of the "daily portions" of such OID for
all days during the taxable year on which the holder holds the debt instrument.
The daily portions of OID required to be included in a holder's gross income in
a taxable year will be determined upon a constant-yield basis by allocating to
each day during the taxable year on which the holder holds the debt instrument a
pro-rata portion of the OID on such debt instrument which is attributable to the
"accrual period" in which such day is included. Accrual periods with respect to
a Note may be of any length and may vary in length over the term of the Note as
long as (i) no accrual period is longer than one year and (ii) each scheduled
payment of interest or principal on the Note occurs on either the final or first
day of an accrual period. The amount of the OID attributable to each "accrual
period" will be the product of the "adjusted issue price" at the beginning of
such accrual period and the "yield to maturity" of the debt instrument (stated
in a manner appropriately taking into account the length of the
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accrual period). The "yield to maturity" is the discount rate that, when used in
computing the present value of all payments to be made under the Notes, produces
an amount equal to the issue price of the Notes. The "adjusted issue price" of a
debt instrument at the beginning of an accrual period is defined generally as
the issue price of the debt instrument plus the aggregate amount of OID that
accrued in all prior accrual periods, less any cash payments on the debt
instrument. Accordingly, a U.S. Holder of a Note will be required to include OID
in gross income for U.S. federal income tax purposes in advance of the receipt
of cash in respect of such income. The amount of OID allocable to an initial
short accrual period may be computed using any reasonable method if all other
accrual periods, other than a final short accrual period, are of equal length.
The amount of OID allocable to the final accrual period at maturity of the Note
is the difference between (x) the amount payable at the maturity of the Note,
and (y) the Note's adjusted issue price as of the beginning of the final accrual
period.
EFFECT OF MANDATORY AND OPTIONAL REDEMPTIONS ON OID. In the event of a
Change of Control, the Company will be required to offer to redeem all of the
Notes at redemption prices specified elsewhere herein. In the event that the
Company receives net proceeds from one or more Equity Offerings, the Company
may, at any time prior to April 15, 2000, use all or a portion of such net
proceeds to redeem the Notes in amounts and at redemption prices specified
elsewhere herein. Under the OID Regulations, computation of yield and maturity
of the Notes is not affected by such redemption rights and obligations if, based
on all the facts and circumstances as of the issue date, the stated payment
schedule of the Notes (that does not reflect a Change of Control or Equity
Offerings) is significantly more likely than not to occur. The Company has
determined that, based on all of the facts and circumstances as of the issue
date, it is significantly more likely than not that the Notes will be paid
according to their stated schedule.
The Company may redeem the Notes, in whole or in part, at any time on or
after February 15, 2003, at redemption prices specified elsewhere herein, plus
accrued and unpaid interest to the date of redemption. The OID Regulations
contain rules for determining the "maturity date" and the stated redemption
price at maturity of an instrument that may be redeemed prior to its stated
maturity date at the option of the issuer. Under the OID Regulations, solely for
purposes of the accrual of OID, it is assumed that the issuer will exercise any
option to redeem a debt instrument if such exercise will lower the
yield-to-maturity of the debt instrument. The Company believes that it will not
be presumed to redeem the Notes prior to their stated maturity under the
foregoing rules because the exercise of such option would not lower the
yield-to-maturity of the Notes.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS
The Notes are "applicable high yield discount obligations" ("AHYDOs"), as
defined in the Code, because the yield to maturity of such Notes exceeds the
"applicable federal rate" in effect at the time of their issuance (the "AFR")
plus five percentage points. Under the rules applicable to AHYDOs, a portion of
the OID that accrues on the Notes will not be deductible by the Company at any
time. The non-deductible portion of the OID will be an amount that bears the
same ratio to such OID as (i) the excess of the yield to maturity of the Notes
over the AFR plus six percentage points bears to (ii) the yield to maturity of
the Notes. To the extent that the non-deductible portion of OID would have been
treated as a dividend if it had been distributed with respect to the Company's
stock, it generally will be treated as a dividend to holders of the Notes for
purposes of the rules relating to the dividends received deduction applicable to
corporate holders. Any remaining OID on the Notes will not be deductible by the
Company until such OID is paid.
MARKET DISCOUNT, ACQUISITION PREMIUM
If a U.S. Holder acquires a Note for an amount that is less than its revised
issue price (generally, adjusted issue price at the time of acquisition), the
amount of the difference will be treated as "market discount," unless such
difference is less than a specified DE MINIMIS amount. Under the market discount
rules of the Code, a U.S. Holder will be required to treat any principal payment
on, or any gain on the sale, exchange, retirement or other disposition
(including a gift) of, a Note as ordinary income to the extent of
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any accrued market discount that has not previously been included in income.
Market discount generally accrues on a straight-line basis over the remaining
term of the Note, unless the U.S. Holder elects to accrue market discount on a
constant interest method. A U.S. Holder may not be allowed to deduct immediately
all or a portion of the interest expense on any indebtedness incurred or
continued to purchase or to carry such Note.
A U.S. Holder may elect to include market discount in income currently as it
accrues (either on a straight-line basis or, if the U.S. Holder so elects, on a
constant-yield basis), in which case the interest deferral rule set forth in the
preceding paragraph will not apply. Such an election will apply to all bonds
acquired by the U.S. Holder on or after the first day of the first taxable year
to which such election applies and may be revoked only with the consent of the
Service.
A U.S. Holder that acquires a Note for an amount that is greater than the
adjusted issue price of such Note but equal to or less than the sum of all
amounts payable on such Note after the purchase date will be considered to have
purchased such Note at an "acquisition premium." Under the acquisition premium
rules of the Code and the OID Regulations, the daily portion of OID which such
holder must include in its gross income with respect to such Note for any
taxable year will be reduced by an amount equal to the OID multiplied by a
fraction, the numerator of which is the amount of such acquisition premium and
the denominator of which is the OID remaining from the date the Note was
purchased to its maturity date.
SALE OR OTHER DISPOSITION
In general, upon the sale, exchange or redemption of a Note, a U.S. Holder
will recognize taxable gain or loss equal to the difference between (i) the
amount of cash proceeds and the fair market value of any property received on
the sale, exchange or redemption (not including any amount attributable to
accrued but unpaid interest) and (ii) the U.S. Holder's adjusted tax basis in
the Note. A U.S. Holder's adjusted tax basis in a Note generally will be equal
to the cost of the Note to such U.S. Holder (or the portion of the Unit purchase
price allocable to such Notes), increased by the amount of any market discount
or OID previously taken into income by the U.S. Holder and reduced by the amount
of any principal received by the U.S. Holder.
Subject to the discussion of market discount above, gain or loss realized on
the sale, exchange or redemption of a Note will be capital gain or loss. Capital
gain recognized by individual U.S. Holders generally will be subject to a
maximum federal income tax rate of (i) 39.6% if the U.S. Holder held the Note
for not more than one year, (ii) 28% if the U.S. Holder held the Note for more
than one year but not more than eighteen months, and (iii) 20% if the U.S.
Holder held the Note for more than eighteen months. The distinction between
capital gain or loss and ordinary income or loss is also relevant for purposes
of, among other things, limitations with respect to the deductibility of capital
losses.
An exchange of Notes pursuant to the Exchange Offer and the assumption of
the Notes by the Company should not be considered a taxable event.
NON-U.S. HOLDERS
In general, subject to the discussion below concerning backup withholding:
(a) payments of principal or interest (including OID) on the Notes by the
Company or any paying agent to a beneficial owner of a Note that is a Non-U.S.
Holder will not be subject to U.S. withholding tax, provided that, in the case
of interest or accrued OID, (i) such Non-U.S. Holder does not own, actually or
constructively, 10% or more of the total combined voting power of all classes of
stock of the Company entitled to vote, within the meaning of Section 871(h)(3)
of the Code, (ii) such Non-U.S. Holder is not a "controlled foreign corporation"
(within the meaning of the Code) that is related, directly or indirectly, to the
Company through stock ownership, (iii) such Non-U.S. Holder is not a bank
receiving interest described in Section 881(c)(3)(A) of the Code, and (iv) the
certification requirements under Section
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871(h) or Section 881(c) of the Code and Treasury Regulations thereunder
(summarized below) are satisfied;
(b) a Non-U.S. Holder of a Note will not be subject to U.S. income tax on
gains realized on the sale, exchange or other disposition of such Note, unless
(i) such Non-U.S. Holder is an individual who is present in the U.S. for 183
days or more in the taxable year of sale, exchange or other disposition, and
certain conditions are met, (ii) such gain is effectively connected with the
conduct by the Non-U.S. Holder of a trade or business in the U.S. and, if
certain tax treaties apply, is attributable to a U.S. permanent establishment
maintained by the Non-U.S. Holder, or (iii) the Non-U.S. Holder is subject to
Code provisions applicable to certain U.S. expatriates; and
(c) a Note held by an individual who is not a citizen or resident of the
U.S. at the time or his death will not be subject to U.S. estate tax as a result
of such individual's death, provided that, at the time of such individual's
death, the individual does not own, actually or constructively, 10% or more of
the total combined voting power of all classes of stock of the Company entitled
to vote and payments with respect to such Note would not have been effectively
connected with the conduct by such individual of a trade or business in the U.S.
To satisfy the certification requirements referred to in (a)(iv) above,
Sections 871(h) and 881(c) of the Code and currently effective Treasury
Regulations thereunder require that either (i) the beneficial owner of a Note
must certify, under penalties of perjury, to the Company or its paying agent, as
the case may be, that such owner is a Non-U.S. Holder and must provide such
owner's name and address, and U.S. taxpayer identification number ("TIN"), if
any, or (ii) a securities clearing organization, bank or other financial
institution that holds customers securities in the ordinary course of its trade
or business (a "Financial Institution") and holds the Note on behalf of the
beneficial owner thereof must certify, under penalties of perjury, to the
Company or its paying agent, as the case may be, that such certificate has been
received from the beneficial owner and must furnish the payor with a copy
thereof. A certificate described in this paragraph is effective only with
respect to payments of interest made to the certifying Non-U.S. Holder after
delivery of the certificate in the calendar year of its delivery and the two
immediately succeeding calendar years. Under temporary Treasury Regulations,
such requirement will be fulfilled if the beneficial owner of a Note certifies
on IRS Form W-8, under penalties of perjury, that it is a Non-U.S. Holder and
provides its name and address, and any Financial Institution holding the Note on
behalf of the beneficial owner files a statement with the withholding agent to
the effect that it has received such a statement from the beneficial owner (and
furnishes the withholding agent with a copy thereof).
Treasury Regulations published on October 14, 1997 (the "New Regulations"),
and pursuant to an announcement made by the Service on March 30, 1998, effective
for payments made after December 31, 1999, will provide alternative methods for
satisfying the certification requirements described above. The New Regulations
also would require, in the case of Notes held by a foreign partnership, that (i)
the certification be provided by the partners rather than by the foreign
partnership and (ii) the partnership provide certain information, including a
U.S. taxpayer identification number. A look-through rule would apply in the case
of tiered partnerships.
If a Non-U.S. Holder of a Note is engaged in a trade or business in the U.S.
and if interest (including OID) on the Note, or gain realized on the sale,
exchange or other disposition of the Note, is effectively connected with the
conduct of such trade or business and, if certain tax treaties apply, is
attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder
in the U.S., the Non-U.S. Holder, although exempt from U.S. withholding tax
(provided that the certification requirements discussed in the next sentence are
met), will generally be subject to regular U.S. income tax on such interest or
gain in the same manner as if it were a U.S. Holder. In lieu of the certificate
described above, such a Non-U.S. Holder will be required, under currently
effective Treasury Regulations, to provide the Company with a properly executed
IRS Form 4224 in order to claim an exemption from withholding tax. In addition,
if such Non-U.S. Holder is a foreign corporation, it may be subject to a branch
profits tax equal to 30% (or such lower
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rate provided by an applicable treaty) of its effectively connected earnings and
profits for the taxable year, subject to certain adjustments. For purposes of
the branch profits tax, interest (including OID) on a Note and any gain
recognized on the sale, exchange or other disposition of a Note will be included
in the earnings and profits of such Non-U.S. Holder if such interest or gain is
effectively connected with the conduct by a Non-U.S. Holder of a trade or
business in the U.S. The New Regulations will change certain of the withholding
reporting and certification requirements described above, effective for payments
made after December 31, 1999, subject to certain grandfathering provisions.
In the unlikely event the Notes were treated as equity, the periodic
distributions received by a Non-U.S. Holder on the Notes would not qualify for
the portfolio interest exemption from U.S. federal income tax described above.
Rather, the periodic distributions would be subject to a 30% U.S. withholding
tax (or reduced rate under an applicable tax treaty) in the case where income on
the Note was not effectively connected with a U.S. trade or business of such
Non-U.S. Holder. Under currently effective Treasury Regulations, a withholding
agent would be required to withhold tax from all distributions paid on the stock
regardless of the company's earnings and profits, but holders could apply for
refunds if such stock's share of the company's earnings and profits were less
than the amount of the distributions. Under the New Regulations, and with
respect to payments made after December 31, 1999, a company may reduce the
amount of withholding required under the foregoing rule if it elects to make a
reasonable estimate of its current and accumulated earnings and profits.
Non-U.S. Holders should consult with their tax advisors regarding U.S. and
foreign tax consequences with respect to the Notes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding of U.S. federal income tax at a rate of 31% may apply to
payments made in respect of a Note to a holder that is not an "exempt recipient"
and that fails to provide certain identifying information (such as the holder's
TIN) in the manner required. Generally, individuals are not exempt recipients,
whereas corporations and certain other entities are exempt recipients. Payments
made in respect of a Note must be reported to the Service, unless the holder is
an exempt recipient or otherwise establishes an exemption.
In the case of payments of interest on a Note to a Non-U.S. Holder, Treasury
Regulations provide that backup withholding and information reporting will not
apply to payments with respect to which either requisite certification has been
received or an exemption has otherwise been established (provided that neither
the Company nor a paying agent has actual knowledge that the holder is a U.S.
Holder or that the conditions of any other exemption are not in fact satisfied).
Payments of the proceeds of the sale of a Note to or through a foreign
office of a broker that is a U.S. person, a "controlled foreign corporation"
(within the meaning of the Code) or a foreign person, 50% or more of whose gross
income from all sources for the three-year period ending with the close of its
taxable year preceding the payment was effectively connected with the conduct of
a trade or business within the U.S., are currently subject to certain
information reporting requirements, unless the payee is an exempt recipient or
such broker has evidence in its records that the payee is a Non-U.S. Holder and
no actual knowledge that such evidence is false and certain other conditions are
met. Temporary Treasury Regulations indicate that such payments are not
currently subject to backup withholding. Under current Treasury Regulations,
payments of the proceeds of a sale of a Note to or through the U.S. office of a
broker will be subject to information reporting and backup withholding unless
the payee certifies under penalties of perjury as to his or her status as a
Non-U.S. Holder and satisfies certain other qualifications (and no agent or
broker who is responsible for receiving or reviewing such statement has actual
knowledge that it is incorrect) and provides his or her name and address or the
payee otherwise establishes an exemption.
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Any amounts withheld under the backup withholding rules from a payment to a
holder of a Note will be allowed as a refund or credit against such holder's
U.S. federal income tax, provided that the required information is furnished to
the Service.
As noted above, the Treasury Department recently issued the New Regulations.
In general, the New Regulations do not significantly alter the substantive
withholding and information reporting requirements but unify current
certification procedures and forms and clarify reliance standards. Under the New
Regulations, special rules apply which permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. Although the New Regulations do not take effect
until January 1, 1999, the Service announced on March 30, 1998, that it will
regard the 1999 calendar year as a transition period for the administration of
the withholding tax system. Accordingly, in enforcing compliance with current
withholding rules for 1999, the Service will take into account the extent to
which a withholding agent makes a good faith effort to transform its information
systems to comply with the New Regulations. A holder of a Note should consult
with its tax advisor regarding the application of the backup withholding rules
to its particular situation, the availability of an exemption therefrom, the
procedure for obtaining such an exemption, if available, and the impact of the
New Regulations on payments made with respect to Notes or Warrants after
December 31, 1999.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NOTES IN LIGHT OF
ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. PROSPECTIVE HOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM
OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE
APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN UNITED STATES OR OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
Reference is made to "The Exchange Offer" above for a description of the
Exchange Offer, including the purpose of the Exchange Offer, the basis upon
which the Exchange Notes are offered and expenses incurred in connection with
the Exchange Offer.
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus with
any resale of such Exchange Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Original Notes where
such Original Notes were acquired as a result of market making activities or
other trading activities. The Company will, during the period ending 180 days
after the Expiration Date, make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
Neither the Company nor any of its affiliates has entered into any
arrangement or understanding with any broker-dealer to distribute the Exchange
Notes and will not receive any proceeds from any sale of Exchange Notes by any
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of the resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker or dealer and/or the purchaser of any such
Exchange Notes. Any broker or dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such Exchange Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Notes and any commissions or concessions
received by any such person may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
other than commissions or concessions of any brokers or dealers and expenses of
counsel for the underwriters or Holders of the Exchange Notes.
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Company by
Kelley Drye & Warren LLP, New York, New York, counsel to the Company. Certain
attorneys in the firm of Kelley Drye & Warren own an aggregate of approximately
$225,000 of the partnership interests in KMC Telecommunications L.P. which owns
40,000 shares of Common Stock of the Company. Certain regulatory matters are
being passed upon for the Company by Swidler & Berlin, Chartered, Washington
D.C.
EXPERTS
The balance sheets of KMC Telecom Holdings, Inc. as of December 31, 1997,
and KMC Telecom Inc. as of December 31, 1996 and the related statements of
operations, redeemable and nonredeemable equity and cash flows for the years
then ended, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing. The
Kamine Multimedia Corp. and KMC Southeast Corp. combined statements of
operations, redeemable and nonredeemable equity and cash flows for the year
ended December 31, 1995 have been audited by KPMG Peat Marwick LLP, independent
auditors, as set forth in their report appearing elsewhere herein and are
included in reliance upon such report given upon the authority of such
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firm as experts in accounting and auditing. The balance sheets of the Melbourne
System (an operating unit of ICG Communications, Inc.) as of December 31, 1995
and 1996 and the related statements of operations and accumulated deficit and
cash flows for the years then ended have been audited by KPMG Peat Marwick LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
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GLOSSARY OF SELECTED TERMS
ACCESS CHARGES. The fees paid by long distance carriers to ILECs for
originating and terminating long distance calls on their local networks.
ATM (Asynchronous Transfer Mode). A switching and transmission technology
that is one of a general class of packet technologies that relay traffic by way
of an address contained within the first five bits of a standard 53 bit-long
packet or cell. ATM-based packet transport was specifically developed to allow
switching and transmission of mixed voice, data and video (sometimes referred to
as "multimedia" information) at varying rates. The ATM format can be used by
many different information systems.
BACKBONE RING. Most CLECs have built their networks in ring configurations
in order to ensure that, if one segment of a network is damaged or cut, the
traffic can be simply re-routed and sent to its destination in the opposite
direction. The Company uses a "self-healing" optical fiber ring architecture
known as SONET.
BACKBONE EXTENSIONS. Fiber optic connections to remote areas not within the
backbone ring network.
BOCS (Bell Operating Companies). The seven local telephone companies
established by the Divestiture. These BOCs were historically prohibited from
providing interLATA services and from manufacturing telecommunications
equipment.
CAP (Competitive Access Provider). A company that provides its customers
with an alternative to the local telephone company for local transport of
private line, special access and interstate transport of switched access
telecommunications services. CAPs are the predecessor companies to the CLECs.
CENTRAL OFFICES. The switching centers or central switching facilities for
the Company and other CLECs and/or ILECs.
CENTREX. Centrex is a service that offers features similar to those of a
Private Branch Exchange (PBX), except the equipment is located at the carrier's
premises and not at the premises of the customer. These features include direct
dialing within a given phone system, voice mail, direct dialing of incoming
calls, and automatic identification of outbound calls, among others. Carriers
with Centrex-type capabilities can provide these value-added services to a wide
range of customers who do not have the size or the funds to support their own
on-site PBX.
CLEC (Competitive Local Exchange Carrier). A CAP that also provides
switched local telecommunications services.
CO-CARRIER STATUS. A relationship between a CLEC and an ILEC that affords
each entity the same access to and right on the other's network, and that
provides access and services on an equal basis.
COLLOCATION. The ability of a CLEC to connect to another LEC's Central
Office. Physical collocation describes the placing of network connection
equipment inside the LEC's central offices. Virtual collocation is an
alternative to physical collocation pursuant to which an LEC permits another LEC
to connect its network to its LEC's central offices on comparable terms, even
though the network connection equipment is not physically located inside the
central offices.
DEDICATED LINES. Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the ILEC's public switched network).
DIALING PARITY. Allows customers to have 1 + and 0+ service no matter which
local or long distance carrier they choose. For example, when MCI first got into
the long distance business, customers had to dial
G-1
<PAGE>
a ten digit prefix before the number they were calling. This was considered
unacceptable to many in the industry who favor "dialing parity."
DIVESTITURE. In 1982, the Department of Justice forced the breakup of the
old Bell System. The Divestiture of AT&T established seven separate Regional
Bell Operating Companies (RBOCs) and created two distinct segments of
telecommunications service: local and long distance. This laid the groundwork
for intense competition in the long distance industry, but essentially created
seven separate regionally-based local exchange service monopolies.
DOMINANT CARRIER. Carriers with the market power to raise prices, curtail
overall output or engage in predatory pricing.
DS-O, DS-1, DS-3. Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit rate of 64 kilobits per
second. DS- 1 service has a bit rate of 1.544 megabits per second and DS-3
service has a bit rate of 45 megabits per second.
FCC. The Federal Communications Commission, an agency of the United States.
FIBER MILE. The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route mile" below.
FIBER OPTICS. Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and many environmental factors that affect copper wiring and
satellite transmission. Fiber optic technology involves sending laser light
pulses across glass strands in order to transmit digital information.
GECC. General Electric Capital Corporation, a New York corporation.
ILECS (INCUMBENT LOCAL EXCHANGE COMPANY). The local access business, until
recently, has remained the domain of the RBOCs and approximately 1,000 ILECs,
including GTE. In general, the ILECs connect end users inter-LATA and also
provide the local portion for most long distance calls. The ILECs are required
to serve all residential and business users within a restricted geographic area
defined as a LATA. The market for local exchange services consists of a number
of services and related charges that include (i) basic dial tone and private
line services; (ii) the local origination or termination of long distinct
telephone calls; and (iii) the variable portion of charges received by the ILECs
for long distance calls originating and terminating within a LATA or for
intra-LATA toll services.
ISDN (INTEGRATED SERVICES DIGITAL NETWORK). A complex networking concept
designed to provide a variety of voice, data and digital interface standards.
Incorporated into ISDN are many new enhanced services, such as high speed data
file transfer, desk top videoconferencing, telepublishing, telecommuting,
telepresence learning (distance learning), remote collaboration (screened
sharing), data network linking and home information services.
ISP (INTERNET SERVICE PROVIDER). A company that provides subscribers basic
access to the Internet, along with additional services that may include E-Mail,
site hosting, web page development, and other Internet-related services, along
with technical support of these services.
INTERCONNECTION DECISIONS. Rulings by the FCC announced in August 1996,
which established a framework of minimum, national rules enabling state public
service commissions and the FCC to begin implementing many of the local
competition provisions of the Telecommunications Act.
INTER-LATA CALLS. Inter-LATA calls are calls that pass from one LATA to
another. Typically, these calls are referred to as long distance calls.
Historically, the ILECs were prohibited from providing Inter-LATA long distance
service.
G-2
<PAGE>
INTRA-LATA CALLS. Intra-LATA calls, also known as short haul calls, are
those local calls that originate and terminate within the same LATA. Although
most states allow some form of Intra-LATA competition, dialing parity still does
not exist, and very little ILEC Intra-LATA revenue has been won by competitors.
IXC. Inter-Exchange Carriers, usually referred to as long distance
providers. There are many facilities-based IXCs including AT&T, MCI, WorldCom,
Sprint and Frontier, as well as many CLECs that are authorized for IXC service.
KILOBIT. One thousand bits of information.
LANS (Local Area Networks). The interconnection of computers for the
purpose of sharing files, programs and various devices such as work stations,
printers and high-speed modems. LANs may include dedicated computers or file
servers that provide a centralized source of shared files and programs.
LATAS. The geographically defined Local Access and Transport Areas in which
ILECs are authorized to provide local exchange services.
LOCAL EXCHANGE CARRIER OR LEC. Provider of local exchange services,
includes the RBOCs, GTE and independent companies such as the Company.
LONG DISTANCE CARRIERS OR IXCS (Interexchange Carriers). Long distance
carriers provide services between local exchanges on an interstate or intrastate
basis. A long distance carrier may offer services over its own or another
carrier's facilities. Major long distance carriers include AT&T, MCI, Sprint,
WorldCom and Frontier, but may also include resellers of long distance capacity.
MEGABIT. One million bits of information.
NUMBER PORTABILITY. The ability of an end user to change local exchange
carriers while retaining the same telephone number. If number portability does
not exist, customers will have to change phone numbers when they change local
exchange carriers. This is considered to be anti-competitive because customers
are reluctant to change numbers, since they may lose business or confuse those
people trying to call them. It is currently being ascertained whether or not
number portability is technologically and economically feasible, and over what
time frame it can be implemented.
PBX. A Private Branch Exchange is a switching system within an office
building which allows calls from outside to be routed directly to the individual
instead of through a central number. This PBX also allows for calling within an
office by way of four digit extensions. Centrex is a service which can simulate
this service from an outside switching source, thereby eliminating the need for
a large capital expenditure on a PBX.
PHYSICAL COLLOCATION. See Collocation.
POPS (Points of Presence). Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PRIVATE LINE. A private, dedicated telecommunications connection to
different locations (excluding long distance carrier POPs).
RBOCS (Regional Bell Operating Companies). Same as BOCs.
RECIPROCAL COMPENSATION. The same compensation of a CLEC for termination of
a local call on the CLEC network, as the CLEC pays the ILEC for termination of
local calls on the ILEC network.
ROUTE MILES. The number of miles of the telecommunications path in which
fiber optic cables are installed as it would appear on a network map.
G-3
<PAGE>
SPECIAL ACCESS. The lease of private, dedicated telecommunications lines or
"circuits" along the network of an ILEC or a CLEC (such as the Company), which
lines or circuits run to and from a long distance carrier's POPs. Examples of
special access services are telecommunications lines running between POPs of a
single long distance carrier, from one long distance carrier POP to the POP of
another long distance carrier or from an end user to its long distance carrier
POP. Special access services do not require the use of switches.
SONET (Synchronous Optical Network). SONET is the electronics and network
architecture which enables transmission of voice, video and data (multimedia) at
very high speeds. This state-of-the-art self-healing ring network offers
advantages over older linear networks in that a cut line or equipment failure
can be overcome by rerouting calls within the network. If the line is cut, the
traffic can be simply reversed and sent to its destination around the other side
of the ring.
SWITCH. A sophisticated computer that accepts instructions from a caller in
the form of a telephone number. Like an address on an envelope, the numbers tell
the switch where to route the call. The switch opens or closes circuits or
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
SWITCHED ACCESS TRANSPORT SERVICES. Transportation of switched traffic
along dedicated lines between the ILEC central offices and long distance carrier
POPs.
SWITCHED SERVICES. These services are the greatest source of revenue for
carriers. While some CLEC networks simply provide special access capacity for
other carriers, those carriers authorized to provide switched service are in a
position to generate significantly greater revenue.
TELECOMMUNICATIONS ACT. The Telecommunications Act of 1996.
TIER I MARKETS. Metropolitan markets in the United States with a population
greater than two million.
TIER II MARKETS. Metropolitan markets in the United States with population
ranging from 750,000 to two million.
TIER III MARKETS. Metropolitan markets in the United States with population
ranging from 100,000 to 750,000.
G-4
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
KMC Telecom Holdings, Inc. and Predecessors
Report of Ernst & Young LLP.............................................................................. F-2
Report of KPMG Peat Marwick LLP.......................................................................... F-3
Balance Sheets, December 31, 1996 and 1997............................................................... F-4
Statements of Operations, Years Ended December 31, 1995, 1996 and 1997................................... F-5
Statements of Redeemable and Nonredeemable Equity, Years Ended December 31, 1995, 1996 and 1997.......... F-6
Statements of Cash Flows, Years Ended December 31, 1995, 1996 and 1997................................... F-7
Notes to Financial Statements............................................................................ F-8
Melbourne System (an operating unit of ICG Communications, Inc.)
Report of KPMG Peat Marwick LLP.......................................................................... F-27
Balance Sheets, December 31, 1995 and 1996............................................................... F-28
Statements of Operations and Accumulated Deficit, Years Ended December 31, 1995
and 1996............................................................................................... F-29
Statements of Cash Flows, Years Ended December 31, 1995 and 1996......................................... F-30
Notes to Financial Statements............................................................................ F-31
Unaudited Condensed Statement of Operations and Accumulated Deficit, Period from January 1, 1997 to July
11, 1997............................................................................................... F-34
Unaudited Condensed Statement of Cash Flows, Period from January 1, 1997 to July 11, 1997................ F-35
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
KMC Telecom Holdings, Inc.
We have audited the balance sheets of KMC Telecom Holdings, Inc. as of
December 31, 1997 and KMC Telecom Inc. as of December 31, 1996, and the related
statements of operations, redeemable and nonredeemable equity and cash flows for
the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of KMC Telecom Holdings, Inc.
as of December 31, 1997 and KMC Telecom Inc. as of December 31, 1996, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey
March 11, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder
Kamine Multimedia Corp. and
KMC Southeast Corp.:
We have audited the accompanying combined statements of operations,
redeemable and nonredeemable equity and cash flows of Kamine Multimedia Corp.
and KMC Southeast Corp. for the year ended December 31, 1995. These combined
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations of Kamine Multimedia
Corp. and KMC Southeast Corp. and their cash flows for the year ended December
31, 1995 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
April 26, 1996
F-3
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
(SEE NOTE 1)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
<S> <C> <C>
1996 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 1,486,514 $ 15,552,903
Accounts receivable, net............................................................ 22,516 1,318,156
Prepaid expenses and other current assets........................................... 142,416 488,719
------------ ------------
Total current assets.................................................................. 1,651,446 17,359,778
Networks and equipment, net........................................................... 12,347,216 71,371,063
Intangible assets, net................................................................ 1,192,582 2,655,207
Deferred financing costs, net......................................................... 1,458,698 4,196,613
Other assets.......................................................................... 65,267 360,646
------------ ------------
$ 16,715,209 $ 95,943,307
------------ ------------
------------ ------------
LIABILITIES, REDEEMABLE AND NONREDEEMABLE EQUITY
Current liabilities:
Accounts payable.................................................................... $ 2,580,347 $ 5,513,487
Accrued expenses.................................................................... 1,334,456 8,127,453
Due to affiliates................................................................... 81,518 47,024
------------ ------------
Total current liabilities............................................................. 3,996,321 13,687,964
Convertible notes payable............................................................. 12,330,006 --
Notes payable......................................................................... -- 51,276,933
Subordinated notes payable............................................................ -- 10,000,000
------------ ------------
Total liabilities..................................................................... 16,326,327 74,964,897
Commitments and contingencies
Redeemable equity:
Redeemable cumulative convertible preferred stock, par value $.01 per share; 498,800
shares authorized; shares issued and outstanding:
123,800 shares of Series A ($12,380,000 liquidation preference)................. -- 18,878,626
150,000 shares of Series C ($15,000,000 liquidation preference)................. -- 14,667,283
25,000 shares of Series D ($2,500,000 liquidation preference)................... -- 2,379,475
Redeemable common stock, 132,773 shares issued and outstanding...................... -- 11,186,705
Redeemable common stock warrants.................................................... -- 539,600
------------ ------------
Total redeemable equity............................................................... -- 47,651,689
Nonredeemable equity (deficiency):
KMC Telecom Holdings, Inc.:
Common stock, par value $.01 per share; 3,000,000 shares authorized, 613,835
shares issued and outstanding................................................... -- 6,138
KMC Telecom Inc.:
Preferred stock, par value $.01 per share; 500,000 shares authorized.............. -- --
Common stock, par value $.01 per share; 2,900,000 shares authorized; 600,000
shares issued and outstanding................................................... 6,000 --
Additional paid-in capital.......................................................... 7,742,063 18,647,276
Unearned compensation............................................................... (1,239,000) (6,521,349)
Accumulated deficit................................................................. (6,120,181) (38,805,344)
------------ ------------
Total nonredeemable equity (deficiency)............................................... 388,882 (26,673,279)
------------ ------------
$ 16,715,209 $ 95,943,307
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
(SEE NOTE 1)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
<S> <C> <C> <C>
1995 1996 1997
------------- ------------- --------------
<CAPTION>
(PREDECESSORS)
<S> <C> <C> <C>
Revenue............................................................. $ -- $ 205,087 $ 3,417,441
Operating expenses:
Network operating costs........................................... -- 448,672 7,735,849
Selling, general and administrative............................... 1,591,159 3,128,972 9,922,804
Stock option compensation expense................................. -- 240,000 13,869,346
Depreciation and amortization..................................... 5,770 286,509 2,505,875
------------- ------------- --------------
Total operating expenses........................................ 1,596,929 4,104,153 34,033,874
------------- ------------- --------------
Loss from operations................................................ (1,596,929) (3,899,066) (30,616,433)
Interest expense, net............................................... 23,463 596,248 2,068,730
------------- ------------- --------------
Net loss............................................................ (1,620,392) (4,495,314) (32,685,163)
Dividends and accretion on redeemable preferred stock............... -- -- (8,904,403)
------------- ------------- --------------
Net loss applicable to common shareholders.......................... $ (1,620,392) $ (4,495,314) $ (41,589,566)
------------- ------------- --------------
------------- ------------- --------------
Net loss per common share........................................... $ (2.70) $ (7.49) $ (64.93)
------------- ------------- --------------
------------- ------------- --------------
Weighted average number of common shares outstanding................ 600,000 600,000 640,568
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
(SEE NOTE 1)
STATEMENTS OF REDEEMABLE AND NONREDEEMABLE EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
REDEEMABLE EQUITY
-----------------------------------------------------------------------------------------------
PREFERRED STOCK
-----------------------------------------------------------------------
SERIES A SERIES C SERIES D COMMON STOCK
---------------------- ---------------------- ----------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- ----------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994.................... -- $ -- -- $ -- -- $ -- -- $ --
Initial capital
contribution, KMC
Southeast Corp. April
19, 1995................
Net loss..................
--------- ----------- --------- ----------- ----------- ---------- --------- -----------
Balance, December 31,
1995.................... -- -- -- -- -- -- -- --
Change in authorized
capital.................
Conversion of
stockholder's loan and
related imputed interest
to equity...............
Issuance of common stock..
Issuance of stock options
to employees............
Amortization of unearned
compensation............
Fair value of stock
options issued to non-
employees...............
Net loss..................
--------- ----------- --------- ----------- ----------- ---------- --------- -----------
Balance, December 31,
1996.................... -- -- -- -- -- -- -- --
Conversion of convertible
notes payable to Series
A Preferred Stock....... 123,800 11,518,527
Issuance of warrants......
Issuance of common stock
and exercise of
warrants................ 132,773 10,863,226
Issuance of Series C
Preferred Stock......... 150,000 14,198,806
Issuance of Series D
Preferred Stock......... 25,000 2,299,648
Accretion on redeemable
equity.................. 7,360,099 468,477 79,827 323,479
Issuance and adjustment to
fair value of stock
options to employees....
Amortization of unearned
compensation............
Increase in fair value of
stock options issued to
non-employees...........
Net loss..................
--------- ----------- --------- ----------- ----------- ---------- --------- -----------
Balance, December 31,
1997.................... 123,800 $18,878,626 150,000 $14,667,283 25,000 $2,379,475 132,773 $11,186,705
--------- ----------- --------- ----------- ----------- ---------- --------- -----------
--------- ----------- --------- ----------- ----------- ---------- --------- -----------
<CAPTION>
NONREDEEMABLE EQUITY
------------------------------------------------------------------
TOTAL COMMON STOCK ADDITIONAL
REDEEMABLE ---------------------- PAID-IN UNEARNED ACCUMULATED
WARRANTS EQUITY SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
----------- ----------- --------- ----------- ----------- -------------- -------------
<S> <C>
Balance, December 31,
1994.................... $ -- $ -- 100 $ 1 $ 999 $ -- $ (4,475)
Initial capital
contribution, KMC
Southeast Corp. April
19, 1995................ 100 1 999
Net loss.................. (1,620,392)
----------- ----------- --------- ----------- ----------- -------------- -------------
Balance, December 31,
1995.................... -- -- 200 2 1,998 -- (1,624,867)
Change in authorized
capital................. 559,800 5,598 (5,598)
Conversion of
stockholder's loan and
related imputed interest
to equity............... 2,267,063
Issuance of common stock.. 40,000 400 3,999,600
Issuance of stock options
to employees............ 1,283,000 (1,283,000)
Amortization of unearned
compensation............ 44,000
Fair value of stock
options issued to non-
employees............... 196,000
Net loss.................. (4,495,314)
----------- ----------- --------- ----------- ----------- -------------- -------------
Balance, December 31,
1996.................... -- -- 600,000 6,000 7,742,063 (1,239,000) (6,120,181)
Conversion of convertible
notes payable to Series
A Preferred Stock....... 11,518,527
Issuance of warrants...... 2,025,277 2,025,277
Issuance of common stock
and exercise of
warrants................ (1,500,277) 9,362,949 13,835 138
Issuance of Series C
Preferred Stock......... 14,198,806
Issuance of Series D
Preferred Stock......... 2,299,648
Accretion on redeemable
equity.................. 14,600 8,246,482 (8,246,482)
Issuance and adjustment to
fair value of stock
options to employees.... 14,295,658 (14,295,658)
Amortization of unearned
compensation............ 9,013,309
Increase in fair value of
stock options issued to
non-employees........... 4,856,037
Net loss.................. (32,685,163)
----------- ----------- --------- ----------- ----------- -------------- -------------
Balance, December 31,
1997.................... $ 539,600 $47,651,689 613,835 $ 6,138 $18,647,276 $ (6,521,349) $(38,805,344)
----------- ----------- --------- ----------- ----------- -------------- -------------
----------- ----------- --------- ----------- ----------- -------------- -------------
<CAPTION>
TOTAL
NONREDEEMABLE
EQUITY
(DEFICIENCY)
---------------
Balance, December 31,
1994.................... $ (3,475)
Initial capital
contribution, KMC
Southeast Corp. April
19, 1995................ 1,000
Net loss.................. (1,620,392)
---------------
Balance, December 31,
1995.................... (1,622,867)
Change in authorized
capital................. --
Conversion of
stockholder's loan and
related imputed interest
to equity............... 2,267,063
Issuance of common stock.. 4,000,000
Issuance of stock options
to employees............ --
Amortization of unearned
compensation............ 44,000
Fair value of stock
options issued to non-
employees............... 196,000
Net loss.................. (4,495,314)
---------------
Balance, December 31,
1996.................... 388,882
Conversion of convertible
notes payable to Series
A Preferred Stock.......
Issuance of warrants......
Issuance of common stock
and exercise of
warrants................ 138
Issuance of Series C
Preferred Stock.........
Issuance of Series D
Preferred Stock.........
Accretion on redeemable
equity.................. (8,246,482)
Issuance and adjustment to
fair value of stock
options to employees.... --
Amortization of unearned
compensation............ 9,013,309
Increase in fair value of
stock options issued to
non-employees........... 4,856,037
Net loss.................. (32,685,163)
---------------
Balance, December 31,
1997.................... $ (26,673,279)
---------------
---------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
(SEE NOTE 1)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
<S> <C> <C> <C>
1995 1996 1997
------------- -------------- --------------
OPERATING ACTIVITIES
Net loss.......................................................... $ (1,620,392) $ (4,495,314) $ (32,685,163)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................... 5,770 286,509 2,505,875
Non-cash interest expense....................................... -- 697,644 611,478
Non-cash stock option compensation expense...................... -- 240,000 13,869,346
Changes in assets and liabilities:
Accounts receivable........................................... -- (22,516) (1,295,640)
Prepaid expenses and other current assets..................... (4,542) (137,874) (346,303)
Accounts payable.............................................. 65,516 789,100 2,933,140
Accrued expenses.............................................. 316,874 417,138 6,061,307
Due to affiliates............................................. 479,967 (409,549) (34,494)
Other assets.................................................. (22,226) (52,428) (295,379)
------------- -------------- --------------
Net cash used in operating activities............................. (779,033) (2,687,290) (8,675,833)
------------- -------------- --------------
INVESTING ACTIVITIES
Construction of networks and purchases of equipment............... (1,772,802) (9,110,989) (59,145,924)
Cash paid for acquisition of Melbourne Network.................... -- -- (2,000,000)
Acquisitions of franchises, authorizations and related assets..... (147,286) (1,063,347) (1,846,423)
------------- -------------- --------------
Net cash used in investing activities............................. (1,920,088) (10,174,336) (62,992,347)
------------- -------------- --------------
FINANCING ACTIVITIES
Proceeds from stockholder loans................................... 2,727,400 3,542,161 --
Repayment of stockholder loans.................................... -- (4,181,561) --
Proceeds from notes payable, net of issuance costs................ -- 10,953,170 59,872,751
Proceeds from issuance of common stock and exercise of warrants,
net of issuance costs........................................... 1,000 4,000,000 9,363,364
Proceeds from issuance of preferred stock, net of issuance
costs........................................................... -- -- 16,498,454
------------- -------------- --------------
Net cash provided by financing activities......................... 2,728,400 14,313,770 85,734,569
------------- -------------- --------------
Net increase in cash and cash equivalents......................... 29,279 1,452,144 14,066,389
Cash and cash equivalents, beginning of year...................... 5,091 34,370 1,486,514
------------- -------------- --------------
Cash and cash equivalents, end of year............................ $ 34,370 $ 1,486,514 $ 15,552,903
------------- -------------- --------------
------------- -------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest, net of amounts
capitalized..................................................... $ 56,537 $ 96,974 $ 766,236
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
KMC Telecom Holdings, Inc. ("KMC Holdings") is a holding company formed
primarily to own all of the shares of its operating subsidiaries, KMC Telecom
Inc. ("KMC Telecom"), KMC Telecom II, Inc. ("KMC Telecom II"), and KMC Telecom
of Virginia Inc. On September 22, 1997, the stockholders of KMC Telecom
exchanged all of their KMC Telecom common and preferred stock for equal numbers
of shares of common and preferred stock of KMC Holdings.
KMC Holdings and its subsidiaries, KMC Telecom, KMC Telecom II and KMC
Telecom of Virginia, Inc. are collectively referred to herein as the Company.
The predecessors to KMC Telecom, Kamine Multimedia Corp. and KMC Southeast
Corp. (the "Predecessors") were incorporated in the state of Delaware on May 10,
1994 and April 19, 1995, respectively. The Predecessors were established through
the purchase of 100 shares of common stock of each company by Harold N. Kamine
("Kamine") for $1,000 per company. Effective May 23, 1996, Kamine Multimedia
Corp. was merged into KMC Southeast Corp., and the surviving corporation was
renamed KMC Telecom Inc.
The Company is a facilities-based competitive local exchange carrier
providing telecommunications and data services to its customers; principally
business, industry, institutions, government and other users, primarily in the
Southeastern and Midwestern United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
As noted above, effective May 23, 1996, KMC Telecom was the successor
resulting from the merger of the Predecessors, and effective September 22, 1997,
KMC Telecom became a wholly-owned subsidiary of KMC Holdings. The accompanying
financial statements include the consolidated financial position and results of
operations of KMC Holdings and its subsidiaries subsequent to September 22,
1997, the financial position and results of operations of KMC Telecom from May
23, 1996, and the combined results of operations of the Predecessors from
January 1, 1995. All significant intercompany accounts and transactions have
been eliminated.
REVENUE RECOGNITION
Revenue is recognized in the period the service is provided.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
NETWORKS AND EQUIPMENT
Networks and equipment are stated at cost, net of accumulated depreciation.
Depreciation is provided over the estimated useful lives of the respective
assets using the straight-line method for financial statement reporting
purposes.
F-8
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimated useful lives of the Company's principal classes of assets are
as follows:
<TABLE>
<S> <C>
Networks:
Fiber optic systems........................................ 20 years
Telecommunications equipment............................... 10 years
Furniture and fixtures....................................... 5 years
Leasehold improvements....................................... Life of lease
</TABLE>
INTANGIBLE ASSETS
Costs incurred in developing new networks or expanding existing networks,
including negotiation of rights-of-way and obtaining regulatory authorizations
are deferred and amortized over the initial term of the franchise.
Costs incurred to obtain city franchises are deferred by the Company and
amortized over the initial term of the franchise.
DEFERRED FINANCING COSTS
The Company capitalizes issuance costs related to its debt. Such costs are
amortized utilizing the interest method over the lives of the related debt.
OTHER ASSETS
Other assets are comprised principally of security deposits and other
deposits.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share ("Statement 128"). Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented in accordance with the provisions of Statement 128. The adoption of
Statement 128 had no effect on previously reported earnings per share. Diluted
earnings per share has not been presented for any period, as the impact of
including outstanding options and warrants would be anti-dilutive. The
Predecessors' earnings per share have been computed as if the May 23, 1996
merger and the related change in authorized and issued common stock had occurred
as of May 10, 1994 (date of inception).
INCOME TAXES
Through June 4, 1996, the Predecessors and KMC Telecom elected to be treated
as "S" Corporations for federal income tax purposes. As a result, any income or
loss generated through such date was allocated directly to the Stockholder.
Effective June 5, 1996, KMC Telecom revoked its "S" Corporation election.
F-9
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company uses the liability method to account for income taxes. Deferred
taxes are recorded based upon differences between the financial statement and
tax basis of assets and liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of their short-term nature. The
carrying amounts of long-term debt approximate fair value because their interest
rates are reflective of rates that the Company would be able to obtain on debt
with similar terms and conditions.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations or expected to be disposed of when events and circumstances indicate
that the cash flows expected to be derived from those assets are less than the
carrying amounts of those assets. No such events and circumstances have
occurred.
STOCK-BASED COMPENSATION
As permitted by FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("Statement 123"), the Company has elected to follow Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB
25") and related interpretations in accounting for its employee stock option
plans. Under APB 25, no compensation expense is recognized at the time of option
grant if the exercise price of the employee stock option is fixed and equals or
exceeds the fair market value of the underlying common stock on the date of
grant, and the number of shares to be issued pursuant to the exercise of such
option are known and fixed at the grant date. As more fully described in Note 8,
KMC Telecom's outstanding stock options are not considered fixed options under
APB 25.
F-10
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
3. NETWORKS AND EQUIPMENT
Networks and equipment are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Fiber optic systems............................................ $ 4,343,027 $ 40,362,978
Telecommunications equipment................................... 838,892 7,530,858
Furniture and fixtures......................................... 264,201 1,517,777
Leasehold improvements......................................... 159,931 792,039
Construction-in-progress....................................... 7,003,396 23,551,719
------------- -------------
12,609,447 73,755,371
Less accumulated depreciation.................................. (262,231) (2,384,308)
------------- -------------
$ 12,347,216 $ 71,371,063
------------- -------------
------------- -------------
</TABLE>
Costs capitalized during the development of the Company's networks include
amounts incurred related to network engineering, design and construction and
capitalized interest. Capitalized interest related to the construction of the
networks during the years ended December 31, 1995, 1996 and 1997 amounted to
approximately $37,000, $103,000, and $854,000, respectively.
For the years ended December 31, 1995, 1996 and 1997, depreciation expense
was $2,181, $260,050 and $2,122,077, respectively.
4. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Franchise costs................................................... $ 694,600 $ 1,342,016
Authorizations and rights-of-ways................................. 362,770 1,150,505
Building access agreements and other.............................. 155,872 567,144
------------ ------------
1,213,242 3,059,665
Less accumulated amortization..................................... (20,660) (404,458)
------------ ------------
$ 1,192,582 $ 2,655,207
------------ ------------
------------ ------------
</TABLE>
5. DEFERRED FINANCING COSTS
As of December 31, 1997, the Company has capitalized an aggregate of
approximately $4.0 million (of which $600,000 had been capitalized as of
December 31, 1996) of issuance costs related to its $70 million senior credit
facility and its $10 million subordinated note payable, as well as approximately
$732,000 of costs related to the Company's January 1998 issuance of senior
discount notes and warrants.
Costs related to the senior credit facility and subordinated note payable
are being amortized utilizing the interest method, and approximately $561,000 of
such costs were charged to interest expense during the year ended December 31,
1997.
F-11
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. DEFERRED FINANCING COSTS (CONTINUED)
At December 31, 1996, the Company had capitalized an aggregate of
approximately $1,047,000 of issuance costs related to the convertible notes
payable. For the year ended December 31, 1996, $189,000 of such costs were
charged to interest expense. The net unamortized balance of such costs were
charged to additional paid-in capital in January 1997 upon the conversion of
such notes to preferred stock (see Note 6).
6. CONVERTIBLE NOTES PAYABLE
KMC Telecom entered into an Amended and Restated Note Purchase and
Investment Agreement dated as of October 22, 1996 and amended as of December 30,
1996 (the "Agreement") with Nassau Capital Partners L.P. and NAS Partners I
L.L.C. ("Nassau Capital" and "Nassau Partners", respectively, collectively
referred to as "Nassau") pursuant to which convertible secured notes payable of
$5,941,320 and $58,680 were issued on October 22, 1996 to Nassau Capital and
Nassau Partners, respectively. Additionally, the Agreement amended and restated
certain terms related to convertible secured notes payable of $5,952,616 and
$47,384 issued on June 6, 1996 to Nassau Capital and Nassau Partners,
respectively. (The convertible secured notes payable issued on June 6, 1996 and
October 22, 1996 are collectively referred to herein as the "Convertible
Notes".)
The Convertible Notes bore interest at an annual rate of 7%, payable
quarterly. At the option of KMC Telecom, such interest could be paid either in
cash or through a payment in-kind, increasing the outstanding principal amount
due under the Convertible Notes. KMC Telecom had reflected the $330,006 of
interest due through December 31, 1996 as additional principal.
Concurrent with the January 21, 1997 receipt of the proceeds of KMC
Telecom's initial borrowing under the AT&T Facility, the Convertible Notes,
including accrued interest through that date, aggregating approximately
$12,380,000 were converted into 123,800 shares of Series A Cumulative
Convertible Preferred Stock of KMC Telecom (such stock was exchanged for an
equal number of shares of Series A Preferred Stock of KMC Holdings on September
22, 1997). In connection with the conversion, net unamortized deferred financing
costs of approximately $862,000 were charged against redeemable preferred stock.
7. LONG-TERM DEBT
AT&T FACILITY
KMC Telecom entered into a Loan and Security Agreement dated as of December
31, 1996 with AT&T Commercial Finance Corporation ("AT&T Finance") which
provided for borrowings up to $35 million to fund construction and operating
costs of networks in various cities.
On September 22, 1997, KMC Telecom and KMC Telecom II entered into an
Amended and Restated Loan and Security Agreement (the "AT&T Facility") with AT&T
Finance. Under the AT&T Facility, AT&T Finance agreed to lend KMC Telecom and
KMC Telecom II (the "Borrowers") up to an aggregate of $70 million (the
"Commitment Amount") to be used for the construction of fiber optic
telecommunications networks in certain markets, subject to certain conditions.
Disbursements under the AT&T Facility are available for engineering, design and
backbone construction with additional amounts to finance expansion of networks
operated by KMC Telecom (which comprise the original eight networks), and up to
F-12
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. LONG-TERM DEBT (CONTINUED)
55% of the cost of switches and electronic equipment, not to exceed $15 million,
purchased for networks to be operated by KMC Telecom II. The total amount loaned
for any network may not exceed the total property, plant and equipment book
value for such network. At December 31, 1997, an aggregate of $51,276,933 was
outstanding under this facility, of which $10,800,784 had been borrowed by KMC
Telecom II.
The AT&T Facility will mature no later than October 1, 2005. Escalating
quarterly payments are due under the facility beginning January 1, 2000.
Borrowings under the AT&T Facility will bear interest on the outstanding
principal amount. The interest rate, prior to October 1, 1999 will be the
commercial paper rate (as defined in the AT&T Facility) plus 5%. After October
1, 1999, the interest rate will be either a fixed rate equal to 5.5% plus the
average rate of U.S. Treasury Notes maturing the same month in which the
remaining average life of the loans ends, or a variable rate equal to either the
commercial paper rate plus 5%, or the LIBOR rate plus 5%, at Borrowers' option.
If the Borrowers default on any payment due under the AT&T Facility, the
interest rate will increase by four percentage points. An annual administration
fee of $100,000 is payable on the first payment date of each calendar year
beginning January 1, 1998.
KMC Holdings has unconditionally guaranteed the repayment of the AT&T
Facility when such repayment is due, whether at maturity, upon acceleration, or
otherwise. KMC Holdings has agreed to pay all amounts outstanding under the AT&T
Facility, on demand, upon the occurrence and during the continuation of any
event of default (as defined therein). The Company has pledged the shares of KMC
Telecom and KMC Telecom II to AT&T Finance to secure its obligations under the
guaranty. In addition, each of the Borrowers has pledged all of its assets to
AT&T Finance. Accordingly, if there were an event of default under the AT&T
Facility, the lenders thereunder would be entitled to payment in full and could
foreclose on the assets of the Borrowers and the holders of the senior discount
notes (issued in January 1998) would have no right to share in such assets.
AT&T Finance has the right to require prepayment of all loans made under the
AT&T Facility in the event of a change in control (as defined in the AT&T
Facility). Events triggering a change in control include KMC Holdings ceasing to
own 100% of the outstanding capital stock of each of the Borrowers (except as a
result of the exercise of warrants by AT&T Finance or its affiliates, successors
or assigns or the exercise of stock options under KMC Telecom's existing option
plan). AT&T Finance has the right, in its discretion, to require repayment of
the outstanding obligations of KMC Telecom II at the closing of a debt offering
by KMC Holdings with gross cash proceeds of at least $50 million. On January 29,
1998, the $10,800,784 borrowed by KMC Telecom II was repaid in full with a
portion of the proceeds of KMC Holdings' issuance of senior discount notes and
warrants. After repayment of all amounts borrowed by KMC Telecom II on the
Closing Date: (i) KMC Telecom II is no longer a borrower or an obligor under the
AT&T Facility, (ii) KMC Telecom II is no longer subject to the covenants and
restrictions referred to in the immediately succeeding paragraph and (iii) the
stock and assets of KMC Telecom II have been released from the pledge to AT&T
Finance.
The AT&T Facility contains a number of negative covenants including, among
others, covenants restricting the ability of the Borrowers to consolidate or
merge with any person, sell or lease assets not in the ordinary course of
business, sell or enter into long term leases of dark fiber, redeem stock, pay
dividends, create subsidiaries, transfer any permits or licenses, or incur
additional indebtedness or act as guarantor for the debt of any person. The AT&T
Facility also contains a number of affirmative covenants including, among
others, covenants requiring the Borrowers to preserve and maintain corporate
existence,
F-13
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. LONG-TERM DEBT (CONTINUED)
comply with laws, maintain their properties, maintain insurance, pay taxes,
furnish AT&T Finance with copies of financial statements and inform the lender
of litigation.
The Borrowers are required to comply with certain financial tests and
maintain certain financial ratios, including, among others, a requirement that
at the end of each fiscal quarter of each of the Borrowers commencing with the
fiscal quarter ending September 30, 1997 through and including the fiscal
quarter ending December 31, 1999 the ratio of available cash (defined as cash
available plus the amount available under the AT&T Facility for which all
conditions precedent have been fulfilled) plus, only if positive, EBITDA to
lender debt service (as defined below) shall equal at least 1.00 to 1.00. Lender
debt service shall be measured on the last day of each fiscal quarter and shall
equal the sum of (i) cash interest expense for the immediately succeeding four
fiscal quarters, to be calculated by giving effect to the total debt outstanding
to AT&T Finance on the last day of such fiscal quarter, with such debt deemed to
be accruing interest over the next four fiscal quarters at an interest rate
equal to the interest rate in effect on such last day of such fiscal quarter,
and (ii) scheduled principal payments for the immediately succeeding four fiscal
quarters. At the end of each fiscal quarter ending March 31, 2000 through June
30, 2001, inclusive, the ratio of the sum of the available cash, plus, only if
positive, EBITDA to lender debt service must equal at least 1.25 to 1.00.
At the end of each fiscal quarter of KMC Telecom during each period set
forth below, the ratio of EBITDA of KMC Telecom for the immediately preceding
four fiscal quarters to lender debt service shall equal at least the ratio set
forth below:
<TABLE>
<CAPTION>
FISCAL PERIODS RATIO
- ------------------------------------------------------------------------------- -------------
<S> <C>
July 1, 2001--December 31, 2001................................................ 1.25 to 1.00
January 1, 2002--December 31, 2002............................................. 1.35 to 1.00
January 1, 2003--and each fiscal quarter thereafter............................ 1.75 to 1.00
</TABLE>
Failure to satisfy any of the financial covenants will constitute an event
of default under the AT&T Facility, permitting AT&T Finance, after notice, to
terminate the commitment and/or accelerate payment of outstanding indebtedness
notwithstanding the ability of the Borrowers to meet their debt service
obligations. The AT&T Facility also includes other customary events of default,
including, without limitation, a cross-default to other indebtedness, material
undischarged judgments and bankruptcy.
The Company is required to make twenty-four consecutive quarterly
installment payments commencing January 1, 2000 as follows, assuming that the
full $70 million has been borrowed (quarterly payments will be reduced pro rata
for any unused portion of the $70 million Commitment Amount):
<TABLE>
<CAPTION>
QUARTERLY QUARTERLY
PAYMENT DATES PRINCIPAL AMOUNT
- --------------------------------------------------------------------- -----------------------
<S> <C>
January 1, 2000--October 1, 2002..................................... $ 1,750,000
January 1, 2003--October 1, 2004..................................... 3,500,000
January 1, 2005--July 1, 2005........................................ 5,250,000
October 1, 2005...................................................... Remaining balance
</TABLE>
Additionally, the AT&T Facility restricts the ability of KMC Telecom to pay
dividends to, or to pay principal or interest on loans from, KMC Holdings. Such
restrictions could adversely affect the Company's
F-14
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. LONG-TERM DEBT (CONTINUED)
liquidity and ability to meet its cash requirements, including its ability to
repay the senior discount notes (issued in January 1998).
The AT&T Facility requires that the Company purchase interest rate cap
agreements under which, if the commercial paper rate (as defined therein) or
LIBOR rises above 12%, the Company will receive payments to offset the higher
interest rates due on the debt. As a result, the Company has entered into an
interest rate cap agreement with a bank which expires on December 1, 1998, to
hedge the Company's interest expense on $35 million of its indebtedness under
the AT&T Facility.
SUPPLEMENTAL AT&T FACILITY
On September 22, 1997, KMC Telecom and KMC Telecom II obtained a
subordinated term loan (the "Supplemental AT&T Facility") from AT&T Finance with
an original principal amount of $10 million. The proceeds from the loan were
used for working capital and general corporate purposes. The loan bears interest
at the option of the Company at the commercial paper rate plus 6% or the LIBOR
rate plus 6%, payable quarterly. The Supplemental AT&T Facility is due in full
upon the closing of a debt offering with gross cash proceeds of at least $50
million or in escalating quarterly installments commencing January 2000. On
January 29, 1998, the entire $10 million outstanding under this facility was
repaid in full with a portion of the proceeds of the Company's issuance of
senior discount notes and warrants.
The Supplemental AT&T Facility is generally subject to the same terms,
covenants and restrictions as the AT&T Facility.
8. REDEEMABLE AND NONREDEEMABLE EQUITY
KMC TELECOM PREFERRED STOCK
On January 21, 1997, in connection with the initial funding of the AT&T
Facility, the Convertible Notes were converted into 123,800 shares of Series A
Cumulative Convertible Preferred Stock of KMC Telecom with an aggregate
liquidation value of $12,380,000. Effective September 22, 1997, all of the
shares of Series A Cumulative Convertible Preferred Stock were exchanged for a
similar number of shares of Series A Cumulative Convertible Preferred Stock of
KMC Holdings.
Pursuant to an agreement with Nassau, all dividends accumulated on the
Series A Cumulative Convertible Preferred Stock of KMC Telecom through September
22, 1997 ($592,000) were paid upon the closing of KMC Holdings' issuance of
senior discount notes and warrants on January 29, 1998.
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
There are 123,800 shares of Series A Cumulative Convertible Preferred Stock
of KMC Holdings ("Series A Preferred Stock") authorized and outstanding. Series
A Preferred Stock has a liquidation preference of $100 per share and an annual
dividend equal to 7.0% of the liquidation preference, payable quarterly, when
and if declared by the Board of Directors out of funds legally available
therefor. Unpaid dividends accumulate and the unpaid amount increases at the
annual rate of 7.0%, compounded quarterly. All accumulated but unpaid dividends
will be paid upon the occurrence of a Realization Event (defined as (i) an
initial public offering with gross proceeds of at least $40 million or (ii) sale
of substantially all the assets or stock of the Company or the merger or
consolidation of the Company into one or more other
F-15
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
8. REDEEMABLE AND NONREDEEMABLE EQUITY (CONTINUED)
corporations). As of December 31, 1997, dividends in arrears on the Series A
Preferred Stock aggregated $216,000. Notwithstanding the foregoing, pursuant to
an agreement among Nassau and the Company dated September 22, 1997, Nassau has
agreed to forego the payment of dividends from September 22, 1997 through the
date on which Nassau disposes of its interest in the Company; provided that at
the time of such disposition Nassau has received not less than a 10% annual
compound rate of return during the period it held the Series A Preferred Stock.
Series A Preferred Stock is convertible into Common Stock at a conversion
price equal to $20.63 per share of Common Stock, subject to adjustment upon the
occurrence of certain events. Holders of Series A Preferred Stock may convert
all or part of such shares to Common Stock at any time and from time to time.
Upon conversion, subject to the aforementioned agreement dated September 22,
1997 to forego the payment of dividends, the holders are entitled to receive a
cash payment of the accumulated but unpaid dividends; provided, however, that
the Company may substitute common shares having a fair market value equal to the
amount of such cash payment if the conversion occurs before a Realization Event.
Series A Preferred Stock will automatically convert into Common Stock upon the
occurrence of a Qualified Public Offering (defined as the first sale of Common
Stock pursuant to a registration statement filed under the Securities Act in
which the Company receives gross proceeds of at least $40 million, provided that
the per share price at which such shares are sold in such offering is at least
four times the conversion price of the Series A Preferred Stock).
The holders of Series A Preferred Stock, except as otherwise provided in the
Company's Certificate of Incorporation, are entitled to vote on all matters
voted on by holders of Common Stock. Each share of Series A Preferred Stock is
entitled to a number of votes equal to the number of shares of Common Stock into
which such share is convertible. Without the prior consent of two-thirds of the
shares of Series A Preferred Stock, among other things, the Company may not
increase the number of shares of preferred stock (of whatever series) authorized
for issuance, or declare or pay any dividends on shares of Common Stock or other
junior shares.
SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK
There are 350,000 shares of Series C Cumulative Convertible Preferred Stock
of KMC Holdings ("Series C Preferred Stock") authorized of which 150,000 shares
are outstanding at December 31, 1997. Such shares were issued in November 1997
generating aggregate gross proceeds of $15 million. Series C Preferred Stock has
a liquidation preference of $100 per share and an annual dividend equal to 7.0%
of the liquidation preference, payable quarterly, when and if declared by the
Board of Directors out of funds legally available therefor. Unpaid dividends
accumulate and the unpaid amount increases at the annual rate of 7.0%,
compounded quarterly. All accumulated but unpaid dividends will be paid upon the
occurrence of a Realization Event. As of December 31, 1997, dividends in arrears
on the Series C Preferred Stock aggregated $161,000. Notwithstanding the
foregoing, pursuant to the Purchase Agreement among the Company, Nassau and the
holders of the Series C Preferred Stock dated as of October 31, 1997, each
current holder of Series C Preferred Stock has agreed to forego the payment of
dividends that accumulate during the period from issuance through the date on
which such holder disposes of its interest in the Company; provided that at the
time of such disposition it has received not less than a 10% annual compound
rate of return during such period.
F-16
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
8. REDEEMABLE AND NONREDEEMABLE EQUITY (CONTINUED)
Series C Preferred Stock is convertible into Common Stock at a conversion
price equal to (i) from the date of initial issuance to but excluding the date
which is 30 months after the date of such initial issuance, $52.50 per share of
Common Stock; provided, however, that if a Realization Event occurs during such
30-month period the conversion price will be equal to a fraction the numerator
of which is (A) the consideration per share of Common Stock (on a fully diluted
basis) received in connection with such Realization Event, and the denominator
of which is (B) 1.30 raised to a number equal to the number of years (or
fraction thereof) from the date of initial issuance of the Series C Preferred
Stock until the date of such Realization Event, but in no case greater than
$52.50 nor less than $42.18 per share of Common Stock and (ii) from and after
the date which is 30 months after the date of initial issuance, $42.18, subject
to adjustment upon the happening of certain events. Holders of Series C
Preferred Stock may convert all or part of such shares to Common Stock at any
time and from time to time. Upon conversion, subject to the aforementioned
agreement dated October 31, 1997 to forego the payment of dividends, the holders
are entitled to receive a cash payment of the accumulated but unpaid dividends;
provided, however, that the Company may substitute common shares having a fair
market value equal to the amount of such cash payment if the conversion occurs
before a Realization Event. Series C Preferred Stock will automatically convert
into Common Stock upon the occurrence of a Qualified Public Offering.
The holders of Series C Preferred Stock, except as otherwise provided in the
Company's Certificate of Incorporation, are entitled to vote on all matters
voted on by holders of Common Stock. Each share of Series C Preferred Stock is
entitled to a number of votes equal to the number of shares of Common Stock into
which such share is convertible. Without the prior consent of two-thirds of the
shares of Series C Preferred Stock, among other things, the Company may not
increase the number of shares of preferred stock (of whatever series) authorized
for issuance, or declare or pay any dividends on shares of Common Stock or other
junior shares.
The Series C Preferred Stock is subject to redemption at the option of the
Company, in whole but not in part, in connection with an "Acquisition Event." An
Acquisition Event is defined to mean any merger or consolidation of the Company
with any other company, person or entity, whether or not the Company is the
surviving entity, as a result of which the holders of the Company's Common Stock
(determined on a fully diluted basis) will hold less than a majority of the
outstanding shares of Common Stock or other equity interest of the Company,
person or entity resulting from such transaction, or any parent of such entity.
SERIES D CUMULATIVE CONVERTIBLE PREFERRED STOCK
There are 25,000 shares of Series D Cumulative Convertible Preferred Stock
of KMC Holdings ("Series D Preferred Stock") authorized, of which 25,000 shares
are outstanding at December 31, 1997. Such shares were issued to Nassau in
November 1997 generating aggregate gross proceeds of $2.5 million. In January
1998, Nassau exercised its conversion rights and converted its shares of Series
D Preferred Stock into an equal number of shares of Series C Preferred Stock.
Series D Preferred Stock has a liquidation preference of $100 per share and an
annual dividend equal to 7.0% of the liquidation preference, payable quarterly,
when and if declared by the Board of Directors out of funds legally available
therefor. Unpaid dividends accumulate and the unpaid amount increases at the
annual rate of 7.0%, compounded quarterly. All accumulated but unpaid dividends
will be paid upon the occurrence of a
F-17
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
8. REDEEMABLE AND NONREDEEMABLE EQUITY (CONTINUED)
Realization Event. As of December 31, 1997, dividends in arrears on the Series D
Preferred Stock aggregated $27,000.
KMC TELECOM COMMON STOCK
On November 12, 1996, KMC Telecommunications L.P., a limited partnership
owned by Kamine and Kathleen Kamine, purchased 40,000 shares of Class A Common
Stock, $.01 par value, of KMC Telecom for the purchase price of $4 million.
Using the proceeds from this equity issuance, KMC Telecom repaid in full its
indebtedness to Kamine of $4 million.
On September 22, 1997, all of the outstanding shares of Class A Common Stock
of KMC Telecom were exchanged for a similar number of shares of Common Stock of
KMC Holdings.
COMMON STOCK
Holders of Common Stock of the Company are entitled to one vote for each
share held on all matters submitted to a vote of stockholders, except with
respect to the election of Directors. Except as otherwise required by law,
actions at the Company's stockholders meetings (held at least annually), require
the affirmative vote of a majority of the shares represented at the meeting, a
quorum being present. Holders of Common Stock are entitled, subject to the
preferences of preferred stock, to receive such dividends, if any, as may be
declared by the Board of Directors out of funds legally available therefor.
Without the prior consent of two-thirds of the shares of Series A Preferred
Stock and two-thirds of the shares of Series C Preferred Stock, the Company may
not declare or pay any dividends on its Common Stock. Except as discussed under
"Redemption Rights" below, the holders of Common Stock have no preemptive,
redemption or conversion rights. Pursuant to provisions contained in the
Company's Certificate of Incorporation and an Amended and Restated Stockholders
Agreement dated as of October 31, 1997, among the Company, Kamine, Nassau, AT&T
Credit Corporation ("AT&T Credit"), General Electric Capital Corporation
("GECC"), and CoreStates Bank, N.A. ("CoreStates") ( the "Stockholders'
Agreement"), until Kamine and Nassau cease to own Common Stock or preferred
stock convertible into Common Stock representing at least five percent of the
outstanding shares of Common Stock (assuming all convertible securities are
converted), Kamine and Nassau have special rights to elect Directors. Kamine's
shares of Common Stock currently have the right to elect three Directors, one of
whom must be the Company's President and Chief Executive Officer. Nassau's
shares currrently have the right to elect three Directors. A Director elected by
Kamine's shares or Nassau's shares may not be removed except with the
affirmative vote of a majority of the applicable shares of capital stock. If
Kamine or Nassau transfer their shares of capital stock, the number of Directors
their shares are entitled to elect decreases. If Kamine or Nassau hold less than
5% of the shares of capital stock initially issued to them, the shares of such
person have no further right to elect specific Directors. Directors other than
those elected by vote of Kamine's shares or Nassau's shares are elected by
holders of Common Stock and holders of preferred stock that are entitled to vote
in the election of Directors. If a default relating to payment occurs under the
AT&T Facility and continues uncured for 90 days, the holders of Series C
Preferred Stock are entitled to elect two additional Directors, who will serve
until the default is cured.
In connection with the reorganization on September 22, 1997, Nassau and
Kamine each received 13,835 shares of Common Stock of KMC Holdings.
F-18
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
8. REDEEMABLE AND NONREDEEMABLE EQUITY (CONTINUED)
On September 22, 1997, KMC Holdings sold to AT&T Credit 91,268 shares of
Common Stock for gross proceeds of $10 million.
REDEMPTION RIGHTS
Pursuant to the Stockholders' Agreement, each of Nassau, CoreStates, AT&T
Credit and GECC has a "put right" entitling it to have the Company repurchase
its preferred and common shares for the fair market value of such shares if no
Liquidity Event (defined as (i) an initial public offering with gross proceeds
of at least $40.0 million, (ii) the sale of substantially all of the stock or
assets of the Company or (iii) the merger or consolidation of the Company with
one or more other corporations) has taken place by the later of (x) October 22,
2003 or (y) 90 days after the final maturity date of the senior discount notes
(issued in January 1998, with a stated maturity date of January 2008).
CoreStates, GECC and AT&T Credit may not exercise such put rights unless Nassau
has exercised its put right. The restrictive covenants of the senior discount
notes limit the Company's ability to repurchase such shares. All of the shares
of preferred and common stock subject to such "put right" are presented as
redeemable equity in the accompanying balance sheet at December 31, 1997.
The redeemable preferred stock, redeemable common stock and redeemable
common stock warrants (described below) are being accreted up to their fair
market values from their respective issuance dates to their earliest potential
redemption date (October 22, 2003). At December 31, 1997, the aggregate
redemption value of the redeemable equity was approximately $118 million.
Accordingly, $8,246,000 of accretion has been charged to additional
paid-in-capital in 1997.
WARRANTS
In connection with KMC Telecom's 1996 Loan and Security Agreement, warrants
representing a 5% ownership interest in the fully diluted common voting capital
stock of KMC Telecom, including anti-dilution protection, were granted to AT&T
Finance (and subsequently assigned to AT&T Credit and CoreStates). These
warrants, at an exercise price of $.01 per share, were issued on January 21,
1997, concurrent with the initial borrowing under the AT&T Facility, at which
date the fair value of such warrants was determined to be $1.5 million, which
was reflected as a charge to deferred financing costs and credited to equity in
January 1997. On September 22, 1997, 50% of such warrants were exercised, and an
aggregate of 27,670 shares of Class A Common Stock of KMC Telecom were issued to
the warrant holders; these shares were subsequently exchanged for a similar
number of shares of Common Stock of KMC Holdings.
The remaining 50% of the warrants ("Restricted Warrants") are not
exercisable prior to June 30, 1998. The Restricted Warrants will be exercisable
after July 1, 1998 unless the Company obtains additional financing with gross
proceeds in excess of $100 million prior to July 1, 1998. Upon the closing of
KMC Holdings' senior discount notes and warrants offering in January 1998, the
Restricted Warrants were repurchased by KMC Holdings for a de minimis price.
In connection with the AT&T Facility, warrants to purchase 10,000 shares of
Common Stock were issued to GECC in 1997. These warrants, at an exercise price
of $.01 per share, are exercisable from issuance through January 21, 2005. The
fair value of such warrants was determined to be $525,000, which was reflected
as a charge to deferred financing costs and credited to equity. Pursuant to the
Stockholders'
F-19
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
8. REDEEMABLE AND NONREDEEMABLE EQUITY (CONTINUED)
Agreement, GECC may put the shares of Common Stock issuable upon the exercise of
such warrants back to the Company. These warrants have been presented as
redeemable common stock warrants in the accompanying balance sheet at December
31, 1997.
In connection with the Supplemental AT&T Facility, KMC Holdings issued to
AT&T Finance a warrant to purchase 91,268 shares of its Common Stock for an
aggregate purchase price of $10 million. Upon the closing of KMC Holdings'
senior discount notes and warrants offering in January 1998, such warrant was
exercised and KMC Holdings issued such shares of Common Stock.
OPTIONS
During 1996, the Board of KMC Telecom adopted and Kamine approved the 1996
Stock Purchase and Option Plan for Key Employees of KMC Telecom Inc. and
Affiliates (the "1996 Plan"). The 1996 Plan, which is administered by the
Compensation Committee of the Board of Directors of KMC Telecom, provides for
various grants to key employees, directors, affiliated members or other persons
having a unique relationship with the Company excluding Kamine and any person
employed by Nassau Capital or any Nassau affiliate. Grants may include, without
limitation, incentive stock options, non-qualified stock options, stock
appreciation rights, dividend equivalent rights, restricted stocks, purchase
stocks and performance units. The Compensation Committee has the power and
authority to designate recipients of the options and to determine the terms,
conditions, and limitations of the options.
Under the 1996 Plan, options to purchase 150,000 shares of Class C Common
Stock of KMC Telecom are available for grant, of which 115,385 options were
allocated to the Plan as of December 31, 1996 and 150,000 options were allocated
to the Plan as of December 31, 1997. No individual may receive options for more
than 40,000 shares. The exercise price of all incentive stock options granted
under the 1996 Plan must be at least equal to the fair market value of the
shares on the date of grant. The exercise price of all non-qualified stock
options granted under the 1996 Plan must be at least 50% of the fair market
value of the shares on the date of grant.
Options granted pursuant to the 1996 Plan will have terms not to exceed 10
years and become exercisable over a vesting period as specified in such options.
The 1996 Plan will terminate no later than 2006. Under the 1996 Plan, no options
vest until at least six months after the later of (i) January 1, 1995 or (ii)
the date of employment with the Company or an affiliate. Options granted under
the 1996 Plan are nontransferable, other than by will or by the laws of descent
and distribution, and may be exercised during the optionee's lifetime, only by
the optionee.
The 1996 Plan provides for an adjustment of the number of shares exercisable
in the event of a merger, consolidation, recapitalization, change of control,
stock split, stock dividend, combination of shares or other similar changes,
exchange or reclassification of the common stock at the discretion of the
Compensation Committee. Pursuant to the agreements adopted under the 1996 Plan,
fifty percent of all unvested options granted become fully vested upon a
change-in-control of the Company or a qualified public offering, as defined.
The holders of options to acquire shares of Class C Common Stock of KMC
Telecom are required to enter into agreements with KMC Telecom which place
certain restrictions upon their ability to sell or otherwise transfer such
shares. In the event of termination of employment of the option holder by KMC
Telecom or the affiliates, KMC Telecom can repurchase all of the shares or
options held by such
F-20
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
8. REDEEMABLE AND NONREDEEMABLE EQUITY (CONTINUED)
individuals, generally for an amount equal to the fair value of such shares or
the excess of the fair value of such options over their exercise price.
During the year ended December 31, 1996, non-qualified options to purchase
an aggregate of 95,385 shares were granted at exercise prices of $50 (57,229
options), $75 (19,078 options) and $100 (19,078 options). The options granted
during 1996 are comprised of 85,000 options granted to employees and 10,385
options granted to individuals employed by certain affiliates of the Company.
All such options have 10 year terms. The $50 options become exercisable over a
three year period in six month intervals commencing six months after the grant
date in increments of 9,538 options each. The $75 options become exercisable in
two increments of 9,539 options each, forty-two and forty-eight months after the
grant date. The $100 options become exercisable in two increments of 9,539
options each, fifty-four and sixty months after the grant date.
During the year ended December 31, 1997, non-qualified options to purchase
an aggregate of 63,115 shares were granted at exercise prices of $50 (37,869
options), $75 (12,623 options) and $100 (12,623 options). The options granted
during 1997 are comprised of 55,385 options granted to employees and 7,730
options granted to individuals employed by certain affiliates of the Company.
All such options have 10 year terms. The $50 options become exercisable over a
three year period in six month intervals commencing six months after the grant
date in increments of 6,311 options each. The $75 options become exercisable in
two increments of 6,311 options each, forty-two and forty-eight months after the
grant date. The $100 options become exercisable in two increments of 6,311
options each, fifty-four and sixty months after the grant date. Additionally,
17,000 options were cancelled during 1997.
As a result of certain anti-dilution provisions governing the conversion of
shares of Class C Common Stock into shares of Class A Common Stock, KMC Telecom
is required to account for the 1996 Plan as a variable stock option plan.
Generally accepted accounting principles, as prescribed by APB 25, for variable
stock option plans require KMC Telecom to recognize a non-cash compensation
charge for these options (amortized over the vesting period of the employee
options and recognized in full as of the grant date for the non-employee
options). Such charge is determined by the difference between the fair value of
the common stock underlying the options and the option price as of the end of
each period, until the Class C Common Stock underlying such options is no longer
protected by such anti-dilution provisions. Based on the estimated fair value of
the Class A Common Stock of KMC Telecom at December 31, 1996 and 1997,
cumulative deferred compensation obligations of $1,283,000 and $15,579,000,
respectively, have been established. The Company has recognized compensation
expense aggregating $240,000 and $13,869,000 for the years ended December 31,
1996 and 1997, respectively, including $44,000 and $9,013,000 of amortization of
unearned compensation. KMC Holdings intends to adopt a new stock option plan in
1998, and to cancel the existing KMC Telecom 1996 Plan at such time.
Pro forma information regarding compensation expense and net loss is
required by Statement 123 as if KMC Telecom had accounted for its employee stock
options under the fair value method prescribed by Statement 123. The fair value
of such options, estimated at the date of grant and adjusted to reflect the
impact of the anti-dilution provisions through December 31, 1996 and 1997, using
a minimum value option pricing model, approximates the amounts recognized by KMC
Telecom for 1996 and 1997 under APB 25.
F-21
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
9. INCOME TAXES
As of December 31, 1997, the Company and its subsidiaries had consolidated
net operating loss carryforwards for United States income tax purposes ("NOLs")
of approximately $22.8 million which expire through 2012. Under Section 382 of
the Internal Revenue Code of 1986, as amended (the "Code"), if the Company
undergoes an "ownership change," its ability to use its preownership change NOLs
(NOLs accrued through the date of the ownership change) would generally be
limited annually to an amount equal to the product of (i) the long-term
tax-exempt rate for ownership changes prescribed monthly by the Treasury
Department and (ii) the value of the Company's equity immediately before the
ownership change, excluding certain capital contributions. Any allowable portion
of the preownership change NOLs that is not used in a particular taxable year
following the ownership change could be carried forward to subsequent taxable
years until the NOLs expire, usually 15 years after they are generated. As a
result of the cumulative effect of issuances of preferred and common stock
through September 22, 1997, KMC Telecom has undergone an ownership change.
For financial reporting purposes, the Company has an aggregate of
approximately $38.2 million of loss carryforwards and net temporary differences
at December 31, 1997. At existing tax rates, the future benefit of these items
approximates $13.0 million at December 31, 1997. A valuation allowance has been
established equal to the entire net tax benefit associated with all
carryforwards and temporary differences at December 31, 1996 and 1997 as their
realization is uncertain.
The composition of expected future tax benefits at December 31, 1996 and
1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
------------- --------------
<S> <C> <C>
Loss carryforwards............................................. $ 1,036,000 $ 7,754,000
Temporary differences:
Stock option compensation.................................... 82,000 4,797,000
Other, net................................................... 342,000 456,000
------------- --------------
1,460,000 13,007,000
Less valuation allowance....................................... (1,460,000) (13,007,000)
------------- --------------
$ -- $ --
------------- --------------
------------- --------------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases various facilities and equipment under operating leases.
Minimum rental commitments are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31:
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 790,000
1999............................................................................ 795,000
2000............................................................................ 779,000
2001............................................................................ 770,000
2002............................................................................ 650,000
Thereafter...................................................................... 2,086,000
------------
$ 5,870,000
------------
------------
</TABLE>
F-22
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense under operating leases was $98,000 and $478,000 for the years
ended December 31, 1996 and 1997, respectively.
LITIGATION
By letter dated August 29, 1997, KMC Telecom notified I-Net, Inc. ("I-NET")
that KMC Telecom considered I-NET to be in default under a Master
Telecommunications System Rollout Agreement dated as of October 1, 1996 (the
"I-NET Agreement"). By letter dated October 27, 1997, I-NET demanded payment of
all amounts it alleged were due under the I-NET Agreement and a related
agreement (aggregating $4.1 million) and stated that it would invoke the
arbitration provisions under the I-NET Agreement if the parties could not agree
as to the amount due and payment terms on or before November 27, 1997. By letter
dated December 1, 1997, I-NET extended its deadline for reaching agreement to
December 15, 1997. Although the Company and I-NET conducted discussions they
were unable to reach an agreement and on February 12, 1998, the Company received
a demand for arbitration from Wang Laboratories, Inc. ("Wang"), the successor to
I-NET. The demand seeks at least $4.1 million. The Company believes that it has
meritorious defenses to Wang's claims and has asserted counterclaims seeking in
excess of $2.5 million as a result of I-NET's defaults under the I-NET
Agreement. The Company believes that resolution of this matter will not have a
material adverse impact on its financial condition. No assurance can be given,
however, as to the ultimate resolution of this matter.
FRANCHISE AGREEMENTS
At December 31, 1997, the Company was obligated under franchise agreements
to various cities to make payments based upon the Company's financial
performance. The franchise terms range from 5 to 15 years, with several of the
franchise agreements providing for renewal options. The franchise fees payable
under the agreements are generally based on percentages of gross receipts, gross
revenues, or billings.
Several of the franchise agreements contain construction commitment clauses,
with specified timeframes for commencement and completion of construction of the
fiber optic telecommunication systems. The Company has not commenced
construction within the time specified by one of its franchise agreements. The
municipality has not indicated to management that it intends to exercise its
option to revoke the franchise. In the event such franchise was revoked, it
would not have a material adverse impact on the Company's financial position or
results of operations.
LUCENT TECHNOLOGIES AGREEMENTS
Pursuant to two contracts between Lucent Technologies Inc. ("Lucent"), KMC
Telecom and KMC Telecom II, Lucent has committed to provide the hardware,
software and related support services for digital local exchange
telecommunications switching systems. Pursuant to the Lucent General Agreement,
the Company committed to spend at least $88 million for hardware and software by
the end of the initial approximately three year contract term ending September
24, 2000, of which $30 million is to be committed for purchases by July 23,
1998. Through December 31, 1997, KMC Telecom and KMC Telecom II have purchased
switching system hardware, software and related services under the Lucent
General Agreement aggregating approximately $36.3 million.
F-23
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Pursuant to the Lucent Professional Services Agreement, Lucent will (i)
install and test each switch purchased under the General Agreement for a fixed
charge per switch; (ii) monitor and support the telecommunications switching
hardware and software for a minimum, monthly per switch fee; and (iii) provide a
fixed number of hours of other consulting services for specified fee. The
Company can also contract for additional services pursuant to a price schedule
attached to the agreement. The Professional Services Agreement is for an initial
three-year term commencing July 23, 1997 and is subject to renewal on a
year-to-year basis, thereafter.
ACE*COMM AGREEMENTS
Pursuant to two agreements between ACE*COMM Corporation ("ACE*COMM"), KMC
Telecom and KMC Telecom II, each dated September 29, 1997, ACE*COMM is providing
comprehensive billing, order processing and customer care software, which
includes the provision of certain dedicated hardware to be located at ACE*COMM's
Gaithersburg, Maryland facility, together with relevant software, maintenance of
the same, and data processing services. KMC Telecom and KMC Telecom II have
contracted to pay ACE*COMM approximately $1.1 million in connection with the
implementation of the data processing system hardware and software, of which
installments totaling $673,000 were paid as of December 31, 1997. The remaining
balance is due when the system becomes fully operational at completion (the
"Commencement Date"), anticipated to occur by the end of the first quarter of
1998. Pursuant to the second ACE*COMM agreement, ACE*COMM will perform data
processing and system support, and ACE*COMM will be paid fees under a rate
structure based on the number of calls charged to the Company's customers,
provided that, in any event, the Company must pay a minimum combined service
fee, plus an additional minimum monthly payment for support services from and
after such date. The service and support agreement has an initial term ending
four years after the Commencement Date, and is subject to year-to-year renewal
thereafter.
PURCHASE COMMITMENTS
As of December 31, 1997, the Company has outstanding commitments aggregating
approximately $52.3 million related to the purchases of telecommunications
equipment and fiber optic cable and its obligations under its agreements with
Lucent and ACE*COMM.
EMPLOYMENT AGREEMENTS
In July 1996, KMC Telecom entered into a three year employment agreement
with its chief executive officer. In addition to a base salary, the agreement
provides for certain incentive compensation payments, based upon completion of
construction and attainment of specified revenues for additional networks.
The Company has also agreed to make similar incentive compensation payments
to certain other key employees.
11. ACQUISITIONS
On July 11, 1997, KMC Telecom acquired a network in Melbourne, Florida for a
purchase price of $2 million in cash. The acquisition was accounted for under
the purchase method and the purchase price approximated the fair value of the
fixed assets acquired. Assuming the Melbourne Network had been
F-24
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
11. ACQUISITIONS (CONTINUED)
acquired as of January 1, 1997, the Company's pro forma consolidated revenue and
net loss for the year ended December 31, 1997 would have been $3,655,000 and
$33,212,000, respectively.
On October 1, 1997, the Company entered into a letter of intent to acquire
from FiberCap Digital Inc. an existing network of approximately 13 miles in
length located in Winston-Salem, North Carolina. The acquisition is subject to
various approvals and the negotiation and execution of a definitive purchase
agreement.
12. RELATED PARTY TRANSACTIONS
At December 31, 1995, KMC Telecom had loans payable to Kamine aggregating
$2,727,400, and, through November 1996, KMC Telecom made additional borrowings
from Kamine. In November 1996, KMC Telecom repaid its then-outstanding
indebtedness to Kamine of $4 million in full.
The proceeds of such loans were used to fund the construction of the network
in Huntsville, Alabama, and to fund operating cash flow requirements. These
loans were payable on demand and, through April 30, 1996, bore interest at the
prime rate (8.25% at April 30, 1996). Interest expense charged by Kamine under
these loans amounted to $120,000 for the year ended December 31, 1996. Effective
May 1, 1996, Kamine elected not to charge interest on these loans. However, for
financial reporting purposes, $180,000 of interest expense was imputed on these
loans for the period from May 1, 1996 to November 12, 1996, and a corresponding
credit has been recorded to additional paid-in capital.
The Company has informal agreements with affiliated companies which provide
certain administrative services, including certain personnel, utilities and
supplies. The Company incurred approximately $488,000 and $281,000 of expense
related to these agreements for the years ended December 31, 1996 and 1997,
respectively.
The Company leases its corporate office space through January 2007 with an
affiliated company. The lease provides for a base annual rental cost of
approximately $207,000, adjusted periodically for changes in the consumer price
index, plus operating expenses. Rent expense recognized under this lease for the
years ended December 31, 1996 and 1997 was $93,000 and $207,000, respectively.
Amounts due to affiliated companies were $81,518 and $47,024 at December 31,
1996 and 1997, respectively.
13. SUBSEQUENT EVENTS
On January 29, 1998, KMC Holdings sold 460,800 units, each unit consisting
of a 12 1/2% senior discount note with a principal amount at maturity of $1,000
due 2008 (the "Senior Discount Notes") and one warrant to purchase .21785 shares
of Common Stock of KMC Holdings at an exercise price of $.01 per share. Interest
on the Senior Discount Notes will be payable in cash on each February 15 and
August 15, commencing August 15, 2003. The Senior Discount Notes are
unsubordinated, unsecured indebtedness of KMC Holdings. However, KMC Holdings is
a holding company and the Senior Discount Notes will be effectively subordinated
to all existing and future liabilities (including trade payables) of the
Company's subsidiaries. The gross and net proceeds of the offering were
approximately $250.0 million and $236.9 million, respectively. Upon the closing
of the offering, the Company used the proceeds as follows: $10.8 million to
repay all amounts borrowed by KMC Telecom II under the AT&T Facility; $10.1
million to repay
F-25
<PAGE>
KMC TELECOM HOLDINGS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
13. SUBSEQUENT EVENTS (CONTINUED)
the Supplemental AT&T Facility (including $100,000 of accrued interest thereon);
$5.0 million as a non-refundable down payment under its agreement with Lucent
for future purchases of switching equipment; and $592,000 to pay dividend
arrearages on the Series A Cumulative Convertible Preferred Stock of KMC Telecom
to Nassau. The balance will be used to finance the planned expansion and further
development of the Company's networks and to fund operating losses and for other
general corporate purposes.
The Senior Discount Notes contain covenants that, among other things,
restrict the ability of KMC Holdings and its subsidiaries to incur additional
indebtedness, create liens, engage in sale-leaseback transactions, pay dividends
or make distributions in respect of their capital stock, make investments or
certain other restricted payments, sell assets, redeem capital stock, issue or
sell stock of subsidiaries, enter into transactions with stockholders or
affiliates or, with respect to KMC Holdings, effect a consolidation or merger.
However, these limitations are subject to a number of qualifications and
exceptions.
The Senior Discount Notes are "applicable high yield discount obligations"
("AHYDOs"), as defined in the Code, because the yield to maturity of such Senior
Discount Notes exceeded the "applicable federal rate" in effect at the time of
their issuance (the "AFR") plus five percentage points. Under the rules
applicable to AHYDOs, a portion of the original issue discount ("OID") that
accrues on the Senior Discount Notes will not be deductible by the Company at
any time. The non-deductible portion of the OID will be an amount that bears the
same ratio to such OID as (i) the excess of the yield to maturity of the Senior
Discount Notes over the AFR plus six percentage points bears to (ii) the yield
to maturity of the Senior Discount Notes. To the extent that the non-deductible
portion of OID would have been treated as a dividend if it had been distributed
with respect to the Company's stock, it generally will be treated as a dividend
to holders of the Senior Discount Notes for purposes of the rules relating to
the dividends received deduction applicable to corporate holders. Any remaining
OID on the Senior Discount Notes will not be deductible by the Company until
such OID is paid.
The warrants may be exercised at any time during the period beginning on the
date that is one year after the closing date and ending on January 31, 2008.
Warrants that are not exercised by such date will expire. The warrants were
recorded at their aggregate fair value of $11 million.
The Senior Discount Notes and warrants have not been registered under the
Securities Act of 1933 and are subject to restrictions on transfer.
14. YEAR 2000 (UNAUDITED)
While the Company believes that its software applications are Year 2000
compliant, there can be no assurance until the Year 2000 occurs that all systems
will then function adequately. Further, if the software applications of local
exchange carriers, long distance carriers or others on whose services the
Company depends or with whom the Company's systems interface are not Year 2000
compliant, it could affect the Company's systems, which would have a material
adverse effect on the Company's business, financial condition and results of
operations and its ability to make payments on its then outstanding
indebtedness.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ICG Communications, Inc.:
We have audited the accompanying balance sheets of the Melbourne System (an
operating unit of ICG Communications, Inc.) as of December 31, 1995 and 1996,
and the related statements of operations and accumulated deficit and cash flows
for the years then ended. These financial statements are the responsibility of
the System's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Melbourne System as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Denver, Colorado
December 16, 1997
F-27
<PAGE>
MELBOURNE SYSTEM
(AN OPERATING UNIT OF ICG COMMUNICATIONS, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1995 1996
------------ ------------
ASSETS
Current assets:
Cash................................................................................ $ 1,000 $ 1,000
Accounts receivable................................................................. 23,486 57,879
Prepaid expenses and deposits....................................................... 1,633 --
------------ ------------
Total current assets................................................................ 26,119 58,879
Equipment (note 2).................................................................... 5,872,459 2,549,884
Less accumulated depreciation......................................................... (154,131) (459,507)
------------ ------------
Net equipment....................................................................... 5,718,328 2,090,377
------------ ------------
Other assets:
Goodwill, net of accumulated amortization of $26,592................................ 403,514 --
Other assets........................................................................ 28,856 8,398
------------ ------------
Total assets........................................................................ $ 6,176,817 $ 2,157,654
------------ ------------
------------ ------------
LIABILITIES AND PARENT'S EQUITY
Current liabilities:
Accounts payable.................................................................... $ 184,509 $ --
Accrued liabilities................................................................. 100,241 64,590
Current portion of capital leases (note 4).......................................... 396,428 51,630
------------ ------------
Total current liabilities........................................................... 681,178 116,220
Capital lease obligations, less current portion (note 4).............................. 1,472,196 69,803
------------ ------------
Total liabilities................................................................... 2,153,374 186,023
------------ ------------
Parent's equity:
Investment by Parent................................................................ 4,578,159 6,754,534
Accumulated deficit................................................................. (554,716) (4,782,903)
------------ ------------
Total parent's equity............................................................... 4,023,443 1,971,631
------------ ------------
Total liabilities and parent's equity............................................... $ 6,176,817 $ 2,157,654
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-28
<PAGE>
MELBOURNE SYSTEM
(AN OPERATING UNIT OF ICG COMMUNICATIONS, INC.)
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996
----------- -------------
<S> <C> <C>
Revenue:
Telecommunications................................................................ $ 58,405 $ 277,409
Other............................................................................. 16,599 75,870
----------- -------------
Total revenue................................................................... 75,004 353,279
Operating costs and expenses:
Network operating costs (note 3).................................................. 37,726 86,825
Selling, general and administrative expenses (note 3)............................. 146,783 430,361
Depreciation and amortization..................................................... 172,765 460,481
Loss on impairment of long-lived assets (note 1).................................. -- 3,446,587
----------- -------------
Operating loss.................................................................... (282,270) (4,070,975)
Interest expense...................................................................... 185,832 157,212
----------- -------------
Net loss.......................................................................... (468,102) (4,228,187)
Accumulated deficit, beginning of period.............................................. (86,614) (554,716)
----------- -------------
Accumulated deficit, end of period.................................................... $ (554,716) $ (4,782,903)
----------- -------------
----------- -------------
</TABLE>
See accompanying notes.
F-29
<PAGE>
MELBOURNE SYSTEM
(AN OPERATING UNIT OF ICG COMMUNICATIONS, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................................... $ (468,102) $ (4,228,187)
Adjustments to reconcile net loss to cash used by operating activities:
Depreciation and amortization................................................... 172,765 460,481
Provision for impairment of long-lived assets................................... -- 3,446,587
Changes in operating assets and liabilities:
Accounts receivable............................................................. (20,987) (34,393)
Prepaid expenses and deposits................................................... 3,727 1,633
Other assets.................................................................... (23,463) --
Accounts payable and accrued liabilities........................................ 74,351 (220,160)
------------- -------------
Net cash used by operating activities........................................... (261,709) (574,039)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment.......................................................... (2,237,967) (1,301,149)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations............................................. (397,358) (319,220)
Advances from Parent.............................................................. 2,897,034 2,194,408
------------- -------------
Net cash provided by financing activities....................................... 2,499,676 1,875,188
------------- -------------
Net increase (decrease) in cash................................................. -- --
Cash, beginning of period........................................................... 1,000 1,000
------------- -------------
Cash, end of period................................................................. $ 1,000 $ 1,000
------------- -------------
------------- -------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Transfer of assets to Parent (note 3)............................................. $ 73,943 $ 1,435,028
------------- -------------
------------- -------------
Assumption of capital lease obligations by Parent (note 3)........................ $ -- $ 1,427,971
------------- -------------
------------- -------------
Equipment acquired under capital lease............................................ $ 713,873 $ --
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-30
<PAGE>
MELBOURNE SYSTEM
(AN OPERATING UNIT OF ICG COMMUNICATIONS, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
The Melbourne System (the System) is an operating unit of ICG
Communications, Inc. (ICG or the Parent). The System's principal business
activity is providing special access telecommunications service to customers in
the Melbourne, Florida area. The accompanying financial statements include the
assets, liabilities, revenue and expenses of the System on a separate entity
basis.
In July 1997, the assets of the system were acquired by KMC Telecom Inc.,
for total consideration of $2.0 million in a business combination accounted for
using the purchase method of accounting.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
EQUIPMENT
Equipment is stated at cost. Equipment held under capital leases is stated
at the lower of the fair value of the asset or the net present value of the
minimum lease payments at the inception of the lease. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets
owned and the related lease term for equipment held under capital leases.
Estimated useful lives of major categories of property and equipment are as
follows:
<TABLE>
<S> <C>
Office furniture and equipment................................. 3 to 5
years
Equipment...................................................... 10 years
Fiber optic transmission system................................ 20 years
</TABLE>
OTHER ASSETS
The Melbourne System assets were acquired by the Parent in 1994 and were
recorded using the purchase method of accounting. Goodwill, resulting from the
excess of the purchase price over the fair market value of the acquired net
assets, was recorded in the accompanying financial statements using push-down
accounting. Amortization of goodwill was provided using the straight-line method
over 20 years.
REVENUE RECOGNITION
The System recognizes revenue as services are provided. Uncollectible trade
receivables are accounted for using the allowance method.
INCOME TAXES
The operations of the System are included in the consolidated income tax
returns of ICG.
F-31
<PAGE>
MELBOURNE SYSTEM
(AN OPERATING UNIT OF ICG COMMUNICATIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The System accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (SFAS 109).
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. No tax benefit or expense has been allocated to the
System by the Parent due to losses incurred at the consolidated level. A
valuation allowance has been provided for the entire amount of the System's
deferred tax assets relating primarily to its net operating losses.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Parent and the System adopted Statement of
Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS 121) which
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. An impairment loss is recognized when estimated undiscounted future
cash flows expected to be generated by the asset are less than its carrying
value. Measurement of the impairment loss is based on the fair value of the
asset, which is generally determined using valuation techniques such as the
discounted present value of expected future cash flows or independent appraisal.
During 1996, the Parent began to actively seek a buyer for the System. Based
upon discussions with interested parties, the Parent determined that the net
book value of the System's assets (primarily equipment and goodwill) exceeded
the estimated fair market value of such assets, including the cost of disposal.
As a result, the Parent recorded a loss of $3,446,587 for the impairment of the
System's assets, which amount has been recorded as a charge to operations and as
a reduction in the carrying amount of such assets in the accompanying financial
statements.
(2) EQUIPMENT
Equipment, including assets owned under capital leases is comprised of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1995 1996
------------ ------------
Fiber optic transmission system................................... $ 3,660,701 $ 1,416,198
Construction in progress.......................................... 2,102,740 555,768
Furniture, fixtures and office equipment.......................... 69,405 80,638
Equipment......................................................... 39,613 497,280
------------ ------------
$ 5,872,459 $ 2,549,884
------------ ------------
------------ ------------
</TABLE>
F-32
<PAGE>
MELBOURNE SYSTEM
(AN OPERATING UNIT OF ICG COMMUNICATIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
(3) TRANSACTIONS WITH PARENT
ICG typically allocates certain corporate overhead costs, representing
primarily salaries and related benefits for accounting, sales and marketing
personnel, information systems support and executive services to certain of its
systems, divisions and subsidiaries based on revenue and direct operating costs
of the respective entity. The System does not currently have a formal cost
sharing or allocation agreement with ICG. The costs allocated to the System are
not necessarily indicative of the costs that the System would have incurred on a
separate company basis. For the years ended December 31, 1995 and 1996, an
aggregate of $59,456 and $166,249, respectively, of such costs have been
allocated to the System by ICG, which are included in network operating costs
and selling, general and administrative expenses in the accompanying statements
of operations.
During 1995 and 1996, certain assets and associated capital lease
obligations were transferred by the System to the Parent. Such transfers were
reflected as changes in the investment by Parent balance.
(4) CAPITAL LEASE OBLIGATIONS
The System is obligated under various capital lease agreements for equipment
at December 31, 1995 and 1996. The future required payments under the System's
capital lease obligations subsequent to December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C>
1997............................................................................... $ 65,273
1998............................................................................... 69,075
1999............................................................................... 7,676
---------
Total minimum lease payments....................................................... 142,024
Less amounts representing interest................................................. (20,591)
---------
Present value of net minimum lease payments........................................ 121,433
Less current portion............................................................... (51,630)
---------
$ 69,803
---------
---------
</TABLE>
F-33
<PAGE>
MELBOURNE SYSTEM
(AN OPERATING UNIT OF ICG COMMUNICATIONS, INC.)
UNAUDITED CONDENSED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997
TO
JULY 11, 1997
-----------------
<S> <C>
Revenue:
Telecommunications........................................................................... $ 189,474
Other........................................................................................ 48,339
-----------------
Total revenue............................................................................ 237,813
Operating costs and expenses:
Network operating costs...................................................................... 63,080
Selling, general and administrative expenses................................................. 384,857
Depreciation and amortization................................................................ 138,884
-----------------
Operating loss............................................................................... (349,008)
Interest expense............................................................................... 26,940
-----------------
Net loss..................................................................................... (375,948)
Accumulated deficit, beginning of period....................................................... (4,782,903)
-----------------
Accumulated deficit, end of period............................................................. $ (5,158,851)
-----------------
-----------------
</TABLE>
F-34
<PAGE>
MELBOURNE SYSTEM
(AN OPERATING UNIT OF ICG COMMUNICATIONS, INC.)
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1997
TO JULY 11,
1997
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................................... $ (375,948)
Adjustments to reconcile net loss to cash used by operating activities:
Depreciation and amortization.................................................................. 138,884
Changes in operating assets and liabilities:
Accounts receivable............................................................................ (53,859)
Prepaid expenses and deposits.................................................................. (4,888)
Other assets................................................................................... (2,145)
Accounts payable and accrued liabilities....................................................... (38,927)
-------------
Net cash used by operating activities.......................................................... (336,883)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations............................................................ (25,814)
Advances from Parent............................................................................. 362,697
-------------
Net cash provided by financing activities...................................................... 336,883
-------------
Net increase (decrease) in cash................................................................ --
-------------
Cash, beginning of period........................................................................ 1,000
-------------
Cash, end of period.............................................................................. $ 1,000
-------------
-------------
</TABLE>
F-35
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information........................ 4
Prospectus Summary........................... 5
Risk Factors................................. 16
The Exchange Offer........................... 29
Use of Proceeds.............................. 37
Capitalization............................... 38
Selected Financial Data...................... 39
Unaudited Pro Forma Consolidated Statement of
Operations................................. 41
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 43
Business..................................... 50
Management................................... 66
Certain Relationships and Related
Transactions............................... 72
Principal Stockholders....................... 74
Description of Certain Indebtedness.......... 78
Description of the Exchange Notes............ 81
Certain United States Federal Income Tax
Considerations............................. 111
Plan of Distribution......................... 118
Legal Matters................................ 118
Experts...................................... 118
Glossary of Selected Terms................... G-1
Index to Financial Statements................ F-1
</TABLE>
KMC TELECOM
HOLDINGS, INC.
OFFER TO EXCHANGE
12 1/2% SENIOR DISCOUNT NOTES DUE 2008
FOR
ALL OUTSTANDING
12 1/2% SENIOR DISCOUNT NOTES DUE 2008
---------------------
PROSPECTUS
---------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Seventh of the Certificate of Incorporation, as amended, provides
that a director of the corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director except for liability (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) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. No amendment or repeal of this provision shall apply to or
have any effect on the liability or alleged liability of any director for or
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal. Article VI, Section 5 of the By-Laws provides that the
Corporation shall indemnify, to the fullest extent permitted by law, members of
the Board, its officers, employees and agents and any and all persons whom it
shall have power to indemnify against any and all expenses, liabilities or other
matters.
The effect of these provisions is to eliminate the rights of the Company and
its stockholders (through stockholders' derivative suits on behalf of the
Company) to recover monetary damages against a director or officer for breach of
fiduciary duty (including breaches resulting from grossly negligent behavior),
except in the situations described above.
These provisions will not limit the liability of directors or officers under
the federal securities laws of the United States. This discussion of Article
Seventh of the Company's Certificate of Incorporation, as amended, and Article
VI, Section 5 of the By-Laws is qualified in its entirety by reference to the
relevant provisions of the Certificate of Incorporation (filed as Exhibit 3.1)
and the By-Laws (filed as Exhibit 3.3).
See Item 22 for a statement of the Company's undertaking as to the
Securities and Exchange Commission's position respecting indemnification arising
under the Securities Act of 1933.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) See Index of Exhibits.
(b) Financial Statement Schedules.
Report of Independent Auditors (included at page S-1)
Schedule I--Condensed Financial Information of Registrant (included at
pages S-2 to S-7)
ITEM 22. UNDERTAKINGS
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(5) That every prospectus: (i) that is filed pursuant to paragraph (4)
immediately proceeding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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-2
<PAGE>
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(8) To supply by means of post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Bedminster, State of New
Jersey on the 20th day of April, 1998.
<TABLE>
<S> <C> <C>
KMC TELECOM HOLDINGS, INC.
By: /s/ MICHAEL A. STERNBERG
------------------------------------------
Michael A. Sternberg
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Michael A. Sternberg, Roscoe C. Young II
and Cynthia Worthman, and each of them, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities to sign any and all
amendments including post-effective amendments) to this registration statement
and all amendments and supplements to any prospectus relating thereto and any
other documents and instruments incidental thereto, and any registration
statement filed pursuant to Rule 482 under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as full to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that each of said
attorneys-in-fact and agents and/or either of them, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, the Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
DATE SIGNATURE TITLE
- ---------------- --------------------------------------- ------------------------------------------------------
<S> <C> <C>
/s/ MICHAEL A. STERNBERG
April 20, 1998 ------------------------------ President, Chief Executive Officer and Director
Michael A. Sternberg (Principal Executive Officer)
/s/ CYNTHIA WORTHMAN Chief Financial Officer, Vice President, Secretary and
April 20, 1998 ------------------------------ Treasurer (Principal Financial and Accounting
Cynthia Worthman Officer)
/s/ HAROLD N. KAMINE
April 20, 1998 ------------------------------ Chairman of the Board of Directors
Harold N. Kamine
/s/ GARY E. LASHER
April 20, 1998 ------------------------------ Director, Vice Chairman of the Board of Directors
Gary E. Lasher
/s/ JOHN G. QUIGLEY
April 20, 1998 ------------------------------ Director
John G. Quigley
/s/ RICHARD H. PATTERSON
April 20, 1998 ------------------------------ Director
Richard H. Patterson
/s/ RANDALL A. HACK
April 20, 1998 ------------------------------ Director
Randall A. Hack
/s/ WILLIAM H. STEWART
April 20, 1998 ------------------------------ Director
William H. Stewart
</TABLE>
II-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
KMC Telecom Holdings, Inc.
We have audited the consolidated balance sheet of KMC Telecom Holdings, Inc.
as of December 31, 1997 and the related consolidated statements of operations,
redeemable and nonredeemable equity and cash flows for the year then ended. Our
audit report issued thereon dated March 11, 1998 is included elsewhere in this
Form S-4. Our audit also included the financial statement schedules listed in
Item 21 of this Form S-4. These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey
March 11, 1998
S-1
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
KMC TELECOM HOLDINGS, INC.
(PARENT COMPANY)
CONDENSED BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Amounts due from subsidiaries..................................................... $ 25,655
Deferred financing costs.......................................................... 732
---------
$ 26,387
---------
---------
LIABILITIES, REDEEMABLE AND NONREDEEMABLE EQUITY (DEFICIENCY)
Losses of subsidiaries in excess of basis......................................... $ 5,408
Redeemable equity:
Redeemable cumulative convertible preferred stock, par value $.01 per share;
498,800 shares authorized; shares issued and outstanding:
123,800 shares of Series A ($12,380,000 liquidation preference)............. 18,879
150,000 shares of Series C ($15,000,000 liquidation preference)............. 14,667
25,000 shares of Series D ($2,500,000 liquidation preference)............... 2,379
Redeemable common stock, 132,773 shares issued and outstanding.................. 11,187
Redeemable common stock warrants................................................ 540
---------
Total redeemable equity........................................................... 47,652
Nonredeemable equity (deficiency):
Common stock, par value $.01 per share; 3,000,000 shares authorized, 613,835
shares issued and outstanding................................................. 6
Additional paid-in capital...................................................... (4,819)
Accumulated deficit............................................................. (21,860)
---------
Total nonredeemable equity (deficiency)........................................... (26,673)
---------
$ 26,387
---------
---------
</TABLE>
See accompanying notes.
S-2
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
KMC TELECOM HOLDINGS, INC.
(PARENT COMPANY)
CONDENSED STATEMENT OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS)
PERIOD FROM SEPTEMBER 22, 1997 (FORMATION) TO DECEMBER 31, 1997
<TABLE>
<S> <C>
Equity in net loss of subsidiaries................................................ $ (21,860)
---------
Net loss.......................................................................... $ (21,860)
---------
---------
</TABLE>
See accompanying notes.
S-3
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
KMC TELECOM HOLDINGS, INC.
(PARENT COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
PERIOD FROM SEPTEMBER 22, 1997 (FORMATION)
TO DECEMBER 31, 1997
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss.......................................................................... $ (21,860)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in net loss of subsidiaries.............................................. 21,860
Amounts due from subsidiaries................................................... (25,129)
---------
Net cash used in operating activities............................................. (25,129)
---------
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of issuance costs..................... 9,363
Proceeds from issuance of preferred stock, net of issuance costs.................. 16,498
Payment of issuance costs related to senior discount notes........................ (732)
---------
Net cash provided by financing activities......................................... 25,129
---------
Cash and cash equivalents, beginning of period.................................... --
---------
Cash and cash equivalents, end of period.......................................... $ --
---------
---------
</TABLE>
See accompanying notes.
S-4
<PAGE>
Schedule I -- Condensed Financial Information of Registrant
KMC Telecom Holdings, Inc.
(Parent Company)
Notes to Condensed Financial Statements
DECEMBER 31, 1997
1. BASIS OF PRESENTATION
In the parent company only financial statements, KMC Telecom Holdings,
Inc.'s (the "Company") investment in subsidiaries is stated at cost less equity
in losses of subsidiaries since date of formation. These Parent Company
financial statements should be read in conjunction with the Company's
consolidated financial statements. The Company's principal operating
subsidiaries are KMC Telecom Inc. ("KMC Telecom") and KMC Telecom II, Inc. ("KMC
Telecom II").
On September 22, 1997, the stockholders of KMC Telecom exchanged all of
their KMC Telecom common and preferred stock for equal numbers of shares of
common and preferred stock of the Company.
2. GUARANTEE
On September 22, 1997, KMC Telecom and KMC Telecom II entered into an
Amended and Restated Loan and Security Agreement (the "AT&T Facility") with AT&T
Commercial Finance Corporation ("AT&T Finance"). Under the AT&T Facility, AT&T
Finance agreed to lend KMC Telecom and KMC Telecom II (the "Borrowers") up to an
aggregate of $70 million to be used for the construction of fiber optic
telecommunications networks in certain markets, subject to certain conditions.
The Company has unconditionally guaranteed the repayment of the AT&T
Facility when such repayment is due, whether at maturity, upon acceleration, or
otherwise. The Company has agreed to pay all amounts outstanding under the AT&T
Facility, on demand, upon the occurrence and during the continuation of any
event of default (as defined therein). The Company has pledged the shares of KMC
Telecom and KMC Telecom II to AT&T Finance to secure its obligations under the
guaranty. In addition, each of the Borrowers has pledged all of its assets to
AT&T Finance. Accordingly, if there were an event of default under the AT&T
Facility, the lenders thereunder would be entitled to payment in full and could
foreclose on the assets of the Borrowers and the holders of the senior discount
notes (issued in January 1998) would have no right to share in such assets. At
December 31, 1997, an aggregate of $51.3 million was outstanding under this
facility, including $10.8 million which had been borrowed by KMC Telecom II (and
which was repaid in full with a portion of the proceeds of the Company's January
1998 issuance of senior discount notes and warrants).
Additionally, the AT&T Facility restricts the ability of KMC Telecom to pay
dividends to, or to pay principal or interest on loans from, the Company. Such
restrictions could adversely affect the Company's liquidity and ability to meet
its cash requirements, including its ability to repay the senior discount notes
(issued in January 1998).
On September 22, 1997, KMC Telecom and KMC Telecom II obtained a
subordinated term loan (the "Supplemental AT&T Facility") from AT&T Finance with
an original principal amount of $10 million. The Supplemental AT&T Facility is
generally subject to the same terms, covenants and restrictions as the AT&T
Facility. On January 29, 1998, the entire $10 million outstanding under this
facility was repaid in full with a portion of the proceeds of the Company's
issuance of senior discount notes and warrants.
S-5
<PAGE>
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
KMC TELECOM HOLDINGS, INC.
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
3. REDEEMABLE EQUITY
Pursuant to provisions contained in the Company's Certificate of
Incorporation and in an Amended and Restated Stockholders' Agreement dated as of
October 31, 1997, among the Company, Harold N. Kamine, Nassau Capital Partners
L.P. and NAS Partners I L.L.C. (collectively referred to as "Nassau"), AT&T
Credit Corporation ("AT&T Credit"), General Electric Capital Corporation
("GECC"), and CoreStates Bank, N.A. ("Corestates"), (the "Stockholders'
Agreement"), each of Nassau, CoreStates, AT&T Credit and GECC has a "put right"
entitling it to have the Company repurchase its preferred and common shares for
the fair market value of such shares if no Liquidity Event (defined as (i) an
initial public offering with gross proceeds of at least $40.0 million, (ii) the
sale of substantially all of the stock or assets of the Company or (iii) the
merger or consolidation of the Company with one or more other corporations) has
taken place by the later of (x) October 22, 2003 or (y) 90 days after the final
maturity date of the senior discount notes (issued in January 1998, with a
stated maturity date of January 2008). CoreStates, GECC and AT&T Credit may not
exercise such put rights unless Nassau has exercised its put right. The
restrictive covenants of the senior discount notes limit the Company's ability
to repurchase such shares. All of the shares of preferred and common stock
subject to such "put right" are presented as redeemable equity in the
accompanying condensed balance sheet at December 31, 1997.
The redeemable preferred stock, redeemable common stock and redeemable
common stock warrants (described below) are being accreted up to their fair
market values from their respective issuance dates to their earliest potential
redemption date (October 22, 2003). At December 31, 1997, the aggregate
redemption value of the redeemable equity was approximately $118 million.
In connection with the AT&T Facility, warrants to purchase 10,000 shares of
Common Stock were issued to GECC in 1997. These warrants, at an exercise price
of $.01 per share, are exercisable from issuance through January 2005. Pursuant
to the Stockholders' Agreement, GECC may put the shares of Common Stock issuable
upon the exercise of such warrants back to the Company. These warrants have been
presented as redeemable common stock warrants in the accompanying condensed
balance sheet at December 31, 1997.
4. CONTINGENCIES
By letter dated August 29, 1997, KMC Telecom notified I-NET, Inc. ("I-NET")
that KMC Telecom considered I-NET to be in default under a Master
Telecommunications Systems Account Agreement dated as of October 1, 1997 (the
"I-NET Agreement"). By letter dated October 27, 1997, I-NET demanded payment of
all amounts it alleged were due under the I-NET agreement and a related
agreement (aggregating $4.1 million) and stated that it would invoke the
arbitration provisions under the I-NET Agreement if the parties could not agree
as to the amount due and payment terms on or before November 27, 1997. By letter
dated December 1, 1997, I-NET extended its deadline for reaching agreement to
December 15, 1997. Although the Company and I-NET conducted discussions they
were unable to reach an agreement and on February 12, 1998, the Company received
a demand for arbitration from Wang Laboratories, Inc. "Wang") the successor to
I-NET. The demand seeks at least $4.1 million. The Company believes that it has
meritorious defenses to Wang's claims and has asserted counterclaims seeking in
excess of $2.5 million as a result of I-NET's defaults under the I-NET
Agreement. The Company believes that resolution of this matter will not have a
material adverse impact on its financial condition. No assurance can be given,
however, as to the ultimate resolution of this matter.
S-6
<PAGE>
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
KMC TELECOM HOLDINGS, INC.
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
5. SUBSEQUENT EVENTS
On January 29, 1998, the Company sold 460,800 units, each consisting of a
12 1/2% senior discount notes with a principal amount at maturity of $1,000 due
2008 (the "Senior Discount Notes") and one warrant to purchase .21785 shares of
Common Stock of the Company at an exercise price of $.01 per share. The gross
and net proceeds of the offering were approximately $250.0 million and $236.9
million, respectively. Upon the closing of the offering, the Company used the
proceeds as follows: $10.8 million to repay all amounts borrowed by KMC Telecom
II under the AT&T Facility; $10.1 million to repay the Supplemental AT&T
Facility (including $100,000 of accrued interest thereon); $5.0 million as a
non-refundable down payment under its agreement with Lucent Technologies, Inc.
for future purchases of switching equipment; and $592,000 to pay dividend
arrearages on the Series A Cumulative Convertible Preferred Stock of KMC Telecom
to Nassau.
The Senior Discount Notes contain covenants that, among other things,
restrict the ability of the Company and its subsidiaries to incur additional
indebtedness, create liens, engage in sale-leaseback transactions, pay dividends
or make distributions in respect of their capital stock , make investments or
certain other restricted payments, sell assets, redeem capital stock, issue or
sell stock of subsidiaries, enter into transactions with stockholders or
affiliates or, with respect to the Company, effect a consolidation or merger.
However, these limitations are subject to a number of qualifications and
exceptions.
S-7
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of KMC Telecom Holdings, Inc.
3.2 Certificate of Amendment of the Certificate of Incorporation of KMC Telecom Holdings, Inc.
3.3 By-Laws of KMC Telecom Holdings, Inc.
4.1 Amended and Restated Stockholders Agreement dated as of October 31, 1997 by and among KMC Telecom
Holdings, Inc., Nassau Capital Partners, L.P., NAS Partners I L.L.C., Harold N. Kamine, KMC
Telecommunications L.P., AT&T Credit Corporation, General Electric Capital Corporation, CoreStates Bank,
N.A. and CoreStates Holdings, Inc.
4.2 Amendment No. 1 dated as of January 7, 1998 to the Amended and Restated Stockholders Agreement dated as
of October 31, 1997 and among KMC Telecom Holdings, Inc., Nassau Capital Partners, L.P., NAS Partners I
L.L.C. Harold N. Kamine, KMC Telecommunications L.P., AT&T Credit Corporation, General Electric Capital
Corporation, CoreStates Bank, N.A. and CoreStates Holdings, Inc.
4.3 Amendment No. 2 dated as of January 26, 1998 to the Amended and Restated Stockholders Agreement dated as
of October 31, 1997 by and among KMC Telecom Holdings, Inc., Nassau Capital Partners, L.P., Partners I
L.L.C. Harold N. Kamine, KMC Telecommunications L.P., AT&T Credit Corporation, General Electric Capital
Corporation, CoreStates Bank, N.A. and CoreStates Holdings, Inc.
4.4 Amendment No. 3 dated as of February 25, 1998 to the Amended and Restated Stockholders Agreement dated
as of October 31, 1997 by and among KMC Telecom Holdings, Inc., Nassau Capital Partners, L.P., Partners
I L.L.C. Harold N. Kamine, KMC Telecommunications L.P., AT&T Credit Corporation, General Electric
Capital Corporation, CoreStates Bank, N.A. and CoreStates Holdings, Inc.
4.5 Indenture dated as of January 29, 1998 between KMC Telecom Holdings, Inc. and The Chase Manhattan Bank,
as Trustee, including specimen of KMC Telecom Holdings, Inc.'s 12 1/2% Senior Discount Note due 2008.
4.6 Registration Rights Agreement dated January 26, 1998 between KMC Telecom Holdings, Inc. and Morgan
Stanley & Co. Incorporated.
4.7 Warrant Agreement between KMC Telecom Holdings, Inc. and The Chase Manhattan Bank, as Warrant Agent,
dated as of January 29, 1998 including a specimen of Warrant Certificate.
4.8 Warrant Registration Rights Agreement dated as of January 26, 1998 between KMC Telecom Holdings, Inc.
and Morgan Stanley & Co. Incorporated.
5.1* Opinion of Kelley Drye & Warren LLP regarding legality.
8.1* Opinion of Kelley Drye & Warren LLP regarding taxes (contained in Exhibit 5.1.).
10.1 Purchase Agreement dated January 26, 1998 by and between KMC Telecom Holdings, Inc. and Morgan Stanley &
Co. Incorporated.
10.2 Amended and Restated Loan and Security Agreement dated as of September 22, 1997 among KMC Telecom Inc.,
KMC Telecom II, Inc. and AT&T Commercial Finance Corporation.
10.3 Amendment No. 1 dated as of October 31, 1997 to the Amended and Restated Loan and Security Agreement
dated as of September 22, 1997 among KMC Telecom Inc., KMC Telecom II, Inc. and AT&T Commercial Finance
Corporation.
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.4 Amendment No. 2 dated as of January 7, 1998 to the Amended and Restated Loan and
Security Agreement dated as of September 22, 1997 among KMC Telecom Inc., KMC
Telecom II, Inc. and AT&T Commercial Finance Corporation.
10.5 Pledge by KMC Telecom Holdings, Inc. of the capital stock of KMC Telecom Inc. dated
as of September 29, 1997.
10.6 Pledge by KMC Telecom Inc. of the membership interests of KMC Telecom Leasing I LLC,
dated as of October 31, 1997.
10.7 General Agreement between KMC Telecom Inc., KMC Telecom II, Inc. and Lucent
Technologies, Inc. dated September 24, 1997, as amended on October 15, 1997.
10.8 Professional Services Agreement between KMC Telecom, Inc. and Lucent Technologies,
Inc. dated September 4, 1997.
10.9 1996 Stock Purchase and Option Plan for Key Employees of KMC Telecom Inc. and
Affiliates.
10.10 Employment Agreement dated as of July 29, 1996 between KMC Telecom Inc. and Michael
A. Sternberg.
10.11 Data Processing Services and Support Agreement dated September 29, 1997 between
ACE*COMM Corporation and KMC Telecom Inc., KMC Telecom II, Inc. and KMC Telecom of
Virginia, Inc.
10.12 Contract for Delivery of Computer System dated as of September 29, 1997 between
ACE*COMM Corporation and KMC Telecom Inc., KMC Telecom II, Inc. and KMC Telecom of
Virginia, Inc.
21.1 Subsidiaries of KMC Telecom Holdings, Inc.
23.1* Consent of Kelley Drye & Warren LLP (contained in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of KPMG Peat Marwick LLP.
25.1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of
The Chase Manhattan Bank (on Form T-1)
27.1 Financial Data Schedule.
99.1* Form of Letter of Transmittal.
99.2* Notice of Guaranteed Delivery.
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
KMC TELECOM HOLDINGS, INC.
Pursuant to Sections 241 and 245 of the General Corporation Law of the State of
Delaware
KMC TELECOM HOLDINGS, INC., a corporation organized and existing under and
by virtue of General Corporation Laws of the State of Delaware (the
"Corporation"), does hereby certify as follows:
FIRST: That the name of the Corporation is KMC TELECOM HOLDINGS, INC.
SECOND: That the original Certificate of Incorporation of the Corporation
was filed with the Secretary of State of Delaware on September 17, 1997. As of
the date hereof, the Corporation has not received any payment for any of its
stock.
THIRD: That a majority of the Board of Directors of the Corporation at a
Special Meeting of the Board of Directors of the Corporation adopted a
resolution amending the Certificate of Incorporation and adopting the Amended
and Restated Certificate of Incorporation as set forth as Exhibit A hereto as
the Certificate of Incorporation of the Corporation.
IN WITNESS WHEREOF, KMC TELECOM HOLDINGS, INC. has caused this certificate
to be duly executed by its Chief Financial Officer this 22nd day of
September, 1997.
KMC TELECOM HOLDINGS, INC.
By: /s/ Cynthia Worthman
--------------------------
Name: Cynthia Worthman
Title: Chief Financial Officer
<PAGE>
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
KMC TELECOM HOLDINGS, INC.
FIRST: The name of the Corporation is KMC Telecom Holdings, Inc.
SECOND: The address of the Corporation's registered office in the State of
Delaware is The Corporation Trust Company, 1209 Orange Street, in the City of
Wilmington, County of New Castle.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH:
A. Authorized Capital Stock.
The total number of shares of all classes of capital stock which the
Corporation shall have the authority to issue is 3,500,000 shares, consisting of
3,000,000 shares of Common Stock with a par value of $0.01 per share ("Common
Stock") and 500,000 shares of Preferred Stock with a par value of $0.01 per
share ("Preferred Stock"). The Preferred Stock may be issued from time to time
in one or more series. The Board of Directors is hereby authorized to fix or
alter by resolution or resolutions, the designations, preferences and relative
participating, optional, or other special rights of the shares of each series
and the qualifications, limitations, or restrictions thereon, including, but not
limited to, determination of the dividend rights, dividend rates, conversion
rights, voting rights, rights in terms of redemption (including sinking fund
provisions), redemption price or prices and liquidation preferences of any
wholly unissued series of Preferred Stock and the number of shares constituting
any such series and the designation thereof of any of them; and to increase or
decrease the number of shares of any series subsequent to the issue of shares
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 in such series.
<PAGE>
B. Common Stock.
1. General. The voting, dividend and liquidation rights of the holders
of the Common Stock are subject to and qualified by the rights of the holders of
the Preferred Stock.
2. Dividends. Dividends may be declared and paid on the Common Stock
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
3. Dissolution, Liquidation or Winding Up. In the event of any
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, each issued and outstanding share of Common
Stock shall entitle the holder thereof to receive an equal portion of the net
assets of the Corporation available for distribution to holders of Common Stock,
subject to any preferential rights of any then outstanding Preferred Stock.
4. Voting Rights. Except as otherwise required by law or this
Certificate of Incorporation, each holder of Common Stock shall have one vote in
respect of each share of stock held by such holder of record on the books of the
Corporation for the election of directors and on all matters submitted to a vote
of stockholders of the Corporation.
C. Preferred Stock.
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors of the Corporation is expressly authorized to provide for
the issue of all or any of the remaining shares of the Preferred Stock in one or
more series, and to fix the number of shares and to determine or alter for each
such series, such voting powers, full or limited, or no voting powers, and such
designations, preferences, and relative, participating, optional, or other
rights and such qualifications, limitations, or restrictions thereof, as shall
be stated and expressed in any resolution or resolutions adopted by the Board of
Directors providing for the issue of such shares and as may be permitted by the
General Corporation Law of the State of Delaware.
FIFTH: Elections of directors need not be by ballot unless the By-Laws of
the Corporation shall so provide.
SIXTH: The Board of Directors of the Corporation may make By-Laws and from
time to time may alter, amend or repeal By-Laws.
SEVENTH: A director of the corporation shall not be personally liable to
the corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director except for liability (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) under Section 174 of the Delaware
2
<PAGE>
General Corporation Law, or (iv) for any transaction form which the director
derived any improper personal benefit. No amendment or repeal of this provision
shall apply to or have any effect on the liability or alleged liability of any
director for or with respect to any acts or omissions of such director occurring
prior to such amendment or repeal.
EIGHTH:
Section 1. Powers of Directors. The property, business and affairs of the
Corporation shall be managed and controlled by its Board of Directors. The
Board may exercise all of the powers of the Corporation except such as are by
law, the Certificate of Incorporation or the By-Laws conferred upon or reserved
to the stockholders.
Section 2. Number and Term of Office. The number of directors
constituting the entire Board of Directors shall not be less than six nor more
than nine. The number of directors shall be fixed from time to time by
resolution of the Board of Directors.
Section 3. Resignations. Any director or member of a committee of the
Board may resign at any time. Such resignation shall be made in writing and
shall take effect at the time specified therein, and if no time is specified, at
the time of its receipt by the Chairman of the Board, if one is elected,
President or Secretary. The acceptance of a resignation shall not be necessary
to make it effective.
Section 4. Removal. Any director or the entire Board of Directors may be
removed either for or without cause at any time by the affirmative vote of the
holders of a majority of all of the shares of stock outstanding and entitled to
vote for the election of directors at any annual or special meeting of
stockholders called for that purpose. Vacancies thus created may be filled at
the meeting held for the purpose of removal by the affirmative vote of a
majority of the stockholders entitled to vote for directors, or if not so
filled, by the directors as provided in Section 5 below.
Section 5. Vacancies and Newly Created Directorships. Vacancies in the
office of any director or member of a committee of the Board of Directors and
newly created directorships may be filled by a majority vote of the remaining
directors in the office. Any director so chosen shall hold office for the
unexpired term of his predecessor and until his successor shall be elected and
qualified or until his earlier resignation or removal. However, the directors
may not fill the vacancy created by removal of a director by electing the
director so removed.
Section 6. Place of Meeting. The Board of Directors may hold its
meetings at such places and times as the Board of Directors from time to time
shall determine.
Section 7. Regular Meetings. No notice shall be required for any regular
meeting of the Board of Directors; however, if the item or place of any regular
meeting shall be changed, notice shall be given to each Director at least two
days before the meeting.
3
<PAGE>
Section 8. Special Meetings. Special meetings of the Board of Directors
shall be called by the Chairman of the Board, if one is elected, the President
or by the Secretary on the written request of any two directors and shall be
held at such place as may be determined by the directors or as shall be stated
in the notice of the meeting.
Section 9. Quorum, Voting and Adjournment. A majority of the entire Board
of Directors of any committee of the Board of Directors shall constitute a
quorum for the transaction of business at any meeting of the Board of Directors
or committee thereof. The vote of the majority of the directors present at any
meeting of the Board of Directors or committee at which a quorum is present
shall be the act of the Board of Directors or committee. If at any meeting of
the Board or committee there is less than a quorum present, a majority of those
present may adjourn the meeting from time to time.
Section 10. Organization. The Chairman of the Board, if one is elected,
or, in his absence or the vacancy of such office, the President, shall preside
at all meetings of the Board of Directors. In the absence of the Chairman of
the Board and the President, a Chairman shall be elected by the Directors
present. The Secretary of the Corporation shall act as Secretary of all
meetings of the Directors. In the absence of the Secretary, the Chairman may
appoint any person to act as Secretary of the meeting.
Section 11. Committees. The Board of Directors may, by resolution
passed by a majority of the Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
to replace any absent or disqualified member of any meeting of the committee.
In the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent specified by resolution
of the Board, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and the affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority to amend the Certificate of Incorporation, adopt an agreement of
merger or consolidation, recommend to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets,
recommend to the stockholders a dissolution of the Corporation or a revocation
of a dissolution, or amend the By-Laws; and unless otherwise expressly provided,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
Section 12. Conference Telephone Meetings. Unless otherwise restricted by
the Certificate of Incorporation or by the By-Laws, the members of the Board of
Directors or any committee thereof, may participate in a meeting of the Board or
committee, by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation shall constitute presence in person at such meeting.
4
<PAGE>
Section 13. Action Without a Meeting. Any action required or permitted to
be taken at any meeting of the Board of Directors, or any committee thereof, may
be taken without a meeting if all members of the Board or committee, as the case
may be, consent thereto in writing.
Section 14. Compensation. Directors shall be entitled to receive and be
paid for their services of such compensation as the Board of Directors may
determine. Any director may serve the Corporation in any other capacity as an
officer, agent or otherwise, and receive compensation therefor.
Section 15. Special Classification Provisions.
(a) Notwithstanding anything to the contrary in the preceding provisions
of this Article EIGHTH, the provisions of this Section 15 shall govern the
number, election and removal of the members of the Board of Directors and any
committees thereof (and the filling of vacancies on the Board of Directors and
any committees thereof) until such time as the aggregate number of shares of
Common Stock that are outstanding and owned by Nassau Capital Partners, L.P. and
its affiliates ("Nassau") or subject to issuance to Nassau upon conversion of
outstanding shares of Preferred Stock ("Nassau Common Stock") ceases to
represent at least 5 percent of the aggregate number of outstanding shares of
all classes of Common Stock on a fully converted basis.
(b) The number of directors constituting the entire Board of Directors
shall be six or such greater number (not exceeding nine) as shall be specified
in a resolution of the Board of Directors approved by the Board of Directors;
provided that so long as there shall be at least one Kamine Director (as
hereinafter defined), the affirmative vote of the Kamine Directors shall be
required, and so long as there shall be at least one Nassau Director (as
hereinafter defined), the affirmative vote of the Nassau Directors shall be
required.
(c) Subject to the provisions of paragraph (h), three of the directors of
the Corporation (the "Kamine Directors") shall be elected by Harold N. Kamine
and his affiliates ("Kamine") voting their Common Stock ("Kamine Common Stock")
separately as a class; provided that one of the Kamine Directors shall be the
President and Chief Executive Officer of the Corporation, elected from time to
time pursuant to Article IV of the By-Laws. Subject to the provisions of
paragraph (h), three of the directors of the Corporation (the "Nassau
Directors") shall be elected by holders of Nassau Common Stock, voting
separately as a class. Subject to the provisions of paragraph (h), any other
directors of the Corporation to be elected shall be elected by holders of Kamine
Common Stock and Nassau Common Stock voting together as a single class.
(d) No Kamine Director may be removed, whether for or without cause,
except by the affirmative vote of a majority in voting power of the outstanding
shares of Kamine Common Stock voting separately as a class. No Nassau Director
may be removed, whether for or without cause, except by the affirmative vote of
a majority in voting power of the outstanding shares of Nassau Common Stock
voting as a separate class.
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<PAGE>
(e) If as a result of death, removal or resignation, any vacancy shall
exist among the Kamine Directors or Nassau Directors, as the case may be, such
vacancy shall be filled by the holders of Kamine Common Stock or Nassau Common
Stock, respectively, voting as a separate class.
(f) A quorum for the transaction of business at any meeting of the Board
of Directors or any committee thereof shall require the presence of a majority
of the Board of Directors, including at least one Kamine Director and at least
one Nassau Director.
(g) The members of each committee of the Board of Directors shall include
an equal number of Kamine Directors and Nassau Directors.
(h) (1) From and after the date that Nassau and its affiliates own in the
aggregate Shares representing less than two-thirds of the shares of Nassau
Common Stock initially issued to them, Nassau shall have the right to elect or
remove only two (2) directors for election or removal (and shall cause one of
the Nassau Directors to resign), (ii) from and after the date that Nassau and
its affiliates own in the aggregate Shares representing less than one-third of
the shares of Nassau Common Stock initially issued to them, Nassau shall have
the right to elect or remove only one (1) director (and shall cause such number
of Nassau Directors to resign such that one Nassau Director remains on the Board
of Directors) and (iii) at such time as Nassau and affiliates owns less than 5%
of the shares of Nassau Common Stock initially issued them on a fully diluted
basis (taking into account the conversion prices then in effect), Nassau shall
not be entitled to elect or remove any directors (and shall cause all Nassau
Directors to resign).
(2) Notwithstanding anything herein to the contrary, (i) from and
after the date that Kamine and his affiliates own in the aggregate Shares
representing less than two-thirds of the shares of Kamine Common Stock
originally issued to them, Kamine shall have the right to elect or remove only
two (2) directors (and shall cause one of the Kamine Directors to resign), (ii)
from and after the date that Kamine and his affiliates own in the aggregate
Shares representing less than one-third of the shares of Kamine Common Stock
originally issued to them, Kamine shall have the right to elect or remove only
one (1) director (and shall cause such number of Kamine Directors to resign such
that one Kamine Director remains on the Board of Directors) and (iii) at such
time as Kamine and his affiliates own less than 5% of the shares of Kamine
Common Stock originally issued to them, Kamine shall not be entitled to elect or
remove any directors (and shall cause all Kamine Directors to resign).
(3) If any director resigns pursuant to the provisions of paragraphs
(h)(1) and (h)(2), unless the number of directors constituting the entire Board
of Directors shall be reduced in accordance with paragraph (b), the Board of
Directors shall fill any vacancy for the unexpired term of the Director who has
resigned and thereafter the holders of the Common Stock shall elect any such
Director.
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<PAGE>
NINTH: In addition to such other voting requirements as may be specified
by the General Corporation Law of the State of Delaware, no provision of
Article EIGHTH or this Article NINTH may be amended, altered or repealed except
by affirmative vote of a majority in voting power of the Kamine Common Stock and
Nassau Common Stock (as defined in Article EIGHTH), each voting separately as a
class.
7
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
KMC TELECOM HOLDINGS, INC.
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
Filed by:
Kelley Drye & Warren LLP
101 Park Avenue
New York, New York 10178
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
KMC TELECOM HOLDINGS, INC.
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
KMC TELECOM HOLDINGS, INC., a corporation organized and existing under and
by virtue of General Corporation Laws of the State of Delaware (the
"Corporation"), does hereby certify as follows:
FIRST: That the name of the Corporation is KMC TELECOM HOLDINGS, INC.
SECOND: That the original Certificate of Incorporation of the Corporation
was filed with the Secretary of State of Delaware on September 17, 1997, and
that an Amended and Restated Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware at 12:00 p.m. on
September 22, 1997.
THIRD: That the Board of Directors of the Corporation consented in
writing to adopt a resolution proposing that Article EIGHTH, Section 15(a) of
the Amended and Restated Certificate of Incorporation be amended and restated
(the "First Article Eighth Amendment"). The stockholders of the Corporation
duly approved the First Article Eighth Amendment by written consent in
accordance with Sections 228 and 242 of the General Corporation of the State of
Delaware. The resolution setting forth the proposed Amendment is as follows:
RESOLVED, that Article EIGHTH, Section 15(a) of the Amended and
Restated Certificate of Incorporation is hereby amended and restated as set
forth in Exhibit A to this Written Consent.
FOURTH: That the Board of Directors of the Corporation consented in
writing to adopt a resolution proposing that Article EIGHTH, Section 15(c) of
the Amended and Restated Certificate of Incorporation be amended by amending and
restating the last sentence thereof (the "Second Article Eighth Amendment").
The stockholders of the Corporation duly approved the Second Article Eighth
Amendment by written consent in accordance with Sections 228 and 242 of the
General Corporation of the State of Delaware. The resolution setting forth the
proposed Amendment is as follows:
<PAGE>
RESOLVED, that Article EIGHTH, Section 15(c) of the Amended and
Restated Certificate of Incorporation is hereby amended by amending and
restating the last sentence thereof as set forth in Exhibit B to this
Written Consent.
FIFTH: That the Board of Directors of the Corporation consented in
writing to adopt a resolution proposing that Article FOURTH, Section A of the
Amended and Restated Certificate of Incorporation of the Corporation be amended
by amending and restating the first sentence thereof (the "Article Fourth
Amendment"). The stockholders of the Corporation duly approved the Article
Fourth Amendment by written consent in accordance with Sections 228 and 242 of
the General Corporation of the State of Delaware. The amended first sentence of
Article FOURTH, Section A is as follows:
"The total number of shares of all classes of capital stock which the
Corporation shall have the authority to issue is 3,598,800 shares,
consisting of 3,000,000 shares of Common Stock with a par value of $0.01
per share ("Common Stock") and 598,800 shares of Preferred Stock with a par
value of $0.01 per share ("Preferred Stock")."
IN WITNESS WHEREOF, KMC TELECOM HOLDINGS, INC. has caused this certificate
to be duly executed by its President this 4th day of October, 1997.
KMC TELECOM HOLDINGS, INC.
By: /s/ Michael Sternberg
-------------------------------------
Name: Michael Sternberg
Title: President & CEO
<PAGE>
Exhibit A
Section 15. Special Classification Provisions.
(a) Notwithstanding anything to the contrary in the preceding provisions
of this Article EIGHTH (but subject to such requirements as may, from time to
time, be specified in the terms of any outstanding series of Preferred Stock),
the provisions of this Section 15 shall govern the number, election and removal
of the members of the Board of Directors and any committees thereof (and the
filling of vacancies on the Board of Directors and any committees thereof) until
such time as the aggregate number of shares of Common Stock that are outstanding
and owned by Nassau Capital Partners, L.P. and its affiliates ("Nassau") or
subject to issuance upon the conversion of outstanding shares of Preferred Stock
("Nassau Common Stock") ceases to represent at least five percent of the
aggregate number of outstanding shares of all classes of Common Stock on a fully
converted basis.
<PAGE>
Exhibit B
(b) The number of directors constituting the entire Board of Directors
shall be six or such greater number (not exceeding nine), or such greater number
as may be required, from time to time, by the terms of any outstanding Series of
Preferred Stock as shall be specified in a resolution of the Board of Directors
approved by the Board of Directors; provided that so long as there shall be at
least one Kamine Director (as hereinafter defined), the affirmative vote of the
Kamine Directors shall be required, and so long as there shall be at least one
Nassau Director (as hereinafter defined), the affirmative vote of the Nassau
Directors shall be required.
<PAGE>
Exhibit C
Subject to the provisions of paragraph (h) and to such requirements as may,
from time to time, be specified in the terms of any outstanding series of
Preferred Stock, any other directors of the Corporation to be elected shall be
elected by holders of Kamine Common Stock and Nassau Common Stock voting
together as a single class.
<PAGE>
EX 3.3
BY-LAWS
OF
KMC Telecom Holdings, Inc.
As Adopted as of September 19, 1997
ARTICLE I
Offices
SECTION 1. Offices. The Corporation shall maintain its registered office
in the State of Delaware at 1209 Orange Street, in the City of Wilmington, New
Castle County, and its resident agent at such address is The Corporation Trust
Company. The Corporation may also have offices in such other places in the
United States or elsewhere as the Board of Directors may, from time to time,
appoint or as the business of the Corporation may require.
ARTICLE II
Stockholders
SECTION 1. Annual Meetings. Annual meetings of the stockholders of the
Corporation for the election of Directors and for such other business as may be
conducted at such meeting shall be held on such date, at such time and at such
place within or without the State of Delaware as the Board of Directors shall
determine by resolution and set forth in the notice of the meeting. In the
event the Board of Directors fails to so determine the time, date and place for
the annual meeting, it shall be held, beginning in 1998, at the principal office
of the Corporation at 11:00 a.m. on the third Monday in March of each year.
SECTION 2. Special Meetings. Special meetings of the stockholders of the
Corporation for any purpose may be called by resolution of the Board of
Directors, the
<PAGE>
Chairman of the Board, if one is elected, or the President and shall be called
by the Chairman of the Board, if one is elected, the President or the Secretary
upon the written request of at least twenty-five percent in interest of the
stockholders entitled to vote at such meeting. Notice of each special meeting
shall be given in accordance with Section 3 of this Article II.
SECTION 3. Notice of Meetings. Written notice of each meeting of the
stockholders of the Corporation shall be given not less than ten (10) nor more
than sixty (60) days before the date of any such meeting to each stockholder of
record entitled to vote thereat and shall be mailed to or delivered personally
to each stockholder at his address as it appears on the records of the
Corporation. The notice shall state the place, date and time of the meeting
and, in the case of a special meeting, the purposes for which the meeting is
called. Except where prohibited by law, the Certificate of Incorporation or
these By-Laws, business not set forth in the notice of meeting may also be
transacted at such meeting, provided only that such business properly comes
before the meeting.
SECTION 4. Quorum. Except as otherwise required by law, the Certificate
of Incorporation or these By-Laws, the presence, in person or by proxy, at any
meeting of the stockholders, of the holders of a majority of the outstanding
shares of stock of the Corporation entitled to vote thereat shall constitute a
quorum thereof.
SECTION 5. Adjourned Meetings. Whether or not a quorum shall be present
at any meeting of the stockholders, a majority of the stockholders of the
Corporation entitled to vote at such meeting, present in person or by proxy, may
adjourn the meeting to another time, place and date without notice other than by
announcement at the meeting so adjourned.
2
<PAGE>
Any business may be transacted at any adjourned meeting that could have been
transacted at the meeting originally noticed, but only those stockholders
entitled to vote at the meeting originally noticed shall be entitled to vote at
any adjourned meeting. If the adjournment is for more than thirty (30) days
from the date of the meeting originally noticed, or if a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the adjourned meeting.
SECTION 6. Organization. The Chairman of the Board, if one is elected,
or, in his absence or the vacancy of such office, the President of the
Corporation shall preside at all meetings of the stockholders. In the absence
of the Chairman of the Board and the President, the holders of a majority of the
shares of the Corporation, present in person or by proxy, entitled to vote
thereat shall elect a Chairman.
The Secretary of the Corporation shall act as Secretary of all meetings of
the stockholders, and in his absence, the Chairman of the Board, if one is
elected, or the President, may appoint a person to act as Secretary of such
meeting.
A complete list of stockholders entitled to vote at any meeting of the
stockholders, arranged in alphabetical order, showing the address of each
stockholder and the number of shares registered in the name of each stockholder
shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least ten (10)
days prior to the meeting either at a place within the city where the meeting is
to be held, which shall be specified in the notice of the meeting, or if not so
specified, of the place where the meeting is to be held. The list shall also be
produced and kept at the meeting and may be inspected by any stockholder who is
present.
3
<PAGE>
SECTION 7. Voting. Each stockholder shall be entitled to one vote, in
person or by proxy, for each share of the capital stock of the Corporation
registered in his name. Upon the demand of any stockholder entitled to vote at
any meeting, the vote upon any matter before such meeting shall be by written
ballot. Directors shall be elected by a plurality of the vote. All other
matters shall be authorized by majority vote unless otherwise required by these
By-Laws, the Certificate of Incorporation or by law.
SECTION 8. Inspectors. The Chairman presiding at any meeting of
stockholders shall have the power, in his discretion, to appoint one or more
persons to act as Inspectors, to receive, canvass and report the votes cast by
stockholders at such meeting, but no candidate for the office of director shall
be appointed as inspector at any meeting for the election of directors. If any
person so appointed fails to appear or act, the vacancy may be filled by
appointment in like manner.
SECTION 9. Consent of Stockholders in Lieu of Meeting. Unless otherwise
provided in the Certificate of Incorporation, any action required to be taken or
which may be taken at any annual or special meeting of the stockholders of the
Corporation, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of corporate action taken without a meeting by less than unanimous
written consent shall be given to those stockholders who have not consented in
writing.
4
<PAGE>
ARTICLE III
Intentionally Omitted
ARTICLE IV
Officers
SECTION 1. Officers. The officers of the Corporation shall be a
President, a Secretary and a Treasurer, all of whom shall be elected by the
Board of Directors. In addition, the Board of Directors may elect a Chairman of
the Board, a Chief Financial Officer, one or more Vice Presidents, one or more
Assistant Secretaries and one or more Assistant Treasurers. The initial
officers shall be elected at the first meeting of the Board of Directors and,
thereafter at the organization meeting of the Board after each annual meeting of
the stockholders. All officers shall hold office at the pleasure of the Board
of Directors. Officers may, but need not, be Directors. Any number of offices
may be held by the same person. In addition to the powers and duties of the
officers of the Corporation as set forth in these By-Laws, the officers shall
have such authority and shall perform such duties as from time to time may be
determined by the Board of Directors.
SECTION 2. Resignation and Removal. Any officer of the Corporation may
resign at any time. Such resignation shall be made in writing and shall take
effect at the time specified therein, and if no time is specified, at the time
of its receipt by the Chairman of the Board, if one is elected, President or
Secretary. The acceptance of a resignation shall not be necessary to make it
effective.
5
<PAGE>
SECTION 3. Vacancies. Any vacancy caused by the death, resignation or
removal of any officer may be filled by the Board of Directors.
SECTION 4. Powers and Duties of the Chairman of the Board. The Chairman
of the Board, if one is elected, must be a director of the Corporation. Subject
to the control of the Board of Directors, the Chairman of the Board shall
perform all duties incident to the office of Chairman of the Board. He shall
preside at all meetings of the stockholders and the Board of Directors and shall
have such other powers and perform such other duties as may from time to time be
assigned to him by these By-Laws or by the Board of Directors.
SECTION 5. Powers and Duties of the President The President shall be the
chief executive officer of the Corporation and, subject to the control of the
Board of Directors, shall have general charge and control of all its business,
affairs and operations and shall perform all duties incident to the office of
President. He shall preside at all meetings of the stockholders and the Board
of Directors, in the absence of the Chairman of the Board and shall have such
other powers and perform such other duties as may from time to time be assigned
to him by the Board of Directors or the Chairman of the Board.
SECTION 6. Powers and Duties of the Vice Presidents. Each Vice President,
if any are elected, (of whom one or more may be designated Executive Vice
President) shall have such powers and perform such duties as may from time to
time be assigned to him by the Board of Directors, the Chairman of the Board, if
one is elected, or the President.
SECTION 7. Powers and Duties of the Secretary. The Secretary shall keep
the minutes of all meetings of the Board of Directors and the stockholders in
books provided for that purpose; he shall cause all notices of the Corporation
to be given; he shall have custody of the corporate seal of the Corporation and
shall affix the same to such documents and other
6
<PAGE>
papers as the Board of Directors or the President shall authorize and direct; he
shall have charge of the stock certificate books, transfer books and stock
ledgers and such other books and papers as the Board of Directors or the
President shall direct. He shall perform all duties incident to the office of
Secretary and shall also have such other powers and shall perform such other
duties as may from time to time be assigned to him by these By-Laws or the Board
of Directors, the Chairman of the Board, if one is elected, or the President.
SECTION 8. Powers and Duties of the Treasurer. The Treasurer shall have
custody of all funds, securities, evidences of indebtedness and other valuables
of the Corporation and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation. He shall deposit all
moneys and other valuables to the credit of the Corporation in such depositaries
as the Board of Directors may designate. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, or the President and
shall render to the President and Board of Directors upon their request, a
report of the financial condition of the Corporation. The Treasurer shall
perform all duties incident to the office of Treasurer and shall also have such
other powers and shall perform such other duties as may from time to time be
assigned to him by the Board of Directors, the Chairman of the Board, if one is
elected, or the President.
SECTION 9. Additional Officers. The Board of Directors may elect such
other officers including a Chief Financial Officer, a Controller, Assistant
Treasurers, Assistant Secretaries and Assistant Controllers, as they deem
advisable and such officers shall have such authority and shall perform such
duties as may from time to time be assigned to them by the Board of Directors,
the Chairman of the Board, if one is elected, or the President.
7
<PAGE>
SECTION 10. Giving of Bond by Officers. All officers of the Corporation,
if required to do so by the Board of Directors, shall furnish bonds to the
Corporation for the faithful performance of their duties, in such penalties and
with such conditions and security as the Board shall require.
SECTION 11. Ownership of Stock of Another Corporation. The Chairman of
the Board, if one is elected, the President or the Treasurer or such other
officer as shall be authorized by the Board of Directors shall have power and
authority on behalf of the Corporation to attend and to vote at any meetings of
stockholders of any corporation in which the Corporation may hold stock, and
shall possess and may exercise any and all of the rights, powers and privileges
incident to the ownership of such stock at any such meetings; and shall have
power and authority to execute and deliver proxies and consents on behalf of
this Corporation in connection with the exercise by this Corporation of the
rights and powers incident to the ownership of such stock.
SECTION 12. Compensation of Officers. The officers of the Corporation
shall be entitled to receive such compensation for their services as shall from
time to time be determined by the Board of Directors.
SECTION 13. Contracts and Other Documents. The President or Treasurer, or
such other officer or officers as may from time to time be authorized by the
Board of Directors shall have power to sign and execute on behalf of the
Corporation deeds, conveyances and contracts, and any and all other documents
requiring execution by the Corporation.
8
<PAGE>
SECTION 14. Delegation of Duties. The Board of Directors may delegate to
another officer the powers or duties of any officer, in case of such officer's
absence, disability or refusal to exercise such powers or perform such duties.
ARTICLE V
Stock-Seal-Fiscal Year
SECTION 1. Certificates For Shares of Stock. The shares of the
Corporation shall be represented by certificates, which shall be numbered and
shall be in such form as the Board of Directors may, from time to time
prescribe; provided that the Board of Directors may provide by resolution that
some or all of any or all classes or series of its stock shall be uncertificated
shares. Any such resolution shall not apply to shares represented by a
certificate until such certificate is surrendered to the Corporation.
Notwithstanding the adoption of such a resolution by the Board of Directors,
every holder of stock represented by certificates and upon request every holder
of uncertificated shares shall be entitled to have a certificate signed by, or
in the name of the Corporation by the Chairman of the Board, if one is elected,
or the President or a Vice-President, and by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary representing the number of
shares registered in certificate form. Any or all the signatures on the
certificate may be a facsimile. The Board of Directors shall have power to
appoint one or more transfer agents or registrars for the transfer or
registration of certificates of stock of any class, and may require that stock
certificates shall be countersigned by one or more such transfer agents or
registrars. If any officer, transfer agent or registrar who has signed or whose
facsimile
9
<PAGE>
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue. The name of the person owning
the shares represented thereby with the number of such shares and the date of
issue thereof shall be entered on the books of the Corporation.
Except as hereinafter provided, all certificates surrendered to the
Corporation for transfer shall be canceled, and no new certificates shall be
issued until former certificates for the same number of shares have been
surrendered.
SECTION 2. Lost, Stolen or Destroyed Certificates. A new certificate for
shares of stock may be issued in the place of any certificate previously issued
by the Corporation, alleged to have been lost, stolen, destroyed or mutilated.
The Board of Directors may, in their discretion, require the owner of the lost,
stolen, destroyed or mutilated certificate to give to the Corporation an
affidavit, setting forth, to the best of his knowledge and belief, the time,
place and circumstances of the loss, theft, destruction or mutilation, and a
bond or other indemnification in such sums as the Board of Directors may direct
to indemnify the Corporation against any claim that may be made against it with
respect to the alleged loss, theft, destruction or mutilation of any such
certificate or the issuance of a new certificate.
SECTION 3. Transfer of Shares. Shares of stock of the Corporation shall
be transferred on the books of the Corporation by the holder thereof, in person
or by his duly authorized attorney or legal representative, upon surrender and
cancellation of certificates for the number of shares of stock to be
transferred, except as provided in the preceding section.
10
<PAGE>
SECTION 4. Regulations. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem necessary or proper
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation.
SECTION 5. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held; the record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting,
when no prior action by the Board of Directors is necessary, shall be the day on
which the first written consent is expressed; and the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
11
<PAGE>
SECTION 6. Dividends. Subject to the provisions of the Certificate of
Incorporation, the Board of Directors shall have power to declare and pay
dividends upon shares of stock of the Corporation out of funds legally available
therefor.
Subject to the provisions of the Certificate of Incorporation, dividends
declared upon the stock of the Corporation shall be payable on such date or
dates as the Board of Directors shall determine.
SECTION 7. Corporate Seal. The seal of the Corporation shall be circular
in form and shall bear the name of the Corporation around the circumference and
the State and year of incorporation.
SECTION 8. Fiscal Year. The fiscal year of the Corporation shall end on
December 31st of each year or such other twelve consecutive months as the Board
of Directors, from time to time, by resolution shall determine.
ARTICLE VI
Miscellaneous Provisions
SECTION 1. Notice. Whenever any written notice is required to be given by
law, the Certificate of Incorporation of the Corporation or these By-Laws, such
notice, if mailed, shall be deemed to be sufficiently given if it is written or
printed and deposited in the United States mail, postage prepaid, addressed to
the person entitled to such notice at his address as it appears on the books and
records of the Corporation. Such notice may also be sent by telegram. The
mailing of such notice or posting of such telegram, as the case may
12
<PAGE>
be, shall constitute due notice, which shall be deemed to have been given on the
day of such mailing or posting.
SECTION 2. Waivers of Notice. Whenever any notice is required to be given
by law, the Certificate of Incorporation or these By-Laws, a written waiver of
notice, signed by the person entitled to the notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, unless
the person attends the meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any meeting of the stockholders, directors, or members of a
committee of the Board need be specified in any written waiver of notice.
SECTION 5. Indemnification of Directors, Officers and Employees. The
Corporation shall indemnify, to the fullest extent permitted by law, members of
the Board, its officers, employees and agents any and all persons whom it shall
have power to indemnify against any and all expenses, liabilities or other
matters.
ARTICLE VII
These By-Laws may be altered, amended or repealed, or new By-Laws may be
adopted, by the Board of Directors at any regular or special meeting by the
affirmative vote of a majority of the Board. By-Laws adopted by the Board of
Directors may be altered, amended or repealed by the stockholders of the
Corporation.
13
<PAGE>
Exhibit 4.1
Execution Copy
================================================================================
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
among
KMC TELECOM HOLDINGS, INC.,
NASSAU CAPITAL PARTNERS L.P.,
NAS PARTNERS I L.L.C.,
HAROLD N. KAMINE,
KMC TELECOMMUNICATIONS L.P.,
AT&T CREDIT CORPORATION,
GENERAL ELECTRIC CAPITAL CORPORATION
CORESTATES BANK, N.A.
and
CORESTATES HOLDINGS, INC.
----------------------------
Dated as of October 31, 1997
----------------------------
================================================================================
<PAGE>
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT, dated as of October 31,
1997 (this "AGREEMENT"), among KMC Telecom Holdings, Inc., a Delaware
corporation (the "COMPANY"), Nassau Capital Partners L.P., a Delaware limited
partnership ("NASSAU CAPITAL"), NAS Partners I L.L.C., a Delaware limited
liability company ("NAS" and, together with Nassau Capital, "NASSAU"), Harold N.
Kamine ("HNK"), KMC Telecommunications L.P. ("KMC LP", AND, TOGETHER WITH HNK,
"KAMINE"), AT&T Credit Corporation, a Delaware corporation ("AT&T"), General
Electric Capital Corporation, a New York corporation ("GECC"), CoreStates Bank,
N.A., a national banking association ("CORESTATES BANK") and CoreStates
Holdings, Inc., a Delaware corporation ("CORESTATES HOLDINGS", AND TOGETHER WITH
CORESTATES BANK, "CORESTATES").
WHEREAS, the parties hereto (other than GECC and CoreStates Holdings)
are parties to a Stockholders Agreement dated as of September 22, 1997 (the
"EXISTING STOCKHOLDERS AGREEMENT");
WHEREAS, pursuant to a Purchase Agreement dated as of the date hereof
with the Company, GECC and CoreStates Holdings are purchasing an aggregate of
150,000 shares of the Company's Series C Cumulative Convertible Preferred Stock,
par value $.01 per share ("SERIES C CONVERTIBLE PREFERRED STOCK") and Nassau is
purchasing 25,000 shares of the Company's Series D Cumulative Convertible
Preferred Stock, par value $.01 per share ("SERIES D CONVERTIBLE PREFERRED
STOCK");
WHEREAS, after giving effect to such purchases: (i) HNK owns 573,835
shares of Common Stock, par value $.01 per share, of the Company (the "COMMON
STOCK"), 13,835 shares of which are subject to repurchase by the Company under
certain circumstances; (ii) KMC L.P. owns 40,000 shares of Common Stock; (iii)
Nassau owns 123,800 shares of Series A Cumulative Convertible Preferred Stock,
par value $.01 per share, of the Company ("SERIES A CONVERTIBLE PREFERRED
STOCK"), 25,000 shares of Series D Convertible Preferred Stock and 13,835 shares
of Common Stock which shares of Common Stock are subject to repurchase by the
Company under certain circumstances; (iv) AT&T owns 112,020.5 shares of Common
Stock (20,752.5 shares of which are "AT&T Warrant Stock") and a warrant ("AT&T
COMPANY WARRANT") to purchase 91,268 shares of Common Stock (subject to certain
adjustments); (v) GECC owns 100,000 shares of Series C Convertible Preferred
Stock and a warrant (the "GECC Warrant") to purchase 10,000 shares of Common
Stock; and (vi) CoreStates owns 50,000 shares of Series C Convertible Preferred
Stock and 6,917.5 shares of Common Stock ("CORESTATES WARRANT STOCK" and
together with AT&T Warrant Stock, "WARRANT STOCK"); and
WHEREAS, in connection with the purchases of Series C and Series D
Convertible Preferred Stock the parties hereto wish to amend certain provisions
of the Existing Stockholders Agreement
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2
and to restate the provisions of such Agreement, as so amended, in their
entirety;
NOW, THEREFORE, in consideration of the mutual promises and agreements
set forth herein, the adequacy of which is hereby acknowledged, the parties
hereto agree as follows:
1. DEFINITIONS. As used in this Agreement, terms which are used
herein but not defined herein are used herein as defined in the Investment
Agreement, and the following terms shall have the meanings set forth below:
"ACCREDITED INVESTOR" shall have the meaning ascribed to such term in
subsections (a)(1), (a)(2), (a)(3) and (a)(7) of Rule 501 of the Securities
Act.
"AFFILIATE" shall mean, with respect to any Person, (i) each Person
that, directly or indirectly, owns or controls, whether beneficially, or as
a trustee, guardian or other fiduciary, 25% or more of the Capital Stock
having ordinary voting power in the election of directors of such Person,
(ii) each Person that controls, is controlled by or is under common control
with such Person or any Affiliate of such Person or (iii) each of such
Person's executive officers and directors. For the purpose of this
definition, "CONTROL" of a Person shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of its management
or policies, whether through the ownership of voting securities, by
contract or otherwise.
"AT&T COMPANY WARRANT" has the meaning assigned to such term in the
recitals.
"AT&T SUBSIDIARY WARRANT" means Warrant No. 4, dated September 22,
1997 and granted to AT&T, to purchase shares of common stock, par value
$.01 per share, of KMC.
"BOARD OF DIRECTORS" means the Board of Directors of the Company.
"CERTIFICATE" means the Amended and Restated Certificate of
Incorporation of the Company in the form annexed hereto as Exhibit A.
"COMMON STOCK" means Common Stock, par value $.01 per share, of the
Company or any other capital stock of the Company into which such stock is
reclassified or reconstituted.
"COMMON STOCK EQUIVALENTS" means any security or obligation which is
by its terms convertible into shares of Common Stock and any option,
warrant or other subscription or purchase right with respect to Common
Stock.
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3
"CONVERTIBLE PREFERRED STOCK" means the Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock, Series C Convertible Preferred
Stock and Series D Convertible Preferred Stock.
"CORESTATES SUBSIDIARY WARRANT" means Warrant No. 5, dated September
22, 1997 and granted to CoreStates, to purchase shares of Common Stock.
"DEMAND HOLDER" has the meaning assigned such term in Section 6.1.
"DEMAND RIGHTS COMMENCEMENT DATE" means the date on which the Company
completes an initial Public Offering and any related holdback period under
Section 6.3 expires.
"DGCL" means the General Corporation Law of the State of Delaware.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the SEC thereunder.
"FAMILY MEMBERS" has the meaning assigned such term in Section 2.2.2.
"FAMILY TRUST" has the meaning assigned such term in Section 2.2.2.
"FULLY-DILUTED BASIS" means at any date as of which the number of
shares of Common Stock is to be determined, ON A BASIS INCLUDING all shares
of Common Stock outstanding at such date and the maximum shares of Common
Stock issuable in respect of Common Stock Equivalents (giving effect to the
then current respective conversion prices) and other rights to purchase
(directly or indirectly) shares of Common Stock or Common Stock
Equivalents, outstanding on such date, to the extent such rights to
convert, exchange of exercise thereunder are presently exercisable.
"GECC WARRANT" has the meaning assigned to such term in the recitals.
"HIGH YIELD DEBT AND EQUITY OFFERING" shall have the meaning assigned
to such term in a Subordinated Loan and Security Agreement, dated as of
September 22, 1997, among the Company, KMC Telecom II, Inc. and AT&T
Commercial Finance Corporation, as in effect as of the date hereof.
"INVESTMENT AGREEMENT" shall mean the Amended and Restated Note
Purchase and Investment Agreement, dated as of October 22, 1996, by and
among KMC Telecom Inc. ("KMC"), Nassau, HNK, and Parent, as amended from
time to time.
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4
"KAMINE DIRECTORS" has the meaning assigned such term in the
Certificate.
"LIQUIDITY EVENT" shall mean the occurrence of (i) the sale of all or
substantially all of the stock or assets of the Company, the consolidation
or merger of the Company with one or more other corporations or (ii) the
closing of an initial public offering of Common Stock in which the Company
receives aggregate gross proceeds (before deduction of underwriting
discounts and expenses of sale) of at least $40,000,000.
"MAJORITY SERIES C HOLDERS" shall mean the Persons holding, from time
to time, greater than 50% of the combined voting power of the outstanding
shares of Series C Convertible Preferred Stock and the outstanding shares
of Common Stock into which shares of Series C Convertible Preferred Stock
theretofore have been converted.
"NASSAU DIRECTORS" has the meaning assigned such term in the
Certificate.
"OFFERED SECURITIES" has the meaning assigned such term in Section
3.1.1.
"OFFERING NOTICE" has the meaning assigned such term in Section 3.1.1.
"OFFER PRICE" has the meaning assigned such term in Section 3.1.1.
"PERMITTED TRANSFEREES" has the meaning assigned such term in Section
2.2.
"PERSON" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, fund, unincorporated
association or organization or government or other agency or political
subdivision thereof.
"PROHIBITED TRANSFEREE" means any person actively engaged, either
directly, or indirectly through subsidiaries, in the operation of providing
local access or long distance telephone services.
"PUBLIC OFFERING" means any offer for sale of Common Stock pursuant to
an effective Registration Statement filed under the Securities Act.
"QUALIFIED PUBLIC OFFERING" or "QPO" means the first offer for sale of
Common Stock, in any single transaction or series of related transactions,
pursuant to an effective registration statement filed by Holdings under the
1933 Act in which the Company receives aggregate gross proceeds (before
deduction of underwriting discounts and expenses of sale) of at least
$40,000,000, provided that, the price per
<PAGE>
5
share at which such shares are sold in the offering (before deduction of
underwriting discounts and expenses of sale) is at least four (4) times the
Conversion Price of the Company's Series A Convertible Preferred Stock
which would then be in effect if determined pursuant to the terms of the
Series A Convertible Preferred Stock in effect as of the date hereof
(whether or not any shares of such stock are then outstanding).
"REGISTRABLE SECURITIES" means (i) the Common Stock issued or issuable
upon the conversion of the Convertible Preferred Stock or the exercise of
the AT&T Company Warrant or the GECC Warrant, (ii) any Common Stock
acquired by Nassau, Kamine, AT&T, GECC, CoreStates, any Accredited Investor
that is a permitted transferee of Common Stock pursuant to Section 3.1.6 or
any of their respective Affiliates after the date hereof, (iii) the Common
Stock held by Kamine, Nassau, AT&T and CoreStates and their respective
Affiliates and (iv) any shares of capital stock of the Company issued or
issuable with respect to the securities referred to in clauses (i), (ii)
and (iii) by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization. For purposes of this Agreement, a Person will be deemed to
be a holder of Registrable Securities whenever such Person has the right to
acquire directly or indirectly such Registrable Securities (including,
without limitation, upon conversion or exercise in connection with a
transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such
acquisition has actually been effected. As to any particular Registrable
Securities, once issued such securities shall cease to be Registrable
Securities when (i) such securities shall have been registered under the
Securities Act, and the registration statement with respect to the sale of
such securities shall have become effective under the Securities Act or
such securities shall have been sold under circumstances in which all
applicable conditions of Rule 144 (or any similar provision then in force)
under the Securities Act are met or may be sold pursuant to Rule 144(k),
(ii) such securities shall have been otherwise transferred, new
certificates for them not bearing a legend restricting further transfer
shall have been delivered by the Company and subsequent disposition of such
securities shall not require registration or qualification of such
securities under the Securities Act or any state securities or blue sky
laws then in force in a preponderance of states or (iii) such securities
shall cease to be outstanding.
"REGISTRATION EXPENSES" shall mean all expenses incident to the
Company's performance of or compliance with this Agreement, including,
without limitation, all SEC and stock exchange or National Association of
Securities Dealers, Inc. ("NASD") registration and filing fees and
expenses, fees and expenses of compliance with securities or blue sky laws
<PAGE>
6
(including, without limitation, reasonable fees and disbursements of
counsel for the underwriters in connection with blue sky qualifications of
the Registrable Securities), rating agency fees, printing expenses,
messenger, telephone and delivery expenses, the fees and expenses incurred
in connection with the listing of the securities to be registered on each
securities exchange or national market system on which similar securities
issued by the Company are then listed, fees and disbursements of counsel
for the Company and all independent certified public accountants (including
the expenses of any annual audit, special audit and "cold comfort" letters
required by or incident to such performance and compliance), securities
laws liability insurance (if the Company so desires), the fees and
disbursements of underwriters (including, without limitation, all fees and
expenses of any "qualified independent underwriter" required by the rules
of the NASD) customarily paid by issuers or sellers of securities (but not
including any underwriting discounts or commissions attributable to the
sale of Registrable Securities by the sellers of Registrable Securities),
the reasonable fees of counsel selected pursuant to Section 6.5(b) hereof
by the holders of Registrable Securities in connection with each such
registration, the reasonable fees and expenses of any special experts
retained by the Company in connection with such registration, fees and
expenses of other persons retained by the Company.
"REGISTRATION STATEMENT" means a registration statement filed pursuant
to the Securities Act.
"RULE 144" means Rule 144 under the Securities Act (or any similar
rule then in force).
"RULE 144A" means Rule 144A under the Securities Act (or any similar
rule then in force).
"SEC" means the Securities and Exchange Commission or any governmental
body or agency succeeding to the functions thereof.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC thereunder.
"SELLING STOCKHOLDER" has the meaning assigned such term in Section
3.1.1.
"SERIES A CONVERTIBLE PREFERRED STOCK" has the meaning assigned to
such term in the recitals.
"SERIES B CONVERTIBLE PREFERRED STOCK" has the meaning assigned
to such term in the recitals.
"SERIES C CONVERTIBLE PREFERRED STOCK" has the meaning assigned
to such term in the recitals.
<PAGE>
7
"SERIES C DIRECTOR" has the meaning assigned to such term in Section
4.3.2.
"SERIES D CONVERTIBLE PREFERRED STOCK" has the meaning assigned
to such term in the recitals.
"SHARES" means, with respect to each Stockholder, all shares, whether
now owned or hereafter acquired, of Common Stock and Convertible Preferred
Stock owned thereby; PROVIDED, HOWEVER, that for the purposes of any
computation of the number of Shares either outstanding or held by any
Stockholder or otherwise to be determined hereunder, (i) the shares of
Common Stock issuable upon conversion, exercise or exchange of all Common
Stock Equivalents shall be deemed outstanding whether or not such
conversion, exercise or exchange has actually been effected and (ii) the
number of Shares held by each holder of shares of Convertible Preferred
Stock shall be the number of votes exercisable with respect to such shares
of Convertible Preferred Stock.
"STOCKHOLDERS" shall mean Nassau, Kamine, AT&T, GECC, CoreStates and
any transferee thereof who has agreed to be bound by the terms and
conditions of this Agreement in accordance with Section 2.4, and the term
"Stockholder" shall mean any such Person.
"STOCKHOLDERS MEETING" has the meaning assigned such term in Section
4.1.
"SUBSIDIARY WARRANTS" mean the AT&T Subsidiary Warrant and the
CoreStates Subsidiary Warrant.
"THIRD PARTY PURCHASER" has the meaning assigned such term in Section
3.1.1.
"TRANSFER" has the meaning set forth in Section 2.1.
"WRITTEN CONSENT" has the meaning assigned such term in Section 4.1.
2. RESTRICTIONS ON TRANSFER OF SHARES.
2.1. LIMITATION ON TRANSFER. No Stockholder shall sell, give, assign,
hypothecate, pledge, encumber, grant a security interest in or otherwise dispose
of (whether by operation of law or otherwise) (each a "TRANSFER") any Shares or
any right, title or interest therein or thereto, except in accordance with the
provisions of this Agreement; PROVIDED, HOWEVER, that any transferee obtaining
any of such Shares hereunder shall agree to be bound by this Agreement and shall
comply with Section 2.4. Any attempt to transfer any Shares or any rights
thereunder in violation of the preceding sentence shall be null and void AB
INITIO and the Company shall not register any such transfer.
<PAGE>
8
2.2. PERMITTED TRANSFERS. Notwithstanding anything to the contrary
contained in this Agreement, each of the Stockholders may transfer Shares in
accordance with this Section 2.2 (the Persons to whom such Stockholders may so
transfer Shares are referred to hereinafter as "PERMITTED TRANSFEREES").
2.2.1 TRANSFERS BY NASSAU, AT&T, GECC, AND CORESTATES. At any
time, each of Nassau, AT&T, GECC, CoreStates and transferees of AT&T, GECC and
CoreStates which are Accredited Investors may (a) subject to Sections 2.3 and
2.4, transfer Shares to any Affiliate and (b) subject to Sections 2.3, 2.4, 3.1
and 4.5, transfer Shares to any Person.
2.2.2 TRANSFERS BY KAMINE. At any time, Kamine may (a) subject
to Sections 2.3 and 2.4, transfer Shares to any of his Affiliates and (b)
subject to Sections 2.3, 2.4, 3.1 and 4.5, transfer Shares to any Person on and
after October 22, 2002. At any time, Kamine may, subject to this Section 2.2.2
and Sections 2.3 and 2.4, transfer Shares to a member of his immediate family,
which shall include his parents, spouse, sibling, children or grandchildren
("FAMILY MEMBERS"), or a trust, corporation, limited liability company or
partnership, all of the beneficial interests in which shall be held by Kamine or
one or more Family Members of Kamine or which would otherwise be an Affiliate of
Kamine (collectively, a "FAMILY TRUST"); PROVIDED, HOWEVER, that during the
period any such trust, corporation, or partnership holds any right, title or
interest in any Shares, no Person other than Kamine or one or more Family
Members of Kamine may be or become beneficiaries, stockholders, members or
limited or general partners thereof.
2.2.3 CERTAIN PERMITTED TRANSFERS BY KAMINE. Notwithstanding the
provisions of Section 2.2.2, Kamine may transfer in the aggregate up to 160,000
of his Shares so long as (i) Kamine first complies with the provisions of
Section 3.1, (ii) if Kamine has received a bona fide written offer, Nassau, AT&T
and the Stockholders owning Series C Convertible Preferred Stock are then given
30 days to exercise the right to acquire such Shares on a pro rata basis, based
on their respective ownership of Common Stock and Common Stock Equivalents on a
Fully Diluted Basis, upon the same price and other terms and conditions offered
in good faith in writing by the proposed transferee of such Shares (even if the
Company has exercised its rights pursuant to Section 3.1) and (iii) the
transferee of such Shares, in its capacity as such, does not receive board seats
or other corporate governance or special shareholder rights). In addition,
notwithstanding the provisions of Section 2.2.2, Kamine may pledge in the
aggregate up to 60% of the number of Shares owned by Kamine (measured at the
time of the first pledge pursuant to this sentence) provided that (x) the
institution receiving such pledge is a financial institution that has a combined
capital and surplus of at least $25,000,000 and assets of greater than
$500,000,000) and (b) such institution agrees to the following restrictions on
the remedies it can exercise with respect to such pledged Shares: (1) upon a
foreclosure Nassau, AT&T and the Stockholders owning Series C
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9
Preferred Stock have the right to purchase the loan (pro rata as described
above) at the unpaid principal amount thereof and take possession of the pledged
Shares as the pledgees thereof and to hold such Shares subject to the terms of
the pledge agreement relating thereto, and (2) such institution will not have
board visitation rights for a period of six months after foreclosing on the
pledged Shares or the right to designate board members for a period of one year
after foreclosing on the pledged Shares.
2.3. PERMITTED TRANSFER PROCEDURES. If any Stockholder wishes to
transfer Shares to a Permitted Transferee under this Section 2, such Stockholder
shall give notice to the Company of its intention to make any transfer permitted
under this Section 2 not less than ten (10) days prior to effecting such
transfer, which notice shall state the name and address of each Permitted
Transferee to whom such transfer is proposed and the number of Shares proposed
to be transferred to such Permitted Transferee.
2.4. TRANSFERS IN COMPLIANCE WITH LAW; SUBSTITUTION OF TRANSFEREE.
Notwithstanding any other provision of this Agreement, no transfer may be made
pursuant to this Section 2 or Section 3 unless (a) the Permitted Transferee
(other than a financial institution referred to in Section 2.2.3) has agreed in
writing to be bound by the terms and conditions of this Agreement, (b) the
transfer complies in all respects with the applicable provisions of this
Agreement and (c) the transfer complies in all respects with applicable federal
and state securities laws, including, without limitation, the Securities Act.
If requested by the Company in its reasonable judgment, an opinion of counsel to
such transferring Stockholder shall be supplied to the Company at such
transferring Stockholder's expense, to the effect that such transfer complies
with the applicable federal and state securities laws. Any attempt to transfer
any Shares or rights hereunder in violation of this Agreement shall be null and
void AB INITIO and the Company shall not register such transfer. Upon becoming
a party to this Agreement, a Permitted Transferee shall be substituted for, and
shall enjoy the same rights and be subject to the same obligations as, its
predecessor hereunder only to the extent that this Agreement specifically states
that such Permitted Transferee shall enjoy the particular right or be subject to
the particular obligation of its predecessor, as the case may be.
3. PROPOSED VOLUNTARY TRANSFERS.
3.1. PROPOSED VOLUNTARY TRANSFERS; RIGHT OF FIRST OFFER.
3.1.1 OFFERING NOTICE. If any Stockholder (each, a "SELLING
STOCKHOLDER") wishes to sell or otherwise transfer all or any portion of its or
his Shares to any Person (other than to (i) a Permitted Transferee that is an
Affiliate thereof or (ii) a Permitted Transferee that is a Family Member or
Family Trust of Kamine, in the case of Kamine) (a "THIRD PARTY PURCHASER") to
the extent permitted under Section 2 of this Agreement, such Selling Stockholder
shall offer such Shares first to the Company (and
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10
second to the other Stockholders) by sending written notice (the "OFFERING
NOTICE") to the Company and the other Stockholders, which shall state (a) the
number of Shares proposed to be sold or otherwise transferred (the "OFFERED
SECURITIES") and (b) the proposed purchase price per Share which the Selling
Stockholder is willing to accept (the "OFFER PRICE"). Upon delivery of the
Offering Notice, such offer shall be irrevocable unless and until the rights of
first offer provided for herein shall have been waived or shall have expired.
3.1.2 OPTION. For a period of fifteen (15) business days after
the giving of the offering Notice pursuant to Section 3.1.1 (the "OPTION
PERIOD"), the Company shall have the right to purchase (and, if the Company
chooses not to exercise such right, the other Stockholders shall have the right
to purchase on a pro rata basis based on the number of Shares held by such other
Stockholders, provided that any Offered Securities thereby offered to any other
Stockholder that elects not to purchase such Offered Securities shall be
reallocated pro rata among the remaining other Stockholders who have elected to
exercise their option to purchase such Offered Securities) all (but not less
than all) of the Offered Securities at a purchase price equal to the Offer Price
and upon the terms and conditions set forth in the Offering Notice.
3.1.3 EXERCISE OF OPTIONS. The option under Section 3.1.2 shall
be exercisable (x) by the Company by delivering written notice of the exercise
thereof, prior to the expiration of the 15-business day period referred to in
Section 3.1.2, to the Selling Stockholder with a copy to the other Stockholders
and (y) to the extent the Company has elected not to exercise its option, by the
other Stockholders by delivering written notice of the exercise thereof within
15 days of receiving a notice from the Selling Stockholders that the Company has
elected not to exercise its option. The failure of the Company and the other
Stockholders to respond within such 15-business day and 15-day periods,
respectively, to the Selling Stockholder shall be deemed to be a waiver of their
rights under Section 3.1.2.
3.1.4 CLOSING OF THE SALE TO THE COMPANY OR THE OTHER
STOCKHOLDERS. The closing of the purchase of Offered Securities subscribed to
by the Company or the other Stockholders under Section 3.1.2 shall be held at
the principal office of the Company at 11:00 a.m., local time, on the 60th day
after the giving of the Offering Notice pursuant to Section 3.1.1 or at such
other time and place as the parties to the transaction may agree. At such
closing, the Selling Stockholder shall deliver to the Company or the other
Stockholders exercising such option, as the case may be, certificates
representing the Offered Securities, duly endorsed for transfer and accompanied
by all requisite transfer taxes, if any, and such Offered Securities shall be
free and clear of any Liens (other than those arising hereunder), and the
Selling Stockholder shall so represent and warrant, and shall further represent
and warrant that it is the sole beneficial and record owner of such Offered
Securities. The Company or the other
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11
Stockholders exercising such option, as the case may be, shall deliver at the
closing to the Selling Stockholder payment in full in immediately available
funds for the Offered Securities purchased by it or them.
3.1.5 SALE TO THIRD PARTY PURCHASER. Unless the Company or the
other Stockholders elect to purchase all of the Offered Securities pursuant to
Section 3.1.2, the Selling Stockholder may sell the Offered Securities to the
Third Party Purchaser at a price per Share equal to (or greater than) the Offer
Price set forth in the Offering Notice and otherwise on the terms and conditions
set forth in the Offering Notice; PROVIDED, HOWEVER, that such sale is bona fide
and made pursuant to a contract entered into within ninety (90) days of the
earlier of the waiver by the Company and the other Stockholders of their option
to purchase the Offered Securities or the expiration of the Option Period (the
earlier of such dates being referred to herein as the "CONTRACT DATE"); and
PROVIDED, FURTHER, that such sale shall not be consummated unless and until all
of the following conditions are met:
(a) The Selling Stockholder shall deliver to the Company and the other
Stockholders a certificate of the Third Party Purchaser stating that (i)
the terms and conditions set forth in the Offering Notice have been
approved by the Third Party Purchaser's board of directors (or the
equivalent if the Third Party Purchaser is not a corporation), if
necessary, (ii) the Third Party Purchaser is aware of the rights of the
Company and the other Stockholders contained in this Section 3.1 and (iii)
prior to the purchase by the Third Party Purchaser of any of such Offered
Securities, the Third Party Purchaser shall become a party to this
Agreement and agree to be bound by the terms and conditions hereof in
accordance with Section 2.4 hereof.
(b) The consummation of such sale to the Third Party Purchaser shall
not be subject to any conditions (other than necessary filings under the
HSR Act and other customary closing conditions).
(c) The purchase price shall be payable by the Third Party Purchaser
wholly in cash.
(d) The Third Party Purchaser shall have furnished evidence
satisfactory to the Company and the other Stockholders, in their reasonable
judgments, as to the financial ability of such Third Party Purchaser to
consummate the proposed purchase.
If such sale is not consummated within forty-five (45) days of the Contract Date
for any reason, then the restrictions provided for herein shall again become
effective, and no transfer of such Offered Securities may be made thereafter by
the Selling Stockholder without again offering the same to the Company and the
other Stockholders in accordance with this Section 3.1.
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12
3.1.6 Notwithstanding the foregoing provisions of Section 3, from
and after the earliest of (i) a Public Offering, (ii) the first anniversary of
the High Yield Debt and Equity Offering and (iii) December 31, 1998, AT&T, GECC,
CoreStates and Accredited Investors that are transferees of Shares pursuant
hereto shall not be subject to any of the provisions set forth in subsections
3.1.1 through 3.1.5 with respect to any sale or transfer of Shares that meets
both of the following conditions: (i) the transferee of such Shares (A) is an
Accredited Investor and (B) if any such transfer occurs prior to a Public
Offering, such transferee is not a Prohibited Transferee or an Affiliate thereof
and (ii) the proceeds from such transfer shall be at least $150,000.
4. CORPORATE GOVERNANCE.
4.1. GENERAL. From and after the execution of this Agreement, each
Stockholder shall vote its or his Shares at any regular or special meeting of
stockholders of the Company (a "STOCKHOLDERS MEETING") or in any written consent
executed in lieu of such a meeting of stockholders (a "WRITTEN CONSENT"), and
shall take all other actions necessary, to give effect to the provisions of this
Agreement (including, without limitation, Section 4.3 hereof) and to ensure that
the Certificate and the By-laws of the Company do not, at any time hereafter,
conflict in any respect with the provisions of this Agreement and the Investment
Agreement. In addition, each Stockholder shall vote its or his Shares at any
Stockholders Meeting or act by Written Consent with respect to such Shares, upon
any matter submitted for action by the Company's stockholders or with respect to
which such Stockholder may vote or act by Written Consent, in conformity with
the specific terms and provisions of this Agreement and the Certificate and the
By-laws of the Company. Furthermore, the Company agrees to notify AT&T, GECC
and CoreStates, in accordance with Section 9.1 hereof, of all meetings of the
Board of Directors of the Company within the time frame specified in the
Company's By-laws for notifying members of the Board of Directors of such
meetings. The Company further agrees that a designated representative of each
of AT&T, GECC and CoreStates will be entitled to attend and participate in each
meeting of the Board of Directors of the Company, whether in person or by
teleconference and that the Company shall provide AT&T, GECC and CoreStates with
all materials provided to members of the Board of Directors in connection with
such meetings. Such representative of AT&T shall not be entitled to participate
in any portion of any meeting of the Board of Directors at which any discussion
or vote is taking place with respect to any contract or transaction with AT&T or
any of its Affiliates (or any proposal
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13
with respect thereto) or any other matter in respect of which AT&T or any of its
Affiliates has a direct or indirect financial interest (other than
proportionately as a Stockholder of the Company). Such representative of GECC
shall not be entitled to participate in any portion of any meeting of the Board
of Directors at which any discussion or vote is taking place with respect to any
contract or transaction with GECC or any of its Affiliates (or any proposal with
respect thereto) or any other matter in respect of which GECC or any of its
Affiliates has a direct or indirect financial interest (other than
proportionately as a Stockholder of the Company). Such representative of
CoreStates shall not be entitled to participate in any portion of any meeting of
the Board of Directors at which any discussion or vote is taking place with
respect to any contract or transaction with CoreStates or any of its Affiliates
(or any proposal with respect thereto) or any other matter in respect of which
CoreStates or any of its Affiliates has a direct or indirect financial interest
(other than proportionately as a Stockholder of the Company). The foregoing
rights of each of AT&T, GECC and CoreStates to receive materials and notices
with respect to and to participate in meetings of the Board of Directors shall
exists so long as such party holds at least 2% of the Common Stock on a
Fully-Diluted Basis. Furthermore, the rights of each of GECC and CoreStates to
receive materials and notices with respect to and to participate in meetings of
the Board of Directors pursuant to this Section 4.1 shall be suspended during
any period in which the board includes Series C Directors. At the request of
AT&T or GECC, the Company agrees to call Stockholders Meetings and Board of
Directors meetings so long as AT&T or GECC, respectively, holds at least 5% of
the total Common Stock outstanding on a Fully-Diluted Basis, PROVIDED that with
respect to a Stockholders Meeting, a Public Offering shall not have occurred.
4.2. STOCKHOLDERS ACTIONS. In order to effectuate the provisions of
this Section 4, each Stockholder hereby agrees that when any action or vote is
required to be taken by such Stockholder pursuant to this Agreement, such
Stockholder shall use its or his best efforts to call, or cause the appropriate
officer and directors of the Company to call, a Stockholders Meeting or to
execute or cause to be executed a Written Consent pursuant to Section 228(a) of
the DGCL to effectuate such stockholder action. Further, each Stockholder shall
use its or his best efforts to cause the Board of Directors to adopt, either at
a meeting of the Board of Directors or by unanimous written consent of the Board
of Directors pursuant to Section 141(f) of the DGCL, all the resolutions
necessary to effectuate the provisions of this Agreement and the Investment
Agreement. Each Stockholder shall use its or his best efforts to cause the
Board of Directors to cause the Secretary of the Company, or if there be no
secretary, such other officer of the Company as the Board of Directors may
appoint to fulfill the duties of Secretary, to not record any vote or consent
contrary to the terms of this Section 4.
4.3. ELECTION OF DIRECTORS.
4.3.1 NUMBER AND COMPOSITION. Subject to Section 4.3.2, each
Stockholder agrees that the number of directors shall be seven (7) and each
Stockholder shall vote its or his Shares at any Stockholders Meeting, or act by
Written Consent with respect to such Shares, and take all other actions
necessary to ensure that the number of directors constituting the entire Board
of Directors shall be seven (7), as provided for below. Each
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14
Stockholder shall vote its or his Shares at any Stockholders Meeting called for
the purpose of filling the positions on the Board of Directors, or in any
Written Consent executed for such purpose, and to take all other actions
necessary to ensure, including, without limitation, using its or his best
efforts to cause the Board of Directors to take such actions to ensure: (i) the
election to the Board of Directors of (x) three individuals designated by Nassau
to serve initially as Nassau Directors, (y) subject to paragraph (b) of Section
4.4, three individuals (one of whom shall be the President and chief executive
officer of the Company from time to time, elected pursuant to Article IV of the
By-Laws) designated by Kamine to serve initially as Kamine Directors and (z) one
independent director who shall be mutually acceptable to Nassau, Kamine and
either AT&T or the Majority Series C Holders, provided that it is agreed that
Gary E. Lasher shall be the independent director beginning November 1, 1997;
(ii) the election to each committee of the Board of Directors of an equal number
of Nassau Directors and Kamine Directors; and (iii) the election of the
independent director to the compensation committee of the Board of Directors.
4.3.2 INCREASE IN NUMBER OF DIRECTORS. (a) If, with the prior
written consent of Nassau, the Company sells from time to time additional Shares
to any person who is not a Stockholder, the number of directors constituting the
entire Board of Directors may be increased by up to two individuals, subject to
paragraph (b) below.
(b) In the event that a Default (as such term is defined in the Loan
Agreement (as defined below) as in effect as of the date hereof) relating to
payment obligations for principal and interest thereunder has occurred and
continued for a period of 90 days under the Amended and Restated Loan and
Security Agreement, dated as of September 22, 1997, among KMC Telecom Inc., KMC
Telecom II, Inc. and AT&T Commercial Finance Corporation (the "Loan Agreement"),
the number of directors constituting the entire Board of Directors shall be
increased by two individuals and the Majority Series C Holders (for themselves
and on behalf of all Stockholders holding shares of Common Stock into which
shares of Series C Convertible Preferred Stock have been, or may be, converted)
shall be entitled to elect two individuals (the "Series C Directors") to the
Board of Directors. Immediately upon the cure of such Default, the number of
directors constituting the entire Board of Directors shall be reduced by two
individuals and the Majority Series C Holders shall cause the Series C Directors
to resign from the Board of Directors.
4.4. REMOVAL AND REPLACEMENT.(a) Nassau shall be entitled at any time
and for any reason (or for no reason) to designate any or all of the Nassau
Directors for removal. Subject to Section 4.5, if at any time, a vacancy is
created on the Board of Directors by reason of the death, removal or resignation
of any Nassau Director, then each Stockholder shall, as soon as practicable
after the date such vacancy first occurs and in any event prior to the
transaction of any other business by the
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15
Stockholders or the Board of Directors, take action, including the voting of its
Shares, to elect a director or directors designated by Nassau to fill such
vacancy or vacancies.
(b) Kamine shall be entitled at any time and for any reason (or for no
reason) to designate any or all of the Kamine Directors for removal; provided
that Kamine shall not be entitled, and agrees to take no action, to designate
the President and chief executive officer of the Company for removal as a Kamine
Director without the prior written consent of Nassau. Subject to Section 4.5, if
at any time, a vacancy is created on the Board of Directors by reason of the
death, removal or resignation of any Kamine Director, then each Stockholder
shall, as soon as practicable after the date such vacancy first occurs, and in
any event prior to the transaction of any other business by the Stockholders or
the Board of Directors, take action, including the voting of its Shares, to
elect a director or directors designated by Kamine to fill such vacancy or
vacancies. If at any time the person serving as President and chief executive
officer of the Company is removed or resigns from such office, Kamine shall
designate such person for removal as a Kamine Director.
4.5. ADJUSTMENT OF RIGHTS UNDER SECTIONS 4.3.1 AND 4.4. (a)
Notwithstanding anything herein to the contrary, (i) from and after the date
that Nassau and its Affiliates own in the aggregate Shares representing less
than two-thirds of the Shares (on an as if fully converted basis) owned in the
aggregate by them immediately following the Reorganization, Nassau shall have
the right to designate only two (2) directors for election or removal pursuant
to Section 4.3.1 or 4.4 (and shall cause one of the Nassau Directors to resign),
(ii) from and after the date that Nassau and its Affiliates own in the aggregate
Shares representing less than one-third of the Shares (on an as if fully
converted basis) owned in the aggregate by them immediately following the
Reorganization, Nassau shall have the right to designate only one (1) director
for election or removal pursuant to section 4.3.1 or 4.4 (and shall cause such
number of Nassau Directors to resign such that one Nassau Director remains on
the Board of Directors) and (iii) at such time as Nassau and its Affiliates owns
less than 5% of the Shares on a Fully Diluted Basis, Nassau shall not be
entitled to designate any director for election or removal pursuant to Section
4.3.1 or Section 4.4 (and shall cause all Nassau Directors to resign).
(b) Notwithstanding anything herein to the contrary, (i) from and
after the date that Kamine and his Affiliates own in the aggregate Shares
representing less than two-thirds of the Shares (on an as if fully converted
basis) owned in the aggregate by them immediately following the Reorganization,
Kamine shall have the right to designate only two (2) directors for election or
removal pursuant to Section 4.3.1 or 4.4 (and shall cause one of the Kamine
Directors to resign), (ii) from and after the date that Kamine and his
Affiliates own in the aggregate Shares representing less than one-third of the
Shares (on an as if fully converted basis) owned in the aggregate by them
immediately following the
<PAGE>
16
Reorganization, Kamine shall have the right to designate only one (1) director
for election or removal pursuant to Section 4.3.1 or 4.4 (and shall cause such
number of Kamine Directors to resign such that one Kamine Director remains on
the Board of Directors) and (iii) at such time as Kamine and his Affiliates own
less than 5% of the Shares on a Fully Diluted Basis, Kamine shall not be
entitled to designate any director for election or removal pursuant to Section
4.3.1 or 4.4 (and shall cause all Kamine Directors to resign).
5. PUT RIGHT. (a) If no Liquidity Event shall have occurred by the
later of October 22, 2003 or 90 days following the final maturity date of debt
securities issued in the High Yield Debt and Equity Offering, then each of
Nassau and its Affiliates, AT&T, GECC and CoreStates shall have the right, at
any time thereafter, by giving written notice to the Company (a "PUT NOTICE"),
to require the Company to repurchase (a "PUT") all or any portion of the shares
of Convertible Preferred Stock or Common Stock held by such Stockholder for an
amount (the "PUT AMOUNT") equal to (A) the fair market value of the shares
subject to such Put as determined within 30 days of each Put Notice by an
investment bank of national reputation which is mutually acceptable to the
Company and holders of a majority of the voting power of Common Stock and Common
Stock Equivalents held by all parties exercising Puts hereunder or (B) in the
case of any shares of Convertible Preferred Stock, at the liquidation preference
thereof plus all accrued and unpaid dividends, at the option of holders thereof;
provided that AT&T, GECC and CoreStates shall not have the right to exercise a
Put hereunder unless Nassau or its Affiliates have exercised a Put. The Company
shall give AT&T, GECC and CoreStates prompt notice of Nassau's intent to
exercise a Put. The Company shall give Notice to Nassau and the other
Stockholders of any exercise of the Put right under Section 14 of either of the
Subsidiary Warrants or hereunder. The Company shall pay to the party exercising
a Put the Put Amount within 60 days of the date of such determination of fair
market value. Any unpaid balance of a Put Amount thereafter shall bear
interest, which interest shall be paid together with any payment of such Put
Amount, at a rate of 18.0% per annum (the "DEFAULT RATE"); provided that accrual
of interest at the Default Rate shall not constitute a waiver of any party
exercising a Put hereunder to receive immediate payment of the Put Amount.
(b) If at the time of any exercise of a Put hereunder there shall be
pending any Put by any other party hereunder or any Repurchase Notice under
Section 14 of either Subsidiary Warrant, and if either the Company or KMC shall
not have funds legally available in the amount necessary to repurchase all the
Convertible Preferred Stock, Common Stock, Subsidiary Warrants and Warrant Stock
with respect to which a Put Notice or Repurchase Notice has been received, then
such Convertible Preferred Stock, Common Stock, Subsidiary Warrants and Warrant
Stock, as applicable, shall be repurchased by the Company or KMC, as applicable,
to the extent that funds are legally available for such repurchases; PROVIDED
that (A) the Put Amount and (B) the
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17
Repurchase Amount (as defined in the Subsidiary Warrants) to be received by each
party exercising a Put shall be aggregated and paid to each such party pro rata.
Any Put not satisfied in full in cash shall remain an obligation of the Company
and shall be evidenced by a promissory note due within 366 days and bearing
interest at the Default Rate to the extent provided above.
(c) The Company agrees that it will effect all such capital
contributions, advances, dividends and other actions among itself and its
wholly-owned subsidiaries so as to maximize the Company's and KMC's ability to
satisfy the Put rights contained in this Section 5 and the put rights contained
in Section 14 of either Subsidiary Warrant subject to such limitations as may be
applicable under applicable law and the terms of any agreement to which the
Company and its subsidiaries may be bound.
6. REGISTRATION RIGHTS.
6.1. DEMAND REGISTRATIONS.
(a) RIGHT TO DEMAND. At any time and from time to time after June 5,
2000, each of Nassau, Kamine, AT&T and the Majority Series C Holders (each of
which is referred to in this Section 6 as a "Demand Holder") may request the
Company to register its Registrable Securities in the manner set forth herein by
written notice (the "REGISTRATION NOTICE") to the Company only if a disposition
of the Registrable Securities may not, in the opinion of the Demand Holder, be
effected in the public marketplace (as opposed to a private transaction under
the Securities Act) at equally favorable net terms to the Demand Holder without
registration of such shares under the Securities Act. In the event that the
Company receives a Registration Notice, the Company shall effect a registration
under the Securities Act of the number of Registrable Securities determined in
accordance with Section 6.1(c) on Form S-1 or any similar long-form registration
("LONG-FORM REGISTRATIONS") or on Form S-2 or S-3 or any similar short-form
registration ("SHORT-FORM REGISTRATIONS") if available. All registrations
requested pursuant to this Section 6.1(a) are referred to herein as "DEMAND
REGISTRATIONS.
(b) NUMBER OF DEMAND REGISTRATIONS. Each of Nassau and Kamine will
be entitled to obtain up to two (2) Long-Form Registrations and two (2)
Short-Form Registrations. So long as AT&T or any of its Affiliates shall hold
any Registrable Securities, then AT&T, or if AT&T and its Affiliates no longer
hold any Registrable Securities, then the holders of at least 50% of the
aggregate number of Registrable Securities transferred by AT&T which are
Registrable Securities on the date such request is being made, will be entitled
following the Demand Rights Commencement Date to obtain up to an aggregate of
two (2) Registrations (which may be Short-Form Registrations, at the Company's
option, if the Company is then eligible therefor). The Majority Series C
Holders (for themselves and on behalf of all Stockholders holding shares of
Common Stock into which shares of
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18
Series C Convertible Preferred Stock have been, or may be, converted) will be
entitled following the Demand Rights Commencement Date to obtain up to an
aggregate of two (2) Registrations (which may be Short-Form Registrations, at
the Company's option, if the Company is then eligible therefor). A registration
will not count as a Long-Form Registration or Short-Form Registration, as the
case may be, until such Demand Registration has become effective and unless the
Demand Holder is able to register and sell at least 66 2/3% of the Registrable
Securities requested to be included in such registration. Demand Registrations
will be Short-Form Registrations whenever the Company is permitted to use any
applicable short form. After the Company has become subject to the reporting
requirements of the Exchange Act, the Company will use its best efforts to make
Short-Form Registrations available for the sale of Registrable Securities. The
Company shall not be required to pay for any expenses of any registration
proceeding begun pursuant to this Section 6.1(b) (including the Company's
internal costs in proceeding on such request, as reasonably determined by the
Company's Board of Directors) if the registration request is subsequently
withdrawn, unless the Demand Holder agrees to treat the withdrawn request as a
registration undertaken pursuant to this Section 6.1(b); PROVIDED, that if the
Demand Holder withdraws a request as a result of a material adverse change in
the condition, business or prospects of the Company or in the market for the
Company's securities from that known to the Demand Holder at the time of its
request, the Company, and not the Demand Holder, shall be required to pay all
the expenses relating to the proposed registration and such request shall not be
treated as a registration for purposes of this Section 6.1(b).
(c) DEMAND REGISTRATIONS. Within (a) 75 days after the Company
receives a Registration Notice with respect to the first offer for sale of
Shares pursuant to an effective registration statement filed by the Company
under the Securities Act or (b) within 45 days after the Company receives a
Registration Notice with respect to any other demand registration, the Company
shall file with the SEC a registration statement under the Securities Act for
such Demand Registration. The Company shall use its best efforts to cause the
Demand Registration to be declared effective under the Securities Act as soon as
is practical after filing, and once effective, the Company shall cause such
Demand Registration to remain effective for such time period as is specified in
such request, but for no time period longer than the period ending on the
earlier of (i) the one-year anniversary of the effective date of such Demand
Registration, (ii) the date on which all Registrable Securities have been sold
pursuant to the Demand Registration or (iii) the date as of which there are no
longer any Registrable Securities in existence. Each request for a Demand
Registration shall specify the approximate number of Registrable Securities
requested to be registered and the anticipated per share price range for such
offering.
(d) PRIORITY ON DEMAND REGISTRATIONS. The Company will not include
in any Demand Registration any securities which
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19
are not Registrable Securities without the prior written consent of the Demand
Holder. If a Demand Registration is an underwritten offering and the managing
underwriters advise the Company in writing that in their opinion the number of
Registrable Securities and, if permitted hereunder, other securities requested
to be included in such offering exceeds the number of Registrable Securities and
other securities, if any, which can be sold therein without adversely affecting
the marketability of the offering, the Company will include in such
registration, (i) first, the Registrable Securities requested to be included in
such registration, pro rata among the holders of such Registrable Securities, on
the basis of the number of shares of Registrable Securities owned by each such
holder and requested to be included therein and (ii) second, other securities,
if any, requested to be included in such registration. Any Persons other than
holders of Registrable Securities who participate in Demand Registrations which
are not at the Company's expense must pay their proportionate share of the
Registration Expenses as provided in Section 6.5 hereof.
(e) RESTRICTIONS ON DEMAND REGISTRATIONS. The Company will not be
obligated to effect any Demand Registration within six months after the
effective date of a previous Demand Registration. If at the time of any request
to register Registrable Securities pursuant to Section 6.1 hereof, the Company
is engaged, or has fixed plans to engage within 90 days of the time of the
request, in a registered public offering as to which the Stockholders may
include such Registrable Securities pursuant to Section 6.2 hereof or is engaged
in any activity which, in the good faith determination of the Company's Board of
Directors, would be adversely affected by the requested registration to the
material detriment of the Company, then the Company may at its option direct
that such request be delayed for a period not in excess of 60 days from the
effective date of such offering, or the date of commencement of such other
material activity, as the case may be, such right to delay a request to be
exercised by the Company not more than once within any twelve month period.
(f) SELECTION OF UNDERWRITERS. In the case of a Demand Registration,
the Company shall have the right to select the investment banker or bankers,
underwriters and managers to administer the offering; PROVIDED, HOWEVER, that
such investment banker or bankers underwriters and managers shall be
satisfactory to the Demand Holder.
(g) OTHER REGISTRATION RIGHTS. (i) Within the limitations prescribed
by this paragraph (i), but not otherwise, the Company may grant to subsequent
investors in the Company rights of incidental registration (such as those
provided in Section 6.2). Such rights may only pertain to shares of Common
Stock, including shares of Common Stock into which any other securities may be
converted. Such rights may be granted with respect to (a) registrations
actually requested by a Demand Holder pursuant to Section 6.1, but only in
respect of that portion of any such registration as remains after inclusion of
all
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20
Registrable Securities requested by the Demand Holder and (b) registrations
initiated by the Company, but only in respect of that portion of such
registration as is available under the limitations set forth in Section 6.2(c)
(which limitations shall apply pro rata to all holders of registrable
securities) and such rights shall be limited in all cases to sharing pro rata in
the available portion of the registration in question with holders of
registrable securities, such sharing to be based on the number of shares of
Common Stock held by the respective holders of registrable securities and held
by such other investors, plus the number of shares of Common Stock into which
other securities held by the holders of registrable securities and such other
investors are convertible, which are entitled to registration rights. With
respect to registrations which are for underwritten public offerings, "available
portion" as used above shall mean the portion of the underwritten shares which
is available as specified in clauses (a) and (b) of the third sentence of this
paragraph (i). Shares not included in such underwriting shall not be
registered.
(ii) The Company may not grant to subsequent investors in the Company
rights of registration upon request (such as those provided in Section 6.1)
unless (a) such rights are limited to shares of Common Stock; (b) the Demand
Holders are given enforceable contractual rights to participate in registrations
requested by such subsequent investors (but subject to the right of priority of
registration in the following order: such subsequent investors and the holders
of Registrable Securities on a pro rata basis), such participation to be on the
pro rata basis and subject to the limitations described in the final three
sentences of paragraph (i) of this Section 6.1(g); (c) such rights shall not
become effective prior to 90 days after the effective date of the first
registration pursuant to Section 6.1; and (d) such rights shall not be more
favorable than those granted to the Demand Holders.
6.2. PIGGYBACK REGISTRATIONS.
(a) RIGHT TO PIGGYBACK. Whenever the Company proposes to register
any of its equity securities, including, without limitation, the Common Stock
under the Securities Act (other than pursuant to a registration statement on
Form S-8 or S-4 or any successor forms), and the form to be used may be used for
the registration of Registrable Securities (a "PIGGYBACK REGISTRATION"), the
Company will give prompt written notice to all holders of Registrable Securities
of its intention to effect such a registration and will include in such
registration all Registrable Securities with respect to which the Company has
received written requests for inclusion therein within 20 days after the receipt
of the Company's notice.
(b) PIGGYBACK EXPENSES. The Registration Expenses of the holders of
Registrable Securities will be paid by the Company in all Piggyback
Registrations.
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21
(c) PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration
is an underwritten primary registration on behalf of the Company, the Company
will include in such registration all securities requested to be included in
such registration; PROVIDED, that if the managing underwriters advise the
Company in writing that in their opinion the number of securities requested to
be included in such registration exceeds the number which can be sold in such
offering without adversely affecting the marketability of the offering, the
Company will include in such registration (i) first, the securities the Company
proposes to sell, (ii) second, the Registrable Securities requested to be
included in such registration, pro rata among the holders of such Registrable
Securities on the basis of the number of Registrable Securities owned by each
such holder and requested to be included therein, and (iii) third, other
securities, if any, requested to be included in such registration.
(d) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration
is an underwritten secondary registration on behalf of holders of the Company's
securities (which registration was consented to pursuant to Section 6.1(g)
above), and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering without
adversely affecting the marketability of the offering, the Company will include
in such registration (i) first, the Registrable Securities requested to be
included in such registration, pro rata among the holders of such Registrable
Securities on the basis of the number of Registrable Securities owned by each
such holder and requested to be included therein, and (ii) second, other
securities requested to be included in such registration.
(e) SELECTION OF UNDERWRITERS. If any Piggyback Registration is an
underwritten offering, the investment banker(s), underwriter(s) and manager(s)
for the offering or distribution will be selected by the Company.
(f) OTHER REGISTRATIONS. If the Company has previously filed a
registration statement with respect to Registrable Securities pursuant to this
Section 6.2, and if such previous registration statement has not been withdrawn
or abandoned, the Company will not file or cause to be effected any other
registration of any of its equity securities, including, without limitation, the
Common Stock, or securities convertible or exchangeable into or exercisable for
its equity securities under the Securities Act (except on Forms S-4 or S-8, or
any successor forms), whether on its own behalf or at the request of any holder
or holders of such securities, until a period of at least six months has elapsed
from the effective date of such previous registration or qualification.
<PAGE>
22
6.3. HOLDBACK AGREEMENTS.
(a) Each holder of Registrable Securities agrees not to effect any
public sale or distribution (including sales pursuant to Rule 144) of equity
securities, including, without limitation, the Common Stock, of the Company, or
any securities convertible into or exchangeable or exercisable for such
securities, during the seven days prior to and the 180-day period beginning on
the effective date of any Demand Registration or Piggyback Registration for a
public offering to be underwritten on a firm commitment basis (except as part of
such underwritten registration), unless the investment bankers or underwriters
managing the public offering otherwise agree.
(b) The Company agrees (i) not to effect any public sale or
distribution of its equity securities, including, without limitation, the Common
Stock, or any securities convertible into or exchangeable or exercisable for
such securities, during the seven days prior to and during the 180-day period
beginning on the effective date of any underwritten Demand Registration or
Piggyback Registration (except as part of such underwritten registration),
unless the underwriters managing the registered public offering otherwise agree,
and (ii) to use best efforts to cause each holder of at least 5% (on a Fully
Diluted Basis) of its equity securities, including, without limitation, Common
Stock, or any securities convertible into or exchangeable or exercisable for
such securities, purchased from the Company at any time after the date of this
Agreement (other than in a registered public offering or distribution) to agree
not to effect any public sale or distribution (including sales pursuant to Rule
144) of any such securities during such period (except as part of such
underwritten registration), unless the underwriters managing the public offering
or distribution otherwise agree.
6.4. REGISTRATION PROCEDURES. Whenever the holders of Registrable
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company will use its best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof, and pursuant thereto the Company will as
expeditiously as possible:
(a) prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective (provided that before
filing a registration statement or prospectus or any amendments or
supplements thereto, the Company will furnish to the counsel selected by
the holders of a majority of the Registrable Securities covered by such
registration statement copies of all such documents proposed to be filed);
(b) subject to Section 6.4(e), prepare and file with the SEC such
amendments and supplements to such registration statement and the
prospectus used in connection therewith as
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23
may be necessary to keep such registration statement effective for a period
of not less than six months and comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such registration statement during such period in accordance with the
intended methods of disposition by the sellers thereof set forth in such
registration statement;
(c) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement
thereto, the prospectus included in such registration statement (including
each preliminary prospectus) and such other documents as such seller may
reasonably request in order to facilitate the disposition of the
Registrable Securities owned by such seller;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such
jurisdictions of the United States of America as any seller reasonably
requests and do any and all other acts and things which may be reasonably
necessary or advisable to enable such seller to consummate the disposition
in such jurisdictions of the Registrable Securities owned by such seller
(provided that the Company will not be required to (i) qualify generally to
do business in any jurisdiction where it would not otherwise be required to
qualify but for this subsection, (ii) subject itself to taxation in any
such jurisdiction or (iii) consent to general service of process (i.e.,
service of process which is not limited solely to securities law
violations) in any such jurisdiction);
(e) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue
statement of a material fact or omits any fact necessary to make the
statements therein not misleading, and, at the request of any such seller,
the Company will promptly prepare a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make
the statements therein not misleading; PROVIDED, that upon not less than
five days' notice to the holders of Registrable Securities, the Company may
defer the filing of an amendment or withdraw an amendment or may defer the
effectiveness of an amendment or the preparation of a supplement if the
Board of Directors of the Company determines, in good faith, that such
amendment or supplement, or the disclosure of any information in connection
therewith, would have a material adverse affect upon the Company or its
subsidiaries; and PROVIDED, FURTHER, that the Company may not defer the
filing of any such amendment or supplement for more than 30 days;
<PAGE>
24
(f) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are
then listed and, if not so listed, to be listed on the National Association
of Securities Dealers Automated Quotations System ("NASDAQ") and, if listed
on the NASDAQ, use its best efforts to secure designation of all such
Registrable Securities covered by such registration statement as a
"national market system security" within the meaning of Rule 11Aa2-1 of the
SEC or, failing that, to secure NASDAQ authorization for such Registrable
Securities and, without limiting the generality of the foregoing, to
arrange for at least two market makers to register as such with respect to
such Registrable Securities with the NASD;
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration
statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the
holders of a majority of the Registrable Securities being sold or the
underwriters, if any, reasonably request in order to expedite or facilitate
the disposition of such Registrable Securities (including, without
limitation, effecting a stock split or a combination of shares);
(i) make available, subject to any confidentiality agreements
reasonably requested by the Company, for inspection by any seller of
Registrable Securities, any underwriter participating in any disposition
pursuant to such registration statement and any attorney, accountant or
other agent retained by any such seller or underwriter, all financial and
other records, pertinent corporate documents and properties of the Company,
and cause the Company's officers, directors, employees and independent
accountants to supply all information reasonably requested by any such
seller, underwriter, attorney, accountant or agent in connection with such
registration statement;
(j) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and, if required, make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months beginning with the first day
of the Company's first full calendar quarter after the effective date of
the registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;
(k) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the
qualification of any equity securities, including, without limitation, the
Common Stock, included in such registration statement for sale in any
<PAGE>
25
jurisdiction, the Company will use its reasonable best efforts promptly to
obtain the withdrawal of such order;
(l) use its best efforts to cause such Registrable Securities covered
by such registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to enable
the sellers thereof to consummate the disposition of such Registrable
Securities; and
(m) obtain a "cold comfort" letter from the Company's independent
public accountants in customary form and covering such matters of the type
customarily covered by "cold comfort" letters as the holders of a majority
of the Registrable Securities being sold reasonably request; and
It shall be a condition precedent to the obligation of the Company to
take any action pursuant to this Agreement in respect of the securities which
are to be registered at the request of any holder of Registrable Securities that
such holder shall furnish to the Company such information regarding the
securities held by such holder and the intended method of disposition thereof as
the Company shall reasonably request in connection with such registration.
6.5. REGISTRATION EXPENSES.
(a) Except as otherwise expressly provided in this Agreement, all
Registration Expenses will be borne by the Company.
(b) Except as otherwise expressly provided in this Agreement, in
connection with each Demand Registration and each Piggyback Registration, the
Company will reimburse the holders of Registrable Securities covered by such
registration for the reasonable fees and disbursements of one counsel chosen by
the holders of a majority of the Registrable Securities initially requesting
such registration.
6.6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless, to the full
extent permitted by law, each holder of Registrable Securities, its officers and
directors and each Person who controls such holder (within the meaning of the
Securities Act) against all losses, claims, damages, liabilities and expenses
arising out of or based upon any untrue or alleged untrue statement of material
fact contained in any registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, and shall reimburse such holder,
director, officer or controlling person for any legal or other expenses
reasonably incurred by such holder, director, officer or controlling person in
connection with the investigation or defense of such loss, claim, damage,
liability or expense,
<PAGE>
27
except insofar as the same are contained in any information furnished in writing
to the Company by such holder expressly for use therein or by such holder's
failure to deliver a copy of the registration statement or prospectus or any
amendments or supplements thereto after the Company has furnished such holder
with a sufficient number of copies of the same. In connection with an
underwritten offering, the Company will indemnify such underwriters, their
officers and directors and each Person who controls such underwriters (within
the meaning of the Securities Act) to the same extent as provided above with
respect to the indemnification of the holders of Registrable Securities.
(b) In connection with any registration statement in which a holder
of Registrable Securities is participating, each such holder will furnish to the
Company in writing such information as the Company reasonably requests for use
in connection with any such registration statement or prospectus and, to the
full extent permitted by law, will indemnify and hold harmless the Company, its
directors and officers and each Person who controls the Company or any other
holder of registrable securities (within the meaning of the Securities Act)
against any losses, claims, damages, liabilities and expenses resulting from any
untrue or alleged untrue statement of material fact contained in the
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, but only to the extent that such untrue statement or omission is
contained in any information so furnished in writing by such holder; PROVIDED,
that the obligation to indemnify will be individual to each holder and will be
limited to the net amount of proceeds received by such holder from the sale of
Registrable Securities pursuant to such registration statement.
(c) Any Person entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability for any settlement made
by the indemnified party without its consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(d) The indemnification provided for under this Agreement will be in
addition to any liability the indemnifying
<PAGE>
27
party may otherwise have and without prejudice to any other right or remedy the
indemnified party may otherwise have, which will remain in full force and effect
regardless of any omission to give notice (except to the extent such omission
effects the ability of the indemnifying party to defend such claim) or any
investigation made by or on behalf of the indemnified party or any officer,
director or controlling Person of such indemnified party and will survive the
transfer of securities. The Company also agrees to make such provisions, as are
reasonably requested by any indemnified party, for contribution to such party in
the event the Company's indemnification is unavailable for any reason.
6.7. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person may
participate in any registration hereunder which is underwritten unless such
Person (a) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (b) completes and executes all customary
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements; PROVIDED, that no holder of Registrable Securities included in any
underwritten registration shall be required to make any representations or
warranties to the Company or the underwriters other than representations and
warranties regarding such holder and such holder's intended method of
distribution.
6.8. RULE 144 REPORTING. With a view to making available to the
holders of Registrable Securities the benefits of certain rules and regulations
of the SEC which may permit the sale of the Registrable Securities to the public
without registration, the Company agrees to use its best efforts to:
(a) make and keep current public information available, within the
meaning of Rule 144 or any similar or analogous rule promulgated under the
Securities Act, at all times after it has become subject to the reporting
requirements of the Exchange Act;
(b) file with the SEC, in a timely manner, all reports and other
documents required of the Company under the Securities Act and Exchange Act
(after it has become subject to such reporting requirements); and
(c) so long as any party hereto owns any Registrable Securities,
furnish to such Person forthwith upon request, a written statement by the
Company as to its compliance with the reporting requirements of said Rule
144 (at any time commencing 90 days after the effective date of the first
registration filed by the Company for an offering of its securities to the
general public), the Securities Act and the Exchange Act (at any time after
it has become subject to such reporting requirements); a copy of the most
recent annual or quarterly report of the Company; and such other reports
and documents as such Person may reasonably request in availing
<PAGE>
28
itself of any rule or regulation of the SEC allowing it to sell any such
securities without registration.
7. AFTER-ACQUIRED SECURITIES. All of the provisions of this
Agreement shall apply to all of the Shares now owned or which may be issued or
transferred hereafter to a Stockholder in consequence of any additional
issuance, purchase, exchange or reclassification of any of the Shares (including
without limitation, upon the exercise of any option or warrant), corporate
reorganization, or any other form of recapitalization, consolidation, merger,
share split or share dividend, or which are acquired by a Stockholder in any
other manner.
8. STOCK CERTIFICATE LEGEND. A copy of this Agreement shall be
filed with the Secretary of the Company and kept with the records of the
Company. Each certificate issued on or after the date hereof representing
Shares now held or hereafter acquired by any Stockholder shall, for as long as
this Agreement is effective, bear legends substantially in the following forms:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS OR
PURSUANT TO A WRITTEN OPINION OF COUNSEL FOR THE COMPANY THAT REGISTRATION
IS NOT REQUIRED.
THE SALE, ASSIGNMENT, HYPOTHECATION, PLEDGE, ENCUMBRANCE OR OTHER
DISPOSITION (EACH A "TRANSFER") AND VOTING OF ANY OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE TERMS OF THE AMENDED
AND RESTATED STOCKHOLDERS AGREEMENT, DATED AS OF OCTOBER 31, 1997 (THE
"STOCKHOLDERS AGREEMENT"), AMONG KMC TELECOM HOLDINGS, INC., NASSAU CAPITAL
PARTNERS L.P., NAS PARTNERS I L.L.C., HAROLD N. KAMINE, KMC
TELECOMMUNICATIONS L.P., GENERAL ELECTRIC CAPITAL CORPORATION, CORESTATES
HOLDINGS, INC. AND AT&T CREDIT CORPORATION, A COPY OF WHICH MAY BE
INSPECTED AT THE COMPANY'S PRINCIPAL OFFICE. THE COMPANY WILL NOT REGISTER
[6~ THE TRANSFER OF SUCH SECURITIES ON THE BOOKS OF THE COMPANY UNLESS AND
UNTIL THE TRANSFER HAS BEEN MADE IN COMPLIANCE WITH THE TERMS OF SUCH
STOCKHOLDERS AGREEMENT.
9. MISCELLANEOUS.
9.1. NOTICES. All notices or other communication required or
permitted hereunder shall be in writing and shall be delivered personally,
telecopied or sent by certified, registered or express mail, postage prepaid.
Any such notice shall be deemed
<PAGE>
29
given when so delivered personally, telecopied or sent by certified, registered
or express mail or, if mailed, five days after the date of deposit in the United
States mail, as follows:
(a) if to the Company or Kamine:
KMC Telecom Holdings, Inc.
1545 Route 206
Bedminster, New Jersey 07921
Attn: Chief Executive Officer
Telecopier No: (908) 719-8775
with a copy to:
Kelley Drye & Warren
101 Park Avenue
New York, New York 10178
Attn: Alan Epstein, Esq.
Telecopier No: (212) 808-7898/7899
(b) if to Nassau:
Nassau Capital L.L.C.
22 Chambers Street
Princeton, New Jersey 08542
Attention: John Q. Quigley
Telecopy: (609) 924-8887
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: George R. Krouse, Jr., Esq.
Telecopy: (212) 455-2502
(c) if to AT&T:
AT&T Credit Corporation
44 Whippany Road
Morristown, New Jersey 07960-1983
Attention: Capital Markets Division
Vice President Operations
Telephone: 973-397-3333
Telecopy: 973-397-4368
with copies to:
AT&T Credit Corporation
44 Whippany Road
Morristown, New Jersey 07962-1983
Attention: Capital Markets Division
Chief Counsel
Telephone: 973-397-4189
Telecopy: 973-397-3165
<PAGE>
30
and
John M. O'Hare, Esq.
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
Telecopy: (312) 853-7036
(d) if to CoreStates Bank:
CoreStates Bank, N.A.
1339 Chestnut Street
Philadelphia, PA 19102
Attention: Elizabeth Elmore
FC1-8-11-28
Telecopy: 215-786-4321
with a copy to:
Pepper, Hamilton & Scheetz
3000 Two Logan Square
Philadelphia, PA 19103
Attention: James S. Lawlor
Telecopy: 215-981-4403
(e) if to CoreStates Holdings:
CoreStates Holdings, Inc.
900 Market Street
Suite 202
Wilmington, DE 19801
Attention: Francis B. Jacobs, II
Telecopy: 302-421-7378
with a copy to:
Pepper, Hamilton & Scheetz
3000 Two Logan Square
Philadelphia, PA 19103
Attention: James S. Lawlor
Telecopy: 215-981-4403
(e) if to GECC:
General Electric Capital Corporation
120 Long Ridge Road
Stamford, CT 06927
Attention: Manager-Operations
Telecopy: 203-961-2017
with a copy to
Pillsbury Madison & Sutro
235 Montgomery Street
San Francisco, CA 94104
<PAGE>
31
Attention: George Haley
Telecopy: 415-983-1200
(f) if to any other Stockholder, at its address as it appears on the
record books of the Company. Any party may by notice given in accordance
with this Section 9.1 designate another address or person for receipt of
notices hereunder.
9.2. AMENDMENT AND WAIVER.
(a) No failure or delay on the part of any party hereto in exercising
any right, power or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right, power or remedy preclude
any other or further exercise thereof or the exercise of any other right, power
or remedy. The remedies provided for herein are cumulative and are not
exclusive of any remedies that may be available to the parties hereto at law, in
equity or otherwise.
(b) Any amendment, supplement or modification of or to any provision
of this Agreement, any waiver of any provision of this Agreement, and any
consent to any departure by any party from the terms of any provision of this
Agreement, shall be effective (i) only if it is made or given in writing and
signed by Nassau, Kamine, AT&T, GECC and CoreStates and (ii) only in the
specific instance and for the specific purpose for which made or given;
PROVIDED, HOWEVER, that any such amendment, supplement or modification to this
Agreement shall not be effective to withdraw, deny or adversely affect the
rights of any Stockholder who has not consented in writing to such amendment,
supplement or modification.
9.3. SPECIFIC PERFORMANCE. The parties hereto intend that each of the
parties have the right to seek damages or specific performance in the event that
any other party hereto fails to perform such party's obligations hereunder.
Therefore, if any party shall institute any action or proceeding to enforce the
provisions hereof, any party against whom such action or proceeding is brought
hereby waives any claim or defense therein that the plaintiff party has an
adequate remedy at law.
9.4. HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
9.5. SEVERABILITY. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, unless the provisions held
invalid, illegal or unenforceable shall substantially impair the benefits of the
remaining provisions hereof.
<PAGE>
32
9.6. ENTIRE AGREEMENT. This Agreement, together with the Investment
Agreement, is intended by the parties as a final expression of their agreement
and intended to be a complete and exclusive statement of the agreement and
understanding of the parties hereto in respect of the subject matter contained
herein and therein. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein or therein. This
Agreement, together with the exhibits hereto, supersedes all prior agreements
and understandings between the parties with respect to such subject matter.
9.7. TERM OF AGREEMENT. The provisions of this Agreement shall become
effective upon the execution hereof and, except as otherwise specified herein,
the provisions of Sections 2 and 3 of this Agreement shall terminate upon the
consummation of a QPO and the remaining provision of this Agreement shall
terminate as provided herein.
9.8. VARIATIONS IN PRONOUNS. All pronouns and any variations thereof
refer to the masculine, feminine or neuter, singular or plural, as the context
may require.
9.9. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES
OF CONFLICTS OF LAW THEREOF.
9.10. FURTHER ASSURANCES. Each of the parties shall, and shall cause
their respective Affiliates to, execute such instruments and take such action as
may be reasonably required or desirable to carry out the provisions hereof and
the transactions contemplated hereby.
9.11. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors, heirs,
legatees and legal representatives. This Agreement is not assignable except in
connection with a transfer of Shares in accordance with this Agreement.
9.12. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which taken
together shall constitute one and the same instrument.
<PAGE>
33
IN WITNESS WHEREOF, the undersigned have executed, or have cause to be
executed, this Agreement on the date first written above.
KMC TELECOM HOLDINGS, INC.
By: /s/ Cynthia Wortham
---------------------------------
Name: Cynthia Wortham
Title: Chief Financial Officer
KMC TELECOMMUNICATIONS L.P.
By:
---------------------------------
Name:
Title:
NASSAU CAPITAL PARTNERS L.P.
By: Nassau Capital L.L.C., its General
Partner
By: /s/ John G. Quigley
---------------------------------
Name: John G. Quigley
Title: Member
NAS PARTNERS I L.L.C.
By: /s/ John G. Quigley
---------------------------------
Name: John G. Quigley
Title: Member
HAROLD N. KAMINE
/s/ Harold N. Kamine
------------------------------------
AT&T CREDIT CORPORATION
By: /s/ Glenn A. Votek
---------------------------------
Name: Glenn A. Votek
Title: Vice President and Treasurer
<PAGE>
34
CORESTATES BANK, N.A.
By: /s/ Elizabeth Elomze
---------------------------------
Name:Elizabeth Elomze
Title: Vice President
CORESTATES HOLDINGS, INC.
By: /s/ Francis B. Jacobs II
---------------------------------
Name: Francis B. Jacobs II
Title: Vice President
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ Molly S. Ferguson
---------------------------------
Name: Molly S. Ferguson
Title: Manager, Operations
<PAGE>
EX. 4.2
AMENDMENT NO. 1
TO THE
AMENDED AND RESTATED
STOCKHOLDERS AGREEMENT
AMENDMENT NO. 1, dated as of January 7, 1998, to the Amended and
Restated Stockholders Agreement, dated as of October 31, 1997 (as amended
from time to time, the "Stockholders Agreement"), among KMC Telecom Holdings,
Inc. (the "Company"), Nassau Capital Partners L.P., NAS Partners I L.L.C.,
Harold N. Kamine ("HNK"), KMC Telecommunications L.P. ("KMC LP"), AT&T Credit
Corporation, General Electric Capital Corporation, CoreStates Bank, N.A. and
CoreStates Holdings, Inc.
W I T N E S S E T H:
WHEREAS, HNK intends to transfer his general-partner interest in
KMC LP to a substitute general partner, in the form of a partnership owned or
controlled by Gerard M. Russomagno and Albert Kamine and other limited
partners, some of whom are members of HNK's family (such substitute general
partner, the "New Partner"); and
WHEREAS, the undersigned stockholders of the Company desire to
accommodate such transfer to the New Partner by amending the Stockholders
Agreement in accordance with the terms set forth herein;
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, all
capitalized terms used herein have the meanings ascribed thereto in the
Stockholders Agreement.
2. Amendment to Preamble. The Preamble to the Stockholders
Agreement is hereby amended by deleting the first paragraph thereof and
replacing such paragraph in its entirety with the following:
"AMENDED AND RESTATED STOCKHOLDERS AGREEMENT, dated as of
October 31, 1997 (this "Agreement"), among KMC Telecom Holdings,
Inc., a Delaware corporation (the "Company"), Nassau Capital
Partners L.P., a Delaware limited partnership ("Nassau Capital"),
NAS Partners I L.L.C., a Delaware limited liability company
("NAS" and, together with Nassau Capital, "Nassau"), Harold N.
Kamine ("HNK" or "Kamine"), AT&T Credit Corporation, a Delaware
corporation ("AT&T"), General Electric Capital Corporation, a New
York corporation ("GECC"), CoreStates Bank, N.A., a national
banking association ("CoreStates Bank") and CoreStates Holdings,
Inc., a Delaware corporation ("CoreStates Holdings" and, together
with CoreStates Bank, "CoreStates").
<PAGE>
3. Amendment to Definitions. The Definitions section of the
Stockholders Agreement is hereby amended as follows:
""Registrable Securities" means (i) the Common Stock issued
or issuable upon the conversion of the Convertible Preferred
Stock or the exercise of the AT&T Company Warrant or the GECC
Warrant, (ii) any Common Stock acquired after October 31, 1997 by
Nassau, Kamine, AT&T, GECC, CoreStates, any Accredited Investor
that is a permitted transferee of Common Stock pursuant to
Section 3.1.6 or any of their respective Affiliates, (iii) the
Common Stock held, as of October 31, 1997, by Kamine, Nassau,
AT&T and CoreStates and their respective Affiliates and by KMC
Telecommunications L.P., a Delaware limited partnership, and (iv)
any shares of capital stock of the Company issued or issuable
with respect to the securities referred to in clauses (i) through
(iii) by way of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger,
consolidation or other reorganization. For purposes of this
Agreement, a Person will be deemed to be a holder of Registrable
Securities whenever such Person has the right to acquire directly
or indirectly such Registrable Securities (including, without
limitation, upon conversion or exercise in connection with a
transfer of securities or otherwise, but disregarding any
restrictions or limitations upon the exercise of such right),
whether or not such acquisition has actually been effected. As
to any particular Registrable Securities, once issued such
securities shall cease to be Registrable Securities when (i) such
securities shall have been registered under the Securities Act,
and the registration statement with respect to the sale of such
securities shall have become effective under the Securities Act
or such securities shall have been sold under circumstances in
which all applicable conditions of Rule 144 (or any similar
provision then in force) under the Securities Act are met or may
be sold pursuant to Rule 144(k), (ii) such securities shall have
been otherwise transferred, new certificates for them not bearing
a legend restricting further transfer shall have been delivered
by the Company and subsequent disposition of such securities
shall not require registration or qualification of such
securities under the Securities Act or any state securities or
blue sky laws then in force in a preponderance of states, or
(iii) such securities shall cease to be outstanding.
4. Limited Amendment. Except as expressly amended hereby, all the
provisions of the Stockholders Agreement are hereby affirmed and shall
continue to be in full force and effect in accordance with their terms, and
any amendments contained herein shall be limited precisely as drafted and
shall not constitute an amendment of any terms or provisions of the
Stockholders Agreement except as expressly provided.
5. Governing Law. THIS AMENDMENT NO. 1 AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT NO. 1 SHALL BE GOVERNED BY,
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF
DELAWARE.
2
<PAGE>
6. Counterparts. This Amendment No. 1 may be executed by
one or more of the parties to this Amendment on any number of separate
counterparts, and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
on the date first written above.
3
<PAGE>
/s/ Harold N. Kamine
----------------------------
Harold N. Kamine
KMC TELECOM HOLDINGS, INC.
By: /s/ Cynthia Worthman
------------------------
Name:
Title:
NASSAU CAPITAL PARTNERS L.P.
By: NASSAU CAPITAL L.L.C.
(as general partner)
By: /s/ Illegible
-------------------
Name:
Title:
NAS PARTNERS I L.L.C.
By: /s/ Illegible
------------------------
Name:
Title:
KMC TELECOMMUNICATIONS L.P.
By: /s/ Harold N. Kamine
------------------------
Name:
Title:
AT&T CREDIT CORPORATION
By: /s/ William G. Roos
------------------------
Name: William G. Roos
Title: Vice President
4
<PAGE>
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ Edward Smith Cristie
--------------------------
Name: Edward Smith Cristie
Title: Manager-Operations
CORESTATES BANK, N.A.
By: /s/ Elizabeth Elmore
------------------------
Name: Elizabeth Elmore
Title: Vice President
CORESTATES HOLDINGS, INC.
By: /s/ Francis B. Jacobs II
--------------------------
Name: Francis B. Jacobs II
Title: Vice President
5
<PAGE>
Exhibit 4.3
AMENDMENT NO. 2 TO
THE AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
AMENDMENT NO. 2 dated as of January 26, 1998 to the Amended and
Restated Stockholders Agreement, dated as of October 31, 1997 (as heretofore
amended, the "Stockholders Agreement") among KMC Telecom Holdings, Inc., Nassau
Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, AT&T Credit
Corporation, General Electric Capital Corporation, CoreStates Bank, N.A., and
CoreStates Holdings, Inc.
W I T N E S S E T H
WHEREAS, the parties to the Stockholders Agreement entered into a letter
agreement, dated January 6, 1998, pursuant to which it was agreed that the
Stockholders Agreement would be amended to permit the grant of certain
registration rights in connection with a proposed high yield debt and equity
offering currently contemplated by the Company; and
WHEREAS, the parties hereto desire to make such amendments to the
Stockholders Agreement;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. DEFINED TERMS. Unless otherwise defined herein, all capitalized
terms defined in the Stockholders Agreement and used herein are so used as so
defined. In addition, the following terms shall have the meanings set forth
below:
"HYDEO" means the offering and sale of not more than 460,800 Units,
each Unit consisting of $1,000 principal amount at maturity of Senior Discount
Notes due 2008 of the Company and one warrant to purchase Common Stock,
substantially in the manner contemplated by the Purchase Agreement dated January
26, 1998 between the Company and Morgan Stanley & Co. Incorporated.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement dated as of January 26, 1998 between the Company and Morgan Stanley &
Co. Incorporated, relating to the granting by the Company of registration rights
with respect to the Senior Discount Notes.
"SENIOR DISCOUNT NOTES" means the Senior Discount Notes due 2008 of
the Company comprising a portion of the Units.
<PAGE>
2
"UNITS" means the Units offered and sold pursuant to the HYDEO.
"WARRANT REGISTRATION RIGHTS AGREEMENT" means the Warrant Registration
Rights Agreement dated as of January 26, 1998 between the Company and Morgan
Stanley & Co. Incorporated, relating to the granting by the Company of
registration rights with respect to the Warrant Shares.
"WARRANT SHARES" means shares of Common Stock issuable upon exercise
of Warrants, such other securities as shall be issuable upon the exercise of
Warrants, or shares of Common Stock or other securities received upon the
exercise of Warrants.
"WARRANTS" means the Warrants comprising a portion of the Units.
2. AMENDMENTS TO SECTIONS 6.1 AND 6.2 OF THE STOCKHOLDERS AGREEMENT.
Sections 6.1 and 6.2 of the Stockholders Agreement are amended to read as
follows:
6.1 DEMAND REGISTRATIONS.
(a) RIGHT TO DEMAND. At any time and from time to time following the
earlier of June 5, 2000 and the Demand Rights Commencement Date, each of Nassau,
Kamine, AT&T and the Majority Series C Holders (each of which is referred to in
this Section 6 as a "Demand Holder") may request the Company to register its
Registrable Securities in the manner set forth herein by written notice (the
"REGISTRATION NOTICE") to the Company only if a disposition of the Registrable
Securities may not, in the opinion of the Demand Holder, be effected in the
public marketplace (as opposed to a private transaction under the Securities
Act) at equally favorable net terms to the Demand Holder without registration of
such shares under the Securities Act. In the event that the Company receives a
Registration Notice, the Company shall effect a registration under the
Securities Act of the number of Registrable Securities determined in accordance
with Section 6.1(c) on Form S-1 or any similar long-form registration
("LONG-FORM REGISTRATIONS") or on Form S-2 or S-3 or any similar short-form
registration ("SHORT-FORM REGISTRATIONS") if available. All registrations
requested pursuant to this Section 6.1(a) are referred to herein as "DEMAND
REGISTRATIONS.
(b) NUMBER OF DEMAND REGISTRATIONS. Each of Nassau and Kamine will
be entitled following the earlier of June 5, 2000 and the Demand Rights
Commencement Date to obtain up to two (2) Long-Form Registrations and two (2)
Short-Form Registrations. So long as AT&T or any of its Affiliates shall hold
any Registrable Securities, then AT&T, or if AT&T and its Affiliates
<PAGE>
3
no longer hold any Registrable Securities, then the holders of at least 50% of
the aggregate number of Registrable Securities transferred by AT&T which are
Registrable Securities on the date such request is being made, will be entitled
following the earlier of June 5, 2000 and the Demand Rights Commencement Date to
obtain up to an aggregate of two (2) Registrations (which may be Short-Form
Registrations, at the Company's option, if the Company is then eligible
therefor). The Majority Series C Holders (for themselves and on behalf of all
Stockholders holding shares of Common Stock into which shares of Series C
Convertible Preferred Stock have been, or may be, converted) will be entitled
following the earlier of June 5, 2000 and the Demand Rights Commencement Date to
obtain up to an aggregate of two (2) Registrations (which may be Short-Form
Registrations, at the Company's option, if the Company is then eligible
therefor). A registration will not count as a Long-Form Registration or
Short-Form Registration, as the case may be, until such Demand Registration has
become effective and unless the Demand Holder is able to register and sell at
least 66 2/3% of the Registrable Securities requested to be included in such
registration. Demand Registrations will be Short-Form Registrations whenever
the Company is permitted to use any applicable short form. After the Company
has become subject to the reporting requirements of the Exchange Act, the
Company will use its best efforts to make Short-Form Registrations available for
the sale of Registrable Securities. The Company shall not be required to pay
for any expenses of any registration proceeding begun pursuant to this Section
6.1(b) (including the Company's internal costs in proceeding on such request, as
reasonably determined by the Company's Board of Directors) if the registration
request is subsequently withdrawn, unless the Demand Holder agrees to treat the
withdrawn request as a registration undertaken pursuant to this Section 6.1(b);
PROVIDED, that if the Demand Holder withdraws a request as a result of a
material adverse change in the condition, business or prospects of the Company
or in the market for the Company's securities from that known to the Demand
Holder at the time of its request, the Company, and not the Demand Holder, shall
be required to pay all the expenses relating to the proposed registration and
such request shall not be treated as a registration for purposes of this Section
6.1(b).
(c) DEMAND REGISTRATIONS. Within (a) 75 days after the Company
receives a Registration Notice with respect to the first offer for sale of
Shares pursuant to an effective registration statement filed by the Company
under the Securities Act or (b) within 45 days after the Company receives a
Registration Notice with respect to any other demand registration, the Company
shall file with the SEC a registration statement under the Securities Act for
such Demand Registration. The Company shall use its best efforts to cause the
Demand Registration to be declared effective under the Securities Act as soon as
is practical after filing, and once effective, the Company shall cause such
Demand Registration to remain effective for such time period as is
<PAGE>
4
specified in such request, but for no time period longer than the period ending
on the earlier of (i) the one-year anniversary of the effective date of such
Demand Registration, (ii) the date on which all Registrable Securities have been
sold pursuant to the Demand Registration or (iii) the date as of which there are
no longer any Registrable Securities in existence. Each request for a Demand
Registration shall specify the approximate number of Registrable Securities
requested to be registered and the anticipated per share price range for such
offering.
(d) PRIORITY ON DEMAND REGISTRATIONS. The Company will not include
in any Demand Registration any securities which are not Registrable Securities
without the prior written consent of the Demand Holder; provided, however, that
no such consent shall be required in connection with the inclusion in any Demand
Registration of the Senior Discount Notes and Warrant Shares as and to the
extent provided below. If a Demand Registration is an underwritten offering and
the managing underwriters advise the Company in writing that in their opinion
the number of Registrable Securities and, if permitted hereunder, other
securities requested to be included in such offering exceeds the number of
Registrable Securities and other securities, if any, which can be sold therein
without adversely affecting the price, timing or distribution of the offering,
the Company will include in such registration, (i) first, the Registrable
Securities requested to be included in such registration, pro rata among the
holders of such Registrable Securities, on the basis of the number of shares of
Registrable Securities owned by each such holder and requested to be included
therein and (ii) second, other securities, if any, requested to be included in
such registration. Any Persons other than holders of Registrable Securities who
participate in Demand Registrations must pay their proportionate share of the
Registration Expenses as provided in Section 6.5 hereof that are not borne by
the Company.
(e) RESTRICTIONS ON DEMAND REGISTRATIONS. The Company will not be
obligated to effect any Demand Registration within six months after the
effective date of a previous Demand Registration. If at the time of any request
to register Registrable Securities pursuant to Section 6.1 hereof, the Company
is engaged, or has fixed plans to engage within 90 days of the time of the
request, in a registered public offering as to which the Stockholders may
include such Registrable Securities pursuant to Section 6.2 hereof or is engaged
in any activity which, in the good faith determination of the Company's Board of
Directors, would be adversely affected by the requested registration to the
material detriment of the Company, then the Company may at its option direct
that such request be delayed for a period not in excess of 60 days from the
effective date of such offering, or the date of commencement of such other
material activity, as the case may be, such right to delay a request to be
exercised by the Company not more than once within any twelve month
<PAGE>
5
period.
(f) SELECTION OF UNDERWRITERS. In the case of a Demand Registration,
the Company shall have the right to select the investment banker or bankers,
underwriters and managers to administer the offering; PROVIDED, HOWEVER, that
such investment banker or bankers underwriters and managers shall be reasonably
satisfactory to the Demand Holder.
(g) OTHER REGISTRATION RIGHTS. (i) Within the limitations
prescribed by this paragraph (i), but not otherwise, the Company may grant to
subsequent investors in the Company rights of incidental registration (such as
those provided in Section 6.2). Such rights may only pertain to the Senior
Discount Notes and Warrant Shares, in the case of the HYDEO, and, otherwise,
shares of Common Stock, including shares of Common Stock into which any other
securities may be converted. Such rights may be granted with respect to (a)
registrations actually requested by a Demand Holder pursuant to Section 6.1, but
only in respect of that portion of any such registration as remains after
inclusion of all Registrable Securities requested by the Demand Holder and
(b) registrations initiated by the Company, but only in respect of that portion
of such registration as is available under the limitations set forth in
Section 6.2(c) (which limitations shall apply pro rata to all holders of
Registrable Securities) and such rights shall be limited in all cases to sharing
in the available portion of the registration in question with holders of
Registrable Securities and other investors as provided in Section 6.2(c), such
sharing to be based on the number of shares of Common Stock held by the
respective holders of Registrable Securities and held by such other investors,
plus the number of shares of Common Stock into which other securities held by
the holders of Registrable Securities and such other investors are convertible,
which are entitled to registration rights. With respect to registrations which
are for underwritten public offerings, "available portion" as used above shall
mean the portion of the underwritten shares which is available as specified in
clauses (a) and (b) of the third sentence of this paragraph (i). Shares not
included in such underwriting shall not be registered.
(ii) The Company may not grant to subsequent investors in the
Company rights of registration upon request (such as those provided in
Section 6.1) unless (a) such rights are limited to shares of Common Stock;
(b) the Demand Holders are given enforceable contractual rights to
participate in registrations requested by such subsequent investors (but
subject to the right of priority of registration in the following order:
such subsequent investors and the holders of Registrable Securities on a pro
rata basis), such participation to be on the pro rata basis and subject to
the limitations described in the final three sentences of paragraph (i) of
this Section 6.1(g); (c) such rights shall not become effective prior to 90
days after the effective date of the first registration
<PAGE>
6
pursuant to Section 6.1; and (d) such rights shall not be more favorable than
those granted to the Demand Holders. Notwithstanding the foregoing or anything
to the contrary contained in this Agreement, the Company may file shelf
registrations under the Securities Act (x) as required by Section 3 of the
Warrant Registration Rights Agreement, substantially upon the terms and subject
to the conditions contained therein, and (y) as required by Section 2(b) of the
Registration Rights Agreement, substantially upon the terms and subject to the
conditions contained therein.
6.2 PIGGYBACK REGISTRATIONS.
(a) RIGHT TO PIGGYBACK. Whenever the Company proposes to register
any of its equity securities, including, without limitation, the Common Stock
under the Securities Act (other than pursuant to a registration statement on
Form S-8 or S-4 or any successor forms), and the form to be used may be used for
the registration of Registrable Securities (a "PIGGYBACK REGISTRATION"), the
Company will give prompt written notice to all holders of Registrable Securities
of its intention to effect such a registration and will include in such
registration all Registrable Securities with respect to which the Company has
received written requests for inclusion therein within 20 days after the receipt
of the Company's notice.
(b) PIGGYBACK EXPENSES. The Registration Expenses of the holders of
Registrable Securities will be paid by the Company in all Piggyback
Registrations.
(c) PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration
is an underwritten primary registration on behalf of the Company, the Company
will include in such registration all securities requested to be included in
such registration; PROVIDED, that if the managing underwriters advise the
Company in writing that in their opinion the number of securities requested to
be included in such registration exceeds the number which can be sold in such
offering without adversely affecting the price, timing or distribution of the
offering, the Company will include in such registration (i) first, the
securities the Company proposes to sell, (ii) second, the Registrable Securities
requested to be included in such registration, pro rata among the holders of
such Registrable Securities on the basis of the number of Registrable Securities
owned by each such holder and requested to be included therein, and (iii) third,
other securities (including Warrant Shares), if any, requested to be included in
such registration.
(d) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration
is an underwritten secondary registration on behalf of holders of the Company's
securities, and the managing underwriters advise the Company
<PAGE>
7
in writing that in their opinion the number of securities requested to be
included in such registration exceeds the number which can be sold in such
offering without adversely affecting the price, timing or distribution of the
offering, the Company will include in such registration (i) first, the
Registrable Securities requested to be included in such registration, pro rata
among the holders of such Registrable Securities on the basis of the number of
Registrable Securities owned by each such holder and requested to be included
therein, and (ii) second, other securities requested to be included in such
registration.
(e) SELECTION OF UNDERWRITERS. If any Piggyback Registration is an
underwritten offering, the investment banker(s), underwriter(s) and manager(s)
for the offering or distribution will be selected by the Company.
(f) OTHER REGISTRATIONS. If the Company has previously filed a
registration statement with respect to Registrable Securities pursuant to this
Section 6.2, and if such previous registration statement has not been withdrawn
or abandoned, the Company (except as permitted by paragraph (g) of Section 6.1)
will not file or cause to be effected any other registration of any of its
equity securities, including, without limitation, the Common Stock, or
securities convertible or exchangeable into or exercisable for its equity
securities under the Securities Act (except on Forms S-4 or S-8, or any
successor forms), whether on its own behalf or at the request of any holder or
holders of such securities, until a period of at least six months has elapsed
from the effective date of such previous registration or qualification.
3. Except as expressly amended hereby, all of the provisions of the
Stockholders Agreement are hereby affirmed and shall continue in full force and
effect in accordance with their terms.
4. This Amendment shall be governed and construed in accordance with
the laws of the state of Delaware applicable to agreements made and to be
performed entirely within such state, without regard to the principles of
conflicts of laws thereof.
5. This Amendment may be executed in one or more counterparts, each of
which shall be deemed an original and all of which, taken together, shall
constitute one and the same instrument.
<PAGE>
8
IN WITNESS WHEREOF, the undersigned have executed, or caused to be
executed, this Agreement as of the date first above written.
KMC TELECOM HOLDINGS, INC.
By: /s/ Harold N. Kamine
------------------------------
Name:
Title:
NASSAU CAPITAL PARTNERS L.P.
By: Nassau Capital L.L.C., its General
Partner
By: /s/ Randall A. Hack
------------------------------
Name: Randall A. Hack
Title: Member
NAS PARTNERS I L.L.C.
By: /s/ Randall A. Hack
------------------------------
Name: Randall A. Hack
Title: Member
HAROLD N. KAMINE
/s/ Harold N. Kamine
---------------------------------
AT&T CREDIT CORPORATION
By: /s/ Daria A. Pishco
------------------------------
Name: Daria A. Pishco
Title: Vice President
<PAGE>
9
CORESTATES BANK, N.A.
By: /s/ Elizabeth Elmore
------------------------------
Name: Elizabeth Elmore
Title: Vice President
CORESTATES HOLDINGS, INC.
By: /s/ Francis B. Jacobs II
------------------------------
Name: Francis B. Jacobs II
Title: Vice President and
Assistant Treasurer
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ William D. Strittmatter
------------------------------
Name: William D. Strittmatter
Title: Vice President
<PAGE>
Exhibit 4.4
Execution Copy
AMENDMENT NO. 3 TO
THE AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
AMENDMENT NO. 3 dated as of February 25, 1998 to the Amended and
Restated Stockholders Agreement, dated as of October 31, 1997 (as heretofore
amended, the "Stockholders Agreement"), among KMC Telecom Holdings, Inc., Nassau
Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, AT&T Credit
Corporation, General Electric Capital Corporation, CoreStates Bank, N.A., and
CoreStates Holdings, Inc.
W I T N E S S E T H
WHEREAS, the parties hereto desire to make certain amendments to the
Stockholders Agreement;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. DEFINED TERMS. Unless otherwise defined herein, all capitalized
terms defined in the Stockholders Agreement and used herein are so used as so
defined.
2. AMENDMENTS TO SECTIONS 6.1(A) AND (B) OF THE STOCKHOLDERS
AGREEMENT. Sections 6.1(a) and (b) of the Stockholders Agreement are amended to
read as follows:
6.1 DEMAND REGISTRATIONS.
(a) RIGHT TO DEMAND. At any time and from time to time following (i)
June 5, 2000 or (ii) the Demand Rights Commencement Date, as specified in
Section 6.1(b), each of Nassau, Kamine, AT&T and the Majority Series C Holders
(each of which is referred to in this Section 6 as a "Demand Holder") may
request the Company to register its Registrable Securities in the manner set
forth herein by written notice (the "REGISTRATION NOTICE") to the Company only
if a disposition of the Registrable Securities may not, in the opinion of the
Demand Holder, be effected in the public marketplace (as opposed to a private
transaction under the Securities Act) at equally favorable net terms to the
Demand Holder without registration of such shares under the Securities Act. In
the event that the Company receives a Registration Notice, the Company shall
effect a registration under the Securities Act of the number of Registrable
Securities determined in accordance with Section 6.1(c) on Form S-1 or any
similar long-form registration ("LONG-FORM REGISTRATIONS") or on Form S-2 or S-3
or any similar short-form registration ("SHORT-FORM REGISTRATIONS") if
available. All registrations requested pursuant to this Section
<PAGE>
2
6.1(a) are referred to herein as "DEMAND REGISTRATIONS.
(b) NUMBER OF DEMAND REGISTRATIONS. Each of Nassau and Kamine will
be entitled following the earlier of June 5, 2000 and the Demand Rights
Commencement Date to obtain up to two (2) Long-Form Registrations and two (2)
Short-Form Registrations. So long as AT&T or any of its Affiliates shall hold
any Registrable Securities, then AT&T, or if AT&T and its Affiliates no longer
hold any Registrable Securities, then the holders of at least 50% of the
aggregate number of Registrable Securities transferred by AT&T which are
Registrable Securities on the date such request is being made, will be entitled
following the Demand Rights Commencement Date to obtain up to an aggregate of
two (2) Registrations (which may be Short-Form Registrations, at the Company's
option, if the Company is then eligible therefor). The Majority Series C
Holders (for themselves and on behalf of all Stockholders holding shares of
Common Stock into which shares of Series C Convertible Preferred Stock have
been, or may be, converted) will be entitled following the Demand Rights
Commencement Date to obtain up to an aggregate of two (2) Registrations (which
may be Short-Form Registrations, at the Company's option, if the Company is then
eligible therefor). A registration will not count as a Long-Form Registration
or Short-Form Registration, as the case may be, until such Demand Registration
has become effective and unless the Demand Holder is able to register and sell
at least 66 2/3% of the Registrable Securities requested to be included in such
registration. Demand Registrations will be Short-Form Registrations whenever
the Company is permitted to use any applicable short form. After the Company
has become subject to the reporting requirements of the Exchange Act, the
Company will use its best efforts to make Short-Form Registrations available for
the sale of Registrable Securities. The Company shall not be required to pay
for any expenses of any registration proceeding begun pursuant to this Section
6.1(b) (including the Company's internal costs in proceeding on such request, as
reasonably determined by the Company's Board of Directors) if the registration
request is subsequently withdrawn, unless the Demand Holder agrees to treat the
withdrawn request as a registration undertaken pursuant to this Section 6.1(b);
PROVIDED, that if the Demand Holder withdraws a request as a result of a
material adverse change in the condition, business or prospects of the Company
or in the market for the Company's securities from that known to the Demand
Holder at the time of its request, the Company, and not the Demand Holder, shall
be required to pay all the expenses relating to the proposed registration and
such request shall not be treated as a registration for purposes of this Section
6.1(b).
<PAGE>
3
3. Except as expressly amended hereby, all of the provisions of the
Stockholders Agreement are hereby affirmed and shall continue in full force and
effect in accordance with their terms.
4. This Amendment shall be governed and construed in accordance with
the laws of the state of Delaware applicable to agreements made and to be
performed entirely within such state, without regard to the principles of
conflicts of laws thereof.
5. This Amendment may be executed in one or more counterparts, each of
which shall be deemed an original and all of which, taken together, shall
constitute one and the same instrument.
<PAGE>
4
IN WITNESS WHEREOF, the undersigned have executed, or caused to be
executed, this Agreement as of the date first above written.
KMC TELECOM HOLDINGS, INC.
By: /s/ Cynthia Wortham
----------------------------
Name: Cynthia Wortham
Title:
NASSAU CAPITAL PARTNERS L.P.
By: Nassau Capital L.L.C., its General
Partner
By: /s/ John G. Quigley
----------------------------
Name: John G. Quigley
Title: Member
NAS PARTNERS I L.L.C.
By: /s/ John G. Quigley
----------------------------
Name: John G. Quigley
Title: Member
HAROLD N. KAMINE
/s/ Harold N. Kamine
-------------------------------
AT&T CREDIT CORPORATION
By: /s/ Daria A. Pishco
----------------------------
Name: Daria A. Pishco
Title: Vice President
<PAGE>
5
CORESTATES BANK, N.A.
By: /s/ Michael Bienville Grimes
------------------------------
Name: Michael Bienville Grimes
Title: Vice President
CORESTATES HOLDINGS, INC.
By: /s/ Francis B. Jacobs II
----------------------------
Name: Francis B. Jacobs II
Title: Vice President
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ Edward Smith Christie
----------------------------
Name: Edward Smith Christie
Title: Manager-Operations
<PAGE>
Exhibit 4.5
=================================================================
KMC TELECOM HOLDINGS, INC.,
as Issuer
and
THE CHASE MANHATTAN BANK,
as Trustee
-------------------------
Indenture
Dated as of January 29, 1998
-------------------------
121/2% Senior Discount Notes due 2008
=================================================================
<PAGE>
CROSS-REFERENCE TABLE
---------------------
TIA Sections Indenture Sections
------------------
Section 310(a)(1) . . . . . . . . . . . . . . . . . . 7.10
(a)(2). . . . . . . . . . . . . . . . . . . . . . 7.10
(b) . . . . . . . . . . . . . . . . . . . . . . . 7.08
Section 313(c). . . . . . . . . . . . . . . . . . . . 7.06; 10.02
Section 314(a). . . . . . . . . . . . . . . . . . . . 4.18; 10.02
(a)(4). . . . . . . . . . . . . . . . . . . . . . 4.17; 10.02
(c)(1). . . . . . . . . . . . . . . . . . . . . . 10.03
(c)(2). . . . . . . . . . . . . . . . . . . . . . 10.03
(e) . . . . . . . . . . . . . . . . . . . . . . . 10.04
Section 315(b). . . . . . . . . . . . . . . . . . . . 7.05; 10.02
Section 316(a)(1)(A). . . . . . . . . . . . . . . . . 6.05
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . 6.04
(b) . . . . . . . . . . . . . . . . . . . . . . . 6.07
Section 317(a)(1) . . . . . . . . . . . . . . . . . . 6.08
(a)(2). . . . . . . . . . . . . . . . . . . . . . 6.09
Section 318(a). . . . . . . . . . . . . . . . . . . . 10.01
(c) . . . . . . . . . . . . . . . . . . . . . . . 10.01
Note: The Cross-Reference Table shall not for any purpose be deemed to be a
part of the Indenture.
<PAGE>
TABLE OF CONTENTS
Page
RECITALS OF THE COMPANY . . . . . . . . . . . . . . . . . 1
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions. . . . . . . . . . . . . . . . 2
SECTION 1.02. Incorporation by Reference of Trust Indenture Act 25
SECTION 1.03. Rules of Construction. . . . . . . . . . . 26
ARTICLE TWO
THE NOTES
SECTION 2.01. Form and Dating. . . . . . . . . . . . . . 26
SECTION 2.02. Restrictive Legends. . . . . . . . . . . . 28
SECTION 2.03. Execution, Authentication and Denominations 31
SECTION 2.04. Registrar and Paying Agent . . . . . . . . 31
SECTION 2.05. Paying Agent to Hold Money in Trust. . . . 32
SECTION 2.06. Transfer and Exchange. . . . . . . . . . . 33
SECTION 2.07. Book-Entry Provisions for Global Notes . . 34
SECTION 2.08. Special Transfer Provisions. . . . . . . . 36
SECTION 2.09. Replacement Notes. . . . . . . . . . . . . 39
SECTION 2.10. Outstanding Notes. . . . . . . . . . . . . 39
SECTION 2.11. Temporary Notes. . . . . . . . . . . . . . 40
SECTION 2.12. Cancellation . . . . . . . . . . . . . . . 40
SECTION 2.13. CUSIP Numbers. . . . . . . . . . . . . . . 40
SECTION 2.14. Defaulted Interest . . . . . . . . . . . . 40
SECTION 2.15. Issuance of Additional Notes . . . . . . . 41
ARTICLE THREE
REDEMPTION
SECTION 3.01. Right of Redemption. . . . . . . . . . . . 41
SECTION 3.02. Notices to Trustee . . . . . . . . . . . . 42
SECTION 3.03. Selection of Notes to Be Redeemed. . . . . 42
SECTION 3.04. Notice of Redemption . . . . . . . . . . . 42
SECTION 3.05. Effect of Notice of Redemption . . . . . . 43
SECTION 3.06. Deposit of Redemption Price. . . . . . . . 43
SECTION 3.07. Payment of Notes Called for Redemption . . 44
SECTION 3.08. Notes Redeemed in Part . . . . . . . . . . 44
- ---------------------
Note: The Table of Contents shall not for any purposes be deemed to be a
part of the Indenture.
<PAGE>
ii
Page
ARTICLE FOUR
COVENANTS
SECTION 4.01. Payment of Notes . . . . . . . . . . . . . 44
SECTION 4.02. Maintenance of Office or Agency. . . . . . 44
SECTION 4.03. Limitation on Indebtedness . . . . . . . . 45
SECTION 4.04. Limitation on Restricted Payments. . . . . 48
SECTION 4.05. Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries. . . . . . . . . . 52
SECTION 4.06. Limitation on the Issuance and Sale of Capital Stock of
Restricted Subsidiaries. . . . . . . . . . . . . . . 54
SECTION 4.07. Limitation on Issuances of Guarantees by Restricted
Subsidiaries . . . . . . . . . . . . . . . . . . . . 54
SECTION 4.08. Limitation on Transactions with Shareholders and
Affiliates . . . . . . . . . . . . . . . . . . . . . 55
SECTION 4.09. Limitation on Liens. . . . . . . . . . . . 56
SECTION 4.10. Limitation on Sale-Leaseback Transactions. 57
SECTION 4.11. Limitation on Asset Sales. . . . . . . . . 58
SECTION 4.12. Repurchase of Notes upon a Change of Control 59
SECTION 4.13. Existence. . . . . . . . . . . . . . . . . 59
SECTION 4.14. Payment of Taxes and Other Claims. . . . . 60
SECTION 4.15. Maintenance of Properties and Insurance. . 60
SECTION 4.16. Notice of Defaults . . . . . . . . . . . . 60
SECTION 4.17. Compliance Certificates. . . . . . . . . . 61
SECTION 4.18. Commission Reports and Reports to Holders. 61
SECTION 4.19. Waiver of Stay, Extension or Usury Laws. . 61
ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. When Company May Merge, Etc. . . . . . . . 62
SECTION 5.02. Successor Substituted. . . . . . . . . . . 63
ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. Events of Default. . . . . . . . . . . . . 63
SECTION 6.02. Acceleration . . . . . . . . . . . . . . . 65
SECTION 6.03. Other Remedies . . . . . . . . . . . . . . 65
SECTION 6.04. Waiver of Past Defaults. . . . . . . . . . 65
SECTION 6.05. Control by Majority. . . . . . . . . . . . 66
SECTION 6.06. Limitation on Suits. . . . . . . . . . . . 66
SECTION 6.07. Rights of Holders to Receive Payment . . . 67
SECTION 6.08. Collection Suit by Trustee . . . . . . . . 67
<PAGE>
iii
Page
SECTION 6.09. Trustee May File Proofs of Claim . . . . . 67
SECTION 6.10. Priorities . . . . . . . . . . . . . . . . 68
SECTION 6.11. Undertaking for Costs. . . . . . . . . . . 68
SECTION 6.12. Restoration of Rights and Remedies . . . . 68
SECTION 6.13. Rights and Remedies Cumulative . . . . . . 69
SECTION 6.14. Delay or Omission Not Waiver . . . . . . . 69
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. General. . . . . . . . . . . . . . . . . . 69
SECTION 7.02. Certain Rights of Trustee. . . . . . . . . 69
SECTION 7.03. Individual Rights of Trustee . . . . . . . 71
SECTION 7.04. Trustee's Disclaimer . . . . . . . . . . . 71
SECTION 7.05. Notice of Default. . . . . . . . . . . . . 71
SECTION 7.06. Reports by Trustee to Holders. . . . . . . 71
SECTION 7.07. Compensation and Indemnity . . . . . . . . 71
SECTION 7.08. Replacement of Trustee . . . . . . . . . . 72
SECTION 7.09. Successor Trustee by Merger, Etc.. . . . . 73
SECTION 7.10. Eligibility. . . . . . . . . . . . . . . . 73
SECTION 7.11. Money Held in Trust. . . . . . . . . . . . 73
SECTION 7.12. Withholding Taxes. . . . . . . . . . . . . 74
ARTICLE EIGHT
DISCHARGE OF INDENTURE
SECTION 8.01. Termination of the Company's Obligations. . 74
SECTION 8.02. Defeasance and Discharge of Indenture. . . 75
SECTION 8.03. Defeasance of Certain Obligations. . . . . 76
SECTION 8.04. Application of Trust Money . . . . . . . . 77
SECTION 8.05. Repayment to Company . . . . . . . . . . . 77
SECTION 8.06. Reinstatement. . . . . . . . . . . . . . . 78
SECTION 8.07. Defeasance and Certain Other Events of Default 78
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders . . . . . . . . 79
SECTION 9.02. With Consent of Holders. . . . . . . . . . 79
SECTION 9.03. Revocation and Effect of Consent . . . . . 80
SECTION 9.04. Notation on or Exchange of Notes . . . . . 81
SECTION 9.05. Trustee to Sign Amendments, Etc. . . . . . 81
<PAGE>
iv
Page
SECTION 9.06. Conformity with Trust Indenture Act. . . . 81
ARTICLE TEN
MISCELLANEOUS
SECTION 10.01. Trust Indenture Act of 1939 . . . . . . . 82
SECTION 10.02. Notices . . . . . . . . . . . . . . . . . 82
SECTION 10.03. Certificate and Opinion As to Conditions Precedent 84
SECTION 10.04. Statements Required in Certificate or Opinion 84
SECTION 10.05. Rules by Trustee, Paying Agent or Registrar 84
SECTION 10.06. Payment Date Other Than a Business Day. . 84
SECTION 10.07. Governing Law; Submission to Jurisdiction; Agent for
Service. . . . . . . . . . . . . . . . . . . . . . . 85
SECTION 10.08. No Adverse Interpretation of Other Agreements 85
SECTION 10.09. No Recourse Against Others. . . . . . . . 85
SECTION 10.10. Successors. . . . . . . . . . . . . . . . 85
SECTION 10.11. Duplicate Originals . . . . . . . . . . . 85
SECTION 10.12. Separability. . . . . . . . . . . . . . . 85
SECTION 10.13. Table of Contents, Headings, Etc. . . . . 86
EXHIBIT A Form of Note. . . . . . . . . . . . . . . . . .A-1
EXHIBIT B Form of Certificate . . . . . . . . . . . . . .B-1
EXHIBIT C Form of Certificate to Be Delivered in Connection with
Transfers Pursuant to Regulation S. . . . . . .C-1
EXHIBIT D Form of Certificate to Be Delivered in Connection with
Transfers to Non-QIB Accredited Investors . . .D-1
<PAGE>
INDENTURE, dated as of January 29, 1998, between KMC TELECOM
HOLDINGS, INC., a Delaware corporation, as issuer (the "COMPANY") and THE CHASE
MANHATTAN BANK, as trustee (the "TRUSTEE").
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance from time to time of 121/2% Senior
Discount Notes due 2008 as well as the Exchange Notes (collectively, the NOTES")
issuable as provided in this Indenture. Pursuant to the terms of a Purchase
Agreement dated as of January 26, 1998 (the "PURCHASE AGREEMENT") between the
Company and Morgan Stanley & Co. Incorporated, the Company has agreed to issue
and sell 460,800 units (collectively, the "UNITS"), each Unit consisting of
$1,000 principal amount at maturity of the Notes and one warrant (the
"WARRANTS") to purchase initially 0.21785 shares of common stock, par value $.01
per share, of the Company, issuable pursuant to the terms of a Warrant Agreement
dated as of the date hereof (the "WARRANT AGREEMENT") between the Company and
The Chase Manhattan Bank, as the warrant agent (the "WARRANT AGENT"). All
things necessary to make this Indenture a valid agreement of the Company, in
accordance with its terms, have been done, and the Company has done all things
necessary to make the Notes, when executed by the Company and authenticated and
delivered by the Trustee hereunder and duly issued by the Company, the valid
obligations of the Company as hereinafter provided.
The Notes will become separately transferable at the close of business
upon the earliest to occur of (i) the date that is six months after the Closing
Date (as defined below), (ii) the commencement of an exchange offer with respect
to the Notes undertaken pursuant to the Registration Rights Agreement (as
defined below), (iii) the effectiveness of a shelf registration statement with
respect to resales of the Notes, (iv) the commencement of an offer to purchase
the Notes undertaken pursuant to this Indenture or (v) the date which the
Initial Purchaser (as defined below), in its sole discretion, determines;
PROVIDED that, prior to such date, the Company mails notice of such
determination to the Holders (as defined below) of the Warrants (the "SEPARATION
DATE").
This Indenture will, upon the effectiveness of the registration
statement provided for under the Registration Rights Agreement, be subject to,
and governed by, the provisions of the Trust Indenture Act of 1939, as amended,
that are required to be a part of and to govern indentures qualified under the
Trust Indenture Act of 1939, as amended.
<PAGE>
2
For and in consideration of the premises and the purchase of the Notes
by the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders, as follows.
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. DEFINITIONS.
"Accreted Value" means, for any Specified Date, the amount calculated
pursuant to (i), (ii), (iii) or (iv) for each $1,000 principal amount at
maturity of Notes:
(i) if the Specified Date occurs on one of the following dates
(each a "Semi-Annual Accrual Date"), the Accreted Value will equal the
amount set forth below for such Semi-Annual Accrual Date:
SEMI-ANNUAL ACCRETED
ACCRUAL DATE VALUE
------------ -----
August 15, 1998 $579.48
February 15, 1999 $615.70
August 15, 1999 $654.18
February 15, 2000 $695.07
August 15, 2000 $738.51
February 15, 2001 $784.67
August 15, 2001 $833.71
February 15, 2002 $885.81
August 15, 2002 $941.18
February 15, 2003 $1,000.00
(ii) if the Specified Date occurs before the first Semi-Annual
Accrual Date, the Accreted Value will equal the sum of (a) $542.46 and
(b) an amount equal to the product of (1) the Accreted Value for the
first Semi-Annual Accrual Date less $542.46 MULTIPLIED by (2) a
fraction, the numerator of which is the number of days from January
29, 1998 to the Specified Date, using a 360-day year of twelve 30-day
months, and the denominator of which is the number of days elapsed
from January 29, 1998 to the first Semi-Annual Accrual Date, using a
360-day year of twelve 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value
for the Semi-Annual Accrual Date immediately preceding such Specified
Date and (b) an amount equal to the
<PAGE>
3
product of (1) the Accreted Value for the immediately following
Semi-Annual Accrual Date less the Accreted Value for the immediately
preceding Semi-Annual Accrual Date multiplied by (2) a fraction, the
numerator of which is the number of days from the immediately preceding
Semi-Annual Accrual Date to the Specified Date, using a 360-day year of
twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual
Accrual Date, the Accreted Value will equal $1,000.
"Acquired Indebtedness" means Indebtedness of a Person existing at the
time such Person becomes a Restricted Subsidiary or assumed in connection
with an Asset Acquisition by a Restricted Subsidiary and not Incurred in
connection with, or in anticipation of, such Person becoming a Restricted
Subsidiary or such Asset Acquisition; PROVIDED that Indebtedness of such
Person which is redeemed, defeased, retired or otherwise repaid at the time
of or immediately upon consummation of the transactions by which such Person
becomes a Restricted Subsidiary or upon consummation of such Asset
Acquisition shall not be Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the
aggregate net income (or loss) of the Company and its Restricted Subsidiaries
for such period determined in conformity with GAAP; PROVIDED that the
following items shall be excluded in computing Adjusted Consolidated Net
Income (without duplication): (i) the net income (or loss) of any Person that
is not a Restricted Subsidiary (or is an Unrestricted Subsidiary), except to
the extent of the amount of dividends or other distributions actually paid to
the Company or any of its Restricted Subsidiaries by such Person or an
Unrestricted Subsidiary during such period; (ii) solely for the purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of clause (iv) of the first paragraph of Section 4.04 hereof (and
in such case, except to the extent includable pursuant to clause (i) above),
the net income (or loss) of any Person accrued prior to the date it becomes a
Restricted Subsidiary or is merged into or consolidated with the Company or
any of its Restricted Subsidiaries or all or substantially all of the
property and assets of such Person are acquired by the Company or any of its
Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary to
the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of such net income is not at the
time permitted by the operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary (except to the extent such
restriction has been legally waived); (iv) any gains or losses (on an
after-tax basis) attributable to Asset Sales or the termination of
discontinued operations; (v) except for purposes of calculating the amount of
Restricted Payments that may be made pursuant to clause (C) of clause (iv) of
the first paragraph of Section 4.04 hereof, any amount paid or accrued as
dividends on Preferred Stock
<PAGE>
4
of the Company or any Restricted Subsidiary owned by Persons other than the
Company and any of its Restricted Subsidiaries; (vi) all extraordinary gains
and extraordinary losses; (vii) the cumulative effect of a change in
accounting principles since the Closing Date; and (viii) at the irrevocable
election of the Company for each occurrence, any net after-tax income (loss)
from discontinued operations; PROVIDED that for purposes of any subsequent
Investment in the entity conducting such discontinued operations under
Section 4.04 hereof, such entity shall be treated as an Unrestricted
Subsidiary until such discontinued operations have actually been disposed of.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP, and filed with the Commission or provided to
the Trustee pursuant to Section 4.18 hereof.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Agent" means any Registrar, Paying Agent, authenticating agent or
co-Registrar.
"Agent Members" has the meaning provided in Section 2.07(a).
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries or (ii) an acquisition by the
Company or any of its Restricted Subsidiaries of the property and assets of any
Person other than the Company or any of its Restricted Subsidiaries that
constitute substantially all of a division or line of business of such Person.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions
<PAGE>
5
by the Company or any of its Restricted Subsidiaries to any Person other than
the Company or any of its Restricted Subsidiaries of (i) all or any of the
Capital Stock of any Restricted Subsidiary, (ii) all or substantially all of the
property and assets of an operating unit or business of the Company or any of
its Restricted Subsidiaries or (iii) any other property and assets (other than
the Capital Stock or other Investment in an Unrestricted Subsidiary) of the
Company or any of its Restricted Subsidiaries outside the ordinary course of
business of the Company or such Restricted Subsidiary and, in each case, that is
not governed by Article Five hereof; PROVIDED that "Asset Sale" shall not
include (a) sales or other dispositions of inventory, receivables and other
current assets, (b) sales or other dispositions of assets for consideration at
least equal to the fair market value of the assets sold or disposed of, to the
extent that the consideration received would constitute property or assets of
the kind described in clause (B) of the first paragraph of Section 4.11 hereof,
(c) a disposition of cash or Temporary Cash Investments, (d) any Restricted
Payment that is permitted to be made, and is made, under Section 4.04 hereof,
(e) sales or other dispositions of assets with a fair market value (as certified
in an Officers' Certificate) not in excess of $500,000 (provided that any series
of related sales or dispositions in excess of $500,000 shall be considered
"Asset Sales"), (f) the lease, assignment of a lease or sub-lease of any real or
personal property in the ordinary course of business, (g) foreclosures on
assets, (h) pledges of assets or stock by the Company or any of its Restricted
Subsidiaries otherwise permitted under this Indenture, including such pledges
securing Indebtedness under the AT&T Facility and (i) this exercise of common
stock warrants by AT&T Finance in respect of KMC Telecom.
"AT&T Facility" means the Amended and Restated Loan and Security
Agreement dated as of September 22, 1997 among KMC Telecom, KMC Telecom II, and
AT&T Finance and any other lenders or borrowers from time to time party thereto,
all collateral documents, instruments and agreements executed in connection
therewith and any amendments, supplements, modifications, extensions, renewals,
restatements, refinancings or refundings thereof.
"AT&T Finance" means AT&T Commercial Finance Corporation, or its
successors.
"Average Life" means, at any date of determination with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products of
(a) the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Board of Directors" means the Board of Directors of the Company as
required by the context or any committee of such Board of Directors duly
authorized to act under this Indenture.
<PAGE>
6
"Board Resolution" means a copy of a resolution, certified by the
Secretary or Assistant Secretary of the Company as required by the context to
have been duly adopted by the Board of Directors and to be in full force and
effect on the date of such certification, and delivered to the Trustee.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in The City of New York, or in the city of the Corporate
Trust Office of the Trustee, are authorized by law to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock, Preferred Stock, partnership or membership interests and any other right
to receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the amount of the liability in
respect of a Capitalized Lease that would at such time be required to be
capitalized and reflected as a liability on a balance sheet prepared in
accordance with GAAP.
"Certificated Notes" has the meaning provided in Section 2.01.
"Change of Control" means such time as (i) a "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes
the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act) of more than 35% of the total voting power of the Voting Stock of the
Company on a fully diluted basis and such ownership represents a greater
percentage of the total voting power of the Voting Stock of the Company, on a
fully diluted basis, than is held by the Existing Stockholders on such date; or
(ii) individuals who on the Closing Date constitute the Board of Directors
(together with any new directors whose election by the Board of Directors or
whose nomination by the Board of Directors for election by the Company's
stockholders was approved by a vote of at least a majority of the members of the
Board of Directors then in office who either were members of the Board of
Directors on the Closing Date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
members of the Board of Directors then in office.
<PAGE>
7
"Closing Date" means the date on which the Notes are originally issued
under this Indenture.
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act or, if at any time
after the execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the TIA, then the body performing
such duties at such time.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's common stock, whether now outstanding or
issued after the date of this Indenture, including, without limitation, all
series and classes of such common stock.
"Company" means the party named as such in the first paragraph of this
Indenture until a successor replaces it pursuant to the applicable provisions of
this Indenture and thereafter means the successor.
"Company Order" means a written request or order signed in the name of
the Company (i) by its Chairman of the Board, the Vice Chairman of the Board,
its President or a Vice President and (ii) by its Chief Financial Officer,
Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary and
delivered to the Trustee; PROVIDED, HOWEVER, that such written request or order
may be signed by any two of the officers or directors listed in clause (i) above
in lieu of being signed by one of such officers or directors listed in such
clause (i) and one of the officers listed in clause (ii) above.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses or
sales of assets), (iii) depreciation expense, (iv) amortization expense and (v)
all other non-cash items reducing Adjusted Consolidated Net Income (other than
items that will require cash payments and for which an accrual or reserve is, or
is required by GAAP to be, made), less all non-cash items increasing (or, in the
case of a loss, decreasing) Adjusted Consolidated Net Income, determined, with
respect to clauses (ii), (iii) and (iv), on a consolidated basis for the Company
and its Restricted Subsidiaries in conformity with GAAP; PROVIDED that, if any
Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated
EBITDA shall be reduced (to the extent not otherwise reduced in accordance with
GAAP) by an amount equal to (A) the amount of the Adjusted Consolidated Net
Income attributable to such Restricted Subsidiary multiplied by (B) the
percentage ownership interest in the income of such Restricted Subsidiary not
owned on the last day of such period by the Company or any of its Restricted
Subsidiaries.
<PAGE>
8
"Consolidated Indebtedness" means the aggregate amount of Indebtedness
of the Company and its Restricted Subsidiaries on a consolidated basis.
"Consolidated Interest Expense" means, for any period, the aggregate
amount (without duplication) of interest in respect of Indebtedness (including,
without limitation, amortization of original issue discount on any Indebtedness
and the interest portion of any deferred payment obligation, calculated in
accordance with the effective interest method of accounting; all commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing; the net costs associated with Interest Rate
Agreements; and Indebtedness that is Guaranteed or secured by the Company or any
of its Restricted Subsidiaries) and the interest component of Capitalized Lease
Obligations paid, accrued or scheduled to be paid or to be accrued by the
Company and its Restricted Subsidiaries during such period; EXCLUDING, HOWEVER,
(i) any amount of such interest of any Restricted Subsidiary if the net income
of such Restricted Subsidiary is excluded in the calculation of Adjusted
Consolidated Net Income pursuant to clause (iii) of the definition thereof (but
only in the same proportion as the net income of such Restricted Subsidiary is
excluded from the calculation of Adjusted Consolidated Net Income pursuant to
clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses
(and any amortization thereof) payable in connection with the offering of the
Notes, all as determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis outstanding on such Transaction
Date to (ii) the aggregate amount of Consolidated EBITDA for the then most
recent four fiscal quarters for which financial statements of the Company have
been filed with the Commission or provided to the Trustee pursuant to Section
4.18 hereof (such four fiscal quarter period being the "Four Quarter Period");
PROVIDED that, in making the foregoing calculation, PRO FORMA effect shall be
given to the following events which occur from the beginning of the Four Quarter
Period through the Transaction Date (the "Reference Period"): (i) the
Incurrence of the Indebtedness with respect to which the computation is being
made and (if applicable) the application of the net proceeds therefrom,
including to refinance other Indebtedness, as if such Indebtedness was incurred,
and the application of such proceeds occurred, at the beginning of the Four
Quarter Period; (ii) the Incurrence, repayment or retirement of any other
Indebtedness by the Company and its Restricted Subsidiaries since the first day
of the Four Quarter Period as if such Indebtedness was incurred, repaid or
retired at the beginning of the Four Quarter Period; (iii) in the case of
Acquired Indebtedness, the related acquisition, as if such acquisition occurred
at the beginning of the Four Quarter Period; (iv) any acquisition or disposition
by the Company and its Restricted Subsidiaries of any company or any business or
any assets out of the ordinary course of business, whether by merger, stock
purchase or sale or asset purchase or sale or any related repayment of
Indebtedness, in each case since the first day of the Four Quarter Period,
<PAGE>
9
assuming such acquisition or disposition had been consummated on the first day
of the Four Quarter Period and after giving PRO FORMA effect to net cost savings
that the Company reasonably believes in good faith could have been achieved
during the Four Quarter Period as a result of such acquisition or disposition
(PROVIDED that both (A) such cost savings were identified and quantified in an
Officers' Certificate delivered to the Trustee at the time of the consummation
of the acquisition or disposition and (B) with respect to each acquisition or
disposition completed prior to the 90th day preceding such date of
determination, actions were commenced or initiated by the Company within 90 days
of such acquisition or disposition to effect such cost savings identified in
such Officers' Certificate and with respect to any other acquisition or
disposition, such Officers' Certificate sets forth the specific steps to be
taken within the 90 days after such acquisition or disposition to accomplish
such cost savings); and PROVIDED FURTHER that (x) in making such computation,
the Consolidated Interest Expense attributable to interest on any Indebtedness
computed on a PRO FORMA basis and (A) bearing a floating interest rate shall be
computed as if the rate in effect on the date of computation had been the
applicable rate for the entire period and (B) which was not outstanding during
the period for which the computation is being made but which bears, at the
option of the Company, a fixed or floating rate of interest shall be computed by
applying, at the option of the Company, either the fixed or floating rate, and
(y) in making such computation, the Consolidated Interest Expense of the Company
attributable to interest on any Indebtedness under a revolving credit facility
computed on a PRO FORMA basis shall be computed based upon the PRO FORMA average
daily balance of such Indebtedness during the applicable period; and (v) the
occurrence of any of the events described in clauses (i) - (iv) above by any
Person that has become a Restricted Subsidiary or has been merged with or into
the Company or any Restricted Subsidiary during such Reference Period.
"Consolidated Net Worth" means, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of the Company and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Corporate Trust Office" means the office of the Trustee at which the
corporate trust business of the Trustee shall, at any particular time, be
principally administered, which office is, at the date of this Indenture,
located at 450 West 33rd Street, 15th Floor, New York, NY 10001-2697, Attention:
Global Trust Services.
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10
"Currency Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Depository" shall mean The Depository Trust Company, its nominees,
and their respective successors.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; PROVIDED that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock (or the security for which such Capital Stock is convertible
into or exchangeable for) upon the occurrence of an "asset sale" or "change of
control" occurring prior to the Stated Maturity of the Notes shall not
constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock (or the security for which such
Capital Stock is convertible into or exchangeable for) are no more favorable to
the holders of such Capital Stock (or the security for which such Capital Stock
is convertible into or exchangeable for) than the provisions contained in
Sections 4.11 and 4.12 hereof and such Capital Stock (or the security for which
such Capital Stock is convertible into or exchangeable for) specifically
provides that such Person will not repurchase or redeem any such stock pursuant
to such provision prior to the Company's repurchase of such Notes as are
required to be repurchased pursuant to Sections 4.11 and 4.12 hereof.
"Equity Offering" means any public or private sale of common stock or
preferred stock of the Company (excluding Disqualified Stock), other than public
offerings with respect to the Company's Common Stock registered on Form S-8.
"Event of Default" has the meaning provided in Section 6.01.
"Excess Proceeds" has the meaning provided in Section 4.11.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Notes" means any notes of the Company containing terms
identical to the Notes (except that such Exchange Notes (i) shall be registered
under the Securities Act, (ii) will not provide for an increase in the rate of
interest (other than with respect to overdue
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11
amounts) and (iii) will not contain terms with respect to transfer restrictions)
that are issued and exchanged for the Notes pursuant to the Registration Rights
Agreement and this Indenture.
"Existing Stockholders" means Harold N. Kamine, his Affiliates and
Nassau.
"fair market value" means the price that would be paid in an
arm's-length transaction between an informed and willing seller under no
compulsion to sell and an informed and willing buyer under no compulsion to buy,
as determined in good faith by the Board of Directors, whose determination shall
be conclusive if evidenced by a Board Resolution; PROVIDED that for purposes of
clause (ix) of the second paragraph of Section 4.03 hereof, (x) the fair market
value of any security registered under the Exchange Act shall be the average of
the closing prices, regular way, of such security for the 20 consecutive trading
days immediately preceding the sale of Capital Stock and (y) in the event the
aggregate fair market value of any other property (other than cash or cash
equivalents) received by the Company exceeds $10 million, the fair market value
of such property shall be determined by a nationally recognized investment
banking firm or a nationally recognized firm having expertise in the specific
area which is the subject of such determination and set forth in their written
opinion which shall be delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Closing Date, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession. All ratios and computations contained or referred
to in this Indenture shall be computed in conformity with GAAP applied on a
consistent basis, except that calculations made for purposes of determining
compliance with the terms of the covenants and with other provisions of this
Indenture shall be made without giving effect to (i) the amortization of any
expenses incurred in connection with the offering of the Notes and the Company's
Series C and Series D Preferred Stock and (ii) except as otherwise provided, the
amortization of any amounts required or permitted by Accounting Principles Board
Opinion Nos. 16 and 17.
"Global Notes" has the meaning provided in Section 2.01.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness of any other Person
and, without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such
<PAGE>
12
purchase arrangements are on arm's-length terms and are entered into in the
ordinary course of business), to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
PROVIDED that the term "Guarantee" shall not include endorsements for collection
or deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"Guaranteed Indebtedness" has the meaning provided in Section 4.07.
"Holder" or "Noteholder" means the registered holder of any Note.
"Incur" means, with respect to any Indebtedness, to incur, create,
issue, assume, Guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including an "Incurrence" of Acquired Indebtedness; PROVIDED that
neither the accrual of interest nor the accretion of original issue discount
shall be considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding trade letters of
credit), (iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due more than
six months after the date of placing such property in service or taking delivery
and title thereto or the completion of such services, except Trade Payables and
accrued current liabilities arising in the ordinary course of business, (v) all
Capitalized Lease Obligations of such Person, (vi) all Indebtedness referred to
in clauses (i) through (v) hereof of other Persons secured by a Lien on any
asset of such Person, whether or not such Indebtedness is assumed by such
Person; PROVIDED that the amount of such Indebtedness shall be the lesser of (A)
the fair market value of such asset at such date of determination and (B) the
amount of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed
by such Person to the extent such Indebtedness is Guaranteed by such Person and
(viii) to the extent not otherwise included in this definition, obligations
under Currency Agreements and Interest Rate Agreements. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date (or, in the case of a revolving credit or other similar facility, the total
amount of funds outstanding on the date of determination) of all unconditional
obligations as described above and, with respect to contingent obligations, the
maximum liability upon the occurrence of the contingency giving rise to the
obligation of the types described above, PROVIDED (A) that the amount
outstanding at any time of any Indebtedness issued with original issue discount
is the original issue price of
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13
such Indebtedness, (B) that money borrowed and set aside at the time of the
Incurrence of any Indebtedness in order to prefund the payment of the interest
on such Indebtedness shall not be deemed to be "Indebtedness" and (C) that
Indebtedness shall not include any liability for federal, state, local or other
taxes.
"Indenture" means this Indenture as originally executed or as it may
be amended or supplemented from time to time by one or more indentures
supplemental to this Indenture entered into pursuant to the applicable
provisions of this Indenture.
"Institutional Accredited Investor" shall mean an institution that is
an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act.
"Interest Payment Date" means each semiannual interest payment date on
February 15 and August 15 of each year, commencing August 15, 2003.
"Interest Rate Agreement" means any interest rate protection
agreement, interest rate future agreement, interest rate option agreement,
interest rate swap agreement, interest rate cap agreement, interest rate collar
agreement, interest rate hedge agreement, option or future contract or other
similar agreement or arrangement.
"Investment" means, with respect to any Person, all investments by
such Person in other Persons in the form of any direct or indirect advance, loan
or other extension of credit (including, without limitation, by way of Guarantee
or similar arrangement; but excluding advances to customers in the ordinary
course of business that are, in conformity with GAAP, recorded as accounts
receivable on the balance sheet of the Company or its Restricted Subsidiaries
and commissions, travel and similar advances to officers and employees made in
the ordinary course of business) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition of
Capital Stock, bonds, notes, debentures or other similar instruments issued by,
such other Person and shall include (i) the designation of a Restricted
Subsidiary as an Unrestricted Subsidiary and (ii) the fair market value of the
Capital Stock (or any other Investment), held by the Company or any of its
Restricted Subsidiaries, of (or in) any Person that has ceased to be a
Restricted Subsidiary, including without limitation, by reason of any
transaction permitted by clause (iii) of Section 4.06 hereof; PROVIDED that the
fair market value of the Investment remaining in any Person that has ceased to
be a Restricted Subsidiary shall not exceed the aggregate amount of Investments
previously made in such Person valued at the time such Investments were made
less the net reduction of such Investments. For purposes of the definition of
"Unrestricted Subsidiary" and Section 4.04 hereof, (i) "Investment" shall
include the fair market value of the assets (net of liabilities (other than
liabilities to the Company or any of its Restricted Subsidiaries)) of any
Restricted
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14
Subsidiary at the time that such Restricted Subsidiary is designated an
Unrestricted Subsidiary, (ii) the fair market value of the assets (net of
liabilities (other than liabilities to the Company or any of its Restricted
Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary shall be considered a reduction
in outstanding Investments and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer.
"Investment Grade Securities" means (i) securities issued or directly
and fully guaranteed or insured by the United States government or any agency or
instrumentality thereof, (ii) debt securities or debt instruments with a rating
of BBB+ or higher by S&P or Baa1 or higher by Moody's or the equivalent of such
rating by such rating organization, or, if no rating of S&P or Moody's then
exists, the equivalent of such rating by any other nationally recognized
securities rating agency, but excluding any debt securities or instruments
constituting loans or advances among the Company and its Subsidiaries, and (iii)
investment in any fund that invests exclusively in investments of the type
described in clauses (i) and (ii) which fund may also hold cash pending
investment and/or distribution.
"KMC Telecom" means KMC Telecom, Inc., a subsidiary of the Company, or
any successor thereto.
"KMC Telecom II" means KMC Telecom II, Inc., a subsidiary of the
Company, or any successor thereto.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including, without limitation, any conditional sale
or other title retention agreement or lease in the nature thereof or any
agreement to give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Nassau" means Nassau Capital Partners L.P., NAS Partners I L.L.C. or
their respective successors, and their Affiliates.
"Net Cash Proceeds" means (a) with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent corresponding
to the principal, but not interest, component thereof) when received in the form
of cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other commissions, fees and
expenses (including fees and expenses of counsel, accountants and investment
bankers) related to such Asset Sale and any relocation expenses incurred as a
result thereof, (ii) provisions for
<PAGE>
15
all taxes (whether or not such taxes will actually be paid or are payable) as a
result of such Asset Sale without regard to the consolidated results of
operations of the Company and its Restricted Subsidiaries, taken as a whole,
(iii) payments made to repay Indebtedness or any other obligation outstanding at
the time of such Asset Sale that either (A) is secured by a Lien on the property
or assets sold or (B) is required to be paid as a result of such sale and (iv)
appropriate amounts to be provided by the Company or any Restricted Subsidiary
as a reserve against any liabilities associated with such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as determined
in conformity with GAAP and (b) with respect to any issuance or sale of Capital
Stock, the proceeds of such issuance or sale in the form of cash or cash
equivalents, including payments in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary) and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of attorney's fees, accountants'
fees, underwriters' or placement agents' fees, discounts or commissions and
brokerage, consultant and other fees incurred in connection with such issuance
or sale and net of taxes paid or payable as a result thereof.
"Non-U.S. Person" means a Person who is not a U.S. person, as defined
in Regulation S.
"Note Amount" has the meaning provided in Section 4.11 hereof.
"Notes" means any of the notes, as defined in the first paragraph of
the recitals hereof, that are authenticated and delivered under this Indenture.
For all purposes of this Indenture, the term "Notes" shall include any Exchange
Notes to be issued and exchanged for any Notes pursuant to the Registration
Rights Agreement and this Indenture and, for purposes of this Indenture, all
Notes and Exchange Notes shall vote together as one series of Notes under this
Indenture.
"Note Register" has the meaning provided in Section 2.04.
"Offer to Purchase" means an offer to purchase Notes by the Company
from the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that
all Notes validly tendered will be accepted for payment on a pro rata basis;
(ii) the purchase price and the Payment Date; (iii) that any Note not tendered
will continue to accrue interest pursuant to its terms; (iv) that, unless the
Company defaults in the payment of the purchase price, any Note accepted for
payment pursuant to the Offer to Purchase shall cease to accrue interest on and
after the
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16
Payment Date; (v) that Holders electing to have a Note purchased pursuant to the
Offer to Purchase will be required to surrender the Note, together with the form
entitled "Option of the Holder to Elect Purchase" on the reverse side of the
Note completed, to the Paying Agent at the address specified in the notice prior
to the close of business on the Business Day immediately preceding the Payment
Date; (vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and (vii) that Holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount at maturity to the unpurchased portion of the Notes
surrendered; PROVIDED that each Note purchased and each new Note issued shall be
in a principal amount of $1,000 or an integral multiple thereof. On the Payment
Date, the Company shall (i) accept for payment on a pro rata basis Notes or
portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with
the Paying Agent money sufficient to pay the purchase price of all Notes or
portions thereof so accepted; and (iii) deliver, or cause to be delivered, to
the Trustee all Notes or portions thereof so accepted together with an Officers'
Certificate specifying the Notes or portions thereof accepted for payment by the
Company. The Paying Agent shall promptly mail to the Holders of Notes so
accepted payment in an amount equal to the purchase price (or, if the Notes are
represented by one or more permanent global Notes registered in the name of The
Depository Trust Company or its nominee, by such other method as required
thereby), and the Trustee shall promptly authenticate and mail to such Holders a
new Note equal in principal amount at maturity to any unpurchased portion of the
Note surrendered; PROVIDED that each Note purchased and each new Note issued
shall be in a principal amount at maturity of $1,000 or an integral multiple
thereof. The Company will publicly announce the results of an Offer to Purchase
as soon as practicable after the Payment Date. The Trustee shall act as the
Paying Agent for an Offer to Purchase. The Company will comply with Rule 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations are applicable, in the event that the
Company is required to repurchase Notes pursuant to an Offer to Purchase.
"Officer" means, with respect to the Company, (i) the Chairman of the
Board, the Vice Chairman of the Board, the President, the Chief Executive
Officer, the Chief Financial Officer or a Vice President, and (ii) the Treasurer
or any Assistant Treasurer, or the Secretary or any Assistant Secretary of the
Company.
"Officers' Certificate" means a certificate signed by one Officer
listed in clause (i) of the definition thereof and one Officer listed in clause
(ii) of the definition thereof; PROVIDED, HOWEVER, that any such certificate may
be signed by any two of the Officers listed in clause (i) of the definition
thereof in lieu of being signed by one Officer listed in clause (i) of the
definition thereof and one Officer listed in clause (ii) of the definition
thereof. Each
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17
Officers' Certificate (other than certificates provided pursuant to TIA Section
314(a)(4)) shall include the statements provided for in TIA Section 314(e).
"Offshore Global Note" has the meaning provided in Section 2.01.
"Offshore Certificated Notes" has the meaning provided in Section
2.01.
"Opinion of Counsel" means a written opinion signed by legal counsel
who may be an employee of or counsel to the Company. Each such Opinion of
Counsel shall include the statements provided for in TIA Section 314(e).
"Paying Agent" has the meaning provided in Section 2.04, except that,
for the purposes of Article Eight, the Paying Agent shall not be the Company or
a Subsidiary of the Company or an Affiliate of any of them. The term "Paying
Agent" includes any additional Paying Agent.
"Payment Date" means the date of purchase, which shall be a Business
Day no earlier than 30 days nor later than 60 days from the date of notice is
mailed pursuant to an Offer to Purchase.
"Permanent Regulation S Global Notes" means the permanent global Notes
issued in exchange for one or more Temporary Regulation S Global Notes upon
certification that the beneficial interests in such global Note are owned by
either Non-U.S. Persons or U.S. Persons who purchased such interests pursuant to
an exemption from, or in transactions not subject to, the registration
requirements of the Securities Act.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; PROVIDED that such Person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments and Investment Grade Securities; (iii) payroll, travel and similar
advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses in accordance with GAAP and reasonable
advances to sales representatives; (iv) any Investment acquired by the Company
or any of its Restricted Subsidiaries (x) in exchange for any other Investment
or accounts receivable held by the Company or any such Restricted Subsidiary in
connection with or as a result of a bankruptcy, workout, reorganization or
recapitalization of the issuer of such other Investment or accounts receivable
or (y) as a result of a foreclosure by the Company or any of its Restricted
Subsidiaries with respect to any secured Investment or other transfer of title
with respect to any secured Investment in default; (v) any Investment acquired
in
<PAGE>
18
consideration for the issuance of Capital Stock (other than Disqualified Stock)
or the proceeds of the issuance of Capital Stock (other than Disqualified Stock)
to the extent such amounts have not been previously applied to a Restricted
Payment pursuant to clause (C)(2) of clause (iv) of the first paragraph of
Section 4.04 hereof or clause (iii) or (iv) of the second paragraph of Section
4.04 hereof or used to support the Incurrence of Indebtedness pursuant to clause
(x) under Section 4.03 hereof and Investments acquired as a capital
contribution; (vi) Guarantees permitted by Section 4.03 hereof; (vii) loans or
advances to employees of the Company or any Restricted Subsidiary that do not in
the aggregate exceed at any one time outstanding $5.0 million; (viii) Currency
Agreements and Interest Rate Agreements permitted under Section 4.03 hereof;
(ix) Investments in prepaid expenses, negotiable instruments held for collection
and lease, utility and workers' compensation, performance and other similar
deposits; (x) Investments in debt securities or other evidences of Indebtedness
that are issued by companies engaged in the Telecommunications Business;
PROVIDED that when each Investment pursuant to this clause (x) is made, the
aggregate amount of Investments outstanding under this clause (x) does not
exceed $3.0 million; (xi) Strategic Investments and Investments in Permitted
Joint Ventures in an amount not to exceed $20.0 million at any one time
outstanding; (xii) an Investment in any Person the primary business of which is
related, ancillary or complementary to the business of the Company and its
Subsidiaries on the date of such Investments in an amount not to exceed at any
time outstanding the sum of (x) $23.0 million plus (y) 10% of the Company's
Consolidated EBITDA, if positive, for the immediately preceding four fiscal
quarters (valued in each case as provided in the definition of "Investments");
(xiv) securities received in connection with Asset Sales to the extent
constituting non-cash consideration permitted under Section 4.11 hereof; and
(xiv) Investments in an amount not to exceed $5.0 million at any time
outstanding.
"Permitted Joint Venture" means any Unrestricted Subsidiary or any
other Person in which the Company or a Restricted Subsidiary owns, directly or
indirectly, an ownership interest (other than a Restricted Subsidiary) and whose
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries at the time of determination.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen, landlord
or other similar Liens arising in the ordinary course of business and with
respect to amounts not yet delinquent or that are bonded or being contested in
good faith by appropriate legal proceedings promptly instituted and diligently
conducted and for which a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made; (iii) Liens
incurred or deposits made in the ordinary course
<PAGE>
19
of business in connection with workers' compensation, unemployment insurance and
other types of social security; (iv) Liens incurred or deposits made to secure
the performance of tenders, bids, leases, licenses, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, trade or government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements (including
reciprocal easement agreements), rights-of-way, municipal, building and zoning
ordinances and similar charges, utility agreements, covenants, reservations,
restrictions, encroachments, charges, encumbrances, title defects or other
irregularities that do not materially interfere with the ordinary course of
business of the Company or any of its Restricted Subsidiaries; (vi) Liens
(including extensions and renewals thereof) upon real or personal property
acquired after the Closing Date; PROVIDED that (a) such Lien is created solely
for the purpose of securing Trade Payables that the Company reasonably expects
to pay within 90 days or Indebtedness Incurred, in accordance with Section 4.03
hereof, to finance the cost (including the cost of improvements or construction)
of the item of property or assets subject thereto and such Lien is created prior
to, at the time of or within six months after the later of the acquisition, the
completion of construction or the commencement of full operation of such
property, (b) the principal amount of the Trade Payables or Indebtedness secured
by such Lien does not exceed 100% of such cost and (c) any such Lien shall not
extend to or cover any property or assets other than such item of property or
assets and any improvements on such item; (vii) leases or subleases granted to
others that do not materially interfere with the ordinary course of business of
the Company and its Restricted Subsidiaries, taken as a whole; (viii) Liens
encumbering property or assets under construction arising from progress or
partial payments by a customer of the Company or its Restricted Subsidiaries
relating to such property or assets; (ix) any interest or title of a lessor in
the property subject to any Capitalized Lease or operating lease; (x) Liens
arising from filing Uniform Commercial Code financing statements regarding
leases; (xi) Liens on property of, or on shares of Capital Stock or Indebtedness
of, any Person existing at the time such Person becomes, or becomes a part of,
any Restricted Subsidiary; PROVIDED that such Liens do not extend to or cover
any property or assets of the Company or any Restricted Subsidiary other than
the property or assets acquired; (xii) Liens in favor of the Company or any
Restricted Subsidiary; (xiii) Liens arising from the rendering of a final
judgment or order against the Company or any Restricted Subsidiary that does not
give rise to an Event of Default; (xiv) Liens securing reimbursement obligations
with respect to letters of credit that encumber documents and other property
relating to such letters of credit and the products and proceeds thereof; (xv)
Liens in favor of customs and revenue authorities arising as a matter of law to
secure payment of customs duties in connection with the importation of goods;
(xvi) Liens encumbering customary initial deposits and margin deposits, and
other Liens that are within the general parameters customary in the industry and
incurred in the ordinary course of business, in each case, securing Indebtedness
under Interest Rate Agreements and Currency Agreements and forward contracts,
options, future contracts, futures options or similar agreements or arrangements
designed solely to protect the Company or any
<PAGE>
20
of its Restricted Subsidiaries from fluctuations in interest rates, currencies
or the price of commodities; (xvii) Liens arising out of conditional sale, title
retention, consignment or similar arrangements for the sale of goods entered
into by the Company or any of its Restricted Subsidiaries in the ordinary course
of business in accordance with the past practices of the Company and its
Restricted Subsidiaries prior to the Closing Date; and (xviii) Liens on or sales
of receivables.
"Person" means an individual, a corporation, a partnership, a limited
liability company, a joint venture, an association, a trust, an unincorporated
organization or any other entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.
"Preferred Stock" or "preferred stock" means, with respect to any
Person, any and all shares, interests, participation or other equivalents
(however designated, whether voting or non-voting) of such Person's preferred or
preference stock, whether now outstanding or issued after the date of this
Indenture, including, without limitation, all series and classes of such
preferred or preference stock.
"principal" of a debt security, including the Notes, means the
principal amount due on the Stated Maturity as shown on such debt security.
"Private Placement Legend" means the legend initially set forth on the
Notes in the form set forth in Section 2.02(a).
"Public Equity Offering" means an underwritten primary public offering
of Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Redemption Date", when used with respect to any Note or part thereof
to be redeemed, means the date fixed for such redemption by or pursuant to the
terms of the Notes and this Indenture.
"Redemption Price", when used with respect to any Note or part thereof
to be redeemed, means the price at which such Note is to be redeemed pursuant to
the terms of the Notes and this Indenture.
"Registrar" has the meaning provided in Section 2.04.
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21
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of January 26, 1998, between the Company and Morgan Stanley
& Co. Incorporated relating to the Notes.
"Registration Statement" means any registration statement of the
Company that covers any of the Exchange Notes, and all amendments and
supplements to any such Registration Statement, including post-effective
amendments, in each case including the prospectus contained therein, all
exhibits thereto and all material incorporated by reference therein.
"Regular Record Date" for the interest payable on any Interest Payment
Date means the February 1 or August 1 (whether or not a Business Day), as the
case may be, next preceding such Interest Payment Date.
"Regulation S" means Regulation S under the Securities Act.
"Responsible Officer", when used with respect to the Trustee, means
any officer of the Trustee with direct responsibility for the administration of
this Indenture and also means, with respect to a particular corporate trust
matter, any other officer to whom such matter is referred because of his or her
knowledge of and familiarity with the particular subject.
"Restricted Payments" has the meaning provided in Section 4.04.
"Restricted Subsidiary" means any Subsidiary of the Company other than
an Unrestricted Subsidiary.
"Rule 144A" means Rule 144A under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Separation Date" has the meaning specified in the recitals to this
Indenture.
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in 17 CFR Part 210.1-01(w), promulgated
pursuant to the Securities Act, as such regulation is in effect on the date
hereof.
"Specified Date" means any Redemption Date, any Payment Date for an
Offer to Purchase or any date on which the Notes first become due and payable
after an Event of Default.
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"S&P" means Standard & Poor's Ratings Services and its successors.
"Stated Maturity" means (i) with respect to any debt security, the
date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii) with
respect to any scheduled installment of principal of or interest on any debt
security, the date specified in such debt security as the fixed date on which
such installment is due and payable.
"Strategic Investments" means (A) Investments that the Board of
Directors has determined in good faith will enable the Company or any of its
Restricted Subsidiaries to obtain additional business that it might not be able
to obtain without making such Investment and (B) Investments in entities the
principal function of which is to perform research and development with respect
to products and services that may be used or useful in the Telecommunications
Business; PROVIDED that the Company or one of its Restricted Subsidiaries is
entitled or otherwise reasonably expected to obtain rights to such products or
services as a result of such Investment.
"Strategic Subordinated Indebtedness" means Indebtedness of the
Company Incurred to finance the acquisition of a Person engaged in the
Telecommunications Business that by its terms, or by the terms of any agreement
or instrument pursuant to which such Indebtedness is outstanding, (i) is
expressly made subordinate in right of payment to the Notes and (ii) provides
that no payment of principal, premium or interest on, or any other payment with
respect to, such Indebtedness may be made prior to the payment in full of all of
the Company's obligations under the Notes; PROVIDED that such Indebtedness may
provide for and be repaid at any time from the proceeds of the sale of Capital
Stock (other than Disqualified Stock) of the Company after the Incurrence of
such Indebtedness.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association, or other business entity (other than a partnership) of which more
than 50% of the total voting power of shares of Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time of determination owned or
controlled, directly or indirectly, by such Person or one or more of the other
Subsidiaries of such Person or a combination thereof and (ii) any partnership,
joint venture, limited liability company or similar entity of which (x) more
than 50% of the capital accounts, distribution rights, total equity and voting
interests or general or limited partnership interests, as applicable, are owned
or controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of such Person or a combination thereof whether in the form
of membership, general, special or limited partnership or otherwise and (y) such
Person or any Wholly Owned Restricted Subsidiary of such Person is a general
partner or otherwise controls such entity.
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23
"Telecommunications Business" means the development, ownership or
operation of one or more telephone, telecommunications or information systems or
the provision of telephony, telecommunications or information services
(including, without limitation, any voice, video transmission, data or Internet
services) and any related, ancillary or complementary business.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency or instrumentality thereof, (ii) time deposit accounts, certificates of
deposit, eurodollar time deposits and money market deposits maturing within 180
days or less of the date of acquisition thereof issued by a bank or trust
company which is organized under the laws of the United States of America, any
state thereof or any foreign country recognized by the United States of America,
and which bank or trust company has capital, surplus and undivided profits
aggregating in excess of $50 million (or the foreign currency equivalent
thereof) and has outstanding debt which is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clauses (i) and (ii) above
entered into with a bank meeting the qualifications described in clause (ii)
above, (iv) commercial paper, maturing not more than 90 days after the date of
acquisition, issued by a corporation (other than an Affiliate of the Company)
organized and in existence under the laws of the United States of America, any
state thereof or any foreign country recognized by the United States of America
with a rating at the time as of which any investment therein is made of "P-1"
(or higher) according to Moody's or "A-1" (or higher) according to S&P, (v)
securities with maturities of six months or less from the date of acquisition
issued or fully and unconditionally guaranteed by any state, commonwealth or
territory of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by S&P or Moody's, and (vi)
investment funds investing 95% of their assets in securities of the type
described in clause (i)-(v) above.
"Temporary Regulation S Global Note" means the Global Note bearing the
Private Placement Legend in bearer form without interest coupons, that will be
issued in a denomination equal to the outstanding principal amount of the Notes
sold in reliance on Regulation S and deposited with the Trustee, as custodian
for the Depository.
"TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939,
as amended (15 U.S. Code Sections 77aaa-77bbb), as in effect on the date this
Indenture was executed, except as provided in Section 9.06; PROVIDED, HOWEVER,
that, in the event the Trust Indenture Act of 1939 is amended after such date,
"TIA" or "Trust Indenture Act" means, to the extent required by any such
amendment, the Trust Indenture Act of 1939 as so amended.
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24
"Trade Payables" means, with respect to any Person, any accounts
payable or any other indebtedness or monetary obligation to trade creditors
created, assumed or Guaranteed by such Person or any of its Subsidiaries arising
in the ordinary course of business in connection with the acquisition of goods
or services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Trustee" means the party named as such in the first paragraph of this
Indenture until a successor replaces it in accordance with the provisions of
Article Seven of this Indenture and thereafter means such successor.
"Unit Legend" has the meaning provided in Section 2.02(c).
"United States Bankruptcy Code" means the Bankruptcy Reform Act of
1978, as amended and as codified in Title 11 of the United States Code, as
amended from time to time hereafter, or any successor federal bankruptcy law.
"Units" means the units, as defined in the first paragraph of the
recitals hereof.
"U.S. Global Note" has the meaning provided in Section 2.01.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof at any time prior
to the Stated Maturity of the Notes, and shall also include depository receipts
issued by a bank or trust company as custodian with respect to any such U.S.
Government Obligation or a specific payment of interest on or principal of any
such U.S. Government Obligation held by such custodian for the account of the
holder of a depository receipt; PROVIDED that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of interest on
or principal of the U.S. Government Obligation evidenced by such depository
receipt.
"U.S. Person" has the meaning ascribed thereto in Rule 902 under the
Securities Act.
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25
"U.S. Certificated Notes" has the meaning provided in Section 2.01.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below; and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; PROVIDED that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under Section 4.04 hereof and (C) if
applicable, the Incurrence of Indebtedness and the Investment referred to in
clause (A) of this proviso would be permitted under Sections 4.03 and 4.04
hereof. The Board of Directors may designate any Unrestricted Subsidiary to be
a Restricted Subsidiary; PROVIDED that (i) no Default or Event of Default shall
have occurred and be continuing at the time of or after giving effect to such
designation and (ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately after such designation would, if Incurred at such time,
have been permitted to be Incurred (and shall be deemed to have been Incurred)
for all purposes of this Indenture. Any such designation by the Board of
Directors shall be evidenced to the Trustee by promptly filing with the Trustee
a copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Warrant Agreement" means the warrant agreement, dated the Closing
Date, between the Company and The Chase Manhattan Bank, as warrant agent.
"Warrants" means the warrants, as defined in the first paragraph of
the recitals hereof.
"Wholly Owned" means, with respect to any Subsidiary of any Person,
the ownership of 95% or more of the outstanding Capital Stock of such Subsidiary
(other than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) by such Person or one or more Wholly Owned
Subsidiaries of such Person.
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26
SECTION 1.02. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Notes;
"indenture security holder" means a Holder or a Noteholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee; and
"obligor" on the indenture securities means the Company or any other
obligor on the Notes.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by a rule of the
Commission and not otherwise defined herein have the meanings assigned to them
therein.
SECTION 1.03. RULES OF CONSTRUCTION. Unless the context otherwise
requires:
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(iii) "or" is not exclusive;
(iv) words in the singular include the plural, and words in the
plural include the singular;
(v) provisions apply to successive events and transactions;
(vi) "herein," "hereof" and other words of similar import refer to
this Indenture as a whole and not to any particular Article, Section or
other subdivision; and
(vii) all references to Sections or Articles refer to Sections or
Articles of this Indenture unless otherwise indicated.
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27
ARTICLE TWO
THE NOTES
SECTION 2.01. FORM AND DATING. The Notes and the Trustee's
certificate of authentication shall be substantially in the form annexed hereto
as Exhibit A. The Notes may have such appropriate insertions, omissions,
substitutions and other variations as are required or permitted by this
Indenture and may have letters, notations, legends or endorsements required by
law, stock exchange agreements to which the Company is subject or usage. Any
portion of the text of any Note may be set forth on the reverse thereof, with an
appropriate reference thereto on the face of the Note. The Company shall
approve the form of the Notes and any notation, legend or endorsement on the
Notes. Each Note shall be dated the date of its authentication.
The terms and provisions contained in the form of the Notes annexed
hereto as Exhibit A shall constitute, and are hereby expressly made, a part of
this Indenture. Each of the Company and the Trustee, by its execution and
delivery of this Indenture, expressly agrees to the terms and provisions of the
Notes applicable to it and to be bound thereby.
Notes offered and sold in reliance on Rule 144A shall be issued
initially in the form of one or more permanent global Notes in registered form,
substantially in the form set forth in Exhibit A (the "U.S. GLOBAL NOTE"),
deposited with the Trustee, as custodian for the Depository, duly executed by
the Company and authenticated by the Trustee as hereinafter provided. The
aggregate principal amount at maturity of a U.S. Global Note may from time to
time be increased or decreased by adjustments made on the records of the
Trustee, as custodian for the Depository or its nominee, as hereinafter
provided.
Notes offered and sold in offshore transactions in reliance on
Regulation S shall be issued initially in the form of one or more temporary
global Notes in registered form substantially in the form set forth in Exhibit A
(the "TEMPORARY REGULATION S GLOBAL NOTE"), deposited on behalf of the
purchasers of the Notes represented thereby with the Trustee, as custodian for
the Depository, duly executed by the Company and authenticated by the Trustee as
hereinafter provided. At any time following the later of the Separation Date
and March 10, 1998 upon receipt by the Trustee and the Company of a certificate
substantially in the form of Exhibit B hereto, one or more permanent global
Notes in registered form substantially in the form set forth in Exhibit A (the
"PERMANENT REGULATION S GLOBAL NOTE" and together with the Temporary Regulation
S Global Note, the "OFFSHORE GLOBAL NOTE") duly executed by the Company and
authenticated by the Trustee as hereinafter provided shall be deposited with the
Trustee, as custodian for the Depository, which shall reflect on its books and
records the date and a decrease in the principal amount of the Temporary
Regulation S Global Notes in an amount equal to the principal amount of the
beneficial interest in the Temporary Regulation S Global Notes transferred.
The aggregate principal amount at maturity of an Offshore Global
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28
Note may from time to time be increased or decreased by adjustments made in the
records of the Trustee, as custodian for the Depository or its nominee, as
herein provided.
Notes which are offered and sold to Institutional Accredited Investors
which are not QIBs (excluding Non-U.S. Persons) shall be issued in the form of
permanent certificated Notes in registered form in substantially the form set
forth in Exhibit A (the "U.S. CERTIFICATED NOTES"). Notes issued pursuant to
Section 2.07 in exchange for interests in the Offshore Global Note shall be in
the form of certificated Notes in registered form substantially in the form set
forth in Exhibit A (the "OFFSHORE CERTIFICATED NOTES"). Notes issued pursuant
to Section 2.07 in exchange for interests in the U.S. Global Note shall be in
the form of the U.S. Certificated Note.
The Offshore Certificated Notes and the U.S. Certificated Notes are
sometimes collectively referred to herein as the "CERTIFICATED NOTES". The U.S.
Global Notes and Offshore Global Notes are sometimes collectively herein
referred to as the "GLOBAL NOTES".
The definitive Notes shall be typed, printed, lithographed or engraved
or produced by any combination of these methods or may be produced in any other
manner permitted by the rules of any securities exchange on which the Notes may
be listed, all as determined by the officers executing such Notes, as evidenced
by their execution of such Notes.
SECTION 2.02. RESTRICTIVE LEGENDS. (a) NOTE LEGENDS. Unless and
until a Note is exchanged for an Exchange Note or otherwise disposed of in
connection with an effective Registration Statement pursuant to the Registration
Rights Agreement, (i) each U.S. Global Note and each U.S. Certificated Note
shall bear the legend, set forth below on the face thereof and (ii) each
Offshore Certificated Note and each Temporary Regulation S Global Note shall
bear the legend set forth below on the face thereof until at least 41 days after
the Closing Date and receipt by the Company and the Trustee of a certificate
substantially in the form of Exhibit B hereto.
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND
ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S.
PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS
ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT)
OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE
501(a)(1), (2), (3) OR (7) OF REGULATION
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29
D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR
(C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT; (2)
AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE
144(k) (TAKING INTO ACCOUNT THE PROVISIONS OF RULE 144(d) UNDER THE
SECURITIES ACT, IF APPLICABLE), RESELL OR OTHERWISE TRANSFER THIS NOTE
EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED
INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES
ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR
THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED LETTER
CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
RESTRICTIONS ON TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE
OBTAINED FROM THE TRUSTEE) AND IF SUCH TRANSFER IS IN RESPECT OF AN
AGGREGATE PRINCIPAL AMOUNT AT MATURITY OF NOTES OF LESS THAN $500,000,
AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN
COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN
OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES
ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144
UNDER THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT
WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY
TRANSFER OF THIS NOTE WITHIN THE TIME PERIOD REFERRED TO ABOVE, THE
HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF
RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO
THE TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED
INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO EACH OF
THE TRUSTEE AND THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER
INFORMATION AS SUCH PERSONS MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS
USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S.
PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE
SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE
TO REFUSE TO
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30
REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING
RESTRICTIONS.
(b) GLOBAL NOTE LEGEND. Each Global Note, whether or not an
Exchange Note, shall also bear the following legend on the face thereof:
UNLESS THIS GLOBAL NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY TO THE COMPANY OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY
OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE &
CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE
OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF
OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL
NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN SECTION 2.08 OF THE INDENTURE.
(c) UNITS LEGENDS. Each Note issued prior to the Separation Date
shall bear the following legend (the "UNIT LEGEND") on the face thereof:
"THE NOTES EVIDENCED BY THIS CERTIFICATE ARE INITIALLY ISSUED AS PART
OF AN ISSUANCE OF UNITS, EACH OF WHICH CONSISTS OF $1,000 PRINCIPAL
AMOUNT AT MATURITY OF 121/2% SENIOR DISCOUNT NOTES DUE 2008 OF KMC
TELECOM HOLDINGS, INC. (THE "NOTES") AND ONE WARRANT (EACH, A
"WARRANT" AND COLLECTIVELY, THE "WARRANTS) INITIALLY ENTITLING THE
HOLDER THEREOF TO PURCHASE 0.21785 SHARES OF COMMON
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31
STOCK, PAR VALUE $.01 PER SHARE, OF KMC TELECOM HOLDINGS, INC. PRIOR TO
THE CLOSE OF BUSINESS UPON THE EARLIEST TO OCCUR OF (i) SIX MONTHS AFTER
JANUARY 29, 1998, (ii) THE COMMENCEMENT OF AN EXCHANGE OFFER WITH RESPECT
TO THE NOTES, (iii) THE EFFECTIVENESS OF A SHELF REGISTRATION STATEMENT
WITH RESPECT TO THE NOTES, (iv) THE COMMENCEMENT OF AN OFFER TO
REPURCHASE THE NOTES PURSUANT TO THE INDENTURE, OR (v) THE DATE WHICH THE
INITIAL PURCHASER, IN ITS SOLE DISCRETION DETERMINES, PROVIDED THAT,
PRIOR TO SUCH DATE, THE COMPANY MAILS NOTICE OF SUCH DETERMINATION TO THE
HOLDERS OF THE NOTES, THE NOTES EVIDENCED BY THIS CERTIFICATE MAY NOT BE
TRANSFERRED OR EXCHANGED SEPARATELY FROM, BUT MAY BE TRANSFERRED OR
EXCHANGED ONLY TOGETHER WITH, THE WARRANTS."
SECTION 2.03. EXECUTION, AUTHENTICATION AND DENOMINATIONS. Subject
to Article Four, the aggregate principal amount at maturity of Notes (including
Exchange Notes) which may be authenticated and delivered under this Indenture is
unlimited. The Notes shall be executed by two Officers of the Company, by
facsimile or manual signature, in the name and on behalf of the Company.
If an Officer whose signature is on a Note no longer holds that office
at the time the Trustee or authenticating agent authenticates the Note, the Note
shall be valid nevertheless.
A Note shall not be valid until the Trustee or authenticating agent
manually signs the certificate of authentication on the Note. The signature
shall be conclusive evidence that the Note has been authenticated under this
Indenture.
At any time and from time to time after the execution of this
Indenture, the Trustee or an authenticating agent shall, upon receipt of a
Company Order, authenticate for original issue Notes in the aggregate principal
amount at maturity specified in such Company Order; PROVIDED that the Trustee
shall be entitled to receive an Officers' Certificate and an Opinion of Counsel
of the Company if it so reasonably requests in connection with such
authentication of Notes. Such Company Order shall specify the amount of Notes
to be authenticated, the date on which the issue of Notes is to be authenticated
and in case of an issuance of Notes pursuant to Section 2.15, shall certify that
such issuance is in compliance with Article Four.
The Trustee may appoint an authenticating agent reasonably acceptable
to the Company to authenticate Notes. Unless limited by the terms of such
appointment, an
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32
authenticating agent may authenticate Notes whenever the Trustee may do so.
Each reference in this Indenture to authentication by the Trustee includes
authentication by such authenticating agent. An authenticating agent has the
same rights as an Agent to deal with the Company or an Affiliate of the Company.
The Notes shall be issuable only in registered form without coupons
and only in denominations of $1,000 in principal amount at maturity and any
integral multiple of $1,000 in excess thereof.
SECTION 2.04. REGISTRAR AND PAYING AGENT. The Company shall maintain
an office or agency where Notes may be presented for registration of transfer or
for exchange (the "REGISTRAR"), an office or agency where Notes may be presented
for payment (the "PAYING AGENT") and an office or agency where notices and
demands to or upon the Company in respect of the Notes and this Indenture may be
served, which shall be in the Borough of Manhattan, The City of New York. The
Company shall cause the Registrar to keep a register of the Notes and of their
transfer and exchange (the "NOTE REGISTER"). The Company may have one or more
co-Registrars and one or more additional Paying Agents.
The Company shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture. The agreement shall implement the
provisions of this Indenture that relate to such Agent. The Company shall give
prompt written notice to the Trustee of the name and address of any such Agent
and any change in the address of such Agent. If the Company fails to maintain a
Registrar, Paying Agent and/or agent for service of notices and demands, the
Trustee shall act as such Registrar, Paying Agent and/or agent for service of
notices and demands for so long as such failure shall continue. The Company may
remove any Agent upon written notice to such Agent and the Trustee; PROVIDED
that no such removal shall become effective until (i) the acceptance of an
appointment by a successor Agent to such Agent as evidenced by an appropriate
agency agreement entered into by the Company and such successor Agent and
delivered to the Trustee or (ii) notification to the Trustee that the Trustee
shall serve as such Agent until the appointment of a successor Agent in
accordance with clause (i) of this proviso. The Company, any Subsidiary of the
Company, or any Affiliate of any of them may act as Paying Agent, Registrar or
co-Registrar, and/or agent for service of notice and demands; PROVIDED, HOWEVER,
that neither the Company, a Subsidiary of the Company nor an Affiliate of any of
them shall act as Paying Agent in connection with the defeasance of the Notes or
the discharge of this Indenture under Article Eight.
The Company initially appoints the Trustee as Registrar, Paying Agent,
authenticating agent and agent for service of notice and demands. If, at any
time, the Trustee is not the Registrar, the Registrar shall make available to
the Trustee on or before each Interest Payment Date and at such other times as
the Trustee may reasonably request, the names and addresses of the Holders as
they appear in the Note Register.
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SECTION 2.05. PAYING AGENT TO HOLD MONEY IN TRUST. Not later than
12:00 p.m. New York City time on each due date of the principal, premium, if
any, or interest on any Notes, the Company shall deposit with the Paying Agent
money in immediately available funds sufficient to pay such principal, premium,
if any, or interest so becoming due. The Company shall require each Paying
Agent, if any, other than the Trustee to agree in writing that such Paying Agent
shall hold in trust for the benefit of the Holders or the Trustee all money held
by the Paying Agent for the payment of principal of, premium, if any, or
interest on the Notes (whether such money has been paid to it by the Company or
any other obligor on the Notes), and that such Paying Agent shall promptly
notify the Trustee of any default by the Company (or any other obligor on the
Notes) in making any such payment. The Company at any time may require a Paying
Agent to pay all money held by it to the Trustee and account for any funds
disbursed, and the Trustee may at any time during the continuance of any payment
default, upon written request to a Paying Agent, require such Paying Agent to
pay all money held by it to the Trustee and to account for any funds disbursed.
Upon doing so, the Paying Agent shall have no further liability for the money so
paid over to the Trustee. If the Company or any Subsidiary of the Company or
any Affiliate of any of them acts as Paying Agent, it will, on or before each
due date of any principal of, premium, if any, or interest on the Notes,
segregate and hold in a separate trust fund for the benefit of the Holders a sum
of money sufficient to pay such principal, premium, if any, or interest so
becoming due until such sum of money shall be paid to such Holders or otherwise
disposed of as provided in this Indenture, and will promptly notify the Trustee
of its action or failure to act as required by this Section 2.05.
SECTION 2.06. TRANSFER AND EXCHANGE. The Notes are issuable only in
registered form. A Holder may transfer a Note by written application to the
Registrar stating the name of the proposed transferee and otherwise complying
with the terms of this Indenture. No such transfer shall be effected until, and
such transferee shall succeed to the rights of a Holder only upon registration
of the transfer by the Registrar in the Note Register. Prior to the
registration of any transfer by a Holder as provided herein, the Company, the
Trustee, and any agent of the Company or the Trustee shall treat the Person in
whose name the Note is registered as the owner thereof for all purposes whether
or not the Note shall be overdue, and neither the Company, the Trustee, nor any
such agent shall be affected by notice to the contrary. Furthermore, any Holder
of a Global Note shall, by acceptance of such Global Note, agree that transfers
of beneficial interests in such Global Note may be effected only through a
book-entry system maintained by the Depository (or its agent), and that
ownership of a beneficial interest in the Note shall be required to be reflected
in a book entry. When Notes are presented to the Registrar or a co-Registrar
with a request to register the transfer or to exchange them for an equal
principal amount at maturity of Notes of other authorized denominations
(including on exchange of Notes for Exchange Notes), the Registrar shall
register the transfer or make the exchange as requested if its requirements for
such transactions are met; PROVIDED that no exchanges of Notes for Exchange
Notes shall occur until a
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34
Registration Statement shall have been declared effective by the Commission and
that any Notes that are exchanged for Exchange Notes shall be cancelled by the
Trustee. To permit registrations of transfers and exchanges in accordance with
the terms, conditions and restrictions hereof, the Company shall execute and the
Trustee shall authenticate Notes at the Registrar's request. No service charge
shall be made to any Holder for any registration of transfer or exchange or
redemption of the Notes, but the Company may require payment of a sum sufficient
to cover any transfer tax or similar governmental charge payable in connection
therewith (other than any such transfer taxes or other similar governmental
charge payable upon transfers, exchanges or redemptions pursuant to Section
2.11, 3.08, 4.11, 4.12 or 9.04).
The Registrar shall not be required (i) to issue, register the
transfer of or exchange any Note during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption of
Notes selected for redemption under Section 3.03 or Section 3.08 and ending at
the close of business on the day of such mailing, or (ii) to register the
transfer of or exchange any Note so selected for redemption in whole or in part,
except the unredeemed portion of any Note being redeemed in part.
SECTION 2.07. BOOK-ENTRY PROVISIONS FOR GLOBAL NOTES. (a) Each U.S.
Global Note and Offshore Global Note initially shall (i) be registered in the
name of the Depository for such Global Notes or the nominee of such Depository,
(ii) be delivered to the Trustee as custodian for such Depository and (iii) bear
legends as set forth in Section 2.02.
Members of, or participants in, the Depository ("AGENT MEMBERS") shall
have no rights under this Indenture with respect to any Global Note held on
their behalf by the Depository, or the Trustee as its custodian, or under any
Global Note, and the Depository may be treated by the Company, the Trustee and
any agent of the Company or the Trustee as the absolute owner of such Global
Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein
shall prevent the Company, the Trustee or any agent of the Company or the
Trustee, from giving effect to any written certification, proxy or other
authorization furnished by the Depository or impair, as between the Depository
and its Agent Members, the operation of customary practices governing the
exercise of the rights of a beneficial owner of any Note.
(b) Transfers of a Global Note shall be limited to transfers of
such Global Note in whole, but not in part, to the Depository, its successors or
their respective nominees. Interests of beneficial owners in a Global Note may
be transferred in accordance with the applicable rules and procedures of the
Depository and the provisions of Section 2.08. In addition, U.S. Certificated
Notes or Offshore Certificated Notes shall be transferred to all beneficial
owners in exchange for their beneficial interests in a U.S. Global Note or an
Offshore Global Note, respectively, if (i) the Depository notifies the Company
that it is unwilling or unable to continue as Depository for the U.S. Global
Notes or the Offshore
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35
Global Notes, as the case may be, and a successor depositary is not
appointed by the Company within 90 days of such notice or (ii) an Event of
Default has occurred and is continuing and the Registrar has received a request
to the foregoing effect from the Depository or the Trustee.
(c) Any beneficial interest in one of the Global Notes that is
transferred to a Person who takes delivery in the form of an interest in the
other Global Note will, upon transfer, cease to be an interest in such Global
Note and become an interest in the other Global Note and, accordingly, will
thereafter be subject to all transfer restrictions, if any, and other procedures
applicable to beneficial interests in such other Global Note for as long as it
remains such an interest.
(d) In connection with any transfer pursuant to paragraph (b) of
this Section of a portion of the beneficial interests in a U.S. Global Note or
Offshore Global Note to beneficial owners who are required to hold U.S.
Certificated Notes, the Registrar shall reflect on its books and records the
date and a decrease in the principal amount at maturity of such U.S. Global Note
or Offshore Global Note in an amount equal to the principal amount at maturity
of the beneficial interest in such U.S. Global Note or Offshore Global Note to
be transferred, and the Company shall execute, and the Trustee shall
authenticate and deliver, one or more U.S. Certificated Notes or Offshore
Certificated Notes, as the case may be, of like tenor and amount.
(e) In connection with the transfer of all the U.S. Global Notes
or Offshore Global Notes to beneficial owners pursuant to paragraph (b) of this
Section, the U.S. Global Notes or Offshore Global Notes, as the case may be,
shall be deemed to be surrendered to the Trustee for cancellation, and the
Company shall execute, and the Trustee shall authenticate and deliver, to each
beneficial owner identified by the Depository in exchange for its beneficial
interest in the U.S. Global Notes or Offshore Global Notes, as the case may be,
an equal aggregate principal amount at maturity of U.S. Certificated Notes or
Offshore Certificated Notes, as the case may be, of authorized denominations.
(f) Any U.S. Certificated Note delivered in exchange for an
interest in a U.S. Global Note pursuant to paragraph (b), (d) or (e) of this
Section shall, except as otherwise provided by paragraphs (f)(i)(x) and (d) of
Section 2.08 hereof, bear the legend regarding transfer restrictions applicable
to the U.S. Certificated Note set forth in Section 2.02.
(g) Any Offshore Certificated Note delivered in exchange for an
interest in an Offshore Global Note pursuant to paragraph (b), (d) or (e) of
this Section shall, except as otherwise provided by paragraphs (f)(i)(x) and (d)
of Section 2.08 hereof, bear the legend regarding transfer restrictions
applicable to the Offshore Certificated Note set forth in Section 2.02 hereof.
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36
(h) The registered holder of a Global Note may grant proxies and
otherwise authorize any Person, including Agent Members and Persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Notes.
(i) QIBs that are beneficial owners of interests in a Global Note
may receive Certificated Notes (which shall bear the Private Placement Legend if
required by Section 2.02) in accordance with the procedures of the Depository.
In connection with the execution, authentication and delivery of such
Certificated Notes, the Registrar shall reflect on its books and records a
decrease in the principal amount of the relevant Global Note equal to the
principal amount of such Certificated Notes and the Company shall execute and
the Trustee shall authenticate and deliver one or more Certificated Notes
having an equal aggregate principal amount.
SECTION 2.08. SPECIAL TRANSFER PROVISIONS. Unless and until a Note
is exchanged for an Exchange Note in connection with an effective Registration
Statement pursuant to the Registration Rights Agreement, the following
provisions shall apply:
(a) TRANSFERS TO QIBS. The following provisions shall apply with
respect to the registration of any proposed transfer of a U.S. Certificated Note
or an interest in a U.S. Global Note to a QIB (excluding Non-U.S. Persons):
(i) If the Note to be transferred consists of (x) U.S.
Certificated Notes, the Registrar shall register the transfer if such
transfer is being made by a proposed transferor who has checked the box
provided for on the form of Note stating, or has otherwise advised the
Company and the Registrar in writing, that the sale has been made in
compliance with the provisions of Rule 144A to a transferee who has
signed the certification provided for on the form of Note stating, or has
otherwise advised the Company and the Registrar in writing, that it is
purchasing the Note for its own account or an account with respect to
which it exercises sole investment discretion and that it and any such
account is a QIB within the meaning of Rule 144A, and is aware that the
sale to it is being made in reliance on Rule 144A and acknowledges that
it has received such information regarding the Company as it has
requested pursuant to Rule 144A or has determined not to request such
information and that it is aware that the transferor is relying upon its
foregoing representations in order to claim the exemption from
registration provided by Rule 144A or (y) an interest in a U.S. Global
Note, the transfer of such interest may be effected only through the book
entry system maintained by the Depository.
(ii) If the proposed transferee is an Agent Member, and the Note to
be transferred consists of U.S. Certificated Notes, upon receipt by the
Registrar of the
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37
documents referred to in clause (i) and instructions given in
accordance with the Depository's and the Registrar's procedures, the
Registrar shall reflect on its books and records the date and an increase
in the principal amount at maturity of such U.S. Global Note in an amount
equal to the principal amount at maturity of the U.S. Certificated Notes
to be transferred, and the Trustee shall cancel the Certificated Note so
transferred.
(b) TRANSFERS OF INTERESTS IN OFFSHORE GLOBAL NOTES OR OFFSHORE
CERTIFICATED NOTES TO U.S. PERSONS. The following provisions shall apply with
respect to any transfer of interests in Offshore Global Notes or Offshore
Certificated Notes to U.S. Persons:
(i) prior to the removal of the Private Placement Legend from
Offshore Global Notes or Offshore Certificated Notes pursuant to Section
2.02, the Registrar shall refuse to register such transfer; and
(ii) after such removal, the Registrar shall register the transfer
of any such Note without requiring any additional certification.
(c) TRANSFERS TO NON-U.S. PERSONS AT ANY TIME. The following
provisions shall apply with respect to any transfer of a Note to a Non-U.S.
Person:
(i) The Registrar shall register any proposed transfer to any
Non-U.S. Person if the Note to be transferred is a U.S. Certificated Note
or an interest in a U.S. Global Note only upon receipt of a certificate
substantially in the form of Exhibit C from the proposed transferor.
(ii) (a) If the proposed transferor is an Agent Member holding a
beneficial interest in a U.S. Global Note, upon receipt by the Registrar
of (x) the documents required by paragraph (i) and (y) instructions in
accordance with the Depository's and the Registrar's procedures, the
Registrar shall reflect on its books and records the date and a decrease
in the principal amount at maturity of such U.S. Global Note in an amount
equal to the principal amount at maturity of the beneficial interest
in the U.S. Global Note to be transferred, and (b) if the proposed
transferee is an Agent Member, upon receipt by the Registrar of
instructions given in accordance with the Depository's and the
Registrar's procedures, the Registrar shall reflect on its books and
records the date and an increase in the principal amount at maturity of
such Offshore Global Note in an amount equal to the principal amount at
maturity of the U.S. Certificated Notes or the U.S. Global Notes, as the
case may be, to be transferred, and the Trustee shall cancel the
Certificated Note, if any, so transferred or decrease the amount of the
U.S. Global Notes.
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(d) PRIVATE PLACEMENT LEGEND. Upon the registration of transfer,
exchange or replacement of Notes not bearing the Private Placement Legend, the
Registrar shall deliver Notes that do not bear the Private Placement Legend.
Upon the registration of transfer, exchange or replacement of Notes bearing the
Private Placement Legend, the Registrar shall deliver only Notes that bear the
Private Placement Legend unless either (i) the Private Placement Legend is no
longer required by Section 2.02 or (ii) there is delivered to the Registrar an
Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the
effect that neither such legend nor the related restrictions on transfer are
required in order to maintain compliance with the provisions of the Securities
Act.
(e) GENERAL. By its acceptance of any Note bearing the Private
Placement Legend, each Holder of such a Note acknowledges the restrictions on
transfer of such Note set forth in this Indenture and in the Private Placement
Legend and agrees that it will transfer such Note only as provided in this
Indenture. The Registrar shall not register a transfer of any Note unless such
transfer complies with the restrictions on transfer of such Note set forth in
this Indenture. In connection with any transfer of Notes to an Institutional
Accredited Investor, each Holder agrees by its acceptance of the Notes to
furnish the Registrar or the Company such certifications, legal opinions or
other information as either of them may reasonably require to confirm that such
transfer is being made pursuant to an exemption from, or a transaction not
subject to, the registration requirements of the Securities Act; PROVIDED that
the Registrar shall not be required to determine (but may rely on a
determination made by the Company with respect to) the sufficiency of any such
certifications, legal opinions or other information.
(f) TRANSFERS TO NON-QIB INSTITUTIONAL ACCREDITED INVESTORS. The
following provisions shall apply with respect to the registration of any
proposed transfer of a Note to any Institutional Accredited Investor which is
not a QIB (excluding Non-U.S. Persons):
(i) The Registrar shall register the transfer of any Note, whether
or not such Note bears the Private Placement Legend, if (x) the requested
transfer is after the time period referred to in Rule 144(k) under the
Securities Act as in effect with respect to such transfer or (y) the
proposed transferee has delivered to the Registrar (A) a certificate
substantially in the form of Exhibit D hereto and (B) if the aggregate
principal amount at maturity of the Notes being transferred is less than
$500,000 at the time of such transfer, an Opinion of Counsel acceptable
to the Company that such transfer is in compliance with the Securities
Act.
(ii) If the proposed transferor is an Agent Member holding a
beneficial interest in a U.S. Global Note, upon receipt by the Registrar
and the Company of (x) the documents, if any, required by paragraph (i)
and (y) instructions given in accordance with the Depository's and the
Registrar's procedures, the Registrar shall
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39
reflect on its books and records the date and a decrease in the principal
amount at maturity of such U.S. Global Note in an amount equal to the
principal amount at maturity of the beneficial interest in the U.S.
Global Note to be transferred, and the Company shall execute, and the
Trustee shall authenticate and deliver, one or more U.S. Certificated
Notes of like tenor and amount.
The Registrar shall retain, in accordance with its customary
procedures, copies of all letters, notices and other written communications
received pursuant to Section 2.07 or this Section 2.08. The Company shall have
the right to inspect and make copies of all such letters, notices or other
written communications at any reasonable time upon the giving of reasonable
written notice to the Registrar.
SECTION 2.09. REPLACEMENT NOTES. If a mutilated Note is surrendered
to the Trustee or if the Holder claims that the Note has been lost, destroyed or
wrongfully taken, the Company shall issue and the Trustee shall authenticate a
replacement Note of like tenor and principal amount and bearing a number not
contemporaneously outstanding; PROVIDED that the requirements of the second
paragraph of Section 2.10 are met. If required by the Trustee or the Company,
an indemnity bond must be furnished that is sufficient in the judgment of both
the Trustee and the Company to protect the Company, the Trustee or any Agent
from any loss that any of them may suffer if a Note is replaced. The Company
may charge such Holder for its expenses and the expenses of the Trustee in
replacing a Note. In case any such mutilated, lost, destroyed or wrongfully
taken Note has become or is about to become due and payable, the Company in its
discretion may pay such Note instead of issuing a new Note in replacement
thereof.
Every replacement Note is an additional obligation of the Company and
shall be entitled to the benefits of this Indenture.
SECTION 2.10. OUTSTANDING NOTES. Notes outstanding at any time are
all Notes that have been authenticated by the Trustee except for those cancelled
by it, those delivered to it for cancellation and those described in this
Section 2.10 as not outstanding.
If a Note is replaced pursuant to Section 2.09, it ceases to be
outstanding unless and until the Trustee and the Company receive proof
reasonably satisfactory to them that the replaced Note is held by a BONA FIDE
purchaser.
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40
If the Paying Agent (other than the Company or an Affiliate of the
Company) holds on the maturity date or a redemption date money sufficient to pay
all principal, premium, if any, and interest payable on that date with respect
to the Notes (or portions thereof) to be redeemed or payable on that date, then
on and after that date such Notes cease to be outstanding and interest on them
shall cease to accrue or, the principal of such Notes shall cease to accrete,
the case may be.
A Note does not cease to be outstanding because the Company or one of
its Affiliates holds such Note; PROVIDED, HOWEVER, that, in determining whether
the Holders of the requisite principal amount at maturity of the outstanding
Notes have given any request, demand, authorization, direction, notice, consent
or waiver hereunder, Notes owned by the Company or any other obligor upon the
Notes or any Affiliate of the Company or of such other obligor shall be
disregarded and deemed not to be outstanding, except that, in determining
whether the Trustee shall be protected in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Notes which a
Responsible Officer of the Trustee knows to be so owned shall be so disregarded.
Notes so owned which have been pledged in good faith may be regarded as
outstanding if the pledgee establishes to the satisfaction of the Trustee the
pledgee's right so to act with respect to such Notes and that the pledgee is not
the Company or any other obligor upon the Notes or any Affiliate of the Company
or of such other obligor.
SECTION 2.11. TEMPORARY NOTES. Until definitive Notes are ready for
delivery, the Company may prepare and the Trustee shall authenticate temporary
Notes. Temporary Notes shall be substantially in the form of definitive Notes
but may have insertions, substitutions, omissions and other variations
determined to be appropriate by the Officers executing the temporary Notes, as
evidenced by their execution of such temporary Notes. If temporary Notes are
issued, the Company will cause definitive Notes to be prepared without
unreasonable delay. After the preparation of definitive Notes, the temporary
Notes shall be exchangeable for definitive Notes upon surrender of the temporary
Notes at the office or agency of the Company designated for such purpose
pursuant to Section 4.02, without charge to the Holder. Upon surrender for
cancellation of any one or more temporary Notes the Company shall execute and
the Trustee shall authenticate and deliver in exchange therefor a like principal
amount at maturity of definitive Notes of authorized denominations. Until so
exchanged, the temporary Notes shall be entitled to the same benefits under this
Indenture as definitive Notes.
SECTION 2.12. CANCELLATION. The Company at any time may deliver to
the Trustee for cancellation any Notes previously authenticated and delivered
hereunder which the Company may have acquired in any manner whatsoever, and may
deliver to the Trustee for cancellation any Notes previously authenticated
hereunder which the Company has not issued and sold. The Registrar and the
Paying Agent shall forward to the Trustee any Notes
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41
surrendered to them for registration of transfer, exchange, purchase or payment.
The Trustee shall cancel all Notes surrendered for registration of transfer,
exchange, purchase, payment or cancellation and shall dispose of them in
accordance with its normal procedure. The Company shall not issue new Notes to
replace Notes it has paid in full or delivered to the Trustee for cancellation.
SECTION 2.13. CUSIP NUMBERS. The Company in issuing the Notes may
use "CUSIP" and "CINS" numbers (if then generally in use), and the Trustee shall
use CUSIP numbers or CINS numbers, as the case may be, in notices of redemption
or exchange as a convenience to Holders; PROVIDED that any such notice shall
state that no representation is made as to the correctness of such numbers
either as printed on the Notes or as contained in any notice of redemption or
exchange and that reliance may be placed only on the other identification
numbers printed on the Notes.
SECTION 2.14. DEFAULTED INTEREST. If the Company defaults in a
payment of interest on the Notes, it shall pay, or shall deposit with the Paying
Agent money in immediately available funds sufficient to pay, the defaulted
interest, plus (to the extent lawful) interest on the defaulted interest, to
the Persons who are Holders on a subsequent special record date. A special
record date, as used in this Section 2.14 with respect to the payment of any
defaulted interest, shall mean the 15th day next preceding the date fixed by the
Company for the payment of defaulted interest, whether or not such day is a
Business Day. At least 15 days before the subsequent special record date, the
Company shall mail to each Holder and to the Trustee a notice that states the
subsequent special record date, the payment date and the amount of defaulted
interest to be paid.
SECTION 2.15. ISSUANCE OF ADDITIONAL NOTES. The Company may, subject
to Article Four of this Indenture, issue additional Notes under this Indenture.
The Notes issued on the Closing Date and any additional Notes subsequently
issued shall be treated as a single class for all purposes under this Indenture.
ARTICLE THREE
REDEMPTION
SECTION 3.01. RIGHT OF REDEMPTION. (a) The Notes may be redeemed at
the election of the Company, in whole or in part, at any time and from time to
time on or after February 15, 2003 and prior to maturity, upon not less than 30
nor more than 60 days' prior notice mailed by first-class mail to each Holder's
last address as it appears in the Note Register, at the following Redemption
Prices (expressed in percentages of their principal amount at maturity), plus
accrued and unpaid interest, if any, to the Redemption Date (subject to the
right of Holders of record on the relevant Regular Record Date that is on or
prior to the
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42
Redemption Date to receive interest due on an Interest Payment Date that is on
or prior to the Redemption Date) if redeemed during the 12-month period
commencing on February 15 of the applicable year set forth below:
Redemption
Year Price
---- ----------
2003 106.2500%
2004 104.1666
2005 102.0832
2006 and thereafter 100.0000
(b) In addition, at any time or from time to time, on or prior to
April 15, 2000, the Company may, at its option, redeem up to 35% of the
aggregate principal amount at maturity of the Notes with proceeds of one or more
public or private Equity Offerings, at a Redemption Price equal to 112.5% of the
Accreted Value thereof on the Redemption Date; PROVIDED that at least 65% of the
aggregate principal amount at maturity of the Notes issued on January 29,1998
remains outstanding after each such redemption.
SECTION 3.02. NOTICES TO TRUSTEE. If the Company elects to redeem
Notes pursuant to Section 3.01, it shall notify the Trustee in writing of the
Redemption Date and the principal amount at maturity of Notes to be redeemed.
The Company shall give each notice provided for in this Section 3.02
in an Officers' Certificate at least 60 days before the Redemption Date (unless
a shorter period shall be satisfactory to the Trustee).
SECTION 3.03. SELECTION OF NOTES TO BE REDEEMED. If less than all of
the Notes are to be redeemed at any time, the Trustee shall select the Notes to
be redeemed in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or if the Notes are
not listed on a national securities exchange, by lot or by such other method as
the Trustee in its sole discretion shall deem to be fair and appropriate;
PROVIDED that no Notes of $1,000 in principal amount at maturity or less shall
be redeemed in part.
The Trustee shall make the selection from the Notes outstanding and
not previously called for redemption. Notes in denominations of $1,000 in
principal amount at maturity may only be redeemed in whole. The Trustee may
select for redemption portions (equal to $1,000 in principal amount at maturity
or any integral multiple thereof) of Notes that have denominations larger than
$1,000 in principal amount at maturity. Provisions of this Indenture that apply
to Notes called for
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43
redemption also apply to portions of Notes called for redemption. The Trustee
shall notify the Company and the Registrar promptly in writing of the Notes or
portions of Notes to be called for redemption.
SECTION 3.04. NOTICE OF REDEMPTION. With respect to any redemption
of Notes pursuant to Section 3.01, at least 30 days but not more than 60 days
before a Redemption Date, the Company shall mail a notice of redemption by first
class mail to each Holder whose Notes are to be redeemed.
The notice shall identify the Notes to be redeemed and shall state:
(i) the Redemption Date;
(ii) the Redemption Price;
(iii) the name and address of the Paying Agent;
(iv) that Notes called for redemption must be surrendered to the
Paying Agent in order to collect the Redemption Price;
(v) that, unless the Company defaults in making the redemption
payment, interest on Notes (or portions thereof) called for redemption
ceases to accrue or Notes called for redemption cease to accrete in
value, as the case may be, on and after the Redemption Date and the only
remaining right of the Holders is to receive payment of the Redemption
Price plus accrued interest to the Redemption Date upon surrender of the
Notes to the Paying Agent;
(vi) that, if any Note is being redeemed in part, the portion of
the principal amount at maturity (equal to $1,000 in principal amount at
maturity or any integral multiple thereof) of such Note to be redeemed
and that, on and after the Redemption Date, upon surrender of such Note,
a new Note or Notes in principal amount at maturity equal to the
unredeemed portion thereof will be reissued; and
(vii) that, if any Note contains a CUSIP number as provided in
Section 2.13, no representation is being made as to the correctness of
the CUSIP number either as printed on the Notes or as contained in the
notice of redemption.
At the Company's request (which request may be revoked by the Company
at any time prior to the time at which the Trustee shall have given such notice
to the Holders), made in writing to the Trustee at least 60 days (or such
shorter period as shall be satisfactory to the Trustee) before a Redemption
Date, the Trustee shall give the notice of redemption in the name and at the
expense of the Company. If, however, the Company gives such notice to
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44
the Holders, the Company shall concurrently deliver to the Trustee an Officers'
Certificate stating that such notice has been given.
SECTION 3.05. EFFECT OF NOTICE OF REDEMPTION. Once notice of
redemption is mailed, Notes called for redemption become due and payable on the
Redemption Date and at the Redemption Price. Upon surrender of any Notes to the
Paying Agent, such Notes shall be paid at the Redemption Price, plus accrued
interest, if any, to the Redemption Date.
Notice of redemption shall be deemed to be given when mailed, whether
or not the Holder receives the notice. In any event, failure to give such
notice, or any defect therein, shall not affect the validity of the proceedings
for the redemption of Notes held by Holders to whom such notice was properly
given.
SECTION 3.06. DEPOSIT OF REDEMPTION PRICE. On or prior to any
Redemption Date, the Company shall deposit with the Paying Agent (or, if the
Company, one of its Subsidiaries or any of their Affiliates is acting as Paying
Agent, shall segregate and hold in trust as provided in Section 2.05) money
sufficient to pay the Redemption Price of and accrued interest on all Notes to
be redeemed on that date other than Notes or portions thereof called for
redemption on that date that have been delivered by the Company to the Trustee
for cancellation.
SECTION 3.07. PAYMENT OF NOTES CALLED FOR REDEMPTION. If notice of
redemption has been given in the manner provided above, the Notes or portion of
Notes specified in such notice to be redeemed shall become due and payable on
the Redemption Date at the Redemption Price stated therein, together with
accrued interest to such Redemption Date, and on and after such date (unless the
Company shall default in the payment of such Notes at the Redemption Price and
accrued interest to the Redemption Date, in which case the principal, until
paid, shall bear interest from the Redemption Date at the rate prescribed in the
Notes), such Notes shall cease to accrue interest or accrete in value, as the
case may be. Upon surrender of any Note for redemption in accordance with a
notice of redemption, such Note shall be paid and redeemed by the Company at the
Redemption Price, together with accrued interest, if any, to the Redemption
Date; PROVIDED that installments of interest whose Stated Maturity is on or
prior to the Redemption Date shall be payable to the Holders registered as such
at the close of business on the relevant Regular Record Date.
SECTION 3.08. NOTES REDEEMED IN PART. Upon surrender of any Note
that is redeemed in part, the Company shall execute and the Trustee shall
authenticate and deliver to the Holder a new Note equal in principal amount at
maturity to the unredeemed portion of such surrendered Note.
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45
ARTICLE FOUR
COVENANTS
SECTION 4.01. PAYMENT OF NOTES. The Company shall pay the principal
of, premium, if any, and interest on the Notes on the dates and in the manner
provided in the Notes and this Indenture. An installment of principal, premium,
if any, or interest shall be considered paid on the date due if the Trustee or
Paying Agent (other than the Company, a Subsidiary of the Company, or any
Affiliate of any of them) holds on that date money designated for and sufficient
to pay the installment. If the Company or any Subsidiary of the Company or any
Affiliate of any of them, acts as Paying Agent, an installment of principal,
premium, if any, or interest shall be considered paid on the due date if the
entity acting as Paying Agent complies with the last sentence of Section 2.05.
As provided in Section 6.09, upon any bankruptcy or reorganization procedure
relative to the Company, the Trustee shall serve as the Paying Agent and
conversion agent, if any, for the Notes.
The Company shall pay interest on overdue principal, premium, if any,
and interest on overdue installments of interest, to the extent lawful, at the
rate per annum specified in the Notes.
SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. The Company will
maintain in the Borough of Manhattan, the City of New York, an office or agency
where Notes may be surrendered for registration of transfer or exchange or for
presentation for payment and where notices and demands to or upon the Company in
respect of the Notes and this Indenture may be served. The Company will give
prompt written notice to the Trustee of the location, and any change in the
location, of such office or agency. If at any time the Company shall fail to
maintain any such required office or agency or shall fail to furnish the Trustee
with the address thereof, such presentations, surrenders, notices and demands
may be made or served at the address of the Trustee set forth in Section 10.02
hereof.
The Company may also from time to time designate one or more other
offices or agencies (in or outside the City of New York) where the Notes may be
presented or surrendered for any or all such purposes and may from time to time
rescind such designations; PROVIDED that no such designation or rescission shall
in any manner relieve the Company of its obligation to maintain an office or
agency in the Borough of Manhattan, the City of New York for such purposes. The
Company will give prompt written notice to the Trustee of any such designation
or rescission and of any change in the location of any such other office or
agency.
The Company hereby initially designates the Corporate Trust Office of
the Trustee, located in the Borough of Manhattan, the City of New York, as such
office of the Company in accordance with Section 2.04.
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46
SECTION 4.03. LIMITATION ON INDEBTEDNESS. (a) The Company will not,
and will not permit any of its Restricted Subsidiaries to, Incur any
Indebtedness (other than the Notes and Indebtedness existing on the Closing
Date); PROVIDED that the Company may Incur Indebtedness if, after giving effect
to the Incurrence of such Indebtedness and the receipt and application of the
proceeds therefrom, the Consolidated Leverage Ratio would be greater than zero
and less than 6:1.
Notwithstanding the foregoing, the Company and any Restricted
Subsidiary (except as specified below) may Incur each and all of the following:
(i) Indebtedness of the Company or its Restricted Subsidiaries
outstanding at any time in an aggregate principal amount not to exceed
$100.0 million of unsubordinated Indebtedness and $100.0 million of
subordinated Indebtedness, less any amount of such Indebtedness
permanently repaid as provided under Section 4.11 hereof (and any
Guarantees thereof by the Company or its Restricted Subsidiaries);
(ii) the Incurrence by the Company of Indebtedness represented by
the Notes;
(iii) Indebtedness in existence on the Closing Date;
(iv) Indebtedness of the Company to a Restricted Subsidiary and
Indebtedness of a Restricted Subsidiary to the Company or another
Restricted Subsidiary; PROVIDED that such Indebtedness is made pursuant
to an intercompany note (which, in the case of Indebtedness owed to the
Company, shall be unsubordinated) and any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer of such Indebtedness (other than to the Company or
another Restricted Subsidiary) shall be deemed, in each case, to
constitute an Incurrence of such Indebtedness not permitted by this
clause (iv);
(v) Indebtedness issued in exchange for, or the net proceeds of
which are used to refinance or refund, then outstanding Indebtedness
(other than Indebtedness Incurred under clauses (i), (iv), (vi), (viii)
or (xi) of this paragraph) and any refinancings thereof in an amount not
to exceed the amount so refinanced or refunded (plus premiums, accrued
interest, fees and expenses); PROVIDED that Indebtedness the proceeds of
which are used to refinance or refund Indebtedness that is subordinated
in right of payment to the Notes shall only be permitted under this
clause (v) if (A) such new Indebtedness, by its terms or by the terms of
any agreement or instrument pursuant to which such new Indebtedness is
issued or remains outstanding, is expressly made subordinate in right of
payment to the Notes at least to the extent that the Indebtedness to be
refinanced is subordinated to the Notes and (B) such new Indebtedness,
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47
determined as of the date of Incurrence of such new Indebtedness, does
not mature prior to the Stated Maturity of the Indebtedness to be
refinanced or refunded, and the Average Life of such new Indebtedness is
at least equal to the remaining Average Life of the Indebtedness to be
refinanced or refunded; and PROVIDED FURTHER that in no event may
Indebtedness of the Company be refinanced by means of any Indebtedness
of any Restricted Subsidiary pursuant to this clause (v);
(vi) Indebtedness (A) in respect of performance, surety, appeal
bonds and completion guarantees provided in the ordinary course of
business, (B) under Currency Agreements and Interest Rate Agreements;
PROVIDED that such agreements (a) are designed solely to protect the
Company or its Restricted Subsidiaries against fluctuations in foreign
currency exchange rates or interest rates and (b) do not increase the
Indebtedness of the obligor outstanding at any time (except to the extent
Incurred under another clause hereof) other than as a result of
fluctuations in foreign currency exchange rates or interest rates or by
reason of fees, indemnities and compensation payable thereunder; and (C)
arising from agreements providing for indemnification, adjustment of
purchase price or similar obligations, or from Guarantees or letters of
credit, surety bonds or performance bonds securing any obligations of the
Company or any of its Restricted Subsidiaries pursuant to such
agreements, in each case Incurred in connection with the disposition of
any business, assets or Restricted Subsidiary (other than Guarantees of
Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary for the purpose of financing
such acquisition), in a principal amount not to exceed the gross proceeds
actually received by the Company or any Restricted Subsidiary in
connection with such disposition;
(vii) Indebtedness of the Company, to the extent the net proceeds
thereof are promptly (A) used to purchase Notes tendered in an Offer to
Purchase made as a result of a Change in Control or (B) deposited to
defease the Notes as described below under Article Eight hereof;
(viii) Guarantees of the Notes and Guarantees of Indebtedness of
the Company by any Restricted Subsidiary provided the Guarantee of such
Indebtedness is permitted by and made in accordance with Section 4.07
hereof and any Guarantee by the Company of Indebtedness or other
obligations of any of its Restricted Subsidiaries so long as the
incurrence of such Indebtedness Incurred by such Restricted Subsidiary
is permitted under the terms of this Section 4.03;
(ix) Indebtedness Incurred to finance the cost (including the cost
of design, development, acquisition, construction, installation,
improvement, transportation or integration) to acquire equipment,
inventory or network assets (including acquisitions by way of
acquisitions of real property, leasehold improvements, Capitalized Leases
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48
and acquisitions of the Capital Stock of a Person that becomes a
Restricted Subsidiary to the extent of the fair market value of the
equipment, inventory or network assets so acquired) by the Company or a
Restricted Subsidiary after the Closing Date;
(x) Indebtedness of the Company not to exceed, at any one time
outstanding, two times the sum of (A) the Net Cash Proceeds received by
the Company after the Closing Date from the issuance and sale of its
Capital Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of the Company, to the extent such Net Cash Proceeds have not
been used pursuant to clause (C)(2) of the first paragraph or clause
(iii) or (iv) of the second paragraph of Section 4.04 hereof or clause
(v) of the definition of "Permitted Investments" to make a Restricted
Payment and (B) 80% of the fair market value of property (other than cash
and cash equivalents) received by the Company after the Closing Date from
the sale of its Capital Stock (other than Disqualified Stock) to a Person
that is not a Subsidiary of the Company, to the extent such sale of
Capital Stock has not been used pursuant to clause (iii) or (iv) of the
second paragraph of Section 4.04 hereof to make a Restricted Payment;
PROVIDED that such Indebtedness does not mature prior to the Stated
Maturity of the Notes and has an Average Life longer than the Notes;
(xi) Indebtedness Incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to
letters of credit in the ordinary course of business, including, without
limitation, letters of credit in respect of workers' compensation claims
or self insurance, or other Indebtedness with respect to reimbursement
type obligations regarding workers' compensation claims; PROVIDED,
HOWEVER, that upon the drawing of such letters of credit or the
Incurrence of such Indebtedness, such obligations are reimbursed within
30 days following such drawing or Incurrence;
(xii) Indebtedness of Persons that are acquired by the Company or
any of its Restricted Subsidiaries or merged into a Restricted Subsidiary
in accordance with the terms of this Indenture; PROVIDED that such
Indebtedness is not incurred in contemplation of such acquisition or
merger; and PROVIDED FURTHER that after giving effect to such acquisition
or merger, either (x) the Company would be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Consolidated Leverage
Ratio test set forth in the first sentence of this Section 4.03 or (y)
the Consolidated Leverage Ratio is lower (if greater than zero) or higher
(if less than zero) than immediately prior to such acquisition; and
(xiii) Strategic Subordinated Indebtedness.
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49
(b) For purposes of determining any particular amount of
Indebtedness under this Section 4.03, (1) any Liens granted pursuant to the
equal and ratable provisions referred to in the first paragraph of Section 4.09
shall not be treated as Indebtedness and (2) Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included. For purposes
of determining compliance with this Section 4.03, in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in clauses (i) through (xiii) of Section 4.03(a), the Company, in its
sole discretion, shall classify such item of Indebtedness and only be required
to include the amount and type of such Indebtedness in one of such clauses.
Notwithstanding any other provision of this Section 4.03, the maximum
amount of Indebtedness that the Company or any Restricted Subsidiary may Incur
pursuant to this Section 4.03 shall not be deemed to be exceeded with respect to
any outstanding Indebtedness due solely to result of fluctuations in the
exchange rates of currencies. Accretion on an instrument issued at a discount
will not be deemed to constitute an Incurrence of Indebtedness.
SECTION 4.04. LIMITATION ON RESTRICTED PAYMENTS. The Company will
not, and will not permit any Restricted Subsidiary to, directly or indirectly,
(i) declare or pay any dividend or make any distribution on or
with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire
shares of such Capital Stock and (y) pro rata dividends or distributions
on Common Stock of Restricted Subsidiaries held by minority stockholders)
held by Persons other than the Company or any of its Restricted
Subsidiaries,
(ii) purchase, redeem, retire or otherwise acquire for value any
shares of Capital Stock of (A) the Company or an Unrestricted Subsidiary
(including options, warrants or other rights to acquire such shares of
Capital Stock) held by any Person or (B) a Restricted Subsidiary other
than a Wholly Owned Restricted Subsidiary (including options, warrants or
other rights to acquire such shares of Capital Stock) held by any
Affiliate of the Company (other than a Wholly Owned Restricted
Subsidiary),
(iii) make any voluntary or optional principal payment, or voluntary
or optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of the Company that is subordinated
in right of payment to the Notes (other than the purchase, redemption,
repurchase or other acquisition of such subordinated Indebtedness
purchased in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in each case due within six
months of the date of acquisition) or
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50
(iv) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (i)
through (iv) above being collectively "Restricted Payments")
if, at the time of, and after giving effect to, the proposed Restricted
Payment: (A) a Default or Event of Default shall have occurred and be
continuing, (B) the Company could not Incur at least $1.00 of
Indebtedness under the first paragraph of Section 4.03 hereof or (C) the
aggregate amount of all Restricted Payments (the amount, if other than in
cash, to be determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution)
made after the Closing Date shall exceed the sum of (1) 50% of the
aggregate amount of the Adjusted Consolidated Net Income (or, if the
Adjusted Consolidated Net Income is a loss, minus 100% of the amount
of such loss) (determined by excluding income resulting from
transfers of assets by the Company or a Restricted Subsidiary to an
Unrestricted Subsidiary) accrued on a cumulative basis during the
period (taken as one accounting period) beginning on the first day of
the fiscal quarter immediately following the Closing Date and ending
on the last day of the last fiscal quarter preceding the Transaction
Date for which reports have been filed with the Commission or provided
to the Trustee pursuant to Section 4.18 hereof plus (2) 100% of the
aggregate Net Cash Proceeds and the actual market value of marketable
securities (on the date the calculation hereunder is made) received by
the Company after the Closing Date from the issuance and sale
permitted by this Indenture of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of the
Company, including an issuance or sale permitted by this Indenture of
Indebtedness of the Company for cash subsequent to the Closing Date
upon the conversion of such Indebtedness into Capital Stock (other
than Disqualified Stock) of the Company, or from the issuance to a
Person who is not a Subsidiary of the Company of any options, warrants
or other rights to acquire Capital Stock of the Company (in each case,
exclusive of any Disqualified Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are
required to be redeemed, prior to the Stated Maturity of the Notes),
and the Net Cash Proceeds from any capital contributions to the
Company after the Closing Date from Persons other than Subsidiaries of
the Company, in each case excluding such Net Cash Proceeds to the
extent used to Incur Indebtedness pursuant to clause (x) of the second
paragraph under Section 4.03 hereof and excluding Net Cash Proceeds
from the issuance of Capital Stock to the extent used to make a
Permitted Investment in accordance with clause (v) of such defined
term, PLUS (3) amounts received from Investments (other than Permitted
Investments) in any Person resulting from payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Company or any Restricted
Subsidiary or from the Net Cash Proceeds from the sale of any such
Investment (except, in each case, to the extent any such payment or
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51
proceeds are included in the calculation of Adjusted Consolidated
Net Income), or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed, in each case, the amount
of Investments previously made by the Company or any Restricted
Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of:
(i) the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, such payment would
comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the Notes including premium, if any, and accrued and unpaid
interest, with the proceeds of, or in exchange for, Indebtedness Incurred
under clause (v) of the second paragraph of part (a) of Section 4.03
hereof;
(iii) the repurchase, redemption or other acquisition of Capital
Stock of the Company or an Unrestricted Subsidiary (or options,
warrants or other rights to acquire such Capital Stock) in exchange
for, or out of the proceeds of a substantially concurrent offering of,
shares of Capital Stock (other than Disqualified Stock) of the Company
(or options, warrants or other rights to acquire such Capital Stock);
(iv) the making of any principal payment or the repurchase,
redemption, retirement, defeasance or other acquisition for value of
Indebtedness of the Company which is subordinated in right of payment to
the Notes in exchange for, or out of the proceeds of, a substantially
concurrent offering of, shares of the Capital Stock (other than
Disqualified Stock) of the Company (or options, warrants or other rights
to acquire such Capital Stock);
(v) payments or distributions to dissenting stockholders pursuant
to applicable law, pursuant to or in connection with a consolidation,
merger or transfer of assets that complies with the provisions of this
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company;
(vi) the declaration or payment of dividends on the Common Stock of
the Company following a Public Equity Offering of such Common Stock,
of up to 6% per annum of the Net Cash Proceeds received by the Company
in such Public Equity Offering;
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52
(vii) the repurchase, retirement or other acquisition or
retirement for value of Capital Stock of the Company that is not
registered under the Exchange Act and is held by any current or former
employee, director or consultant (or their estates or the
beneficiaries of such estates) of the Company or any Subsidiary, not
to exceed (A) in any calendar year $2.0 million or (B) $5.0 million in
the aggregate;
(viii) repurchases of Capital Stock deemed to occur upon exercise of
stock options if such Capital Stock represents a portion of the exercise
price of such options;
(ix) repurchases of fractional shares of Capital Stock in
connection with the exercise of Warrants in accordance with the Warrant
Agreement; and
(x) other Restricted Payments in an aggregate amount not to exceed
$2.0 million;
PROVIDED that, except in the case of clauses (i), (ii), (iii) and (iv), no
Default or Event of Default shall have occurred and be continuing or occur as a
consequence of the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clauses (ii) or (viii)
thereof, an exchange of Capital Stock for Capital Stock or Indebtedness referred
to in clause (iii) or (iv) thereof and an Investment referred to in clause (vi)
thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred
to in clauses (iii) and (iv), shall be included in calculating whether the
conditions of clause (C) of clause (iv) of the first paragraph of this Section
4.04 have been met with respect to any subsequent Restricted Payments. In the
event the proceeds of an issuance of Capital Stock of the Company are used for
the redemption, repurchase or other acquisition of the Notes, or Indebtedness
that is PARI PASSU with the Notes, then the Net Cash Proceeds of such issuance
shall be included in clause (C) of clause (iv) of the first paragraph of this
Section 4.04 only to the extent such proceeds are not used for such redemption,
repurchase or other acquisition of Indebtedness.
Any Restricted Payments made other than in cash shall be valued at
fair market value. The amount of any Investment "outstanding" at any time shall
be deemed to be equal to the amount of such Investment on the date made, less
the return of capital to the Company and its Restricted Subsidiaries with
respect to such Investment by distribution, sale or otherwise (up to the amount
of such Investment on the date made).
<PAGE>
53
SECTION 4.05. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS
AFFECTING RESTRICTED SUBSIDIARIES. The Company will not, and will not permit
any Restricted Subsidiary to, create or otherwise cause or suffer to exist or
become effective any consensual encumbrance or restriction of any kind on the
ability of any Restricted Subsidiary to (i) pay dividends or make any other
distributions permitted by applicable law on any Capital Stock of such
Restricted Subsidiary owned by the Company or any other Restricted Subsidiary,
(ii) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary, (iii) make loans or advances to the Company or any other Restricted
Subsidiary or (iv) transfer any of its property or assets to the Company or any
other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions:
(i) existing on the Closing Date in the AT&T Facility, this
Indenture or any other agreements in effect on the Closing Date, and any
extensions, refinancings, renewals or replacements of such agreements;
PROVIDED that the encumbrances and restrictions in any such extensions,
refinancings, renewals or replacements are no less favorable in any
material respect to the Holders than those encumbrances or restrictions
that are then in effect and that are being extended, refinanced, renewed
or replaced;
(ii) existing under or by reason of applicable law, rule,
regulation or order;
(iii) existing with respect to any Person or the property or
assets of such Person acquired by the Company or any Restricted
Subsidiary, existing at the time of such acquisition and not incurred
in contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other
than such Person or the property or assets of such Person so acquired;
(iv) in the case of clause (iv) of the first paragraph of this
Section 4.05, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset, (B)
existing by virtue of any transfer of, agreement to transfer, option
or right with respect to, or Lien on, any property or assets of the
Company or any Restricted Subsidiary not otherwise prohibited by this
Indenture, (C) arising or agreed to in the ordinary course of
business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of property
or assets of the Company or any Restricted Subsidiary in any manner
material to the Company or any Restricted Subsidiary or (D) purchase
money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature discussed in clause
(iv) above on the property so acquired;
(v) with respect to the Company or a Restricted Subsidiary and
imposed pursuant to an agreement that has been entered into for the sale
of assets, including,
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54
without limitation, customary restrictions on the disposition of all or
substantially all of the Capital Stock of, or property and assets of,
such Restricted Subsidiary or the Company;
(vi) contained in the terms of any Indebtedness or any agreement
pursuant to which such Indebtedness was issued (in each case other than
Indebtedness incurred under the AT&T Facility) if (A) the encumbrance or
restriction applies only in the event of a payment default or a default
with respect to a financial covenant contained in such Indebtedness or
agreement, (B) the encumbrance or restriction is not materially more
disadvantageous to the Holders of the Notes than is customary in
comparable financings (as determined by the Company) and (C) the
Company determines that any such encumbrance or restriction will not
materially affect the Company's ability to make principal or interest
payments on the Notes;
(vii) restrictions on cash or other deposits or net worth imposed
by customers under contracts entered into in the ordinary course of
business;
(viii) customary provisions in joint venture agreements and other
similar agreements entered into in the ordinary course of business;
and
(ix) any encumbrances or restrictions of the type referred to in
clauses (i) - (iv) of the first paragraph of this Section 4.05 imposed by
any amendments, modifications, renewals, restatements, increases,
supplements, refundings, replacements or refinancings of the contracts
referred to in clauses (i) through (viii) above;
PROVIDED that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are, in the good faith
judgment of the Company, not materially more disadvantageous to the Holders than
those contained in the restriction prior to such amendment, modification,
restatement, renewal, increase, supplement, refunding, replacement or
refinancing. Nothing contained in this Section 4.05 shall prevent the Company or
any Restricted Subsidiary from (1) creating, incurring, assuming or suffering to
exist any Liens otherwise permitted in Section 4.09 hereof or (2) restricting
the sale or other disposition of property or assets of the Company or any of its
Restricted Subsidiaries that secure Indebtedness of the Company or any of its
Restricted Subsidiaries.
SECTION 4.06. LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF
RESTRICTED SUBSIDIARIES. The Company will not sell, and will not permit any
Restricted Subsidiary, directly or indirectly, to issue or sell, any shares of
Capital Stock of a Restricted Subsidiary (including options, warrants or other
rights to purchase shares of such Capital Stock) except (i) to the Company or a
Wholly Owned Restricted Subsidiary; (ii) issuances of
<PAGE>
55
director's qualifying shares or sales to foreign nationals of shares of Capital
Stock of foreign Restricted Subsidiaries, to the extent required by applicable
law; (iii) if, immediately after giving effect to such issuance or sale, such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any
Investment in such Person remaining after giving effect to such issuance or sale
would have been permitted to be made under Section 4.04 hereof if made on the
date of such issuance or sale; or (iv) issuances or sales of common stock of a
Restricted Subsidiary, PROVIDED that the Company or any Restricted Subsidiary
applies an amount equal to the Net Cash Proceeds thereof in accordance with
Section 4.11 hereof.
SECTION 4.07. LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED
SUBSIDIARIES. The Company will not permit any Restricted Subsidiary, directly
or indirectly, to Guarantee any Indebtedness of the Company which is PARI PASSU
with or subordinate in right of payment to the Notes ("GUARANTEED
INDEBTEDNESS"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to this Indenture providing for a
Guarantee (a "SUBSIDIARY GUARANTEE") of payment of the Notes by such Restricted
Subsidiary and (ii) such Restricted Subsidiary waives and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee; PROVIDED that this paragraph shall
not be applicable to any Guarantee of any Restricted Subsidiary (x) that existed
at the time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary or (y) of the Indebtedness Incurred under the AT&T Facility existing
on the Closing Date. If the Guaranteed Indebtedness is (A) PARI PASSU with the
Notes, then the Guarantee of such Guaranteed Indebtedness shall be PARI PASSU
with, or subordinated to, the Subsidiary Guarantee or (B) subordinated in right
of payment to the Notes, then the Guarantee of such Guaranteed Indebtedness
shall be subordinated in right of payment to the Subsidiary Guarantee at least
to the extent that the Guaranteed Indebtedness is subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a
Restricted Subsidiary may provide by its terms that it shall be automatically
and unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the Company's
and each Restricted Subsidiary's Capital Stock in, or all or substantially all
the assets of, such Restricted Subsidiary (which sale, exchange or transfer is
not prohibited by this Indenture) or (ii) the release or discharge of the
Guarantee which resulted in the creation of such Subsidiary Guarantee, except a
discharge or release by or as a result of payment under such Guarantee.
SECTION 4.08. LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND
AFFILIATES. The Company will not, and will not permit any Restricted Subsidiary
to, directly or indirectly, enter into, renew or extend any transaction
(including, without limitation, the purchase, sale,
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56
lease or exchange of property or assets, or the rendering of any service) with
any Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to:
(i) transactions (A) approved by a majority of the disinterested
members of the Board of Directors or (B) for which the Company or a
Restricted Subsidiary delivers to the Trustee a written opinion of a
nationally recognized investment banking firm or a nationally recognized
firm having expertise in the specific area which is the subject of such
determination stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view;
(ii) any transaction solely between the Company and any of its
Restricted Subsidiaries or solely between Restricted Subsidiaries;
(iii) the payment of reasonable and customary regular fees to, and
indemnity provided on behalf of, officers, directors, employees or
consultants of the Company or its Restricted Subsidiaries;
(iv) any payments or other transactions pursuant to any tax-sharing
agreement between the Company and any other Person with which the Company
files a consolidated tax return or with which the Company is part of a
consolidated group for tax purposes;
(v) any agreement as in effect as of the Closing Date or any
amendment thereto (so long as any such amendment is not disadvantageous
to the Holders in any material respect);
(vi) the existence of, or the performance by the Company or any of
its Restricted Subsidiaries of its obligations under the terms of, any
stockholders agreement (including any registration rights agreement or
purchase agreement related thereto) to which it is a party as of the
Closing Date and any similar agreements which it may enter into
thereafter (so long as any such amendment is not disadvantageous to the
Holders in any material respect); or
(vii) any Permitted Investments and Restricted Payments not
prohibited by Section 4.04 hereof.
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Notwithstanding the foregoing, any transaction or series of related transactions
covered by the first paragraph of this Section 4.08 and not covered by clauses
(ii) through (vii) of this paragraph the aggregate amount of which exceeds $3.0
million in value, must be approved or determined to be fair in the manner
provided for in clause (i) (A) or (B) of this Section 4.08.
SECTION 4.09. LIMITATION ON LIENS. The Company will not, and will
not permit any Restricted Subsidiary to, create, incur, assume or suffer to
exist any Lien on any of its assets or properties of any character (including,
without limitation, licenses), or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
Notes and all other amounts due under this Indenture to be directly secured
equally and ratably with (or, if the obligation or liability to be secured by
such Lien is subordinated in right of payment to the Notes, prior to) the
obligation or liability secured by such Lien.
The foregoing limitation does not apply to:
(i) Liens existing on the Closing Date or required on the Closing
Date to be provided in the future;
(ii) Liens securing obligations under the AT&T Facility (including
Liens pursuant to after-acquired clauses);
(iii) Liens granted after the Closing Date on any assets or Capital
Stock of the Company or its Restricted Subsidiaries created in favor
of the Holders;
(iv) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Company or a Restricted
Subsidiary to secure Indebtedness owing to the Company or such other
Restricted Subsidiary;
(v) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under clause
(v) of the second paragraph of Section 4.03 hereof; PROVIDED that such
Liens do not extend to or cover any property or assets of the Company
or any Restricted Subsidiary other than the property or assets
securing the Indebtedness being refinanced;
(vi) Liens on any property or assets of a Restricted Subsidiary
securing Indebtedness of such Restricted Subsidiary permitted under
Section 4.03 hereof; or
(vii) Permitted Liens.
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SECTION 4.10. LIMITATION ON SALE-LEASEBACK TRANSACTIONS. The Company
will not, and will not permit any Restricted Subsidiary to, enter into any
sale-leaseback transaction involving any of its assets or properties whether now
owned or hereafter acquired, whereby the Company or a Restricted Subsidiary
sells or transfers such assets or properties and then or thereafter leases such
assets or properties or any part thereof or any other assets or properties which
the Company or such Restricted Subsidiary, as the case may be, intends to use
for substantially the same purpose or purposes as the assets or properties sold
or transferred.
The foregoing restriction does not apply to any sale-leaseback
transaction if:
(i) the lease is for a period, including renewal rights, of not in
excess of three years;
(ii) the lease secures or relates to industrial revenue or
pollution control bonds;
(iii) the transaction is solely between the Company and any Wholly
Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or
(iv) the Company or such Restricted Subsidiary, within twelve
months after the sale or transfer of any assets or properties is
completed, applies an amount not less than the net proceeds received
from such sale in accordance with clause (A) or (B) of the first
paragraph of Section 4.11 hereof.
SECTION 4.11. LIMITATION ON ASSET SALES. The Company will not, and
will not permit any Restricted Subsidiary to, consummate any Asset Sale, unless
(i) the consideration received by the Company or such Restricted Subsidiary is
at least equal to the fair market value of the assets sold or disposed of and
(ii) at least 75% of the consideration received consists of cash or Temporary
Cash Investments. For purposes of this Section 4.11, the following are deemed to
be cash: (x) the principal amount or accreted value (whichever is larger) of
Indebtedness of the Company or any Restricted Subsidiary with respect to which
the Company or such Restricted Subsidiary has either (A) received a written
release or (B) been released by operation of law, in either case, from all
liability on such Indebtedness in connection with such Asset Sale and (y)
securities received by the Company or any Restricted Subsidiary from the
transferee that are promptly converted by the Company or such Restricted
Subsidiary into cash. In the event and to the extent that the Net Cash Proceeds
received by the Company or any of its Restricted Subsidiaries from one or more
Asset Sales occurring on or after the Closing Date in any period of 12
consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets
(determined as of the date closest to the commencement of such 12-month period
for which a consolidated balance sheet of the Company and its
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Subsidiaries has been filed with the Commission or provided to the Trustee
pursuant to Section 4.18 hereof), then the Company shall or shall cause the
relevant Restricted Subsidiary to (i) within 12 months after the date Net Cash
Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A)
apply an amount equal to such excess Net Cash Proceeds to permanently repay
unsubordinated Indebtedness of the Company, or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to Section 4.07 hereof or Indebtedness
of any other Restricted Subsidiary, in each case owing to a Person other than
the Company or any of its Restricted Subsidiaries or (B) invest an equal amount,
or the amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within 12 months after the date of such
agreement), in property or assets (other than current assets) of a nature or
type or that are used in a business (or in a Person (other than a natural
person) having property and assets of a nature or type, or engaged in a
business) similar or related to the nature or type of the property and assets
of, or the business of, the Company and its Restricted Subsidiaries existing on
the date of such investment (as determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) and (ii) apply (no later than the end of the 12-month period
referred to in clause (i)) such excess Net Cash Proceeds (to the extent not
applied pursuant to clause (i)) as provided in the following paragraph of this
Section 4.11. The amount of such excess Net Cash Proceeds required to be
applied (or to be committed to be applied) during such 12-month period as set
forth in clause (i) of the preceding sentence and not applied as so required by
the end of such period shall constitute "EXCESS PROCEEDS."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
Section 4.11 totals at least $5 million, the Company must commence, not later
than the fifteenth Business Day of such month, and consummate an Offer to
Purchase from the Holders on a pro rata basis, and an offer to purchase any
outstanding Indebtedness with similar provisions requiring the Company to make
an offer to purchase such Indebtedness, in an aggregate principal amount at
maturity of Notes (or, if prior to February 15, 2003, the Accreted Value of the
Notes) and such PARI PASSU Indebtedness equal to (A) with respect to the Notes,
the product of such Excess Proceeds multiplied by a fraction, the numerator of
which is the outstanding principal amount at maturity of the Notes (or, if prior
to February 15, 2003, the Accreted Value of the Notes) and the denominator of
which is the sum of the outstanding principal amount at maturity of the Notes
(or, if prior to February 15, 2003, the Accreted Value of the Notes) and such
PARI PASSU Indebtedness (the product hereinafter referred to as the "NOTE
AMOUNT"), and (B) with respect to the PARI PASSU Indebtedness, the excess of the
Excess Proceeds over the Note Amount, at a purchase price equal to 100% of the
Accreted Value of the Notes or such PARI PASSU Indebtedness, as the case may be,
on the relevant Payment Date or such other date set forth in the documentation
governing the PARI PASSU Indebtedness, plus, in each case, accrued interest (if
any) to the Payment Date or such other date set forth in the documentation
governing the PARI PASSU Indebtedness. If the aggregate purchase price of the
Notes tendered
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pursuant to the Offer to Purchase is less than the Excess Proceeds, the amount
remaining will be available for use by the Company for general corporate
purposes. Upon the consummation of any Offer to Purchase in accordance with the
terms of this Indenture, the amount of Net Cash Proceeds from Asset Sales
subject to any future Offer to Purchase shall be deemed to be zero.
SECTION 4.12. REPURCHASE OF NOTES UPON A CHANGE OF CONTROL. The
Company must commence, within 30 days of the occurrence of a Change of Control,
and consummate an Offer to Purchase for all Notes then outstanding, at a
purchase price equal to 101% of the Accreted Value thereof on the relevant
Payment Date, plus accrued interest (if any) to the Payment Date; PROVIDED,
HOWEVER, that notwithstanding the occurrence of a Change of Control, the Company
shall not be obligated to purchase the Notes pursuant to this Section 4.12 in
the event that it has irrevocably committed to, within 90 days of such Change of
Control, redeem all the Notes in accordance with the terms hereof.
SECTION 4.13. EXISTENCE. Subject to Articles Four and Five of this
Indenture, the Company will do or cause to be done all things necessary to
preserve and keep in full force and effect its existence and the existence of
each of its Restricted Subsidiaries in accordance with the respective
organizational documents of the Company and each such Subsidiary and the rights
(whether pursuant to charter, partnership certificate, agreement, statute or
otherwise), material licenses and franchises of the Company and each such
Subsidiary; PROVIDED that the Company shall not be required to preserve any such
right, license or franchise, or the existence of any Restricted Subsidiary, if
the maintenance or preservation thereof is no longer desirable in the conduct of
the business of the Company and its Restricted Subsidiaries taken as a whole.
SECTION 4.14. PAYMENT OF TAXES AND OTHER CLAIMS. The Company will
pay or discharge and shall cause each of its Subsidiaries to pay or discharge,
or cause to be paid or discharged, before the same shall become delinquent (i)
all material taxes, assessments and governmental charges levied or imposed upon
(a) the Company or any such Subsidiary, (b) the income or profits of any such
Subsidiary which is a corporation or (c) the property of the Company or any such
Subsidiary and (ii) all material lawful claims for labor, materials and supplies
that, if unpaid, might by law become a Lien upon the property of the Company or
any such Subsidiary; PROVIDED that the Company shall not be required to pay or
discharge, or cause to be paid or discharged, any such tax, assessment, charge
or claim the amount, applicability or validity of which is being contested in
good faith by appropriate proceedings, for which adequate reserves have been
established, and where the failure to effect such payment is not adverse in any
material respect to the Holders.
SECTION 4.15. MAINTENANCE OF PROPERTIES AND INSURANCE. The Company
will cause all properties used or useful in the conduct of its business or the
business of any of its
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Restricted Subsidiaries, to be maintained and kept in good condition, repair and
working order and supplied with all necessary equipment and will cause to be
made all necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Company may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times; PROVIDED that nothing in this Section 4.15 shall prevent
the Company or any such Subsidiary from discontinuing the use, operation or
maintenance of any of such properties or disposing of any of them, if such
discontinuance or disposal is, in the judgment of the Company, desirable in the
conduct of the business of the Company or such Subsidiary.
The Company will provide or cause to be provided, for itself and its
Restricted Subsidiaries, insurance (including appropriate self-insurance)
against loss or damage of the kinds customarily insured against by corporations
similarly situated and owning like properties, with reputable insurers or with
the government of the United States of America, or an agency or instrumentality
thereof, in such amounts, with such deductibles and by such methods as shall be
customary for corporations similarly situated in the industry in which the
Company or such Restricted Subsidiary, as the case may be, is then conducting
business.
SECTION 4.16. NOTICE OF DEFAULTS. In the event that the Company
becomes aware of any Default or Event of Default, the Company, promptly after it
becomes aware thereof, will give written notice thereof to the Trustee.
SECTION 4.17. COMPLIANCE CERTIFICATES. Both of the two principal
accounting officers of the Company and each Guarantor shall certify, on or
before a date not more than 90 days after the end of each fiscal year of the
Company, that a review has been conducted of the activities of the Company and
its Restricted Subsidiaries or such Guarantor, as the case may be, and the
Company's and its Restricted Subsidiaries' or such Guarantor's, as the case may
be, performance under this Indenture and that the Company and each Guarantor
have fulfilled all obligations thereunder, or, if there has been a default in
the fulfillment of any such obligation, specifying each such default and the
nature and status thereof. The Company shall also notify the Trustee of any
default or defaults in the performance of any covenants or agreements under this
Indenture. The Company shall also comply with the other provisions of Section
314(a) of the TIA.
SECTION 4.18. COMMISSION REPORTS AND REPORTS TO HOLDERS. At all
times from and after the earlier of (i) the date of the commencement of an
Exchange Offer or the effectiveness of a Shelf Registration Statement (the
"Registration") and (ii) the date that is six months after the Closing Date, in
either case, whether or not the Company is then required to file reports with
the Commission, the Company shall deliver for filing with the Commission all
such reports and other information as it would be required to file with the
Commission by Sections 13(a) or 15(d) under the Securities Exchange Act of 1934
if it were subject thereto.
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All references herein to reports "filed" with the Commission shall be deemed to
refer to the reports then most recently delivered for filing, whether or not
accepted by the Commission. The Company shall supply the Trustee, within 15
days of filing with the Commission, and each Holder or shall supply to the
Trustee for forwarding to each such Holder, without cost to such Holder, copies
of such reports and other information. In addition, at all times prior to the
earlier of the date of the Registration and the date that is six months after
the Closing Date, the Company shall, at its cost, deliver to each Holder of the
Notes quarterly and annual reports substantially equivalent to those which would
be required by the Exchange Act (or, in lieu thereof, the Registration Statement
on Form S-1, S-3 or S-4 filed or to be filed with the Commission in connection
with the Exchange Offer or the Shelf Registration Statement, if such Form and
any amendments thereof contains comparable information). In addition, at all
times prior to the Registration, upon the request of any Holder or any
prospective purchaser of the Notes designated by a Holder, the Company shall
supply to such Holder or such prospective purchaser the information required
under Rule 144A under the Securities Act.
SECTION 4.19. WAIVER OF STAY, EXTENSION OR USURY LAWS. The Company
covenants (to the extent that it may lawfully do so) that it will not at any
time insist upon, or plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay or extension law or any usury law or other law
that would prohibit or forgive the Company from paying all or any portion of the
principal of, premium, if any, or interest on the Notes as contemplated herein,
wherever enacted, now or at any time hereafter in force, or that may affect the
covenants or the performance of this Indenture; and (to the extent that it may
lawfully do so) the Company hereby expressly waives all benefit or advantage of
any such law and covenants that it will not hinder, delay or impede the
execution of any power herein granted to the Trustee, but will suffer and permit
the execution of every such power as though no such law had been enacted.
ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. WHEN COMPANY MAY MERGE, ETC. The Company shall not
consolidate with, merge with or into, or sell, convey, transfer, lease or
otherwise dispose of all or substantially all of its property and assets (as an
entirety or substantially an entirety in one transaction or a series of related
transactions) to, any Person or permit any Person to merge with or into the
Company unless:
(i) the Company shall be the continuing Person, or the Person (if
other than the Company) formed by such consolidation or into which the
Company is merged or that acquired or leased such property and assets of
the Company shall be a corporation organized and validly existing under
the laws of the United States of America or any
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jurisdiction thereof and shall expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, all of the
obligations of the Company on all of the Notes and under this
Indenture;
(ii) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction on a pro
forma basis,
(A) the Company or any Person becoming the successor
obligor of the Notes, as the case may be, shall have a Consolidated
Net Worth equal to or greater than the Consolidated Net Worth of the
Company immediately prior to such transaction; or
(B) the Company or any Person becoming the successor
obligor of the Notes, as the case may be, shall have a Consolidated
Leverage Ratio no more than the greater of (I) 6:1 and (II) the
Consolidated Leverage Ratio of the Company immediately prior to such
transaction; PROVIDED that this clause (iii) shall not apply to a
consolidation or merger with or into a Wholly Owned Restricted
Subsidiary with a positive net worth;
PROVIDED that, in connection with any such merger or consolidation, no
consideration (other than Capital Stock (other than Disqualified
Stock) in the surviving Person or the Company) shall be issued or
distributed to the stockholders of the Company; and
(iv) the Company delivers to the Trustee an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with
clause (iii) of this Section 5.01) and an Opinion of Counsel, in each
case stating that such consolidation, merger or transfer and such
supplemental indenture complies with this provision and that all
conditions precedent provided for herein relating to such transaction
have been complied with;
PROVIDED, HOWEVER, that clause (iii) of this Section 5.01 does not apply if, in
the good faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal purpose of
such transaction is part of a plan to change the state of incorporation of the
Company; and PROVIDED FURTHER that any such transaction shall not have as one of
its purposes the evasion of the foregoing limitations.
SECTION 5.02. SUCCESSOR SUBSTITUTED. Upon any consolidation or
merger, or any sale, conveyance, transfer or other disposition of all or
substantially all of the property and assets of the Company in accordance with
Section 5.01 of this Indenture, the successor Person
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formed by such consolidation or into which the Company is merged or to which
such sale, conveyance, transfer or other disposition is made shall succeed to,
and be substituted for, and may exercise every right and power of, the Company
under this Indenture with the same effect as if such successor Person had been
named as the Company herein.
ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. EVENTS OF DEFAULT. An "EVENT OF DEFAULT" shall occur
with respect to the Notes if:
(a) the Company defaults in the payment of the principal of (or
premium, if any, on) any Note when the same becomes due and payable at
maturity, upon acceleration, redemption or otherwise;
(b) the Company defaults in the payment of interest on any Note
when the same becomes due and payable, and such default continues for a
period of 30 days;
(c) the Company defaults in the performance of or breaches any
other covenant or agreement of the Company in this Indenture or under
the Notes (other than a default specified in clause (a) or (b) of this
Section 6.01) and such default or breach continues for a period of 30
consecutive days after written notice to the Company by the Trustee or
to the Company and the Trustee by the Holders of 25% or more in
aggregate principal amount of the Notes;
(d) the Company shall have failed to make or consummate an Offer
to Purchase in accordance with Section 4.11 hereof;
(e) the Company shall have failed to make or consummate an Offer
to Purchase in accordance with the provisions of Section 4.12 hereof;
(f) there occurs with respect to any issue or issues of
Indebtedness of the Company or any Significant Subsidiary having an
outstanding principal amount at maturity of $5 million or more in the
aggregate for all such issues of all such Persons, whether such
Indebtedness now exists or shall hereafter be created, (I) an event of
default that has caused the holder thereof to declare such
Indebtedness to be due and payable prior to its Stated Maturity and
such Indebtedness has not been discharged in full or such acceleration
has not been rescinded or annulled within 30 days of such acceleration
and/or (II) the failure to make a principal payment at the final (but
not any
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65
interim) fixed maturity and such defaulted payment shall not have been
made, waived or extended within 30 days of such payment default;
(g) any final judgment or order (not covered by insurance) for the
payment of money in excess of $5 million in the aggregate (treating
any deductibles, self-insurance or retention as not so covered) shall
be rendered against the Company or any Significant Subsidiary and
shall not be paid or discharged, and there shall be any period of 30
consecutive days following entry of the final judgment or order that
causes the aggregate amount for all such final judgments or orders
outstanding and not paid or discharged against the Company or any of
its Significant Subsidiaries to exceed $5 million during which a stay
of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect;
(h) a court having jurisdiction in the premises enters a decree or
order for (A) relief in respect of the Company or any Significant
Subsidiary in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, (B)
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant
Subsidiary or for all or substantially all of the property and assets
of the Company or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Company or any Significant
Subsidiary and, in each case, such decree or order shall remain
unstayed and in effect for a period of 30 consecutive days; or
(i) the Company or any Significant Subsidiary (A) commences a
voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an
order for relief in an involuntary case under any such law, (B)
consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Company or any Significant Subsidiary or for all or
substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) effects any general assignment for the
benefit of creditors.
SECTION 6.02. ACCELERATION. If an Event of Default (other than an
Event of Default specified in clause (h) or (i) of Section 6.01 that occurs with
respect to the Company) occurs and is continuing under this Indenture, the
Trustee or the Holders of at least 25% in aggregate principal amount of the
Notes then outstanding, by written notice to the Company (and to the Trustee if
such notice is given by the Holders), may, and the Trustee at the request of
such Holders shall, declare the Accreted Value of, premium, if any, and accrued
interest on the Notes to be immediately due and payable. Upon a declaration of
acceleration, such Accreted Value of, premium, if any, and accrued interest
shall be immediately due and payable. In the event of a declaration of
acceleration because an Event of Default set forth in
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clause (f) of Section 6.01 has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (f) shall be
remedied or cured by the Company or the relevant Significant Subsidiary or
waived by the holders of the relevant Indebtedness within 60 days after the
declaration of acceleration with respect thereto. If an Event of Default
specified in clause (h) or (i) of Section 6.01 occurs with respect to the
Company, the Accreted Value of, premium, if any, and accrued interest on the
Notes then outstanding shall IPSO FACTO become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder.
SECTION 6.03. OTHER REMEDIES. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy by proceeding at law or
in equity to collect the payment of principal of, premium, if any, or interest
on the Notes or to enforce the performance of any provision of the Notes or this
Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Notes or does not produce any of them in the proceeding.
SECTION 6.04. WAIVER OF PAST DEFAULTS. Subject to Section 9.02, at
any time after such a declaration of acceleration, but before a judgment or
decree for the payment of the money due has been obtained by the Trustee, the
Holders of at least a majority in aggregate principal amount at maturity of the
outstanding Notes by written notice to the Company and to the Trustee may waive
all past Defaults and rescind and annul a declaration of acceleration and its
consequences (except a Default in the payment of, premium, if any, or interest
on any Note as specified in clause (a) or (b) of Section 6.01 (but not as a
result of such acceleration) or in respect of a covenant or provision of this
Indenture which cannot be modified or amended without the consent of the Holder
of each outstanding Note affected) if (i) all existing Events of Default, other
than the nonpayment of the Accreted Value of, premium, if any, and interest on
the Notes that have become due solely by such declaration of acceleration, have
been cured or waived and (ii) the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction. Upon any such waiver,
such Default shall cease to exist, and any Event of Default arising therefrom
shall be deemed to have been cured, for every purpose of this Indenture; but no
such waiver shall extend to any subsequent or other Default or Event of Default
or impair any right consequent thereto.
SECTION 6.05. CONTROL BY MAJORITY. The Holders of at least a
majority in aggregate principal amount of the outstanding Notes may direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred on the Trustee. However,
the Trustee may refuse to follow any direction that conflicts with law or this
Indenture, that may involve the Trustee in personal liability, or that the
Trustee determines in good faith may be unduly prejudicial to the rights of
Holders of
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Notes not joining in the giving of such direction and may take any other action
it deems proper that is not inconsistent with any such direction received from
Holders of Notes.
SECTION 6.06. LIMITATION ON SUITS. A Holder may not pursue any
remedy with respect to this Indenture or the Notes unless:
(i) the Holder gives to the Trustee written notice of a continuing
Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount at
maturity of outstanding Notes make a written request to the Trustee to
pursue the remedy;
(iii) such Holder or Holders offer the Trustee indemnity
satisfactory to the Trustee against any costs, liability or expense to be
incurred in compliance with such request;
(iv) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer of indemnity; and
(v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes do not give the
Trustee a direction that is inconsistent with the request.
For purposes of Section 6.05 of this Indenture and this Section 6.06,
the Trustee shall comply with TIA Section 316(a) in making any determination of
whether the Holders of the required aggregate principal amount at maturity of
outstanding Notes have concurred in any request or direction of the Trustee to
pursue any remedy available to the Trustee or the Holders with respect to this
Indenture or the Notes or otherwise under the law.
A Holder may not use this Indenture to prejudice the rights of another
Holder or to obtain a preference or priority over such other Holder.
SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding
any other provision of this Indenture, the right of any Holder of a Note to
receive payment of principal of, premium, if any, or interest on such Holder's
Note on or after the respective due dates expressed on such Note, or to bring
suit for the enforcement of any such payment on or after such respective dates,
shall not be impaired or affected without the consent of such Holder.
SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default in
payment of principal, premium or interest specified in clause (a) or (b) of
Section 6.01 occurs and is
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continuing, the Trustee may recover judgment in its own name and as trustee of
an express trust against the Company or any other obligor of the Notes for the
whole amount of principal, premium, if any, and accrued interest remaining
unpaid, together with interest on overdue principal, premium, if any, and, to
the extent that payment of such interest is lawful, interest on overdue
installments of interest, in each case at the rate specified in the Notes, and
such further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, and any other amounts due the
Trustee under Section 7.07 hereof.
SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee may file
such proofs of claim and other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee (including any claim for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.07) and the Holders allowed in any judicial proceedings relative to
the Company (or any other obligor of the Notes), its creditors or its property
and shall be entitled and empowered to collect and receive any monies,
securities or other property payable or deliverable upon conversion or exchange
of the Notes or upon any such claims and to distribute the same, and any
custodian, receiver, assignee, trustee, liquidator, sequestrator or other
similar official in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay to
the Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agent and counsel, and any other
amounts due the Trustee under Section 7.07. Nothing herein contained shall be
deemed to empower the Trustee to authorize or consent to, or accept or adopt on
behalf of any Holder, any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Holder in any such
proceeding.
SECTION 6.10. PRIORITIES. If the Trustee collects any money pursuant
to this Article Six, it shall pay out the money in the following order:
FIRST: to the Trustee for all amounts due under Section 7.07;
SECOND: to Holders for amounts then due and unpaid for principal
of, premium, if any, and interest on the Notes in respect of which or
for the benefit of which such money has been collected, ratably,
without preference or priority of any kind, according to the amounts
due and payable on such Notes for principal, premium, if any, and
interest, respectively; and
THIRD: to the Company or any other obligors of the Notes, as their
interests may appear, or as a court of competent jurisdiction may direct.
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The Trustee, upon prior written notice to the Company, may fix a
record date and payment date for any payment to Holders pursuant to this Section
6.10.
SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement
of any right or remedy under this Indenture or in any suit against the Trustee
for any action taken or omitted by it as Trustee, a court may require any party
litigant in such suit to file an undertaking to pay the costs of the suit, and
the court may assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in the suit having due regard to the merits and good
faith of the claims or defenses made by the party litigant. This Section 6.11
does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section
6.07 of this Indenture, or a suit by Holders of more than 10% in principal
amount at maturity of the outstanding Notes.
SECTION 6.12. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or
any Holder has instituted any proceeding to enforce any right or remedy under
this Indenture and such proceeding has been discontinued or abandoned for any
reason, or has been determined adversely to the Trustee or to such Holder, then,
and in every such case, subject to any determination in such proceeding, the
Company, the Trustee and the Holders shall be restored severally and
respectively to their former positions hereunder and thereafter all rights and
remedies of the Company, the Trustee and the Holders shall continue as though no
such proceeding had been instituted.
SECTION 6.13. RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise
provided with respect to the replacement or payment of mutilated, destroyed,
lost or wrongfully taken Notes in Section 2.09, no right or remedy herein
conferred upon or reserved to the Trustee or to the Holders is intended to be
exclusive of any other right or remedy, and every right and remedy shall, to the
extent permitted by law, be cumulative and in addition to every other right and
remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
SECTION 6.14. DELAY OR OMISSION NOT WAIVER. No delay or omission of
the Trustee or of any Holder to exercise any right or remedy accruing upon any
Event of Default shall impair any such right or remedy or constitute a waiver of
any such Event of Default or an acquiescence therein. Every right and remedy
given by this Article Six or by law to the Trustee or to the Holders may be
exercised from time to time, and as often as may be deemed expedient, by the
Trustee or by the Holders, as the case may be.
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ARTICLE SEVEN
TRUSTEE
SECTION 7.01. GENERAL. The duties and responsibilities of the
Trustee shall be as provided by the TIA and as set forth herein.
Notwithstanding the foregoing, no provision of this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder, or in the exercise
of any of its rights or powers, if it shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity against such risk
or liability is not reasonably assured to it. Whether or not therein expressly
so provided, every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Article Seven.
SECTION 7.02. CERTAIN RIGHTS OF TRUSTEE. Subject to TIA Sections
315(a) through (d):
(i) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note, other evidence of indebtedness or other
paper or document believed by it to be genuine and to have been signed
or presented by the proper person. The Trustee need not investigate
any fact or matter stated in the document and may in good faith
conclusively rely as to the truth of the statements and the
correctness of the opinions therein;
(ii) before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel, which shall
conform to Section 10.04. The Trustee shall not be liable for any
action it takes or omits to take in good faith in reliance on such
certificate, opinion and/or an accountants' certificate if required
under the TIA;
(iii) the Trustee may act through its attorneys and agents and
shall not be responsible for the misconduct or negligence of any agent
appointed with due care;
(iv) the Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders, unless such Holders shall have
offered to the Trustee security or indemnity reasonably satisfactory
to it against the costs, expenses and liabilities that might be
incurred by it in compliance with such request or direction;
(v) the Trustee shall not be liable for any action it takes or
omits to take in good faith that it believes to be authorized or
within its rights or powers or for any
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71
action it takes or omits to take in accordance with the direction of
the Holders of a majority in principal amount at maturity of the
Outstanding Notes relating to the time, method and place of conducting
any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred upon the Trustee, under this Indenture;
PROVIDED that the Trustee's conduct does not constitute gross
negligence or bad faith;
(vi) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a making be proved or established prior
to taking, suffering or omitting any action hereunder, the Trustee
(unless other evidence be herein specifically prescribed) may, in the
absence of bad faith on its part, rely upon an Officer's Certificate;
(vii) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, note, other evidence of indebtedness
or other paper or document, but the Trustee, in its discretion, may
make such further inquiry or investigation into such facts or matters
as it may see fit, and, if the Trustee shall determine to make such
further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company personally or by agent or
attorney;
(viii) The Trustee shall not be charged with knowledge of any
Default or Event of Default, of the identity of any Restricted
Subsidiary or of the existence of any Change of Control or Asset Sale
unless either (i) a Responsible Officer shall have actual knowledge
thereof, or (ii) the Trustee shall have received written notice
thereof from the Company or any Holder of the Notes; and
(ix) The Trustee may consult with counsel and the written advice of
such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered
or omitted by it hereunder in good faith and in reliance thereon.
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee, in its
individual or any other capacity, may become the owner or pledgee of Notes and
may otherwise deal with the Company or its Affiliates with the same rights it
would have if it were not the Trustee. Any Agent may do the same with like
rights. However, the Trustee is subject to TIA Sections 310(b) and 311.
SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee (i) makes no
representation as to the validity or adequacy of this Indenture or the Notes,
(ii) shall not be
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accountable for the Company's use or application of the proceeds from the Notes
and (iii) shall not be responsible for any statement in the Notes other than its
certificate of authentication.
SECTION 7.05. NOTICE OF DEFAULT. If any Default or any Event of
Default occurs and is continuing and if such Default or Event of Default is
known to a Responsible Officer of the Trustee, the Trustee shall mail to each
Holder in the manner and to the extent provided in TIA Section 313(c) notice of
the Default or Event of Default within 90 days after it occurs, unless such
Default or Event of Default has been cured; PROVIDED, HOWEVER, that, except in
the case of a default in the payment of the principal of, premium, if any, or
interest on any Note, the Trustee shall be protected in withholding such notice
if and so long as the board of directors, the executive committee or a trust
committee of directors and/or Responsible Officers of the Trustee in good faith
determine that the withholding of such notice is in the interest of the Holders.
If an Event of Default has occurred and is continuing, the Trustee shall use the
same degree of care and skill in its exercise of the rights and powers invested
in it under this Indenture as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after
each May 15, beginning with May 15, 1998, the Trustee shall mail to each Holder
as provided in TIA Section 313(c) a brief report that complies with TIA Section
313(a) dated as of such May 15, if required by TIA Section 313(a).
SECTION 7.07. COMPENSATION AND INDEMNITY. The Company shall pay to
the Trustee such compensation as shall be agreed upon in writing for its
services. The compensation of the Trustee shall not be limited by any law on
compensation of a trustee of an express trust. The Company shall reimburse the
Trustee upon request for all reasonable out-of-pocket expenses and advances
incurred or made by the Trustee. Such expenses shall include the reasonable
compensation and expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee for, and hold it harmless
against, any loss or liability or expense incurred by it without negligence or
bad faith on its part in connection with the acceptance or administration of
this Indenture and its duties under this Indenture and the Notes, including the
costs and expenses of defending itself against any claim or liability and of
complying with any process served upon it or any of its officers in connection
with the exercise or performance of any of its powers or duties under this
Indenture and the Notes.
To secure the Company's payment obligations in this Section 7.07, the
Trustee shall have a lien prior to the Notes on all money or property held or
collected by the Trustee, in its capacity as Trustee, except money or property
held in trust to pay principal of, premium, if any, and interest on particular
Notes.
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If the Trustee incurs expenses or renders services after the
occurrence of an Event of Default specified in clause (h) or (i) of Section
6.01, the expenses and the compensation for the services will be intended to
constitute expenses of administration under Title 11 of the United States
Bankruptcy Code or any applicable federal or state law for the relief of
debtors.
The provisions of this Section 7.07 shall survive the resignation or
removal of the Trustee and the defeasance or other termination of this
Indenture.
SECTION 7.08. REPLACEMENT OF TRUSTEE. A resignation or removal of
the Trustee and appointment of a successor Trustee shall become effective only
upon the successor Trustee's acceptance of appointment as provided in this
Section 7.08.
The Trustee may resign at any time by so notifying the Company in
writing at least 30 days prior to the date of the proposed resignation. The
Holders of a majority in principal amount at maturity of the outstanding Notes
may remove the Trustee by so notifying the Trustee in writing and may appoint a
successor Trustee with the consent of the Company. The Company may at any time
remove the Trustee, by Company Order given at least 30 days prior to the date of
the proposed removal; PROVIDED, that at such date no Event of Default shall have
occurred and be continuing.
If the Trustee resigns or is removed, or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount at maturity of the outstanding Notes may
appoint a successor Trustee to replace the successor Trustee appointed by the
Company. If the successor Trustee does not deliver its written acceptance
required by the next succeeding paragraph of this Section 7.08 within 30 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company or the Holders of a majority in principal amount at maturity of the
outstanding Notes may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after the
delivery of such written acceptance, subject to the lien provided in Section
7.07, (i) the retiring Trustee shall transfer all property held by it as Trustee
to the successor Trustee, (ii) the resignation or removal of the retiring
Trustee shall become effective and (iii) the successor Trustee shall have all
the rights, powers and duties of the Trustee under this Indenture. A successor
Trustee shall mail notice of its succession to each Holder.
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If the Trustee is no longer eligible under Section 7.10, any Holder
who satisfies the requirements of TIA Section 310(b) may petition any court of
competent jurisdiction for the removal of the Trustee and the appointment of a
successor Trustee.
The Company shall give notice of any resignation and any removal of
the Trustee and each appointment of a successor Trustee to all Holders. Each
notice shall include the name of the successor Trustee and the address of its
Corporate Trust Office.
Notwithstanding replacement of the Trustee pursuant to this Section
7.08, the Company's obligation under Section 7.07 shall continue for the benefit
of the retiring Trustee.
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all of its corporate trust business to, another corporation or national banking
association, the resulting, surviving or transferee corporation or national
banking association without any further act shall be the successor Trustee with
the same effect as if the successor Trustee had been named as the Trustee
herein.
SECTION 7.10. ELIGIBILITY. This Indenture shall always have a
Trustee who satisfies the requirements of TIA Sections 310(a)(1) and 310(a)(5).
The Trustee shall have a combined capital and surplus of at least $100,000,000
as set forth in its most recent published annual report of condition.
SECTION 7.11. MONEY HELD IN TRUST. The Trustee shall not be liable
for interest on any money received by it except as the Trustee may agree with
the Company in writing. Money held in trust by the Trustee need not be
segregated from other funds except to the extent required by law and except for
money held in trust under Article Eight of this Indenture.
SECTION 7.12. WITHHOLDING TAXES. The Trustee, as agent for the
Company, shall exclude and withhold from each payment of principal and interest
and other amounts due hereunder or under the Notes any and all withholding taxes
applicable thereto as required by law. The Trustee agrees to act as such
withholding agent and, in connection therewith, whenever any present or future
taxes or similar charges are required to be withheld with respect to any amounts
payable in respect of the Notes, to withhold such amounts and timely pay the
same to the appropriate authority in the name of and on behalf of the Holders of
the Notes, that it will file any necessary withholding tax returns or statements
when due, and that, as promptly as possible after the payment thereof, it will
deliver to each Holder of a Note appropriate documentation showing the payment
thereof, together with such additional documentary evidence as such Holders may
reasonably request from time to time.
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ARTICLE EIGHT
DISCHARGE OF INDENTURE
SECTION 8.01. TERMINATION OF THE COMPANY'S OBLIGATIONS. Except as
otherwise provided in this Section 8.01, the Company may terminate its
obligations under the Notes and this Indenture if:
(i) all Notes previously authenticated and delivered (other than
destroyed, lost or stolen Notes that have been replaced or Notes that
are paid pursuant to Section 4.01 or Notes for whose payment money or
securities have theretofore been held in trust and thereafter repaid
to the Company, as provided in Section 8.05) have been delivered to
the Trustee for cancellation and the Company has paid all sums payable
by it hereunder; or
(ii) (A) all the Notes mature within one year or all of them are to
be called for redemption within one year under arrangements
satisfactory to the Trustee for giving the notice of redemption, (B)
the Company deposits in trust with the Trustee during such one-year
period, under the terms of an irrevocable trust agreement in form and
substance satisfactory to the Trustee, as trust funds solely for the
benefit of the Holders for that purpose, money or U.S. Government
Obligations sufficient to pay principal, premium, if, any, and
interest on the Notes to maturity or redemption, as the case may be,
and to pay all other sums payable by it hereunder, (C) no Default or
Event of Default with respect to the Notes shall have occurred and be
continuing on the date of such deposit, (D) such deposit will not
result in a breach or violation of, or constitute a default under,
this Indenture or any other agreement or instrument to which the
Company is a party or by which it is bound, (E) if at such time the
Notes are listed on a national securities exchange, the Notes will not
be delisted as a result of such deposit, defeasance or discharge and
(F) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, in each case stating that all conditions
precedent provided for herein relating to the satisfaction and
discharge of this Indenture have been complied with.
With respect to the foregoing clause (i), the Company's obligations
under Section 7.07 shall survive. With respect to the foregoing clause (ii),
the Company's obligations in Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.08,
2.09, 2.14, 4.01, 4.02, 7.07, 7.08, 8.04, 8.05 and 8.06 shall survive until the
Notes are no longer outstanding. Thereafter, only the Company's obligations in
Sections 7.07, 8.05 and 8.06 shall survive. After any such irrevocable deposit,
the Trustee upon request shall acknowledge in writing the discharge of the
Company's obligations, as the case may be, under the Notes and this Indenture
except for those surviving obligations specified above.
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SECTION 8.02. DEFEASANCE AND DISCHARGE OF INDENTURE. The Company
will be deemed to have paid and will be discharged from any and all obligations
in respect of the Notes on the 123rd day after the deposit referred to below,
and the provisions of this Indenture will no longer be in effect with respect to
the Notes if,
(A) the Company has deposited or caused to be deposited, in
trust, with the Trustee, money and/or U.S. Government Obligations that
through the payment of interest and principal in respect thereof in
accordance with their terms will, in the opinion of a nationally
recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee, provide money
in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the Notes on the Stated Maturity of such payments
in accordance with the terms of this Indenture and the Notes;
(B) the Company shall have delivered to the Trustee (i) either (x)
an Opinion of Counsel to the effect that the Holders will not
recognize income, gain or loss for federal income tax purposes as a
result of the Company's exercise of its option under this Section 8.02
and will be subject to federal income tax on the same amount and in
the same manner and at the same times as would have been the case if
such deposit, defeasance and discharge had not occurred, which Opinion
of Counsel must be based upon (and accompanied by a copy of) a ruling
of the Internal Revenue Service to the same effect, unless there has
been a change in the applicable federal income tax law after the
Closing Date such that a ruling is no longer required or (y) a ruling
directed to the Trustee received from the Internal Revenue Service to
the same effect as the Opinion of Counsel described in clause (x)
above and (ii) an Opinion of Counsel to the effect that the creation
of the defeasance trust does not violate the Investment Company Act of
1940 and after the passage of 123 days following the deposit, the
trust fund will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and
Creditor Law;
(C) immediately after giving effect to such deposit on a PRO FORMA
basis, no Event of Default, or event that after the giving of notice
or lapse of time or both could become an Event of Default, shall have
occurred and be continuing on the date of such deposit or during the
period ending on the 123rd day after the date of such deposit, and
such deposit shall not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which
the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound;
(D) if at such time the Notes are listed on a national securities
exchange, the Company shall have delivered to the Trustee an Opinion
of Counsel to the effect that the Notes will not be delisted as a
result of such deposit, defeasance and discharge; and
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(E) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, in each case stating that all
conditions precedent provided for herein relating to the defeasance
contemplated by this Section 8.02 have been complied with.
Notwithstanding the foregoing, prior to the end of the 123-day period
referred to in clause (B)(ii) of this Section 8.02, none of the Company's
obligations under this Indenture shall be discharged. Subsequent to the end of
such 123-day period with respect to this Section 8.02, the Company's obligations
in Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 2.09, 2.14, 4.01, 4.02,
4.17, 7.07, 7.08, 8.05 and 8.06 shall survive until the Notes are no longer
outstanding. Thereafter, only the Company's obligations in Sections 7.07, 8.05
and 8.06 shall survive. If and when a ruling from the Internal Revenue Service
or an Opinion of Counsel referred to in clause (B)(i) of this Section 8.02 may
be provided specifically without regard to, and not in reliance upon, the
continuance of the Company's obligations under Section 4.01, then the Company's
obligations under such Section 4.01 shall cease upon delivery to the Trustee of
such ruling or Opinion of Counsel and compliance with the other conditions
precedent provided for herein relating to the defeasance contemplated by this
Section 8.02.
After the 123 day period referred to in clause (B)(ii) of this Section
8.02, the Trustee upon Company Order shall acknowledge in writing the discharge
of the Company's obligations under the Notes and this Indenture except for those
surviving obligations in the immediately preceding paragraph.
SECTION 8.03. DEFEASANCE OF CERTAIN OBLIGATIONS. The Company may
omit to comply with any term, provision or condition set forth in clause (iii)
of Section 5.01 and Sections 4.03 through 4.18, and clause (c) of Section 6.01
with respect to clause (iii) of Section 5.01 and Sections 4.03 through 4.16,
Section 4.18, and clauses (c), (d), (e), (f) and (g) of Section 6.01 shall be
deemed not to be Events of Default, upon:
(a) the deposit, in trust, with the Trustee (or another trustee
satisfying the requirements of Section 7.10 hereof) of money and/or
U.S. Government Obligations that, through the payment of interest and
principal in respect thereof in accordance with their terms, will in
the opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to
the Trustee, provide money in an amount sufficient to pay the
principal of, premium, if any, and accrued interest on the Notes on
the Stated Maturity of such payments in accordance with the terms of
this Indenture and the Notes;
(b) the satisfaction of the provisions described in clauses B(ii),
(C) and (D) of Section 8.02 hereof;
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(c) delivery by the Company to the Trustee of an Opinion of
Counsel to the effect that, the Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such
deposit and defeasance and will be subject to federal income tax on
the same amount and in the same manner and at the same times as would
have been the case if such deposit and defeasance had not occurred; and
(d) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, in each case stating that all
conditions precedent provided for herein relating to the defeasance
contemplated by this Section 8.03 have been complied with.
SECTION 8.04. APPLICATION OF TRUST MONEY. Subject to Section 8.06,
the Trustee or Paying Agent shall hold in trust money or U.S. Government
Obligations deposited with it pursuant to Section 8.01, 8.02 or 8.03, as the
case may be, and shall apply the deposited money and the money from U.S.
Government Obligations in accordance with the Notes and this Indenture to the
payment of principal of, premium, if any, and interest on the Notes; but such
money need not be segregated from other funds except to the extent required by
law.
SECTION 8.05. REPAYMENT TO COMPANY. Subject to Sections 7.07, 8.01,
8.02 and 8.03, the Trustee and the Paying Agent shall promptly pay to the
Company upon request set forth in an Officers' Certificate any excess money, as
determined by a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, and held
by them at any time and thereupon shall be relieved from all liability with
respect to such money. The Trustee and the Paying Agent shall pay to the
Company upon request any money held by them for the payment of principal,
premium, if any, or interest that remains unclaimed for two years; PROVIDED that
the Trustee or such Paying Agent before being required to make any payment may
cause to be published at the expense of the Company once in a newspaper of
general circulation in the City of New York or mail to each Holder entitled to
such money at such Holder's address (as set forth in the Note Register) notice
that such money remains unclaimed and that after a date specified therein (which
shall be at least 30 days from the date of such publication or mailing) any
unclaimed balance of such money then remaining will be repaid to the Company.
After payment to the Company, Holders entitled to such money must look to the
Company for payment as general creditors unless an applicable law designates
another Person, and all liability of the Trustee and such Paying Agent with
respect to such money shall cease.
SECTION 8.06. REINSTATEMENT. If the Trustee or Paying Agent is
unable to apply any money or U.S. Government Obligations in accordance with
Section 8.01, 8.02 or 8.03, as the case may be, by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise
<PAGE>
79
prohibiting such application, the Company's obligations under this Indenture and
the Notes shall be revived and reinstated as though no deposit had occurred
pursuant to Section 8.01, 8.02 or 8.03, as the case may be, until such time as
the Trustee or Paying Agent is permitted to apply all such money or U.S.
Government Obligations in accordance with Section 8.01, 8.02 or 8.03, as the
case may be; PROVIDED that, if the Company has made any payment of principal of,
premium, if any, or interest on any Notes because of the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of
such Notes to receive such payment from the money or U.S. Government Obligations
held by the Trustee or Paying Agent.
SECTION 8.07. DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the
event the Company exercises its option to omit compliance with certain covenants
and provisions of this Indenture with respect to the Notes pursuant to Section
8.03 and such Notes are declared due and payable because of the occurrence of an
Event of Default that remains applicable, the amount of money and/or U.S.
Government Obligations on deposit with the Trustee will be sufficient to pay
amounts due on such Notes at the time of their Stated Maturity. If, in the
event the Company exercises its option to omit compliance with certain covenants
and provisions of this Indenture with respect to the Notes pursuant to Section
8.03 and such Notes are declared due and payable because of the occurrence of an
Event of Default that remains applicable, the amount of money and/or U.S.
Government Obligations on deposit with the Trustee is insufficient to pay
amounts due on the Notes at the time of the acceleration resulting from such
Events of Default pursuant to Section 6.02, the Company will remain liable for
such payments.
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. WITHOUT CONSENT OF HOLDERS. The Company, when
authorized by resolutions of its Board of Directors (as evidenced by a Board
Resolution), and the Trustee may amend or supplement this Indenture or the Notes
without notice to, or the consent of, any Holder:
(i) to cure any ambiguity, defect or inconsistency in this
Indenture; PROVIDED that, in the good faith opinion of the Board of
Directors of the Company evidenced by a Board Resolution, such amendments
or supplements do not adversely affect the interests of the Holders in
any material respect;
(ii) to comply with Article Five;
<PAGE>
80
(iii) to comply with any requirements of the Commission in
connection with the qualification of this Indenture under the TIA;
(iv) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee; or
(v) to make any change that, in the good faith opinion of the Board
of Directors of the Company evidenced by a Board Resolution, does not
materially and adversely affect the rights of any Holder.
SECTION 9.02. WITH CONSENT OF HOLDERS. Subject to Sections 6.04 and
6.07 and without prior notice to the Holders, the Company, when authorized by
its Board of Directors (as evidenced by a Board Resolution), and the Trustee may
amend this Indenture and the Notes with the written consent of the Holders of a
majority in aggregate principal amount at maturity of the Notes then
outstanding, and the Holders of a majority in principal amount at maturity of
the Notes then outstanding by written notice to the Trustee may waive future
compliance by the Company with any provision of this Indenture or the Notes.
Notwithstanding the provisions of this Section 9.02, without the
consent of each Holder affected thereby, an amendment or waiver, including a
waiver pursuant to Section 6.04, may not:
(i) change the Stated Maturity of the principal of, or any
installment of interest on, any Note;
(ii) reduce the Accreted Value or principal amount of, or premium,
if any, or interest on, any Note;
(iii) change the place or currency of payment of principal of, or
premium, if any, or interest on, any Note;
(iv) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption,
on or after the Redemption Date) of any Note;
(v) reduce the above-stated percentage of outstanding Notes the
consent of whose Holders is necessary to modify or amend this Indenture;
(vi) waive a default in the payment of principal of, premium, if
any, or interest on the Notes; or
<PAGE>
81
(vii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of this Indenture or for waiver of
certain defaults.
It shall not be necessary for the consent of the Holders under this
Section 9.02 to approve the particular form of any proposed amendment,
supplement or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section 9.02
becomes effective, the Company shall mail to the Holders affected thereby a
notice briefly describing the amendment, supplement or waiver. The Company will
mail supplemental indentures to Holders upon request. Any failure of the
Company to mail such notice, or any defect therein, shall not, however, in any
way impair or affect the validity of any such supplemental indenture or waiver.
SECTION 9.03. REVOCATION AND EFFECT OF CONSENT. Until an amendment
or waiver becomes effective, a consent to it by a Holder is a continuing consent
by the Holder and every subsequent Holder of a Note or portion of a Note that
evidences the same debt as the Note of the consenting Holder, even if notation
of the consent is not made on any Note. However, any such Holder or subsequent
Holder may revoke the consent as to its Note or portion of its Note. Such
revocation shall be effective only if the Trustee receives the notice of
revocation before the date the amendment, supplement or waiver becomes
effective. An amendment, supplement or waiver shall become effective on receipt
by the Trustee of written consents from the Holders of the requisite percentage
in principal amount at maturity of the outstanding Notes.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver. If a record date is fixed, then, notwithstanding the last
two sentences of the immediately preceding paragraph, those Persons who were
Holders at such record date (or their duly designated proxies) and only those
Persons shall be entitled to consent to such amendment, supplement or waiver or
to revoke any consent previously given, whether or not such Persons continue to
be Holders after such record date. No such consent shall be valid or effective
for more than 90 days after such record date.
After an amendment, supplement or waiver becomes effective, it shall
bind every Holder unless it is of the type described in any of clauses (i)
through (vii) of Section 9.02. In case of an amendment or waiver of the type
described in clauses (i) through (vii) of Section 9.02, the amendment or waiver
shall bind each Holder who has consented to it and every subsequent Holder of a
Note that evidences the same indebtedness as the Note of the consenting Holder.
<PAGE>
82
SECTION 9.04. NOTATION ON OR EXCHANGE OF NOTES. If an amendment,
supplement or waiver changes the terms of a Note, the Trustee may require the
Holder to deliver it to the Trustee. The Trustee may place an appropriate
notation on the Note about the changed terms and return it to the Holder and the
Trustee may place an appropriate notation on any Note thereafter authenticated.
Alternatively, if the Company or the Trustee so determines, the Company in
exchange for the Note shall issue and the Trustee shall authenticate a new Note
that reflects the changed terms.
SECTION 9.05. TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall be
entitled to receive, and shall be fully protected in relying upon, in addition
to the documents required by Section 10.03, an Opinion of Counsel stating that
the execution of any amendment, supplement or waiver authorized pursuant to this
Article Nine is authorized or permitted by this Indenture. Subject to the
preceding sentence, the Trustee shall sign such amendment, supplement or waiver
if the same does not adversely affect the rights of the Trustee. The Trustee
may, but shall not be obligated to, execute any such amendment, supplement or
waiver that affects the Trustee's own rights, duties or immunities under this
Indenture or otherwise.
SECTION 9.06. CONFORMITY WITH TRUST INDENTURE ACT. Every
supplemental indenture executed pursuant to this Article Nine shall conform to
the requirements of the TIA as then in effect.
ARTICLE TEN
MISCELLANEOUS
SECTION 10.01. TRUST INDENTURE ACT OF 1939. Prior to the
effectiveness of the Registration Statement, this Indenture shall incorporate
and be governed by the provisions of the TIA that are required to be part of and
to govern indentures qualified under the TIA. After the effectiveness of the
Registration Statement, this Indenture shall be subject to the provisions of the
TIA that are required to be a part of this Indenture and shall, to the extent
applicable, be governed by such provisions.
SECTION 10.02. NOTICES. Any notice or communication shall be
sufficiently given if in writing and delivered in person or mailed by first
class mail, commercial courier service or telecopier communication, addressed as
follows:
IF TO THE COMPANY:
KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
<PAGE>
83
Bedminster, New Jersey 07921
Telecopier Number: (908) 719-8775
Attention: Chief Financial Officer
With, in the case of any notice given pursuant to Article
Six, a copy to:
Kelley Drye & Warren LLP
101 Park Avenue
New York, NY 10178
Attention: Alan Epstein, Esq.
and
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017-3954
Attention: Arthur D. Robinson, Esq.
IF TO THE TRUSTEE:
The Chase Manhattan Bank
450 West 33rd Street, 15th Floor
New York, New York 10001-2697
Telecopier Number: (212) 946-8159/8160
Attention: Global Trust Services
With a copy to:
Pryor Cashman Sherman & Flynn
410 Park Avenue
New York, NY 10022
Attention: Eric Hellige, Esq.
The Company, the Trustee, or the Depository by notice to the others
may designate additional or different addresses for subsequent notices or
communications.
Any notice or communication mailed to a Holder shall be mailed to him
at his address as it appears on the Note Register by first class mail and shall
be sufficiently given to
<PAGE>
84
him if so mailed within the time prescribed. Copies of any such communication
or notice to a Holder shall also be mailed to the Trustee and each Agent at the
same time.
Failure to mail a notice or communication to a Holder or any defect in
it shall not affect its sufficiency with respect to other Holders. Except for a
notice to the Trustee, which is deemed given only when received, and except as
otherwise provided in this Indenture, if a notice or communication is mailed in
the manner provided in this Section 10.02, it is duly given, whether or not the
addressee receives it.
Where this Indenture provides for notice in any manner, such notice
may be waived in writing by the Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waivers of notice by Holders shall be filed with the Trustee, but such
filing shall not be a condition precedent to the validity of any action taken in
reliance upon such waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause it shall be impracticable to give such notice by mail,
then such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
SECTION 10.03. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company to the Trustee to take any action
under this Indenture, the Company shall furnish to the Trustee:
(i) an Officers' Certificate stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and
(ii) an Opinion of Counsel stating that, in the opinion of such
Counsel, all such conditions precedent have been complied with.
SECTION 10.04. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each
certificate or opinion with respect to compliance with a condition or covenant
provided for in this Indenture shall include:
(i) a statement that each person signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(ii) a brief statement as to the nature and scope of the
examination or investigation upon which the statement or opinion
contained in such certificate or opinion is based;
<PAGE>
85
(iii) a statement that, in the opinion of each such person, he has
made such examination or investigation as is necessary to enable him
to express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(iv) a statement as to whether or not, in the opinion of each such
person, such condition or covenant has been complied with; PROVIDED,
HOWEVER, that, with respect to matters of fact, an Opinion of Counsel may
rely on an Officers' Certificate or certificates of public officials.
SECTION 10.05. RULES BY TRUSTEE, PAYING AGENT OR REGISTRAR. The
Trustee may make reasonable rules for action by or at a meeting of Holders. The
Paying Agent or Registrar may make reasonable rules for its functions.
SECTION 10.06. PAYMENT DATE OTHER THAN A BUSINESS DAY. If an
Interest Payment Date, Redemption Date, Payment Date, Stated Maturity or date of
maturity of any Note shall not be a Business Day, then payment of principal of,
premium, if any, or interest on such Note, as the case may be, need not be made
on such date, but may be made on the next succeeding Business Day with the same
force and effect as if made on the Interest Payment Date, Payment Date, or
Redemption Date, or at the Stated Maturity or date of maturity of such Note;
PROVIDED that no interest shall accrue for the period from and after such
Interest Payment Date, Payment Date, Redemption Date, Stated Maturity or date of
maturity, as the case may be.
SECTION 10.07. GOVERNING LAW; SUBMISSION TO JURISDICTION; AGENT FOR
SERVICE. This Indenture and the Notes shall be governed by the laws of the
State of New York. The Company hereby appoints CT Corporation System as its
agent for service of process in any suit, action or proceeding with respect to
this Indenture or the Notes and for actions brought under the U.S. federal or
state securities laws brought in any federal or state court located in The City
of New York and the Company agrees to submit to the jurisdiction of any such
court.
SECTION 10.08. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This
Indenture may not be used to interpret another indenture, loan or debt agreement
of the Company or any Subsidiary of the Company. Any such indenture, loan or
debt agreement may not be used to interpret this Indenture.
SECTION 10.09. NO RECOURSE AGAINST OTHERS. No recourse for the
payment of the principal of, premium, if any, or interest on any of the Notes,
or for any claim based thereon or otherwise in respect thereof, and no recourse
under or upon any obligation, covenant or agreement of the Company contained in
this Indenture, or in any of the Notes, or because of the creation of any
Indebtedness represented thereby, shall be had against any
<PAGE>
86
incorporator or against any past, present or future partner, shareholder, other
equityholder, officer, director, employee or controlling person, as such, of the
Company or of any successor Person, either directly or through the Company or
any successor Person, whether by virtue of any constitution, statute or rule of
law, or by the enforcement of any assessment or penalty or otherwise; it being
expressly understood that all such liability is hereby expressly waived and
released as a condition of, and as a consideration for, the execution of this
Indenture and the issue of the Notes.
SECTION 10.10. SUCCESSORS. All agreements of the Company in this
Indenture and the Notes shall bind its successors. All agreements of the
Trustee in this Indenture shall bind its successors.
SECTION 10.11. DUPLICATE ORIGINALS. The parties may sign any number
of copies of this Indenture. Each signed copy shall be an original, but all of
them together represent the same agreement.
SECTION 10.12. SEPARABILITY. In case any provision in this Indenture
or in the Notes shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
SECTION 10.13. TABLE OF CONTENTS, HEADINGS, ETC. The Table of
Contents, Cross-Reference Table and headings of the Articles and Sections of
this Indenture have been inserted for convenience of reference only, are not to
be considered a part hereof and shall in no way modify or restrict any of the
terms and provisions hereof.
<PAGE>
87
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, all as of the date first written above.
KMC TELECOM HOLDINGS, INC.
By:
-------------------------
Name:
Title:
THE CHASE MANHATTAN BANK,
as Trustee
By:
-------------------------
Name:
Title:
<PAGE>
EXHIBIT A
[FACE OF NOTE]
KMC TELECOM HOLDINGS, INC.
121/2% Senior Discount Note Due 2008
[CUSIP] [CINS] __________
[insert Private Placement Legend, if applicable]
THE NOTES EVIDENCED BY THIS CERTIFICATE ARE INITIALLY ISSUED AS PART OF AN
ISSUANCE OF UNITS, EACH OF WHICH CONSISTS OF $1,000 PRINCIPAL AMOUNT AT MATURITY
OF 121/2% SENIOR DISCOUNT NOTES DUE 2008 OF KMC TELECOM HOLDINGS, INC. (THE
"NOTES") AND ONE WARRANT (EACH, A "WARRANT" AND COLLECTIVELY, THE "WARRANTS")
INITIALLY ENTITLING THE HOLDER THEREOF TO PURCHASE 0.21785 SHARES OF COMMON
STOCK, PAR VALUE $.01 PER SHARE, OF KMC TELECOM HOLDINGS, INC. PRIOR TO THE
CLOSE OF BUSINESS UPON THE EARLIEST TO OCCUR OF (i) SIX MONTHS AFTER JANUARY 29,
1998, (ii) THE COMMENCEMENT OF AN EXCHANGE OFFER WITH RESPECT TO THE NOTES,
(iii) THE EFFECTIVENESS OF A SHELF REGISTRATION STATEMENT WITH RESPECT TO THE
NOTES, (iv) THE COMMENCEMENT OF AN OFFER TO REPURCHASE THE NOTES PURSUANT TO THE
INDENTURE OR (v) THE DATE WHICH THE INITIAL PURCHASER, IN ITS SOLE DISCRETION
DETERMINES, PROVIDED THAT, PRIOR TO SUCH DATE, THE COMPANY MAILS NOTICE OF SUCH
DETERMINATION TO THE HOLDERS OF THE NOTES. THE NOTES EVIDENCED BY THIS
CERTIFICATE MAY NOT BE TRANSFERRED OR EXCHANGED SEPARATELY FROM, BUT MAY BE
TRANSFERRED OR EXCHANGED ONLY TOGETHER WITH, THE WARRANTS.
UNLESS THIS GLOBAL NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
<PAGE>
A-2
SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN
PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S
NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO
TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.08 OF
THE INDENTURE.
[THIS NOTE IS HELD BY THE DEPOSITORY (AS DEFINED IN THE INDENTURE GOVERNING THIS
NOTE) IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT
TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE
MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.07 OF
THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART
PURSUANT TO SECTION 2.07(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE
DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.12 OF THE
INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR BOOK-ENTRY
DEPOSITORY WITH THE PRIOR WRITTEN CONSENT OF KMC TELECOM HOLDINGS, INC.]
FOR PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED, AND THE RULES AND REGULATIONS THEREUNDER, THIS NOTE IS BEING
ISSUED WITH ORIGINAL ISSUE DISCOUNT; FOR EACH $1,000 PRINCIPAL AMOUNT AT
MATURITY OF THIS NOTE, (i) THE ISSUE PRICE IS $518.59; (ii) THE AMOUNT OF
ORIGINAL ISSUE DISCOUNT IS $1,106.41; (iii) THE ISSUE DATE IS JANUARY 29, 1998;
AND (iv) THE YIELD TO MATURITY (COMPOUNDED SEMI-ANNUALLY) IS 13.11%.
<PAGE>
A-3
No. _________ $_________
KMC TELECOM HOLDINGS, INC., a Delaware corporation (the "Company",
which term includes any successor under the Indenture hereinafter referred to),
for value received, promises to pay to [____________], or its registered
assigns, the principal sum of _____ ($_____) on February 15, 2008.
Interest Payment Dates: February 15 and August 15, commencing August 15,
2003.
Regular Record Dates: February 1 and August 1.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth hereon.
Terms used but not otherwise defined herein shall have their meanings
as defined in the Indenture. The provisions of this Note do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
the provisions of the Indenture.
<PAGE>
A-4
IN WITNESS WHEREOF, the Company has caused this Note to be signed
manually or by facsimile by its duly authorized officers.
Date: KMC TELECOM HOLDINGS, INC.
By:
------------------------------
Name:
Title:
By:
------------------------------
Name:
Title:
This is one of the 121/2% Senior Discount Notes due 2008 described in the
within-mentioned Indenture.
THE CHASE MANHATTAN BANK,
as Trustee
By:
------------------------------
Authorized Officer
<PAGE>
A-5
[REVERSE SIDE OF NOTE]
KMC TELECOM HOLDINGS, INC.
121/2% Senior Discount Note due 2008
1. PRINCIPAL AND INTEREST.
The Company will pay the principal of this Note on February 15, 2008.
The Company promises to pay interest on the principal amount of this
Note on each Interest Payment Date, as set forth below, at the rate per annum
shown above.
Interest will be payable semiannually (to the holders of record of the
Notes at the close of business on the February 1 or August 1 immediately
preceding the Interest Payment Date) on each Interest Payment Date, commencing
August 15, 2003; PROVIDED that no interest shall accrue on the principal amount
of this Note prior to February 15, 2003 and no interest shall be paid on this
Note prior to August 15, 2003, except as provided in the next paragraph.
If an exchange offer registered under the Securities Act is not
consummated, and a shelf registration statement under the Securities Act with
respect to resales of the Notes is not declared effective by the Commission, on
or before the date that is six months after the Closing Date in accordance with
the terms of the Registration Rights Agreement dated January 26, 1998 between
the Company and Morgan Stanley & Co. Incorporated, interest (in addition to the
accrual of original discount during the period prior to February 15, 2003 and in
addition to the interest otherwise due on the Notes after such date) will
accrue, at an annual rate of 0.5% of the Accreted Value on the preceding
Semi-Annual Accrual Date, payable in cash semiannually, in arrears, on February
15 and August 15 of each year, commencing August 15, 1998. The Holder of this
Note is entitled to the benefits of such Registration Rights Agreement.
From and after February 15, 2003, interest on the Notes will accrue
from the most recent date to which interest has been paid or, if no interest has
been paid, from February 15, 2003; PROVIDED that, if there is no existing
default in the payment of interest and this Note is authenticated between a
Regular Record Date referred to on the face hereof and the next succeeding
Interest Payment Date, interest shall accrue from such Interest Payment Date.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
<PAGE>
A-6
The Company shall pay interest on overdue principal and premium, if
any, and interest on overdue installments of interest, to the extent lawful, at
a rate per annum that is 121/2% per annum.
2. METHOD OF PAYMENT.
The Company will pay principal as provided above and interest (except
defaulted interest) on the principal amount of the Notes as provided above on
each February 15 and August 15 to the Persons who are Holders (as reflected in
the Note Register at the close of business on such February 1 and August 1,
immediately preceding the Interest Payment Date), in each case, even if the Note
is cancelled on registration of transfer or registration of exchange after such
record date; PROVIDED that, with respect to the payment of principal, the
Company will not make payment to the Holder unless this Note is surrendered to a
Paying Agent.
The Company will pay principal, premium, if any, and as provided
above, interest in money of the United States that at the time of payment is
legal tender for payment of public and private debts. However, the Company may
pay principal, premium, if any, and interest by its check payable in such money.
It may mail an interest check to a Holder's registered address (as reflected in
the Note Register). If a payment date is a date other than a Business Day at a
place of payment, payment may be made at that place on the next succeeding day
that is a Business Day and no interest shall accrue for the intervening period.
3. PAYING AGENT AND REGISTRAR.
Initially, the Trustee will act as Paying Agent and Registrar. The
Company may change any Paying Agent or Registrar without notice. The Company,
any Subsidiary or any Affiliate of any of them may act as Paying Agent,
Registrar or co-Registrar.
4. INDENTURE; ISSUANCE OF ADDITIONAL NOTES.
This Note is one of a duly authorized issue of Notes of the Company
designated its 121/2% Senior Discount Notes due 2008, issued and to be issued
under an Indenture dated as of January 29, 1998 (the "Indenture"), between the
Company and The Chase Manhattan Bank, as trustee (the "Trustee"). Capitalized
terms herein are used as defined in the Indenture unless otherwise indicated.
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act. The Notes are subject
to all such terms, and Holders are referred to the Indenture and the Trust
Indenture Act for a statement of all such terms. To the extent permitted by
applicable law, in the event of any inconsistency between the terms of this Note
and the terms of the Indenture, the terms of the Indenture shall control.
<PAGE>
A-7
5. REDEMPTION.
The Notes will be redeemable, at the Company's option, in whole or in
part, at any time and from time to time on or after February 15, 2003 and prior
to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first-class mail to each Holders' last address as it appears in the Note
Register, at the following Redemption Prices (expressed in percentages of their
principal amount at maturity), plus accrued and unpaid interest, if any, to the
Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is on or prior to the Redemption Date to receive
interest due on an Interest Payment Date), if redeemed during the 12-month
period commencing on February 15, of the years set forth below:
Redemption
YEAR PRICE
2003 106.2500%
2004 104.1666
2005 102.0832
2006 and thereafter 100.0000
In addition, at any time or from time to time on or prior to April 15,
2000, the Company may, at its option, redeem up to 35% of the aggregate
principal amount at maturity of the Notes with the proceeds of one or more
public or private Equity Offerings, at a Redemption Price equal to 112.5% of the
Accreted Value thereof on the Redemption Date; PROVIDED that at least 65% of the
aggregate principal amount at maturity of Notes issued on January 29, 1998
remains outstanding after each such redemption.
6. NOTICE OF REDEMPTION.
Notice of any optional redemption will be mailed at least 30 days but
not more than 60 days before the Redemption Date to each Holder of Notes to be
redeemed at his last address as it appears in the Note Register. Notes in
original denominations larger than $1,000 of principal amount at maturity may be
redeemed in part. On and after the Redemption Date, interest ceases to accrue
on Notes or portions of Notes called for redemption, unless the Company defaults
in the payment of the Redemption Price.
7. REPURCHASE UPON CHANGE IN CONTROL.
Upon the occurrence of any Change of Control, each Holder shall have
the right to require the repurchase of its Notes by the Company in cash pursuant
to the offer described in the Indenture at a purchase price equal to 101% of the
Accreted Value thereof plus accrued and unpaid interest, if any, to the date of
purchase (the "Change of Control Payment").
<PAGE>
A-8
A notice of such Change of Control will be mailed within 30 days after
any Change of Control occurs to each Holder at his last address as it appears in
the Note Register. Notes in original denominations larger than $1,000 of
principal amount at maturity may be sold to the Company in part. On and after
the date of the Change of Control Payment, interest ceases to accrue on Notes or
portions of Notes surrendered for purchase by the Company, unless the Company
defaults in the payment of the Change of Control Payment.
8. REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, the Company will be
obligated, within 180 days after the issue date of this Note, to consummate an
exchange offer pursuant to which the Holder of this Note shall have the right to
exchange this Note for the Company's Exchange Notes (as defined in the
Registration Rights Agreement) which have been registered under the Securities
Act, in like principal amount at maturity and having terms identical in all
material respects as the Initial Notes. The Holders of the Initial Notes shall
be entitled to receive certain additional interest payments in the event such
exchange offer is not consummated and upon certain other conditions, all
pursuant and in accordance with the terms of the Registration Rights Agreement.
9. DENOMINATIONS; TRANSFER; EXCHANGE.
The Notes are in registered form without coupons in denominations of
$1,000 of principal amount at maturity and multiples of $1,000 in excess
thereof. A Holder may register the transfer or exchange of Notes in accordance
with the Indenture. The Registrar may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and to pay any taxes and
fees required by law or permitted by the Indenture. The Registrar need not
register the transfer or exchange of any Notes selected for redemption. Also,
it need not register the transfer or exchange of any Notes for a period of 15
days before a selection of Notes to be redeemed is made.
10. PERSONS DEEMED OWNERS.
A Holder shall be treated as the owner of a Note for all purposes.
11. UNCLAIMED MONEY.
If money for the payment of principal, premium, if any, or interest
remains unclaimed for two years, the Trustee and the Paying Agent will pay the
money back to the Company at its request. After that, Holders entitled to the
money must look to the Company
<PAGE>
A-9
for payment, unless an abandoned property law designates another Person, and all
liability of the Trustee and such Paying Agent with respect to such money shall
cease.
12. DISCHARGE PRIOR TO REDEMPTION OR MATURITY.
If the Company deposits with the Trustee money and/or U.S. Government
Obligations sufficient to pay the then outstanding principal of, premium, if
any, and accrued interest on the Notes to redemption (a) or maturity, the
Company will be discharged from the Indenture and the Notes, except in certain
circumstances for certain sections thereof, and (b) or to Stated Maturity, the
Company will be discharged from certain covenants set forth in the Indenture.
13. AMENDMENT; SUPPLEMENT; WAIVER.
Subject to certain exceptions, the Indenture or the Notes may be
amended or supplemented with the consent of the Holders of at least a majority
in principal amount at maturity of the Notes then outstanding, and any existing
default or compliance with any provision may be waived with the consent of the
Holders of at least a majority in principal amount at maturity of the Notes then
outstanding. Without notice to or the consent of any Holder, the parties
thereto may amend or supplement the Indenture or the Notes to, among other
things, cure any ambiguity, defect or inconsistency and make any change that
does not materially and adversely affect the rights of any Holder.
14. RESTRICTIVE COVENANTS.
The Indenture imposes certain limitations on the ability of the
Company and its Restricted Subsidiaries, among other things, to Incur
Indebtedness, make Restricted Payments, use the proceeds from Asset Sales,
engage in transactions with Affiliates or, with respect to the Company, merge,
consolidate or transfer substantially all of its assets. Within 90 days after
the end of the last fiscal quarter of each year, the Company must report to the
Trustee on compliance with the terms of the Indenture.
15. SUCCESSOR PERSONS.
When a successor Person or other entity assumes all the obligations of
its predecessor under the Notes and the Indenture, the predecessor Person will
be released from those obligations.
16. DEFAULTS AND REMEDIES.
<PAGE>
A-10
The following events constitute "Events of Default" under the
Indenture: (a) default in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise; (b) default in the payment of interest on any Note when
the same becomes due and payable, and such default continues for a period of 30
days; (c) the Company defaults in the performance of or breaches any other
covenant or agreement of the Company in the Indenture or under the Notes (other
than a default specified in clause (a) or (b) above) and such default or breach
continues for a period of 30 consecutive days after written notice by the
Trustee or the Holders of 25% or more in aggregate principal amount of the
Notes; (d) the Company shall have failed to make or consummate an Offer to
Purchase in accordance with Section 4.11 of the Indenture; (e) the Company shall
have failed to make or consummate an Offer to Purchase in accordance with the
provisions of Section 4.12 of the Indenture; (f) there occurs with respect to
any issue or issues of Indebtedness of the Company or any Significant Subsidiary
having an outstanding principal amount of $5 million or more in the aggregate
for all such issues of all such Persons, whether such Indebtedness now exists or
shall hereafter be created, (I) an event of default that has caused the holder
thereof to declare such Indebtedness to be due and payable prior to its Stated
Maturity and such Indebtedness has not been discharged in full or such
acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (II) the failure to make a principal payment at the final
(but not any interim) fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of such payment default; (g) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $5 million in the aggregate (treating any deductibles, self-insurance
or retention as not so covered) shall be rendered against the Company or any
Significant Subsidiary and shall not be paid or discharged, and there shall be
any period of 30 consecutive days following entry of the final judgment or order
that causes the aggregate amount for all such final judgments or orders
outstanding and not paid or discharged against the Company or any of its
Significant Subsidiaries to exceed $5 million during which a stay of enforcement
of such final judgment or order, by reason of a pending appeal or otherwise,
shall not be in effect; (h) a court having jurisdiction in the premises enters a
decree or order for (A) relief in respect of the Company or any Significant
Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, (B) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Company or any Significant Subsidiary or for all or substantially all of the
property and assets of the Company or any Significant Subsidiary or (C) the
winding up or liquidation of the affairs of the Company or any Significant
Subsidiary and, in each case, such decree or order shall remain unstayed and in
effect for a period of 30 consecutive days; or (i) the Company or any
Significant Subsidiary (A) commences a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
consents to the entry of an order for relief in an involuntary case under any
such law, (B) consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Company or any Significant Subsidiary or for all or substantially all of the
property and assets
<PAGE>
A-11
of the Company or any Significant Subsidiary or (C) effects any general
assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in
clause (h) or (i) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes, then outstanding, by written notice to
the Company (and to the Trustee if such notice is given by the Holders) , may,
and the Trustee at the request of such Holders shall, declare the Accreted Value
of, premium, if any, and accrued interest on the Notes to be immediately due and
payable.
If an Event of Default, as defined in the Indenture, occurs and is
continuing, the Trustee or the Holders of at least 25% in aggregate principal
amount of the Notes then outstanding may declare all the Notes to be due and
payable. If a bankruptcy or insolvency default with respect to the Company or
any Restricted Subsidiary occurs and is continuing, the Notes automatically
become due and payable. Holders may not enforce the Indenture or the Notes
except as provided in the Indenture. The Trustee may require indemnity
satisfactory to it before it enforces the Indenture or the Notes. Subject to
certain limitations, Holders of at least a majority in principal amount of the
Notes then outstanding may direct the Trustee in its exercise of any trust or
power.
17. TRUSTEE DEALINGS WITH COMPANY.
The Trustee under the Indenture, in its individual or any other
capacity, may make loans to, accept deposits from and perform services for the
Company or its Affiliates and may otherwise deal with the Company or its
Affiliates as if it were not the Trustee.
18. NO RECOURSE AGAINST OTHERS.
No incorporator or any past, present or future partner, stockholder,
other equity holder, officer, director, employee or controlling person as such,
of the Company or of any successor Person shall have any liability for any
obligations of the Company under the Notes or the Indenture or for any claim
based on, in respect of or by reason of, such obligations or their creation.
Each Holder by accepting a Note waives and releases all such liability. The
waiver and release are part of the consideration for the issuance of the Notes.
19. AUTHENTICATION.
This Note shall not be valid until the Trustee or authenticating agent
signs the certificate of authentication on the other side of this Note.
<PAGE>
A-12
20. ABBREVIATIONS.
Customary abbreviations may be used in the name of a Holder or an
assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors
Act).
21. CUSIP NUMBERS.
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Issuer has caused CUSIP numbers to be
printed on the Notes and the Trustee may use CUSIP numbers in notices of
redemption as a convenience to Holders. No representation is made as to the
accuracy of such numbers either as printed on the Notes or as contained in any
notice of redemption.
THIS NOTE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
The Company will furnish to any Holder upon written request and
without charge a copy of the Indenture. Requests may be made to KMC Telecom
Holdings, Inc., 1545 Route 206, Suite 300, Bedminster, New Jersey, 07921,
Attention: Chief Financial Officer.
<PAGE>
A-13
[FORM OF TRANSFER NOTICE]
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
INSERT TAXPAYER IDENTIFICATION NO.
- --------------------------------------------------------------------------------
Please print or typewrite name and address including zip code of assignee
- --------------------------------------------------------------------------------
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing_____________________________________attorney to transfer said Note on
the books of the Company with full power of substitution in the premises.
[THE FOLLOWING PROVISION TO BE INCLUDED
ON ALL NOTES OTHER THAN EXCHANGE NOTES,
UNLEGENDED OFFSHORE GLOBAL NOTES AND
UNLEGENDED OFFSHORE CERTIFICATED NOTES]
In connection with any transfer of this Note occurring prior to the date
which is the earlier of (i) the date of an effective Registration or (ii) the
end of the period referred to in Rule 144(k) under the Securities Act, the
undersigned confirms that without utilizing any general solicitation or general
advertising that:
[CHECK ONE]
[ ] (a) this Note is being transferred in compliance with the exemption from
registration under the Securities Act of 1933, as amended, provided by
Rule 144A thereunder.
OR
[ ] (b) this Note is being transferred other than in accordance with (a) above
and documents are being furnished which comply with the conditions of
transfer set forth in this Note and the Indenture.
If none of the foregoing boxes is checked, the Trustee or other Registrar shall
not be obligated to register this Note in the name of any Person other than the
Holder hereof unless and until
<PAGE>
A-14
the conditions to any such transfer of registration set forth herein and in
Section 2.08 of the Indenture shall have been satisfied.
Date:
-------------------- --------------------------------------------------
NOTICE: The signature to this assignment must
correspond with the name as written upon the face
of the within-mentioned instrument in every
particular, without alteration or any change
whatsoever.
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this Note for
its own account or an account with respect to which it exercises sole investment
discretion and that it and any such account is a "qualified institutional buyer"
within the meaning of Rule 144A under the Securities Act of 1933, as amended,
and is aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the Company as the
undersigned has requested pursuant to Rule 144A or has determined not to request
such information and that it is aware that the transferor is relying upon the
undersigned's foregoing representations in order to claim the exemption from
registration provided by Rule 144A.
Dated:
-------------------- --------------------------------------------------
NOTICE: To be executed by an executive officer
<PAGE>
A-15
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to
Section 4.11 or Section 4.12 of the Indenture, check the Box:
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 4.11 or Section 4.12 of the Indenture, state the amount (in
principal amount at maturity): $___________________.
Date:
------------------------
Your Signature:
-----------------------------------------------------------------
(Sign exactly as your name appears on the other side of this Note)
Signature Guarantee:
------------------------------
<PAGE>
EXHIBIT B
FORM OF CERTIFICATE
-------------------
The Chase Manhattan Bank. __________ __, 19__
450 West 33rd Street, 15th Floor
New York, NY 10001-2697
Attention: Global Trust Services
Re: KMC Telecom Holdings, Inc. (the "Company")
121/2% Senior Discount Notes
due 2008 (the "Notes")
------------------------------------------
Ladies and Gentlemen:
This letter relates to U.S. $_____________ principal amount at
maturity of Notes represented by a Note (the "Legended Note") which bears a
legend outlining restrictions upon transfer of such Legended Note. Pursuant to
Section 2.02 of the Indenture (the "Indenture") dated as of January 29, 1998
relating to the Notes, we hereby certify that we are (or we will hold such Notes
on behalf of) a person outside the United States to whom the Notes could be
transferred in accordance with Rule 904 of Regulation S promulgated under the
U.S. Securities Act of 1933, as amended. Accordingly, you are hereby requested
to exchange the legended certificate for an unlegended certificate representing
an identical principal amount at maturity of Notes, all in the manner provided
for in the Indenture.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Holder]
By:
-----------------------------------
Authorized Signature
<PAGE>
EXHIBIT C
Form of Certificate to Be Delivered
in Connection with Transfers
Pursuant to Regulation S
-----------------------------------
The Chase Manhattan Bank. __________ __, 19__
450 West 33rd Street, 15th Floor
New York, NY 10001-2697
Attention: Global Trust Services
Re: KMC Telecom Holdings, Inc. (the "Company")
121/2% Senior Discount Notes
due 2008 (the "Notes")
------------------------------------------
Ladies and Gentlemen:
In connection with our proposed sale of U.S.$
aggregate principal amount at maturity of the Notes, we confirm that such sale
has been effected pursuant to and in accordance with Regulation S under the
Securities Act of 1933, as amended, and, accordingly, we represent that:
(1) the offer of the Notes was not made to a person in the United
States;
(2) at the time the buy order was originated, the transferee was
outside the United States or we and any person acting on our behalf
reasonably believed that the transferee was outside the United States;
(3) no directed selling efforts have been made by us in the United
States in contravention of the requirements of Rule 903(b) or Rule 904(b)
of Regulation S, as applicable; and
(4) the transaction is not part of a plan or scheme to evade the
registration requirements of the U.S. Securities Act of 1933.
<PAGE>
C-2
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:
-------------------------------
Authorized Signature
<PAGE>
EXHIBIT D
Form of Certificate to Be
Delivered in Connection with
Transfers to Non-QIB Accredited Investors
-----------------------------------------
The Chase Manhattan Bank. __________ __, 19__
450 West 33rd Street, 15th Floor
New York, NY 10001-2697
Attention: Global Trust Services
Re: KMC Telecom Holdings, Inc. (the "Company")
121/2% Senior Discount Notes
due 2008 (the "Notes")
------------------------------------------
Dear Sirs:
In connection with our proposed purchase of $___________ aggregate
principal amount of the Notes, we confirm that:
1. We understand that any subsequent transfer of the Notes is
subject to certain restrictions and conditions set forth in the Indenture
dated as of January 29, 1998 relating to the Notes (the "Indenture") and
the undersigned agrees to be bound by, and not to resell, pledge or
otherwise transfer the Notes except in compliance with, such restrictions
and conditions and the Securities Act of 1933, as amended (the "Securities
Act").
2. We understand that the offer and sale of the Notes have not
been registered under the Securities Act, and that the Notes may not be
offered or sold except as permitted in the following sentence. We agree,
on our own behalf and on behalf of any accounts for which we are acting as
hereinafter stated, that if we should sell any Notes, we will do so only
(A) to the Company or any subsidiary thereof, (B) in accordance with Rule
144A under the Securities Act to a "qualified institutional buyer" (as
defined therein), (C) to an institutional "accredited investor" (as defined
below) that, prior to such transfer, furnishes (or has furnished on its
behalf by a U.S. broker-dealer) to you and to the Company a signed letter
substantially in the form of this letter, (D) outside the United States in
accordance with Rule 904 of Regulation S under the Securities Act, (E)
pursuant to the provisions of Rule 144 under the Securities Act, or
<PAGE>
D-2
(F) pursuant to an effective registration statement under the Securities
Act, and we further agree to provide to any person purchasing any of the
Notes from us a notice advising such purchaser that resales of the Notes
are restricted as stated herein.
3. We understand that, on any proposed resale of any Notes, we
will be required to furnish to you and the Company such certifications,
legal opinions and other information as you and the Company may reasonably
require to confirm that the proposed sale complies with the foregoing
restrictions. We further understand that the Notes purchased by us will
bear a legend to the foregoing effect.
4. We are an institutional "accredited investor" (as defined in
Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act)
and have such knowledge and experience in financial and business matters as
to be capable of evaluating the merits and risks of our investment in the
Notes, and we and any accounts for which we are acting are each able to
bear the economic risk of our or its investment.
5. We are acquiring the Notes purchased by us for our own account
or for one or more accounts (each of which is an institutional "accredited
investor") as to each of which we exercise sole investment discretion.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby.
Very truly yours,
[Name of Transferee]
By:
-------------------------------
Authorized Signature
<PAGE>
Exhibit 4.6
================================================================================
REGISTRATION RIGHTS AGREEMENT
Dated January 26, 1998
between
KMC TELECOM HOLDINGS, INC.
and
MORGAN STANLEY & CO. INCORPORATED
================================================================================
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into January 26, 1998 between KMC Telecom Holdings, Inc., a Delaware
corporation (the "Company"), and MORGAN STANLEY & CO. INCORPORATED (the "Initial
Purchaser").
This Agreement is made pursuant to the Purchase Agreement dated the
date hereof, between the Company and the Initial Purchaser (the "Purchase
Agreement"), which provides for the sale by the Company to the Initial Purchaser
of 460,800 Units. Each Unit consists of (i) one 121/2% Senior Discount Note Due
2008 of the Company (each, a "Note") 0.21785 to be issued pursuant to the
Indenture (as hereinafter defined) and (ii) one warrant, entitling the holder
thereof to purchase 0.21785 shares of common stock, par value $0.01 per share,
of the Company, at an exercise price of $0.01 per share, subject to adjustment.
In order to induce the Initial Purchaser to enter into the Purchase Agreement,
the Company has agreed to provide to the Initial Purchaser and its direct and
indirect transferees the registration rights set forth in this Agreement. The
execution of this Agreement is a condition to the closing under the Purchase
Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
1. DEFINITIONS.
As used in this Agreement, the following capitalized defined terms
shall have the following meanings:
"1933 ACT" shall mean the Securities Act of 1933, as amended from time
to time.
"1934 ACT" shall mean the Securities Exchange Act of 1934, as amended
from time to time.
"CLOSING DATE" shall mean the Closing Date as defined in the Purchase
Agreement.
"COMPANY" shall have the meaning set forth in the preamble to this
Agreement and shall also include the Company's successors.
<PAGE>
2
"EXCHANGE OFFER" shall mean the exchange offer by the Company of
Exchange Notes for Registrable Notes pursuant to Section 2(a) hereof.
"EXCHANGE OFFER REGISTRATION" shall mean a registration under the 1933
Act effected pursuant to Section 2(a) hereof.
"EXCHANGE OFFER REGISTRATION STATEMENT" shall mean an exchange offer
registration statement on Form S-4 (or, if applicable, on another
appropriate form) and all amendments and supplements to such registration
statement, in each case including the Prospectus contained therein, all
exhibits thereto and all material incorporated by reference therein.
"EXCHANGE NOTES" shall mean notes issued in the Exchange Offer
pursuant to Section 2(a) hereof.
"HOLDER" shall mean the Initial Purchaser, for so long as it owns any
Registrable Notes, and each of its successors, assigns and direct and
indirect transferees who become registered owners of Registrable Notes
under the Indenture; PROVIDED that for purposes of Sections 4 and 5 of this
Agreement, the term "Holder" shall include Participating Broker-Dealers (as
defined in Section 4(a) hereof).
"INDENTURE" shall mean the Indenture relating to the Notes to be dated
as of the Closing Date between the Company and The Chase Manhattan Bank, as
trustee, and as the same may be amended from time to time in accordance
with the terms thereof.
"INITIAL PURCHASER" shall have the meaning set forth in the preamble
to this Agreement.
"MAJORITY HOLDERS" shall mean the Holders of a majority of the
aggregate principal amount of outstanding Registrable Notes; PROVIDED that
whenever the consent or approval of Holders of a specified percentage of
Registrable Notes is required hereunder, Registrable Notes held by the
Company or any of its affiliates (as such term is defined in Rule 405 under
the 1933 Act) (other than the Initial Purchaser or subsequent holders of
Registrable Notes if such subsequent holders are deemed to be such
affiliates solely by reason of their holding of such Registrable Notes)
shall not be counted in determining whether such consent or approval was
given by the Holders of such required percentage or amount.
"PERSON" shall mean an individual, partnership, corporation, limited
liability company, trust or unincorporated organization or other entity, or
a government or agency or political subdivision thereof.
<PAGE>
3
"PROSPECTUS" shall mean the prospectus included in a Registration
Statement, including any preliminary prospectus, and any such prospectus as
amended or supplemented by any prospectus supplement, including a
prospectus supplement with respect to the terms of the offering of any
portion of the Registrable Notes covered by a Shelf Registration Statement,
and by all other amendments and supplements to such prospectus, and in each
case including all material incorporated by reference therein.
"PURCHASE AGREEMENT" shall have the meaning set forth in the preamble
to this Agreement.
"REGISTRABLE NOTES" shall mean the Notes; PROVIDED, HOWEVER, that the
Notes shall cease to be Registrable Notes (i) when a Registration Statement
with respect to such Notes shall have been declared effective under the
1933 Act and such Notes shall have been disposed of pursuant to such
Registration Statement, (ii) when such Notes have been sold to the public
pursuant to Rule 144 (or any similar rule then in force, but not Rule 144A)
under the 1933 Act or (iii) when such Notes shall have ceased to be
outstanding.
"REGISTRATION EXPENSES" shall mean any and all expenses incident to
performance of or compliance by the Company with this Agreement, including
without limitation: (i) all SEC, stock exchange or National Association of
Securities Dealers, Inc. registration and filing fees, (ii) all fees and
expenses incurred in connection with compliance with state securities or
blue sky laws (including reasonable fees and disbursements of counsel for
any underwriters or Holders in connection with blue sky qualification of
any of the Exchange Notes or Registrable Notes), (iii) all expenses of any
Persons in preparing or assisting in preparing, word processing, printing
and distributing any Registration Statement, any Prospectus, any amendments
or supplements thereto, any underwriting agreements, securities sales
agreements and other documents relating to the performance of and
compliance with this Agreement, (iv) all rating agency fees, (v) all fees
and disbursements relating to the qualification of the Indenture under
applicable securities laws, (vi) the fees and disbursements of the Trustee
and its counsel, (vii) the fees and disbursements of counsel for the
Company and, in the case of a Shelf Registration Statement, the reasonable
fees and disbursements of one counsel for the Holders (which counsel shall
be selected by the Majority Holders and which counsel may also be counsel
for the Initial Purchaser ) and (viii) the fees and disbursements of the
independent public accountants of the Company, including the expenses of
any special audits or "cold comfort" letters required by or incident to
such performance and compliance, but excluding fees and expenses of counsel
to the underwriters (other than reasonable fees and expenses set forth in
clause (ii) above) or the Holders and underwriting discounts and
commissions
<PAGE>
4
and transfer taxes, if any, relating to the sale or disposition of
Registrable Notes by a Holder.
"REGISTRATION STATEMENT" shall mean any registration statement of the
Company that covers any of the Exchange Notes or Registrable Notes pursuant
to the provisions of this Agreement and all amendments and supplements to
any such Registration Statement, including post-effective amendments, in
each case including the Prospectus contained therein, all exhibits thereto
and all material incorporated by reference therein.
"SEC" shall mean the Securities and Exchange Commission.
"SHELF REGISTRATION" shall mean a registration effected pursuant to
Section 2(b) hereof.
"SHELF REGISTRATION STATEMENT" shall mean a "shelf" registration
statement of the Company pursuant to the provisions of Section 2(b) of this
Agreement which covers all of the Registrable Notes (but no other
securities unless approved by the Holders whose Registrable Notes are
covered by such Shelf Registration Statement) on an appropriate form under
Rule 415 under the 1933 Act, or any similar rule that may be adopted by the
SEC, and all amendments and supplements to such registration statement,
including post-effective amendments, in each case including the Prospectus
contained therein, all exhibits thereto and all material incorporated by
reference therein.
"TRUSTEE" shall mean the trustee with respect to the Notes under the
Indenture.
"UNDERWRITTEN REGISTRATION" or "UNDERWRITTEN OFFERING" shall mean a
registration in which Registrable Notes are sold to an Underwriter (as
hereinafter defined) for reoffering to the public.
2. REGISTRATION UNDER THE 1933 ACT.
(a) To the extent not prohibited by any applicable law or applicable
interpretation of the Staff of the SEC, the Company shall use its best efforts
to cause to be filed an Exchange Offer Registration Statement covering the offer
by the Company to the Holders to exchange all of the Registrable Notes for
Exchange Notes and to have such Registration Statement remain effective until
the closing of the Exchange Offer. The Company shall commence the Exchange
Offer promptly after the Exchange Offer Registration Statement has been declared
effective by the SEC and use its best efforts to have the Exchange Offer
consummated not later than 60 days after such effective date. The Company shall
commence the Exchange Offer by mailing the related exchange offer Prospectus and
<PAGE>
5
accompanying documents to each Holder stating, in addition to such other
disclosures as are required by applicable law:
(i) that the Exchange Offer is being made pursuant to this
Registration Rights Agreement and that all Registrable Notes validly
tendered will be accepted for exchange;
(ii) the dates of acceptance for exchange (which shall be a period
of at least 20 business days from the date such notice is mailed) (the
"Exchange Dates");
(iii) that any Registrable Note not tendered will remain outstanding
and continue to accrue interest, but will not retain any rights under this
Registration Rights Agreement;
(iv) that Holders electing to have a Registrable Note exchanged
pursuant to the Exchange Offer will be required to surrender such
Registrable Note, together with the enclosed letters of transmittal, to the
institution and at the address (located in the Borough of Manhattan, The
City of New York) specified in the notice prior to the close of business on
the last Exchange Date; and
(v) that Holders will be entitled to withdraw their election, not
later than the close of business on the last Exchange Date, by sending to
the institution and at the address (located in the Borough of Manhattan,
The City of New York) specified in the notice a telegram, telex, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Registrable Notes delivered for exchange and a statement that
such Holder is withdrawing his election to have such Notes exchanged.
As soon as practicable after the last Exchange Date, the Company
shall:
(i) accept for exchange Registrable Notes or portions thereof
tendered and not validly withdrawn pursuant to the Exchange Offer; and
(ii) deliver, or cause to be delivered, to the Trustee for
cancellation all Registrable Notes or portions thereof so accepted for
exchange by the Company and issue, and cause the Trustee to promptly
authenticate and mail to each Holder, an Exchange Note equal in principal
amount to the principal amount of the Registrable Notes surrendered by such
Holder.
The Company shall use its best efforts to complete the Exchange Offer as
provided above and shall comply with the applicable requirements of the 1933
Act, the 1934 Act and other applicable laws and regulations in connection with
the Exchange Offer. The Exchange Offer
<PAGE>
6
shall not be subject to any conditions, other than that the Exchange Offer does
not violate applicable law or any applicable interpretation of the Staff of the
SEC. The Company shall inform the Initial Purchaser of the names and addresses
of the Holders to whom the Exchange Offer is made, and the Initial Purchaser
shall have the right, subject to applicable law, to contact such Holders and
otherwise facilitate the tender of Registrable Notes in the Exchange Offer.
(b) In the event that (i) the Company determines that the Exchange
Offer Registration provided for in Section 2(a) above is not available or may
not be consummated as soon as practicable after the last Exchange Date because
it would violate applicable law or the applicable interpretations of the Staff
of the SEC, (ii) the Exchange Offer is not for any other reason consummated by
the date that is six months after the Closing Date or (iii) the Exchange Offer
has been completed and in the opinion of counsel for the Initial Purchaser a
Registration Statement must be filed and a Prospectus must be delivered by the
Initial Purchaser in connection with any offering or sale of Registrable Notes
by such Initial Purchaser, of Registrable Notes that were acquired by the
Initial Purchaser from the Company, the Company shall use its best efforts to
cause to be filed as soon as practicable after such determination, date or
notice of such opinion of counsel is given to the Company, as the case may be, a
Shelf Registration Statement providing for the sale by the Holders of all of the
Registrable Notes and to have such Shelf Registration Statement declared
effective by the SEC. The Company agrees to use its best efforts to keep the
Shelf Registration Statement continuously effective until the expiration of the
period referred to in Rule 144(k) under the 1933 Act with respect to all
Registrable Notes covered by the Shelf Registration Statement, or such shorter
period that will terminate when all of the Registrable Notes covered by the
Shelf Registration Statement have been sold pursuant to the Shelf Registration
Statement. The Company further agrees to supplement or amend the Shelf
Registration Statement if required by the rules, regulations or instructions
applicable to the registration form used by the Company for such Shelf
Registration Statement or by the 1933 Act or by any other rules and regulations
thereunder for shelf registration or if reasonably requested by a Holder with
respect to information relating to such Holder, and to use its best efforts to
cause any such amendment to become effective and such Shelf Registration
Statement to become usable as soon as thereafter practicable. The Company
agrees to furnish to the Holders of Registrable Notes copies of any such
supplement or amendment promptly after its being used or filed with the SEC.
(c) The Company shall pay all Registration Expenses in connection
with the registration pursuant to Section 2(a) or Section 2(b). Each Holder
shall pay all underwriting discounts and commissions and transfer taxes, if any,
relating to the sale or disposition of such Holder's Registrable Notes pursuant
to the Shelf Registration Statement.
(d) An Exchange Offer Registration Statement pursuant to Section
2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof
will not be deemed to
<PAGE>
7
have become effective unless it has been declared effective by the SEC;
PROVIDED, HOWEVER, that, if, after it has been declared effective, the offering
of Registrable Notes pursuant to a Shelf Registration Statement is interfered
with by any stop order, injunction or other order or requirement of the SEC or
any other governmental agency or court, such Registration Statement will be
deemed not to have become effective during the period of such interference until
the offering of Registrable Notes pursuant to such Registration Statement may
legally resume. As provided for in the Indenture, in the event that the
Exchange Offer is not consummated and, if a Shelf Registration Statement is
required hereby, the Shelf Registration Statement is not declared effective on
or prior to the date that is six months after the Closing Date, the interest
rate on the Notes (and on the Exchange Notes) will increase by 0.5% per annum
until the date the Exchange Offer is consummated or a Shelf Registration
Statement is declared effective.
(e) Without limiting the remedies available to the Initial
Purchaser and the Holders, the Company acknowledges that any failure by the
Company to comply with its obligations under Section 2(a) and Section 2(b)
hereof may result in material irreparable injury to the Initial Purchaser or the
Holders for which there is no adequate remedy at law, that it will not be
possible to measure damages for such injuries precisely and that, in the event
of any such failure, the Initial Purchaser or any Holder may obtain such relief
as may be required to specifically enforce the Company's obligations under
Section 2(a) and Section 2(b) hereof.
3. REGISTRATION PROCEDURES.
In connection with the obligations of the Company with respect to the
Registration Statements pursuant to Section 2(a) and Section 2(b) hereof, the
Company shall as expeditiously as possible:
(a) prepare and file with the SEC a Registration Statement on the
appropriate form under the 1933 Act, which form (x) shall be selected by the
Company and (y) shall, in the case of a Shelf Registration, be available for the
sale of the Registrable Notes by the selling Holders thereof and (z) shall
comply as to form in all material respects with the requirements of the
applicable form and include all financial statements required by the SEC to be
filed therewith, and use its best efforts to cause such Registration Statement
to become effective and remain effective in accordance with Section 2 hereof;
(b) prepare and file with the SEC such amendments and
post-effective amendments to each Registration Statement as may be necessary to
keep such Registration Statement effective for the applicable period and cause
each Prospectus to be supplemented by any required prospectus supplement and, as
so supplemented, to be filed pursuant to Rule 424 under the 1933 Act; to keep
each Prospectus current during the period described under Section
<PAGE>
8
4(3) and Rule 174 under the 1933 Act that is applicable to transactions by
brokers or dealers with respect to the Registrable Notes or Exchange Notes;
(c) in the case of a Shelf Registration, furnish to each Holder of
Registrable Notes, to counsel for the Initial Purchaser, to counsel for the
Holders and to each Underwriter of an Underwritten Offering of Registrable
Notes, if any, without charge, as many copies of each Prospectus, including each
preliminary Prospectus, and any amendment or supplement thereto and such other
documents as such Holder or Underwriter may reasonably request, in order to
facilitate the public sale or other disposition of the Registrable Notes; and
the Company consents to the use of such Prospectus and any amendment or
supplement thereto in accordance with applicable law by each of the selling
holders of Registrable Notes and any such Underwriters in connection with the
offering and sale of the Registrable Notes covered by and in the manner
described in such Prospectus or any amendment or supplement thereto in
accordance with applicable law;
(d) use its reasonable best efforts to register or qualify the
Registrable Notes under all applicable state securities or "blue sky" laws of
such jurisdictions as any Holder of Registrable Notes covered by a Registration
Statement shall reasonably request in writing by the time the applicable
Registration Statement is declared effective by the SEC, to cooperate with such
Holders in connection with any filings required to be made with the National
Association of Securities Dealers, Inc. and do any and all other acts and things
which may be reasonably necessary or advisable to enable such Holder to
consummate the disposition in each such jurisdiction of such Registrable Notes
owned by such Holder; PROVIDED, HOWEVER, that the Company shall not be required
to (i) qualify as a foreign corporation or as a dealer in securities in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 3(d), (ii) file any general consent to service of process or
(iii) subject itself to taxation in any such jurisdiction if it is not so
subject;
(e) in the case of a Shelf Registration, notify each Holder of
Registrable Notes, counsel for the Holders and counsel for the Initial Purchaser
promptly and, if requested by any such Holder or counsel, confirm such advice in
writing (i) when a Registration Statement has become effective and when any
post-effective amendment thereto has been filed and becomes effective, (ii) of
any request by the SEC or any state securities authority for amendments and
supplements to a Registration Statement and Prospectus or for additional
information after the Registration Statement has become effective, (iii) of the
issuance by the SEC or any state securities authority of any stop order
suspending the effectiveness of a Registration Statement or the initiation of
any proceedings for that purpose, (iv) if, between the effective date of a
Registration Statement and the closing of any sale of Registrable Notes covered
thereby, the representations and warranties of the Company contained in any
underwriting agreement, securities sales agreement or other similar agreement,
if any, relating to the offering cease to be true and correct in all material
respects or if the Company receives
<PAGE>
9
any notification with respect to the suspension of the qualification of the
Registrable Notes for sale in any jurisdiction or the initiation of any
proceeding for such purpose, (v) of the happening of any event during the period
a Shelf Registration Statement is effective which makes any statement made in
such Registration Statement or the related Prospectus untrue in any material
respect or which requires the making of any changes in such Registration
Statement or Prospectus in order to make the statements therein not misleading
in any material respect and (vi) of any determination by the Company that a
post-effective amendment to a Registration Statement would be appropriate;
(f) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of a Registration Statement at the earliest
possible moment and provide prompt notice to each Holder of the withdrawal of
any such order;
(g) in the case of a Shelf Registration, furnish to each Holder of
Registrable Notes, without charge, at least one conformed copy of each
Registration Statement and any post-effective amendment thereto (without
documents incorporated therein by reference or exhibits thereto, unless
requested);
(h) in the case of a Shelf Registration, cooperate with the
selling Holders of Registrable Notes to facilitate the timely preparation and
delivery of certificates representing Registrable Notes to be sold and not
bearing any restrictive legends and enable such Registrable Notes to be in such
denominations (consistent with the provisions of the Indenture) and registered
in such names as the selling Holders may reasonably request at least two
business days prior to the closing of any sale of Registrable Notes;
(i) in the case of a Shelf Registration, upon the occurrence of
any event contemplated by Section 3(e)(v) hereof, use its best efforts to
prepare and file with the SEC a supplement or post-effective amendment to a
Registration Statement or the related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Notes, such Prospectus will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The Company agrees to notify the Holders
to suspend use of the Prospectus as promptly as practicable after the occurrence
of such an event, and the Holders hereby agree to suspend use of the Prospectus
until the Company has amended or supplemented the Prospectus to correct such
misstatement or omission;
(j) a reasonable time prior to the filing of any Registration
Statement, any Prospectus, any amendment to a Registration Statement or
amendment or supplement to a Prospectus or any document which is to be
incorporated by reference into a Registration Statement or a Prospectus after
initial filing of a Registration Statement, provide copies of such
<PAGE>
10
document to the Initial Purchaser and its counsel (and, in the case of a Shelf
Registration Statement, the Holders and their counsel) and make such of the
representatives of the Company as shall be reasonably requested by the Initial
Purchaser or its counsel (and, in the case of a Shelf Registration Statement,
the Holders or their counsel) available for discussion of such document, and
shall not at any time file or make any amendment to the Registration Statement,
any Prospectus or any amendment of or supplement to a Registration Statement or
a Prospectus or any document which is to be incorporated by reference into a
Registration Statement or a Prospectus, of which the Initial Purchaser and its
counsel (and, in the case of a Shelf Registration Statement, the Holders and
their counsel) shall not have previously been advised and furnished a copy or to
which the Initial Purchaser or its counsel (and, in the case of a Shelf
Registration Statement, the Holders or their counsel) shall reasonably object;
(k) obtain a CUSIP number for all Exchange Notes or Registrable
Notes, as the case may be, not later than the effective date of a Registration
Statement;
(l) cause the Indenture to be qualified under the Trust Indenture
Act of 1939, as amended (the "TIA"), in connection with the registration of the
Exchange Notes or Registrable Notes, as the case may be, cooperate with the
Trustee and the Holders to effect such changes to the Indenture as may be
required for the Indenture to be so qualified in accordance with the terms of
the TIA and execute, and use its reasonable best efforts to cause the Trustee to
execute, all documents as may be required to effect such changes and all other
forms and documents required to be filed with the SEC to enable the Indenture to
be so qualified in a timely manner;
(m) in the case of a Shelf Registration, upon execution of
customary confidentiality agreements reasonably satisfactory to the Company and
its counsel, make available for inspection by a representative of the Holders of
the Registrable Notes, any Underwriter participating in any disposition pursuant
to such Shelf Registration Statement, and attorneys and accountants designated
by the Holders, at reasonable times and in a reasonable manner, all financial
and other records, pertinent documents and properties of the Company, and cause
the respective officers, directors and employees of the Company to supply all
information reasonably requested by any such representative, Underwriter,
attorney or accountant in connection with a Shelf Registration Statement;
(n) if reasonably requested by any Holder of Registrable Notes
covered by a Registration Statement, (i) promptly incorporate in a Prospectus
supplement or post-effective amendment such information with respect to such
Holder as such Holder reasonably requests to be included therein and (ii) make
all required filings of such Prospectus supplement or such post-effective
amendment as soon as the Company has received notification of the matters to be
incorporated in such filing; and
<PAGE>
11
(q) in the case of a Shelf Registration, use its reasonable best
efforts to enter into such customary agreements and take all such other actions
in connection therewith (including those requested by the Holders of a majority
in principal amount of the Registrable Notes being sold) in order to expedite or
facilitate the disposition of such Registrable Notes including, but not limited
to, an Underwritten Offering and in such connection, (i) to the extent possible,
make such representations and warranties to the Holders and any Underwriters of
such Registrable Notes with respect to the business of the Company and its
subsidiaries, the Registration Statement, Prospectus and documents incorporated
by reference therein or deemed incorporated by reference therein, if any, in
each case, in form, substance and scope as are customarily made by issuers to
underwriters in underwritten offerings and confirm the same if and when
requested, (ii) use its reasonable best efforts to obtain opinions of counsel to
the Company (which counsel and opinions, in form, scope and substance, shall be
reasonably satisfactory to the Holders and such Underwriters and their
respective counsel) addressed to each selling Holder and Underwriter of
Registrable Notes, covering the matters customarily covered in opinions
requested in underwritten offerings, (iii) use its reasonable best efforts to
obtain "cold comfort" letters from the independent certified public accountants
of the Company (and, if necessary, any other certified public accountant of any
subsidiary of the Company, or of any business acquired by the Company for which
financial statements and financial data are or are required to be included in
the Registration Statement) addressed to each selling Holder and Underwriter of
Registrable Notes, such letters to be in customary form and covering matters of
the type customarily covered in "cold comfort" letters in connection with
underwritten offerings, and (iv) deliver such documents and certificates as may
be reasonably requested by the Holders of a majority in principal amount of the
Registrable Notes being sold or the Underwriters, and which are customarily
delivered in underwritten offerings, to evidence the continued validity of the
representations and warranties of the Company made pursuant to clause (i) above
and to evidence compliance with any customary conditions contained in an
underwriting agreement.
In the case of a Shelf Registration Statement, the Company may require
each Holder of Registrable Notes to furnish to the Company such information
regarding the Holder and the proposed distribution by such Holder of such
Registrable Notes as the Company may from time to time reasonably request in
writing. No Holder of Registrable Notes may include its Registrable Notes in
such Shelf Registration Statement unless and until such Holder furnishes such
information to the Company. Each Holder including Registrable Notes in a Shelf
Registration shall agree to furnish promptly to the Company any information
regarding such Holder and the proposed distribution by such Holder of such
Registrable Notes required to make any information previously furnished to the
Company by such Holder not materially misleading.
In the case of a Shelf Registration Statement, each Holder agrees
that, upon receipt of any notice from the Company of the happening of any event
of the kind described in
<PAGE>
12
Section 3(e)(v) hereof, such Holder will forthwith discontinue disposition of
Registrable Notes pursuant to a Registration Statement until such Holder's
receipt of the copies of the supplemented or amended Prospectus contemplated by
Section 3(i) hereof, and, if so directed by the Company, such Holder will
deliver to the Company (at its expense) all copies in its possession, other than
permanent file copies then in such Holder's possession, of the Prospectus
covering such Registrable Notes current at the time of receipt of such notice.
If the Company shall give any such notice to suspend the disposition of
Registrable Notes pursuant to a Registration Statement, the Company shall extend
the period during which the Registration Statement shall be maintained effective
pursuant to this Agreement by the number of days during the period from and
including the date of the giving of such notice to and including the date when
the Holders shall have received copies of the supplemented or amended Prospectus
necessary to resume such dispositions. There may not be more than two such
suspensions during any 365 day period and any such suspensions may not exceed 30
days for each suspension.
The Holders of Registrable Notes covered by a Shelf Registration
Statement who desire to do so may sell such Registrable Notes in an Underwritten
Offering; provided that the Company shall be required to use its reasonable best
efforts to effect an underwritten offering only upon the request of Holders of
at least 25% in aggregate principal amount of the Registrable Notes outstanding
at the time such request is delivered to the Company. In any such Underwritten
Offering, the investment banker or investment bankers and manager or managers
(the "Underwriters") that will administer the offering will be selected by the
Majority Holders of the Registrable Notes included in such offering, subject to
approval by the Company, which approval will not be unreasonably withheld.
4. PARTICIPATION OF BROKER-DEALERS IN EXCHANGE OFFER.
(a) The Staff of the SEC has taken the position that any
broker-dealer that receives Exchange Notes for its own account in the Exchange
Offer in exchange for Notes that were acquired by such broker-dealer as a result
of market-making or other trading activities (a "Participating Broker-Dealer"),
may be deemed to be an "underwriter" within the meaning of the 1933 Act and must
deliver a prospectus meeting the requirements of the 1933 Act in connection with
any resale of such Exchange Notes.
The Company understands that it is the Staff's position that if the
Prospectus contained in the Exchange Offer Registration Statement includes a
plan of distribution containing a statement to the above effect and the means by
which Participating Broker-Dealers may resell the Exchange Notes, without naming
the Participating Broker-Dealers or specifying the amount of Exchange Notes
owned by them, such Prospectus may be delivered by Participating Broker-Dealers
to satisfy their prospectus delivery obligation under the 1933
<PAGE>
13
Act in connection with resales of Exchange Notes for their own accounts, so long
as the Prospectus otherwise meets the requirements of the 1933 Act.
(b) In light of the above, notwithstanding the other provisions of
this Agreement, the Company agrees that the provisions of this Agreement as they
relate to a Shelf Registration shall also apply to an Exchange Offer
Registration to the extent, and with such reasonable modifications thereto as
may be, reasonably requested by the Initial Purchaser or by one or more
Participating Broker-Dealers, in each case as provided in clause (ii) below, in
order to expedite or facilitate the disposition of any Exchange Notes by
Participating Broker-Dealers consistent with the positions of the Staff recited
in Section 4(a) above; PROVIDED that:
(i) the Company shall not be required to amend or supplement the
Prospectus contained in the Exchange Offer Registration Statement, as would
otherwise be contemplated by Section 3(i), for a period exceeding 180 days
after the last Exchange Date (as such period may be extended pursuant to
the penultimate paragraph of Section 3 of this Agreement) and Participating
Broker-Dealers shall not be authorized by the Company to deliver and shall
not deliver such Prospectus after such period in connection with the
resales contemplated by this Section 4; and
(ii) the application of the Shelf Registration procedures set forth
in Section 3 of this Agreement to an Exchange Offer Registration, to the
extent not required by the positions of the Staff of the SEC or the 1933
Act and the rules and regulations thereunder, will be in conformity with
the reasonable request to the Company by the Initial Purchaser or with the
reasonable request in writing to the Company by one or more broker-dealers
who certify to the Initial Purchaser and the Company in writing that they
anticipate that they will be Participating Broker-Dealers; and PROVIDED
FURTHER that, in connection with such application of the Shelf Registration
procedures set forth in Section 3 to an Exchange Offer Registration, the
Company shall be obligated (x) to deal only with one entity representing
the Participating Broker-Dealers, which shall be the Initial Purchaser
unless it elects not to act as such representative, (y) to pay the fees and
expenses of only one counsel representing the Participating Broker-Dealers,
which shall be counsel to the Initial Purchaser unless such counsel elects
not to so act and (z) to cause to be delivered only one, if any, "cold
comfort" letter with respect to the Prospectus in the form existing on the
last Exchange Date and with respect to each subsequent amendment or
supplement, if any, effected during the period specified in clause (i)
above.
(c) The Initial Purchaser shall have no liability to the Company
or any Holder with respect to any request that it may make pursuant to Section
4(b) above.
5. INDEMNIFICATION AND CONTRIBUTION.
<PAGE>
14
(a) The Company agrees to indemnify and hold harmless the Initial
Purchaser, each Holder and each person, if any, who controls the Initial
Purchaser or any Holder within the meaning of either Section 15 of the 1933 Act
or Section 20 of the 1934 Act, or is under common control with, or is controlled
by, the Initial Purchaser or any Holder, from and against all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred by the Initial Purchaser, any Holder or any such
controlling or affiliated person in connection with defending or investigating
any such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement (or any
amendment thereto) pursuant to which Exchange Notes or Registrable Notes were
registered under the 1933 Act, including all documents incorporated therein by
reference, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or caused by any untrue statement or alleged untrue
statement of a material fact contained in any Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact necessary to make the statements therein in light of the
circumstances under which they were made not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
relating to the Initial Purchaser or any Holder furnished to the Company in
writing by the Initial Purchaser or any selling Holder expressly for use
therein; provided, that the foregoing indemnity agreement shall not inure to the
benefit of any Holder or any Person controlling such Holder, with respect to any
sale or disposition of Registrable Notes by such Holder in violation of the
penultimate paragraph of Section 3 of this Agreement. In connection with any
Underwritten Offering permitted by Section 3, the Company will also indemnify
the Underwriters, if any, selling brokers, dealers and similar securities
industry professionals participating in the distribution, their officers and
directors and each Person who controls such Persons (within the meaning of the
1933 Act and the 1934 Act) to the same extent as provided above with respect to
the indemnification of the Holders, if requested in connection with any
Registration Statement.
(b) Each Holder (including the Initial Purchaser if it is a
Holder) agrees, severally and not jointly, to indemnify and hold harmless the
Company, the Initial Purchaser and the other selling Holders, and each of their
respective directors, officers who sign the Registration Statement and each
Person, if any, who controls the Company, the Initial Purchaser and any other
selling Holder within the meaning of either Section 15 of the 1933 Act or
Section 20 of the 1934 Act to the same extent as the foregoing indemnity from
the Company to the Initial Purchaser and the Holders, but only with reference to
information relating to such Holder furnished to the Company in writing by such
Holder expressly for use in any Registration Statement (or any amendment
thereto) or any Prospectus (or any amendment or supplement thereto).
<PAGE>
15
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to either paragraph (a) or paragraph (b) above,
such person (the "indemnified party") shall promptly notify the person against
whom such indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for (a) the reasonable fees and expenses of more than
one separate firm (in addition to any local counsel) for the Initial Purchaser
and all Persons, if any, who control the Initial Purchaser within the meaning of
either Section 15 of the 1933 Act or Section 20 of the 1934 Act, (b) the
reasonable fees and expenses of more than one separate firm (in addition to any
local counsel) for the Company, its directors, its officers who sign the
Registration Statement and each Person, if any, who controls the Company within
the meaning of either such Section and (c) the reasonable fees and expenses of
more than one separate firm (in addition to any local counsel) for all Holders
and all Persons, if any, who control any Holders within the meaning of either
such Section, and that all such fees and expenses shall be reimbursed as they
are incurred. In such case involving the Initial Purchaser and Persons who
control the Initial Purchaser, such firm shall be designated in writing by the
Initial Purchaser. In such case involving the Holders and such Persons who
control Holders, such firm shall be designated in writing by the Majority
Holders. In all other cases, such firm shall be designated by the Company. The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent but, if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment. Notwithstanding the foregoing sentence, if at
any time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel as contemplated
by the second and third sentences of this paragraph, the indemnifying party
agrees that it shall be liable for any settlement of any proceeding effected
without its written consent if (i) such settlement is entered into more than 60
days after receipt by such indemnifying party of the aforesaid request and (ii)
such indemnifying party shall not have reimbursed the indemnified party for such
fees and expenses of counsel in accordance with such request prior to the date
of such settlement. No indemnifying party shall, without the prior written
consent of the indemnified
<PAGE>
16
party, effect any settlement of any pending or threatened proceeding in respect
of which such indemnified party is or could have been a party and indemnity
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.
(d) If the indemnification provided for in paragraph (a) or
paragraph (b) of this Section 5 is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities in such proportion as is appropriate to reflect the relative fault
of the indemnifying party or parties on the one hand and of the indemnified
party or parties on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative fault of the
Company and the Holders shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Holders and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Holders' respective obligations to contribute
pursuant to this Section 5(d) are several in proportion to the respective
principal amount of Registrable Notes of such Holder that were registered
pursuant to a Registration Statement.
(e) The Company and each Holder agree that it would not be just or
equitable if contribution pursuant to this Section 5 were determined by PRO RATA
allocation or by any other method of allocation that does not take account of
the equitable considerations referred to in paragraph (d) above. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages and liabilities referred to in paragraph (d) above shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 5, no Holder shall be required to indemnify or contribute any amount in
excess of the amount by which the total price at which Registrable Notes were
sold by such Holder exceeds the amount of any damages that such Holder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 5 are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
<PAGE>
17
The indemnity and contribution provisions contained in this Section 5
shall remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf of
the Initial Purchaser, any Holder or any Person controlling the Initial
Purchaser or any Holder, or by or on behalf of the Company, its officers or
directors or any Person controlling the Company, (iii) acceptance of any of the
Exchange Notes and (iv) any sale of Registrable Notes pursuant to a Shelf
Registration Statement.
6. MISCELLANEOUS.
(a) NO INCONSISTENT AGREEMENTS. The Company has not entered into,
and on or after the date of this Agreement will not enter into, any agreement
which is inconsistent with the rights granted to the Holders of Registrable
Notes in this Agreement or otherwise conflicts with the provisions hereof. The
rights granted to the Holders hereunder do not in any way conflict with and are
not inconsistent with the rights granted to the holders of the Company's other
issued and outstanding securities under any such agreements.
(b) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given unless the Company has obtained the written consent of Holders
of at least a majority in aggregate principal amount of the outstanding
Registrable Notes affected by such amendment, modification, supplement, waiver
or consent; PROVIDED, HOWEVER, that no amendment, modification, supplement,
waiver or consent to any departure from the provisions of Section 5 hereof shall
be effective as against any Holder of Registrable Notes unless consented to in
writing by such Holder.
(c) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery (i) if to a Holder, at the most current address given by such Holder to
the Company by means of a notice given in accordance with the provisions of this
Section 6(c), which address initially is, with respect to the Initial Purchaser,
the address set forth in the Purchase Agreement; and (ii) if to the Company,
initially at the Company's address set forth in the Purchase Agreement and
thereafter at such other address, notice of which is given in accordance with
the provisions of this Section 6(c).
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt is acknowledged, if telecopied; and on
the next business day if timely delivered to an air courier guaranteeing
overnight delivery.
<PAGE>
18
Copies of all such notices, demands, or other communications shall be
concurrently delivered by the person giving the same to the Trustee, at the
address specified in the Indenture.
(d) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors, assigns and transferees of each
of the parties, including, without limitation and without the need for an
express assignment, subsequent Holders; PROVIDED that nothing herein shall be
deemed to permit any assignment, transfer or other disposition of Registrable
Notes in violation of the terms of the Purchase Agreement. If any transferee of
any Holder shall acquire Registrable Notes, in any manner, whether by operation
of law or otherwise, such Registrable Notes shall be held subject to all of the
terms of this Agreement, and by taking and holding such Registrable Notes such
person shall be conclusively deemed to have agreed to be bound by and to perform
all of the terms and provisions of this Agreement and such person shall be
entitled to receive the benefits hereof. The Initial Purchaser (in its capacity
as Initial Purchaser) shall have no liability or obligation to the Company with
respect to any failure by a Holder to comply with, or any breach by any Holder
of, any of the obligations of such Holder under this Agreement.
(e) PURCHASES AND SALES OF NOTES. The Company shall not, and
shall use its best efforts to cause its affiliates (as defined in Rule 405 under
the 1933 Act) not to, purchase and then resell or otherwise transfer any Notes.
(f) THIRD PARTY BENEFICIARY. The Holders shall be third party
beneficiaries to the agreements made hereunder between the Company, on the one
hand, and the Initial Purchaser, on the other hand, and shall have the right to
enforce such agreements directly to the extent it deems such enforcement
necessary or advisable to protect its rights or the rights of Holders hereunder.
(g) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) HEADINGS. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
(i) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
<PAGE>
19
(j) SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
KMC TELECOM HOLDINGS, INC.
By
-----------------------------
Name:
Title:
Confirmed and accepted as of
the date first above written:
MORGAN STANLEY & CO. INCORPORATED
By
-----------------------------
Name:
Title:
<PAGE>
Exhibit 4.7
- --------------------------------------------------------------------------------
WARRANT AGREEMENT
between
KMC TELECOM HOLDINGS, INC.
and
THE CHASE MANHATTAN BANK,
as Warrant Agent
Dated as of January 29, 1998
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
CERTAIN DEFINITIONS
ARTICLE II
ORIGINAL ISSUE OF WARRANTS
Section 2.1. FORM OF WARRANT CERTIFICATES. . . . . . . . . . . . . . . 6
Section 2.2. RESTRICTIVE LEGENDS . . . . . . . . . . . . . . . . . . . 7
Section 2.3. EXECUTION AND DELIVERY OF WARRANT CERTIFICATES. . . . . . 10
Section 2.4. CERTIFICATED WARRANTS . . . . . . . . . . . . . . . . . . 11
ARTICLE III
EXERCISE PRICE AND EXERCISE OF WARRANTS
Section 3.1. EXERCISE PRICE. . . . . . . . . . . . . . . . . . . . . . 11
Section 3.2. EXERCISE; RESTRICTIONS ON EXERCISE. . . . . . . . . . . . 11
Section 3.3. METHOD OF EXERCISE; PAYMENT OF EXERCISE PRICE . . . . . . 12
ARTICLE IV
ADJUSTMENTS
Section 4.1. ADJUSTMENTS . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.2. NOTICE OF ADJUSTMENT. . . . . . . . . . . . . . . . . . . 21
Section 4.3. STATEMENT ON WARRANTS . . . . . . . . . . . . . . . . . . 22
Section 4.4. NOTICE OF CONSOLIDATION, MERGER, ETC. . . . . . . . . . . 22
Section 4.5. FRACTIONAL INTERESTS. . . . . . . . . . . . . . . . . . . 22
ARTICLE V
DECREASE IN EXERCISE PRICE
ARTICLE VI
LOSS OR MUTILATION
<PAGE>
ii
ARTICLE VII
RESERVATION AND AUTHORIZATION
OF COMMON SHARES
ARTICLE VIII
WARRANT TRANSFER BOOKS; RESTRICTIONS ON TRANSFER
Section 8.1. TRANSFER AND EXCHANGE . . . . . . . . . . . . . . . . . . 24
Section 8.2. BOOK-ENTRY PROVISIONS FOR THE GLOBAL WARRANTS . . . . . . 25
Section 8.3. SPECIAL TRANSFER PROVISIONS . . . . . . . . . . . . . . . 27
Section 8.4. SURRENDER OF WARRANT CERTIFICATES . . . . . . . . . . . . 31
ARTICLE IX
WARRANT HOLDERS
Section 9.1. WARRANT HOLDER DEEMED NOT A SHAREHOLDER . . . . . . . . . 31
Section 9.2. RIGHT OF ACTION . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE X
THE WARRANT AGENT
Section 10.1. DUTIES AND LIABILITIES . . . . . . . . . . . . . . . . . 32
Section 10.2. RIGHT TO CONSULT COUNSEL . . . . . . . . . . . . . . . . 33
Section 10.3. COMPENSATION; INDEMNIFICATION. . . . . . . . . . . . . . 33
Section 10.4. NO RESTRICTIONS ON ACTIONS . . . . . . . . . . . . . . . 34
Section 10.5. DISCHARGE OR REMOVAL; REPLACEMENT WARRANT AGENT. . . . . 34
Section 10.6. SUCCESSOR WARRANT AGENT. . . . . . . . . . . . . . . . . 35
ARTICLE XI
MISCELLANEOUS
Section 11.1. MONIES DEPOSITED WITH THE WARRANT AGENT. . . . . . . . . 35
Section 11.2. PAYMENT OF TAXES . . . . . . . . . . . . . . . . . . . . 36
Section 11.3. NO MERGER, CONSOLIDATION OR SALE OF ASSETS OF THE COMPANY 36
Section 11.4. REPORTS TO HOLDERS . . . . . . . . . . . . . . . . . . . 36
Section 11.5. NOTICES; PAYMENT . . . . . . . . . . . . . . . . . . . . 36
Section 11.6. BINDING EFFECT . . . . . . . . . . . . . . . . . . . . . 37
Section 11.7. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . 38
<PAGE>
iii
Section 11.8. AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . 38
Section 11.9. HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 11.10. COMMON SHARES LEGEND. . . . . . . . . . . . . . . . . . 38
Section 11.11. THIRD PARTY BENEFICIARIES . . . . . . . . . . . . . . . 40
Section 11.12. TERMINATION . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 11.13. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . 40
EXHIBIT A FORM OF WARRANT CERTIFICATE
EXHIBIT B FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH
TRANSFERS PURSUANT TO REGULATION S
EXHIBIT C-1 FORM OF CERTIFICATE TO BE DELIVERED BY TRANSFEROR IN CONNECTION
WITH TRANSFERS TO INSTITUTIONAL ACCREDITED INVESTORS
EXHIBIT C-2 FORM OF CERTIFICATE TO BE DELIVERED BY TRANSFEREES IN
CONNECTION WITH TRANSFERS TO INSTITUTIONAL ACCREDITED INVESTORS
EXHIBIT D FORM OF CERTIFICATE
APPENDIX A LIST OF FINANCIAL EXPERTS
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of January 29, 1998 (this "AGREEMENT"),
between KMC TELECOM HOLDINGS, INC., a Delaware corporation (the "COMPANY"), and
The Chase Manhattan Bank, as warrant agent (the "WARRANT AGENT").
W I T N E S S E T H:
WHEREAS, pursuant to the terms of a Purchase Agreement dated January
26, 1998 (the "PURCHASE AGREEMENT"), between the Company and Morgan Stanley &
Co. Incorporated (the "INITIAL PURCHASER"), the Company has agreed to issue and
sell to the Initial Purchaser an aggregate of 460,800 warrants (each, a
"WARRANT" and collectively, the "WARRANTS"), each Warrant initially entitling
the holder thereof to purchase 0.21785 shares of Common Stock (as defined below)
of the Company at an exercise price of $.01 per Common Share (as defined below)
as part of 460,800 units (the "UNITS"), each Unit consisting of one 121/2%
Senior Discount Note due 2008 of the Company (each, a "NOTE" and collectively,
the "NOTES") to be issued pursuant to the provisions of an Indenture, dated as
of the date hereof, between the Company and The Chase Manhattan Bank, as trustee
(the "INDENTURE"), and one Warrant;
WHEREAS, the Notes and the Warrants included in each Unit will become
separately transferable at the close of business upon the earliest to occur of
(i) the date that is six months after the Closing Date (as defined below),
(ii) the commencement of an exchange offer with respect to the Notes undertaken
pursuant to the Notes Registration Rights Agreement (as defined below), (iii)
the effectiveness of a shelf registration statement with respect to resales of
the Notes, (iv) the commencement of an offer to purchase the Notes undertaken
pursuant to the Indenture or (v) the date which the Initial Purchaser, in its
sole discretion, determines; PROVIDED that, prior to such date, the Company
mails notice of such determination to the Warrant Agent and the Holders (as
defined below) of the Warrants (the "SEPARATION DATE"); and
WHEREAS, the Company desires to engage the Warrant Agent to act on the
Company's behalf, and the Warrant Agent desires to act on behalf of the Company,
in connection with the issuance of the Warrant Certificates (as defined below)
and the other matters as provided herein, including, without limitation, for the
purpose of defining the terms and provisions of the Warrants and the respective
rights and obligations thereunder of the Company and the record holders thereof
(together with the holders of shares of Common Stock (or other securities)
received upon exercise thereof, the "HOLDERS").
<PAGE>
2
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements contained herein and in the Purchase Agreement, the Company and the
Warrant Agent hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
"Affiliate" means, as applied to any Person, any other Person directly
or indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Agent Members" has the meaning specified in Section 8.2 hereof.
"Auditors" means, at any time, the independent auditors of the Company
at such time.
"Board" means the board of directors of the Company from time to time.
"Business Day" means a day other than a Saturday or Sunday on which
the Depositary, Euroclear, Cedel Bank and commercial banks in The City of New
York are open for business.
"Cedel Bank" means Cedel Bank, societe anonyme.
"Certificated Warrants" has the meaning specified in Section 2.1
hereof.
"Certificate for Surrender" means the form on the reverse side of the
Warrant Certificate substantially in the form included in Exhibit A hereto.
"Closing Date" means the date hereof.
"Commission" means the United States Securities and Exchange
Commission.
"Common Shares" means the shares of the Common Stock of the Company.
<PAGE>
3
"Common Stock" means the common stock, par value $0.01 per share, of
the Company.
"Company" has the meaning specified in the preamble to this Agreement.
"Current Market Value" has the meaning specified in Section 4.1(f)
hereof.
"Depositary" means The Depository Trust Company, its nominees and
their respective successors.
"Euroclear" means The Euroclear System.
"Exchange Act" means the United States Securities Exchange Act of
1934, as amended.
"Exercise Price" has the meaning specified in Section 3.1 hereof.
"Expiration Date" means January 31, 2008.
"Financial Expert" means one of the Persons listed in Appendix A
hereto.
"Global Warrants" has the meaning specified in Section 2.1 hereof.
"Holders" has the meaning specified in the recitals to this Agreement.
"IAI Certificated Warrants" has the meaning specified in Section 2.1
hereof.
"Indenture" has the meaning specified in the recitals to this
Agreement.
"Independent Financial Expert" means a Financial Expert that does not
(and whose directors, executive officers and 5% stockholders do not) have a
direct or indirect financial interest in the Company or any of its subsidiaries
or Affiliates, which has not been for at least five years and, at the time it is
called upon to give independent financial advice to the Company is not (and none
of its directors, executive officers or 5% stockholders is) a promoter,
director, or officer of the Company or any of its subsidiaries or Affiliates.
The Independent Financial Expert may be compensated and indemnified by the
Company for opinions or services it provides as an Independent Financial Expert.
"Initial Purchaser" has the meaning specified in the recitals to this
Agreement.
<PAGE>
4
"Institutional Accredited Investor" shall mean an institution that is
an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or
(7) of Regulation D under the Securities Act.
"Non-U.S. Person" means a Person who is not a U.S. person as defined
in Rule 902 of Regulation S.
"Notes" has the meaning specified in the recitals to this Agreement.
"Notes Registration Rights Agreement" means the Registration Rights
Agreement with respect to the Notes dated January 26, 1998 between the Company
and the Initial Purchaser.
"Officer" means, with respect to the Company, (i) the Chairman of the
Board, the Vice Chairman of the Board, the President, the Chief Executive
Officer, the Chief Operating Officer, the Chief Financial Officer and (ii) the
Treasurer or any Assistant Treasurer, the Secretary or any Assistant Secretary
of the Company.
"Officers' Certificate" means a certificate signed by one Officer
listed in clause (i) of the definition thereof and one Officer listed in clause
(ii) of the definition thereof; PROVIDED, HOWEVER, that any such certificate may
be signed by any two of the Officers listed in clause (i) of the definition
thereof in lieu of being signed by one Officer listed in clause (i) of the
definition thereof and one Officer listed in clause (ii) of the definition
thereof.
"Offshore Certificated Warrants" has the meaning specified in Section
2.1 hereof.
"Opinion of Counsel" means a written opinion signed by legal counsel
who may be an employee of or counsel to the Company.
"Permanent Regulation S Global Warrant" has the meaning specified in
Section 2.1 hereof.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization or other entity
or any government or any agency or political subdivision thereof.
"Private Placement Legend" means the legend set forth on the Warrant
Certificates in the form set forth in Section 2.2(a) hereof.
<PAGE>
5
"Purchase Agreement" has the meaning specified in the recitals to this
Agreement.
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Regulation S" means Regulation S under the Securities Act.
"Regulation S Global Warrant" has the meaning specified in Section 2.1
hereof.
"Restricted Certificated Warrants" has the meaning specified in
Section 2.1 hereof.
"Restricted Global Warrant" has the meaning specified in Section 2.1
hereof.
"Right" has the meaning specified in Section 4.1(c) hereof.
"Rule 144A" means Rule 144A under the Securities Act.
"Securities Act" means the United States Securities Act of 1933, as
amended.
"Separation Date" has the meaning specified in the recitals to this
Agreement.
"Spread" means, with respect to any Warrant, the last reported trade
price of the Common Shares subject to such Warrant at the close of business on
any Business Day on the exchange or quotation system on which the Company's
Common Shares are listed, less the Exercise Price of such Warrant, in each case
as adjusted as provided herein.
"Subscription Form" means the form on the reverse side of the Warrant
Certificate substantially in the form included in Exhibit A hereto.
"Temporary Regulation S Global Warrant" has the meaning specified in
Section 2.1 hereof.
"Underlying Securities" shall mean the Common Shares (or other
securities) issuable upon exercise of the Warrants.
"Units" has the meaning specified in the recitals to this Agreement.
"U.S. Certificated Warrants" has the meaning specified in Section 2.1
hereof.
<PAGE>
6
"Value Report" has the meaning specified in Section 4.1(k) hereof.
"Warrant" has the meaning specified in the recitals to this Agreement.
"Warrant Agent" has the meaning specified in the preamble to this
Agreement.
"Warrant Certificates" has the meaning specified in Section 2.1
hereof.
"Warrant Registration Rights Agreement" means the Warrant Registration
Rights Agreement, dated January 26, 1998, between the Company and the Initial
Purchaser.
"Warrant Registration Statement" means a shelf registration statement
on the appropriate form which will be filed by the Company pursuant to the
Warrant Registration Rights Agreement.
ARTICLE II
ORIGINAL ISSUE OF WARRANTS
SECTION 2.1. FORM OF WARRANT CERTIFICATES. Certificates representing
the Warrants (the "WARRANT CERTIFICATES") shall be substantially in the form
attached hereto as Exhibit A, shall be dated the date on which such Warrant
Certificates are countersigned by the Warrant Agent and shall have such
insertions as are appropriate or required or permitted by this Agreement and may
have such letters, numbers or other marks of identification and such legends and
endorsements stamped, printed, lithographed or engraved thereon as the Company
may deem appropriate and as are not inconsistent with the provisions of this
Agreement, or as may be required to comply with any law or with any rule or
regulation pursuant thereto or with any rule or regulation of any securities
exchange on which the Warrants may be listed, or to conform to usage.
Warrants offered and sold in reliance on Rule 144A shall be issued
initially in the form of one or more permanent global Warrant Certificates in
definitive, fully registered form, substantially in the form set forth in
Exhibit A (the "RESTRICTED GLOBAL WARRANT"), deposited with the Warrant Agent,
as custodian for, and registered in the name of the nominee for, the Depositary,
duly executed by the Company and countersigned by the Warrant Agent as
hereinafter provided. The aggregate number of Warrants represented by the
Restricted Global Warrant may from time to time be increased or decreased by
adjustments made on the records of the Warrant Agent, as custodian for the
Depositary, or its nominee, as provided in Section 2.4 and Section 8.3 hereof.
<PAGE>
7
Warrants offered and sold in offshore transactions in reliance on
Regulation S shall be issued initially in the form of one or more temporary
global Warrant Certificates in definitive, fully registered form, substantially
in the form set forth in Exhibit A (the "TEMPORARY REGULATION S GLOBAL
WARRANT"), deposited with the Warrant Agent, as custodian for, and registered in
the name of, the Depositary or its nominee for the accounts of Euroclear and
Cedel Bank, duly executed by the Company and countersigned by the Warrant Agent
as hereinafter provided. Prior to January 29, 1999, beneficial interests in the
Temporary Regulation S Global Warrant may only be held through Euroclear and
Cedel Bank. At any time following January 29, 1999, upon receipt by the Warrant
Agent and the Company of a certificate substantially in the form of Exhibit D
hereto, one or more global Warrants in registered form substantially in the form
set forth in Exhibit A (the "PERMANENT REGULATION S GLOBAL WARRANT"; and
together with the Temporary Regulation S Global Warrant, the "REGULATION S
GLOBAL WARRANTS") shall be deposited with the Warrant Agent, as custodian for,
and registered in the name of the nominee for, the Depositary, duly executed by
the Company and countersigned by the Warrant Agent as hereinafter provided, and
the Warrant Agent shall reflect on its books and records the date and a decrease
in the Temporary Regulation S Global Warrant in an amount equal to the
beneficial interest in number of Warrants evidenced by the Temporary Regulation
S Global Warrant transferred. The aggregate number of Warrants represented by
the Regulation S Global Warrant may from time to time be increased or decreased
by adjustments made on the records of the Warrant Agent, as custodian for the
Depositary, or its nominee, as provided in Section 2.4 and Section 8.3 hereof.
Warrants offered and sold to Institutional Accredited Investors who
are not QIBs shall be issued initially in registered form substantially in the
form set forth in Exhibit A ("IAI CERTIFICATED WARRANTS").
Warrants issued pursuant to Section 2.4 and Section 8.2(b) in exchange
for interests in the Restricted Global Warrant shall be issued in the form of
permanent Warrant Certificates in registered form, substantially in the form set
forth in Exhibit A (the "RESTRICTED CERTIFICATED WARRANTS" and, together with
IAI Certificated Warrants, the "U.S. CERTIFICATED WARRANTS"). Warrants issued
pursuant to Section 2.4 and Section 8.2(b) in exchange for interests in the
Regulation S Global Warrants shall be issued in the form of permanent Warrant
Certificates in registered form, substantially in the form set forth in Exhibit
A (the "OFFSHORE CERTIFICATED WARRANTS"). The Offshore Certificated Warrants
and the U.S. Certificated Warrants are sometimes herein collectively referred to
as the "CERTIFICATED WARRANTS". The Restricted Global Warrant and the
Regulation S Global Warrant are sometimes herein collectively referred to as the
"GLOBAL WARRANTS."
The definitive Warrant Certificates shall be typed, printed,
lithographed or engraved or produced by any combination of these methods or may
be produced in any other
<PAGE>
8
manner permitted by the rules of any securities exchange on which the Warrants
may be listed, all as determined by the officers executing such Warrant
Certificates, as evidenced by their execution of such Warrant Certificates.
SECTION 2.2. RESTRICTIVE LEGENDS. (a) The Warrant Certificates,
other than the Permanent Regulation S Global Warrants, shall bear the following
legend on the face thereof:
THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
STATE SECURITIES LAWS, AND ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED
OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT
OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE.
BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS
DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE
SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A
U.S. PERSON AND IS ACQUIRING THIS WARRANT IN AN OFFSHORE TRANSACTION IN
COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT
WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) (TAKING INTO
ACCOUNT THE PROVISIONS OF RULE 144(d) UNDER THE SECURITIES ACT, IF
APPLICABLE) RESELL OR OTHERWISE TRANSFER THE WARRANTS REPRESENTED BY THIS
CERTIFICATE EXCEPT (A) TO KMC TELECOM HOLDINGS, INC. (THE "COMPANY") OR ANY
SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE
WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN
INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES
TO THE WARRANT AGENT A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND
AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THE WARRANTS
REPRESENTED BY THIS CERTIFICATE (THE FORM OF WHICH LETTER CAN BE OBTAINED
FROM THE WARRANT AGENT), AND, IF SUCH TRANSFER IS SUBSEQUENT TO THE DATE ON
WHICH THE WARRANTS REPRESENTED HEREBY BECOME SEPARATELY TRANSFERABLE, AN
OPINION OF COUNSEL
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9
ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE
SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION
IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE
EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT
(IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO
WHOM THE WARRANTS REPRESENTED BY THIS CERTIFICATE ARE TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY
TRANSFER OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE WITHIN THE TIME
PERIOD REFERRED TO ABOVE, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET
FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND
SUBMIT THIS CERTIFICATE TO THE WARRANT AGENT. IF THE PROPOSED TRANSFEREE
IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH
TRANSFER, FURNISH TO EACH OF THE WARRANT AGENT AND THE COMPANY SUCH
CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY
REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO
AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO
THEM BY REGULATION S UNDER THE SECURITIES ACT. THE WARRANT AGREEMENT
CONTAINS A PROVISION REQUIRING THE WARRANT AGENT TO REFUSE TO REGISTER ANY
TRANSFER OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IN VIOLATION OF
THE FOREGOING RESTRICTIONS.
(b) Each Global Warrant shall also bear the following legend on the
face thereof:
UNLESS THIS WARRANT CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO KMC TELECOM HOLDINGS,
INC. OR THE WARRANT AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT
AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
<PAGE>
10
NAME OF CEDE & CO. OR SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS
MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A
SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF
THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH
THE RESTRICTIONS SET FORTH IN ARTICLE VIII OF THE WARRANT AGREEMENT.
(c) Each Warrant Certificate issued prior to the Separation Date
shall bear the following legend on the face thereof:
THE WARRANTS EVIDENCED BY THIS CERTIFICATE ARE INITIALLY ISSUED AS PART OF
AN ISSUANCE OF UNITS, EACH OF WHICH CONSISTS OF $1,000 PRINCIPAL AMOUNT AT
MATURITY OF 121/2% SENIOR DISCOUNT NOTES DUE 2008 OF KMC TELECOM
HOLDINGS, INC. (THE "NOTES") AND ONE WARRANT INITIALLY ENTITLING THE HOLDER
THEREOF TO PURCHASE 0.21785 COMMON SHARES, PAR VALUE $0.01 PER SHARE, OF
KMC TELECOM HOLDINGS, INC. PRIOR TO THE CLOSE OF BUSINESS UPON THE
EARLIEST TO OCCUR OF (i) THE DATE THAT IS SIX MONTHS AFTER THE CLOSING
DATE, (ii) THE COMMENCEMENT OF AN EXCHANGE OFFER WITH RESPECT TO THE NOTES,
(iii) THE EFFECTIVENESS OF A SHELF REGISTRATION STATEMENT WITH RESPECT TO
THE NOTES, (iv) THE COMMENCEMENT OF AN OFFER TO REPURCHASE THE NOTES OR (v)
THE DATE WHICH THE INITIAL PURCHASER, IN ITS SOLE DISCRETION, DETERMINES,
PROVIDED THAT, PRIOR TO SUCH DATE, THE COMPANY MAILS NOTICE OF SUCH
DETERMINATION TO THE HOLDERS OF THE WARRANTS. THE WARRANTS EVIDENCED BY
THIS CERTIFICATE MAY NOT BE TRANSFERRED OR
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11
EXCHANGED SEPARATELY FROM, BUT MAY BE TRANSFERRED OR EXCHANGED ONLY
TOGETHER WITH, THE NOTES.
SECTION 2.3. EXECUTION AND DELIVERY OF WARRANT CERTIFICATES. Warrant
Certificates evidencing 460,800 Warrants, each Warrant to purchase initially
0.21785 Common Shares, may be executed, on or after the date of this Agreement,
by the Company and delivered to the Warrant Agent for countersignature, and the
Warrant Agent shall thereupon countersign and deliver such Warrant Certificates
upon the order and at the written direction of the Company signed by its
Chairman of the Board, Vice Chairman of the Board, President, Chief Operating
Officer, Chief Financial Officer or Chief Executive Officer to the purchasers
thereof on the date of issuance. The Warrant Agent is hereby authorized to
countersign and deliver Warrant Certificates as required by this Section 2.3 or
by Section 3.3, Article VI or Article VIII hereof.
The Warrant Certificates shall be executed on behalf of the Company by
its Chairman of the Board, Vice Chairman of the Board, President, Chief
Operating Officer, Chief Financial Officer or Chief Executive Officer either
manually or by facsimile signature printed thereon. The Warrant Certificates
shall be countersigned by manual signature of the Warrant Agent and shall not be
valid for any purpose unless so countersigned. In case any officer or director
of the Company whose signature shall have been placed upon any of the Warrant
Certificates shall cease to be such officer or director of the Company before
countersignature by the Warrant Agent and the issuance and delivery thereof,
such Warrant Certificates may nevertheless be countersigned by the Warrant Agent
and issued and delivered with the same force and effect as though such person
had not ceased to be such officer or director of the Company.
SECTION 2.4. CERTIFICATED WARRANTS. Beneficial owners of interests
in a Global Warrant may receive Certificated Warrants (which, except as set
forth in Section 8.3(f) hereof, shall bear the Private Placement Legend) in
accordance with the procedures of the Warrant Agent and the Depositary;
PROVIDED, HOWEVER, that beneficial owners of interests in the Regulation S
Global Warrant may not receive Offshore Certificated Warrants in exchange for
such interests prior to the date one year from the Closing Date. In connection
with the execution and delivery of such Certificated Warrants, the Warrant Agent
shall reflect on its books, and record, a decrease in the number of Warrants
represented by the relevant Global Warrant equal to the number of Warrants
represented by such Certificated Warrants and the Company shall execute and the
Warrant Agent shall countersign and deliver to said beneficial owners one or
more Certificated Warrants in an equal aggregate number.
<PAGE>
12
ARTICLE III
EXERCISE PRICE AND EXERCISE OF WARRANTS
SECTION 3.1. EXERCISE PRICE. Each Warrant Certificate shall, when
countersigned by the Warrant Agent, initially entitle the Holder thereof,
subject to the provisions of this Agreement, to purchase the number of Common
Shares indicated thereon at a purchase price (the "EXERCISE PRICE") of $.01 per
Common Share, subject to adjustment as provided in Section 4.1 and Article V
hereof.
SECTION 3.2. EXERCISE; RESTRICTIONS ON EXERCISE. At any time
beginning one year after the Closing Date and on or before the Expiration Date,
any outstanding Warrants may be exercised on any Business Day by the Holders
thereof; PROVIDED, that the Warrant Registration Statement is, at the time of
exercise, effective and available for the exercise of the Warrants or the
exercise of such Warrants is exempt from the registration requirements of the
Securities Act. Any Warrants not exercised by 5:00 p.m., New York City time,
on the Expiration Date shall expire and all rights of the Holders of such
Warrants shall terminate. Additionally, pursuant to Section 4.1(j)(ii) hereof,
the Warrants shall expire and all rights of the Holders of such Warrants shall
terminate in the event the Company merges or consolidates with or sells all or
substantially all of its property and assets to a Person (other than an
Affiliate of the Company) if the consideration payable to holders of Common
Stock in exchange for their Common Stock in connection with such merger,
consolidation or sale consists solely of cash or in the event of the
dissolution, liquidation or winding up of the Company.
SECTION 3.3. METHOD OF EXERCISE; PAYMENT OF EXERCISE PRICE. (a) In
order to exercise all or any of the Warrants represented by a Warrant
Certificate, the Holder thereof must surrender for exercise the Warrant
Certificate to the Warrant Agent at its corporate trust office address set forth
in Section 11.5 hereof, with the Subscription Form set forth on the reverse of
the Warrant Certificate duly executed, together with payment in full of the
Exercise Price then in effect for each Common Share (or other securities)
issuable upon exercise of the Warrants as to which a Warrant is exercised; such
payment may be made by wire transfer, in cash or by certified or official bank
or bank cashier's check payable to the order of the Company and shall be made to
the Warrant Agent at its corporate trust office address set forth in Section
11.5 hereof prior to the close of business on the date the Warrant Certificate
is surrendered to the Warrant Agent for exercise. Notwithstanding the
foregoing, if the Common Shares (or other securities) issuable upon exercise of
the Warrants are registered under the Exchange Act, the Exercise Price may be
paid by surrendering additional Warrants to the Warrant Agent having an
aggregate Spread equal to the aggregate Exercise Price of the Warrants being
exercised. All payments received upon exercise of Warrants shall be delivered
<PAGE>
13
to the Company by the Warrant Agent as instructed in writing by the Company. If
less than all the Warrants represented by a Warrant Certificate are exercised or
surrendered (in connection with a cashless exercise), such Warrant Certificate
shall be surrendered and a new Warrant Certificate of the same tenor and for the
number of Warrants which were not exercised or surrendered shall be executed by
the Company and delivered to the Warrant Agent and the Warrant Agent shall
countersign the new Warrant Certificate, registered in such name or names as may
be directed in writing by the Holder, and shall deliver the new Warrant
Certificate to the Person or Persons entitled to receive the same. Upon the
exercise of any Warrants following the surrender of a Warrant Certificate in
conformity with the foregoing provisions, the Warrant Agent shall instruct the
Company to transfer promptly to the Holder or, upon the written order of the
Holder of such Warrant Certificate, appropriate evidence of ownership of any
Common Shares or other security or property to which it is entitled, registered
or otherwise placed in such name or names as may be directed in writing by the
Holder, and to deliver such evidence of ownership to the Person or Persons
entitled to receive the same and fractional shares, if any, or an amount in
cash, in lieu of any fractional shares, as provided in Section 4.5 hereof;
PROVIDED that the Holder of such Warrant shall be responsible for the payment of
any transfer taxes required as the result of any change in ownership of such
Warrants or the issuance of such Common Shares other than to the Holder of such
Warrants and any such transfer shall comply with applicable law. Upon the
exercise of a Warrant or Warrants, the Warrant Agent is hereby authorized and
directed to requisition from any transfer agent of the Common Shares (and all
such transfer agents are hereby authorized to comply with all such requests)
certificates (bearing the legend set forth in Section 11.10 hereof, if
applicable, unless a registration statement relating to such Common Shares filed
with the Commission shall then be in effect or the Company and the Holder
exercising such Warrant or Warrants otherwise agree) for the necessary number of
Common Shares to which said Holder may be entitled. The Company shall enter, or
shall cause any transfer agent of the Common Shares to enter, the name of the
Person entitled to receive the Common Shares upon exercise of the Warrants into
the Company's register of shareholders within 14 days of such exercise. A
Warrant shall be deemed to have been exercised immediately prior to the close of
business on the date of the surrender for exercise, as provided above, of the
Warrant Certificate representing such Warrant together with payment in full of
the Exercise Price (or surrender of sufficient shares in connection with a
cashless exercise) and, for all purposes under this Agreement, the Person
entitled to receive any Common Shares deliverable upon such exercise shall, as
between such Person and the Company, be deemed to be the Holder of such Common
Shares of record as of the close of business on such date and shall be entitled
to receive, and the Warrant Agent shall deliver to such Person, any Common
Shares to which such Person would have been entitled had such Person been the
registered holder on such date.
<PAGE>
14
(b) In addition to the requirements of paragraph (a) above, in
connection with any exercise of Warrants represented by Offshore Certificated
Warrants or the Regulation S Global Warrants, the Holder thereof shall be
required to provide to the Warrant Agent (i) (x) written certification
substantially in the form of Exhibit B hereto that it is a Non-U.S. Person and
the Warrant is not being exercised on behalf of a U.S. person within the meaning
of Rule 902 of Regulation S or (y) a written opinion of counsel reasonably
satisfactory to the Company and its counsel to the effect that the Warrant and
the Warrant Shares issued upon exercise of the Warrants have been registered
under the Securities Act or are exempt from registration thereunder and (ii) if
an opinion is not being furnished, written certification that the Holder
exercising the Warrant is located outside the United States at the time of the
exercise thereof.
ARTICLE IV
ADJUSTMENTS
SECTION 4.1. ADJUSTMENTS. The Exercise Price and the number of
Common Shares issuable upon exercise of each Warrant shall be subject to
adjustment from time to time as follows:
(a) DIVISIONS; CONSOLIDATIONS; RECLASSIFICATIONS. In case the
Company shall, on or before the Expiration Date, (i) issue any Common Shares in
payment of a dividend or other distribution with respect to its Common Stock,
(ii) subdivide its issued and outstanding Common Shares, (iii) consolidate its
issued and outstanding Common Shares into a smaller number of shares, or
(iv) reclassify or convert the Common Shares (other than a reclassification in
connection with a merger, consolidation or other business combination which will
be governed by Section 4.1(j)), then the number of Common Shares purchasable
upon exercise of each Warrant immediately prior to the record date for such
issue or distribution or the effective date of such subdivision, consolidation,
reclassification or conversion shall be adjusted so that the Holder of each
Warrant shall thereafter be entitled to receive the kind and number of Common
Shares which such Holder would have been entitled to receive after the happening
of any of the events described above had such Warrant been exercised immediately
prior to the happening of such event or any record date with respect thereto.
An adjustment made pursuant to this Section 4.1(a) shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
(b) RIGHTS; OPTIONS; WARRANTS. In case the Company shall issue
rights, options, warrants or convertible or exchangeable securities (other than
convertible or exchangeable securities subject to Section 4.1(a)) to all holders
of its Common Shares,
<PAGE>
15
entitling them to subscribe for or purchase Common Shares at a price per share
which is lower (at the record date for such issuance) than the then Current
Market Value per Common Share, then the Company shall ensure that at the time of
such issuance, the same or a like offer or invitation is made to the Holders of
the Warrants as if their Warrants had been exercised on the day immediately
preceding the record date of such offer or invitation on the terms (subject to
any adjustment pursuant to Section 4.1(a) for a prior event) on which such
Warrants could have been exercised on such date; PROVIDED that if the Board so
resolves, the Company shall not be required to ensure that the same offer or
invitation is made to the Holders of the Warrants, but the number of Common
Shares thereafter purchasable upon the exercise of each Warrant shall instead be
adjusted and shall be determined by multiplying the number of Common Shares
theretofore purchasable upon exercise of each Warrant by a fraction, the
numerator of which shall be the sum of (i) the number of Common Shares
outstanding immediately prior to the issuance of such rights, options, warrants
or convertible or exchangeable securities plus (ii) the number of additional
Common Shares which may be purchased or subscribed for upon exercise, exchange
or conversion of such rights, options, warrants or convertible or exchangeable
securities and the denominator of which shall be the sum of (x) the number of
Common Shares outstanding immediately prior to the issuance of such rights,
options, warrants or convertible or exchangeable securities plus (y) the number
of shares which the total consideration received by the Company for such rights,
options, warrants or convertible or exchangeable securities so offered would
purchase at the then Current Market Value per Common Share. Except as otherwise
provided above, such adjustment shall be made whenever such rights, options,
warrants or convertible or exchangeable securities are issued, and shall become
effective retroactively immediately after the record date for the determination
of shareholders entitled to receive such rights, options, warrants or
convertible or exchangeable securities.
(c) ISSUANCE OF COMMON SHARES AT LOWER VALUES. In case the Company
shall sell and issue any Common Share or Right (as defined below) (excluding
(i) any Right issued in any of the transactions described in Section 4.1(a) or
(b) above, (ii) Common Shares issued pursuant to (x) any Rights outstanding on
the date of this Agreement or any Rights issued in any transaction described in
Section 4.1(a) or (b) above and (y) a Right, if on the date such Right was
issued, the exercise, conversion or exchange price per Common Share with respect
thereto was at least equal to the then Current Market Value per Common Share,
(iii) any Common Shares or Rights issued (A) as consideration when any
corporation or business is acquired, merged into or becomes part of the Company
or a subsidiary of the Company or (B) in good faith in connection with any other
acquisition of assets, in each case in an arm's-length transaction between the
Company and a Person other than an Affiliate of the Company, (iv) grants or
exercises of Rights granted to or exercised by employees, directors, consultants
or advisors of the Company or any of its subsidiaries for issuances of shares of
Common Stock to such Persons and (v) exercises of Rights by former employees,
<PAGE>
16
former directors, former consultants or former advisors of the Company or any of
its subsidiaries for issuances of shares of Common Stock to such Persons) at a
price per Common Share (determined in the case of any such Right, by dividing
(x) the total consideration receivable by the Company in consideration of the
sale and issuance of such Right, plus the total consideration payable to the
Company upon exercise, conversion or exchange thereof, by (y) the total number
of Common Shares covered by such Right) that is lower than the Current Market
Value per Common Share in effect immediately prior to such sale or issuance,
then the number of Common Shares thereafter purchasable upon the exercise of
each Warrant shall be determined by multiplying the number of Common Shares
theretofore purchasable upon exercise of such Warrant by a fraction, the
numerator of which shall be the number of Common Shares outstanding immediately
after such sale or issuance and the denominator of which shall be the number of
Common Shares outstanding immediately prior to such sale or issuance plus the
number of Common Shares which the aggregate consideration received (determined
as provided below) for such sale or issuance would purchase at such Current
Market Value per Common Share. For purposes of this Section 4.1(c), the Common
Shares which the holder of any such Right shall be entitled to subscribe for or
purchase shall be deemed to be issued and outstanding as of the date of such
sale and issuance and the consideration received by the Company therefor shall
be deemed to be the consideration received by the Company for such Right, plus
the consideration or premiums stated in such Right to be paid for the Common
Shares covered thereby. In case the Company shall sell and issue any Right
together with one or more other securities as part of a unit at a price per
unit, then in determining the "price per Common Share" and the "consideration
received by the Company" for purposes of the first sentence of this
Section 4.1(c), the Board shall determine, in good faith, the fair value of the
Right then being sold as part of such unit. For purposes of this paragraph, a
"RIGHT" shall mean any right, option, warrant or convertible or exchangeable
security containing the Right to subscribe for or acquire one or more Common
Shares, excluding the Warrants. This Section 4.1(c) shall not apply to: (i) the
exercise of Warrants, or the conversion or exchange of other securities
convertible or exchangeable for Common Shares; or (ii) Common Shares issued upon
the exercise of Rights or warrants issued to all holders of Common Shares.
(d) DISTRIBUTIONS OF DEBT, ASSETS, SUBSCRIPTION RIGHTS OR
CONVERTIBLE SECURITIES. In case the Company shall make a distribution to all
holders of its Common Shares of evidences of its indebtedness, or assets, or
other distributions (excluding distributions in connection with the dissolution,
liquidation or winding-up of the Company which shall be governed by
Section 4.1(j) and distributions of securities referred to in Section 4.1(a),
Section 4.1(b) or Section 4.1(c)), then, in each case, the number of Common
Shares purchasable after such record date upon the exercise of each Warrant
shall be determined by multiplying the number of Common Shares purchasable upon
the exercise of such Warrant immediately prior to such record date by a
fraction, the numerator of which shall be the
<PAGE>
17
Current Market Value per Common Share immediately prior to the record date for
such distribution and the denominator of which shall be the Current Market Value
per Common Share immediately prior to the record date for such distribution less
the then fair value (as determined in good faith by the Board) of the evidences
of indebtedness, or assets or other distributions so distributed attributable to
one Common Share. Such adjustment shall be made whenever any such distribution
is made, and shall become effective on the date of distribution retroactive to
the record date for the determination of shareholders entitled to receive such
distribution.
(e) EXPIRATION OF RIGHTS, OPTIONS AND CONVERSION PRIVILEGES. Upon
the expiration of any rights, options, warrants or conversion or exchange
privileges (including, without limitation, any Rights) that have previously
resulted in an adjustment hereunder, if any thereof shall not have been
exercised, exchanged or converted, the Exercise Price and the number of Common
Shares issuable upon the exercise of each Warrant shall, upon such expiration,
be readjusted and shall thereafter, upon any future exercise, be such as they
would have been had they been originally adjusted (or had the original
adjustment not been required, as the case may be) as if (i) the only Common
Shares so issued were the Common Shares, if any, actually issued or sold upon
the exercise, exchange or conversion of such rights, options, warrants or
conversion or exchange rights (including, without limitation, any Rights) and
(ii) such Common Shares, if any, were issued or sold for the consideration
actually received by the Company upon such exercise, exchange or conversion plus
the consideration, if any, actually received by the Company for issuance, sale
or grant of all such rights, options, warrants or conversion or exchange rights
(including, without limitation, any Rights) whether or not exercised.
(f) CURRENT MARKET VALUE. For the purposes of any computation
under this Article IV, the "CURRENT MARKET VALUE" per Common Share or of any
other security (herein collectively referred to as a "security") at any date
herein specified shall be:
(i) if the security is not registered under the Exchange Act, the
value of the security (1) most recently determined as of a date within the
six months preceding such date by an Independent Financial Expert selected
by the Board in accordance with the criteria for such valuation set out in
Section 4.1(k), or (2) if no such determination shall have been made within
such six-month period or if the Company so chooses, determined as of such a
date by an Independent Financial Expert selected by the Board in accordance
with the criteria for such valuation set out in Section 4.1(k), or
(ii) if the security is registered under the Exchange Act, the
average of the daily market prices of the security for the 20 consecutive
trading days immediately preceding such date or, if the security has been
registered under the Exchange Act for
<PAGE>
18
less than 20 consecutive trading days before such date, then the average of
the daily market prices for all of the trading days before such date for
which daily market prices are available. The market price for each such
trading day shall be: (A) in the case of a security listed or admitted to
trading on any national securities exchange, the closing sales price,
regular way, on such day, or if no sale takes place on such day, the
average of the closing bid and asked prices on such day on the principal
national securities exchange on which such security is listed or admitted,
as determined by the Board, in good faith, (B) in the case of a security
not then listed or admitted to trading on any national securities exchange,
the last reported sale price on such day, or if no sale takes place on such
day, the average of the closing bid and asked prices on such day, as
reported by a reputable quotation source designated by the Company, (C) in
the case of a security not then listed or admitted to trading on any
national securities exchange and as to which no such reported sale price or
bid and asked prices are available, the average of the reported high bid
and low asked prices on such day, as reported by a reputable quotation
service, or a newspaper of general circulation in the Borough of Manhattan,
City and State of New York customarily published on each Business Day,
designated by the Company, or, if there shall be no bid and asked prices on
such day, the average of the high bid and low asked prices, as so reported,
on the most recent day (not more than 30 days prior to the date in
question) for which prices have been so reported and (D) if there are no
bid and asked prices reported during the 30 days prior to the date in
question, the Current Market Value of the security shall be determined as
if the security were not registered under the Exchange Act.
(g) CONSIDERATION RECEIVED. For purposes of any computation
respecting consideration received pursuant to this Section 4.1, the following
shall apply:
(i) in the case of the issuance of Common Shares for cash, the
consideration shall be the amount of such cash, PROVIDED that in no case
shall any deduction be made for any commissions, discounts or other
expenses incurred by the Company for any underwriting of the issue or
otherwise in connection therewith;
(ii) in the case of the issuance of Common Shares for a
consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair market value thereof as determined
in good faith by the Board (irrespective of the accounting treatment
thereof), whose determination shall be conclusive and described in
reasonable detail in a board resolution which shall be provided as soon as
practicable thereafter to the Warrant Agent; and
(iii) in the case of the issuance of rights, options, warrants or
securities convertible into or exchangeable for Common Shares, (including,
without limitation,
<PAGE>
19
any Rights), the aggregate consideration received therefor shall be deemed
to be the consideration received by the Company for the issuance of such
rights, options, warrants or securities convertible into or exchangeable
for Common Shares, plus the additional minimum consideration, if any, to be
received by the Company upon the exercise, conversion or exchange thereof
(the consideration in each case to be determined in the same manner as
provided in clauses (i) and (ii) of this Section 4.1(g)).
(h) DE MINIMIS ADJUSTMENTS. No adjustment in the number of Common
Shares purchasable hereunder shall be required unless such adjustment would
require an increase or decrease of at least one percent (1%) in the number of
Common Shares purchasable upon the exercise of each Warrant; PROVIDED, HOWEVER,
that any adjustments which by reason of this Section 4.1(h) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations shall be made to the nearest one-thousandth of a
share.
(i) ADJUSTMENT OF EXERCISE PRICE. Whenever the number of Common
Shares purchasable upon the exercise of each Warrant is adjusted, as herein
provided, the Exercise Price per Common Share payable upon exercise of such
Warrant shall be adjusted (calculated to the nearest $.01) so that it shall
equal the price determined by multiplying such Exercise Price immediately prior
to such adjustment by a fraction the numerator of which shall be the number of
Common Shares purchasable upon the exercise of each Warrant immediately prior to
such adjustment and the denominator of which shall be the number of Common
Shares so purchasable immediately thereafter. Following any adjustment to the
Exercise Price pursuant to this Article IV, the amount payable, when adjusted,
together with the amount paid in connection with the original issuance of the
Warrants, shall never be less than the par value per Common Share at the time of
such adjustment.
If after an adjustment, a Holder of a Warrant upon exercise of it may
receive shares of two or more classes in the capital of the Company, the Company
shall determine the allocation of the adjusted Exercise Price between such
classes of shares in a manner that the Board deems fair and equitable to the
Holders. After such allocation, the exercise privilege and the Exercise Price
of each class of shares shall thereafter be subject to adjustment on terms
comparable to those applicable to Common Shares in this Article IV.
Such adjustment shall be made successively whenever any event listed
above shall occur.
(j) CONSOLIDATION, MERGER, ETC. (i) Subject to the provisions of
Subsection
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20
(ii) below of this Section 4.1(j), in case of the consolidation of the
Company with, or merger of the Company with or into, or of the sale of all
or substantially all of the properties and assets of the Company to, any
Person, and in connection therewith consideration is payable to holders of
Common Shares (or other securities or property purchasable upon exercise of
Warrants) in exchange therefor, the Warrants shall remain subject to the
terms and conditions set forth in this Agreement and each Warrant shall,
after such consolidation, merger or sale, entitle the Holder to receive
upon exercise the number of shares in the capital or other securities or
property (including cash) of or from the Person resulting from such
consolidation or surviving such merger or to which such sale shall be made
or of the parent of such Person, as the case may be, that would have been
distributable or payable on account of the Common Shares if such Holder's
Warrants had been exercised immediately prior to such merger, consolidation
or sale (or, if applicable, the record date therefor); and in any such case
the provisions of this Agreement with respect to the rights and interests
thereafter of the Holders of Warrants shall be appropriately adjusted by
the Board in good faith so as to be applicable, as nearly as may reasonably
be, to any shares, other securities or any property thereafter deliverable
on the exercise of the Warrants.
(ii) Notwithstanding the foregoing, (x) if the Company merges or
consolidates with, or sells all or substantially all of its property and
assets to, another Person (other than an Affiliate of the Company) and
consideration is payable to holders of Common Shares in exchange for their
Common Shares in connection with such merger, consolidation or sale which
consists solely of cash, or (y) in the event of the dissolution,
liquidation or winding up of the Company, then the Holders of Warrants
shall be entitled to receive distributions on the date of such event on an
equal basis with holders of Common Shares (or other securities issuable
upon exercise of the Warrants) as if the Warrants had been exercised
immediately prior to such event, less the Exercise Price. Upon receipt of
such payment, if any, the rights of a Holder shall terminate and cease and
such Holder's Warrants shall expire. In case of any such merger,
consolidation or sale of assets, the surviving or acquiring Person and, in
the event of any dissolution, liquidation or winding up of the Company, the
Company shall deposit promptly with the Warrant Agent the funds, if any,
necessary to pay the Holders of the Warrants. After receipt of such
deposit from such Person or the Company and after receipt of surrendered
Warrant Certificates, the Warrant Agent shall make payment by delivering a
check in such amount as is appropriate (or, in the case of consideration
other than cash, such other consideration as is appropriate) to such Person
or Persons as it may be directed in writing by the Holder surrendering such
Warrants.
(k) If required pursuant to Section 4.1(f)(i), the Current Market
Value shall be deemed to be equal to the value set forth in the Value Report (as
defined below) as
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21
determined by an Independent Financial Expert, which shall be selected by the
Board in its sole discretion, and retained on customary terms and conditions,
using one or more valuation methods that the Independent Financial Expert, in
its best professional judgment, determines to be most appropriate. The Company
shall use its reasonable best efforts to cause the Independent Financial Expert
to deliver to the Company, with a copy to the Warrant Agent, within 45 days of
the appointment of the Independent Financial Expert, a value report (the "VALUE
REPORT") stating the value of the Common Shares and other securities or property
of the Company, if any, being valued as of the Valuation Date and containing a
brief statement as to the nature and scope of the examination or investigation
upon which the determination of value was made. The Warrant Agent shall have no
duty with respect to the Value Report of any Independent Financial Expert,
except to keep it on file and available for inspection by the Holders. The
determination as to Current Market Value in accordance with the provisions of
this Section 4.1(k) shall be conclusive on all Persons. The Independent
Financial Expert shall consult with management of the Company in order to allow
management to comment on the proposed value prior to delivery to the Company of
any Value Report.
(l) WHEN NO ADJUSTMENT REQUIRED. Without limiting any other
exception contained in this Section 4.1, and in addition thereto, no adjustment
need be made for:
(i) (A) grants to, exercises of Rights by, or issuances of equity
securities to employees, directors, consultants or advisors of
the Company or any of its subsidiaries and (B) exercises of
Rights by, or issuances of equity securities in connection with
Rights previously issued to former employees, former directors,
former consultants or former advisors of KMC Telecom, Inc. (to
the extent that all such securities do not have an aggregate
value in excess of 15% of the equity value of the Company on a
fully diluted basis, as determined in good faith by the Board);
(ii) grants of options, warrants or other agreements or rights to
purchase capital stock of the Company entered into prior to the
date of the issuance of the Warrants or any issuance of capital
stock pursuant thereto or in connection therewith;
(iii) rights to purchase Common Shares pursuant to a Company plan for
the reinvestment of dividends or interest;
(iv) future options, warrants or other rights with an exercise or
conversion price at least equal to the fair market value of the
related shares on the date of grant, as determined in good
faith by the Company's Board of Directors;
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22
(v) a change in the par value of the Common Shares (including a
change from par value to no par value or vice versa);
(vi) future options granted to current holders of options in KMC
Telecom Common Stock in exchange for their options in KMC
Telecom with an exercise price determined in good faith by the
Company's Board of Directors to be fair; and
(vii) bona fide public offerings or private placements through
investment banks of national standing.
To the extent the Warrants become convertible into cash, no adjustment
need be made thereafter as to the cash. Interest will not accrue on the cash.
SECTION 4.2. NOTICE OF ADJUSTMENT. Whenever the number of Common
Shares purchasable upon the exercise of each Warrant or the Exercise Price is
adjusted, as herein provided, the Company shall cause, so far as it is able, the
Warrant Agent promptly to mail, at the expense of the Company, to each Holder
notice of such adjustment or adjustments and shall deliver to the Warrant Agent
a certificate of the Auditors setting forth the number of Common Shares
purchasable upon the exercise of each Warrant and the Exercise Price after such
adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.
Such certificate shall be conclusive evidence of the correctness of such
adjustment except in the case of manifest error. The Warrant Agent shall be
entitled to rely on such certificate and shall be under no duty or
responsibility with respect to any such certificate, except to exhibit the same,
from time to time, to any Holder desiring an inspection thereof during
reasonable business hours upon reasonable notice. The Warrant Agent shall not
at any time be under any duty or responsibility to any Holders to determine
whether any facts exist which may require any adjustment of the Exercise Price
or the number of Common Shares purchasable on exercise of the Warrants or any of
the other adjustments set forth in Section 4.1, or with respect to the nature or
extent of any such adjustment when made, or with respect to the method employed
in making such adjustment, or the validity or value (or the kind or amount) of
any Common Shares which may be purchasable on exercise of the Warrants. The
Warrant Agent shall not be responsible for any failure of the Company to make
any cash payment or to issue, transfer or deliver any Common Shares or share
certificates upon the exercise of any Warrant.
SECTION 4.3. STATEMENT ON WARRANTS. Irrespective of any adjustment
in the Exercise Price or the number or kind of shares purchasable upon the
exercise of the Warrants, Warrants theretofore or thereafter issued may continue
to express the same price and number and kind of shares as are stated in the
Warrants initially issuable pursuant to this Agreement.
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23
SECTION 4.4. NOTICE OF CONSOLIDATION, MERGER, ETC. In case at any
time after the date hereof and prior to 5:00 p.m. (New York City time) on the
Expiration Date, there shall be any (i) consolidation or merger involving the
Company or sale, transfer or other disposition of all or substantially all of
the Company's property, assets or business (except (A) a merger or other
reorganization in which the Company shall be the surviving corporation and
holders of Common Shares receive no consideration in respect of their shares and
(B) a merger of the Company into a wholly owned subsidiary of the Company, the
principal purpose of which, in the good faith determination of the Board, is to
change the state of incorporation of the Company) or (ii) any other transaction
contemplated by Section 4.1(j)(ii) above then, in any one or more of such cases,
the Company shall cause to be mailed to the Warrant Agent and shall use its
reasonable best efforts to cause the Warrant Agent to mail, at Company's
expense, to each Holder of a Warrant, at the earliest practicable time (and, in
any event, not less than 20 days before any date set for definitive action),
notice of the date on which such reorganization, sale, consolidation, merger,
dissolution, liquidation or winding up shall take place, as the case may be.
Such notice shall also set forth such facts as shall indicate the effect of such
action (to the extent such effect may be known at the date of such notice) on
the Exercise Price and the kind and amount of the Common Shares and other
securities, money and other property deliverable upon exercise of the Warrants.
Such notice shall also specify the date as of which the holders of record of the
Common Shares or other securities or property issuable upon exercise of the
Warrants shall be entitled to exchange their shares for securities, money or
other property deliverable upon such reorganization, sale, consolidation,
merger, dissolution, liquidation or winding up, as the case may be.
SECTION 4.5. FRACTIONAL INTERESTS. If more than one Warrant shall be
presented for exercise in full at the same time by the same Holder, the number
of full Common Shares which shall be issuable upon such exercise thereof shall
be computed on the basis of the aggregate number of Common Shares purchasable on
exercise of the Warrants so presented. The Company shall not be required to
issue fractional Common Shares upon the exercise of Warrants. If any fraction
of a Common Share would, except for the provisions of this Section 4.5, be
issuable on the exercise of any Warrant (or specified portion thereof), the
Company may pay an amount in cash calculated by it to be equal to the then
Current Market Value per Common Share multiplied by such fraction computed to
the nearest whole cent.
SECTION 4.6. WHEN ISSUANCE OR PAYMENT MAY BE DEFERRED. In any case
in which this Article IV shall require that an adjustment in the Exercise Price
be made effective as of a record date for a specified event, the Company may
elect to defer until the occurrence of such event (i) issuing to the Holder of
any Warrant exercised after such record date the Common Shares and other shares
in the capital of the Company, if any, issuable upon such exercise over and
above the Common Shares and other shares in the capital of the Company, if any,
issuable upon such exercise and (ii) paying such Holder any amount in cash in
lieu of a
<PAGE>
24
fractional share; PROVIDED, HOWEVER, that the Company shall deliver to such
Holder a due bill or other appropriate instrument evidencing such Holder's right
to receive such additional Common Shares, other shares and cash upon the
occurrence of the event requiring such adjustment.
SECTION 4.7. INITIAL PUBLIC OFFERING. Notwithstanding anything to
the contrary herein contained, if the Company conducts an initial public
offering of equity securities (other than nonconvertible preferred shares), the
Company will give the Holders the opportunity to convert such Warrants into
warrants to purchase such equity securities (other than nonconvertible preferred
shares) and such Common Shares or such other securities that have been received
by the Holders upon the exercise of Warrants into such equity securities (other
than nonconvertible preferred shares). Such conversion opportunity will be on
terms and conditions determined to be fair and reasonable by the Board.
ARTICLE V
DECREASE IN EXERCISE PRICE
The Board, in its sole discretion, shall have the right at any time,
or from time to time, to decrease the Exercise Price of the Warrants and/or
increase the number of shares issuable upon the exercise of the Warrants.
ARTICLE VI
LOSS OR MUTILATION
Upon receipt by the Company and the Warrant Agent of evidence
satisfactory to them of the ownership and the loss, theft, destruction or
mutilation of any Warrant Certificate and of indemnity or bond satisfactory to
them and (in the case of mutilation) upon surrender and cancellation thereof,
then, in the absence of notice to the Company or the Warrant Agent that the
Warrants represented thereby have been acquired by a bona fide purchaser, the
Company shall execute and the Warrant Agent shall countersign and deliver to the
registered Holder of the lost, stolen, destroyed or mutilated Warrant
Certificate, in exchange for or in lieu thereof, a new Warrant Certificate of
the same tenor and for a like aggregate number of Warrants. Upon the issuance
of any new Warrant Certificate under this Article VI, the Company may require
the payment of a sum sufficient to cover any tax or other governmental charge
that may be imposed in relation thereto and other expenses (including the fees
and expenses of the Warrant Agent) in connection therewith. Every new
<PAGE>
25
Warrant Certificate executed and delivered pursuant to this Article VI in lieu
of any lost, stolen or destroyed Warrant Certificate shall constitute a
contractual obligation of the Company whether or not the allegedly lost, stolen
or destroyed Warrant Certificates shall be at any time enforceable by anyone and
shall be entitled to the benefits of this Agreement equally and proportionately
with any and all other Warrant Certificates duly executed and delivered
hereunder. The provisions of this Article VI are exclusive and shall preclude
(to the extent lawful) all other rights or remedies with respect to the
replacement of mutilated, lost, stolen, or destroyed Warrant Certificates.
ARTICLE VII
RESERVATION AND AUTHORIZATION
OF COMMON SHARES
The Company shall at all times reserve and keep available such number
of its authorized but unissued Common Shares deliverable upon exercise of the
Warrants as will be sufficient to permit the exercise in full of all outstanding
Warrants and will cause appropriate evidence of ownership of such Common Shares
to be delivered to the Warrant Agent upon its request for delivery thereof upon
the exercise of Warrants. The Company covenants that all Common Shares of the
Company that may be issued upon the exercise of the Warrants will, upon
issuance, be duly authorized, validly issued, fully paid and not subject to any
calls for funds and free from pre-emptive rights and all taxes, liens, charges
and security interests with respect to the issue thereof.
ARTICLE VIII
WARRANT TRANSFER BOOKS; RESTRICTIONS ON TRANSFER
SECTION 8.1. TRANSFER AND EXCHANGE. The Warrant Certificates shall
be issued in registered form only. The Warrant Agent shall keep at its office a
register for the registration of Warrant Certificates and transfers or exchanges
of Warrant Certificates as herein provided and other appropriate data as
determined by the Warrant Agent. The Company shall, upon reasonable notice to
the Warrant Agent, have access to such register during the Warrant Agent's
regular business hours. All Warrant Certificates issued upon any registration
of transfer or exchange of Warrant Certificates shall be the valid obligations
of the Company, evidencing the same obligations, and entitled to the same
benefits under this Agreement, as the Warrant Certificates surrendered for such
registration of transfer or exchange.
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26
The Warrants shall initially be issued as part of the issuance of the
Units. Prior to the Separation Date, the Warrants may not be transferred or
exchanged separately from, but may be transferred or exchanged only together
with, the Notes issued as part of such Units.
A Holder may transfer its Warrants only by written application to the
Warrant Agent stating the name of the proposed transferee and otherwise
complying with the terms of this Agreement. No such transfer shall be effected
until, and such transferee shall succeed to the rights of a Holder only upon,
final acceptance and registration of the transfer by the Warrant Agent in the
register. Prior to the registration of any transfer of Warrants by a Holder as
provided herein, the Company, the Warrant Agent, and any agent of the Company or
the Warrant Agent may treat the Person in whose name the Warrants are registered
as the owner thereof for all purposes and as the Person entitled to exercise the
rights represented thereby, any notice to the contrary notwithstanding.
Furthermore, any Holder of a Global Warrant shall, by acceptance of such Global
Warrant, agree that transfers of beneficial interests in such Global Warrant may
be effected only through a book-entry system maintained by the Holder of such
Global Warrant (or its agent), and that ownership of a beneficial interest in
the Warrants represented thereby shall be required to be reflected in a
book-entry. When Warrant Certificates are presented to the Warrant Agent with a
request to register the transfer or to exchange them for an equal amount of
Warrants of other authorized denominations, the Warrant Agent shall register
such transfer or make such exchange as requested if its requirements for such
transactions are met. To permit registrations of transfers and exchanges, the
Company shall execute Warrant Certificates at the Warrant Agent's request. No
service charge shall be made for any registration of transfer or exchange of
Warrants, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection with any
registration of transfer of Warrants.
SECTION 8.2. BOOK-ENTRY PROVISIONS FOR THE GLOBAL WARRANTS. (a) The
Global Warrants initially shall (i) be registered in the name of the Depositary
for such Global Warrant or the nominee of such Depositary, (ii) be delivered to
the Warrant Agent as custodian for such Depositary and (iii) bear legends as set
forth in Section 2.2 hereof.
Members of, or participants in, the Depositary ("AGENT MEMBERS") shall
have no rights under this Agreement with respect to the Global Warrants held on
their behalf by the Depositary or the Warrant Agent as its custodian, and the
Depositary may be treated by the Company, the Warrant Agent and any agent of the
Company or the Warrant Agent as the absolute owner of such Global Warrant for
all purposes whatsoever. Nothing herein shall prevent the Company, the Warrant
Agent or any agent of the Company or the Warrant Agent, from giving effect to
any written certification, proxy or other authorization furnished by the
Depositary or impair, as between the Depositary and its Agent Members, the
operation of customary practices governing the exercise of the rights of a
Holder of any Warrants.
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27
(b) Transfers of a Global Warrant shall be limited to transfers of
such Global Warrant in whole, but not in part, to the Depositary, its successors
or their respective nominees. Interests of beneficial owners in the Global
Warrants may be transferred in accordance with the rules and procedures of the
Depositary and the provisions of Section 8.3 hereof. U.S. Certificated Warrants
and Offshore Certificated Warrants shall be transferred to beneficial owners in
exchange for their beneficial interests in the Restricted Global Warrant or the
Regulation S Global Warrant, as the case may be, (i) if the Depositary notifies
the Company that it is unwilling or unable to continue as Depositary for any
such Global Warrant and a successor depositary is not appointed by the Company
within 90 days of such notice, (ii) if there is a Default or (iii) upon the
request of the beneficial owner in accordance with the rules and procedures of
the Depositary and the provisions of Section 8.3 hereof; provided that Offshore
Certificated Warrants shall not be transferred in exchange for the Temporary
Regulation S Global Note prior to one year from the Closing Date.
(c) Any beneficial interest in one of the Global Warrants that is
transferred to a Person who takes delivery in the form of an interest in any
other Global Warrant will, upon transfer, cease to be an interest in the first
such Global Warrant and become an interest in such other Global Warrant and,
accordingly, will thereafter be subject to all transfer restrictions, if any,
and other procedures applicable to beneficial interests in such other Global
Warrant for as long as it remains such an interest.
(d) In connection with the transfer of the entire Restricted Global
Warrant or Regulation S Global Warrant to beneficial owners pursuant to
paragraph (b) of this Section 8.2, the Restricted Global Warrant or the
Regulation S Global Warrant, as the case may be, shall be surrendered to the
Warrant Agent for cancellation, and the Company shall execute, and the Warrant
Agent shall countersign and deliver, to each beneficial owner identified by the
Depositary in exchange for its beneficial interest in the Restricted Global
Warrant or the Regulation S Global Warrant, as the case may be, U.S.
Certificated Warrants or Offshore Certificated Warrants, as the case may be, of
authorized denominations representing, in the aggregate, the number of Warrants
theretofore represented by the Restricted Global Warrant or the Regulation S
Global Warrant, as the case may be.
(e) In connection with the transfer of a portion of the beneficial
interests in the Restricted Global Warrant or the Permanent Regulation S Global
Warrant to beneficial owners pursuant to paragraph (b) of this Section 8.2, the
Warrant Agent shall reflect on its books and records the date and a decrease in
the amount of Warrants represented by the Restricted Global Warrant or Permanent
Regulation S Global Warrant in an amount equal to the amount of Warrants
represented by the beneficial interest in the Restricted Global Warrant or
Permanent Regulation S Global Warrant to be transferred, and the Company shall
execute, and the Warrant Agent shall countersign and deliver, to each beneficial
owner identified by the
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28
Depositary in exchange for its beneficial interest in the Restricted Global
Warrant or the Permanent Regulation S Global Warrant, as the case may be, U.S.
Certificated Warrants or Offshore Certificated Warrants, as the case may be, of
like tenor and amount.
(f) Any Certificated Warrant delivered in exchange for an interest
in a Global Warrant pursuant to paragraph (b), of this Section shall, except as
otherwise provided by paragraph (d) of Section 8.3 hereof, bear the legend
regarding transfer restrictions set forth in Section 2.2 hereof.
(g) The registered holder of a Global Warrant may grant proxies and
otherwise authorize any Person, including Agent Members and Persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Agreement or the Warrants.
SECTION 8.3. SPECIAL TRANSFER PROVISIONS. The following provisions
shall apply:
(a) TRANSFERS TO QIBS. The following provisions shall apply with
respect to the registration of any proposed transfer of Warrants to a QIB
(excluding non-U.S. Persons):
(i) If the Warrants to be transferred are represented by
Certificated Warrants or by an interest in the Temporary Regulation S
Global Warrant, the Warrant Agent shall register the transfer if such
transfer is being made by a proposed transferor who has checked the box
provided for on the form of Warrant Certificate stating, or has otherwise
advised the Company and the Warrant Agent in writing, that the sale has
been made in compliance with the provisions of Rule 144A to a transferee
who has signed the certification provided for on the form of Warrant
Certificate stating, or has otherwise advised the Company and the Warrant
Agent in writing, that it is purchasing the Warrants for its own account or
an account with respect to which it exercises sole investment discretion
and that it and any such account is a QIB within the meaning of Rule 144A,
and is aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the Company as
it has requested pursuant to Rule 144A or has determined not to request
such information and that it is aware that the transferor is relying upon
its foregoing representations in order to claim the exemption from
registration provided by Rule 144A.
(ii) If the proposed transferee is an Agent Member, and the Warrants
to be transferred are represented by Certificated Warrants or an interest
in the Temporary Regulation S Global Warrant, upon receipt by the Warrant
Agent of the documents referred to in clause (i) above and instructions
given in accordance with the Depositary's and the Warrant Agent's
procedures, the Warrant Agent shall reflect on
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29
its books and records the date and an increase in the amount of Warrants
represented by the Restricted Global Warrant in an amount equal to the
amount of Warrants represented by the Certificated Warrants or the interest
in the Temporary Regulation S Global Warrant, as the case may be, to be
transferred, and the Warrant Agent shall cancel the Certificated Warrants
or decrease the amount of the Temporary Regulation S Global Warrant so
transferred.
(b) TRANSFERS TO NON-U.S. PERSONS AT ANY TIME. The following
provisions shall apply with respect to the registration of any proposed transfer
of Warrants (other than transfer of the Regulation S Global Warrant) to a
Non-U.S. Person:
(i) The Warrant Agent shall register any proposed transfer of
Warrants to a Non-U.S. Person only upon receipt of a certificate
substantially in the form of Exhibit B from the proposed transferor.
(ii) If the proposed transferee is an Agent Member and the Warrants
to be transferred are represented by Certificated Warrants or an interest
in the Restricted Global Warrant, upon receipt by the Warrant Agent of the
documents referred to in clause (i) above and instructions given in
accordance with the Depositary's and the Warrant Agent's procedures, the
Warrant Agent shall reflect on its books and records the date and an
increase in the number of Warrants represented by the Regulation S Global
Warrant in an amount equal to the number of Warrants represented by the
Certificated Warrants or the Restricted Global Warrant, as the case may be,
to be transferred, and the Warrant Agent shall cancel the Certificated
Warrant or decrease the amount of Warrants represented by the Restricted
Global Warrant so transferred.
(c) TRANSFERS TO ANY OTHER PERSON. The following provisions shall
apply with respect to the registration of any proposed transfer of Warrants
(other than transfers of the Regulation S Global Warrant) to any Person not
specified in paragraphs (a) and (b) above (including any Institutional
Accredited Investor which is not a QIB).
(i) The Warrant Agent shall register any proposed transfer of
Warrants to any such Person if (x) the transferor has delivered to the
Warrant Agent and the Company a certificate substantially in the form of
Exhibit C-1 hereto and, if required by paragraph (d) thereof, an Opinion of
Counsel to the effect set forth therein and (y) the proposed transferee has
delivered to the Warrant Agent and the Company a certificate substantially
in the form of Exhibit C-2 hereto if such transferee is an Institutional
Accredited Investor that is not a QIB.
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(ii) If the proposed transferor is an Agent Member holding a
beneficial interest in the Restricted Global Warrant, upon receipt by the
Warrant Agent and the Company of the documents referred to in clause (i)
above and instructions given in accordance with the Depositary's and the
Warrant Agent's procedures, the Company shall execute and the Warrant Agent
shall countersign Certificated Warrants in an amount equal to the number of
Warrants represented by the Restricted Global Warrant, to be transferred
and the Warrant Agent shall decrease the number of Warrants represented by
the Restricted Global Warrant or the Regulation S Global Warrant so
transferred.
(d) TRANSFERS OF INTERESTS IN THE TEMPORARY REGULATION S GLOBAL
WARRANT. The following provisions shall apply with respect to registration of
any proposed transfer of interests in the Temporary Regulation S Global Warrant:
(i) The Warrant Agent shall register the transfer of any Warrant
(x) if the proposed transferee is a Non-U.S. Person and the proposed
transferor has delivered to the Warrant Agent a certificate substantially
in the form of Exhibit B hereto or (y) if the proposed transferee is a QIB
and the proposed transferor has checked the box provided for on the form of
Warrant Certificate stating, or has otherwise advised the Company and the
Warrant Agent in writing, that the sale has been made in compliance with
the provisions of Rule 144A to a transferee who has signed the
certification provided for on the form of Warrant Certificate stating, or
has otherwise advised the Company and the Warrant Agent in writing, that it
is purchasing the Warrant for its own account or an account with respect to
which it exercises sole investment discretion and that it and any such
account is a QIB within the meaning of Rule 144A, and is aware that the
sale to it is being made in reliance on Rule 144A and acknowledges that it
has received such information regarding the Company as it has requested
pursuant to Rule 144A or has determined not to request such information and
that it is aware that the transferor is relying upon its foregoing
representations in order to claim the exemption from registration provided
by Rule 144A.
(ii) If the proposed transferee is an Agent Member, upon receipt by
the Warrant Agent of the documents referred to in clause (i)(y) above and
instructions given in accordance with the Depositary's and the Warrant
Agent's procedures, the Warrant Agent shall reflect on its books and
records the date and an increase in the number of Warrants represented by
the Regulation S Global Warrant or the Restricted Global Warrant, as the
case may be, in an amount equal to the number of Warrants represented by
the Temporary Regulation S Global Warrant to be transferred, and the
Warrant Agent shall decrease the number of Warrants represented by the
Temporary Regulation S Global Warrant.
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31
(e) TRANSFERS OF INTERESTS IN THE PERMANENT REGULATION S GLOBAL
WARRANT OR OFFSHORE CERTIFICATED WARRANTS. The Warrant Agent shall register the
transfer of any Permanent Regulation S Global Warrant or permanent Offshore
Certificated Warrant without requiring any additional certification.
(f) PRIVATE PLACEMENT LEGEND. Upon the registration of transfer,
exchange or replacement of Warrant Certificates not bearing the Private
Placement Legend, the Warrant Agent shall deliver Warrant Certificates that do
not bear the Private Placement Legend. Upon the registration of transfer,
exchange or replacement of Warrant Certificates bearing the Private Placement
Legend, the Warrant Agent shall deliver only Warrant Certificates that bear the
Private Placement Legend unless either (i) the circumstances contemplated by the
third sentence of the third paragraph of Section 2.1 exist or (ii) there is
delivered to the Warrant Agent an opinion of counsel reasonably satisfactory to
the Company, its Counsel and the Warrant Agent to the effect that neither such
legend nor the related restrictions on transfer are required in order to
maintain compliance with the provisions of the Securities Act.
(g) GENERAL. (i) By its acceptance of any Warrants represented by
a Warrant Certificate bearing the Private Placement Legend, each Holder of such
Warrants acknowledges the restrictions on transfer of such Warrants set forth in
this Agreement and in the Private Placement Legend and agrees that it will
transfer such Warrants only as provided in this Agreement. The Warrant Agent
shall not register a transfer of any Warrants unless such transfer complies with
the restrictions on transfer of such Warrants set forth in this Agreement. In
connection with any transfer of Warrants, each Holder agrees by its acceptance
of Warrants to furnish the Warrant Agent or the Company such certifications,
legal opinions or other information as either of them may reasonably require to
confirm that such transfer is being made pursuant to an exemption from, or a
transaction not subject to, the registration requirements of the Securities Act
or any applicable laws of any state or foreign jurisdiction; PROVIDED that the
Warrant Agent shall not be required to determine (but may rely on a
determination made by the Company with respect to) the sufficiency of any such
certifications, legal opinions or other information.
(ii) The Warrant Agent shall retain, in accordance with its
customary procedure, copies of all letters, notices and other written
communications received pursuant to Section 8.2 hereof or this Section 8.3.
The Company shall have the right to inspect and make copies of all such
letters, notices or other written communications at any reasonable time
upon the giving of reasonable written notice to the Warrant Agent.
<PAGE>
32
SECTION 8.4. SURRENDER OF WARRANT CERTIFICATES. Any Warrant
Certificate surrendered for registration of transfer, exchange or exercise of
the Warrants represented thereby shall, if surrendered to the Company, be
delivered to the Warrant Agent, and all Warrant Certificates surrendered or so
delivered to the Warrant Agent shall be promptly cancelled by the Warrant Agent
and shall not be reissued by the Company and, except as provided in this Article
VIII in case of an exchange, Article III hereof in case of the exercise of less
than all the Warrants represented thereby or Article VI in case of a mutilated
Warrant Certificate, no Warrant Certificate shall be issued hereunder in lieu
thereof. The Warrant Agent shall deliver to the Company from time to time or
otherwise dispose of such cancelled Warrant Certificates as the Company may
direct in writing.
ARTICLE IX
WARRANT HOLDERS
SECTION 9.1. WARRANT HOLDER DEEMED NOT A SHAREHOLDER. The Company
and the Warrant Agent may deem and treat the registered Holder(s) of the Warrant
Certificates as the absolute owner(s) thereof (notwithstanding any notation of
ownership or other writing thereon made by anyone), for the purpose of any
exercise thereof and for all other purposes, and neither the Company nor the
Warrant Agent nor any agent thereof shall be affected by any notice to the
contrary. Accordingly, the Company and/or the Warrant Agent shall not, except
as ordered by a court of competent jurisdiction as required by law, be bound to
recognize any equitable or other claim to or interest in the Warrants on the
part of any Person other than such registered Holder, whether or not it shall
have express or other notice thereof. Prior to the valid exercise of the
Warrants, no Holder of a Warrant Certificate, as such, shall be entitled to any
rights of a shareholder of the Company, including, without limitation, the right
to vote or to consent to any action of the shareholders, to receive dividends or
other distributions, to exercise any preemptive right or to receive any notice
of meetings of shareholders and, except as otherwise provided in this Agreement,
shall not be entitled to receive any notice of any proceedings of the Company.
SECTION 9.2. RIGHT OF ACTION. All rights of action with respect to
this Agreement are vested in the Holders of the Warrants, and any Holder of any
Warrant, without the consent of the Warrant Agent or the Holders of any other
Warrant, may, on such Holder's own behalf and for such Holder's own benefit,
enforce, and may institute and maintain any suit, action or proceeding against
the Company suitable to enforce, or otherwise in respect of, such Holder's right
to exercise such Warrants in the manner provided in the Warrant Certificate
representing such Warrants and in this Agreement.
<PAGE>
33
ARTICLE X
THE WARRANT AGENT
SECTION 10.1. DUTIES AND LIABILITIES. The Warrant Agent hereby
accepts the agency established by this Agreement and agrees to perform the same
upon the terms and conditions herein set forth, by all of which the Company and
the Holders of Warrants, by their acceptance thereof, shall be bound. The
Warrant Agent shall not, by countersigning Warrant Certificates or by any other
act hereunder, be deemed to make any representations as to the validity or
authorization of the Warrants or the Warrant Certificates (except as to its
countersignature thereon) or of any Common Shares issued upon exercise of any
Warrant, or as to the accuracy of the computation of the Exercise Price or the
number or kind or amount of Common Shares deliverable upon exercise of any
Warrant or the correctness of the representations of the Company made in the
certificates that the Warrant Agent receives. The Warrant Agent shall not be
accountable for the use or application by the Company of the proceeds of the
exercise of any Warrant. The Warrant Agent shall not have any duty to calculate
or determine any adjustments with respect to either the Exercise Price or the
kind and amount of Common Shares receivable by Holders upon the exercise of
Warrants required from time to time and the Warrant Agent shall have no duty or
responsibility in determining the accuracy or correctness of such calculation.
The Warrant Agent shall not be (a) liable for any recital or statement of fact
contained herein or in the Warrant Certificates or for any action taken,
suffered or omitted by it in good faith in the belief that any Warrant
Certificate or any other documents or any signatures are genuine or properly
authorized, (b) responsible for any failure on the part of the Company to comply
with any of its covenants and obligations contained in this Agreement or in the
Warrant Certificates or (c) liable for any act or omission in connection with
this Agreement except for its own gross negligence, bad faith or willful
misconduct. The Warrant Agent is hereby authorized to accept instructions with
respect to the performance of its duties hereunder from the Chairman of the
Board, the Vice Chairman of the Board, the President, Chief Executive Officer,
the Chief Operating Officer, the Chief Financial Officer, or any other executive
officer of the Company and to apply to any such officer for instructions (which
instructions will be promptly given in writing when requested) and the Warrant
Agent shall not be liable for any action taken or suffered to be taken by it in
good faith in accordance with the instructions of any such officer; PROVIDED,
HOWEVER, that, in its discretion, the Warrant Agent may, in lieu thereof, accept
other evidence of such or may require such further or additional evidence as it
may deem reasonable. The Warrant Agent shall not be liable for any action taken
with respect to any matter in the event it requests instructions from the
Company as to that matter and does not receive such instructions within a
reasonable period of time after the request therefor.
<PAGE>
34
The Warrant Agent may execute and exercise any of the rights and
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys, agents or employees, and the Warrant Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys, agents or employees; PROVIDED that reasonable care has been
exercised with respect to the retention of any such attorney, agent or employee.
The Warrant Agent shall not be under any obligation or duty to institute, appear
in or defend any action, suit or legal proceeding in respect hereof, unless
first indemnified to its reasonable satisfaction. The Warrant Agent shall
promptly notify the Company in writing of any claim made or action, suit or
proceeding instituted against it arising out of or in connection with this
Agreement.
The Company will perform, execute, acknowledge and deliver or cause to
be delivered all such further acts, instruments and assurances as are consistent
with this Agreement and as may reasonably be required by the Warrant Agent in
order to enable it to carry out or perform its duties under this Agreement.
The Warrant Agent shall act solely as agent of the Company hereunder.
The Warrant Agent shall not be liable except for the failure to perform such
duties as are specifically set forth herein, and no implied covenants or
obligations shall be read into this Agreement against the Warrant Agent, whose
duties and obligations shall be determined solely by the express provisions
hereof.
SECTION 10.2. RIGHT TO CONSULT COUNSEL. The Warrant Agent may at any
time consult with legal counsel (who may be legal counsel for the Company), and
the written opinion or advice of such counsel shall be full and complete
authorization and protection to the Warrant Agent and the Warrant Agent shall
incur no liability or responsibility to the Company or to any Holder for any
action taken, suffered or omitted by it in good faith in accordance with the
opinion or advice of such counsel.
SECTION 10.3. COMPENSATION; INDEMNIFICATION. The Company agrees
promptly to pay the Warrant Agent from time to time and in any case within 30
days of receipt of an invoice, compensation for its services hereunder as the
Company and the Warrant Agent may agree from time to time, and to reimburse it
upon its request (which shall be accompanied by reasonable supporting
documentation) for reasonable fees or expenses and reasonable counsel fees and
expenses incurred in connection with the execution and administration of this
Agreement, and further agrees to indemnify the Warrant Agent and save it
harmless against any losses, liabilities or reasonable expenses arising out of
or in connection with the acceptance and administration of this Agreement,
including, without limitation, the reasonable costs and expenses of
investigating or defending any claim of such liability, except that the Company
shall have no liability hereunder to the extent that any such loss, liability or
expense
<PAGE>
35
results from the Warrant Agent's own gross negligence, bad faith or willful
misconduct. The obligations of the Company under this Section 10.3 shall
survive the exercise and the expiration of the Warrants, the termination of this
Agreement and the resignation or removal of the Warrant Agent in respect of
services or expenses incurred in connection with the Warrants or this Agreement.
SECTION 10.4. NO RESTRICTIONS ON ACTIONS. Nothing in this Agreement
shall be deemed to prevent the Warrant Agent and any shareholder, director,
officer or employee of the Warrant Agent from buying, selling or dealing in any
of the Warrants or other securities of the Company or becoming pecuniarily
interested in transactions in which the Company may be interested, or
contracting with or lending money to the Company or otherwise acting as fully
and freely as though it were not the Warrant Agent under this Agreement.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
SECTION 10.5. DISCHARGE OR REMOVAL; REPLACEMENT WARRANT AGENT. The
Warrant Agent may resign from its position as such and be discharged from all
further duties and liabilities hereunder (except liability arising as a result
of the Warrant Agent's own gross negligence, bad faith or willful misconduct),
after giving one month's prior written notice to the Company. The Company may
at any time remove the Warrant Agent upon one month's written notice specifying
the date when such discharge shall take effect, and the Warrant Agent shall
thereupon in like manner be discharged from all further duties and liabilities
hereunder, except as aforesaid. The Warrant Agent shall mail to each Holder of
a Warrant, at the Company's expense, a copy of said notice of resignation or
notice of removal, as the case may be. Upon such resignation or removal the
Company shall appoint in writing a new warrant agent. If the Company shall fail
to make such appointment within a period of 30 days after it has been notified
in writing of such resignation by the resigning Warrant Agent or after such
removal, then the resigning or removed Warrant Agent or the Holder of any
Warrant may apply to any court of competent jurisdiction for the appointment of
a new warrant agent. After 30 days from receipt of, or giving, notice, as the
case may be, and pending appointment of a successor to the original Warrant
Agent, either by the Company or by such a court, the duties of the Warrant Agent
shall be carried out by the Company. Any new warrant agent, whether appointed
by the Company or by such a court, shall be a bank or trust company doing
business under the laws of the United States or any state thereof, in good
standing and having a combined capital and surplus of not less than $25,000,000.
The combined capital and surplus of any such new warrant agent shall be deemed
to be the combined capital and surplus as set forth in the most recent annual
report of its condition published by such warrant agent prior to its
appointment, PROVIDED that such reports are published at least annually pursuant
to law or to the requirements of a federal or state supervising or examining
authority. After acceptance in writing of such appointment by the new warrant
agent, it shall be vested with
<PAGE>
36
the same powers, rights, duties and responsibilities as if it had been
originally named herein as the Warrant Agent, without any further assurance,
conveyance, act or deed; however, the original Warrant Agent shall in all events
deliver and transfer to the successor Warrant Agent all property (including,
without limitation, documents and recorded information), if any, at the time
held hereunder by the original Warrant Agent and if for any reason it shall be
necessary or expedient to execute and deliver any further assurance, conveyance,
act or deed, the same shall be done at the expense of the Company and shall be
legally and validly executed and delivered by the resigning or removed Warrant
Agent. Not later than the effective date of any such appointment, the Company
shall file notice thereof with the resigning or removed Warrant Agent and shall
use its reasonable best efforts to forthwith cause a copy of such notice to be
mailed by the successor Warrant Agent to each Holder of a Warrant. Failure to
give any notice provided for in this Section 10.5, however, or any defect
therein, shall not affect the legality or validity of the resignation of the
Warrant Agent or the appointment of a new warrant agent, as the case may be. No
Warrant Agent hereunder shall be liable for any acts or omissions of any
successor Warrant Agent.
SECTION 10.6. SUCCESSOR WARRANT AGENT. Any corporation into which
the Warrant Agent or any new warrant agent may be merged or converted, or any
corporation resulting from any consolidation to which the Warrant Agent or any
new warrant agent shall be a party or any corporation succeeding to all or
substantially all the corporate agency business of the Warrant Agent, shall be a
successor Warrant Agent under this Agreement without any further act, PROVIDED
that such corporation would be eligible for appointment as successor to the
Warrant Agent under the provisions of Section 10.5 hereof. Any such successor
Warrant Agent shall promptly cause notice of its succession as Warrant Agent to
be mailed to each Holder of a Warrant.
ARTICLE XI
MISCELLANEOUS
SECTION 11.1. MONIES DEPOSITED WITH THE WARRANT AGENT. The Warrant
Agent shall not be required to pay interest on any monies deposited pursuant to
the provisions of this Agreement except such as it shall agree in writing with
the Company to pay thereon. Any monies, securities or other property which at
any time shall be deposited by the Company or on its behalf with the Warrant
Agent pursuant to this Agreement shall be and are hereby assigned, transferred
and set over to the Warrant Agent in trust for the purpose for which such
monies, securities or other property shall have been deposited; but such monies,
securities or other property need not be segregated from other funds, securities
or other property except to the extent required by law. Any monies, securities
or other property deposited with the
<PAGE>
37
Warrant Agent for payment or distribution to the Holders that remains unclaimed
for one year after the date the monies, securities or other property was
deposited with the Warrant Agent shall be delivered to the Company upon its
request therefor.
SECTION 11.2. PAYMENT OF TAXES. Subject to Article VI hereof, all
Common Shares issuable upon the exercise of Warrants shall be validly issued,
fully paid and not subject to any calls for funds, and the Company shall pay any
taxes and other governmental charges that may be imposed under the laws of the
United States of America or any political subdivision or taxing authority
thereof or therein in respect of the issue or delivery thereof upon exercise of
Warrants (other than income taxes imposed on the Holders). The Company shall
not be required, however, to pay any tax or other charge imposed in connection
with any transfer involved in the issue of any certificate for Common Shares
(including other securities or property issuable upon the exercise of the
Warrants) or payment of cash to any Person other than the Holder of a Warrant
Certificate surrendered upon the exercise of a Warrant and in case of such
transfer or payment, the Warrant Agent and the Company shall not be required to
issue any share certificate or pay any cash until such tax or charge has been
paid or it has been established to the Warrant Agent's and the Company's
satisfaction that no such tax or charge is due.
SECTION 11.3. NO MERGER, CONSOLIDATION OR SALE OF ASSETS OF THE
COMPANY. Except as otherwise provided herein, the Company will not merge into
or consolidate with any other Person, or sell or otherwise transfer its
property, assets and business substantially as an entirety to a successor of the
Company, unless the Person resulting from such merger or consolidation, or such
successor of the Company, shall expressly assume, by supplemental agreement
satisfactory in form to the Warrant Agent and executed and delivered to the
Warrant Agent, the due and punctual performance and observance of each and every
covenant and condition of this Agreement or contained in the Warrants to be
performed and observed by the Company.
SECTION 11.4. REPORTS TO HOLDERS. At all times from and after the
earlier of (i) the Separation Date and (ii) the date that is six months after
the Closing Date, in either case, whether or not the Company is then required to
file reports with the Commission, the Company shall file with the Commission all
such reports and other information it would be required to file with the
Commission by Section 13(a) or 15(d) under the Exchange Act if it were subject
thereto. The Company shall supply the Warrant Agent and each Holder or shall
supply to the Warrant Agent for forwarding to each such Holder, without cost to
such Holder, copies of such reports and other information. In addition, at all
times, upon the request of any Holder or any prospective purchaser of the
Warrants designated by a Holder, the Company shall supply to such Holder or such
prospective purchaser the information required under Rule 144A under the
Securities Act.
<PAGE>
38
SECTION 11.5. NOTICES; PAYMENT. (a) Except as otherwise provided in
Section 11.5(b) hereof, any notice, demand or delivery authorized by this
Agreement shall be sufficiently given or made when mailed, if sent by first
class mail, postage prepaid, addressed to any Holder of a Warrant at such
Holder's last known address appearing on the register of the Company maintained
by the Warrant Agent and to the Company or the Warrant Agent as follows:
To the Company:
KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07921
Attention: Chief Financial Officer
To the Warrant Agent:
The Chase Manhattan Bank
450 West 33rd St., 15th Floor
New York, NY 10001-2697
Attention: Global Trust Services
or such other address as shall have been furnished to the party giving or making
such notice, demand or delivery. Any notice that is mailed in the manner herein
provided shall be conclusively presumed to have been duly given when mailed,
whether or not the Holder receives the notice.
(b) Payment of the Exercise Price should be made in accordance with
the provisions of this Agreement at the office of the Warrant Agent set forth
above.
(c) Any notice required to be given by the Company to the Holders
shall be made by mailing to the Holders at their last known addresses appearing
on the register maintained by the Warrant Agent. The Company hereby irrevocably
authorizes the Warrant Agent, in the name and at the expense of the Company, to
mail any such notice upon receipt thereof from the Company. Any notice that is
mailed in the manner herein provided shall be conclusively presumed to have been
duly given when mailed, whether or not the Holder receives the notice.
SECTION 11.6. BINDING EFFECT. This Agreement shall be binding upon
and inure to the benefit of the Company and the Warrant Agent and their
respective successors and assigns, and the Holders from time to time of the
Warrants. Nothing in this Agreement is
<PAGE>
39
intended or shall be construed to confer upon any Person, other than the
Company, the Warrant Agent and the Holders of the Warrants, any right, remedy or
claim under or by reason of this Agreement or any part hereof.
SECTION 11.7. COUNTERPARTS. This Agreement may be executed manually
or by facsimile in any number of counterparts, each of which shall be deemed an
original, but all of which together constitute one and the same instrument.
SECTION 11.8. AMENDMENTS. The Warrant Agent may, without the consent
or concurrence of the Holders of the Warrants, by supplemental agreement or
otherwise, join with the Company in making any changes or corrections in this
Agreement that (a) are required to cure any ambiguity or to correct any
defective or inconsistent provision or clerical omission or mistake or manifest
error herein contained or (b) add to the covenants and agreements of the Company
in this Agreement further covenants and agreements of the Company thereafter to
be observed, or surrender any rights or power reserved to or conferred upon the
Company in this Agreement; PROVIDED that in either case such changes or
corrections do not and will not adversely affect, alter or change the rights,
privileges or immunities of the Holders of Warrants. Upon the Warrant Agent's
request, the Company shall promptly provide an Officer's Certificate and Opinion
of Counsel which provide that all conditions precedent to adoption of an
amendment have been satisfied.
SECTION 11.9. HEADINGS. The descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
SECTION 11.10. COMMON SHARES LEGEND. Unless and until the Common
Shares issuable upon the exercise of the Warrants are registered under the
Securities Act, or unless otherwise agreed by the Company and the Holder
thereof, such Common Shares will bear a legend to the following effect:
THE COMMON SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND ACCORDINGLY, MAY
NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE
UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS
EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION
HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT) OR (B) IT IS AN
<PAGE>
40
INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3)
OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL
ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THE
COMMON SHARES REPRESENTED BY THIS CERTIFICATE IN AN OFFSHORE TRANSACTION IN
COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT
WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) (TAKING INTO
ACCOUNT THE PROVISIONS OF RULE 144(d) UNDER THE SECURITIES ACT, IF
APPLICABLE), AS IN EFFECT WITH RESPECT TO SUCH TRANSFER, RESELL OR
OTHERWISE TRANSFER THE COMMON SHARES REPRESENTED BY THIS CERTIFICATE EXCEPT
(A) TO KMC TELECOM HOLDINGS, INC. (THE "COMPANY") OR ANY SUBSIDIARY
THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE
144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN
INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES
TO THE TRANSFER AGENT AND REGISTRAR A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF
THE COMMON SHARES REPRESENTED BY THIS CERTIFICATE (THE FORM OF WHICH LETTER
CAN BE OBTAINED FROM THE TRANSFER AGENT AND REGISTRAR) AND AN OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH
THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT,
(E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER
THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL
DELIVER TO EACH PERSON TO WHOM THE COMMON SHARES REPRESENTED BY THIS
CERTIFICATE ARE TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS
LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE COMMON SHARES REPRESENTED
BY THIS CERTIFICATE WITHIN THE TIME PERIOD REFERRED TO ABOVE, THE HOLDER
MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO
THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRANSFER
AGENT AND REGISTRAR. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL
ACCREDITED
<PAGE>
41
INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO EACH OF THE
TRANSFER AGENT AND REGISTRAR AND THE COMPANY SUCH CERTIFICATIONS, LEGAL
OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO
CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR
IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED
STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S
UNDER THE SECURITIES ACT. THE WARRANT AGREEMENT CONTAINS A PROVISION
REQUIRING THE TRANSFER AGENT AND REGISTRAR TO REFUSE TO REGISTER ANY
TRANSFER OF THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE IN
VIOLATION OF THE FOREGOING RESTRICTIONS.
SECTION 11.11. THIRD PARTY BENEFICIARIES. The Holders shall be third
party beneficiaries to the agreements made hereunder between the Company, on the
one hand, and the Warrant Agent, on the other hand, and each Holder shall have
the right to enforce such agreements directly to the extent it deems such
enforcement necessary or advisable to protect its rights or the rights of
Holders hereunder. By acquiring Warrants, each Holder agrees to be bound by the
obligations of Holders generally as set forth herein and as such obligations may
be applicable to such Holder.
SECTION 11.12. TERMINATION. Except as otherwise specified herein,
this Agreement shall terminate at 5:00 p.m. (New York City time) on the
Expiration Date. Notwithstanding the foregoing, this Agreement shall terminate
on any earlier date as of which all Warrants have been exercised.
SECTION 11.13. GOVERNING LAW. This Agreement shall be governed by
the laws of the State of New York.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, as of the day and year first above written.
KMC TELECOM HOLDINGS, INC.
By:
-----------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, as Warrant Agent
By:
-----------------------------------
Name: Patricia Kelly
Title:
<PAGE>
EXHIBIT A
FORM OF WARRANT CERTIFICATE
KMC TELECOM HOLDINGS, INC.
[CUSIP] [CINS] [ISIN] No. _____
No. _____
WARRANTS TO PURCHASE COMMON SHARES
This certifies that ______________, or its registered assigns, is the
owner of ___________ Warrants, each of which represents the right to purchase,
after January 29, 1999, from KMC TELECOM HOLDINGS, INC., a Delaware corporation
(the "COMPANY"), 0.21785 shares of the Common Stock, par value $0.01 per share,
of the Company (the "COMMON SHARES") at an exercise price (the "EXERCISE PRICE")
of $0.01 per Common Share (subject to adjustment as provided in the Warrant
Agreement hereinafter referred to below), upon surrender hereof at the office of
The Chase Manhattan Bank, or to its successor, as the warrant agent under the
Warrant Agreement (any such warrant agent being herein called the "WARRANT
AGENT"), with the Subscription Form on the reverse hereof duly executed, with
signature guaranteed as therein specified and simultaneous payment in full by
wire transfer, in cash or by certified or official bank or bank cashier's check
payable to the order of the Company. Notwithstanding the foregoing, if the
Common Shares (or other securities) issuable upon exercise of the Warrants are
registered under the Exchange Act, the Exercise Price may be paid by
surrendering additional Warrants to the Warrant Agent having an aggregate Spread
equal to the aggregate Exercise Price of the Warrants being exercised. At any
time beginning one year after the Closing Date and on or before the Expiration
Date, any outstanding Warrants may be exercised on any Business Day; PROVIDED
that the Warrant Registration Statement is, at the time of exercise, effective
and available for the exercise of Warrants or the exercise of such Warrants is
exempt from the registration requirements of the Securities Act.
This Warrant Certificate is issued under and in accordance with a
Warrant Agreement dated as of January 29, 1998 (the "WARRANT AGREEMENT"),
between the Company and The Chase Manhattan Bank and a Warrant Registration
Rights Agreement dated as of January 26, 1998 (the "WARRANT REGISTRATION RIGHTS
AGREEMENT"), between the Company and Morgan Stanley & Co. Incorporated, and is
subject to the Certificate of Incorporation and Bylaws of the Company and to the
terms and provisions contained therein, to all of which terms and provisions the
Holder of this Warrant Certificate consents by acceptance hereof. The terms of
the Warrant Agreement and the Warrant Registration Rights Agreement are hereby
incorporated herein by reference and made a part hereof. Reference is hereby
made to the Warrant Agreement and the Warrant Registration Rights Agreement for
a full description
<PAGE>
A-2
of the rights, limitations of rights, obligations, duties and immunities
thereunder of the Company and the Holders of the Warrants. The summary of the
terms of the Warrant Agreement and the Warrant Registration Rights Agreement
contained in this Warrant Certificate is qualified in its entirety by express
reference to the Warrant Agreement and the Warrant Registration Rights
Agreement. All terms used in this Warrant Certificate that are defined in the
Warrant Agreement and the Warrant Registration Rights Agreement shall have the
meanings assigned to them in such agreements.
Copies of the Warrant Agreement and the Warrant Registration Rights
Agreement are on file at the office of the Warrant Agent and may be obtained by
writing to the Warrant Agent at the following address:
The Chase Manhattan Bank
450 West 33rd St., 15th Floor
New York, NY 10001-2697
Attention: Global Trust Services
If the Company merges or consolidates with or into, or sells all or
substantially all of its property and assets to, another Person and the
consideration received by holders of Common Shares consists solely of cash, the
Holders of Warrants shall be entitled to receive distributions on the date of
such event on an equal basis with holders of Common Shares (or other securities
issuable upon exercise of the Warrants) as if the Warrants had been exercised
immediately prior to such event (less the Exercise Price). Upon receipt of such
payment, if any, the rights of a Holder shall terminate and cease and such
Holder's Warrants shall expire.
The number of Common Shares purchasable upon the exercise of each
Warrant and the price per share are subject to adjustment as provided in the
Warrant Agreement. Except as stated in the immediately preceding paragraph, in
the event the Company merges or consolidates with, or sells all or substantially
all of its assets to, another Person, each Warrant will, upon exercise, entitle
the Holder thereof to receive the number of shares of capital stock or other
securities or the amount of money and other property which the holder of a
Common Share (or other securities or property issuable upon exercise of a
Warrant) is entitled to receive upon completion of such merger, consolidation or
sale.
As to any final fraction of a share which the same Holder of one or
more Warrant Certificates would otherwise be entitled to purchase upon exercise
thereof in the same transaction, the Company may pay the cash value thereof
determined as provided in the Warrant Agreement.
<PAGE>
A-3
Subject to Article VI of the Warrant Agreement, all Common Shares
issuable by the Company upon the exercise of Warrants shall be validly issued,
fully paid and not subject to any calls for funds, and the Company shall pay any
taxes and other governmental charges that may be imposed under the laws of the
United States of America or any political subdivision or taxing authority
thereof or therein in respect of the issue or delivery thereof upon exercise of
Warrants (other than income taxes imposed on the Holders). The Company shall
not be required, however, to pay any tax or other charge imposed in connection
with any transfer involved in the issue of any certificate for Common Shares
(including other securities or property issuable upon the exercise of the
Warrants) or payment of cash to any Person other than the Holder of a Warrant
Certificate surrendered upon the exercise of a Warrant and in case of such
transfer or payment, the Warrant Agent and the Company shall not be required to
issue any share certificate or pay any cash until such tax or charge has been
paid or it has been established to the Warrant Agent's and the Company's
satisfaction that no such tax or charge is due.
Subject to the restrictions on and conditions to transfer set forth in
Articles II and VIII of the Warrant Agreement, this Warrant Certificate and all
rights hereunder are transferable by the registered Holder hereof, in whole or
in part, on the register of the Company maintained by the Warrant Agent for such
purpose at the Warrant Agent's office in New York, New York, upon surrender of
this Warrant Certificate duly endorsed, or accompanied by a written instrument
of transfer in form satisfactory to the Company and the Warrant Agent duly
executed, with signatures guaranteed as specified in the attached Form of
Assignment, by the registered Holder hereof or his attorney duly authorized in
writing and by such other documentation required pursuant to the Warrant
Agreement and upon payment of any necessary transfer tax or other governmental
charge imposed upon such transfer. Upon any partial transfer, the Company will
sign and issue and the Warrant Agent will countersign and deliver to such Holder
a new Warrant Certificate or Certificates with respect to any portion not so
transferred. Each taker and Holder of this Warrant Certificate, by taking and
holding the same, consents and agrees that prior to the registration of transfer
as provided in the Warrant Agreement, the Company and the Warrant Agent may
treat the Person in whose name the Warrants are registered as the absolute owner
hereof for any purpose and as the Person entitled to exercise the rights
represented hereby, any notice to the contrary notwithstanding. Accordingly,
the Company and/or the Warrant Agent shall not, except as ordered by a court of
competent jurisdiction as required by law, be bound to recognize any equitable
or other claim to or interest in the Warrants on the part of any Person other
than such registered Holder, whether or not it shall have express or other
notice thereof.
This Warrant Certificate may be exchanged at the office of the Warrant
Agent maintained for such purpose in New York, New York for Warrant Certificates
representing
<PAGE>
A-4
the same aggregate number of Warrants, each new Warrant Certificate to represent
such number of Warrants as the Holder hereof shall designate at the time of such
exchange.
Prior to the valid exercise of the Warrants represented hereby, the
Holder of this Warrant Certificate, as such, shall not be entitled to any rights
of a shareholder of the Company, including, without limitation, the right to
vote or to consent to any action of the shareholders, to receive any
distributions, to exercise any pre-emptive right or to receive any notice of
meetings of shareholders, and shall not be entitled to receive any notice of any
proceedings of the Company except as provided in the Warrant Agreement.
This Warrant Certificate shall be void and all rights evidenced hereby
shall cease on January 31, 2008, unless sooner terminated by the liquidation,
dissolution or winding-up of the Company or as otherwise provided in the Warrant
Agreement upon the consolidation or merger of the Company with, or sale of the
Company to, another Person or unless such date is extended as provided in the
Warrant Agreement.
[Balance of page intentionally left blank.]
<PAGE>
A-5
This Warrant Certificate shall not be valid for any purpose until it
shall have been countersigned by the Warrant Agent.
KMC TELECOM HOLDINGS, INC.
By:
------------------------------
Name:
Title:
Dated:
Countersigned:
THE CHASE MANHATTAN BANK,
as Warrant Agent
By:
------------------------------
Name:
Title:
<PAGE>
A-6
FORM OF REVERSE OF WARRANT CERTIFICATE
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
To: The Chase Manhattan Bank
450 West 33rd St., 15th Floor
New York, NY 10001-2697
Attention: Global Trust Services
The undersigned irrevocably exercises ________ of the Warrants
represented by this Warrant Certificate and herewith makes payment of $ _______
(such payment being by wire transfer, in cash or by certified or official bank
or bank cashier's check payable to the order or at the direction of KMC Telecom
Holdings, Inc. or, if the Common Shares (or other securities) issuable upon
exercise of the Warrants are registered under the Exchange Act, the exercise
price may be paid by surrendering additional Warrants to the Warrant Agent
having an aggregate Spread equal to the aggregate exercise price of the Warrants
being exercised) all at the exercise price and on the terms and conditions
specified in this Warrant Certificate and in the Warrant Agreement and the
Warrant Registration Rights Agreement referred to herein and surrenders this
Warrant Certificate and all right, title and interest therein to and directs
that the shares of Common Stock, par value $.01 per share, of KMC Telecom
Holdings, Inc. (the "COMMON SHARES") deliverable upon the exercise of such
Warrants be registered or placed in the name and at the address specified below
and delivered thereto.
CHECK ONE
/ / Payment made by wire transfer, in cash, or by certified or
official bank or bank cashier's check.
OR
/ / The Common Shares (or other securities) issuable upon exercise
of the Warrants are registered under the Exchange Act and
Payment is being made by surrendering Warrants having an
aggregate Spread equal to the aggregate Exercise Price of the
Warrants being exercised.
[THE FOLLOWING PROVISION TO BE INCLUDED ONLY
ON OFFSHORE CERTIFICATED WARRANTS]
The undersigned certifies that:
<PAGE>
A-7
CHECK ONE
/ / (a) (i) it is not a U.S. person (as defined in Rule 902 of
Regulation S under the Securities Act) and the Warrants are not
being exercised on behalf of a U.S. person.
OR
/ / (ii) it is furnishing to the Warrant Agent a written opinion of
counsel to the effect that the Warrants and the Common Shares
issuable upon exercise of the Warrants have been registered
under the Securities Act or are exempt from registration
thereunder.
and (b) if an opinion is not being furnished, the undersigned is located outside
the United States at the time of the exercise hereof.
Dated: _______________________________
(Signature of Owner)
_______________________________
(Street Address)
_______________________________
(City) (State) (Zip Code)
Signature Guaranteed By:
_______________________________
Securities and/or check or other property to be issued or delivered to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
<PAGE>
A-8
FORM OF ASSIGNMENT
In consideration of monies or other valuable consideration received
from the Assignee(s) named below, the undersigned registered Holder of this
Warrant Certificate hereby sells, assigns, and transfers unto the Assignee(s)
named below (including the undersigned with respect to any Warrants constituting
a part of the Warrants evidenced by this Warrant Certificate not being assigned
hereby) all of the right of the undersigned under this Warrant Certificate, with
respect to the number of Warrants set forth below:
Name(s) of Assignee(s): _____________________________________
Address: ____________________________________________________
No. of Warrants: ____________________________________________
Please insert social security or other identifying number of assignee(s):
and does hereby irrevocably constitute and appoint ________________________ the
undersigned's attorney to make such transfer on the books of __________________
maintained for the purposes, with full power of substitution in the premises.
[THE FOLLOWING PROVISION TO BE INCLUDED ON ALL CERTIFICATES EXCEPT PERMANENT
REGULATION S GLOBAL WARRANTS AND OFFSHORE CERTIFICATED WARRANTS]
In connection with any transfer of Warrants, the undersigned confirms
that without utilizing any general solicitation or general advertising that:
[Check One]
/ / (a) these Warrants are being transferred in compliance with the exemption
from registration under the U.S. Securities Act of 1933, as amended,
provided by Rule 144A thereunder.
OR
/ / (b) these Warrants are being transferred other than in accordance with (a)
above and documents are being furnished which comply with the
conditions of transfer set forth in this Warrant Certificate and the
Warrant Agreement.
OR
<PAGE>
A-9
/ / (c) these Warrants are being transferred pursuant to an effective
registration statement under the U.S. Securities Act of 1933, as
amended.
If none of the foregoing boxes is checked, the Warrant Agent shall not be
obligated to register the Warrants in the name of any Person other than the
Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Article VIII of the Warrant Agreement shall
have been satisfied.
Dated:
_______________________________
(Signature of Owner)
_______________________________
(Street Address)
_______________________________
(City) (State) (Zip Code)
Signature Guaranteed By:
_______________________________
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing the
Warrant(s) for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the U.S. Securities
Act of 1933, as amended, and is aware that the sale to it is being made in
reliance on Rule 144A and acknowledges that it has received such information
regarding KMC Telecom Holdings, Inc. as the undersigned has requested pursuant
to Rule 144A or has determined not to request such information and that it is
aware that the transferor is relying upon the undersigned's foregoing
representations in order to claim the exemption from registration provided by
Rule 144A.
Dated:________________
________________________________________
[NOTE: To be executed by an executive officer]
<PAGE>
EXHIBIT B
Form of Certificate to be Delivered
in Connection with
Transfers Pursuant to Regulation S
----------------------------------
[Date]
KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07921
The Chase Manhattan Bank
450 West 33rd St., 15th Floor
New York, NY 10001-2697
Attention: Global Trust Services
Re: KMC Telecom Holdings, Inc.
(the "COMPANY") Warrants to Purchase
Common Shares (the "WARRANTS")
Ladies and Gentlemen:
In connection with our proposed sale of _______________ Warrants, we
hereby certify that such sale has been effected pursuant to and in accordance
with Regulation S under the U.S. Securities Act of 1933, as amended (the
"Securities Act"), and, accordingly, we represent that:
(1) the offer of the Warrants was not made to a person in the
United States and not to a U.S. Person (as defined in Regulation S
under the Securities Act);
(2) at the time the buy order was originated, the transferee was
outside the United States or we and any person acting on our behalf
reasonably believed that the transferee was outside the United States;
(3) no directed selling efforts (as such term is defined in
Rule 902(b) of Regulations S under the Securities Act) have been made
by us, any of our affiliates
<PAGE>
B-2
or any persons acting on our behalf in the United States in
contravention of the requirements of Rule 903(b) or Rule 904(b) of
Regulation S under the Securities Act, as applicable; and
(4) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:
-------------------------
Authorized Signature
<PAGE>
EXHIBIT C-1
Form of Certificate to be
Delivered by Transferor in Connection with
Transfers to Institutional Accredited Investors
-----------------------------------------------
[Date]
KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07921
The Chase Manhattan Bank
450 West 33rd St., 15th Floor
New York, NY 10001-2697
Attention: Global Trust Services
Re: Warrants (the "Warrants") to Purchase
Common Shares of KMC Telecom Holdings, Inc. (the "Company")
Ladies and Gentlemen:
We hereby certify that such transfer is being effected in compliance
with the transfer restrictions applicable to the Warrants or interests therein
transferred pursuant to and in accordance with the Securities Act, and
accordingly we hereby further certify that (check one):
(a) / / such transfer is being effected pursuant to and in accordance
with Rule 144 under the Securities Act;
or
(b) / / such transfer is being effected to the Company or a subsidiary
thereof;
or
(c) / / such transfer is being effected pursuant to an effective
registration statement under the Securities Act;
or
<PAGE>
C1-2
(d) / / such transfer is being effected pursuant to an exemption from
the registration requirements of the Securities Act other than Rule 144A, Rule
144 or Rule 904, and we hereby further certify that such transfer complies with
the transfer restrictions applicable to the Warrants or interests therein
transferred to Institutional Accredited Investors and in accordance with the
requirements of the exemption claimed, which certification is supported by an
Opinion of Counsel provided by us or the transferee (a copy of which we have
attached to this certification), to the effect that such transfer is in
compliance with the Securities Act. Upon consummation of the proposed transfer
in accordance with the terms of the Warrant Agreement, the transferred Warrants
or interests therein will be subject to the restrictions on transfer enumerated
in the Private Placement Legend printed on the IAI Certificated Warrant and in
the Warrant Agreement and the Securities Act.
Very truly yours,
[Name of Transferor]
By:
------------------------------
Authorized Signatory
<PAGE>
EXHIBIT C-2
Form of Certificate to be
Delivered By Transferees in Connection with
Transfers to Institutional Accredited Investors
-----------------------------------------------
[Date]
KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07921
The Chase Manhattan Bank
450 West 33rd St., 15th Floor
New York, NY 10001-2697
Attention: Global Trust Services
Re: Warrants (the "WARRANTS") to Purchase
Common Shares of
KMC Telecom Holdings, Inc. (the "COMPANY")
Ladies and Gentlemen:
In connection with our proposed purchase of ___________ aggregate
number of Warrants, we confirm that:
1. We understand that any subsequent transfer of the Warrants, any
interest therein or the Common Shares issuable upon exercise of any Warrant
(the "WARRANT SHARES") is subject to certain restrictions and conditions
set forth in the Warrant Agreement dated as of January 29, 1998 relating to
the Warrants (the "WARRANT AGREEMENT") and the Warrant Registration Rights
Agreement dated January 26, 1998 relating to the Warrants (the "WARRANT
REGISTRATION RIGHTS AGREEMENT") and the undersigned agrees to be bound by,
and not to resell, pledge or otherwise transfer the Warrants or Warrant
Shares except in compliance with, such restrictions and conditions and the
U.S. Securities Act of 1933, as amended (the "SECURITIES ACT").
2. We understand that the Warrants represented by this Warrant
Certificate and, as of the date this Warrant Certificate was originally
issued, the Warrant Shares have not been registered under the Securities
Act, and accordingly may not be offered, sold, pledged or otherwise
transferred within the United States or to, or for the account
<PAGE>
C2-2
or benefit of, U.S. Persons except as set forth in the following sentence.
We agree that we will not, within the time period referred to in Rule
144(k) of the Securities Act (taking into account the provisions of Rule
144(d) under the Securities Act, if applicable) under the Securities Act as
in effect on the date of the transfer of this Warrant, resell or otherwise
transfer the Warrants represented by this Warrant Certificate except (a) to
KMC Telecom Holdings, Inc. or any subsidiary thereof, (b) to a qualified
institutional buyer in compliance with Rule 144A under the Securities Act,
(c) outside the United States in an offshore transaction in compliance with
Rule 904 under the Securities Act, (d) pursuant to the exemption from
registration provided by Rule 144 under the Securities Act (if available),
(e) to an institutional accredited investor that, prior to such transfer,
furnishes to you, to the Company and, in the case of the Warrant Shares, to
the transfer agent and registrar therefor, a signed letter containing
certain representations and agreements relating to the restrictions on
transfer of the Warrants represented by this Warrant Certificate (the form
of which letter can be obtained from the Warrant Agent) and an opinion of
counsel acceptable to KMC Telecom Holdings, Inc. and its counsel that such
transfer is in compliance with the Securities Act or (f) pursuant to an
effective registration statement under the Securities Act and, in each
case, in accordance with applicable state securities laws.
3. We understand that, on any proposed resale of any Warrants, any
interest therein or Warrant Shares, we will be required to furnish to you
and the Company such certifications, legal opinions and other information
as you and the Company may reasonably require to confirm that the proposed
sale complies with the foregoing restrictions. We further understand that
the Warrants purchased by us will bear a legend to the foregoing effect.
4. We are an institutional "accredited investor" (as defined in
Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act)
and have such knowledge and experience in financial and business matters as
to be capable of evaluating the merits and risks of our investment in the
Warrants, and we and any accounts for which we are acting are each able to
bear the economic risk of our or its investment for an indefinite period of
time.
5. We are acquiring the Warrants purchased by us for our own
account or for one or more accounts (each of which is an institutional
"accredited investor") as to each of which we exercise sole investment
discretion.
<PAGE>
C2-3
You, the Company and, if applicable, the transfer agent and registrar
for the Warrant Shares are entitled to rely upon this letter and are irrevocably
authorized to produce this letter or a copy hereof to any interested party in
any administrative or legal proceedings or official inquiry with respect to the
matters covered hereby.
Very truly yours,
[Name of Transferee]
By:
------------------------------
Authorized Signature
<PAGE>
EXHIBIT D
Form of Certificate
-------------------
________, __
The Chase Manhattan Bank
450 West 33rd St., 15th Floor
New York, NY 10001-2697
Attention: Global Trust Services
KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07921
Attention: Chief Financial Officer
Re: Warrants to Purchase Common Shares of KMC Telecom Holdings, Inc. (the
"Company")
---------------------------------------------------------------------
Ladies and Gentlemen:
This letter relates to Warrants represented by a Warrant
Certificate (the "Temporary Warrants") which bears a legend outlining
restrictions upon transfer of such Temporary Warrants. Pursuant to Section 2.1
of the Warrant Agreement dated as of January 29, 1998 (the "Warrant Agreement")
relating to the Warrants, we hereby certify that we are (or we will hold such
securities on behalf of) a person outside the United States to whom the Warrants
could be transferred in accordance with Rule 904 of Regulation S promulgated
under the U.S. Securities Act of 1933. Accordingly, you are hereby requested to
exchange the temporary certificate for a permanent certificate representing an
identical number of Warrants, all in the manner provided for in the Warrant
Agreement.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Holder]
By:
------------------------------
Authorized Signature
<PAGE>
APPENDIX A
LIST OF FINANCIAL EXPERTS
- -------------------------
Alex. Brown & Sons
Bear, Stearns & Co., Inc.
Dillon, Read & Co. Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.
Lazard Freres & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
PaineWebber Incorporated
Prudential Securities Inc.
Salomon Brothers Inc
Lehman Brothers
<PAGE>
Exhibit 4.8
WARRANT REGISTRATION RIGHTS AGREEMENT
between
KMC TELECOM HOLDINGS, INC.
and
MORGAN STANLEY & CO. INCORPORATED
Dated as of January 26, 1998
<PAGE>
WARRANT REGISTRATION RIGHTS AGREEMENT
WARRANT REGISTRATION RIGHTS AGREEMENT, dated as of January 26, 1998
(this "AGREEMENT"), between KMC TELECOM HOLDINGS, INC., a Delaware corporation
(the "COMPANY"), and Morgan Stanley & Co. Incorporated (the "Initial
Purchaser").
Pursuant to the terms of a Purchase Agreement dated the date hereof
(the "PURCHASE AGREEMENT") between the Company and the Initial Purchaser, the
Company has agreed to issue and sell to the Initial Purchaser an aggregate of
460,800 warrants (each, a "WARRANT"), each Warrant initially entitling the
holder thereof to purchase 0.21785 shares of Common Stock (as defined below) of
the Company at an exercise price of $.01 per Common Share (as defined below), as
part of 460,800 units (each, a "Unit" and collectively, the "UNITS"), each Unit
consisting of one 121/2% Senior Discount Note due 2008 of the Company (each, a
"NOTE" and collectively, the "NOTES") to be issued pursuant to the provisions of
an Indenture (the "Indenture") dated as of the Closing Date (as defined below)
between the Company, as issuer, and The Chase Manhattan Bank, as trustee, and
one Warrant. The Note and the Warrant included in each Unit will become
separately transferable at the close of business upon the earliest to occur of
(i) the date that is six months after the Closing Date, (ii) the commencement of
an exchange offer with respect to the Notes undertaken pursuant to the Notes
Registration Rights Agreement (as defined below), (iii) the effectiveness of a
shelf registration statement with respect to resales of the Notes, (iv) the
commencement of an offer to purchase the Notes pursuant to the Indenture or (v)
the date which the Initial Purchaser, in its sole discretion, determines;
PROVIDED that, prior to such date, the Company mails notice of such
determination to the holders of the Warrants.
In consideration of the foregoing and of the mutual agreements
contained herein and in the Purchase Agreement, the Company and the Initial
Purchaser hereby agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following capitalized defined terms
shall have the following meanings:
"Auditors" means, at any time, the independent auditors of the Company
at such time.
"Board" means the board of directors of the Company from time to
time.
"Closing Date" means January 29, 1998.
"Comfort Letter" has the meaning specified in Section 3 hereof.
<PAGE>
2
"Commission" means the United States Securities and Exchange
Commission.
"Common Shares" means the shares of the Common Stock of the Company.
"Common Stock" means the common stock, par value $.01 per share, of
the Company.
"Company" means KMC Telecom Holdings, Inc., a Delaware corporation.
"Company IPO Shares" has the meaning specified in Section 2 hereof.
"Cutback Notice" has the meaning specified in Section 2 hereof.
"Expiration Date" means the second anniversary of the Closing Date.
"Holders" means the record holders of the Warrants and the holders of
Common Shares (or other securities) received upon exercise thereof.
"Includible Secondary Shares" has the meaning specified in Section 2
hereof.
"Indenture" has the meaning specified in the recitals to this
Agreement.
"Initial Purchaser" has the meaning specified in the recitals to this
Agreement.
"managing underwriter" has the meaning specified in Section 2 hereof.
"Notes" has the meaning specified in the recitals to this Agreement.
"Notes Registration Rights Agreement" means the Registration Rights
Agreement dated the date hereof between the Company and the Initial Purchaser
relating to the Notes.
"Opinion" has the meaning specified in Section 3 hereof.
"Other IPO Shares" has the meaning specified in Section 2 hereof.
"Piggy-back Registration Rights" has the meaning specified in Section
2 hereof.
"Purchase Agreement" has the meaning specified in the recitals to this
Agreement.
<PAGE>
3
"Registration Statement" has the meaning specified in Section 2
hereof.
"Resale Shelf" has the meaning specified in Section 3 hereof.
"Securities Act" means the United States Securities Act of 1933, as
amended.
"Stockholders Agreement" means the Amended and Restated Stockholders
Agreement, dated as of October 31, 1997, among the Company, Nassau Capital
Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, KMC Telecommunications
L.P., AT&T Credit Corporation, General Electric Capital Corporation, CoreStates
Bank, N.A. and CoreStates Holdings, Inc., as amended and supplemented from time
to time.
"Underlying Securities" means the Common Shares issuable upon exercise
of the Warrants or such other securities as shall be issuable upon the exercise
of the Warrants, pursuant to the Warrant Agreement.
"Units" has the meaning specified in the recitals to this Agreement.
"Warrant" has the meaning specified in the recitals to this Agreement.
"Warrant Agent" means The Chase Manhattan Bank, in its capacity as
Warrant Agent under the Warrant Agreement.
"Warrant Agreement" means the Warrant Agreement dated the Closing Date
between the Company and The Chase Manhattan Bank relating to the Warrants.
"Warrant Registration Statement" has the meaning specified in Section
3 hereof.
"Warrant Shares" has the meaning specified in Section 2 hereof.
2. PIGGY-BACK REGISTRATION RIGHTS.
(a) If, prior to the Expiration Date, the Company proposes to file a
Registration Statement with the Commission respecting an offering of any shares
of Common Stock (or other securities issuable upon exercise of the Warrants)
(other than (i) an offering registered solely on Form S-4 or S-8 or any
successor form thereto, or (ii) the initial public offering of shares of Common
Stock (or other securities issuable upon exercise of the Warrants) if no
shareholder of the Company participates therein), the Company shall give prompt
written notice to all the Holders of Warrants or Common Shares or such other
securities received upon exercise of Warrants, to the extent such Common Shares
or other securities would be (upon
<PAGE>
4
issuance) or are, as the case may be, subject to restrictions on transfer, at
least 30 days prior to the initial filing of the registration statement relating
to such offering (the "REGISTRATION STATEMENT"). Each such Holder shall have
the right, within 20 days after delivery of such notice, to request in writing
that the Company include all or a portion of such of the Common Shares issuable
upon exercise of such Holder's Warrants, such other securities as shall be
issuable upon the exercise of the Warrants, or the Common Shares or such other
securities received upon the exercise thereof, pursuant to the Warrant
Agreement, in each case to the extent that such Common Shares or other
securities would be (upon issuance) or are, as the case may be, subject to
restrictions on transfer, ("WARRANT SHARES") in such Registration Statement
("PIGGY-BACK REGISTRATION RIGHTS"). The Company shall include in the public
offering all of the Warrant Shares that a Holder has requested be included,
unless the underwriter for the public offering or the underwriter managing the
public offering (in either case, the "MANAGING UNDERWRITER") delivers a notice
(a "CUTBACK NOTICE") pursuant to Section 2(b) or 2(c) hereof. The managing
underwriter may deliver one or more Cutback Notices at any time prior to the
execution of the underwriting agreement for the public offering.
(b) If a proposed public offering includes both securities to be
offered for the account of the Company ("COMPANY IPO SHARES") and shares to be
sold by stockholders, the provisions of this Section 2(b) shall be applicable if
the managing underwriter delivers a Cutback Notice stating that, in its opinion,
the number of Common Shares (other than Warrant Shares to be sold by the
Holders) that selling stockholders propose to sell therein, whether or not such
selling stockholders have the right to include shares therein (the "OTHER IPO
SHARES"), plus the number of Warrant Shares that the Holders have requested to
be sold therein, plus the Company IPO Shares, exceeds the maximum number of
shares specified by the managing underwriter in such Cutback Notice that may be
distributed without adversely affecting the price, timing or distribution of the
Company IPO Shares. Such maximum number of shares that may be so sold,
excluding the Company IPO Shares, are referred to as the "INCLUDIBLE SHARES."
If the managing underwriter delivers such Cutback Notice, (i) the
Company shall be entitled to include all of the Company IPO Shares in the public
offering, (ii) each stockholder who has requested the inclusion of Other IPO
Shares in the public offering pursuant to Section 6.1 or 6.2 of the Stockholders
Agreement shall be entitled to include all of its Other IPO Shares in priority
to the inclusion of any Warrant Shares requested to be included by Holders and
(iii) except as otherwise provided in clause (ii), above each requesting Holder
shall be entitled to include in the public offering up to its pro rata portion
of the Includible Shares in priority to the inclusion (except as otherwise
provided in clause (ii) above) of any Other IPO Shares that are proposed to be
sold in such public offering.
(c) If a proposed public offering is entirely a secondary offering,
the provisions of this Section 2(c) shall be applicable if the managing
underwriter delivers a
<PAGE>
5
Cutback Notice stating that, in its opinion, the aggregate number of Warrant
Shares and Other IPO Shares proposed to be sold therein exceeds the maximum
number of shares (the "INCLUDIBLE SECONDARY SHARES") specified by the managing
underwriter in such Cutback Notice that may be distributed without adversely
affecting the price, timing or distribution of the Common Shares being
distributed. If the managing underwriter delivers such Cutback Notice, (i) each
stockholder who has requested the inclusion of Other IPO Shares in the public
offering pursuant to Section 6.1 or 6.2 of the Stockholders Agreement shall be
entitled to include all of its Other IPO Shares in priority to the inclusion of
any Warrant Shares requested to be included by Holders and (ii) except as
otherwise provided in clause (i) above, each requesting Holder shall be entitled
to include in the public offering up to its pro rata portion of the Includible
Secondary Shares in priority to the inclusion (except as set forth in clause
(i)) of any Other IPO Shares that are proposed to be sold in such public
offering.
(d) The underwriting agreement for such public offering shall provide
that each requesting Holder shall have the right to sell its Warrant Shares
(other than Warrant Shares excluded from such public offering pursuant to a
Cutback Notice and the terms of Section 2(b) or 2(c)) to the underwriters and
that the underwriters shall purchase the Warrant Shares at the price paid by the
underwriters for the Common Shares sold by the Company and/or other selling
stockholders, as the case may be.
3. SHELF REGISTRATION.
(a) If only the Company sells Common Shares in an initial public
offering or all of the Warrant Shares have not been sold in a public offering,
the Company shall use its reasonable best efforts to cause to be filed pursuant
to Rule 415 under the Securities Act a shelf registration statement on the
appropriate form (the "WARRANT REGISTRATION STATEMENT") covering the issuance of
the Warrant Shares upon exercise of the Warrants and shall use its reasonable
best efforts to cause the Warrant Registration Statement to become effective
under the Securities Act within 180 days after the closing date of the initial
public offering; PROVIDED, HOWEVER, that (1) in no event may the Warrant
Registration Statement be declared effective prior to the first anniversary of
the Closing Date and (2) if the Commission shall request that the Company
register the resale of the Warrant Shares instead of the issuance thereof, the
Warrant Registration Statement shall register such resale as opposed to such
issuance. The Company shall use reasonable efforts to keep the Warrant
Registration Statement continuously effective until the earlier of (i) such time
as all Warrants have been exercised or, in the case of clause (2), until such
time as all Warrant Shares have been resold or (ii) the Expiration Date. Prior
to filing the Warrant Registration Statement or any amendment thereto, the
Company shall provide a copy thereof to the Initial Purchaser and its counsel
and afford them a reasonable time to comment thereon.
(b) If the Warrant Registration Statement shall register the resale
of the
<PAGE>
6
Warrant Shares (a "RESALE SHELF") as provided in Section 3(a)(2) above, the
Company agrees to:
(i) make available for inspection by a representative of the
Holders, any underwriter participating in any disposition pursuant to such
Resale Shelf and attorneys and accountants designated by the Holders, at
reasonable times and in a reasonable manner, financial and other records,
documents and properties of the Company that are pertinent to the conduct
of due diligence customary for an underwritten offering, and cause the
officers, directors and employees of the Company to supply all information
reasonably requested by any such representative, underwriter, attorney or
accountant in connection with a Resale Shelf; PROVIDED, HOWEVER, that such
persons shall first agree in writing with the Company to use such
information only in connection with the transaction for which such
information was obtained and that any information that is reasonably and in
good faith designated by the Company in writing as confidential at the time
of delivery of such information shall be kept confidential by such persons,
unless and to the extent that disclosure of such information is required by
law or such information becomes generally available to the public other
than as a result of a disclosure or failure to safeguard such information
by such person;
(ii) use its reasonable best efforts to cause all Warrant Shares
sold under a Resale Shelf to be listed on any securities exchange or any
automated quotation system on which securities of the same class issued by
the Company are then listed if requested by the Holders of Warrant Shares
representing a majority of the Warrants originally issued, to the extent
such Warrant Shares satisfy applicable listing requirements;
(iii) provide at a reasonable date, a reasonable number of copies of
the prospectus included in such Resale Shelf to Holders that are selling
Warrant Shares pursuant to such Resale Shelf;
(iv) cause to be provided to the Warrant Agent, on behalf of the
Holders and beneficial owners of Warrant Shares, upon the effectiveness of
such Resale Shelf, a customary "10b-5" opinion of independent counsel (an
"OPINION") and a customary "cold comfort" letter of independent auditors (a
"COMFORT LETTER");
(v) cause to be provided to Holders and beneficial owners of
Warrant Shares an Opinion and Comfort Letter with respect to each Form 10-K
and Form 10-Q, including any amendments thereto, that is incorporated by
reference in such Resale Shelf; and
(vi) notify the Warrant Agent, for distribution to the Holders, (A)
when the Resale Shelf has become effective and when any post-effective
amendment thereto has
<PAGE>
6
been filed and becomes effective, (B) of any request by the Commission or
any state securities authority for amendments and supplements to the Resale
Shelf or of any material request by the Commission or any state securities
authority for additional information after the Resale Shelf has become
effective, (C) of the issuance by the Commission or any state securities
authority of any stop order suspending the effectiveness of the Resale
Shelf or the initiation of any proceedings for that purpose, (D) if,
between the effective date of the Resale Shelf and the closing of any sale
of Warrant Shares covered thereby, the representations and warranties of
the Company contained in any underwriting agreement, securities sales
agreement or other similar agreement, including this Agreement, relating to
disclosure cease to be true and correct in all material respects or if the
Company receives any notification with respect to the suspension of the
qualification of the Warrant Shares for sale in any jurisdiction or the
initiation of any proceeding for such purpose, (E) of the happening of any
event during the period the Resale Shelf is effective such that such Resale
Shelf or the related prospectus contains an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make statements therein not misleading and (F) of any
determination by the Company that a post-effective amendment to a
Registration Statement would be appropriate. The Holders hereby agree to
suspend the use of the prospectus contained in any Resale Shelf upon
receipt of such notice under clause (C), (E) or (F) above until, in the
case of clause (C), such stop order is removed or rescinded or, in the case
of clauses (E) and (F), the Company has amended or supplemented such
prospectus to correct such misstatement or omission.
4. SUSPENSION.
Notwithstanding the foregoing, in addition to any suspension
contemplated by clauses (C), (E) or (F) of Section 3(b)(vi), during any
consecutive 365-day period, the Company shall have the privilege to suspend
availability of the Warrant Registration Statement and the related prospectus
for (i) up to two 30-consecutive-day periods, except for the 30 days immediately
prior to the Expiration Date, if the Board determines in good faith that there
is a valid purpose for such suspension and (ii) five additional, non-consecutive
three-day periods, except for the 30 days immediately prior to the Expiration
Date, if the Board determines in good faith that the Company cannot provide
adequate disclosure during such period due to circumstances beyond its control.
Notice of such suspension shall be given promptly to the Warrant Agent.
5. BLUE SKY.
The Company shall use its reasonable best efforts to register or
qualify the Underlying Securities proposed to be sold or issued pursuant to the
Registration Statement or the Warrant Registration Statement under all
applicable securities or "blue sky" laws of all
<PAGE>
8
jurisdictions in the United States in which any Holder of Warrants may or may be
deemed to purchase Underlying Securities upon the exercise of Warrants or resale
of the Warrant Shares, as the case may be, and shall use its reasonable best
efforts to maintain such registration or qualification through the earlier of
(A) in the case of a Registration Statement, the date upon which all of the
Warrant Shares have been sold or such other sale as shall be required by
applicable law, (B) the date upon which all Warrants have been exercised or all
Warrant Shares have been resold, as the case may be, under the Warrant Shelf
Registration Statement and (C) the Expiration Date; PROVIDED, HOWEVER, that the
Company shall not be required to (i) qualify as a foreign corporation or as a
broker or a dealer in securities in any jurisdiction where it would not
otherwise be required to qualify but for this Section 5, (ii) file any general
consent to service of process or (iii) subject itself to taxation in any
jurisdiction if it is not otherwise so subject.
6. ACCURACY OF DISCLOSURE.
The Company (and its successors) represents and warrants to each
Holder (and each beneficial owner of a Warrant or Warrant Share) and agrees for
the benefit of each Holder (and each beneficial owner of a Warrant or Warrant
Share) that, except during any period in which the availability of the Warrant
Registration Statement has been suspended, (i) the Warrant Registration
Statement and the documents incorporated by reference therein will not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein not misleading; and (ii) the prospectus
delivered to such Holder upon its exercise of Warrants or pursuant to which such
Holder sells its Warrant Shares, as the case may be, and the documents
incorporated by reference therein will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that representations, warranties and agreements
set forth in this Section 6 do not apply to statements or omissions in the
Warrant Registration Statement or any such prospectus based upon information
relating to any Holder furnished to the Company (or its successors) in writing
by such Holder expressly for use therein.
7. INDEMNITY.
The Company hereby agrees to indemnify each beneficial owner of a
Warrant and each person, if any, who controls any beneficial owner of a Warrant
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Securities Exchange Act of 1934 (the "EXCHANGE ACT"), or is under common
control with, or is controlled by, any beneficial owner of a Warrant (whether or
not it is, at the time the indemnity provided for in this Section 7 is sought,
such a beneficial owner), from and against all losses, damages or liabilities
which such beneficial owner or any such controlling or affiliated person suffers
as a result of any breach, on the date of any exercise of a Warrant by such
beneficial owner or the resale of any
<PAGE>
9
Warrant Share by such Holder, in either case pursuant to the Warrant
Registration Statement, of the representations, warranties or agreements
contained in Section 6 hereof. Each beneficial owner of a Warrant Share sold
pursuant to a Resale Shelf, by accepting its beneficial ownership of a Warrant,
hereby (i) agrees to provide the Company with information with respect to it
that the Company reasonably requests in connection with any Resale Shelf and
(ii) agrees, severally and not jointly, to indemnify the Company, its directors
and officers and each person, if any, who controls the Company within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act against any liability incurred by it or such controlling person as a result
of any misstatement of information provided by such beneficial owner to the
Company in writing expressly for inclusion in the Resale Shelf or any omission
of a material fact from any such information provided by such beneficial owner
to the Company.
8. EXPENSES.
All expenses incident to the Company's performance of or compliance
with its obligations under this Agreement will be borne by the Company,
regardless of whether a Registration Statement or Warrant Registration Statement
becomes effective, including without limitation (i) all Commission or National
Association of Securities Dealers, Inc. registration and filing fees, (ii) all
reasonable fees and expenses incurred in connection with compliance with state
securities or "blue sky" laws, (iii) all reasonable expenses of any persons
incurred by or on behalf of the Company in preparing or assisting in preparing,
word processing, printing and distributing any registration statement, any
prospectus, any amendments or supplements thereto and other documents relating
to the performance of and compliance with this Agreement, (iv) the reasonable
fees (including reasonable legal fees and expenses) and disbursements of the
Warrant Agent, (v) the reasonable fees and disbursements of counsel for the
Company and (vi) the fees and disbursements, if any, of the Auditors; but
excluding any and all fees, expenses and disbursements of the Holders (not
specifically included above), including, without limitation, (x) fees and
disbursements of counsel retained by the participating Holders and (y) the
Holder's share of underwriting discounts and commissions.
9. MISCELLANEOUS.
(a) NO INCONSISTENT AGREEMENTS. Each of the Company and the
Initial Purchaser represent to the other that it has not entered into, and
agrees that on or after the date of this Agreement it will not enter into, any
agreement which is materially inconsistent with the rights granted to the
Holders of Warrants or Warrant Shares in this Agreement or otherwise materially
conflicts with the provisions hereof. The Company represents that the rights
granted to the Holders hereunder do not in any material way conflict with and
are not materially inconsistent with the rights granted to the holders of the
Company's other issued and
<PAGE>
10
outstanding securities under any agreements.
(b) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given unless the Company and the Warrant Agent have obtained the
written consent of Holders of at least a majority of the outstanding Warrants
affected by such amendment, modification, supplement, waiver or consent;
PROVIDED that any amendment, modification or supplement to this Agreement which,
in the good faith opinion of the Board (and evidenced by a resolution of such
board), does not adversely affect any Holder, shall not be subject to such
requirement for written consent.
(c) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery (i) if to a Holder, at the most current address given by such Holder to
the Company by means of a notice given in accordance with the provisions of this
Section 9(c); (ii) if to the Company, initially at the Company's address set
forth in the Purchase Agreement and thereafter at such other address, notice of
which is given in accordance with the provisions of this Section 9(c); and
(iii) if to the Initial Purchaser, initially at the Initial Purchaser's address
set forth in the Purchase Agreement and thereafter at such other address, notice
of which is given in accordance with the provisions of this Section 9(c).
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt is acknowledged, if telecopied; and on
the next business day if timely delivered to an air courier guaranteeing
overnight delivery.
(d) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors, assigns and transferees of each
of the parties, including, without limitation, subsequent Holders; PROVIDED that
nothing herein shall be deemed to permit any assignment, transfer or other
disposition of Warrants in violation of the terms of the Purchase Agreement or
the Warrant Agreement. If any transferee of any Holder shall acquire Warrants,
in any manner, whether by operation of law or otherwise, such Warrants shall be
held subject to all of the terms of this Agreement and the Warrant Agreement,
and by taking and holding such Warrants such person shall be conclusively deemed
to have agreed to be bound by and to perform all of the terms and provisions of
this Agreement and the Warrant Agreement and such person shall be entitled to
receive the benefits hereof.
(e) PURCHASES AND SALES OF WARRANTS. The Company shall not, and
shall use its reasonable best efforts to cause its affiliates (as defined in
Rule 405 under the Securities
<PAGE>
11
Act) not to, purchase and then resell or otherwise transfer any Warrants other
than Warrants acquired and cancelled.
(f) THIRD PARTY BENEFICIARY. The Holders shall be third party
beneficiaries to the agreements made hereunder between the Company and the
Initial Purchaser, and each Holder shall have the right to enforce such
agreements directly to the extent it deems such enforcement necessary or
advisable to protect its rights or the rights of Holders hereunder.
(g) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) HEADINGS. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
(i) GOVERNING LAW. This Agreement shall be governed by the laws
of the State of New York.
(j) SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
(k) WAIVER OF IMMUNITY. To the extent that the Company has or
hereafter may acquire any immunity from jurisdiction of any court or from any
legal process (whether through service of notice, attachment prior to judgement,
attachment in aid of execution, execution or otherwise) with respect to itself
or its property, it hereby irrevocably waives such immunity in respect of its
obligations under this Agreement to the fullest extent permitted by law.
(l) INITIAL PUBLIC OFFERING. Notwithstanding anything to the
contrary herein contained, if the Company conducts an initial public offering of
equity securities (other than nonconvertible preferred shares), the Company will
give the Holders the opportunity to convert such Warrants into warrants to
purchase such equity securities (other than nonconvertible preferred shares) and
such Warrant Shares into such equity securities (other than nonconvertible
preferred shares). Such conversion opportunity will be on terms and conditions
determined to be fair and reasonable by the Company's Board.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
KMC TELECOM HOLDINGS, INC.
By
-----------------------------
Name:
Title:
MORGAN STANLEY & CO. INCORPORATED
By
-----------------------------
Name:
Title:
<PAGE>
Exhibit 10.1
KMC TELECOM HOLDINGS, INC.
$249,965,568 REPRESENTING 460,800 UNITS, EACH UNIT CONSISTING OF
ONE 121/2% SENIOR DISCOUNT NOTE DUE 2008 AND
ONE WARRANT TO PURCHASE COMMON STOCK OF THE COMPANY
PURCHASE AGREEMENT
January 26, 1998
<PAGE>
KMC TELECOM HOLDINGS, INC.
PURCHASE AGREEMENT
January 26, 1998
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036-8293
Dear Sirs and Mesdames:
KMC Telecom Holdings, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to you (the "Initial Purchaser") 460,800 Units (the
"Units"). Each Unit will consist of (i) one 121/2% Senior Discount Note due
2008 of the Company (collectively, the "Notes") to be issued pursuant to the
provisions of an Indenture (the "Indenture") dated as of the Closing Date (as
defined in Section 4) between the Company and The Chase Manhattan Bank, as
trustee (in such capacity, the "Trustee"), and (ii) one Warrant (collectively,
the "Warrants"), entitling the holder thereof to purchase 0.21785 shares of
common stock, par value $0.01 per share ("Common Stock"), of the Company
(collectively, the "Warrant Shares") from the Company at an exercise price of
$0.01 per share, subject to adjustment as provided in the Warrant Agreement (as
defined below). The Warrants will be issued pursuant to the provisions of a
warrant agreement (the "Warrant Agreement") dated as of the Closing Date between
the Company and The Chase Manhattan Bank, as warrant agent (in such capacity,
the "Warrant Agent"), substantially in the form attached hereto as Exhibit A.
The Units will be offered without being registered under the
Securities Act of 1933, as amended (the "Securities Act") to qualified
institutional buyers in compliance with the exemption from registration provided
by Rule 144A under the Securities Act, in offshore transactions in reliance on
Regulation S under the Securities Act ("Regulation S") and to institutional
accredited investors (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) that deliver a letter in the form annexed to the Final
Memorandum.
The Initial Purchaser and its direct and indirect transferees will be
entitled to the benefits of a Registration Rights Agreement relating to the
Notes, to be dated the date hereof, and to be substantially in the form attached
hereto as Exhibit B (the "Registration Rights Agreement") and (ii) a Warrant
Registration Rights Agreement relating to the Warrants, dated the date hereof,
and to be substantially in the form attached hereto as Exhibit C (the "Warrant
Registration Rights Agreement").
<PAGE>
2
In connection with the sale of the Units, the Company has prepared a
preliminary private placement memorandum dated January 7, 1998 (the "Preliminary
Memorandum") and will prepare a final private placement memorandum (the "Final
Memorandum" and, with the Preliminary Memorandum, each a "Memorandum") setting
forth or including a description of the terms of the Units, the Notes, the
Warrants and the Warrant Shares, the terms of the offering and a description of
the Company and its business.
1. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to, and agrees with, you that as of the date hereof:
(a) The Preliminary Memorandum as of the date hereof does not
contain and the Final Memorandum, in the form used by the Initial Purchaser
to confirm sales and on the Closing Date, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or
omissions in either Memorandum based upon information relating to the
Initial Purchaser furnished to the Company in writing by such Initial
Purchaser expressly for use therein.
(b) The Company has been duly incorporated, is validly existing as
a corporation in good standing under the laws of the State of Delaware, has
the corporate power and authority to own its property and to conduct its
business as described in each Memorandum and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
(c) Each subsidiary of the Company is listed on Exhibit D hereto
(each a "Subsidiary" and, collectively, the "Subsidiaries") and has been
duly incorporated or otherwise organized, is validly existing as a
corporation or limited liability company, as the case may be, in good
standing under the laws of the jurisdiction of its incorporation or
organization, has the corporate and/or limited liability company power and
authority, as appropriate, to own its property and to conduct its business
as described in each Memorandum and is duly qualified to transact business
and is in good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and the Subsidiaries, taken as a whole; all of the issued shares of capital
stock or membership interests of each Subsidiary of the Company have been
duly and validly authorized and issued, are fully paid and non-assessable
and are
<PAGE>
3
owned, directly or indirectly, by the Company, free and clear of all liens,
encumbrances, equities or claims, other than those indicated in either
Memorandum.
(d) This Agreement has been duly authorized, executed and delivered
by the Company.
(e) The Notes have been duly authorized by the Company and, when
executed and authenticated in accordance with the Indenture, and delivered
to and paid for by the Initial Purchaser in accordance with the terms of
this Agreement, will (x) be valid and binding obligations of the Company
enforceable in accordance with their terms, except as (A) the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium
or similar laws affecting creditors' rights generally and (B) rights of
acceleration, if applicable, and the availability of equitable remedies may
be limited by equitable principles of general applicability and (y) be
entitled to the benefits of the Indenture pursuant to which such Notes are
to be issued and the Registration Rights Agreement.
(f) Each of the Indenture and the Registration Rights Agreement has
been duly authorized by the Company and, when executed and delivered by the
Company, will be a valid and binding agreement of, the Company, enforceable
in accordance with its terms except that (w) the enforceability thereof may
be limited by bankruptcy, insolvency, moratorium or similar laws affecting
creditors' rights generally, (x) rights of acceleration, if applicable, and
the availability of equitable remedies may be limited by equitable
principles of general applicability, (y) rights to indemnification and
contribution may be limited by public policy and (z) provisions of the
Indenture, if any, requiring any waiver of stay or extension laws, diligent
performance or other acts on the part of the Trustee may be unenforceable
under principles of public policy.
(g) The Warrants have been duly authorized by the Company and, when
executed, and countersigned by the Warrant Agent as provided in the Warrant
Agreement, and delivered to and paid for by the Initial Purchaser in
accordance with the terms of this Agreement, will (x) be valid and binding
obligations of the Company enforceable in accordance with their terms,
except as (A) the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium or similar laws relating to or affecting creditors'
rights generally and (B) rights of acceleration, if applicable, and the
availability of equitable remedies may be limited by equitable principles
and (y) be entitled to the benefits of the Warrant Agreement pursuant to
which such Warrants are to be issued and the Warrant Registration Rights
Agreement.
(h) Each of the Warrant Agreement and the Warrant Registration
Rights Agreement has been duly authorized by the Company and, when executed
and
<PAGE>
4
delivered by the Company, will be a valid and binding agreement of the
Company, enforceable in accordance with its terms except as (x) the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium
or similar laws relating to or affecting creditors' rights generally,
(y) rights of acceleration, if applicable, and the availability of
equitable remedies may be limited by equitable principles and (z) rights to
indemnification and contribution may be limited by public policy.
(i) The Warrant Shares issuable upon exercise of the Warrants have
been duly authorized and reserved by the Company and, when issued and
delivered upon exercise of the Warrants in accordance with the terms of the
Warrants and the Warrant Agreement, will be validly issued, fully paid and
non-assessable and the issuance of such Warrant Shares will not be subject
to any preemptive rights.
(j) The shares of Common Stock outstanding prior to the issuance of
the Units have been duly authorized and are validly issued, fully paid and
non-assessable.
(k) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement, the
Indenture, the Registration Rights Agreement, the Warrant Agreement, the
Warrant Registration Rights Agreement, the Notes and the Warrants
(collectively, the "Transaction Documents") and the issuance, sale and
delivery of the Units, Notes and Warrants and the issuance of the Warrant
Shares upon exercise of the Warrants in accordance with the terms of the
Warrants and the Warrant Agreement by the Company will not contravene (i)
any provision of applicable law, (ii) the certificate of incorporation or
bylaws of the Company, (iii) any agreement or other instrument binding upon
the Company or any of its Subsidiaries, or (iv) any judgment, order or
decree of any governmental body, agency or court having jurisdiction over
the Company or any Subsidiary, except with respect to clauses (i) and (iii)
to the extent than any contravention would not have a material adverse
effect on the Company and its Subsidiaries taken as a whole.and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the Company
of its obligations under the Transaction Documents, except (x) such as may
be required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Units, Notes and Warrants, (y)
such as may be required by Federal and state securities laws with respect
to the Company's obligations under the Registration Rights Agreement and
the Warrant Registration Rights Agreement and (z) for any consents,
approvals, authorizations, orders or qualifications, the failure to obtain
which would not have a material adverse effect on the ability of the
Company to perform its obligations under the Transaction Documents.
<PAGE>
5
(l) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its Subsidiaries, taken as a whole, from that
set forth in the Preliminary Memorandum. Furthermore, (1) the Company and
its Subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in the
ordinary course of business; (2) the Company has not purchased (except for
the repurchase of shares of Common Stock from employees, officers,
directors, consultants or other persons providing services to the Company
or any of its Subsidiaries pursuant to agreements under which the Company
has the option to repurchase such shares of Common Stock at cost upon the
occurrence of certain events such as the termination of employment or other
service-providing relationship) any of its outstanding capital stock, nor
declared, paid or otherwise made any dividend or distribution of any kind
on its capital stock other than ordinary and customary dividends; and (3)
there has not been any material change in the capital stock, short-term
debt or long-term debt of the Company and its consolidated Subsidiaries
taken as a whole, except in each case as described in the Final Memorandum.
(m) There are no legal or governmental proceedings pending or, to
the knowledge of the Company, threatened to which the Company or any of its
Subsidiaries is a party or to which any of the properties of the Company or
any of its Subsidiaries is subject other than proceedings accurately
described in all material respects in each Memorandum and proceedings that
are not reasonably likely to have a material adverse effect on the Company
and its Subsidiaries, taken as a whole, or on the power or ability of the
Company to perform its obligations under any of the Transaction Documents
or to consummate the transactions contemplated by the Final Memorandum.
(n) Neither the Company nor any affiliate (as defined in
Rule 501(b) of Regulation D under the Securities Act, an "Affiliate") of
the Company has directly, or through any agent, (i) sold, offered for sale,
solicited offers to buy or otherwise negotiated in respect of, any security
(as defined in the Securities Act) which is or will be integrated with the
sale of the Units, the Notes or the Warrants in a manner that would require
the registration under the Securities Act of the Units, the Notes or the
Warrants or (ii) engaged in any form of general solicitation or general
advertising (as those terms are used in Regulation D under the Securities
Act) in connection with the offering of the Units, the Notes or the
Warrants or in any manner involving a public offering within the meaning of
Section 4(2) of the Securities Act.
(o) The Company is not, and after giving effect to the offering and
sale of the Units, the Notes and the Warrants and the application of the
proceeds thereof as
<PAGE>
6
described in the Final Memorandum, will not be an "investment company" as
such term is defined in the Investment Company Act of 1940, as amended.
(p) It is not necessary in connection with the offer, sale and
delivery of the Units, the Notes and the Warrants to the Initial Purchaser
in the manner contemplated by this Agreement to register the Units, the
Notes or the Warrants under the Securities Act or to qualify the Indenture
under the Trust Indenture Act of 1939, as amended.
(q) The Company and its Subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not, singly or in
the aggregate, have a material adverse effect on the Company and its
Subsidiaries, taken as a whole.
(r) There are no costs and liabilities associated with
Environmental Laws (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance
with Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a material adverse
effect on the Company and its Subsidiaries, taken as a whole.
(s) The Units, the Notes and the Warrants satisfy the requirements
set
forth in Rule 144A(d)(3) under the Securities Act.
(t) None of the Company, its Affiliates or any person acting on its
or their behalf (other than the Initial Purchaser) has engaged in any
directed selling efforts (as that term is defined in Regulation S under the
Securities Act) with respect to the Units, the Notes or the Warrants and
the Company and its Affiliates and any person acting on its or their behalf
(other than the Initial Purchaser) have complied with the offering
restrictions requirement of Regulation S.
(u) Except as described in each Memorandum, the Company and its
Subsidiaries (i) have all necessary consents, authorizations, approvals,
orders, certificates and permits of and from, and have made all
declarations and filings with, all federal, state, local and other
governmental, administrative or regulatory
<PAGE>
7
authorities, all self-regulatory organizations and all courts and other
tribunals, to own, lease, license and use their properties and assets and
to conduct their business in the manner described in each Memorandum,
except to the extent that the failure to obtain such consents,
authorizations, approvals, orders, certificates or permits or make such
declarations or filings would not have a material adverse effect on the
Company and its Subsidiaries, taken as a whole; and (ii) has not received
any notice of proceedings relating to the violation, revocation or
modification of any such license, consent, authorization, approval, order,
certificate or permit which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would reasonably be expected to
result in a material adverse change in the condition, financial or
otherwise, in the earnings, business or operations of the Company and its
Subsidiaries, taken as a whole.
(v) The Company and its Subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company and its Subsidiaries, taken as a whole, in each case free and clear
of all liens, encumbrances and defects except (i) such as are described in
each Memorandum, (ii) such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made of
such property by the Company and its Subsidiaries; or (iii) such as do not
have a material adverse effect on the Company and its Subsidiaries taken as
a whole; and any real property and buildings held under lease by the
Company and its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
materially interfere with the use made and proposed to be made of such
property and buildings by the Company and its Subsidiaries, in each case
except as described in or contemplated by each Memorandum.
(w) The Company and its Subsidiaries own or possess, or can acquire
on reasonable terms, all material patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names currently
employed by them in connection with the business now operated by them, and,
except as set forth in each Memorandum, neither the Company nor any of its
Subsidiaries has received any notice of infringement of or conflict with
asserted rights of others with respect to any of the foregoing which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would be reasonably likely to result in any material
adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of the Company and its Subsidiaries, taken
as a whole.
<PAGE>
8
(x) No material labor dispute with the employees of the Company or
any of its Subsidiaries exists, except as described in or contemplated by
each Memorandum, or, to the knowledge of the Company, is imminent; and the
Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that might reasonably be expected to result
in any material adverse change in the condition, financial or otherwise, or
in the earnings, business or operations of the Company and its
Subsidiaries, taken as a whole.
(y) The Company and its Subsidiaries are insured against such
losses and risks and in such amounts as the Company reasonably believes are
prudent and customary in the businesses in which they are engaged; neither
the Company nor any such Subsidiary has been refused any insurance coverage
sought or applied for; and neither the Company nor any such Subsidiary has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business
at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the
Company and its Subsidiaries, taken as a whole, except as described in or
contemplated by each Memorandum.
(z) The Company and its Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(aa) The terms of the Units, the Notes, the Warrants, the Common
Stock (including the Warrant Shares), the Indenture and the Warrant
Agreement conform in all material respects to the description thereof
contained in the Final Memorandum under the headings "Description of the
Units," "Description of the Notes," "Description of the Warrants" and
"Description of Capital Stock," respectively
2. AGREEMENTS TO SELL AND PURCHASE . The Company hereby agrees to
sell to the Initial Purchaser, and the Initial Purchaser, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees to purchase from the Company the Units at a purchase
price of $520.76 per Unit (the "Purchase
<PAGE>
9
Price") plus accrued interest, if any, on the Notes from January 29, 1998 to the
Closing Date.
3. TERMS OF OFFERING. You have advised the Company that the
Initial Purchaser will make an offering of the Units purchased by the Initial
Purchaser hereunder on the terms set forth in the Final Memorandum, as soon as
practicable after this Agreement is entered into as in your judgment is
advisable.
4. PAYMENT AND DELIVERY. Payment for the Units shall be made to
the Company in Federal or other funds immediately available in New York City
against delivery of the Units at a closing (the "Closing") to be held at the
office of Shearman & Sterling, 599 Lexington Avenue, New York, New York, at
10:00 A.M., local time, on January 29, 1998, or at such other time on the same
or such other date, not later than February 12, 1998, as shall be designated in
writing by you. The time and date of such payment are herein referred to as
the "Closing Date."
Certificates for the Units, the Notes and the Warrants shall be in
definitive form or global form, as specified by you, and registered in such
names and in such denominations as you shall request in writing not later than
one full business day prior to the Closing Date. The certificates evidencing
the Notes shall be delivered to you on the Closing Date for the account of the
Initial Purchaser, with any transfer taxes payable in connection with the
transfer of the Units, the Notes or the Warrants to the Initial Purchaser duly
paid, against payment of the purchase price therefor.
5. CONDITIONS TO THE INITIAL PURCHASER'S OBLIGATIONS . The
obligation of the Initial Purchaser to purchase and pay for the Units on the
Closing Date is subject to the following conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date,
(i) there shall not have occurred any downgrading, nor
shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not
indicate the direction of the possible change, in the rating accorded
any of the Company's securities by any nationally recognized
statistical rating organization," as such term is defined for purposes
of Rule 436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations, of
the Company and its subsidiaries, taken as a whole, from that set
forth in the Final Memorandum (exclusive of
<PAGE>
10
any amendments or supplements thereto subsequent to the date of this
Agreement) that, in your judgment, is material and adverse and that
makes it, in your judgment, impracticable to market the Units on the
terms and in the manner contemplated in the Final Memorandum.
(b) The Initial Purchaser shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, to the effect that the representations and warranties of the
Company contained in this Agreement are true and correct as of the Closing
Date and that the Company has complied with all of the agreements contained
herein and satisfied all of the conditions contained herein on its part to
be performed or satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
(c) The Initial Purchaser shall have received on the Closing Date
an opinion of Kelley Drye & Warren LLP, outside counsel to the Company,
dated the Closing Date, to the effect set forth in Exhibit E. Such
opinion shall be rendered to the Initial Purchaser at the request of the
Company and shall so state therein.
(d) The Initial Purchaser shall have received on the Closing Date
an opinion of Simpson Thacher & Bartlett, Special Note Counsel to the
Company, dated the Closing Date, to the effect set forth in Exhibit F.
Such opinion shall be rendered to the Initial Purchaser at the request of
the Company and shall so state therein.
(e) The Initial Purchaser shall have received on the Closing Date
an opinion of Swidler & Berlin, Chartered, regulatory counsel to the
Company, dated the Closing Date, to the effect set forth in Exhibit G.
Such opinion shall be rendered to the Initial Purchaser at the request of
the Company and shall so state therein.
(f) The Initial Purchaser shall have received on the Closing Date
an opinion of Shearman & Sterling, counsel to the Initial Purchaser, dated
the Closing Date, in form and substance satisfactory to you.
(g) The Initial Purchaser shall have received on each of the date
hereof and the Closing Date a letter, dated the date hereof or the Closing
Date, as the case may be, in form and substance satisfactory to the Initial
Purchaser, from Ernst & Young LLP, independent public accountants,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
<PAGE>
11
Final Memorandum; PROVIDED that the letter delivered on the Closing Date
shall use a "cut-off date" not earlier than the date hereof.
(h) You shall have received such other documents and certificates
as are reasonably requested by you or your counsel.
6. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Initial Purchaser contained in this Agreement, the Company
covenants with the Initial Purchaser as follows:
(a) To use its reasonable best efforts to furnish to you in New
York City, without charge, prior to 10:00 a.m. New York City time on the
business day next succeeding the date of this Agreement and during the
period mentioned in Section 6(c), as many copies of the Final Memorandum
and any supplements and amendments thereto as you may reasonably request.
(b) Before amending or supplementing either Memorandum, to furnish
to you a copy of each such proposed amendment or supplement and not to use any
such proposed amendment or supplement to which you reasonably object
without unreasonable delay.
(c) If, during such period after the date hereof and prior to the
date on which all of the Units shall have been sold by the Initial
Purchaser, any event shall occur or condition exist as a result of which it
is necessary to amend or supplement the Final Memorandum in order to make
the statements therein, in the light of the circumstances when the Final
Memorandum is delivered to a purchaser, not misleading, or if, in the
opinion of counsel to the Initial Purchaser it is necessary to amend or
supplement the Final Memorandum to comply with applicable law, forthwith to
prepare and furnish, at its own expense, to the Initial Purchaser, either
amendments or supplements to the Final Memorandum so that the statements in
the Final Memorandum as so amended or supplemented will not, in the light
of the circumstances when the Final Memorandum is delivered to a purchaser,
be misleading or so that the Final Memorandum, as so amended or
supplemented, will comply in all material respects with applicable law.
(d) To endeavor to qualify the Units, the Notes, the Warrants and
the Warrant Shares for offer and sale under the securities or Blue Sky laws
of such jurisdictions as you shall reasonably request; provided that in no
event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which
would subject it to taxation in any jurisdiction where it is not now so
subject or to service or process in suits, other than those
<PAGE>
12
arising out of the offering or sale of the Units, the Notes, the Warrants
or the Warrant Shares in any jurisdiction where it is not now so subject.
(e) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid
all expenses incident to the performance of its obligations under this
Agreement, including: (i) the preparation of each Memorandum and all
amendments and supplements thereto, (ii) the preparation, issuance and
delivery of the Units, the Notes and the Warrants, (iii) the fees and
disbursements of the Company's counsel and accountants and the Trustee and
its counsel, (iv) the qualification of such Units, Notes and Warrants under
securities or Blue Sky laws in accordance with the provisions of
Section 6(d), including filing fees and the fees and disbursements of
counsel for the Initial Purchaser in connection therewith and in connection
with the preparation of any Blue Sky or legal investment memoranda, (v) the
printing and delivery to the Initial Purchaser in quantities as hereinabove
stated of copies of the Memorandum and any amendments or supplements
thereto, (vi) any fees charged by rating agencies, (vii) all document
production charges and expenses of counsel to the Initial Purchaser (but
not including their fees for professional services) in connection with the
preparation of this Agreement, (viii) the fees and expenses, if any,
incurred in connection with the admission of such Units, Notes or Warrants
for trading in PORTAL or any other appropriate market system, (ix) the
costs and expenses of the Company relating to investor presentations on any
"road show" undertaken in connection with the marketing of the Offering,
including, without limitation, expenses associated with the production of
road show slides and graphics, fees and expenses of any consultants engaged
in connection with the road show presentations with the prior approval of
the Company, travel and lodging expense of the representatives and officers
of the Company and any such consultants, and the cost of any aircraft
chartered in connection with the road show with the prior approval of the
Company, and (x) all other costs and expenses incident to the performance
of the obligations of the Company hereunder for which provision is not
otherwise made in this Section. It is understood, however, that except as
provided in this Section, Section 8 and Section 11, the Initial Purchaser
will pay all of its costs and expenses, including fees and disbursements of
its counsel, transfer taxes payable on resale of any of the Units, the
Notes or the Warrants by them and any advertising expenses connected with
any offers they may make.
(f) Neither the Company nor any Affiliate will sell, offer for sale
or solicit offers to buy or otherwise negotiate in respect of any security
(as defined in the Securities Act) which could be integrated with the sale
of the Units, the Notes or the Warrants in a manner which would require the
registration under the Securities Act of such Units, Notes or Warrants.
<PAGE>
13
(g) Not to solicit any offer to buy or offer or sell the Units, the
Notes or the Warrants by means of any form of general solicitation or
general advertising (as those terms are used in Regulation D under the
Securities Act) or in any manner involving a public offering within the
meaning of Section 4(2) of the Securities Act, except as may be
contemplated by the Registration Rights Agreement and the Warrant
Registration Rights Agreement.
(h) While any of the Units, the Notes or the Warrants remain
"restricted securities" within the meaning of the Securities Act, to make
available, upon request, to any seller of such Units, Notes or Warrants the
information specified in Rule 144A(d)(4) under the Securities Act, unless
the Company is then subject to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act").
(i) Except as may be contemplated by the Registration Rights
Agreement and the Warrant Registration Rights Agreement, none of the
Company, its Affiliates or any person acting on its or their behalf (other
than the Initial Purchaser) will engage in any directed selling efforts (as
that term is defined in Regulation S) with respect to the Units, the Notes
or the Warrants, and the Company and its Affiliates and each person acting
on its or their behalf (other than the Initial Purchaser) will comply with
the offering restrictions of Regulation S.
(j) To refuse, and to cause the Warrant Agent with respect to the
Warrants and the registrar for the Warrant Shares to refuse, to register
any transfer of Warrants or Warrant Shares sold pursuant to Regulation S if
such transfer is not made in accordance with the provisions of Regulation S.
(k) To refuse, and to cause the Trustee to refuse, to register any
transfer of the Notes sold pursuant to Regulation S if such transfer is not
made in accordance with the provisions of Regulation S and the Indenture.
(l) To use its reasonable best efforts to permit the Units, the
Notes and the Warrants to be designated PORTAL securities in accordance
with the rules and regulations adopted by the National Association of
Securities Dealers, Inc. relating to trading in the PORTAL Market.
(m) To use its reasonable best efforts to cause all Warrant Shares
sold under a resale shelf to be listed on any securities exchange or any
automated quotation system on which securities of the same class issued by
the Company are then listed if requested by the holders of Warrant Shares
representing a majority of the Warrants originally issued, to the extent
such Warrant Shares satisfy applicable listing requirements.
<PAGE>
14
(n) The Company shall not, and shall use its best efforts to cause
its affiliates (as defined in Rule 405 under the Securities Act) not to,
purchase and then resell or otherwise transfer any Units, Notes or
Warrants.
7. OFFERING OF UNITS, NOTES AND WARRANTS; RESTRICTIONS ON
TRANSFER. (a) The Initial Purchaser represents and warrants that such Initial
Purchaser is a qualified institutional buyer as defined in Rule 144A under the
Securities Act (a "QIB"). The Initial Purchaser agrees with the Company that
(i) it will not solicit offers for, or offer or sell, Units, Notes or Warrants
by any form of general solicitation or general advertising (as those terms are
used in Regulation D under the Securities Act) or in any manner involving a
public offering within the meaning of Section 4(2) of the Securities Act and
(ii) it will solicit offers for Units, Notes, or Warrants only from, and will
offer such Units, Notes or Warrants only to, persons that it reasonably believes
to be (A) in the case of offers inside the United States, (x) QIBs or (y) other
institutional accredited investors (as defined in Rule 501(a) (1), (2), (3) or
(7) under the Securities Act) ("institutional accredited investors") that, prior
to their purchase of Units, deliver to such Initial Purchaser a letter
containing the representations and agreements set forth in Appendix A to the
Final Memorandum and (B) in the case of offers outside the United States, to
persons other than U.S. persons ("foreign purchasers", which term shall include
dealers or other professional fiduciaries in the United States acting on a
discretionary basis for foreign beneficial owners (other than an estate or
trust)) in reliance upon Regulation S under the Securities Act that, in each
case, in purchasing such Units, Notes or Warrants are deemed to have represented
and agreed as provided in the Final Memorandum under the caption "Transfer
Restrictions."
(b) The Initial Purchaser represents, warrants, and agrees with
respect to offers and sales outside the United States that:
(i) it understands that no action has been or will be taken
in any jurisdiction by the Company that would permit a public offering
of the Units, the Notes or the Warrants, or possession or distribution
of either Memorandum or any other offering or publicity material
relating to the Units, the Notes or the Warrants, in any country or
jurisdiction where action for that purpose is required;
(ii) such Initial Purchaser will comply with all
applicable laws and regulations in each jurisdiction in which it
acquires, offers, sells or delivers Units, Notes or Warrants or
has in its possession or distributes either Memorandum or any
such other material, in all cases at its own expense;
<PAGE>
15
(iii) the Units, the Notes and the Warrants have not
been and will not be registered under the Securities Act and may
not be offered or sold within the United States or to, or for the
account or benefit of, U.S. persons except in accordance with
Rule 144A or Regulation S under the Securities Act or pursuant to
another exemption from the registration requirements of the
Securities Act;
(iv) such Initial Purchaser has offered the Units, the
Notes or the Warrants and will offer and sell the Units, the
Notes or the Warrants (A) as part of their distribution at any
time and (B) otherwise until 40 days after the Closing Date, with
respect to the Notes, and one year after the Closing Date with
respect to the Units and the Warrants, only in accordance with
Rule 903 of Regulation S or as otherwise permitted in Section
7(a); accordingly, neither such Initial Purchaser, its Affiliates
nor any persons acting on its or their behalf have engaged or
will engage in any directed selling efforts (within the meaning
of Regulation S) with respect to the Units, the Notes or the
Warrants, and any such Initial Purchaser, its Affiliates and any
such persons have complied and will comply with the offering
restrictions requirement of Regulation S;
(v) such Initial Purchaser has (A) not offered or sold
and, prior to the date six months after the Closing Date, will
not offer or sell any Units, Notes or Warrants to persons in the
United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which have not resulted
and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities
Regulations 1995; (B) complied and will comply with all
applicable provisions of the Financial Services Act 1986 with
respect to anything done by it in relation to the Units, the
Notes or the Warrants in, from or otherwise involving the United
Kingdom; and (C) only issued or passed on and will only issue or
pass on in the United Kingdom any document received by it in
connection with the issue of the Units, the Notes or the Warrants
to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 or is a person to whom such document may
otherwise lawfully be issued or passed on;
(vi) such Initial Purchaser understands that the Units,
the Notes and the Warrants have not been and will not be
registered under
<PAGE>
16
the Securities and Exchange Law of Japan, and represents that it has
not offered or sold, and agrees that it will not offer or sell, any
Units, Notes or Warrants, directly or indirectly in Japan or for the
account of any resident thereof except pursuant to any exemption from
the registration requirements of the Securities and Exchange Law of
Japan and otherwise in compliance with applicable provisions of
Japanese law; and
(vii) such Initial Purchaser agrees that, at or prior to
confirmation of sales of the Units, it will have sent to each
distributor, dealer or person receiving a selling concession, fee
or other remuneration that purchases Units from it during the
restricted period a confirmation or notice to substantially the following
effect:
"The Units, the Notes and the Warrants covered
hereby have not been registered under the U.S.
Securities Act of 1933 (the "Securities Act") and
may not be offered and sold within the United
States or to, or for the account or benefit of,
U.S. persons (i) as part of their distribution at
any time or (ii) otherwise until 40 days after the
closing date, with respect to the Notes, and one
year after the closing date with respect to the
Units and the Warrants, except in either case in
accordance with Regulation S (or Rule 144A if
available) under the Securities Act. Terms used
above have the meaning given to them by Regulation
S."
Terms used in this Section 7(b) have the meanings given to them by
Regulation S.
8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless the Initial Purchaser, and each person, if any, who
controls such Initial Purchaser within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in either Memorandum (as
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to state
therein a material fact necessary to make the statements therein in the light of
the circumstances under which they were made not misleading, except insofar as
such losses, claims, damages or
<PAGE>
17
liabilities are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information relating to the Initial
Purchaser furnished to the Company in writing by the Initial Purchaser expressly
for use therein.
(b) The Initial Purchaser agrees to indemnify and hold harmless the
Company, its directors, its officers and each person, if any, who controls
the Company within the meaning of either Section 15 of the Securities Act
or Section 20 of the Exchange Act to the same extent as the foregoing
indemnity from the Company to such Initial Purchaser, but only with
reference to information relating to such Initial Purchaser furnished to
the Company in writing by the Initial Purchaser expressly for use in either
Memorandum or any amendments or supplements thereto.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to either Section 8(a) or 8(b), such
person (the "indemnified party") shall promptly notify the person against
whom such indemnity may be sought (the "indemnifying party") in writing and
the indemnifying party, upon request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may designate in
such proceeding and shall pay the fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any indemnified party
shall have the right to retain its own counsel, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless
(i) the indemnifying party and the indemnified party shall have mutually
agreed to the retention of such counsel or (ii) the named parties to any
such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
indemnifying party shall not, in respect of the legal expenses of any
indemnified party in connection with any proceeding or related proceedings
in the same jurisdiction, be liable for the fees and expenses of more than
one separate firm (in addition to any local counsel) for all such
indemnified parties and that all such fees and expenses shall be reimbursed
as they are incurred. Such firm shall be designated in writing by Morgan
Stanley & Co. Incorporated in the case of parties indemnified pursuant to
Section 8(a) and by the Company in the case of parties indemnified pursuant
to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or
judgment. Notwithstanding the foregoing sentence, if at any time an
indemnified party shall have requested an indemnifying party to reimburse
the indemnified party for fees and expenses of counsel as contemplated by
the second and third sentences of this
<PAGE>
18
paragraph, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if
(i) such settlement is entered into more than 60 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying
party shall not have reimbursed the indemnified party in accordance with
such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened proceeding in respect of which
any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from
all liability on claims that are the subject matter of such proceeding.
(d) To the extent the indemnification provided for in Section 8(a)
or 8(b) is unavailable to an indemnified party or insufficient in respect
of any losses, claims, damages or liabilities referred to therein, then
each indemnifying party under such section, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect
the relative benefits received by the Company, on the one hand, and the
Initial Purchaser, on the other hand, from the offering of such Units or
(ii) if the allocation provided by clause 8(d)(i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause 8(d)(i) above but also the
relative fault of the Company on the one hand and the Initial Purchaser on
the other hand in connection with the statements or omissions that resulted
in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Initial Purchaser on the other hand in
connection with the offering of such Units shall be deemed to be in the
same respective proportions as the net proceeds from the offering of such
Units (before deducting expenses) received by the Company and the total
discounts and commissions received by the Initial Purchaser in respect
thereof bear to the aggregate offering price of such Units. The relative
fault of the Company on the one hand and of the Initial Purchaser on the
other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission
or alleged omission to state a material fact relates to information
supplied by the Company or by the Initial Purchaser and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
(e) The Company and the Initial Purchaser agree that it would not
be just or equitable if contribution pursuant to this Section 8 were
determined by PRO RATA allocation or by any other method of allocation
that does not take account of the equitable considerations referred to in
Section 8(d). The amount paid or payable by
<PAGE>
19
an indemnified party as a result of the losses, claims, damages and
liabilities referred to in Section 8(d) above shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8, the Initial Purchaser shall not be required
to contribute any amount in excess of the amount by which the total price
at which the Units resold by it in the initial placement of such Units were
offered to investors exceeds the amount of any damages that such Initial
Purchaser has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The remedies provided for
in this Section 8 are not exclusive and shall not limit any rights or
remedies which may otherwise be available to any indemnified party at law
or in equity.
(f) The indemnity and contribution provisions contained in this
Section 8 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement,
(ii) any investigation made by or on behalf of the Initial Purchaser or any
person controlling the Initial Purchaser or by or on behalf of the Company,
its officers or directors or any person controlling the Company and
(iii) acceptance of and payment for any of the Units.
9. TERMINATION. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 9(a)(i) through 9(a)(iv), such event singly or
together with any other such event makes it, in your judgment, impracticable to
market the Units on the terms and in the manner contemplated in the Final
Memorandum.
10. EFFECTIVENESS. This Agreement shall become effective upon the
execution and delivery hereof by the parties hereto.
<PAGE>
20
11. MISCELLANEOUS. If this Agreement shall be terminated by the
Initial Purchaser because of any failure or refusal on the part of the Company
to comply with the terms or to fulfill any of the conditions of this Agreement,
or if for any reason the Company shall be unable to perform its obligations
under this Agreement (other than by reason of a breach of this Agreement by the
Initial Purchaser), the Company will reimburse the Initial Purchaser for all
out-of-pocket expenses (including the fees and disbursements of its counsel)
reasonably incurred by such Initial Purchaser in connection with this Agreement
or the offering contemplated hereunder.
12. COUNTERPARTS. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
14. HEADINGS. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
Please confirm your agreement to the foregoing by signing in the space
provided below for that purpose and returning to us a copy hereof, whereupon
this Agreement shall constitute a binding agreement between us.
Very truly yours,
KMC Telecom Holdings, Inc.
By /s/ Michael Sternberg
---------------------------------
Name: Michael Sternberg
Title: Chief Executive Officer
Agreed, January 29, 1998
Morgan Stanley & Co.
Incorporated
By /s/ Gregory Attorri
---------------------------------
Name: Gregory Attorri
Title: Principal
<PAGE>
EXHIBIT A
Form of Warrant Agreement
<PAGE>
EXHIBIT B
Form of Registration Rights Agreement
<PAGE>
EXHIBIT C
Form of Warrant Registration Rights Agreement
<PAGE>
EXHIBIT D
Subsidiaries of the Company
Jurisdiction of
Incorporation or
Name Organization
- ---- ----------------
KMC Telecom Inc. Delaware
KMC Telecom II, Inc. Delaware
KMC Telecom Leasing I LLC Delaware
KMC Telecom Leasing II LLC Delaware
KMC Telecom of Virginia, Inc. Virginia
<PAGE>
EXHIBIT E
Form of Opinion of
Kelley Drye & Warren LLP
Pursuant to Section 5(c) of the Purchase Agreement, Kelley Drye &
Warren shall deliver an opinion to the effect that:
(A) the Company has been duly incorporated, is validly existing as
a corporation in good standing under the laws of the State of Delaware,has
the corporate power and authority to own its property and to conduct its
business as described in the Final Memorandum (references herein to the
Final Memorandum being taken to mean the same, as amended or supplemented),
and is duly qualified to transact business and is in good standing in New
Jersey;
(B) each subsidiary of the Company listed in Exhibit D to the
Purchase Agreement has been duly organized, is validly existing as a
corporation or limited liability company, as the case may be, in good
standing under the laws of the jurisdiction of its organization, has the
corporate and/or limited liability company power and authority, as
appropriate, to own its property and to conduct its business as described
in the Final Memorandum and is duly qualified to transact business and is
in good standing in each jurisdiction listed opposite its name on Annex I
hereto;
(C) the Purchase Agreement has been duly authorized, executed and
delivered by the Company;
(D) the Notes have been duly authorized and, when executed,
authenticated and delivered to and paid for in accordance with the terms of
the Purchase Agreement, will (x) be valid and binding obligations of the
Company enforceable in accordance with their terms, except as (A) the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium
or similar laws affecting creditors' rights generally, and (B) rights of
acceleration, if applicable, and the availability of equitable remedies may
be limited by equitable principles of general applicability and (y) be
entitled to the benefits of the Indenture and the Registration Rights
Agreement;
(E) each of the Indenture and the Registration Rights Agreement
has been duly authorized, executed and delivered by, and is a valid and
binding agreement of, the Company, enforceable in accordance with its terms
except as (w) the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium or similar laws affecting creditors' rights
generally, (x) rights of acceleration, if applicable, and the availability
of equitable remedies may be limited by equitable principles of general
applicability, (y) rights to indemnification and contribution may be
limited by public policy and (z) provisions of the Indenture, if any,
requiring any
<PAGE>
E-2
waiver of stay or extension laws, diligent performance or other acts on the
part of the Trustee may be unenforceable under principles of public policy;
(F) the Warrants have been duly authorized by the Company and, when
executed, and countersigned by the Warrant Agent as provided in the Warrant
Agreement, and delivered to and paid for by the Initial Purchaser in
accordance with the terms of the Purchase Agreement, will (x) be valid and
binding obligations of the Company enforceable in accordance with their
terms, except as (A) the enforceability thereof may be limited by
bankruptcy, insolvency, moratorium or similar laws relating to or affecting
creditors' rights generally and (B) rights of acceleration, if applicable,
and the availability of equitable remedies may be limited by equitable
principles and (y) be entitled to the benefits of the Warrant Agreement and
the Warrant Registration Rights Agreement;
(G) each of the Warrant Agreement and the Warrant Registration
Rights Agreement has been duly authorized by the Company and, when executed
and delivered by the Company, will be a valid and binding agreement of the
Company, enforceable in accordance with its terms except as (x) the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium
or similar laws relating to or affecting creditors' rights generally,
(y) rights of acceleration, if applicable, and the availability of
equitable remedies may be limited by equitable principles and (z) rights to
indemnification and contribution may be limited by public policy;
(H) the Warrant Shares issuable upon exercise of the Warrants have
been duly authorized and reserved by the Company and, when issued and
delivered upon exercise of the Warrants in accordance with the terms of the
Warrants and the Warrant Agreement, will be validly issued, fully paid and
non-assessable and the issuance of such Warrant Shares will not be subject
to any preemptive rights;
(I) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, the Purchase
Agreement, the Indenture, the Registration Rights Agreement, the Warrant
Agreement, the Warrant Registration Rights Agreement, the Notes and the
Warrants (collectively, the "Transaction Documents") and the issuance, sale
and delivery of the Notes and the Warrants and the issuance of the Warrant
Shares upon exercise of the Warrants in accordance with the terms of the
Warrants and the Warrant Agreement by the Company will not contravene (i)
any provision of applicable law, (ii) the certificate of incorporation or
by-laws of the Company, (iii) to such counsel's knowledge, any agreement or
other instrument binding upon the Company or any of its Subsidiaries that
is material to the Company and its Subsidiaries, taken as a whole, or (iv)
to such counsel's knowledge, any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company or
any Subsidiary, except, in the case of clauses (i),
<PAGE>
E-3
(iii) and (iv), for such contraventions which would not have a material
adverse on the Company and its Subsidiaries, taken as a whole and no
consent, approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the Company
or its subsidiaries of their obligations under the Transaction Documents,
except such as may be required by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the Units, the
Notes and the Warrants;
(J) after inquiry of the executive officers of the Company, to such
counsel's knowledge, there is not now pending or threatened any legal or
governmental proceedings to which the Company or any of its subsidiaries is
a party or to which any of the properties of the Company or any of its
subsidiaries is subject other than proceedings fairly summarized in all
material respects in the Final Memorandum and proceedings which such
counsel believes are not reasonably likely to have a material adverse
effect on the Company and its Subsidiaries, taken as a whole, or on the
power or ability of the Company to perform its obligations under the
Transaction Documents or to consummate the transactions contemplated by the
Final Memorandum;
(K) the Company is not, and after giving effect to the offering and
sale of the Units, the Notes and the Warrants and the application of the
proceeds thereof as described in the Final Memorandum, will not be an
"investment company" as such term is defined in the Investment Company Act
of 1940, as amended;
(L) the statements in the Final Memorandum under the captions
"Business - Legal and Administrative Proceedings", "Description of Certain
Indebtedness", "Description of the Units", "Description of the Warrants",
"Description of Capital Stock", "Private Placement" and "Transfer
Restrictions", in each case insofar as such statements constitute summaries
of the legal matters, documents or proceedings referred to therein, fairly
summarize the matters referred to therein in all material respects;
(M) the statements in the Final Memorandum, under the caption
"Certain United States Federal Income Tax Considerations" are accurate in
all material respects and fairly summarize the matters referred to therein;
(N) based upon the representations, warranties, and agreements of
the Company in the Purchase Agreement and of the Initial Purchaser in
Section 7 of the Purchase Agreement, it is not necessary in connection with
the offer, sale and delivery of the Units, Notes and Warrants to the
Initial Purchaser under the Purchase Agreement or in connection with the
initial resale of such Units, Notes and Warrants by the Initial Purchaser
in accordance with Section 7 of the Purchase Agreement to register the
Units, the Notes or the Warrants under the Securities Act of 1933, it being
understood that no opinion is expressed as to any subsequent resale of any
Unit, Note or Warrant;
<PAGE>
E-4
ATTACHMENT A
TO
FORM OF KELLEY, DRYE & WARREN OPINION
-------------------------------------
In the course of the preparation by the Company of the Final Memorandum, we
have participated in conferences with officers, directors and representatives of
the Company, its independent auditors, your representatives and representatives
of your counsel at which conferences the contents of the Final Memorandum and
related matters were discussed. Although we have not independently verified
the accuracy or completeness of, or otherwise verified the statements made in
the Final Memorandum (other than as expressly provided above), nothing has come
to our attention that has led us to believe that the Final Memorandum, as of its
date or the date hereof, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order the make the statements
therein in the light of the circumstances under which they were made, not
misleading. Notwithstanding the foregoing, we are not expressing any opinion or
belief as to the financial statements and supporting notes and schedules and
other financial data contained in the Final Memorandum nor with respect to any
FCC data contained therein. Nor are we expressing any opinion or belief as to
any statements in the Final Memorandum under the captions "Risk Factors -
Government Regulation" and "Business - Regulation" insofar as such statements
constitute a summary of the legal matters, documents, or proceedings of the FCC
and any state authority overseeing telecommunication matters with respect to
telecommunications regulation referred to therein.
<PAGE>
E-5
ANNEX I
TO
KELLEY DRYE & WARREN OPINION
KMC TELECOM INC. Delaware
Alabama
Florida
Georgia
Louisiana
New Jersey
Texas
Wisconsin
KMC TELECOM II, INC. Delaware
Florida
Georgia
Kansas
Maryland
Michigan
Minnesota
New Jersey
North Carolina
KMC TELECOM LEASING I LLC Delaware
Alabama
Georgia
Louisiana
New Jersey
Texas
Wisconsin
KMC TELECOM LEASING II LLC Delaware
New Jersey
Georgia
KMC TELECOM OF VIRGINIA, INC. Virginia
<PAGE>
EXHIBIT F
Form of Opinion of Simpson Thacher & Bartlett
(A) the statements in the Final Memorandum under the caption "Description
of the Notes", insofar as such statements constitute summaries of certain terms
of documents referred to therein, constitute accurate summaries of the terms
for such documents in all material respects.
<PAGE>
EXHIBIT G
Form of Opinion of Swidler & Berlin, Chartered
Pursuant to Section 5(e) of the Purchase Agreement, Swidler & Berlin,
Chartered , regulatory counsel for the Company, shall furnish an opinion to the
effect that:
(A) (1) the execution and delivery of the Purchase Agreement by the
Company and the consummation of the transactions contemplated thereby do
not violate (i) the federal Communications Act of 1934, as amended, and the
Telecommunications Act of 1996, any rules or regulations of the Federal
Communications Commission ("FCC") applicable to the Company (collectively,
the "Communications Act"), (ii) any state telecommunications law, rules or
regulations ("State Law") applicable to the Company, and (iii) to the best
of such counsel's knowledge, any decree from any court, and (2) no consent,
approval, authorization or order of or filing with the FCC or any state
authority overseeing telecommunications matters ("State Authority"), is
necessary for the execution and delivery of the Purchase Agreement by the
Company and except to the extent that the failure to obtain such consents,
approvals, authorizations or orders or to make filings with, the FCC or any
State Authority would not, individually or in the aggregate, have a
material adverse effect on the prospects, condition (financial or
otherwise) or in the earnings, business or operations of the Company and
KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom Leasing I, LLC, KMC
Telecom Leasing II, LLC and KMC Telecom of Virginia, Inc. (the
"Subsidiaries") taken as a whole;
(B) except as indicated in this paragraph B, to the best of our
knowledge, based on our understanding of operations of the Company and its
Subsidiaries from the Certificate [see Attachment A] (1) the Company and
its Subsidiaries have made all reports and filings, and paid all fees,
required by the FCC and the State Authorities, and have all certificates,
orders, permits, licenses, authorizations, consents and approvals of and
from, and have made all filings and registrations, with the FCC and the
State Authorities necessary to own, lease, license and use its properties
and assets and to conduct its respective business in the manner described
in the Preliminary and Final Memorandum, except for those filings, fees,
and approvals the failure to obtain or file of which would not have
material adverse effect on the financial condition, or on the earnings,
business, or operations of the Company and its Subsidiaries, taken as a
whole; (2) has not received any notice of proceedings relating to the
violation, revocation or modification of any such certificates, orders,
permits, licenses,
<PAGE>
G-2
authorizations,consents or approvals, or the qualification or rejection of
any such filing or registration, the effect of which, singly or in the
aggregate, would have a material adverse effect on the prospects,
condition, financial or otherwise, or in the earnings, business or
operations of the Company, taken as a whole; and (3) neither the Company
nor its Subsidiaries is in violation of, or in default under the
Communications Act or State Law, the effect of which, singly or in the
aggregate, would have a material adverse effect on the prospects,
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its Subsidiaries, taken as a whole;
Notwithstanding the foregoing, the Company has not obtained the
required authority in the related jurisdictions listed on SCHEDULE 1 hereof
for the 1997 reorganization of the Company into a holding company
structure, the execution of voting agreement by Harold Kamine reducing Mr.
Kamine's voting rights, and related transactions. However, the Company is
in the process of seeking NUNC PRO TUNC or retroactive approval from State
Authorities through appropriate filings to be made in the states that
require approval or notice of such transactions. To the best of our
knowledge, none of the State Authorities in the jurisdictions listed on
SCHEDULE 1 has taken significant enforcement action in connection with
similar filings in the past and we do not expect the State Authorities to
initiate enforcement action with respect to the Company's filings that
would, if taken against the Company, have a material adverse effect on the
financial condition, or on the earnings, business, or operations of the
Company and its Subsidiaries taken as a whole.
(C) to the best of such counsel's knowledge after due inquiry (i)
no adverse judgment, decree or order of the FCC or any State Authority has
been issued against the Company or its Subsidiaries and (ii) no litigation,
proceeding, inquiry or investigation has been commenced or threatened
against the Company or its Subsidiaries before or by the FCC or any State
Authority which, if decided adversely to the interests of the Company or
its Subsidiaries would have a material adverse effect on the Company and
its Subsidiaries, taken as a whole; and
(D) the statements in the Final Memorandum under the captions "Risk
Factors - Competition," "Risk Factors - Government Regulation," "Business
- Industry Overview" and "Business - Regulation," insofar as such
statements constitute a summary of the legal matters, documents or
proceedings of the FCC and State Authorities with respect to
telecommunications regulation referred to therein, fairly summarize the
matters referred to therein.
<PAGE>
G-3
ATTACHMENT A TO OPINION OF SWIDLER & BERLIN
CERTIFICATE OF OFFICER
Except as otherwise stated herein, all capitalized terms used herein
shall have the respective meanings ascribed to them in the Swidler & Berlin
Opinion Letter, dated January 29, 1998 or the documents referred to in the
Opinion Letter.
The undersigned is an officer of KMC Telecom Holdings, Inc., KMC
Telecom Inc., KMC Telecom II, Inc., KMC Telecom Leasing I, LLC, KMC Telecom
Leasing II, LLC and KMC Telecom of Virginia, Inc. (collectively, "KMC").
The undersigned, in the capacity as an officer of KMC and not in an
individual capacity, does hereby certify to Swidler & Berlin, Chartered, that:
1. KMC has all certificates, orders, permits, licenses,
authorizations, consents, and approvals of and from, and has made all
filings and registrations with, the FCC and the State Authorities necessary
to own, lease, license and use its properties and assets and to provide the
services authorized by the certifications listed in Exhibit A hereto. As
of the date of this Certificate, KMC Telecom Inc. is not providing any
services other than those authorized by the terms and conditions of the
certificates issued to KMC Telecom Inc. by the State Authorities listed in
Exhibit A thereto. As of the date of this Certificate, KMC Telecom of
Virginia, Inc. and KMC Telecom II, Inc. are not yet providing
telecommunications services. In addition, KMC Telecom Leasing I, LLC, and
KMC Telecom Leasing II, LLC do not hold out or provide telecommunications
services to the public. KMC Telecom Holdings, Inc. is a holding company
and does not hold out or provide telecommunications services to the public.
2. KMC has made all reports and periodic filings, and paid all
fees, required by the FCC and the State Authorities except as may be
required to authorize or to provide notification of the reorganization of
the Company and its subsidiaries into the current holding company structure
for Harold Kamine to enter into a voting agreement reducing his voting
rights and related transactions.
3. KMC has not received notice of any litigation, complaint,
inquiry or investigation, formal or informal, pending or threatened by or
before the FCC or any State Authority based on any alleged violations by
the Company or its Subsidiaries of a character which, if adversely
determined, is likely to impair materially the FCC or
<PAGE>
G-4
any of the State Authority authorizations held by the Company or its
Subsidiaries. KMC has not received notice of any proceedings or threatened
proceedings relating to the revocation, restriction, or modification of any
of the licenses or certifications listed in Exhibit A hereto.
4. To the best of my knowledge, based on a review of the Offering
Memorandum, the description in the Offering Memorandum of the manner in
which the Company and its Subsidiaries conduct their respective businesses
and the factual representations made therein are complete and accurate.
This Certificate is given with the express understanding that it will
be relied upon by the law firm of Swidler & Berlin, Chartered, in rendering its
opinion pursuant to Section 5(e) of the Purchase Agreement.
IN WITNESS WHEREOF, the undersigned has set his/her hand this __ day
of January, 1998.
By:
-------------------------------------
-------------------------------------
Name
-------------------------------------
Title
<PAGE>
Exhibit 10.2
- --------------------------------------------------------------------------------
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
DATED AS OF SEPTEMBER 22, 1997
AMONG
KMC TELECOM INC.
AND
KMC TELECOM II, INC.,
AS BORROWERS
AND
AT&T COMMERCIAL FINANCE CORPORATION,
AS LENDER
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
INTERPRETATION OF THIS AGREEMENT; DEFINITIONS . . . . . . . . . . . . . .1
SECTION 1.01. Amendment and Restatement. . . . . . . . . . . . . . . . .1
SECTION 1.02. Definitions. . . . . . . . . . . . . . . . . . . . . . . .2
SECTION 1.03. Accounting Terms . . . . . . . . . . . . . . . . . . . . 13
SECTION 1.04. Others Defined in New Jersey Uniform Commercial Code . . 13
ARTICLE II
LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 2.01. Outstanding Balance; Agreement to Lend . . . . . . . . . 14
SECTION 2.02. Loans. . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 2.03. Procedure for Loan Request . . . . . . . . . . . . . . . 15
SECTION 2.04. The Note . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 2.05. Interest on Loans. . . . . . . . . . . . . . . . . . . . 15
SECTION 2.06. Payments . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 2.07. Optional Prepayment of Loans; Mandatory Prepayment of
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.08. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 2.09. Payment, etc.. . . . . . . . . . . . . . . . . . . . . . 18
SECTION 2.10. Maximum Lawful Interest Rate . . . . . . . . . . . . . . 18
SECTION 2.11. Increased Capital. . . . . . . . . . . . . . . . . . . . 19
SECTION 2.12. Joint and Several Liability; Contribution. . . . . . . . 19
ARTICLE III
REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . 20
SECTION 3.01. Organization; Powers . . . . . . . . . . . . . . . . . . 20
SECTION 3.02. Corporate Authorization. . . . . . . . . . . . . . . . . 20
SECTION 3.03. Financial Statements . . . . . . . . . . . . . . . . . . 21
SECTION 3.04. No Material Adverse Change . . . . . . . . . . . . . . . 21
SECTION 3.05. Litigation . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 3.06. Tax Returns. . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 3.07. No Defaults. . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 3.08. Properties . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 3.09. Licenses, Material Agreements, Intellectual Property . . 21
SECTION 3.10. Compliance With Laws . . . . . . . . . . . . . . . . . . 22
SECTION 3.11. ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 3.12. Investment Company Act; Public Utility Holding Company
Act. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 3.13. Federal Reserve Regulations. . . . . . . . . . . . . . . 23
SECTION 3.14. Collateral . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 3.15. Chief Place of Business. . . . . . . . . . . . . . . . . 23
SECTION 3.16. Other Corporate Names. . . . . . . . . . . . . . . . . . 24
<PAGE>
SECTION 3.17. Insurance. . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 3.18. Milestone Plan . . . . . . . . . . . . . . . . . . . . . 24
SECTION 3.19. Capitalization and Subsidiaries. . . . . . . . . . . . . 24
SECTION 3.20. Real Property, Leases and Easements. . . . . . . . . . . 24
SECTION 3.21. Solvency.. . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 3.22. Brokers, etc.. . . . . . . . . . . . . . . . . . . . . . 25
SECTION 3.23. No Material Misstatements. . . . . . . . . . . . . . . . 25
SECTION 3.24. KMC Virginia . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE IV
CONDITIONS FOR LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 4.01. Conditions Precedent to Initial Loan after the Closing
Date . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 4.02. Conditions Precedent to All Loans. . . . . . . . . . . . 30
ARTICLE V
AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 5.01. Corporate and Franchise Existence. . . . . . . . . . . . 32
SECTION 5.02. Compliance with Laws, Etc. . . . . . . . . . . . . . . . 32
SECTION 5.03. Maintenance of Properties. . . . . . . . . . . . . . . . 32
SECTION 5.04. Insurance. . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 5.05. Obligations and Taxes. . . . . . . . . . . . . . . . . . 37
SECTION 5.06. Financial Statements, Reports, etc.. . . . . . . . . . . 38
SECTION 5.07. Litigation and Other Notices . . . . . . . . . . . . . . 40
SECTION 5.08. Mortgages; Landlord Consents; Licenses and Other
Agreements . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 5.09. ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 5.10. Access to Premises and Records . . . . . . . . . . . . . 41
SECTION 5.11. Design and Construction. . . . . . . . . . . . . . . . . 41
SECTION 5.12. Environmental Notices. . . . . . . . . . . . . . . . . . 41
SECTION 5.13. Amendment of Organizational Documents. . . . . . . . . . 41
SECTION 5.14. Pledge Agreements. . . . . . . . . . . . . . . . . . . . 41
SECTION 5.15. Accounts Payable.. . . . . . . . . . . . . . . . . . . . 41
SECTION 5.16. Collateral Assignments.. . . . . . . . . . . . . . . . . 42
SECTION 5.17. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 5.18. Minimum Available Cash . . . . . . . . . . . . . . . . . 42
SECTION 5.19. Additional Equity or Debt. . . . . . . . . . . . . . . . 42
SECTION 5.20. Further Assurances . . . . . . . . . . . . . . . . . . . 42
ARTICLE VI
NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 6.01. Liens, etc.. . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 6.02. Use of Proceeds. . . . . . . . . . . . . . . . . . . . . 43
SECTION 6.03. Sale of Assets, Consolidation, Merger, etc.. . . . . . . 43
SECTION 6.04. Dividends and Distributions; Sale of Capital Stock . . . 44
SECTION 6.05. Management Fees and Permitted Corporate Overhead . . . . 44
SECTION 6.06. Guarantees; Third Party Sales and Leases . . . . . . . . 44
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SECTION 6.07. Investments. . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 6.08. Subsidiaries. . . . . . . . . . . . . . . . . . . . . . 45
SECTION 6.09. Permitted Activities . . . . . . . . . . . . . . . . . . 45
SECTION 6.10. Disposition of Licenses, etc.. . . . . . . . . . . . . . 45
SECTION 6.11. Transactions with Affiliates . . . . . . . . . . . . . . 45
SECTION 6.12. ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 6.13. Indebtedness . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 6.14. Margin Regulation. . . . . . . . . . . . . . . . . . . . 47
SECTION 6.15. Capital Expenditures . . . . . . . . . . . . . . . . . . 47
ARTICLE VII
FINANCIAL COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 7.01. Available Cash Plus EBITDA to Lender Debt Service Ratio. 47
SECTION 7.02. EBITDA to Lender Debt Service Ratio. . . . . . . . . . . 48
ARTICLE VIII
COLLATERAL SECURITY . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 8.01. Collateral Security. . . . . . . . . . . . . . . . . . . 48
SECTION 8.02. Preservation of Collateral and Perfection of Security
Interests Therein. . . . . . . . . . . . . . . . . . . . 49
SECTION 8.03. Appointment of Lender as the Borrowers' Attorney-in-Fact 49
SECTION 8.04. Collection of Accounts and Restricted Account
Arrangements . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 8.05. Cure Rights. . . . . . . . . . . . . . . . . . . . . . . 50
ARTICLE IX
EVENTS OF DEFAULT; REMEDIES . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 9.01. Events of Default. . . . . . . . . . . . . . . . . . . . 50
SECTION 9.02. Termination of Commitment; Acceleration. . . . . . . . . 53
SECTION 9.03. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 9.04. Rights and Remedies Generally. . . . . . . . . . . . . . 53
SECTION 9.05. Entry Upon Premises and Access to Information. . . . . . 54
SECTION 9.06. Sale or Other Disposition of Collateral by Lender. . . . 54
SECTION 9.07. Governmental Approvals . . . . . . . . . . . . . . . . . 54
SECTION 9.08. Appointment of Receiver or Trustee . . . . . . . . . . . 55
SECTION 9.09. Right of Setoff. . . . . . . . . . . . . . . . . . . . . 55
ARTICLE X
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 10.01. Notices; Action on Notices, etc . . . . . . . . . . . . 56
SECTION 10.02. No Waivers; Amendments. . . . . . . . . . . . . . . . . 56
SECTION 10.03. Governing Law and Jurisdiction. . . . . . . . . . . . . 57
SECTION 10.04. Expenses; Documentary Taxes . . . . . . . . . . . . . . 57
SECTION 10.05. Equitable Relief. . . . . . . . . . . . . . . . . . . . 57
SECTION 10.06. Indemnification; Limitation of Liability. . . . . . . . 57
SECTION 10.07. Survival of Representations and Warranties, etc.. . . . 58
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SECTION 10.08. Successors and Assigns. . . . . . . . . . . . . . . . . 58
SECTION 10.09. Severability. . . . . . . . . . . . . . . . . . . . . . 59
SECTION 10.10. Cover Page, Table of Contents and Section Headings. . . 59
SECTION 10.11. Counterparts. . . . . . . . . . . . . . . . . . . . . . 59
SECTION 10.12. Application of Payments . . . . . . . . . . . . . . . . 59
SECTION 10.13. Marshalling; Payments Set Aside . . . . . . . . . . . . 59
SECTION 10.14. SERVICE OF PROCESS. . . . . . . . . . . . . . . . . . . 60
SECTION 10.15. WAIVER OF JURY TRIAL, ETC . . . . . . . . . . . . . . . 60
SECTION 10.16. Confidentiality . . . . . . . . . . . . . . . . . . . . 60
SECTION 10.17. Additional Financing by Borrowers . . . . . . . . . . . 61
SECTION 10.18. Entire Agreement, etc.. . . . . . . . . . . . . . . . . 61
SECTION 10.19. No Strict Construction. . . . . . . . . . . . . . . . . 61
iv
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EXHIBITS
EXHIBIT A Milestone Plan
EXHIBIT B Form of Collateral Assignment of Leases
EXHIBIT C Form of Collateral Assignment of Licenses
EXHIBIT D Form of Landlord Waiver
EXHIBIT E Form of Note of KMC
EXHIBIT E-2 Form of Note of KMC II
EXHIBIT F Form of Periodic Reporting Certificate
EXHIBIT G Form of Guaranty
EXHIBIT H Form of Notice of Borrowing
EXHIBIT I Financials
EXHIBIT J-1 Form of Secretary's Certificate of Borrower
EXHIBIT J-2 Form of Secretary's Certificate of KMC Holdings
EXHIBIT K-1 Form of Opinion of Borrowers' Special Counsel
EXHIBIT K-2 Form of Opinion of Borrowers' Regulatory Counsel
EXHIBIT L Form of Pledge Agreement
EXHIBIT M Form of Loss Payable Endorsement
EXHIBIT N Form of Restricted Account Agreement
EXHIBIT O Form of Holdings Pledge Agreement
EXHIBIT P Form of Limited Guaranty
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SCHEDULES
SCHEDULE 2.01 Lucent Invoice
SCHEDULE 3.02 Consents
SCHEDULE 3.05 Litigation
SCHEDULE 3.09(a) Governmental Authorizations and Approvals
SCHEDULE 3.09(b) Material Agreements
SCHEDULE 3.09(c) Intellectual Property
SCHEDULE 3.10 Environmental Matters
SCHEDULE 3.11 Plans
SCHEDULE 3.14 Filing Offices
SCHEDULE 3.16 Corporate and Fictitious Names
SCHEDULE 3.17 Insurance
SCHEDULE 3.19 Capitalization and Subsidiaries
SCHEDULE 3.20 Real Property, Leased Real Property and Easements
SCHEDULE 6.11 Transactions With Affiliates
SCHEDULE 8.04 Collection Accounts
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AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ("Agreement") dated
as of September 22, 1997 among KMC TELECOM INC., a Delaware corporation ("KMC"),
KMC TELECOM II, INC., a Delaware corporation ("KMC II"; KMC and KMC II being
collectively referred to hereinafter as the "Borrowers" and sometimes
individually as a "Borrower") and AT&T COMMERCIAL FINANCE CORPORATION, a
Delaware corporation ("Lender").
RECITALS
A. KMC and the Lender are parties to a certain Loan and Security
Agreement dated as of December 31, 1996, as amended pursuant to that certain
First Amendment to Loan and Security Agreement dated as of April 7, 1997 (such
Loan and Security Agreement, as so amended being hereinafter referred to as the
"Original Agreement"), providing for certain loans and other financial
accommodations by the Lender to KMC.
B. KMC and the Lender have agreed to amend the Original Agreement in
certain respects, to, among other things, (i) increase the Commitment Amount to
$70,000,000 and (ii) make KMC II a party as a Borrower under this Agreement, and
have agreed to execute this Agreement as a restatement of the Original
Agreement, in order to incorporate such amendments and the prior amendment into
a single document.
C. It is the intent of the parties hereto that the execution and delivery
of this Agreement, made for the purpose described in the immediately preceding
Recital, not effectuate a novation of the indebtedness outstanding under the
Original Agreement, but rather a substitution of certain of the terms governing
the payment and performance of such indebtedness.
ARTICLE I
INTERPRETATION OF THIS AGREEMENT; DEFINITIONS
SECTION 1.01. AMENDMENT AND RESTATEMENT. The Borrowers and the
Lender hereby agree that, effective upon the execution and delivery of this
Agreement by each such party: (a) the terms and provisions of the Original
Agreement shall be and hereby are amended, superseded and restated in their
entirety by the terms and provisions of this Agreement, except that any grant of
security by KMC to the Lender pursuant to Section 8.01 of the Original Agreement
shall remain effective as of the date any such grant first became effective, and
(b) the indebtedness evidenced by the Original Agreement shall be payable solely
in accordance with the terms of this Agreement and any Loan Documents delivered
pursuant hereto. No party hereto shall have any obligations under the Original
Agreement, except to the extent that any obligations thereunder may be restated
in this Agreement or the other Loan Documents. The Borrowers and the Lender
agree that the execution and delivery of this Agreement shall not effectuate a
novation of the indebtedness outstanding under the Original Agreement, but
rather a substitution of certain of the terms governing the payment and
performance of such indebtedness.
<PAGE>
SECTION 1.02. DEFINITIONS. As used in this Agreement, the following
words and terms shall have the meanings specified below:
"ACCOUNTS" shall mean all present and future rights of either Borrower
to payment for goods sold or leased or for services rendered which are not
evidenced by instruments or chattel paper, and whether or not they have been
earned by performance.
"ADDITIONAL PURCHASE AGREEMENT" shall mean a purchase agreement
between either Borrower and an Additional Vendor relating to the purchase of
Equipment on terms and conditions reasonably satisfactory to Lender.
"ADDITIONAL VENDOR" shall mean a vendor of Equipment other than
Lucent, which Additional Vendor shall be reasonably satisfactory to Lender.
"AFFILIATE" shall mean any Person other than Lender directly or
indirectly controlling, controlled by or under common control with either
Borrower and any officer or shareholder of such Person or either Borrower, which
shareholder beneficially owns at least ten percent (10%) of the Common Stock of
such Person or either Borrower. For the purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by",
and "under common control with"), as used with respect to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED, HOWEVER,
that beneficial ownership of at least 10% of the Common Stock of a Person shall
be deemed to constitute control.
"APPLICABLE MARGIN" shall mean with respect to each Loan bearing
interest at the Variable Rate, 5.00% per annum.
"AVAILABLE CASH" shall mean on any date with respect to the Borrowers,
the Borrowers' unrestricted available cash consisting of funds immediately
available to the Borrowers plus that portion of the undrawn Commitment Amount
for which the Borrowers would be able to fulfill all conditions precedent to
drawdown on such date.
"BENEFIT PLAN" shall mean a defined benefit plan as defined in Section
3(35) of ERISA (other than a Multiemployer Plan) in respect of which either
Borrower or any ERISA Affiliate is, or within the immediately preceding six (6)
years was, an "employer" as defined in Section 3(5) of ERISA.
"BUSINESS" shall mean the business of constructing, operating and
maintaining the Systems and all operations related thereto or in support
thereof.
"BUSINESS DAY" shall mean any day not a Saturday, Sunday or legal
holiday in the State of New York or New Jersey, on which banks are open for
business in New York and New Jersey.
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"CAPITALIZED LEASE OBLIGATIONS" shall mean Debt represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such Debt shall be
the capitalized amount of such obligations determined in accordance with GAAP.
"CAPITAL STOCK" shall mean, with respect to any Person, any and all
shares or other equivalents (however designated) of capital stock, partnership
interests or any other participation, right or other interest in the nature of
an equity interest in such Person or any option, warrant or other security
convertible into any of the foregoing.
"CHANGE OF CONTROL" shall mean (A) Harold N. Kamine ceases to have
senior management responsibilities with respect to the Business and other
operations of the Borrowers, or (B) KMC Holdings no longer beneficially owns all
of the outstanding Capital Stock of KMC or KMC II (other than as a result of the
exercise of the Warrants.)
"CHANGE OF CONTROL PREMIUM" shall mean the amount, which shall not be
less than zero, by which (a) the present value of the remaining scheduled
payments of principal and interest on the Loans discounted at a rate equal to
the sum of (x) the "ask yield" to maturity of the United States Treasury Note
trading closest to par with a maturity closest to the maturity of the Loans, as
quoted in the Eastern Edition of THE WALL STREET JOURNAL (or any successor
publication) on the date two Business Days prior to the making of the
prepayment, and (y) 2.50%, exceeds (b) the outstanding principal balance of the
Loans.
"CLOSING DATE" shall mean the date on which this Agreement is executed
and delivered by the parties hereto.
"COLLATERAL" shall mean, all property and interests in property now
owned or hereafter acquired by either Borrower in or upon which a security
interest, lien or mortgage is granted to Lender by either Borrower, whether
under this Agreement or the other Loan Documents.
"COLLATERAL ASSIGNMENT OF LEASES" shall mean the Collateral Assignment
of Leases in the form of EXHIBIT B attached hereto, to be executed and delivered
pursuant to SECTION 4.01 hereof.
"COLLATERAL ASSIGNMENT OF LICENSES" shall mean the Collateral
Assignment of Licenses in the form of EXHIBIT C attached hereto, to be executed
and delivered pursuant to SECTION 4.01 hereof.
"COLLECTION ACCOUNTS" AND "COLLECTION AGENT" shall have the meanings
given to such terms in SECTION 8.04 hereof.
"COMMERCIAL PAPER RATE" shall mean a floating rate of interest,
adjusted on the first calendar day of each calendar quarter (i.e., January 1,
April 1, July 1 and October 1 of each calendar year) and equal to the Applicable
Margin plus the per annum rate of interest published in the Eastern Edition of
THE WALL STREET JOURNAL as being the ninety day "commercial paper" rate
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<PAGE>
(identified in such edition of THE WALL STREET JOURNAL as high-grade unsecured
notes sold through dealers by major corporations, PROVIDED, HOWEVER, that if
such edition of THE WALL STREET JOURNAL quotes or publishes more than one such
ninety day "commercial paper" rate, the highest of such rates will be used) on
the Business Day prior to the Funding Date as the applicable rate for the second
Business Day prior to the Funding Date, for the period from the Funding Date
until the end of the calendar quarter in which the Funding Date occurs, and
thereafter during each calendar quarter in which any Loan is outstanding, such
rate as published on the second Business Day of such calendar quarter as the
applicable rate on the first Business Day of such calendar quarter. In the
event that THE WALL STREET JOURNAL is not published or fails to publish the
ninety day "commercial paper" rate described above, Lender shall determine the
applicable ninety day "commercial paper rate" for the applicable period using
such means as it deems appropriate to reasonably approximate the interest rate
on high-grade unsecured commercial paper notes having a maturity of ninety days
sold through dealers by major corporations.
"COMMITMENT" shall mean Lender's commitment to lend as set forth in
SECTION 2.01 hereof.
"COMMITMENT AMOUNT" shall mean $70,000,000.
"COMMITMENT TERMINATION DATE" shall mean October 1, 1999.
"COMMON STOCK" shall mean with respect to any Person, all Capital
Stock of such Person that is generally entitled to (i) vote in the election of
directors of such Person or (ii) if such Person is not a corporation, vote or
otherwise participate in the selection of the governing body, partners, managers
or others that will control the management and policies of such Person.
"COMPLETED SYSTEM" shall mean any System of KMC which is fully
operational, without switching capabilities, encompasses at least twenty route
miles, and with respect to which all Governmental Approvals have been obtained
and connectivity to at least one major interexchange carrier point-of-presence
has been achieved.
"CONSOLIDATED" or "CONSOLIDATED" refers, with respect to any Person,
to the consolidation of the accounts of such Person and its Subsidiaries, if
any, in accordance with GAAP.
"CONTAMINANT" shall mean any pollutant, hazardous substance, toxic
substance, hazardous waste, special waste, petroleum or petroleum derived
substance or waste, or any constituent of any such substance or waste.
"CORESTATES" shall mean CoreStates Bank, N.A.
"DEBT" shall mean, with respect to any Person, (i) indebtedness for
borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other
similar instruments, (iii) obligations which have been incurred in connection
with the acquisition of property or services (including, without limitation,
obligations to pay the deferred purchase price of property or
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<PAGE>
services), excluding trade payables and accrued expenses incurred in the
ordinary course of business, (iv) obligations as lessee under leases which shall
have been or should be, in accordance with GAAP, recorded as capital or
operating leases, (v) all Guarantees of such Person and (vi) all indebtedness,
obligations or other liabilities in respect of any Interest Rate Agreement,
PROVIDED (i) that the amount outstanding at any time of any Debt issued with
original issue discount is the principal amount of such Debt less the remaining
unamortized portion of the original issue discount of such Debt at such time as
determined in conformity with GAAP and (ii) that Debt shall not include any
liability for Federal, state, local or other taxes. Notwithstanding any other
provision of the foregoing definition, any trade payable arising from the
purchase of goods or materials or for services obtained in the ordinary course
of business shall not be deemed to be "Debt" of either Borrower for purposes of
this definition. Furthermore, guarantees of (or obligations with respect to
letters of credit supporting) Debt otherwise included in the determination of
such amount shall not also be included.
"DEFAULT" shall mean any event which but for the passage of time or
giving of notice would constitute an Event of Default.
"EASEMENTS" shall have the meaning ascribed to such term in SECTION
3.20 hereof.
"EBITDA" shall mean, with respect to any Person for any period, an
amount equal to Net Income before interest expense and fees with respect to
Debt, taxes, depreciation and amortization, as determined in accordance with
GAAP as calculated at the end of such period.
"EQUIPMENT" shall mean the transmission and Switching Equipment
(including related services and licenses, peripheral equipment, wiring and
miscellaneous items) and the interduct and fiber optic cable (including related
services and licenses, peripheral equipment and miscellaneous items) purchased
by either Borrower from Lucent and/or an Additional Vendor pursuant to a Lucent
Purchase Agreement and/or an Additional Purchase Agreement and all attachments,
accessories, additions, substitutions, products, replacements, rentals and
proceeds (including but not limited to insurance proceeds) thereof.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time.
"ERISA AFFILIATE" shall mean (i) any corporation which is a member of
the same controlled group of corporations (within the meaning of Section 414(b)
of the IRC) as either Borrower, (ii) any partnership or other trade or business
(whether or not incorporated) under common control (within the meaning of
Section 414(c) of the IRC) with either Borrower and (iii) any member of the same
affiliated service group (within the meaning of Section 414(m) of the IRC) as
either Borrower, any corporation described in clause (i) above or any
partnership or trade or business described in clause (ii) above.
"EVENT OF DEFAULT" shall have the meaning given to such term in
ARTICLE IX hereof.
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"EVENT OF LOSS" shall mean, with respect to any item of Collateral,
the actual or constructive loss of such item of Collateral or the use thereof,
due to theft, destruction, damage beyond repair or damage from any reason
whatsoever, to an extent which makes repair uneconomical, or rendition thereof
unfit for normal use, or the condemnation, confiscation or seizure of, or
requisition of title to or use of, such item of Collateral by any Governmental
Authority or any other Person, acting under or deemed to be acting under color
of any Governmental Authority.
"EXCESS OPERATING CASH FLOW" shall mean for the fiscal quarter
preceding the date on which KMC intends to make an optional prepayment pursuant
to the provisions of SECTION 2.07(A), Net Income of the Borrowers plus non-cash
interest expense, depreciation and amortization and any other non-cash items of
the Borrowers, minus scheduled principal payments of the Borrowers to Lender,
lease payments and capital expenditures of the Borrowers, plus or minus changes
in working capital of the Borrowers, as appropriate.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"FCC" shall mean the Federal Communications Commission or any
successor commission or agency of the United States of America having
jurisdiction over either Borrower or any System.
"FIXED CHARGE COVERAGE RATIO" shall mean with respect to any
consecutive four fiscal quarter period of the Borrowers, the ratio of (i) EBITDA
for the Borrowers, collectively, calculated at the end of such period for the
immediately preceding four fiscal quarters to (ii) Fixed Charges.
"FINANCIALS" shall have the meaning given to such term in SECTION
3.03.
"FIXED CHARGES" shall mean with respect to any fiscal period of the
Borrowers, the sum of the following amounts calculated at the end of such
period: (i) cash interest expense of the Borrowers, (ii) fees payable by the
Borrowers to the Lender, (iii) scheduled principal payments required to be made
by the Borrowers with respect to the Loans for the immediately succeeding four
fiscal quarters, (iv) lease payments of the Borrowers for the immediately
succeeding four fiscal quarters, and (v) capital expenditures of the Borrowers
for the immediately succeeding four fiscal quarters.
"FIXED RATE" shall mean a rate equal to the average of the "ask
yields" of United States Treasury Notes trading closest to par and maturing in
the month in which the remaining average life of the Loans ends (the "Term
Month"), as quoted in the Eastern Edition of THE WALL STREET JOURNAL (or any
successor publication) on a date two (2) Business Days prior to the Rate
Selection Date (or if there is no United States Treasury Note maturity in such
month, an interpolation by the Lender of the "ask yields" of United States
Treasury Notes trading closest to par and maturity in the month closest but
prior to, and in the month closest but subsequent to, the Term Month as quoted
in the Eastern Edition of THE WALL STREET JOURNAL (or any successor
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publication) on the date two (2) Business Days prior to the Rate Selection Date,
plus in either case, 5.50% per annum.
"FUNDING DATE" shall mean the date upon which, subject to the
satisfaction of all conditions precedent contained in SECTIONS 4.01 and 4.02,
the initial Loans made after the Closing Date, shall be funded.
"GOVERNMENTAL APPROVAL" shall mean, with respect to either Borrower,
any license, permit or certificate of public convenience and necessity issued to
either Borrower by the FCC, any PUC or any other Governmental Authority in
connection with any System.
"GOVERNMENTAL AUTHORITY" shall mean any federal, state, local or other
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
"GUARANTEE" shall mean any obligation, contingent or otherwise, of any
Person guaranteeing any indebtedness of any other Person (the "Primary Obligor")
in any manner, whether directly or indirectly, and including any obligation of
such Person, direct or indirect, (i) to purchase or pay (or advance or supply
funds for the purchase or payment of) such indebtedness or to purchase (or to
advance or supply funds for the purchase of) any security for the payment of
such indebtedness; (ii) to purchase property, securities or services for the
purpose of assuring the owner of such indebtedness of the payment of such
indebtedness; or (iii) to maintain working capital, equity capital or other
financial statement condition of the Primary Obligor so as to enable the Primary
Obligor to pay such indebtedness.
"HIGH YIELD DEBT AND EQUITY OFFERING" shall mean the debt and equity
issuance of at least $100,000,000 (in gross proceeds) by KMC Holdings, as
contemplated in that certain letter to KMC dated September 8, 1997 from Morgan
Stanley & Co. Incorporated.
"HOLDINGS PLEDGE AGREEMENT" shall mean a Pledge Agreement executed by
a shareholder of KMC Holdings in the form of EXHIBIT O attached hereto.
"INTEREST RATE AGREEMENT" shall mean for any Person, any interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement or
other similar agreement designed to protect the party indicated therein against
fluctuations in interest rates.
"INVESTMENT" shall mean, as applied to any Person, any direct or
indirect purchase or other acquisition by that Person of securities, or of a
beneficial interest in securities, of any other Person, and any direct or
indirect loan, advance (other than deposits with financial institutions
available for withdrawal on demand, prepaid expenses, advances to employees,
officers and directors and similar items, each made or incurred in the ordinary
course of business), or capital contribution by that Person to any other Person,
including all Debt of such other Person to that Person, but excluding accounts
owed by that other Person in the ordinary course of business. Investments shall
exclude (i) extensions of trade credit on commercially reasonable
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terms in accordance with normal trade practices and (ii) the repurchase of
securities of any Person by such Person. The amount of any Investment shall be
determined in conformity with GAAP.
"IRC" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and the rules and regulations promulgated thereunder, and any
successor statutes or rules and regulations.
"IRS" shall mean the Internal Revenue Service or any successor agency.
"KMC HOLDINGS" shall mean KMC Telecom Holdings, Inc., a Delaware
corporation.
"KMC NOTE" shall mean the promissory note of KMC, substantially in the
form of EXHIBIT E-1 attached hereto.
"KMC II NOTE" shall mean the promissory note of KMC II, substantially
in the form of EXHIBIT E-2 attached hereto.
"KMC II SYSTEM" shall mean any System of KMC II with respect to which
any asset included in such System has been financed by Lender.
"KMC VIRGINIA" shall mean KMC Telecom of Virginia, Inc., a Virginia
public service company.
"LEASED REAL PROPERTY" shall have the meaning given to such term in
SECTION 3.20 hereof.
"LENDER DEBT SERVICE" shall mean the sum of (i) cash interest expense
for both Borrowers for the immediately succeeding four fiscal quarters, to be
calculated by giving effect to the total Debt of both Borrowers outstanding to
Lender on the last day of such fiscal quarter, with such Debt deemed to be
accruing interest over the next four fiscal quarters at an interest rate equal
to the interest rate in effect on such last day of such fiscal quarter, and (ii)
scheduled principal payments of both Borrowers for the immediately succeeding
four fiscal quarters, and shall be measured on the last day of each fiscal
quarter.
"LIBOR RATE" shall mean a floating rate of interest, adjusted on the
first calendar day of each calendar quarter (i.e., January 1, April 1, July 1
and October 1 of each calendar year) and equal to the Applicable Margin plus the
per annum rate of interest published in the Eastern Edition of THE WALL STREET
JOURNAL as being the three-month "London Interbank Offered Rate" on the Business
Day prior to the Funding Date as the applicable rate for the second Business Day
prior to the Funding Date, for the period from the Funding Date until the end of
the calendar quarter in which the Funding Date occurs, and thereafter during
each calendar quarter during which any Loan is outstanding, such rate as
published on the second Business Day of such calendar quarter as the applicable
rate on the first Business Day of such calendar quarter. In the event that THE
WALL STREET JOURNAL is not published or fails to publish the three-month "London
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Interbank Offered Rate" described above, Lender shall determine the applicable
three-month "London Interbank Offered Rate" using such means as it deems
appropriate to reasonably approximate the interest rate at which deposits in
U.S. dollars having a maturity of three-months are offered in London, England to
prime banks in the London interbank market.
"LIEN" shall mean any mortgage, pledge, deed of trust, assignment,
lien, charge, encumbrance or security interest of any kind, or the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement, but excluding easements, rights of way or similar
encumbrances on real property which are in the ordinary course and which do not
materially affect the value, use and insurability of title of such real
property.
"LIMITED GUARANTY" shall mean a limited guaranty executed by a
shareholder of KMC Holdings in the form of EXHIBIT P attached hereto.
"LOAN" shall mean a Loan as made pursuant to SECTIONS 2.01 and 2.02
hereof.
"LOAN DOCUMENTS" shall mean all agreements, instruments and documents,
including, without limitation, security agreements, loan agreements, notes,
guarantees, mortgages, deeds of trust, subordination agreements, pledges, powers
of attorney, consents, assignments, contracts, notices, leases, financing
statements, Interest Rate Agreements between either Borrower and Lender or any
Participant and all other written matter whether heretofore, now, or hereafter
executed by or on behalf of either Borrower or any other Person in connection
with the transactions contemplated hereby and delivered to Lender, together with
all agreements and documents referred to therein or contemplated thereby;
provided, however, that the Subordinated Loan Agreement, the promissory note and
other documents executed in connection therewith, and the documents executed in
connection with the purchase by AT&T Credit Corporation or any Participant of
equity interests in KMC and KMC Holdings shall not constitute Loan Documents.
"LUCENT" shall mean Lucent Technologies, Inc.
"LUCENT PURCHASE AGREEMENT" shall mean an agreement between either
Borrower and Lucent for the purchase of Equipment, on terms and conditions
satisfactory to Lender.
"MATERIAL ADVERSE EFFECT" shall mean, with respect to any Person, a
material adverse effect upon the condition (financial or otherwise), operations
or properties of such Person, or upon the ability of such Person to perform
under the Loan Documents.
"MAXIMUM RATE" shall have the meaning given to such term in SECTION
2.10 hereof.
"MILESTONE PLAN" shall mean the Milestone Plan of KMC attached as
EXHIBIT A hereto.
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"MORTGAGES" shall mean mortgages or deeds of trust in favor of Lender,
with respect to either Borrower's (i) owned real property and (ii) other
interests in those items of real property and Easements, as specified by Lender,
which mortgages and deeds of trust shall be in form and substance satisfactory
to Lender.
"MULTIEMPLOYER PLAN" shall mean a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA which is, or within the immediately preceding six
(6) years was, contributed to by either Borrower or an ERISA Affiliate.
"NET INCOME" shall mean, with respect to any Person for any period,
the net income (loss) of such Person determined in accordance with GAAP.
"NOTES" shall mean the KMC Note and the KMC II Note.
"OBLIGATIONS" shall mean all the obligations of either Borrower now or
hereafter existing under this Agreement or any other Loan Document to which
either Borrower is a party, whether for principal, interest, fees, expenses,
indemnification or otherwise.
"PARTICIPANTS" shall mean each of General Electric Capital
Corporation, a New York corporation, CoreStates Bank, N.A., a national banking
association, each of their respective successors and assigns and each other
financial institution which becomes a party to the Participation Agreement other
than Lender.
"PARTICIPATION AGREEMENT" shall mean that certain Participation
Agreement of even date herewith among the Lender, the Borrowers and the
Participants.
"PARTICIPATION SHARE" shall have the meaning ascribed to such term in
the Participation Agreement.
"PAYMENT DATE" shall mean the first day of January, April, July and
October in each calendar year, but if any such date is not a Business Day, the
next succeeding Business Day, commencing October 1, 1997.
"PBGC" shall mean the Pension Benefit Guaranty Corporation referred to
and defined in ERISA.
"PERIODIC REPORTING CERTIFICATE" shall mean a periodic reporting
certificate in the form of EXHIBIT F attached hereto.
"PERMITTED LIENS" shall have the meaning set forth in SECTION 6.01
hereof.
"PERSON" shall mean any natural person, corporation, division of a
corporation, business trust, joint venture, association, company, partnership,
unincorporated organization or other legal entity, or a government or any agency
or political subdivision thereof.
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"PLAN" shall mean any employee benefit plan as defined in Section 3(3)
of ERISA (other than a Multiemployer Plan) in respect of which either Borrower
or any ERISA Affiliate is, or within the immediately preceding six (6) years
was, an "employer" as defined in Section 3(5) of ERISA.
"PLEDGE AGREEMENT" shall mean each of the Pledge Agreements executed
in favor of the Lender by the shareholders of KMC and KMC II, in the form of
EXHIBIT L attached hereto with respect to KMC Holdings and otherwise in form and
substance satisfactory to Lender, with respect to any other Pledgor.
"PLEDGORS" shall mean, collectively, the Person that have executed and
delivered the Pledge Agreements.
"PREPAYMENT PREMIUM" shall mean (A) with respect to the initial
$35,000,000 in Loans advanced to KMC, (i) if the Loans are bearing interest at
the Fixed Rate, an amount, which shall not be less than zero, by which (1) the
present value of the remaining scheduled payments of principal and interest on
the Loans made to KMC discounted at a rate equal to the sum of one percent
(1.00%) plus the "ask yield" to maturity of the United States Treasury Note
trading closest to par with a maturity closest to the average maturity of the
Loans, as quoted in the Eastern Edition of THE WALL STREET JOURNAL (or any
successor publication) on the date two (2) Business Days prior to the making of
the prepayment in question exceeds the outstanding principal balance of the
Loans made to KMC, multiplied by a fraction, the numerator of which is the
outstanding principal balance of the Loans being prepaid and the denominator of
which is the outstanding principal balance of the initial $35,000,000 in Loans
made to KMC and (ii) if the Loans are bearing interest at the Variable Rate, one
percent (1%) of the principal amount being prepaid on or prior to October 1,
2001 unless the prepayment of the Variable Rate Loans is being made totally out
of Excess Operating Cash Flow or new loans from Lenders in an amount equal or
greater to the outstanding principal balance of the Loans immediately prior to
the prepayment in question, in which case no prepayment fee shall be charged,
and if the Variable Rate Loans are being prepaid after October 1, 2001, $0, and
(B) with respect to any additional Loans advanced to KMC in excess of the
initial $35,000,000 advanced to KMC, two percent (2%) of the principal amount
being prepaid.
"PUC" shall mean any state Governmental Authority having utility or
telecommunications regulatory authority over either Borrower or any System.
"PURCHASE DEBT" shall have the meaning ascribed to such term in
SECTION 6.13(IV).
"RATE SELECTION DATE" shall mean August 15, 1999.
"RELEASE" shall mean any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration into
the environment or into or out of any property, including the movement of
Contaminants through or in the air, soil, surface water, groundwater or
property.
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"REMEDIAL ACTION" shall mean actions required to (1) clean up, remove,
treat or in any other way address Contaminants in the environment; (2) prevent
the Release or threat of Release or prevent or minimize the further Release of
Contaminants so they do not migrate or endanger or threaten to endanger public
health or welfare or the environment; or (3) perform preremedial studies and
investigations and postremedial monitoring and care.
"REPORTABLE EVENT" shall mean any reportable event as defined in
Section 4043 of ERISA unless the reporting requirement with respect to such
reportable event has been waived by the PBGC or other appropriate Governmental
Authority.
"SOLVENT" shall mean, at any time of determination, with respect to
any Person:
(i) the assets of such Person, at a fair valuation, are in excess of
the total amount of its debts (including, without limitation, contingent
liabilities); and
(ii) the present fair saleable value of its assets is greater than its
probable liability on its existing debts as such debts become absolute and
matured; and
(iii) it is then able and expects to be able to pay its debts
(including, without limitation, contingent debts and other commitments) as
they mature; and
(iv) it has capital sufficient to carry on its business as conducted.
For purposes of determining whether a Person is Solvent, the amount of any
contingent liability shall be computed as the amount that, in light of all the
facts and circumstances existing at such time, represents the amount that can
reasonably be expected to become an actual or mature liability.
"STOCK OPTION PLAN" shall mean that certain 1997 Stock Purchase and
Option Plan For Key Employees of KMC Holdings and Affiliates.
"SUBORDINATED LOAN AGREEMENT" shall mean that certain Subordinated
Loan and Security Agreement of even date herewith among the Borrowers and the
Lender.
"SUBSIDIARY" shall mean, with respect to any Person, any corporation,
partnership, joint venture, association or other business entity, whether now
existing or hereafter organized or acquired, (i) in the case of a corporation,
of which more than 50% of the total voting power of the Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, officers or trustees thereof is held by such Person or any of its
Subsidiaries; or (ii) in the case of a partnership, joint venture, association
or other business entity, with respect to which such Person or any of its
Subsidiaries has the power to direct or cause the direction of the management
and policies of such entity by contract or otherwise or if in accordance with
GAAP such entity is consolidated with the such Person for financial statement
purposes.
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<PAGE>
"SWITCHING EQUIPMENT" shall mean telecommunications switches and
associated electronics.
"SYSTEM" shall mean each fiber optic telecommunications system to be
constructed, developed, owned and operated by either Borrower in the United
States of America as a competitive local exchange carrier in a designated
metropolitan area, in accordance with the Milestone Plan, and all replacements,
enhancements or additions thereto.
"TEMPORARY CASH INVESTMENTS" shall mean (i) Investments in marketable,
direct obligations issued or guaranteed by the United States of America, or of
any governmental agency or political subdivision thereof, maturing within 365
days of the date of purchase; (ii) Investments in certificates of deposit issued
by a bank organized under the laws of the United States of America or any state
thereof or the District of Columbia, in each case having capital, surplus and
undivided profits totaling more than $500,000,000 and rated at least A by
Standard & Poor's Ratings Service and A-2 by Moody's Investors Service, Inc.
maturing within 365 days of purchase; or (iii) Investments not exceeding 365
days in duration in money market funds that invest substantially all of such
funds' assets in the Investments described in the preceding clauses (i) and
(ii).
"TERMINATION EVENT" shall mean (i) a Reportable Event with respect to
a Benefit Plan; (ii) the withdrawal of either Borrower or any ERISA Affiliate
from a Benefit Plan during a plan year in which either Borrower or such ERISA
Affiliate was a "substantial employer" as defined in Section 4001(a)(2) of
ERISA; (iii) the imposition of an obligation on either Borrower or any ERISA
Affiliate under Section 4041 of ERISA to provide affected parties written notice
of intent to terminate a Benefit Plan in a distress termination described in
Section 4041(c) of ERISA; (iv) the institution by the PBGC of proceedings to
terminate a Benefit Plan; (v) any event or condition which might constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Benefit Plan; or (vi) the partial or complete
withdrawal of either Borrower or any ERISA Affiliate from a Multiemployer Plan.
"VARIABLE RATE" shall mean the Commercial Paper Rate or the LIBOR
Rate.
"VOTING STOCK" shall mean securities of any class or classes of a
corporation, the holders of which are ordinarily, in the absence of
contingencies, entitled to elect a majority of the corporate directors (or
Persons performing similar functions).
"WARRANTS" shall mean the warrants granted to AT&T Credit Corporation
and CoreStates to purchase voting Common Stock of KMC Holdings and KMC.
SECTION 1.03. ACCOUNTING TERMS. Except as otherwise herein
specifically provided, each accounting term used herein shall have the meaning
given to it under generally accepted accounting principles applied on a
consistent basis ("GAAP").
SECTION 1.04. OTHERS DEFINED IN NEW JERSEY UNIFORM COMMERCIAL CODE.
All other terms contained in this Agreement (and which are not otherwise
specifically defined herein)
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shall have the meanings provided by the Uniform Commercial Code of the State of
New Jersey (the "CODE") to the extent the same are used or defined therein.
ARTICLE II
LOANS
SECTION 2.01. OUTSTANDING BALANCE; AGREEMENT TO LEND. (a) Prior to
the Funding Date the aggregate outstanding principal balance of the Loans was
$32,187,235.08. Subject to the terms and conditions hereof and of the
Participation Agreement and relying upon the representations and warranties of
KMC herein, Lender agrees to make Loans to KMC in an aggregate amount not to
exceed the Commitment Amount less the principal amount of Loans advanced to KMC
II until the Commitment Termination Date.
(b) Subject to the terms and conditions hereof and relying upon the
representations and warranties of KMC II herein, Lender agrees to make Loans to
KMC II in an amount equal to up to fifty-five percent (55%) of the invoiced
price of Switching Equipment and related electronics Equipment as set forth in
SCHEDULE 2.01 hereto, which does not include installation charges, but in no
event to exceed the lesser of (i) $15,000,000 or (ii) the Commitment Amount less
the principal amount of Loans advanced to KMC.
(c) The Borrowers acknowledge (i) that the Lender is not responsible
for the failure of any Participant to fund its "Participation Share" (as defined
in the Participation Agreement) of any Loan, (ii) that with respect to any Loan
requested for which the conditions precedent have been satisfied, the Lender's
funding obligation shall be limited to an amount equal to the Loan requested
less the aggregate Participation Shares of all Participants, (iii) that the
Lender obtained internal credit approval to fund for its own account not more
than $30,000,000 in Loans, and (iv) acknowledge that if an Event of Default has
occurred and has been declared by Lender or notice thereof has been provided to
the Borrowers by Lender, then pursuant to the Participation Agreement, each
Participant has the right to elect not to fund its Participation Share of a
Loan.
(d) If and to the extent that a Participant shall not have made its
Participation Share available to the Lender, and Lender shall have funded such
Participation Share to a Borrower requesting a Loan, then such Borrower agrees
to repay to the Lender forthwith on demand such corresponding amount together
with interest thereon, for each day from the date such amount is made available
to the Borrower until the date such amount is repaid to the Lender, at the
interest rate applicable at the time to the related Loan.
SECTION 2.02. LOANS. (a) The proceeds of the Loans made to KMC shall
be used by KMC to build and operate its Systems in accordance with the Milestone
Plan and to purchase Equipment, and may, on request by KMC or at Lender's option
in the case of Equipment, be paid by Lender, on behalf of KMC, directly to
Lucent or an Additional Vendor, as applicable. Loans may also be used by KMC to
pay transaction costs incurred in connection with the execution, delivery and
performance of the Loan Documents and to pay interest on the Loans
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made to KMC. Each Loan shall be in a minimum principal amount of $500,000.
Exclusive of advances for Switching Equipment, not more than $3,500,000 will be
advanced for any Completed System; provided, however, that additional Loans may
be made to finance expansion of Completed Systems upon satisfaction of all
conditions precedent in SECTION 4.02. In no event shall the Loans made with
respect to any System exceed one hundred percent (100%) of the invoiced price
for the total property, plant and equipment for such System plus, without
duplication, one hundred percent of the capitalized construction costs of such
System, which capitalization shall be calculated in accordance with GAAP.
(b) The proceeds of the Loans made to KMC II shall be used by KMC II
to purchase the Switching Equipment for its Systems and related electronics
Equipment listed on SCHEDULE 2.01, and may, on request by KMC II, be paid by
Lender, on behalf of KMC II, directly to Lucent. Loans may also be used by KMC
II to pay transaction costs incurred in connection with the execution, delivery
and performance of the Loan Documents and to pay interest on the Loans made to
KMC II.
SECTION 2.03. PROCEDURE FOR LOAN REQUEST. A Borrower requesting a
Loan shall deliver to Lender all items required under Article IV hereof,
together with a Notice of Borrowing substantially in the form of EXHIBIT H
attached hereto at least seven (7) Business Days prior to the date on which such
Loan is requested to be made, which notice, once given, shall be irrevocable.
In the case of a Loan the proceeds of which will be used to purchase Equipment,
the Notice of Borrowing will include a certificate of delivery and acceptance in
the form included in EXHIBIT H and a copy of the invoice from the seller of the
Equipment described in such invoice and in the case of a Loan the proceeds of
which will be used to pay transaction, construction and operating costs, the
Notice of Borrowing will include a copy of the invoice from the provider of the
service or appropriate supporting documentation. Subject to the terms and
conditions hereof, Lender shall make the Loan proceeds available to the
applicable Borrower or the Person entitled to payment thereof at the bank
account(s) specified in the Notice of Borrowing on the date specified in such
Notice of Borrowing in U.S. dollars in immediately available funds.
SECTION 2.04. THE NOTES. All the Loans made to KMC shall be
evidenced by the KMC Note and shall mature on October 1, 2005. All Loans made
to KMC II shall be evidenced by the KMC II Note and shall mature on October 1,
2005. Each Loan shall bear interest from its date on the outstanding principal
balance thereof as set forth in SECTION 2.05. Lender is hereby authorized by
either Borrower to register on Schedule A to the Note executed by it the date
and amount of each Loan made to such Borrower, and to register the date and
amount of each payment on each Loan made to such Borrower, and such Schedule A
shall be conclusive evidence against such Borrower of the amounts owing to
Lender with respect to the Loans made to such Borrower in the absence of
manifest error; PROVIDED, HOWEVER, that the failure of Lender to register any
such information on such schedule shall not in any manner affect the obligation
of such Borrower to repay the Loans made to such Borrower in accordance with the
terms of this Agreement.
SECTION 2.05. INTEREST ON LOANS. (a) GENERAL. On or prior to the
Commitment Termination Date each Loan shall bear interest at the rate per annum
equal to the Commercial
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Paper Rate, computed on the basis of a 360 day year and the actual number of
days elapsed, compounded quarterly. After the Commitment Termination Date, all
the Loans shall bear interest at the Fixed Rate or the Variable Rate, as set
forth in a notice provided by the Borrowers to the Lender on or prior to the
Rate Selection Date, computed on the basis of a 360 day year and the actual
number of days elapsed, compounded quarterly. If the Borrowers select the
Variable Rate, then on or prior to the Commitment Termination Date, the
Borrowers shall enter into an Interest Rate Agreement upon terms and with
counterparties acceptable to the Lender to provide the Borrowers with payments
in an amount equal to the interest on the Loans in excess of twelve percent
(12%) per annum throughout the remaining term of the Loans.
(b) DEFAULT INTEREST. If either Borrower shall default in the
payment of the principal of or interest on any Loan or any other amount becoming
due hereunder on its due date and such default shall continue uncured for ten
days, then both Borrowers shall, on demand, thereafter pay interest on all Loans
at a rate that is four percent (4.00%) per annum above the rates of interest
otherwise payable on all the Loans from the date such payment is due to the date
such payment default is either cured or waived in writing by Lender. If any
other Event of Default shall occur and be continuing, then the Borrowers shall,
on demand, thereafter pay interest on all the Loans at a rate that is two
percent (2.00%) per annum above the rates of interest otherwise payable on the
Loans from the date of the occurrence of such Event of Default until the date
such Event of Default has been cured or waived in writing by Lender; PROVIDED,
that in the event that an Event of Default described in the first sentence of
this clause (b) shall occur at any time that a Default described in this
sentence has occurred and is continuing, then the rate of interest described in
the first sentence of this clause (b) shall apply.
(c) ADDITIONAL INTEREST. In the event that five days after the
Closing Date KMC Holdings shall not have (i) executed an unlimited guaranty of
the Obligations of KMC, (ii) executed a Pledge Agreement pledging all of the
Capital Stock of KMC to Lender, and (iii) delivered stock certificates to Lender
representing all of the Capital Stock of KMC together with undated stock powers
executed in blank, the Borrowers shall thereafter pay interest on all the Loans
at a rate that is two percent (2.00%) per annum above the rates of interest
otherwise payable on the Loans from such date until all the conditions specified
in clauses (i), (ii) and (iii) have been fulfilled.
SECTION 2.06. PAYMENTS. (a) Interest on each Loan shall be payable
quarterly in arrears on each Payment Date.
(b) The outstanding principal balance all of the Loans made to the
Borrowers shall be payable in twenty-four consecutive quarterly installments
beginning on the ninth Payment Date (i.e. the Payment Date occurring on January
1, 2000). The amount of each quarterly principal payment due on each Payment
Date shall be as follows:
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Payment Date Number Principal Amount
------------------- ----------------
9 to 20 $1,750,000
21 to 28 $3,500,000
29 to 31 $5,250,000
32 Balance Due
(c) Payments made with respect to the Loans by each Borrower shall be
applied by Lender first to unpaid and accrued fees and interest and then to the
outstanding unpaid principal balance of the Loans of such Borrower, PROVIDED,
HOWEVER, that on and after the occurrence and during the continuance of an Event
of Default, any payments received by Lender shall be applied to the Obligations
in any manner Lender shall determine.
SECTION 2.07. OPTIONAL PREPAYMENT OF LOANS; MANDATORY PREPAYMENT OF
LOANS. (a) Provided that no Event of Default has occurred and is continuing,
(i) KMC shall have the right upon the provision of sixty days' prior written
notice to Lender, which notice, once given, shall be irrevocable, on any Payment
Date occurring on or after October 1, 2000, to prepay the outstanding principal
of the Loans in an aggregate amount of $100,000 or a multiple thereof, together
with accrued interest thereon and the aggregate Prepayment Premium applicable
thereto, and (ii) KMC II shall have the right upon the provision of sixty days'
prior written notice to Lender, which notice, once given, shall be irrevocable,
on any Payment Date to prepay the outstanding principal balance of all, but not
less than all, of the Loans made to it together with accrued interest thereon
but without premium or penalty. The amount of principal so prepaid by either
Borrower shall be applied to the remaining principal payments of the Loans made
to such Borrower in the inverse order of maturity.
(b) Upon the occurrence of a Change of Control, at the sole option of
Lender, the Borrowers shall prepay the outstanding principal balance of the
Loans and all the other Obligations on a date designated by Lender, together
with accrued interest and the Change of Control Premium (but without the
Prepayment Premium).
(c) Upon the occurrence of any Event of Loss with respect to any item
of Collateral that is not repaired or replaced (other than an item of Collateral
no longer used or useful in the Business) such that after such repair or
replacement it has a value at least equal to its value prior to the occurrence
of such Event of Loss, the affected Borrower shall make a principal prepayment
in an amount equal to the replacement value of the item of Collateral which
suffered the Event of Loss, together with accrued interest thereon (but without
the Prepayment Premium) with such principal payment to be applied, PRO RATA, to
the principal installments of the Loans to such Borrower in the inverse order of
maturity.
(d) If the aggregate principal balance of the Loans at any time
exceeds the Commitment Amount, then the Borrowers shall immediately repay to
Lender, without Prepayment Premium, upon notice from Lender, the amount by which
the outstanding principal balance of the Loans exceeds the Commitment Amount,
together with all accrued and unpaid interest on such excess principal up to the
date of repayment.
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(e) Upon the completion of the High Yield Debt and Equity Offering,
(i) at the sole option of Lender, KMC II shall prepay all of the Loans made to
it, together with accrued interest thereon but without premium or penalty, and
(ii) KMC II may, at its option, prepay all of the Loans made to it, together
with accrued interest thereon but without premium or penalty.
(f) Upon prepayment of all the Loans made to KMC II, KMC II shall
have no further rights to borrow hereunder, and except as otherwise provided in
SECTION 10.07, KMC II shall have no further obligations hereunder, and the
Lender shall release the Collateral of KMC II and its Lien on the Capital Stock
of KMC II, and all references herein to "Borrowers", "either Borrower" or "each
Borrower" shall thereafter be deemed to be a reference solely to KMC.
(g) On June 30, 1998 KMC II shall prepay all of the Loans made to it,
together with accrued interest thereon but without premium or penalty.
SECTION 2.08. FEES. (a) If less than fifty percent (50%) of the
Commitment Amount has been advanced to the Borrowers on or prior to December 31,
1997, the Borrowers shall pay and the Borrowers shall be jointly and severally
liable to Lender for payment of a nonutilization fee of one quarter percent
(0.25%) of the quarterly unused Commitment Amount, which fee shall be calculated
on the basis of the unused amount of the Commitment Amount as of the last day of
each quarter preceding a Payment Date and shall be payable on each Payment Date
following such last day of a quarter beginning on January 1, 1998 until and
including the Payment Date following the Commitment Termination Date.
(b) The Borrowers shall pay Lender and shall be jointly and severally
liable to Lender for payment of an annual administration fee of $100,000 on the
first Payment Date of each calendar year beginning January 1, 1998.
SECTION 2.09. PAYMENT, ETC. All payments by the Borrowers hereunder
and under the Notes shall be made to Lender by wire transfer or other electronic
payment method to Lender's account at AT&T Capital Corp., Chase Manhattan Bank,
N.Y., N.Y., ABA# 021000021, Account # 322021979, reference Capital Markets --
KMC Telecom, or to such bank account as Lender may designate, for the account of
Lender in U.S. dollars in immediately available funds by 12:00 p.m., New Jersey
time, on the date on which such payment shall be due. Interest in respect of
any Loan hereunder shall accrue from the day such Loan is made up to and
including the day prior to the date on which such Loan is paid in full.
Payments received after 12:00 p.m. shall not be given credit until the next
Business Day, and the Borrowers shall be liable for interest, if any, accruing
on such payment until the next Business Day.
SECTION 2.10. MAXIMUM LAWFUL INTEREST RATE. Notwithstanding any
provision contained herein, the total liability of the Borrowers for payment of
interest pursuant hereto and the Notes, including any other charges or other
amounts, to the extent such charges and other amounts are deemed to be interest,
shall not exceed the maximum amount of such interest permitted by law to be
charged, collected, or received from the Borrowers (the "MAXIMUM RATE"). If any
payments by either Borrower include interest in excess of the Maximum Rate,
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Lender shall apply such excess to the reduction of the unpaid principal amount
owing by such Borrower, or if none is due, such excess shall be returned to such
Borrower.
SECTION 2.11. INCREASED CAPITAL. If the Lender or any Participant
which is subject to minimum capital requirements determines that compliance by
such Person, with any guideline or request from any central bank or other
Governmental Authority (whether or not having the force of law) affects or would
affect the amount of capital required or expected to be maintained by such
Person, or any corporation controlling such Person, and such Person reasonably
determines that the amount of such capital is increased by or based upon any
commitment to lend hereunder or under the Participation Agreement or making or
maintaining Loans, and other commitments of this type, then, upon demand by such
Person, the Borrowers agree to, within three (3) days of such demand, pay to
such Person, from time to time as specified by such Person, additional amounts
sufficient to compensate such Person in the light of such circumstances, to the
extent that such Person reasonably determines such increase in capital to be
allocable to such Person's commitment or maintenance of Loans hereunder or
pursuant to the Participation Agreement. A certificate as to the amount of such
increased cost, submitted to the Borrowers by the applicable Person shall,
absent manifest error, be conclusive and binding on the Borrowers for all
purposes.
SECTION 2.12. JOINT AND SEVERAL LIABILITY; CONTRIBUTION. (a)
Notwithstanding anything to the contrary in this Agreement or the other Loan
Documents but subject to the provisions of SECTION 2.07(F), all payment and
performance Obligations arising under this Agreement and the other Loan
Documents shall be joint and several obligations of each Borrower secured by all
the Borrowers' Collateral. Lender may apply any portion of any Borrower's
Collateral to satisfy any of the Obligations of any other Borrower.
(b) CONTRIBUTION AND INDEMNIFICATION BETWEEN THE BORROWERS. To the
extent that either Borrower shall, as a result of the operation of SECTION 2.12,
pay any Obligation of the other Borrower under the Loan Documents (such payment
being referred to as an "Accommodation Payment"), then such Borrower shall be
entitled to contribution and indemnification from, and be reimbursed by the
other Borrower, equal to a fraction of such Accommodation Payment, the numerator
of which fraction is such other Borrower's "Allocable Amount" (as defined below)
and the denominator of which is the sum of the Allocable Amounts of both the
Borrowers. As of any date of determination, the "Allocable Amount" of each
Borrower shall be equal to the maximum amount of liability for Accommodation
Payments which could be asserted against such Borrower hereunder without (a)
rendering such Borrower "insolvent" within the meaning of Section 101(31) of the
Bankruptcy Code , Section 2 of the Uniform Fraudulent Transfer Act (the "UFTA")
or Section 2 of the Uniform Fraudulent Conveyance Act (the "UFCA"), (ii) leaving
such Borrower with unreasonably small capital or assets, within the meaning of
Section 548 of the Bankruptcy Code, Section 4 of the UFTA, or Section 5 of the
UFCA, or (iii) leaving such Borrower unable to pay its debts as they become due
within the meaning of Section 548 of the Bankruptcy Code or Section 4 of the
UFTA, or Section 5 of the UFCA. All rights and claims of contribution,
indemnification and reimbursement under this section shall be subordinate in
right of payment to the prior payment in full of the Obligations. The
provisions of this section shall, to the
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extent expressly inconsistent with any provision in any Loan Document, supersede
such inconsistent provision.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Each Borrower represents and warrants to Lender that:
SECTION 3.01. ORGANIZATION; POWERS. (a) Such Borrower (i) is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of organization and (ii) is qualified to do business in the
jurisdiction in which its principal place of business is located and in every
other jurisdiction where such qualification is necessary;
(b) such Borrower has the power and authority to own its properties,
to carry on its business as now conducted; and
(c) such Borrower has the power and authority to execute and deliver
and perform this Agreement and the other Loan Documents to which it is a party,
to borrow hereunder, and will have the power to execute and deliver any
Mortgages and Collateral Assignments of Leases or other instruments as agreed to
be delivered by it subsequent to the date hereof.
SECTION 3.02. CORPORATE AUTHORIZATION. The execution, delivery and
performance of this Agreement and the other Loan Documents to which it is a
party, and the Loans hereunder:
(a) have been duly authorized by such Borrower's Board of Directors
and, if necessary, such Borrower's stockholders;
(b) (1) do not violate (i) any existing provision of law applicable
to such Borrower and not immaterial to its business, (ii) such Borrower's
Certificate or Articles of Incorporation or (iii) any applicable order of any
court or other governmental agency, and (2) do not conflict with, result in a
breach of or constitute (with due notice or lapse of time or both) a default
under any indenture, agreement for borrowed money, bond, note or other similar
instrument or any other material agreement to which such Borrower is a party or
by which such Borrower or any of such Borrower's property is bound;
(c) do not result in the creation or imposition of any Lien of any
nature whatsoever upon any property or assets of such Borrower other than the
Liens granted pursuant to this Loan Agreement or the other Loan Documents;
(d) constitute legal, valid and binding obligations of such Borrower,
enforceable against such Borrower in accordance with their respective terms; and
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(e) do not, as of the date of execution hereof, require any
governmental consent, filing, registration or approval except as set forth on
SCHEDULE 3.02.
SECTION 3.03. FINANCIAL STATEMENTS. KMC has furnished to the Lender
the audited consolidated financial statements of KMC dated as of December 31,
1996, and the unaudited consolidated financial statements for the fiscal quarter
ended June 30, 1997 and for the period ended July 31, 1997, which statements are
attached hereto as EXHIBIT I (collectively, the "FINANCIALS"). The Financials
have been prepared in accordance with GAAP applied on a basis consistent with
that of preceding periods and are complete and correct in all material respects.
As of the date of the Financials, (a) the Financials fairly represent KMC's
financial position and results of operations; and (b) there are no omissions
from the Financials or any other facts or circumstances not reflected in the
Financials which are or may be material according to GAAP.
SECTION 3.04. NO MATERIAL ADVERSE CHANGE. There has been no material
adverse change in the condition (financial or otherwise), operations or
properties of KMC or KMC II since the date of the Financials.
SECTION 3.05. LITIGATION. Except as set forth on SCHEDULE 3.05,
there are no actions, suits or proceedings at law or in equity or by or before
any Governmental Authority now pending or, to the knowledge of such Borrower
against or affecting such Borrower or any property or rights of such Borrower as
to which there is a reasonable possibility of an adverse determination and
which, if adversely determined, would individually or in the aggregate
materially impair the right of either Borrower to carry on business
substantially as now being conducted or as presently contemplated or would
result in any Material Adverse Effect.
SECTION 3.06. TAX RETURNS. Such Borrower has filed or caused to be
filed all Federal, state and local tax returns which are required to be filed
and has paid or caused to be paid all taxes as shown on such returns or on any
assessment received by it to the extent that such taxes have become due, except
such taxes the amount, applicability or validity of which are being contested in
good faith by appropriate proceedings and with respect to which such Borrower
shall have set aside on its books adequate reserves with respect to such taxes
as are required by GAAP.
SECTION 3.07. NO DEFAULTS. Such Borrower is not in default (i) with
respect to any judgment, writ, injunction, decree, rule or regulation of any
Governmental Authority which is likely to have a Material Adverse Effect, or
(ii) in the performance, observance or fulfillment of any of the obligations,
covenants or conditions contained in any material agreement or instrument to
which such Borrower is a party or by which any of its assets are bound, which is
likely to have a Material Adverse Effect.
SECTION 3.08. PROPERTIES. Such Borrower has good and marketable
title to all its material properties and assets and all Collateral of such
Borrower is free and clear of all Liens of any nature whatsoever, except
Permitted Liens.
SECTION 3.09. LICENSES, MATERIAL AGREEMENTS, INTELLECTUAL PROPERTY.
(a) Such Borrower has obtained all Governmental Approvals and approvals of any
Governmental Authority
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having jurisdiction over such Borrower which Governmental Approvals and
approvals are necessary or appropriate for the construction and operation of the
Systems as are presently operating, as contemplated in the Milestone Plan. Such
Governmental Approvals and approvals are correctly listed on SCHEDULE 3.09(A)
and constitute the only material licenses, permits or franchises or other
Governmental Approvals of any Governmental Authority required in connection with
the Systems as are presently operating. All Governmental Approvals of such
Borrower are in full force and effect, are duly issued in the name of, or
validly assigned to, such Borrower and such Borrower has the power and authority
to operate thereunder.
(b) SCHEDULE 3.09(B) accurately and completely lists all material
agreements to which such Borrower is a party, including, without limitation, all
purchase agreements, construction contracts, right of way or right of occupancy
agreements, lease agreements, consulting, employment, management and related
agreements. All of the foregoing agreements are valid, subsisting and in full
force and effect and none of such Borrower, or, to the best of such Borrower's
knowledge and belief, any other parties, are in material default thereunder.
Such Borrower has given true and complete copies of all such agreements to
Lender.
(c) Such Borrower owns or possesses all the patents, trademarks,
service marks, trade names, copyrights and licenses, and all rights with respect
to the foregoing, necessary for the conduct of its business as presently
conducted without any known conflict with the rights of others. SCHEDULE
3.09(C) accurately and completely lists all such rights.
SECTION 3.10. COMPLIANCE WITH LAWS. Except as disclosed on SCHEDULE
3.10, the operations of such Borrower comply in all material respects with all
applicable federal, state or local laws and regulations, including
environmental, health and safety statutes and regulations. None of the
operations of such Borrower is subject to any judicial or administrative
proceeding alleging the violation of any federal, state or local environmental,
health or safety statute or regulation. None of the operations of such Borrower
is the subject of federal or state investigation evaluating whether any Remedial
Action is needed to respond to a Release. Except as disclosed on SCHEDULE 3.10,
such Borrower has not filed any notice under any federal or state law indicating
past or present treatment, storage or disposal of a hazardous waste or reporting
a Release. Except as disclosed on SCHEDULE 3.10, such Borrower has no
contingent liability of which such Borrower has knowledge or reasonably should
have knowledge in connection with any Release.
SECTION 3.11. ERISA. None of such Borrower or any ERISA Affiliate of
such Borrower maintains or contributes to any Plan other than a Plan listed on
SCHEDULE 3.11 hereto. Each Plan which is intended to be qualified under Section
401(a) of the IRC has been determined by the IRS to be so qualified, and each
trust related to any such Plan has been determined to be exempt from federal
income tax under Section 501(a) of the IRC. Except as disclosed on SCHEDULE
3.11, none of such Borrower or any ERISA Affiliate maintains or contributes to
any employee welfare benefit plan within the meaning of Section 3(1) of ERISA
which provides benefits to employee after termination of employment other than
as required by Section 601 of ERISA. None of such Borrower or any ERISA
Affiliate has breached any of the responsibilities, obligations or duties
imposed on it by ERISA or regulations promulgated thereunder with respect
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to any Plan. No Plan has incurred any accumulated funding deficiency (as
defined in Section 302(a)(2) of ERISA and Section 412(a) of the IRC), whether
waived or not waived. None of such Borrower or any ERISA Affiliate nor any
fiduciary of any Plan which is not a Multiemployer Plan (i) has engaged in a
nonexempt "prohibited transaction" described in Section 406 of ERISA or Section
4975 of the IRC or (ii) has taken or failed to take any action which would
constitute or result in a Termination Event. None of such Borrower or any ERISA
Affiliate has incurred any liability to the PBGC which remains outstanding other
than the payment of premiums, and there are no premium payments which have
become due which are unpaid. Schedule B to the most recent annual report filed
with the IRS with respect to each Plan is complete and accurate. Since the date
of each such Schedule B, there has been no adverse change in the funding status
or financial condition of the Plan relating to such Schedule B. None of such
Borrower or any ERISA Affiliate has (i) failed to make a required contribution
or payment to a Multiemployer Plan or (ii) made a complete or partial withdrawal
under Sections 4203 or 4205 of ERISA from a Multiemployer Plan. None of such
Borrower or any ERISA Affiliate has failed to make a required installment or any
other required payment under Section 412 of the IRC on or before the due date
for such installment or other payment. None of such Borrower or any ERISA
Affiliate is required to provide security to a Plan under Section 401(a)(29) of
the IRC due to a Plan amendment that results in an increase in current liability
for the plan year.
SECTION 3.12. INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY
ACT. Such Borrower is not an "investment company" as that term is defined in,
and is not otherwise subject to regulation under, the Investment Company Act
of 1940. Such Borrower is not a "holding company" as that term is defined in,
and is not otherwise subject to regulation under, the Public Utility Holding
Company Act of 1935.
SECTION 3.13. FEDERAL RESERVE REGULATIONS. Such Borrower is not
engaged principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying any margin stock
(within the meaning of Regulation G of the Board of Governors of the Federal
Reserve System of the United States), and no part of the proceeds of the Loans
made to such Borrower will be used to purchase or carry any such margin stock or
to extend credit to others for the purpose of purchasing or carrying any such
margin stock or for any purpose that violates, or is inconsistent with, the
provisions of Regulation G, T, U or X of said Board of Governors.
SECTION 3.14. COLLATERAL. The security interests granted by ARTICLE
VIII hereof, and accompanying financing statements, when duly filed in the
offices and jurisdictions set forth on SCHEDULE 3.14 hereof, create valid and
perfected first priority Liens in and to the Collateral of such Borrower,
enforceable against other Persons in all jurisdictions securing the payment, as
applicable, of the Obligations hereunder. Upon filing such financing
statements, to the extent that the filing of a financing statement is sufficient
to perfect a security interest, no further action is required to perfect the
Liens of Lender in the Collateral of such Borrower described in SECTION 8.01.
SECTION 3.15. CHIEF PLACE OF BUSINESS. As of the Closing Date, the
chief executive office and principal place of business address of such Borrower
is 1545 Route 206,
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Bedminster, New Jersey 07921. If any change in any such location occurs, such
Borrower shall notify Lender thereof not later than ten days after the
occurrence thereof. As of the date of execution hereof, the books and records
of such Borrower and all chattel paper and all records of account are located at
the principal place of business or chief executive office of such Borrower and
if any change in such location occurs, such Borrower shall notify Lender thereof
not later than ten days after the occurrence thereof.
SECTION 3.16. OTHER CORPORATE NAMES. Except as set forth on SCHEDULE
3.16, such Borrower has not used and does not now use and will not use any
corporate or fictitious name.
SECTION 3.17. INSURANCE. SCHEDULE 3.17 contains a description of all
insurance which such Borrower maintains or has maintained on its behalf. All of
such insurance is in full force and effect.
SECTION 3.18. MILESTONE PLAN. The Milestone Plan represents good
faith projections of future financial performance of KMC for the periods set
forth therein. Such document has been prepared on the basis of the assumptions
set forth therein, which KMC believes are reasonable in light of current and
reasonably foreseeable business conditions.
SECTION 3.19. CAPITALIZATION AND SUBSIDIARIES. The classes of
Capital Stock, number of authorized shares, number of outstanding shares and par
values or other designations of the Capital Stock or other equity securities or
beneficial interests of such Borrower are correctly set forth on SCHEDULE 3.19.
All the outstanding shares of Capital Stock or other equity securities or
beneficial interests of such Borrower are duly and validly issued, fully paid
and nonassessable, and none of such issued and outstanding shares, equity
securities or beneficial interests has been issued in violation of, or is
subject to, any preemptive or subscription rights. Except as set forth on
SCHEDULE 3.19, there are no: (A) outstanding shares of Capital Stock or other
equity securities or beneficial interests or other securities convertible into
or exchangeable for shares of Capital Stock or other equity securities or other
beneficial interests of such Borrower, (B) outstanding rights of subscription,
warrants, calls, options, contracts or other agreements of any kind, issued,
made or granted to or with any Person under which such Borrower may be obligated
to issue, sell, purchase, retire or redeem or otherwise acquire or dispose of
any shares of Capital Stock or other equity securities or beneficial interests
of such Borrower, or (C) Subsidiaries of such Borrower. KMC Holdings
beneficially owns all of the equity interests of such Borrower (without giving
effect to any exercise of the Warrants).
SECTION 3.20. REAL PROPERTY, LEASES AND EASEMENTS. Such Borrower
owns the real property described on SCHEDULE 3.20. Set forth on SCHEDULE 3.20
is a list of (i) all real property leased by such Borrower (the "LEASED REAL
PROPERTY") and (ii) all easements, rights of way, rights of occupancy, licenses
and similar rights with respect to real property granted to such Borrower not
otherwise disclosed to Lender on a title report delivered to Lender pursuant to
the terms hereof (together with all easements, rights of way, rights of
occupancy, licenses and similar rights with respect to real property granted to
such Borrower which are so disclosed, collectively, the "EASEMENTS"). Also set
forth on SCHEDULE 3.20 is a street address of the real property and
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Leased Real Property locations described above, including a description of such
properties' current use. Except as set forth in SCHEDULE 3.20, such Borrower's
interests in the owned real property, the Leased Real Property and the Easements
are sufficient in order for such Borrower to conduct its business and operations
as presently conducted.
SECTION 3.21. SOLVENCY. After giving effect to any Loans made to
such Borrower hereunder, the disbursement of the proceeds of such Loans pursuant
to such Borrower's instructions and the execution, delivery and performance of
each of the Loan Documents and transactions contemplated thereby, such Borrower
is Solvent and is not contemplating either the filing of a petition by it under
any state or federal bankruptcy or insolvency laws or the liquidation of all or
a substantial portion of its property, and has no knowledge of any Person
contemplating the filing of any such petition against such Borrower.
SECTION 3.22. BROKERS, ETC. Such Borrower has not dealt with any
broker, finder, commission agent or other similar Person in connection with the
Loans or the transactions being effected contemporaneously with this Agreement
other than Hackman, Baring & Co. and Jefferies & Co., and such Borrower
covenants and agrees to indemnify and hold harmless Lender from and against, any
broker's fee, finder's fee or commission in connection with such transactions.
SECTION 3.23. NO MATERIAL MISSTATEMENTS. Except for previous
business plans submitted to Lender which have been updated and superseded by the
Milestone Plan, neither any report, financial statement, exhibit or schedule
furnished by or on behalf of such Borrower to Lender in connection with the
negotiation of this Agreement and the other Loan Documents or included herein or
therein, nor any other information required to be furnished pursuant to the
provisions of ARTICLE V hereof, contains any material misstatement of fact or
omits to state any material fact necessary to make the statements therein not
materially misleading.
SECTION 3.24. KMC VIRGINIA. KMC Virginia has no assets or
liabilities other than its corporate organization documents, Governmental
Approvals and contract rights and obligations and does not engage in any
business.
ARTICLE IV
CONDITIONS FOR LOANS
The obligations of Lender to make Loans hereunder are subject to the
accuracy, as of the Funding Date and as of the date of making of each of the
Loans after the Funding Date, of the representations and warranties contained in
ARTICLE III and the other Loan Documents, to the performance by each Borrower of
its obligations to be performed hereunder on or before the date of such Loan and
to the satisfaction of the following further conditions:
SECTION 4.01. CONDITIONS PRECEDENT TO INITIAL LOAN AFTER THE CLOSING
DATE. In the case of the Loans to be made on the Funding Date:
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(a) All then applicable legal matters incident to this Agreement and
the other Loan Documents shall be reasonably satisfactory to counsel for Lender.
(b) Lender shall have received payment in full of the nonrefundable
commitment fee of $350,000 (which is in addition to the $350,000 commitment fee
paid under the Original Agreement), and all the other documented out-of-pocket
costs and expenses of Lender incurred on or prior to the Funding Date,
including, without limitation, reasonable attorneys' and paralegals' fees and
expenses and the fees and expenses incurred in connection with preparation of
any environmental audits.
(c) Lender shall have received the following items, in each case in
form and substance satisfactory to Lender:
(i) the Financials;
(ii) the Milestone Plan showing in reasonable detail and
specifying any material underlying assumptions, for the
subsequent 9 year period, KMC's anticipated revenues and
expenses and projected statements of cash flow and
information with respect to projected capital
expenditures and changes in working capital over such
period, and a detailed Systems construction and buildout
schedule;
(iii) certificates substantially in the form of EXHIBITS J-1
and J-2 hereto, dated the Funding Date or dated the
Closing Date and a reaffirmation of such certificate
dated the Funding Date, of the secretaries or assistant
secretaries of each of the Borrowers and KMC Holdings,
certifying (1) the names and true signatures of the
officers authorized to sign each Loan Document to which
either Borrower or KMC Holdings is a party, (2) the
resolutions of the Board of Directors of either Borrower
or KMC Holdings approving the transactions contemplated
by the Loan Documents to which each is a party, and (3)
each Borrower's or KMC Holdings's bylaws;
(iv) the written opinion of special, regulatory counsel for
the Borrowers and KMC Holdings, dated the Funding Date,
addressed to Lender (and upon which the Participants may
rely) and satisfactory to (and containing only such
qualifications and limitations as are satisfactory to)
counsel for Lender, which opinions shall be substantially
in the forms set forth in EXHIBITS K-1 and K-2 attached
hereto;
(v) a Pledge Agreement duly executed by KMC Holdings with
respect to the Capital Stock of KMC II, together with
stock certificates for
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all the Capital Stock of KMC II and undated stock powers
executed in blank;
(vi) an unlimited guaranty of KMC Holdings, duly executed by
KMC Holdings in the form of EXHIBIT G hereto with respect
to the Obligations of KMC II;
(vii) certificates of appropriate public officials dated not
more than 30 days prior to the Funding Date, as to the
legal existence or qualification, and good standing of
each Borrower and KMC Holdings from such Person's
jurisdiction of organization and from the jurisdiction in
which such Person has its principal place of business;
(viii) each Borrower's and KMC Holdings's Certificate or
Articles of Incorporation, as amended, modified or
supplemented on or prior to the Funding Date, each
certified to be true, correct and complete by the
Secretary of State of the state in which such Person is
organized;
(ix) loss payable endorsements substantially in the form of
EXHIBIT M attached hereto with respect to each Borrower's
insurance policies relating to the Collateral, and
insurance certificates required by SECTION 5.04(G) from
nationally recognized insurance brokers with respect to
each Borrower's insurance policies;
(x) with respect to each Borrower's then existing Collection
Accounts, Restricted Account Agreements substantially in
the form of EXHIBIT N attached hereto, duly executed by
the applicable Borrower and the financial institutions
maintaining the Collection Accounts;
(xi) the duly executed Collateral Assignment of Licenses by
KMC, together with consents to assignment of licences and
rights from Persons designated by Lender duly executed by
such Persons, including agreements as to default notices,
cure rights, waiver of lien rights, conveyance of
nondisturbance rights and other terms satisfactory to
Lender;
(xii) the duly executed Collateral Assignment of Leases by KMC,
together with consents to assignment, duly executed by
the appropriate Persons, including agreements as to
default notices, cure rights, waiver of lien rights,
conveyance of nondisturbance rights and other terms
satisfactory to Lender with respect to those leased
properties specified by Lender, together with landlord
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waivers in the form of EXHIBIT D hereto executed by the
appropriate landlord;
(xiii) the Notes duly executed and delivered by the Borrowers;
(xiv) completed environmental questionnaires and indemnity
agreement executed by the applicable Borrower and Phase I
Environmental Reports with respect to premises described
on SCHEDULE 3.10;
(xv) an Access Agreement executed and delivered by
Cogeneration Services, Inc. with respect to KMC II's
premises located at 1545 Route 206, Suite 300,
Bedminster, New Jersey in form and substance satisfactory
to Lender;
(xvi) Holdings Pledge Agreements executed by each of the
shareholders of KMC Holdings other than AT&T Credit
Corporation and CoreStates, together with stock
certificates for seventy-five percent (75%) of the
Capital Stock of KMC Holdings and undated stock powers
duly executed in blank; and
(xvii) Limited Guaranties executed by the shareholders of KMC
Holdings referred to in clause (xvi) above.
(d) Lender shall have satisfactorily completed its review of any
Lucent Purchase Agreement, any Additional Purchase Agreements, construction and
maintenance contracts, and right of way agreements related to the Systems being
financed with the initial Loan made after the Closing Date and the
interconnection agreements for each System being financed with the initial Loan
made after the Closing Date.
(e) Lender shall have received evidence satisfactory to Lender that
Lender's security interests in the Collateral have been properly perfected and
constitute first and prior security interests subject only to Permitted Liens,
including by means of the filing of Mortgages, the Collateral Assignment of
Licenses, the Collateral Assignment of Leases, obtaining consents thereto,
leasehold mortgages and UCC-1 financing statements in certain filing and
recording offices, and the taking of possession of stock certificates and other
instruments; provided, however, that no third party consents shall be required
with respect to KMC II except as specifically provided in SECTION 4.02(N).
(f) Lender shall have received evidence satisfactory to Lender,
including the results of searches conducted in the mortgage recording, UCC, tax
Lien and judgment filing records in each appropriate filing office or
jurisdiction, that there are no Liens against the Collateral except Permitted
Liens.
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(g) Lender shall have received evidence satisfactory to Lender that
neither Borrower has any Debt other than as described in SCHEDULE 6.13 and that
the holders of any such Debt shall have executed subordination and standstill
agreements satisfactory to the Lender.
(j) Lender has obtained or waived in writing with respect to each
real estate and material equipment lease and each mortgage of either Borrower
relating to the Systems being financed with the initial Loan made after the
Closing Date (i) the right from the applicable lessors and mortgagees to cure
all payment defaults under such leases and mortgages by making payment directly
to the applicable lessors and mortgagees and (ii) landlord waivers and consents,
as Lender may require, with respect to each leased facility.
(k) Lender shall have satisfactorily completed its due diligence
investigation of the Borrowers and the Systems and the Borrowers' other assets,
and their respective officers and directors including, without limitation,
environmental reviews, engineering reviews, review of material agreements of the
Borrowers and review of easement matters.
(l) All right of way agreements with respect to each System under
construction shall be sufficient to allow full operation of such System and
shall solely with respect to each such System of KMC, be assignable to Lender or
its designee.
(m) The Borrowers shall have entered into an Interest Rate Agreement
upon terms and with counterparties satisfactory to Lender providing for the
payment to Borrowers of an amount equal to all interest in excess of twelve
percent (12%) per annum on a notional principal amount of $35,000,000 for the
period from the Funding Date to the Commitment Termination Date.
(n) There shall not have occurred in the opinion of Lender, any
material adverse change in either Borrower's or KMC Holdings's senior management
team, which shall comprise its Chief Executive Officer, Chief Financial Officer
and Executive Vice President - Field Sales and Operations.
(o) Lender shall have made equity investments in KMC Holdings of at
least $10,000,000 in the aggregate.
(p) Lender shall have advanced $10,000,000 to KMC pursuant to the
Subordinated Loan Agreement.
(q) Lender and the Participants shall have executed and delivered the
Participation Agreement, pursuant to which the Participants shall have agreed to
purchase participations equal to 57.14285% of each Loan.
(r) Lucent shall have executed and delivered to the Lender, in form
and substance satisfactory to the Lender, a consent to collateral assignment of
the Lucent Purchase Agreement.
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SECTION 4.02. CONDITIONS PRECEDENT TO ALL LOANS. In the case of each
Loan hereunder:
(a) The representations and warranties of each Borrower set forth in
ARTICLE III or in any other Loan Document shall be true and correct in all
material respects on and as of the date of such Loan with the same effect as
though such representations and warranties had been made on and as of such date.
(b) At the time of each such Loan, and after giving effect to such
Loan, each Borrower shall be in compliance with all the terms and provisions set
forth herein on its part to be observed or performed, and no Event of Default or
Default shall have occurred and be continuing.
(c) At the time of each such Loan and after giving effect to each
such Loan, there shall have been no material adverse change in the condition
(financial or otherwise), operations, properties or prospects of either Borrower
since the date of the Financials.
(d) Such Loan, when combined with Loans previously made to the
Borrowers, shall not exceed the Commitment Amount.
(e) All legal matters incident to such Loan and the Loan Documents
shall be satisfactory to counsel for Lender.
(f) Lender shall have received a Notice of Borrowing for the Loan and
acceptance certificate and invoices required by SECTION 2.03. In the case of a
Loan the proceeds of which will be used to purchase Equipment, the Notice of
Borrowing will include a certificate of delivery and acceptance in the form
included in Exhibit H and a copy of the invoice from the seller of the Equipment
described in such invoice and in the case of a Loan the proceeds of which will
be used to pay transaction, construction and capitalized operating costs, the
Notice of Borrowing will include a copy of the invoice from the provider of the
service or appropriate supporting documentation.
(g) Lender shall have first priority Liens on all personal and real
property assets of KMC that comprise or relate to all Completed Systems on the
date of each Notice of Borrowing, collateral assignments of all material third
party agreements relating to such Completed Systems, consented to by the
applicable third parties, and first priority Liens on all Switching Equipment of
KMC II financed by Lender.
(h) Lender shall have received copies of such lien waivers and other
acknowledgments from Persons constructing the Systems of KMC, any subcontractors
or vendors (including Lucent or each Additional Vendor) with respect to the
construction of the Systems of KMC as the Lender may reasonably request.
(i) All fees and expenses which are due and payable to Lender on or
prior to the date of the advance of such Loan shall have been paid.
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(j) If the use of the Loan proceeds are for purposes of financing a
System of KMC which is not a Completed System, Lender shall have (i) first
priority Liens on all personal and real property assets of KMC that comprise or
relate to such System, (ii) received evidence that all necessary Governmental
Approvals for such System have been obtained, and (iii) received confirmation of
such other matters as may be required by Lender's counsel.
(k) Lender shall have satisfactorily completed its review of any
Additional Purchase Agreements, construction and maintenance contracts related
to the Systems of KMC being financed with such Loan and the interconnection
agreements for each System of KMC being financed with such Loan.
(l) Lender shall have obtained or waived in writing with respect to
each real estate and material equipment lease, each mortgage of KMC, and each
material third party agreement of KMC relating to the Systems of KMC being
financed with such Loan (i) the right from the applicable lessors and mortgagees
to cure all payment defaults under such leases and mortgages by making payments
directly to the applicable lessors and mortgagees, (ii) landlord waivers and
consents, as Lender may require, with respect to each leased facility, and (iii)
consents to collateral assignment, as the Lender may require, with respect to
each such material third party agreement.
(m) If the use of the Loan proceeds are for purposes of financing a
particular System of KMC for the first time, Lender shall have received a design
and engineering study and technical and construction operational review of such
System, including without limitation evidence of basic technology based on
Bellcore standards or recommendations.
(n) If KMC II is requesting the Loan (A) Lucent shall have (i)
released its Lien on the Switching Equipment and related electronics Equipment
to be financed with the Loan proceeds, (ii) delivered such Switching Equipment
and related electronics Equipment to KMC II or to Lucent's Mauro, Georgia
assembly site, and (iii) agreed in writing to grant Lender access to the Mauro,
Georgia assembly site in the event Lender forecloses on any such Switching
Equipment and related electronics Equipment of KMC II located there and to
permit Lender to remove such Switching Equipment and related electronics
Equipment, (B) the landlord of any premises of KMC II on which any such
Switching Equipment is located shall have executed a landlord waiver
substantially in the form of EXHIBIT D attached hereto, and (C) the mortgagee of
any premises of KMC II on which any Switching Equipment is located shall have
executed a mortgagee waiver in form and substance satisfactory to Lender.
(o) With respect to any Loan requested five days after the Closing
Date or at time thereafter, all the conditions specified in clauses (i), (ii)
and (iii) of SECTION 2.05(C) shall have been fulfilled.
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ARTICLE V
AFFIRMATIVE COVENANTS
Each Borrower covenants and agrees with Lender that on and after the
Funding Date and as so long as the Agreement shall remain in effect with respect
to such Borrower or any Obligations hereunder or under any of the other Loan
Documents are unpaid:
SECTION 5.01. CORPORATE AND FRANCHISE EXISTENCE. Such Borrower shall
preserve and maintain its corporate existence, rights, franchises and privileges
in its jurisdiction of its organization, and in all other jurisdictions in which
such qualification is necessary in view of its business and operations and
property and preserve, protect and keep in full force and effect its material
rights and its Governmental Approvals.
SECTION 5.02. COMPLIANCE WITH LAWS, ETC. Such Borrower shall comply
in all material respects with all laws and regulations applicable to it and all
material contractual obligations applicable to it.
SECTION 5.03. MAINTENANCE OF PROPERTIES. Such Borrower shall at all
times maintain in good repair, working order and condition, excepting ordinary
wear and tear, all of its properties material to its operations and make all
appropriate repairs, replacements and renewals thereof, in each case consistent
with prudent industry practices and sound business judgment and with respect to
the maintenance of machinery and equipment, in compliance with applicable
government regulations, manufacturers' warranty requests and any licensing
requirements.
SECTION 5.04. INSURANCE.
(a) COVERAGE. Without limiting any of the other obligations or
liabilities of such Borrower under this Agreement, such Borrower shall carry and
maintain, and require each contractor retained in connection with the
construction of any System to carry and maintain, each at its own expense, at
least the minimum insurance coverage set forth in this SECTION 5.04. Such
Borrower shall also carry and maintain any other insurance that the Lender may
reasonably require from time to time. All insurance carried pursuant to this
SECTION 5.04 shall be placed with such insurers that have an A.M. Best rating of
A:X or better, or as may be acceptable to the Lender. Such coverage shall be in
such form, with terms, conditions, limits and deductibles as shall be acceptable
to the Lender.
(b) CONSTRUCTION PERIOD. During the period from, and including the
commencement of construction of any System, to and including the completion of
construction of any System, such Borrower shall maintain in full force and
effect, pay all premiums when due in respect of, and comply with all terms and
conditions of the following coverages:
(i) ALL RISK BUILDER'S RISK. Such Borrower shall maintain all risk
builder's risk insurance covering physical loss or damage to such System
including, but not limited to, fire and extended coverage, collapse, flood,
earth movement, and comprehensive boiler and machinery coverage (including
electrical malfunction and mechanical breakdown).
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Such insurance shall cover all property during construction and testing, as
well as any and all materials, equipment and machinery intended for such
System during off-site storage and inland transit and, if necessary, during
ocean and air transit. All transit coverage shall be on a "warehouse to
warehouse" basis. The all risk builder's risk policy shall be written on a
replacement cost basis for the full construction cost of such System or in
an amount acceptable to the Lender and shall contain an agreed amount
endorsement waiving any coinsurance penalty. Coverage shall not exclude
resultant damage caused by faulty workmanship, design or materials nor
shall it exclude machinery and equipment under guarantee or warranty; and
(ii) DELAY IN START-UP. As an extension of the coverage required
under subsection (b)(i) or as a separate policy, such Borrower shall
maintain delay in start-up insurance covering net profits (if any),
continuing expenses and debt service payments resulting from delays in
achieving the completion date for the construction of any System caused by
(i) physical loss or damage to such System during construction or testing,
(ii) loss or damage to equipment while in ocean, air or inland transit or
(iii) loss or damage to equipment while in storage away from the site.
Contingent delay in start-up coverage shall also be included to cover delay
caused by damage to critical path items while under manufacture or at the
supplier's premise. Such extension or separate policy shall have a period
of indemnity of not less than twelve (12) months with an agreed amount
limit not less than $1,400,000 per System and shall contain an agreed
amount endorsement waiving any coinsurance penalty. Such extension or
separate policy shall also cover expediting expenses in an amount not less
than $1,000,000. Deductibles may not exceed thirty (30) days; and
(iii) COMPREHENSIVE OR COMMERCIAL GENERAL LIABILITY. Such Borrower
shall maintain comprehensive general liability insurance written on an
occurrence basis with a limit of liability not less than $1,000,000.
Coverage shall include, but not be limited to, premises/operations,
explosion, collapse, and underground hazards, broad form contractual,
independent contractors products/completed operations, broad form property
damage, and personal injury liability. Such insurance shall not exclude
coverage for punitive or exemplary damages where insurable by law; and
(iv) WORKERS' COMPENSATION/EMPLOYER'S LIABILITY. Such Borrower
shall maintain workers' compensation insurance in accordance with statutory
provisions covering accidental injury, illness or death of an employee of
such Borrower while at work or in the scope of his or her employment with
such Borrower and employer's liability insurance in an amount not less than
$1,000,000. Such coverage shall not contain any occupational disease
exclusions; and
(v) AUTOMOBILE LIABILITY. Such Borrower shall maintain automobile
liability insurance covering owned, non-owned, leased, hired or borrowed
vehicles against bodily injury or property damage. Such coverage shall
have a limit of not less than $1,000,000; and
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(vi) EXCESS/UMBRELLA LIABILITY. Such Borrower shall maintain excess
or umbrella liability insurance in an amount not less than $25,000,000
written on an occurrence basis providing coverage limits in excess of the
insurance limits required under SECTION 5.04(B)(III), (B)(IV) (employer's
liability only), and (b)(v). Such insurance shall follow from the primary
insurances and drop down in case of exhaustion of underlying limits and/or
aggregates. Such insurance shall not exclude coverage for punitive or
exemplary damages where insurable by law.
(c) CONTRACTOR INSURANCE COVERAGE. Such Borrower shall cause each
contractor retained in connection with the construction of any System to carry
and maintain, in full force and effect, such insurance and such bonds as such
contractor is required to maintain pursuant to the following:
(i) BOND. Such Contractor shall maintain performance and payment
bond written in a form and by a surety acceptable to the Lender. Such bond
shall cover all payments, performance, material and other obligations of
such contractor and all subcontractors. The applicable performance and
payment bonds shall, at all times, be in an amount equal to the full value
of the construction contracts. Each bond shall cover the faithful
performance of the construction contract. Such Borrower and Lender shall
be named as obligees under each bond; and
(ii) COMPREHENSIVE OR COMMERCIAL GENERAL LIABILITY. Such contractor
shall maintain comprehensive general liability insurance covering the
construction of such System written on an occurrence basis with a limit of
liability not less than $25,000,000. Coverage shall include, but not be
limited to, premises/operations, explosion, collapse, and underground
hazards, sudden and accidental pollution, broad form contractual,
independent contractors, products/completed operations, broad form property
damage, and personal injury liability. Such insurance may be written in
any combination of primary and excess/umbrella forms. The products
completed operations coverage shall be extended to cover such System for
two years after completion of such System. Such insurance shall not
exclude coverage for punitive or exemplary damages where insurable by law;
and
(iii) WORKERS' COMPENSATION/EMPLOYER'S LIABILITY. Such contractor
shall maintain workers' compensation insurance in accordance with statutory
provisions covering accidental injury, illness or death of an employee of
such contractor while at work or in the scope of his or her employment with
such contractor and employer's liability insurance in an amount not less
than $25,000,000 written in any combination of primary and excess/umbrella
policies, and
(iv) AUTOMOBILE LIABILITY. Such contractor shall maintain
automobile liability insurance covering owned, non-owned, leased, hired or
borrowed vehicles against bodily injury or property damage. Such coverage
shall have a limit of not less than $25,000,000 written in any combination
of primary and excess/umbrella policies.
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(d) OPERATIONS PERIOD. Beginning on the completion date of each
System, such Borrower shall maintain in full force and effect, pay all premiums
when due in respect of, and comply with all terms and conditions of the
following insurance coverages for each System.
(i) ALL RISK PROPERTY INSURANCE. Such Borrower shall maintain all
risk property insurance covering such System against physical loss or
damage, including but not limited to fire and extended coverage, collapse,
flood, earth movement and comprehensive boiler and machinery coverage
(including electrical malfunction and mechanical breakdown). Such
insurance shall cover each and every component of such System and shall not
contain any exclusion for resultant damage caused by faulty workmanship,
design or materials. Coverage shall be written on a replacement cost basis
in an amount acceptable to the Lender. Such insurance policy shall contain
an agreed amount endorsement waiving any coinsurance penalty; and
(ii) BUSINESS INTERRUPTION. As an extension of the coverage
required under SECTION 5.04(D)(I), such Borrower shall maintain business
interruption insurance in an agreed amount equal to twelve (12) months
projected loss of net profits, continuing expenses and debt service
payments of such System and shall contain an agreed amount endorsement
waiving any coinsurance penalty. Contingent business interruption
insurance shall also be included to cover the major suppliers and customers
of the Borrowers. Coverage shall be included for expediting expenses in an
amount not less than $1,000,000. Such insurance shall also cover service
interruption. Deductibles shall not exceed thirty (30) days; and
(iii) COMPREHENSIVE OR COMMERCIAL GENERAL LIABILITY INSURANCE. Such
Borrower shall maintain comprehensive general liability insurance written
on an occurrence basis with a limit of not less than $1,000,000. Such
coverage shall include, but not be limited to, premises/operations,
explosion, collapse, underground hazards, contractual liability,
independent contractors, products, completed operations, property damage
and personal injury liability. Such insurance shall not exclude coverage
for punitive or exemplary damages where insurable by law; and
(iv) WORKERS' COMPENSATION/EMPLOYER'S LIABILITY. Such Borrower
shall maintain workers' compensation insurance in accordance with statutory
provisions covering accidental injury, illness or death of an employee of
such Borrower while at work or in the scope of his or her employment with
such Borrower and employer's liability insurance in an amount not less than
$1,000,000. Such coverage shall not contain any occupational disease
exclusions; and
(v) AUTOMOBILE LIABILITY. Such Borrower shall maintain automobile
liability insurance covering owned, non-owned, leased, hired or borrowed
vehicles against bodily injury or property damage. Such coverage shall
have a limit of not less than $1,000,000; and
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(vi) EXCESS/UMBRELLA LIABILITY. Such Borrower shall maintain excess
or umbrella liability insurance in an amount not less than $25,000,000
written on an occurrence basis providing coverage limits in excess of the
insurance limits required under SECTIONS 5.04(D)(III), (D)(IV) (employer's
liability only), and (D)(V). Such insurance shall follow from the primary
insurances and drop down in case of exhaustion of underlying limits and/or
aggregates. Such insurance shall not exclude coverage for punitive or
exemplary damages where insurable by law.
(e) ENDORSEMENTS. Such Borrower shall cause all insurance carried
and maintained in accordance with this SECTION 5.04 to be endorsed as follows:
(i) Such Borrower shall be the named insured and the Lender shall
be an additional named insured and loss payee with respect to policies
described in SECTION 5.04(B)(I), (B)(II), (D)(I) and (D)(II). Such
Borrower shall be the named insured and the Lender shall be an additional
insured with respect to policies described in SECTION 5.04(B)(III), (B)(IV)
(to the extent allowed by law), (B)(V), (B)(VI), (D)(III), (D)(IV) (to the
extent allowed by law), (D)(V) and (D)(VI). Such Borrower and Lender shall
be additional insureds under all insurances carried by contractors under
SECTION 5.04(C) to the extent allowed by law. All policies shall provide
that any obligation imposed upon such Borrower and/or any contractor,
including but not limited to the obligation to pay premiums, shall be the
sole obligation of such Borrower and/or the contractor and not that of the
Lender; and
(ii) with respect to policies described in SECTION 5.04(B)(I) and
(B)(II), and (D)(I) and (D)(II), the interests of the Lender shall not be
invalidated by any action or inaction of such Borrower, or any other
Person, and shall insure the Lender regardless of any breach or violation
by such Borrower, any contractor or any other Person, of any warranties,
declarations or conditions of such policies, and
(iii) inasmuch as the liability policies are written to cover more
than one insured, all terms, conditions, insuring agreements and
endorsements, with the exception of the limits of liability, shall operate
in the same manner as if there were a separate policy covering such
insured; and
(iv) the insurers thereunder shall waive all rights of subrogation
against the Lender any right of setoff or counterclaim and any other right
to deduction, whether by attachment or otherwise; and
(v) such insurance shall be primary without right of contribution
of any other insurance carried by or on behalf of the Lender with respect
to its interest as such in such System; and
(vi) if such insurance is canceled for any reason whatsoever,
including nonpayment of premium, or any changes are initiated by such
Borrower or carrier which affect the interests of the Lender, such
cancellation or change shall not be effective as to
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the Lender until thirty (30) days, except in the case of non-payment of
premium which shall be ten (10) days, after receipt by the Lender of
written notice sent by registered mail from such insurer.
(f) CERTIFICATIONS. On the Funding Date, and at each policy
renewal, but not less than annually, such Borrower shall provide to the Lender
approved certification from each insurer or by an authorized representative of
each insurer. Such certification shall identify the underwriters, the type of
insurance, the limits, deductibles, and term thereof and shall specifically list
the special provisions delineated for such insurance required for this SECTION
5.04.
(g) INSURANCE REPORT. Concurrently with the furnishing of all
certificates referred to in this Section 5.04, such Borrower shall furnish the
Lender with an opinion from an independent insurance broker, acceptable to the
Lender, stating that all premiums then due have been paid and that, in the
opinion of such broker, the insurance then maintained by such Borrower is in
accordance with this section. Furthermore, upon its first knowledge, such
broker shall advise the Lender promptly in writing of any default in the payment
of any premiums or any other act or omission, on the part of any Person, which
might invalidate or render unenforceable, in whole or in part, any insurance
provided by such Borrower hereunder.
(h) APPLICATION OF PAYMENTS. All payments received by such
Borrower from any insurance referred in SECTION 5.04(B)(I), (B)(II), (D)(I) and
(D)(II) shall be promptly delivered directly to the Lender, which amounts shall
be applied by the Lender, upon request by such Borrower and provision to the
Lender of detailed information, including a construction schedule and cost
estimates, which establish to the reasonable satisfaction of the Lender that the
amounts available and the proposed schedule are adequate to restore, replace or
rebuild the property subject to insurance payments in a timely manner, to such
restoration, replacement or rebuilding unless an Event of Default or Default
shall have occurred and be continuing or such Borrower shall have failed to make
such request within thirty (30) days after receipt of such amounts by Lender, in
which case such amounts shall be applied in the Lender's sole discretion to the
repayment of the Obligations or such restoration, replacement or rebuilding.
(i) GENERAL. The Lender shall be entitled, upon reasonable advance
notice, to review and/or receive copies of such Borrower's (or other appropriate
party's) books and records regarding all insurance policies carried and
maintained with respect to each System and such Borrower's obligations under
this SECTION 5.04. Notwithstanding anything to the contrary herein, no
provision of this Agreement or any other Loan Document shall impose on the
Lender any duty or obligation to verify the existence or adequacy of the
insurance coverage maintained by such Borrower, nor shall the Lender be
responsible for any representations or warranties made by or on behalf of such
Borrower to any insurance broker, company or underwriter. The Lender, at its
sole option, may obtain such insurance if not provided by such Borrower; in such
event, such Borrower shall reimburse the Lender upon demand for the cost thereof
together with interest, and such costs shall constitute Obligations secured by
the Collateral.
SECTION 5.05. OBLIGATIONS AND TAXES. Such Borrower shall pay all of
its indebtedness and obligations promptly and in accordance with their terms and
pay and discharge
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promptly all taxes, assessments and governmental charges or levies imposed upon
it or upon its income or profits or in respect of its property, before the same
shall become in default, as well as all lawful claims for labor, materials and
supplies or otherwise which, if unpaid, might become a Lien upon such properties
or any part thereof; PROVIDED, HOWEVER, that such Borrower shall not be required
to pay and discharge or to cause to be paid and discharged any such tax,
assessment, charge, levy or claim so long as the validity or amount thereof
shall be contested in good faith by appropriate proceedings diligently pursued,
and such Borrower shall set aside on its books such reserves as are required by
GAAP with respect to any such tax, assessment, charge, levy or claim so
contested.
SECTION 5.06. FINANCIAL STATEMENTS, REPORTS, ETC. Such Borrower
shall furnish to Lender:
(a) within one hundred twenty (120) days after the end of each fiscal
year of such Borrower, annual consolidated and consolidating financial
statements for KMC Holdings, including the balance sheets and statements of
operations, income, stockholders' equity and cash flows, for such fiscal year,
prepared in accordance with GAAP, which consolidated financial statements and
other above described financial information shall have been audited by a
nationally recognized independent certified public accounting firm satisfactory
to Lender, and accompanied by such independent certified public accounting
firm's unqualified opinion;
(b) within forty-five (45) days after the end of each month and each
fiscal quarter during each fiscal year of such Borrower, consolidated and
consolidating unaudited balance sheets and statements of operations for KMC
Holdings, and consolidated and consolidating statements of stockholders' equity
and cash flows of KMC Holdings as of the end of each such month or fiscal
quarter, as applicable, and for the then elapsed portion of the fiscal year;
(c) concurrently with (a) and (b) above, a certificate of KMC
Holdings's independent certified public accountant or KMC Holdings's chief
financial officer, as applicable, to the effect that the financial statements
referred to in clause (a) or (b) above, present fairly the financial position
and results of operations of KMC Holdings, KMC and KMC II and as having been
prepared in accordance with GAAP consistently applied, in each case subject to
normal year end audit adjustments except for the statements referred to in
clause (a) above;
(d) concurrently with (a) above, and any statements delivered
pursuant to (b) above in respect of the month of March and the period ending
March 31, the month of June and the period ending June 30 or the month of
September and the period ending September 30, a Periodic Reporting Certificate
of the chief financial officer of KMC Holdings setting forth the calculations
contemplated in ARTICLE VII hereof, and certifying as to the fact that such
Person has examined the provisions of this Agreement and that no Event of
Default or any Default, shall have occurred and be continuing or if such an
event has occurred, a statement explaining its nature and extent and setting
forth the steps KMC or KMC II proposes to take to cure or prevent any Event of
Default;
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(e) (i) not later than December 1 of each calendar year,
consolidating and consolidated projected and annual revenue and income
statements, including detailed revenue and expense statements, balance sheets
and cash flow statements for KMC Holdings for the succeeding fiscal year, such
statements to be reasonably acceptable to Lender, and a revised Milestone Plan
satisfactory to Lender, and (ii) not later than January 15 of each calendar year
until January 15, 1998 an annual operating budget on a monthly basis for such
calendar year and not later than January 15 of each calendar year beginning
January 15, 1999, an annual operating budget on a quarterly basis for such
calendar year;
(f) all material agreements or licenses affecting the Governmental
Approvals of either Borrower or any System promptly after any execution, or
material amendment thereto;
(g) promptly upon their becoming available, copies of any periodic or
special documents, statements or other information filed by either Borrower with
the FCC, PUC or other Governmental Authority in connection with the construction
and/or operation of any System or with respect to the transactions contemplated
by any of the Loan Documents, and copies of any material notices and other
material communications from the FCC, PUC or from any other Governmental
Authority;
(h) immediately upon any officer of either Borrower obtaining
knowledge of any condition or event (i) which either constitutes an Event of
Default or a Default, (ii) which renders any representation, covenant or
warranty contained herein materially false or misleading, or (iii) which would
result in any financial results for any fiscal year to materially deviate from
the financial results projected for such fiscal year in the Milestone Plan or
the financial projections described in clause (e) described above, a certificate
signed by an authorized officer of such Borrower specifying in reasonable detail
the nature and period of existence thereof and what corrective action such
Borrower has taken or proposes to take with respect thereto;
(i) within thirty (30) days after the end of each fiscal year of
such Borrower, a certificate signed by an authorized officer of such Borrower
(x) setting forth all the Leased Real Property, Easements, licenses, rights of
way and other similar interests in real property acquired by such Borrower in
the preceding year and (y) confirming that no Default or Event of Default has
occurred and is continuing;
(j) evidence in the manner set forth in SECTION 5.04(E) of
insurance complying with SECTION 5.04;
(k) following the written request of Lender, not later than
forty-five (45) days after the end of each fiscal month, reports on accounts
receivable and accounts payable of such Borrower in such detail and format as
may be reasonably requested by the Lender;
(l) promptly upon the filing thereof, copies of all registration
statements and annual, quarterly, monthly or other regular reports which such
Borrower or KMC Holdings files with the Securities and Exchange Commission; and
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(m) promptly from time to time such other information regarding the
operations (including, without limitation, construction budgeting and System
completion), business affairs and condition (financial or otherwise) of such
Borrower or KMC Holdings as Lender may reasonably request.
SECTION 5.07. LITIGATION AND OTHER NOTICES. Such Borrower shall give
Lender prompt written notice upon obtaining knowledge of the following: (a) all
Events of Default or Defaults and all events of default or any event that would
become an event of default upon notice or lapse of time or both under any of the
terms or provisions of any note, or of any other evidence of indebtedness or
agreement or contract governing the borrowing of money in excess of $25,000 in
the aggregate, of such Borrower; (b) any levy, attachment, execution or other
process against any of the property or assets, real or personal, of such
Borrower in an amount in excess of $100,000; (c) the filing or commencement of
any action, suit or proceeding by or before any court or any Governmental
Authority which, if adversely determined against such Borrower, would result in
a Material Adverse Effect; (d) any material notice, letter or other
correspondence of any kind from the FCC or the PUC relating to the Governmental
Approvals or any System; (e) any default under any other material license,
agreement or contract to which such Borrower is or may become a party; and (f)
any matter which has resulted in, or which such Borrower reasonably believes
will result in, a Material Adverse Effect on such Borrower.
SECTION 5.08. MORTGAGES; LANDLORD CONSENTS; LICENSES AND OTHER
AGREEMENTS. As security for the Obligations, KMC shall with respect to each
Completed System, and each System which is not a Completed System but which is
requested to be financed with the proceeds of Loans (i) promptly execute and
deliver to Lender (1) Mortgages in favor of Lender with respect to any real
property purchased by KMC, together with lender's title policies for such real
property satisfactory to Lender, (2) leasehold mortgages or collateral
assignments of leases with respect to any real property leased by KMC,
satisfactory to Lender, (3) Mortgages or collateral assignments with respect to
KMC's Easements and rights of way, as specified by Lender, satisfactory to
Lender, (4) in the case of any leased facilities, Easements or rights of way,
landlord waivers or consents satisfactory to Lender, and (ii) (1) update
Schedule 1 to the Collateral Assignment of Licenses to cover all Governmental
Approvals obtained by KMC after the Closing Date and agreements entered into by
KMC after the Closing Date with third Persons, (2) obtain consents to collateral
assignments from the licensors granting the Governmental Approvals referred to
in clause (ii) (1) above and from those third Persons referred to in clause (ii)
(1) above that are specified by Lender, such consents to collateral assignment
to be in form and substance satisfactory to Lender.
SECTION 5.09. ERISA. Such Borrower shall comply in all material
respects with the applicable provisions of ERISA and furnish to Lender, (i) as
soon as possible, and in any event within thirty (30) days after such Borrower
or any officer of such Borrower knows or has reason to know that any Reportable
Event with respect to any Plan has occurred or any Termination Event has
occurred, a statement of an officer of such Borrower setting forth details as to
such Reportable Event or Termination Event and the corrective action that such
Borrower proposes to take with respect thereto, together with a copy of the
notice of any such Reportable Event given to the PBGC, and (ii) promptly after
receipt thereof, a copy of any notice such
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Borrower may receive from the PBGC relating to the intention of the PBGC to
terminate any Plan or to appoint a trustee to administer any such Plan.
SECTION 5.10. ACCESS TO PREMISES AND RECORDS. Such Borrower shall
permit representatives of Lender to have access to such Borrower's books and
records and to the Collateral and the premises of such Borrower at reasonable
times upon reasonable notice and to make such excerpts from such records as such
representatives deem necessary and to inspect the Collateral.
SECTION 5.11. DESIGN AND CONSTRUCTION. KMC shall design, construct,
equip and operate its Systems substantially as previously disclosed to Lender in
the Milestone Plan and in accordance with prudent industry standards.
SECTION 5.12. ENVIRONMENTAL NOTICES. If such Borrower shall (a)
receive notice that any violation of any federal, state or local environmental
law or regulation may have been committed or is about to be committed by such
Borrower, (b) receive notice that any administrative or judicial complaint or
order has been filed or is about to be filed against such Borrower alleging
violations of any federal, state or local environmental law or regulation or
requiring such Borrower to take any action in connection with any Release of any
Contaminant into the environment, or (c) receive any notice from a Governmental
Authority or private party alleging that such Borrower may be liable or
responsible for costs associated with a response to or cleanup of a Release or
any damages caused thereby, such Borrower shall provide Lender with a copy of
such notice within twenty (20) Business Days of such Borrower's receipt thereof.
SECTION 5.13. AMENDMENT OF ORGANIZATIONAL DOCUMENTS. Such Borrower
shall notify Lender of any amendment to its Certificate or Articles of
Incorporation within ten (10) days of the occurrence of any such event, and
provide Lender with copies of any amendments certified by the secretary of such
Borrower and of all other relevant documentation. Such Borrower shall promptly
deliver to Lender such financing statements executed by such Borrower which
Lender may request as a result of any such event.
SECTION 5.14. PLEDGE AGREEMENTS. In the event that any Person other
than KMC Holdings becomes a shareholder of KMC II after the Closing Date or of
KMC, after the date on which any Pledge Agreement relating to the Capital Stock
of KMC is delivered hereunder, the applicable Borrower shall cause each such
Person to execute and deliver to Lender a Pledge Agreement substantially in the
form of Exhibit L attached hereto and a limited nonrecourse guaranty, which
guaranty shall contain substantially the same provisions as the guaranty
attached as Exhibit G hereto except that the liability of such Person shall be
nonrecourse to such Person and shall be limited to the value of the "Pledged
Collateral" (as defined in the Pledge Agreement) and the payment of certain
expenses.
SECTION 5.15. ACCOUNTS PAYABLE. Such Borrower shall pay each of its
accounts payable in accordance with its practices as of the Closing Date but in
any event no later than sixty (60) days after the due date, PROVIDED, HOWEVER,
that such Borrower shall not be required to pay
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any account payable as long as the validity thereof shall be contested in good
faith by appropriate proceedings and such Borrower shall have set aside adequate
reserves with respect thereto.
SECTION 5.16. COLLATERAL ASSIGNMENTS. Such Borrower shall furnish to
Lender collateral assignments of, and consents to such assignments from the
applicable counter parties, for each material license, lease, contract or other
agreement or instrument entered into by such Borrower after the date hereof.
SECTION 5.17. FISCAL YEAR. Such Borrower shall maintain a fiscal
year ending on December 31.
SECTION 5.18. MINIMUM AVAILABLE CASH. The Borrowers shall at all
times maintain Available Cash of not less than $150,000 in the aggregate.
SECTION 5.19. ADDITIONAL EQUITY OR DEBT. (a) KMC shall not later
than December 31, 1997 obtain additional cash equity or unsecured Debt
subordinated to the Obligations pursuant to an intercreditor agreement
satisfactory to the Lender, in an aggregate amount of at least $20,000,000
(exclusive of any equity investments or subordinated loans of Lender described
in Section 4.01 (Q) and (R)) with respect to which KMC shall have unrestricted
rights to the use thereof for the Business.
(b) KMC shall not later than December 31, 1998 obtain additional cash
equity or unsecured Debt subordinated to the Obligations pursuant to an
intercreditor agreement satisfactory to the Lender in an aggregate principal
amount of at least $50,000,000 (exclusive of any equity investments or
subordinated loans of Lender described in SECTION 4.01 (Q) and (R)) with respect
to which KMC shall have unrestricted rights to the use thereof for the Business.
SECTION 5.20. FURTHER ASSURANCES. Such Borrower agrees to do such
further acts and things and to execute and deliver to Lender such additional
assignments, agreements, powers and instruments, at such Borrower's expense, as
Lender may reasonably require or deem advisable to carry into effect the
purposes of this Agreement and the other Loan Documents or to better assure and
confirm unto Lender its rights, powers and remedies hereunder and thereunder.
ARTICLE VI
NEGATIVE COVENANTS
Each Borrower covenants and agrees with Lender that on and after the
Funding Date and as long as this Agreement shall remain in effect or the
Obligations hereunder or under any of the Loan Documents shall be unpaid,
without the prior written consent of Lender:
SECTION 6.01. LIENS, ETC. Such Borrower shall not create, incur,
assume or suffer to exist, directly or indirectly, any Lien upon or with respect
to any of its properties or the Collateral, now owned or hereafter acquired, or
upon any proceeds, products, issues, income or profits therefrom except for the
following "PERMITTED LIENS":
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(i) Liens granted pursuant to the Loan Documents;
(ii) Liens securing any Purchase Debt to the extent that the Liens
cover only the subject assets purchased with such Purchase Debt;
(iii) Liens for taxes, assessments or governmental charges or
levies on such Borrower's property if the same shall not at the time
be delinquent or thereafter can be paid without penalty, or are being
diligently contested in good faith and by appropriate proceedings and
for which such Borrower shall have set aside reserves on its books as
required by GAAP;
(iv) Liens imposed by law, such as landlord's, carrier's,
warehousemen's and mechanic's liens, which liens shall be waived in writing
to the extent waivable, and with respect to obligations not yet due or
being contested in good faith by appropriate proceedings and in either case
for which such Borrower shall have set aside reserves on its books as
required by GAAP;
(v) Liens arising out of pledges or deposits under workmen's
compensation laws, unemployment insurance, old age pensions, or other
social security benefits other than any Lien imposed by ERISA;
(vi) Liens incurred or deposits made in the ordinary course of
business to secure surety bonds provided that such Liens shall extend only
to cash collateral for such surety bonds; or
(vii) Liens consisting of long-term leases of "dark fiber" permitted
by SECTION 6.03 of this Agreement.
SECTION 6.02. USE OF PROCEEDS. Such Borrower shall not use the
proceeds of any Loan for any purpose other than as provided in SECTION 2.02
hereof.
SECTION 6.03. SALE OF ASSETS, CONSOLIDATION, MERGER, ETC. Such
Borrower shall not consolidate with or merge into any other Person, or without
the prior written consent of Lender, sell, lease, transfer or otherwise dispose
of any Collateral, except for (a) sales of inventory in the ordinary course of
business not to exceed $50,000 in the aggregate, (b) any sale, lease, transfer
or other disposition of assets no longer used or useful in the conduct of the
Business for the fair market value thereof not to exceed $50,000 in the
aggregate, (c) sales or long-term leases of "dark fiber" subject to the receipt
of the previous written consent of Lender, provided that Lender shall not
unreasonably withhold its consent to any such sale or lease, (d) transfers of
intangible property and real estate rights of way, easements and other rights to
use real property from KMC to KMC II that specifically relate to one or more
Systems not financed by Lender and not anticipated to be financed by Lender
pursuant to the Milestone Plan, and (e) transfers of assets from KMC to KMC
Virginia to the extent permitted by SECTION 6.16.
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SECTION 6.04. DIVIDENDS AND DISTRIBUTIONS; SALE OF CAPITAL STOCK.
(a) Such Borrower shall not purchase, redeem or otherwise acquire any interest
of such Borrower, declare or make or pay any dividends in any fiscal year of
such Borrower on any class or classes of stock, return capital of such Borrower
to its shareholders, make any other distribution on or in respect of any shares
of any class of capital stock of such Borrower or make other payments to any
shareholder of such Borrower (including in the form of compensation, loan,
expense reimbursement or management fee); PROVIDED, HOWEVER, that provided no
Event of Default or Default has occurred and is continuing or would result
therefrom, (i) such Borrower may make payments of fees or compensation for
services which are in the nature of management, corporate overhead or
administrative services to the extent permitted by SECTION 6.05 hereof, (ii)
provided further, that (A) during the previous four fiscal quarters of both
Borrowers, EBITDA equaled at least ninety percent (90%) of "Estimated EBITDA"
(as defined below), (B) during the previous four fiscal quarters of both
Borrowers, the Borrowers maintained a Fixed Charge Coverage Ratio of at least
1.25 to 1.00, (C) with respect to the next four fiscal quarters of the
Borrowers, EBITDA for both Borrowers, as projected in the most recent financial
information furnished pursuant to SECTION 5.06(E), is projected to equal at
least ninety percent (90%) of Estimated EBITDA for such fiscal quarters, and
(D) with respect to the next four fiscal quarters of the Borrowers, the Fixed
Charge Coverage Ratio as projected in the most recent financial information
submitted to Lender pursuant to SECTION 5.06(E), is projected to equal at least
1.25 to 1.00, each Borrower may pay cash dividends to its shareholders, and
(iii) upon the consummation of the HighYield Debt and Equity Offering, KMC may
pay to KMC Holdings the amount of accrued and unpaid dividends as of the Closing
Date on KMC's Series A Preferred Stock, but not to exceed $800,000. Estimated
EBITDA shall mean "EBITDA" as calculated in the Milestone Plan.
(b) Such Borrower shall not sell or issue any additional Capital
Stock except pursuant to the Stock Option Plan as in effect on the date hereof
or as a result of the exercise of the Warrants.
SECTION 6.05. MANAGEMENT FEES AND PERMITTED CORPORATE OVERHEAD. Such
Borrower shall not pay or enter into any arrangement to pay any fee or
compensation, or reimburse expenses of, an Affiliate or any other Person for
services which are in the nature of management, corporate overhead or
administrative services except to the extent provided for in the Milestone Plan
or as described on SCHEDULE 6.11 attached hereto.
SECTION 6.06. GUARANTEES; THIRD PARTY SALES AND LEASES. Such
Borrower shall not directly or indirectly, (i) assume any obligation or
indebtedness of another Person, (ii) make or assume any Guarantee, or (iii)
finance any third party sales or leases, other than its obligations under
SECTION 2.12 or its joint and several obligations under the Subordinated Loan
Agreement.
SECTION 6.07. INVESTMENTS. Such Borrower shall not, directly or
indirectly, make any Investments except:
(i) Temporary Cash Investments;
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(ii) Investments in certificates of deposit, repurchase agreements,
money market or other cash management accounts, bankers acceptances and
short term Eurodollar time deposits with financial institutions having a
long term deposit rating of at least A+ from Moody's Investors Service,
Inc. or Standard & Poor's Ratings Group, respectively; and
(iii) Investments in commercial paper rated P1 or A1 by Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group respectively.
SECTION 6.08. SUBSIDIARIES. Such Borrower shall not create or
acquire any Subsidiary other than KMC Virginia without the prior written consent
of Lender.
SECTION 6.09. PERMITTED ACTIVITIES. Such Borrower shall not engage
in any business or activity other than the operation of its Business in
accordance with the Milestone Plan with respect to KMC or as presently
contemplated with respect to KMC II without the prior written consent of Lender.
SECTION 6.10. DISPOSITION OF LICENSES, ETC. Such Borrower shall not
sell, assign, transfer or otherwise dispose or attempt to dispose of in any way
any Governmental Approval or any other licenses, permits or approvals necessary
or appropriate for the operation of any System or of the Business in accordance
with the Milestone Plan.
SECTION 6.11. TRANSACTIONS WITH AFFILIATES. Except as set forth on
SCHEDULE 6.11, such Borrower shall not directly or indirectly, enter into any
transaction, including, without limitation, leases or other agreements for the
purchase or use of any goods or services, with any Affiliate, except in the
ordinary course of and pursuant to reasonable requirements of such Borrower's
business upon fair and reasonable terms no less favorable to such Borrower than
it would obtain in a comparable arm's length transaction with an unaffiliated
Person.
SECTION 6.12. ERISA. Such Borrower shall not:
(A) engage, or permit any ERISA Affiliate to engage, in any
prohibited transaction described in Section 406 of ERISA or 4975 of the IRC for
which a statutory or class exemption is not available or a private exemption has
not been previously obtained from the United States Department of Labor;
(B) permit to exist any accumulated funding deficiency (as defined in
Section 302 of ERISA and Section 412 of the IRC), whether or not waived;
(C) fail, or permit any ERISA Affiliate to fail, to pay timely
required contributions or annual installments due with respect to any waived
funding deficiency to any Benefit Plan;
(D) terminate, or permit any ERISA Affiliate to terminate, any
Benefit Plan which would result in any material liability of such Borrower under
Title IV of ERISA;
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(E) fail to make any contribution or payment to any Multiemployer
Plan which such Borrower or any ERISA Affiliate may be required to make under
any agreement relating to such Multiemployer Plan, or any law pertaining
thereto;
(F) amend, or permit any ERISA Affiliate to amend, a Plan resulting
in an increase in current liability for the plan year such that such Borrower is
required to provide security to such Plan under Section 401(a)(29) of the IRC;
or
(G) fail, or permit any ERISA Affiliate to fail, to pay any required
installment under Section 412 of the IRC on or before the due date for such
installment or other payment.
SECTION 6.13. INDEBTEDNESS. Such Borrower shall not create or suffer
to exist any Debt or any other obligations for the deferred purchase price of
property or services except:
(i) the Obligations;
(ii) the obligations arising under any Loan Document;
(iii) obligations under leases contemplated in the Milestone Plan and
the Schedules to this Agreement;
(iv) obligations under Capitalized Leases, financing leases or loan
agreements or similar debt documents with respect to the financing and
contemplated purchase of office equipment, vehicles and non-essential
telecommunications equipment, not to exceed an aggregate amount for both
Borrowers of $1,000,000 at any time ("PURCHASE DEBT");
(v) Interest Rate Agreements required by the terms of this
Agreement;
(vi) additional unsecured Debt subordinate to the payment of the
Obligations on terms and conditions approved by the Lender subject to the
prior written consent of Lender but in no event to exceed an aggregate
amount for both Borrowers of $1,000,000 in principal amount outstanding at
any time;
(vii) performance bonds executed solely in connection with the
construction of Systems in the ordinary course of business;
(viii) subordinated Debt payable by KMC to Lender in an aggregate
principal amount of $10,000,000;
(ix) the obligations contemplated by SECTION 5.19; and
(x) Debt payable to KMC Holdings as a result of loans made by KMC
Holdings to either Borrower, which Debt shall be subordinated to the Obligations
and shall have terms and conditions satisfactory to the Lender.
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SECTION 6.14. MARGIN REGULATION. Such Borrower shall not use or
permit any other Person to use any portion of the proceeds of any credit
extended under this Agreement in any manner which might cause the extension of
credit made by Lender or the application of such proceeds to violate the
Securities Act of 1933 or Securities Exchange Act of 1934 (each as amended from
time to time, and any successor statute) or to violate Regulation G, Regulation
U, or Regulation X, or any other regulation of the Federal Reserve Board, in
each case as in effect on the date or dates of such extension of credit and such
use of proceeds.
SECTION 6.15. CAPITAL EXPENDITURES. Such Borrower shall not make
capital expenditures in excess of the amounts set forth in the Milestone Plan
and then only at the times and in accordance with and for the purposes set forth
in the Milestone Plan, plus, provided that no Event of Default or Default has
occurred and is continuing, an additional amount solely for KMC II of $5,000,000
in the aggregate.
SECTION 6.16 KMC VIRGINIA. Such Borrower shall not transfer any
assets to KMC Virginia or Capital Stock of KMC Virginia to any Person; provided,
however, that KMC may transfer the Capital Stock of KMC Virginia to KMC
Holdings, and in the event that KMC Virginia needs to utilize Switching
Equipment owned by KMC II, KMC II may transfer such Switching Equipment to KMC
Virginia if KMC Virginia becomes a borrower hereunder on same terms and
conditions that KMC II has become a borrower hereunder, including, without
limitation, a grant to Lender of a first priority security interest in any
Switching Equipment of KMC Virginia, a pledge of all the Capital Stock of KMC II
to Lender and immediately prior to of such assumption of Debt, KMC Virginia
would be able to fulfill all conditions precedent in Article IV for the making
of a Loan hereunder. Upon fulfillment of all such conditions, KMC Virginia
shall assume the Debt of KMC II associated with such Switching Equipment.
ARTICLE VII
FINANCIAL COVENANTS
Each Borrower covenants and agrees with Lender that as long as this
Agreement shall remain in effect or the Obligations hereunder or under any of
the Loan Documents shall be unpaid.
SECTION 7.01. AVAILABLE CASH PLUS EBITDA TO LENDER DEBT SERVICE
RATIO. (a) At the end of each fiscal quarter of the Borrowers commencing with
the fiscal quarter ending September 30, 1997 through and including the fiscal
quarter ending December 31, 1999,
the ratio of the sum of Available Cash plus, only if positive, EBITDA for both
Borrowers, to Lender Debt Service shall equal at least 1.00 to 1.00.
(b) At the end of each fiscal quarter of the Borrowers commencing
with the fiscal quarter ending March 31, 2000 through and including the fiscal
quarter ending June 30, 2001, the ratio of the sum of Available Cash plus, only
if positive, EBITDA for both Borrowers, to Lender Debt Service shall equal at
least 1.25 to 1.00.
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SECTION 7.02. EBITDA TO LENDER DEBT SERVICE RATIO. At the end of
each fiscal quarter of the Borrowers during each period set forth below, the
ratio of EBITDA of both Borrowers for the immediately preceding four fiscal
quarters to Lender Debt Service shall equal at least the ratio set forth below:
Fiscal Year Ratio
----------- -----
July 1 1, 2001 - December 31, 2001 1.25 to 1.00
January 1, 2002 - December 31, 2002 1.35 to 1.00
January 1, 2003 - and each fiscal
quarter thereafter 1.75 to 1.00
ARTICLE VIII
COLLATERAL SECURITY
SECTION 8.01. COLLATERAL SECURITY. (a) To secure payment and
performance of all of the Obligations, KMC hereby reaffirms its grant to Lender
of, and KMC II hereby grants to Lender, to the extent permitted by law, a right
of setoff against and a continuing security interest in and to all of such
Borrower's tangible and intangible personal property, fixtures and real property
leasehold and easement interests, whether now owned or existing, or hereafter
acquired or arising, wheresoever located, including, without limitation, all of
the following property, or interests in property: (a) all machinery, equipment
and fixtures, including without limitation, fiber optic and other cables,
transmission and switching equipment, transmission facilities, connection
equipment, conduit, carrier pipes, junctions, regenerators, power sources, alarm
systems, electronics, structures and shelters and cable laying equipment; (b)
all Accounts, accounts receivable, other receivables, contract rights, leases,
chattel paper, investment property, and general intangibles of such Borrower
(including, without limitation, goodwill, going concern value, patents,
trademarks, trade names, service marks, blueprints, designs, product lines and
research and development), including, without limitation, all of such Borrower's
rights under all present and future Governmental Approvals, permits, licenses
and franchises heretofore or hereafter granted to such Borrower for the
operation and ownership of its Systems (excluding licenses and permits issued by
the FCC, any PUC or any other Governmental Authority to the extent, and only to
the extent, it is unlawful to grant a security interest in such licenses and
permits, but including, to the maximum extent permitted by law, all rights
incident or appurtenant to such licenses and permits, including, without
limitation, the right to receive all proceeds derived from or in connection with
the sale, assignment or transfer of such licenses and permits), whether now
owned or hereafter acquired by such Borrower, or in which such Borrower may now
have or hereafter acquire an interest; (c) all instruments, letters of credit,
documents of title, policies and certificates of insurance, securities, bank
deposits, deposit accounts (including such Borrower's Collection Accounts),
checking accounts and cash now or hereafter owned by such Borrower, or in which
such Borrower may now have or hereafter acquire an interest; (d) all inventory,
including all merchandise, raw materials, work in process, finished goods and
supplies, now or hereafter owned by such Borrower or in which such Borrower may
now have or hereafter acquire an interest; (e) all of such Borrower's leasehold
interest in any real property, all of such Borrower's licenses, easements and
rights of way with respect to real property; (f) all accessions, additions or
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improvements to, substitutions for and all proceeds and products of, all of the
foregoing, including proceeds of insurance; and (g) all books, records,
documents, computer tapes and discs relating to all of the foregoing. KMC
hereby reaffirms the Collateral Assignment of Licenses and each of the
Collateral Assignments of Leases.
SECTION 8.02. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY
INTERESTS THEREIN. Such Borrower shall execute and deliver to Lender, prior to
the Funding Date, and at any time or times thereafter at the request of Lender,
all financing statements or other documents (and pay the cost of filing or
recording the same in all public offices deemed necessary by Lender), as Lender
may request, in a form satisfactory to Lender, to perfect and keep perfected the
security interest in the Collateral granted by such Borrower to Lender or to
otherwise protect and preserve the Collateral and Lender's security interest
therein or to enforce Lender's security interest in the Collateral. Should such
Borrower fail to do so, Lender is authorized to sign any such financing
statements as such Borrower's agent. Such Borrower further agrees that a
carbon, photographic or other reproduction of this Agreement or of a financing
statement is sufficient as a financing statement.
SECTION 8.03. APPOINTMENT OF LENDER AS THE BORROWERS'
ATTORNEY-IN-FACT. Such Borrower hereby irrevocably designates, makes,
constitutes and appoints Lender (and all persons designated by Lender) as such
Borrower's true and lawful attorney-in-fact, and authorizes Lender, in such
Borrower's or Lender's name, to, following the occurrence and during the
continuance of an Event of Default: (i) demand payment of such Borrower's
Accounts; (ii) enforce payment of such Borrower's Accounts by legal proceedings
or otherwise; (iii) exercise all of such Borrower's rights and remedies with
respect to proceedings brought to collect an Account; (iv) sell or assign any
Account upon such terms, for such amount and at such time or times as Lender
deems advisable; (v) settle, adjust, compromise, extend or renew an Account;
(vi) discharge and release any Account; (vii) prepare, file and sign such
Borrower's name on any proof of claim in bankruptcy or other similar document
against an account debtor of such Borrower; (viii) notify the post office
authorities to change the address for delivery of such Borrower's mail to an
address designated by Lender, and open and deal with all mail addressed to such
Borrower; (ix) do all acts and things which are necessary, in Lender's sole
discretion, to fulfill such Borrower's obligations under this Agreement; (x)
take control in any manner of any item of payment or proceeds thereof; (xi) have
access to any lockbox or postal box into which such Borrower's mail is
deposited; (xii) endorse such Borrower's name upon any items of payment or
proceeds thereof and deposit the same in Lender's account on account of the
Obligations; (xiii) endorse such Borrower's name upon any chattel paper,
document, instrument, invoice, or similar document or agreement relating to any
Account or any goods pertaining thereto; and (xiv) sign such Borrower's name on
any verification of Accounts and notices thereof to account debtors.
SECTION 8.04. COLLECTION OF ACCOUNTS AND RESTRICTED ACCOUNT
ARRANGEMENTS. Such Borrower hereby represents and warrants that each depository
account ("COLLECTION ACCOUNT") now maintained by such Borrower at any bank
("COLLECTION AGENT") for the collection of checks and cash constituting proceeds
of Accounts and sales of other personal property which are part of the
Collateral is identified on SCHEDULE 8.04 attached hereto and made a part
hereof. With respect to each Collection Account, such Borrower shall, no later
than the Funding Date,
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deliver to Lender, a "RESTRICTED ACCOUNT AGREEMENT" substantially in the form of
EXHIBIT N attached hereto and made a part hereof, duly executed and delivered by
such Borrower and the applicable Collection Agent, authorizing and directing
such Collection Agent, upon receipt of written notice from Lender that an Event
of Default has occurred and is continuing, to deposit all checks and cash
received into a restricted account (a "RESTRICTED ACCOUNT") and remit all
amounts deposited in such Restricted Account to Lender's account specified in
such Restricted Account Agreement until such time as the Collection Agent
receives written notice from Lender rescinding such instruction. Such Borrower
shall, following the occurrence and during the continuance of an Event of
Default and any subsequent request by Lender therefor, take such further action
as Lender may reasonably deem desirable to effect the transfer of exclusive
ownership and control of the Restricted Accounts and all Collection Accounts to
Lender. Until all of the Obligations have been indefeasibly paid in full, such
Borrower agrees not to enter into any agreement or execute and deliver any
direction which would modify, impair or adversely affect the rights and benefits
of Lender under any Restricted Account Agreement. Such Borrower shall not open,
establish or maintain any Collection Account (other than those identified on
SCHEDULE 8.04 hereto) without first having delivered to Lender a duly executed
and delivered Restricted Account Agreement with respect to such Collection
Account. Such Borrower shall notify Lender in writing not less than five (5)
days prior to the date it shall open or establish any Collection Account other
than an account described on SCHEDULE 8.04 hereto.
SECTION 8.05. CURE RIGHTS. Such Borrower expressly authorizes the
Lender, and the Lender may, but shall not be required to, at any time and from
time to time, to take any and all action that it reasonably determines to be
necessary or desirable to cure any default or violation (including a payment
default) of such Borrower in connection with any real estate lease, license
agreement, Governmental Approval or any other material lease, agreement or
contract entered into with respect to the Systems.
ARTICLE IX
EVENTS OF DEFAULT; REMEDIES
SECTION 9.01. EVENTS OF DEFAULT. The following events shall each
constitute an "EVENT OF DEFAULT":
(a) Either Borrower shall fail to pay the principal of or interest on
its Note or any other amounts payable hereunder or under any of the other Loan
Documents when due, whether as scheduled, at a date fixed for prepayment, by
acceleration or otherwise, and five (5) Business Days shall have elapsed; or
(b) Either Borrower shall fail to observe or perform any other
covenant, condition or agreement to be observed or performed by such Borrower in
any of the Loan Documents, in any material agreement of such Borrower and such
Borrower fails to cure such breach within ten (10) Business Days after written
notice thereof unless the breach relates to a covenant contained in SECTIONS
5.04, or ARTICLE VI (other than SECTION 6.05 or SECTION 6.07) or VII, in which
case no notice or grace period shall apply, or unless the breach relates to
SECTION 5.06, in which case an
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Event of Default shall occur on the thirtieth day following the breach without
any notice requirement, unless the breach shall have been cured before such
date; or
(c) Any representation or warranty made by either Borrower or any
Pledgor in connection with this Agreement or any other Loan Document, or the
Loans or any statement or representation made in any report, certificate,
financial statement or other instrument furnished by or on behalf of such
Borrower or any Pledgor pursuant to this Agreement or any other Loan Document,
shall prove to have been false or misleading in any material respect when made
or delivered or when deemed made in accordance with the terms hereof or thereof;
or
(d) Either Borrower or KMC Holdings shall fail to make any payment
due (whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) on any other obligation for borrowed money in excess of $200,000 and
such failure shall continue after the applicable grace period, if any, specified
in the agreement or instrument relating to such indebtedness; or any other
default or event under any agreement or instrument relating to any indebtedness
for borrowed money in excess of $200,000 or any other event, shall occur and
shall continue after the applicable grace period, if any, specified in such
agreement or instrument if the effect of such default or event is to accelerate,
or to permit the acceleration of, the maturity of such indebtedness in excess of
$200,000; or any such indebtedness in excess of $200,000 shall be declared to be
due and payable or required to be prepaid (other than by a regularly scheduled
required prepayment) prior to the stated maturity thereof; or
(e) Either Borrower or KMC Holdings shall (i) apply for or consent to
the appointment of a receiver, trustee, custodian, sequestrator or similar
official for such Borrower or KMC Holdings or for a substantial part of its
property, (ii) make a general assignment for the benefit of creditors, (iii)
become unable, or admit in writing its inability, to pay its debts as they
become due, (iv) voluntarily or involuntarily dissolve, liquidate or wind up its
affairs, or (v) take action for the purpose of effecting any of the foregoing;
or
(f) A proceeding under any bankruptcy, reorganization, arrangement of
debts, insolvency or receivership law is filed by or against either Borrower or
KMC Holdings, or either Borrower or KMC Holdings takes any action to authorize
any of the foregoing matters, and in the case of any such proceeding instituted
against either Borrower or KMC Holdings (but not instituted by either Borrower
or KMC Holdings), either such proceeding shall remain undismissed or unstayed
for a period of 60 days or any of the actions sought in such proceeding
(including, without limitation, the entry of an order for relief against, or the
appointment of a receiver, trustee or other similar official for either Borrower
or KMC Holdings or any substantial part of its property) shall be granted or
shall occur; or
(g) a Termination Event occurs which Lender in good faith believes
would subject either Borrower to a material liability; or
(h) the plan administrator of any Plan applies under Section 412(d)
of the IRC for a waiver of the minimum funding standards of Section 412(a) of
the IRC and Lender in good faith
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believes that the approval of such waiver could subject either Borrower or any
ERISA Affiliate to material liability; or
(i) any of the Governmental Approvals or any other license,
Governmental Approval or other governmental consent or approval necessary for
the continuing operation of KMC or any System of KMC or any other material
Governmental Approval or approval of or material filing with the FCC, any PUC or
any other Governmental Authority with respect to the conduct by KMC of its
business and operations, including its Business, shall not be obtained or shall
cease to be in full force and effect, which in respect of any of the
Governmental Approvals shall, in the case of an order of the FCC, any PUC or
other Governmental Authority having jurisdiction with respect thereto, revoking,
or deciding not to renew, any such Governmental Approval, occur upon the
issuance of such order, and, in the case of any other order revoking or
terminating any of the Governmental Approvals or deciding not to renew such
Governmental Approvals prior to the termination thereof, occur when such order
becomes final; or
(j) the FCC, any PUC or any other Governmental Authority, by final
order, determines that the existence or performance of this Agreement or any
other Loan Document will result in a revocation, suspension or material adverse
modification of any of the Governmental Approvals for any System of KMC; or
(k) for any reason any Loan Document shall not be in full force and
effect or shall not be enforceable in accordance with its terms, or any security
interest or lien granted pursuant thereto shall fail to be perfected or to have
its intended priority, or any party thereto other than Lender shall contest the
validity of any lien granted under, or shall disaffirm its obligations under any
Loan Document; or
(l) either Borrower shall have wrongfully failed to accept Equipment
in accordance with any Lucent Purchase Agreement or Additional Purchase
Agreement within the period specified in such Lucent Purchase Agreement or
Additional Purchase Agreement or shall otherwise default under any Lucent
Purchase Agreement or Additional Purchase Agreement, which default shall not
have been cured or waived within the applicable grace period thereunder; or
(m) for any reason, either Borrower ceases to operate its Business or
KMC ceases to own any of its Governmental Approvals necessary for the continuing
conduct of its Business; or
(n) a judgment or judgments for the payment of money in excess of
$250,000 individually or $500,000 in the aggregate at any one time shall have
been rendered against either Borrower and the same shall have remained
unsatisfied and in effect for any period of sixty (60) days during which no stay
of execution shall have been obtained; or
(o) KMC is enjoined, restrained or in any way prevented by the order
of any court or administrative or regulatory agency from conducting its business
in any material respect with respect to any one or more of its Systems; or
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(p) either Borrower becomes subject to any liabilities, costs,
expenses, damages, fines or penalties which could reasonably be expected to have
a Material Adverse Effect arising out of or related to (i) any Remedial Action
in response to a Release or threatened Release at any location of any
Contaminant into the indoor or outdoor environment or (ii) any material
violation of any environmental, health or safety requirement of law; or
(q) a Change of Control shall occur and either Borrower shall have
failed to comply with the provisions of SECTION 2.07(B) if requested to do so by
the Lender.
SECTION 9.02. TERMINATION OF COMMITMENT; ACCELERATION. Upon the
occurrence and at any time during the continuance of any Event of Default:
(a) Lender may by notice to the Borrowers, terminate Lender's
Commitment to make Loans hereunder;
(b) Lender may by notice to the Borrowers, declare the Obligations
to be immediately due and payable, whereupon all the Obligations shall be
immediately due and payable without further notice of any kind, PROVIDED,
HOWEVER, that if an Event of Default described in SECTION 9.01(F) shall exist or
occur, all of the Obligations shall automatically, without declaration or notice
of any kind, be immediately due and payable and the Commitment shall be
automatically terminated; and
(c) a Participant may, pursuant to the terms of the Participation
Agreement if such Event of Default has been declared by Lender or notice thereof
provided to Borrowers by Lender, upon notice to the Lender, the Borrowers and
the other Participants, terminate its obligation to purchase Participations, in
which case a portion of the Commitment equal to the Participation Share of such
Participant shall automatically terminate.
SECTION 9.03. WAIVER. Demand, presentment, protest and notice of
nonpayment are hereby waived by the Borrowers. The Borrowers also waive the
benefit of all valuation, appraisal and exemption laws and the posting of any
bond required of Lender in connection with any judicial process to realize on
the Collateral, to enforce any judgment or other court order entered in favor of
Lender or to enforce by specific performance, temporary restraining order, or
preliminary or permanent injunction, this Agreement or any other Loan Documents.
The Borrowers hereby acknowledge that Lender has no obligation to resort to any
collateral or make claim against any other Person before seeking payment or
performance from either Borrower.
SECTION 9.04. RIGHTS AND REMEDIES GENERALLY. If an Event of Default
occurs and is continuing, Lender shall have, in addition to any other rights and
remedies contained in this Agreement or in any of the other Loan Documents, all
of the rights and remedies of a secured party under the Code or other applicable
laws, all of which rights and remedies shall be cumulative, and none exclusive,
to the extent permitted by law. In addition to all such rights and remedies,
the sale, lease or other disposition of the Collateral, or any part thereof, by
Lender after the occurrence of an Event of Default may be for cash, credit or
any combination thereof, and
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Lender may purchase all or any part of the Collateral at public or, if permitted
by law, private sale, and in lieu of actual payment of such purchase price, may
set off the amount of such purchase price against the Obligations then owing.
Any sales of the Collateral may be adjourned from time to time with or without
notice. Lender may, in its sole discretion, cause the Collateral to remain on
the premises of either Borrower, at the expense of the Borrowers, pending sale
or other disposition of the Collateral. Lender shall have the right to conduct
such sales on the premises of either Borrower, at the expense of the Borrowers,
or elsewhere, on such occasion or occasions as Lender may see fit.
SECTION 9.05. ENTRY UPON PREMISES AND ACCESS TO INFORMATION. If an
Event of Default occurs and is continuing, Lender shall have the right to enter
upon the premises of either Borrower where any Collateral is located (or is
believed to be located) without any obligation to pay rent to such Borrower, or
any other place or places where the Collateral is believed to be located and
kept, and render the Collateral unusable or remove the Collateral therefrom to
the premises of Lender or any agent of Lender, for such time as Lender may
desire, in order effectively to collect or liquidate the Collateral, and/or
Lender may require either Borrower to assemble the Collateral and make it
available to Lender at a place or places to be designated by Lender. If an
Event of Default occurs and is continuing, Lender shall have the right to obtain
access to either Borrower's data processing equipment, computer hardware and
software relating to the Collateral and to use all of the foregoing and the
information contained therein in any manner Lender deems appropriate.
SECTION 9.06. SALE OR OTHER DISPOSITION OF COLLATERAL BY LENDER. Any
notice required to be given by Lender of a sale, lease or other disposition or
other intended action by Lender with respect to any of the Collateral which is
deposited in the United States mails, registered or certified, postage prepaid
and duly addressed to the Borrowers at the address specified in SECTION 10.01
below, at least ten days prior to such proposed action shall constitute fair and
reasonable notice to the Borrowers of any such action. The net proceeds
realized by Lender upon any such sale or other disposition, after deduction for
the expense of retaking, holding, preparing for sale, selling or the like and
the reasonable attorneys' fees and legal expenses incurred by Lender in
connection therewith, shall be applied as provided herein toward satisfaction of
the Obligations. Lender shall account to the Borrowers for any surplus realized
upon such sale or other disposition, and the Borrowers shall remain liable for
any deficiency. The commencement of any action, legal or equitable, or the
rendering of any judgment or decree for any deficiency shall not affect Lender's
security interest in the Collateral. The Borrowers agree that Lender has no
obligation to preserve rights to the Collateral against any other parties.
Lender is hereby granted a license or other right to use, without charge, the
Borrowers' labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, and the
Borrowers' rights under all licenses and all franchise agreements shall inure to
Lender's benefit until the Obligations are paid in full.
SECTION 9.07. GOVERNMENTAL APPROVALS. In connection with the
enforcement by Lender of any remedies available to it as a result of any Event
of Default, each Borrower agrees that it shall join and cooperate fully with, at
the request of Lender, any receiver referred to
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below and/or the successful bidder or bidders at any foreclosure sale in a
filing of an application (and furnishing any additional information that may be
required in connection with such application or which Lender may believe
relevant to such application) with the FCC, any PUC and all other applicable
Governmental Authorities, requesting their prior approval of (i) the operation
or abandonment of all or the portion of any System and/or (ii) the transfer of
control of such Borrower or assignment of all licenses, certificates,
Governmental Approvals, approvals and permits, issued to such Borrower by the
FCC, any PUC or any such Governmental Authorities with respect to any System and
the operation thereof, to Lender, the receiver or to the successful bidder or
bidders. In connection with the foregoing, each Borrower shall take such
further actions, and execute all such instruments, as Lender reasonably deems
necessary or desirable. Each Borrower agrees that Lender may enforce any
obligation of such Borrower as set forth in this section by an action for
specific performance. In addition, each Borrower hereby irrevocably constitutes
and appoints Lender and any agent or officer thereof (which appointment is
coupled with an interest) as its true and lawful attorney-in-fact with full
irrevocable power and authority and in the place and stead of such Borrower and
in the name of such Borrower or in its own name, from time to time in its
discretion after the occurrence and during the continuance of an Event of
Default and in connection with the foregoing, for the purpose of executing on
behalf and in the name of such Borrower any and all of the above-referenced
instruments and to take any and all appropriate action in furtherance of the
foregoing. THE EXERCISE OF ANY RIGHTS OR REMEDIES HEREUNDER OR UNDER ANY OTHER
LOAN DOCUMENT BY LENDER THAT MAY REQUIRE FCC, ANY PUC OR ANY OTHER GOVERNMENTAL
AUTHORITY APPROVAL SHALL BE SUBJECT TO OBTAINING SUCH APPROVAL. PENDING THE
RECEIPT OF ANY FCC, ANY PUC OR ANY OTHER GOVERNMENTAL AUTHORITY APPROVAL,
NEITHER BORROWER SHALL DO ANYTHING TO DELAY, HINDER, INTERFERE OR OBSTRUCT THE
EXERCISE OF LENDER'S RIGHTS OR REMEDIES HEREUNDER IN OBTAINING SUCH APPROVALS.
SECTION 9.08. APPOINTMENT OF RECEIVER OR TRUSTEE. In connection with
the exercise of its remedies under this Agreement, Lender may, upon the
occurrence of an Event of Default, obtain the appointment of a receiver or
trustee to assume, upon receipt of all necessary judicial, FCC, any PUC or other
Governmental Authority consents or approvals, control of or ownership of any of
the Governmental Approvals. Such receiver or trustee shall have all rights and
powers provided to it by law or by court order or provided to Lender under this
Agreement. Upon the appointment of such trustee or receiver, the Borrowers
agree to cooperate, to the extent necessary or appropriate, in the expeditious
preparation, execution and filing of an application to the FCC any PUC or any
other Governmental Authority or for consent to the transfer of control or
assignment of either Borrower's Governmental Approvals to the receiver or
trustee.
SECTION 9.09. RIGHT OF SETOFF. In addition to any rights and
remedies of Lender provided by law, Lender shall have the right, without prior
notice to the Borrowers, upon the occurrence of an Event of Default, to setoff
and apply against the amount of any Obligation, whether matured or unmatured,
any amount owing from Lender or any affiliate of Lender to either Borrower, or
any of either Borrower's Affiliates. Lender agrees promptly to notify the
Borrowers after any such setoff and application made by Lender or any affiliate
of Lender; PROVIDED that the failure to give such notice shall not affect the
validity of such setoff and application. The Borrowers hereby agree that the
foregoing provisions are intended to be
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construed so as to satisfy the requirements of Section 553 of the Federal
Bankruptcy Code or amendments thereto (including any requirement of mutuality of
obligations therein).
ARTICLE X
MISCELLANEOUS
SECTION 10.01. NOTICES; ACTION ON NOTICES, ETC. (a) Notices and
other communications provided for herein shall be in writing and shall be
delivered by a courier service of recognized standing (specifying one (1) day
delivery), or by registered or certified mail, postage prepaid, return receipt
requested (or, if by telex, graphic scanning or other telegraphic or telecopy
communications equipment of the sending party, delivered by such equipment)
addressed, if to the Borrowers, at KMC Telecom Inc., 1545 Route 206, Bedminster,
NJ 07921; Attention: President; (telecopy no. (908) 719-8775, confirmation no.
(908 ) 719-2200) with a copy to Alan M. Epstein Esq., Kelley Drye & Warren LLP,
101 Park Avenue, New York, NY 10178; (telecopy no. (212) 808-7897, confirmation
no. (212) 808-7800) and if to Lender, at 44 Whippany Road, Morristown, NJ
07962-1983, Attention: Capital Markets Division, Vice President-Credit (telecopy
no. (973) 397-4368, confirmation no. (973) 397-3333), with a copy to AT&T
Capital Corporation/ Capital Markets Division at 44 Whippany Road, Morristown,
NJ 07962-1983, Attention: Chief Counsel (telecopy no. (973) 397-3165,
confirmation no. (973) 397-4189). All notices and other communications given to
any party hereto in accordance with the provisions of this Agreement shall be
deemed to have been given (a) five Business Days after mailing when sent by
registered or certified mail, postage prepaid, return receipt requested, or (b)
upon receipt, if by courier service or any telegraphic communications equipment
of the sender, in each case addressed to such party as provided in this Section
or in accordance with the latest unrevoked direction from such party.
(b) Each Borrower agrees that Lender may act upon any notice,
consent, certificate, cable, telex or other instrument or writing believed by
Lender to be genuine, that Lender may consult with legal counsel, selected by
Lender and shall not be liable to either Borrower for any action taken or
omitted to be taken in good faith by Lender in accordance with the advice of
such counsel.
SECTION 10.02. NO WAIVERS; AMENDMENTS. (a) No failure or delay of
Lender to exercise any right hereunder or under any other Loan Document shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right, preclude any other or further exercise thereof or the exercise of
any other right. No waiver of any provision of this Agreement or any other Loan
Document nor consent to any departure by either Borrower therefrom shall in any
event be effective unless the same shall be in writing and signed by Lender, and
then such waiver or consent shall be effective only in the specific instance and
for the purpose for which given. No notice or demand on either Borrower in any
case shall entitle either Borrower to any other or further notice or demand in
similar or other circumstances. Each of the Borrowers acknowledges and agrees
that no failure or delay of Lender to exercise any right under the Original
Agreement shall operate as a waiver hereunder and no course of dealing under the
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Original Agreement that constituted a departure from the terms and provisions
thereof shall have any effect under this Agreement.
(b) This Agreement may not be amended or modified except pursuant to
an agreement or agreements in writing executed by the Borrowers and Lender.
SECTION 10.03. GOVERNING LAW AND JURISDICTION. THIS AGREEMENT AND
THE OTHER LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE INTERNAL LAWS OF THE STATE OF NEW JERSEY WITHOUT GIVING EFFECT TO ANY
CONFLICTS OF LAWS PRINCIPLES. THE BORROWERS AND LENDER CONSENT TO THE
JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED IN THE STATE OF NEW
JERSEY AND WAIVE ANY OBJECTION RELATING TO IMPROPER VENUE OR FORUM NON
CONVENIENS TO THE CONDUCT OF ANY PROCEEDING BY SUCH COURT.
SECTION 10.04. EXPENSES; DOCUMENTARY TAXES. The Borrowers will pay,
and have joint and several liability for, all documented out-of-pocket
third-party expenses (i) incurred by Lender and Participants in connection with
the negotiation, preparation and execution of the Loan Documents (whether or not
the transactions contemplated hereby shall be consummated), and (ii) by Lender
in connection with the administration of the Loan Documents, the creation,
perfection, priority and protection of the Liens in the Collateral, and the
enforcement of the rights of Lender in connection with this Agreement, any other
Loan Documents or the Collateral, including all reasonable attorneys' and
paralegals' fees and related expenses and costs. The Borrowers agree that they
shall jointly and severally indemnify Lender from and hold it harmless against
any documentary taxes, assessments or charges made by any Governmental Authority
by reason of the execution and delivery of this Agreement or any other Loan
Document unless prohibited by law.
SECTION 10.05. EQUITABLE RELIEF. Each Borrower recognizes that, in
the event such Borrower fails to perform, observe or discharge any of its
obligations or liabilities under this Agreement, or any other Loan Document, any
remedy at law may prove to be inadequate relief to Lender; therefore, such
Borrower agrees that Lender, if Lender so requests, shall be entitled to
temporary and permanent injunctive relief in any such case without the necessity
of proving actual damages.
SECTION 10.06. INDEMNIFICATION; LIMITATION OF LIABILITY. (a) The
Borrowers jointly and severally agree to protect, indemnify and hold harmless
Lender and each of its officers, affiliates, directors, employees, attorneys,
accountants, consultants, representatives, agents and Participants (collectively
called the "INDEMNITEES") from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, claims, costs, expenses
and disbursements (including, without limitation, payment by Lender of any
obligations due or past due under any contract or agreement to which either
Borrower is or becomes a party) of any kind or nature whatsoever (including,
without limitation, the fees and disbursements of counsel for and consultants of
such Indemnitees in connection with any investigative, administrative or
judicial proceeding, whether or not such Indemnitees shall be designated a party
thereto), which may be
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imposed on, incurred by, or asserted against such Indemnitees (whether direct,
indirect, or consequential and whether based on any federal or state laws or
other statutory regulations, including, without limitation, securities,
environmental and commercial laws and regulations, under common law or at
equitable cause or on contract or otherwise) in any manner relating to or
arising out of this Agreement or any of the other Loan Documents, or any act,
event or transaction related or attendant thereto, the agreements of Lender
contained herein, the making of Loans, the management of such Loans or the
Collateral (including any liability under federal, state or local environmental
laws or regulations) or the use or intended use of the proceeds of such Loans
hereunder (collectively, the "INDEMNIFIED MATTERS"); PROVIDED that the Borrowers
shall not have any obligation to any Indemnitee hereunder with respect to
Indemnified Matters caused by or resulting from the willful misconduct or gross
negligence of such Indemnitee; PROVIDED, FURTHER that neither Borrower shall
have an obligation to any Indemnitee hereunder with respect to taxes that are
imposed on the net income of any Indemnitee or any franchise or doing business
taxes imposed on any Indemnitee. To the extent that the undertaking to
indemnify, pay and hold harmless set forth in the preceding sentence may be
unenforceable because it is violative of any law or public policy, the Borrowers
shall contribute the maximum portion which they are permitted to pay and satisfy
under applicable law, to the payment and satisfaction of all Indemnified Matters
incurred by the Indemnitees.
(b) To the extent permitted by applicable law, no claim may be made
by the Borrowers or any other Person against Lender or any of its affiliates,
directors, officers, employees, agents, attorneys, accountants, representatives,
consultants or Participants for any special, indirect, consequential or punitive
damages in respect of any claim for breach of contract or any other theory of
liability arising out of or related to the transactions contemplated by any of
the Loan Documents or any act, omission or event occurring in connection
therewith; and the Borrowers hereby waive, release and agree not to sue upon any
claim for any such damages, whether or not accrued and whether or not known or
suspected to exist in its favor.
SECTION 10.07. SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. All
warranties and representations made by either Borrower in any Loan Document
shall survive the execution and delivery of this Agreement and the other Loan
Documents and the making and repayment of the Obligations. The confidentiality
obligations of each Borrower in SECTION 10.16, the indemnification obligations
of each Borrower in SECTION 10.06, and to the extent the second sentence of
SECTION 10.13 is applicable, all covenants of each Borrower, survive the
repayment of the Obligations.
SECTION 10.08. SUCCESSORS AND ASSIGNS. (a) This Agreement shall be
binding upon and inure to the benefit of the Borrowers and Lender and their
respective successors and permitted assigns. Neither Borrower shall assign or
transfer any of its rights or obligations hereunder without the prior written
consent of Lender. Any such impermissible assignment or delegation shall be
void and of no force or effect. Without limiting the generality of the
foregoing, the Lender shall have the right to assign any of its rights hereunder
or delegate any of its obligations hereunder, in whole or in part and/or all of
its rights and interest under the Loan Documents as security therefor to any
affiliate, or to any bank, financial institution or financing company which in
the ordinary course of its business accepts assignments of loans or assumes
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obligations to make loans from third parties, and in furtherance thereof to
provide to any such prospective or actual assignee financial or other
information relating to either Borrower, the Systems and the transactions
contemplated hereby.
(b) Without limiting the generality of the foregoing, the Lender
shall have the right in its sole discretion to sell one or more participations
in either Note and the Loan Documents without notice to or consent of either
Borrower to any affiliate, or to any bank, financial institution or financing
company which in the ordinary course of its business accepts assignments of
loans or assumes obligations to make loans from third parties, and in connection
therewith, to provide such participants with financial and other information and
copies of documents relating to the Borrowers, the Systems and the transactions
contemplated hereby. Upon receipt of written notice from Lender, the Borrowers
agree to provide to such participant(s) copies of all financial information
required to be delivered to the Lender pursuant to SECTION 5.06.
SECTION 10.09. SEVERABILITY. In case any one or more of the
provisions contained in this Agreement or any other Loan Document shall be
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein and therein shall
not in any way be affected or impaired thereby.
SECTION 10.10. COVER PAGE, TABLE OF CONTENTS AND SECTION HEADINGS.
The cover page, Table of Contents and section headings used herein are for
convenience of reference only, are not part of this Agreement and are not to
affect the construction of or be taken into consideration in interpreting this
Agreement.
SECTION 10.11. COUNTERPARTS. This Agreement may be signed in
counterparts with the same effect as if the signatures thereof and hereto were
upon the same instrument.
SECTION 10.12. APPLICATION OF PAYMENTS. Notwithstanding any contrary
provision contained in this Agreement or in any of the other Loan Documents,
upon the occurrence and during the continuance of any Event of Default, each
Borrower irrevocably waives the right to direct the application of any and all
payments at any time or times hereafter received by Lender from such Borrower or
with respect to any of the Collateral, and such Borrower does hereby irrevocably
agree that Lender shall have the continuing exclusive right to apply and reapply
any and all payments received at any time or times hereafter, whether with
respect to the Collateral or otherwise, against the Obligations in such manner
as Lender may deem advisable, notwithstanding any entry by Lender upon any of
its books and records.
SECTION 10.13. MARSHALLING; PAYMENTS SET ASIDE. Lender shall be
under no obligation to marshall any assets in favor of either Borrower or any
other party or against or in payment of any or all of the Obligations. To the
extent that either Borrower makes a payment or payments to Lender or Lender
enforces its security interests or exercises its rights of setoff, and such
payment or payments or the proceeds of such enforcement or setoff or any part
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside and/or required to be repaid to a trustee, receiver or any other party
under any bankruptcy law, state or federal law, common law or equitable cause,
then to the extent of such recovery, the obligation or part thereof
59
<PAGE>
originally intended to be satisfied shall be revived and continued in full force
and effect as if such payment had not been made or such enforcement or setoff
had not occurred.
SECTION 10.14. SERVICE OF PROCESS. EACH BORROWER WAIVES PERSONAL
SERVICE OF ANY PROCESS UPON IT AND, CONSENTS THAT ALL SERVICE OF PROCESS SHALL
BE MADE BY REGISTERED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO SUCH BORROWER
AT THE ADDRESS INDICATED IN SECTION 10.01 AND SERVICE SO MADE SHALL BE DEEMED TO
BE COMPLETED FIVE (5) BUSINESS DAYS AFTER SAME SHALL HAVE BEEN POSTED AS
AFORESAID.
SECTION 10.15. WAIVER OF JURY TRIAL, ETC. EACH OF THE BORROWERS AND
LENDER WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE,
WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN LENDER AND EITHER
BORROWER ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR
DELIVERED IN CONNECTION THEREWITH OR THE TRANSACTIONS RELATED THERETO. EACH OF
THE BORROWERS AND LENDER HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND
THAT ANY OF THEM MAY FILE AS AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT
WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE
WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
SECTION 10.16. CONFIDENTIALITY. Neither Borrower shall at any time
before or after payment in full and satisfaction of all of the Obligations,
reveal, divulge or make known, or knowingly permit to be so revealed, divulged
or made known, to any Person (including persons within its own organization who
do not have a definite need to know for the purpose of performance of this
Agreement), the terms or conditions of this Agreement or any document or
agreement now or hereafter executed in connection herewith; PROVIDED that the
foregoing shall not apply to information required to be disclosed by order of a
court of competent jurisdiction or in connection with any governmental
investigation (in each case to the extent disclosure is required, but no
further) so long as such Borrower notifies the Lender in writing of any
circumstances of which such Borrower is aware that may lead to such a
requirement or order, so as to allow Lender to take steps to contest such order
or investigation; PROVIDED, FURTHER, that the foregoing shall not apply to
information which is required to be disclosed by such Borrower or information
which in the reasonable determination of such Borrower is desirable for such
Borrower to disclose, pursuant to federal or state securities laws, pursuant to
the rules or regulations of the FCC, any PUC or other applicable Governmental
Authority or to disclosure of information to Persons who may potentially provide
debt financing (other than a lender providing secured financing to such Borrower
or any debt financing in replacement of the Loans) or equity financing to such
Borrower or any Affiliate with respect to its Business and any consultants or
61
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advisors of such Person, or to Persons who are consultants, advisors (including
but not limited to attorneys and auditors), officers, directors or employees of
such Borrower, provided that each such Person is required by such Borrower to
keep such information confidential.
SECTION 10.17. ADDITIONAL FINANCING BY BORROWERS. Lender
acknowledges that Borrowers are contemplating additional financing which may
include equity or unsecured debt facilities. Notwithstanding the provisions of
SECTION 6.04 and 6.13 but subject to (i) the prior written consent of Lender not
to be unreasonably withheld, (ii) the execution and delivery by Borrowers and
applicable third parties of subordination, intercreditor and standstill
agreements containing commercially reasonable terms and otherwise acceptable to
Lender, (iii) the absence of any Default or Event of Default as a result of any
such financing other than pursuant to SECTION 6.04 or 6.13, the Borrowers shall
be permitted to obtain such additional financing.
SECTION 10.18. ENTIRE AGREEMENT, ETC. This Agreement (including all
schedules and exhibits referred to herein), the Notes and all other Loan
Documents constitute the entire contract between the parties hereto with respect
to the subject matter hereof and thereof and shall supersede and take the place
of any other instrument purporting to be an agreement of the parties hereto
relating to such subject matter.
SECTION 10.19. NO STRICT CONSTRUCTION. The parties hereto have
participated, jointly in the negotiation and drafting of this Agreement. In the
event of any ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of authorship of any provisions of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their duly authorized officers as of the day and year first
above written.
KMC TELECOM INC.
By: /s/ Cynthia Worthman
-----------------------------------
Name: Cynthia Worthman
Title: Vice President and CFO
KMC TELECOM II, INC.
By: /s/ Cynthia Worthman
-----------------------------------
Name: Cynthia Worthman
Title: Vice President and CFO
AT&T COMMERCIAL FINANCE
CORPORATION
By: /s/ Edward W. Andrews, Jr.
-----------------------------------
Name: Edward W. Andrews, Jr.
Title: President & Chief Operating
Officer, Capital Markets
<PAGE>
Exhibit 10.3
EXECUTION COPY
AMENDMENT NO. 1
TO
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
AND NOTES MODIFICATION AGREEMENT
AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT ("Amendment") dated as
of October 31, 1997, among KMC TELECOM INC., a Delaware corporation ("KMC"), KMC
Telecom II, Inc., a Delaware corporation ("KMC II"), KMC Telecom Leasing I LLC,
a Delaware limited liability company ("Leasing I"), KMC Telecom Leasing II LLC,
a Delaware limited liability company ("Leasing II"), and AT&T COMMERCIAL FINANCE
CORPORATION, a Delaware corporation ("Lender").
WHEREAS, KMC, KMC II and the Lender have entered into that certain
Amended and Restated Loan and Security Agreement ("Loan Agreement") dated as of
September 22, 1997, pursuant to which the Lender has agreed to make certain
loans and other financial accommodations to KMC and KMC II; and
WHEREAS, KMC and KMC II have requested the Lender to amend the Loan
Agreement to, INTER ALIA, add Leasing I and Leasing II as borrowers thereunder,
and Lender has agreed to such request;
NOW, THEREFORE, in consideration of the premises set forth above, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Borrowers and the Lender agree as follows:
SECTION 1. AMENDMENT TO THE LOAN AGREEMENT. Effective as of the date
first above written and subject to the execution of this Amendment by the
parties hereto and the satisfaction of the conditions precedent set forth in
SECTION 3 below, the Loan Agreement shall be and hereby is amended as follows:
(a) Leasing I and Leasing II shall become Borrowers under the Loan
Agreement and the Loan Documents. All references in the Loan Agreement and
the Loan Documents to the Borrowers shall be deemed a reference to KMC, KMC
II, Leasing I and Leasing II. All references in the Loan Agreement and the
Loan Documents to any Borrower or either Borrower shall be deemed a
reference to any of KMC, KMC II, Leasing I or Leasing II. All references
in the Loan Agreement to neither Borrower shall be deemed a reference to
none of KMC, KMC II, Leasing I or Leasing II. References to such Borrower
shall include Leasing I or Leasing II, as appropriate, unless the
antecedent to the term "such Borrower" is either KMC or KMC II.
<PAGE>
(b) The definition of "Change of Control" is amended to add the
following clauses:
or (C) KMC shall no longer beneficially own all of the outstanding
membership interests in Leasing I or (D) KMC II shall no longer
beneficially own all of the outstanding membership interests in
Leasing II.
(c) The definition of "Notes" is amended in its entirety to read as
follows:
"NOTES" shall mean the KMC Note, the KMC II Note, the Leasing I Note
and the Leasing II Note.
(d) The definition of "Pledge Agreement" is amended to add the words
"and the members of Leasing I and Leasing II" after the words "KMC II" in
the second line thereof.
(e) The following definitions are added to SECTION 1.02 of the Loan
Agreement:
"LEASING I NOTE" shall mean the promissory Note of Leasing I, executed
and delivered by Leasing I to the Lender.
"LEASING II NOTE" shall mean the promissory Note of Leasing II,
executed and delivered by Leasing II to the Lender.
(f) The second sentence of SECTION 2.01(A) is amended in its entirety
to read as follows:
(a) Subject to the terms and conditions hereof and the
Participation Agreement and relying upon the representations and
warranties of KMC and Leasing I herein, Lender agrees to make Loans to
KMC and Leasing I in an aggregate amount not to exceed the Commitment
Amount less the principal amount of Loans advanced to KMC II and
Leasing II until the Commitment Termination Date.
(g) SECTION 2.01(B) is amended in its entirety to read as follows:
(b) Subject to the terms and conditions hereof and relying upon
the representations and warranties of KMC II and Leasing II herein,
Lender agrees to make Loans to KMC II and Leasing II in an aggregate
amount equal to up to fifty-five percent (55%) of the invoiced price
of Switching Equipment and related electronics Equipment as set forth
in SCHEDULE 2.01 hereto, which does not include installation charges,
but in no event to exceed the lesser of (i) $15,000,000 or (ii)
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the Commitment Amount less the principal amount of Loans advanced to
KMC and Leasing I.
(h) The following new SECTIONS 2.02(C) and (D) are added:
(c) The proceeds of the Loans made to Leasing I shall be used by
Leasing I to purchase Switching Equipment and related electronics
Equipment listed on SCHEDULE 2.01 to be leased to KMC for the
operation of KMC's Systems, and may on request by Leasing I, be paid
by Lender, on behalf of Leasing I, directly to Lucent. Loans may also
be used by Leasing I to pay transaction costs incurred in connection
with the execution, delivery and performance of the Loan Documents and
to pay interest on the Loans made to Leasing I.
(d) The proceeds of the Loans made to Leasing II shall be used
by Leasing II to purchase Switching Equipment and related electronics
Equipment listed on SCHEDULE 2.01 to be leased to KMC II for the
operation of KMC II's Systems, and may on request by Leasing II, be
paid by Lender, on behalf of Leasing II, directly to Lucent. Loans
may also be used by Leasing II to pay transaction costs incurred in
connection with the execution, delivery and performance of the Loan
Documents and to pay interest on the Loans made to Leasing II.
(i) SECTION 2.04 is amended to delete the second sentence thereof and
to substitute the following sentences therefor:
All the Loans made to KMC II shall be evidenced by the KMC II Note and
shall mature on June 30, 1998. All the Loans made to Leasing I shall
be evidenced by the Leasing I Note and shall mature on October 1,
2005. All the Loans made to Leasing II shall be evidenced by the
Leasing II Note and shall mature on June 30, 1998.
(j) SECTION 2.06(B) is amended to delete the words "the Borrowers" in
the first line thereof and to substitute the words "KMC and Leasing I"
therefor.
(k) SECTION 2.06(C) is renumbered as SECTION 2.06(D) and the
following new SECTION 2.06(C) is added:
(c) The outstanding principal balance of all of the Loans made to KMC
II and Leasing II shall be payable on June 30, 1998.
(l) SECTION 2.07(A)(I) is amended to delete the word "KMC" and to
substitute therefor the words "each of KMC and Leasing I".
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<PAGE>
(m) SECTION 2.07(A)(II) is amended to delete the words "KMC II" and
to substitute therefor the words "each of KMC II and Leasing II".
(n) SECTION 2.07(E) is amended to delete the words "KMC II" each time
they appear and to substitute therefor the words "each of KMC II and
Leasing II".
(o) SECTION 2.07(F) is amended in its entirety to read as follows:
(f) Upon prepayment in full or payment in full of all the Loans
made to KMC II and Leasing II, neither KMC II nor Leasing II shall
have any further rights to borrow hereunder, and except as otherwise
provided in SECTION 10.07 neither KMC II nor Leasing II shall have any
further obligations hereunder, and the Lender shall release the
collateral of KMC II and Leasing II and its Lien on the Capital Stock
of KMC II and the membership interest of Leasing II.
(p) SECTION 2.07(G) is deleted in its entirety.
(q) SECTION 3.01(A)(I) is amended to add the words "or limited
liability company" after the word "corporation".
(r) SECTION 3.02(A) is amended to add the words "or members, as
applicable," after the word "Directors".
(s) SECTION 3.02(B)(1)(II) is amended to add at the end of such
clause the words "or limited liability company certificate or operating
agreement, as applicable, or".
(t) SECTION 3.04 is amended to delete the words "or KMC II" and to
substitute therefor the words ", KMC II, Leasing I or Leasing II".
(u) SECTION 4.02(G) is amended to add the words ", Leasing I and
Leasing II" after the words "KMC II".
(v) SECTION 4.02(N) is amended to add the words, "Leasing I or
Leasing II" after the words "KMC II" in the first, sixth, eighth and tenth
lines thereof and to add the words, "Leasing I or Leasing II, as
applicable," after the words "KMC II" in the third line thereof.
(w) SECTION 5.06(C) is amended to delete the words "and KMC II" and
to substitute therefor the words ",KMC II, Leasing I and Leasing II".
(x) SECTION 5.06(D) is amended to delete the words "or KMC II" and to
substitute therefor the words ",KMC II, Leasing I or Leasing II".
4
<PAGE>
(y) SECTION 5.13 is amended to add the words "or limited liability
company certificate or operating agreement, as applicable," after the word
"Incorporation" in the second line thereof, and to add the following
sentence at the end of such section: If Leasing I or Leasing II becomes
the subject of an operating agreement, such agreement shall not contain
any terms or provisions which are inconsistent with the terms or provisions
of any of the Loan Documents, and Leasing I or Leasing II shall provide
Lender with copies of any proposed operating agreement or amendment thereto
at least ten days prior to the effective date thereof, and copies of any
actual operating agreement or amendment thereto not later than ten days
after the effective date thereof.
(z) SECTION 5.14 is amended to add the following sentence: In the
event that any Person other than KMC becomes a member of Leasing I or any
Person other than KMC II becomes a member of Leasing II, or the applicable
Borrower shall cause each such Person to execute and deliver a Pledge
Agreement substantially similar to the one executed and delivered by KMC or
KMC II, as applicable, and a limited nonrecourse guaranty, which guaranty
shall contain substantially the same provisions as the guaranty attached as
Exhibit G hereto except that the liability of such Person shall be
nonrecourse to such Person and shall be limited to the value of the
"Pledged Collateral" (as defined in the Pledge Agreement) and the payment
of certain expenses.
(aa) SECTION 6.09 is amended to add the words ", Leasing I or Leasing
II" after the words "KMC II".
(bb) SECTION 8.01 is amended to delete the words "KMC II" in the
second line and to substitute therefor the words "each of KMC II, Leasing I
and Leasing II".
SECTION 2. NOTES MODIFICATION AGREEMENT. Each of the KMC Note and
the KMC II Note is modified to add the following paragraph:
In accordance with the provisions of SECTION 2.12 of the Amended and
Restated Loan Agreement, the Borrower shall be jointly and severally
liable with the other Borrowers for all payment and performance
Obligations arising under the Amended and Restated Loan Agreement and
the other Loan Documents.
SECTION 3. CONDITIONS PRECEDENT. The effectiveness of this Amendment
shall be subject to the delivery to Lender, in form and substance satisfactory
to Lender, of all of the documents listed on the List of Closing Documents
attached as EXHIBIT A hereto.
SECTION 4. REFERENCE TO AND EFFECT ON THE LOAN AGREEMENT.
4.1. Upon the effectiveness of this Amendment, each reference in the
Loan Agreement to "this Agreement", "hereunder", "hereof", "herein", or words of
like import shall mean and be a reference to the Loan Agreement as modified
hereby, and each reference to the
5
<PAGE>
Loan Agreement in any other document, instrument or agreement shall mean and be
a reference to the Loan Agreement as modified hereby.
4.2. Except as specifically amended hereby, the Loan Agreement and
other documents, instruments and agreements executed and/or delivered in
connection therewith shall remain in full force and effect and are hereby
ratified and confirmed.
4.3. The execution, delivery and effectiveness of this Amendment
shall not (a) operate as a waiver of any right, power or remedy of the Lender
under the Loan Agreement or any other document, instrument or agreement executed
in connection therewith, or constitute a waiver of any provision contained
therein, nor (b) be deemed to be a consent to any other or further actions or
occurrences, except as specifically set forth herein.
SECTION 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE OTHER REMAINING TERMS OF THE LOAN AGREEMENT AND
THE INTERNAL LAWS (AS OPPOSED TO CONFLICT OF LAW PROVISIONS) OF THE STATE OF NEW
JERSEY.
SECTION 6. PARAGRAPH HEADINGS. The paragraph headings contained in
this Amendment are and shall be without substance, meaning or content of any
kind whatsoever and are not a part of the agreement among the parties hereto.
SECTION 7. COUNTERPARTS. This Amendment may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[Signature Page Follows]
6
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the
day and year first above written.
KMC TELECOM INC.
By: /s/ Cynthia Worthman
-------------------------------------
Name: Cynthia Worthman
Title: Chief Financial Officer
& Vice President
KMC TELECOM II, INC.
By: /s/ Cynthia Worthman
-------------------------------------
Name: Cynthia Worthman
Title: Chief Financial Officer
& Vice President
KMC TELECOM LEASING I LLC
By: /s/ Cynthia Worthman
-------------------------------------
Name: Cynthia Worthman
Title: Chief Financial Officer
& Vice President
KMC TELECOM LEASING II LLC
By: /s/ Cynthia Worthman
-------------------------------------
Name: Cynthia Worthman
Title: Chief Financial Officer
& Vice President
AT&T COMMERCIAL FINANCE
CORPORATION
By: /s/ Edward W. Andrew, Jr.
-------------------------------------
Name: Edward W. Andrew, Jr.
Title: President
<PAGE>
EXHIBIT A
RESTRUCTURING OF
AT&T COMMERCIAL FINANCE CORPORATION
$70,000,000
LOAN FACILITY
TO
KMC TELECOM INC. AND KMC TELECOM II, INC.
October 31, 1997
LIST OF CLOSING DOCUMENTS
A. LOAN AND SECURITY DOCUMENTS
1. Amendment No. 1 ("Amendment") to Loan and Security Agreement
("Loan Agreement") and Notes Modification Agreement among AT&T Commercial
Finance Corporation ("Lender"), KMC Telecom Inc., a Delaware corporation
("KMC"), KMC Telecom II, Inc., a Delaware corporation ("KMC II"), KMC Telecom
Leasing I LLC, a Delaware limited liability company ("Leasing I"), and KMC
Telecom Leasing II LLC, a Delaware limited liability company ("Leasing II"; KMC,
KMC II, Leasing I and Leasing II, being collectively referred to hereinafter as
the "BORROWERS"). Unless otherwise defined herein, capitalized terms used
herein shall have the meanings assigned to such terms in the Loan Agreement.
Exhibit A -- List of Closing documents
Revised Schedule 3.05 -- Litigation
2. Promissory Note executed by Leasing I and made payable to the
Lender in the principal amount of $70,000,000.
3. Promissory Note executed by Leasing II and made payable to Lender
in the principal amount of $15,000,000.
B. UCC DOCUMENTS
4. UCC Financing Statements filed against Leasing I in favor of
Lender in the offices listed below:
a. Secretary of State of Alabama
b. Department of State of Florida
c. Clerk of the Superior Court of Fulton County, Georgia
d. Clerk of Court of Caddo Parish, Louisiana
e. Clerk of Court of East Baton Rouge Parish, Louisiana
f. Secretary of State of New Jersey
g. Secretary of State of Texas
h. Secretary of State of Wisconsin
<PAGE>
5. Post-Filing UCC Search Reports of Filings against Leasing I in
the offices listed above.
6. UCC Financing Statements filed against Leasing II in favor of
Lender in the offices listed below:
a. Clerk of the Superior Court of Bibb County, Georgia
b. Clerk of the Superior Court of Fulton County, Georgia
c. Secretary of State of Kansas
d. Secretary of State of Minnesota
e. Secretary of State of North Carolina
f. Register of Deeds of Catawba County, North Carolina
g. Register of Deeds of Forsyth County, North Carolina
h. Register of Deeds of Guilford County, North Carolina
i. State Corporation Commission of Virginia
j Clerk of Court of Roanoke County, Virginia
7. Post-Filing UCC Search Reports of Filings against Leasing II in
the offices listed above.
8. UCC Financing Statements filed against KMC II in favor of Lender
in the offices listed below:
a. Clerk of the Superior Court of Bibb County, Georgia
b. Secretary of State of Kansas
c. Secretary of State of Minnesota
d. Secretary of State of North Carolina
e. Register of Deeds of Catawba County, North Carolina
f. Register of Deeds of Forsyth County, North Carolina
g. Register of Deeds of Guilford County, North Carolina
h State Corporation Commission of Virginia
i. Clerk of Court of Roanoke County, Virginia
9. Post-Filing UCC Search Reports of Filings against KMC II in the
offices listed above.
10. UCC Financing Statements filed against KMC and KMC II with
respect to their respective membership interests in Leasing I and Leasing II in
the office of the Secretary of State of New Jersey.
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<PAGE>
11. Post-Filing UCC Search Reports of Filings against KMC and KMC II
in the office listed above.
C. CORPORATE DOCUMENTS
12. Good Standing Certificates for Leasing I from the Secretaries of
State of Alabama, Delaware, Georgia, Louisiana, New Jersey and Texas.
13. Good Standing Certificates for Leasing II from the Secretaries of
State of Delaware, Georgia and New Jersey.
14. Limited Liability Company Certificate for Leasing I and Leasing
II certified by the Secretary of State of Delaware.
15. Member's Certificate for each Borrower certifying (i) the
resolutions authorizing the execution, delivery and performance of the Amendment
and the other Loan Documents executed pursuant thereto, (ii) the incumbency of
certain officers, (iii) that no amendments have been made to such Borrower's
Certificate of Formation or Limited Liability Company Certificate, as applicable
and (iv) the absence of such Borrower's by-laws or operating agreement.
D. THIRD PARTY SUPPORT DOCUMENTS
16. Pledge Agreement executed by KMC with respect to the outstanding
membership interests in Leasing I and certain other collateral described
therein.
17. Pledge Instruction.
18. Initial Transactions Statement.
19. Pledge Agreement executed by KMC II with respect to the
outstanding membership interests in Leasing II and certain other collateral
described therein.
20. Pledge Instruction.
21. Initial Transactions Statement.
22. Amendment to AT&T Letter Agreement between Lucent Technologies
Inc. ("LUCENT") and Lender to include references to Leasing I and Leasing II.
23. Access Agreement by Cogeneration Services, Inc. with respect to
Leasing I and Leasing II's premises located at 1545 Route 206, Suite 300,
Bedminster, New Jersey.
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24. Reaffirmation of Pledge Agreements and Guaranties executed by
Holdings.
E. SUBORDINATED DEBT DOCUMENTS
25. Amendment to Subordinated Loan and Security Agreement and Note
Modification Agreement among KMC, KMC II and Lender.
Exhibit A -- List of Closing Documents
Revised Schedule 3.05 -- Litigation
26. Pledge Agreement executed by KMC with respect to the outstanding
membership interest in Leasing I and certain other collateral described therein.
27. Pledge Instruction.
28. Initial Transactions Statement.
29. Pledge Agreement executed by KMC II with respect to the
outstanding membership interests in Leasing II and certain other collateral
described therein.
30. Pledge Instruction.
31. Initial Transactions Statement.
32. Reaffirmation of Pledge Agreements and Guaranties executed by
Holdings.
F. LEASING DOCUMENT
33. Mater Lease Agreement between Leasing I and KMC.
34. Master Lease Agreement between Leasing II and KMC II.
G. OPINIONS
35. Opinion of Borrowers' and Holdings' special counsel: Kelley,
Drye & Warren LLP.
H. INTERCREDITOR DOCUMENTS
36. Amendment to Participation Agreement and Consent.
4
<PAGE>
I. EQUIPMENT PURCHASE DOCUMENTS
37. Amendment to Special Payment Terms Letter Agreement among Lucent,
KMC and KMC II to add Leasing I and Leasing II as parties.
38. Amendment to General Agreement among KMC, KMC II and Lucent to
add Leasing I and Leasing II as parties.
39. Amendment Number One to the Commission Letter Agreement between
Lucent and AT&T Credit Corporation to add Leasing I and Leasing II as parties.
5
<PAGE>
SCHEDULE 3.05
LITIGATION
On June 24, 1997, the Public Service Commission of Wisconsin
authorized KMC Telecom Inc. to provide facilities-based local exchange services
in the territory serviced by Mid-Plains, Inc. ("Mid-Plains"). (KMC plans to
provide service in Middleton, WI as part of its Madison, WI system.) On July
28, 1997, Mid-Plains filed a Petition for Judicial Review of the June 24 PSC
Order alleging that the Order was not issued in compliance with applicable laws.
The Petition seeks to affect only the right of KMC to provide facilities-based
and switched local service. KMC is not a party to this action.
By letter dated August 29, 1997, the Company notified I-Net, Inc. ("I-
NET") that the Company considers I-NET to be in default under a Master
Telecommunications System Rollout Agreement dated as of October 1, 1996 (the
"I-NET Agreement"). The Company has been in extensive discussions with I-NET
regarding the Company's belief that I-NET has not provided services to the
Company in accordance with the I-NET Agreement. By letter dated October 27,
1997, Wang Laboratories, Inc. ("Wang"), which has purchased I-NET, provided the
Company with all outstanding invoices and stated that, Wang will immediately
invoke the arbitration provisions under the I-NET Agreement if the Company and
Wang cannot agree as to payment terms and charge the Company interest after
November 27, 1997 for all amounts owing thereunder.
<PAGE>
Exhibit 10.4
EXECUTION COPY
AMENDMENT NO. 2
TO
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
AMENDMENT NO. 2 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
("Amendment") dated as of January 7, 1998, among KMC TELECOM INC., a Delaware
corporation ("KMC"), KMC Telecom II, Inc., a Delaware corporation ("KMC II"),
KMC Telecom Leasing I LLC, a Delaware limited liability company ("Leasing I"),
KMC Telecom Leasing II LLC, a Delaware limited liability company ("Leasing II";
KMC, KMC II, Leasing I and Leasing II being hereinafter collectively referred to
hereinafter as the "Borrowers" ), and AT&T COMMERCIAL FINANCE CORPORATION, a
Delaware corporation ("Lender").
WHEREAS, the Borrowers and the Lender are parties to that certain
Amended and Restated Loan and Security Agreement ("Loan Agreement") dated as of
September 22, 1997, pursuant to which the Lender has agreed to make certain
loans to the Borrowers; and
WHEREAS, the Borrowers have requested the Lender to amend the Loan
Agreement in the manner set forth herein, and Lender has agreed to such request;
NOW, THEREFORE, in consideration of the premises set forth above, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Borrowers and the Lender agree as follows:
SECTION 1. AMENDMENT TO THE LOAN AGREEMENT. Effective as of the date
first above written and subject to the execution of this Amendment by the
parties hereto, the Loan Agreement shall be and hereby is amended as follows:
(a) SECTION 1.02 is amended to delete the text of the definition of
"CHANGE OF CONTROL and to substitute the following therefor:
"CHANGE OF CONTROL" shall mean (A) other than by reason of the
death or disability of Harold N. Kamine or prior to the raising
of at least $100,000,000 in unsecured debt by the Borrowers or
KMC Holdings, Harold N. Kamine ceases to have senior management
responsibilities with respect to the Business and the other
operations of the Borrowers, or (B) KMC Holdings no longer
beneficially owns all of the outstanding Capital Stock of KMC or
KMC II (other than as a result of the exercise of the Warrants),
or (C) KMC shall no longer beneficially own all of the
outstanding membership interests in Leasing I or (D) KMC II shall
no
<PAGE>
longer beneficially own all of the outstanding membership
interests in Leasing II.
(b) SECTION 1.02 is further amended to add in the definition of
"GOVERNMENTAL AUTHORITY" the words "any nation or government," after the
word "means" in the second line of such definition.
(c) SECTION 2.06(B) is amended to delete the word "ninth" in the
second line and to substitute therefor the word "tenth" and under the
caption "PAYMENT DATE NUMBER" to delete the number "9" and to substitute
therefor the number "10".
(d) SECTION 2.12(B) is amended to (i) in the third sentence thereof
add the words "and all rights of subrogation" after the words "under this
section" and (ii) add the following sentences after the third sentence
thereof:
Each Borrower agrees that any extension, forbearance or amendment, or
any acceptance, release or substitution of security, or any impairment
or suspension of Lender's remedies or rights against any other
Borrower or the cessation of the liability of any other Borrower for
any reason other than full and indefeasible satisfaction of all
Obligations shall not in any way affect the liability of such
Borrower. Each Borrower has provided itself of the means of remaining
informed of the financial condition of each other Borrower, and waives
any right to require Lender to keep it informed of the financial
condition of any other Borrower.
(e) SECTION 6,04(A) is amended by deleting the word "and" after the
words "to its shareholders," on the twentieth line thereof and adding the
words "; and (iv) KMC may repay any Debt, including interest thereon,
payable to KMC Holdings as permitted pursuant to SECTION 6.13(X)" after the
word "$800,000" and before the period on the twenty-third line thereof.
(f) SECTION 9.03 is amended to add the words "or pursue any remedy"
in the last sentence after the word "claim".
SECTION 3. REFERENCE TO AND EFFECT ON THE LOAN AGREEMENT.
3.1. Upon the effectiveness of this Amendment, each reference in the
Loan Agreement to "this Agreement", "hereunder", "hereof", "herein", or words of
like import shall mean and be a reference to the Loan Agreement as modified
hereby, and each reference to the Loan Agreement in any other document,
instrument or agreement shall mean and be a reference to the Loan Agreement as
modified hereby.
2
<PAGE>
3.2. Except as specifically amended hereby, the Loan Agreement and
other documents, instruments and agreements executed and/or delivered in
connection therewith shall remain in full force and effect and are hereby
ratified and confirmed.
3.3. The execution, delivery and effectiveness of this Amendment
shall neither (a) operate as a waiver of any right, power or remedy of the
Lender under the Loan Agreement or any other document, instrument or agreement
executed in connection therewith, or constitute a waiver of any provision
contained therein, nor (b) be deemed to be a consent to any other or further
actions or occurrences, except as specifically set forth herein.
SECTION 4. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE OTHER REMAINING TERMS OF THE LOAN AGREEMENT AND
THE INTERNAL LAWS (AS OPPOSED TO CONFLICT OF LAW PROVISIONS) OF THE STATE OF NEW
JERSEY.
SECTION 5. PARAGRAPH HEADINGS. The paragraph headings contained in
this Amendment are and shall be without substance, meaning or content of any
kind whatsoever and are not a part of the agreement among the parties hereto.
SECTION 6. COUNTERPARTS. This Amendment may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[Signature Page Follows]
3
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the
day and year first above written.
KMC TELECOM INC.
By:
-------------------------------------
Name: Cynthia Worthman
Title: Vice President and CFO
KMC TELECOM II, INC.
By:
-------------------------------------
Name: Cynthia Worthman
Title: Vice President and CFO
KMC TELECOM LEASING I LLC
By:
-------------------------------------
Name: Cynthia Worthman
Title: Vice President and CFO
KMC TELECOM LEASING II LLC
By:
-------------------------------------
Name: Cynthia Worthman
Title: Vice President and CFO
AT&T COMMERCIAL FINANCE
CORPORATION
By:
-------------------------------------
Name:
Title:
<PAGE>
ACCEPTED AND AGREED TO:
CORESTATES BANK, N.A.
By:
----------------------------
Its:
---------------------------
GE CAPITAL CORPORATION
By:
----------------------------
Its:
---------------------------
<PAGE>
Exhibit 10.5
EXECUTION COPY
PLEDGE AGREEMENT
This PLEDGE AGREEMENT ("PLEDGE AGREEMENT"), dated as of September 29,
1997, is executed by and between KMC Telecom Holdings, Inc., a Delaware
corporation (the "PLEDGOR"), and AT&T Commercial Finance Corporation (the
"LENDER"). Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings given to such terms in the "Amended and Restated
Loan Agreement" (as defined below).
WITNESSETH:
WHEREAS, the Pledgor's wholly-owned subsidiary KMC Telecom Inc. (the
"BORROWER"), a Delaware corporation, KMC Telecom II, Inc. and Lender have
entered into a certain Amended and Restated Loan and Security Agreement dated as
of September 22, 1997 (as amended, restated, supplemented or otherwise modified
from time to time, the "AMENDED AND RESTATED LOAN AGREEMENT"), pursuant to which
Lender has agreed, subject to certain conditions precedent, to make loans to the
Borrower from time to time;
WHEREAS, the Pledgor owns all of the issued and outstanding common
stock of the Borrower and Pledgor will derive direct and indirect economic
benefit from the loans made to the Borrower under the Amended and Restated Loan
Agreement;
WHEREAS, the Pledgor has executed on behalf of Lender that certain
Guaranty of even date herewith (as the same may be amended, restated,
supplemented or otherwise modified from time to time, the "Guaranty") pursuant
to which the Pledgor has agreed, among other things, to guarantee all of the
"Obligations" (as such term is defined in the Amended and Restated Loan
Agreement); and
WHEREAS, it is a condition precedent to the making of loans by the
Lender under the Amended and Restated Loan Agreement that the Pledgor shall have
granted a first priority security interest in the "Pledged Collateral" (as
hereinafter defined below) in order to secure the prompt and complete payment,
observance and performance of all of the Pledgor's obligations under the
Guaranty (such obligations and liabilities being hereinafter referred to as the
"LIABILITIES");
NOW, THEREFORE, in consideration of the premises set forth herein and
in order to induce the Lender to make loans, advances and other financial
accommodations under the Amended and Restated Loan Agreement, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Pledgor and the Lender hereby agree as follows:
<PAGE>
1. PLEDGE. The Pledgor hereby pledges to the Lender, and grants to
the Lender a security interest in, the following (collectively, the "PLEDGED
COLLATERAL"):
(a) all shares of the capital stock of the Borrower, and the
certificates representing all shares of such capital stock (as identified on
EXHIBIT A attached hereto and made a part hereof), all options and warrants for
the purchase of shares of the stock of the Borrower now or hereafter held in the
name of the Pledgor and relating to such specified shares of capital stock (all
of said capital stock, options and warrants and all capital stock held in the
name of the Pledgor as a result of the exercise of such options or warrants
being hereinafter collectively referred to as the "PLEDGED STOCK"), herewith
delivered to the Lender accompanied by stock powers in the form of EXHIBIT B
attached hereto and made a part hereof ("POWERS") duly executed in blank, and
all dividends, cash, instruments and other property from time to time received,
receivable or otherwise distributed in respect of, or in exchange for, any or
all of such shares;
(b) all additional shares of stock of the Borrower from time to time
acquired by the Pledgor in any manner as a result of the ownership of the shares
of capital stock described on EXHIBIT A, and the certificates representing such
additional shares (any such additional shares shall constitute part of the
Pledged Stock and shall be listed on EXHIBIT A), and all options, warrants,
dividends, cash, instruments and other rights and options from time to time
received, receivable or otherwise distributed in respect of or in exchange for
any or all of such shares;
(c) the property and interests in property described in SECTION 3
below; and
(d) all proceeds of any of the foregoing.
2. SECURITY FOR THE LIABILITIES. The Pledged Collateral secures the
prompt payment, performance and observance of the Liabilities.
3. PLEDGED COLLATERAL ADJUSTMENTS. If, during the term of this
Pledge Agreement:
(a) any stock dividend, reclassification, readjustment or other
change is declared or made in the capital structure of the Borrower, or any
option included within the Pledged Collateral is exercised, or both, or
(b) subscription warrants or any other rights or options shall be
issued in connection with the Pledged Collateral, then all new, substituted and
additional shares, warrants, rights, options or other securities, issued by
reason of any of the foregoing, together with stock powers in the form of
EXHIBIT B duly executed in blank (or other comparable instruments) shall be
immediately delivered to and held by the Lender under the terms of this Pledge
Agreement and shall constitute Pledged Collateral hereunder; PROVIDED, HOWEVER,
that nothing contained in this SECTION 3 shall be deemed to permit any stock
dividend, issuance of additional stock, warrants, rights or options,
reclassification, readjustment or other change in the capital structure of the
Borrower which is not expressly permitted in the Amended and Restated Loan
Agreement.
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<PAGE>
4. SUBSEQUENT CHANGES AFFECTING PLEDGED COLLATERAL. The Pledgor
represents and warrants that it has made its own arrangements for keeping
informed of changes or potential changes affecting the Pledged Collateral
(including, but not limited to, rights to convert, rights to subscribe, payment
of dividends, reorganization or other exchanges, tender offers and voting
rights), and the Pledgor agrees that the Lender shall have no obligation to
inform the Pledgor of any such changes or potential changes or to take any
action or omit to take any action with respect thereto. The Lender may, after
the occurrence of an Event of Default, without notice and at its option,
transfer or register the Pledged Collateral or any part thereof into its or its
nominee's name with or without any indication that such Pledged Collateral is
subject to the security interest hereunder. In addition, the Lender may at any
time exchange certificates or instruments representing or evidencing Pledged
Shares for certificates or instruments of smaller or larger denominations.
5. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and
warrants as follows:
(a) the Pledgor is the record owner of one hundred percent (100%) of
the issued and outstanding capital stock of the Borrower, free and clear of any
Lien except for the security interest created by this Pledge Agreement which
security interest attaches to all the capital stock of the Borrower, represented
by certificate nos. PA-4 and A-9, and the second priority security interest
created by the Pledge Agreement (the "Junior Pledge") executed in favor of the
Lender under that certain Subordinated Loan and Security Agreement of September
22, 1997 between the Lender and the Borrowers;
(b) the Pledgor has full power and authority (corporate or otherwise)
to enter into this Pledge Agreement;
(c) there are no restrictions upon the voting rights associated with,
or upon the transfer of, any of the Pledged Collateral other than those created
by the Junior Pledge;
(d) the Pledgor has the right to vote, pledge and grant a security
interest in or otherwise transfer such Pledged Collateral free of any Liens
other than those created by the Junior Pledge;
(e) no authorization, approval, or other action by, and no notice to
or filing with, any governmental authority or regulatory body is required either
(i) for the pledge of the Pledgor's Pledged Collateral pursuant to this Pledge
Agreement or for the execution, delivery or performance of this Pledge Agreement
by the Pledgor or (ii) for the exercise by the Lender of the voting or other
rights provided for in this Pledge Agreement or the remedies in respect of the
Pledged Collateral pursuant to this Pledge Agreement (except as may be required
(x) in connection with such disposition by laws affecting the offering and sale
of securities generally and (y) by the FCC or any PUC);
-3-
<PAGE>
(f) the pledge of the Pledgor's Pledged Collateral pursuant to this
Pledge Agreement creates a valid and perfected first priority security interest
in such Pledged Collateral, in favor of the Lender, securing the payment and
performance of the Liabilities; and
(g) the Powers are duly executed and give the Lender the authority
they purport to confer.
6. VOTING RIGHTS. During the term of this Pledge Agreement, and
except as provided in this SECTION 6 below, the Pledgor shall have the right to
exercise all corporate rights associated with the Pledged Collateral and vote
the Pledged Stock on all corporate questions in a manner not inconsistent with
the terms of this Pledge Agreement, the Guaranty, the Amended and Restated Loan
Agreement and any other agreement, instrument or document executed pursuant
thereto or in connection therewith. The Lender shall at the sole cost and
expense of the Pledgor, execute and deliver (or cause to be executed and
delivered) to the Pledgor all such proxies and other instruments the Pledgor may
reasonably request for the purpose of enabling such Pledgor to exercise the
voting or other rights that it is entitled to exercise. Subject to the
provisions of SECTION 9(G), after the occurrence and during the continuation of
an Event of Default, the Lender may, at the Lender's option and following
written notice from the Lender to the Pledgor, exercise all voting powers and
corporate rights pertaining to the Pledged Collateral, and until all of the
Obligations have been paid in full (in cash), the Pledgor irrevocably
constitutes and appoints Lender as the proxy and attorney-in-fact of the
Pledgor, with full power of substitution to exercise such voting powers and
corporate rights; PROVIDED, HOWEVER that Lender will not take any action
pursuant to this Pledge Agreement which would constitute or result in any
assignment of a FCC or PUC license or any change of control of the Borrower if
such assignment or change of control would require under then existing law
(including the written rules and regulations promulgated by the FCC or any PUC),
the prior approval of the FCC or any PUC, without first obtaining such approval
of the FCC or any PUC.
7. DIVIDENDS AND OTHER DISTRIBUTIONS.
(a) So long as no Event of Default shall have occurred and be
continuing:
(i) the Pledgor shall be entitled to receive and retain any and all
dividends and interest paid in respect of the Pledged Collateral to the
extent the Borrower is permitted to make such payments under the Amended
and Restated Loan Agreement, PROVIDED, HOWEVER, that any and all
(A) dividends and interest paid or payable other than in cash
with respect to, and instruments and other property received,
receivable or otherwise distributed with respect to, or in exchange
for, any of the Pledged Collateral; and
(B) dividends and other distributions paid or payable in cash
with respect to any of the Pledged Collateral on account of a partial
or total liquidation or
-4-
<PAGE>
dissolution or in connection with a reduction of capital, capital
surplus or paid-in surplus; or in redemption of, or in exchange for,
any of the Pledged Collateral;
shall be, and shall be forthwith delivered to the Lender to hold as,
Pledged Collateral and shall, if received by the Pledgor, be received in
trust for the Lender, be segregated from the other property or funds of the
Pledgor, and be delivered immediately to the Lender as Pledged Collateral
in the same form as so received (with any necessary endorsement); and
(ii) the Lender shall execute and deliver (or cause to be executed
and delivered) to the Pledgor all such proxies and other instruments as the
Pledgor may reasonably request for the purpose of enabling the Pledgor to
receive the dividends or interest payments which it is authorized to
receive and retain pursuant to paragraph (i) above.
(b) Subject to the provisions of SECTION 9(G), after the occurrence
and during the continuation of an Event of Default:
(i) All rights of the Pledgor to receive the dividends and interest
payments which it would otherwise be authorized to receive and retain
pursuant to SECTION 7(A)(I) hereof shall cease, and all such rights shall
thereupon become vested in the Lender, which shall thereupon have the sole
right to receive and hold as Pledged Collateral such dividends and interest
payments;
(ii) all dividends and interest payments which are received by the
Pledgor contrary to the provisions of paragraph (i) of this SECTION 7(B)
shall be received in trust for the Lender, shall be segregated from other
funds of the Pledgor and shall be paid over immediately to the Lender as
Pledged Collateral in the same form as so received (with any necessary
endorsements); and
(iii) the Pledgor shall, upon the request of the Lender, at Pledgor's
expense, use its best efforts to do or cause to be done all such other acts
and things as may be necessary to make the sale of the Pledged Collateral
or any part thereof valid and binding and in compliance with applicable
law. The Pledgor will reimburse the Lender for all expenses incurred by
the Lender in connection with the foreclosure on or sale of the Pledged
Collateral, including, without limitation, reasonable attorneys' and
accountants' fees and expenses in connection with any of the foregoing.
8. TRANSFERS AND OTHER LIENS. The Pledgor agrees that it will not
(i) sell or otherwise dispose of, or grant any option with respect to, any of
the Pledged Collateral without the prior written consent of the Lender, or (ii)
create or permit to exist any Lien upon or with respect to any of the Pledged
Collateral, except for the security interest under this Pledge Agreement and the
Junior Pledge.
9. REMEDIES.
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<PAGE>
(a) The Lender shall have, in addition to any other rights given
under this Pledge Agreement or by law, all of the rights and remedies with
respect to the Pledged Collateral of a secured party under the Uniform
Commercial Code as in effect in the State of New Jersey. In addition, after the
occurrence and during the continuation of an Event of Default, the Lender shall
have such powers of sale and other powers as may be conferred by applicable law.
With respect to the Pledged Collateral or any part thereof which shall then be
in or shall thereafter come into the possession or custody of the Lender or
which the Lender shall otherwise have the ability to transfer under applicable
law, the Lender may, in its sole discretion, without notice except as specified
below, after the occurrence and during the continuation of an Event of Default,
sell or cause the same to be sold at any exchange, broker's board or at public
or private sale, in one or more sales or lots, at such price as the Lender may
deem best, for cash or on credit or for future delivery, without assumption of
any credit risk, and the purchaser of any or all of the Pledged Collateral so
sold shall thereafter own the same, absolutely free from any claim, encumbrance
or right of any kind whatsoever. The Lender may, in its own name, or in the
name of a designee or nominee, buy the Pledged Collateral at any public sale
and, if permitted by applicable law, buy the Pledged Collateral at any private
sale. The Pledgor shall be liable to the Lender for all reasonable expenses
(including, without limitation, court costs and reasonable attorneys' and
paralegals' fees and expenses) of, or incident to, the enforcement of any of the
provisions hereof. The Lender agrees to distribute any proceeds of the sale of
the Pledged Collateral in accordance with the Amended and Restated Loan
Agreement.
(b) Unless any of the Pledged Collateral threatens to decline
speedily in value or is or becomes of a type sold on a recognized market, the
Lender will give the Pledgor reasonable notice of the time and place of any
public sale thereof, or of the time after which any private sale or other
intended disposition is to be made. Any sale of the Pledged Collateral
conducted in conformity with reasonable commercial practices of banks,
commercial finance companies, insurance companies or other financial
institutions disposing of property similar to the Pledged Collateral shall be
deemed to be commercially reasonable. Notwithstanding any provision to the
contrary contained herein, any requirements of reasonable notice shall be met if
such notice is received by the Pledgor as provided in SECTION 19 below, at least
five (5) Business Days before the time of the sale or disposition. Any other
requirement of notice, demand or advertisement for sale is waived, to the extent
permitted by law.
(c) In view of the fact that federal and state securities laws may
impose certain restrictions on the method by which a sale of the Pledged
Collateral may be affected after an Event of Default, the Pledgor agrees that
after the occurrence of an Event of Default, the Lender may, from time to time,
attempt to sell all or any part of the Pledged Collateral by means of a private
placement restricting the bidders and prospective purchasers to those who are
qualified and will represent and agree that they are purchasing for investment
only and not for distribution. In so doing, the Lender may solicit offers to
buy the Pledged Collateral, or any part of it, from a limited number of
investors deemed by the Lender, in its reasonable judgment, to be financially
responsible parties who might be interested in purchasing the Pledged
Collateral. If the Lender solicits such offers from not less than three (3)
such investors, then the acceptance by the Lender
-6-
<PAGE>
of the highest offer obtained therefrom shall be deemed to be a commercially
reasonable method of disposing of such Pledged Collateral.
(d) In connection with the enforcement by the Lender of any remedies
available to the Lender as a result of any Event of Default, the Pledgor agrees
to, and to use its best efforts to cause the Borrower to join and cooperate
fully, in each case at the Lender's election, with the Lender, any receiver
referred to below and/or the successor bidder or bidders at any foreclosure sale
in a filing of an application (and furnishing any additional information that
may be required in connection with such application) with the FCC, any PUC and
all applicable federal, state and local governmental authorities, requesting
their prior approval of (i) the operation and/or abandonment of all or any
portion of any System and/or (ii) the transfer of control of the Borrower or any
of its Systems or assignment of all licenses, certificates, authorizations,
approvals and permits, issued to the Borrower by the FCC, any PUC or any such
authorities with respect to its System(s) and the operation thereof. In
connection with the foregoing, the Pledgor agrees to, and agrees to use its best
efforts to cause the Borrower to, take such further actions, and execute all
such instruments, as the Lender reasonably deems necessary or desirable. The
Pledgor agrees that the Lender may enforce any obligations of the Pledgor as set
forth in this Section by an action for specific performance.
(e) Notwithstanding any other provision of this Pledge Agreement to
the contrary, the exercise of any rights hereunder by the Lender that may
require FCC or any PUC approval shall be subject to obtaining such approval.
Pending obtaining FCC or such PUC approval the Pledgor will not do anything to
delay, hinder, interfere or obstruct the exercise of the Lender's rights
hereunder in obtaining such approvals.
(f) In connection with the exercise of its remedies under this
Agreement, Lender may, upon the occurrence and during the continuation of an
Event of Default obtain the appointment of a receiver or trustee to assume, upon
receipt of all necessary judicial, FCC, PUC or other governmental authority,
consents or approvals, control of or ownership of any Pledged Collateral. Such
receiver or trustee shall have all rights and powers provided to it by law or by
court order or provided to Lender under this Pledge Agreement. Upon the
appointment of such trustee or receiver, the Pledgor agrees to cooperate, to the
extent necessary or appropriate, in the expeditious preparation, execution and
filing of an application to the FCC or any PUC for consent to the transfer of
control or assignment of the Borrower's Authorizations to the receiver or
trustee.
(g) If an Event of Default has occurred and Lender demands payment of
the Obligations pursuant to SECTION 9.02 of the Amended and Restated Loan
Agreement, then Lender shall forebear from foreclosing on the Pledged Collateral
for five (5) Business Days following Lender's demand for payment of the
Obligations pursuant to SECTION 9.02 of the Amended and Restated Loan Agreement,
and if within such five (5) Business Day period the Pledgor or Borrower pays to
Lender all of the Obligations (without any Prepayment Premium) in cash, then
Lender shall return to Pledgor the Pledged Stock and the Powers, and this Pledge
Agreement shall terminate.
-7-
<PAGE>
10. SECURITY INTEREST ABSOLUTE. All rights of the Lender and
security interests hereunder, and all obligations of the Pledgor hereunder,
shall be absolute and unconditional irrespective of:
(i) any lack of validity or enforceability of the Amended and
Restated Loan Agreement or any other agreement or instrument relating thereto;
(ii) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Obligations, or any other amendment or waiver
of or any consent to any departure from the Amended and Restated Loan Agreement;
(iii) any exchange, release or non-perfection of any other
collateral, or any release or amendment or waiver of or consent to departure
from any guaranty, for all or any of the Obligations; or
(iv) to the extent permitted by law, any other circumstance which
might otherwise constitute a defense available to, or a discharge of, the
Pledgor in respect of the Obligations or of this Pledge Agreement other than
indefeasible payment in full (in cash).
11. LENDER APPOINTED ATTORNEY-IN-FACT. The Pledgor hereby appoints
the Lender its attorney-in-fact, with full authority, in the name of the Pledgor
or otherwise, after the occurrence and during the continuation of an Event of
Default, from time to time in the Lender's discretion, to take any action and to
execute any instrument which the Lender may deem necessary or advisable to
accomplish the purposes of this Pledge Agreement, including, without limitation,
to receive, endorse and collect all instruments made payable to the Pledgor
representing any dividend, interest payment or other distribution in respect of
the Pledged Collateral or any part thereof and to give full discharge for the
same and to arrange for the transfer of all or any part of the Pledged
Collateral on the books of the Borrower to the name of the Lender or the
Lender's nominee.
12. WAIVERS. The Pledgor waives presentment and demand for payment
of any of the Liabilities, protest and notice of dishonor or Event of Default
with respect to any of the Liabilities and all other notices to which the
Pledgor might otherwise be entitled except as otherwise expressly provided
herein or in the Amended and Restated Loan Agreement.
13. TERM. This Pledge Agreement shall remain in full force and
effect until the Obligations have been fully and indefeasibly paid and satisfied
and the Amended and Restated Loan Agreement and the Guaranty have terminated
pursuant to their respective terms. Upon the termination of this Pledge
Agreement as provided above (other than as a result of the sale of the Pledged
Collateral), the Lender will release the security interest created hereunder and
will deliver the Pledged Stock and the Powers to the Pledgor.
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<PAGE>
14. DEFINITIONS. The singular shall include the plural and vice
versa and any gender shall include any other gender as the context may require.
15. SUCCESSORS AND ASSIGNS. This Pledge Agreement shall be binding
upon and inure to the benefit of the Pledgor, the Lender and their respective
successors and assigns. The Pledgor's successors and assigns shall include,
without limitation, a receiver, trustee or debtor in possession of or for the
Pledgor.
16. APPLICABLE LAW; SEVERABILITY. THIS PLEDGE AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO
THE CONFLICT OF LAWS PROVISIONS) AND DECISIONS OF THE STATE OF NEW JERSEY.
Whenever possible, each provision of this Pledge Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but, if any
provision of this Pledge Agreement shall be held to be prohibited or invalid
under applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Pledge Agreement. Furthermore, if
any term or provision hereof is held to be inconsistent with the Communications
Act of 1934, as amended, 47 U.S.C. 151 et seq., or with the Rules and
Regulations of the FCC, or otherwise illegal, unenforceable or invalid for any
reason, such provision shall not affect the remainder hereof, and the parties
shall promptly cooperate in good faith to modify this Pledge Agreement, so as to
avoid any impairment of Lender's security interest in the Pledged Collateral.
17. FURTHER ASSURANCES. The Pledgor agrees that it will cooperate
with the Lender and will execute and deliver, or cause to be executed and
delivered, all such other stock powers, proxies, instruments and documents, and
will take all such other action, including, without limitation, the filing of
financing statements, as the Lender may reasonably request from time to time in
order to carry out the provisions and purposes of this Pledge Agreement.
18. THE LENDER'S DUTY OF CARE. The Lender shall not be liable for
any acts, omissions, errors of judgment or mistakes of fact or law including,
without limitation, acts, omissions, errors or mistakes with respect to the
Pledged Collateral, except for those arising solely out of or solely in
connection with the Lender's (i) gross negligence or willful misconduct, or (ii)
failure to use reasonable care with respect to the safe custody of the Pledged
Collateral in the Lender's possession. Without limiting the generality of the
foregoing, the Lender shall be under no obligation to take any steps necessary
to preserve rights in the Pledged Collateral against any other parties but may
do so at its option. All expenses incurred in connection therewith shall be for
the sole account of the Pledgor, and shall constitute part of the Obligations
secured hereby.
19. NOTICES. All notices and other communications required or
desired to be served, given or delivered hereunder shall be made in the manner
prescribed by the Amended and Restated Loan Agreement and to the following
addresses, facsimile and telephone numbers:
if to the Lender, to
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<PAGE>
AT&T Capital Corporation/
Capital Markets Division
44 Whippany Road
Morristown, New Jersey 07962-1983
Attention: Vice President /Credit
Facsimile: 973-397-4368
Confirmation: 973-397-3333
with a copy to:
AT&T Capital Corporation/
Capital Markets Division
44 Whippany Road
Morristown, New Jersey 07962-1983
Attention: Chief Counsel
Facsimile: 973-397-3165
Confirmation: 973-397-4189
if to the Pledgor to:
c/o Kamine Development Corp.
1545 Route 205
Bedminster, New Jersey 07921
Attention: Harold Kamine
Facsimile: 908-719-2211
Confirmation: 908-719-2200
20. AMENDMENTS, WAIVERS AND CONSENTS. No amendment or waiver of any
provision of this Pledge Agreement nor consent to any departure by the Pledgor
herefrom, shall in any event be effective unless the same shall be in writing
and signed by the Lender pursuant to the terms of the Amended and Restated Loan
Agreement and then such amendment, waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given.
21. NO STRICT CONSTRUCTION. The parties hereto have participated,
jointly in the negotiation and drafting of this Pledge Agreement. In the event
of any ambiguity or question of intent or interpretation arises, this Pledge
Agreement shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of authorship of any provisions of this Pledge Agreement.
22. SECTION HEADINGS. The section headings herein are for
convenience of reference only, and shall not affect in any way the
interpretation of any of the provisions hereof.
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<PAGE>
23. EXECUTION IN COUNTERPARTS. This Pledge Agreement may be executed
in any number of counterparts, each of which shall be an original, but all of
which shall together constitute one and the same agreement.
IN WITNESS WHEREOF, the Pledgor and the Lender have executed and
delivered this Pledge Agreement by their respective duly authorized officers as
of the 29th day of September, 1997.
KMC TELECOM HOLDINGS, INC.
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<PAGE>
By:
---------------------------
Title:
AT&T COMMERCIAL FINANCE CORPORATION
By:
---------------------------
Title:
<PAGE>
ACKNOWLEDGMENT
The undersigned hereby acknowledges receipt of a copy of the foregoing
Pledge Agreement, agrees promptly to note on its books the security interests
granted under such Pledge Agreement, and waives any rights or requirement at any
time hereafter to receive a copy of such Pledge Agreement in connection with the
registration of any Pledged Collateral in the name of the Lender or its nominee
or the exercise of voting rights by the Lender.
KMC TELECOM INC.
By:
---------------------------
Title:
<PAGE>
EXHIBIT A
to
PLEDGE AGREEMENT
dated as of September 29, 1997
PLEDGED STOCK CERTIFICATES
Percentage of Issued and Shares of Capital
Name of Outstanding Capital Stock Stock owned by Pledgor
Borrower owned by Pledgor Subject to Pledge
KMC Telecom Inc. 100% 123,800 Preferred Stock
627,670 Class A Common
Stock
<PAGE>
EXHIBIT B
to
PLEDGE AGREEMENT
dated as of September 29, 1997
FORM OF STOCK POWER
STOCK POWER
FOR VALUE RECEIVED, the undersigned does hereby sell, assign and
transfer to ________________________________________ 123,800 Shares of Preferred
Stock and 627,670 Shares of Class A Common Stock of KMC Telecom Inc., a Delaware
corporation, represented by Certificate Nos. PA-4 and A-9 (the "Stock"),
standing in the name of the undersigned on the books of said corporation and
does hereby irrevocably constitute and appoint ________________________ as the
undersigned's true and lawful attorney, for it and in its name and stead, to
sell, assign and transfer all or any of the Stock, and for that purpose to make
and execute all necessary endorsements or other acts of assignment and transfer
thereof; and to substitute one or more persons with like full power, hereby
ratifying and confirming all that said attorney or substitute or substitutes
shall lawfully do by virtue hereof.
Dated:
KMC TELECOM HOLDINGS, INC.
By:
--------------------------------
Title:
<PAGE>
STOCK POWER
FOR VALUE RECEIVED, the undersigned does hereby sell, assign and
transfer to ________________________________________ 123,800 Shares of Preferred
Stock and 627,670 Shares of Class A Common Stock of KMC Telecom Inc., a Delaware
corporation, represented by Certificate Nos. PA-4 and A-9(the "Stock"), standing
in the name of the undersigned on the books of said corporation and does hereby
irrevocably constitute and appoint ________________________________________ as
the undersigned's true and lawful attorney, for it and in its name and stead, to
sell, assign and transfer all or any of the Stock, and for that purpose to make
and execute all necessary endorsements or other acts of assignment and transfer
thereof; and to substitute one or more persons with like full power, hereby
ratifying and confirming all that said attorney or substitute or substitutes
shall lawfully do by virtue hereof.
Dated:
KMC TELECOM HOLDINGS, INC.
By:
--------------------------------
Title:
<PAGE>
Exhibit 10.6
EXECUTION COPY
PLEDGE AGREEMENT
This PLEDGE AGREEMENT ("PLEDGE AGREEMENT"), dated as of October 31,
1997, is executed by and between KMC Telecom Inc., a Delaware corporation (the
"PLEDGOR"), and AT&T Commercial Finance Corporation (the "LENDER").
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings given to such terms in the "Amended and Restated Loan
Agreement" (as defined below).
WITNESSETH:
WHEREAS, the Pledgor, KMC Telecom II, Inc. ("KMC II") and Lender have
entered into a certain Amended and Restated Loan and Security Agreement dated as
of September 22, 1997 (as amended, restated, supplemented or otherwise modified
from time to time, the "AMENDED AND RESTATED LOAN AGREEMENT"), pursuant to which
Lender has agreed, subject to certain conditions precedent, to make loans to the
Pledgor and KMC II from time to time;
WHEREAS, the Pledgor owns all of the issued and outstanding membership
interests of KMC Telecom Leasing I LLC, a Delaware limited liability company
("Leasing I"), and Pledgor will derive direct and indirect economic benefit from
the loans made to Leasing I under the Amended and Restated Loan Agreement;
WHEREAS, Pledgor and KMC II have requested Lender to amend the Amended
and Restated Loan Agreement to, INTER ALIA, add Leasing I and KMC Telecom
Leasing II LLC, a Delaware limited liability company ("Leasing II"), as
borrowers thereunder; and
WHEREAS, Lender has agreed to such request, provided, among other
things, that the Pledgor shall have granted a first priority security interest
in the "Pledged Collateral" (as hereinafter defined below) in order to secure
the prompt and complete payment, observance and performance of all of the
Pledgor's "Obligations" (as defined in the Amended and Restated Loan Agreement);
NOW, THEREFORE, in consideration of the premises set forth herein and
in order to induce the Lender to make additional loans, advances and other
financial accommodations under the Amended and Restated Loan Agreement, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Pledgor and the Lender hereby agree as follows:
1. PLEDGE. The Pledgor hereby pledges to the Lender, and grants to
the Lender a security interest in, the following (collectively, the "PLEDGED
COLLATERAL"):
<PAGE>
(a) all membership interests of Leasing I, now or at any time or
times hereafter owned by the Pledgor, whether or not such membership interests
are represented by certificates, and any certificates representing such
membership interests (as identified on EXHIBIT A attached hereto and made a part
hereof), all options and warrants for the purchase of the membership interests
of Leasing I now or hereafter held in the name of the Pledgor (all of said
membership interests, options and warrants and all membership interests held in
the name of the Pledgor as a result of the exercise of such options or warrants
being hereinafter collectively referred to as the "PLEDGED MEMBERSHIP
INTERESTS"), and all distributions, cash, instruments, investment property and
other property from time to time received, receivable or otherwise distributed
in respect of, or in exchange for, any or all of such membership interests;
(b) all additional membership interests of Leasing I from time to
time acquired by the Pledgor in any manner, whether or not such membership
interests are represented by certificates and the certificates representing such
additional membership interests (any additional membership interests shall
constitute part of the Pledged Membership Interests and shall be listed on
EXHIBIT A), and all options, warrants, distributions, cash, instruments,
investment property and other rights and options from time to time received,
receivable or otherwise distributed in respect of or in exchange for any or all
of such membership interests;
(c) the property and interests in property described in SECTION 3
below; and
(d) all proceeds of any of the foregoing.
2. SECURITY FOR THE OBLIGATIONS. The Pledged Collateral secures the
prompt payment, performance and observance of the Obligations.
3. PLEDGED COLLATERAL ADJUSTMENTS. If, during the term of this
Pledge Agreement:
(a) any distribution, reclassification, readjustment or other change
is declared or made in the capital structure of Leasing I, or any option
included within the Pledged Collateral is exercised, or both; or
(b) subscription warrants or any other rights or options shall be
issued in connection with the Pledged Collateral, then all new, substituted and
additional membership interests, warrants, rights, options, investment
properties or other securities, issued by reason of any of the foregoing, shall
be immediately delivered to and held by the Lender under the terms of this
Pledge Agreement and shall constitute Pledged Collateral hereunder; PROVIDED,
HOWEVER, that nothing contained in this SECTION 3 shall be deemed to permit any
distribution, issuance of additional membership interests, warrants, rights or
options, reclassification, readjustment or other change in the capital structure
of Leasing I which is not expressly permitted in the Amended and Restated Loan
Agreement.
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<PAGE>
4. SUBSEQUENT CHANGES AFFECTING PLEDGED COLLATERAL. The Pledgor
represents and warrants that it has made its own arrangements for keeping
informed of changes or potential changes affecting the Pledged Collateral
(including, but not limited to, rights to convert, rights to subscribe, rights
to distributions, reorganization or other exchanges, tender offers and voting
rights), and the Pledgor agrees that the Lender shall have no obligation to
inform the Pledgor of any such changes or potential changes or to take any
action or omit to take any action with respect thereto. The Lender may, after
the occurrence of an Event of Default, without notice and at its option,
transfer or register the Pledged Collateral or any part thereof into its or its
nominee's name with or without any indication that such Pledged Collateral is
subject to the security interest hereunder. In addition, the Lender may at any
time exchange certificates or instruments representing or evidencing Pledged
Membership Interests for certificates or instruments of smaller or larger
denominations.
5. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and
warrants as follows:
(a) the Pledgor is the sole legal and beneficial owner of one hundred
percent (100%) of the issued and outstanding membership interests of Leasing I,
free and clear of any Lien except for the security interest created by this
Pledge Agreement, and the second priority security interest created by the
Pledge Agreement (the "Junior Pledge") executed in favor of the Lender under
that certain Subordinated Loan and Security Agreement of September 22, 1997, as
amended, among the Lender, the Pledgor, KMC II, Leasing I and Leasing II;
(b) the Pledgor has full power and authority (corporate or otherwise)
to enter into this Pledge Agreement;
(c) there are no restrictions upon the voting rights associated with,
or upon the transfer of, any of the Pledged Collateral other than those created
by the Junior Pledge;
(d) the Pledgor has the right to vote, pledge and grant a security
interest in or otherwise transfer such Pledged Collateral free of any Liens
other than those created by the Junior Pledge;
(e) no authorization, approval, or other action by, and no notice to
or filing with, any governmental authority or regulatory body is required either
(i) for the pledge of the Pledgor's Pledged Collateral pursuant to this Pledge
Agreement or for the execution, delivery or performance of this Pledge Agreement
by the Pledgor or (ii) for the exercise by the Lender of the voting or other
rights provided for in this Pledge Agreement or the remedies in respect of the
Pledged Collateral pursuant to this Pledge Agreement (except as may be required
(x) in connection with such disposition by laws affecting the offering and sale
of securities generally and (y) by the FCC or any PUC); and
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<PAGE>
(f) the pledge of the Pledgor's Pledged Collateral pursuant to this
Pledge Agreement creates a valid and perfected first priority security interest
in such Pledged Collateral, in favor of the Lender, securing the payment and
performance of the Obligations; and
(g) to the extent that the Pledged Collateral consists of
uncertificated membership interests, Pledgor agrees to ensure that, pursuant to
Section 12A:8-408(7) of the New Jersey Uniform Commercial Code, at periodic
intervals no less frequent than annually and at any time upon reasonable written
request of the Lender, Leasing I shall send to the Lender a dated written
statement in the form of EXHIBIT B containing:
(i) A description of the issue of which the uncertificated security
is a part;
(ii) The name and address and any taxpayer identification number of
the Pledgor, as the registered owner;
(iii) The name and address and any taxpayer identification number of
Lender, as the registered pledgee;
(iv) The number of units subject to the pledge; and
(v) A notation of any liens and restrictions of the issuer and any
adverse claims (as to which the issuer has a duty under 12A:8-403(4)) to
which the uncertificated security may be subject or a statement that there
are none of those liens, restrictions, or adverse claims.
6. VOTING RIGHTS. During the term of this Pledge Agreement, and
except as provided in this SECTION 6 below, the Pledgor shall have the right to
exercise all membership rights associated with the Pledged Collateral and vote
the Pledged Membership Interests in a manner not inconsistent with the terms of
this Pledge Agreement, the Amended and Restated Loan Agreement and any other
agreement, instrument or document executed pursuant thereto or in connection
therewith. The Lender shall at the sole cost and expense of the Pledgor,
execute and deliver (or cause to be executed and delivered) to the Pledgor all
such proxies and other instruments the Pledgor may reasonably request for the
purpose of enabling such Pledgor to exercise the voting or other rights that it
is entitled to exercise. Subject to the provisions of SECTION 9(G), after the
occurrence and during the continuation of an Event of Default, the Lender may,
at the Lender's option and following written notice from the Lender to the
Pledgor, exercise all voting powers and membership rights pertaining to the
Pledged Collateral, and until all of the Obligations have been paid in full (in
cash), the Pledgor irrevocably constitutes and appoints Lender as the proxy and
attorney-in-fact of the Pledgor, with full power of substitution to exercise
such voting powers and membership rights; PROVIDED, HOWEVER that Lender will not
take any action pursuant to this Pledge Agreement which would constitute or
result in any assignment of a FCC or PUC license or any change of control of
Leasing I if such assignment or change of control would require under then
existing law (including the written rules and regulations
-4-
<PAGE>
promulgated by the FCC or any PUC), the prior approval of the FCC or any PUC,
without first obtaining such approval of the FCC or any PUC.
7. DISTRIBUTIONS.
(a) So long as no Event of Default shall have occurred and be
continuing:
(i) the Pledgor shall be entitled to receive and retain any and all
distributions in respect of the Pledged Collateral to the extent Leasing I
is permitted to make such payments under the Amended and Restated Loan
Agreement, PROVIDED, HOWEVER, that any and all
(A) distributions and interest paid or payable other than in
cash with respect to, and instruments and other property received,
receivable or otherwise distributed with respect to, or in exchange
for, any of the Pledged Collateral; and
(B) distributions paid or payable in cash with respect to any
of the Pledged Collateral on account of a partial or total liquidation
or dissolution or in connection with a reduction of capital, capital
surplus or paid-in surplus; or in redemption of, or in exchange for,
any of the Pledged Collateral;
shall be, and shall be forthwith delivered to the Lender to hold as,
Pledged Collateral and shall, if received by the Pledgor, be received in
trust for the Lender, be segregated from the other property or funds of the
Pledgor, and be delivered immediately to the Lender as Pledged Collateral
in the same form as so received (with any necessary endorsement); and
(ii) the Lender shall execute and deliver (or cause to be executed
and delivered) to the Pledgor all such proxies and other instruments as the
Pledgor may reasonably request for the purpose of enabling the Pledgor to
receive the distribution payments which it is authorized to receive and
retain pursuant to paragraph (i) above.
(b) Subject to the provisions of SECTION 9(G), after the occurrence
and during the continuation of an Event of Default:
(i) All rights of the Pledgor to receive the distributions which it
would otherwise be authorized to receive and retain pursuant to SECTION
7(A)(I) hereof shall cease, and all such rights shall thereupon become
vested in the Lender, which shall thereupon have the sole right to receive
and hold as Pledged Collateral such distributions;
(ii) all distributions which are received by the Pledgor contrary to
the provisions of paragraph (i) of this SECTION 7(B) shall be received in
trust for the Lender, shall be segregated from other funds of the Pledgor
and shall be paid over immediately to the
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<PAGE>
Lender as Pledged Collateral in the same form as so received (with any
necessary endorsements); and
(iii) the Pledgor shall, upon the request of the Lender, at Pledgor's
expense, use its best efforts to do or cause to be done all such other acts
and things as may be necessary to make the sale of the Pledged Collateral
or any part thereof valid and binding and in compliance with applicable
law. The Pledgor will reimburse the Lender for all expenses incurred by
the Lender in connection with the foreclosure on or sale of the Pledged
Collateral, including, without limitation, reasonable attorneys' and
accountants' fees and expenses in connection with any of the foregoing.
8. TRANSFERS AND OTHER LIENS. The Pledgor agrees that it will not
(i) sell or otherwise dispose of, or grant any option with respect to, any of
the Pledged Collateral without the prior written consent of the Lender, or (ii)
create or permit to exist any Lien upon or with respect to any of the Pledged
Collateral, except for the security interest under this Pledge Agreement and the
Junior Pledge.
9. REMEDIES.
(a) The Lender shall have, in addition to any other rights given
under this Pledge Agreement or by law, all of the rights and remedies with
respect to the Pledged Collateral of a secured party under the Uniform
Commercial Code as in effect in the State of New Jersey. In addition, after the
occurrence and during the continuation of an Event of Default, the Lender shall
have such powers of sale and other powers as may be conferred by applicable law.
With respect to the Pledged Collateral or any part thereof which shall then be
in or shall thereafter come into the possession or custody of the Lender or
which the Lender shall otherwise have the ability to transfer under applicable
law, the Lender may, in its sole discretion, without notice except as specified
below, after the occurrence and during the continuation of an Event of Default,
sell or cause the same to be sold at any exchange, broker's board or at public
or private sale, in one or more sales or lots, at such price as the Lender may
deem best, for cash or on credit or for future delivery, without assumption of
any credit risk, and the purchaser of any or all of the Pledged Collateral so
sold shall thereafter own the same, absolutely free from any claim, encumbrance
or right of any kind whatsoever. The Lender may, in its own name, or in the
name of a designee or nominee, buy the Pledged Collateral at any public sale
and, if permitted by applicable law, buy the Pledged Collateral at any private
sale. The Pledgor shall be liable to the Lender for all reasonable expenses
(including, without limitation, court costs and reasonable attorneys' and
paralegals' fees and expenses) of, or incident to, the enforcement of any of the
provisions hereof. The Lender agrees to distribute any proceeds of the sale of
the Pledged Collateral in accordance with the Amended and Restated Loan
Agreement.
(b) Unless any of the Pledged Collateral threatens to decline
speedily in value or is or becomes of a type sold on a recognized market, the
Lender will give the Pledgor reasonable notice of the time and place of any
public sale thereof, or of the time after which any private sale
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<PAGE>
or other intended disposition is to be made. Any sale of the Pledged Collateral
conducted in conformity with reasonable commercial practices of banks,
commercial finance companies, insurance companies or other financial
institutions disposing of property similar to the Pledged Collateral shall be
deemed to be commercially reasonable. Notwithstanding any provision to the
contrary contained herein, any requirements of reasonable notice shall be met if
such notice is received by the Pledgor as provided in SECTION 19 below, at least
five (5) Business Days before the time of the sale or disposition. Any other
requirement of notice, demand or advertisement for sale is waived, to the extent
permitted by law.
(c) In view of the fact that federal and state securities laws may
impose certain restrictions on the method by which a sale of the Pledged
Collateral may be affected after an Event of Default, the Pledgor agrees that
after the occurrence of an Event of Default, the Lender may, from time to time,
attempt to sell all or any part of the Pledged Collateral by means of a private
placement restricting the bidders and prospective purchasers to those who are
qualified and will represent and agree that they are purchasing for investment
only and not for distribution. In so doing, the Lender may solicit offers to
buy the Pledged Collateral, or any part of it, from a limited number of
investors deemed by the Lender, in its reasonable judgment, to be financially
responsible parties who might be interested in purchasing the Pledged
Collateral. If the Lender solicits such offers from not less than three (3)
such investors, then the acceptance by the Lender of the highest offer obtained
therefrom shall be deemed to be a commercially reasonable method of disposing of
such Pledged Collateral.
(d) In connection with the enforcement by the Lender of any
remedies available to the Lender as a result of any Event of Default, the
Pledgor agrees to, and to use its best efforts to cause Leasing I to join and
cooperate fully, in each case at the Lender's election, with the Lender, any
receiver referred to below and/or the successor bidder or bidders at any
foreclosure sale in a filing of an application (and furnishing any additional
information that may be required in connection with such application) with the
FCC, any PUC and all applicable federal, state and local governmental
authorities, requesting their prior approval of (i) the operation and/or
abandonment of all or any portion of any assets of Leasing I and/or (ii) the
transfer of control of Leasing I or any of its assets or assignment of all
licenses, certificates, authorizations, approvals and permits, issued to Leasing
I by the FCC, any PUC or any such authorities with respect to its assets and the
operation thereof. In connection with the foregoing, the Pledgor agrees to, and
agrees to use its best efforts to cause Leasing I to, take such further actions,
and execute all such instruments, as the Lender reasonably deems necessary or
desirable. The Pledgor agrees that the Lender may enforce any obligations of
the Pledgor as set forth in this Section by an action for specific performance.
(e) Notwithstanding any other provision of this Pledge Agreement to
the contrary, the exercise of any rights hereunder by the Lender that may
require FCC or any PUC approval shall be subject to obtaining such approval.
Pending obtaining FCC or such PUC approval the Pledgor will not do anything to
delay, hinder, interfere or obstruct the exercise of the Lender's rights
hereunder in obtaining such approvals.
-7-
<PAGE>
(f) In connection with the exercise of its remedies under this
Agreement, Lender may, upon the occurrence and during the continuation of an
Event of Default obtain the appointment of a receiver or trustee to assume, upon
receipt of all necessary judicial, FCC, PUC or other governmental authority,
consents or approvals, control of or ownership of any Pledged Collateral. Such
receiver or trustee shall have all rights and powers provided to it by law or by
court order or provided to Lender under this Pledge Agreement. Upon the
appointment of such trustee or receiver, the Pledgor agrees to cooperate, to the
extent necessary or appropriate, in the expeditious preparation, execution and
filing of an application to the FCC or any PUC for consent to the transfer of
control or assignment of Leasing I's Authorizations to the receiver or trustee.
(g) If an Event of Default has occurred and Lender demands payment of
the Obligations pursuant to SECTION 9.02 of the Amended and Restated Loan
Agreement, then Lender shall forebear from foreclosing on the Pledged Collateral
for five (5) Business Days following Lender's demand for payment of the
Obligations pursuant to SECTION 9.02 of the Amended and Restated Loan Agreement,
and if within such five (5) Business Day period the Pledgor or Borrower pays to
Lender all of the Obligations (without any Prepayment Premium) in cash, then
Lender shall return to Pledgor the Pledged Membership Interests, and this Pledge
Agreement shall terminate.
10. SECURITY INTEREST ABSOLUTE. All rights of the Lender and
security interests hereunder, and all obligations of the Pledgor hereunder,
shall be absolute and unconditional irrespective of:
(i) any lack of validity or enforceability of the Amended and
Restated Loan Agreement or any other agreement or instrument relating thereto;
(ii) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Obligations, or any other amendment or waiver
of or any consent to any departure from the Amended and Restated Loan Agreement;
(iii) any exchange, release or non-perfection of any other
collateral, or any release or amendment or waiver of or consent to departure
from any guaranty, for all or any of the Obligations; or
(iv) to the extent permitted by law, any other circumstance which
might otherwise constitute a defense available to, or a discharge of, the
Pledgor in respect of the Obligations or of this Pledge Agreement other than
indefeasible payment in full (in cash).
11. LENDER APPOINTED ATTORNEY-IN-FACT. The Pledgor hereby appoints
the Lender its attorney-in-fact, with full authority, in the name of the Pledgor
or otherwise, after the occurrence and during the continuation of an Event of
Default, from time to time in the Lender's discretion, to take any action and to
execute any instrument which the Lender may deem necessary or advisable to
accomplish the purposes of this Pledge Agreement, including, without
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<PAGE>
limitation, to receive, endorse and collect all instruments made payable to the
Pledgor representing any interest payment or other distribution in respect of
the Pledged Collateral or any part thereof and to give full discharge for the
same and to arrange for the transfer of all or any part of the Pledged
Collateral on the books of Leasing I to the name of the Lender or the Lender's
nominee.
12. WAIVERS. The Pledgor waives presentment and demand for payment
of any of the Obligations, protest and notice of dishonor or Event of Default
with respect to any of the Obligations and all other notices to which the
Pledgor might otherwise be entitled except as otherwise expressly provided
herein or in the Amended and Restated Loan Agreement.
13. TERM. This Pledge Agreement shall remain in full force and
effect until the Obligations have been fully and indefeasibly paid and satisfied
and the Amended and Restated Loan Agreement has terminated pursuant to its
terms. Upon the termination of this Pledge Agreement as provided above (other
than as a result of the sale of the Pledged Collateral), the Lender will release
the security interest created hereunder and will deliver the Pledged Membership
Interests to the Pledgor.
14. DEFINITIONS. The singular shall include the plural and vice
versa and any gender shall include any other gender as the context may require.
15. SUCCESSORS AND ASSIGNS. This Pledge Agreement shall be binding
upon and inure to the benefit of the Pledgor, the Lender and their respective
successors and assigns. The Pledgor's successors and assigns shall include,
without limitation, a receiver, trustee or debtor in possession of or for the
Pledgor.
16. APPLICABLE LAW; SEVERABILITY. THIS PLEDGE AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO
THE CONFLICT OF LAWS PROVISIONS) AND DECISIONS OF THE STATE OF NEW JERSEY.
Whenever possible, each provision of this Pledge Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but, if any
provision of this Pledge Agreement shall be held to be prohibited or invalid
under applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Pledge Agreement. Furthermore, if
any term or provision hereof is held to be inconsistent with the Communications
Act of 1934, as amended, 47 U.S.C. 151 et seq., or with the Rules and
Regulations of the FCC, or otherwise illegal, unenforceable or invalid for any
reason, such provision shall not affect the remainder hereof, and the parties
shall promptly cooperate in good faith to modify this Pledge Agreement, so as to
avoid any impairment of Lender's security interest in the Pledged Collateral.
17. FURTHER ASSURANCES. The Pledgor agrees that it will cooperate
with the Lender and will execute and deliver, or cause to be executed and
delivered, all such other powers, proxies, instruments and documents, and will
take all such other action, including, without
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<PAGE>
limitation, the filing of financing statements, as the Lender may reasonably
request from time to time in order to carry out the provisions and purposes of
this Pledge Agreement.
18. THE LENDER'S DUTY OF CARE. The Lender shall not be liable for
any acts, omissions, errors of judgment or mistakes of fact or law including,
without limitation, acts, omissions, errors or mistakes with respect to the
Pledged Collateral, except for those arising solely out of or solely in
connection with the Lender's (i) gross negligence or willful misconduct, or (ii)
failure to use reasonable care with respect to the safe custody of the Pledged
Collateral in the Lender's possession. Without limiting the generality of the
foregoing, the Lender shall be under no obligation to take any steps necessary
to preserve rights in the Pledged Collateral against any other parties but may
do so at its option. All expenses incurred in connection therewith shall be for
the sole account of the Pledgor, and shall constitute part of the Obligations
secured hereby.
19. NOTICES. All notices and other communications required or
desired to be served, given or delivered hereunder shall be made in the manner
prescribed by the Amended and Restated Loan Agreement and to the following
addresses, facsimile and telephone numbers:
if to the Lender, to
AT&T Capital Corporation/
Capital Markets Division
44 Whippany Road
Morristown, New Jersey 07962-1983
Attention: Vice President /Credit
Facsimile: 973-397-4368
Confirmation: 973-397-3333
with a copy to:
AT&T Capital Corporation/
Capital Markets Division
44 Whippany Road
Morristown, New Jersey 07962-1983
Attention: Chief Counsel
Facsimile: 973-397-3165
Confirmation: 973-397-4189
if to the Pledgor to:
c/o KMC Telecom Inc.
1545 Route 205
Bedminster, New Jersey 07921
Attention: President
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<PAGE>
Facsimile: 908-719-8775
Confirmation: 908-470-2100
20. AMENDMENTS, WAIVERS AND CONSENTS. No amendment or waiver of any
provision of this Pledge Agreement nor consent to any departure by the Pledgor
herefrom, shall in any event be effective unless the same shall be in writing
and signed by the Lender pursuant to the terms of the Amended and Restated Loan
Agreement and then such amendment, waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given.
21. NO STRICT CONSTRUCTION. The parties hereto have participated,
jointly in the negotiation and drafting of this Pledge Agreement. In the event
of any ambiguity or question of intent or interpretation arises, this Pledge
Agreement shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of authorship of any provisions of this Pledge Agreement.
22. SECTION HEADINGS. The section headings herein are for
convenience of reference only, and shall not affect in any way the
interpretation of any of the provisions hereof.
23. EXECUTION IN COUNTERPARTS. This Pledge Agreement may be executed
in any number of counterparts, each of which shall be an original, but all of
which shall together constitute one and the same agreement.
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<PAGE>
IN WITNESS WHEREOF, the Pledgor and the Lender have executed and
delivered this Pledge Agreement by their respective duly authorized officers as
of the 31st day of October, 1997.
KMC TELECOM INC.
By: /s/ Cynthia Worthman
-----------------------------------
Title: Chief Financial Officer
and Vice President
AT&T COMMERCIAL FINANCE CORPORATION
By: /s/ Edward W. Andrews, Jr.
-----------------------------------
Title: President
<PAGE>
ACKNOWLEDGMENT
The undersigned hereby acknowledges receipt of a copy of the foregoing
Pledge Agreement, agrees promptly to note on its books the security interests
granted under such Pledge Agreement, and waives any rights or requirement at any
time hereafter to receive a copy of such Pledge Agreement in connection with the
registration of any Pledged Collateral in the name of the Lender or its nominee
or the exercise of voting rights by the Lender.
KMC Telecom Leasing I LLC
By: /s/ Cynthia Worthman
-----------------------------------
Title: Chief Financial Officer
and Vice President
<PAGE>
EXHIBIT A
to
PLEDGE AGREEMENT
dated as of October 31, 1997
PLEDGED MEMBERSHIP INTERESTS
Percentage of Issued and
Outstanding Membership
Name of Borrower Interests Owned by Pledgor
KMC Telecom Leasing I LLC 100%
<PAGE>
EXHIBIT B
to
PLEDGE AGREEMENT
dated as of October 31, 1997
FORM OF STATEMENT OF UNCERTIFICATED SECURITIES
___________ __, 1997
AT&T Commercial Finance Corporation
44 Whippany Road
Morristown, New Jersey 01926-1983
Taxpayer Identification No.: 223545324
KMC Telecom Inc.
1545 Route 206, Suite 300
Bedminster, New Jersey 07921
Taxpayer Identification No.: 63-1143232
Re: Statement delivered pursuant to Section 12A:8-408(7) of the New
Jersey Commercial Code
Ladies and Gentlemen:
The undersigned, KMC Telecom Leasing I LLC ("Leasing I"), a Delaware
limited liability company, has caused the pledge of a 100% membership interest
in Leasing I (the "Pledged Membership Interests") by KMC Telecom Inc., a
Delaware corporation, in favor of AT&T Commercial Finance Corporation ("Lender")
to be registered on the books and records of Leasing I. Except for (i) the
pledge in favor of the Lender under the Amended and Restated Loan and Security
Agreement, dated as of September 22, 1997, as amended; (ii) the pledge in favor
of the Lender under the Subordinated Loan and Security Agreement, dated as of
September 22, 1997, as amended; and (iii) the terms and conditions contained in
the Limited Liability Company Agreement of Leasing I, to the knowledge of the
undersigned (including, without limitation, any information which may appear on
the undersigned's books and records), there are no liens, restrictions or
adverse claims to which the Membership Interests are or may be subject as of the
date hereof.
THIS STATEMENT IS MERELY A RECORD OF THE RIGHTS OF THE ADDRESSEE AS OF
THE TIME OF ISSUANCE. DELIVERY OF THIS STATEMENT, OF ITSELF, CONFERS NO RIGHTS
ON THE RECIPIENT. THIS STATEMENT IS NEITHER A NEGOTIABLE INSTRUMENT NOR A
SECURITY.
KMC TELECOM LEASING I LLC
By:
-----------------------------------
<PAGE>
EXHIBIT 10.7
GENERAL AGREEMENT
BETWEEN
KMC TELECOM INC.
AND
KMC TELECOM II, INC.
AND
LUCENT TECHNOLOGIES INC.
<PAGE>
Contract No.: LNM970313MP
TABLE OF CONTENTS
GENERAL AGREEMENT TERMS AND CONDITIONS
ARTICLE I GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . .1
1.1 HEADINGS AND DEFINITIONS:. . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 TERM OF AGREEMENT: . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.3 SCOPE: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1.4 PURCHASE AND SALE: . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1.5 ORDERS:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1.6 CHANGES IN CUSTOMER'S ORDERS:. . . . . . . . . . . . . . . . . . . . . . .4
1.7 PRICES:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
1.8 INVOICES AND TERMS OF PAYMENT: . . . . . . . . . . . . . . . . . . . . . .4
1.9 SHIPPING AND PACKING:. . . . . . . . . . . . . . . . . . . . . . . . . . .5
1.10 TAXES:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
1.11 TITLE AND RISK OF LOSS: . . . . . . . . . . . . . . . . . . . . . . . . .5
1.12 PURCHASE MONEY SECURITY INTEREST: . . . . . . . . . . . . . . . . . . . .6
1.13 WARRANTY: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
1.14 CHANGES IN PRODUCTS:. . . . . . . . . . . . . . . . . . . . . . . . . . .8
1.15 INFRINGEMENT: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
1.16 CUSTOMER'S REMEDIES:. . . . . . . . . . . . . . . . . . . . . . . . . . .9
1.17 USE OF INFORMATION: . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.18 LICENSE FOR LICENSED MATERIALS: . . . . . . . . . . . . . . . . . . . . 11
1.19 TITLE, RESTRICTIONS, AND CONFIDENTIALITY: . . . . . . . . . . . . . . . 11
1.20 EXPORT CONTROL: . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.21 DOCUMENTATION:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.22 CHANGES IN LICENSED MATERIALS:. . . . . . . . . . . . . . . . . . . . . 12
1.23 OPTIONAL SOFTWARE FEATURES: . . . . . . . . . . . . . . . . . . . . . . 12
1.24 ADDITIONAL PROVISIONS FOR PRODUCT SPECIFIC LICENSED MATERIALS:. . . . . 12
1.25 COMPATIBILITY OF SELLER'S PRODUCTS AND LICENSED MATERIALS:. . . . . . . 12
1.26 PUBLICITY:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.27 PUBLICATION OF AGREEMENT: . . . . . . . . . . . . . . . . . . . . . . . 13
1.28 NOTICES:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.29 CUSTOMER RESPONSIBILITY:. . . . . . . . . . . . . . . . . . . . . . . . 13
1.30 RIGHT OF ACCESS:. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.31 FORCE MAJEURE:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
<PAGE>
Contract No.: LNM970313MP
1.32 INDEPENDENT CONTRACTOR: . . . . . . . . . . . . . . . . . . . . . . . . 14
1.33 RELEASES VOID:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.34 SEVERABILITY: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.35 SURVIVAL OF OBLIGATIONS:. . . . . . . . . . . . . . . . . . . . . . . . 14
1.36 NON-WAIVER: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.37 ASSIGNMENT: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.38 TERMINATION OF ORDERS FOR CONVENIENCE:. . . . . . . . . . . . . . . . . 15
1.39 TERMINATION FOR BREACH: . . . . . . . . . . . . . . . . . . . . . . . . 16
1.40 APPLICABLE LAW: . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.41 ARBITRATION; NO WORK STOPPAGE:. . . . . . . . . . . . . . . . . . . . . 16
1.42 LIABILITY AND INDEMNIFICATION:. . . . . . . . . . . . . . . . . . . . . 16
1.43 INSURANCE:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1.44 COMPLIANCE WITH LAWS. . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE II ADDITIONAL PROVISIONS FOR LICENSED MATERIALS . . . . . . . . . . 17
5ESS SWITCH LICENSED MATERIALS . . . . . . . . . . . . . . . . . . . . . . . 18
2.1 ADDITIONAL RIGHTS IN SOFTWARE: . . . . . . . . . . . . . . . . . . . . . 18
2.2 RELATED DOCUMENTATION: . . . . . . . . . . . . . . . . . . . . . . . . . 18
TRANSMISSION SYSTEMS LICENSED MATERIALS. . . . . . . . . . . . . . . . . . . 19
2.3 DEFINITIONS: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.4 ADDITIONAL RIGHTS IN TRANSMISSION SYSTEMS SOFTWARE:. . . . . . . . . . . 19
2.5 INSTALLATION OF TRANSMISSION SYSTEMS SOFTWARE: . . . . . . . . . . . . . 19
ARTICLE III PROVISIONS APPLICABLE TO ENGINEERING, INSTALLATION, AND OTHER
SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.1 CONDITIONS OF INSTALLATION AND OTHER SERVICES PERFORMED ON CUSTOMER'S
SITE:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.2 ACCEPTANCE OF INSTALLATION:. . . . . . . . . . . . . . . . . . . . . . . 23
3.3 SITE PREPARATION:. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.4 WORK OR SERVICES PERFORMED BY OTHERS:. . . . . . . . . . . . . . . . . . 24
ARTICLE IV ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . 25
4.1 ENTIRE AGREEMENT:. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
<PAGE>
Contract No.: LNM970313MP
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
A-1.1 SCOPE OF APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . 26
A-1.2 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
A-1.3 CUSTOMER PURCHASE COMMITMENT. . . . . . . . . . . . . . . . . . . . . 27
A-1.4 TERMS OF DISCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . 27
A-1.5 NETWORK STANDARDIZATION . . . . . . . . . . . . . . . . . . . . . . . 27
A-1.6 CUSTOMER FORECASTS. . . . . . . . . . . . . . . . . . . . . . . . . . 28
A-1.7 PRICING PLAN FOR 5ESS-Registered Trademark--2000 PRODUCTS . . . . . . 28
A-1.8 PRICING PLAN FOR 5ESS-Registered Trademark--2000 CDX/VCDX SWITCH SOFTWARE
RELEASES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
A-1.9 5ESS-Registered Trademark--2000 SWITCH TRAINING INCENTIVE . . . . . . 29
A-1.10 INVENTORY CONTROL PROVISIONS FOR 5ESS-Registered Trademark--2000
SWITCHES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
A-1.11 CUSTOMER SUPPORT . . . . . . . . . . . . . . . . . . . . . . . . . . 30
A-1.12 TECHNICAL SUPPORT OF 5ESS-Registered Trademark--2000 SWITCH
PRODUCTS AND LICENSED MATERIALS. . . . . . . . . . . . . . . . . . . 30
A-1.13 5ESS SWITCH DOCUMENTATION. . . . . . . . . . . . . . . . . . . . . . 30
A-1.14 MAINTENANCE SERVICE FOR 5ESS SWITCH SOFTWARE . . . . . . . . . . . . 30
A-1.15 PRICING PLAN FOR TRANSMISSION SYSTEMS. . . . . . . . . . . . . . . . 31
A-1.15.1 PRICING PLAN FOR DACS IV-2000 SYSTEMS . . . . . . . . . . . . . . . 31
A-1.16 TRANSMISSION TRAINING INCENTIVE. . . . . . . . . . . . . . . . . . . 32
A-1.17 PRICING PLAN FOR POWER PLANT SYSTEMS . . . . . . . . . . . . . . . . 33
A-1.18 CONTINUING PRODUCT SUPPORT -- PARTS AND SERVICES . . . . . . . . . . 33
A-1.19 PRODUCT AVAILABILITY . . . . . . . . . . . . . . . . . . . . . . . . 33
A-1.20 PROMOTIONAL SUPPORT. . . . . . . . . . . . . . . . . . . . . . . . . 33
A-1.21 FUTURE CONSIDERATIONS. . . . . . . . . . . . . . . . . . . . . . . . 34
Schedule 1 MARKETING DEVELOPMENT FUND GUIDLINES 11/1/96. . . . . . . . . . 35
<PAGE>
Contract No.: LNM970313MP
GENERAL AGREEMENT TERMS AND CONDITIONS
ARTICLE I
GENERAL PROVISIONS
This General Agreement Number LNM970313MP (hereinafter "General Agreement" or
"Agreement") is made by and between KMC Telecom Inc. and KMC Telecom II, Inc.,
each a Delaware corporation, with offices located at 1545 Route 206, Suite 300,
Bedminster, NJ 07921 (hereinafter collectively referred to as "Customer"), and
Lucent Technologies Inc., a Delaware corporation with offices located at 600
Mountain Ave., Murray Hill, New Jersey 07974 (hereinafter "Seller").
WHEREAS, Seller is an experienced and reputable company engaging in the business
of designing, manufacturing, selling and installing telecommunications switching
systems for use in local communications networks, including related software and
hardware, and providing related pre- and post-sales service including, without
limitation, the Products, Licensed Materials, and Services (each as defined
below); and
WHEREAS, Customer wishes to engage Seller to provide the Products, Licensed
Materials and Services described herein which Customer will use to deliver
digital local telephone service in designated markets in the United States to be
serviced by Customer; and
WHEREAS, pending negotiation of this General Agreement, for the limited purpose
of implementing the sale and/or licensing, as appropriate, of certain equipment
and software during the period prior to the finalization of this General
Agreement, Customer and Seller entered into a certain interim General Agreement
Number LMN970205RPKMC effective March 6, 1997 ("Interim General Agreement")
whereby Seller agreed to supply and Customer agreed to procure certain products
and services; and
WHEREAS, Customer and Seller desire to enter into this General Agreement to
supersede in its entirety the Interim General Agreement,
NOW THEREFORE, in consideration of the mutual promises hereinafter set forth and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties agree as follows:
1.1 HEADINGS AND DEFINITIONS:
All headings used in this Agreement are inserted for convenience only and
are not intended to affect the meaning or interpretation of this Agreement or
any clause. For the purpose of this Agreement, the following definitions will
apply:
(a) "Affiliate" of a corporation means its Subsidiaries, any company of which
it is a Subsidiary, and other Subsidiaries of such company;
(b) "Customer Price List" means Seller's published "Ordering and Price Guides"
or other price notification releases furnished by Seller for the purpose of
communicating Seller's prices or pricing related information to Customer,
however, this does not include firm price quotations;
(c) "Designated Processor" means the Product for which a license to Use
Licensed Materials is granted;
(d) "Firmware" means a combination of (1) hardware and (2) Software represented
by a pattern of bits contained in such hardware;
(f) "Hazardous Materials" means material designated as a "hazardous chemical
substance or mixture" pursuant to Section 6 of the Toxic Substance Control
Act; a "hazardous material" as defined in the Hazardous
Lucent Technologies Proprietary
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<PAGE>
Contract No.: LNM970313MP
Materials Transportation Act (49 U.S.C. 1801, et seq.); "hazardous
substance" as defined in the Occupational Safety and Health Act Hazard
Communication Standard (29 CFR 1910.1200);
(g) "Licensed Materials" means the Software and Related Documentation for which
licenses are granted by Seller under this Agreement; no Source Code
versions of Software are included in Licensed Materials;
(h) "Product" means systems, equipment, hardware and parts thereof, but the
term does not mean Software whether or not such Software is part of
Firmware;
(i) "Related Documentation" means materials useful in connection with Software
such as, but not limited to, flowcharts, logic diagrams and listings,
program descriptions and Specifications; no Source Code versions of
Software are included in Related Documentation;
(j) "Seller's Manufactured Product" means a Product manufactured by Lucent
Technologies Network Systems Group or purchased by it pursuant to its
procurement specifications (e.g., KS or AT);
(k) "Services" means the performance of work and includes but is not limited
to: (1) engineering services such as preparation of equipment
specifications, preparation and updating office records, and preparation of
a summary of material not specifically itemized in an order; (2)
installation services such as installation, equipment removal, and cable
mining; and (3) other services such as maintenance and repairs, and
Customer personnel training, performed by Seller under this Agreement, but
for the purposes of this Agreement the term "Services" does not include any
services provided by the Professional Services Division of Seller's Network
Systems Group unless otherwise expressly agreed to in writing by the
parties;
(l) "Software" means a computer program consisting of a set of logical
instructions and tables of information which guide the functioning of a
processor; such program may be contained in any medium whatsoever,
including hardware containing a pattern of bits representing such program,
but the term "Software" does not mean or include such medium;
(m) "Source Code" means any version of Software incorporating high-level or
assembly language that generally is not directly executable by a processor;
(n) "Specifications" means Seller's or its vendor's technical specifications
for particular Products or Software furnished hereunder, or customized
specifications Seller has agreed to under the terms of this Agreement to
design for Customer;
(o) "Subsidiary" of a company means a corporation the majority of whose shares
or others securities entitled to vote for election of directors is now or
hereafter owned or controlled by such company either directly or
indirectly; but such corporation shall be deemed to be a Subsidiary of such
company only as long as such ownership or control exists;
(p) "United States" means the United States of America and all of its
territories and possessions, and
(q) "Use" with respect to Licensed Materials means loading the Licensed
Materials, or any portion thereof, into a processor for execution of the
instructions and tables contained in such Licensed Materials.
1.2 TERM OF AGREEMENT:
The term of this General Agreement shall be effective (and relate back to
in all respects) March 6, 1997 (the "Effective Date") which was also the
effective date of the Interim General Agreement and, except as otherwise
provided herein, shall continue in effect hereafter for a period of three (3)
years (hereinafter, the Term). The parties will meet not less than six (6)
months prior to the end of the Term to discuss extending the term hereof. This
General
Lucent Technologies Proprietary
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Contract No.: LNM970313MP
Agreement may be terminated at any time by either party, without cause, upon at
least sixty (60) days prior written notice to the other party.
1.3 SCOPE:
This Agreement shall replace and supersede the Interim General Agreement in
its entirety. Upon execution of this Agreement, the Interim General Agreement
shall be of no further force and effect and any transactions between the parties
with respect to the subject matter hereof and thereof shall be governed by this
Agreement. The terms of this General Agreement shall apply to all transactions
in which Seller furnishes Products, Licensed Materials, or Services (excluding
Operations Systems Products and related Licensed Materials) provided by its
Network Systems Group to Customer. Purchase orders placed under this General
Agreement for Seller's 5ESS-Registered Trademark--2000 Switch Products,
Transmission Systems Products, Power Systems Products and related Licensed
Materials shall be governed by the terms set forth in Appendix A attached hereto
and made a part hereof. By virtue of placing orders with Seller or using any
Products, Licensed Materials, or Services provided hereunder, Customer agrees to
be bound to the terms set forth in this General Agreement respecting such
Products, Licensed Materials, or Services. All Products, Licensed Materials, or
Services furnished by Seller to Customer pursuant to this General Agreement
shall be for Customer's own internal use and not for resale unless authorized
representatives of both parties expressly agree in writing that the terms and
conditions of this General Agreement, modified where applicable, shall apply to
resale transactions.
As an independent contractor with overall responsibility as provider under
this Agreement, Seller will design, manufacture, and install and mechanically
test, if applicable, the Product(s) and Licensed Materials ordered hereunder
within the time frames agreed to by the parties for the applicable purchase
order. As each purchase order is agreed upon for one or more Products and/or
Licensed Materials, the parties will agree on a schedule for the delivery and
installation, if applicable, for such Product(s) and/or Licensed Materials.
Seller will provide to Customer a copy of such schedule for each purchase order.
The terms and conditions of this Agreement shall apply to Seller's
provision of the Services defined in clause 1.1 DEFINITIONS of this Agreement.
Upon its execution, the Professional Services Agreement Number LNS970602JC,
between the parties will govern the terms and conditions of the additional
services identified in the Scope of Work of such Agreement, if required by
Customer from Seller.
1.4 PURCHASE AND SALE:
Seller will sell, and Customer will purchase and/or license, as
appropriate, the Products, Licensed Materials and Services set forth in Appendix
A available for purchase under this Agreement at the prices and/or discounts set
forth therein (subject to change in accordance with clause 1.7), and in
accordance with the terms and conditions hereof. All firm price quotes made by
Seller to Customer shall incorporate the terms and conditions of this General
Agreement. Any conflicting terms and conditions of a firm price quote, which
have been duly signed by an authorized representative of each of Seller and
Customer, will supersede the comparable terms of this General Agreement, but
solely with respect to the items subject to such firm price quote.
1.5 ORDERS:
All orders submitted by Customer for Products, Licensed Materials, and
Services shall be deemed to incorporate and be subject to the terms and
conditions of this Agreement. Any order submitted pursuant to a firm price
quotation shall reference and include such firm price quotation number. All
orders shall contain the information regarding the Products, Licensed Materials
and Services reasonably necessary for Seller to fill the order. All schedules
and requested dates are subject to Seller's reasonable concurrence. Upon
agreement by the parties as to a schedule for delivery and installation, if
applicable, Seller will provide a copy of such schedule to Customer. All orders
are subject to acceptance by Seller in accordance with this Agreement. Such
acceptance will not be unreasonably withheld or delayed. Seller reserves the
right to place any order on hold, delay shipment, and/or reject
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any order throughout the occurrence and continuation of any of the following:
(i) Customer being in default of its payment obligations under this Agreement;
(ii) in the event Customer shall not have in place a financing commitment having
available credit equal to the amount of such orders; or (ii) Seller has provided
Customer with a notice of a material breach under this Agreement which remains
uncured after any applicable cure period. In all other cases in which there is
a foreseeable delay, Seller will promptly notify Customer of such delay and its
reason.
1.6 CHANGES IN CUSTOMER'S ORDERS:
Changes by Customer to an accepted order shall be treated as a separate
order unless the parties expressly agree otherwise. If any such change
materially affects Seller's ability to meet its obligations under the original
order, any price (or discount, if applicable), shipment date or Services
completion date quoted by Seller relating to the parts of the original order so
affected is subject to change, and shall be negotiated between the parties to
accommodate the additional work required or inconvenience encountered.
1.7 PRICES:
To the extent Customer's order is subject to a firm price quotation made by
Seller, prices, fees and charges (hereinafter "prices") shall be as set forth in
Seller's firm price quotation. In all other cases, prices shall be as set forth
in Seller's Customer Price Lists. As of the Effective Date of this Agreement,
Customer's prices and/or discounts for Seller's 5ESS-Registered Trademark--2000
Switch Products, Transmission Systems Products, Power Systems Products and
related Licensed Materials shall be as set forth in Appendix A attached hereto.
Engineering, installation and related Services provided under this Agreement
will be quoted by Seller in a firm price quotation on a case by case basis. In
those cases where the price is to be determined from a Customer Price List, the
applicable Price List shall be the issue which is in effect on the date of
Seller's receipt of the order provided that the shipment or Services
commencement date is in accordance with Seller's published shipping or planning
interval or thirty (30) days from the date of order receipt, whichever is
longer. Prices for Products or Services to be shipped or performed beyond the
published shipping interval will be established by determining an effective
order entry date (the date required for order entry by Seller in accordance with
Customer's requested date) and applying the price from the applicable Customer
Price List as of that date. Seller may amend its prices, other than those
subject to firm price quotations, and, except when applicable prices are
adjusted for changes in raw material prices and agrees to provide thirty (30)
days written notice of any increase in prices contained in Seller's Customer
Price Lists. When prices contained in Seller's Customer Price Lists are adjusted
for changes in raw material prices, Seller's new prices will be revised
effective the first day of any given month. The basis for raw material
adjustments will be provided to Customer upon request. Notwithstanding the
foregoing, if Seller is delayed from completion of an order due to any change
requested by Customer or as a result of Customer's delay in furnishing
reasonably necessary information or in performing its material obligations under
this Agreement, prices are subject to change. Unless expressly stated in
writing, Seller's prices are exclusive of charges for transportation and related
Services such as hauling and hoisting, and any sales or other tax or duty which
Seller may be required to collect or pay upon the ordered transaction. Seller,
in accordance with its normal practices, will arrange for prepaid
transportation, if appropriate, and invoice transportation charges back to
Customer. Premium transportation will be used only with Customer's concurrence.
1.8 INVOICES AND TERMS OF PAYMENT:
(a) For Products, Licensed Materials, and Services ordered by Customer on an
engineer, furnish and install (EF&I) basis, Seller shall invoice the total
amount due for Products and Licensed Materials for each such purchase order upon
the main shipment of such Products and Licensed Materials. Seller shall invoice
Customer the full amount due for engineering, installation and other Services
when Seller submits its notice of completion of installation or as soon
thereafter as practicable.
(b) In all other cases (i.e., not subject to subsection (a) above), Products
and/or Licensed Materials (including transportation charges and taxes, if
applicable) will be invoiced by Seller when shipped, or as soon thereafter as
practicable. Engineering for such Products and/or Licensed Materials will be
invoiced upon main shipment of
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Products. Installation and other Services will be invoiced as performed or as
soon thereafter as practical. Payments for all such invoices furnished by Seller
under subsections (a) or (b) of this clause 1.8 shall be made by Customer in
accordance with paragraph (c) below.
(c) Customer shall pay such invoiced amounts, less any disputed items, for
receipt by Seller within thirty (30) days of the invoice date; provided,
however, that with respect to invoices for the Services described in subsection
(a) above, if Customer notifies Seller in writing within the aforesaid thirty
(30) day payment period that the installed Products or Licensed Materials do not
perform as required for acceptance under Article 3.2 and said notice describes
in reasonable detail the nature of such non-performance (a "Deficiency Notice"),
then the thirty (30) day payment period for such invoices shall be extended for
that period of time which elapses between the date of the Deficiency Notice and
Seller's correction of the non-performance specified in the Deficiency Notice.
Delinquent payments are subject to a late payment charge at the rate of one and
one-half percent (1-1/2%) per month, or portion thereof, of the amount due (but
not to exceed the maximum lawful rate). If the claim is not resolved in favor of
Customer, then the item will be due for payment based upon the original invoice
date. Customer shall notify Seller of any disputed invoice within thirty (30)
days from the date of the invoice. Seller may apply any credit which remains
outstanding in favor of Customer to the oldest undisputed invoice which remains
in Customer's portfolio. Customer agrees to pay Seller's reasonable attorneys'
fees and other direct costs incurred by Seller in the collection of any amounts
past due hereunder.
1.9 SHIPPING AND PACKING:
Seller shall, at no additional charge, pack Products in accordance with its
standard practices for domestic shipments. Where, in order to meet Customer's
requests, Seller packs Products in other than its normal manner for domestic
shipment, Customer shall pay Seller's additional charges for such packing. No
packaging shall be returnable unless expressly stated as such to Customer prior
to delivery. Customer shall not be responsible for the state of any returnable
packaging relating to materials to be installed by Seller.
1.10 TAXES:
Customer shall be liable for and shall reimburse Seller for all taxes and
related charges, however designated, (excluding taxes on Seller's net income)
imposed upon or based upon the provision, sale, license or use of Products,
Licensed Materials or Services (if applicable). Such taxes shall be separately
listed on the invoice. Seller shall not collect the otherwise applicable state
sales tax if the front of Customer's order indicates that the purchase or
license is exempt from Seller's collection of such tax and a valid tax exemption
certificate is furnished by Customer to Seller. Seller's failure to collect
taxes in accordance herewith shall not be deemed to be an authorization to
resell Products or Services or sublicense Licensed Materials.
1.11 TITLE AND RISK OF LOSS:
Title (except as provided in the clauses USE OF INFORMATION and TITLE,
RESTRICTIONS, AND CONFIDENTIALITY) and risk of loss to Products and Licensed
Materials shall pass to Customer upon Delivery to the Customer. Customer shall
notify Seller promptly of any claim with respect to loss which occurs while
Seller has the risk of loss and shall cooperate in every reasonable way to
facilitate the settlement of any claim. For purposes of this clause, "Delivery"
shall mean the earliest of the point at which Seller or Seller's supplier or
agent turns over possession of the Product or Licensed Materials to Customer,
Customer's employee, Customer's designated carrier, Customer's warehouse,
Customer's designated site including Seller's staging site, or other Customer's
agent and not necessarily the final destination shown on the order.
1.12 PURCHASE MONEY SECURITY INTEREST:
Seller reserves and Customer agrees that Seller shall have a purchase money
security interest in Products or Licensed Materials furnished under this
Agreement until such time as Seller has been paid in full. Customer shall
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promptly execute and deliver UCC-1 financing statements and such other documents
prepared by Seller so that Seller may perfect its security interest, and Seller
shall prepare, execute and promptly file all UCC-1 financing statements, and the
necessary UCC-3 termination statements upon the effectuation of the applicable
payments. The preparation and filing of all such financing statements shall be
at the expense of Seller. Seller agrees to cooperate with Customer's lending
institutions in order to meet the respective collateral security requirements of
such institutions under the applicable financing documents, provided that no
such security requirements shall subordinate Seller's purchase money security
interest.
1.13 WARRANTY:
Seller warrants to Customer only, that (i) upon shipment Seller's
Manufactured Products (exclusive of Software) will be free from defects in
material and workmanship and will conform to Seller's Specifications for such
Products; (ii) upon shipment Software developed by Seller will be free from
those defects which materially affect performance in accordance with Seller's
Specifications, it being understood from the foregoing that the Software, as
such, will not necessarily run uninterrupted or error free but will have the
basic functionality required for the Products to function for their intended
purposes; and (iii) Services will be performed in a workmanlike manner and in
accordance with good usage and accepted practices in the community in which
Services are provided. With respect to Products or Software or partial assembly
of Products furnished by Seller but neither manufactured by Seller nor purchased
by Seller pursuant to its procurement specifications ("Vendor Items"), Seller
does hereby assign to Customer the warranties given to Seller by its vendor(s)
of such Vendor Items to the fullest extent permitted by such warranties.
SELLER'S MANUFACTURED PRODUCTS ,SOFTWARE AND SERVICES
WARRANTY PERIOD(1)
BASE PERIOD REPAIRED
NEW PRODUCT OR
PRODUCT(2) PART(3)
5ESS-Registered Trademark--2000
Switch Products (hardware only) 24 Months 6 Months
Central Office Power Equipment 24 Months 6 Months
Transmission Systems Products:
- - All Transmission Products in the "2000
Product Family" 60 Months 6 Months
- DACS-IV 2000 60 Months 6 Months
- FT-2000 OC-48 60 Months 6 Months
- DDM-2000 OC-3/OC-12 60 Months 6 Months
- DDM-2000 FiberReach 60 Months 6 Months
- SLC 2000 Access System 60 Months 6 Months
- SLC 2000 MSDT 60 Months 6 Months
- - SLC 96 Circuit Packs 60 Months 6 Months
- - SLC Series 5 Circuit Packs 60 Months 6 Months
- - T1 Repeaters 60 Months 6 Months
- - DDM-1000 Circuit Packs 60 Months 6 Months
- - DACS II Systems (hardware) 24 Months 6 Months
Other Transmission Products (i.e., DDM Plus, Repeater
Cases) 24 Months 6 Months
Processors Other than in Switch Systems 3 Months 2 Months
Network Cable Systems Products 12 Months 3 Months
All Other Products 2 Months 2 Months
5ESS-Registered Trademark--2000 Switch Software 12 Months 6 Months
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SELLER'S MANUFACTURED PRODUCTS ,SOFTWARE AND SERVICES
WARRANTY PERIOD(1)
BASE PERIOD REPAIRED
NEW PRODUCT OR
PRODUCT(2) PART(3)
All Transmission Software in
the "2000 Product Family" 12 Months 6 Months
Transmission Systems Software 12 Months 6 Months
All Other Software 3 Months 1 Month
1 The term "Warranty Period" means the period of time listed above which,
unless otherwise stated, commences two (2) weeks from the date of shipment of
Products or Software, or if installed by Seller, on acceptance by Customer, or
thirty (30) days from the date Seller submits its notice of completion of its
installation, whichever is sooner. With respect to Products and Software
installed by Seller, if Customer delivers to Seller a Deficiency Notice (as such
term is defined in Section 1.8(c) hereof) within thirty (30) days from the date
of Seller's notice of completion of installation, then the Warranty Period for
the non-performing Products and Software specified in the Deficiency Notice
shall commence upon Seller's correction of the non-performance. The Warranty
Period for engineering and installation Services is six (6) months which
commences on the date the Services are completed.
2 The Warranty Period for Products ordered for use in systems is that of the
initial systems or equipment except as may be otherwise noted.
3 The Warranty Period for a Product or part thereof repaired or replaced under
this Warranty is the period listed or the unexpired term of the new Product
Warranty Period, whichever is longer.
If, under normal and proper use, a defect or deficiency appears in Seller's
Manufactured Products or Software during the applicable Warranty Period and
Customer promptly notifies Seller in writing of such defect or deficiency and
follows Seller's reasonable instructions regarding return of defective or
deficient Product or Software, Seller will first attempt to repair, replace or
correct the same without charge at its manufacturing or repair facility and if
such efforts to repair or replace are unsuccessful, Seller shall provide a
refund or credit based on the original purchase price or license fee. With
respect to Seller's efforts to repair or replace in accordance with the
preceding sentence, Seller agrees to commence such efforts promptly and to
proceed diligently to effectuate such repairs and replacements as soon as
practicable. If engineering or installation Services prove not to be performed
as warranted within a six (6) month period commencing on the date of completion
of the Services, Seller will first attempt to correct the defect or non-
conforming Services and if such efforts to correct the defect or Service are
unsuccessful, Seller shall render a full or pro-rated refund or credit based on
the original charges for the Services. With respect to Seller's efforts to
correct a defect or non-conforming Service in accordance with the preceding
sentence, Seller agrees to commence such correction promptly and to proceed
diligently to effectuate such correction as soon as practicable. No Product or
Software will be accepted for repair or replacement without the written
authorization of and in accordance with instructions of Seller. Removal and
reinstallation expenses as well as transportation expenses associated with
returning such Product or Software to Seller shall be borne by Customer. Seller
shall pay the costs of transportation of the repaired or replacing Product or
Software to the destination designated by Customer (within the United States).
If Seller determines through reasonable investigation that returned Product or
Software is not defective, Customer shall pay Seller's costs of handling,
inspecting, testing and transportation and, if applicable, reasonable and
necessary travel and related expenses. In repairing or replacing any Product,
part of Product, or Software medium under this warranty, Seller may use either
new or remanufactured, reconditioned, refurbished or functionally equivalent
Products or parts which are "equivalent to new". Products or parts returned to
Seller following replacement by Seller shall become Seller's property.
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With respect to Seller's Manufactured Products which Seller has ascertained are
not readily returnable for repair, Seller, at its option, may elect to repair or
replace the Products at Customer's site. Customer, at its expense, shall make
the Products accessible for repair or replacement and restore the site after
Seller has completed its repairs or replacement; provided, however, that Seller
shall be responsible for any damage caused by Seller to the site which was not
expected or necessary to effectuate such repair or replacement.
Seller makes no warranty with respect to defective conditions or
non-conformities resulting solely from the following: Customer's modifications,
misuse, neglect, accident or abuse; improper wiring, repairing, splicing,
alteration, installation, storage or maintenance by Customer or Customer's
employees, agents or contractors; use in a manner not in accordance with
Seller's or its vendor's Specifications, or operating instructions or failure of
Customer to apply previously applicable Seller's modifications or corrections.
In addition, Seller makes no warranty with respect to Products which have had
their serial numbers or month and year of manufacture intentionally removed,
altered and with respect to expendable items, including, without limitation,
fuses, light bulbs, motor brushes and the like. No warranty is made that
Software will run uninterrupted or error free, and in addition Seller makes no
warranty with respect to defects related to Customer's data base errors unless
such errors are the fault of Seller.
THE FOREGOING WARRANTIES ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER EXPRESS AND
IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE. CUSTOMER'S SOLE AND EXCLUSIVE REMEDY SHALL
BE SELLER'S OBLIGATION TO REPAIR, REPLACE, CREDIT, OR REFUND AS SET FORTH ABOVE
IN THIS WARRANTY. THIS EXCLUSIVE REMEDY SHALL NOT LIMIT CUSTOMER'S RIGHT TO
BRING AN ACTION FOR BREACH OF CONTRACT (INCLUDING BREACH OF THIS WARRANTY).
1.14 CHANGES IN PRODUCTS:
Prior to shipment, Seller may at any time make changes in Products or modify
the drawings and Specifications relating thereto or substitute Products of later
design, provided the changes, modifications or substitutions under normal and
proper use do not impact negatively upon quality, form, fit, or function of an
ordered Product as provided in Seller's Specifications. With respect to changes,
modifications, and substitutions which do affect the quality, form, fit, or
function of an ordered Product, Seller shall notify Customer in writing thirty
(30) days prior to their effective dates. In the event any such change is not
desired by Customer, Customer shall notify Seller within thirty (30) days from
the date of notice and Seller shall not furnish any such changed Products to
Customer on any orders in process at the time Seller is so notified.
1.15 INFRINGEMENT:
In the event of any claim, action, proceeding or suit by a third party
against Customer alleging an infringement of any United States patent, United
States copyright, or United States trademark, or a violation in the United
States of any trade secret or proprietary rights by reason of the use, in
accordance with this Agreement, of any Product or Licensed Materials furnished
by Seller to Customer under this Agreement, Seller, at its expense, will
indemnify, hold harmless and defend Customer, subject to the conditions and
exceptions stated below. Seller will reimburse Customer for any reasonable cost,
expense or attorneys' fees, incurred by Customer prior to Seller's full active
assumption, with reputable counsel reasonably acceptable to Customer, of the
defense of any such claim, and will indemnify Customer against any liability
assessed against Customer by (a) final judgment by a competent court on account
of such infringement or violation arising out of such use or (b) appealable
judgment by a competent court on account of such infringement or violation
arising out of such use in the event Seller elects not to pursue an appeal.
Following Seller's assumption of any such defense, Customer may participate in
any such defense with counsel of Customer's own choosing and at Customer's
expense provided Customer's counsel does not interfere with such defense.
If Customer's use shall be enjoined or in Seller's reasonable opinion is likely
to be enjoined, Seller will, at its expense and at its option, either (1)
replace the enjoined Product or Licensed Materials furnished pursuant to this
Agreement
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with a suitable substitute free of any infringement; (2) modify it so that it
will be free of the infringement; or (3) procure for Customer a license or other
right to use it. If none of the foregoing options are practical despite the
exercise by Seller of commercially reasonable best efforts to effectuate option
(1), (2), or (3) above, Seller will remove the enjoined Product or Licensed
Materials and refund to Customer any amounts paid to Seller therefor.
Customer shall give Seller prompt written notice of all such claims, actions,
proceedings or suits alleging infringement or violation and Seller shall have
full and complete authority to assume the sole defense thereof, including
appeals, and to settle same, provided that such settlement does not materially
impair Customer's rights to use the Products and Licensed Materials provided
under and in accordance with this Agreement in any respect. Customer shall, upon
Seller's request and at Seller's expense, furnish all information and assistance
available to Customer and cooperate in every reasonable way to facilitate the
defense and/or settlement of any such claim, action, proceeding or suit.
No undertaking of Seller under this clause shall extend to any such alleged
infringement or violation to the extent that it: (1) arises from adherence to
design modifications, specifications, drawings, or written instructions which
Seller is directed by Customer to follow, but only if such alleged infringement
or violation does not reside in corresponding commercial Product or Licensed
Materials of Seller's design or selection; or (2) arises from adherence to
instructions to apply Customer's trademark, trade name or other company
identification; or (3) resides in a product or licensed materials which are not
of Seller's origin and which are furnished by Customer to Seller for use under
this Agreement; or (4) relates to uses of Product or Licensed Materials provided
by Seller in combinations with other Product or Licensed Materials, furnished
either by Seller or others, which combination was not installed, recommended or
otherwise approved by Seller. In the foregoing cases numbered (1) through (4),
Customer will defend and save Seller harmless, subject to the same terms and
conditions and exceptions stated above, with respect to the Seller's rights and
obligations under this clause; provided, however, that Customer's responsibility
hereunder shall be limited to the extent that the infringement or violation is
proven to be attributable to subsections (1), (2), (3), or (4) above.
The liability of Seller and Customer with respect to any and all claims,
actions, proceedings or suits by third parties alleging infringement of patents,
trademarks or copyrights or violation of trade secrets or proprietary rights
because of, or in connection with, any Products or Licensed Materials furnished
pursuant to this Agreement shall be limited to the specific undertakings
contained in this clause (but shall not be subject to any dollar cap) except in
the event of a party's willful or intentional breach of its obligations to the
other party under this clause, in which case no such limitation shall apply.
1.16 CUSTOMER'S REMEDIES:
A. SUBJECT TO SECTION 1.16D BELOW, CUSTOMER'S EXCLUSIVE REMEDIES AND THE
ENTIRE LIABILITY OF SELLER, ITS AFFILIATES AND THEIR EMPLOYEES, AND AGENTS,
AND ITS SUPPLIERS FOR ANY CLAIM, LOSS, DAMAGE OR EXPENSE OF CUSTOMER OR ANY
OTHER ENTITY ARISING OUT OF THIS AGREEMENT, OR THE USE OR PERFORMANCE OF
ANY PRODUCT, LICENSED MATERIALS, OR SERVICES, WHETHER IN AN ACTION FOR OR
ARISING OUT OF BREACH OF CONTRACT, TORT, INCLUDING NEGLIGENCE, INDEMNITY,
OR STRICT LIABILITY, SHALL BE AS FOLLOWS:
1) FOR INFRINGEMENT--THE REMEDY SET FORTH IN THE "INFRINGEMENT" CLAUSE;
2) FOR THE PERFORMANCE OR NONPERFORMANCE OF PRODUCTS, SOFTWARE, AND
SERVICES OR CLAIMS THAT THEY DO NOT CONFORM TO A WARRANTY--THE REMEDY SET
FORTH IN THE APPLICABLE "WARRANTY" CLAUSE;
3) FOR TANGIBLE PROPERTY DAMAGE AND PERSONAL INJURY CAUSED BY SELLER'S
ACTS OR OMISSIONS--THE AMOUNT OF THE AWARDED DAMAGES TOGETHER WITH THE
ACTUAL OUT-OF-POCKET COSTS AND EXPENSES INCURRED BY CUSTOMER IN CONNECTION
WITH DEFENDING ANY CLAIMS OR ACTIONS BROUGHT AGAINST
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CUSTOMER AS A RESULT OF SELLER'S LIABILITY HEREUNDER; PROVIDED, HOWEVER,
THAT SELLER SHALL ALSO BE LIABLE TO CUSTOMER FOR AWARDED PUNITIVE AND
EXEMPLARY DAMAGES WHICH RESULT FROM SELLER'S TORTIOUS CONDUCT;
4) FOR EVERYTHING OTHER THAN AS SET FORTH ABOVE--THE AMOUNT OF THE DIRECT
DAMAGES INCLUDING AWARDED COUNSEL FEES AND COSTS UNDER OR ARISING OUT OF
THIS AGREEMENT SHALL NOT TO EXCEED THE GREATER OF (a) TEN PERCENT (10%) OF
THE TOTAL AMOUNT THEN INVOICED BY SELLER FOR PURCHASES MADE UNDER THIS
AGREEMENT, OR (b) $3,500,000.
B. NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, HOWEVER SUBJECT
TO SELLER'S LIABILITY FOR AWARDED PUNITIVE AND EXEMPLARY DAMAGES FOR
TORTIOUS CONDUCT UNDER SECTION 1.16A(3) ABOVE, NEITHER CUSTOMER NOR SELLER,
ITS AFFILIATES AND THEIR EMPLOYEES, AND AGENTS, AND ITS SUPPLIERS SHALL BE
LIABLE FOR ANY INCIDENTAL, INDIRECT, OR CONSEQUENTIAL DAMAGES OR LOST
PROFITS, REVENUES OR SAVINGS ARISING OUT OF THIS AGREEMENT, OR THE USE OR
PERFORMANCE OF ANY PRODUCT, LICENSED MATERIALS, OR SERVICES, WHETHER IN AN
ACTION FOR OR ARISING OUT OF BREACH OF CONTRACT, TORT, INCLUDING
NEGLIGENCE, OR STRICT LIABILITY. THIS CLAUSE, 1.16(B), SHALL SURVIVE
FAILURE OF AN EXCLUSIVE OR LIMITED REMEDY.
C. EACH PARTY SHALL GIVE THE OTHER PROMPT WRITTEN NOTICE OF ANY CLAIM.
ANY ACTION OR PROCEEDING AGAINST EITHER PARTY MUST BE BROUGHT WITHIN
TWENTY-FOUR (24) MONTHS AFTER THE CAUSE OF ACTION ACCRUES.
D. NOTHING HEREIN SHALL BE CONSTRUED AS LIMITING EITHER PARTY'S RIGHT TO
BRING AN ACTION TO ENFORCE THE EXPRESS PROVISIONS OF THIS AGREEMENT.
1.17 USE OF INFORMATION:
All technical and business information in whatever form recorded which
bears a legend or notice restricting its use, copying, or dissemination or, if
not in tangible form, is described as being proprietary or confidential at the
time of disclosure and is subsequently summarized in a writing so marked and
delivered to the receiving party within thirty (30) days of disclosure to the
receiving party (all hereinafter designated "Information") shall remain the
property of the furnishing party. The furnishing party grants the receiving
party the right to use such Information only as follows: Such Information (1)
shall not be reproduced or copied, in whole or part, except for use as
authorized in this Agreement; and (2) shall, together with any full or partial
copies thereof, be returned or destroyed when no longer needed. Moreover, when
Seller is the receiving party, Seller shall use such Information only for the
purpose of performing under this Agreement, and when Customer is the receiving
party, Customer shall use such Information only (1) to order; (2) to evaluate
Seller's Products, Licensed Materials and Services; or (3) to install, operate
and maintain the particular Products and Licensed Materials for which it was
originally furnished. Unless the furnishing party consents in writing, such
Information, except for that part, if any, which is known to the receiving party
free of any confidential obligation, or which becomes generally known to the
public through acts not attributable to the receiving party, shall be held in
confidence by the receiving party. The receiving party may disclose such
Information to other persons, upon the furnishing party's prior written
authorization, but solely to perform acts which this clause expressly authorizes
the receiving party to perform itself and further provided such other person
agrees in writing (a copy of which writing will be provided to the furnishing
party at its request) to the same conditions respecting use of Information
contained in this clause and to any other reasonable conditions requested by the
furnishing party.
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1.18 LICENSE FOR LICENSED MATERIALS:
Upon delivery of Licensed Materials pursuant to this Agreement and subject
to payment of all amounts required to be paid by Customer for such Licensed
Materials and compliance with the license terms set forth in this Agreement,
Seller grants to Customer an irrevocable, perpetual, nontransferable, and
nonexclusive license to Use Licensed Materials on a Designated Processor for its
own business operations. No license is granted to Customer to sublicense such
Licensed Materials furnished by Seller. Customer shall not decompile or
disassemble Software furnished as object code to generate corresponding Source
Code. Unless otherwise agreed in writing by Seller, Customer shall not modify
Software furnished by Seller under this Agreement. If the Designated Processor
becomes temporarily inoperative, Customer shall have the right to Use the
Licensed Materials temporarily on a backup processor until operable status is
restored and processing on the backup processor is completed.
With respect to all Licensed Materials owned in whole or in party by a
third party manufacturer or licensor that are to be made available to Customer
under this Agreement ("Third Party Software"), Seller represents and warrants
that it now has existing licenses to the Third Party Software, and has the right
to grant to Customer, and hereby grants to Customer a personal, perpetual,
nontransferable, and nonexclusive license to such Software on Customer's
Designated Processor.
1.19 TITLE, RESTRICTIONS, AND CONFIDENTIALITY:
Except to the extent otherwise required in connection with the granting of
licensed hereunder, all Licensed Materials (whether or not part of Firmware)
furnished by Seller, and all copies thereof made by Customer, including
translations, compilations, and partial copies are, and shall remain, the
property of Seller. Except for any part of such Licensed Materials which is or
becomes generally known to the public through acts not attributable to Customer,
Customer shall hold such Licensed Materials in confidence, and shall not,
without Seller's prior written consent, disclose, provide, or otherwise make
available, in whole or in part, any Licensed Materials to anyone, except to its
employees having a need-to-know. Customer shall not copy Software embodied in
Firmware. Customer shall not make any copies of any other Licensed Materials
except as necessary in connection with the rights granted hereunder. Customer
shall reproduce and include any Seller copyright and proprietary notice on all
such necessary copies of the Licensed Materials. Customer shall also mark all
media containing such copies with a warning that the Licensed Materials are
subject to restrictions contained in an agreement between Seller and Customer
and that such Licensed Materials are the property of Seller. Customer shall
maintain records of the number and location of all copies of the Licensed
Materials. Customer shall take reasonably appropriate action, by instruction,
agreement, or otherwise, with the persons permitted access to the Licensed
Materials so as to enable Customer to satisfy its obligations under this
Agreement. If either (i) Customer's license does not vest for failure to pay
amounts due under Section 1.8 in connection with Licensed Materials, (ii) a
competent court or arbitration under Article 1.41 has determined Customer has
committed a material breach of license terms as to one or more specific
locations, and, as a result thereof, that Seller is entitled to terminate the
license granted hereunder as to any such specific locations, or (iii) the
Licensed Materials are no longer needed by Customer, Customer shall return all
copies of such Licensed Materials in Customer's possession or control to Seller
or follow written disposition instructions provided by Seller.
1.20 EXPORT CONTROL:
The parties acknowledge that any Products, Software, and technical
information (including, but not limited to, Services and training) provided
under this Agreement are subject to U.S. export laws and regulations any use or
transfer of such Products, Software, and technical information must be
authorized under those regulations. Customer agrees that it will not use,
distribute, transfer, or transmit the Products, Software, or technical
information (even if incorporated into other Products) except in compliance with
U.S. export regulations. If requested by Seller, Customer also agrees to sign
written assurances and other export-related documents as may be required for
Seller to comply with U.S. export regulations.
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1.21 DOCUMENTATION:
Seller shall furnish to Customer, at no additional charge, one copy of the
documentation for Products provided hereunder sufficient to operate and maintain
such Products and/or one copy of the Related Documentation for Software
furnished by Seller pursuant to this Agreement. Such documentation will be that
customarily provided by Seller to its Customers at no additional charge. Such
documentation shall be provided either prior to, included with, or shortly after
shipment of Products and/or Software from Seller to Customer. Additional copies
of such documentation are available at prices set forth in Seller's Customer
Price Lists.
1.22 CHANGES IN LICENSED MATERIALS:
Prior to shipment, Seller may at any time modify the Specifications
relating to its Licensed Materials. Seller may substitute modified Licensed
Materials to fill an order, provided the modifications, under normal and proper
Use, do not materially adversely affect the Use, function, or performance of the
ordered Licensed Materials, and Seller shall advise Customer in writing at least
fifteen (15) days prior to implementation of such changes. Unless otherwise
agreed, such substitution shall not result in any additional charges to Customer
with respect to licenses for which Seller has quoted fees to Customer.
1.23 OPTIONAL SOFTWARE FEATURES:
Software provided to Customer under this Agreement may contain optional
features which are separately licensed and priced. Customer agrees that such
optional features will not be activated without written authorization from
Seller and Customer's payment of the appropriate license fees. If, in spite of
Customer's best efforts to comply with this restriction, such features are
activated, Customer agrees to so notify Seller promptly and to pay Seller the
license fees for the activated features.
1.24 ADDITIONAL PROVISIONS FOR PRODUCT SPECIFIC LICENSED MATERIALS:
In addition to the provisions applicable to the furnishing of Licensed
Materials as set forth above in clauses "License for Licensed Materials,"
"Title, Restrictions and Confidentiality," "Documentation," and "Changes in
Licensed Materials," additional provisions regarding the furnishing of Product
specific Licensed Materials are set forth in Article II attached hereto.
1.25 COMPATIBILITY OF SELLER'S PRODUCTS AND LICENSED MATERIALS:
Seller makes no representations or warranties whatsoever that Products or
Licensed Materials will be compatible with any equipment currently or hereafter
owned by Customer or any other entity (all such equipment hereinafter for
purposes of this clause referred to as "Other Equipment"). Custom er shall
be responsible for any and all modifications or additions which may be required
to Other Equipment so that such Other Equipment operates satisfactorily with
Products or Licensed Materials furnished and installed by Seller. If Customer
requests Seller to make any such modifications or additions, Seller, at its
discretion, may elect to do so, and in such case, the modifications and
additions will be made as requested by Customer and shall be billed to and paid
for by Customer at prices determined by Seller as a separate item in addition to
any other amounts due and payable by Customer. Seller shall have no liability to
Customer for any such modifications or additions to Other Equipment except to
the extent Seller fails to follow Customer's instructions. As Customer selects
the various hardware and software components of its network, Customer may
consult with Seller regarding Customer's existing equipment and request Seller's
recommendation relating to such components. Seller will notify Customer if
Seller has actual knowledge that Products or Licensed Materials to be installed
by Seller are incompatible with Other Equipment with which such Products or
Licensed Materials are to be installed.
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1.26 PUBLICITY:
Each party shall submit to the other proposed copy of all advertising
wherein the name, trademark, code, specification or service mark of the other
party or its Subsidiaries or Affiliates is mentioned. Neither party shall
publish or use such advertising without the other's prior written approval. Such
approval shall be granted as promptly as possible (usually within ten [10]
days), and may be withheld only for good cause.
1.27 PUBLICATION OF AGREEMENT:
The parties shall keep the provisions of this Agreement and any order
submitted hereunder confidential except as reasonably necessary for performance
hereunder and except to the extent disclosure may be required by applicable laws
or regulations, in which latter case, the party required to make such disclosure
shall promptly inform the other prior to such disclosure in sufficient time to
enable such other party to make known any objections it may have to such
disclosure. The disclosing party shall take all reasonable steps to secure a
protective order or otherwise assure that the Agreement or order will be
withheld from the public record. In addition to the foregoing, Customer shall
have the right to disclose the provisions of this Agreement to Customer's
prospective lenders and investors, each of which shall be required to maintain
the confidentiality of the same in accordance with clause 1.17 of this
Agreement, and Customer shall provide to Seller the names of each party to whom
disclosed.
1.28 NOTICES:
All notices under this Agreement shall be in writing (except where
otherwise stated) and shall be addressed to the addresses set forth at the
beginning of this Agreement or to such other address as either party may
designate by notice pursuant hereto. Such notices shall be deemed to have been
given when received. Further, Seller shall provide a copy of any written notice
of material default which Seller provides to Customer to AT&T Commercial Finance
Corporation at the following address: 44 Whippany Road, Morristown, New Jersey
07962-1983.
1.29 CUSTOMER RESPONSIBILITY:
Customer shall, at no charge to Seller, provide Seller with such electrical
and environmental conditions, technical information, data, technical support or
assistance as may reasonably be required by Seller to fulfill its obligations
under this Agreement, any subordinate agreement or order. If Customer fails to
provide the required conditions, technical information, data, support or
assistance, Seller shall be discharged from any such obligation until such time
as such materials or information are made available. If such delay affects
Seller's ability to meet its obligations under this Agreement, any price (or
discount, if applicable), shipment date or Services completion date quoted by
Seller and affected by such delay is subject to change.
1.30 RIGHT OF ACCESS:
Each party shall provide the other access to its facilities reasonably
required in connection with the performance of the respective obligations under
this Agreement. No charge shall be made for such access. Reasonable prior
notification will be given when access is required.
1.31 FORCE MAJEURE:
Neither party shall be held responsible for any delay or failure in
performance to the extent that such delay or failure is caused by a Force
Majeure. Each party shall promptly notify the other party of the occurrence of
a Force Majeure. If any Force Majeure occurs and results in a delay or failure
in performance, the party injured by the other's inability to perform may elect
to: (a) terminate that part of any order affected by the Force Majeure as to
Products or Licensed Materials not already shipped or Services not already
rendered if the Force Majeure continues for a period of forty-five (45) days
after notification; (b) suspend that part of any order affected by the Force
Majeure for the duration of the Force Majeure, buy, sell, obtain, or furnish
elsewhere Products or Licensed Materials to be bought,
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sold, obtained, or furnished hereunder, and deduct from any order commitment the
quantity bought, sold, obtained, or furnished or for which such commitments have
been made elsewhere; or (c) resume performance under such order once the Force
Majeure ceases with an option for the injured party to extend the delivery or
performance date up to the length of time the Force Majeure endured. Unless
written notice is given within thirty (30) days after such injured party is
apprised of the occurrence of a Force Majeure, option (c) shall be deemed
selected. For purposes hereof, Force Majeure means fires, strikes, embargoes,
explosions, earthquakes, floods, wars, water, the elements, labor disputes,
government requirements, civil or military authorities, acts of God or by the
public enemy, inability to secure raw materials or transportation facilities,
acts or omissions of carriers or suppliers, or other causes beyond its control
whether or not similar to the foregoing. Each party shall, with the cooperation
of the other, exercise all reasonable efforts to mitigate the extent of a delay
or failure resulting from a Force Majeure condition.
1.32 INDEPENDENT CONTRACTOR:
All work performed by either party under this Agreement shall be performed
as an independent contractor and not as an agent of the other, and no persons
furnished by the performing party shall be considered the employees or agents of
the other.
1.33 RELEASES VOID:
Neither party shall require releases or waivers of any personal rights from
representatives or employees of the other in connection with visits to its
premises, nor shall such parties plead such releases or waivers in any action or
proceeding.
1.34 SEVERABILITY:
If any provision in this Agreement shall be held to be invalid or
unenforceable, the remaining portions shall remain in effect. In the event such
invalid or unenforceable provision is considered an essential element of this
Agreement, the parties shall promptly negotiate a replacement.
1.35 SURVIVAL OF OBLIGATIONS:
The rights and obligations of the parties which by their nature would
continue beyond the termination, cancellation, or expiration of this Agreement,
shall survive such termination, cancellation or expiration.
1.36 NON-WAIVER:
No waiver of the terms and conditions of this Agreement, or the failure of
either party to strictly enforce any such term or condition on one or more
occasions shall be construed as a waiver of the same or of any other terms or
conditions of this Agreement on any other occasion.
1.37 ASSIGNMENT:
Except as provided below, neither party shall assign this Agreement or any
right or interest under this Agreement, nor delegate any work or obligation to
be performed under this Agreement (an "assignment"), without the other party's
prior written consent. Such consent shall not be unreasonably withheld or
delayed. Any attempted assignment in contravention of this shall be void and
ineffective. Nothing shall preclude a party from employing a subcontractor in
carrying out its obligations under this Agreement. A party's use of such
subcontractor shall not release the party from its obligations under this
Agreement.
Notwithstanding the foregoing, nothing herein shall preclude an assignment
by Customer, without the consent of Seller, to an entity controlling, controlled
by or under common control with, or which acquires or succeeds to ownership of
substantially all of the assets and operations of Customer, or to its financing
parties for collateral
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security purposes (a "Permitted Assignment"); provided, however, that (a) a
Permitted Assignment shall not include an assignment where Customer is in
material breach or default of this Agreement at such time as Customer seeks to
effectuate such assignment and such breach or default will not be cured
immediately upon giving effect to such assignment; and (b) a Permitted
Assignment shall not include an assignment by Customer to any party or entity
who (1) in the reasonable opinion of Seller, does not have sufficient financing
in place or other financial resources sufficient to consummate the purchases
contemplated under this Agreement, or (2) is a manufacturer of
telecommunications products or a provider of related services in competition
with Seller. In no event shall a Permitted Assignment operate to diminish the
rights (including, without limitation, relating to any purchase commitments) or
increase the obligations of Seller under, this Agreement or any existing
agreement between Seller and the assignee for the procurement of Products,
Licensed Materials, or Services available for procurement by Customer under this
Agreement (a "Pre-Existing Agreement") or to supersede any such Pre-Existing
Agreement. In the event of a Permitted Assignment to Customer's financing
parties for collateral security purposes, Seller shall, at no out-of-pocket cost
to Seller, cooperate with such parties in connection with the execution of
collateral assignment documents which are reasonable and customary in connection
with Customer's project financings.
For purposes of this clause, the term "Agreement" includes this Agreement,
any subordinate agreement placed under this Agreement and any order placed under
this Agreement or subordinate agreement.
1.38 TERMINATION OF ORDERS FOR CONVENIENCE:
Customer may, upon written notice to Seller, terminate an order under this
Agreement or a portion thereof except with respect to Products and Licensed
Materials that have already been shipped and Services that have already been
performed. For those Products and Licensed Materials not shipped and considered
stock items, Customer agrees that it will pay Seller an order fee equal to ten
percent (10%) of the price or license fee for such items. For those Products and
Licensed Materials not shipped and considered customized or non-stock items,
Customer agrees to pay a fee based upon Seller's incurred expenses (after
adjustment for recoveries and/or salvage value, if any), including documented,
associated general and administrative expenses plus a profit on actual work
incurred. For Services in process, Customer agrees to pay for all Services
rendered to date, plus Seller's incurred expenses, including a reasonable
profit, for those Services ordered by Customer and subsequently terminated.
Customer may issue "holds" on orders or suspend performance under this
Agreement, in whole or in part, with Seller's prior written consent and upon
terms that will compensate Seller for any loss, damages, or expenses.
1.39 TERMINATION FOR BREACH:
In the event either party is in material breach or default of the terms of
this Agreement and such breach or default continues for a period of forty-five
(45) days after the receipt of written notice, then the party not in breach or
default shall have the right to terminate this Agreement without any charge,
obligation or liability except for Products or Licensed Materials already
delivered and Services already performed. The party not in breach or default
shall provide full cooperation to the other in every reasonable way to
facilitate the remedy of the breach or default hereunder within such forty-five
(45) day period.
1.40 APPLICABLE LAW:
The construction and interpretation of, and the rights and obligations of
the parties pursuant to this Agreement, shall be governed by the laws of the
State of New York without reference to principles of conflicts of law.
1.41 ARBITRATION; NO WORK STOPPAGE:
If a dispute arises out of or relates to this Agreement, or its breach, the
parties agree to submit the dispute to a sole mediator selected by the parties
or, at any time at the option of a party, to mediation by the American
Arbitration Association ("AAA"). If not thus resolved, it shall be referred to
arbitration by the parties within thirty (30) days of the mediation governed by
the United States Arbitration Act, and judgment on the award may be entered in
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any court having jurisdiction. Any such arbitration shall proceed before three
(3) arbitrators. The party invoking arbitration (the "Claimant Party") shall
notify the other party (the "Respondent Party") in writing (i) setting forth its
basic position in the dispute, (ii) requesting the Respondent Party promptly to
appoint its arbitrator and to notify the Claimant Party of such person's
identity. The Respondent Party shall within thirty (30) days thereafter appoint
its own arbitrator and immediately advise the Claimant Party in writing of the
identity of the arbitrator. If the Respondent Party has not notified the
Claimant Party within the thirty (30) days of the identity and appointment of
its arbitrator, such arbitrator shall thereupon, at the request of the Claimant
Party, be promptly appointed in accordance with the rules of the U.S.
Arbitration Act.
The two (2) arbitrators so appointed shall, within fifteen (15) calendar
days after the date as of which they have both been identified, select any
person agreeable to both of them to serve as the third arbitrator and chairman.
If the two (2) arbitrators appointed on behalf of the respective parties fail to
agree, as provided above, such third arbitrator shall promptly be appointed in
accordance with said rules. The arbitrators may determine issues of
arbitrability, but may not award punitive damages or limit, expand or otherwise
modify the terms of this Agreement. The parties, their representatives, other
participants and the mediator and arbitrators shall hold the existence, content
and result of mediation and arbitration in confidence.
Subject to Seller's rights to hold, delay shipment, and/or reject any order
for the specific reasons identified in Article 1.5 of this Agreement, Seller
agrees not to stop work being performed hereunder during the pendency of a good
faith dispute between the parties.
1.42 LIABILITY AND INDEMNIFICATION:
Without limiting Seller's intellectual property indemnity under clause
1.15, both parties agree to indemnify, defend and hold harmless the other party,
any of its affiliated companies, and all of their respective directors,
officers, employees, agents, representatives, servants, successors and assigns
("Indemnitees"), from and against all actions, causes of action, claims,
administrative proceedings, and demands, and all losses, liabilities, judgments,
decrees, fines, penalties, damages, obligations, expenses, amounts paid in
settlement and investigation and costs and charges of any kind, including but
not limited to, attorney's and investigation fees, including such fees incurred
to enforce this clause (collectively, "Claims"), relating in any way whatsoever
to, or arising from the following:
(1) any Claims involving any failure by either party or any of its
affiliates to comply with any law, statute, code, ordinance, regulation, rule or
order of any governmental or quasi-governmental body, in the performance of
either party's responsibility under this Agreement;
(2) any Claims on account of (i) injury to or death of persons or (ii)
damages to or loss of real or tangible personal property arising directly or
indirectly out of either party's acts or omissions under this Agreement;
(3) all taxes and fees, penalties and interest payable thereon, payable by
either party in connection with this Agreement;
(4) all laborers', mechanics' or materialmen's liens upon Customer's
facilities and/or any property of Customer arising out of Services performed by
Seller or by its subcontractors in connection with this Agreement.
1.43 INSURANCE:
Both parties shall maintain during the term of this Agreement the following
insurance coverage as well as all other insurance required by law in the
jurisdictions where the work is performed: (1) Workers' Compensation and
related insurance as required by law; (2) employer's liability insurance with a
limit of at least five hundred thousand ($500,000) dollars for each occurrence;
(3) commercial general liability insurance with a limit of at least one million
($1,000,000) dollars combined single limit for bodily injury and property damage
liability per occurrence; and (4) automobile liability insurance with limit of
at least one million ($1,000,000) dollars combined single limit for bodily
injury
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and property damage for any one occurrence. Each party shall furnish prior to
the start of work, if requested by the other, certificates or adequate proof of
the insurance required by this clause. Each party shall notify the other in
writing at least thirty (30) days prior to cancellation of, or any material
change in the policy. Notwithstanding the above, Seller shall have the option
where permitted by law to self-retain any or all of the forgoing risks.
1.44 COMPLIANCE WITH LAWS
Seller and Customer agree to comply with all applicable laws, statutes,
regulations, and codes of all governmental authorities having jurisdiction in
connection with the performance by the parties of their respective obligations
and duties under this Agreement.
ARTICLE II
ADDITIONAL PROVISIONS FOR LICENSED MATERIALS
GENERAL: The provisions of this Article II also apply to the granting of
licenses by Seller to Customer for 5ESS-Registered Trademark- Switch Licensed
Materials, and Transmission Systems Licensed Materials.
5ESS SWITCH LICENSED MATERIALS
2.1 ADDITIONAL RIGHTS IN SOFTWARE:
(a) TRANSFER OF 5ESS SWITCH SOFTWARE RIGHT-TO-USE: Customer may transfer
its right-to-use 5ESS Switch Software furnished under this Agreement
without the payment of an additional right-to-use fee by transferee,
except where size sensitive units are a factor. Such transfer can be
made to an end user for their own internal use, but not to competitors
of Seller in the business of manufacturing comparable systems and only
under the following conditions:
(i) Such Software shall be Used only within the United States;
however, Seller will not unreasonably withhold its consent to
Use outside the United States provided the proprietary
information associated with the Use can be adequately
protected;
(ii) Except as otherwise provided in the Agreement, the right to
Use such Software may be transferred only together with the
5ESS Switch Product with which Customer has a right to Use
such Software, and such right to Use the Software shall
continue to be limited to Use with such Product;
(iii) Before any such Software shall be transferred, Customer shall
notify Seller of such transfer and the transferee shall have
agreed in writing (a copy of which will be provided to Seller
at its request) to keep such Software in confidence and to
corresponding conditions respecting Use of Licensed Materials
as those imposed on Customer; and
(iv) Within the United States, the transferee shall have the same
right to Software warranty or Software maintenance for such
Software as the transferor, provided the transferee continues
to pay the fees, if any, associated with such Software or
Software maintenance.
(b) RELOCATION OF 5ESS SWITCH SOFTWARE: Upon advance written notice to
Seller, Customer may remove 5ESS Switch Software or optional feature
packages, for which Customer has the right to Use, from one
Customer-owned 5ESS Switch Product and relocate them to another
Customer-owned 5ESS Switch Product within the same company as Customer
(or to an Affiliate or Subsidiary of Customer, with Seller's prior
written consent which shall not be unreasonably withheld or delayed).
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Customer shall not be required to pay additional right-to-use fees as
a result of such relocation, except where size sensitive units are a
factor. Seller may charge Customer for Services requested by Customer
in support of such relocation. Such Software shall not be Used or
transferred to Customer's Affiliate that is a manufacturer of
telecommunication products in direct competition with Seller.
(c) RIGHTS TO SELLER'S 5ESS SWITCH SOFTWARE DEVELOPMENT INFORMATION: If
Seller ceases to maintain a standard, supported version of Software
for the 5ESS Switch Product furnished pursuant to this Agreement, and
these support services are not available from another entity, then
Seller shall furnish Customer, under a suitable confidentiality
agreement, Seller's then existing Software Source Code, Software
development programs, and associated documentation for such standard
version to the extent necessary for Customer to maintain and enhance
for its own use the standard version of that Software for which it has
the right to Use.
2.2 RELATED DOCUMENTATION:
Seller will provide to Customer at no charge one (1) copy each of the most
recent text and drawing CD-ROM or one (1) login to the 5ESS Switch Documentation
Dial-Up Service for each new 5ESS-Registered Trademark--2000 Switch site. No
documentation will be provided to RSMs or ORMs. In addition, Seller will
provide updates at no charge to the host/standalone site for a period of two (2)
years following Switch turnover. After the initial two (2) year update period,
Customer may purchase an update subscription at the standard subscription rate.
TRANSMISSION SYSTEMS LICENSED MATERIALS
2.3 DEFINITIONS:
In addition to the definitions in Article I of this Agreement, the
following terms, for purposes of this Article II, shall have the meanings
indicated below as to Transmission Systems Licensed Materials:
(a) "Delivery Date" means the date by which all deliverables ordered by
Customer are delivered to the site designated by the Customer, and
(b) "Installation Complete Date" means the date on which Transmission Systems
Software is installed by Seller at the site designated by the Customer and
ready for Use by Customer.
2.4 ADDITIONAL RIGHTS IN TRANSMISSION SYSTEMS SOFTWARE:
(a) Upon thirty (30) days advance written notice, Customer may relocate any
Software permanently to a new processor of Customer. This new processor
shall then become the Designated Processor in lieu of the former Designated
Processor.
(b) Customer may retain an archival copy of the Software for as long as such
Software is relevant to Customer's operations.
2.5 INSTALLATION OF TRANSMISSION SYSTEMS SOFTWARE:
(a) Where Customer is responsible for Software installation, Seller's sole
responsibility is to deliver the Software to Customer on or before the
scheduled Delivery Date agreed to by Seller. However, if the order
specifies that Seller is responsible for such installation, Seller shall
deliver the Software to Customer in sufficient time for it to be installed
on or before the scheduled Installation Complete Date agreed to by Seller,
and Seller shall complete its installation and associated testing on or
before such date.
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(b) Where Customer has assumed responsibility for the installation of newly
licensed Software, Seller will, at Customer's request and without charge,
provide for the first such installation a reasonable level of technical
assistance when Customer encounters installation difficulties. For all
subsequent installations of such Software by Customer, Seller reserves the
right to charge Customer for any technical assistance provided in response
to Customer's request for assistance.
ARTICLE III
PROVISIONS APPLICABLE TO ENGINEERING,
INSTALLATION, AND OTHER SERVICES
GENERAL: The provisions of this Article III additionally apply to the
furnishing by Seller of Services to Customer. Such Services include, but are not
limited to, (1) engineering Services such as preparation of equipment
specifications, configuration, preparation and updating of office records, and
preparation of a summary of material not specifically itemized in the order; (2)
installation Services such as installation, testing of the equipment on a
standalone basis, equipment removal, and cable mining; and (3) other Services
such as repairs. Services shall be performed by Seller in accordance with its
standard practices.
3.1 CONDITIONS OF INSTALLATION AND OTHER SERVICES PERFORMED ON CUSTOMER'S SITE:
ITEMS PROVIDED BY CUSTOMER
Customer will be responsible for furnishing the following items (as required by
the conditions of the particular installation or other on-site Service) at no
charge to Seller and these items are not included in Seller's price for the
Services. Should Seller incur expense as a result of Customer's failure to
provide any of these items, additional billing will be rendered to and paid by
Customer.
ACCESS TO BUILDING AND WORK SITE - Allow employees of Seller and its
subcontractors free access to the portion of Customer's premises and facilities
necessary to render Services at all hours during the scheduled Service or at
such other times as are requested by Seller. Customer shall obtain for Seller's
and its subcontractors' employees any necessary identification and clearance
credentials to enable Seller and its subcontractors to have access to the work
site.
ENVIRONMENTAL CONDITIONS - Take such action as may be necessary to insure that
the premises on which the Services will be provided will be dry and free from
dust and Hazardous Materials, including but not limited to asbestos, and in such
condition as not to be injurious to Seller's or its subcontractors' employees or
to the Products to be installed. Prior to commencement of the Services and
during the performance of the Services, Customer shall, if requested by Seller,
provide Seller with sufficient data to assist Seller or its subcontractor in
evaluating the environmental conditions at the work site (including the presence
of Hazardous Materials). The price quoted by Seller for Services does not
include the cost of removal or disposal of the Hazardous Materials from the work
site. Customer is responsible for removing and disposing of the Hazardous
Materials, including but not limited to asbestos, prior to commencement of
Services.
SENSITIVE EQUIPMENT - Prior to commencement of Services, inform Seller of the
presence of any sensitive equipment at the work site (e.g., equipment sensitive
to static electricity or light).
REPAIRS TO BUILDINGS - Prior to Services start date, make such alterations and
repairs as are necessary for proper installation of Products.
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BUILDING READINESS - Prior to Services start date, provide hoisting and hauling
services, furnish suitable openings in buildings to allow Products to be placed
in position, and provide necessary openings and ducts for cable and conductors
in floors and walls as designated on engineering drawings furnished by Seller.
At least twelve (12) weeks prior to the Services start date, Seller shall
provide such drawings to Customer. To the extent required for the performance of
the Services, Customer shall fireproof (with steel covers) all unopened paths
throughout the building.
SURVEYS - Prior to Services start date, furnish surveys (describing the physical
characteristics, legal limitations, and utility locations for the work site) and
a legal description of the site.
ELECTRICAL CURRENT, HEAT, LIGHT, AND WATER - Provide electric current for
charging storage batteries and for any other necessary purposes with suitable
terminals where work is to be performed; provide temperature control and general
illumination (regular and emergency) in rooms in which work is to be performed
or Products stored, equivalent to that ordinarily furnished for similar purposes
in a working office; provide exit lights; provide water and other necessary
utilities for the proper execution of Services.
BUILDING EVACUATION - Prior to Services start date, provide building evacuation
plans in case of a fire or other emergency.
CEILING INSERTS - Provide ceiling inserts as required using Seller's standard
spacing arrangement for ceiling support equipment.
MATERIAL FURNISHED BY CUSTOMER - Unless expressly stated to the contrary,
Seller's prices do not include costs for any Customer furnished material nor
does it include any Seller charges for engineering, installation, modification,
or repair Services to Customer furnished material. New or used material
furnished by Customer shall be in such condition that it requires no repair and
no adjustment or test effort in excess of that normal for new equipment.
Customer assumes all responsibility for the proper functioning of such material.
Customer shall also provide the necessary information for Seller to properly
install such material. Seller upon discovering any problems with the
functioning of any such material or adequacy of such information, will promptly
notify Customer so that Customer can take the appropriate remedial action.
TOILET FACILITIES AND EYEWASH STATION - Provide proper and easily accessible
toilet facilities and supplies, such as towels and soap, in buildings in which
Services are in progress. Where temporary facilities are required, Customer will
provide suitable, portable facilities including supplies and custodial services.
Provide emergency eyewash station in power room near battery stands.
FLOOR SPACE AND STORAGE FACILITIES - Provide, during progress of the Services,
suitable and easily accessible floor space and storage facilities (a) to permit
storing major items of Products and other material closely adjacent to where
they will be used; (b) for administrative and luncheon purposes; (c) for
Seller's and its subcontractors' employees' personal effects; and (d) for tools
and property of Seller and its subcontractors. Where the Services are to be
performed outside of a building or in a building under construction, Customer
shall, in addition to the above requirements, as appropriate, permit or secure
permission for Seller and its subcontractors to maintain at the work site,
storage facilities (such as trailers) for Products, material, tools, and
equipment needed to complete the Services.
EASEMENTS, PERMITS, AND RIGHTS OF WAY - Prior to Services start date, provide
all rights-of-way, easements, licenses to come upon land to perform the
Services; permits and authority for installation of Products and other material;
permits for opening sidewalks, streets, alleys, and highways; and construction
and building permits.
WATCH SERVICE - Provide normal security necessary to prevent admission of
unauthorized persons to building and other areas where installation Services are
performed and to prevent unauthorized removal of the Products and other
materials. Seller will inform Customer as to which storage facilities at the
work site Seller will keep locked. Such storage facilities will remain closed to
Customer's building surveillance.
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USE OF AVAILABLE TESTING EQUIPMENT - Customer shall make available to Seller the
maintenance test facilities which are embedded in equipment to which the Product
being installed will be connected or added. Seller's use of such test equipment
shall not interfere with Customer's normal equipment maintenance functions.
HAZARDOUS MATERIALS CLEANUP - At the conclusion of the Services, Customer shall
be responsible for the cleanup, removal, and proper disposal of all Hazardous
Materials present at Customer's premises unless such hazardous materials were
brought to the site by Seller, in which case, Seller shall be responsible for
the hazardous materials cleanup, removal, and proper disposal.
ACCESS TO EXISTING FACILITIES - Customer shall permit Seller reasonable use of
such portions of the existing plant or equipment as are necessary for the proper
completion of such tests as require coordination with existing facilities. Such
use shall not interfere with the Customer's normal maintenance of equipment.
GROUNDS - Customer shall provide access to suitable and isolated building ground
as required for Seller's standard grounding of equipment. Where installation is
outside or in a building under construction, Customer shall also furnish
lightning protection ground.
REQUIREMENTS FOR CUSTOMER DESIGNED CIRCUITS - Customer shall furnish information
covering the proper test and readjust requirements for apparatus and
requirements for circuit performance associated with circuits designed by
Customer or standard circuits modified by Customer's drawings.
STANDBY ENGINE/ALTERNATOR FACILITIES - Customer shall provide suitable fuel,
storage, gas, water, antifreeze, sewer, and exhaust facilities as required with
piping terminating within the building and within ten (10) feet of the location
of the engine/alternator to be installed, or terminating within the engine room
if engine/alternator is housed in a separate room. If Seller tests the
engine/alternator outdoors, Customer shall also provide lightning protection
ground.
CROSS-CONNECTING MAIN DISTRIBUTING FRAMES AND INSTALLING HEAT COILS - Customer
shall install such cross-connections and heat coils.
CLEARING EQUIPMENT FOR MODIFICATIONS - Customer shall remove cross-connections,
transfer service on trunks and sundry working equipment, and make other
arrangements required to permit Seller to modify existing plant.
DESIGNATION STRIPS - Customer shall number all jack designation strips described
in job requirements.
FIRE PROTECTION APPARATUS - Customer shall install the permanent fire protection
apparatus and furnish such temporary apparatus as may be necessary for the
protection of the Product and other equipment stored prior to installation.
BATTERY ROOM VENTILATION - Customer shall provide the required ventilation for
battery rooms or areas.
HOUSE SERVICE PANEL - Customer shall provide electric power from the Customer's
service panel to the Seller's power board and shall run all leads between said
service panel and power board.
THROUGH TESTS AND TRUNK TESTS - Customer shall make required through tests and
trunk tests to other offices after Seller provides its notice of completion or
notice of advanced turnover.
ITEMS TO BE FURNISHED BY SELLER
The following items will be furnished by Seller (if required by the conditions
of the particular Services) and the price thereof is included in Seller's price
for Services:
PROTECTION OF EQUIPMENT AND BUILDINGS - Seller shall provide adequate protection
for Customer's equipment and buildings during the performance of the Services in
accordance with Seller's standard practices.
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METHOD OF PROCEDURE - Seller shall prepare a detailed Method of Procedure
("MOP") before starting work on live equipment and provide Customer a reasonable
lead time under the circumstances for review and mutual discussion prior to the
intended implementation date. Customer shall review the MOP and any requested
changes shall be negotiated. Customer shall give Seller written acceptance of
the MOP prior to start of this work.
POWER CIRCUIT - Seller shall install power conduit and wire as are necessary to
complete the Service.
FRAME AND AISLE LIGHTING - Seller shall install conduit, wire, fixtures, and
other necessary material for frame and aisle lighting as described in Customer's
job requirements.
FIREPROOFING - Seller shall fireproof (with steel covers) all openings it makes
in the building in the course of providing the Services.
RESTORATION - Where it is necessary in the performance of the Services to open
sidewalks, driveways, curbing, alleys, streets, or other property, Seller shall
restore said property to at least its former condition.
CROSS-CONNECTIONS OTHER THAN TO OUTSIDE CABLE TERMINATIONS - Seller shall run
cross-connections in accordance with the Customer's cross-connection list.
THE FOLLOWING ITEMS MAY BE FURNISHED BY SELLER IF REQUESTED BY CUSTOMER, BUT
CUSTOMER WILL BE BILLED AND SHALL PAY FOR THEM IN ADDITION TO SELLER'S STANDARD
OR FIRM QUOTED PRICE FOR SERVICES:
PROTECTION OF BUILDINGS AND EQUIPMENT - Seller may provide protection of
buildings and equipment in accordance with special practices of Customer
differing from Seller's standard practices.
READJUSTING APPARATUS - Seller may provide readjustment (in excess of that
normally required on new apparatus) of apparatus associated with relocated or
rewired circuits.
RERUNNING CROSS-CONNECTIONS - Seller may rerun permanent cross-connections in
accordance with revised cross-connection lists furnished by Customer.
HANDLING, PACKING, TRANSPORTATION, AND DISPOSITION OF REMOVED AND SURPLUS
CUSTOMER EQUIPMENT - Seller may pack, transport, and dispose of surplus and
removed Customer equipment as agreed by the parties.
PREMIUM TIME ALLOWANCES AND NIGHT SHIFT BONUSES - Seller may have its Services
personnel work premium time and night shifts to the extent that Seller may deem
such to be necessary to effect the required coordination of installing and
testing operations or other Services because of Customer's requirements;
provided, however, that there shall be no additional charge for any overtime
work that is required for Seller to complete the Services in the time frame
agreed to by the parties with respect to any accepted order, unless such
schedule has been affected by acts by or omissions of Customer.
EMERGENCY LIGHTING SYSTEM - Seller may provide new emergency lighting system
(other than the original ceiling mounted stumble lighting) to satisfy
illumination and safety needs of Products of certain heights.
3.2 ACCEPTANCE OF INSTALLATION:
At reasonable times during the course of Seller's installation, Customer,
at its request may, or upon Seller's request shall, inspect completed portions
of such installation. Upon Seller's further request, and upon sufficient notice
to Customer, Customer shall observe Seller's testing of Products and Licensed
Materials being installed to determine that such testing and the test results
are in accordance with Seller's 5ESS-Registered Trademark--2000 Installation &
Test Handbook, if applicable, or such other Installation & Test Handbook of
Seller for the Product or Licensed Materials being installed.
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The job shall be considered complete and ready for acceptance by Customer when
Products and Licensed Materials have been installed and tested prior to
integration into the network by Seller in accordance with its standard
procedures, and Seller represents such Products and Licensed Materials to be in
working order. Customer may observe Seller's such testing of Products and
Software being installed to determine that such testing and the test results are
in accordance with Seller's standard procedures. Upon completion of the
installation, Seller will submit to Customer a notice of completion or, if
Customer has elected advance-turnover of subsystems, a notice of completion of
advance-turnover.
Customer shall promptly make its final inspection of substantial
conformance with the Specifications and shall exercise all reasonable efforts to
expedite acceptance of the job. Seller will promptly correct any defects for
which it is responsible. If Customer discovers that any Product or Software
installed by Seller is not acceptable as a result of its failure to
substantially conform to the Specifications, it shall advise Seller as promptly
as possible (followed up in writing if originally advised orally) of the nature
of the problem. In such event the parties shall cooperate in every reasonable
respect to reach a timely and appropriate solution for Seller to correct the
identified problem. Depending on the circumstances, such solution may include a
requirement that Seller accelerate its activities or deploy additional resources
to correct such deficiency, minimizing to the extent possible adverse impact on
the overall schedule. The cost to be borne to correct such problem shall be the
responsibility of Seller, except as otherwise agreed between the parties. The
job will be considered as fully accepted unless Seller receives notification to
the contrary within thirty (30) days after submitting its notice of completion.
Not withstanding the foregoing, if Customer places the Products and/or Licensed
Materials into commercial service, such action will constitute Customer's
acceptance.
3.3 SITE PREPARATION:
Where Services are to be performed by Seller, Customer shall be responsible
for insuring that the premises where the work is to be performed are accessible
to Seller and ready and suitable for the Services to be performed in accordance
with Seller's site-preparation conditions. Such conditions include, but are not
limited to, (a) site readiness; and (b) access to adequate storage space,
working space, personal facilities, heat, light, ventilation, telephone,
electrical current, and outlets, all provided within a reasonable distance of
the area where the work is to be performed. A reasonable period of time prior to
the commencement of Services Seller and Customer will perform a mutual
inspection and walk-through of Customer's premises to mutually determine the
necessary building repairs and modifications, including fire protection, that
will be necessary to effectuate the Services. Seller's representative shall
have the right to inspect the site prior to Services start date to confirm
compliance of the site to Seller's site-preparation conditions. Such site
inspection may include, without limitation, a full building grounding
inspection, existing power plan, and emergency facilities inspection. The cost
for Seller to conduct one (1) site survey will be included in the Seller's quote
for engineering and installation Services. Seller's representatives will
provide Customer with a site preparation list and recommended solutions to
existing site-related problems and deficiencies discovered by Seller during
Seller's inspection. Should Customer fail to comply with the site-preparation
conditions after Seller provides Customer notice, Seller may perform such work
or furnish such items and charge Customer for them in addition to the prices
otherwise charged by Seller for such Services.
To the extent Customer reasonably requests Seller to deviate from Seller's
then-current specifications or methods for site preparation, site environment,
utilities or installation, Seller may install Seller's 5ESS-Registered
Trademark--2000 Switch Products, Transmission Products and Power Products at
Customer's site provided that Customer agrees to fully indemnify and hold
harmless Seller from and against any losses, damages, claims, demands, suits and
liabilities (including reasonable attorneys' fees) that arise out of, or result
from injuries or death to persons or damage to property or other claims or
demands of any kind (including Workers Compensation claims and warranty) caused
or alleged to be caused by Seller proceeding with installation of such Products.
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3.4 WORK OR SERVICES PERFORMED BY OTHERS:
Work or Services performed at the site by Customer or its other vendors or
contractors shall not unreasonably interfere with Seller's performance of
Services. Seller shall have no responsibility or liability with respect to such
work or Services performed by others. If Customer or its other vendors or
contractors fail to timely complete the site readiness or if Customer's or its
other vendors' or contractors' work interferes with Seller's performance, the
scheduled completion date of Seller's Services under this Agreement shall be
extended as reasonably necessary to compensate for such delay or interference.
ARTICLE IV
ENTIRE AGREEMENT
4.1 ENTIRE AGREEMENT:
The terms and conditions contained in this General Agreement, together with
the Appendices and attachments hereto supersede all prior oral or written
understandings between the parties with respect to the subject matter hereof and
constitute the entire agreement between the parties with respect to such subject
matter. The preprinted terms and conditions on Customer's purchase orders or
Seller's sales forms are deleted. The typed or handwritten provisions of an
order which are consistent with the terms of this General Agreement along with
the terms of this General Agreement shall constitute the entire Agreement
between the parties relating to said order. Terms shall not be modified or
amended except by a writing signed by authorized representative of both parties.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives on the date(s) indicated.
KMC TELECOM INC. KMC TELECOM II, INC.
By: /s/ Michael Sternberg By: /s/ Michael Sternberg
------------------------ --------------------------
Name: Michael Sternberg Name: Michael Sternberg
Title: President Title: President
Date: September 24, 1997 Date: September 24, 1997
LUCENT TECHNOLOGIES INC.
By: /s/ Thomas C. Gaddy
------------------------
Name: Thomas C. Gaddy
Title: Sales Director
Date: September 24, 1997
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APPENDIX A
A-1.1 SCOPE OF APPENDIX A
This Appendix A (hereinafter "Appendix") shall govern any purchase order placed
by Customer during the Term for Seller's 5ESS-Registered Trademark--2000
Products, Transmission Systems Products, Power System Products and related
Licensed Materials. This Appendix A is issued pursuant to and incorporates the
non-conflicting terms and conditions of the General Agreement. In the event of
any conflict or inconsistency between the terms of this Appendix and the terms
of the General Agreement, the terms of this Appendix shall prevail.
A-1.2 DEFINITIONS
In addition to the definitions in Article I of this Agreement, the following
terms shall have the meanings indicated below as to the Products and Licensed
Materials described herein:
(a) "5ESS-Registered Trademark--2000 Products" means the 5ESS-Registered
Trademark--2000 Switch, Growth and related Licensed Materials including,
without limitation, Base Software.
(b) "5ESS-Registered Trademark--2000 Switch" means any 5ESS-Registered
Trademark--2000 Switch system (including the 5ESS-Registered
Trademark--2000 Compact Digital Exchange ("CDX") and 5ESS-Registered
Trademark--2000 Very Compact Digital Exchange ("VCDX")). With the exception
of the VCDX, a 5ESS-Registered Trademark--2000 Switch contains at a
minimum, an Administrative Module ("AM"), Communications Module ("CM"), and
at least one (1) Switch Module, and any such Switch can act as a host for
Optically Remote Modules ("ORMs"), Remote Switch Modules ("RSMs") and/or
the Extended Switch Modules ("EXMs"). The VCDX contains a Sun Workstation
and one (1) Switch Module.
(c) "Base Software" means the platform upgrade package for the 5ESS-Registered
Trademark--2000 Switch.
(d) "Growth" means any hardware or Software required to support the expansion
of any 5ESS-Registered Trademark--2000 Switch which may include, without
limitation, any ORMs, RSM, or EXMs not purchased with the associated
5ESS-Registered Trademark--2000 Switch.
(e) "Initial Switch" means the first 5ESS-Registered Trademark--2000 Switch
furnished by Seller under this Appendix for deployment in a particular
geographic area (other than an area in which a Seller furnished
5ESS-Registered Trademark--2000 Switch already exists).
(f) "List Price" means Seller's global list price in effect at the time of
order placement.
(g) "Peripherals" means hardware and/or Software extensions added subsequent to
the installation of the Initial Switch or Switch Module.
(h) "Power System Products" means batteries, Cabinetized Power Systems ("CPS"),
Evolutionary Control Systems ("ECS"), power plant products and other
manufactured (FE class) or other purchased (FF class) power Products.
(i) "Product Manufacturing Information" means manufacturing drawings and
specifications of raw materials and components, including part
manufacturing drawings and specifications covering special tooling and the
operation thereof, and a detailed list of all commercially available parts
and components purchased by Seller on the open market disclosing the part
number, name and location of the supplier, and price lists.
(j) "Remote Switch Module ("RSM")" means either an RSM (metallic connection),
an ORM or an EXM located away from the host site.
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(k) "Repair Parts" means new, remanufactured, reconditioned, refurbished, or
functionally equivalent parts for the maintenance, replacement, and repair
of Products sold pursuant to this Agreement.
(l) "Switch Module" means a Module Control/Time Slot Interchange Unit along
with a number of Peripheral units and related Software added to an embedded
5ESS-Registered Trademark--2000 Switch, 5ESS-Registered Trademark--2000 CDX
Switch or to an existing Remote Switch Module site.
(m) "Total Paid Purchases" means Customer's purchases of Seller's Products and
related Licensed Materials only, for which Seller has received payment.
(n) "Transmission Systems" means the Seller's SONET Transmission Systems
Products, such as DDM-2000 OC-1 Fiber Reach Multiplexer, DDM-2000 OC3
Multiplexer, DDM-2000 OC-12 Multiplexer, or FT-2000 OC-48 Lightwave; Access
Systems, such as SLC-Registered Trademark--2000 Access System,
SLC-Registered Trademark--2000 MSDT, or SLC-Registered Trademark--Series 5
Carrier System; and DACS II and DACS IV-2000 Systems.
A-1.3 CUSTOMER PURCHASE COMMITMENT
In consideration for the discounts, allowances, and incentives set forth herein,
Customer agrees to procure directly from Seller a minimum of eighty-eight
million ($88,000,000) dollars of Seller's Products and related Licensed
Materials during the Term.
At the end of the first twelve (12) months of the Term, Seller will evaluate
Customer's actual Total Paid Purchases procured through the time of evaluation.
If Customer's Total Paid Purchases is less than thirty million ($30,000,000)
dollars during the first twelve (12) months of the Term, or less than sixty
million ($60,000,000) dollars during the first twenty-four (24) month period of
the Term, Seller reserves the right to discontinue or adjust accordingly all
discounts, allowances and/or incentives set forth herein for all subsequent
orders placed by Customer.
A-1.4 TERMS OF DISCOUNT
Any purchase orders placed pursuant to this Appendix shall reference Contract
Number LNM970313MP to qualify for the discounts incorporated herein. During the
Term, all discounts shown in this Appendix are applicable to Seller's Products
and related Licensed Materials listed herein only and are not applicable to
related Services such as engineering and installation. Such discounts shall be
applied to Seller's List Price in effect at the time of order receipt and will
be held firm for three (3) years after the Effective Date of this Agreement.
Discounts set forth in this Appendix will apply to all purchase orders requiring
Seller's then-current standard delivery interval. For the Products and related
Licensed Materials specified herein, Seller agrees to hold its List Price firm
for eighteen (18) months after the Effective Date of this Agreement.
A-1.5 NETWORK STANDARDIZATION
Customer agrees to standardize its switch network exclusively on Seller's
5ESS-Registered Trademark--2000 Switch Systems Products and Transmission Systems
Products during the Term, such that in the event Customer requires any equipment
and/or software which is functionally comparable to Seller's Products and
related Licensed Materials available for purchase under this Appendix, then
Customer agrees to purchase all of its requirements for such equipment and
software from Seller. Notwithstanding the foregoing, the requirements of this
Section A-1.5 shall not apply to any entity acquired by or merged with Customer
after the effective date if and only to the extent such acquired or merged
entity is bound by a pre-existing contract with a third party vendor which
prohibits such entity from procuring from Seller as set forth above.
If Customer procures functionally comparable equipment and/or software from
another supplier during the Term in breach of the provisions of this Section
A-1.5, Seller may, in addition to all other rights and remedies available to
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Seller under law, equity, or otherwise, discontinue any and all discounts herein
and may enter into negotiations with Customer on a new pricing discount
structure.
A-1.6 CUSTOMER FORECASTS
Beginning thirty (30) days from the Effective Date, Customer will submit written
forecasts of its planned purchases. Such forecasts shall include type(s),
quantities and location(s) of planned purchases, and such other information as
may be agreed upon by the parties. The forecast will be updated monthly, and
shall provide a twelve (12) month rolling view of prospective monthly purchases
of Products, Licensed Materials and Services. Customer shall submit such
forecasts to Seller's account executive at the address listed below, or such
other address as is hereinafter specified by Seller:
William H. Pittman, Account Executive
Lucent Technologies Inc.
900 North Point Parkway, Room 91S456
Alpharetta, Georgia 30202
Customer will designate upon execution of this General Agreement an authorized
representative to coordinate the ordering and distribution of Products and
related Licensed Materials and to interface with Seller's account executive as
needed.
A-1.7 PRICING PLAN FOR 5ESS-Registered Trademark--2000 PRODUCTS
In consideration for Customer's purchase commitment as set forth in Section
A-1.3, "Customer Purchase Commitment," Seller will provide the following
discounts off the List Price for all purchases of the following products made by
Customer during the Term.
<TABLE>
<CAPTION>
DISCOUNT SCHEDULE FOR 5ESS-Registered Trademark--2000 SWITCH PRODUCTS
PRODUCT TYPE INITIAL SWITCH SWITCH MODULE PERIPHERAL GROWTH
DISCOUNTS GROWTH DISCOUNTS DISCOUNTS
<S> <C> <C> <C>
5ESS-Registered Trademark--2000 Switch 75% 55% 25%
5ESS-Registered Trademark--2000 CDX Switch 75% 55% 25%
5ESS-Registered Trademark--2000 VCDX Switch 75% N/A 25%
RSM/ORM/EXM 65% 55% 25%
</TABLE>
For the first 5ESS-Registered Trademark--2000 Switch or first Remote Switch
Module purchased at each new site, the initial discount shall apply. For
subsequent Growth of such 5ESS-Registered Trademark--2000 Switch, Customer may
designate two (2) six (6) month periods after such Switch turnover during which
the initial discount specified above shall also apply. For Switch Modules
and/or Peripherals ordered outside of such periods, the applicable Switch Module
and/or Peripheral discount shall apply.
A-1.8 PRICING PLAN FOR 5ESS-Registered Trademark--2000 CDX/VCDX SWITCH
SOFTWARE RELEASES
For purposes of this Section, the fees for Base Software releases shall mean the
Software Right-to-Use ("RTU") and Office Data Administration ("ODA") fees. The
purchase by Customer of a 5ESS-Registered Trademark--2000 Switch during the Term
will include, at no additional charge to Customer, a license (subject to the
licensing provisions of the General Agreement) to use the then-current Base
Software release. Additional Base Software releases licensed by
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Customer will be priced at eighty thousand dollars ($80,000) per release for
each 5ESS-Registered Trademark--2000 Switch host, fifty five thousand dollars
($55,000) per release for each CDX host Switch and thirty five thousand dollars
($35,000) per release for each VCDX host Switch. These license fees do not
include any additional hardware or installation. Customer will be responsible
for all engineering charges associated with each Base Software release furnished
by Seller under this Appendix.
Base Software releases shall be available to Customer in accordance with
Seller's published announcement stating when customers can order Base Software
subject, however, to Seller's then-current availability process and Seller's
standard order intervals.
A-1.9 5ESS-Registered Trademark--2000 SWITCH TRAINING INCENTIVE
For the first 5ESS-Registered Trademark--2000 Switch purchased, Seller will make
available to Customer up to one hundred (100) tuition-free training days to be
used by Customer within two (2) years of order receipt. For each subsequent
5ESS-Registered Trademark--2000 Switch purchased thereafter by Customer during
the Term, Seller will provide an additional fifteen (15) tuition-free training
days. For each Remote Switch Module (EXM, ORM, RSM) purchased by Customer
during the Term, Seller will provide an additional six (6) tuition-free training
days. Training days earned by Customer for each 5ESS-Registered Trademark--2000
Switch shall be used within twelve (12) months after the turnover date for such
5ESS-Registered Trademark--2000 Switch. Customer is responsible for all
associated travel and living expenses for Customer personnel. Seller, at its
option, shall offer training regionally at the Dublin or Hickory Ridge Training
Centers. In those cases in which Seller suitcases a course to a Customer site,
Customer shall be responsible for all associated travel and living expenses for
the instructor. While Seller recommends core courses from its Customer Training
Catalog, Customer may choose from any of Seller's 5ESS-Registered
Trademark--2000 Switch related courses.
A-1.10 INVENTORY CONTROL PROVISIONS FOR 5ESS-Registered Trademark--2000
SWITCHES
Seller will offer the Spares Exchange Service for 5ESS-Registered
Trademark--2000 Switches ("SES-5") to address Customer's 5ESS-Registered
Trademark--2000 Switch system inventory control requirements. SES-5 will
enhance equipment maintenance by facilitating the exchange of defective circuit
packs for new or remanufactured devices in a timely manner. This service
operates on a twenty-four-hour, seven-day-week basis, under the following
delivery services options:
1. Normal Delivery Interval (2 to 7 days) $35 per plug-in
2. Emergency Delivery Interval (24 hours) $70 per plug-in
3. Critical Delivery Interval (less than 24 hours) $120 per plug-in
(minimum $480 per order)
SES-5 will exchange Seller-manufactured material usually required to support a
5ESS-Registered Trademark--2000 Switch and the embedded 3B21 Computer for
"readily returnable" material (e.g., circuit packs and plug-ins, but not disk or
tape drives). Customer shall not be charged for the "readily returnable"
material provided by Seller through SES-5 if the material for which it is
exchanged is determined by Seller to be under warranty. If Seller determines
such exchanged material to be out of warranty, Customer will be billed and shall
pay for the material furnished by Seller through SES-5 based on the current
SES-5 catalog price.
A-1.11 CUSTOMER SUPPORT
In consideration for the purchase commitment set forth in Section A-1.3,
"Customer Purchase Commitment," Seller will provide, only to the extent deemed
reasonable by Seller, pre-sale engineering Services to Customer at no charge
throughout the Term. Such Services shall include technical consultation and
quote preparation for the purpose of supporting Customer's network questions and
5ESS-Registered Trademark--2000 System feature description questions. Seller's
technical consultant support group will also provide engineering Services with
respect to the integration of Seller's Products and related Licensed Materials
into Customer's network locations subject to the prior written agreement of the
parties on the price and terms for such Services.
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A-1.12 TECHNICAL SUPPORT OF 5ESS-Registered Trademark--2000 SWITCH
PRODUCTS AND LICENSED MATERIALS
During the Term, warranty assistance shall be available to Customer by calling
Seller's Regional Technical Assistance Center (RTACs) on 1-800-CAL-RTAC
(1-800-225-7822). Seller shall monitor this number on a twenty-four (24) hours
a day, seven days a week basis. During regular business hours (8:00 a.m. to
5:00 p.m. central time), calls will be answered by the closest geographically
located RTAC. Outside of regular business hours , all calls will be answered at
a centralized assistance center. Service-affecting problems will be expedited
to the local RTAC.
Seller will, in addition to its obligations under the "Warranty" clause of the
General Agreement, make available for purchase by Customer post-warranty
technical support. Such post-warranty technical support shall be provided under
mutually agreed upon, separate post-warranty service contracts entered into by
the parties or on a per-problem basis during the Term at Seller's prevailing
rates. Separately from such warranty or post-warranty services, Seller may
offer Services designed to enhance the operating capabilities of Customer 's
network or system on a billable basis. In addition to its obligations under
Warranty, Seller shall also make available to Customer additional technical
support. Such additional technical support shall be provided at Seller's
prevailing rates and terms.
A-1.13 5ESS SWITCH DOCUMENTATION
As part of the first Initial Switch purchase by Customer under this Agreement,
Seller will provide to Customer, at no charge, two (2) sets of product
documentation (each of the most recent text and drawing on CD-ROM). For each
subsequent 5ESS-Registered Trademark--2000 Switch purchase, Seller will provide,
at Customer's option, one (1) set of product documentation or a login to the
5ESS-Registered Trademark--2000 Switch Documentation Dial-Up Service.
Additionally, for each Switch site, Seller will provide to Customer a condensed
copy of the Translation Guide (TG5) document. No documentation will be provided
to the RSM, EXM, or ORM sites.
In addition, at no additional charge to Customer, Seller will provide to
Customer during the two (2) year period following the turnover of each
5ESS-Registered Trademark--2000 Switch purchased by Customer hereunder, those
updates to the Related Documentation which Seller makes generally available to
its other customers during such time period. After the initial two (2) year
update period described above, Customer may purchase an update subscription at
Seller's standard subscription rate.
A-1.14 MAINTENANCE SERVICE FOR 5ESS SWITCH SOFTWARE
5ESS-Registered Trademark--2000 Switch maintenance service for Software will be
offered by Seller at fixed price for term service and/or time and materials
service. This will be provided under a separate professional services
agreement. However, unless otherwise agreed to by Seller in writing,
maintenance service shall only be available for the current generic Base
Software release and the two (2) immediately preceding generic releases. If
Customer desires 5ESS-Registered Trademark--2000 Switch Base Software
maintenance service for a release which is older than the preceding (2) generic
releases, Seller and Customer must mutually agree to the scope, price and terms
and conditions of such maintenance agreement.
A-1.15 PRICING PLAN FOR TRANSMISSION SYSTEMS
In consideration for the Customer purchase commitment set forth in Section
A-1.3, "Customer Purchase Commitment", Seller will provide the discounts set
forth below for all purchases of the Transmission Systems Products described
therein which are made by Customer during the Term:
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TRANSMISSION SYSTEMS PRODUCTS DISCOUNT SCHEDULE
TRANSMISSION SYSTEMS PRODUCTS* DISCOUNT
DDM PLUS 27%
DDM-2000 FiberReach OC-1 25%
DDM-2000 OC-3 35%
DDM-2000 OC-12 35%
FT-2000 OC-48 Lightwave System 30%
SLC-Registered Trademark--2000 Multi Services Distant Terminals (MSDT) 35%
SLC-Registered Trademark--2000 Access System - Common Units 40%
SLC-Registered Trademark--2000 Access System - POTS/SPOTS Units 35%
SLC-Registered Trademark--2000 Access System - Special Service Units 40%
SLC-Registered Trademark--2000 Access System - Software 00%
SLC-Registered Trademark--SERIES 5 Carrier System - Common Units 35%
SLC-Registered Trademark--SERIES 5 Carrier System - POTS/SPOTS Units 35%
SLC-Registered Trademark--SERIES 5 Carrier System - Special
Service Units 35%
DACS IV 2000 Systems see 1.15.1 below
DACS II Systems (hardware and Software) 27%
* The above Products do not include Network Cable Systems equipment or power
equipment. Unless otherwise specified, the discounts shown above apply to
Transmission Systems Products (hardware) only. The discount for the cables used
in the systems set forth above shall be twenty percent (20%) off the List Price.
A-1.15.1 PRICING PLAN FOR DACS IV-2000 SYSTEMS
INITIAL SYSTEMS - In consideration for Customer's purchase commitment as set
forth in Sections A-1.3, "Customer Purchase Commitment" and A-1.5, "Network
Standardization", Seller will provide special model pricing on initial DACS
IV-2000 System purchases. The initial DACS IV-2000 configuration will consist
of one (1) DACS IV-2000 256 System equipped with twelve (12) STS-1s and four (4)
DS3s and twenty-eight (28) DS1s, and will have a special initial price of two
hundred eleven thousand five hundred eighty three dollars ($211,583) per system,
excluding spares. This price will be held firm for a period of twelve (12)
months from Seller's receipt of the initial DACS IV-2000 order. Following this
period, the DACS IV-2000 will be priced at forty-five percent (45%) off List
Price.
GROWTH - In consideration of the special initial price outlined above, an
upgrade price of one hundred sixty thousand dollars ($160,000) will be charged
once the DACS IV-2000 System exceeds one hundred twenty eight (128) equivalent
STS-1s. All DACS IV-2000 growth will receive a forty-five percent (45%)
discount off List Price. This growth discount will be held firm for three (3)
years after the Effective Date of this Agreement. DACS IV-2000 List Prices will
be held firm for a period of eighteen (18) months from the Effective Date of
this Agreement. Customer's special DACS IV-2000 price plan is summarized below.
PRODUCT TYPE INITIAL MODEL PRICE GROWTH DISCOUNT UPGRADE FEE BEYOND 128
EQUIVALENT STS-1S *
DACS IV-2000 $211,583 45% $160,000
* For the purposes of this Section Equivalent STS-1s represents the total
number of DS3s, STS-1s and increments of twenty-eight (28) DS1s equipped on the
DACS IV-2000 System.
Lucent Technologies Proprietary
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Contract No.: LNM970313MP
A-1.16 TRANSMISSION TRAINING INCENTIVE
In consideration for each Central Office purchased by Customer under this
Agreement which meets the minimum Transmission equipment requirements shown in
Table 1 below, Seller will provide up to fifty (50) tuition-free days of
training to Customer on Seller's Transmission Systems Products. These fifty (50)
training days correspond to two (2) complete Operations, Maintenance and
Administration classes on each of the recommended Transmission Product Training
classes shown in Table 2 below. Such tuition-free training days may be used
within the six (6) months prior to turnover date of the Central Office
deployment or no later than twelve (12) months after turnover date of such
System.
TABLE 1: MINIMUM TRANSMISSION SYSTEM REQUIREMENTS PER SITE
PRODUCT MINIMUM NUMBER OF SYSTEMS
DEPLOYED
DDM-2000 OC-3 6
DDM-2000 OC-12 6
DDM-2000 FiberReach WBS 4
DACS IV-2000 1
SLC-Registered Trademark--2000 Access System 2
DDM-2000 FiberReach NBS 4
DACS II 1
TABLE 2: TRANSMISSION OAM&P TRAINING CLASSES
PRODUCT COURSE # DAYS/CLASS TOTAL STUDENT DAYS
DDM-2000 OC-3 LW2608 2 4
LW2603 4 8
DDM-2000 OC-12 LW2612 5 10
DDM-2000 FiberReach WBS LW2611 1 2
DACS IV-2000 TR3542 4 8
SLC-Registered Trademark--2000
Access System TR4610 4 8
DACS II TR3521 5 10
TOTAL TUITION DAYS 50
Customer is responsible for all associated travel and living expenses for
Customer personnel. Seller, at its option, shall offer training regionally at
the Dublin or Hickory Ridge Training Centers. In those cases in which Seller
suitcases a course to a Customer site, Customer shall be responsible for all
associated travel and living expenses for the instructor. While Seller
recommends core courses from its Customer Training Catalog, any Transmission
System related courses may be taken at Customer's discretion. The tuition-free
seats may be used for standard course offerings associated with purchased
Transmission Systems. A minimum of eight (8) students are required for
suitcased classes.
A-1.17 PRICING PLAN FOR POWER PLANT SYSTEMS
In consideration for Customer's purchase commitment set forth in Section A-1.3,
"Customer Purchase Commitment", Seller will provide discounts set forth below
for all purchases of the Power Systems Products described therein which are made
by Customer during the Term.
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Contract No.: LNM970313MP
PRODUCT DESCRIPTION* DISCOUNT
UNIGY BATTERIES 20%
IR BATTERIES 20%
CPS/ECS POWER PLANT PRODUCT 35%
OTHER MANUFACTURED (FE class) 30%
OTHER PURCHASED (FF class) 15%
A-1.18 CONTINUING PRODUCT SUPPORT -- PARTS AND SERVICES
In addition to repairs provided for under the Warranty clause of this Agreement,
Seller offers repair Services and Repair Parts in accordance with Seller's
repair and Repair Parts practices and terms and conditions then in effect, for
Seller's Manufactured Products furnished pursuant to this Agreement. Such repair
Services and Repair Parts shall be available while Seller is manufacturing or
stocking such Products or Repair Parts, but in no event more than five (5) years
after such Product's discontinued availability effective date. Seller may use
either new, remanufactured, reconditioned, refurbished, or functionally
equivalent Products or parts in the furnishing of repairs or replacements under
this Agreement.
If during the agreed to support period Seller is unable to provide Repair
Part(s) and/or Repair Service(s) and a functionally equivalent replacement has
not been designated, Seller shall advise Customer, by written notice prior to
such discontinuance to allow Customer to plan appropriately, and if Seller is
unable to identify another source of supply for such Repair Part(s) and/or
Repair Service(s), Seller shall provide Customer, upon written request, with
nonexclusive licenses for Product Manufacturing Information to the extent Seller
can grant such licenses, so that Customer will have sufficient information to
have manufactured, or obtain such Service or parts from other sources. License
terms, for such Product Manufacturing Information, including charges, will be in
accordance with Seller's licensing procedures then in effect.
A-1.19 PRODUCT AVAILABILITY
Seller shall notify Customer, usually at least one (1) year, before Seller
discontinues accepting orders for a Seller's Manufactured Product sold under
this Agreement. Where Seller offers a functionally equivalent Product for sale,
the notification period may vary.
A-1.20 PROMOTIONAL SUPPORT
Seller agrees to allocate to the Marketing Development Fund ("MDF") described in
Schedule 1 attached hereto to this Appendix, ten thousand dollars ($10,000) per
5ESS-Registered Trademark--2000 Switch site purchased by Customer during the
Term of this Agreement. Any amounts allocated to the Marketing Development Fund
hereunder shall be subject in all respects to and may be utilized by Customer
only in accordance with MDF Guidelines.
A-1.21 FUTURE CONSIDERATIONS
Upon completion of Customer's high yield debt and equity offering, Customer
shall pay Lucent a non-refundable down payment of five million dollars
($5,000,000) for dedication of Lucent's factory capacity to support Customer's
construction project in the second set of eighteen (18) cities. When Customer's
total purchases of 5ESS-Registered Trademark--2000 Switch Products and related
Software (excluding Services) exceeds thirty-five million dollars ($35,000,000),
Seller shall, in addition to the applicable discount specified in Section A-1.7
above, apply a 42.7% credit to all subsequent Switch Product and related
Software orders (excluding Services) until the total dollar amount of such
credits equals five million dollars ($5,000,000).
Lucent Technologies Proprietary
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Contract No.: LNM970313MP
Schedule 1 MARKETING DEVELOPMENT FUND GUIDLINES 11/1/96
MARKETING DEVELOPMENT FUND
The Marketing Development Fund (MDF) is a cooperative approach to marketing and
promotion. The program provides assistance for pre-approved market development
and promotional activities executed by authorized Lucent Technologies Global
Commercial Markets (GCM) customers to stimulate switched services sales
activity.
MDF FUNDING
- - Funding is based on the year's purchases of Lucent Technologies Network
Systems 5ESS-Registered Trademark-, Transmission, Transmission and OS
products only. Network Systems products are used to calculate the amount
of MDF funds. NOTE: Network Cable Systems products are not eligible for
rebate reimbursement calculations under this plan.
- - For customers to be eligible for MDF, a written marketing plan must be
jointly approved by the Lucent Technologies GCM Marketing Administrator and
sales organization and the customer's marketing and sales organization
prior to submission of any MDF reimbursement claims.
- - Proper MDF forms are submitted by the customer along with supporting
documentation for pre-approval. After approval, copies of original paid
invoices are submitted. MDF reimbursements are issued as credits to be
applied to current or future Lucent Technologies invoices.
- - Funding is based on a percentage of the year's total paid direct purchases.
- - MDF reimbursements apply to marketing activity within the approved plan
only.
IT'S A FIVE STEP PROCESS
1. Jointly prepare a Marketing Development Business Plan. This plan must at a
minimum include:
- Marketing opportunities or projects designed to stimulate
switched services sales activities
- Forecasts of new revenues produced with corresponding cost
summaries, and
- Specific "measurements of success."
2. Submit a completed MDF Submittal Form for pre-approval.
3. When the project is completed, the approved MDF Submittal Form will be
returned to Lucent Technologies along with PAID invoices and substantiating
documents.
4. The MDF program administrator will process the reimbursement claim, verify
that funding is available, and, if so, forward the approval documentation
to the customer with a reimbursement certificate.
5. When submitted by the customer, the amount of the reimbursement certificate
will be credited to the customer's account.
ANSWERS TO YOUR QUESTIONS . . .
Your primary MDF contact with Lucent Technologies is your Account
Representative. Your Representative can provide whatever assistance you may
need in providing direction and planning marketing strategies.
Lucent Technologies has appointed a Marketing Development Fund Administrator who
handles day-to-day details of tracking and coordinating reimbursement claims
within Lucent Technologies. You may contact the Administrator at the following
address: 5 Wood Hollow Rd., Room 1I82, Parsippany, NJ 07054-2821.
Lucent Technologies Proprietary
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Contract No.: LNM970313MP
ACTIVITIES ELIGIBLE FOR MDF REIMBURSEMENT
DIRECT MARKETING
Direct marketing may include advertising, e.g. print ads and radio spots,
collateral salesware, catalogs, trade show fees, Lucent Technologies product
displays, direct mail and telemarketing programs and other pre-approved
activities. MDF funds may be utilized to assist with individual company
customization of direct marketing materials, including development, printing,
and one-time production costs on authorized mailings.
EVENTS
MDF allowances may be used to off-set Lucent Technologies sponsorship of events
such as technology forums, conferences, seminars, trade shows or other business
related activities.
Pre-approval requests must clearly demonstrate goals and objectives of the
event. Reimbursement claims must include a list of any other co-sponsers, a
copy of guest invitations to the event, detailed event cost estimates, and a
full description of the participation, involvement, and activity by the Lucent
Technologies Representative who would attend or support the event.
DATABASE ACQUISITION
MDF can be utilized to fund a variety of pre-approved database tools such as
market-based automated pricing tools (which could include basic Centrex rates,
standard features, and ISDN rates and features), and Marketing Information
Databases (such as MKIS) for client prospecting, lead generation and
infrastructure modeling.
SALES INCENTIVE PROGRAMS
Incentive programs to stimulate switched services sales are designed and
administered by the customer. A jointly established target for service activity
penetration must be in effect and tracked for the duration of the program.
Proposed incentive programs must conform to the following guidelines:
- - An outline of procedures to administer, track and audit the program is
provided.
- - Estimated program costs, award descriptions and values are identified.
- - A complete program activity description with specific time-frames is
established.
- - A list of participating Account Executives and Sales Managers and their
incentive program objectives is submitted to Lucent Technologies.
TRAINING
Lucent Technologies offers a wide range of educational opportunities, and
encourages Lucent Technologies sponsored customers to increase product knowledge
and marketing and sales skills. Lucent Technologies training courses are
delivered at Lucent Technologies training locations or suitcased to remote
locations.
MDF PERSONNEL
Under the MDF program, the Lucent Technologies customer may fund technical
consultants and/or marketing sales consultant personnel to implement marketing
and sales programs to stimulate switched services sales activity. All
pre-approved personnel funded by MDF must be dedicated 100% to stimulating
Lucent Technologies switched services sales. All expenses must conform to
standard Lucent Technologies voucher guidelines. All expenses require
pre-approval and must include: overall project concept, opportunity
identification, program cost, and a detailed action plan with measurable
milestones and start-stop dates. MDF payments for personnel are made quarterly.
Lucent Technologies Proprietary
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Contract No.: LNM970313MP
AMENDMENT NUMBER ONE
TO THE GENERAL AGREEMENT
BETWEEN
KMC TELECOM INC., KMC TELECOM II, INC.
AND
LUCENT TECHNOLOGIES INC.
This Amendment (Contract Number LNM970922MP) (hereinafter "Amendment") is made
effective October 15, 1997, ("Effective Date") by and between KMC Telecom Inc.
and KMC Telecom II, Inc., each a Delaware corporation, with offices located at
1545 Route 206, Suite 300, Bedminster, New Jersey 07921 (hereinafter
collectively referred to as "Customer"), and Lucent Technologies, Inc., a
Delaware corporation, acting through its Network Systems Group, with offices
located at 600 Mountain Avenue, Murray Hill, New Jersey 07974 (hereinafter
"Seller").
WHEREAS, Customer and Seller have, effective March 6, 1997, entered into a
General Agreement (Contract Number LNM970313MP) (hereinafter "General
Agreement") setting forth the terms and conditions pursuant to which Seller
agreed to supply and Customer agreed to procure certain Lucent Products,
Licensed Materials and Services (as such terms are defined therein); and
WHEREAS, Customer and Seller desire to amend the General Agreement as set forh
herein,
NOW THEREFORE, in consideration of the mutual promises hereinafter set forth and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties agree as follows:
1. SCOPE OF AMENDMENT
The definition of "Customer" contained in the General Agreement is hereby
amended to additionally include KMC Telecom Leasing I, LLC and KMC Telecom
Leasing II, LLC; it being the intent and understanding among the parties that
KMC Telecom Leasing I, LLC and KMC Telecom Leasing II, LLC shall be authorized
to procure Products, Licensed Materials and Services from Seller under and
pursuant to the terms and conditions of the General Agreement.
2. ENTIRE AGREEMENT
Except as specifically modified, amended or supplemented herein, all terms and
conditions of the General Agreement shall remain in full fore and effect.
Lucent Technologies - Proprietary
<PAGE>
Contract No.: LNM970313MP
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by
their duly authorized representatives on the date(s) indicated.
KMC TELECOM INC. KMC TELECOM II, INC.
By: /s/ Michael Sternberg By: /s/ Michael Sternberg
-------------------------- ---------------------------
Typed Name: Michael Sternberg Typed Name: Michael Sternberg
Title: President Title: President
Date: October 20, 1997 Date: October 20, 1997
LUCENT TECHNOLOGIES INC.
By: /s/ Thomas C. Gaddy
-------------------------
Typed Name: Thomas C. Gaddy
Title: Sales Director
Date: October 28, 1997
Lucent Technologies - Proprietary
<PAGE>
Exhibit 10.8
PROFESSIONAL SERVICES AGREEMENT
BETWEEN
KMC TELECOM, INC.
AND
LUCENT TECHNOLOGIES INC.
<PAGE>
PROFESSIONAL SERVICES AGREEMENT
BETWEEN KMC TELECOM, INC.
AND LUCENT TECHNOLOGIES INC.
THIS PROFESSIONAL SERVICES AGREEMENT NUMBER LNS970602JC dated September 4, 1997,
is made by and between Lucent Technologies Inc., a Delaware corporation, acting
through its Network Systems Group with offices at 283 King George Road, Warren,
New Jersey 07059, hereinafter ("Lucent"), and KMC Telecom, Inc., a Delaware
corporation with offices at 1545 Route 206, Suite 300, Bedminster, New Jersey
07921, hereinafter ("Customer").
1. TERM AND SCOPE
(a) For an initial period of three (3) years, beginning July 23, 1997 Lucent
will provide Professional Services ("Services") in support of service
requirements of Customer to its customers in the United States. At the
expiration of the initial three (3) year term hereof, this Agreement shall
extend automatically for an additional one (1) year term, unless either party
has given written notice of its desire to terminate not less than six (6) months
prior to the end of the initial term. The parties will meet not less than six
(6) months prior to the end of the extended term to negotiate further
extensions of the term.
(b) Services to be provided hereunder are set forth in the Statement of Work,
which is attached to and incorporated herein as Appendix A.
2. CHARGES
Charges for Services to be performed under this Agreement are as set forth in
Appendix A Section 2.
3. INVOICES AND TERMS OF PAYMENT
Lucent shall invoice Customer monthly for the Services listed in Appendix A.
For other services such as Call-Out Service, and Additional Operation Services
as defined in Appendix A, Lucent shall invoice for such other services as they
are performed or as soon thereafter as practicable. Invoices shall be
accompanied by details such as dates of Service, number of hours delivered, rate
per hour, employee's name and number. Customer shall pay the invoiced amounts,
less any disputed amount, within thirty (30) days from the date of Lucent's
invoice. Delinquent payments are subject to a late payment charge at the rate
of one and one-half percent (1-1/2 %) per month, or portion thereof, of the
amount due (but not to exceed the maximum lawful rate).
Any disputed amounts which are determined to be valid are due for payment based
upon the original invoice date and will be subject to a retroactive late payment
charge based on the original invoice date. Customer shall notify Lucent of any
disputed invoice within thirty (30)
Lucent/KMC Proprietary
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<PAGE>
days from the date of the invoice. In the event the parties are unable to
resolve a payment dispute within thirty (30) days, either party may submit the
dispute to resolution pursuant to the clause DISPUTES RESOLUTION. Customer shall
not be subject to a late payment charge for good faith disputed invoice.
4. TAXES
Customer shall be liable for and shall reimburse Lucent for all taxes and
related charges however designated (excluding taxes on Lucent's net income)
imposed upon or arising from the provision of Services, or the transfer, sale,
license, or use of material, provided by Lucent. Taxes reimbursable under this
paragraph shall be separately listed on the invoice. Lucent shall not collect
the otherwise applicable tax if a valid tax exemption certificate is furnished
by Customer to Lucent. Lucent will be responsible for payment of Lucent
employees' taxes (i.e. FICA, state or federal income tax and all other related
labor taxes).
5. INDEPENDENT CONTRACTOR
All work performed by one party under this Agreement shall be performed as an
independent contractor and not as an agent of the other, and no person furnished
by the performing party shall be considered the employee or agent of the other.
The performing party shall be responsible for, and shall ensure that its
employees comply with all applicable laws, rules, and regulations while
performing work under this Agreement, or while present on the other party's
premises.
6. PERSONNEL & SUBCONTRACTORS
Lucent reserves the right to assign, reassign and substitute its personnel with
personnel having comparable qualifications at any time during the term of this
Agreement, provided that no such action shall result in an interruption of
Service
Lucent represents that it and its subcontractors performing Services are and
will continue to be experienced and qualified to perform the Services and all of
their respective obligations under this Agreement.
Customer shall have the right to interview and approve or reject the assignment
by Lucent of any subcontractors to positions of on-site work, provided that
Customer may not exercise its right to reject any subcontractors on grounds
unrelated to job performance or in a manner that obligates Lucent to commit an
unlawful act. If Customer does not exercise its right to interview and approve
or reject any assignment of a subcontractor within fifteen (15) days of
submittal of a resume by Lucent to Customer, then Customer agrees to the
assignment of such subcontractor. At Customer's request, Lucent shall provide
Customer with the resume of a subcontractor whom Lucent intends to designate to
perform on-site work. Customer shall treat the resume and interview information
as "Lucent Confidential Information". Customer agrees not to make an offer of
employment to any subcontractor rejected by Customer.
Customer may notify Lucent when it finds any Lucent on-site subcontractor
unacceptable to provide Services at a Customer site for any lawful reason,
including Customer's reasonable determination that subcontractor is not
qualified to perform the work to which subcontractor is assigned. Upon receipt
of such notice Lucent shall, within ten (10) business days, or earlier if
Lucent/KMC Proprietary
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<PAGE>
Customer specifically so requests, review the matter with Customer and take
appropriate action as necessary. Lucent shall have a reasonable time to replace
any such subcontractor.
During the term of this Agreement and for a period of one (1) year from the
termination of this Agreement or a (Statement of Work), the parties agree not to
employ, make an offer of employment to, or enter into a consulting relationship
with any employee, or full time consultant of the other party who is directly
involved with the delivery of Services under this Agreement, except upon the
prior written consent of the affected party, provided that the foregoing
prohibition shall not be construed to apply to a former employee of the other
party who has not been employed by such other party for at least one year (6
months in the case of lay-off).
Lucent reserves the right to subcontract any or all of the Services to qualified
and experienced third-parties and use independent consultants provided that the
use of subcontractors and/or consultants will not cause any interruption of
Services to Customer. Services supplied by such third parties shall be subject
to the terms and conditions of this Agreement as if supplied directly by Lucent
and Lucent shall be responsible for the Services performed. Any such
subcontracting shall not relieve Lucent from its liability (if any) or
obligation under this Agreement and Lucent shall be responsible for the acts,
defaults and neglects of any subcontractor, its agents, servants, or workers as
fully as if they were the acts, defaults or neglects of Lucent, its agents,
servants or workers. Lucent shall require that its subcontractors comply with
the provisions of this Agreement, insofar as they apply to the subcontracted
work. Should any subcontractor fail to perform in a satisfactory manner the work
undertaken by it, Lucent shall investigate and take any appropriate action.
Nothing contained in this Agreement shall create any contractual relationship
between any subcontractor of Lucent and Customer and no subcontractor is
intended to be or shall be deemed a third party beneficiary of this Agreement.
Customer's site representative shall exercise no supervision over any personnel
furnished by Lucent or any subcontractor, but Customer's site representative
shall be available to Lucent for consultation and advice, as shall Lucent be
available to Customer regarding any problems with personnel furnished by Lucent.
Lucent will assign a team leader at it's Network Operations Center ("NOC") to
coordinate NOC Services with KMC.
7. FORCE MAJEURE
a) General
Neither party shall be held responsible for delay or failure in performance of
any part of this Agreement to the extent such delay or failure is caused by
fire, flood, explosion, war, strikes, embargo, government requirement, civil or
military authority, act of God, inability to secure material or transportation
facilities, act or omission of carriers or other causes beyond Lucent's or
Customer's control, provided, however, that in the event of delay or failure in
performance, the party first learning of such delay or failure shall inform the
other immediately, and if such delay or failure persists for a period of sixty
(60) days, either party may terminate this Agreement upon ten (10) days written
notice without liability for such termination except for payment of Services
provided and accepted up to the date of termination. Each party shall, with
Lucent/KMC Proprietary
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<PAGE>
the cooperation of the other, exercise all reasonable efforts to mitigate the
extent of a delay or failure resulting from a Force Majeure condition.
b) NOC Recovery Plan
Lucent shall provide a recovery plan detailing Lucent's response if a Force
Majeure condition occurs at its NOC. Such recovery plan will be provided within
ninety (90) days of the effective date of this Agreement and incorporated as an
Appendix to this Agreement.
8. USE OF INFORMATION
All technical and business information and all software and related
documentation in whatever form recorded (all hereinafter designated
"Information") furnished to either party under or in contemplation of this
Agreement and designated as proprietary shall remain the property of the
furnishing party. Unless the parties otherwise agree in writing, such
Information: (i) shall be treated in confidence by the receiving party and used
only, in the case of Customer, for evaluation purposes or to install, operate,
and maintain the particular items for which the Information is initially ordered
and, in the case of Lucent , used only for the purposes for which furnished,
(ii) shall not be reproduced or copied in whole or in part, except as necessary
for use as authorized in this Agreement, and (iii) shall, together with any
copies thereof, be returned or destroyed when no longer needed, or may, if in
the form of software recorded on an erasable storage medium, be erased. The
above conditions do not apply to any part of the Information that is known to
the receiving party to be free of any obligation to keep in confidence.
9. WARRANTY
Lucent agrees to perform Services in a workmanlike manner and in accordance with
good usage and the highest business practices, standards and industry codes
prevailing in the telecommunications industries, and in compliance with all
applicable Federal, state and local laws, ordinances and regulations. If
Services performed by Lucent fail to meet the foregoing and if Customer
notifies Lucent to that effect within a thirty (30) day period commencing on the
of completion of the Service, Lucent will correct any defects and deficiencies
in a timely manner and render a pro-rated refund or credit based on the original
charge for the Services.
THIS SERVICES WARRANTY IS EXCLUSIVE AND IS IN LIEU OF ALL OTHER EXPRESS OR
IMPLIED WARRANTIES INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE. CUSTOMER'S SOLE AND EXCLUSIVE REMEDY
SHALL BE LUCENT'S OBLIGATION TO MAKE CORRECTIONS AND RENDER A CREDIT OR REFUND
AS SET FORTH ABOVE IN THIS WARRANTY. THIS EXCLUSIVE REMEDY SHALL NOT LIMIT
CUSTOMER'S RIGHT TO BRING AN ACTION FOR BREACH OF CONTRACT INCLUDING BREACH OF
THIS WARRANTY.
10. INSURANCE
Both parties shall maintain during the term of this Agreement the following
insurance coverage: as well as all other insurance required by law in the
jurisdictions where the work is performed: (1) Worker's Compensation and related
insurance as required by law; and, (2) employer's liability insurance with a
limit of at least five hundred thousand ($500,000.00) dollars for each
Lucent/KMC Proprietary
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<PAGE>
occurrence; (3) comprehensive general liability insurance, with a limit of at
least one million ($1,000,000.00) dollars per occurrence; (4) comprehensive
motor vehicle liability insurance with limits of at least one million
($1,000,000.00) dollars for bodily injury including death, to any one person,
three hundred thousand ($300,000.00) dollars for each occurrence of property
damage, and one million ($1,000,000.00) dollars for any one occurrence. Each
party shall furnish the other prior to the start of the work, if requested by
the other, certificates or adequate proof of the insurance required by this
clause. Each party shall notify the other in writing at least thirty (30) days
prior to cancellation of or any material change in the policy. Notwithstanding
the above, each party shall have the option where permitted by law to self-
insure any or all of the foregoing risks.
11. LIMITATION OF LIABILITY
SUBJECT TO SECTION 11d BELOW, CUSTOMER'S EXCLUSIVE REMEDIES AND THE ENTIRE
LIABILITY OF LUCENT, ITS AFFILIATES AND THEIR EMPLOYEES, AND AGENTS, AND ITS
SUPPLIERS FOR ANY CLAIM, LOSS, DAMAGE OR EXPENSE OF CUSTOMER OR ANY OTHER ENTITY
ARISING OUT OF THIS AGREEMENT, OR THE PERFORMANCE OF ANY SERVICES, WHETHER IN AN
ACTION FOR OR ARISING OUT OF BREACH OF CONTRACT, TORT, INCLUDING NEGLIGENCE,
INDEMNITY, OR STRICT LIABILITY, SHALL BE AS FOLLOWS:
(a) CUSTOMER'S REMEDIES AND LUCENT'S LIABILITY FOR TANGIBLE PROPERTY DAMAGE TO
CUSTOMER'S PROPERTY AND FOR PERSONAL INJURY CAUSED BY LUCENT'S ACTS OR OMISSIONS
SHALL BE LIMITED TO THE AMOUNT OF THE AWARDED DAMAGES TOGETHER WITH THE ACTUAL
OUT-OF-POCKET COSTS AND EXPENSES INCURRED BY CUSTOMER IN CONNECTION WITH
DEFENDING ANY CLAIMS OR ACTIONS BROUGHT AGAINST CUSTOMER AS A RESULT OF LUCENT'S
LIABILITY HEREUNDER; PROVIDED, HOWEVER, THAT LUCENT SHALL ALSO BE LIABLE TO
CUSTOMER FOR AWARDED PUNITIVE AND EXEMPLARY DAMAGES WHICH RESULT FROM LUCENT'S
TORTIOUS CONDUCT;
(b) CUSTOMER'S REMEDIES AND LUCENT'S LIABILITY FOR THE PERFORMANCE OR
NON-PERFORMANCE OF THE SERVICE(S) OR CLAIMS THAT IT DOES NOT CONFORM TO THE
WARRANTY ARE LIMITED TO THE REMEDIES SET FORTH IN THE WARRANTY CLAUSE;
(c) CUSTOMER'S REMEDIES AND LUCENT'S LIABILITY FOR CLAIMS OTHER THAN AS SET
FORTH ABOVE AND IN THE CLAUSE ENTITLED "INDEMNITY" WILL BE LIMITED TO THE AMOUNT
OF THE DIRECT DAMAGES NOT TO EXCEED $1,000,000 INCLUDING COUNSEL FEES AND
COSTS.
(d) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, HOWEVER SUBJECT TO
LUCENT'S LIABILITY FOR AWARDED PUNITIVE AND EXEMPLARY DAMAGES FOR TORTIOUS
CONDUCT UNDER SECTION 11(a) ABOVE, NEITHER CUSTOMER NOR LUCENT, ITS AFFILIATES
AND THEIR EMPLOYEES, AND AGENTS AND ITS SUPPLIERS SHALL BE LIABLE TO EACH OTHER,
ANY OTHER PERSON OR COMPANY FOR SPECIAL, INDIRECT, RELIANCE, INCIDENTAL OR
CONSEQUENTIAL DAMAGES OR LOSS ARISING OUT OF THE PROVISION OF THE SERVICES OR IN
ANY WAY ARISING OUT OF THIS AGREEMENT, WHETHER IN AN ACTION ARISING OUT
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<PAGE>
OF BREACH OF CONTRACT, BREACH OF WARRANTY, DELAY, NEGLIGENCE, STRICT TORT
LIABILITY, PATENT MATTERS OR ANY OTHER THEORY. THIS CLAUSE, 11 (d), SHALL
SURVIVE FAILURE OF AN EXCLUSIVE OR LIMITED REMEDY. EACH PARTY SHALL GIVE THE
OTHER PROMPT WRITTEN NOTICE OF ANY CLAIM, ANY ACTION OR PRECEDING AGAINST EITHER
PARTY MUST BE BROUGHT WITHIN TWENTY-FOUR (24) MONTHS AFTER THE SERVICES ARE
RENDERED.
(e) NOTHING HEREIN SHALL BE CONSTRUED AS LIMITING EITHER PARTY'S RIGHT TO
BRING AN ACTION TO ENFORCE THE EXPRESS PROVISIONS OF THIS AGREEMENT.
12. CUSTOMER'S RESPONSIBILITIES
Throughout the term of this Agreement, Customer agrees to:
(a) Follow all Lucent's or relevant equipment manufacturer's applicable
installation, operation, administration, and maintenance instructions;
(b) Provide the proper environment, electrical, and telecommunications
connections as reasonably specified by Lucent or relevant equipment
manufacturer;
(c)Provide access at reasonable times to the Products to enable Lucent to
perform Services; Reasonable prior notification will be given when access is
required.
(d) Provide adequate communications facilities, workspace, and storage space for
Lucent spare parts;
(e) Have their representative at the equipment location during any Lucent
service activity on the premises. Customer or Lucent may be subject to
additional incurred time and material charges if Customer fails to have a
representative at the equipment location or fails to contact the other party
within (30) minutes of the agreed time;
(f) Maintain a procedure external to the software program(s) and host computer
for reconstruction of lost or altered files, data or programs to the extent
deemed necessary by the Customer.
(g) Provide test equipment and maintenance documentation sufficient for
maintenance of non- Lucent products that are listed in this Agreement; and,
(h) Assure that work done at the site by Customer or by others shall not
unreasonably interfere with Lucent's performance of Services.
13. MOVES AND MODIFICATIONS
Customer may move or modify any Product being maintained, but must promptly
notify Lucent in writing of such move or modification. Customer agrees to pay
reasonably demonstrated
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<PAGE>
additional charges if the move or modification increases Lucent's costs or
expenses of providing maintenance Services.
14. MAINTENANCE NOT COVERED
This Agreement does not cover maintenance services required to repair damages,
malfunctions, or service failures caused by:
(a) Customer's failure to follow manufacturer relevant installation, operation
or maintenance instructions;
(b) Failure of a host computer, or other equipment or software not maintained
under this Agreement;
(c) Customer's abuse, misuse.
(d) Power failure or surges, lightning, fire, flood, pest damage, accident,
actions of third parties and other events outside Lucent's reasonable control or
not arising under normal operating conditions; and
(e) Maintenance repair performed by a party not authorized by Lucent.
Lucent may agree to perform such maintenance services on a time and materials
basis.
15. ASSIGNMENT
Except as provided below, neither party shall assign this Agreement or any right
or interest under this Agreement, nor delegate any work or obligation to be
performed under this Agreement (an "assignment"), without the other party's
prior written consent. Such consent shall not be unreasonably withheld or
delayed. Any attempted assignment in contravention of this shall be void and
ineffective. Nothing shall preclude a party from employing a subcontractor in
carrying out its obligations under this Agreement. A party's use of such
subcontractor shall not release the party from its obligations under this
Agreement.
Notwithstanding the foregoing, nothing herein shall preclude an assignment by
Customer, without the consent of Lucent, to an entity controlling, controlled by
or under common control with, or which acquires or succeeds to ownership of
substantially all of the assets and operations of Customer, or to its financing
parties for collateral security purposes (a "Permitted Assignment") provided,
however, that (a) a Permitted Assignment shall not include an assignment where
Customer is in material breach or default of this Agreement at such time as
Customer seeks to effectuate such assignment and such breach or default will not
be cured immediately upon giving effect to such assignment; and (b) a Permitted
Assignment shall not include an assignment by Customer to any party or entity
who (1) in the reasonable opinion of Lucent, does not have sufficient financing
in place or other financial resources sufficient to consummate the purchases
contemplated under this Agreement, or (2) is a manufacturer of
telecommunications products or a provider of related services in competition
with Lucent. In no event shall a Permitted Assignment operate to diminish the
rights (including, without limitation, relating to any purchase commitments) or
increase the obligations of Lucent under, this Agreement or any existing
agreement between
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Lucent and the assignee for the procurement of Products, Licensed Materials, or
Services available for procurement by Customer under this Agreement (a
"Pre-Existing Agreement") or to supersede any such Pre-Existing Agreement. In
the event of a Permitted Assignment to Customer's financing parties for
collateral security purposes, Lucent shall, at no out-of-pocket cost to Lucent,
cooperate with such parties in connection with the execution of collateral
assignment documents which are reasonably and customary in connection with
Customer's project financings.
For the purposes of this clause, the term "Agreement" includes this Agreement,
any subordinate agreement placed under this Agreement and any order placed under
this Agreement or subordinate agreement.
16. NONWAIVER
No waiver of the terms and conditions of this Agreement, or the failure of
either party strictly to enforce any such term or condition on one or more
occasions shall be construed as a waiver of the same or of any other term or
condition of this Agreement on any other occasion.
17. RELEASES VOID
Neither party shall require waivers or releases of any personal rights from
representatives of the other in connection with visits to its premises and both
parties agree that no such releases or waiver shall be pleaded by them or third
persons in any action or proceeding.
18. APPLICABLE LAWS
The construction and interpretation of, and the rights and obligations of the
parties pursuant to, this Agreement shall be governed by the laws of the State
of New York without reference the conflicts of law provisions. The parties
further agree to the jurisdiction of New York courts.
19. SURVIVAL OF OBLIGATIONS
The parties' rights and obligations that, by their nature, would continue beyond
the termination, cancellation, or expiration of this Agreement, shall survive
such termination, cancellation or expiration.
20. TERMINATION FOR CAUSE
Either party may terminate this Agreement if the other fails to perform or
observe any material term or condition of this Agreement and such failure shall
continue unremedied for thirty (30) calendar days after receipt of written
notice thereof. Neither party shall terminate this Agreement as result of a
dispute related to this Agreement if such dispute has been referred to
arbitration pursuant to Section 24, Arbitration, until such dispute has been
finally settled.
21. AUTHORIZED CUSTOMER CONTACTS
Only authorized Customer contacts listed in this Agreement shall contact the
Lucent Designated Support Center. Customer may change its authorized contact(s)
upon ten (10) days prior written notice to Lucent Customer hereby grants
authority to its authorized contacts to incur on its behalf
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<PAGE>
Call-Out, Out-of-Coverage Hour charges, or Consultation Services which will be
billed to the Customer's Purchase Order identified in the Service Agreement,
unless otherwise provided.
22. NOTICES
All notices under this Agreement shall be in writing (except for requests for
services) and shall be addressed to the addresses set forth at the beginning of
this Agreement or to such other address as either party may designate by notice
pursuant hereto and whose telephone and facsimile numbers are listed below. Such
notices shall be deemed to have been given when received.
If to Customer: With copy to:
KMC Telecom Inc. Kelley Drye & Warren LLP
Chief Financial Officer Anne Falvey, Esq.
1545 Route 206, Suite 300 101 Park Avenue
Bedminster, New Jersey 07921 New York, New York 10178
If to Lucent: With copy to:
Lucent Technologies Inc Lucent Technologies Inc
Contract Management, Network Systems Mr. J. Michael Hartnett
I-85 & Mt. Hope Church Road Law Department
McLeansville, North Carolina 27301 283 King George Road
Warren, New Jersey 07059
23. HAZARDOUS MATERIALS/CONDITIONS
The Customer has the responsibility to inform, identify, correct, mark, monitor,
remove, and/or dispose of any hazardous materials or conditions prior to start
of on-site Service, If hazardous materials or conditions are found to affect
provision of Services, work stoppage or delay will occur until the site is no
longer injurious to Lucent's employees. Customer may be billed for additional
work effort or expenses arising out of such work stoppage or delay.
24. ARBITRATION:
If a dispute arises out of or relates to this Agreement, or its breach, the
parties agree to submit the dispute to arbitration governed by the United States
Arbitration Act, and judgment on the award may be entered in any court having
jurisdiction. Any such arbitration shall proceed before three (3) arbitrators.
The party invoking arbitration (the "Claimant Party") shall notify the other
party (the "Respondent Party") in writing (i) setting forth its basic position
in the dispute, (ii) requesting the Respondent Party promptly to appoint its
arbitrator and to notify the Claimant Party of such person's identity. The
Respondent Party shall within thirty (30) days thereafter appoint its own
arbitrator and immediately advise the Claimant Party in writing of the identity
of the arbitrator. If the Respondent Party has not notified the Claimant Party
within the thirty (30) days of the identity and appointment of its arbitrator,
such arbitrator shall thereupon, at the request of the Claimant Party, be
promptly appointed in accordance with the rules of the U.S. Arbitration Act.
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<PAGE>
The two (2) arbitrators so appointed shall, within fifteen (15) calendar days
after the date as of which they have both been identified, select any person
agreeable to both of them to serve as the third arbitrator and chairman. If the
two (2) arbitrators appointed on behalf of the respective parties fail to agree,
as provided above, such third arbitrator shall promptly be appointed in
accordance with said rules. The arbitrators may determine issues of
arbitrability, but may not award punitive damages or limit, expand or otherwise
modify the terms of this Agreement. The parties, their representatives, other
participants and the arbitrators shall hold the existence, content and result of
arbitration in confidence.
25. INDEMNITY
Each party agrees to indemnify, defend and hold harmless the other party, any of
its affiliated companies, and all of their respective directors, officers,
employees, agents, representatives, servants, successors and assigns
("Indemnitees"), from and against all actions, causes of action, claims,
administrative proceedings, and demands, and all losses, liabilities, judgments,
decrees, fines, penalties, damages, obligations, expenses, amounts paid in
settlement and investigation and costs and charges of any kind, including but
not limited to, attorney's and investigation fees, including such fees incurred
to enforce this clause (collectively, "Claims"), relating in any way whatsoever
to, or arising from the following:
(1) any Claims involving any failure by indemnifying party or any of its
affiliates to comply with any law, statute, code, ordinance, regulation, rule or
order of any governmental or quasi-governmental body, in the performance of
either party's responsibility under this Agreement;
(2) any Claims on account of (i) injury to or death of persons or (ii)
damages to or loss of real or tangible personal property arising directly or
indirectly out of indemnifying party's acts or omissions under this Agreement;
(3) all taxes and fees, penalties and interest payable thereon, payable by
indemnifying party in connection with this Agreement;
(4) claims against Lucent relating to all laborers', mechanics' or
materialmen's liens upon Customer's facilities and/or any property of Customer
arising out of Services performed by Seller or by its subcontractors in
connection with this Agreement.
26. EXECUTION IN COUNTERPARTS
This Agreement may be executed in counterparts by the parties hereto, each of
which when so executed and delivered shall be an original, but both the
counterparts shall together constitute one and the same instrument. All
signatures need not appear on the same counterpart.
27. SEVERABILITY
If any provision of this Agreement is held to be invalid or unenforceable, such
holding shall not affect the remaining provisions of this Agreement, it being
the intent of the parties that the rights and obligations therein shall continue
despite, or to the extent not affected by, such holding.
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<PAGE>
28. ENTIRE AGREEMENT
The terms and conditions contained in this Agreement including all Appendices
listed below, supersede all prior oral or written understandings between the
parties with respect to the subject matter thereof and constitute the entire
agreement of the parties with respect to such subject matter. Such terms and
conditions shall not be modified or amended except by a writing signed by
authorized representatives of both parties.
Appendix A Statement of Work
Appendix B Definitions Statement of Work
Appendix C Non-Lucent Products
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly
authorized representatives on the date(s) indicated.
LUCENT TECHNOLOGIES INC. KMC TELECOM INC.
By: Thomas C. Gaddy By: Cynthia Worthman
- -------------------------- ---------------------------
PRINTED PRINTED
/s/ Thomas Guddy /s/ Cynthia Worthman
- -------------------------- ---------------------------
SIGNED SIGNED
Sales Director Chief Financial Officer and Secretary
TITLE TITLE
September 18, 1997 September 16, 1997
DATE DATE
Lucent/KMC Proprietary
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<PAGE>
APPENDIX B
DEFINITIONS
CALL-OUT SERVICES: A) When requested by Customer, Call-Out Services are provided
on an availability basis and are billed at the rates identified in Appendix A,
Section 2. B) Rates are measured from the start of remote diagnostic assistance
or from time of dispatch until return to point of dispatch. C) Minimum billing
requirements apply and are identified in Appendix A, Section 2.
ADDITIONAL OPERATIONS SERVICES: Diagnostic assistance provided from product or
system specialists. Charges for Additional Operations Services are billed at
the rates identified in Appendix A, Section 2. Minimum charges for remote
diagnostics (voice or modem) are billed at the rates identified in Appendix A,
Section 2. If on-site visitation is required, minimum charges are billed for
eight hours plus incurred travel and living expenses.
EFFECTIVE DATE means the date that the Agreement is executed by the parties.
PRODUCT means systems and equipment provided by Lucent or other manufacturers
for which Lucent is providing Services hereunder; other manufacturers' products
are identified in Appendix C attached hereto.
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<PAGE>
APPENDIX C
NON-LUCENT PRODUCTS
MANUFACTURER DESCRIPTION
Fujitsu FLM150 ADM
Fujitsu FLM600 ADM
Fujitsu FLM2400 ADM
Fujitsu FLM6 ADM
Tellabs Titan 5500S
Telcom Solutions DCD - LPR GPS Timing Receiver
Telcom Solutions DCD 523
Cumming Onan Power Plant Backup Generator with Automatic
Transfer Switch
Lucent/KMC Proprietary
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<PAGE>
Exhibit 10.9
1996 STOCK PURCHASE AND OPTION PLAN
FOR KEY EMPLOYEES OF
KMC TELECOM, INC. AND AFFILIATES
1. PURPOSE OF PLAN
The 1996 Stock Purchase and Option Plan for Key Employees of KMC Telecom,
Inc. and Affiliates (the "Plan") is designed:
(a) to promote the long term financial interests and growth of KMC Telecom,
Inc. (the "Corporation") and its affiliates by attracting and retaining
management personnel with the training, experience and ability to enable them to
make a substantial contribution to the success of the Corporation's business;
(b) to motivate management personnel by means of growth-related incentives
to achieve long range goals; and
(c) to further the alignment of interests of participants with those of the
stockholders of the Corporation through opportunities for increased stock, or
stock-based, ownership in the Corporation.
2. DEFINITIONS
As used in the Plan, the following words shall have the following meanings:
(a) "Affiliate" means, with respect to the Corporation, any corporation
directly or indirectly controlling, controlled by, or under common control with,
the Corporation or any other entity designated by the Board of Directors of the
Corporation in which the Corporation or an Affiliate has an interest.
(b) "Board of Directors" means the Board of Directors of the Corporation.
(c) "Change of Control" shall mean the purchase or other acquisition by
any person, entity or group of persons, within the meaning of section 13(d) of
14(d) of the Securities Exchange Act of 1934, or any comparable successor
provisions, of (i) ownership of fifty percent (50%) or more of the combined
voting power of the Company's then outstanding voting securities entitled to
vote generally or (ii) all or substantially all of the direct and indirect
assets of the Company and its subsidiaries.
(d) "Committee" means the Compensation Committee of the Board of
Directors.
<PAGE>
2
(e) "Common Stock" or "Share" means common stock of the Corporation which
may be authorized but unissued, or issued and reacquired.
(f) "Employee" means a person, including an officer, in the regular full-
time employment of the Corporation or one of its Affiliates who, in the opinion
of the Committee, is, or is expected to be, primarily responsible for the
management, growth or protection of some part or all of the business of the
Corporation.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(h) "Fair Market Value" shall mean with respect to the Common Stock of the
Corporation, (A) if on the date as of which Fair Market Value is being
determined such class of capital stock is listed on a national securities
exchange or is quoted in the NASDAQ System or the over-the-counter market, the
last sale price, regular way, of such security on the principal national
securities exchange on which such security is at the time listed, or (B) if
there have been no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on such exchange at the end of such day, or
(C) if on any day such security is not so listed, the average of the
representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M.,
New York time, or (D) if on any day such security is not quoted in the NASDAQ
System, the average of the highest bid and lowest asked prices on such day in
the domestic over-the-counter market as reported by the National Quotation
Bureau, Incorporated, or any similar successor organization, in each such case
of clauses (A)-(D) averaged over a period of 20 days consisting of the day as of
which Fair Market Value is being determined and the latest 19 consecutive
trading days prior to such day, or (E) if the Common Stock is not publicly
traded the fair market value of the Common Stock as determined in good faith by
the Board.
(i) "Grant" means an award made to a Participant pursuant to the Plan and
described in Paragraph 5, including, without limitation, an award of an
Incentive Stock Option, Stock Option, Stock Appreciation Right, Dividend
Equivalent Right, Restricted Stock, Purchase Stock, Performance Units,
Performance Shares or Other Stock Based Grant or any combination of the
foregoing.
(j) "Grant Agreement" means an agreement between the Corporation and a
Participant that sets forth the terms, conditions and limitations applicable to
a Grant.
(k) "Nassau Affiliate" means, with respect to Nassau Capital L.L.C., any
corporation directly or indirectly controlling, controlled by, or under common
control with, Nassau Capital L.L.C., other than the Corporation and its
Subsidiaries.
(l) "Participant" means an Employee, director or other person having a
unique relationship with the Corporation or one of its Affiliates, to whom one
or more Grants have been made and such Grants have not all been forfeited or
terminated under the Plan.
<PAGE>
3
(m) "Stock-Based Grants" means the collective reference to the grant of
Stock Appreciation Rights, Dividend Equivalent Rights, Restricted Stock,
Performance Units, Performance Shares and Other Stock Based Grants.
(n) "Stock Options" means the collective reference to "Incentive Stock
Options" and "Other Stock Options".
(o) "Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Corporation if each of the corporations, or
group of commonly controlled corporations, other than the last corporation in
the unbroken chain then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
3. ADMINISTRATION OF PLAN
(a) The Plan shall be administered by the Committee. Except as provided
in Section 4, the members of the Committee shall be eligible to be selected for
Grants under the Plan; provided, however, that the members of the Committee
shall qualify to administer the Plan for purposes of Rule 16b-3 (and any other
applicable rule) promulgated under Section 16(b) of the Exchange Act to the
extent that the Corporation is subject to such rule. The Committee may adopt
its own rules of procedure, and action of a majority of the members of the
Committee taken at a meeting, or action taken without a meeting by unanimous
written consent, shall constitute action by the Committee. The Committee shall
have the power and authority to administer, construe and interpret the Plan, to
make rules for carrying it out and to make changes in such rules. Any such
interpretations, rules, and administration shall be consistent with the basic
purposes of the Plan.
(b) The Committee may delegate to the Chief Executive Officer and to other
senior officers of the Corporation its duties under the Plan subject to such
conditions and limitations as the Committee shall prescribe except that only the
Committee may designate and make Grants to Participants who are subject to
Section 16 of the Exchange Act.
(c) The Committee may employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Corporation, and the
officers and directors of the Corporation shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee in good faith shall be
final and binding upon all Participants, the Corporation and all other
interested persons. No member of the Committee shall be personally liable for
any action, determination or interpretation made in good faith with respect to
the Plan or the Grants, and all members of the Committee shall be fully
protected by the Corporation with respect to any such action, determination or
interpretation.
<PAGE>
4
(d) If, at any time, the Committee has less than three members and it is
unable to reach a decision on a matter, that matter shall be determined by the
Board of Directors.
4. ELIGIBILITY
The Committee may from time to time make Grants under the Plan to such
Employees, directors or other persons having a unique relationship with the
Corporation or any of its Affiliates, and in such form and having such terms,
conditions and limitations as the Committee may determine; provided, however,
that neither Harold N. Kamine nor any person employed by Nassau Capital L.L.C.
or any Nassau Affiliate shall be eligible for Grants under the Plan. Grants may
be granted singly, in combination or in tandem. The terms, conditions and
limitations of each Grant under the Plan shall be set forth in a Grant
Agreement, in a form approved by the Committee, consistent, however, with the
terms of the Plan; provided, however, such Grant Agreement shall contain
provisions dealing with the treatment of Grants in the event of the termination,
death or disability of a Participant, and may also include provisions concerning
the treatment of Grants in the event of a Change of Control of Corporation.
5. GRANTS
From time to time, the Committee will determine the forms and amounts of
Grants for Participants. Such Grants may take the following forms in the
Committee's sole discretion:
(a) INCENTIVE STOCK OPTIONS - These are stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended ("Code"), to
purchase Common Stock. In addition to other restrictions contained in the Plan,
an option granted under this Paragraph 5(a), (i) may not be exercised more than
10 years after the date it is granted, (ii) may not have an option price less
than the Fair Market Value of Common Stock on the date the option is granted,
(iii) must otherwise comply with Code Section 422, and (iv) must be designated
as an "Incentive Stock Option" by the Committee. The maximum aggregate Fair
Market Value of Common Stock (determined at the time of each Grant) with respect
to which Incentive Stock Options are first exercisable with respect to any
participant under this Plan and any Incentive Stock Options granted to the
Participant for such year under any plans of the Corporation or any Subsidiary
in any calendar year is $100,000. Payment of the option price shall be made in
cash or in shares of Common Stock, or a combination thereof, in accordance with
the terms of the Plan, the Grant Agreement, and of any applicable guidelines of
the Committee in effect at the time.
(b) OTHER STOCK OPTIONS - These are options to purchase Common Stock which
are not designated by the Committee as "Incentive Stock Options". At the time
of the Grant the Committee shall determine, and shall include in the Grant
Agreement or other Plan rules, the option exercise period, the option price, and
such other conditions or restrictions on the
<PAGE>
5
grant or exercise of the option as the Committee deems appropriate, which may
include the requirement that the grant of options is predicated on the
acquisition of Purchase Shares under Paragraph 5(e) by the Optionee. In
addition to other restrictions contained in the Plan, an option granted under
this Paragraph 5(b), (i) may not be exercised more than 10 years after the date
it is granted and (ii) may not have an option exercise price less than 50% of
the Fair Market Value of Common Stock on the date the option is granted.
Payment of the option price shall be made in cash or in shares of Common Stock,
or a combination thereof, in accordance with the terms of the Plan, the Grant
Agreement and of any applicable guidelines of the Committee in effect at the
time.
(c) STOCK APPRECIATION RIGHTS - These are rights that on exercise entitle
the holder to receive the excess of (i) the Fair Market Value of a share of
Common Stock on the date of exercise over (ii) the Fair Market Value on the date
of Grant (the "base value") multiplied by (iii) the number of rights exercised
as determined by the Committee. Stock Appreciation Rights granted under the
Plan may, but need not be, granted in conjunction with an Option under Paragraph
5(a) or 5(b). The Committee, in the Grant Agreement or by other Plan rules, may
impose such conditions or restrictions on the exercise of Stock Appreciation
Rights as it deems appropriate, and may terminate, amend, or suspend such Stock
Appreciation Rights at any time. No Stock Appreciation Right granted under this
Plan may be exercised less than 6 months or more than 10 years after the date it
is granted except in the event of death or disability of a Participant. To the
extent that any Stock Appreciation Right that shall have become exercisable, but
shall not have been exercised or cancelled or, by reason of any termination of
employment, shall have become non-exercisable, it shall be deemed to have been
exercised automatically, without any notice of exercise, on the last day on
which it is exercisable, provided that any conditions or limitations on its
exercise are satisfied (other than (i) notice of exercise and (ii) exercise or
election to exercise during the period prescribed) and the Stock Appreciation
Right shall then have value. Such exercise shall be deemed to specify that the
holder elects to receive cash and that such exercise of a Stock Appreciation
Right shall be effective as of the time of automatic exercise.
(d) RESTRICTED STOCK - Restricted Stock is Common Stock delivered to a
Participant with or without payment of consideration with restrictions or
conditions on the Participant's right to transfer or sell such stock; provided
that the price of any Restricted Stock delivered for consideration and not as
bonus stock may not be less than 50% of the Fair Market Value of Common Stock on
the date such Restricted Stock is granted or the price of such Restricted Stock
may be the par value. If a Participant irrevocably elects in writing in the
calendar year preceding a Grant of Restricted Stock, dividends paid on the
Restricted Stock granted may be paid in shares of Restricted Stock equal to the
cash dividend paid on Common Stock. The number of shares of Restricted Stock
and the restrictions or conditions on such shares shall be as the Committee
determines, in the Grant Agreement or by other Plan rules, and the certificate
for the Restricted Stock shall bear evidence of the restrictions or conditions.
No Restricted Stock may have a restriction period of less than 6 months, other
than in the case of death or disability.
<PAGE>
6
(e) PURCHASE STOCK - Purchase Stock refers to shares of Common Stock
offered to a Participant at such price as determined by the Committee, the
acquisition of which will make him eligible to receive under the Plan,
including, but not limited to, Other Stock Options; provided, however, that the
price of such Purchase Shares may not be less than 50% of the Fair Market Value
of the Common Stock on the date such shares of Purchase Stock are offered.
(f) DIVIDEND EQUIVALENT RIGHTS - These are rights to receive cash payments
from the Corporation at the same time and in the same amount as any cash
dividends paid on an equal number of shares of Common Stock to shareholders of
record during the period such rights are effective. The Committee, in the Grant
Agreement or by other Plan rules, may impose such restrictions and conditions on
the Dividend Equivalent Rights, including the date such rights will terminate,
as it deems appropriate, and may terminate, amend, or suspend such Dividend
Equivalent Rights at any time.
(g) PERFORMANCE UNITS - These are rights to receive at a specified future
date payment in cash of an amount equal to all or a portion of the value of a
unit granted by the Committee. At the time of the Grant, in the Grant Agreement
or by other Plan rules, the Committee must determine the base value of the unit,
the performance factors applicable to the determination of the ultimate payment
value of the unit and the period over which the Corporation's performance will
be measured. These factors must include a minimum performance standard for the
Corporation below which no payment will be made and a maximum performance level
above which no increased payment will be made. The term over which the
Corporation's performance will be measured shall be not less than six months.
(h) PERFORMANCE SHARES - These are rights to receive at a specified future
date payment in cash or Common Stock, as determined by the Committee, of an
amount equal to all or a portion of the average Fair Market Value for all days
that the Common Stock is traded during the last forty-five (45) days of the
specified period of performance of a specified number of shares of Common Stock
at the end of a specified period based on the Corporation's performance during
the period. At the time of the Grant, the Committee, in the Grant Agreement or
by Plan rules, will determine the factors which will govern the portion of the
rights so payable and the period over which the Corporation's performance will
be measured. The factors will be based on the Corporation's performance and
must include a minimum performance standard for the Corporation below which no
payment will be made and a maximum performance level above which no increased
payment will be made. The term over which the Corporation's performance will be
measured shall be not less than six months. Performance Shares will be granted
for no consideration.
(i) OTHER STOCK-BASED GRANTS - The Committee may make other Grants under
the Plan pursuant to which shares of Common Stock (which may, but need not, be
shares of Restricted Stock pursuant to Paragraph 5(d)) or other equity
securities of the Corporation are or may in the future be acquired, or Grants
denominated in stock units, including ones valued using measures other than
market value. Other Stock-Based Grants may be granted with or
<PAGE>
7
without consideration; provided, however, that the price of any such Grant made
for consideration that provides for the acquisition of shares of Common Stock or
other equity securities of the Corporation may not be less than 50% of the Fair
Market Value of the Common Stock or such other equity securities on the date of
grant of such Grant. Such Other Stock-Based Grants may be made alone, in
addition to or in tandem with any Grant of any type made under the Plan and must
be consistent with the purposes of the Plan.
6. LIMITATIONS AND CONDITIONS
(a) The number of Shares available for Grants under this Plan shall be
150,000 shares of the authorized Common Stock as of the effective date of the
Plan, subject to adjustment in accordance with Section 8 or 9 hereof. The
number of Shares subject to Grants under this Plan to any one Participant shall
not be more than 40,000 shares, subject to adjustment in accordance with Section
8 or 9 hereof. Unless restricted by applicable law, Shares related to Grants
that are forfeited, terminated, cancelled or expire unexercised, shall
immediately become available for Grants.
(b) No Grants shall be made under the Plan beyond ten years after the
effective date of the Plan, but the terms of Grants made on or before the
expiration of the Plan may extend beyond such expiration. At the time a Grant
is made or amended or the terms or conditions of a Grant are changed, the
Committee may provide for limitations or conditions on such Grant.
(c) Nothing contained herein shall affect the right of the Corporation to
terminate any Participant's employment at any time or for any reason.
(d) Deferrals of Grant payouts may be provided for, at the sole discretion
of the Committee, in the Grant Agreements.
(e) Except as otherwise prescribed by the Committee, the amounts of the
Grants for any employee of a Affiliate, along with interest, dividend, and other
expenses accrued on deferred Grants, shall be charged to the Participant's
employer during the period for which the Grant is made. If the Participant is
employed by more than one Affiliates or by both the Corporation and an Affiliate
during the period for which the Grant is made, the Participant's Grant and
related expenses will be allocated between the companies employing the
Participant in a manner prescribed by the Committee.
(f) Other than as specifically provided with regard to the death of a
Participant, no benefit under the Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or
charge, and any attempt to do so shall be void. No such benefit shall, prior to
receipt thereof by the Participant, be in any manner liable for or subject to
the debts, contracts, liabilities, engagements, or torts of the Participant.
<PAGE>
8
(g) Participants shall not be, and shall not have any of the rights or
privileges of, stockholders of the Corporation in respect of any Shares
purchasable in connection with any Grant unless and until certificates
representing any such Shares have been issued by the Corporation to such
Participants.
(h) No election as to benefits or exercise of Stock Options, Stock
Appreciation Rights, or other rights may be made during a Participant's lifetime
by anyone other than the Participant except by a legal representative appointed
for or by the Participant.
(i) Absent express provisions to the contrary, any grant under this Plan
shall not be deemed compensation for purposes of computing benefits or
contributions under any retirement plan of the Corporation or its Subsidiaries
and shall not affect any benefits under any other benefit plan of any kind now
or subsequently in effect under which the availability or amount of benefits is
related to level of compensation. This Plan is not a "Retirement Plan" or
"Welfare Plan" under the Employee Retirement Income Security Act of 1974, as
amended.
(j) Unless the Committee determines otherwise, no benefit or promise under
the Plan shall be secured by any specific assets of the Corporation or any of
its Subsidiaries, nor shall any assets of the Corporation or any of its
Subsidiaries be designated as attributable or allocated to the satisfaction of
the Corporation's obligations under the Plan.
7. TRANSFERS AND LEAVES OF ABSENCE
For purposes of the Plan, unless the Committee determines otherwise: (a) a
transfer of a Participant's employment without an intervening period of
separation among the Corporation and any Affiliate shall not be deemed a
termination of employment, and (b) a Participant who is granted in writing a
leave of absence shall be deemed to have remained in the employ of the
Corporation during such leave of absence.
8. ADJUSTMENTS
In the event of any change in the outstanding Common Stock by reason of a
stock split, spin-off, stock dividend, stock combination or reclassification,
recapitalization or merger, Change of Control or similar event, or as required
under any Grant Agreement, the Committee may adjust appropriately the number of
Shares subject to the Plan and available for or covered by Grants and Share
prices related to outstanding Grants and make such other revisions to
outstanding Grants as it deems are equitably required.
9. MERGER, CONSOLIDATION, EXCHANGE,
ACQUISITION, LIQUIDATION OR DISSOLUTION
In its absolute discretion, and on such terms and conditions as it deems
appropriate, coincident with or after the grant of any Stock Option or any
Stock-Based Grant,
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9
the Committee may provide, with respect to the merger or consolidation of the
Corporation into another corporation, the exchange of all or substantially all
of the assets of the Corporation for the securities of another corporation, a
Change of Control or the recapitalization, reclassification, liquidation or
dissolution of the Corporation, either a) that such Stock Option or Stock-Based
Grant cannot be exercised after such event, in which case the Committee shall
also provide, either by the terms of such Stock Option or Stock-Based Grant or
by a resolution adopted prior to the occurrence of such event, that for some
period of time prior to such event, such Stock Option or Stock-Based Grant shall
be exercisable as to all shares subject thereto which are exercisable or, by
virtue of the event, become exercisable, notwithstanding anything to the
contrary herein (but subject to the provisions of Paragraph 6(b)) and that, upon
the occurrence of such event, such Stock Option or Stock-Based Grant shall
terminate and be of no further force or effect; or b) that even if the Stock
Option or Stock-Based Grant shall remain exercisable after such event, from and
after such event, any such Stock Option or Stock-Based Grant shall be
exercisable only for the kind and amount of securities and/or other property, or
the cash equivalent thereof, receivable as a result of such event by the holder
of a number of shares of stock for which such Stock Option or Stock-Based Grant
could have been exercised immediately prior to such event.
In addition, in the event of a Change of Control, the Committee may,
in its absolute discretion and on such terms and conditions as it deems
appropriate, provide, either by the terms of such Stock Option or Stock-Based
Grant or by a resolution adopted prior to the occurrence of the Change of
Control, that such Stock Option or Stock-Based Grant shall be exercisable as to
all or any portion of the shares subject thereto, notwithstanding anything to
the contrary herein (but subject to the provisions of Paragraph 6(b)).
10. AMENDMENT AND TERMINATION
The Committee shall have the authority to make such amendments to any terms
and conditions applicable to outstanding Grants as are consistent with this Plan
provided that, except for adjustments under Paragraph 8 or 9 hereof, no such
action shall modify such Grant in a manner adverse to the Participant without
the Participant's consent except as such modification is provided for or
contemplated in the terms of the Grant.
The Board of Directors may amend, suspend or terminate the Plan except that
no such action, other than an action under Paragraph 8 or 9 hereof, may be taken
which would, without shareholder approval (but only if such approval is
necessary for exemption under Section 16(b) of the Exchange Act), increase the
aggregate number of Shares available for Grants under the Plan, decrease the
price of outstanding Options or Stock Appreciation Rights, change the
requirements relating to the Committee or extend the term of the Plan.
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10
11. WITHHOLDING TAXES
The Corporation shall have the right to deduct from any cash payment made
under the Plan any federal, state or local income or other taxes required by law
to be withheld with respect to such payment. It shall be a condition to the
obligation of the Corporation to deliver shares upon the exercise of an Option
or Stock Appreciation Right, upon payment of Performance units or shares, upon
delivery of Restricted Stock or upon exercise, settlement or payment of any
Other Stock-Based Grant that the Participant pay to the Corporation such amount
as may be requested by the Corporation for the purpose of satisfying any
liability for such withholding taxes. Any Grant Agreement may provide that the
Participant may elect, in accordance with any conditions set forth in such Grant
Agreement, to pay a portion or all of such withholding taxes in shares of Common
Stock.
12. EFFECTIVE DATE AND TERMINATION DATES
The Plan shall be effective on and as of the date of its approval by the
stockholders of the Corporation and shall terminate ten years later, subject to
earlier termination by the Board of Directors pursuant to Paragraph 10;
PROVIDED, HOWEVER, that any payment under the Plan which would constitute a
"parachute payment" under section 280G of the Code must be approved by a vote of
75% of the Corporation's stockholders to be effective.
<PAGE>
EX 10.10
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made as of this ___ day
of July, 1996 (the "Commencement Date"), by and between KMC TELECOM INC., a
New Jersey corporation with its principal place of business located at 1545
Route 206, Suite 300 Bedminster, N.J. 07921 ("KMC") and MICHAEL A. STERNBERG,
an individual, residing at 834 Raintree Drive, Naperville, Illinois 60540
("Mr. Sternberg").
W I T N E S E T H:
WHEREAS, KMC is engaged in, among other things, the development, licensing,
design, financing, installation, marketing, sale and operation of
voice/video/data communications systems including but not limited to competitive
access provider systems (individually, a "Project", collectively
"Telecommunication Projects");
WHEREAS, KMC believes that Mr. Sternberg has extensive experience and
knowledge with respect to the development, licensing, design, marketing, sale,
financing, installation and operation of Telecommunication Projects and further
KMC believes that Mr. Sternberg will make a significant contribution in
developing and maintaining KMC's business and desires Mr. Sternberg to be the
President and Chief Executive Officer of KMC by, among other things, offering
Mr. Sternberg the compensation and benefits package provided for herein; and
WHEREAS, KMC desires to formalize the terms of employment of Mr. Sternberg,
and Mr. Sternberg agrees to formalize the terms of his employment as hereinafter
set forth and to supervise the development, licensing, design, marketing, sale,
financing,
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installation and operation of Telecommunication Projects located primarily, but
not exclusively, in cities within the contiguous forty-eight United States (the
"Territory").
NOW, THEREFORE, in consideration of the mutual promises, agreements and
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which hereby is acknowledged, KMC and Mr. Sternberg
agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms
shall have the meanings set forth below:
"Affiliate" shall mean any corporation, partnership or other business
entity owned, controlled or in which Harold N. Kamine or his family has a
substantial interest directly or indirectly which is engaged in
Telecommunication Projects or which is a successor in interest to KMC, and for
purposes hereof "substantial interest" shall mean the ownership of 15% or more
of the equity interest in such entity.
"Base Salary" shall have the meaning assigned to it in Section 4(a) of this
Agreement.
"Bonus Payment" shall have the meaning assigned to it in Section 4(c) of
this Agreement.
"Business" shall mean the business conducted by KMC in the past and on the
date of execution of this Agreement, including business activities under review
or in developmental stages, all other business activities which emanate
therefrom by a reasonable expansion of the present activities of KMC, all
business activities which may be developed by KMC during the Term, and all
business activities now conducted by any Affiliate of KMC or which may be
developed by such Affiliate, during the term of this Agreement, as reasonable
expansions of their present activities.
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"Business Plan" shall mean KMC's business plan with respect to the full
scale development of competitive access provider network(s) and other
Telecommunication Projects.
"CAP Project" shall have the meaning assigned to it in Section 4(c).
"Commencement Date" shall mean the date of this Agreement, as stated in the
preamble on page 1.
"Companies" shall have the meaning assigned to it in Section 2(c).
"Employment Year" shall mean each twelve-month period during which Mr.
Sternberg is employed hereunder commencing on the Commencement Date.
"Project" shall have the meaning assigned to it in the first whereas
paragraph.
"Subject Matter" shall have the meaning assigned to it in Section 3(e).
"Telecommunication Projects" shall have the meaning assigned to it in the
first WHEREAS paragraph.
"Term" shall mean the term of employment of Mr. Sternberg under this
Agreement.
"Territory" shall have the meaning assigned to it in the third WHEREAS
paragraph.
Wherever from the context it appears appropriate, each word or phrase
stated in either the singular or the plural shall include the singular and the
plural, and each pronoun stated in the masculine, feminine or neuter gender
shall include the masculine, feminine and neuter.
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2. EMPLOYMENT AND DUTIES.
(a) Employment and Term. KMC hereby agrees to employ Mr. Sternberg,
and Mr. Sternberg hereby agrees to be employed by KMC, upon the terms and
conditions set forth herein. The Term of Mr. Sternberg's employment hereunder
shall commence as of the Commencement Date and, except as otherwise provided in
this Agreement, shall continue for a period of three (3) consecutive years and
end on July 29, 1999, subject to extension thereafter as provided in Section
2(b), below.
(b) Extension of Term of Employment. If Mr. Sternberg's employment
hereunder has not previously been terminated in accordance with Section 9
hereof, then KMC shall have the sole and absolute right to extend the Term of
Mr. Sternberg's employment hereunder, on the terms and conditions set forth
herein for a further period of two (2) years, by written notice to Mr. Sternberg
delivered within ninety (90) days of the end of the Term.
(c) Duties. KMC shall employ Mr. Sternberg as President and Chief
Executive Officer of KMC. As President and Chief Executive Officer, Mr.
Sternberg shall have the responsibility and authority to
(i) supervise and administer the development, marketing, sales,
financing, installation and operation of Telecommunication Projects, including
without limitation, CAP Projects to corporations or other entities (such
corporations, together with such other entities, being herein referred to as the
"Companies"),
(ii) provide such customary services with respect to offering and
promoting the Business to Companies,
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(iii) assist in identification and introduction of Companies and
strategic business partners and joint ventures to KMC,
(iv) assist KMC, if required, in obtaining the execution by
Companies, acceptable to KMC, of binding, written commitments indicating that
such Companies will serve as joint venture partners of Project, provided that
any necessary requirements are met so that Project can be successfully financed
and built,
(v) supervise and administer all aspects of the Business with a
view to meeting KMC's short-term and long-term targets, including, but not
limited to (A) the management of all operations and personnel relating to the
Business, (B) the review, approval and recommendation of areas for modification
in the current Business Plan, and the preparation and presentation of a revised
Business Plan for each fiscal year not later than ninety (90) days prior to the
beginning of such fiscal year, and (C) the development of the Business as it
relates to KMC and its Affiliates or its joint venturers, in accordance with the
Business Plan, as amended from time to time,
(vi) perform such other duties as are usually attendant upon the
President and CEO of a corporation in the performance of the foregoing services,
and
(vii) assist in the raising of debt or equity capital for KMC.
(d) Performance of Services. During the term of his employment
hereunder, Mr. Sternberg shall
(i) perform faithfully the responsibilities assigned to him
hereunder to the best of his ability,
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(ii) devote his full and undivided business time, other than
during vacations taken in accordance with KMC's established policies, to the
performance of such responsibilities,
(iii) not engage, without the prior written approval of KMC, in
any other business activities, other than (A) personal investment activities
which are not in competition with the Business and in which Mr. Sternberg is not
in any managerial or active role and (B) for a period not exceeding ninety (90)
days after the Commencement Date, individual consulting projects commenced prior
to the Commencement Date, provided that such consulting activities are not
performed for entities in competition with the Business or interfere with Mr.
Sternberg's duties as President and Chief Executive Officer of KMC, and
(iv) if requested by KMC, perform the responsibilities assigned
to him hereunder or related services for the benefit of joint venturers or
subsidiaries of KMC to the best of his ability. Notwithstanding anything to the
contrary contained in this Agreement, nothing shall prevent the Board of
Directors of KMC from reasonably supervising the manner of performance of such
responsibilities by Mr. Sternberg.
(e) Services to KMC and/or its Subsidiaries. During the Term of
this Agreement, it is understood that Mr. Sternberg may be requested from time
to time to provide assistance or consultative or other services to, or to act
temporarily as an executive of a subsidiary of KMC other than (and in addition
to) KMC. Mr. Sternberg shall perform such services and, if elected as an
officer or director of any such other company, shall hold such office (and
discharge its duties) without additional compensation other than the
compensation set forth in this Agreement.
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(f) Place of Employment. The principal place of employment of
Mr. Sternberg shall be Bedminster, New Jersey. It is however distinctly
understood and agreed that Mr. Sternberg may be required, in connection with the
performance of his duties, to work from time to time at other locations
designated by the Board of Directors of KMC to carry out Mr. Sternberg's duties
as President and Chief Executive Officer. When required to travel to and/or
spend time at such other locations, Mr. Sternberg's reasonable and customary
traveling and temporary living expenses shall be reimbursed to him by KMC, upon
his submittal of detailed written vouchers, supported by appropriate
documentation in accordance with the general reimbursement policies of KMC with
respect to executive officers.
3. EXCLUSIVITY OF SERVICE; CONFIDENTIAL INFORMATION; UNIQUE SERVICES.
(a) Exclusive Service. During the Term and for a period of eighteen
(18) months after the date of termination of Mr. Sternberg's employment
hereunder, Mr. Sternberg shall not (i) directly or indirectly, as an employee,
agent, manager, director, officer, stockholder, partner or otherwise, own,
manage, operate, control, be employed by, participate in or be connected in any
manner whatsoever with the ownership, management, operation or control of any
business in competition with activities in which KMC, is engaged, (ii) solicit
from any Company, or any division, department or subsidiary of any Company, or
any individual employed by any of the foregoing, any business relating to
services similar to the services which were performed by KMC, its joint
venturers or Affiliates for such Company during Mr. Sternberg's employment by
KMC or (iii) request or cause any Company to cancel or terminate any business
relationship with KMC, its joint
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venturers or Affiliates, or directly or indirectly solicit or otherwise cause
any employee to terminate such employee's relationship with KMC, its joint
venturers or Affiliates.
(b) Invalidity. If any portion of the restrictions set forth in
Section 3(a) hereof should, for any reason whatsoever, be declared invalid by a
court of competent jurisdiction, the validity or enforceability of the remainder
of such restrictions shall not thereby be adversely affected.
(c) Reasonable Scope and Time Limitation. Mr. Sternberg acknowledges
and declares that the scope and time limitations set forth in Section 3(a) are
reasonable and customary, and properly required for the adequate protection of
the Business of KMC, its joint venturers, Affiliates and employees. In the
event any such scope or time limitation is deemed to be unreasonable by a court
of competent jurisdiction, Mr. Sternberg agrees to the reduction of said scope
or time limitation or such scope or period which said court shall have deemed
reasonable.
(d) Claim not a Defense. The existence of any claim or cause of
action by Mr. Sternberg against KMC other than under this Agreement shall not
constitute a defense to the enforcement by KMC of the foregoing restrictive
covenants, but such claim or cause of action shall be litigated separately.
(e) Disclosure of Subject Matter. Mr. Sternberg shall promptly and
fully disclose to KMC, and with all necessary detail for development, marketing,
sale and installation, any and all know-how, discoveries, inventions,
improvements, ideas, writings, formulae, processes and methods (whether
copyrightable, patentable or otherwise) made, received, conceived, acquired or
written by Mr. Sternberg (whether or not at the request or upon the suggestion
of KMC) during the Term, solely or jointly with others, in or relating to
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any activities of KMC or an Affiliate known to Mr. Sternberg as a consequence of
his employment (collectively referred to herein as the "Subject Matter").
(f) Assignment of Rights in Subject Matter. Mr. Sternberg hereby
assigns and transfers, and agrees to assign and transfer, to KMC, all right,
title and interest in and to the Subject Matter, and Mr. Sternberg further
agrees to execute, acknowledge and deliver all such further papers, including
applications for copyrights and patents, as may be necessary to obtain
copyrights or patents for any thereof in any and all countries and to vest title
thereto to KMC. Mr. Sternberg shall assist KMC in obtaining such copyrights or
patents during the period of this Agreement and any time thereafter and to
testify in any prosecution or litigation involving any of the Subject Matter.
(g) Confidential Information. Mr. Sternberg shall not, during the
period of this Agreement, or at any time thereafter, directly or indirectly,
disclose or permit to be known, to any person, firm or corporation, any
trade-secrets or confidential information acquired by him during the course of
or as an incident to the employment hereunder, relating to KMC, its officers or
directors, any Company which Mr. Sternberg has knowledge of or dealt with in the
course of his employment by KMC, or any joint venture or Affiliate of KMC, or in
which any of the foregoing has a beneficial interest, including, but not limited
to, the business affairs of each of the foregoing. Such confidential
information shall include, but is not limited to, the Subject Matter as well as
information relating to agreements, research, methods, writings, manuals,
developments, marketing and any other document embodying such confidential
information. Confidential information shall not include any information that
(i) is in the public domain other than by reason of a breach hereof; or (ii) was
in the possession of Mr. Sternberg at the time of the disclosure; or (iii)
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was obtained by Mr. Sternberg in good faith from a third party entitled to
disclose it; or (iv) was required to be disclosed by a court of competent
jurisdiction or a governmental authority with authority over KMC, in which case
Mr. Sternberg shall use his best efforts, prior to such disclosure, to give
timely notice of such requirement to the Board of Directors of KMC, which shall
have the right to object to such disclosure or seek confidential treatment of
the Confidential Information.
(h) Client Lists; Return of Confidential Information. All names of
actual or potential clients which have been solicited or are on any mailing
lists, rolodex, files or directories in the possession or under the control of
Mr. Sternberg, and all information and documents relating to KMC or its joint
venturers or Affiliates, shall be the exclusive property of KMC, and Mr.
Sternberg shall use his best efforts to prevent any publication or disclosure
thereof. Upon termination of Mr. Sternberg's employment with KMC, all names of
actual or potential customers, documents, records, reports, writings and other
similar documents containing confidential information, or trade-secrets
including copies thereof, then in Mr. Sternberg's possession or control shall be
promptly returned to KMC.
(i) Remedies. Mr. Sternberg and KMC recognize that the services to
be rendered hereunder are of a special, unique, unusual, extraordinary and
intellectual character involving a high degree of skill and having a peculiar
value, the loss of which may cause KMC immediate and irreparable harm which
cannot be adequately compensated in damages. In the event of a breach or
threatened breach by Mr. Sternberg of this Agreement, Mr. Sternberg consents
that KMC shall be entitled to injunctive relief, both preliminary and permanent,
without bond, and Mr. Sternberg will not raise the defense that KMC has an
adequate remedy at law. In addition, KMC shall be entitled to any other legal
or equitable
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remedies as may be available under law. The remedies provided in this Agreement
shall be deemed cumulative and the exercise of one shall not preclude the
exercise of any other remedy at law or in equity for the same event or any other
event.
(j) Survival. The provisions of this Section 3 shall survive the
termination of Mr. Sternberg's employment for a period of eighteen (18) months
for any reason whatsoever and whether or not specifically set forth or
contemplated by this Agreement.
4. COMPENSATION. As compensation for services rendered during the Term,
KMC shall pay, or cause to be provided, to Mr. Sternberg the following amounts
and benefits:
(a) Base Salary. The sum of $16,666.67 for each full calendar month
from the Commencement Date through the date of termination of Mr. Sternberg's
employment, such sum, when paid for a full calendar year, shall be $200,000 (the
"Base Salary").
(b) Payments of Base Salary. Payments made by KMC to Mr. Sternberg
pursuant to Section 4(a) hereof shall be divided into and paid in equal
consecutive bi-weekly installments in accordance with KMC's standard payroll
practices, as such practices may be amended from time to time.
(c) Bonus. In addition to the Base Salary, KMC shall pay Mr.
Sternberg, the sum of $25,000 for each city in which a Project involving the
development, licensing, design, marketing, sale, financing, installation and
operation of a competitive access provider network (a "CAP Project") is
successfully completed (the "Bonus Payment"), which shall be payable as follows:
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(i) $12,500 after satisfactory completion of construction of a
CAP Project, it being agreed that construction of each CAP Project shall be
considered satisfactorily completed when all backbone fibers are carrying light
and are ready for customer use, and
(ii) $12,500 when recurring revenues for such CAP Project are
equal to eighty percent (80%) of the projected first month's revenues as stated
in the Business Plan.
(d) Compensation upon Termination. Notwithstanding anything to the
contrary contained herein:
(i) in the event KMC shall terminate Mr. Sternberg's employment
hereunder in accordance with Section 8(b) hereof, then, effective on the date of
such termination, all compensation previously payable to Mr. Sternberg shall
cease and under no circumstance whatsoever shall Mr. Sternberg be entitled to
receive any Bonus Payment hereunder;
(ii) in the event KMC shall terminate Mr. Sternberg's employment
hereunder in accordance with Section 8(a) hereof, then, as of the date of such
termination, Mr. Sternberg shall be entitled to (A) all accrued Base Salary to
the date of such termination, (B) all unreimbursed expenses in accordance with
Section 5(c), (C) the Bonus Payment, if any, in accordance with Section 4(c)
hereof, as of the day immediately preceding the date of such termination, (D)
severance payment in an amount equal to the annual Base Salary and (E) COBRA
payments for insurance continuation for a period of one year after the date of
such termination within seven (7) days of termination.
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5. FRINGE BENEFITS.
(a) Short Term Benefits. KMC shall reimburse. Mr. Sternberg for all
reasonable and documented expenses actually incurred by Mr. Sternberg in
relocating from his residence located at 834 Raintree Drive, Naperville,
Illinois to a new address in order to assume his duties at the principal place
of business of KMC in Bedminster, New Jersey, including real estate broker's
commissions and other closing costs in respect of Mr. Sternberg's old and new
residence. In addition, for a period of not more than six (6) months after the
Commencement Date, KMC shall provide Mr. Sternberg a furnished apartment at a
mutually agreed upon location.
(b) Additional Benefits. KMC shall provide the following additional
benefits to Mr. Sternberg during the Term:
(i) participation, on terms and conditions at least equal with
all other employees of KMC, in (A) any stock option plan KMC adopts, provided
that such stock option plan shall provide that Mr. Sternberg shall have the
right to purchase at least 40,000, but, in any event, not less than four percent
(4%), of KMC's outstanding shares of stock at the prices and during the periods
set forth in Exhibit 1 hereto, (B) KMC's 401(k) plan for salaried employees of
KMC, subject to any eligibility requirements thereof, and (C) KMC's group life,
medical, dental, hospitalization or accident/disability insurance plans and
health programs, but in all events, subject to applicable terms of the plans,
and (D) and any other benefits accorded a comparable employee of KMC;
(ii) two weeks vacation and one week illness allowance with pay
in each Employment Year comparable to that afforded other executives of KMC and
its Affiliates. In the event KMC's vacation policy is modified then Mr.
Sternberg will be
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entitled to any increase in vacation such modification provides. There will be
no carryover of unused vacation time or pay from year to year. Mr. Sternberg
shall also be entitled to all holiday privileges regularly observed by KMC
during the Term; and
(iii) the use of a leased automobile, including lease
payments.
(c) Reimbursement for Expenses. KMC shall pay or reimburse Mr.
Sternberg for all reasonable and proper expenses actually incurred or paid by
him during the Term in the performance of his services under this Agreement in
accordance with the policies and procedures established by KMC from time to
time. Except as otherwise specifically provided for in this Agreement, as part
of such policies and procedures, the Board of Directors of KMC may from time to
time require prior approval for individual expense items in excess of
pre-established aggregate amounts for a fixed period or in excess of
pre-established amounts for any type of expenditure during any fixed period.
Mr. Sternberg will incur expenses in accordance with such policies and
procedures both as to the nature and amount of such expenses.
6. KEY MAN LIFE POLICY; DEATH AND DISABILITY BENEFITS.
(a) Key Man Policy. Separate and apart from any life insurance
policy provided by KMC for the benefit of Mr. Sternberg pursuant to Section
5(b)(i), KMC shall be permitted to maintain a "key man life insurance policy",
in such amount and on such terms as KMC shall in its sole discretion determine,
on the life of Mr. Sternberg for so long as this Agreement remains in effect.
Any proceeds from any such "key man" policy shall be payable solely to KMC; Mr.
Sternberg, his heirs, assigns and beneficiaries shall have no
14
<PAGE>
rights with respect thereto. Mr. Sternberg confirms that he is in good health
and therefore has no reason to believe that such insurance will not be available
at standard rates.
(b) Death Benefits. If Mr. Sternberg dies during the term of this
Agreement, KMC shall, promptly after his death, pay to his designated
beneficiary or, if none, his estate (i) all accrued and unpaid Base Salary due
under Section 4(a) for that portion of the term of his employment hereunder
through the date of death, (ii) all unreimbursed expenses due under Section 5(c)
hereof, (iii) any Bonus Payment due under Section 4(c) hereof and (iv) any
insurance proceeds received by KMC under any life insurance policy maintained
for the benefit of Mr. Sternberg pursuant to Section 5(b)(i).
(c) Disability Benefits. If, during the term of his employment
hereunder, Mr. Sternberg becomes incapable of performing the responsibilities
contemplated herein (as confirmed by competent medical evidence reasonably
acceptable to KMC), KMC shall continue to pay to Mr. Sternberg the compensation
due under Section 4 for the first three months of such incapacity. At its
option, KMC may, after the end of such three-month period, continue or extend,
as the case may be, the term of Mr. Sternberg's employment hereunder by
continuing to pay all compensation under this Agreement, or, at the end of such
three-month period or at any time thereafter, terminate the term of Mr.
Sternberg's employment hereunder by paying to Mr. Sternberg (i) all accrued and
unpaid compensation due under Section 4 for that portion of the term of his
employment hereunder through the date of termination and (ii) all unreimbursed
expenses due under Section 5 hereof. Mr. Sternberg hereby agrees to submit to
any medical examination or examinations as may be reasonably recommended by KMC
for the purpose of determining the existence or absence of such incapacity.
Nothing in this Agreement shall impair Mr. Sternberg's rights, if any, to
15
<PAGE>
disability benefits under any disability plan or program of KMC in which Mr.
Sternberg is a participant.
7. REPRESENTATIONS AND WARRANTIES BY MR. STERNBERG.
(a) No Prohibitions under Other Agreements. Mr. Sternberg hereby
represents and warrants, the same being part of the essence of this Agreement
that, as of the Commencement Date, he is not a party to any agreement, contract
or understanding, and that no facts or circumstances exist which would in any
way restrict or prohibit him from undertaking or performing any of his
obligations under this Agreement. The foregoing representation and warranty
shall remain in effect throughout the Term.
(b) Achievability of Business Plan. Mr. Sternberg further represents and
warrants that he has read the Business Plan, believes it to be reasonable and
achievable, has participated in its finalization, and understands that he is
responsible for achieving the targets set forth therein.
8. TERMINATION OF EMPLOYMENT.
(a) Termination Without Cause. KMC may terminate this Agreement at
any time without cause upon ninety (90) days notice to Mr. Sternberg. In such
event, Mr. Sternberg shall continue to render his services hereunder, and shall
be paid his regular compensation up to the date of termination and be entitled
to receive the payments set forth in Section 4(d)(ii) hereof; provided, however,
if, during such ninety (90) day period, Mr. Sternberg shall fail to perform the
services required of him pursuant to this Agreement, KMC may, at its option,
elect to terminate Mr. Sternberg's employment immediately. In such event, Mr.
Sternberg shall cease to be an employee of KMC on the date that KMC elects to
terminate Mr. Sternberg in accordance with this Section 8.
16
<PAGE>
(b) Termination for Cause. KMC shall have the right to terminate the
term of Mr. Sternberg's employment hereunder for cause. For the purposes of
this Agreement, the term "cause" shall mean:
(i) misappropriation of corporate funds or other acts of fraud
or dishonesty by Mr. Sternberg;
(ii) Mr. Sternberg's willful refusal to perform, or gross
negligence in connection with, his responsibilities under
Section 2 hereof;
(iii) Mr. Sternberg's breach of (A) any of the covenants or
agreements contained in Section 3 hereof, or (B) the
representations and warranties contained in Section 7(a)
hereof; and
(iv) Mr. Sternberg's being convicted of a felony.
(c) Maximum Liability. In the event Mr. Sternberg's employment
hereunder shall be terminated for reasons not expressly contemplated by this
Agreement then it is expressly understood and agreed that the maximum liability
for compensation owing by KMC to Mr. Sternberg shall be all accrued and unpaid
Base Salary pursuant to Section 4(a), any earned but unpaid Bonus Payment
pursuant to Section 4(c) and any unreimbursed expenses pursuant to Section 5(c),
in each case, to the date of such termination.
9. ASSIGNABILITY. The obligations of Mr. Sternberg hereunder are
personal and may not be assigned or transferred by him to any person or entity
in any manner whatsoever. This Agreement may be assigned by KMC to any parent,
subsidiary or Affiliate of KMC or any person, firm or corporation which succeeds
to the business of
17
<PAGE>
KMC, if the obligations of KMC hereunder are expressly assumed by, and shall be
binding upon, the assignee or successor, and the assignee or successor is or
will then be engaged in the Business.
10. ARBITRATION. Except as otherwise provided in Sections 3(b) or 3(c)
hereof, any controversy or claim arising out of or relating to this Agreement or
any breach thereof shall be settled by 3 arbitrators in Bedminster, New Jersey,
or such other place in New Jersey as the parties hereto shall agree, in
accordance with the rules then promulgated by the American Arbitration
Association. Judgment upon any award rendered may be entered in any court
having jurisdiction thereof.
11. ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement constitutes the
entire agreement of KMC and Mr. Sternberg with respect to the subject matter
hereof and supersedes all prior written and oral agreements and understandings
with respect to such subject matter. Neither this Agreement nor any of the
terms hereof may be terminated, amended, supplemented, waived or modified
orally, but only by an instrument in writing signed by both parties. No failure
or delay of KMC in exercising any power or right under this Agreement shall
operate as a waiver hereof, nor shall any single or partial exercise of any such
right or power, or any abandonment or discontinuance of steps to enforce such a
right or power, preclude any other or further exercise thereof or the exercise
of any other right or power.
12. NOTICES. Any notice or request required or permitted to be given
hereunder shall be deemed to have been properly given if it is given in writing
and is delivered personally or sent by registered mail, return receipt
requested. If to Mr. Sternberg, such notice shall be sent to his new address,
which he will make known to KMC
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by notice similarly given. If to KMC, such notice shall be directed to the
attention of Harold N. Kamine at the address of KMC set forth in the first
paragraph hereof. In addition to notice to KMC, Mr. Sternberg shall also
deliver or send a copy of any notice to KMC to Alan M. Epstein, Esq., Kelley
Drye & Warren, LLP. 101 Park Avenue, New York, New York 10178.
13. SEVERABILITY. Any provision of this Agreement that shall be
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. To the extent permitted
by applicable law, KMC and Mr. Sternberg hereby waive any provision of law that
renders any provision hereof prohibited or unenforceable in any respect;
provided that any final decision of any court of competent jurisdiction in the
State of New Jersey that is not subject to appeal with respect to Section 3
shall be binding on the parties in all jurisdictions.
14. GOVERNING LAW. This Agreement shall in all respects be governed by,
and construed, interpreted and enforced in accordance with, the law (excluding
principles of conflicts of law to the extent application thereof would result in
the application of the laws of another jurisdiction) of the State of New Jersey.
15. COUNTERPARTS. This Agreement may be executable in counterparts, each
of which, for all purposes, shall be deemed an original.
19
<PAGE>
IN WITNESS WHEREOF, KMC has caused this Agreement to be signed by its duly
authorized officer and Mr. Sternberg has signed this Agreement, each as of the
day and year first above written.
EMPLOYEE EMPLOYER
- -------- --------
/s/ Michael A. Sternberg KMC TELECOM INC.
- ------------------------
Michael A. Sternberg
By:
---------------------------------
Title: Vice President
------------------------------
20
<PAGE>
Exhibit 1
<TABLE>
<CAPTION>
Number of Shares Option
of Common Price
Employment Year Date Option Vests Stock Vested Per Share
--------------- ----------------- ----------------- ---------
<S> <C> <C> <C>
July 29, 1996 to July 29, 1997 -- 0 --
July 29, 1997 to July 29, 1998 July 29, 1997 5,000 $50
July 29, 1998 to July 29, 1999 July 29, 1998 15,000 $200
July 29, 1999 to July 29, 2000 July 29, 1999 15,000 $300
July 29, 2000 to July 29, 2001 July 29, 2000 5,000 $500
</TABLE>
21
<PAGE>
Exhibit 10.11
DATA PROCESSING SERVICES AND SUPPORT AGREEMENT
THIS AGREEMENT (the "Agreement") is hereby entered into on September 29, 1997
between ACE*COMM Corporation ("ACE*COMM") located at 704 Quince Orchard Road,
Gaithersburg, Maryland 20878, and KMC Telecom Inc., KMC Telecom II, Inc. and KMC
Telecom of Virginia, Inc., collectively the "Customer", with offices at 1545
Route 206, Suite 300, Bedminster, New Jersey 07921.
RECITALS
Whereas ACE*COMM is a supplier of computer-based telephone billing products and
services and KMC is a competitive local exchange carrier and ACE*COMM intends to
sell and KMC intends to purchase certain telephone billing products and
services, ACE*COMM and KMC are entering into the following two agreements:
1. A CONTRACT FOR DELIVERY OF COMPUTER SYSTEM whereby ACE*COMM will provide
computer hardware, software, and documentation for KMC's Customer billing
requirements.
2. This DATA PROCESSING SERVICES AND SUPPORT AGREEMENT whereby ACE*COMM will
provide computer processing services and support regarding billing and
additional services.
Now, therefore, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
1. General Undertaking.
(a) Computer Processing Services. The ACE*COMM Data Center ("Data
Center") shall provide Customer with the computer processing services
described in the Schedule of Processing Services (the "Processing
Services") to process Customer's internal information (the "Data"),
which may include internal information of Customer's parent,
subsidiary or other affiliate controlled by any of the foregoing, in
accordance with Section 2(d) ("Performance Goals") and this Agreement.
The Data Center will provide the Processing Services from its data
processing Data Center located in Gaithersburg, Maryland (the
"Processing ACE*COMM Data Center"), at the prices set forth in
Section 4 ("Service Fees & Other Charges").
(b) Communications System. The Data Center shall deliver Processing
Services to a "Point of Connection" located within the communications
room at the Data Center. The Customer shall at its own expense
provide or arrange dedicated telecommunications circuits and
transmission services linking the Point of Connection with the
Customer's central and various remote locations (the
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Data Processing Services and Support Agreement
"Communications System"). The Data Center's ability to provide
Processing Services in accordance with this Agreement is expressly
conditioned on the adequacy and availability of the Communications
System supplied by Customer, provided that ACE*COMM does not interrupt
or interfere with the communications system by its acts or omission or
any of its subcontractors, agents, and representatives. In the event
of any such interruption or interference by ACE*COMM, they shall cause
it to be repaired as soon as possible at their expense.
(c) Remote Access Equipment. The parties shall provide the following
equipment during the Term of this Agreement:
(i) Supplied by the ACE*COMM Data Center. The Data Center shall
provide, install and maintain at the prices set forth in the
Contract for Delivery of Computer System the computer hardware
and telecommunications devices identified on Subpart A of the
attached Schedule of Remote Access Equipment, in Attachment A at
the locations specified therein (the "Data Center's Equipment").
(ii) Supplied by Customer. Except as specified in Section (c) (i)
General Undertaking above, the Customer shall provide, install
and maintain at its own expense all other remote computer
terminals, modems, printers and other hardware and
telecommunications services (including leased lines and
circuits) and devices required to obtain access to the Processing
Data Center and to make effective use of the Processing Services
at the level of activity and performance contemplated herein (the
"Customer Equipment"). ACE*COMM will assist in the implementation
and maintenance of Customer equipment located in Data Center.
(d) Software. The software used by the Data Center to provide the
Processing Services shall be supplied as follows:
(i) Operations Software. The Data Center shall, as specified in
Attachment A, provide a "Standard Library of Software" at no
additional charge and shall provide the "Software Subject to
Surcharge" at the surcharge rates set forth in Attachment A as
amended from time to time.
(ii) Processing Services. Unless specified in the Schedule of
Processing Services, the work contemplated hereunder does not
include software applications development, maintenance or
conversion of programs or data.
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Data Processing Services and Support Agreement
(e) Computer Hardware and Software Support
ACE*COMM agrees to provide Customer support services, hereinafter called
"Support", for items listed in Schedules A through F hereof.
Subject to Customer's fulfillment of its applicable obligations specified in
Section (viii) below, Support under this Agreement will include the following:
(i) Customer Telephone Support
The Customer Telephone Support Service is offered from 8:30 a.m.
to 10:00 p.m. Monday - Friday Eastern Time weekdays except
holidays (24-hour/7-day service is available as an option). The
current holidays are New Year's Day, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and the following Friday, and
Christmas Day.
(ii) Product support services for the NetPlus Pro*Vision Software as listed
in Schedule A which shall include the following:
1. Resolution of problems associated with generic and custom
application software provided by ACE*COMM.
2. Improvements made available through new releases of the
application software features that resolve problems or potential
problems inherent in the Customer's software set.
3. Installation of the new software release via remote dial-up
access.
4. Old version to new version conversion tools as necessary.
5. Documentation updates and improvements.
6. Coverage of the installed operating system. All sites listed
must be operating at the same revision level of the operating
system.
7. This coverage does not include Data Processing Services and
Support required for third party software products.
(iii) Operating System support, as listed in Schedule B, includes:
1. Problem identification and resolution.
2. Assistance with system start-up and shutdown procedures, disk
management procedures, such as disk defragmentation, and other
system administrative housekeeping procedures.
3
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Data Processing Services and Support Agreement
3. Site configuration setup and modification, as required, for
approved device software connections, such as printers, modems,
terminals, and switch interfaces.
4. Backup procedures, including standalone backups, incremental
backups, and application software backups, and with file
restoration.
5. This coverage does not include the cost of software modifications
to the Operating System, required as a result of equipment
modifications installed by parties other than ACE*COMM.
6. This coverage does not include Data Processing Services and
Support required for third party software products other than the
Operating System unless such product is provided by ACE*COMM.
(iv) Product support services for host computer equipment as listed in
Schedule C, which includes the following:
1. Data Processing Services and Support of the installed equipment .
2. Replacement of all defective applicable hardware parts (labor
included). Shipment will be made via next day air service within
24 hours of identification of defective parts.
3. Twenty-four (24) hour response. Upon notification of a hardware
or software failure by the Customer, ACE*COMM will provide
response within the next business day.
(v) Support Outside Scope
Support provided outside the Scope of this Agreement (such as
additional operator training, Hardware or Software not listed in
Schedules A to C, problems induced by malfunctions of systems not
covered under this Agreement, or data recovery) will be charged at
ACE*COMM's current time and expense rates as listed in Schedule E.
(vi) Problem Resolution
A problem is defined as the failure of any unaltered software or
unaltered hardware listed in Schedules A through C hereof to comply
with Customer-level documentation, when operating within the specified
or operational environment established at the Customer site, at the
time of initial installation. The supplied software or hardware
systems should not have been expanded nor otherwise altered, except by
ACE*COMM, since the time of installation.
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<PAGE>
Data Processing Services and Support Agreement
Similarly, any host interfacing or associated systems, not supplied by
ACE*COMM, shall be unaltered and operating in accordance with the
manufacturer's specifications, at the time of installation.
Problem Resolution support shall include the following:
1. Assisting the Customer in isolating problems and preparing
problem documentation, if necessary.
2. Providing problem resolution by one or more of the following
methods:
a. Replacing appropriate hardware components or correcting
software as necessary.
b. Correcting documentation.
c. Publishing feature limitations with possible workarounds.
d. Cooperate with the Customer to propose other solutions that
may be outside the scope of this Agreement.
ACE*COMM shall have unlimited rights to further use or market all software
problem resolutions arising out of the Agreement.
ACE*COMM shall not be liable to perform any services hereunder (i) on any
equipment connected to the installed system without prior written approval
from ACE*COMM, which shall not be unreasonably withheld or delayed or (ii)
relating to damage or malfunction caused by such unapproved installation.
If ACE*COMM performs any work on any such equipment installed without its
approval then ACE*COMM will be paid by KMC for such services at its then
effective hourly rates unless otherwise mutually agreed.
(vii) Response Time
ACE*COMM shall respond to critical problems within two hours. A critical
problem shall be defined as a problem that prevents billing from completing
on time in accordance with the schedule outlined in the Customer Guide, or
one that prevents more then twenty-five percent of the users from
completing their normal tasks. ACE*COMM shall continually use its best
efforts during times of Customer Telephone Support to correct the critical
problem until it is corrected. In all other cases, ACE*COMM shall respond
to a call from the Customer for assistance within four support hours, where
support hours shall mean the hours of Customer Telephone Support and shall
use its best efforts to correct the problem on a mutually agreeable
schedule.
(viii) Customer Responsibilities
To receive the support outlined in Section (e) hereof, the Customer must
provide the following items:
5
<PAGE>
Data Processing Services and Support Agreement
1. A dial-up/dial-out communications line to/from Gaithersburg, Maryland
to Customer's site and communications hardware at the Customer's site
to allow ACE*COMM personnel to access the Customer's computer
hardware, software and database for problem analysis and resolution.
The Customer shall provide appropriate security procedures to control
access to this line and any sensitive data. Customer is responsible
for usage costs on this line.
2. All expendable items, i.e., printer ribbons, magnetic tapes, drums,
diskettes, batteries, etc.
3. Sufficient notification and applicable documentation on any problem to
allow duplication of the problem on ACE*COMM equipment and software
when necessary.
4. Appropriate magnetic data storage media for the transportation of
computer software between ACE*COMM and Customer's site.
5. Access to the hardware site if on-site Data Processing Services and
Support is required.
6. ACE*COMM will be responsible for implementing and following procedures
to conduct full backups of the system. In the event of database loss
or of a system failure that causes a database loss, ACE*COMM will
assist in restoring the database from the latest backup tape created
and archived by the Customer. ACE*COMM will be responsible for
re-entering any system updates not recovered from the latest backup
tape.
(ix) Price for Support
1. Customer shall pay ACE*COMM in the monthly amount(s) listed in
Schedule F of this Agreement for the Support specified herein.
2. Should travel be necessary, Customer will be charged for all travel
expenses incurred by ACE*COMM in addition to amount(s) listed in
Schedules A, B, C, D, and E except for travel necessary to maintain
host computer equipment.
3. For services required at a time other than those set forth in this
Agreement and for services required because of damages resulting from
accident, transportation, neglect, or misuse, operation of the
equipment outside of the manufacturer's environmental specifications,
failure of electrical power, air conditioning or humidity control,
said service charges shall be at the per call rate in effect at the
time service is rendered.
4. Remedial service calls wherein the problem is determined to be other
than as covered by this Data Processing Services and Support Agreement
shall be billed to the Customer at the per call rate in effect at the
time of call.
6
<PAGE>
Data Processing Services and Support Agreement
5. Charges not covered by this Data Processing Services and Support
Agreement are Customer's responsibility and the Customer shall pay for
sales, use and like taxes.
6. Other Billable Services. The Data Center shall be reasonably
available from time to time during the Term hereof to assist Customer
with "Other Billable Services" outside the scope of Schedule of
Processing Services. Such services could include assistance in the
design or procurement of additional or different telecommunications
circuits, implementation or consolidation of other Customer data
processing operations, software development or conversion services and
general troubleshooting of problems with Customer-supplied application
software or problems interfering with Processing Services not caused
by the ACE*COMM Data Center. Other Billable Services shall be subject
to a signed amendment hereto or separate agreement between the
parties.
2. Processing Data Center Operations.
(a) Initiating Processing at ACE*COMM Data Center. Within fifteen (l5)
days after execution of this Agreement, the parties shall each appoint
a Coordinator responsible for coordinating and facilitating the
implementation of Customer's data processing operations to the
Processing ACE*COMM Data Center. If higher authority is required, it
shall be resolved expeditiously. The Data Center shall plan, manage
and execute the implementation according to a plan and schedule
approved by the parties. Both parties shall develop the first draft
of the plan within thirty (30) days of contract signing and will
refine the plan throughout the term of this Agreement. Such plan
shall provide the Implementation Plan.
(b) Commencement of Processing Services. Upon completion of
implementation, the parties shall test the Processing Services to
determine whether the level of performance complies with the criteria
set forth in the Implementation Plan, as mutually created. The
"Commencement Date" of the Processing Services shall be the date of
Customer's verification that the Processing Services conform to the
criteria set forth in the Implementation Plan or, if earlier, the date
on which Customer begins to make substantial beneficial use of the
Processing Services, as shall be mutually agreed. Target date will be
between November 15,1997 and December 15 1997. Thereafter, each
anniversary of the Commencement Date shall be considered a separate
"Processing Year" for purposes of this Agreement.
(c) Operations Management.
(i) Customer Account Coordinator. The Data Center shall appoint a
Customer Account Coordinator to serve as Customer's key point of
contact with the Data Center for any questions, problems or
service issues during the Term hereof, as more fully explained in
the ACE*COMM Data Center's Customer Guide to be provided no later
than October 30,1997 in draft form and to be completed no later
than November 15,1997 with five (5) working days for each review
cycle (when so completed, the
7
<PAGE>
Data Processing Services and Support Agreement
"Customer Guide."). This Customer Guide is to be kept current by
both parties as to current practices and procedures.
(ii) Documentation. The Data Center shall, at its own expense,
provide Customer two (2) copies of the Customer Guide and related
documentation pertaining to ACE*COMM Data Center-supplied
software (collectively, the "Documentation"). The Customer may
copy the Documentation. Upon termination of this Agreement, the
Customer shall return to the Data Center all copies of
Documentation under its possession or control.
(iii) Data Center Contact/Interface Training. The Data Center
shall, provide Customer initial training and instructions at a
mutually convenient location as may reasonably be needed by
managers and technicians of general proficiency to make effective
use of the Processing Services provided by ACE*COMM. Training is
to be provided under and in accordance with the Contract for
Delivery of Computer Systems.
(iv) Operating Procedures. The Customer and ACE*COMM shall at all
times comply with each company's respective operational and
security procedures, as reflected in the Customer Guide, as from
time to time revised upon mutual agreement. Each Party reserves
the right in its sole discretion to upgrade or reconfigure its
own system components, hardware or software and otherwise to
arrange its location or method of operations and procedures as it
deems necessary or helpful in meeting the requirements of this
Agreement, provided that no configuration or upgrading interferes
with ACE*COMM's ability to perform in full its obligations
hereunder and further provide that no such reconfiguration or
upgrading has a cost impact on Customer without its prior written
approval.
(d) Performance Goals.
(i) Processing Services Performance Objectives. The Data Center
shall make its best efforts to meet the minimum performance
objectives (Performance Goals) for the Processing Services, as
follows:
a) Timeliness of Bills. The Data Center shall send out all
bills generated by Processing Services with the following
schedule. Where not otherwise specified by agreement
between ACE*COMM, Customer and the billed party, the Data
Center shall send out its standard subscriber bills for
Customer's accounts within nine (9) days after the end of
the billing cycle or nine (9) days after all correct
information has been provided by Customer, whichever occurs
later, wherein the billed charges were incurred. Bills must
be sent to the correct address, physical or electronic, for
each account as provided by Customer in order for ACE*COMM
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<PAGE>
Data Processing Services and Support Agreement
to fulfill the requirement of timeliness set forth by this
Subsection (a).
ACE*COMM will meet the above schedule by completing cycle
processing for verification not later than six days after
the scheduled cycle date. Cycle verification will be the
responsibility of Customer. ACE*COMM will not release for
printing cycle statements until verification by Customer is
complete and ACE*COMM is notified by Customer to proceed.
This activity will be done via Facsimile or via E-mail as
defined in Data Center Customer Guide.
ACE*COMM will print, stuff and prepare for mailing all cycle
statements within two days after cycle verification by
Customer. ACE*COMM will mail statements in local markets by
the third day after the date Customer gives ACE*COMM cycle
verification.
b) Method of Delivery for Bills. The Data Center shall deliver
bills in accordance with the method specified by Customer
for the billing of each account. Where not otherwise
specified by Customer, the Data Center shall deliver bills
by first-class mail postage prepaid.
c) Accuracy of Bills. The Data Center shall bill parties for
the full and exact amount indicated as calculated by the
Data provided by Customer unless otherwise instructed in
writing by Customer.
(ii) Other Matters. The Performance Goals (and any specific
goals for particular system functions described in any attachment
hereto other than the Connectivity Goal) shall be considered
objectives only and not representations, warranties or guarantees
of performance, except as expressly set forth in iii.
(iii)Connectivity Goal. The ACE*COMM Data Center shall make its
best effort to meet the performance objective for Computer
System Availability (as defined below for on-line
communications) of 97.5%.
After the first month of operation, during any month that
Computer System Availability falls below 97.5%, then the monthly
processing fee shall be reduced by an amount equal to 1/2 percent
of the Monthly Minimum Processing Fee for each 1/2 percent below
the 97.5%. During any month that Computer System Availability is
greater than 97.5%, then the monthly processing fee shall be
increased by an amount equal to 1/2 percent of the Monthly
Minimum Processing Fee for each 1/2 percent above the 97.5%. Six
months from the date of this agreement, the parties shall
negotiate in good faith to weight the charges to account for
hours of operation that may be most critical to the Customer
(i.e. hours that are
9
<PAGE>
Data Processing Services and Support Agreement
more critical may have a fee adjustment that is greater than
hours that are less important; however, the total adjustment
shall not change.)
(iv) For these purposes, the "Computer System Availability" means the
processor complex and the operating system connectivity to
Customer's own communications equipment and leased lines.
ACE*COMM will work to coordinate scheduled outages via a
quarterly plan that is mutually worked with KMC. The percentage
of Computer System Availability shall be calculated as follows:
Potential Available Hours. The total actual hours per month of
Scheduled Maintenance Outages (as mutually determined on at least
five (5) days' notice) prior to the commencement of any outage
for the Computer System Connectivity are subtracted from the
total number of Calendar Hours per month (24 hours times the
actual number of days in a given month) to derive the Potential
Available Hours;
Actual Available Hours. The total Outage time for that month
expressed in fractions of hours ("Outage Hours"), as recorded in
the ACE*COMM Data Center's Problem Management System and other
system information logs, is subtracted from the Potential
Available Hours to derive the Actual Available Hours; and
Percentage of Computer System Availability. The Actual Available
Hours (x) is divided by the Potential Available Hours (y), less
recorded network outages (outside of the Data Center, which
includes the output port of Customer owned communications
equipment) to yield the percentage of Computer System
Availability.
Migration From ACE*COMM Data Center. If Customer terminates on
account of ACE*COMM's breach and such breach is confirmed either
by mutual agreement or otherwise, then ACE*COMM will upon
request, provide sample data and then, upon a second request,
provide all KMC data currently stored at ACE*COMM to KMC and
shall provide thirty two (32) hours of telephone consulting
services at no additional charge. If such services are requested
for an additional period, then they shall be offered at
ACE*COMM's rates that are then in effect. Upon termination of
this Agreement for any other reason after the term of this
Agreement, the Data Center shall provide support staff, services
and shall cooperate fully with Customer to plan and execute an
orderly migration of hardware, software and Processing Services
to the destination of Customer's choice according to a migration
plan and schedule supplied by Customer in mutually agreeable
form. Such assistance shall be provided as Other Billable
Services in accordance with Section 1(e) ("Other Billable
Services").
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Data Processing Services and Support Agreement
3. Term, Termination. This Agreement shall be effective from the date
indicated above and, unless terminated earlier under this Section 3 or
under Section 14 ("Default"), shall continue in full force and effect for a
period of four (4) years from the Commencement Date. The Term shall be
renewed for successive one (l) year periods unless either party notifies
the other party at least ninety (90) days prior to expiration of the then
current Term that the Agreement shall not be renewed. Notwithstanding the
foregoing, Customer may terminate this Agreement at any time for
convenience after completion of the third (3rd) Processing Year, upon
ninety (90) days' notice and payment of the "Termination Fee" described in
Attachment A. Such termination shall have no effect on Customer's
obligation to pay for all amounts due hereunder or the parties' rights and
obligations under Section 6 ("Proprietary Rights"), Section 7
("Confidential Information"), Section 8 ("Nonsolicitation"), Section 11
("Limitation of Remedies & Liabilities") or Section 21 ("Compliance with
Export Regulations"). Notwithstanding the foregoing, in the event the Data
Center fails during four (4) of any eight (8) consecutive months to meet
the Performance Goals described in Section 2(d) ("Performance Goals") and
such failure is not excused by Section 20 ("Force Majeure"), Customer shall
have an unrestricted right to terminate this agreement and shall thereafter
incur no obligations under the Agreement. Such termination shall have no
effect on the parties' rights and obligations under Section 6 ("Proprietary
Rights"), Section 7 ("Confidential Information"), Section 8
("Nonsolicitation"), Section 11 ("Limitation of Remedies & Liabilities") or
Section 21 ("Compliance with Export Regulations").
4. Service Fees & Other Charges. Beginning with the Commencement Date and in
consideration of the Processing Services and other technology or services
provided under Section 1 ("General Undertaking"), the Customer agrees to
pay the Data Center the following compensation in accordance with Section 5
("Invoices & Payment"):
(a) Monthly Service Fees.
Customer shall pay the greater of either:
(i) Minimum Monthly Service Fee. Data Center a Minimum Monthly
Service Fee in the amount of twelve thousand five hundred dollars
($12,500.00) for the Processing Services, prorated for the
initial partial month following the commencement date in
accordance with section 5.
(ii) Transaction Processing Fee. Data Center Transaction Processing
Fee as calculated in accordance with Attachment B.
(b) Certain Other Charges. If the data submitted by Customer is
incorrect, incomplete or not in the format specified by the
Customer Guide, Customer agrees to pay the ACE*COMM its then
current standard hourly rates as set forth in this agreement at
such time for additional work required to correct, complete or
otherwise prepare the data for processing. ACE*COMM shall be
required to provide to Customer itemized invoices with reasonable
detail as to all or any such charges.
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Data Processing Services and Support Agreement
Prior to cycle printing (cycle printing here means printing bills and
associated reports for the affected billing cycle), ACE*COMM shall
provide a file that KMC shall review for approval. Once KMC provides
approval for cycle printing (which consent shall not be withheld to
the extent that defects are immaterial - e.g. relating to formatting
or other cosmetic effects), (i) all costs for transaction processing,
and/or cycle printing will be the responsibility of Customer (this
includes restarts and reruns) and (ii) KMC shall have no claim against
ACE*COMM for any errors or omissions that were made available for KMC
to review. Any time required by KMC to review bills shall not be
considered as part of the days ACE*COMM has taken to print the bills
The price for Other Billable Services, if any, rendered by the Data
Center shall be the ACE*COMM Data Center's then current price from
time to time in effect or such price as the parties otherwise agree in
writing. Unless otherwise stated, the price for Other Billable
Services does not include and Customer shall reimburse the Data Center
for all associated, required and actually incurred, reasonable
out-of-pocket costs for travel (coach class if by air), long distance
telephone, shipping, supplies and other related costs, subject to
reasonable reporting and substantiation requirements and charge an
additional amount calculated at the same rates as those listed in
Attachment B.
If reruns and restarts are required because of Customer error, then
Data Center will provide rerun individual cycle activity at normal
cost to Customer (this includes the direct cost of printing and
output processing materials and supplies and services).
If reruns and restarts are required because of Data Center error, then
Data Center will rerun individual cycle activity at no additional cost
to Customer.
If reruns and restarts are required because of joint Customer and Data
Center error, then Data Center will perform a single cycle activity
rerun process at no additional cost to Customer (this does not include
the direct cost of printing and output processing materials and
supplies and services).
All rerun responsibilities for both Customer and ACE*COMM are outlined
in Data Center Customer Guide.
(c) Certain Taxes. The Customer shall be responsible for any state and
local sales or use tax based on the Customer's payment of fees and use
of Processing Services or other deliverables provided hereunder.
ACE*COMM shall be responsible for taxes based on ACE*COMM's net
income, gross income, receipts, capital or net worth as well as all
minimum taxes, doing business taxes, franchise taxes, and employment
related taxes.
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Data Processing Services and Support Agreement
5. Invoices & Payment.
(a) Minimum Monthly Service Fee. The Minimum Monthly Service Fee shall be
paid in arrears, without invoice or additional notice, on the first
day of each month beginning with the month following the month in
which the Commencement Date occurs. The Minimum Monthly Service Fee
shall be prorated during the first month of the first Processing Year
and the last month of the Term hereof based on the ratio of the actual
number of days of Processing Services utilization to the total number
of days in each such month.
(b) Additional Service Fee. The Data Center shall submit an invoice to
Customer for any additional service fees relating to reruns,
consulting services, etc. (Additional Service Fees) by the fifteenth
(15th) day of the month following the month in which such Additional
Service Fees are incurred by Customer. Such Additional Service Fees
shall be paid no later than thirty (30) days from date of invoice.
(c) Other Charges. Any amounts due for Other Billable Services,
reimbursable out-of-pocket costs or other charges due hereunder shall
be invoiced monthly and paid by Customer within thirty (30) days from
date of invoice.
(d) Late Charges. Except as otherwise specifically set forth in Data
Processing Services payment shall be made within thirty (30) days from
receipt of invoice. Customer may not withhold or "setoff" any amounts
due, unless amounts are in dispute, hereunder and ACE*COMM reserves
the right to suspend work without prejudice if amounts are not paid
within thirty (30) days after the date when due. Any late payment
shall be subject to any necessary costs of collection (including
reasonable legal fees) and shall bear interest at the prime rate
announced by Citibank plus 3% until paid.
(e) Audit Procedures. Customer from time to time will be able to perform
an audit of processes that are used by the Data Center for calculating
charges to Customer. This process shall be mutually agreed upon with
frequency, and terms are outlined in the Customer Guide.
6. Proprietary Rights.
(a) Rights in Data. The Data Center agrees that all Data received,
computed, developed, used or stored pursuant to this Agreement shall
remain the exclusive property of the Customer and that immediately
upon termination of this Agreement, all such Data shall be furnished
to Customer in machine readable form without additional charge, except
for reasonable processing, material and labor costs, provided Customer
is current in its payment of all amounts due hereunder. The Data
Center further agrees that the Data will be used only for the purposes
expressly contemplated by this agreement and for no other purpose.
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Data Processing Services and Support Agreement
(b) Rights in Software. All software of third party vendors (other than
ACE*COMM) supplied by the Data Center shall be governed by the terms
and conditions of the original vendor license agreement accompanying
such software or, if no such license agreement is included, by the
vendor's standard license terms generally applicable to the particular
product provided such terms are typical and ordinary and, in all
cases, do not impose any obligations upon the Customer in addition to
the Customer's obligations as set forth in this Agreement.
Upon payment of all fees associated thereto, which are included in the
price hereof at no extra cost or expense as part of the monthly fees
hereunder, the Customer is hereby granted the nonexclusive right and
license to use, execute and copy all software supplied by the Data
Center in object code form as an integral part of obtaining the
Processing Services and for no other purpose. Except as provided by
Section 19 ("Assignment, Transfer"), Customer may not assign, transfer
or sublicense this license without the Data Center's prior written
consent (which consent shall not be unreasonably withheld, or delayed)
and any attempt to the contrary shall be void. With respect to the
Customer-supplied software, the Data Center is hereby granted the
nonexclusive right and license to use such software in the same
form(s) provided by Customer for use in providing the Processing
Services and for no other purpose. The Data Center may not assign,
transfer or sublicense this license without the Customer's prior
written consent (which consent shall not be unreasonably withheld. or
delayed) and any attempt to the contrary shall be void. Unless
otherwise agreed in writing, any specially ordered software or
modifications developed by the Data Center at Customer's request shall
be owned exclusively by the Data Center and Customer; provided that to
the extent any custom software also contains third party software,
Customer shall receive a nonexclusive license conferring rights and
obligations equivalent to those provided for other ACE*COMM Data
Center-supplied software, as described in the second sentence of this
Subsection.
7. Confidential Information.
(a) Acknowledgment of Confidentiality. Each party hereby acknowledges
that it may be exposed to confidential information belonging to or
supplied by the other party or relating to its affairs including,
without limitation, the Data, software, business plans and procedures,
the terms of this Agreement, the Customer Guide, and other information
that may be marked as confidential ("Confidential Information").
Confidential Information does not include (i) information already
known or independently developed by the recipient outside the scope of
this project and without knowledge of this project (i.e. unaided
memory); (ii) information in the public domain through no wrongful act
of the recipient, or (iii) information received by the recipient from
a third party who was free to disclose it.
(b) Covenant Not to Disclose. With respect to the other party's
Confidential Information, and except as expressly authorized herein or
as required by a court of competent jurisdiction, or other
governmental agency, the recipient hereby agrees that during the Term
hereof and at all times thereafter it shall not use,
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Data Processing Services and Support Agreement
commercialize or disclose such Confidential Information to any person
or entity, except to its own employees having a "need to know" or such
parties attorneys, accountants if required and in the cases of
Customer, to its lenders who it is understood shall be entitled to
under Customer's financing arrangements (and who are themselves bound
by similar nondisclosure restrictions) and to such other recipients as
the other party may approve in writing. In no event shall either party
attempt to decompile, disassemble or reverse engineer the other
party's confidential or proprietary information and any information
discovered in violation of this provision shall be treated as
Confidential Information belonging exclusively to the other party.
Each party shall use at least the same degree of care in safeguarding
the other party's Confidential Information as it uses in safeguarding
its own confidential information, but in no event shall less than due
diligence and care be exercised. The Data Center shall not make use
of any of the information received from the Customer for any purpose
not expressly contemplated by this Agreement. If requested by the
Customer, the ACE*COMM Data Center's Personnel who are assigned to
work on the Customer's projects shall execute a document satisfactory
to the Customer acknowledging and agreeing to be bound by the terms of
this Section 7 ("Confidential Information").
(c) Normal Use. Except as otherwise specifically set forth in Section 6,
nothing in this Section 7 shall be deemed to restrict the Customer
from using any of the Customer's Data or any deliverable in the
ordinary course of its business it being understood that many
employees, subcontractors and others will use the Confidential
Information in completing their duties for the Customer and that it
may become necessary for the Customer to interface Confidential
Information constituting software to other systems utilized by the
Customer, its customers, its suppliers, and its consultants.
8. Nonsolicitation. During the Term and for a period of one (1) year
thereafter, each party agrees not knowingly to solicit, nor attempt to
solicit, the services of anyone who has been an employee within the
previous six months of the other party, unless such employee was terminated
or laid off by such party, without the prior written consent of the other
party. If this provision is violated, the violating party shall pay
liquidated damages equal to one hundred fifty (150) percent of the
solicited person's annual compensation; provided that upon making such
payment, the violating party shall not be in breach of this Agreement.
9. Injunctive Relief. The parties acknowledge that violation by one party of
the provisions of Section 6 ("Proprietary Rights"), Section 7
("Confidential Information") or Section 8 ("Nonsolicitation") would cause
irreparable harm to the other party not adequately compensable by monetary
damages. In addition to other relief, it is agreed that temporary and
permanent injunctive relief would be an appropriate remedy to prevent any
actual or threatened violation of such provisions or to enforce such
provisions according to their terms. Any party substantially prevailing in
an action for injunctive relief under this Section 9 shall be entitled to
recover its costs of enforcement, including reasonable attorneys' fees.
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Data Processing Services and Support Agreement
10. Warranties; Indemnity.
(a) Noninfringement Warranty. ACE*COMM (the "Indemnitor") represents and
warrants that the Data and any software supplied by it in accordance
with Section l(d) ("Software"), when properly used as contemplated
herein, will not infringe or misappropriate any United States
copyright, trademark, patent, or the trade secrets of any third
persons and will defend, indemnify and hold harmless the Customer, its
affiliates and their respective agents, representatives, directors,
officers and employees (the "Indemnitees") from all damages, costs and
expenses (including reasonable attorneys' fees) incurred as a result
of any third party claim to the contrary. Upon being notified of such
a claim, the Indemnitor shall (i) defend through litigation or obtain
through negotiation the right of Indemnitee to continue using the Data
or software; (ii) purge the Data of tainted material or rework the
software so as to make it noninfringing while preserving the original
functionality; or (iii) replace the software with functionally
equivalent software. If the Indemnitee reasonably determines that
none of the foregoing alternatives provide an adequate remedy, the
Indemnitee may, in addition to other relief, terminate all or any part
of this Agreement.
(b) Limited Performance Warranty. The Data Center represents and warrants
that it shall make its best efforts to ensure that the Processing
Services are compatible with industry standards and practices, and
that all software is free from material malfunctions, errors or loss
of Data, however, the Data Center does not represent or warrant that
the Software will be entirely free from error or defect, or that it
will actually achieve the Performance Goals. The foregoing warranty
shall not apply if: (i) Customer fails to follow all operational
instructions contained in the most current Customer Guide;
(ii) Customer fails to notify the Data Center of errors or defects
within a reasonable time after the appearance thereof; (iii) Customer
fails to (to the extent Customer bears responsibility under another
provision of this Agreement) provide and maintain adequate Remote
Access Equipment, software, the Communications System and
environmental conditions in accordance with applicable specifications
and industry standards; (iv) Customer has introduced other equipment,
software or unusually heavy workloads creating a materially adverse
impact on the Processing Services or the ACE*COMM Data Center's
ability to achieve the Performance Goals. Customer is solely
responsible for the adequacy and accuracy of all Data it submits.
(c) Warranty Response. Upon being notified by the Customer or otherwise
obtaining knowledge of a malfunction, error, or defect of the Software
the Data Center shall respond within a reasonable time as set forth in
the Customer Guide, by telephone support or through the issuance of
periodic updates to acknowledge the malfunction, error, or defect and,
with the cooperation of the Customer, shall promptly commence
diagnosis and error correction efforts and shall use all reasonable
efforts to correct such problem before the subsequent billing cycle
commences.
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Data Processing Services and Support Agreement
(d) Warranty Disclaimer. EXCEPT AS SPECIFICALLY PROVIDED IN THIS
SECTION 10 ("WARRANTIES") THE DATA CENTER HEREBY DISCLAIMS WITH
RESPECT TO ALL PROCESSING OR OTHER SERVICES, EQUIPMENT, SOFTWARE, OR
DELIVERABLES PROVIDED HEREUNDER, ALL EXPRESS AND IMPLIED WARRANTIES,
INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY, IT BEING
UNDERSTOOD THAT THE PROCESSING SERVICES SHALL BE FIT FOR CUSTOMER'S
INTENDED PURPOSE.
11. Remedies & Limitation of Liability. The parties acknowledge that the
following provisions have been negotiated by them and reflect a fair
allocation of risk:
(a) Warranty Remedies. Customer's remedy for Data Center's breach of
warranty hereunder shall be to obtain repair, replacement or
correction of the defective services, software, equipment or
deliverable to the extent warranted under Section 10 ("Warranties")
which, in the case of Processing Services, means the Data Center shall
at its own expense reinput the Data or rerun the programs containing
the error, provided that Customer shall have the right to bring action
to enforce such warranty. If such remedy is not economically or
technically feasible or effective, then Customer may obtain an
equitable partial or full credit or refund of amounts paid with
respect to the defective services or deliverable, subject to the
limitation set forth in Subsection (b) below.
(b) Make-Whole Amounts. Subject to the provisions of Section 20 of this
Agreement, if for any billing period ACE*COMM has timely received the
billing data from Customer, but delays in issuing such bills for a
period in excess of fifteen (15) days past the mutually Scheduled Date
as established in the Customer Guide, then ACE*COMM shall pay Customer
an amount equal to the daily interest on the aggregate principal
amount of such delayed bills, commencing on the 16th day of delay and
continuing for each day the bills are not issued until the 45th day of
delay, at a rate that is equal to prime interest rate plus 12% per
annum or the then current cost of money to KMC ("Interest Make-Whole
Amount"). Subject to the provisions of Section 20 of this Agreement,
if ACE*COMM continues to delay in issuing bills after such 45 day
period, then ACE*COMM shall pay to Customer, in addition to the
Interest Make-Whole Amount, an amount equal to 15% of the aggregate
principal amount of all such unissued bills ("Principal Make-Whole
Amount"). Upon review and approval by ACE*COMM, all amounts payable
to Customer by ACE*COMM under this Section 11(b) shall be paid within
twenty (20) days of receiving Customer's invoice requesting such
amounts. Sixty days following the date of issuance of bills subject
to Principal Make-Whole Amounts, Customer shall prepare a
reconciliation and promptly refund to ACE*COMM the portion, if any, of
the Principal Make-Whole Amount equal to (1) the excess over 85% of
the aggregate billed amount actually collected and (2) allowance for
bad debt which as of the date hereof is equal to Customers preceding
twelve (12) months bad debt experience as a percent of revenue.
Customer will perform a final reconciliation sixty (60) days after the
initial reconciliation, and shall refund to ACE*COMM
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Data Processing Services and Support Agreement
any additional amount over 85% of the principal collected during such
period and the reasonable allowance for bad debt. Make-Whole
calculations and the basis for such calculations shall be subject to
ACE*COMM review and approval. Any actual delay caused by any changes
to the software made at the request of KMC and in the time frame
mutually agreed to by Customer and ACE*COMM shall not be considered
delays for purposes of this section and the grace period shall be
extended on a day-for-day basis.
(c) Liabilities. EXCEPT FOR (i) WARRANTY CORRECTION OBLIGATIONS UNDER
SECTION 10 (A), (ii) DAMAGES ARISING FROM INJURY TO PERSON OR PROPERTY
COVERED UNDER SECTION 17, (iii) DAMAGES ARISING OUT OF AN INFRINGEMENT
OF INTELLECTUAL PROPERTY RIGHTS OR DISCLOSURE OF CONFIDENTIAL
INFORMATION, (iv) ANY INJUNCTIVE RELIEF AUTHORIZED PURSUANT TO THIS
AGREEMENT, or Make-Whole Amounts under Section 11(b), and without
limiting the parties' respective indemnity obligations under Section
17:
(i) ACE*COMM's aggregate liability for contract damages shall not
exceed a maximum amount of $1,000,000.00; and
(ii) Customer's liability hereunder shall consist solely of (i) its
obligations to make payments for services rendered hereunder as
and when due; (ii) late fees assessed in connection therewith;
(iii) payments in connection with its insurance/indemnity
obligations under Section 17 and; (iv) any applicable termination
fee.
(d) NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY THIRD PARTY,
WHETHER IN CONTRACT, TORT (INCLUDING CONTRACT NEGLIGENCE, BUT
EXCLUDING PERSONAL INJURY TORT LIABILITY) OR OTHERWISE, FOR ANY
INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFIT
OR BUSINESS INTERRUPTION EVEN IF NOTIFIED IN ADVANCE OF SUCH
POSSIBILITY) ARISING OUT OF OR PERTAINING TO THE SUBJECT MATTER OF
THIS AGREEMENT.
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DATA PROCESSING SERVICES AND SUPPORT AGREEMENT
12. Notices. Notices sent to either party shall be effective when delivered in
person or transmitted by telecopier ("fax") machine answerback confirmation
received, one (1) day after being sent by nationally reputable private
overnight courier when received, or two (2) days after being sent by
first-class mail postage prepaid to the addresses set forth below, or to
such other address as the parties may from time to time give notice:
<TABLE>
<CAPTION>
<S> <C>
KMC Telecom Address: ACE*COMM Address
Ms. Cynthia Worthman Mr. S. Joseph Dorr
Chief Financial Officer Vice President, NET*COMM
KMC Telecom Inc. ACE*COMM Corporation
1545 Route 206 704 Quince Orchard Road
Suite 300 Suite 100
Bedminster, NJ 07921 Gaithersburg, MD 20878
Tel (908) 719-2100 Tel (301) 721-3000
Fax (908) 719-8775 Fax (301) 258-5692
</TABLE>
13. Fax Counterparts. A facsimile of this Agreement and notices generated in
good form by a fax machine (as well as a photocopy thereof) shall be
treated as "original" documents admissible into evidence unless a
document's authenticity is genuinely placed in question.
14. Default. Either party shall be in default of this Agreement if: (i) it
breaches any material provision hereof and fails within thirty (30) days
after receipt of notice of default to correct such default or to commence
corrective action reasonably acceptable to the aggrieved party and proceed
with due diligence to completion; provided that Customer shall not be in
breach for purposes of giving a notice of breach on account of late payment
until payments are at least thirty (30) days past due and the Customer
shall have ten (10) days to correct such default;or (ii) it becomes
insolvent, makes an assignment for the benefit of its creditors, a receiver
is appointed or a petition in Bankruptcy is filed with respect to the party
and is not dismissed within thirty (30) days.
15. Dispute Escalation: Arbitration, Choice of Law. Except for certain
injunctive relief, a party may seek at law or in accordance with section
10(a) which may be sought at any time, any dispute between the parties
arising out of or relating to this Agreement or a breach hereof which
dispute is not resolved within 10 days after receipt of notice by the
allegedly breaching party, such dispute shall immediately be referred for
resolution jointly by senior executives of the parties who are authorized
to negotiate a resolution to such dispute. If such individuals are unable
to agree upon a resolution within 20 days after referral of such dispute to
them (such 20 day period together with the preceding 10 day period being
referred to as the Resolution Period; provided, however that the Resolution
period shall in no event be less than 30 days), then either party may, upon
notice to the other party pursuant to Section 12, refer the dispute for
final, binding arbitration to the American Arbitration Association ("AAA")
or its successor organization for arbitration before a panel of three
arbitrators (with each party choosing one arbitrator and the third
arbitrator being chosen by the first two arbitrators) in
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Washington, D.C. Such arbitration shall be conducted under the
administrative rules of the AAA; provided, however, that in the event of
any conflict between such administrative rules and this Section 15, the
provisions of this Section 15 shall govern. Each party shall bear its own
costs and attorneys' fees with respect to such arbitration. The award of
the arbitrators shall include a written explanation of their decision. The
parties hereby agree that arbitration before the AAA pursuant to this
Section 15 shall be the parties' exclusive remedy and that the arbitration
decision and award, if any, shall be final, binding upon, and enforceable
against, the parties, and may be confirmed by the judgment of a court of
competent jurisdiction. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF the state of New York without
reference to principles of conflicts of laws.
16. Independent Contractor Status. Each, party and its people are independent
contractors in relation to the other party with respect to all matters
arising under this Agreement. Nothing herein shall be deemed to establish
a partnership, joint venture, association or employment relationship
between the parties. Each party shall remain responsible, and shall
indemnify and hold harmless the other party, for the withholding and
payment of all Federal, state and local personal income, wage, earnings,
occupation, social security, worker's compensation, unemployment, sickness,
and disability insurance taxes, payroll levies or employee benefit
requirement (under ERISA, state law or otherwise) now existing or hereafter
enacted and attributable to themselves and their respective people.
17. Security, No Conflicts. Each party agrees to inform the other of any
information made available to the other party that is classified or
restricted data, agrees to comply with the security requirements imposed by
any state or local government, or by the United States Government, and
shall return all such material upon request. Each party warrants that its
participation in this Agreement does not conflict with any contractual or
other obligation of the party or create any conflict of interest prohibited
by the U.S. Government or any other government and shall promptly notify
the other party if any such conflict arises during the Term.
18. Insurance, Indemnity. Each party shall maintain adequate Insurance
protection covering its respective activities hereunder, including in the
case of ACE*COMM the following: (a) commercial general liability insurance
written on an occurrence basis with a limit of not less than $1,000,000,
including, but not limited to, premises/operations, contractual liability,
independent contractors, products/completed operations, property damage and
personal injury liability; (b) workers' compensation insurance in
accordance with statutory provisions covering employees of ACE*COMM while
at work or in the scope of employment and employer's liability insurance in
an amount not less than $1,000,000; (c) automobile liability insurance
covering owned, non-owned, leased, hired or borrowed vehicles with a limit
of not less than $1,000,000; (d) excess or umbrella liability insurance in
an amount not less than $5,000,000 written on an occurrence basis providing
coverage limits in excess of the insurance limits required under clauses
(a), (b) (employer's liability only), and (c). ACE*COMM shall cause all
such insurance policies to be endorsed as follows: Customer shall be named
as an additional insured, and the insurers shall waive all rights of
subrogation against Customer and its subsidiaries and
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affiliates and such insurance shall be primary and without right of
contribution of any other insurance carried by or on behalf of Customer and
its subsidiaries and affiliates.
(a) ACE*COMM Indemnity. Without duplication of ACE*COMM's indemnity
obligations under the Contract for Delivery of Computer System,
ACE*COMM agrees to indemnify, defend and hold harmless Customer and
any of its affiliates and all of their respective directors, officers,
employees, agents, representatives, successor and assigns, from and
against all causes of action liabilities, judgments, penalties,
damages and expenses (including settlements) relating to, or arising
from the following:
(i) actual or asserted failure by ACE*COMM or any of its affiliates
to comply with any law, statute, code, ordinance, regulation,
rule or order of any governmental or quasi-governmental body, in
the performance of ACE*COMM's responsibility under this
Agreement; or
(ii) intellectual property related claims in accordance with the
provisions of Section 11(a); or
(iii) claims on account of (a) injury to or death of persons or
(b) damages to or loss of real or tangible personal property
arising directly or indirectly out of ACE*COMM's
responsibilities under this Agreement; or
(iv) any claims of third parties brought against Customer which arise
as a direct result of breach or fault by ACE*COMM under this
Agreement.
(b) Customer Indemnity. Without duplication of ACE*COMM's indemnification
obligations under subsection (a) above, Customer agrees to indemnify,
defend and hold harmless ACE*COMM and any of its affiliates and all of
their respective directors, officers, employees, agents,
representatives, successors and assigns, from and against all causes
of action and claims of any kind and all liabilities, judgments,
penalties, damages and expenses relating in any way whatsoever to, or
arising from the following:
(i) actual or asserted failure by Customer or any of its affiliates
to comply with any law, statute, code, ordinance, regulation,
rule or order of any governmental or quasi-governmental body, in
the performance of Customer's responsibility under this
Agreement; or
(ii) claims on account of (A) injury to or death of persons or (B)
damages to or loss of real or tangible personal property arising
directly or indirectly out of Customer's responsibilities under
this Agreement.
(c) If either party (in such case the "Indemnitee") intends to seek
indemnification under this Article form the other party (the
"Indemnifying Party") with respect to any claim, the Indemnitee shall
give the Indemnifying Party notice of such claim as soon as
practicable after learning of the commencement of the action or
proceeding or
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filing of a claim that may give rise to the right to indemnification
hereunder. The Indemnifying Party shall have the right to assume the
defense of any such claim with counsel designated by the Indemnifying
Party and reasonably satisfactory to the Indemnitee. The Indemnitee
shall cooperate with and assist the Indemnifying Party as may be
reasonably required, at the Indemnifying Party's expense, in
connection with the disposition of such claim or costs being
indemnified against. After the Indemnifying Party assumes such
defense, the Indemnitee shall have the right to participate in such
action, from and after such time at its own expense. Should the
Indemnifying Party fail or refuse to assume the defense of such claim
or action, the Indemnitee may contest or settle such claim with
counsel of its choice at the sole expense of the Indemnifying Party.
(d) In the event of joint liability, the parties shall bear their
respective share of fault. Any party seeking indemnity under this
provision shall promptly notify the other party within the time
required to allow the indemnifying party to prepare and timely file
court papers in connection with the claim.
(e) Survival. The indemnification obligations of the parties under this
Section shall survive the termination of the Agreement respecting all
claims that arise, or events that occur giving rise to a claim, under
any legal theory, prior to the termination of this Agreement; provided
that any party seeking to limit its indemnification obligations under
this Section shall be required to establish in each case that the
claim or event giving rise to the claim arose after the termination of
such obligation.
19. Binding Nature of Agreement; Assignment. - This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that no party may assign or transfer its
rights or obligations under this Agreement without the prior written
consent of the other party hereto, which shall not be unreasonably
withheld. Customer may assign this Agreement either (i) to a direct
affiliate which is the Project company pursuing one or more cities,
provided such assignee is under common ownership and control with Customer
and establishes it is creditworthy to the reasonable satisfaction of
ACE*COMM, or (ii) to its lenders for purposes of meeting lenders'
collateral security requirements. Consent of assignment shall not require
additional payment except to the extent that ACE*COMM's costs increase.
20. Force Majeure. Excluding any of the Customer's payment obligations under
this agreement, neither party shall be liable for delays or failure to
perform as a direct result of causes beyond its reasonable control (except
for strikes affecting the party alleging force majure), including Acts of
God (fire, storm, floods, earthquakes), civil disturbances or disruption of
telecommunications, or other essential services.
21. Compliance with Export Regulations. Customer shall obtain in a timely
manner all necessary or appropriate licenses, permits or other governmental
authorizations or approvals and shall comply with all foreign or domestic
laws, regulations or requirements pertaining to the importation,
exportation, or use of the Processing Services, software, equipment,
technology or Data to be provided herein. Absent such governmental
22
<PAGE>
authorization, the Customer shall not directly or indirectly export or
re-export any such Processing Services, software, equipment, technology or
Data to Afghanistan, the People's Republic of China or any Group Q.S.W.Y or
Z country specified in Supplement 1 to Part 770 of the U.S. Export
Administration Regulations. This provision and the assurances made herein
shall survive termination of this Agreement.
22. Miscellaneous. This document and the accompanying Schedules, which are
hereby incorporated by reference in its entirety, constitute the entire
agreement between the parties with respect to the subject matter hereof and
supersede all other communications, whether written or oral. This
Agreement may be modified or amended only by a writing signed by the party
against whom enforcement is sought. Any provision hereof found by a
tribunal of competent jurisdiction to be illegal or unenforceable shall be
automatically conformed to the minimum requirements of law and all other
provisions shall remain in full force and effect. Waiver of any provision
hereof in one instance shall not preclude enforcement thereof on future
occasions. Headings are for reference purposes only and have no
substantive effect.
IN WITNESS WHEREOF, and intending to be legally bound, the parties hereto have
caused this Agreement to be executed by their duly authorized representatives.
KMC TELECOM INC. ACE*COMM CORPORATION
By: /s/ Michael Sternberg By: /s/ S. Joseph Dorr
-------------------------- --------------------------
Name: Michael Sternberg Name: S. Joseph Dorr
Title: President Title: Vice President
KMC TELECOM II, INC. KMC TELECOM OF VIRGINIA, INC.
By: /s/ Michael Sternberg By: /s/ [ILLEGIBLE]
-------------------------- --------------------------
Name: Michael Sternberg Name: ILLEGIBLE
Title: President Title: Chariman
23
<PAGE>
ATTACHMENT A
Schedule of Remote Access Equipment
Subpart A. Supplied by the ACE*COMM Data Center
None.
Subpart B. Supplied at this time.
None identified at this time.
Schedule of Employees
<TABLE>
<CAPTION>
<S> <C> <C>
Company Position Name
ACE*COMM Program Manager Dennis Vandendriessche
Operations Project
Manager Dan Vestal
KMC Telecom Point of Contact Ron Twine
</TABLE>
Schedule of Prices
Per N97-0684 (Attachment B)
Standard Library of Software All currently supported software (In Use)
used in Data Center for normal duties to support daily operations in
support of this agreement. These are deemed non-chargeable to Customer.
Software Subject to Surcharge
24
<PAGE>
All software required supporting this agreement that was purchased on
behalf of Customer to support this agreement with prior approval of
Customer. Cost may be a one-time charge or computed in the normal monthly
charge as agreed.
Transportation Charges
As required at cost plus 10% (Coach air fare, if required.)
Other Charges
ACE*COMM Supplied Equipment as required plus 30%
KMC Telecom Supplied Equipment Plus 10%
Software and integration cost plus 30%
Termination Fee
Total remaining Minimum Monthly Service Fees at $12,500 per month.
<TABLE>
<CAPTION>
Migration Fee
<S> <C>
Labor Category Hourly Rate
Data Processing Personnel
Operations Project Manager $100.00
Operations Staff $ 60.00
Systems Personnel
Project Manager $150.00
Engineering Staff $120.00
</TABLE>
25
<PAGE>
SCHEDULE OF PROCESSING SERVICES
The following represents the Processing Services referred to in Section 1(a)
("Computer Processing Services"):
1. Operations Support.
(a) Production. The Data Center shall monitor, schedule, or
otherwise initiate batch jobs on behalf of the Customer as shown
in the following Billing Data Processing Responsibility Matrix.
Summary Reports and logs will be reviewed and the Customer will
be notified of any problems.
(b) Production Batch. Unless otherwise agreed in writing, the
Customer's schedule for batch jobs will be the same schedule in
existence prior to implementation of Data Center processing or a
mutually agreed per service level. Where input is required from
the Customer for job scheduling functions, such input from
Customer will be forwarded to the Data Center in hard copy form
or via facsimile. The Data Center reserves the right to automate
the manual initiation of batch jobs where possible. The Data
Center operators will notify the Customer of abnormal job
termination and perform job reruns and restarts under established
guidelines directed and approved by Customer.
The Customer will review end-of-cycle reports and status and
authorize close of each billing cycle in writing. Such
authorization will be forwarded to the Data Center via facsimile
or E-mail.
Data Processing requirements for Carrier Access Billing have not
yet been defined. Data Center services rendered to support this
function will be priced separately.
The attached Billing Data Processing Responsibility Matrix
provides the specific run time activities.
(c) Customer Server System Administration. Per Data Processing
Services and Support Agreement, the Data Center shall provide the
following system administrator functions for the Customer NetPlus
Pro*Vision server:
(I) Maintain Network Configuration Files
(II) Maintain NetPlus Pro*Vision Configuration File
(III) Server Maintenance to include coordinating shutting
down and booting the server.
26
<PAGE>
(IV) User Maintenance
(V) Maintain Access Control of Server Applications
(VI) Maintain Background Jobs
(VII) Monitor System Logs
(VIII) Maintain NetPlus Pro*Vision Environment Variables
(IX) Database Management to include Starting and Stopping ORACLE,
mounting, dismounting the ORACLE database, monitoring
real-time use and performance of the ORACLE database, and
performing backup and recovery of database logs and data.
(X) Disk Management to include allocation and reallocation of
permanent, temporary, and work data sets, data
compression, data purging, and other required tasks.
Customer retains responsibility for network administration and
client workstation administration.
(d) Subscriber Invoices. The Data Center shall perform printing,
packaging, and mailing of the Customer invoices. Subscriber
invoices will be printed two-sided on pre-printed 8 1/2" by 11"
paper stock. The first page of each invoice shall be perforated
with a logo banner pre-printed at the top of the page. The first
page of each invoice section shall have a logo banner and a
colored box for insert of the section title pre-printed at the
top of the page. The continuation pages of each section shall
have only a logo banner pre-printed at the top of the page.
Subscriber invoices shall be packaged unbound. KMC shall provide
pre-printed paper stock that meets the standards identified in
the Customer Guide. ACE*COMM reserves the right to outsource the
printing, packaging, and mailing, provided that any outsourcing
contractor agrees to be bound by the confidentiality obligations
of this agreement and provided further that ACE*COMM shall remain
liable for all acts or omissions of such contractor. Any
Customer requirements outside of this standard will be priced
separately.
(e) Outgoing Tape Generation. The Data Center shall perform all
outgoing tape and other external media processing functions,
including mounts and dismounts, and logging the tape generation
and tape shipment to third parties.
(f) External Media Management. The Data Center shall perform all
tape and other external media processing functions, including
logging receipt and shipment, mounts, dismounts, on-site storage
and off-site vaulting of tapes and other external media received
from third parties for Customer processing. All such tapes and
external media will be stored in a physically secured environment
at the ACE*COMM Data Center. Processed tapes and external media
will be archived to off-site vaulting on a
27
<PAGE>
weekly basis. The Customer will provide the Data Center with
written instructions for retention of tapes in off-site vaulting.
(g) Customer Server System Backup and Restore. The Data Center
shall perform an incremental daily backup of the Customer NetPlus
Pro*Vision server database and data files to magnetic tape and a
full backup of the NetPlus Pro*Vision server weekly. The Data
Center shall provide for off site vault archiving of backup tapes
All backup tape receipts and distributions will be logged. All
backup and recovery operations will be coordinated with Customer.
Customer retains responsibility for client workstation backup and
restore.
(h) Customer Disaster Recovery. The Data Center shall provide
disaster recovery support for the Customer in the event of a
catastrophe. ACE*COMM will make available resources, including
space, operations staff, and operations equipment at a cost to be
determined when and if such support is required.
(i) Data Center Environment. ACE*COMM shall provide a secure
processing environment for data center facilities. ACE*COMM
shall provide secured access to operations equipment. Systems
used for Customer processing shall be provided with an UPS system
for system operation for not less than one hour for all data
center equipment used in support of service level agreements.
(j) Data Center Process Control. The Data Center shall provide for
logging of all processing tasks performed with reports each month
to the Customer. This activity will provide the basis for
billing/invoicing the Customer for services rendered under this
contract. ACE*COMM and the Customer will establish logging and
monthly report criteria prior to the commencement of operations
for the Customer.
(k) Customer Server Startup/Shutdown. The Data Center will control
the startup and shutdown of all NetPlus Pro*Vision server
processing functions at the direction of Customer. The Data
Center will notify Customer's users of any unscheduled startup or
shutdown of server processing.
(l) Customer System and Subsystem Monitoring and Management. The
Data Center will be responsible for installing, maintaining, and
administering all system or subsystem level monitoring and
management software.
(m) Customer System Upgrades. Customer hardware and software
upgrades shall be coordinated with the Data Center to ensure
compatibility of operations between the Customer Site and the
Data Center.
(n) Priorities. Customer will determine the task priorities for both
batch and online processing services. The Data Center will
administer services provided according to Customer priorities.
(o) Help Desk. The Data Center will provide the following Help Desk
services:
28
<PAGE>
(i) Customer will initiate trouble reports through its designated
representative(s) by contacting the Help Desk at the telephone
number listed in the Customer Guide;
(ii) The Data Center will log and classify all reported problems. The
Data Center will address all reported problems regarding network
and system availability, response time, terminal and printer
resets and any other such problem reasonably classified by the
Data Center as system related. The Data Center will enlist
Customer's information services staff when necessary to assist in
the resolution of these problems. For both online and batch
application problems, the Data Center will contact the designated
Customer personnel for resolution of such application related
problems. If the designated Customer personnel are not
available, the parties shall follow the "escalation procedures"
set forth in the Customer Guide;
(iii) Terminal and printer hardware problems and any problems
related to Customer's applications will be forwarded to
Customer's operations or applications staff. If the Data
Center cannot contact the appropriate Customer personnel,
the parties shall follow the "escalation procedures" set
forth in the Customer Guide.
(p) Additional Services.
(i) Professional Services. Any professional services specifically
requested and approved in writing by the Customer will be billed
at the ACE*COMM Data Center's then current published rates for
such services. The Data Center will bill the Customer for its
reasonable out-of-pocket expenses incurred in connection with
providing professional services to the Customer.
(ii) Other Services. Additional hardware, software,
telecommunications, travel or other services or deliverables
beyond the scope of activities contemplated in this Schedule and
which have been requested and approved by the Customer, will be
billed separately by the ACE*COMM Data Center.
29
<PAGE>
DATA PROCESSING SERVICES AND SUPPORT AGREEMENT
BILLING DATA PROCESSING RESPONSIBILITY MATRIX
<TABLE>
<CAPTION>
PROCESSING
TASK RESPONSIBLE LOCATION FREQUENCY QUANTITY
- ------------- ---------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
MAINTAIN ACCOUNT CLASSES CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
MAINTAIN GENERAL LEDGER CODES CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
MAINTAIN TRANSACTION TYPE CODES CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
MAINTAIN ACCOUNTS CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
CHANGE/MERGE ACCOUNTS CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
DEFINE BILLING HIERARCHY CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
DISPLAY ACCOUNT BALANCES CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
GENERATE ACCOUNT REPORT CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
GENERATE ACCOUNT ROLL-UP REPORT CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
GENERATE ACCOUNT EQUIPMENT SUMMARY REPORT CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
MAINTAIN TAX SCHEMES CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
ASSOCIATE TAX SCHEMES WITH ACCOUNTS, ITEM
CODES, OR TRANSACTION TYPES CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
MAINTAIN PAYMENTS/CREDITS AND SUPPLEMENTAL
CHARGE TRANSACTIONS CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
DISPLAY ACCOUNT TRANSACTIONS CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
GENERATE ACCOUNT ACTIVITY REPORT CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
GENERATE TRANSACTION SUMMARY REPORT CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
GENERATE TRANSACTION DETAIL REPORT CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
MAINTAIN THE FLAT RATE TABLE CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
PROCESSING
TASK RESPONSIBLE LOCATION FREQUENCY QUANTITY
- ------------- ---------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
MAINTAIN DIALING PLANS CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
LOAD RATE TABLES CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
MAINTAIN TIME PERIOD TABLES CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
MAINTAIN CURRENCY CONVERSION RATES CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
MAINTAIN FROM-TELEPHONE NUMBER TRANSLATIONS CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
MAINTAIN COUNTRY RATES CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
MAINTAIN POLLING CONTROL PARAMETERS ACE*COMM CUSTOMER AS REQUIRED AS REQUIRED
MAINTAIN POLLING JOBS ACE*COMM CUSTOMER AS REQUIRED AS REQUIRED
SHOW POLLING JOB STATUS ACE*COMM CUSTOMER AS REQUIRED AS REQUIRED
START POLLING JOBS ACE*COMM CUSTOMER AS REQUIRED AS REQUIRED
STOP POLLING JOBS ACE*COMM CUSTOMER AS REQUIRED AS REQUIRED
VIEW/PRINT THE POLLING LOG ACE*COMM CUSTOMER AS REQUIRED AS REQUIRED
DISPLAY THE POLLING ACTIVITY LOG ACE*COMM CUSTOMER AS REQUIRED AS REQUIRED
DELETE THE POLLING ACTIVITY LOG ACE*COMM CUSTOMER AS REQUIRED AS REQUIRED
DISPLAY/PRINT THE RATING LOG FOR POLLING
ACTIVITY ACE*COMM CUSTOMER AS REQUIRED AS REQUIRED
MAINTAIN CALL DETAIL RECORDS CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
CORRECT REJECTED CALL RECORDS CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
GENERATE THE REJECTED CALL RECORD REPORTS CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
RECYCLE REJECTED CALLS ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
GENERATE STATION MESSAGE DETAIL REPORTS CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
PROCESSING
TASK RESPONSIBLE LOCATION FREQUENCY QUANTITY
- ------------- ---------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
RATE CALLS INTERACTIVELY CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
</TABLE>
<TABLE>
<CAPTION>
TASK RESPONSIBLE LOCATION FREQUENCY QUANTITY
- ---- ---------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
MAINTAIN ELECTRONIC MEDIA JOBS ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
LOAD INTERNET USAGE MEDIA AND RATE ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE INTERNET USAGE MEDIA LOG ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE RATING LOG FOR INTERNET USAGE ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
LOAD IXC CT TAPE AND RATE ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE IXC CT TAPE LOG ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE RATING LOG FOR IXC CT ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
LOAD ILEC EMR TAPE AND RATE ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE ILEC EMR TAPE LOG ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE RATING LOG FOR ILEC EMR ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
LOAD ILEC AMA TAPE AND RATE ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE ILEC AMA TAPE LOG ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE RATING LOG FOR ILEC AMA ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
LOAD ILEC TAPE AND RATE ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE ILEC TAPE LOG ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE RATING LOG FOR ILEC ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
LOAD DS1 USAGE MEDIA AND RATE ACE*COMM DATA CENTER AS REQUIRED AS REQUIRED
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
TASK RESPONSIBLE LOCATION FREQUENCY QUANTITY
- ------------------- ---------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
VIEW/PRINT THE DS1 USAGE MEDIA LOG ACE*COMM DATACENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE RATING LOG FOR DS1 ACE*COMM DATACENTER AS REQUIRED AS REQUIRED
LOAD OCTEL MEDIA AND RATE ACE*COMM DATACENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE OCTEL MEDIA LOG ACE*COMM DATACENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE RATING LOG FOR OCTEL ACE*COMM DATACENTER AS REQUIRED AS REQUIRED
LOAD DEBIT CARD USAGE MEDIA AND RATE ACE*COMM DATACENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE DEBIT CARD USAGE MEDIA LOG ACE*COMM DATACENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE RATING LOG FOR DEBIT CARD USAGE ACE*COMM DATACENTER AS REQUIRED AS REQUIRED
LOAD GTE EMR TAPE AND RATE ACE*COMM DATACENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE GTE EMR TAPE LOG ACE*COMM DATACENTER AS REQUIRED AS REQUIRED
VIEW/PRINT THE RATING LOG FOR GTE EMR ACE*COMM DATACENTER AS REQUIRED AS REQUIRED
GENERATE CMDS II TAPE ACE*COMM DATA CENTER MONTHLY 1 TAPE
GENERATE OUTCOLLECT TAPES ACE*COMM DATA CENTER MONTHLY 1 TAPE
GENERATE CABS TAPES ACE*COMM DATA CENTER MONTHLY 1 TAPE
GENERATE INVOICES FOR CARRIERS MONTHLY AS REQUIRED
LOAD RATE TAPES ACE*COMM DATA CENTER, MONTHLY 1 TAPE
CUSTOMER
UPDATE THE BILLING CYCLE ACE*COMM CUSTOMER AS REQUIRED AS REQUIRED
CUSTOMIZE THE BILLING STATEMENT TEXT CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
TRIAL BILLING CYCLE CLOSE CUSTOMER,
ACE*COMM CUSTOMER AS REQUIRED AS REQUIRED
CLOSE THE TOLL CYCLE CUSTOMER,
ACE*COMM CUSTOMER AS REQUIRED AS REQUIRED
SHOW THE PROGRESS OF END-OF CYCLE PROCESS ACE*COMM CUSTOMER AS REQUIRED AS REQUIRED
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
TASK RESPONSIBLE LOCATION FREQUENCY QUANTITY
---------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
PROCESS
TERMINATE THE END-OF-CYCLE PROCESS ACE*COMM CUSTOMER AS REQUIRED AS REQUIRED
DISPLAY/PRINT/REVIEW THE TOLL CLOSE REPORT CUSTOMER, CUSTOMER AS REQUIRED AS REQUIRED
ACE*COMM
CLOSE THE BILLING CYCLE CUSTOMER, CUSTOMER AS REQUIRED AS REQUIRED
ACE*COMM
SHOW THE PROGRESS OF CLOSE BILLING CYCLE PROCESS ACE*COMM CUSTOMER AS REQUIRED AS REQUIRED
REVIEW THE CLOSE BILLING CYCLE REPORT CUSTOMER, DATACENTER, WEEKLY ONCE
ACE*COMM CUSTOMER
SHOW ON-LINE BILLING HISTORY DATA CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
GENERATE PRINTED SUBSCRIBER BILLS ACE*COMM DATACENTER MTHY/CYCLE AS REQUIRED
GENERATE SUBSCRIBER BILLS TO ELECTRONIC MEDIA ACE*COMM DATACENTER MTHY/CYCLE AS REQUIRED
GENERATE THE AGED ACCOUNT REPORT CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
GENERATE THE EXPENSE RECOVERY ANALYSIS REPORT CUSTOMER CUSTOMER AS REQUIRED AS REQUIRED
FILE TRANSFER USAGE DETAIL FROM DATA CENTER TO
CUSTOMER SITE ACE*COMM DATACENTER DAILY ONCE
CUSTOMER
FILE TRANSFER BAF DATA FROM CUSTOMER SITE TO DATACENTER
DATA CENTER ACE*COMM CUSTOMER DAILY ONCE
TRANSFER END OF CYCLE DATA FROM CUSTOMER SITE DATACENTER
TO DATA CENTER ACE*COMM CUSTOMER WEEKLY ONCE
TRANSFER INVOICE IMAGE TO CUSTOMER SITE FOR
INVOICE INQUIRY ACE*COMM DATACENTER WEEKLY ONCE
</TABLE>
34
<PAGE>
Data Processing Services and Support Agreement
Functional Rollout
A consolidated View of Planned
Enhancements Over Baseline Pro*Vision
1.0.1
Phase 1 - October 04, Phase 2 - December 31,
1997 Phase 3 - March 31, 1998 Planned
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Pro*Vision WFM/Enhancement Capability Roll-out
- -----------------------------------------------------------------------------
<S> <C>
General Billing Capabilities
KMC Item Code Capability
- Item Code Grouping (Master/Child)................... Phase 1
- Multiple hierarchy ................................. Phase 1
- Plain English description .......................... Phase 1
Invoice Billing
- A/R Tracking to invoice number ..................... Phase 3
- Product specific Invoice Billing ................... Phase 3
Update Customer account information
(Acct receivables).................................... Phase 1
Bill minimums based on agreements....................... Phase 3
Payment history on invoice.............................. Phase 1
Consolidate multiple accounts (Parent/Child)............ Phase 1
Customer Service call crediting......................... Phase 1
Ability to suppress or customize bill................... Phase 1
On-line account status.................................. Phase 1
15 day ability to change rates, add promo's, etc........ Phase 1
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Vendor provider billing capability
- Billing for wholesale services...................... Phase1
- Bill on behalf of other service provider............ Phase 1
Provide Electronic distribution of Bill (EMAIL)......... Phase 3
Ability to do Bill re-runs.............................. Phase 1
RATING & BILLING PROCESSING
5ESS AMA processing(1).................................. Phase 1
Rating Calls (Local / IntraLata /InterLata ) (1)........ Phase 1
IXC CT Records processing (1)........................... Phase 1
EMI Processing (operator, third party & CMDS) (1)....... Phase 1
Reconciliation between 5ESS & 1 Primary PIC tapes....... Phase 2
Boston Technology record processing (2)................. Phase 2
Partial cent rating by product or Customer.............. Phase 1
Billing Adjustments..................................... Phase 1
*Post billing only
Multiple billing cycles ................................ Phase 2
Flexible billing periods................................ Phase 2
Sort by Billing periods................................. Phase 2
- Track 30/60/90 overdue.............................. Phase 1
- close-cycle logic to select designated billables.... Phase 3
</TABLE>
(1) Formats must be provided to ACE*COMM by Customer thirty (30) business days
before delivery of processing capability.
(2) Formats must be provided to ACE*COMM by Customer thirty (30) business days
before delivery of processing capability.
36
<PAGE>
Data Processing Services and Support Agreement
<TABLE>
<S> <C>
Sort by Billing media..................................... Phase 1
Volume Discounting........................................ Phase 3
Discounting per service with start & end dates............ Phase 1
KMC Tax requirements...................................... Phase 1
Prorating taxes........................................... Phase 3
Billing by bandwidth, packets, frame counts............... Phase 3
Rate Schedule system - Record exchange for
carrier settlements..................................... Phase 1
INVOICE PROCESSING & PRODUCTION FUNCTIONAL CAPABILITY
Mandatory Sections/page to print
(Remit/TOC/SOA/CS).................................... Phase 1
Print ONLY sections which apply to specific customer.... Phase 1
Alpha Suffix after invoice number to indicate
exceptions............................................ Phase 2
Customer Flexibility (Parameter table).................. Phase 1
- Customer ability to Suppress /customize
elements of bill.................................... Phase 1
- Ability to choose sections.......................... Phase 1
- Ability for customer to modify each billing
cycle (before deadline)............................. Phase 1
- Ability to provide Customer two levels of
sorting capability.................................. Phase 2
- Sort detail such as Tel Number, location,
dept, acct code..................................... Phase 1
</TABLE>
38
<PAGE>
<TABLE>
<S> <C>
- Sort actual call record details chronological,
sequential numeric.................................. Phase 1
- Ability to define TOTALS, by telephone number,
location............................................ Phase 1
Charges Summary - Trending capability.................. Phase 2
- Only Show current month............................ Phase 1
- Last month charges (if product is still being
subscribed to)...................................... Phase 2
- This month last year (if applicable)................ Phase 2
- year to date ....................................... Phase 1
Provide Graphics capability ............................ Phase 2
- Charge summary...................................... Phase 2
- Trending............................................ Phase 2
- Automatic scaling of graph.......................... Phase 2
Custom Marketing messages .............................. Phase 2
INVOICE SECTIONS CAPABILITY
Table of Contents....................................... Phase 1
Payment History......................................... Phase 1
Account Balance Reconciliation.......................... Phase 1
Charges Summary......................................... Phase 1
Voice Services.......................................... Phase 1
Misc. Charges, Taxes and Surcharges..................... Phase 1
Account Inventory....................................... Phase 1
Service Summary Reports................................. Phase 1
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C>
Exception Reports....................................... Phase 1
KMC PRODUCT INVOICE CAPABILITY
Dedicated Services (see T1, DS1,3 below)............... Phase 1
Data Services (see below)............................... Phase 1
Video Services (see below).............................. Phase 1
Leased Equipment........................................ Phase 1
Systems Integration..................................... Phase 1
Process Improvement..................................... Phase 1
Voice Mail.............................................. Phase 1 Recurring Charge Only
Voice Conf Bridge....................................... Phase 1 Recurring Charge Only
Bus. Quality Video...................................... Phase 1 Recurring charge only
High Res. Video ........................................ Phase 1 Recurring charge only
T1/DS1/DS3 ............................................. Phase 1 Recurring charge only
Gateway, Packet Switching............................... Phase 1 Recurring charge only
Virtual LAN Services.................................... Phase 1 Recurring charge only
HS Internet............................................. Phase 1 *recurring charge only
I'net Access Port Utilization Overcharge................ Phase 1 RC Only, No Threshold
overcharge
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C>
Frame Relay............................................. Phase 1 Recurring charge only
SERVICE NEGOTIATION
Provide user interface for service order input.......... Phase 1
Automatic query for open TT/WO & bill status............ Phase 2
Service Order Input..................................... Phase 1
Service Negotiation Screen.............................. Phase 2
Automatic Process Flow/indicator lights................. Phase 3
Service Order Subtotaling............................... Phase 1
Provide appropriate pop up screen & menus............... Phase 2
All appropriate data fields with real time data input... Phase 1
Online help and user lead-through....................... Phase 1
Provide access to product database...................... Phase 1 application launch/no interface
INFRASTRUCTURE DB
- provide lookup for CLE/POP inventory
(Shelf/Lincards/slots/ports).......................... Phase 1
- status against inventory (pending/avail/in-
use/rsvr'd/vacant).................................... Phase 2
- reserve inventory against crt ID or Tel number........ Phase 1
- provide association with S.O #/Due Date /service ID... Phase 3
- Provide association with EWO.......................... Phase 1
- Service negotiation capable of linking Due date
to inventory results.................................. Phase 3
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C>
- Svc negotiation capable of associating Svc to
line card type........................................ Phase 3
- Cancel SO removes reservation information
from all inventory.................................... Phase 1
- Provide threshold levels & notification upon
threshold crossings................................... Phase 1
- Auto-posting of due date upon completion.............. Phase 2
Provide Tel. No mgmt ................................... Phase 1
Vanity Number Sort capability........................... Phase 3
Customer profile database...............................
- corp address fields................................... Phase 1
- Customer billing/pricing plan......................... Phase 1
- Email address......................................... Phase 1
- billing cycle field................................... Phase 1
- direct billing media.................................. Phase 1
- cust. contract and tariff info........................ Phase 1
- payment history....................................... Phase 1
- cust service location addresses....................... Phase 1
- ability for cust to modify billing cycles ............ Phase 2
- Customer contact log.................................. Phase 1
- Auto purging of contact entries....................... Phase 1
Provide screen to support listings creation............... Phase 1
Create DNCF order to LEC..................................
- Mod to Work order processor to provide interface
to Rboc (real-time interface)......................... Phase 3
- modify 411 listings to conform to Rboc ............... Phase 3
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C>
- Sync with existing transaction logging................ Phase 3
Directory listing and E911 interface to LEC.............
- Interface to Rboc..................................... Phase 3
- Modify length of personnel listings to conform
to Rboc............................................... Phase 1
- Sync existing transaction logging with new layout..... Phase 3
- Sync existing auto-updates between Tel. &
Directory tables...................................... Phase 3
Order status reporting by category and aging
to/from carriers ..................................... Phase 1
Electronic interface to LEC ordering system............. Phase 3
Provide ASR form from service order data................ Phase 1
- JetForm integration .................................. Phase 1
- Auto Population into Form............................. Phase 3
Yellow pages............................................ TBD KMC to define process
AUTO-SWITCH PROVISIONING
- Batch mode capability................................. Phase 1
- Support 30/40 CENTREX features........................ Phase 1
- Table validity checking / Sync database ............... Phase 1
- En-mass user definable execution times................. Phase 1
- Batching of up to 100 lines/customer................... Phase 2
- ISDN Provisioning (BRI)................................ Phase 1
- ISDN Provisioning (PRI)................................ TBD
</TABLE>
43
<PAGE>
<TABLE>
<S> <C>
Real-time connection to 5ESS -11 - auto Phase 1
populate required translations
Automatically activate switch services Phase 1
Send reject information in real-time to Phase 1
exception mgr
Provide two fields for Customer Lata PIC & Phase 1
Interlata PIC selection
Automatic PIC Notification to Carrier (MCI, Phase 3
IXC, ATT)
Multiple line / TN assignment Phase 2
Provide user with Real-time QDN/QOE query Phase 2
capability
</TABLE>
<TABLE>
<CAPTION>
SERVICE REQUESTS
<S> <C>
- - Types of work orders (Quote, New Site Phase 1
service, SO, EWO)
- - SO status - pending, planning, complete Phase 1
- - SO action field - disconnect, add, change, Phase 1
cancel
- - modify all TSR terminology to conform to Phase 1
KMC terminology
Distribute order to appropriate field techs Phase 1
Provide a completion mechanism following the Phase 1
turn-up of service
Provide customer screening capability Phase 1
define customers as new, additional, service Phase 1
trouble report
Maintain up to date cust. service profile Phase 1
</TABLE>
<PAGE>
DATA PROCESSING SERVICES AND SUPPORT AGREEMENT
<TABLE>
<S> <C>
Provide customer details
- - line and feature inventory Phase 1
- - Account profile Phase 1
- - Total telecom usage by service Phase 1
- - number of lines Phase 1
- - contract terms and rate agreements Phase 1
- - product and service agreements Phase 1
- - status, completion, aging reports for all Phase 1
order types
Ability to reconcile switch and billing Phase 1
databases
Ability to correct PIC or other billing Phase 2
discrepancies
</TABLE>
<TABLE>
<CAPTION>
TROUBLE REPORTING
<S> <C> <C>
Create customer trouble record Phase 1
Provide customer screening Phase 1
Provide from TR screen access to all customer Phase 1
info & 5ESS info
Provide trouble report history Phase 1
Distribute work orders to Techs Phase 1
Provide image of customer last 6 months bills Phase 1
Provide access to all customer billing info Phase 1
Provide access to up to the minute CDR info Phase 1 Based on
Switch
AMA
availability
Carrier reporting and tracking interface Phase 1
</TABLE>
<PAGE>
DATA PROCESSING SERVICES AND SUPPORT AGREEMENT
<TABLE>
<S> <C>
Provide progress of pending TR's to Phase 1
appropriate personnel
Trouble ticket source summary table Phase 1
</TABLE>
<TABLE>
<CAPTION>
BILL LAYOUT CAPABILITIES
<S> <C>
81/2 X 11 format - 2-sided / 66 lines per page Phase 1
margins: 11/2 top, 1/2 left, right, bottom Phase 1
Paper type Phase 1
- - Section title format - includes color logo Phase 1
- - remittance Phase 1
- - Section - color logo band at top, front, and Phase 1
back
Suppression of empty lines Phase 1
Variable length Information exchange section Phase 1
Suppression of leading zeros Phase 1
line numbers on left side - 50%-60% screened Phase 1
Provide "continuation" detail on top of page Phase 1
Number field formats as per "Invoice Format" Phase 1
Rich Format Text as per "Invoice Format" Phase 2
</TABLE>
<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE
<S> <C>
Provide user definable credit rating rules Phase 3
- - External credit checking (Manual) Phase 1
- - Provide view to data and method to manually Phase 1
enter data
</TABLE>
<PAGE>
DATA PROCESSING SERVICES AND SUPPORT AGREEMENT
<TABLE>
<S> <C>
- - External credit checking -provide scoring Phase 3
logic
- - internal credit checking Phase 2
- - User definable credit checking criteria Phase 3
- - Provide external credit checking access Phase 1
Manage pre-pay deposits Phase 1
Track Payment record Phase 1
Declare overdue accounts Phase 1
Resubmit overdue accounts to billing database Phase 1
Declare Delinquent Accounts Phase 1
Declare and refer bad debt Phase 1
Delinquent account management Phase 1
Report delinquent account Phase 1
Payment collection Phase 1
Historical Activity file Phase 1
Collect and update payments Phase 1
Update accounting journals and ledger Phase 3
Billing Payment media (Input mechanism) Phase 2
- Lock Box capability Phase 1
- Electronic Fund transfer Phase 3
- Preauthorized payment (debit) Phase 1
</TABLE>
<TABLE>
Separations and Settlements
<S> <C>
Manage KMC toll charges Phase 1
</TABLE>
<PAGE>
DATA PROCESSING SERVICES AND SUPPORT AGREEMENT
<TABLE>
<S> <C>
Receive and sort toll charges from toll service Phase 1
providers
Provide local & Long Distance originating and Phase 1
terminating access data to CDG (EMR format)
Fraud - monitor usage Phase 1
Fraud - set bill thresholds Phase 3
</TABLE>
<TABLE>
<CAPTION>
Management Report and Tracking
<S> <C>
Create history records Phase 1
Provide service order tracking Phase 1
- user definable milestone dates Phase 3
- track progress of SO (request, complete, etc) Phase 1
- provide progress of pending TR's Phase 1
Provide jeopardy escalation if one of the due Phase 3
dates missed
Provide tracking of all service orders, EWO, TR Phase 1
Provide daily, weekly, monthly summary reports Phase 1
Service level measurement reports Phase 1
Tracking cost/volume by salesperson Phase 3
Support or delivery account management system Phase 2
Conform to CLLI naming convention Phase 1
System Admin / Security Phase 1
</TABLE>
<TABLE>
<CAPTION>
Interface Summary
<S> <C>
Telephone number administration Phase 1
</TABLE>
<PAGE>
DATA PROCESSING SERVICES AND SUPPORT AGREEMENT
<TABLE>
<S> <C>
E911 Fax & data file Phase 2
E911 Electronic Interface Phase 3
Product/Marketing Interface Phase 1
5ESS usage DB Phase 1
5ESS interactive line translations Phase 1
ATM Network Mgr Phase 3
Network resource at specific address DB Phase 1
Remote access capability Phase 1
Billing printing and mailing Phase 1
Electronic bill distribution Phase 1
Accounts receivable Phase 1
Trouble repair DB Phase 1
SO and Provisioning DB Phase 1
Communications DB Phase 1
Prospect DB Phase 1
Directory Listings fax and data file Phase 2
Directory listings Electronic Interface Phase 3
Outbound Carrier ASR fax and data file Phase 2
Outbound Carrier ASR electronic interface Phase 3
Outbound Carrier PIC fax and data file Phase 2
Outbound Carrier PIC electronic interface Phase 3
CDG CABS Interface (EMR) Phase 1
Billing for Carrier Phase 1
</TABLE>
<PAGE>
DATA PROCESSING SERVICES AND SUPPORT AGREEMENT
<TABLE>
<S> <C>
Service Bureau interface Phase 1
</TABLE>
<PAGE>
CONTRACT FOR DELIVERY OF COMPUTER SYSTEM
This Contract for delivery of a computer system is made as of September 29,
1997, by and between ACE*COMM Corporation ("ACE*COMM"), located at 704 Quince
Orchard Road, Gaithersburg, Maryland 20878, and KMC Telecom Inc., KMC Telecom
II, Inc., and KMC Telecom of Virginia, Inc., collectively the "Customer" with
offices at 1545 Route 206, Suite 300, Bedminster, New Jersey 07921.
RECITALS
Whereas ACE*COMM is a supplier of computer-based telephone billing products and
services and KMC is a competitive local exchange carrier and ACE*COMM intends to
sell and KMC intends to purchase certain telephone billing products and
services, ACE*COMM and KMC are entering into the following two agreements:
1. This CONTRACT FOR DELIVERY OF COMPUTER SYSTEM whereby ACE*COMM will provide
computer hardware, software, and documentation for KMC's customer billing
requirements.
2. A DATA PROCESSING SERVICES AND SUPPORT AGREEMENT whereby ACE*COMM will
provide computer processing services and support regarding billing and
additional services.
Now, therefore, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
ARTICLE I Purpose
The purpose of this Contract is to provide Customer with a computer system that
can handle current business requirements and that can be expanded in the future
to handle additional business and technical tasks. The system consists of
computer machinery, hereinafter referred to as "hardware", and computer
programs, hereinafter referred to as "software", and associated training and
documentation.
ARTICLE II Scope of Work
A. Deliverables -
1. ACE*COMM will deliver to Customer at Customer's designated
locations, items consisting of the hardware and software
components specified in Attachment A hereto, to be delivered in
accordance with the schedule set forth in Article V.A. and
detailed in the Functional Rollout Schedule ("the Schedule")
detailed in the Data Processing Services and Support Agreement,
which may be revised by Customer and ACE*COMM under mutual
agreement.
2. Documentation - ACE*COMM will provide to Customer one copy of
documentation on the computer hardware, operating system
reference manuals, and one copy of the user's manual for each
application software package. ACE*COMM will provide updates as
they are available.
1
<PAGE>
CONTRACT FOR DELIVERY OF COMPUTER SYSTEM
B. Independent Contractor Status. Each, party and its people are
independent contractors in relation to the other party with respect to
all matters arising under this Agreement. Nothing herein shall be
deemed to establish a partnership, joint venture, association or
employment relationship between the parties. Each party shall remain
responsible, and shall indemnify and hold harmless the other party,
for the withholding and payment of all Federal, state and local
personal income, wage, earnings, occupation, social security, worker's
compensation, unemployment, sickness, and disability insurance taxes,
payroll levies or employee benefit requirement (under ERISA, state law
or otherwise) now existing or hereafter enacted and attributable to
themselves and their respective people.
C. Installation and Training
1. Installation - ACE*COMM will install the software in accordance
with Article V.A.
2. Training - ACE*COMM will provide training for Customer on the
operations of the application software at ACE*COMM's facility.
As of the date hereof the parties anticipate the training shall
include a minimum of two (2) days planning and thirteen (13) days
of instruction which includes a maximum of twelve (12) attendees
per day. Parties will cooperate to determine whether the
training days are adequate. The training schedule will be
subject to mutual agreement and availability during normal
working hours.
ARTICLE III Compensation
A. Compensation - In return for the hardware, software, and services
provided by ACE*COMM under this Contract, Customer agrees to pay a
total fixed price listed in Attachment A. ACE*COMM reserves the right
to revise the price if Customer order Optional items contained in
Attachment A or alters the scope of any software package beyond that
mutually negotiated and agreed to in writing at the time this Contract
is signed in any material way, provided that ACE*COMM shall document
the basis for the prices, which shall correspond to the actual
additional work required minus any work value deleted.
B. Taxes - In addition to any other sums payable hereunder, Customer is
responsible for amounts equal to any sales or similar taxes related to
this sale however designated arising from or based upon the fees, this
Agreement, the licensed software and associated media and system
reference and user manual(s) furnished for their use, including any
sales and/or use tax, local privilege or excise tax, tariff, duty,
property tax or assessment (but excluding income taxes of ACE*COMM or
its employment related taxes) and related interest and penalties, if
any are imposed by any governmental authority at any time.
C. ACE*COMM is not responsible for any expenses incurred for
installation, testing, or operation of the system and its features
except for these expenses specifically and expressly set forth herein
as ACE*COMM's responsibility.
2
<PAGE>
CONTRACT FOR DELIVERY OF COMPUTER SYSTEM
D. Payments - All payments shall be made to ACE*COMM at:
ACE*COMM
Attn: Accounts Receivable
P. O. Box 79201
Baltimore, MD 21279-0201
Or if by courier to:
ACE*COMM
Attn: Accounts Receivable
704 Quince Orchard Road
Gaithersburg, Maryland 20878
ARTICLE IV Project Management
A. Customer Project Manager - Customer will designate a Project Manager
with the responsibility and authority to perform the necessary
interface approval functions.
B. ACE*COMM Project Manager - ACE*COMM will designate a Project Manager
with the responsibility and authority to successfully complete the
project. ACE*COMM may use additional personnel as required under the
direction of the ACE*COMM Project Manager. If higher tier approval is
required, it shall be resolved expeditiously.
C. Reviews - ACE*COMM will provide to Customer weekly written reports
reviewing project status and setting forth any delays and plans to
mitigate the delays. Additional reviews will be scheduled as needed.
ARTICLE V Delivery and Payment Schedule
The Delivery and Payment Schedule is as follows:
A. Delivery Schedule - As defined in Data Processing Services and Support
Agreement N97-1257.
<TABLE>
<CAPTION>
Contract Milestones
<S> <C>
1. Contract Signed September 29, 1997
2. Phase 1 and Hardware On or before October 4,1997
3. Phase 2 On or before December 31,1997
4. Phase 3 On or before March 31, 1998
</TABLE>
3
<PAGE>
B. Payment Schedule - Customer agrees to pay ACE*COMM when invoiced in
accordance with the schedule outlined in Attachment A and as follows:
<TABLE>
<CAPTION>
<S> <C>
At Contract 20%
At Installation (Base) 20%
At Acceptance (Base) 20%
At Phase 2 Installation 10%
At Phase 2 Acceptance 10%
At Phase 3 Installation 10%
At Phase 3 Acceptance 10%
</TABLE>
Additional and Optional hardware shall be installed as ordered and on
a mutually agreed schedule.
C. Late Payment - Payments not received within thirty days of the date of
invoice will be assessed a late payment penalty of 1 % per month.
ARTICLE VI Installation of Hardware and Software
A. Hardware - The hardware specified in Attachment A hereto will be
delivered F.O.B. Gaithersburg, directly to Customer's specified
location by a transport carrier. Within two (2) days after receipt of
the hardware, Customer and ACE*COMM will immediately arrange for the
installation of the hardware in accordance with Article V.A.
B. Software - ACE*COMM will install the software programs and
modifications in accordance with the mutually developed implementation
schedule in accordance with Article V.A.
ARTICLE VII Maintenance of Software and Hardware
A. Hardware - Customer is entitled to field service as provided under
Data Processing Services and Support Agreement which presently is
Monday through Friday, 8:00 am to 10:00 pm, EST, excluding holidays,
and at the current prevailing yearly field service costs under said
Agreement.
B. Applications Software - ACE*COMM will immediately create an action
plan to correct all software errors to the purchased application
software for the period of three (3) months from acceptance of each
phase by Customer of the application software at no additional cost to
Customer. Following the three-month period, a software maintenance
and subscription service will be available. Dispute resolution
procedures will be followed for remedy.
Under no circumstances shall Customer withhold payment or part of a
payment beyond the schedule provided in Section V because of errors or
inconsistencies in the hardware or software system. ACE*COMM will
remedy any such problem in accordance with the preceding paragraph.
4
<PAGE>
ARTICLE VIII Inspection and Acceptance of Hardware and Software
A. Inspection and Acceptance of Hardware or Software- ACE*COMM shall
provide an Acceptance Test Plan for KMC's review and approval for
each phase. ACE*COMM will execute the acceptance test procedures
in the presence of the Customer. Customer shall have ten (10)
working days from the date ACE*COMM notifies Customer that
installation of the hardware or software is complete. By the end
of such ten (10) day period, Customer shall either submit a
written acceptance certificate or notice of any test failures to
ACE*COMM. ACE*COMM shall correct any failure and repeat the
appropriate test procedure, and notify Customer when complete.
The software shall be accepted when any of the following events
occur:
1. Customer submits a written acceptance.
2. The acceptance test has been completed with no failures as signed off
by the parties.
3. Customer uses the software in a production mode provided that if there
are errors or defects they will be corrected promptly and if such
defects are material, warranty shall commence on the date the
corrections are complete.
After acceptance, any failures that occur shall be corrected under the warranty
provisions.
ARTICLE IX General Terms and Conditions
A. Proprietary Consideration
1. Server Software Program License - Customer agrees to the
following terms and conditions of the following Software
Program License.
Software is provided under license for installation on a
single site (Central Processing Unit ("CPU") identified by
manufacturer, model and serial number) for use by Customer
to process its own administrative, accounting and/or
management information. Software may only be copied, in
whole or in part, for installation and use on the identified
CPU. Copies in whatever form shall include the copyright or
proprietary rights notice. Customer understands that the
licensed software is proprietary to ACE*COMM. Customer is
authorized to make modified versions of the Programs
provided the originals and copies thereof: (1) acknowledge
copyrights; and (2) are installed and used on the CPU
identified by manufacturer, model and serial number.
Customer agrees not to provide or otherwise make available
the software or modified originals or copies of either to
anyone. Software may not be assigned, sublicensed, or
otherwise transferred; title or ownership of software is not
transferred to Customer. Use of software or modified
versions, for purposes other than specified herein, will
require the prior execution of a separate license agreement.
5
<PAGE>
2. Client Software Program License - Customer agrees to the
following terms and conditions of the following Software
Program License.
Software is provided under license for installation on a
single CPU (identified by manufacturer, model and serial
number at installation) for use by Customer to process its
own administrative, accounting and/or management
information. Software may only be copied, in whole or in
part, for installation and use on the identified CPU or
other Customer client workstations in accordance with
Article V.A. within the purchased licensed limit. Copies in
whatever form shall include the copyright or proprietary
rights notice. Customer understands that the licensed
software is proprietary to ACE*COMM. Customer is authorized
to make modified versions of the Programs provided the
originals and copies thereof: (1) acknowledge copyrights;
and (2) are installed and used on Customer's CPU identified
by manufacturer, model and serial number, (on a, as
requested basis, by ACE*COMM with not less than 30 days
notice for audit purposes). Customer agrees not to provide
or otherwise make available the software or modified
originals or copies of either to anyone. Software may not
be assigned, sublicensed, or otherwise transferred; title or
ownership of software is not transferred to Customer, except
as provided in Section I. Use of software or modified
versions, for purposes other than specified herein, will
require the prior execution of a separate license agreement.
3. "Execute Only" Form - The system software will be delivered
in an "execute only" form that cannot be modified by
Customer. The licensed applications software will also be
delivered in an "execute only" form that cannot be modified
by Customer.
4. Protection of Customer Data - Since in the course of this
Contract ACE*COMM may obtain access to Customer's
proprietary technical and business information, ACE*COMM
will take firm measures to assure that this information is
handled in a business confidential manner and not released
to third parties (i.e. in accordance with Section 7 of the
Data Processing Services and Support Agreement).
B. Warranties
1. Licensed Application Software Warranty - ACE*COMM warrants
that the licensed applications software, when delivered,
will perform as represented herein; however, Customer
acknowledges that the licensed applications software may
have immaterial residual documentation or programming errors
provided, however, that none of the Software shall be
subject to failure on account of any such errors, whether
individually or in the aggregate, during the warranty
period, ACE*COMM will provide all reasonable services to
correct such errors reported and documented by Customer
which ACE*COMM's diagnosis indicates are caused by a defect
in a version unaltered by Customer of the delivered licensed
applications software. For each licensed applications
software package, this warranty is valid for a period of
three months from the date each licensed application
software package is accepted by Customer ("Warranty
Period").
6
<PAGE>
CONTRACT FOR DELIVERY OF COMPUTER SYSTEM
2. Hardware Warranties - All hardware warranties from the
hardware manufacturer will be passed through to Customer.
ACE*COMM makes no warranty on its own behalf either explicit
or implicit and Customer does hereby waive any and all
claims, suits or actions which it or they may have for
damages including incidental or consequential damages
arising thereunder; and, ACE*COMM makes no further or
additional warranties as to the hardware: except that
ACE*COMM warrants software provided hereunder will operate
correctly on the hardware provided. While hardware is under
warranty, ACE*COMM will work with hardware manufacturers to
effect necessary repairs. Thereafter, these services shall
be provided under the Data Processing Services and Support
Agreement.
3. No Hardware Schedule Warranty - ACE*COMM cannot warrant the
hardware delivery schedule quoted by the hardware
manufacturer. All ACE*COMM's schedules will slip on a
day-to-day as delivery of the hardware slips. Consequently,
Customer's Hardware and System Software payments will slip
also.
4. Customer Held Harmless from Infringement Claims - ACE*COMM
warrants to Customer the applications software contains no
Customer components that have not been duly acquired by
ACE*COMM for resale, or otherwise infringe upon the rights
of any others. Customer is held harmless from any
infringement claims.
5. Funding Available - Customer warrants that funds have been
planned and will be available for payment in accordance with
the payment schedule in Contract Article V (B).
6. Liability - ACE*COMM will make its best effort to meet the
schedule milestones.
C. Other Liability - ACE*COMM shall not be liable to Customer for any
incidental or consequential damages arising from Customer's use of
ACE*COMM supplied equipment, software programs, or services.
D. Nonexclusive Agreement - This contract is nonexclusive. Nothing
contained in this contract shall be construed to prohibit ACE*COMM
from selling or leasing the same or similar equipment and software to
others.
E. Excusable Delays and Failures - ACE*COMM shall not be responsible for
any failure to perform due to causes that are not foreseeable and
which are beyond its reasonable control provided that such cause is
not the fault of ACE*COMM and further provided that ACE*COMM endeavors
to the extent it is commercially reasonable to do so, mitigate and
schedule around the delay.
F. Indulgences - Neither the failure nor any delay on the part of either
party to exercise any right, remedy, power, or privilege under this
Contract shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power, or privilege preclude
any other or further exercise of the same or of any other right,
remedy, power, or privilege with respect to any other occurrence.
7
<PAGE>
CONTRACT FOR DELIVERY OF COMPUTER SYSTEM
G. Controlling Law - This Contract and all questions relating to its
validity, interpretation, performance and enforcement shall be
governed by and construed in accordance with the laws of the State of
New York, without reference to principles of conflicts of law.
H. Notices - All notices, requests, demands, and other communications
required or permitted under this Contract and the transactions
contemplated herein shall be in writing and shall be deemed to have
been duly given, made and received when delivered in person or
transmitted by telecopier ("fax") machine (answerback confirmation
received), one (1) day after being sent by nationally reputable
overnight courier, or when received after being sent by first-class
mail postage prepaid to the addresses set forth below, or to such
other address as the parties may from time to time give notice:
<TABLE>
<CAPTION>
<S> <C>
KMC Telecom Address: ACE*COMM Address
Ms. Cynthia Worthman Mr. S. Joseph Dorr
Chief Financial Officer Vice President, NET*COMM
KMC Telecom Inc. ACE*COMM, Corporation
1545 Route 206 704 Quince Orchard Road
Suite 300 Suite 100
Bedminster, NJ 07921 Gaithersburg, MD 20878
Tel (908) 719-2100 Tel (301) 721-3000
Fax (908) 719-8775 Fax (301) 258-5692
</TABLE>
I. Binding Nature of Agreement; Assignment. - This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that no party may assign or
transfer its rights or obligations under this Agreement without the
prior written consent of the other party hereto, which shall not be
unreasonably withheld. Customer may assign this Agreement either (i)
to a direct affiliate which is the Project company pursuing one or
more cities, provided such assignee is under common ownership and
control with Customer and establishes it is creditworthy to the
reasonable satisfaction of ACE*COMM or (ii) to its lenders for
purposes of meeting lenders' collateral security requirements.
Consent of assignment shall not require additional payment except to
the extent that ACE*COMM's costs increase.
J. Separable Provisions - The provisions of this Contract are independent
of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for
any reason any other or others of them may be invalid or unenforceable
in whole or in part.
K. Entire Contract - This Contract contains the entire understanding
between the parties hereto with respect to the subject matter hereof,
and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or
written, except as herein contained. The express terms hereof control
and supersede any course of performance and/or usage of the trade
inconsistent with any of the terms other than by an agreement in
writing. This Contract supersedes and replaces in all respects and
relates back to that certain Letter Agreement between the parties
dated as of August _____ 1997.
8
<PAGE>
CONTRACT FOR DELIVERY OF COMPUTER SYSTEM
L. Default. Either party shall be in default of this Agreement if:
(i) it breaches any material provision hereof and fails within thirty
(30) days after receipt of notice of default to correct such default
or to commence corrective action reasonably acceptable to the
aggrieved party and proceed with due diligence to completion; provided
that Customer shall not be in breach for purposes of giving a notice
of breach on account of late payment until payments are at least
thirty (30) days past due and the customer shall have ten (10) days to
correct such default; or (ii) it becomes insolvent, makes an
assignment for the benefit of its creditors, a receiver is appointed
or a petition in Bankruptcy is filed with respect to the party and is
not dismissed within thirty (30) days. Upon default by a party, the
non-breaching party may terminate this Agreement at the end of the
applicable grace period by giving written notice of the intent to
terminate and specifying the date of termination.
M. Modification - This Contract may be amended or modified at any time by
mutual agreements of the parties, in writing.
N. Term of Agreement. This Agreement shall be effective from the date
indicated above and, unless terminated earlier under Section L
("Default"), shall continue in full force and effect until all work is
complete and all payments are made. Such termination shall have no
effect on Customer's obligation to pay for all amounts due hereunder
or the parties' rights, obligation under Proprietary Considerations,
or limitations on remedies and liabilities.
ARTICLE X Signatures
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have
executed this Contract by their duly authorized representative as of the day and
year written above.
KMC Telecom Inc. ACE*COMM Corporation
By:_________________________________ By:________________________________
Title:______________________________ Title:_____________________________
KMC Telecom II, Inc. KMC Telecom of Virginia, Inc.
By:_________________________________ By:_________________________________
Title:______________________________ Title:______________________________
9
<PAGE>
Exhibit 21.1
Subsidiaries of KMC Telecom Holdings, Inc.
------------------------------------------
Company State of Incorporation/Organization
- ------- -----------------------------------
KMC Telecom Inc. Delaware
KMC Telecom II, Inc. Delaware
KMC Telecom Leasing I LLC Delaware
KMC Telecom Leasing II LLC Delaware
KMC Telecom of Virginia, Inc. Virginia
<PAGE>
EXHIBIT 23.2
We consent to the reference to our Firm under the caption "Experts" and to the
use of our reports dated March 11, 1998, in the Registration Statement Form S-4
and related Prospectus of KMC Telecom Holdings, Inc. for the registration of
238,967,391 of 12 1/2% Senior Discount Notes due 2008.
/s/ ERNST & YOUNG LLP
MetroPark, NJ
April 17, 1998
<PAGE>
EXHIBIT 23.3
The Board of Directors
KMC Telecom Holdings, Inc.:
We consent to the inclusion of our report dated April 26, 1996 covering our
audit of the combined statements of operations, redeemable and nonredeemable
equity and cash flows of Kamine Multimedia Corp. and KMC Southeast Corp. for the
year ended December 31, 1995 and to the reference of our firm under the heading
"Experts" in the KMC Telecom Holdings, Inc. Prospectus and Registration
Statement on Form S-4.
/s/ KPMG Peat Marwick LLP
New York, New York
April 17, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
ICG Communications, Inc.:
We consent to the inclusion of our report dated December 16, 1997 relating
to the balance sheets of the Melbourne System (an operating unit if ICG
Communications, Inc.) as of December 31, 1995 and 1996, and the related
statements of operations and accumulated deficit and cash flows for the years
then ended and to the reference to our firm under the heading "Experts" in the
KMC Telecom Holdings, Inc. Prospectus and Registration Statement on Form S-4.
/s/ KPMG Peat Marwick LLP
Denver, Colorado
April 16, 1998
<PAGE>
Exhibit 25.1
___________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________________
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
___________________________________________
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________
________________________________________
THE CHASE MANHATTAN BANK
(Exact name of trustee as specified in its charter)
NEW YORK 13-4994650
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
270 PARK AVENUE
NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
William H. McDavid
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
____________________________________________
KMC TELECOM HOLDINGS, INC.
(Exact name of obligor as specified in its charter)
DELAWARE 22-3545325
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
1545 ROUTE 206
SUTIE 300
BEDMINSTER, NEW JERSEY 07921
(Address of principal executive offices) (Zip Code)
-----------
12-1/2 SENIOR DISCOUNT NOTES DUE 2008
(Title of the indenture securities)
<PAGE>
GENERAL
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
New York State Banking Department, State House, Albany, New York
12110.
Board of Governors of the Federal Reserve System, Washington, D.C.,
20551
Federal Reserve Bank of New York, District No. 2, 33 Liberty Street,
New York, N.Y.
Federal Deposit Insurance Corporation, Washington, D.C., 20429.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with the Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
- 2 -
<PAGE>
Item 16. List of Exhibits
List below all exhibits filed as a part of this Statement of Eligibility.
1. A copy of the Articles of Association of the Trustee as now in effect,
including the Organization Certificate and the Certificates of Amendment dated
February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982,
February 28, 1985, December 2, 1991 and July 10, 1996 (see Exhibit 1 to Form T-1
filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
2. A copy of the Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference. On July 14, 1996,
in connection with the merger of Chemical Bank and The Chase Manhattan Bank
(National Association), Chemical Bank, the surviving corporation, was renamed
The Chase Manhattan Bank).
3. None, authorization to exercise corporate trust powers being contained
in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form T-
1 filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the Act (see
Exhibit 6 to Form T-1 filed in connection with Registration Statement No.
33-50010, which is incorporated by reference. On July 14, 1996, in connection
with the merger of Chemical Bank and The Chase Manhattan Bank (National
Association), Chemical Bank, the surviving corporation, was renamed The Chase
Manhattan Bank).
7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Chase Manhattan Bank, a corporation organized and existing under
the laws of the State of New York, has duly caused this statement of eligibility
to be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of New York and State of New York, on the 14th day of April, 1998.
THE CHASE MANHATTAN BANK
By /s/ P. Kelly
---------------------------------
P. Kelly
Vice President
- 3 -
<PAGE>
Exhibit 7 to Form T-1
Bank Call Notice
RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF
The Chase Manhattan Bank
of 270 Park Avenue, New York, New York 10017
and Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System,
at the close of business December 31, 1997, in
accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
DOLLAR AMOUNTS
ASSETS IN MILLIONS
Cash and balances due from depository institutions:
Noninterest-bearing balances and
currency and coin ........................................ $ 12,428
Interest-bearing balances ................................ 3,428
Securities: ..................................................
Held to maturity securities.................................... 2,561
Available for sale securities.................................. 43,058
Federal funds sold and securities purchased under
agreements to resell ..................................... 29,633
Loans and lease financing receivables:
Loans and leases, net of unearned income $129,260
Less: Allowance for loan and lease losses 2,783
Less: Allocated transfer risk reserve ...... 0
--------
Loans and leases, net of unearned income,
allowance, and reserve ................................... 126,477
Trading Assets ................................................ 62,575
Premises and fixed assets (including capitalized
leases)................................................... 2,943
Other real estate owned ....................................... 295
Investments in unconsolidated subsidiaries and
associated companies...................................... 231
Customers' liability to this bank on acceptances
outstanding .............................................. 1,698
Intangible assets ............................................. 1,466
Other assets .................................................. 10,268
TOTAL ASSETS .................................................. $297,061
========
- 4 -
<PAGE>
LIABILITIES
Deposits
In domestic offices ...................................... $94,524
Noninterest-bearing .........................$39,487
Interest-bearing ............................ 55,037
------
In foreign offices, Edge and Agreement,
subsidiaries and IBF's ................................... 71,162
Noninterest-bearing ..............................$ 3,205
Interest-bearing ............................ 67,957
Federal funds purchased and securities sold under agree-
ments to repurchase ........................................... 43,181
Demand notes issued to the U.S. Treasury ...................... 1,000
Trading liabilities ........................................... 48,903
Other borrowed money (includes mortgage indebtedness
and obligations under capitalized leases):
With a remaining maturity of one year or less ............ 3,599
With a remaining maturity of more than one year .
through three years................................ 253
With a remaining maturity of more than three years....... 132
Bank's liability on acceptances executed and outstanding 1,698
Subordinated notes and debentures ............................. 5,715
Other liabilities
............................................................... 9,896
TOTAL LIABILITIES
............................................................... 280,063
-------
EQUITY CAPITAL
Perpetual preferred stock and related surplus 0
Common stock .................................................. 1,211
Surplus (exclude all surplus related to preferred stock)...... 10,291
Undivided profits and capital reserves ........................ 5,502
Net unrealized holding gains (losses)
on available-for-sale securities .............................. (22)
Cumulative foreign currency translation adjustments ........... 16
TOTAL EQUITY CAPITAL .......................................... 16,998
------
TOTAL LIABILITIES AND EQUITY CAPITAL .......................... $297,061
========
I, Joseph L. Sclafani, E.V.P. & Controller of the above-named
bank, do hereby declare that this Report of Condition has
been prepared in conformance with the instructions issued
by the appropriate Federal regulatory authority and is true
to the best of my knowledge and belief.
JOSEPH L. SCLAFANI
We, the undersigned directors, attest to the correctness
of this Report of Condition and declare that it has been
examined by us, and to the best of our knowledge and
belief has been prepared in conformance with the in-
structions issued by the appropriate Federal regulatory
authority and is true and correct.
WALTER V. SHIPLEY )
THOMAS G. LABRECQUE ) DIRECTORS
WILLIAM B. HARRISON, JR.)
-5-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF KMC TELECOM HOLDINGS, INC. AS OF DECEMBER 31, 1997 AND THE RELATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,552,903
<SECURITIES> 0
<RECEIVABLES> 1,318,156
<ALLOWANCES> (34,000)
<INVENTORY> 0
<CURRENT-ASSETS> 17,359,778
<PP&E> 73,755,371
<DEPRECIATION> (2,384,308)
<TOTAL-ASSETS> 95,943,307
<CURRENT-LIABILITIES> 13,687,964
<BONDS> 61,276,933
47,651,689
0
<COMMON> 6,138
<OTHER-SE> (26,679,417)
<TOTAL-LIABILITY-AND-EQUITY> 95,943,307
<SALES> 0
<TOTAL-REVENUES> 3,417,441
<CGS> 0
<TOTAL-COSTS> 7,735,849
<OTHER-EXPENSES> 26,298,025
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,068,730
<INCOME-PRETAX> (32,685,163)
<INCOME-TAX> 0
<INCOME-CONTINUING> (32,685,163)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,685,163)
<EPS-PRIMARY> (64.93)
<EPS-DILUTED> (64.93)
</TABLE>
