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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 333-50475
KMC TELECOM HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-3545325
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
(I.R.S. EMPLOYER IDENTIFICATION NO.)
1545 ROUTE 206, SUITE 300
BEDMINSTER, NEW JERSEY 07921
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
Registrant's telephone number, including area code: (908) 470-2100
SECURITIES REGISTERED PURSUANT TO SECTION
12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION
12(G) OF THE ACT:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the voting common stock held by
non-affiliates of the registrant as of March 29, 2000 was approximately
$69,982,563, based upon an estimate of the fair value thereof by management of
the registrant. There is no established trading market for the voting common
stock of the registrant and no sales have occurred within the past sixty days.
As of March 29, 2000, 853,765 shares of the registrant's Common Stock,
$0.01 par value, were outstanding. There is no established trading market for
the Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE. None.
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD - LOOKING STATEMENTS
STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, INCLUDING STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, HOPES,
INTENTIONS OR STRATEGIES REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS
INCLUDE: STATEMENTS REGARDING THE ANTICIPATED DEVELOPMENT AND EXPANSION OF OUR
BUSINESS, THE MARKETS IN WHICH OUR 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, OUR DIRECTORS OR
OFFICERS WITH RESPECT TO OUR FUTURE FINANCIAL PERFORMANCE AND OTHER MATTERS, AND
OTHER STATEMENTS REGARDING MATTERS THAT ARE NOT HISTORICAL FACTS. ALL
FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO
THE COMPANY AS OF THE DATE THIS REPORT IS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS
INCLUDE, BUT ARE NOT LIMITED TO, THE FACTORS SET FORTH IN "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
CERTAIN FACTORS WHICH MAY AFFECT OUR FUTURE RESULTS."
PART I
ITEM 1. BUSINESS.
BACKGROUND
The initial predecessors of KMC Telecom Holdings, Inc. were founded in 1994
and 1995, respectively, by Harold N. Kamine, the Company's Chairman of the
Board. These predecessors were merged in 1996 and renamed KMC Telecom Inc. KMC
Telecom Holdings, Inc. was formed during 1997 primarily to own, directly or
indirectly, all of the shares of its operating subsidiaries, KMC Telecom Inc.,
KMC Telecom II, Inc., KMC Telecom III, Inc., and KMC Telecom of Virginia, Inc.
The principal equity investors in the Company currently include Mr. Kamine,
Nassau Capital Partners, L.P., Newcourt Capital, Inc., First Union Corp.,
General Electric Capital Corporation and Lucent Technologies, Inc.
COMPANY OVERVIEW
We are a facilities-based competitive local exchange carrier providing
telecommunications and data services in Tier III markets (markets with a
population from 100,000 to 750,000). A facilities-based competitive local
exchange carrier is one which operates its own network, including switching
equipment and transmission lines, rather than one which intends to primarily
resell the services of other carriers. The markets in which we operate are
predominantly located in the Southeastern and Midwestern United States. We
target as customers business, government and institutional end-users, as well as
Internet service providers, long distance carriers and wireless service
providers. Our objective is to provide our customers with a complete solution
for their communications needs. We currently provide on-net local dial tone,
Internet access infrastructure, ISDN (or integrated services digital network),
long distance, special access, private line and a variety of other advanced
services and features.
We currently operate in 34 Tier III markets and have systems under
construction in 3 additional Tier III markets. We expect these new systems to be
commercially operational by the end of the first half of 2000. During 2000 we
will continue to investigate new Tier III markets. We construct robust fiber
optic networks in each of our markets, which we believe allows us to ensure high
quality of service, facilitate the delivery of value-added and data services,
and effectively control our costs. We currently have Lucent Technologies Series
5ESS(R)-type switches in commercial operation in all of our operational markets
and intend to install Lucent switches in any future networks which we may build.
BUSINESS STRATEGY
We intend to become the dominant competitive provider of telephony and data
services in the markets that we serve. To accomplish this objective we intend
to:
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Focus on Tier III markets. We intend to operate in Tier III markets with
attractive demographic, economic, competitive and demand characteristics. We
believe that incumbent local exchange carriers tend to focus their efforts on
larger markets and generally underserve and underinvest in Tier III markets. We
also believe that there is generally significantly less competition from other
facilities-based competitive local exchange carriers in Tier III markets, which
allows us to gain market share more rapidly than we could expect in Tier I and
Tier II markets. In addition, network construction, labor and rights-of-way
costs are generally lower in Tier III markets than in Tier I and Tier II
markets. For example, 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. We estimate that approximately 70% of our
fiber is deployed aerially. We select target markets from among the
approximately 250 Tier III markets in the United States by first identifying
those markets that do not yet have significant, established competitors to the
existing incumbent local exchange carrier, and by then reviewing the specific
demographic, economic, competitive and telecommunications demand characteristics
of such markets to determine their suitability for the types of services which
we offer. We estimate market demand on the basis of the concentration of
potential business, government and institutional end-user customers in the
market and the general economic prospects for the area.
Deploy comprehensive fiber networks. We build geographically extensive,
full service, facilities-based networks. We believe such networks provide
significant operating leverage, facilitate the capture of market share, and are
likely to deter other competitive local exchange carriers from attempting to
penetrate our markets due to the cost of constructing a competing network of
equal capability. Prior to both the initial construction of our network backbone
and any subsequent network expansion, we perform detailed rate of return
analyses to justify the capital expenditures involved. In all of our operational
markets, we have completed our backbone construction connecting the market's
central business district with outlying office parks, large institutions, the
locations of long distance carriers' transmission equipment and major incumbent
local exchange carrier central offices. We intend to continue to expand our
existing networks in response to anticipated customer demand.
Provide enabling infrastructure for data services growth. We intend to
serve as a gateway for the provision of sophisticated value-added data services
and high speed connectivity to customers in Tier III markets. We believe it is
strategically important for us to offer these services because:
o data and internet access is required for businesses to succeed and grow,
o e-commerce is mission critical for many businesses, and
o national service carriers and internet service providers, such as Qwest
and UUNet feel it is necessary for them to expand into Tier III markets.
We will provide data services directly to our own customers and will also
provide access to Tier III markets for long distance carriers, national service
carriers, Internet service providers and other businesses which require
broadband access to those markets but which have not constructed their own
networks and connections in those markets to enable them to provide it to their
own customers.
Establish local presence with personalized customer service. We seek to
capture and retain our retail customers through local, personalized sales,
marketing and customer service programs. To this end, we:
o establish sales offices in each market in which we operate a network,
o strive to recruit our city directors and sales staff from the local market,
o rely principally on a face-to-face selling approach, and
o support our sales staff with locally based customer service and
technical support personnel.
Most of our existing sales personnel are local residents who have
previously worked for the incumbent local exchange carrier or other
telecommunications companies. We believe that our "Creative Solutions with a
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Hometown Touch"(R) sales approach is very important to customers in Tier III
markets, who do not typically receive focused local sales contact or customer
support from the incumbent local exchange carrier. We seek to build long-term
relationships with our customers by responding rapidly and creatively to their
telecommunications needs.
Employ a national approach to larger accounts. While establishing a local
presence to market to retail customers in our markets, we will employ a national
approach to large wholesale customers, such as long distance carriers and
Internet service providers, through our carrier group and to the headquarters of
large corporations with branch offices in our markets through our national
accounts sales organization.
Deploy networks rapidly. It is our practice to use innovative
"switch-in-a-box" construction and deployment techniques for most of our
networks. Using these techniques, transmission, switching and power equipment
are pre-installed by Lucent under controlled factory conditions in portable,
weatherproof, storm-proof concrete buildings delivered to the Lucent facility by
our contractor. The completed buildings are then shipped to the appropriate city
for final installation, reducing costs, installation risks and time to market.
Implement a high-quality operations support system. We are developing a
high-quality operations support system to provide us with comprehensive billing,
order processing and customer care software for all of our existing and
contemplated services. This system is designed to provide us with a single
"flow-through" order form that will entail several components, allowing each
order to be tracked from service provisioning through to complete installation.
We believe that this system will allow us to quickly address customer concerns
and provide us with a competitive advantage in customer service and operations
efficiency. Initial installation of the new operational support systems
commenced during the third quarter of 1999, with development and expansion to
continue over the next 12 months.
Leverage our experienced management team. Our experienced management team
is led by Harold N. Kamine, Chairman of the Board of Directors. Other members of
the team include Roscoe C. Young II, President and Chief Operating Officer,
William H. Stewart, Executive Vice President and Chief Financial Officer, Tricia
Breckenridge, Executive Vice President--Business Development and James L.
Barwick, Senior Vice President and Chief Technology Officer.
SERVICES
General. We have historically provided dedicated access service and have
also resold switched services which we purchased from incumbent local exchange
carriers. In December 1997, we began providing our own on-net switched services
to our customers via direct connections to our networks or unbundled network
elements leased from incumbent local exchange carriers. On-net switched services
and resale services have accounted for the following percentages of our revenues
in 1997, 1998 and 1999:
1997 1998 1999
---- ---- ----
On-net switched services....... 32% 37% 69%
Resale services................. 68% 63% 31%
Private Line and Special Access Services. We currently provide various
types of on-net dedicated services which permit the transmission of voice and
data between two points over circuits dedicated to a particular customer.
Private line service involves the provision of a private, dedicated
telecommunications connection of a customer's different locations. For these
services we offer several types of dedicated circuits that have different
capacities. DS-1 and DS-3 circuits are dedicated lines that can carry up to 24
and 672 DS-0 circuits, respectively. Special access service involves leasing
private, dedicated telecommunications lines running over our networks to long
distance carriers. The long distance carriers use these lines to connect
different locations where they have installed transmission equipment within the
market, to connect locations where they have installed transmission equipment to
the transmission equipment locations of other long distance carriers within the
market, or to connect large customers directly to the locations of their
transmission equipment. In addition to DS-0, DS-1 and DS-3 dedicated circuits,
we also offer OC3, OC12 and OC48 circuits for these services. These OC circuits
provide the fastest transmission available for carriers and large business
users.
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Switch-Based Services. We have added and continue to add capability to
provide local dial tone and switched access origination and termination services
to our networks. Switches are currently in commercial operation in all of our 34
existing markets and we expect switches to be in commercial operation in the 3
additional Tier III markets in which we currently have networks under
construction by the end of the first half of 2000.
Long Distance. We offer a full range of long distance products including
inter-LATA, intra-LATA, interstate, international, calling card and 800-number
services. During the first quarter of 1999, we introduced KMC-branded operator
services, directory services, prepaid phone cards and audio-conference services.
We offer these services both on-net and off-net. We offer long distance services
on a resale basis by entering into wholesale agreements with various long
distance carriers to deliver these services. We believe that many of our
customers will prefer the option of purchasing long distance services from us as
part of a one-stop telecommunications solution.
Centrex-type Services. We provide Centrex-type services. By using
Centrex-type services instead of purchasing and installing a switching system on
its own premises, a customer can substantially reduce its capital expenditures
and the fixed costs associated with maintaining telecommunications equipment. We
introduced our ClearStarsm Advantage service in all of our operational markets
during the first quarter of 1999. It has been designed to support multiple
applications, ranging from basic access services to services focused on desktop
applications. The basic access service connects to a customer's internal system
and is equipped with up to 14 features including call forwarding, speed dialing
and call transfer capabilities. More sophisticated levels of service are
designed to replace portions of a customer's existing telecommunications system.
At the high end of service offerings is ClearStarsm Advantage Plus, a packaged,
end-to-end offering which combines all of the basic features with Basic Rate
ISDN network access, advanced feature functionality, voice messaging and Lucent
ISDN multi-featured telephone sets.
New Data Services Offerings. Data services represented approximately 9% of
our revenue for 1999. We currently plan to expand our capabilities by
introducing additional data services in 2000. We believe that these services
will enhance our ability to provide an integrated turnkey solution to our
customers' voice, data and video transmission requirements. These data services
will include:
o Basic Rate ISDN. Basic Rate ISDN, or BRI, provides customers the
potential of 144 kilobits per second of digital communications via a
single network facility interface. We believe it will be attractive to
small and medium size customers, since it provides dial-up access to
the Internet, and other dial-up data applications, while
simultaneously providing the ability to integrate voice traffic on a
single network facility.
o Primary Rate ISDN. Primary Rate ISDN provides customers the equivalent
of 1.544 megabits per second of digital communications via a T-1 type
facility, with 23 channels for voice and data communications and a
24th channel providing network signaling and control for the services.
We focus our Primary Rate ISDN sales efforts on (i) Internet service
providers who use Primary Rate ISDN as a means of supporting customer
access to their operations, and (ii) end-user customers who use
Primary Rate ISDN as a network access facility for their internal
telecommunications systems.
o Port wholesale. Port wholesaling is a technology that provides large
bandwidth users with data switching capability at the network level,
allowing them to acquire capacity as required without investing in
data switching equipment. Port wholesaling gives us the ability to
provide data switching to Internet service providers by allowing data
calls to be terminated through the port wholesale equipment rather
than the switch. This enables the Internet service provider to more
cost effectively manage its data requirements while, at the same time,
increasing the efficiency and capacity of our Lucent Technologies
Series 5ESS(R)-type switch.
o DSL. DSL is a method of using unconditioned, copper wire pairs for
high bit-rate data transport for use in the "last mile" connecting our
network backbone ring to the customer's premises. We plan to utilize
DSL to provide high bandwidth data and video service to small and
medium size customers.
o Frame Relay/ATM. Frame relay and ATM, or asynchronous transfer mode,
are used by some of our data customers as a fast data transport
service for Wide Area Networks. Today we resell these services. In the
future we intend to provide these services over our own network and
utilize a third party provider for transport outside our network.
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We plan to remain flexible in responding to evolving customer demands for data
services.
LOCAL NETWORKS
As part of determining the economic viability of a network in a particular
market, we review the demographic, economic, competitive and telecommunications
demand characteristics of the market. We estimate market demand using data
gathered from long distance carriers, the Federal Communications Commission,
local sources, site visits and specific market studies commissioned by us, the
concentration of potential business, government and institutional end-user
customers and the general economic prospects for the area.
Once we target a market for development, we design a network to provide
access to approximately 70% of the business customers in that market either
through direct connections to our network or through unbundled network elements
leased from the incumbent local exchange carrier. Typically, we construct a
"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 locations of the
transmission equipment of long distance carriers offering services in the area,
and the incumbent local exchange carrier's central office(s). Following
construction of our backbone network, we expect to build additional loops to
increase the size of our addressable market, as required.
During Phase I of our network construction program we completed networks in
8 Tier III markets. We established networks in 15 Tier III markets during Phase
II of the program and will add networks in 14 additional Tier III markets during
Phase III. Eleven of the 14 networks to be added during Phase III have been
completed and the remaining 3 networks will be completed during the first half
of 2000. The markets in which we established or plan to establish markets during
each of these phases of the program are as follows:
<TABLE>
<CAPTION>
PHASE I PHASE II PHASE III
- - ----------------------- ---------------------------- ---------------------------
<S> <C> <C>
Huntsville, Alabama Greensboro, North Carolina Charleston, South Carolina
Baton Rouge, Louisiana Winston-Salem, North Carolina Lansing, Michigan
Shreveport, Louisiana Tallahassee, Florida Akron, Ohio
Corpus Christi, Texas Roanoke, Virginia Spartanburg, South Carolina
Savannah, Georgia Ann Arbor, Michigan Toledo, Ohio
Madison, Wisconsin Topeka, Kansas Columbia, South Carolina
Augusta, Georgia Fort Wayne, Indiana Monroe, Louisiana
Melbourne, Florida Eden Prairie, Minnesota Montgomery,Alabama
Daytona Beach, Florida Clearwater/St.Petersburg, Florida
Fort Myers, Florida Dayton, Ohio
Longview, Texas Biloxi/Gulf Port, Mississippi
Sarasota, Florida Johnson City/Kingsport, Tennessee
Pensacola, Florida Chattanooga, Tennessee
Fayetteville, North Carolina Rockville/Bethesda/Frederick, Maryland
Norfolk, Virginia
</TABLE>
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The following table presents aggregate data as of February 29, 2000, for
the networks placed in operation during Phase I and Phase II, respectively, of
our network construction program:
<TABLE>
<CAPTION>
SWITCHED DEDICATED DS-0
ACCESS EQUIVALENT ADDRESSABLE CENTRAL
LINES IN CIRCUITS IN ROUTE COMMERCIAL OFFICE
SERVICE(1) SERVICE(2) MILES BUILDINGS(3) COLLOCATIONS
---------- ------------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Phase I markets (8 markets) 65,396 136,572 662 14,800 33
Phase II markets (15 markets) 65,342 130,626 757 25,947 52
---------- ------------- ----- ------------ ------------
Total 130,738 267,198 1,419 40,747 85
</TABLE>
- - -----------------------------------------------
(1) Represents all active switched channels we provide to customers either by
resale via the incumbent local exchange carrier's network, by unbundled
network elements leased from the incumbent local exchange carrier, or by
direct connection to our own network.
(2) Represents all active dedicated DS-0, DS-1 and DS-3 circuits we provide to
customers expressed on a DS-0 basis.
(3) Addressable by either unbundled network elements leased from the incumbent
local exchange carrier or by a direct connection to our own network. We
define a commercial building as one with greater than ten employees.
We are continuing to investigate expanding into additional Tier III markets
during 2000. Further expansion of our networks, however, will be dependent upon
our ability to obtain additional financing.
The construction of a network requires us 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 by us or the
provision of services by us to the municipality without compensation. In
addition, we 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,
incumbent local exchange carriers, other competitive local exchange carriers,
railroads and long distance carriers. The Telecommunications Act of 1996
requires most utilities to afford access to rights-of-way to competitive local
exchange carriers on non-discriminatory terms and conditions and at reasonable
rates. However, there can be no assurance that delays or disputes will not
occur. Our agreements for rights-of-way and similar matters generally require us
to indemnify the party providing such rights. Such indemnities could make us
liable for actions (including negligence) of the other party.
Our requirements for a planned network are communicated to our engineering
group which finalizes the route and completes the network's design. Independent
construction and installation contractors are selected through a competitive
bidding process. Our own personnel negotiate required contracts and
rights-of-way and supervise the construction, installation and testing of
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 our experience, we believe that a new fiber optic network can be made
commercially operational within approximately 6 months after construction
commences.
In a typical Tier III market, selected office buildings are connected to
our network by network backbone extensions or unbundled network elements leased
from the incumbent local exchange carrier. Within each building, customer
equipment is connected to Company-provided electronic equipment where customer
transmissions are digitized, combined and converted to an optical signal. The
traffic is then transmitted through the network backbone to our local central
office where it can be routed to its ultimate destination.
We are able to expand our reach in a market by collocating equipment in an
incumbent local exchange carrier's central office and leasing unbundled network
elements from that incumbent local exchange carrier in order to reach customers
located in buildings which are not directly connected to our own backbone ring.
We attempt to place collocation equipment in a sufficient number of incumbent
local exchange carrier central offices to allow us to reach approximately 70% of
the business customers in a given market, either by means of such unbundled
network elements or direct connections to our own network. The decision as to
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whether to collocate in a specific central office is based upon the number of
business lines, number and type of businesses, number of households and the
location of the central office within the market.
Our networks consist of our fiber optic backbones, fiber laterals and
unbundled network elements. Our networks allow for high speed, high quality
transmission of voice, data and video communications. We typically install
backbone fiber optic cables containing 48 to 144 fiber strands which have
significantly greater bandwidth carrying capacity than other media. Our OC-48
SONET networks support up to 32,256 simultaneous voice conversations over a
single pair of fiber optic fibers. We expect 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.
We currently offer 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. If a line
is cut, traffic can simply be reversed and sent to its destination around the
other side of the ring. Back-up electronics become operational in the event of
failure of the primary components.
We monitor our fiber optic networks and electronics seven days per week, 24
hours per day, using a combination of local and national network control
centers. Local network monitoring is accomplished by means of an automatic
notification system that monitors for any system anomaly. This system provides
instantaneous alarms to an on-call network technician whenever an anomaly is
detected. The local market technician is trained in network problem resolution
and provides on-site corrective procedures when appropriate. A national Network
Reliability Center, located in Denver, Colorado, acts as the focal point for all
of our operating networks, providing integrated and centralized network
monitoring, and correlation and problem management. The Network Reliability
Center has access to all operating networks and can work independently of the
local systems to effect repair or restoration activities. The Network
Reliability Center is currently provided by Lucent on a contractual basis. In
the future, we may develop our own national center.
We manage our network systems both locally and centrally. Customer service
calls and maintenance are primarily handled through the local offices. In
addition, as described above, we contract to provide integrated monitoring of
our networks via Lucent's Network Reliability Center. This is accomplished by
the use of a sophisticated integrated management system that is connected to all
of our locations, including our Duluth, Georgia, operations center. With this
system the Network Reliability Center is capable of accessing all available
information regarding the configuration and operating condition of any network
components in use. This proactive monitoring capability is further augmented by
a 24 hour a day, seven day a week call center, also provided by Lucent at the
Network Reliability Center, that receives, tracks and manages all customer calls
and issues to satisfactory conclusion. The call center works with the Company's
own customer care representatives and engineers in the Duluth facility to ensure
that timely and consistent service is provided.
SALES AND MARKETING
We target our sales and marketing activities at three separate customer
groups: retail, national accounts and wholesale. Retail customers are composed
of business, government and institutional telecommunications and data services
end-users and local Internet service providers. National accounts are usually
large corporations which have branches or local offices within our markets, but
which make their buying decisions centrally from their corporate headquarters.
Wholesale customers typically consist of long distance carriers, wireless
service providers and national Internet service providers. As of February 29,
2000, we had approximately 290 employees engaged in sales and marketing
activities.
Retail Customers. We target retail customer segments such as business,
government, healthcare and educational institutions. We target all business
customers in our markets as well as local Internet service providers. Each
city's local sales staff is responsible for calling on the retail customers in
its market.
National Accounts. While there are few Fortune 500 companies with
headquarters located in our operating cities, there are branches and local
offices of large corporations within our market areas. Often these large
corporations make their buying decisions centrally, either through their
telecommunications or MIS functions, which are normally located at corporate
headquarters. Our national accounts sales organization is structured to assist
them in determining requirements for their various locations within our markets.
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We believe that this focus on national accounts will further increase our market
penetration with large companies in our cities.
Wholesale Customers. We currently target the major long distance carriers
such as AT&T, MCI WorldCom and Sprint, Internet service providers, wireless
service providers and other competitive local exchange carriers, through our
carrier group. We believe that we can effectively compete to provide access to
these customers based on price, reliability, technology, route diversity,
ease-of-ordering and customer service. We provide competitive pricing for the
transport and termination of communications for high volume users of
long-distance services, which has historically been provided by the incumbent
local exchange carrier. To the extent that incumbent local exchange carriers
begin to compete with long distance carriers in providing long distance
services, the long distance carriers have a competitive incentive to move
traffic away from incumbent local exchange carriers to competitive local
exchange carriers like us. Wireless service providers, who need network backbone
to transport calls, are an active customer base, as are other competitive local
exchange carriers as wholesale users. Revenues from access services may decline
in future years due to a change in pricing proposed by the Federal
Communications Commission.
Sales Personnel. We establish local sales offices in each market that we
serve. Initially, each local sales office is staffed by a City Director and 2 or
3 salespersons, which increases to between 4 and 6 as our operations in the
market expand. We seek to hire our sales personnel locally, since we believe
that knowledge of, and contacts in, a local market are key factors for
competitive differentiation and commercial success in a Tier III market. We
believe that this local focus will help to set us apart from the incumbent local
exchange carriers, our principal competitors.
City Directors. We seek to hire local, seasoned telecommunications
managers, with sales experience, as City Directors. City Directors assist with
the initial network buildout and oversee the daily operations of their network,
in addition to managing sales staff and market development. Daily operations
responsibilities include monitoring provisioning, customer service, pricing
decisions and the billing process. A City Director works with senior management
in the strategic planning process, including capital expenditures and budget
planning. They perform cash flow analysis for fiber connections of new buildings
to the network, and participate in planning fiber network extensions in their
markets.
SUPPLIERS
Lucent. We have contracted with Lucent, as our primary supplier, to
purchase switching, transport and digital cross connect products. Lucent has
also agreed to implement and test our switches and related equipment. In
addition, Lucent and the Company have entered into an agreement pursuant to
which Lucent has agreed to monitor our switches on an on-going basis. Lucent is
an investor in our preferred stock and a lender under our Amended Senior Secured
Credit Facility.
Billing Support Systems Implementation. In the second quarter of 1999, we
installed software developed by Billing Concepts Systems, Inc. to provide us
with comprehensive billing functionality, including the ability to collect call
detail records, message rating, bill calculation, invoice generation, commission
tracking, customer care and inquiry, collections management, and quality
assurance. The Billing Concepts software enables us to produce a single bill
covering all of the products and services that we provide to a customer.
Additional development of the new billing systems will take place over the next
9 months.
Operational Support Systems Implementation. We entered into an agreement
with Eftia OSS Solutions Inc. to develop operational support systems. These
systems manage service order processing, circuit and asset inventory, telephone
number inventory and trouble administration. The operational support system's
responsibilities will be expanded during the later phases of the project to
include workforce management, local number portability management, network
management, service bureau interfaces, and Internet-based service inquiry. The
system will automate operational support activities and provide a means of
managing operational performance of our business. Initial installation of the
new operational support systems commenced during the third quarter of 1999, with
development and expansion to continue over the next 12 months.
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COMPETITION
Overview. The telecommunications industry is highly competitive. Our
principal competitors in Tier III markets will be the incumbent local exchange
carriers. In most instances the incumbent local exchange carrier is one of the
Regional Bell Operating Companies (such as Ameritech, Bell Atlantic, BellSouth
or SBC), one of GTE Corporation's subsidiaries or one of Sprint Corporation's
subsidiaries. Incumbent local exchange carriers presently have almost 100% of
the market share in those areas we consider our market areas. Because of their
relatively small size, we do not believe that Tier III markets can profitably
support more than two competitors to the incumbent local exchange carrier.
Other competitors may include other competitive local exchange carriers,
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
Regional Bell Operating Companies 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 and MCI WorldCom, which have begun to offer
integrated local and long distance telecommunications services. AT&T also has
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.
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, we will face competition from large carriers such as AT&T, MCI
WorldCom and Sprint. We will rely on other carriers to provide transmission and
termination for our long distance traffic and therefore will be dependent on
such carriers.
Incumbent Local Exchange Carriers. Our principal competitors for local
exchange services are the Regional Bell Operating Companies, GTE Corporation's
subsidiaries and Sprint Corporation's subsidiaries. As a recent entrant in the
integrated telecommunications services industry, we have not yet achieved a
significant market share for any of our services. In particular, the incumbent
local exchange carriers: have long-standing relationships with their customers,
o have financial, technical and marketing resources substantially
greater than ours,
o have the potential to fund competitive services with revenues
from a variety of businesses, and
o currently benefit from certain existing regulations that favor
the incumbent local exchange carriers over us in certain
respects.
Recent regulatory initiatives allow us, as a competitive local exchange
carrier, to interconnect with incumbent local exchange carrier facilities. This
provides increased business opportunities for us. However, these regulatory
initiatives have been accompanied by increased pricing flexibility for, and
relaxation of regulatory oversight of, the incumbent local exchange carriers. If
the incumbent local exchange carriers engage in increased volume and discount
pricing practices or charge us increased fees for interconnection to their
networks, or if the incumbent local exchange carriers seek to delay
implementation of our interconnection to their networks, our business, financial
condition and results of operations could be adversely affected.
To the extent that we interconnect with and use incumbent local exchange
carrier networks to serve our customers, we are dependent upon their technology
and capabilities. We will become increasingly dependent on interconnection with
incumbent local exchange carriers as switched services become a greater
percentage of our business. The Telecommunications Act of 1996 imposes
interconnection obligations on incumbent local exchange carriers, but we cannot
assure you that we will be able to obtain the interconnection we require at
rates, and on terms and conditions, that will permit us to offer switched
services at desirable rates, terms and conditions. In the event that we
experience difficulties in obtaining appropriate and reasonably priced service
from the incumbent local exchange carriers, our ability to serve our customers
would be impaired.
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Competitive Local Exchange Carriers and Other Competitors. We will compete
from time to time with other competitive local exchange carriers. It is likely
that in several of our markets we will face competition from two or more
facilities-based competitive local exchange carriers. 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 3 or more facilities-based competitive local
exchange carriers, we expect substantial price competition. We believe that
operations in such markets are likely to be unprofitable for one or more
operators.
We expect to face competition in each of our markets. However, we believe
that our 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 we target should reduce the number of facilities-based
competitors and drive other entrants to focus on the resale of incumbent local
exchange carrier service or our services or to invest in other markets. We
believe that each market will also see more agent and distributor resale
initiatives.
We expect to experience declining prices and increasing price competition.
We cannot assure you that we will be able to achieve or maintain adequate market
share or revenue, or compete effectively, in any of our markets.
REGULATION
Our services are subject to varying degrees of federal, state and local
regulation. The Federal Communications Commission exercises jurisdiction over
facilities of, and interstate and international services offered by,
telecommunications common carriers. 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 competitive local exchange
carriers.
Federal Regulation
We are 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 of 1996. This legislation is designed to enhance
competition in the local telecommunications marketplace by:
o removing state and local entry barriers,
o requiring incumbent local exchange carriers to provide
interconnection to their facilities,
o facilitating the end-users' choice to switch service providers
from incumbent local exchange carriers to competitive local
exchange carriers such as the Company, and
o requiring access to rights-of-way.
The legislation also is designed to enhance the competitive position of the
competitive local exchange carriers and increase local competition by newer
competitors such as long distance carriers, cable television companies and
public utility companies. Under the Telecommunications Act of 1996, Regional
Bell Operating Companies have the opportunity to provide in-region long distance
services if certain conditions are met and are no longer prohibited from
providing certain cable television services. In addition, the Telecommunications
Act of 1996 eliminates certain restrictions on utility holding companies, thus
clearing the way for them to diversify into telecommunications services.
The Telecommunications Act of 1996 specifically requires all
telecommunications carriers (including incumbent local exchange carriers and
competitive local exchange carriers (like us)):
o not to prohibit or unduly restrict resale of their services,
o to provide dialing parity and nondiscriminatory access to
telephone numbers, operator services, directory assistance and
directory listings,
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o to afford access to poles, ducts, conduits and rights-of-way, and
o to establish reciprocal compensation arrangements for the
transport and termination of telecommunications.
It also requires competitive local exchange carriers and incumbent local
exchange carriers to provide interconnection for the transmission and routing of
telephone exchange service and exchange access. It requires incumbent local
exchange carriers to provide such interconnection:
o at any technically feasible point within the incumbent local
exchange carrier's network,
o that is at least equal in quality to that provided by the
incumbent local exchange carrier to itself, its affiliates or any
other party to which the incumbent local exchange carrier
provides interconnection, and
o at rates, terms and conditions that are just, reasonable and
nondiscriminatory.
Incumbent local exchange carriers 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 of 1996 provided for the removal of most
restrictions from AT&T and the Regional Bell Operating Companies resulting from
the consent decree entered in 1982 providing for divestiture of the Regional
Bell Operating Companies from AT&T in 1984. The Telecommunications Act
establishes procedures under which a Regional Bell Operating Company can enter
the market for long distance service between specified areas within its local
service area. The Telecommunications Act of 1996 permitted the Regional Bell
Operating Companies to enter the out-of-region long distance market immediately
upon enactment, and Regional Bell Operating Companies can provide intra-LATA
long distance services. Before the Regional Bell Operating Company can provide
in-region inter-LATA services, it must obtain Federal Communications Commission
approval upon a showing that facilities-based competition is present in its
market, that the Regional Bell Operating Company has entered into
interconnection agreements in the states where it seeks authority, that the
Regional Bell Operating Company has satisfied a 14-point "checklist" of
competitive requirements, and that such entry is in the public interest. To
date, the Federal Communications Commission has granted such authority only to
Bell Atlantic in New York State. The provision of inter-LATA services by
Regional Bell Operating Companies is expected to reduce the market share of
major long distance carriers, and consequently, may have an adverse effect on
the ability of competitive local exchange carriers to generate access revenues
from the long distance carriers.
Federal Communications Commission Rules Implementing the Local Competition
Provisions of the Telecommunications Act of 1996. The Federal Communications
Commission in 1996 established a framework of national rules enabling state
public service commissions and the Federal Communications Commission to begin
implementing many of the local competition provisions of the Telecommunications
Act of 1996. The Federal Communications Commission prescribed certain minimum
points of interconnection necessary to permit competing carriers to choose the
most efficient points at which to interconnect with the incumbent local exchange
carriers' networks. The Federal Communications Commission also adopted a minimum
list of unbundled network elements that incumbent local exchange carriers 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 Federal Communications Commission also adopted a methodology for
states to use when applying the Telecommunications Act's "avoided cost standard"
for incumbent local exchange carriers to set the prices to be charged to
resellers of their services.
The Federal Communications Commission has authority to establish national
pricing rules for interconnection, unbundled elements and resale services. The
Supreme Court also upheld the Federal Communications Commission's interpretation
of the "pick and choose" provisions, which permit carriers to obtain favorable
provisions in interconnection agreements. However, the Supreme Court overturned
the Federal Communications Commission's rules regarding what network elements
must be unbundled by the Regional Bell Operating Companies, and remanded to the
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Federal Communications Commission the question of what network elements are
"necessary" to competing carriers such as the Company. On November 5, 1999, the
Federal Communications Commission issued an order and proposed rulemaking
establishing the network elements that must be offered by incumbent local
exchange carriers as unbundled network elements. In addition, the Supreme
Court's decision creates some uncertainty regarding the legal status of
complaints filed at the Federal Communications Commission to enforce
interconnection agreements. We cannot assure you that we will be able to
maintain interconnection agreements on terms acceptable to us.
On December 9, 1999, the Federal Communications Commission released an
order requiring incumbent local exchange carriers to offer "line sharing"
arrangements that will permit competitors like us to offer DSL service over the
same copper wires used by the incumbent local exchange carriers to provide voice
service. The specific prices and terms of these arrangements will be determined
by future decisions of state utility commissions, and cannot be predicted at
this time. The Federal Communications Commission's ruling may also be challenged
in court. We expect, however, that this order, if implemented, will allow us to
offer DSL services at a significantly lower cost than is now possible. On March
17, 2000, the U.S. Court of Appeals for the District of Columbia Circuit vacated
certain Federal Communications Commission rules relating to collocation of
competitors' equipment in incumbent local exchange carriers' central offices.
This decision requires the Federal Communications Commission to limit
collocation to equipment that is "necessary" for interconnection with the
incumbent local exchange carrier or access to the incumbent local exchange
carrier's unbundled network elements. We believe that all of the equipment we
currently place in collocation arrangements is necessary for these purposes, and
therefore our collocation arrangements should not be adversely affected by the
court decision. However, any disputes over the "necessary" status of particular
items of equipment may have to be resolved by the Federal Communications
Commission or by state commissions, and such disputes could result in delays or
changes to our collocation plans.
Other Regulation. In general, the Federal Communications Commission's
policies encourage the entry of new competitors in the telecommunications
industry and are designed to prevent anti-competitive practices. Currently,
large incumbent local exchange carriers such as GTE and the Regional Bell
Operating Companies are regulated as "dominant" carriers, while competitive
local exchange carriers such as the Company are considered "nondominant"
carriers. Dominant carriers face more detailed regulatory scrutiny. As a
nondominant carrier, we are subject to relatively minimal Federal Communications
Commission regulation.
o Tariff. We may install and operate facilities for the
transmission of domestic interstate communications without prior
Federal Communications Commission authorization. The Federal
Communications Commission requires us to file tariffs and
periodic reports concerning our interstate circuits and
deployment of network facilities, and offer interstate services
on a nondiscriminatory basis, at just and reasonable rates. We
also remain subject to Federal Communications Commission
complaint procedures.
The Federal Communications Commission adopted an order in 1996
(the "Detariffing Order") which eliminated the requirement that
nondominant interstate carriers maintain tariffs on file with the
Federal Communications Commission for domestic interstate
services. The order provided 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 Federal Communications
Commission as a means of providing notice to customers of prices,
terms and conditions under which they offer their interstate
services. If we cancel our Federal Communications Commission
tariffs as a result of the Detariffing Order, we will need to
individually negotiate contract terms with certain of our
customers, which could result in substantial legal and
administrative expense.
o Access Charges. The Federal Communications Commission has granted
incumbent local exchange carriers significant flexibility in
pricing their interstate special and switched access services on
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a specific central office by central office basis. Under this
pricing scheme, incumbent local exchange carriers may establish
pricing zones based on access traffic density and charge
different prices for each zone. We anticipate that this pricing
flexibility will result in incumbent local exchange carriers
lowering their prices in high traffic density areas, which is
where our customers are concentrated. The Federal Communications
Commission adopted an order on August 5, 1999 granting incumbent
local exchange carriers subject to price cap regulation
additional pricing flexibility. 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 order provides certain immediate regulatory relief to incumbent local
exchange carriers subject to price cap regulation and sets a framework of
"triggers" to provide those companies with greater pricing flexibility to set
interstate access rates as competition increases. The order also initiated a
rulemaking to determine whether the Federal Communications Commission should
regulate the access charges of competitive local exchange carriers. If this
increased pricing flexibility is not effectively monitored by federal
regulators, it could have a material adverse effect on our ability to price our
interstate access services competitively. A May 16, 1999 order, which was upheld
on appeal by the United States Court of Appeals for the Eighth Circuit,
substantially increased the amounts that incumbent local exchange carriers
subject to the Federal Communications Commission's price cap rules ("price cap
local exchange carriers") recover through monthly flat-rate charges and
substantially decreased the amounts that these local exchange carriers recover
through traffic sensitive (per-minute) access charges. Several parties appealed
the May 16th order.
These decisions are likely to have a significant impact on our operations,
expenses, pricing and revenue.
Universal Service Reform. The Federal Communications Commission implemented
the provisions of the Telecommunications Act of 1996 relating to the
preservation and advancement of universal telephone service in 1997. The Federal
Communications Commission's universal service principles provide 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 us, must
contribute to the universal service support fund. On October 8, 1999, the
Federal Communications Commission released an order implementing changes to its
universal service rules to comply with a recent decision of the Fifth Circuit
Court of Appeals. Among other changes, the Federal Communications Commission
revised its rules concerning assessment of carriers' intrastate and
international revenues for universal service contribution. The Federal
Communications Commission narrowed the scope of the contribution base, removing
intrastate end-user telecommunications revenues from the assessment, consistent
with the opinion of the Fifth Circuit Court of Appeals. The contribution factor
for the first quarter of 2000 is 5.877% of interstate and international end-user
telecommunications revenues.
State Regulation
We believe that most, if not all, states in which we operate or propose to
operate require a certification or other authorization to offer intrastate and
local services. Many of the states in which we operate or intend to operate are
in the process of addressing issues relating to the regulation of competitive
local exchange carriers. We are subject to state 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.
We have obtained state authority for the provision of our dedicated
services and a full range of local switched services and long distance services.
In most states, we are required to file tariffs setting forth the terms,
conditions and prices for services that are classified as intrastate. We plan to
obtain additional state authorities to accommodate our business and network
expansion.
Some states also impose reporting, customer service, and quality
requirements, as well as unbundling and universal service requirements. In
addition, we are subject to the outcome of proceedings held by state utility
commissions to determine state regulatory policies with respect to incumbent
local exchange carrier and competitive local exchange carrier competition,
geographic build-out, mandatory detariffing and other issues relevant to
competitive local exchange carrier operations. Certain states have adopted
state-specific universal service funding obligations.
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In addition to obtaining state certifications, we must negotiate terms of
interconnection with the incumbent local exchange carrier before we can begin
providing switched services. Our executed agreements are subject to the approval
of the state commissions. State commissions have approved our existing
agreements. We anticipate state commission approval of our future
interconnection agreements.
We believe that, as the degree of local competition increases, the states
will offer the incumbent local exchange carriers increasing pricing flexibility.
This flexibility may present the incumbent local exchange carriers with an
opportunity to subsidize services that compete with our services with revenues
generated from noncompetitive services, thereby allowing incumbent local
exchange carriers to offer competitive services at prices below the cost of
providing the service. We cannot predict the extent to which this may occur, but
it could have a material adverse effect on our business.
We actively participate in various regulatory proceedings before the
states, the outcome of which may establish policies that affect our competitive
and/or economic position in the local and other telecommunications services
markets.
We also may be 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.
Local Government Authorizations. We are required to obtain street use and
construction permits and licenses and/or franchises to install and expand our
fiber optic networks using municipal rights of way. In some municipalities where
we have installed or anticipate constructing networks, we will be required to
pay license or franchise fees based on a percentage of gross revenues or on a
per foot basis, as well as post performance bonds or letters of credit. We are
actively pursuing permits, franchises and other relevant authorities for use of
rights-of-way and utility facilities in a number of cities.
FRANCHISES AND PERMITS
The construction of a network requires us 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 us to the municipality without compensation. In addition, we 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, incumbent local exchange
carriers, other competitive local exchange carriers, railroads and long distance
carriers. The Telecommunications Act of 1996 requires most utilities to afford
access to rights-of-way to competitive local exchange carriers on
non-discriminatory terms and conditions and at reasonable rates. However, there
can be no assurance that delays and disputes will not occur. Our agreements for
rights-of-way and similar matters generally require us to indemnify the party
providing such rights. Such indemnities could make us liable for actions
(including negligence) of the other party.
CUSTOMERS
No single customer accounted for more than 10% of our consolidated revenues
in 1998 or 1999. Our five largest customers accounted for 11% of our
consolidated revenues in 1998 and 8% of our consolidated revenues in 1999. We
expect customer concentration to continue to decrease as we expand into
additional markets and increase full scale marketing of an integrated service
package. In the near term, however, the loss of, or decrease of business from,
one or more of our principal customers could have a material adverse effect on
our business, financial condition and results of operations.
Although they are not our customers, we did recognize revenue of
approximately $9.7 million, or 15.1% of our 1999 revenue, from incumbent local
exchange carriers primarily related to reciprocal compensation for terminating
local calls from customers of the incumbent local exchange carriers to Internet
service providers which are our customers. Of this amount approximately 64% is
attributable to reciprocal compensation due to us from BellSouth. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview - Revenue" for a discussion of a dispute which has arisen
between incumbent local exchange carriers, such as BellSouth, and competitive
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local exchange carriers, like us, with respect to the obligation of incumbent
local exchange carriers to make reciprocal compensation payments to competitive
local exchange carriers with respect to the termination of local calls to
Internet service providers.
EMPLOYEES
As of February 29, 2000, we had approximately 1,100 full time employees.
None of our employees are represented by a labor union or subject to a
collective bargaining agreement, nor have we experienced any work stoppage due
to labor disputes. We believe that our relations with our employees are good.
GEOGRAPHIC AREAS
We have no foreign operations. All of our networks are located in, and all
of our revenues are attributable to, the United States.
ITEM 2. PROPERTIES.
We are headquartered in Bedminster, New Jersey in approximately 14,000
square feet of office space, approximately 7,200 of which we lease from Kamine
Development Corp. (an entity controlled by Mr. Kamine, the Company's Chairman of
the Board). The lease with Kamine Development Corp., which expires in January
2007, provides for a base annual rental of approximately $217,000 (adjusted
periodically for changes in the consumer price index), plus operating expenses.
We also maintain an operations center in an aggregate of approximately
104,000 square feet of leased space in Duluth, Georgia under leases which expire
at various dates from July 2000 through February 2003. We also own or lease
facilities in each of our existing markets for central offices, sales offices
and the location of our switches and related equipment.
We believe that our facilities are in good condition, are suitable for our
operations and that, if needed, suitable alternative space would be readily
available.
ITEM 3. LEGAL PROCEEDINGS.
We are from time to time involved in litigation incidental to the conduct
of our business. There is no pending legal proceeding to which we are a party,
however, which, in the opinion of our management, is likely to have a material
adverse effect on our business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is currently no established trading market for our Common Stock,
$0.01 par value per share. As of March 29, 2000 there were nine holders of
record of our Common Stock.
We have never declared nor paid cash dividends on our Common Stock and do
not presently anticipate paying any cash dividends on our Common Stock in the
foreseeable future. We currently expect that earnings, if any, will be retained
for growth and development of our business.
As a holding company, we depend upon the receipt of dividends and other
cash payments from our operating subsidiaries in order to meet our cash
requirements. Pursuant to the terms of our Amended and Restated Loan and
Security Agreement, dated as of February 15, 2000, among our principal operating
subsidiaries and a group of lenders led by First Union National Bank, Newcourt
Commercial Finance Corporation and Lucent (the "Amended Senior Secured Credit
Facility"), those subsidiaries are restricted in their ability to pay dividends
on their capital stock. The indentures applicable to our 13 1/2% Senior Notes
due 2009 and our 12 1/2% Senior Discount Notes due 2008, respectively, impose
certain restrictions upon our ability to pay dividends on our capital stock.
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Subject to the foregoing and to any restrictions which may be contained in
any future indebtedness which we may incur, the payment of cash dividends on our
Common Stock will be within the sole discretion of our Board of Directors, and
will depend upon the earnings, capital requirements and financial position of
the Company, applicable requirements of law, general economic conditions and
other factors considered relevant by our Board of Directors.
On May 24, 1999, we sold $275.0 million aggregate principal amount of 13
1/2% Senior Notes due 2009 to Morgan Stanley & Co. Incorporated, as
representative of certain initial purchasers. The sale of the Senior Notes to
the initial purchasers was made in reliance upon the exemption from the
registration requirements of the Securities Act of 1933, as amended, provided by
Section 4(2) of that Act, on the basis that the transaction did not involve a
public offering. The initial purchasers agreed that any resales which they made
would be made only (i) to qualified institutional buyers as defined in Rule 144A
under the Securities Act, (ii) to institutional accredited investors as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act, or (iii) outside
the United States to persons other than U.S. persons in reliance upon Regulation
S under the Securities Act.
On December 16, 1999, one institutional investor exercised 50 warrants to
purchase an aggregate of 10 shares of our Common Stock for aggregate gross
proceeds of $0.10. The issuance of the shares upon exercise of the warrants was
made in reliance on the exemption from registration provided by Section 4(2) of
the Securities Act, on the basis that the transaction did not involve a public
offering. The Warrant Agreement applicable to the warrants contains
representations as to such investor's investment intent and imposes substantial
restrictions upon transfer of the securities.
On January 1, 1999, July 1, 1999 and October 1, 1999, the Company granted
options to purchase an aggregate of 82,342 shares of its Common Stock to
employees of the Company and employees of certain affiliates of the Company
under the 1998 Stock Purchase and Option Plan for Key Employees of KMC Telecom
Holdings, Inc. and Affiliates. No consideration was received by us for the
issuance of the options. The options have various exercise prices with 67,509
exercisable at an exercise price of $125 per share, 2,933 exercisable at an
exercise price of $225 per share, and 11,900 exercisable at an exercise price of
$250 per share. The issuance of the options was made in reliance upon the
exemption from the registration requirements of the Securities Act provided by
Section 4(2) of that Act, on the basis that the transaction did not involve a
public offering.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below for the years ended December
31, 1995, 1996, 1997, 1998 and 1999 were derived from our audited financial
statements and those of our predecessors. The data presented below should be
read in conjunction with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto included in "Item 8. Financial Statements and
Supplementary Data."
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
----------------------------------------------------------------
1995 1996 1997 1998 1999
----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue...................................... $ - $ 205 $ 3,417 $ 22,425 $64,313
Operating expenses:
Network operating costs................... - 1,361 7,735 37,336 110,309
Selling, general and administrative....... 1,591 2,216 9,923 24,534 55,803
Stock option compensation expense......... - 240 13,870 7,080 29,833
Depreciation and amortization............. 6 287 2,506 9,257 29,077
--------- ------------ ---------- ---------- ---------
Total operating expenses............... 1,597 4,104 34,034 78,207 225,022
--------- ------------ ---------- ---------- --------
Loss from operations......................... (1,597) (3,899) (30,617) (55,782) (160,709)
Other expense (a)............................ - - - - (4,297)
Interest income.............................. - - 513 8,818 8,701
Interest expense (b)......................... (23) (596) (2,582) (29,789) (69,411)
--------- ------------ ----------- ---------- ---------
Net loss..................................... (1,620) (4,495) (32,686) (76,753) (225,716)
Dividends and accretion on redeemable preferred
stock .................................... - - (8,904) (18,285) (81,633)
-------- ----------- ----------- ---------- ---------
Net loss applicable to common shareholders... $(1,620) $ (4,495) $ (41,590) $ (95,038) $(307,349)
======== ============ =========== ========== ==========
Net loss per common share.................... $ (2.70) $ (7.49) $ (64.93) $ (114.42) $ (360.88)
======== ============ ============ =========== ==========
Weighted average number of common shares
outstanding............................... 600 600 641 831 852
========= ======== ========== ========== ========
OTHER DATA:
Capital expenditures (including acquisitions) $ 3,498 $ 9,111 $ 61,146 $ 161,803 $ 440,733
Adjusted EBITDA(c)........................... (1,591) (3,373) (14,241) (39,445) (101,799)
EBITDA(c).................................... (1,591) (3,613) (28,111) (46,525) (135,929)
Cash used in operating activities............ (779) (2,687) (8,676) (33,573) (98,293)
Cash used in investing activities............ (1,920) (10,174) (62,992) (180,198) (277,078)
Cash provided in financing activities........ 2,728 14,314 85,734 219,399 440,156
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 34 $ 1,487 $ 15,553 $ 21,181 $85,966
Investments held for future capital
expenditures............................... - - - 27,920 -
Restricted investments(d).................... - - - - 88,571
Networks and equipment, net.................. 3,496 12,347 71,371 224,890 639,324
Total assets................................. 3,704 16,715 95,943 311,310 886,040
Long-term debt............................... 2,727 12,330 61,277 309,225 811,137
Redeemable preferred stock................... - - 35,925 52,033 203,790
Redeemable common stock and warrants......... - - 11,726 22,979 46,680
Total nonredeemable equity (deficiency)...... (1,623) 389 (26,673) (104,353) (384,4130)
</TABLE>
- - -----------------------------------------------
(a) During the second quarter of 1999, the Company recorded a $4.3 million
charge to other expense in connection with an unfavorable arbitration
award. The net amount due under the terms of the award was paid in full in
June 1999.
(b) Excludes capitalized interest of (i) $37,000 for 1995, (ii) $103,000 for
1996, (iii) $854,000 for 1997, (iv) $5.1 million for 1998 and (v) $6.6
million for 1999. During the construction of the Company's networks, the
interest costs related to construction expenditures are capitalized.
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(c) Adjusted EBITDA consists of earnings (loss) before net interest, income
taxes, depreciation and amortization charges, stock option compensation
expense (a non-cash charge) and other expense. EBITDA consists of earnings
(loss) before all of the foregoing items except stock option compensation
expense and other expense. These items are provided because they are
measures commonly used in the telecommunications industry. They are
presented to enhance an understanding of the Company's operating results
and they are not intended to represent cash flow or results of operations
in accordance with generally accepted accounting principles. Adjusted
EBITDA and EBITDA are not calculated under generally accepted accounting
principles and are not necessarily comparable to similarly titled measures
of other companies. For a presentation of cash flows calculated under
generally accepted accounting principles, see the Company's historical
financial statements contained in Item 8 of this Report.
(d) Represents amounts pledged to secure the next five payments of interest on
the 13 1/2% Senior Notes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
You should read the following discussion and analysis together with the
Company's financial statements, including the notes and the other financial
information appearing elsewhere in this Report. Due to our limited operating
history, startup nature and rapid growth, period-to-period comparisons of
financial data are not necessarily indicative, and you should not rely upon them
as an indicator of our future performance. The following discussion includes
forward-looking statements.
OVERVIEW
General. We are a facilities-based competitive local exchange carrier
providing telecommunications and data services in Tier III markets. The markets
in which we operate are predominantly located in the Southeastern and Midwestern
United States. We target as customers business, government and institutional
end-users, as well as Internet service providers, long distance carriers and
wireless service providers. Our objective is to provide our customers with a
complete solution for their communications needs. We currently provide on-net
local dial tone, Internet access infrastructure, ISDN, long distance, special
access, private line and a variety of other advanced services and features.
We have invested significant capital and effort in developing our
telecommunications business. This capital has been invested in the development
of our networks, the development and installation of operating systems, the
introduction of services, marketing and sales efforts, and an acquisition. We
expect to make significant additional capital expenditures to build additional
networks, to expand current networks to additional customer buildings, long
distance carrier points of presence and incumbent local exchange carrier central
offices, and to broaden our service offerings, and we may consummate
acquisitions. Proper management of our growth will require us to maintain cost
controls, continue to assess market potential, ensure quality control in
implementing our services, as well as to expand our internal management,
customer care and billing and information systems, all of which will require
substantial investment.
The development, construction and expansion of our networks requires
significant capital, a large portion of which is invested before any revenue is
generated. We have incurred, and expect to continue to incur, significant and
increasing operating losses, negative adjusted EBITDA and net cash outflows for
operating and investing activities while we expand our network operations and
build our customer base. Based on our experience to date and that of our
competitors, we estimate 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 we will be able to establish a sufficient
revenue-generating customer base or gross margins in any particular market or on
a consolidated basis.
The facilities-based competitive local exchange carrier business is capital
intensive. We estimate 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 average approximately $10.0
million to $12.0 million for the fiber optic backbone and switch in each
standard Tier III 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. Our 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 expenditure
requirements, upon commencement of the construction phase of a network we begin
to incur direct operating costs for such items as salaries and rent. As network
construction progresses, we incur costs associated with construction, including
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preparation of rights-of-way, and increased sales, marketing, operating and
administrative expenses. We capitalize certain direct costs related to network
planning and construction costs for new networks.
The initial construction of a network consists of deploying the fiber optic
backbone, installing the switch and related electronics and testing the system.
This takes approximately 6 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 our entry into local services, we plan to
install switching equipment in all of our markets. Switches are in commercial
operation in all of our 34 operating markets and we expect to be in commercial
operation in 3 additional Tier III markets by the end of the first half of 2000.
We also intend to install Lucent switches in any future networks which we may
build. Once a switch is commercially operational, we offer local dial tone and
switched data services such as ISDN, Internet access infrastructure, Local Area
Network-to-Local Area Network interconnect and Wide Area Network services, as
well as voice mail and other custom calling features.
We expect 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
our network. Although under the Telecommunications Act of 1996, incumbent local
exchange carriers are required to unbundle local network elements, thereby
decreasing operating expenses by permitting us to purchase only the origination
and termination services we need, we cannot assure you that such unbundling will
be effected in a timely manner and result in prices favorable to us.
Revenue. Historically, we have derived our revenue primarily from resale of
switched services, along with special access, private line and Internet access
infrastructure services provided on our facilities. Future revenues will include
increasing amounts of on-net services, long distance services and value-added
data services, such as ISDN, DSL, Local Area Network-to-Local Area Network
interconnect, Wide Area Network services, BRI (or Basic Rate ISDN), PRI (or
Primary Rate ISDN) and port wholesale as well as other value-added services such
as Centrex-type services, voice mail and other custom calling features. We
maintain interconnection agreements with the major incumbent local exchange
carriers in each state in which we operate. Among other things, these contracts
govern the reciprocal amounts to be billed by us for terminating local traffic
of Internet service providers in each state. Incumbent local exchange carriers
around the country have been contesting whether the obligation to pay reciprocal
compensation to competitive local exchange carriers should apply to local
telephone calls from an incumbent local exchange carrier's customers to Internet
service providers served by competitive local exchange carriers. The incumbent
local exchange carriers claim that this traffic is interstate in nature and
therefore should be exempt from compensation arrangements applicable to local
intrastate calls. Competitive local exchange carriers have contended that the
interconnection agreements provide no exception for local calls to Internet
service providers and reciprocal compensation is therefore applicable. Incumbent
local exchange carriers have threatened to withhold, and in many cases have
withheld, reciprocal compensation to competitive local exchange carriers for the
transport and termination of these calls. During 1999, we recognized revenue
from incumbent local exchange carriers of approximately $9.7 million, or 15.1%
of our 1999 revenue, for such services. Payments of approximately $1.6 were
received from the incumbent local exchange carriers during 1999.
We determined to recognize this revenue because we concluded, based upon
all of the facts and circumstances available to us at the time, including
numerous state public service commission and state and federal court decisions
upholding competitive local exchange carriers' entitlement to reciprocal
compensation for such calls, that realization of those amounts was reasonably
assured. On October 13, 1999, however, the Louisiana Public Service Commission
ruled that local traffic to Internet service providers in Louisiana is not
eligible for reciprocal compensation. As a result of that ruling, we determined
that we could no longer conclude that realization of amounts attributable to
reciprocal compensation for termination of local calls to Internet service
providers in Louisiana was reasonably assured. Accordingly, we recorded an
adjustment to reduce revenue in the quarter ended September 30, 1999, which
reversed all reciprocal compensation revenue previously recognized related to
Internet service provider traffic in Louisiana for the entire year of 1998 and
for the first nine months of 1999. The adjustment amounted to $4.4 million, of
which $1.1 million relates to the year ended December 31, 1998 and $3.3 million
relates to the nine months ended September 30, 1999.
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<PAGE>
Although incumbent local exchange carriers have disputed the entitlement of
competitive local exchange carriers to reciprocal compensation for termination
of local calls to Internet service providers in jurisdictions other than
Louisiana as well, we have determined to continue to recognize amounts due to us
for reciprocal compensation for calls in jurisdictions other than Louisiana in
which we currently operate systems because we have concluded, based upon all of
the facts and circumstances, including numerous state public service commission
and state and federal court decisions upholding competitive local exchange
carriers entitlement to reciprocal compensation for such calls, that realization
of such amounts is reasonably assured. South Carolina has also ruled that
incumbent local exchange carriers are not obligated to pay reciprocal
compensation for termination of local calls to Internet service providers. As a
result, unless that decision is reversed, we will not recognize revenue for such
calls in South Carolina for our systems in Spartanburg, Columbia and Charleston.
In jurisdictions other than Louisiana and South Carolina we will continue to
account for reciprocal compensation with the incumbent local exchange carriers,
including the activity associated with the disputed Internet service provider
traffic, as local traffic pursuant to the terms of our interconnection
agreements. Accordingly, in these jurisdictions, we will continue to recognize
revenue in the period that the traffic is terminated.
Currently, over 30 state commissions and several federal and state courts
have ruled that reciprocal compensation arrangements do apply to calls to
Internet service providers, while four jurisdictions have ruled to the contrary.
A number of these rulings are subject to appeal. Additional disputes over the
appropriate treatment of Internet service provider traffic are pending in other
states. On February 26, 1999, the Federal Communications Commission issued a
declaratory ruling determining that Internet service provider traffic is
interstate for jurisdictional purposes, but that its current rules neither
require nor prohibit the payment of reciprocal compensation for such calls. In
the absence of a federal rule, the Federal Communications Commission determined
that state commissions have authority to interpret and enforce the reciprocal
compensation provisions of existing interconnection agreements, and to determine
the appropriate treatment of Internet service provider traffic in arbitrating
new agreements. The Federal Communications Commission also requested comment on
alternative federal rules to govern compensation for such calls in the future.
In response to the Federal Communications Commission ruling some Regional Bell
Operating Companies have asked state commissions to reopen previous decisions
requiring the payment of reciprocal compensation on Internet service provider
calls. Some Regional Bell Operating Companies and some competitive local
exchange carriers appealed the Federal Communications Commission's declaratory
ruling to the United States Court of Appeals for the District of Columbia
Circuit, which issued a decision on March 24, 2000, vacating the declaratory
ruling. The court stated that the Federal Communications Commission had not
adequately explained its conclusion that calls to Internet service providers
should not be treated as local traffic for reciprocal compensation purposes. We
view this decision as favorable, but the court's direction to the Federal
Communications Commission to re-examine the issue will likely result in further
delay in the resolution of pending compensation disputes, and there can be no
assurance as to the ultimate outcome of these proceedings.
Operating Expenses. Our principal operating expenses consist of network
operating costs, selling, general and administrative expenses, stock option
compensation expense and depreciation and amortization. Network operating costs
include charges from incumbent local exchange carriers for resale services,
termination and unbundled network element charges; charges from long distance
carriers for resale of long distance services; salaries and benefits associated
with network operations, billing and information services and customer care
personnel; franchise fees and other costs, including direct city administration
costs. Network operating costs also include a percentage of both our intrastate
and interstate revenues which we pay as universal service fund charges. Selling,
general and administrative expenses consist of sales personnel and support
costs, corporate and finance personnel and support costs and legal and
accounting expenses. Depreciation and amortization includes charges related to
plant, property and equipment and amortization of intangible assets, including
franchise acquisition costs. Depreciation and amortization expense will increase
as we place additional networks into service and continue to expand our existing
networks.
Interest Expense. Interest expense includes interest charges on our 13 1/2%
Senior Notes, 12 1/2% Senior Discount Notes and our Amended Senior Secured
Credit Facility. 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 13 1/2% Senior Notes and increased borrowings
under the Amended Senior Secured Credit Facility, discussed below.
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<PAGE>
1999 COMPARED TO 1998
Revenue. Revenue increased from $22.4 million for 1998 to $64.3 million for
1999. This increase is primarily attributable to the fact that for 1999 we
derived revenues from 23 markets during the entire period, as compared to 1998
when we derived revenues from only 8 markets during the entire period, and began
to derive revenues from 14 additional markets during the fourth quarter of 1998.
In addition, each of our markets from which we derived revenues during 1998
generated increased revenues during 1999.
During 1998 and 1999, we recognized revenue which we believed was due to us
from incumbent local exchange carriers for terminating local traffic of Internet
service providers. We determined to recognize this revenue because we concluded,
based upon all of the facts and circumstances known to us at the time, including
numerous state public service commission and state and federal court decisions
upholding competitive local exchange carriers' entitlement to reciprocal
compensation for such calls, that realization of those amounts was reasonably
assured. On October 13, 1999, however, the Louisiana Public Service Commission
ruled that local traffic to Internet service providers in Louisiana is not
eligible for reciprocal compensation. As a result of that ruling, we determined
that we could no longer conclude that realization of amounts attributable to
termination of local calls to Internet service providers in Louisiana was
reasonably assured. Accordingly, we recorded an adjustment to reduce revenue in
the third quarter of 1999, which reversed all reciprocal revenue recognized
related to Internet service provider traffic in Louisiana for the entire year of
1998 and the first nine months of 1999. The adjustment amounted to $4.4 million,
of which $1.1 million relates to the year ended December 31, 1998 and $3.3
million relates to the nine months ended September 30, 1999.
Although incumbent local exchange carriers, such as BellSouth, have
generally withheld payments of amounts due for reciprocal compensation to
competitive local exchange carriers such as the Company for calls to Internet
service providers and disputed the entitlement of competitive local exchange
carriers to reciprocal compensation for such calls in jurisdictions other than
Louisiana as well, we have determined to continue to recognize amounts due to us
for reciprocal compensation for such calls in jurisdictions other than Louisiana
and South Carolina (which is the only other jurisdiction in which we currently
operate that has adopted a similar position) because we have concluded, based
upon all of the facts and circumstances, including numerous state public service
commission and state and federal court decisions upholding competitive local
exchange carriers' entitlement to reciprocal compensation for such calls, that
realization of such amounts is reasonably assured.
Revenue for 1998 and 1999 included $14.2 million and $19.7 million,
respectively, of revenue derived from resale of switched services and an
aggregate of $8.2 million and $44.6 million (including, after giving effect to
the third quarter 1999 $4.4 million adjustment for Louisiana, $9.7 million of
revenue related to reciprocal compensation during 1999), respectively, of
revenue derived from on-net special access, private line and switched services.
Resale of switched services represented 63.2% of revenue in 1998 and 30.6% of
revenue in 1999.
Network Operating Costs. Network operating costs increased from $37.3
million in 1998 to $110.3 million in 1999. This increase of approximately $73.0
million was due primarily to the increase in the number of markets in which we
operated in 1999 and the related increases of $27.7 million in direct costs
associated with providing on-net services, resale services and leasing unbundled
network element services, $19.2 million in personnel costs, $6.5 million in
network support services, $6.3 million in consulting and professional services
costs, $2.2 million in telecommunications costs, $2.2 million in facility costs,
$1.4 million in travel costs and $7.5 million in other direct operating costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $24.5 million in 1998 to $55.8 million in
1999. This increase of approximately $31.3 million resulted primarily from
increases of $20.5 million in personnel costs, $3.9 million in professional
costs, $2.9 million in travel related costs, as well as increases in other
marketing and general and administrative costs aggregating approximately $4.0
million. These increases were due primarily to the greater number of networks in
commercial operation during 1999.
Stock Option Compensation Expense. Stock option compensation expense, a
non-cash charge, increased from $7.1 million for 1998 to $29.8 million for 1999.
This increase primarily resulted from an increase in the estimated fair value of
the Company's Common Stock, as well as the grant of additional option awards
during 1999.
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Depreciation and Amortization. Depreciation and amortization expense
increased from $9.3 million for 1998 to $29.1 million for 1999, primarily as a
result of depreciation expense associated with the greater number of networks in
commercial operation during 1999.
Other Expense. During the second quarter of 1999, the Company recorded a
$4.3 million charge to other expense in connection with an unfavorable
arbitration award. The net amount due under the terms of the award was paid in
full in June 1999.
Interest Income. Interest income remained consistent from $8.8 million in
1998 to $8.7 million in 1999.
Interest Expense. Interest expense increased from $29.8 million in 1998 to
$69.4 million in 1999. The increase resulted primarily from the issuance of the
Senior Notes in May 1999, additional accretion on the Senior Discount Notes and
increased interest charges related to higher borrowings under the Senior Secured
Credit Facility. The Company capitalized interest related to network
construction projects of $5.1 million during 1998 and $6.6 million during 1999.
Net Loss. For the reasons stated above, net loss increased from $76.8
million for 1998 to $225.7 million for 1999.
1998 COMPARED TO 1997
Revenue. Revenue increased from $3.4 million for 1997 to $22.4 million for
1998. This increase is primarily attributable to the fact that for 1998 we
derived revenues from 8 markets during the entire period, as well as 14
additional markets from which we began to derive revenues at various points
during the period, as compared to 1997 when we derived revenues from only 1
market during the entire period, and began to derive revenues from 7 additional
markets at various points during the year. In addition, each of our markets from
which we derived revenues during 1997 generated increased revenues during 1998.
Revenue for 1997 and 1998 included $2.3 million and $14.2 million, respectively,
of revenue derived from resale of switched services and an aggregate of $1.1
million and $8.2 million (including $2.9 million of revenue from reciprocal
compensation in 1998), respectively, of revenue derived from on-net special
access, private line and switched services. Resale of switched services
represented 67.6% of revenue in 1997 and 63.2% of revenue in 1998.
Network Operating Costs. Network operating costs increased from $7.7
million in 1997 to $37.3 million in 1998. This increase of approximately $29.6
million was due primarily to the increase in the number of markets in which we
operated in 1998 and the related increases of $14.5 million in costs associated
with providing resale services and leasing unbundled network element services,
$5.3 million in personnel costs, $1.6 million in consulting and professional
services costs, $3.4 million in contracted network support costs, and $1.1
million in facilities related costs, $1.0 million in travel related costs and
$2.7 million in other direct operating costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $9.9 million in 1997 to $24.5 million in
1998. This increase of approximately $14.6 million resulted primarily from
increases of $8.5 million in personnel costs, $900,000 in professional costs
(consisting primarily of legal costs relating to regulatory matters) and $1.2
million in travel related costs, as well as increases in other marketing and
general and administrative costs aggregating approximately $4.0 million.
Stock Option Compensation Expense. Stock option compensation expense, a
non-cash charge, decreased from $13.9 million in 1997 to $7.1 million in 1998.
These charges are directly impacted by changes in the estimated fair value of
the Company's common stock. The increase in the estimated fair value of such
stock in 1998 was less than the increase in 1997. The expense charge for 1998
includes the net effect of a credit resulting from the termination of the KMC
Telecom Inc. stock option plan, which was substantially offset by a charge
related to the adoption of the KMC Telecom Holdings, Inc., stock option plan, in
September 1998.
Depreciation and Amortization. Depreciation and amortization expense
increased from $2.5 million for 1997 to $9.3 million for 1998, primarily as a
result of depreciation expense associated with the greater number of networks in
commercial operation during 1998, as well as higher amortization of intangible
assets.
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<PAGE>
Interest Expense. Interest expense increased from $2.6 million in 1997 to
$29.8 million in 1998. This increase resulted primarily from the issuance of the
Senior Discount Notes during the first quarter of 1998, which generated interest
expense of $29.6 million in 1998, as well as the increased expense attributable
to the higher level of borrowings under a credit facility in 1998. The Company
capitalized interest of $5.1 million related to network construction projects
during 1998 and $854,000 during 1997. Net Loss. For the reasons stated above,
net loss increased from $32.7 million for 1997 to $76.8 million for 1998.
STOCK COMPENSATION PLAN
During 1996 and 1997 one of our principal operating subsidiaries granted
options to purchase shares of its common stock pursuant to its 1996 Stock Plan.
On June 26, 1998, the Board of Directors of the Company adopted the 1998 Stock
Purchase and Option Plan for Key Employees of KMC Telecom Holdings, Inc. and
Affiliates which authorizes the grant of options to purchase common stock of the
Company. During the third quarter of 1998, the Company replaced the options to
purchase shares of common stock of the subsidiary previously granted under its
1996 Stock Plan, with options to purchase common stock of the Company granted
under the 1998 Stock Plan and granted options to certain additional employees of
the Company. Upon cancellation of the outstanding options under the 1996 Stock
Plan, the Company reversed all compensation expense previously recorded with
respect to such options. Additionally, to the extent the fair value of the
common stock of the Company exceeded the exercise price of the options granted
under the 1998 Stock Plan, the Company recognized compensation expense related
to such options to the extent vested. The net effect of the cancellation of the
options outstanding under the 1996 Stock Plan and the grant of options under the
1998 Stock Plan resulted in a credit to compensation expense of approximately
$600,000 in 1998.
Certain provisions in the stock option awards granted under the 1998 Stock
Plan will necessitate that such awards be treated as variable stock compensation
awards pursuant to Accounting Principles Board Opinion No. 25. Accordingly,
compensation expense will be charged or credited periodically through the date
of exercise or cancellation of such stock options, based on changes in the value
of the Company's stock as well as the vesting schedule of such options. These
compensation charges or credits are non-cash in nature, but could have a
material effect on the Company's future reported net income (loss).
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant operating and net losses as a result of the
development and operation of our networks. We expect that such losses will
continue as we emphasize the development, construction and expansion of our
networks and build our customer base. As a result, there will not be any cash
provided by operations in the near future and we will need to fund the expansion
of our networks. We have financed our operating losses and capital expenditures
with equity invested by our founders, preferred stock placements, credit
facility borrowings and the 12 1/2% Senior Discount Notes and the 13 1/2% Senior
Notes.
In February 1999, we issued PIK Preferred Stock and warrants to purchase
common stock for aggregate gross proceeds of $65.0 million to two purchasers. In
April 1999, we issued additional shares of PIK Preferred Stock and warrants to
purchase common stock to one additional purchaser for aggregate gross proceeds
of $35.0 million.
On May 24, 1999, we issued $275.0 million aggregate principal amount of 13
1/2% Senior Notes due 2009 in a private offering. On December 30, 1999, we
exchanged those notes for $275.0 million aggregate principal amount of notes
that had been registered under the Securities Act of 1933. Approximately $104.1
million of the proceeds of the offering were used to purchase a portfolio of
U.S. treasury securities that were pledged to secure the payment of the first
six interest payments on the 13 1/2% Senior Notes.
During the first quarter of 2000, we amended and expanded our $250.0
million senior secured credit facility to a new $700.0 million facility. In
connection with the amendment, the $41.0 million borrowed under our prior credit
facility with Lucent Technologies, Inc. was repaid and that facility was
combined into the amended facility. Under the Amended Senior Secured Credit
Facility, our subsidiaries which own our 34 existing networks and the 3 networks
which are to be completed by the end of the first half of 2000 are permitted to
borrow up to an aggregate of $700.0 million, subject to certain conditions, for
the purchase of fiber optic cable, switches and other telecommunications
equipment and, once certain financial conditions are met, for working capital
24
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and other general corporate purposes. At March 29, 2000 we had $441.8 million of
indebtedness outstanding under the Amended Senior Secured Credit Facility and
had an additional $258.2 million in borrowing capacity available thereunder
subject to certain conditions. The Amended Senior Secured Credit Facility
contains a number of affirmative and negative covenants, one of which requires
us to make cash capital contributions to our subsidiaries which are the
borrowers thereunder of at least $185 million prior to April 1, 2001.
In March 2000, we received a commitment from Lucent Technologies, Inc. to
purchase an additional $100 million of our PIK Preferred Stock which we will
apply towards the $185 million requirement referred to above. We currently
contemplate raising the $85 million balance through private or public sales of
securities in the capital markets.
Net cash provided by financing activities from borrowings and equity
issuances was $440.2 million for 1999. Our net cash used in operating and
investing activities was $375.4 million for 1999.
We made capital expenditures of $61.1 million in 1997 (including the
acquisition of the Melbourne, Florida network for a purchase price of $2.0
million), $161.8 million in 1998 and $440.7 million in 1999. Continued
significant capital expenditures are expected to be made in 2000 and 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 our services. In addition, we expect to continue to incur
operating losses while we expand our business and build our 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 our control, including economic conditions, competition,
regulatory developments and the availability of capital.
At December 31, 1999, we had outstanding commitments aggregating
approximately $96.5 million related to the purchase of fiber optic cable and
telecommunications equipment under our agreements with certain suppliers and
service providers.
We believe that our cash, the expected proceeds from our proposed sale of
PIK Preferred Stock to Lucent and borrowings available under the Amended Senior
Secured Credit Facility will be sufficient to meet our liquidity needs through
the completion of our remaining 3 networks currently planned for completion by
the end of the first half of 2000, as well as operating losses and capital
expenditure requirements for all of our 37 markets for the next 12 months.
However, in the event that our plans change, the assumptions upon which our
plans are based prove inaccurate, we expand or accelerate our business plan or
we determine to consummate acquisitions, the foregoing sources of funds may
prove insufficient to complete all such networks, and we may be required to seek
additional financing sooner than we currently expect. Additional sources of
financing may include public or private equity or debt financings by the
Company, capitalized leases and other financing arrangements.
We will require additional financing before we can begin to implement our
plans to expand into any additional Tier III markets. We are exploring a number
of alternatives but we cannot assure you that we will be successful in this
regard.
We can give no assurance that additional financing will be available to us
or, if available, that it can be obtained on a timely basis and on acceptable
terms. Failure to obtain such financing could result in the delay or abandonment
of some or all of our development and expansion plans and expenditures, which
would have a material adverse effect on our business, financial condition and
results of operations. Such a failure could also limit our ability to make
principal and interest payments on our indebtedness, and meet our dividend and
redemption obligations with respect to our preferred stock.
YEAR 2000 COMPLIANCE
We did not experience any material business interruption as a result of the
Year 2000 issue. Our own software applications functioned well and we did not
experience any problems with the software applications of the local exchange
carriers, long distance carriers or others on whose operations we depend or with
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which our systems interact. We spent approximately $150,000 in connection with
our Year 2000 compliance efforts, which we expensed as incurred. This amount did
not include the cost of the new billing software, operational software and
financial and personnel software systems which we implemented as a result of the
expansion of our business. We will continue to monitor our mission critical
computer applications and those of our suppliers and vendors throughout the Year
2000 to ensure that any Year 2000 matters that may arise are addressed promptly.
CERTAIN FACTORS WHICH MAY AFFECT OUR FUTURE RESULTS
We Have Had a Limited Operating History and Have Incurred Negative Gross
Profits, Operating Losses, Negative Cash Flow and Negative Adjusted
EBITDA
We were formed in September 1997 as a holding company. Our subsidiaries
commenced material operations in 1996 and, as a result, we have had only a
limited operating history and limited revenues. We have only recently completed
the process of building many of our networks. Our prospects must be considered
in the light of the risks, expenses and difficulties frequently encountered by
companies in the early stage of development. In connection with the construction
of our networks we have incurred and expect to continue to incur significant and
increasing negative gross profits, operating losses and negative adjusted EBITDA
while we expand our business and build our customer base. We can give no
assurance that an adequate customer base with respect to any or all of our
services will be obtained or sustained.
Our negative gross profits, operating losses, negative adjusted EBITDA,
cash used by operations and capital expenditures will increase as a result of
the continuation of our expansion strategy. We cannot assure you that we will
achieve or sustain profitability or generate positive EBITDA or at any time have
sufficient resources to meet our capital expenditure and working capital
requirements or make payments on our indebtedness. We must significantly
increase our revenues and cash flows to meet our debt service and preferred
stock dividend obligations.
Substantial Indebtedness
At February 29, 2000, we had outstanding approximately $938.2 million of
indebtedness outstanding. Our indebtedness could have important consequences.
For example, it could:
o limit our ability to obtain any necessary financing in the future,
o require us to dedicate a substantial portion of our cash flow from
operations to make payments on our indebtedness, thereby reducing the
funds available to us for other purposes, including working capital
and capital expenditures,
o limit our flexibility in planning for, or reacting to changes in, our
business or the industry in which we operate,
o make us more highly leveraged than many, if not all, of our
competitors, which could place us at a competitive disadvantage
compared to those of our competitors that are less leveraged, and
o increase our vulnerability in the event of a downturn in our business.
If we fail to meet our obligations there could be a default on our
indebtedness which would permit the holders of substantially all of our
indebtedness to accelerate the maturity thereof.
In connection with the build-out of our networks and expansion of our
services, we have been experiencing increasing negative adjusted EBITDA and our
earnings were insufficient to cover fixed charges for 1997, 1998 and 1999. We
might not be able to improve our earnings before fixed charges or adjusted
EBITDA expense. If we do not, we might not be able to meet our debt service
obligations.
We cannot assure you that our cash flow from operations and capital
resources will be sufficient to repay our 13 1/2% Senior Notes, 12 1/2% Senior
Discount Notes, and the Amended Senior Secured Credit Facility in full or that a
substantial portion of our indebtedness will not need to be refinanced. We can
give no assurance that we will be able to effect such refinancings.
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You should be aware that our ability to repay or refinance our current debt
depends on our successful financial and operating performance and our ability to
successfully implement our business strategy. Unfortunately, we cannot assure
you that we will be successful in implementing our strategy or in realizing our
anticipated financial results. You should also be aware that our financial and
operational performance depends upon a number of factors, many of which are
beyond our control. These factors include:
o the economic and competitive conditions in the telecommunications
network industry,
o any operating difficulties, increased operating costs or pricing
pressure we may experience,
o the passage of legislation or other regulatory developments that may
adversely affect us,
o any delays in implementing any strategic projects, and
o our ability to complete our networks on time and in a cost-effective
manner.
The Amended Senior Secured Credit Facility and the indentures applicable to
our 13 1/2% Senior Notes and 12 1/2% Senior Discount Notes contain a number of
significant covenants. These covenants limit our ability to, among other things:
o borrow additional money,
o make capital expenditures and other investments,
o pay dividends,
o merge, consolidate, or dispose of our assets, and
o enter into transactions with our affiliates.
Under the Amended Senior Secured Credit Facility, our subsidiaries are
required to meet certain financial tests at the end of each quarter. Failure to
comply with these covenants could limit our ability to make further borrowings,
or could result in a default under the Amended Senior Secured Credit Facility,
allowing the lenders to accelerate the maturity of the loans made thereunder.
There can be no assurance that we will be able to comply with such covenants in
the future.
Our Future Growth Will Require Substantial Additional Capital
Our current plans for expansion will require substantial additional cash
from outside sources. We currently anticipate that our capital expenditures for
2000 will be approximately $285.0 million. We also will have substantial net
losses to fund. Our substantial cash requirements will continue into the
foreseeable future.
We believe that our cash, the expected proceeds from our proposed sale of
PIK Preferred Stock to Lucent and borrowings available under our Amended Senior
Secured Credit Facility, will provide sufficient funds for us to complete the
initial fiber optic backbone and installation of a switch in the remaining 3
networks currently planned for completion by the end of the first half of 2000,
as well as operating losses and capital expenditure requirements for all of our
37 markets for the next 12 months. Thereafter, we will require additional
financing.
However, in the event that:
o our plans change,
o the assumptions upon which our plans are based prove inaccurate,
o we expand or accelerate our business plan, or
o we determine to consummate acquisitions,
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the foregoing sources of funds may prove to be insufficient to complete all such
networks, and we may require additional financing sooner than we currently
expect.
We will require additional financing, however, before we can begin to
implement our plans to expand into any additional Tier III markets. We are
exploring a number of alternatives, but we cannot assure you that we will be
successful in this regard.
Additional sources of financing may include:
o public or private equity or debt financings,
o capitalized leases, and
o other financing arrangements.
Pursuant to certain provisions of our Series A and Series C Cumulative
Convertible Preferred Stock, and our Series E and Series F Senior Redeemable,
Exchangeable, PIK Preferred Stock, we may not increase the authorized number of
shares of our preferred stock or common stock without the consent of the holders
of two-thirds of the shares of those series. We currently have only three
million shares of common stock authorized.
Additional financing might not be available to us on acceptable terms,
within the limitations contained in our indebtedness, or at all. Failure to
obtain such additional financing could result in the delay or abandonment of
some or all of our development and expansion plans and expenditures, which would
have a material adverse effect on our business prospects.
Because We Are a Holding Company, We Will Be Reliant on Funds from Our
Subsidiaries to Repay Our Indebtedness and Our Subsidiaries' Creditors May
Have Priority on those Funds
We are a holding company whose sole material asset is the common stock of
our subsidiaries. In connection with the Amended Senior Secured Credit Facility,
we have reaffirmed the pledge of all of the common stock of our operating
subsidiaries that own our 34 existing networks (and the 3 networks planned for
completion by the end of the first half of 2000) to the lenders under the
Amended Senior Secured Credit Facility. Our operating subsidiaries, which
currently own substantially all of our operating assets, are directly liable to
the lenders under the Amended Senior Secured Credit Facility.
We must rely upon dividends and other payments from our operating
subsidiaries to generate the funds necessary to meet our obligations, including
the payment of principal and interest on the notes. These subsidiaries are
legally distinct from us and have no obligation to pay amounts due by us. The
ability of our operating subsidiaries to make such payments to us will be
subject to, among other things, the availability of funds, the terms of each
operating subsidiary's indebtedness and applicable state laws. In particular,
the terms of the operating subsidiaries' credit facilities prohibit them from
paying dividends and principal and interest on intercompany borrowings unless,
among other things, they are in compliance with certain financial covenants.
Accordingly, we cannot assure you that we will be able to obtain any funds from
our operating subsidiaries.
Claims of creditors of our 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 our indebtedness and capital stock. We have
unconditionally guaranteed the repayment of the Amended Senior Secured Credit
Facility.
Our Industry is Extremely Competitive and Many of Our Competitors Have
Greater Resources Than We Do
The telecommunications industry is extremely competitive, particularly with
respect to price and service. We face competition in all of our markets.
Generally, the incumbent local exchange carrier competitor is one of the
Regional Bell Operating Companies, one of GTE Corporation's subsidiaries or one
of Sprint Corporation's subsidiaries. The incumbent local exchange carriers:
o have long-standing relationships with their customers,
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o have financial, technical and marketing resources substantially
greater than ours,
o have the potential to fund competitive services with revenues from a
variety of businesses, and
o currently benefit from certain existing regulations that favor the
incumbent local exchange carriers over us in certain respects.
We do not believe that Tier III markets can profitably support more than
two competitors to the incumbent local exchange carrier. Accordingly, we believe
that once we have completed the construction of our network backbone and the
installation of our switch in a given market, potential new entrants in that
market are likely to seek to deploy their capital elsewhere. We will generally
continue to build in our markets after initial backbone construction and switch
installation. We expect that this demonstration of our commitment to our markets
will further deter new entrants.
However, it is likely that in one or more of our markets we will face
competition from two or more facilities-based competitive local exchange
carriers. 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 competitive local exchange carriers, we expect substantial
price competition. We believe that operations in such markets are likely to be
unprofitable for one or more operators.
Potential competitors in our markets include:
o microwave and satellite carriers,
o wireless telecommunications providers,
o cable television companies, utilities, Regional Bell Operating
Companies seeking to operate outside their current local service
areas, and
o large long distance carriers, such as AT&T and MCI WorldCom, which
have begun to offer integrated local and long distance
telecommunications services.
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
for us. One of the primary purposes of the Telecommunications Act of 1996 is to
promote competition, particularly in local markets. We believe that Tier III
markets will also see more agent and distributor resale initiatives.
Recent regulatory initiatives allow competitive local exchange carriers
like us to interconnect with incumbent local exchange carrier facilities. This
provides increased business opportunities for us. However, these regulatory
initiatives have been accompanied by increased pricing flexibility for, and
relaxation of regulatory oversight of, the incumbent local exchange carriers. If
the incumbent local exchange carriers engage in increased volume and discount
pricing practices or charge competitive local exchange carriers increased fees
for interconnection to their networks, or if the incumbent local exchange
carriers delay implementation of interconnection to their networks, our
business, financial condition and results of operations could be adversely
affected.
To the extent we interconnect with and use incumbent local exchange carrier
networks to service our customers, we are dependent upon the technology and
capabilities of the incumbent local exchange carriers to provide services and to
maintain our service standards. We will become increasingly dependent on
interconnection with incumbent local exchange carriers as switched services
become a greater percentage of our business. The Telecommunications Act imposes
interconnection obligations on incumbent local exchange carriers, but we cannot
assure you that we will be able to obtain the interconnections we require at
desirable rates, terms and conditions. In the event that we experience
difficulties in obtaining appropriate and reasonably priced service from the
incumbent local exchange carriers, our ability to serve our customers would be
impaired.
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Both the long distance business and 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 we will face competition from large carriers such as AT&T, MCI Worldcom
and Sprint. We will rely on other carriers to provide transmission and
termination for our long distance traffic and therefore will be dependent on
such carriers.
We expect to experience declining prices and increasing price competition.
We might not be able to achieve or maintain adequate market share or revenue, or
compete effectively, in any of our markets. Any of the foregoing factors could
have a material adverse effect on our business, financial condition and results
of operations.
The Regional Bell Operating Companies and GTE Companies Have Disputed the
Entitlement of Competitive Local Exchange Carriers to Reciprocal
Compensation for Certain Calls to Internet Service Providers
Every time a customer of a Regional Bell Operating Company calls an
Internet service provider that is one of our customers, we are entitled to
receive payment from the Regional Bell Operating Company or a GTE Company. This
payment is called "reciprocal compensation." The Regional Bell Operating
Companies and GTE Companies object to making reciprocal compensation payments
and are seeking to have this changed by legislation, regulation and litigation.
The Regional Bell Operating Companies and GTE Companies have threatened to
withhold, and in many cases have withheld, reciprocal compensation for the
transport and termination of such calls. We recognized revenue of approximately
$2.9 million, or 12.9% of our 1998 revenue, from incumbent local exchange
carriers related to reciprocal compensation. We recognized revenue of
approximately $9.7 million, or 15.1% of our revenue, related to these calls for
1999. Payments of approximately $135,000 and $1.6 million were received from the
incumbent local exchange carriers during 1998 and 1999, respectively.
We determined to recognize this revenue because we concluded, based upon
all of the facts and circumstances available to us at the time, including
numerous state public service commission and state and federal court decisions
upholding competitive local exchange carriers' entitlement to reciprocal
compensation for such calls, that realization of those amounts was reasonably
assured. On October 13, 1999, however, the Louisiana Public Service Commission
ruled that local traffic to Internet service providers in Louisiana is not
eligible for reciprocal compensation. As a result of that ruling, we determined
that we could no longer conclude that realization of amounts attributable to
reciprocal compensation for termination of local calls to Internet service
providers in Louisiana was reasonably assured. Accordingly, we recorded an
adjustment to reduce revenue in the quarter ended September 30, 1999, which
reversed all reciprocal compensation revenue previously recognized related to
Internet service provider traffic in Louisiana for the entire year of 1998 and
for the first nine months of 1999. The adjustment amounted to $4.4 million, of
which $1.1 million relates to the year ended December 31, 1998 and $3.3 million
relates to the nine months ended September 30, 1999.
Although incumbent local exchange carriers have disputed the entitlement of
competitive local exchange carriers to reciprocal compensation for termination
of local calls to Internet service providers in jurisdictions other than
Louisiana as well, we have determined to continue to recognize amounts due to us
for reciprocal compensation for calls in jurisdictions other than Louisiana in
which we operate systems because we have concluded, based upon all of the facts
and circumstances, including numerous state public service commissions and state
and federal court decisions upholding competitive local exchange carriers
entitlement to reciprocal compensation for such calls, that realization of such
amounts is reasonably assured. South Carolina has also ruled that incumbent
local exchange carriers are not obligated to pay reciprocal compensation for
termination of local calls to Internet service providers. As a result, unless
that decision is reversed, we will not recognize revenue for such calls in South
Carolina for our systems in Spartanburg, Columbia and Charleston.
Currently, over 30 state commissions and several federal and state courts
have ruled that reciprocal compensation arrangements do apply to calls to
Internet service providers, while four jurisdictions have ruled to the contrary.
A number of these rulings are subject to appeal. Additional disputes over the
appropriate treatment of Internet service provider traffic are pending in other
states.
On February 26, 1999 the Federal Communications Commission issued a
declaratory ruling determining that Internet service provider traffic is
interstate for jurisdictional purposes, but that its current rules neither
require nor prohibit the payment of reciprocal compensation for such calls. In
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the absence of a federal rule, the Federal Communications Commission determined
that state commissions have authority to interpret and enforce the reciprocal
compensation provisions of existing interconnection agreements, and to determine
the appropriate treatment of Internet service provider traffic in arbitrating
new agreements. The Federal Communications Commission also requested comment on
alternative federal rules to govern compensation for such calls in the future.
In response to the Federal Communications Commission ruling some Regional Bell
Operating Companies have asked state commissions to reopen previous decisions
requiring the payment of reciprocal compensation on Internet service provider
calls. Some Regional Bell Operating Companies and some competitive local
exchange carriers appealed the Federal Communications Commission's declaratory
ruling to the United States Court of Appeals for the District of Columbia
Circuit, which issued a decision on March 24, 2000, vacating the declaratory
ruling. The court stated that the Federal Communications Commission had not
adequately explained its conclusion that calls to Internet service providers
should not be treated as local traffic for reciprocal compensation purposes. We
view this decision as favorable, but the court's direction to the Federal
Communications Commission to re-examine the issue will likely result in further
delay in the resolution of pending compensation disputes, and there can be no
assurance as to the ultimate outcome of these proceedings.
Our management will continue to consider the circumstances surrounding this
dispute periodically in determining whether reserves against unpaid balances are
warranted. As of December 31, 1999, no reserves are considered necessary by
management.
Our interconnection agreements provide for reciprocal compensation. As
these expire, the incumbent local exchange carriers are expected to refuse to
execute new agreements that provide for reciprocal compensation for such
traffic. This is the case for our interconnection agreement with BellSouth,
which expired in February, 1999. Upon termination of our interconnection
agreements, if we cannot agree on reciprocal compensation with the incumbent
local exchange carrier, the matter will be referred for arbitration to the state
public utility commissions. If new interconnection agreements do not provide for
reciprocal compensation, this could have a material adverse effect on our
business, financial condition and results of operations.
There Are Significant Risks in Our Expansion Strategy and a Failure to
Manage Our Growth Effectively Could Adversely Affect Our Operations
We must achieve substantial growth in order to meet our payment obligations
under our indebtedness. Our networks have only recently become commercially
operational and we have only recently deployed switches in our networks. Our
success will depend, among other things, upon our ability to:
o assess potential markets,
o design and build fiber optic backbone routes that provide ready access
to a substantial customer base,
o achieve a sufficient customer base,
o install facilities,
o obtain required rights-of-way, building access and governmental
permits,
o implement interconnection and collocation with the incumbent local
exchange carriers,
o obtain unbundled network elements from incumbent local exchange
carriers, and
o secure financing.
In addition, we may make additional acquisitions of existing businesses.
Acquisitions could divert our resources and management time and would require
integration with our management information, payroll and other systems, and with
our existing networks and service offerings.
We cannot assure you that any expansions of our networks will be completed
on schedule, at a reasonable cost or within our specifications.
Our growth may place a significant strain on our financial, management and
operational resources. Our future performance will depend, in part, upon our
ability to:
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o manage our growth effectively,
o monitor operations,
o control costs, and
o maintain effective quality control.
This will require us to continue to implement and improve our operating,
financial and accounting systems, to expand, train and manage our employee base
and to effectively manage the integration of acquired businesses.
If we fail to expand in accordance with our plans or to manage our growth,
there would be a material adverse effect on our 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 our operating results.
There Are Significant Risks Involved in Implementation of Our Business Plan
We are a recent entrant into the competitive local telecommunications
services industry. The local telecommunications services market was virtually
closed to competition until the Telecommunications Act of 1996 and related
regulatory rulings eliminated many barriers to entry. There are numerous
operating complexities associated with providing these services. We will be
required to develop new products, services and systems and will need to develop
new marketing initiatives to sell these services. We have limited experience
providing switched access and local dial tone services and we cannot assure you
that we will be able to successfully implement our switched and data services
strategy.
We are deploying high capacity digital switches in our markets. This will
enable us to offer local dial tone and a variety of switched access services and
data services. We expect to incur negative gross profits and negative adjusted
EBITDA from our switched services in any given market during the 24 to 36 month
period after the switch is deployed. We expect operating margins to improve as
each network is expanded and larger volumes of traffic are carried on our
network. Implementation of our switched and data services is also subject to the
ability of our equipment manufacturers to meet our switch deployment schedule.
We cannot assure you that all of our switches will be deployed on the schedule
that we presently contemplate or that, if deployed, our switches will be
utilized to the degree that we presently expect.
Our services may not be profitable due to, among other factors:
o lack of customer demand,
o inability to secure access to incumbent local exchange carrier
facilities at acceptable rates,
o competition and pricing pressure from other competitive local exchange
carriers and the incumbent local exchange carriers, and
o cost overruns in connection with network build-outs.
The franchises that we obtain may require us to complete the build-out of
our network within a period specified in the franchise grant. If we are unable
to complete the build-out of a network within the specified period, and unable
to obtain an extension of time in which to complete the build-out, our franchise
agreement may be terminable by the local authority.
We Must Improve Our Customer Service Systems
Sophisticated information and processing systems are vital to our growth
and our ability to monitor costs, bill customers, provision customer orders and
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achieve operating efficiencies. Until recently our billing and information
systems were produced largely in-house with partial reliance on third-party
vendors and these systems have generally met our needs due in part to our low
volume of bills and orders. As we expand our services and our customer base, the
need for sophisticated billing and information systems has increased
significantly. We have recently embarked upon a program to implement a full
suite of order management, customer service, billing and financial applications.
These applications include electronic order tracking software developed by Eftia
OSS Solutions Inc., software providing comprehensive billing functions developed
by Billing Concepts Systems, Inc., and financial software developed by People
Soft, Inc. Initial installation of the new operational support systems commenced
during the third quarter of 1999, with development and expansion to continue
over the next 12 months. The initial installation of the new billing and
financial systems was completed during the second quarter of 1999. Additional
development of the billing and financial systems will take place over the next 9
months. Our failure to:
o implement the new operational support systems on a timely basis,
o adequately identify all of our information and processing needs, or
o upgrade our systems as necessary,
could have a material adverse effect on our business, financial condition and
results of operations.
We Will Be Reliant on Incumbent Local Exchange Carriers for Interconnection
and Provisioning
In each of our markets, we rely on incumbent local exchange carriers to
originate and terminate all of our switched services traffic until our own
switch becomes operational. Although the incumbent local exchange carriers are
legally required to "unbundle" their services and permit us to purchase only the
origination and termination services we need, thereby decreasing operating
expenses, we cannot assure you that such unbundling will be timely or result in
favorable prices. The Supreme Court overturned the Federal Communications
Commission's rules regarding what network elements must be unbundled by the
incumbent local exchange carriers, and remanded to the Federal Communications
Commission the question of which network elements are "necessary" to competing
carriers such as the Company. On November 5, 1999, the Federal Communications
Commission issued an order and proposed rulemaking establishing the network
elements that must be offered by incumbent local exchange carriers as unbundled
network elements. The Supreme Court's decision also creates some uncertainty
regarding the legal status of complaints filed at the Federal Communications
Commission to enforce interconnection agreements.
Carrying customer traffic on our own network generates substantially higher
margins than reselling (i.e. paying an incumbent local exchange carrier to carry
the traffic over its network). We are in the process of bringing our customers
on-net, so that their traffic will generate better margins. During 1999 we
significantly expanded our internal department that deals with bringing
customers on-net. During the next 12 months we expect to begin transmitting our
orders to the incumbent local exchange carriers electronically. However, we are
dependent on the incumbent local exchange carriers to carry out the conversion
process. During 1998 and 1999, 63% and 31%, respectively, of our revenue was
from reselling.
We cannot bring a customer on-net unless the incumbent local exchange
carrier sends a technician to physically alter its network. Historically, the
incumbent local exchange carriers have not stationed a large number of
technicians in Tier III markets. We believe that incumbent local exchange
carriers are increasing their technical staffs in Tier III markets, but they are
still not able to process our orders promptly.
In addition, the incumbent local exchange carriers have a financial
incentive to delay this process. Accordingly, we expect to face substantial
delays in bringing our resale customers on-net, which will delay our ability to
improve our financial results as much as we would like.
The foregoing factors could result in a material adverse effect on our
business, financial condition and results of operations.
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There Are Significant Risks of Entry into the Long Distance Business
In order to offer our end-user customers a complete package of
telecommunications services, we recently began to offer long distance services.
As a new entrant in the long distance business, we expect to generate low gross
margins and substantial start-up expenses as we roll out our long distance
service offerings.
Long distance telecommunications services involve the origination of
traffic from end-user customers to our telecommunications switches. From these,
we will rely on other carriers to provide transmission and termination services
for our long distance traffic and will therefore be dependent on such carriers.
We enter into resale agreements with long distance carriers to provide us with
long distance transmission services. These 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 our future long distance customers. Should we fail to meet our minimum
volume commitments, if any, pursuant to these resale agreements, we may be
obligated to pay underutilization charges or we may lose the benefit of all or a
portion of the volume discounts we have negotiated. Likewise, we may
underestimate our need for long distance facilities and therefore be required to
obtain the necessary transmission capacity in "spot markets" which are often
more expensive than longer term contracts. We cannot assure you that we will
acquire long distance capacity on favorable terms or that we can accurately
predict long distance prices and volumes so that we can generate favorable gross
margins from our long distance business. Our success in entering into the long
distance business will be dependent upon, among other things:
o our ability to select new equipment and software and integrate these
into our networks,
o our ability to hire and train qualified personnel,
o our ability to enhance our billing, back-office and information
systems to accommodate long distance services, and
o the acceptance by potential customers of our long distance service
offerings.
If our long distance transmission business fails to generate favorable
gross margins, or if we fail in any of the foregoing respects, such failure may
have a material adverse effect on our business, financial condition and results
of operations.
There Are Significant Risks of Entry into the Data Transmission Business
To complement our telecommunications services offerings, we began offering
data transmission services in certain of our markets in 1997. We now offer ISDN,
Internet access infrastructure, Local Area Network-to-Local Area Network
interconnect and Wide-Area Network services and we are developing product
applications for DSL, port wholesale, frame relay and ATM services to complement
our existing data services. These services are primarily targeted at large and
medium sized businesses with substantial data communications requirements. In
providing these services, we will be dependent upon vendors for equipment, as
well as ongoing training and support and other matters. The success of our entry
into the data transmission business will be dependent upon, among other things:
o our ability to select new equipment and software and integrate these
into our networks,
o our ability to hire and train qualified personnel,
o our ability to enhance our billing, back-office and information
systems to accommodate data transmission services, and
o the acceptance by potential customers of our service offerings.
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We cannot assure you that we will be successful with respect to these
matters. If we are not successful with respect to these matters, there may be a
material adverse effect on our business, financial condition and results of
operations.
We Are Subject to Significant Government Regulation Which May Change in an
Adverse Manner
Our 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 competitive local exchange
carrier industry in particular, are undergoing substantial regulatory change and
uncertainty. We cannot assure you that future regulatory, judicial or
legislative changes, or other regulatory activities will not have a material
adverse effect on our business, financial condition and results of operations.
The Terms of Our Indebtedness May Restrict Our Corporate Activities
The documents under which our long-term debt was issued contain a number of
significant covenants. These covenants limit, among other things, our ability
to:
o borrow additional money,
o create liens,
o engage in sale-leaseback transactions,
o pay dividends,
o make investments,
o sell assets,
o issue capital stock,
o redeem capital stock,
o merge or consolidate, and
o enter into transactions with our stockholders and affiliates.
However, the limitations contained in the documents under which our
long-term debt was issued are subject to a number of important qualifications
and exceptions. In particular, while the indenture applicable to our 12 1/2%
Senior Discount Notes and the indenture applicable to the 13 1/2% Senior Notes
restrict our ability to incur additional indebtedness, they do permit us to
incur an unlimited amount of purchase money indebtedness. If we incur new
indebtedness, the related risks that we and our subsidiaries now face could
intensify. Any of the foregoing factors could have a material adverse effect on
our business, financial condition and results of operations.
We Are Dependent on Third Parties for Our Rights-of-Way and Franchises
We 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 our networks, some
of which may be terminated upon 30 or 60 days' notice to us. We cannot assure
you that we 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
us. If any of our existing franchise or license agreements were terminated or
not renewed and we were forced to remove our fiber optic cables or abandon our
networks in place, such termination could have a material adverse effect on our
business, financial condition and results of operations.
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The Telecommunications Industry is Subject to Rapid Technological Change
The telecommunications industry is subject to rapid and significant changes
in technology, and we must rely on third parties for the development of and
access to new technology. We cannot predict the effect of technological changes
on our business. We believe our future success will depend, in part, on our
ability to anticipate or adapt to such changes and to offer, on a timely basis,
services that meet customer demands. We may not 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 our
business, financial condition and results of operations.
The Future Success of Our Business Depends Upon Certain Key Personnel
We believe that the efforts of a small number of key management and
operating personnel will largely determine our success and the loss of any such
persons could adversely affect us. We do not maintain so-called "key man"
insurance on any of our personnel. We have employment agreements with Mr.
Kamine, the Chairman of our Board of Directors, and Mr. Young, our President and
Chief Operating Officer, which currently run through December 31, 2002. Our
success will also depend in part upon our 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, we may not be able to hire or retain necessary
personnel. Our failure to hire or retain necessary personnel could have a
material adverse effect on our business, financial condition and results of
operations.
36
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risks relating to our operations result primarily from changes in
interest rates. The substantial majority of our long-term debt bears interest at
a fixed rate. However, the fair market value of the fixed rate debt is sensitive
to changes in interest rates. We are subject to the risk that market interest
rates will decline and the interest expense due under the fixed rate debt will
exceed the amounts due based on current market rates. We have entered into an
interest rate swap agreement with a commercial bank to reduce the impact of
changes in interest rates on a portion of our outstanding variable rate debt.
The agreement effectively fixes the interest rate on $125.0 million of our
outstanding variable rate borrowings under the Amended Senior Secured Credit
Facility due 2007. The interest rate swap agreement terminates in April 2004.
The following table provides information about our significant
financial instruments that are sensitive to changes in interest rates (in
millions):
<TABLE>
<CAPTION>
Fair Value on Future Principal Payments
December 31,
1999 2000 2001 2002 2003 2004 Thereafter Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt:
Fixed Rate:
Senior Discount Notes,
Interest payable at 12 1/2%,
Maturing 2008.................... $ 275.7 $ - $ - $ - $ - $ - $ 301.1 $ 301.1
Senior Notes,
Interest payable at 13 1/2 %,
Maturing 2009.................... 263.5 - - - - - 275.0 275.0
Variable rate:
Amended Senior Secured Credit
Facility,
interest variable (10.26% at
December 31, 1999)(a)............ 235.0 - - .5 22.5 35.6 176.4 235.0
---------------------------------------------------------------------
Interest rate swap:
Variable rate for fixed rate........ (3.9) $ - - - - - - -
---------------------------------------------------------------------
Total............................ $ 770.3 $ - $ - $ .5 $22.5 $35.6 $ 752.5 $ 811.1
=====================================================================
</TABLE>
- - -----------------------------------------------
(a) Pay interest rate is based on a variable rate, which at our option, is
determined by either a base rate or LIBOR, plus, in each case, a specified
margin.
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following statements are filed as part of this Annual Report on Form
10-K:
<TABLE>
<CAPTION>
FORM 10-K
PAGE NO.
------------
<S> <C>
Report of Independent Auditors................................................. 39
Consolidated Balance Sheets as of December 31, 1998 and 1999................... 40
Consolidated Statements of Operations for the years ended December 31, 1997,
1998 and 1999............................................................... 41
Consolidated Statements of Redeemable and Nonredeemable Equity for the years
ended December 31, 1997, 1998 and 1999...................................... 42
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999......................................................... 44
Notes to Consolidated Financial Statements..................................... 45
Independent Auditors' Report on Schedules...................................... 72
Schedule I - Condensed Financial Information of Registrant..................... 73
Schedule II - Valuation and Qualifying Accounts................................ 82
</TABLE>
38
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
KMC Telecom Holdings, Inc.
We have audited the consolidated balance sheets of KMC Telecom Holdings, Inc. as
of December 31, 1998 and 1999, and the related consolidated statements of
operations, redeemable and nonredeemable equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of KMC
Telecom Holdings, Inc. as of December 31, 1998 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey
January 31, 2000, except for Note 18
as to which the date is March 28, 2000
39
<PAGE>
<TABLE>
<CAPTION>
KMC TELECOM HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31
------------------------------
1998 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 21,181 $ 85,966
Restricted investments................................................. -- 37,125
Accounts receivable, net of allowance for doubtful accounts of $350
and $5,551 in 1998 and 1999, respectively........................... 7,539 27,373
Prepaid expenses and other current assets.............................. 1,315 1,375
------------- -------------
Total current assets...................................................... 30,035 151,839
Investments held for future capital expenditures.......................... 27,920 --
Long-term restricted investments.......................................... -- 51,446
Networks and equipment, net............................................... 224,890 639,324
Intangible assets, net.................................................... 2,829 3,602
Deferred financing costs, net............................................. 20,903 38,816
Other assets.............................................................. 4,733 1,013
------------- -------------
$ 311,310 $ 886,040
============= =============
LIABILITIES, REDEEMABLE AND NONREDEEMABLE EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable....................................................... $ 21,052 $ 167,490
Accrued expenses....................................................... 9,187 37,047
Deferred revenue....................................................... 1,187 4,309
------------- -------------
Total current liabilities................................................. 31,426 208,846
Notes payable............................................................. 41,414 235,000
Senior notes payable...................................................... -- 275,000
Senior discount notes payable............................................. 267,811 301,137
------------- -------------
Total liabilities......................................................... 340,651 1,019,983
Commitments and contingencies
Redeemable equity:
Senior redeemable, exchangeable, PIK preferred stock, par value
$.01 per share; authorized: -0- shares in 1998 and 630 shares
in 1999; shares issued and outstanding:
Series E, -0- in 1998 and 65 shares in 1999 ($65,004 liquidation
preference)..................................................... -- 50,770
Series F, -0- in 1998 and 44 shares in 1999 ($44,177 liquidation
preference)..................................................... -- 41,370
Redeemable cumulative convertible preferred stock, par value $.01
per share; 499 shares authorized; shares issued and outstanding:
Series A, 124 shares in 1998 and 1999 ($12,380 liquidation
preference)..................................................... 30,390 71,349
Series C, 175 shares in 1998 and 1999 ($17,500 liquidation
preference)..................................................... 21,643 40,301
Redeemable common stock, shares issued and outstanding, 224 in 1998
and 1999............................................................ 22,305 33,755
Redeemable common stock warrants....................................... 674 12,925
------------- -------------
Total redeemable equity................................................... 75,012 250,470
Nonredeemable equity (deficiency)
Common stock, par value $.01 per share; 3,000 shares authorized,
issued and outstanding, 614 shares in 1998 and 629 shares in 1999.... 6 6
Additional paid-in capital.............................................. 13,750 --
Unearned compensation................................................... (5,824) (9,163)
Accumulated deficit..................................................... (112,285) (375,256)
------------- -------------
Total nonredeemable equity (deficiency)................................... (104,353) (384,413)
------------- -------------
$ 311,310 $ 886,040
============= =============
See accompanying notes.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
KMC TELECOM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenue....................................................... $ 3,417 $ 22,425 $ 64,313
Operating expenses:
Network operating costs.................................... 7,735 37,336 110,309
Selling, general and administrative........................ 9,923 24,534 55,803
Stock option compensation expense.......................... 13,870 7,080 29,833
Depreciation and amortization.............................. 2,506 9,257 29,077
------------ ------------ ------------
Total operating expenses...................................... 34,034 78,207 225,022
------------ ------------ ------------
Loss from operations.......................................... (30,617) (55,782) (160,709)
Other expense................................................. -- -- (4,297)
Interest income............................................... 513 8,818 8,701
Interest expense.............................................. (2,582) (29,789) (69,411)
------------ ------------ ------------
Net loss...................................................... (32,686) (76,753) (225,716)
------------ ------------ ------------
Dividends and accretion on redeemable preferred stock......... (8,904) (18,285) (81,633)
------------ ------------ ------------
Net loss applicable to common shareholders.................... $ (41,590) $ (95,038) $ (307,349)
============ ============ ============
Net loss per common share..................................... $ (64.93) $ (114.42) $ (360.88)
============ ============ ============
Weighted average number of common shares outstanding.......... 641 831 852
============ ============ ============
See accompanying notes.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
KMC TELECOM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE AND NONREDEEMABLE EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
Redeemable Equity
---------------------------------------------------------------------------------------
PREFERRED STOCK
----------------------------------------------------------------------------
SERIES A SERIES C SERIES D SERIES E SERIES F COM-
---------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 - $ - - $ - - $ - - $ - - $ - -
Conversion of convertible notes
payable of Series A Preferred Stock 124 11,519
Issuance of warrants
Issuance of common stock and exercise
of warrants 133
Issuance of Series C Preferred Stock 150 14,199
Issuance of Series D Preferred Stock 25 2,299
Accretion on redeemable equity 7,360 468 80
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 124 18,879 150 14,667 25 2,379 - - - - -
Conversion of Series D Preferred Stock 25 2,379 (25) (3,379)
to Series C Preferred Stock
Issuance of common stock 91
Accretion on redeemable equity 11,511 4,597
Payment of dividends on preferred stock
of subsidiary
Issuance of warrants
Cancellation of KMC Telecom stock
options
Issuance and adjustment to fair value of
stock options to employees
Issuance and adustment to fair value of
stock options to non-employees
Amortization of unearned compensation
Net loss
=========================================================================================
Balance, December 31, 1998 124 30,390 175 21,643 - - - - - - 224
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Redeemable Equity (cont'd) Nonredeemable Equity (Deficiency)
----------------------------- ------------------------------------------------------------
TOTAL
TOTAL ADDITIONAL NONREDEEMABLE
MON STOCK REDEEMABLE COMMON STOCK PAID-IN UNEARNED ACCUMULATED EQUITY
----------------- --------------
AMOUNT WARRANTS EQUITY SHARES AMOUNT CAPITAL COMPENSATION DEFICIT (DEFICIENCY)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ - $ - $ - 600 $6 $ 4,468 $ (1,239) $ (2,846) $ 389
Conversion of convertible notes
payable of Series A Preferred Stock 11,519 -
Issuance of warrants 2,025 2,025 -
Issuance of common stock and exercise
of warrants 10,863 (1,500) 9,363 14 -
Issuance of Series C Preferred Stock 14,199 -
Issuance of Series D Preferred Stock 2,299
Accretion on redeemable equity 324 14 8,246 (8,246) 8,246
Issuance and adjustment to fair value of
stock options to employees 14,296 (14,296) -
Amortization of unearned compensation 9,014 9,014
Increase in fair value of stock options
issued to non-employees 4,856 4,856
Net loss
(32,686) (32,686)
=========================================================================================
Balance, December 31, 1997 11,187 539 47,651 614 6 15,374 (6,521) (35,532) (26,673)
Conversion of Series D Preferred Stock
to Series C Preferred Stock - -
Issuance of common stock 9,500 9,500 -
Accretion on redeemable equity 1,618 135 17,861 (17,861) (17,861)
Payment of dividends on preferred stock
of subsidiary (592) (592)
Issuance of warrants 10,446 10,446
Cancellation of KMC Telecom stock
options (26,191) 4,845 (21,346)
Issuance and adjustment to fair value of
stock options to employees 27,906 27,906 -
Issuance and adustment to fair value of
stock options to non-employees 4,668 4,668
Amortization of unearned compensation 23,758 23,758
Net loss (76,753) (76,753)
===========================================================================================
Balance, December 31, 1998 22,305 674 75,012 614 6 13,750 (5,824) (112,285) (104,353)
See accompanying notes.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
KMC TELECOM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE AND NONREDEEMABLE EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
Redeemable Equity
---------------------------------------------------------------------------------------
PREFERRED STOCK
----------------------------------------------------------------------------
SERIES A SERIES C SERIES D SERIES E SERIES F COM-
---------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998
(carried forward) 124 $30,390 175 $21,643 - $ - - $ - - $ 224
Issuance of Series E Preferred Stock 60 44,829
Issuance of Series F Preferred Stock 40 34,817
Stock dividend of Series E Preferred
Stock 5 5,004
Stock dividend of Series F Preferred
Stock 4 4,177
Issuance of warrants
Reclassification of warrants
related to "put rights"
Exercise of warrants
Accretion on redeemable equity 40,959 18,658 937 2,376
Issuance and adjustment to fair
value of stock option to employees
Adjustment to fair value of
stock options to non-employees
Amortization of
unearned compensation
Exercise of stock
options
Reclassification of
additional paid-in
capital deficiency
Net loss
=========================================================================================
Balance, December 31, 1999 124 $71,349 175 $40,301 - $ - 65 $50,770 44 $41,370 224
=========================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Redeemable Equity (cont'd) Nonredeemable Equity (Deficiency)
---------------------------- ------------------------------------------------------------
TOTAL
TOTAL ADDITIONAL NONREDEEMABLE
MON STOCK REDEEMABLE COMMON STOCK PAID-IN UNEARNED ACCUMULATED EQUITY
----------------- --------------
AMOUNT WARRANTS EQUITY SHARES AMOUNT CAPITAL COMPENSATION DEFICIT (DEFICIENCY)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998
(carried forward) $22,305 $ 674 $75,012 614 $6 $13,750 $(5,824) $(112,285) $(104,353)
Issuance of Series E Preferred Stock 44,829 -
Issuance of Series F Preferred Stock 34,817 -
Stock dividend of Series E Preferred
Stock 5,004 (5,004) (5,004)
Stock dividend of Series F Preferred
Stock 4,177 (4,177) (4,177)
Issuance of warrants 10,606 10,606 749 749
Reclassification of warrants
related to "put rights" (249) (249) 249 249
Exercise of warrants 1 1
Accretion on redeemable equity 11,450 1,894 76,274 (76,274) (76,274)
Issuance and adjustment to fair
value of stock option to employees 27,286 (27,286) -
Adjustment to fair value of
stock options to non-employees 5,832 5,832
Amortization of
unearned compensation 23,947 23,947
Exercise of stock
options 15 333 333
Reclassification of
additional paid-in
capital deficiency 37,255 (37,255) -
Net loss (225,716) (225,716)
=================================================================================================
Balance, December 31, 1999 $33,755 $12,925 $250,470 629 $6 $ - $(9,163) $(375,256) $(384,413)
=================================================================================================
See accompanying notes.
</TABLE>
43
<PAGE>
KMC TELECOM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998 1999
------- -------- ------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................................................... $ (32,686) $ (76,753) $(225,716)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.............................. 2,506 9,257 29,077
Provision for doubtful accounts............................ 34 370 5,263
Non-cash interest expense.................................. 610 25,356 31,141
Non-cash stock option compensation expense................. 13,870 7,080 29,833
Changes in assets and liabilities:
Accounts receivable...................................... (1,330) (6,591) (25,097)
Prepaid expenses and other current assets................ (346) (826) (60)
Accounts payable......................................... 2,934 7,449 29,319
Accrued expenses......................................... 6,062 2,953 24,227
Due to affiliates........................................ (35) (47) -
Other assets............................................. (295) (1,821) 3,720
------- -------- --------
Net cash used in operating activities......................... (8,676) (33,573) (98,293)
------- -------- --------
INVESTING ACTIVITIES
Construction of networks and purchases of equipment........... (59,146) (148,580) (318,536)
Acquisitions of franchises, authorizations and related assets. (1,846) (1,147) (1,992)
Cash paid for acquisition of Melbourne Network................ (2,000) - -
Deposit on purchase of equipment.............................. - (2,551) -
Purchase of investments, net.................................. - (27,920) -
Redemption of investments..................................... - - 43,450
-------- --------- ---------
Net cash used in investing activities......................... (62,992) (180,198) (277,078)
-------- --------- ---------
FINANCING ACTIVITIES
Proceeds from notes payable, net of issuance costs............ 59,873 938 -
Proceeds from issuance of common stock and warrants,
net of issuance costs....................................... 9,363 20,446 -
Proceeds from issuance of preferred stock and related
warrants, net of issuance costs............................. 16,498 - 91,001
Issuance costs of credit facilities........................... - (6,515) (2,300)
Proceeds from exercise of stock options....................... - - 333
Proceeds from issuance of senior notes, net of issuance costs
and purchase of portfolio of restricted investments........ - - 158,286
Proceeds from senior secured credit facility, net of issuance
costs...................................................... - - 192,836
Repayment of notes payable.................................... - (20,801) -
Proceeds from issuance of senior discount notes, net of
issuance costs............................................. - 225,923 -
Dividends on preferred stock of subsidiary.................... - (592) -
-------- --------- ---------
Net cash provided by financing activities..................... 85,734 219,399 440,156
-------- --------- ---------
Net increase in cash and cash equivalents..................... 14,066 5,628 64,785
Cash and cash equivalents, beginning of year.................. 1,487 15,553 21,181
----------- ----------- -----------
Cash and cash equivalents, end of year........................ $ 15,553 $ 21,181 $ 85,966
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest, net of amounts
capitalized................................................... $ 766 $ 4,438 $ 29,182
=========== =========== ===========
</TABLE>
See accompanying notes.
44
<PAGE>
KMC TELECOM HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. ORGANIZATION
KMC Telecom Holdings, Inc. ("KMC Holdings") is a holding company formed during
1997 primarily to own all of the shares of its operating subsidiaries, KMC
Telecom Inc. ("KMC Telecom"), KMC Telecom II, Inc. ("KMC Telecom II"), KMC
Telecom III, Inc. ("KMC Telecom III") 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. The merger was accounted for as an exchange of
shares between entities under common control, and no changes were made to the
historical cost basis of KMC Telecom's net assets.
KMC Telecom Holdings, Inc. and its subsidiaries, KMC Telecom, Inc., KMC Telecom
II, Inc., KMC Telecom III, Inc., KMC Telecom IV, Inc., KMC Telecom of Virginia,
Inc., KMC Telecom Financial Services LLC, KMC Telecom.com, and KMC Telecom
Financing, Inc. are collectively referred to herein as the Company.
The Company is a facilities-based competitive local exchange carrier ("CLEC")
providing telecommunications and data services to its customers; principally
business, government and institutional end users, as well as Internet service
providers, long distance companies and wireless service providers, primarily in
the Southeastern and Midwestern United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
As noted above, 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. All significant intercompany
transactions and balances have been eliminated.
On July 1, 1999, the Company acquired all of the membership interests of KMC
Services LLC from Harold N. Kamine, the Chairman of the Board of Directors, for
nominal consideration. KMC Services LLC was formed to provide services to the
Company and its customers, initially offering a leasing program for equipment
physically installed at the customer's premises. The acquisition was accounted
for as a combination of entities under common control, and no changes were made
to the historical cost basis of KMC Services LLC's assets. During the second
quarter of 1999, the Company had reduced the carrying value of its $709,000 loan
receivable from KMC Services LLC to an amount equal to the value of KMC Services
LLC's net assets at the acquisition date. KMC Services LLC has been consolidated
with the Company since July 1, 1999.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
Investments Held for Future Capital Expenditures
In 1998, the Company has designated certain amounts as investments held for
future capital expenditures. As of December 31, 1998, the Company's investments
held for future capital expenditures consisted of cash equivalents (bank term
deposits and commercial paper with maturities of less than 90 days) of $11.2
million and debt securities (U.S. government obligations and commercial bonds
due within 1 year) of $16.7 million. All debt securities have been designated by
the Company as held-to-maturity. Accordingly, such securities are recorded in
the accompanying December 31, 1998 financial statements at amortized cost.
45
<PAGE>
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.
The estimated useful lives of the Company's principal classes of assets are as
follows:
Networks:
Fiber optic systems...............................................20 years
Telecommunications equipment......................................10 years
Furniture and other................................................5 years
Leasehold improvements.......................................Life of lease
Intangible Assets
Costs incurred in developing new networks or expanding existing networks,
including negotiation of rights-of-way and obtaining regulatory authorizations
are capitalized and amortized over the initial term of the agreements, which
generally range from 2 to 7 years. Costs incurred to obtain city franchises are
capitalized by the Company and amortized over the initial term of the
franchises, which generally range from 2 to 7 years.
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. The
related amortization is included as a component of interest expense, and
amounted to $561,000, $2,279,000 and $3,814,000 for the years ended December 31,
1997, 1998 and 1999, respectively.
Other Assets
Other assets are comprised principally of employee loans, security deposits and
other deposits and, at December 31, 1998, non-refundable deposits for the
purchase of switching equipment.
Revenue Recognition
Revenue is recognized in the period the service is provided. The Company
generally invoices customers one month in advance for recurring services
resulting in deferred revenue. Unbilled revenue included in accounts receivable
represents revenue earned for services which will be billed in the succeeding
month and totaled $1,272,000 and $5,305,000 at December 31, 1998 and 1999,
respectively.
Net Loss Per Common Share
Earnings per share are calculated in accordance with FASB Statement No. 128,
Earnings per Share ("Statement 128"). All earnings per share amounts for all
periods have been presented in accordance with the provisions of Statement 128.
Diluted earnings per share have not been presented for any period, as the impact
of including outstanding options and warrants would be anti-dilutive.
Income Taxes
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.
Advertising Costs
Advertising costs are included in selling, general and administrative expenses
and charged to expense as incurred. For the years ended December 31, 1997, 1998
and 1999, such costs were $66,000, $2,769,000 and $4,080,000, respectively.
46
<PAGE>
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.
Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations or
expected to be disposed of when impairment indicators are present and the cash
flows expected to be derived from those assets are less than the carrying
amounts of those assets. An impairment loss is measured as the amount by which
the carrying amount of the asset exceeds the fair value of the asset.
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-based compensation. 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, the Company's
outstanding stock options are not considered fixed options under APB 25. The
Company accounts for non-employee stock-based compensation in accordance with
Statement 123.
Segment Reporting
In 1998, the Company adopted FASB Statement No. 131, Disclosures About Segments
of an Enterprise and Related Information ("Statement 131"). Statement 131 uses a
management approach to report financial and descriptive information about an
entity's operating segments. Operating segments are revenue-producing components
of an enterprise for which separate financial information is produced internally
for the entity's chief operating decision maker. Under this definition, the
Company operated within a single segment for all periods presented.
Start-up Activities
In 1999, the Company adopted Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities, which requires costs of start-up activities to be
expensed as incurred. This statement had no effect on the Company's results of
operations or financial position, because the Company expensed such costs in
prior years.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
("Statement 133"), Accounting for Derivative Instruments and Hedging Activities,
which will require the Company to recognize all derivatives on the balance sheet
at fair value. The Company will be required to adopt Statement 133, as amended
by Statement No. 137 which defers the effective date, as of January 1, 2001.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company has not yet determined what the
effect of Statement 133 will be on the earnings and financial position of the
Company.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB
101 provides additional guidance in applying generally accepted accounting
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<PAGE>
principles to revenue recognition in financial statements. In 1999 and previous
years, the Company recognized installation revenue upon completion of the
installation. Effective January 1, 2000, in accordance with the provisions of
SAB 101, the Company will begin deferring installation revenue over the life of
the contract. The Company estimates the effect of this change will be a
reduction of revenue of approximately $2.2 million and will be reported as a
cumulative effect of a change in accounting principle in the Company's interim
unaudited consolidated financial statements for the period ended March 31, 2000.
Reclassifications
Certain reclassifications have been made to the 1997 and 1998 consolidated
financial statements to conform with the 1999 presentation.
3. NETWORKS AND EQUIPMENT
Networks and equipment are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1999
--------------------------------
(in thousands)
<S> <C> <C>
Fiber optic systems........................................... $ 99,502 $ 164,985
Telecommunications equipment.................................. 115,769 421,718
Furniture and fixtures........................................ 7,340 21,397
Leasehold improvements........................................ 1,177 1,811
Construction-in-progress...................................... 11,770 66,380
--------------------------------
235,558 676,291
Less accumulated depreciation................................. (10,668) (36,967)
================================
$ 224,890 $ 639,324
================================
</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, 1997, 1998 and 1999 amounted to,
$854,000, $5,133,000 and $6,635,000, respectively.
For the years ended December 31, 1997, 1998 and 1999, depreciation expense was
$2,122,000, $8,284,000 and $27,723,000, respectively.
4. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1999
------------------------------
(in thousands)
<S> <C> <C>
Franchise costs................................ $ 1,690 $ 2,015
Authorizations and rights-of-ways.............. 1,455 2,052
Building access agreements and other........... 480 637
Other.......................................... 582 401
------------------------------
4,207 5,105
Less accumulated amortization.................. (1,378) (1,503)
------------------------------
$ 2,829 $ 3,602
==============================
</TABLE>
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5. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
DECEMBER 31
1998 1999
-------------------------------
(in thousands)
Accrued compensation............................ $4,436 $11,423
Accrued costs related to financing activities... 380 7,316
Accrued interest payable........................ 162 8,544
Accrued telecommunications costs................ 565 3,794
Other accrued expenses.......................... 3,644 5,970
===============================
$9,187 $37,047
===============================
6. LONG-TERM DEBT
Senior Secured Credit Facility
On December 22, 1998, KMC Telecom, KMC Telecom II and KMC Telecom of Virginia
(the "Subsidiary Borrowers"), refinanced and expanded the Amended and Restated
Loan and Security Agreement (the "AT&T Facility") by entering into a Loan and
Security Agreement (the "Senior Secured Credit Facility") with Newcourt
Commercial Finance Corp. ("Newcourt"), First Union National Bank, General
Electric Capital Corporation ("GECC") and Canadian Imperial Bank of Commerce
(the "Creditors"). Under the Senior Secured Credit Facility, the Creditors
agreed to lend the Subsidiary Borrowers up to an aggregate of $250 million
initially to be used for the construction and expansion of fiber optic
telecommunications networks in certain markets and for payment of transaction
fees and expenses and, subject to the attainment of certain financial
conditions, for working capital and general corporate purposes.
The Senior Secured Credit Facility includes a $175 million eight year revolving
loan and a $75 million eight and one half year term loan. At December 31, 1998
and 1999, an aggregate of $41.4 and $235.0 million, respectively, was
outstanding under this facility.
As discussed further in Note 18, the Subsidiary Borrowers and KMC Telecom III
amended, restated and combined the Senior Secured Credit Facility and the Lucent
Loan and Security Agreement during the first quarter of 2000.
Borrowings under the Senior Secured Credit Facility bear interest payable at the
Subsidiary Borrowers' option, at (a) the "Applicable Base Rate Margin" (which
generally ranges from 1.75% to 3.25%) plus the greater of (i) the administrative
agent's prime rate or (ii) the overnight federal funds rate plus .5% or (b) the
"Applicable LIBOR Margin" (which generally ranges from 2.75% to 4.25%) plus
LIBOR, as defined. Interest on borrowings outstanding at December 31, 1999 was
based on both the base rate and LIBOR. The Subsidiary Borrowers were being
charged a weighted-average interest rate of 9.38% and 10.26% at December 31,
1998 and 1999, respectively. The Subsidiary Borrowers must pay an annual
commitment fee on the unused portion of the Senior Secured Credit Facility
ranging from .75% to 1.25%.
The Senior Secured Credit Facility contains a number of affirmative and negative
covenants including, among others, covenants restricting the ability of the
Subsidiary 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 KMC Holdings, create
subsidiaries, transfer any permits or licenses, or incur additional indebtedness
or act as guarantor for the debt of any person, subject to certain conditions.
The Subsidiary Borrowers are required to comply with certain financial tests and
maintain certain financial ratios, including, among others, a ratio of total
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debt to contributed capital, certain minimum revenues, maximum EBITDA losses and
minimum EBITDA, maximum capital expenditures and minimum access lines, a maximum
total leverage ratio, a minimum debt service coverage ratio, a minimum fixed
charge coverage ratio and a maximum consolidated leverage ratio.
The Company obtained a waiver of compliance, for the quarter ended September 30,
1999, with certain financial covenants (related to revenue and EBITDA) contained
in the Senior Secured Credit Facility. In addition, the EBITDA covenant was
amended for the fourth quarter of 1999 through the fourth quarter of 2000 and
the revenue covenant was amended for the fourth quarter of 1999 through the
first quarter of 2001 to less restrictive amounts. As of December 31, 1999, the
Subsidiary Borrowers were in compliance with the covenants, as amended.
Lucent Loan and Security Agreement
KMC Telecom III entered into a Loan and Security Agreement (the "Lucent
Facility") dated February 4, 1999 with Lucent Technologies Inc. ("Lucent") which
provides for borrowings to be used to fund the acquisition of certain
telecommunications equipment and related expenses. The Lucent Facility provides
for an aggregate commitment of up to $600 million, of which $250 million is
available at December 31, 1999 to purchase Lucent products. Further, up to an
additional $350 million will be available upon (a) additional lenders
participating in the Lucent Facility and making commitments to make loans so
that Lucent's aggregate commitment does not exceed $250 million and (b) the
Company satisfying certain other requirements, the most significant of which is
KMC Holdings raising and contributing at least $300 million in high yield debt
or equity (other than disqualified stock) to KMC Telecom III. The Lucent
Facility places certain restrictions upon KMC Telecom III's ability to purchase
non-Lucent equipment with proceeds from such facility. At December 31, 1999, no
amounts had been borrowed under the Lucent Facility.
As discussed further in Note 18, the Subsidiary Borrowers and KMC Telecom III
amended, restated and combined the Senior Secured Credit Facility and the Lucent
Loan and Security Agreement during the first quarter of 2000.
Interest on borrowings under the Lucent Facility is charged, at the option of
KMC Telecom III, at a floating rate of LIBOR plus the "Applicable LIBOR Margin",
or at an alternative base rate plus the "Applicable Base Rate Margin" (as
defined). Such margins will be increased by 0.25% until KMC Telecom III and its
subsidiaries have completed systems in fourteen markets.
The Lucent Facility contains a number of affirmative and negative covenants
including, among others, covenants restricting the ability of KMC Telecom III to
consolidate or merge with any person, sell or lease assets not in the ordinary
course of business, sell or enter into any long-term leases of dark fiber,
redeem stock, pay dividends or make any other payments (including payments of
principal or interest on loans) to KMC Holdings, create subsidiaries, transfer
any permits or licenses, or incur additional indebtedness or act as guarantor
for the debt of any other person, subject to certain conditions.
KMC Telecom III is required to comply with certain financial tests and maintain
certain financial ratios, including, among others, a ratio of total debt to
contributed capital, certain minimum revenues, maximum EBITDA losses and minimum
EBITDA, maximum capital expenditures and minimum access lines, a maximum total
leverage ratio, a minimum debt service coverage ratio, a minimum fixed charge
coverage ratio and a maximum consolidated leverage ratio.
Senior Discount Notes
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 pursuant to the Senior Discount Note Indenture between KMC Holdings and the
Chase Manhattan Bank, as trustee (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. The gross and net proceeds of the offering were approximately
$250 million and $236.4 million, respectively. A substantial portion of the net
proceeds of the offering have been loaned by KMC Holdings to its subsidiaries.
On August 11, 1998, KMC Holdings exchanged the notes issued on January 29, 1998
for $460.8 million aggregate principal amount at maturity of notes that had been
registered under the Securities Act of 1933 (as used below and elsewhere herein,
"Senior Discount Notes" includes the original notes and the exchange notes).
The Senior Discount Notes are unsecured, unsubordinated obligations of the
Company and mature on February 15, 2008. The Senior Discount Notes were sold at
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<PAGE>
a substantial discount from their principal amount at maturity, and there will
not be any payment of interest on the Senior Discount Notes prior to August 15,
2003. The Senior Discount Notes will fully accrete to face value on February 15,
2003. From and after February 15, 2003, the Senior Discount Notes will bear
interest, which will be payable in cash, at the rate of 12.5% per annum on
February 15 and August 15 of each year, commencing August 15, 2003. The Company
is accreting the initial carrying value of the Senior Discount Notes to their
aggregate face value over the term of the debt at its effective interest rate of
13.7%.
The Senior Discount Notes are redeemable, at the Company's option, in whole or
in part, on or after February 15, 2003 and prior to maturity, at redemption
prices equal to 106.25% of the aggregate principal amount at maturity, plus
accrued and unpaid interest, if any, to the redemption date, declining to 100%
of the aggregate principal amount at maturity, plus accrued and unpaid interest
as of February 15, 2006.
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 Senior Discount Notes
with the net proceeds from the sale of common equity at a redemption price of
112.50% of their accreted value on the redemption date.
The indebtedness evidenced by the Senior Discount Notes ranks pari passu in
right of payment with all existing and future unsubordinated, unsecured
indebtedness of KMC Holdings and senior in right of payment to all existing and
future subordinated indebtedness of KMC Holdings. However, KMC Holdings is a
holding company and the Senior Discount Notes are, therefore, effectively
subordinated to all existing and future liabilities (including trade payables)
of its subsidiaries.
Within 30 days of the occurrence of a Change of Control (as defined in the
Senior Discount Note Indenture), the Company must offer to purchase for cash all
Senior Discount Notes then outstanding at a purchase price equal to 101% of the
accreted value thereof, plus accrued interest. The Company's ability to comply
with this requirement is subject to certain restrictions contained in the Senior
Secured Credit Facility.
The Senior Discount Note Indenture contains events of default, including, but
not limited to, (i) defaults in the payment of principal, premium or interest,
(ii) defaults in compliance with covenants contained in the Senior Discount Note
Indenture, (iii) cross defaults on more than $5 million of other indebtedness,
(iv) failure to pay more than $5 million of judgments that have not been stayed
by appeal or otherwise and (v) the bankruptcy of KMC Holdings or certain of its
subsidiaries.
The Senior Discount Note Indenture restricts, among other things, the ability of
KMC Holdings to incur additional indebtedness, create liens, engage in
sale-leaseback transactions, pay dividends or make distributions in respect of
capital stock, make investments or certain other restricted payments, sell
assets of KMC Holdings, redeem capital stock, issue or sell stock of restricted
subsidiaries, enter into transactions with stockholders or affiliates or effect
a consolidation or merger. The Senior Discount Note Indenture permits KMC
Holdings' subsidiaries to be deemed unrestricted subsidiaries and, thus, not
subject to the restrictions of the Senior Discount Note Indenture.
The Senior Discount Notes are "applicable high yield discount obligations"
("AHYDOs"), as defined in the Internal Revenue Code of 1986, as amended. 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. Any remaining OID on the Senior Discount Notes will not be
deductible by the Company until such OID is paid.
Senior Notes
On May 24, 1999, KMC Holdings issued $275.0 million aggregate principal amount
of 13 1/2% Senior Notes due 2009. On December 30, 1999, KMC Holdings exchanged
the notes issued on May 24, 1999 for $275.0 million aggregate principal amount
of notes that had been registered under the Securities Act of 1933 (as used
below and elsewhere herein, "Senior Notes" includes the original notes and the
exchange notes). Interest on the Senior Notes is payable semi-annually in cash
on May 15 and November 15 of each year, beginning November 15, 1999. A portion
of the proceeds from the offering of the Senior Notes was used to purchase a
portfolio of U.S. government securities that were pledged as security for the
first six interest payments on the Senior Notes.
The Senior Notes are redeemable, at the Company's option, in whole or in part,
on or after May 15, 2004 and prior to maturity, at redemption prices equal to
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<PAGE>
106.75% of the aggregate principal amount at maturity, plus accrued and unpaid
interest, if any, to the redemption date, declining to 100% of the aggregate
principal amount at maturity, plus accrued and unpaid interest as of May 15,
2007.
In addition, at any time prior to May 15, 2002, the Company may redeem up to 35%
of the aggregate principal amount at maturity of the Senior Notes with the net
proceeds from the sale of common equity at a redemption price of 113.5% of the
principal amount on such date plus accrued and unpaid interest. Upon a change of
control (as defined in the Senior Note Indenture), the Company must offer to
purchase for cash the Senior Notes at a purchase price equal to 101% of the
principal amount, plus accrued interest. The Company's ability to comply with
this requirement is subject to certain restrictions contained in the Senior
Secured Credit Facility.
The Senior Notes were guaranteed by KMC Telecom Financing, Inc., a wholly-owned
subsidiary. The Senior Notes are senior, unsecured unsubordinated obligations of
KMC Holdings and rank pari passu in right of payment with all existing and
future unsubordinated, unsecured indebtedness of KMC Holdings and senior in
right of payment to all of existing and future subordinated indebtedness of KMC
Holdings. However, KMC Holdings is a holding company and the Senior Notes are,
therefore, effectively subordinated to all existing and future liabilities
(including trade payables), of its subsidiaries.
The Senior Note Indenture contains certain covenants that, among other things,
limit the Company's ability to incur additional indebtedness, engage in
sale-leaseback transactions, pay dividends or make certain other distributions,
sell assets, redeem capital stock, effect a consolidation or merger of KMC
Telecom Holdings, Inc. and enter into transactions with stockholders and
affiliates and create liens on our assets.
7. INTEREST RATE SWAP AGREEMENT
The Company has entered into an interest rate swap agreement with a commercial
bank to reduce the impact of changes in interest rates on a portion of its
outstanding variable rate debt. The agreement effectively fixes the Company's
interest rate on $125 million of the outstanding variable rate borrowings under
the Senior Secured Credit Facility due 2007. The interest rate swap agreement
terminates in April 2004. The Company is exposed to credit loss in the event of
nonperformance by the other party to the interest rate swap agreement. However,
the Company does not anticipate nonperformance by the counterparty.
8. REDEEMABLE AND NONREDEEMABLE EQUITY
KMC Telecom Preferred Stock
On January 21, 1997, certain 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 of KMC Telecom
were exchanged for an equal 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 E Preferred Stock
On February 4, 1999, the Company issued 25,000 shares of Series E Senior
Redeemable, Exchangeable, PIK Preferred Stock (the "Series E Preferred Stock")
to Newcourt Finance, generating aggregate gross proceeds of $22.9 million. On
April 30, 1999, the Company issued an additional 35,000 shares of Series E
Preferred Stock for gross proceeds of $25.9 million. The Series E Preferred
Stock has a liquidation preference of $1,000 per share and an annual dividend
equal to 14.5% of the liquidation preference, payable quarterly. On or before
January 15, 2004, the Company may pay dividends in cash or in additional fully
paid and nonassessable shares of Series E Preferred Stock. After January 15,
2004, dividends must be paid in cash, subject to certain conditions. Unpaid
dividends accrue at the dividend rate of the Series E Preferred Stock,
compounded quarterly. During 1999, the Company issued 5,004 shares of Series E
Preferred Stock to pay the dividends due.
The Series E Preferred Stock must be redeemed on February 1, 2011, subject to
the legal availability of funds therefor, at a redemption price, payable in
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cash, equal to the liquidation preference thereof on the redemption date, plus
all accumulated and unpaid dividends to the date of redemption. After April 15,
2004, the Series E Preferred Stock may be redeemed, in whole or in part, at the
option of the Company, at a redemption price equal to 110% of the liquidation
preference of the Series E Preferred Stock plus all accrued and unpaid dividends
to the date of redemption. The redemption price declines to an amount equal to
100% of the liquidation preference as of April 15, 2007.
In addition, on or prior to April 15, 2002, the Company may, at its option,
redeem up to 35% of the aggregate liquidation preference of Series E Preferred
Stock with the proceeds of sales of its capital stock at a redemption price
equal to 110% of the liquidation preference on the redemption date plus accrued
and unpaid dividends.
The holders of Series E Preferred Stock have voting rights in certain
circumstances. Upon the occurrence of a change of control, the Company will be
required to make an offer to repurchase the Series E Preferred Stock for cash at
a purchase price of 101% of the liquidation preference thereof, together with
all accumulated and unpaid dividends to the date of purchase.
The Series E Preferred Stock is not convertible. The Company may, at the sole
option of the Board of Directors (out of funds legally available), exchange all,
but not less than all, of the Series E Preferred Stock then outstanding,
including any shares of Series E Preferred Stock issued as payment for
dividends, for a new series of subordinated debentures (the "Exchange
Debentures") issued pursuant to an exchange debenture indenture. The holders of
Series E Preferred Stock are entitled to receive on the date of any such
exchange, Exchange Debentures having an aggregate principal amount equal to (i)
the total of the liquidation preference for each share of Series E Preferred
Stock exchanged, plus (ii) an amount equal to all accrued but unpaid dividends
payable on such share.
Series F Preferred Stock
On February 4, 1999, the Company issued 40,000 shares of Series F Senior
Redeemable, Exchangeable, PIK Preferred Stock (the "Series F Preferred Stock")
to Lucent and Newcourt Finance, generating aggregate gross proceeds of $38.9
million. The Series F Preferred Stock has a liquidation preference of $1,000 per
share and an annual dividend equal to 14.5% of the liquidation preference,
payable quarterly. The Company may pay dividends in cash or in additional fully
paid and nonassessable shares of Series F Preferred Stock. During 1999, the
Company issued 4,177 shares of Series F Preferred Stock to pay the dividends due
for such period.
The Series F Preferred Stock may be redeemed at any time, in whole or in part,
at the option of the Company, at a redemption price equal to 110% of the
liquidation preference on the redemption date plus an amount in cash equal to
all accrued and unpaid dividends thereon to the redemption date. Upon the
occurrence of a change of control, the Company will be required to make an offer
to purchase the Series F Preferred Stock for cash at a purchase price of 101% of
the liquidation preference thereof, together with all accumulated and unpaid
dividends to the date of purchase.
The holders of Series F Preferred Stock have voting rights under certain
circumstances.
Upon the earlier of (i) the date that is sixty days after the date on which the
Company closes an underwritten primary offering of at least $200 million of its
Common Stock, pursuant to an effective registration statement under the
Securities Act or (ii) February 4, 2001, any outstanding Series F Preferred
Stock will automatically convert into Series E Preferred Stock, on a one for one
basis.
The Company may, at the sole option of the Board of Directors (out of funds
legally available), exchange all, but not less than all, of the Series F
Preferred Stock then outstanding, including any shares of Series F Preferred
Stock issued as payment for dividends, for Exchange Debentures. The holders of
Series F Preferred Stock are entitled to receive on the date of any such
exchange, Exchange Debentures having an aggregate principal amount equal to (i)
the total of the liquidation preference for each share of Series F Preferred
Stock exchanged, plus (ii) an amount equal to all accrued but unpaid dividends
payable on such share.
Series A Preferred Stock
There are 123,800 shares of Series A Cumulative Convertible Preferred Stock of
KMC Holdings ("Series A Preferred Stock") authorized and outstanding. Such stock
was issued to two entities, Nassau Capital Partners, L.P. and NAS Partners I
L.L.C. ("Nassau Capital" and "Nassau Partners", respectively, collectively
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referred to as "Nassau") in January 1997 upon the conversion of certain notes
payable and related accrued interest due to Nassau aggregating $12,380,000.
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 corporations). As of
December 31, 1999, dividends in arrears on the Series A Preferred Stock
aggregated $2,116,000. Notwithstanding the foregoing, pursuant to an agreement
among Nassau and the Company, 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. Upon conversion, subject to the
aforementioned agreement 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 of 1933 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. As discussed under "Redemption Rights" below, the holders of
Series A Preferred Stock have certain redemption rights. Accordingly, such stock
has been reflected as redeemable equity in the accompanying financial
statements.
Series C Preferred Stock
There are 350,000 shares of Series C Cumulative Convertible Preferred Stock of
KMC Holdings ("Series C Preferred Stock") authorized, of which 175,000 shares
are outstanding at December 31, 1999. 150,000 of such shares were issued in
November 1997, generating aggregate gross proceeds of $15 million and the
remaining 25,000 shares were issued in January 1998 upon the conversion of an
equal number of shares of Series D Preferred Stock. 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, 1999, dividends in arrears
on the Series C Preferred Stock aggregated $2,821,000. Notwithstanding the
foregoing, pursuant to the Purchase Agreement among the Company, Nassau, GECC
and First Union Corp. ("First Union"), 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.
Series C Preferred Stock is convertible into Common Stock at a conversion price
equal to (i) from the date of initial issuance to the date which is 30 months
after the date of such initial issuance, $52.50 per share of Common Stock and
(ii) from and after the date which is 30 months after the date of initial
issuance, $42.18; provided that both such amounts are subject to adjustment upon
the occurrence of certain events. Holders of Series C Preferred Stock may
convert all or part of such shares to Common Stock. Upon conversion, subject to
the aforementioned agreement 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
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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. As discussed under "Redemption Rights" below, the holders of
Series C Preferred Stock have certain redemption rights. Accordingly, such stock
has been reflected as redeemable equity in the accompanying financial
statements.
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 Preferred Stock
There are 25,000 shares of Series D Cumulative Convertible Preferred Stock of
KMC Holdings ("Series D Preferred Stock") authorized, none of which are
outstanding at December 31, 1999. There were 25,000 of such shares issued to
Nassau in November 1997, generating aggregate gross proceeds of $2.5 million. In
January 1998, Nassau exercised its conversion rights and converted all of its
shares of Series D Preferred Stock into an equal number of shares of Series C
Preferred Stock.
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. The
Senior Discount Note Indenture and the Company's other indebtedness restrict the
ability of the Company to pay dividends on its Common Stock. 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, Newcourt Communications Finance Corp., GECC,
and First Union (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 entitling each 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. The number of Directors which
Kamine is entitled to elect would be reduced to two if the number of shares
owned by him were to fall below two-thirds of the number of shares of the
Company initially issued to him, and to one if the number of shares owned by him
were to fall below one-third of the number of shares initially issued to him. If
his ownership were to fall below 5% of the number of shares initially issued to
him, Kamine would no longer be entitled to elect any Directors pursuant to such
provisions. Comparable reductions would be made to the number of Directors which
Nassau is entitled to elect if its ownership were to fall below the specified
percentages. 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 Senior Secured Credit Facility and
55
<PAGE>
continues uncured for 90 days, the holders of Series C Preferred Stock
(currently Nassau, GECC and First Union) are entitled to elect two additional
Directors, who will serve until the default is cured.
Redemption Rights
Pursuant to a stockholders agreement, certain of the Company's stockholders and
warrant holders have "put rights" entitling them to have the Company repurchase
their preferred and common shares and redeemable common stock warrants for the
fair value of such securities if no Liquidity Event (defined as (i) an initial
public offering with gross proceeds of at least $40 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. The restrictive covenants of the
Senior Discount Notes limit the Company's ability to repurchase such securities.
All of the securities subject to such "put rights" are presented as redeemable
equity in the accompanying balance sheets.
The redeemable preferred stock, redeemable common stock and redeemable common
stock warrants, which are subject to the stockholders agreement, 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,
1999, the aggregate redemption value of the redeemable equity was approximately
$320 million, reflecting per share redemption amounts of $1,212 for the Series A
Preferred Stock, $476 for the Series C Preferred Stock and $250 for the
redeemable common stock and redeemable common stock warrants.
Warrants
In connection with KMC Telecom's 1996 Loan and Security Agreement, warrants
representing a 2.5% ownership interest in the fully diluted common voting
capital stock of KMC Telecom, including anti-dilution protection, were granted
to the lenders. 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 redeemable equity in January 1997. On September 22, 1997, such
warrants were exercised, and an aggregate of 28,000 shares of Class A Common
Stock of KMC Telecom were issued to the warrant holders. These shares were
subsequently exchanged for an equal number of shares of Common Stock of KMC
Holdings.
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 redeemable equity.
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
balance sheet at December 31, 1999.
In connection with the sale of Senior Discount Notes in January 1998, the
Company issued warrants to purchase an aggregate of 100,385 shares of Common
Stock at an exercise price of $.01 per share. The net proceeds of $10,446,000
represented the fair value of the warrants at the date of issuance. The warrants
are exercisable through January 2008.
In connection with the February 4, 1999 issuances of the Series E Preferred
Stock and the Series F Preferred Stock, warrants to purchase an aggregate of
24,660 shares of Common Stock were sold to Newcourt Finance and Lucent. The
aggregate gross proceeds from the sale of these warrants was approximately $3.2
million. These warrants, at an exercise price of $.01 per share, are exercisable
from February 4, 2000 through February 1, 2009.
In addition, the Company also delivered to the Warrant Agent certificates
representing warrants to purchase an aggregate of an additional 107,228 shares
of Common Stock at an exercise price of $.01 per share (the "Springing
Warrants"). The Springing Warrants may become issuable under the circumstances
described in the following paragraph.
If the Company fails to redeem all shares of Series F Preferred Stock prior to
the date (the "Springing Warrant Date") which is the earlier of (i) the date
that is sixty days after the date on which the Company closes an underwritten
primary offering of at least $200 million of its Common Stock pursuant to an
56
<PAGE>
effective registration statement under the Securities Act or (ii) February 4,
2001, the Warrant Agent is authorized to issue the Springing Warrants to the
Eligible Holders (as defined in the warrant agreement) of the Series E and
Series F Preferred Stock. In the event the Company has redeemed all outstanding
shares of Series F Preferred Stock prior to the Springing Warrant Date, the
Springing Warrants will not be issued and the Warrant Agent will return the
certificates to the Company. To the extent the Company exercises its option to
exchange all of the Series F Preferred Stock for Exchange Debentures prior to
the Springing Warrant Date, the Springing Warrants will not become issuable.
Therefore, as the future issuance of the Springing Warrants is entirely within
the control of the Company and the likelihood of their issuance is deemed to be
remote, no value has been ascribed to the Springing Warrants.
In connection with the April 30, 1999 issuance of additional shares of the
Series E Preferred Stock, warrants to purchase an aggregate of 60,353 shares of
Common Stock were issued to Newcourt Finance and First Union. The aggregate
gross proceeds from the sale of these warrants was approximately $9.1 million.
These warrants, at an exercise price of $.01 per share, are exercisable from
February 4, 2000 through February 1, 2009.
Options
Prior to the establishment of the present holding company structure, during 1996
and 1997, KMC Telecom granted options to purchase shares of its common stock,
par value $.01 per share ("KMC Telecom Common Stock"), to employees pursuant to
the KMC Telecom Stock Option Plan.
In order to reflect the establishment of the holding company structure, on June
26, 1998, the Board of Directors adopted a new stock option plan, the KMC
Holdings Stock Option Plan (the "1998 Plan"), which authorizes the grant of
options to purchase Common Stock of the Company. The 1998 Plan was approved by
the stockholders, effective July 15, 1998. In September 1998, the Company
replaced 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 1998 Plan and granted options to additional
employees of the Company under the 1998 Plan.
The 1998 Plan, which is administered by the Compensation Committee of the Board
of Directors of KMC Holdings, 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, performance shares 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 1998 Plan, options to purchase 600,000 shares of Common Stock of KMC
Holdings are available for grant, all of which were allocated to the Plan as of
December 31, 1999. No individual may receive options for more than 75,000
shares. The exercise price of all incentive stock options granted under the 1998
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 1998 Plan must be at least 50% of the fair market value of the shares on the
date of grant.
Options granted pursuant to the 1998 Plan will have terms not to exceed 10 years
and become exercisable over a vesting period as specified in such options. The
1998 Plan will terminate no later than 2008. Options granted under the 1998 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 1998 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 1998 Plan, the greater
of 25% of the shares granted or fifty percent of all unvested options granted
become fully vested upon a change-in-control of the Company, as defined. Under
certain circumstances, such percentages may increase.
The holders of options to acquire shares of Common Stock of KMC Holdings are
required to enter into agreements with KMC Holdings 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 the Company or
57
<PAGE>
the affiliates, the Company can repurchase all of the shares or options held by
such 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.
Information on stock options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF SHARES AVERAGE EXERCISE
--------------------------------
OUTSTANDING EXERCISABLE PRICE OF OPTIONS
-------------------------------------------------------
<S> <C> <C> <C>
Balances, January 1, 1997...................... 95,385 - $ 65
Granted...................................... 63,115 - $ 65
Became exercisable........................... - 22,000
Cancelled.................................... (17,000) (3,000) $ (65)
--------------------------------
Balances, December 31, 1997.................... 141,500 19,000 $ 65
Granted...................................... 262,500 - $ 26
Became exercisable........................... - 117,000
Cancelled.................................... (141,500) (19,000) $ (65)
--------------------------------
Balances, December 31, 1998.................... 262,500 117,000 $ 26
Granted...................................... 82,342 - $147
Became exercisable........................... - 51,669
Exercised.................................... (15,600) (15,600) $ 22
Cancelled.................................... (27,200) (2,000) $ (26)
================================
Balances, December 31, 1999.................... 302,042 151,069 $ 59
================================
</TABLE>
The weighted-average exercise price of options exercisable at December 31, 1997,
1998 and 1999 is $50, $22 and $26, respectively, and the weighted-average fair
value of options granted during 1997, 1998 and 1999 were $49, $114 and $134 per
share, respectively.
The range of exercise prices, number of shares and the weighted-average
remaining contractual life for options outstanding as of December 31, 1999 were
as follows:
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- AVERAGE
NUMBER AVERAGE REMAINING
RANGE OF NUMBER OF SHARES EXERCISE CONTRACTUAL
EXERCISE PRICES OF SHARES EXERCISABLE PRICE LIFE
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$20 - $40 219,700 144,025 $ 21 8.66 years
$125 67,509 6,751 125 9.0 years
$225 - $250 14,833 293 225 9.70 years
Total $20 - $250 302,042 151,069 26 8.79 years
</TABLE>
During the year ended December 31, 1999, non-qualified options to purchase an
aggregate of 82,342 shares were granted to employees at exercise prices of $125
(67,509), $225 (2,933) and $250 (11,900). All options have 10 year terms and
become exercisable over a five year period in equal six month increments.
During the year ended December 31, 1998, non-qualified options to purchase an
aggregate of 262,500 shares were granted at exercise prices of $20 (157,500
options), $30 (52,500 options) and $40 (52,500 options). The options granted
during 1998 are comprised of 230,500 options granted to employees and 32,000
options granted to individuals employed by certain affiliates of the Company.
All such options have 10 year terms. The $20 options become exercisable over a
three year period in six month intervals commencing six months after the grant
date in increments of 26,250 options each. The $30 options become exercisable in
two increments of 26,250 options each, forty-two and forty-eight months after
the grant date. The $40 options become exercisable in two increments of 26,250
options each, fifty-four and sixty months after the grant date. For purposes of
vesting, options granted in 1998 under the 1998 Plan to replace options granted
in 1997 and 1996 under the KMC Telecom Stock Option Plan are deemed to have been
granted on the date of grant of the options which they replace.
58
<PAGE>
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
was required to account for the KMC Telecom Stock Option Plan as a variable
stock option plan. Additionally, as a result of restrictions upon the holders of
options granted under the 1998 Plan, including their ability to sell or
otherwise transfer the related shares, the 1998 Plan is required to be accounted
for as a variable stock option plan. Generally accepted accounting principles
for variable stock option plans require the recognition of 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. Accordingly, compensation expense will be charged or
credited periodically through the date of exercise or cancellation of such stock
options, based on changes in the value of the Company's stock as well as the
vesting schedule of such options. These compensation charges or credits are
non-cash in nature, but could have a material effect on the Company's future
reported results of operations.
The Company, upon cancellation of the outstanding options under the KMC Telecom
Stock Option Plan, reversed all compensation expense previously recorded with
respect to such options. Additionally, to the extent the fair value of the
Common Stock of the Company exceeded the exercise price of the options granted
under the 1998 Plan, the Company recognized compensation expense related to such
options over their vesting period.
Based on the estimated fair value of the Common Stock of KMC Telecom at December
31, 1997 and KMC Holdings at December 31, 1998 and December 31, 1999, cumulative
deferred compensation obligations of $15,579,000, $27,906,000 and $50,972,000,
respectively, have been established. The Company has recognized compensation
expense aggregating $13,870,000, $7,080,000 and $29,833,000, for the years ended
December 31, 1997, 1998 and 1999, respectively. The 1998 stock option
compensation expense of $7,080,000 reflects charges of $7,236,000 under the KMC
Telecom Stock Option Plan through its termination in September 1998 and charges
of $21,190,000 related to the 1998 Plan, partially offset by a credit as a
result of the September 1998 cancellation of the KMC Telecom stock options,
reflecting the reversal of $21,346,000 of cumulative compensation previously
recognized for options granted under the KMC Telecom Stock Option Plan.
In accordance with the provisions of Statement 123, the Company applies APB 25
and related interpretations in accounting for its stock option plan. If the
Company had elected to recognize compensation expense based on the fair value of
the options granted at the grant date as prescribed by Statement 123, net loss
and net loss per common share would have been the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998 1999
----------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net loss:
As reported............................ $(32,685) $(76,753) $(225,716)
==============================================
Pro forma.............................. $(20,542) $(76,869) $(219,599)
==============================================
Net loss per common share:
As reported............................ $(64.93) $(114.42) $(360.88)
==============================================
Pro forma.............................. $(45.97) $(114.56) $(353.70)
==============================================
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
-------------------------------------------
<S> <C> <C> <C>
Expected dividend yield..................... 0% 0% 0%
Expected stock price volatility............. 50% 50% 70%
Risk-free interest rate..................... 6% 6% 6.5%
Expected life of options.................... 7 years 7 years 7 years
</TABLE>
59
<PAGE>
The expected stock price volatility factors were determined based on an average
of such factors as disclosed in the financial statements of peer companies. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
9. SERVICE REVENUES
The Company provides on-net switched and dedicated services and resells switched
services previously purchased from the incumbent local exchange carrier. On-net
services include both services provided through direct connections to our own
networks and services provided by means of unbundled network elements leased
from the incumbent local exchange carrier.
The Company's service revenues consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998 1999
------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
On-net.................................... $1,093 $ 8,248 $44,615
Resale.................................... 2,324 14,177 19,698
======================================================
Total..................................... $3,417 $22,425 $64,313
======================================================
</TABLE>
10. INCOME TAXES
As of December 31, 1999, the Company and its subsidiaries had consolidated net
operating loss carryforwards for United States income tax purposes ("NOLs") of
approximately $215 million which expire through 2013. Under Section 382 of the
Internal Revenue Code of 1986, as amended, 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
$109 million and $311 million of loss carryforwards and net temporary
differences at December 31, 1998 and 1999, respectively. At existing federal and
state tax rates, the future benefit of these items approximates $42 million at
December 31, 1998 and $121 million at December 31, 1999. Valuation allowances
have been established equal to the entire net tax benefit associated with all
carryforwards and temporary differences at both December 31, 1998 and 1999 as
their realization is uncertain.
60
<PAGE>
The composition of expected future tax benefits at December 31, 1998 and 1999 is
as follows:
<TABLE>
<CAPTION>
1998 1999
-----------------------------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards............................ $ 22,914 $ 83,762
Temporary differences:
Stock option compensation................................ 8,264 19,528
Interest accretion....................................... 9,797 21,127
Other, net............................................... 1,513 (3,244)
-----------------------------
Total deferred tax assets................................... 42,488 121,173
Less valuation allowance.................................... (42,488) (121,173)
=============================
Net deferred tax assets..................................... $ - $ -
=============================
</TABLE>
A reconciliation of the expected tax benefit at the statutory federal rate of
35% is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-----------------------------------------------------
<S> <C> <C> <C>
Expected tax benefit at statutory rate.......... (35.0)% (35.0)% (35.0)%
State income taxes, net of federal benefit...... (2.9) (2.6) (3.8)
Non-deductible interest expense................. - 2.0 1.1
Other........................................... .1 .1 .1
Change in valuation allowance................... 37.8 35.5 37.6
-----------------------------------------------------
-% -% -%
=====================================================
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases various facilities and equipment under operating leases.
Minimum rental commitments are as follows (in thousands):
Year ending December 31:
2000............................. $ 4,434
2001............................. 5,317
2002............................. 4,754
2003............................. 4,145
2004............................. 3,302
Thereafter............................ 13,219
-----------------
$35,171
=================
Rent expense under operating leases was $478,000, $1,299,000 and $3,815,000, for
the years ended December 31, 1997, 1998 and 1999,
respectively.
Litigation
There are a number of lawsuits and regulatory proceedings related to the
Telecommunications Act of 1996, decisions of the Federal Communications
Commission related thereto and rules and regulations issued thereunder which may
affect the rights, obligations and business of incumbent local exchange
carriers, competitive local exchange carriers and other participants in the
telecommunications industry in general, including the Company.
61
<PAGE>
Purchase Commitments
As of December 31, 1999, the Company has outstanding commitments aggregating
approximately $96.5 million related to purchases of telecommunications equipment
and fiber optic cable and its obligations under its agreements with certain
suppliers and service providers.
Employment Agreements
The Company has entered into employment agreements with certain of its
executives. In addition to a base salary, these agreements also provide 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.
Arbitration Award
During the second quarter of 1999, the Company recorded a $4.3 million charge to
other expense in connection with an unfavorable arbitration award. The net
amount due under the terms of the award was paid in full in June 1999.
12. ACQUISITION
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 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.
13. RELATED PARTY TRANSACTIONS
The Company and certain affiliated companies owned by Kamine share certain
administrative services. The entity which bears the cost of the service is
reimbursed by the other for the other's proportionate share of such expenses.
The Company reimbursed Kamine-affiliated companies for these shared services an
aggregate of approximately $281,000, $136,000 and $60,000, of expense for the
years ended December 31, 1997, 1998 and 1999, respectively. During 1999, the
Company purchased approximately $180,000 of office furniture and leasehold
improvements from an entity controlled by Kamine.
From May 1, 1996 through January 29, 1998, an affiliate of the Company was paid
a fee at an annual rate of $266,000 as reimbursement for the services of 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 and it was terminated effective
December 31, 1998. The fees paid for these services are included in the shared
services payment described in the immediately preceding paragraph.
The Company leases its headquarters office through January 2007 from an entity
controlled by Kamine. The lease provides for a base annual rental cost of
approximately $217,000, adjusted periodically for changes in the consumer price
index, plus operating expenses. Rent expense recognized under this lease for the
years ended December 31, 1997, 1998 and 1999 was $207,000, $217,000 and
$217,000, respectively.
Effective January 1, 1999, the Company is entitled to utilize a Citation III
business jet, chartered by Bedminster Aviation, LLC, a limited liability company
wholly-owned by Kamine, for a fixed price per hour of flight time. During 1999,
the Company paid approximately $210,000 for the use of the Citation III. The
Company has agreed to use its best efforts to utilize the Citation III fifty
hours per quarter during 2000. The Company is under no obligation to do so and
has not guaranteed any financial arrangements with respect to the aircraft or to
Bedminster Aviation, LLC.
Pursuant to an agreement among the Company, Kamine and Nassau, for 1997, 1998
and 1999 Nassau received $100,000, $100,000 and $450,000, respectively, as a
financial advisory fee and as compensation for the Nassau designees who served
on the Board of Directors of the Company. Nassau will be paid $450,000 as a
financial advisory fee for 2000.
62
<PAGE>
As of December 31, 1998 and 1999, the Company has made loans aggregating
$760,000 and $575,000, respectively, to certain of its executives. Such loans
bear interest at a rate of 6% per annum and are included in other assets.
14. NET LOSS PER COMMON SHARE
The following table sets forth the computation of net loss per common share:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Numerator:
Net loss................................... $(32,686) $(76,753) $(225,716)
Dividends and accretion on redeemable
preferred stock........................... (8,904) (18,285) (81,633)
======================================================
Numerator for net loss per common share.... $(41,590) $(95,038) $(307,349)
======================================================
Denominator:
Denominator for net loss per common share -
weighted average number of common shares
outstanding............................... 641 831 852
======================================================
Net loss per common share.................. $(64.93) $ (114.42) $ (360.88)
======================================================
</TABLE>
Options and warrants to purchase an aggregate of 242,768, 372,885 and 496,729
shares of common stock were outstanding as of December 31, 1997, 1998 and 1999,
respectively, but a computation of diluted net loss per common share has not
been presented, as the effect of such securities would be anti-dilutive.
15. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Information with respect to noncash investing and financing activities is as
follows:
In connection with the Senior Discounts Notes, the Company recognized noncash
interest expense of $29.6 and $36.4 million in 1998 and 1999, respectively.
During 1999, the Company issued stock dividends to the holders of the Series
E Preferred Stock and Series F Preferred Stock of 5,004 shares and 4,177
shares, respectively.
In 1997, certain convertible notes, including accrued interest, aggregating
approximately $12,380,000 were converted into 123,800 shares of Series A
Cumulative Convertible Preferred Stock of KMC Telecom.
In 1997, warrants with a fair value of $1.5 million were granted to Newcourt
and warrants with a fair value of $525,000 were granted to GECC.
In connection with options granted to employees under the KMC Holdings Stock
Option Plan in 1998 and 1999, and under the KMC Telecom Stock Option Plan in
1997, cumulative deferred compensation obligations of $15,579,000,
$27,906,000 and $50,972,000, have been established in 1997, 1998 and 1999,
respectively, with offsetting credits to additional paid-in capital. Noncash
compensation expense of $9,014,000, $23,758,000 and $23,947,000 in 1997, 1998
and 1999, respectively, was recognized in connection with such options. In
connection with options granted to individuals employed by certain affiliates
of the Company in 1997, 1998 and 1999, the Company recognized noncash
compensation expense of $4,856,000, $4,668,000 and $5,886,000, respectively.
In addition, during 1998 the Company cancelled all of the then outstanding
options granted under the KMC Telecom Stock Option Plan, resulting in the
reversal of previously recognized compensation expense of $21.3 million.
63
<PAGE>
16. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments.
Cash and Cash Equivalents
The carrying amounts approximate fair value because of the short-term maturity
of the instruments.
Investments Held for Future Capital Expenditures
The carrying amounts and fair value are reported at amortized cost since these
securities are to be held to maturity.
Long-Term Debt
The carrying amount of floating-rate long-term debt approximates its fair value.
The fair value of the Company's fixed-rate long-term debt is estimated using
discounted cash flows at the Company's incremental borrowing rates.
Redeemable Equity
The fair value of the Company's redeemable equity instruments are estimated to
be the amounts at which the holders may require the Company to redeem such
securities, adjusted using discounted cash flows.
Interest Rate Swap
At December 31, 1999, the Company had an interest rate swap agreement to reduce
the impact on interest expense of fluctuations in interest rates on a portion of
its variable rate debt. The effect of this agreement is to limit the Company's
interest rate exposure on a notional amount of debt of $125 million. The fair
value was estimated as the amount the Company would receive if the swap
agreement was terminated at December 31, 1999.
Estimated Fair Values
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows (in millions):
<TABLE>
<CAPTION>
1998 1999
---------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents...................... $ 21.1 $ 21.1 $ 86.0 $ 86.0
Investments held for future capital
expenditures................................... 27.9 27.9 - -
Long-term debt:
Floating rate................................ 41.4 41.4 235.0 235.0
Fixed rate - Senior Discount Notes........... 267.8 249.6 301.1 275.7
Fixed rate - Senior Notes.................... - - 275.0 263.5
Redeemable equity instruments:
Series E Preferred Stock..................... - - 50.8 57.7
Series F Preferred Stock..................... - - 41.4 39.2
Series A Preferred Stock..................... 30.4 38.9 71.3 86.5
Series C Preferred Stock..................... 21.6 21.6 40.3 48.0
Redeemable common stock...................... 22.3 14.5 33.8 34.4
Redeemable common stock warrants............. .7 .7 12.9 13.7
Interest rate swap (asset)..................... - - - 3.9
</TABLE>
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
accounts receivable. The Company places its cash investments with major
64
<PAGE>
financial institutions. With respect to accounts receivable, the Company
performs ongoing credit evaluations of its customers' financial conditions and
generally does not require collateral. No individual customer accounted for more
than 10% of revenue, excluding reciprocal compensation revenue, as described
below, for any of the years ended December 31, 1997, 1998 or 1999.
The Company maintains interconnection agreements with the major incumbent local
exchange carriers ("ILECs") in each state in which it operates. Among other
things, these contracts govern the reciprocal amounts to be billed by
competitive carriers for terminating local traffic of Internet service providers
("ISPs") in each state. ILECs around the country have been contesting whether
the obligation to pay reciprocal compensation to competitive local exchange
carriers should apply to local telephone calls from an ILEC's customers to ISPs
served by competitive local exchange carriers. The ILECs claim that this traffic
is interstate in nature and therefore should be exempt from compensation
arrangements applicable to local intrastate calls. Competitive local exchange
carriers have contended that the interconnection agreements provide no exception
for local calls to ISPs and reciprocal compensation is therefore applicable. The
ILECs have threatened to withhold, and in many cases have withheld, reciprocal
compensation to competitive local exchange carriers for the transport and
termination of these calls. During 1998 and 1999, the Company recognized revenue
from these ILECs of approximately $2.9 million and $9.7 million, or 12.9% and
15.1% of 1998 and 1999 revenue, respectively, for these services. Payments of
approximately $135,000 and $1.6 million were received from the ILECs during 1998
and 1999, respectively.
The Company determined to recognize this revenue because management concluded,
based upon all of the facts and circumstances available to them at the time,
including numerous state public service commission and state and federal court
decisions upholding competitive local exchange carriers' entitlement to
reciprocal compensation for such calls, that realization of those amounts was
reasonably assured. On October 13, 1999, however, the Louisiana Public Service
Commission ruled that local traffic to Internet service providers in Louisiana
is not eligible for reciprocal compensation. As a result of that ruling,
management determined that the Company could no longer conclude that realization
of amounts attributable to reciprocal compensation for termination of local
calls to Internet service providers in Louisiana was reasonably assured.
Accordingly, the Company recorded an adjustment to reduce revenue in the quarter
ended September 30, 1999, which reversed all reciprocal compensation revenue
previously recognized related to Internet service provider traffic in Louisiana
for the entire year of 1998 and for the first nine months of 1999. The
adjustment amounted to $4.4 million, of which $1.1 million relates to the year
ended December 31, 1998 and $3.3 million relates to the nine months ended
September 30, 1999.
South Carolina has also ruled that ILECs are not obligated to pay reciprocal
compensation for termination of local calls to ISPs. As a result, unless that
decision is reversed we will not recognize revenue for such calls in South
Carolina.
Currently, over 30 state commissions and several federal and state courts
have ruled that reciprocal compensation arrangements do apply to calls to ISPs,
while four jurisdictions have ruled to the contrary. A number of these rulings
are subject to appeal. Additional disputes over the appropriate treatment of ISP
traffic are pending in other states. On February 26, 1999, the Federal
Communications Commission issued a declaratory ruling determining that ISP
traffic is interstate for jurisdictional purposes, but that its current rules
neither require nor prohibit the payment of reciprocal compensation for such
calls. In the absence of a federal rule, the Federal Communications Commission
determined that state commissions have authority to interpret and enforce the
reciprocal compensation provisions of existing interconnection agreements, and
to determine the appropriate treatment of ISP traffic in arbitrating new
agreements. The Federal Communications Commission also requested comment on
alternative federal rules to govern compensation for such calls in the future.
In response to the Federal Communications Commission ruling some ILECs have
asked state commissions to reopen previous decisions requiring the payment of
reciprocal compensation on ISP calls. Some ILECs and some competitive local
exchange carriers appealed the Federal Communications Commission's declaratory
ruling to the United States Court of Appeals for the District of Columbia
Circuit, which issued a decision on March 24, 2000, vacating the declaratory
ruling. The court stated that the Federal Communications Commission had not
adequately explained its conclusion that calls to ISPs should not be treated as
local traffic for reciprocal compensation purposes. Management views this
decision as favorable, but the court's direction to the Federal Communications
Commission to re-examine the issue will likely result in further delay in the
resolution of pending compensation disputes, and there can be no assurance as to
the ultimate outcome of these proceedings.
The Company accounts for reciprocal compensation with the ILECs, including the
activity associated with the disputed ISP traffic, as local traffic pursuant to
the terms of its interconnection agreements in all jurisdictions other than
Louisiana and South Carolina. Accordingly, revenue is recognized in the period
65
<PAGE>
that the traffic is terminated. The circumstances surrounding the disputes are
considered by management periodically in determining whether reserves against
unpaid balances are warranted. As of December 31, 1999, no reserves have been
considered necessary by management.
17. SUPPLEMENTAL GUARANTOR INFORMATION
In May 1999, KMC Holdings sold $275,000,000 aggregate principal amount of Senior
Notes. KMC Telecom Financing Inc. (the "Guarantor"), a wholly-owned subsidiary
of the Company, has fully and unconditionally guaranteed the Company's
obligations under these notes. Separate financial statements and other
disclosures of the Guarantor are not presented because management determined the
information is not material to investors. No restrictions exist on the ability
of the Guarantor to make distributions to the Company except to the extent
provided by law generally (adequate capital to pay dividends under corporate
laws) and restrictions contained in the Company's credit facilities. The
following condensed consolidating financial information presents the results of
operations, financial position and cash flows of KMC Holdings (on a stand alone
basis), the guarantor subsidiary (on a stand alone basis), the non-guarantor
subsidiaries (on a combined basis) and the eliminations necessary to arrive at
the consolidated results for the Company at December 31, 1999 and for the year
then ended. The non-guarantor subsidiaries include KMC Telecom, KMC Telecom II,
KMC Telecom III, KMC Telecom Virginia, Inc. and KMC Telecom Financial Services
LLC (collectively, the "Non-Guarantor Subsidiaries").
66
<PAGE>
GUARANTOR/NON-GUARANTOR CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
KMC TELECOM NON- CONSOLIDATED
HOLDINGS, INC. GUARANTOR KMC TELECOM
PARENT CO. GUARANTOR SUBSIDIARIES ELIMINATIONS HOLDINGS, INC.
---------- --------- ------------ ---------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (overdraft)............$ (833) $ -- $ 86,799 $ -- $ 85,966
Restricted investments........................... -- 37,125 -- -- 37,125
Accounts receivable, net......................... 6 -- 27,367 -- 27,373
Prepaid expenses and other current assets........ 1,249 -- 126 -- 1,375
Amounts due from subsidiaries.................... 72,972 -- (72,972) -- --
------ ---------- ----------- -------- ---------
Total current assets 73,394 37,125 41,320 -- 151,839
Long-term restricted investments................... .-- 51,446 -- -- 51,446
Networks and equipment, net ....................... 58,531 -- 580,793 -- 639,324
Intangible assets, net ............................ 1,388 -- 2,214 -- 3,602
Deferred financing costs, net...................... 21,031 -- 17,785 -- 38,816
Loans receivable from subsidiaries................. 590,103 (85,329) (504,774) -- --
Other assets....................................... 825 -- 188 -- 1,013
------- ---------- ----------- ------- ----------
Total assets....................................... $ 745,272 $ 3,242 $ 137,526 $ -- $ 886,040
======= =========== ========== ======== ==========
LIABILITIES, REDEEMABLE AND NONREDEEMABLE EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable.............................. $ 40,984 $ -- $ 126,506 $ -- $ 167,490
Accrued expenses.............................. 14,967 -- 22,080 -- 37,047
Deferred revenue.............................. -- -- 4,309 -- 4,309
-------- ------------- ------------- --------- -------------
Total current liabilities......................... 55,951 -- 152,895 -- 208,846
Notes payable..................................... -- -- 235,000 -- 235,000
Senior notes payable.............................. 275,000 -- -- -- 275,000
Senior discount notes payable..................... 301,137 -- -- -- 301,137
Losses of subsidiaries in excess of basis......... 247,127 -- -- (247,127) --
------- ------------ ------------- --------- -----------
Total liabilities................................. 879,215 -- 387,895 (247,127) 1,019,983
Redeemable equity:
Senior redeemable, exchangeable, PIK preferred stock:
Series E.................................. 50,770 -- -- -- 50,770
Series F.................................. 41,370 -- -- -- 41,370
Redeemable cumulative convertible preferred stock:
Series A.................................. 71,349 -- -- -- 71,349
Series C.................................. 40,301 -- -- 40,301
Redeemable common stock....................... 33,755 -- -- -- 33,755
Redeemable common stock warrants.............. 12,925 -- -- -- 12,925
------ ------------ ------------ --------- -----------
Total redeemable equity .......................... 250,470 -- -- -- 250,470
Nonredeemable equity (deficiency):
Common stock ................................. 6 -- -- 6
Additional paid-in capital.................... -- -- -- -- --
Unearned compensation......................... (9,163) -- -- -- (9,163)
Accumulated deficit........................... (375,256) (250,369) 247,127 (375,256)
--------- --------- ------------ -------- -------------
3,242
Total nonredeemable equity (deficiency) (384,413) (250,369) 247,127 (384,413)
--------- --------- ------------ -------- ----------
3,242
$ 745,272 $ 3,242 $ 137,526 $ -- $ 886,040
========== =========== ========== ======== ==========
</TABLE>
67
<PAGE>
GUARANTOR/NON-GUARANTOR CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
KMC TELECOM NON- CONSOLIDATED
HOLDINGS, INC. GUARANTOR KMC TELECOM
PARENT CO. GUARANTOR SUBSIDIARIES ELIMINATIONS HOLDINGS, INC.
---------- --------- ------------ ---------------------------
<S> <C> <C> <C> <C> <C>
Revenue............................................ $ -- $ -- $ 64,352 $ (39) $ 64,313
Operating expenses:
Network operating costs........................ -- -- 110,348 (39) 110,309
Selling, general and administrative............ 40,714 -- 15,089 -- 55,803
Stock option compensation expense.............. 29,833 -- -- -- 29,833
Depreciation and amortization.................. 3,104 -- 25,973 -- 29,077
----- ---------- ------------- --------- ------------
Total operating expenses........................... 73,651 -- 151,410 (39) 225,022
------ ---------- ---------- --------- ----------
Loss from operations............................... (73,651) -- (87,058) -- (160,709)
Intercompany charges............................... 72,972 -- (72,972) -- --
Other expense...................................... (4,297) -- -- -- (4,297)
Interest income.................................... 1,872 3,242 3,587 -- 8,701
Interest expense................................... (36,729) -- (32,682) -- (69,411)
Equity in net loss of subsidiaries................. (185,883) -- -- 185,883 --
--------- ---------- ------------- ------- ------------
Net income (loss).................................. (225,716) 3,242 (189,125) 185,883 (225,716)
Dividends and accretion on redeemable preferred
stock............................................. (81,633) -- -- -- (81,633)
---------- ---------- -------------- ---------- -------------
Net income (loss) applicable to common shareholders $ (307,349) $ 3,242 $ (189,125) $185,883 $ (307,349)
=========== ========== =========== ======== ===========
</TABLE>
68
<PAGE>
GUARANTOR/NON-GUARANTOR CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
KMC TELECOM NON- CONSOLIDATED
HOLDINGS, INC. GUARANTOR KMC TELECOM
PARENT CO. GUARANTOR SUBSIDIARIES ELIMINATIONS HOLDINGS, INC.
---------- --------- ------------ ---------------------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................... $ (225,716) $ 3,242 $ (189,125) $185,883 $ (225,716)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in net loss of subsidiaries............. 185,883 -- -- (185,883) --
Depreciation and amortization.................. 3,104 -- 25,973 -- 29,077
Non-cash interest expense...................... 36,963 -- (5,822) -- 31,141
Non-cash stock option compensation expense..... 29,833 -- -- -- 29,833
Changes in assets and liabilities:
Accounts receivable.......................... (6) -- (19,828) -- (19,834)
Prepaid expenses and other current assets.... (917) -- 857 -- (60)
Accounts payable............................. 441 -- 28,878 -- 29,319
Accrued expenses............................. 9,075 -- 15,152 -- 24,227
Amounts due from subsidiaries................ (52,050) -- 52,050 -- --
Other assets................................. 1,128 -- 2,592 -- 3,720
------------ ---------- ---------- -------- ----------
Net cash provided by (used in) operating
activities........................................ (12,262) 3,242 (89,273) -- (98,293)
------------ ---------- ----------- -------- -----------
INVESTING ACTIVITIES
Loans receivable from subsidiaries................ (324,390) 85,329 239,061 -- --
Construction of networks and purchases of
equipment......................................... (18,327) -- (300,209) -- (318,536)
Acquisitions of franchises, authorizations and
related assets.................................. (796) -- (1,196) -- (1,992)
Redemption (purchase) of investments.............. -- (88,571) 27,920 104,101 43,450
------------ ----------- ---------- --------- ----------
Net cash used in investing activities............. (343,513) (3,242) (34,424) 104,101 (277,078)
------------- ----------- ---------- --------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock and
related warrants, net of issuance costs......... 91,001 -- -- -- 91,001
Proceeds from exercise of stock options........... 333 -- -- -- 333
Proceeds from issuance of senior notes, net of
issuance costs and purchase of portfolio of
restricted investments......................... 262,387 -- -- (104,101) 158,286
Proceeds from senior secured credit facility, net
of issuance costs.............................. -- -- 192,836 -- 192,836
Issuance costs of Lucent facility................. -- -- (2,300) -- (2,300)
------------ ---------- ----------- -------- -----------
Net cash provided by financing activities......... 353,721 -- 190,536 (104,101) 440,156
------------ ---------- ---------- -------- ----------
Net increase (decrease) in cash and cash
equivalents....................................... (2,054) -- 66,839 -- 64,785
Cash and cash equivalents, beginning of year...... 1,221 -- 19,960 -- 21,181
------------ ---------- ---------- --------- ----------
Cash and cash equivalents, end of year............ $ (833) $ -- $ 86,799 $ -- $ 85,966
============= ========== ========== ========= ==========
</TABLE>
18. SUBSEQUENT EVENTS
Amended Senior Secured Credit Facility
During the first quarter of 2000, KMC Telecom, KMC Telecom II, KMC Telecom of
Virginia and KMC Telecom III (the "Borrowers"), amended, restated and combined
the Senior Secured Credit Facility and the Lucent Facility by entering into a
$700 million Loan and Security Agreement (the "Amended Senior Secured Credit
Facility") with a group of lenders led by Newcourt Commercial Finance
Corporation, GE Capital, Canadian Imperial Bank of Commerce ("CIBC"), First
Union National Bank and Lucent Technologies, Inc. (the "Lenders").
69
<PAGE>
The Amended Senior Secured Credit Facility includes a $175 million reducing
revolver facility (the "Revolver"), a $75 million term loan (the "Term Loan")
and a $450 million term loan facility (the "Lucent Term Loan").
The Revolver will mature on April 1, 2007. Proceeds from the Revolver can be
used to finance the purchase of certain equipment, transaction costs and, upon
attainment of certain financial conditions, for working capital and other
general corporate purposes. The aggregate commitment of the Lenders under the
Revolver will be reduced on each payment date beginning April 1, 2003. The
initial quarterly commitment reduction is 5.0%, reducing to 3.75% on July 1,
2003 and increasing to 6.25% on July 1, 2004, and further increasing to 7.50% on
July 1, 2006. Commencing with the fiscal year ending December 31, 2001, the
aggregate Revolver commitment will be further reduced by an amount equal to 50%
of excess operating cash flows (as defined in the Facility) for the prior fiscal
year until the Borrowers achieve certain financial conditions. The Borrowers
must pay an annual commitment fee on the unused portion of the Revolver ranging
from .75% to 1.25%.
The Term Loan is payable in twenty consecutive quarterly installments of
$188,000 beginning on April 1, 2002 and two final installments of $35.6 million
each on April 1, 2007 and July 1, 2007. Proceeds from the Term Loan can be used
to finance the purchase of certain equipment, transaction costs, working capital
and other general corporate purposes.
The Lucent Term Loan provides for an aggregate commitment of up to $450 million.
Proceeds from the Lucent Term Loan can be used to purchase Lucent products or to
reimburse the Borrowers for Lucent products previously purchased with cash or
other sources of liquidity. The Lucent Term Loan will mature on July 1, 2007 and
has required quarterly amortization beginning on July 1, 2003 of 5%. The
amortization decreases to 3.75% per quarter beginning on October 1, 2003,
increases to 6.25% on October 1, 2004 and further increases to 7.50% on October
1, 2006. An annual commitment fee of 1.50% is payable for any unused portion of
the Lucent Term Loan.
The Amended Senior Secured Credit Facility will bear interest payable at the
Borrowers' option, at (a) the "Applicable Base Rate Margin" (which generally
ranges from 2.00% to 3.25%) plus the greater of (i) the administrative agent's
prime rate or (ii) the overnight federal funds rate plus .5% or (b) the
"Applicable LIBOR Margin" (which generally ranges from 3.00% to 4.25%) plus
LIBOR, as defined. "Applicable Base Rate Margin" interest is payable quarterly
while "Applicable LIBOR Margin" interest is payable at the end of each
applicable interest period or at least every three months. If a payment default
were to occur, the interest rate will be increased by four percentage points. If
any other event of default shall occur, the interest rate will be increased by
two percentage points.
KMC Holdings has unconditionally guaranteed the repayment of the Amended Senior
Secured Credit Facility when such repayment is due, whether at maturity, upon
acceleration, or otherwise. KMC Holdings has pledged the shares of each of the
Borrowers to the Lenders to collateralize its obligations under the guaranty. In
addition, the Borrowers have each pledged all of their assets to the Lenders.
The Amended Senior Secured Credit Facility contains a number of affirmative and
negative covenants, including a covenant requiring the Borrowers to obtain cash
capital contributions from KMC Holdings of at least $185 million prior to April
1, 2001. KMC Holdings has secured a financing commitment from Lucent for $100
million in PIK Preferred Stock towards this requirement and currently
contemplates raising the $85 million balance through private or public sales of
securities in the capital markets. Additional affirmative and negative covenants
include, among others, 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 KMC Holdings, create subsidiaries, transfer any permits or
licenses, or incur additional indebtedness or act as guarantor for the debt of
any person, subject to certain conditions.
The Borrowers are required to comply with certain financial tests and maintain
certain financial ratios, including, among others, a ratio of total debt to
contributed capital, certain minimum revenues, maximum EBITDA losses and minimum
EBITDA, maximum capital expenditures and minimum access lines, a maximum total
leverage ratio, a minimum debt service coverage ratio, a minimum fixed charge
coverage ratio and a maximum consolidated leverage ratio. The covenants become
more restrictive upon the earlier of (i) March 31, 2002 and (ii) after the
Borrowers achieve positive EBITDA on a combined basis for two consecutive fiscal
quarters and a total leverage ratio (as defined) equal to or less than 8 to 1.
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<PAGE>
Failure to satisfy any of the financial covenants will constitute an event of
default under the Amended Senior Secured Credit Facility permitting the Lenders,
after notice, to terminate the commitment and/or accelerate payment of
outstanding indebtedness. The Amended Senior Secured Credit Facility also
includes other customary events of default, including, without limitation, a
cross-default to other material indebtedness, material undischarged judgments,
bankruptcy, loss of a material franchise or material license, breach of
representations and warranties, a material adverse change, and the occurrence of
a change of control.
71
<PAGE>
Independent Auditors' Report on Schedules
The Board of Directors and Stockholders
KMC Telecom Holdings, Inc.
We have audited the consolidated balance sheets of KMC Telecom Holdings, Inc. as
of December 31, 1998 and 1999 and the related consolidated statements of
operations, redeemable and nonredeemable equity and cash flows for the years
then ended. Our audit report issued thereon dated January 31, 2000, except for
Note 18, as to which the date is March 28, 2000, is included elsewhere in this
Form 10-K. Our audit also included the financial statement schedules listed in
Item 14(a) of this Form 10-K. These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
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
January 31, 2000, except for Note 8,
as to which the date is March 28, 2000
72
<PAGE>
SCHEDULE I - Condensed Financial Information of Registrant
KMC Telecom Holdings, Inc.
(Parent Company)
Condensed Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1998 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (overdraft).................................... $ 1,221 $ (833)
Amounts due from subsidiaries............................................ 20,922 72,972
Prepaid expenses and other current assets................................ 332 1,255
-------- -------
Total current assets........................................................ 22,475 73,394
Loans receivable from subsidiaries.......................................... 265,713 590,103
Networks and equipment, net................................................. 4,775 58,531
Intangible assets, net...................................................... 625 1,388
Deferred financing costs.................................................... 12,055 21,031
Other assets................................................................ 1,952 825
-------- -------
$307,595 $745,272
======== =======
LIABILITIES, REDEEMABLE AND NONREDEEMABLE EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable......................................................... $ 2,043 $ 40,984
Accrued expenses......................................................... 5,838 14,967
-------- -------
Total current liabilities................................................... 7,881 55,951
Senior notes payable........................................................ -- 275,000
Senior discount notes payable............................................... 267,811 301,137
Losses of subsidiaries in excess of basis................................... 61,244 247,127
-------- -------
Total liabilities........................................................... 336,936 879,215
Redeemable equity:
Senior redeemable, exchangeable, PIK preferred stock, par value $.01
per share; authorized: -0- shares in 1998 and 630 shares in 1999;
shares issued and outstanding:
Series E, -0- in 1998 and 65 shares in 1999 ($65,004 liquidation
preference)..................................................... -- 50,770
Series F, -0- in 1998 and 44 shares in 1999 ($44,177 liquidation
preference)..................................................... -- 41,370
Redeemable cumulative convertible preferred stock, par value $.01 per share;
499 shares authorized; shares issued and outstanding:
Series A, 124 shares in 1998 and 1999 ($12,380 liquidation preference).. 30,390 71,349
Series C, 175 shares in 1998 and 1999 ($17,500 liquidation preference).. 21,643 40,301
Redeemable common stock, shares issued and outstanding, 224 in 1998 and
in 1999................................................................. 22,305 33,755
Redeemable common stock warrants......................................... 674 12,925
-------- -------
Total redeemable equity..................................................... 75,012 250,470
Nonredeemable equity (deficiency):
Common stock, par value $.01 per share, 3,000 shares authorized;
shares issued and outstanding: 614 shares in 1998 and 629 shares in
1999.................................................................. 6 6
Additional paid-in capital............................................... 13,750 --
Unearned compensation.................................................... (5,824) (9,163)
Accumulated deficit...................................................... (112,285) (375,256)
-------- --------
Total nonredeemable equity (deficiency)..................................... (104,353) (384,413)
-------- --------
$307,595 $745,272
======== ========
</TABLE>
See accompanying notes.
73
<PAGE>
KMC Telecom Holdings, Inc.
(Parent Company)
Condensed Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 22,
1997 YEAR ENDED DECEMBER 31
(FORMATION)
TO DECEMBER ---------------------------------
31, 1997 1998 1999
---------------- -------------- -------------
<S> <C> <C> <C>
Operating expenses:
Selling, general and administrative................ $ -- $ 19,624 $ 40,714
Stock option compensation expense.................. -- 21,190 29,833
Depreciation and amortization...................... -- 1,197 3,104
--------- ---------- ----------
Total operating expenses.............................. -- 42,011 73,651
--------- ---------- ----------
Loss from operations.................................. -- (42,011) (73,651)
Other expense......................................... -- -- (4,297)
Intercompany charges.................................. -- 20,922 72,972
Interest income....................................... -- 8,575 1,872
Interest expense...................................... -- (23,104) (36,729)
Equity in net loss of subsidiaries.................... (21,860) (41,135) (185,883)
Net loss.............................................. (21,860) (76,753) (225,716)
Dividends and accretion on redeemable preferred stock. (8,904) (18,285) (81,633)
--------- ---------- ----------
Net loss applicable to common shareholders............ $(30,764) $(95,038) $(307,349)
========= ========== ==========
</TABLE>
See accompanying notes.
74
<PAGE>
KMC Telecom Holdings, Inc.
(Parent Company)
Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 22,
1997 YEAR ENDED DECEMBER 31
(FORMATION)
TO DECEMBER ---------------------------------
31, 1997 1998 1999
---------------- -------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................................ $(21,860) $(76,753) $ (225,716)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity in net loss of subsidiaries................................. 21,860 41,135 185,883
Depreciation and amortization...................................... -- 1,197 3,104
Non-cash interest expense.......................................... -- 23,104 36,963
Non-cash stock option compensation expense......................... -- 21,190 29,833
Changes in assets and liabilities:
Prepaid expenses and other current assets....................... -- (332) (923)
Accounts payable................................................ -- 2,043 441
Accrued expenses................................................ -- 5,838 9,075
Amounts due from subsidiaries................................... -- (20,922) (52,050)
Other assets.................................................... -- (1,952) 1,128
----------- ----------- ----------
Net cash provided by (used in) operating activities..................... -- (5,452) (12,262)
----------- ----------- ----------
INVESTING ACTIVITIES
Loans receivable from subsidiaries...................................... (24,623) (233,685) (324,390)
Purchases of equipment.................................................. -- (5,845) (18,327)
Acquisitions of intangible assets....................................... (506) (166) (796)
----------- ----------- ----------
Net cash used in investing activities................................... (25,129) (239,696) (343,513)
----------- ----------- ----------
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock and related warrants, net of
issuance costs........................................................ 16,498 - 91,001
Proceeds from exercise of stock options................................. -- - 333
Proceeds from issuance of senior notes, net of issuance costs and
purchase of portfolio of restricted investments...................... -- - 262,387
Proceeds from issuance of common stock and warrants, net of issuance
costs................................................................. 9,363 20,446 -
Proceeds from issuance of senior discount notes, net of issuance costs.. (732) 225,923 -
----------- ---------- ----------
Net cash provided by financing activities............................... 25,129 246,369 353,721
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.................... -- 1,221 (2,054)
Cash and cash equivalents, beginning of year............................ -- - 1,221
----------- ---------- -----------
Cash and cash equivalents, end of year.................................. $ -- $ 1,221 $ (833)
=========== ========== ===========
See accompanying notes.
</TABLE>
75
<PAGE>
SCHEDULE I - Condensed Financial Information of Registrant
KMC Telecom Holdings, Inc.
(Parent Company)
Notes to Condensed Financial Statements
December 31, 1999
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 operating subsidiaries are KMC Telecom Inc.
("KMC Telecom"), KMC Telecom II, Inc. ("KMC Telecom II"), KMC Telecom III, Inc.
("KMC Telecom III") 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 the Company.
Pursuant to a management agreement among the Company and its subsidiaries, the
Company provides management and other services and incurs certain operating
expenses on behalf of its subsidiaries. Such costs are allocated to the
subsidiaries by the Company and reimbursed on a current basis. At December 31,
1998 and 1999, an aggregate of $20.9 and $73.0 million, respectively, was due
from the subsidiaries for such costs and is included in the accompanying
condensed balance sheet at December 31, 1998 and 1999 as a current receivable.
Such reimbursements are permitted under the debt agreements of the Company's
subsidiaries.
2. SENIOR SECURED CREDIT FACILITY
On December 22, 1998, KMC Telecom, KMC Telecom II and KMC Telecom of Virginia
(the "Subsidiary Borrowers"), refinanced and expanded the Amended and Restated
Loan and Security Agreement (the "AT&T Facility") by entering into a Loan and
Security Agreement (the "Senior Secured Credit Facility") with AT&T Commercial
Finance Corporation ("AT&T Finance"), First Union National Bank, General
Electric Capital Corporation ("GECC") and Canadian Imperial Bank of Commerce
(the "Creditors").
The Company has unconditionally guaranteed the repayment of the Senior Secured
Credit Facility when such repayment is due, whether at maturity, upon
acceleration, or otherwise. The Company has agreed to pay all amounts
outstanding under the Senior Secured Credit 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 each of the Subsidiary Borrowers
to the Creditors to collateralize its obligations under the guaranty. In
addition, the Subsidiary Borrowers have pledged all of their assets to the
Creditors. Accordingly, if there were an event of default under the Senior
Secured Credit Facility, the lenders thereunder would be entitled to payment in
full and could foreclose on the assets of the Subsidiary Borrowers, and the
holders of the Senior Discount Notes and Senior Notes would have no right to
share in such assets. At December 31, 1999, an aggregate of $235.0 million was
outstanding under this facility.
Additionally, the Senior Secured Credit Facility restricts the ability of the
Subsidiary Borrowers 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 meets its cash requirements, including its ability to
repay the Senior Discount Notes and the Senior Notes.
At December 31, 1999, an aggregate of $504.8 million has been loaned by the
Company to the Subsidiary Borrowers to be used for the construction and
expansion of fiber optic telecommunications networks and for working capital and
general corporate purposes.
As discussed further in Note 8, the Subsidiary Borrowers amended, restated and
combined the Senior Secured Credit Facility and the Lucent Loan and Security
Agreement during the first quarter of 2000.
76
<PAGE>
3. SENIOR DISCOUNT NOTES
On January 29, 1998, the Company sold 460,800 units, each consisting of 12 1/2%
senior discount notes with a principal amount at maturity of $1,000 due 2008
pursuant to the Senior Discount Note Indenture between KMC Holdings and the
Chase Manhattan Bank, as trustee (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 $236.4 million, respectively. A substantial portion of the
net proceeds of the offering have been loaned by the Company to its
subsidiaries. On August 11, 1998, KMC Holdings consummated an offer to exchange
the notes issued on January 29, 1998 for $460.8 million aggregate principal
amount at maturity of notes that had been registered under the Securities Act of
1933 (as used below and elsewhere herein, "Senior Discount Notes" includes the
original notes and the exchange notes).
The Senior Discount Notes are unsecured, unsubordinated obligations of the
Company and mature on February 15, 2008. The Senior Discount Notes will fully
accrete to face value on February 15, 2003. From and after February 15, 2003,
the Senior Discount Notes will bear interest, which will be payable in cash, at
the rate of 12.5% per annum on February 15 and August 15 of each year,
commencing August 15, 2003. The Company is accreting the initial carrying value
of the Senior Discount Notes to their aggregate face value over the term of the
debt at its effective interest rate of 13.7%.
The indebtedness evidenced by the Senior Discount Notes ranks pari passu in
right of payment with all existing and future unsubordinated, unsecured
indebtedness of KMC Holdings and senior in right of payment to all existing and
future subordinated indebtedness of KMC Holdings. However, KMC Holdings is a
holding company and the Senior Discount Notes are, therefore, effectively
subordinated to all existing and future liabilities (including trade payables)
of its subsidiaries.
The Senior Discount Note Indenture restricts, among other things, the ability of
the Company to incur additional indebtedness, create liens, engage in
sale-leaseback transactions, pay dividends or make distributions in respect of
capital stock, make investments or certain other restricted payments, sell
assets of the Company, redeem capital stock, issue or sell stock of restricted
subsidiaries, enter into transactions with stockholders or affiliates or effect
a consolidation or merger.
4. LUCENT LOAN AND SECURITY AGREEMENT
KMC Telecom III entered into a Loan and Security Agreement (the "Lucent
Facility") dated February 4, 1999 with Lucent Technologies Inc. ("Lucent") which
provides for borrowings to be used to fund the acquisition of certain
telecommunications equipment and related expenses.
The Company has unconditionally guaranteed the repayment of the Lucent Facility
when such repayment is due, whether at maturity, upon acceleration, or
otherwise. The Company has agreed to pay all amounts outstanding under the
Lucent 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 III to Lucent to collateralize its obligations under the guaranty.
In addition, KMC Telecom III has pledged all of its assets to Lucent.
Accordingly, if there were an event of default under the Lucent Facility, Lucent
thereunder would be entitled to payment in full and could foreclose on the
assets of KMC Telecom III and the holders of the Senior Discount Notes and
Senior Notes would have no right to share in such assets. At December 31, 1999,
no amounts were outstanding under this facility.
Additionally, the Lucent Facility restricts the ability of KMC Telecom III 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 and the Senior Notes.
5. SENIOR NOTES
On May 24, 1999, the Company issued $275.0 million aggregate principal amount of
13 1/2% Senior Notes due 2009. On December 30, 1999, the Company exchanged the
77
<PAGE>
notes issued on May 24, 1999 for $275.0 million aggregate principal amount of
notes that had been registered under the Securities Act of 1933 (as used below,
"Senior Notes" includes the original notes and the exchange notes). Interest on
the Senior Notes is payable semi-annually in cash on May 15 and November 15 of
each year, beginning November 15, 1999. A portion of the proceeds from the
offering of the Senior Notes was used to purchase a portfolio of U.S. government
securities that were pledged as security for the first six interest payments on
the Senior Notes.
The Senior Notes are guaranteed by KMC Telecom Financing, Inc., a wholly-owned
subsidiary. The Senior Notes are senior, unsubordinated unsecured obligations of
KMC Holdings and rank pari passu in right of payment with all existing and
future unsubordinated, unsecured indebtedness of KMC Holdings and senior in
right of payment to all of existing and future subordinated indebtedness of KMC
Holdings. However, KMC Holdings is a holding company and the Senior Notes are,
therefore, effectively subordinated to all existing and future liabilities
(including trade payables) of its subsidiaries.
The Senior Note Indenture contains certain covenants that, among other things,
limit the Company's ability to incur additional indebtedness, engage in
sale-leaseback transactions, pay dividends or make certain other distributions,
sell assets, redeem capital stock, effect a consolidation or merger of KMC
Telecom Holdings, Inc. and enter into transactions with stockholders and
affiliates and create liens on our assets.
6. REDEEMABLE EQUITY
Series E Preferred Stock
On February 4, 1999, the Company issued 25,000 shares of Series E Senior
Redeemable, Exchangeable PIK Preferred Stock (the "Series E Preferred Stock") to
Newcourt Commercial Finance Corporation ("Newcourt Finance"), generating
aggregate gross proceeds of $22.9 million. The Series E Preferred Stock has a
liquidation preference of $1,000 per share and an annual dividend equal to 14.5%
of the liquidation preference, payable quarterly. On or before January 15, 2004,
the Company may pay dividends in cash or in additional fully paid and
nonassessable shares of Series E Preferred Stock. After January 15, 2004,
dividends must be paid in cash, subject to certain conditions. Unpaid dividends
accrue at the dividend rate of the Series E Preferred Stock, compounded
quarterly. During 1999, the Company issued 5,004 shares of Series E Preferred
Stock to pay the dividends due.
The Series E Preferred Stock must be redeemed on February 1, 2011, subject to
the legal availability of funds therefor, at a redemption price, payable in
cash, equal to the liquidation preference thereof on the redemption date, plus
all accumulated and unpaid dividends to the date of redemption.
The Series E Preferred Stock is not convertible. The Company may, at the sole
option of the Board of Directors (out of funds legally available), exchange all,
but not less than all, of the Series E Preferred Stock then outstanding, for a
new series of subordinated debentures (the "Exchange Debentures") issued
pursuant to an exchange debenture indenture.
Series F Preferred Stock
On February 4, 1999, the Company issued 40,000 shares of Series F Senior
Redeemable, Exchangeable PIK Preferred Stock (the "Series F Preferred Stock") to
Lucent and Newcourt Finance, generating aggregate gross proceeds of $38.9
million. The Series F Preferred Stock has a liquidation preference of $1,000 per
share and an annual dividend equal to 14.5% of the liquidation preference,
payable quarterly. The Company may pay dividends in cash or in additional fully
paid and nonassessable shares of Series F Preferred Stock. During 1999, the
Company issued 4,177 shares of Series F Preferred Stock to pay the dividends due
for such period.
Upon the earlier of (i) the date that is sixty days after the date on which the
Company closes an underwritten primary offering of at least $200 million of its
Common Stock, pursuant to an effective registration statement under the
Securities Act or (ii) February 4, 2001, any outstanding Series F Preferred
Stock will automatically convert into Series E Preferred Stock, on a one for one
basis.
78
<PAGE>
The Company may, at the sole option of the Board of Directors (out of funds
legally available), exchange all, but not less than all, of the Series F
Preferred Stock then outstanding for Exchange Debentures.
Warrants
In connection with the February 4, 1999 issuances of the Series E Preferred
Stock and the Series F Preferred Stock, warrants to purchase an aggregate of
24,660 shares of Common Stock were sold to Newcourt Finance and Lucent. The
aggregate gross proceeds from the sale of these warrants was approximately $3.2
million. These warrants, at an exercise price of $.01 per share, are exercisable
from February 4, 2000 through February 1, 2009.
In addition, the Company also delivered to the Warrant Agent certificates
representing warrants to purchase an aggregate of an additional 107,228 shares
of Common Stock at an exercise price of $.01 per share (the "Springing
Warrants"). The Springing Warrants may become issuable under the circumstances
described in the following paragraph.
If the Company fails to redeem all shares of Series F Preferred Stock prior to
the date (the "Springing Warrant Date") which is the earlier of (i) the date
that is sixty days after the date on which the Company closes an underwritten
primary offering of at least $200 million of its Common Stock pursuant to an
effective registration statement under the Securities Act or (ii) February 4,
2001, the Warrant Agent is authorized to issue the Springing Warrants to the
Eligible Holders (as defined in the warrant agreement) of the Series E and
Series F Preferred Stock. In the event the Company has redeemed all outstanding
shares of Series F Preferred Stock prior to the Springing Warrant Date, the
Springing Warrants will not be issued and the Warrant Agent will return the
certificates to the Company. To the extent the Company exercises its option to
exchange all of the Series F Preferred Stock for Exchange Debentures prior to
the Springing Warrant Date, the Springing Warrants will not become issuable.
Therefore, as the future issuance of the Springing Warrant is entirely within
the control of the Company and the likelihood of their issuance is deemed to be
remote, no value has been ascribed to the Springing Warrants.
Redemption Rights
Pursuant to a stockholders agreement, certain of the Company's stockholders and
warrant holders have "put rights" entitling them to have the Company repurchase
their preferred and common shares and redeemable common stock warrants for the
fair value of such securities if no Liquidity Event (defined as (i) an initial
public offering with gross proceeds of at least $40 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. The restrictive covenants of the
Senior Discount Notes limit the Company's ability to repurchase such securities.
All of the securities subject to such "put rights" are presented as redeemable
equity in the accompanying balance sheets.
The redeemable preferred stock, redeemable common stock and redeemable common
stock warrants, which are subject to the stockholders agreement, 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,
1999, the aggregate redemption value of the redeemable equity was approximately
$320 million, reflecting per share redemption amounts of $1,212 for the Series A
Preferred Stock, $476 for the Series C Preferred Stock and $250 for the
redeemable common stock and redeemable common stock warrants.
7. ARBITRATION AWARD
During the second quarter of 1999, the Company recorded a $4.3 million charge to
other expense in connection with an unfavorable arbitration award. The net
amount due under the terms of the award was paid in full in June 1999.
8. SUBSEQUENT EVENTS
On February 15, 2000, KMC Telecom, KMC Telecom II, KMC Telecom of Virginia and
KMC Telecom III (the "Borrowers"), amended, restated and combined the Senior
Secured Credit Facility and the Lucent Facility by entering into a $700 million
79
<PAGE>
Loan and Security Agreement (the "Amended Senior Secured Credit Facility") with
a group of lenders led by Newcourt Commercial Finance Corporation, GE Capital,
Canadian Imperial Bank of Commerce ("CIBC"), First Union National Bank and
Lucent Technologies, Inc. (the "Lenders").
The Amended Senior Secured Credit Facility includes a $175 million reducing
revolver facility (the "Revolver"), a $75 million term loan (the "Term Loan")
and a $450 million term loan facility (the "Lucent Term Loan").
The Revolver will mature on April 1, 2007. Proceeds from the Revolver can be
used to finance the purchase of certain equipment, transaction costs and upon
attainment of certain financial condition, for working capital and other general
corporate purposes. The aggregate commitment of the Lenders under the Revolver
will be reduced on each payment date beginning April 1, 2003. The initial
quarterly commitment reduction is 5.0%, reducing to 3.75% on July 1, 2003 and
increasing to 6.25% on July 1, 2004, and further increasing to 7.50% on July 1,
2006. Commencing with the fiscal year ending December 31, 2001, the aggregate
Revolver commitment will be further reduced by an amount equal to 50% of excess
operating cash flows (as defined in the Facility) for the prior fiscal year
until the Borrowers achieve certain financial conditions. The Borrowers must pay
an annual commitment fee on the unused portion of the Revolver ranging from .75%
to 1.25%.
The Term Loan is payable in twenty consecutive quarterly installments of
$188,000 beginning on April 1, 2002 and two final installments of $35.6 million
each on April 1, 2007 and July 1, 2007. Proceeds from the Term Loan can be used
to finance the purchase of certain equipment, transaction costs, working capital
and other general corporate purposes.
The Lucent Term Loan provides for an aggregate commitment of up to $450 million.
Proceeds from the Lucent Term Loan can be used to purchase Lucent products or to
reimburse the Borrowers for Lucent products previously purchased with cash or
other sources of liquidity. The Lucent Term Loan will mature on July 1, 2007 and
has required quarterly amortization beginning on July 1, 2003 of 5%. The
amortization decreases to 3.75% per quarter beginning on October 1, 2003,
increases to 6.25% on October 1, 2004 and further increases to 7.50% on October
1, 2006. An annual commitment fee of 1.50% is payable for any unused portion of
the Lucent Term Loan.
The Amended Senior Secured Credit Facility will bear interest payable at the
Borrowers' option, at (a) the "Applicable Base Rate Margin" (which generally
ranges from 2.00% to 3.25%) plus the greater of (i) the administrative agent's
prime rate or (ii) the overnight federal funds rate plus .5% or (b) the
"Applicable LIBOR Margin" (which generally ranges from 3.00% to 4.25%) plus
LIBOR, as defined. "Applicable Base Rate Margin" interest is payable quarterly
while "Applicable LIBOR Margin" interest is payable at the end of each
applicable interest period or at least every three months. If a payment default
were to occur, the interest rate will be increased by four percentage points. If
any other event of default shall occur, the interest rate will be increased by
two percentage points.
KMC Holdings has unconditionally guaranteed the repayment of the Amended Senior
Secured Credit Facility when such repayment is due, whether at maturity, upon
acceleration, or otherwise. KMC Holdings has pledged the shares of each of the
Borrowers to the Lenders to collateralize its obligations under the guaranty. In
addition, the Borrowers have each pledged all of their assets to the Lenders.
The Amended Senior Secured Credit Facility contains a number of affirmative and
negative covenants including, a covenant requiring the Borrowers to obtain cash
capital contributions from KMC Holdings of at least $185 million prior to April
1, 2001. KMC Holdings has secured a financing commitment for $100 million in PIK
preferred stock from Lucent towards this requirement and currently contemplates
raising the balance of $85 million through sales of private and public
securities in the capital markets. Additional affirmative and negative covenants
include, among others, 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 KMC Holdings, create subsidiaries, transfer any permits or
licenses, or incur additional indebtedness or act as guarantor for the debt of
any person, subject to certain conditions.
The Borrowers are required to comply with certain financial tests and maintain
certain financial ratios, including, among others, a ratio of total debt to
contributed capital, certain minimum revenues, maximum EBITDA losses and minimum
80
<PAGE>
EBITDA, maximum capital expenditures and minimum access lines, a maximum total
leverage ratio, a minimum debt service coverage ratio, a minimum fixed charge
coverage ratio and a maximum consolidated leverage ratio. The covenants become
more restrictive upon the earlier of (i) March 31, 2002 and (ii) after the
Borrowers achieve positive EBITDA on a combined basis for two consecutive fiscal
quarters and a total leverage ratio (as defined) equal to or less than 8 to 1.
Failure to satisfy any of the financial covenants will constitute an event of
default under the Amended Senior Secured Credit Facility permitting the Lenders,
after notice, to terminate the commitment and/or accelerate payment of
outstanding indebtedness. The Amended Senior Secured Credit Facility also
includes other customary events of default, including, without limitation, a
cross-default to other material indebtedness, material undischarged judgments,
bankruptcy, loss of a material franchise or material license, breach of
representations and warranties, a material adverse change, and the occurrence of
a change of control
81
<PAGE>
KMC Telecom Holdings, Inc.
SCHEDULE II - Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
ADDITIONS
------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS AND ACCOUNTS - DEDUCTIONS - BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- - ----------------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts $ -- $ 34 $ -- $ -- $ 34
================= ================ ================= ================ =================
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful accounts $ 34 $ 370 $ -- $ 54(1) $350
================= ================ ================= ================ =================
YEAR ENDED DECEMBER 31, 1999:
Allowance for doubtful accounts $ 350 $5,263 $ -- $ 62(1) $5,551
================= ================ ================= ================ =================
</TABLE>
(1) Uncollectible accounts written-off.
82
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information with respect to the
persons who are members of the Board of Directors or are executive officers of
the Company as of March 29, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Harold N. Kamine................ 43 Chairman of the Board of Directors
Gary E. Lasher.................. 64 Vice Chairman of the Board of Directors
Roscoe C. Young II............. 49 President, Chief Operating Officer and Director
William H. Stewart.............. 33 Executive Vice President, Chief Financial Officer and Director
Tricia Breckenridge............. 53 Executive Vice President - Business Development
James L. Barwick................ 67 Senior Vice President and Chief Technology Officer
John G. Quigley................. 46 Director
Richard H. Patterson............ 41 Director
Randall A. Hack................. 52 Director
</TABLE>
The business experience of each of the directors and executive officers of
the Company is as follows:
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.
Companies owned by Mr. Kamine owned substantial interests in and managed six
power generation plants in the Northeastern United States. Mr. Kamine devotes
approximately eighty percent of his time to the affairs of the Company.
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 from 1987 to 1997. Eastern TeleLogic
was a leading competitive local exchange carrier operating in greater
Philadelphia, Delaware and southern New Jersey before its purchase by TCG
(Teleport Communications Group) in October 1996. Prior to Eastern TeleLogic,
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 holding
various positions including Corporate Vice President, President of the
International Engineering and Construction Company, and various senior positions
with Continental Telephone'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.
ROSCOE C. YOUNG II has over 20 years experience in the field of
telecommunications with both new venture and Fortune 500 companies. He has
served as a director of the Company since December 1999. He was elected
President and Chief Operating Officer of the Company in March 2000. Previously
he had been Executive Vice President and Chief Operating Officer. 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.
WILLIAM H. STEWART has served as a director of the Company since August
1997. Mr. Stewart joined the Company as Executive Vice President and Chief
Financial Officer in March 2000. Mr. Stewart is Managing Director 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.
83
<PAGE>
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.
JAMES L. BARWICK has 40 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 long
distance carrier and incumbent local exchange carrier areas, technical writing,
project management and computer assisted design systems.
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. Between 1980 and the formation of Nassau
Capital in 1995, Mr. Quigley was an attorney with the law firm of Kirkland &
Ellis in Chicago; a partner at Adler & Shaykin; and a partner at Clipper Capital
Partners.
RICHARD H. PATTERSON has served as a director of the Company since May
1997. From May 1986 to January 1999, Mr. Patterson served as a Partner of Waller
Capital Corporation, a media and communications investment banking firm. 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. Since January 2000,
Mr. Patterson has served as a founding principal of a second media and
telecommunications private equity fund managed by Spire Capital Partners LLC and
Spire Capital Management, Inc. Mr. Patterson is a member of the Board of
Directors of Regent Communications, Inc., which owns and operates radio stations
in mid-to-small size markets.
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. and Mezzanine Capital Property Investors, Inc.
Pursuant to provisions contained in both the Company's certificate of
incorporation and a stockholders agreement, Mr. Kamine and the Nassau entities
are currently 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 two of whom are nominated by
agreement of Mr. Kamine, Nassau and either Newcourt Communications Finance
Corporation or the holders of a majority of the outstanding shares of the
Company's Series C Cumulative Convertible Preferred Stock. The number of
Directors which Mr. Kamine is entitled to elect would be reduced to two if the
number of shares owned by him were to fall below two-thirds of the number of
shares of the Company initially issued to him, and to one if the number of
shares owned by him were to fall below one-third of the number of shares
initially issued to him. If his ownership were to fall below 5% of the number of
shares initially issued to him, Mr. Kamine would no longer be entitled to elect
any Directors pursuant to such provisions. Comparable reductions would be made
to the number of Directors which Nassau is entitled to elect if its ownership
were to fall below the specified fractions. If a default relating to payment
occurs under our Amended Senior Secured Credit Facility, and continues uncured
for 90 days, the holders of Series C Cumulative Convertible Preferred Stock
(currently Nassau, General Electric Capital Corporation and First Union) 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. In
October 1998, the bankruptcy court confirmed a plan of liquidation for this
entity.
Directors hold office until the next Annual Meeting of stockholders or
until their successors are duly elected and qualified. Executive officers are
elected annually by the Board of Directors and serve at the discretion of the
Board of Directors.
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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.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by, or paid to, any person acting
as the Company's Chief Executive Officer during 1999, regardless of the amount
of compensation paid, and the other four most highly compensated executive
officers of the Company whose aggregate cash and cash equivalent compensation
exceeded $100,000 during the fiscal year ended December 31, 1999 (collectively,
the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------------- ------------
OTHER ANNUAL SECURITIES
COMPENSATION UNDERLYING
NAME AND POSITION YEAR SALARY($) BONUS ($) ($)(1) OPTIONS(#)(2)
- - ----------------- ---- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Harold N. Kamine................... 1999 $450,000 - - -
Chairman of the
Board
Michael A. Sternberg(3)............ 1999 $496,539 $272,500 - -
President and Chief Executive 1998 $275,000 $407,500 - 65,000
Officer 1997 $240,385 $187,500 $45,909 9,228
Roscoe C. Young II................. 1999 $446,539 $362,500 $18,750 -
Executive Vice President 1998 $218,270 $497,500 $52,189 32,500
and Chief Operating Officer 1997 $180,000 $182,046 $198,180 2,309
James D. Grenfell(4)............... 1999 $222,692 $120,000 $55,403 18,000
Executive Vice President,
Chief Financial
Officer and Secretary
Tricia Breckenridge................ 1999 $193,212 $86,000 - 1,000
Executive Vice President - 1998 $155,577 $75,000 - 5,000
Business Development 1997 $104,138 $49,000 - 691
</TABLE>
- - -----------------------------------------------
(1) The amount reported in this column for Mr. Sternberg in 1997 includes
relocation related expenses of $39,662 and personal use of a Company
automobile of $6,247. The amounts reported in this column for Mr. Young
include relocation related expenses of $18,750 in 1999, relocation related
expenses of $47,377 and personal use of a Company automobile of $4,812 for
1998, and relocation related expenses of $196,029 and personal use of a
Company automobile of $2,151 for 1997. The amounts reported in this column
for Mr. Grenfell include relocation related expenses of $49,265 and
personal use of a company automobile of $6,138 for 1999. The aggregate
value of the perquisites and other personal benefits, if any, received by
Mr. Sternberg in 1999 and 1998 and by each of Mr. Kamine and Ms.
Breckenridge in 1999, 1998 and 1997 have not been reflected in this table
because the amount was below the Securities and Exchange Commission's
threshold for disclosure (i.e., the lesser of $50,000 or 10% of the total
of annual salary and bonus for the executive officer for the year).
(2) The options granted in 1997 were options to purchase shares of common stock
of the Company's principal operating subsidiary KMC Telecom Inc. All of the
options shown as granted in 1997 were cancelled during the third quarter of
1998 and replaced by options to purchase Common Stock of the Company. See
"Stock Option Grants." All options granted during 1998 are options to
purchase shares of Common Stock of the Company.
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<PAGE>
(3) Mr. Sternberg served in the capacities indicated throughout the year ended
December 31, 1999.
(4) Mr. Grenfell joined the Company as Executive Vice President and Chief
Financial Officer in March 1999 and the compensation figures for him are
for the period from that date to the end of the year. William H. Stewart
became Executive Vice President and Chief Financial Officer in March 2000.
STOCK OPTION GRANTS
The following table sets forth information regarding grants of options to
purchase shares of Common Stock made by the Company during 1999 to each of the
Named Executive Officers.
OPTION GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------- -------------------------------------
PERCENT OF
NUMBER OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS ASSUMED ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO MARKET PRICE PRICE APPRECIATION FOR
OPTIONS EMPLOYEES EXERCISE OR OF COMMON OPTION TERM (3)
GRANTED IN FISCAL BASE PRICE STOCK ON DATE EXPIRATION ---------------------------------------
NAME (#)(1) 1999 ($/SHARE) OF GRANT (2) DATE (0%) (5%) (10%)
- - ----------------------- --------- -------- --------- ------------ --------- -------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Harold N. Kamine.......... - - - - - - - -
Michael A. Sternberg ..... - - - - - - - -
Roscoe C. Young II....... - - - - - - - -
James D. Grenfell......... 18,000 21.9% $125 $130 01/01/09 $90,000 $1,566,000 $3,816,000
Tricia Breckenridge....... 1,000 1.2% $125 $130 01/01/09 $ 5,000 $ 87,000 $ 212,000
</TABLE>
- - -----------------------------------------------
(1) 10% of the aggregate amount of each such option vests on each subsequent
six-month anniversary of the date of grant.
(2) There is no active trading market for the Company's Common Stock. The
market price shown is based upon management's estimate of the fair value of
the Company's Common Stock on the date in January, 1999 when these options
were granted.
(3) 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
Common Stock over the term of the options. These assumptions are based on
rules promulgated by the Securities and Exchange Commission and do not
reflect the Company's estimate of future stock price appreciation. Actual
gains, if any, on the stock option exercises and Common Stock holdings are
dependent on the timing of such exercises and the future value of the
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 holders.
OPTION EXERCISES AND OPTION YEAR-END VALUE TABLE
No options were exercised during 1999 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 Common Stock held at
December 31, 1999 by each of the Named Executive Officers.
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<PAGE>
FISCAL 1999 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED "IN-THE-MONEY"
SHARES VALUE OPTIONS AT OPTIONS AT
ACQUIRED ON REALIZED DECEMBER 31, 1999 DECEMBER 31, 1999
NAME EXERCISE(#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- - ------------------------- ----------- ------- ------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
Harold N. Kamine - - - $ - /$ -
Michael A. Sternberg - - 39,000/26,000 $8,970,000/$5,590,000
Roscoe C. Young II - - 19,500/13,000 $4,485,000/$2,795,000
James D. Grenfell - - 1,800/16,200 $225,000/$2,025,000
Tricia Breckenridge - - 4,600/1,400 $1,027,500/$217,500
</TABLE>
- - -----------------------------------------------
(1) Options are "In-the-Money" if the fair market value of the underlying
securities exceeds the exercise price of the options. There is no active
trading market for the Company's Common Stock. The fair market value of the
option grants at December 31, 1999 was determined on the basis of
management's estimate of the fair value of the Company's Common Stock on
that date.
DIRECTOR COMPENSATION
The Company's Directors do not currently receive any compensation for their
services in such capacity, except that Mr. Lasher receives $25,000 per year in
connection with his services as Vice Chairman of the Board and Mr. Patterson
receives $25,000 per year in connection with his services as a Director.
EXECUTIVE EMPLOYMENT CONTRACTS
The Company has an employment contract with Harold N. Kamine, the Chairman
of its Board of Directors. The Company's employment agreement with Mr. Kamine
provides for a term of four years, effective as of January 1, 1999. Under the
agreement, Mr. Kamine's base salary is $450,000 per annum, and Mr. Kamine is
required to devote at least fifty percent of his time and attention to the
performance of his duties under the agreement. Mr. Kamine is entitled to receive
benefits generally received by senior executives of the Company, including
reimbursement of expenses incurred on behalf of the Company, and participation
in group plans. If Mr. Kamine's employment agreement is terminated as a result
of Mr. Kamine's death or permanent disability, or upon the Company's breach of
the agreement, he, or his estate, is entitled to a severance payment in an
amount equal to the lesser of (i) two times his annual base salary and (ii) the
aggregate unpaid base salary that would have been paid to him during the
remaining balance of the term of the employment contract, subject to a minimum
of one-half of his annual base salary.
The Company has an employment contract with Roscoe C. Young, II, President
and Chief Operating Officer. The Company's employment agreement with Mr. Young
provides for a term of four years, effective as of January 1, 1999. Under the
agreement, Mr. Young's base salary is $450,000 per annum and he is entitled to
be considered for an annual bonus in an amount to be determined by the
Compensation Committee of the Company's Board of Directors. Mr. Young 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.
Young is subject to a confidentiality covenant and a twenty-four month
non-competition agreement. If the Company terminates Mr. Young's employment
without cause, he is entitled to a severance payment in an amount equal to the
lesser of (i) two times his annual base salary and (ii) the aggregate unpaid
base salary that would have been paid to him during the remaining balance of the
term of the employment contract, subject to a minimum of one-half of his annual
base salary.
SEPARATION AGREEMENTS
On March 7, 2000, the Company entered into a separation agreement and
release with Michael A. Sternberg, pursuant to which Mr. Sternberg's employment
as the Company's President and Chief Executive Officer was terminated, by mutual
agreement, effective March 8, 2000. Under the separation agreement, Mr.
Sternberg was paid $500,000 and is entitled to an additional $500,000 which will
be paid in semi-monthly installments between April 1, 2000 and March 31, 2001,
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<PAGE>
subject to acceleration in certain circumstances. Mr. Sternberg was also
reimbursed for accrued vacation time. Pursuant to the agreement, the Company
will pay the costs associated with Mr. Sternberg's current enrollment in the
Company's health care plans through December 31, 2001. Mr. Sternberg will also
retain 65,000 stock options previously granted to him under the KMC Holdings
Stock Option Plan. Mr. Sternberg has agreed to vote any shares of common stock
owned by him in accordance with the shares owned by Mr. Kamine and Nassau. Mr.
Sternberg has agreed to make himself available to consult with the Company on a
non-exclusive basis through December 31, 2001.
On March 7, 2000, the Company entered into a separation agreement and
release with James D. Grenfell, pursuant to which Mr. Grenfell's employment as
the Company's Executive Vice President, Chief Financial Officer and Secretary
was terminated, by mutual agreement, effective March 8, 2000. Under the
separation agreement, Mr. Grenfell was paid $500,000 and is entitled to an
additional $300,000 which will be paid in semi-monthly installments to be paid
over a twelve month period in accordance with the Company's payroll practices.
Mr. Grenfell is also entitled to a payment of $200,000 on March 1, 2001.
Pursuant to the agreement, the Company will pay the costs associated with Mr.
Grenfell's current enrollment in the Company's health care plans through
December 31, 2001. Mr. Grenfell will also retain 3,600 stock options previously
granted to him under the KMC Holdings Stock Option Plan. Mr. Grenfell has agreed
to vote any shares of common stock owned by him in accordance with the shares
owned by Mr. Kamine and Nassau. The Company will also pay Mr. Grenfell up to
$40,000 for certain relocation and other services.
EMPLOYEE PLANS
KMC Holdings Stock Option Plan. Employees, directors or other persons
having a unique relationship with the Company or any of its affiliates are
eligible to participate in the KMC Holdings Stock Option Plan. However, neither
Mr. Kamine nor any person employed by Nassau or any affiliate of Nassau is
eligible for grants under the plan. The KMC Holdings Stock Option Plan is
administered by the Compensation Committee of the Board of Directors of the
Company. The Compensation Committee is authorized to grant (i) options intended
to qualify as Incentive Options, (ii) Non-Qualified Options, (iii) stock
appreciation rights, (iv) restricted stock, (v) performance units, (vi)
performance shares and (vii) certain other types of awards.
The number of shares of Company Common Stock available for grant under the
KMC Holdings Stock Option Plan is 600,000. No participant may receive more than
75,000 shares of Company Common Stock under the KMC Holdings Stock Option Plan.
The Compensation Committee has the power and authority to designate
recipients of grants under the KMC Holdings Stock Option Plan, to determine the
terms, conditions and limitations of grants under the plan and to interpret the
provisions of the plan. The exercise price of all Incentive Options granted
under the KMC Holdings Stock Option Plan must be at least equal to the Fair
Market Value (as defined in the plan) of Company Common Stock on the date the
options are granted and the exercise price of all Nonqualified Options granted
under the KMC Holdings Stock Option Plan must be at least equal to 50% of the
Fair Market Value of Company Common Stock on the date the options are granted.
The maximum term of each Option granted under the KMC Holdings Stock Option Plan
will be 10 years. Options will become exercisable at such times and in such
installments as the Compensation Committee provides in the terms of each
individual Option.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Kamine, the Chairman of the Board of the Company, and Messrs. Quigley
and Patterson, Director of the Company, served as members of the Compensation
Committee of the Board of Directors during 1999. Mr. Quigley is also a member of
Nassau Capital Partners L.P. which, through its affiliates, beneficially owns
more than five percent (5%) of the Company's voting securities.
The Company and certain affiliated companies owned by Mr. Kamine share
certain administrative services. The entity which bears the cost of the service
is reimbursed by the other for the other's proportionate share of such expenses.
These shared services do not include the rent paid by the Company for its
headquarters offices to an affiliate of Mr. Kamine under the lease described in
the next succeeding paragraph. The Company reimbursed Kamine-affiliated
companies for these shared services an aggregate of approximately $60,000, for
1999.
Effective June 1, 1996, the Company entered into a lease agreement with
Kamine Development Corp. (an entity controlled by Mr. Kamine) pursuant to which
the Company leases its headquarters office in Bedminster, New Jersey. The lease
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<PAGE>
expires in January 2007. The lease provides for a base annual rental of
approximately $217,000 (adjusted periodically for changes in the consumer price
index), plus operating expenses.
Pursuant to an agreement, the Company is entitled to utilize a Citation III
business jet chartered by Bedminster Aviation, LLC, a limited liability company
wholly owned by Mr. Kamine, for a fixed price of $2,800 per hour of flight time.
The Citation III will enable up to eight employees, guests or representatives of
the Company to utilize local airfields and visit multiple cities in which the
Company either has an operating system or is building a system, without the
necessity of returning to commercial hubs such as Atlanta or St. Louis. The
Company has agreed to use its best efforts to utilize the Citation III fifty
hours per quarter during 2000. However, the Company is under no obligation to do
so and has not guaranteed any financial arrangements with respect to the
aircraft or to Bedminster Aviation, LLC. During 1999 the Company paid $210,000
for the use of the Citation III.
On July 1, 1999, the Company acquired all of the membership interests of
KMC Services LLC from Harold N. Kamine, the Chairman of the Board of Directors,
for nominal consideration. KMC Services LLC was formed to provide services to
the Company and its customers, initially offering a leasing program for
equipment physically installed at the customer's premises. The acquisition was
accounted for as a combination of entities under common control, and no changes
were made to the historical cost basis of KMC Services LLC's assets. During the
second quarter of 1999, the Company had reduced the carrying value of its
$709,000 loan receivable from KMC Services LLC to an amount equal to the value
of KMC Services LLC's net assets at the acquisition date. KMC Services LLC has
been consolidated with the Company since July 1, 1999.
Pursuant to an Agreement among the Company, Mr. Kamine and Nassau, for 1999
Nassau received $450,000 as a financial advisory fee and as compensation for the
Nassau designees who served on the Board of Directors of the Company. Nassau
will be paid $450,000 as a financial advisory fee for 2000.
In December 1999, the Company purchased $180,000 of office equipment and
leasehold improvements from Kamine Development Corp. (an entity controlled by
Mr. Kamine). The Company determined that the purchase of such equipment was upon
fair and reasonable terms no less favorable to the Company than could be
obtained in a comparable arm's-length transaction with a person that is not an
affiliate of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock, as of March 29, 2000, by (i) each person known to
the Company to be the beneficial owner of more than 5% of the Common Stock, (ii)
each of the Company's directors, (iii) each of the Named Executive Officers, and
(iv) all directors and executive officers as a group. All information with
respect to beneficial ownership has been furnished to the Company by the
respective stockholders of the Company.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES (1) OWNERSHIP (1)
------------------------------------ ----------- --------------
<S> <C> <C>
Harold N. Kamine................................................ 573,835 67.2%
c/o Kamine Development Corp.
1545 Route 206
Bedminster, NJ 07921
Nassau Capital Partners L.P..................................... 661,454(2) 44.1%
c/o Nassau Capital L.L.C.
22 Chambers Street
Princeton, NJ 08542
Newcourt Capital, Inc........................................... 191,033.2(3) 21.6%
2 Gate Hall Drive
Parsipany, NJ 07054
First Union Corp. .............................................. 146,742.6(4) 14.8%
301 South College St.
Charlotte, NC 28288
89
<PAGE>
General Electric Capital Corporation............................ 200,476(5) 19.0%
120 Long Ridge Road
Stamford, CT 06927
CIBC Inc. ...................................................... 44,104 5.2%
425 Lexington Avenue
New York, New York 10017
Michael A. Sternberg ........................................... 65,000(6) 7.1%
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, New Jersey 07921
Gary E. Lasher.................................................. 10,000(6) 1.2%
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, New Jersey 07921
John G. Quigley................................................. 661,454(7) 44.1%
c/o Nassau Capital L.L.C.
22 Chambers Street
Princeton, NJ 08542
Richard H. Patterson............................................ 3,000(6) 0.4%
c/o Waller Capital Corporation
30 Rockefeller Center
Suite 4350
New York, NY 10112
Randall A. Hack................................................. 661,454(7) 44.1%
c/o Nassau Capital L.L.C.
22 Chambers Street
Princeton, NJ 08542
Roscoe C. Young II............................................. 22,750(6) 2.6%
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07921
James D. Grenfell............................................... 3,600(6) 0.4%
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07921
William H. Stewart.............................................. 661,454(8) 44.1%
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07921
Tricia Breckenridge............................................. 5,200(6) 0.6%
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07921
Directors and Officers of the Company as a Group (10 persons)... 1,344,839(2) 83.5%
</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
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currently exercisable or exercisable within 60 days of March 29, 2000 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., of which Messrs. Quigley and Hack are members, have the right to
acquire upon conversion of 122,708 and 1,092 shares of Series A Cumulative
Convertible Preferred Stock, respectively, and 47,619 shares of Common
Stock which Nassau and NAS Partners I, L.L.C. have the right to acquire
upon conversion of 24,778 and 222 shares of Series C Cumulative Convertible
Preferred Stock, respectively. These are the same shares listed for Messrs.
Quigley and Hack.
(3) Includes 159,184.5 shares of Common Stock held by Newcourt Communications
Finance Corporation, a subsidiary of Newcourt Capital, Inc. and 31,848.7
shares of Common Stock which Newcourt Commercial Finance Corporation, also
a subsidiary of Newcourt Capital, Inc., has the right to acquire upon the
exercise of warrants.
(4) Includes 95,238 shares of Common Stock which First Union has the right to
acquire upon conversion of 50,000 shares of Series C Cumulative Convertible
Preferred Stock of the Company, and 44,587 shares which First Union Corp.
has the right to acquire upon the exercise of warrants.
(5) Includes 190,476 shares of Common Stock which General Electric Capital
Corporation has the right to acquire upon conversion of 100,000 shares of
Series C Cumulative Convertible Preferred Stock of the Company and 10,000
shares of Common Stock which General Electric Capital Corporation has the
right to acquire upon exercise of a warrant.
(6) Represents shares of Common Stock which the holder has the right to acquire
upon the exercise of options that are exerciseable within sixty days of
March 29, 2000 pursuant to the KMC Holdings Stock Option Plan.
(7) 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
Partners I, L.L.C.; 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.
(8) 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 Partners I, L.L.C.;
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.
Stockholders Agreement. The Amended and Restated Stockholders Agreement,
dated as of October 31, 1997, restricts the ability of the parties to that
agreement to transfer shares in the Company to persons not affiliated with or
related to such parties. Pursuant to such Stockholders Agreement and the
Company's certificate of incorporation, Mr. Kamine and Nassau are currently
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 two of whom are nominated by agreement of Mr.
Kamine, Nassau and either Newcourt Communications Finance Corporation or the
holders of a majority of the outstanding shares of the Company's Series C
Cumulative Convertible Preferred Stock. The number of Directors which Mr. Kamine
is entitled to elect would be reduced to two if the number of shares owned by
him were to fall below two-thirds of the number of shares of the Company
initially issued to him, and to one if the number of shares owned by him were to
fall below one-third of the number of shares initially issued to him. If his
ownership were to fall below 5% of the number of shares initially issued to him,
Mr. Kamine would no longer be entitled to elect any Directors pursuant to such
provisions. Comparable reductions would be made to the number of Directors which
Nassau is entitled to elect if its ownership were to fall below the specified
percentages. If a default relating to payment occurs under the Amended Senior
Secured Credit Facility, and continues uncured for 90 days, the holders of
Series C Cumulative Convertible Preferred Stock (currently Nassau, NAS Partners
I, L.L.C., General Electric Capital Corporation and First Union) will be
entitled to elect two additional Directors, who will serve until the default is
cured.
Each of Nassau, NAS Partners I, L.L.C, First Union, General Electric
Capital Corporation and Newcourt Communications Finance Corporation 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
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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 Company's 12 1/2% Senior Discount Notes. First Union,
General Electric Capital Corporation and Newcourt Communications Finance
Corporation may not exercise such put rights unless Nassau has exercised its put
right. The indenture applicable to the Company's 13 1/2% Senior Notes, 12 1/2%
Senior Discount Notes and the Company's other indebtedness will limit the
Company's ability to repurchase such shares.
Certain of 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In February, 1998, the Company loaned to Roscoe C. Young II, the Company's
President, Chief Operating Officer and Director, 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. In June 1998, the Company loaned Mr. Young an additional $110,000. The
largest aggregate amount of loans outstanding to Mr. Young at any time during
1999 was $405,000. The aggregate amount of loans outstanding to Mr. Young at
March 29, 2000 was $350,000. Mr. Young repaid $55,000 of this loan within thirty
(30) days and repaid the $55,000 balance in December 1999.
Pursuant to agreements entered into in September and October 1997, between
the Company and each of the holders of Series A Cumulative Convertible Preferred
Stock and Series C Cumulative Convertible Preferred Stock each such holder has
agreed to forego the payment of accumulated dividends on its shares of Series A
Cumulative Convertible Preferred Stock and Series C Cumulative Convertible
Preferred Stock of the Company from the date of such Dividend Agreement through
the date on which such holder disposes of its interest in the Company; provided,
that, upon such disposition, such 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.
Mr. Kamine, Nassau, Newcourt Communications Finance Corporation, First
Union and General Electric Capital Corporation are parties to the Stockholders
Agreement. Pursuant to the Stockholder's Agreement and the Company's certificate
of incorporation, Mr. Kamine and Nassau are currently entitled to elect all of
the Company's eight Directors, with each entitled to nominate three Directors,
and two to be nominated by agreement of Mr. Kamine, Nassau and either Newcourt
Communications Finance Corporation or the holders of a majority of the
outstanding shares of the Company's Series C Cumulative Convertible Preferred
Stock. The number of Directors which Mr. Kamine is entitled to elect would be
reduced to two if the number of shares owned by him were to fall below
two-thirds of the number of shares of the Company initially issued to him, and
to one if the number of shares owned by him were to fall below one-third of the
number of shares initially issued to him. If his ownership were to fall below 5%
of the number of shares initially issued to him, Mr. Kamine would no longer be
entitled to elect any Directors pursuant to such provisions. Comparable
reductions would be made to the number of Directors which Nassau is entitled to
elect if its ownership were to fall below the specified fractions.
Newcourt Commercial Finance Corporation (an affiliate of Newcourt Capital,
Inc.) has provided financing for the Company as one of the lenders under the
Amended Senior Secured Credit Facility. Pursuant to the Amended Senior Secured
Credit Facility, the lenders have agreed to make available, subject to certain
conditions, up to a total of $700.0 million, for construction and development of
the Company's twenty-three existing networks. The Company paid Newcourt Capital
and its affiliates an aggregate of $5,000,000 in fees, discounts and commissions
during the year ended December 31, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) 1. Financial Statements.
The financial statements are included in Part II, Item 8. of this
Report.
2. Financial Statement Schedules and Supplementary Information
Required to be Submitted.
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Independent Auditors' Report on Schedules
Schedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
These schedules are included in Part II, Item 8. of this Report.
All other schedules have been omitted because they are
inapplicable or the required information is shown in the
consolidated financial statements or notes.
(B) Reports on Form 8-K.
None.
(C) Index to Exhibits.
The following is a list of all Exhibits filed as part of this
Report:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
*3.1 Certificate of Incorporation of KMC Telecom Holdings, Inc., as amended,
dated as of April 30, 1999. (incorporated herein by reference to Exhibit
3.1 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period
ended June 30, 1999).
*3.2 Certificate of Powers, Designations, Preferences and Rights of the
Series A Cumulative Convertible Preferred Stock, Par Value $.01 Per
Share, as amended, dated as of April 30, 1999. (incorporated herein by
reference to Exhibit 3.2 to KMC Telecom Holdings, Inc.'s Form 10-Q for
the quarterly period ended June 30, 1999).
*3.3 Certificate of Powers, Designations, Preferences and Rights of the
Series C Cumulative Convertible Preferred Stock, Par Value $.01 Per
Share, as amended, dated as of April 30, 1999. (incorporated herein by
reference to Exhibit 3.3 to KMC Telecom Holdings, Inc.'s Form 10-Q for
the quarterly period ended June 30, 1999).
*3.4 Certificate of Powers, Designations, Preferences and Rights of the
Series D Cumulative Convertible Preferred Stock, Par Value $.01 Per
Share, as amended, dated as of April 30, 1999. (incorporated herein by
reference to Exhibit 3.4 to KMC Telecom Holdings, Inc.'s Form 10-Q for
the quarterly period ended June 30, 1999).
*3.5 Certificate of Voting Powers, Designations, Preferences and Relative
Participating, Optional or Other Special Rights and Qualifications,
Limitations and Restrictions Thereof of the Series E Senior Redeemable,
Exchangeable, PIK Preferred Stock, as amended, dated as of April 30,
1999. (incorporated herein by reference to Exhibit 3.5 to KMC Telecom
Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30,
1999).
*3.6 Certificate of Voting Powers, Designations, Preferences and Relative
Participating, Optional or Other Special Rights and Qualifications,
Limitations and Restrictions Thereof of the Series F Senior Redeemable,
Exchangeable, PIK Preferred Stock, as amended, dated as of April 30,
1999. (incorporated herein by reference to Exhibit 3.6 to KMC Telecom
Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30,
1999).
*3.7 By-Laws of KMC Telecom Holdings, Inc. (incorporated herein by reference
to Exhibit 3.3 to KMC Telecom Holdings, Inc.'s Registration Statement on
Form S-4 (Registration No. 333-50475) filed on April 20, 1998.
(hereinafter referred to as the "KMC Holdings' S-4")).
*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.,
Newcourt Commercial Finance Corporation (formerly known as AT&T Credit
Corporation), General Electric Capital Corporation, CoreStates Bank,
N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to
Exhibit 4.1 to KMC Holdings' S-4).
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*4.2 Amendment No. 1 dated as of January 7, 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., NAS Partners I
L.L.C., Harold N. Kamine, KMC Telecommunications L.P., Newcourt
Commercial Finance Corporation (formerly known as AT&T Credit
Corporation), General Electric Capital Corporation, CoreStates Bank,
N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to
Exhibit 4.2 to KMC Holdings' S-4).
*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., NAS Partners I
L.L.C., Harold N. Kamine, KMC Telecommunications L.P., Newcourt
Commercial Finance Corporation (formerly known as AT&T Credit
Corporation), General Electric Capital Corporation, CoreStates Bank,
N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to
Exhibit 4.3 to KMC Holdings' S-4).
*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., NAS
Partners I L.L.C., Harold N. Kamine, KMC Telecommunications L.P.,
Newcourt Commercial Finance Corporation (formerly known as AT&T Credit
Corporation), General Electric Capital Corporation, CoreStates Bank,
N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to
Exhibit 4.4 to KMC Holdings' S-4).
*4.5 Amendment No. 4 dated as of February 4, 1999 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., NAS Partners I
L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation
(formerly known as AT&T Credit Corporation), General Electric Capital
Corporation, CoreStates Bank, N.A. and CoreStates Holdings, Inc.
(incorporated herein by reference to Exhibit 4.5 to KMC Telecom
Holdings, Inc.'s Form 10-K for the fiscal year ended December 31, 1998).
*4.6 Amendment No. 5 dated as of April 30, 1999 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., NAS Partners I
L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation
(formerly known as AT&T Credit Corporation), General Electric Capital
Corporation, First Union National Bank (as successor to CoreStates Bank,
N.A.) and CoreStates Holdings, Inc. (incorporated herein by reference to
Exhibit 4.11 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly
period ended June 30, 1999).
*4.7 Amendment No. 6 dated as of June 1, 1999 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., NAS Partners I
L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation
(formerly known as AT&T Credit Corporation), General Electric Capital
Corporation, First Union National Bank (as successor to CoreStates Bank,
N.A.) and CoreStates Holdings, Inc. (incorporated herein by reference to
Exhibit 4.12 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly
period ended June 30, 1999).
4.8 Amendment No. 7 dated as of January 1, 2000 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., NAS Partners I
L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation
(formerly known as AT&T Credit Corporation), General Electric Capital
Corporation, First Union National Bank (as successor to CoreStates Bank,
N.A.) and CoreStates Holdings, Inc.
*4.9 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.
(incorporated herein by reference to Exhibit 4.5 to KMC Holdings' S-4).
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*4.10 First Supplemental Indenture dated as of May 24, 1999 among KMC Telecom
Holdings, Inc., KMC Telecom Financing, Inc. and The Chase Manhattan
Bank, as Trustee, to the Indenture dated as of January 29, 1998 between
KMC Telecom Holdings, Inc. and The Chase Manhattan Bank, as Trustee.
(incorporated herein by reference to Exhibit 4.1 to KMC Telecom
Holdings, Inc.'s Form 10-Q for the quarterly period ended September 30,
1999).
*4.11 Indenture dated as of May 24, 1999 among KMC Telecom Holdings, Inc., KMC
Telecom Financing, Inc. and The Chase Manhattan Bank, as Trustee,
including specimen of KMC Telecom Holdings, Inc.'s 13 1/2% Senior Notes
due 2009. (incorporated herein by reference to Exhibit 4.2 to KMC
Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended
September 30, 1999).
*4.12 Purchase Agreement dated as of May 19, 1999 among KMC Telecom Holdings,
Inc. and Morgan Stanley & Co. Incorporated, Credit Suisse First Boston
Corporation, First Union Capital Markets Corp., CIBC World Markets
Corp., BancBoston Robertson Stephens Inc. and Wasserstein Perella
Securities, Inc. (incorporated herein by reference to Exhibit 4.3 to KMC
Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended
September 30, 1999).
*4.13 Collateral Pledge and Security Agreement made and entered into as of May
24, 1999 by KMC Telecom Financing, Inc. in favor of The Chase Manhattan
Bank as Trustee. (incorporated herein by reference to Exhibit 4.4 to KMC
Telecom Holdings, Inc. 's Form 10-Q for the quarterly period ended
September 30, 1999).
*4.14 Registration Rights Agreement dated as of January 26, 1998, between KMC
Telecom Holdings, Inc. and Morgan Stanley & Co. Incorporated.
(incorporated herein by reference to Exhibit 4.6 to KMC Holdings' S-4).
*4.15 Registration Rights Agreement dated as of May 19, 1999 among KMC Telecom
Holdings, Inc. and Morgan Stanley & Co. Incorporated, Credit Suisse
First Boston Corporation, First Union Capital Markets Corp., CIBC World
Markets Corp., BancBoston Robertson Stephens Inc. and Wasserstein
Perella Securities, Inc. (incorporated herein by reference to Exhibit
4.5 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period
ended September 30, 1999).
*4.16 Warrant Agreement dated as of January 29, 1998 between KMC Telecom
Holdings, Inc. and The Chase Manhattan Bank, as Warrant Agent, including
a specimen of Warrant Certificate (incorporated herein by reference to
Exhibit 4.7 to KMC Holdings' S-4).
*4.17 Warrant Agreement dated as of February 4, 1999 among KMC Telecom
Holdings, Inc., The Chase Manhattan Bank, as Warrant Agent, Newcourt
Commercial Finance Corporation and Lucent Technologies Inc.
(incorporated herein by reference to Exhibit 10.2 to KMC Telecom
Holdings, Inc. 's Form 10-Q for the quarterly period ended March 31,
1999).
*4.18 Warrant Agreement dated as of April 30, 1999 among KMC Telecom Holdings,
Inc., The Chase Manhattan Bank, as Warrant Agent, First Union Investors,
Inc., Harold N. Kamine and Nassau Capital Partners L.P. (incorporated
herein by reference to Exhibit 4.4 to KMC Telecom Holdings, Inc. 's Form
10-Q for the quarterly period ended June 30, 1999).
*4.19 Amendment No. 1 dated as of April 30, 1999 to the Warrant Agreement
dated as of February 4, 1999, among KMC Telecom Holdings, Inc., The
Chase Manhattan Bank, as Warrant Agent, Newcourt Commercial Finance
Corporation, Lucent Technologies Inc. and First Union Investors, Inc.
(incorporated herein by reference to Exhibit 4.7 to KMC Telecom
Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30,
1999).
*4.20 Amendment No. 2 dated as of June 1, 1999 to the Warrant Agreement dated
as of February 4, 1999, among KMC Telecom Holdings, Inc., The Chase
Manhattan Bank, as Warrant Agent, Newcourt Commercial Finance
Corporation, Lucent Technologies Inc. and First Union Investors, Inc.
(incorporated herein by reference to Exhibit 4.8 to KMC Telecom
Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30,
1999).
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*4.21 Securities Purchase Agreement dated as of February 4, 1999 among KMC
Telecom Holdings, Inc., Newcourt Commercial Finance Corporation and
Lucent Technologies Inc. (incorporated herein by reference to Exhibit
10.1 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period
ended March 31, 1999).
*4.22 Securities Purchase Agreement dated as of April 30, 1999 between KMC
Telecom Holdings, Inc. and First Union Investors, Inc. (incorporated
herein by reference to Exhibit 4.2 to KMC Telecom Holdings, Inc.'s Form
10-Q for the quarterly period ended June 30, 1999).
*4.23 Amendment No. 1 dated as of June 1, 1999 to Securities Purchase
Agreement among KMC Telecom Holdings, Inc., First Union Investors, Inc.,
Newcourt Commercial Finance Corporation and Lucent Technologies Inc.
(incorporated herein by reference to Exhibit 4.3 to KMC Telecom
Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30,
1999).
*4.24 Warrant Registration Rights Agreement dated as of January 26, 1998
between KMC Telecom Holdings, Inc. and Morgan Stanley & Co.
Incorporated. (incorporated herein by reference to Exhibit 4.8 to KMC
Holdings' S-4).
*4.25 Warrant Registration Rights Agreement dated as of February 4, 1999 among
KMC Telecom Holdings, Inc., Newcourt Commercial Finance Corporation and
Lucent Technologies Inc. (incorporated herein by reference to Exhibit
10.3 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period
ended March 31, 1999).
*4.26 Warrant Registration Rights Agreement dated as of April 30, 1999 between
KMC Telecom Holdings, Inc. and First Union Investors, Inc. (incorporated
herein by reference to Exhibit 4.5 to KMC Telecom Holdings, Inc.'s Form
10-Q for the quarterly period ended June 30, 1999).
*4.27 Amendment No. 1 dated as of April 30, 1999 to Warrant Registration
Rights Agreement among KMC Telecom Holdings, Inc., Newcourt Commercial
Finance Corporation and Lucent Technologies Inc. (incorporated herein by
reference to Exhibit 4.6 to KMC Telecom Holdings, Inc.'s Form 10-Q for
the quarterly period ended June 30, 1999).
*4.28 Preferred Stock Registration Rights Agreement dated as of April 30, 1999
between KMC Telecom Holdings, Inc. and First Union Investors, Inc.
(incorporated herein by reference to Exhibit 4.9 to KMC Telecom
Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30,
1999).
*4.29 Amendment No. 1 dated as of June 1, 1999 to Preferred Stock Registration
Rights Agreement among KMC Telecom Holdings, Inc., First Union
Investors, Inc., Newcourt Commercial Finance Corporation and Lucent
Technologies Inc. (incorporated herein by reference to Exhibit 4.10 to
KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended
June 30, 1999).
*10.1 Purchase Agreement dated January 26, 1998 by and between KMC Telecom
Holdings, Inc. and Morgan Stanley & Co. Incorporated (incorporated
herein by reference to Exhibit 10.1 to KMC Holdings' S-4).
*10.2 Loan and Security Agreement dated as of December 22, 1998 among KMC
Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC
Telecom Leasing I LLC, KMC Telecom Leasing II LLC, the additional
subsidiaries from time to time parties thereto, the financial
institutions signatory thereto from time to time as "Lenders", First
Union National Bank as Administrative Agent for the Lenders and Newcourt
Commercial Finance Corporation (formerly known as AT&T Commercial
Corporation), as Collateral Agent for the Lenders. (incorporated herein
by reference to Exhibit 10.2 to KMC Telecom Holdings, Inc.'s Form 10-K
for the fiscal year ended December 31, 1998).
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*10.3 Amendment No. 1 to Loan and Security Agreement dated as of March 3, 1999
to Loan and Security Agreement dated as of December 22, 1998, among KMC
Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC
Telecom Leasing I LLC, KMC Telecom Leasing II LLC, the additional
subsidiaries from time to time parties thereto, the financial
institutions signatory thereto from time to time as "Lenders", First
Union National Bank as Administrative Agent for the Lenders and Newcourt
Commercial Finance Corporation (formerly known as AT&T Commercial
Corporation), as Collateral Agent for the Lenders. (incorporated herein
by reference to Exhibit 10.3 to KMC Telecom Holdings, Inc.'s Form 10-K
for the fiscal year ended December 31, 1998).
*10.4 Waiver and Amendment No. 3 to Loan and Security Agreement dated as of
October 29, 1999 to Loan and Security Agreement dated as of December 22,
1998, among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom of
Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC,
the financial institutions from time to time parties thereto as
"Lenders", First Union National Bank as Administrative Agent for the
Lenders and Newcourt Commercial Finance Corporation (formerly known as
AT&T Commercial Finance Corporation), as Collateral Agent for the
Lenders. (incorporated herein by reference to Exhibit 10.4 to KMC
Telecom Holdings, Inc.'s Registration Statement on Form S-4
(Registration No. 333-91237 and 333-91237-01) filed on November 18, 1999
(the "KMC Holdings 1999 S-4").
10.5 Amendment No. 4 to Loan and Security Agreement dated as of December 31,
1999 to Loan and Security Agreement dated as of December 22, 1998, among
KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc.,
KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC, the financial
institutions from time to time parties thereto as "Lenders", First Union
National Bank as Administrative Agent for the Lenders and Newcourt
Commercial Finance Corporation (formerly known as AT&T Commercial
Finance Corporation), an affiliate of The CIT Group, Inc., as Collateral
Agent for the Lenders.
10.6 Amended and Restated Loan and Security Agreement dated as of February
15, 2000 by and among KMC Telecom Inc., KMC Telecom II, Inc., KMC
Telecom III, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I
LLC, KMC Telecom Leasing II LLC, KMC Telecom Leasing III LLC, KMC
Telecom.com, Inc., KMC III Services LLC, the financial institutions from
time to time parties thereto as "Lenders", First Union National Bank as
Administrative Agent for the Lenders, First Union National Bank, as
Administrative Agent for the Lenders and Newcourt Commercial Finance
Corporation (formerly known as AT&T Commercial Finance Corporation), an
affiliate of The CIT Group, Inc., as Collateral Agent for the Lenders.
*10.7 General Agreement by and among KMC Telecom Inc., KMC Telecom II, Inc.
and Lucent Technologies Inc. dated September 24, 1997, as amended on
October 15, 1997 (incorporated herein by reference to Exhibit 10.7 to
KMC Holdings' S-4).
10.8 Amendment Number Two to the General Agreement by and among KMC Telecom
Inc., KMC Telecom II, Inc., KMC Telecom Leasing I LLC, KMC Telecom
Leasing II LLC and Lucent Technologies Inc. dated as of December 22,
1998.
10.9 Amendment Number Three to the General Agreement by and among KMC Telecom
Inc., KMC Telecom II, Inc., KMC Telecom III, Inc., KMC Telecom of
Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC,
KMC Telecom Leasing III LLC and Lucent Technologies Inc. dated as of
November 15, 1999.
10.10 Amendment Number Four to the General Agreement by and among KMC Telecom
Inc., KMC Telecom II, Inc., KMC Telecom III, Inc., KMC Telecom IV, Inc.,
KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom
Leasing II LLC, KMC Telecom Leasing III LLC, KMC Telecom Leasing IV LLC,
KMC III Services LLC and Lucent Technologies Inc. dated as of February
15, 2000.
*10.11 Professional Services Agreement between KMC Telecom Inc. and Lucent
Technologies, Inc. dated September 4, 1997. (incorporated herein by
reference to Exhibit 10.8 to KMC Holdings' S-4).
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*10.12 Memorandum of Agreement between KMC Telecom Holdings, Inc. and EFTIA OSS
Solutions Inc., dated as of October 26, 1998. (incorporated herein by
reference to Exhibit 10.6 to KMC Telecom Holdings, Inc.'s Form 10-K for
the fiscal year ended December 31, 1998).
*10.13 Master License Agreement dated December 31, 1998 by and between Billing
Concepts Systems, Inc. and KMC Telecom Holdings, Inc. (incorporated
herein by reference to Exhibit 10.7 to KMC Telecom Holdings, Inc.'s Form
10-K for the fiscal year ended December 31, 1998).
*10.14 Lease Agreement dated January 1, 1996 between Cogeneration Services Inc.
(now known as Kamine Development Corp.) and KMC Telecom Inc.
(incorporated herein by reference to Exhibit 10.8 to KMC Telecom
Holdings, Inc.'s Form 10-K for the fiscal year ended December 31, 1998).
*10.15 1998 Stock Purchase and Option Plan for Key Employees of KMC Telecom
Holdings, Inc. and Affiliates. (incorporated herein by reference to
Exhibit 4 to KMC Holdings, Inc.'s Form 10-Q for the quarterly period
ended September 30, 1998).+
*10.16 Specimen of Non-Qualified Stock Option Agreement for options granted
under the 1998 Stock Purchase and Option Plan for Key Employees of KMC
Telecom Holdings, Inc. and Affiliates. (incorporated herein by reference
to Exhibit 10.10 to KMC Holdings, Inc.'s Form 10-Q for the quarterly
period ended September 30, 1998).+
*10.17 Amendment No. 1 made as of June 7, 1999 to 1998 Stock Purchase and
Option Plan for Key Employees of KMC Telecom Holdings, Inc. and
Affiliates (incorporated herein by reference to Exhibit 10.1 to KMC
Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June
30, 1999).+
**21.1 Subsidiaries of KMC Telecom Holdings, Inc.
**24.1 Powers of Attorney (Appears on signature page).
**27.1 Financial Data Schedule.
- - ---------------------------
* Incorporated herein by reference.
** Filed herewith.
+ Management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of
Bedminster, State of New Jersey, on the 30th day of March, 2000.
KMC TELECOM HOLDINGS, INC.
By: /s/ ROSCOE C. YOUNG II
--------------------------------------------
Roscoe Young II
President and Chief Operating Officer
KNOW BY ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Roscoe C. Young II and William H. Stewart his
true and lawful attorney-in-fact and agent, 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 to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or their or his substitutes
or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the 30th day of March, 2000.
SIGNATURE TITLE(S)
President, Chief Operating Officer
/s/ ROSCOE C. YOUNG II and Director (Principal Executive
- - ---------------------------------------- Officer)
/s/ WILLIAM H. STEWART Executive Vice President, Chief
- - ---------------------------------------- Financial Officer and Director
William H. Stewart (Principal Financial Officer)
/s/ ROBERT F. HAGAN Senior Vice President, Finance
- - ---------------------------------------- (Principal Accounting Officer)
Robert F. Hagan
/s/ HAROLD N. KAMINE Chairman of the Board of Directors
- - ----------------------------------------
Harold N. Kamine
/s/ GARY E. LASHER Vice Chairman of the Board of
- - ---------------------------------------- Directors
Gary E. Lasher
/s/ RICHARD H. PATTERSON Director
- - ----------------------------------------
Richard H. Patterson
/s/ JOHN G. QUIGLEY Director
- - ----------------------------------------
John G. Quigley
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EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
*3.1 Certificate of Incorporation of KMC Telecom Holdings, Inc., as amended,
dated as of April 30, 1999. (incorporated herein by reference to
Exhibit 3.1 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly
period ended June 30, 1999).
*3.2 Certificate of Powers, Designations, Preferences and Rights of the
Series A Cumulative Convertible Preferred Stock, Par Value $.01 Per
Share, as amended, dated as of April 30, 1999. (incorporated herein by
reference to Exhibit 3.2 to KMC Telecom Holdings, Inc.'s Form 10-Q for
the quarterly period ended June 30, 1999).
*3.3 Certificate of Powers, Designations, Preferences and Rights of the
Series C Cumulative Convertible Preferred Stock, Par Value $.01 Per
Share, as amended, dated as of April 30, 1999. (incorporated herein by
reference to Exhibit 3.3 to KMC Telecom Holdings, Inc.'s Form 10-Q for
the quarterly period ended June 30, 1999).
*3.4 Certificate of Powers, Designations, Preferences and Rights of the
Series D Cumulative Convertible Preferred Stock, Par Value $.01 Per
Share, as amended, dated as of April 30, 1999. (incorporated herein by
reference to Exhibit 3.4 to KMC Telecom Holdings, Inc.'s Form 10-Q for
the quarterly period ended June 30, 1999).
*3.5 Certificate of Voting Powers, Designations, Preferences and Relative
Participating, Optional or Other Special Rights and Qualifications,
Limitations and Restrictions Thereof of the Series E Senior Redeemable,
Exchangeable, PIK Preferred Stock, as amended, dated as of April 30,
1999. (incorporated herein by reference to Exhibit 3.5 to KMC Telecom
Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30,
1999).
*3.6 Certificate of Voting Powers, Designations, Preferences and Relative
Participating, Optional or Other Special Rights and Qualifications,
Limitations and Restrictions Thereof of the Series F Senior Redeemable,
Exchangeable, PIK Preferred Stock, as amended, dated as of April 30,
1999. (incorporated herein by reference to Exhibit 3.6 to KMC Telecom
Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30,
1999).
*3.7 By-Laws of KMC Telecom Holdings, Inc. (incorporated herein by reference
to Exhibit 3.3 to KMC Telecom Holdings, Inc.'s Registration Statement on
Form S-4 (Registration No. 333-50475) filed on April 20, 1998.
(hereinafter referred to as the "KMC Holdings' S-4")).
*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.,
Newcourt Commercial Finance Corporation (formerly known as AT&T Credit
Corporation), General Electric Capital Corporation, CoreStates Bank,
N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to
Exhibit 4.1 to KMC Holdings' S-4).
*4.2 Amendment No. 1 dated as of January 7, 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., NAS Partners I
L.L.C., Harold N. Kamine, KMC Telecommunications L.P., Newcourt
Commercial Finance Corporation (formerly known as AT&T Credit
Corporation), General Electric Capital Corporation, CoreStates Bank,
N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to
Exhibit 4.2 to KMC Holdings' S-4).
*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., NAS Partners I
L.L.C., Harold N. Kamine, KMC Telecommunications L.P., Newcourt
Commercial Finance Corporation (formerly known as AT&T Credit
Corporation), General Electric Capital Corporation, CoreStates Bank,
N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to
Exhibit 4.3 to KMC Holdings' S-4).
100
<PAGE>
*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., NAS
Partners I L.L.C., Harold N. Kamine, KMC Telecommunications L.P.,
Newcourt Commercial Finance Corporation (formerly known as AT&T Credit
Corporation), General Electric Capital Corporation, CoreStates Bank,
N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to
Exhibit 4.4 to KMC Holdings' S-4).
*4.5 Amendment No. 4 dated as of February 4, 1999 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., NAS Partners I
L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation
(formerly known as AT&T Credit Corporation), General Electric Capital
Corporation, CoreStates Bank, N.A. and CoreStates Holdings, Inc.
(incorporated herein by reference to Exhibit 4.5 to KMC Telecom
Holdings, Inc.'s Form 10-K for the fiscal year ended December 31, 1998).
*4.6 Amendment No. 5 dated as of April 30, 1999 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., NAS Partners I
L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation
(formerly known as AT&T Credit Corporation), General Electric Capital
Corporation, First Union National Bank (as successor to CoreStates Bank,
N.A.) and CoreStates Holdings, Inc. (incorporated herein by reference to
Exhibit 4.11 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly
period ended June 30, 1999).
*4.7 Amendment No. 6 dated as of June 1, 1999 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., NAS Partners I
L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation
(formerly known as AT&T Credit Corporation), General Electric Capital
Corporation, First Union National Bank (as successor to CoreStates Bank,
N.A.) and CoreStates Holdings, Inc. (incorporated herein by reference to
Exhibit 4.12 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly
period ended June 30, 1999).
4.8 Amendment No. 7 dated as of January 1, 2000 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., NAS Partners I
L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation
(formerly known as AT&T Credit Corporation), General Electric Capital
Corporation, First Union National Bank (as successor to CoreStates Bank,
N.A.) and CoreStates Holdings, Inc.
*4.9 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.
(incorporated herein by reference to Exhibit 4.5 to KMC Holdings' S-4).
*4.10 First Supplemental Indenture dated as of May 24, 1999 among KMC Telecom
Holdings, Inc., KMC Telecom Financing, Inc. and The Chase Manhattan
Bank, as Trustee, to the Indenture dated as of January 29, 1998 between
KMC Telecom Holdings, Inc. and The Chase Manhattan Bank, as Trustee.
(incorporated herein by reference to Exhibit 4.1 to KMC Telecom
Holdings, Inc.'s Form 10-Q for the quarterly period ended September 30,
1999).
*4.11 Indenture dated as of May 24, 1999 among KMC Telecom Holdings, Inc., KMC
Telecom Financing, Inc. and The Chase Manhattan Bank, as Trustee,
including specimen of KMC Telecom Holdings, Inc.'s 13 1/2% Senior Notes
due 2009. (incorporated herein by reference to Exhibit 4.2 to KMC
Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended
September 30, 1999).
*4.12 Purchase Agreement dated as of May 19, 1999 among KMC Telecom Holdings,
Inc. and Morgan Stanley & Co. Incorporated, Credit Suisse First Boston
Corporation, First Union Capital Markets Corp., CIBC World Markets
Corp., BancBoston Robertson Stephens Inc. and Wasserstein Perella
Securities, Inc. (incorporated herein by reference to Exhibit 4.3 to KMC
Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended
September 30, 1999).
101
<PAGE>
*4.13 Collateral Pledge and Security Agreement made and entered into as of May
24, 1999 by KMC Telecom Financing, Inc. in favor of The Chase Manhattan
Bank as Trustee. (incorporated herein by reference to Exhibit 4.4 to KMC
Telecom Holdings, Inc. 's Form 10-Q for the quarterly period ended
September 30, 1999).
*4.14 Registration Rights Agreement dated as of January 26, 1998, between KMC
Telecom Holdings, Inc. and Morgan Stanley & Co. Incorporated.
(incorporated herein by reference to Exhibit 4.6 to KMC Holdings' S-4).
*4.15 Registration Rights Agreement dated as of May 19, 1999 among KMC Telecom
Holdings, Inc. and Morgan Stanley & Co. Incorporated, Credit Suisse
First Boston Corporation, First Union Capital Markets Corp., CIBC World
Markets Corp., BancBoston Robertson Stephens Inc. and Wasserstein
Perella Securities, Inc. (incorporated herein by reference to Exhibit
4.5 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period
ended September 30, 1999).
*4.16 Warrant Agreement dated as of January 29, 1998 between KMC Telecom
Holdings, Inc. and The Chase Manhattan Bank, as Warrant Agent, including
a specimen of Warrant Certificate (incorporated herein by reference to
Exhibit 4.7 to KMC Holdings' S-4).
*4.17 Warrant Agreement dated as of February 4, 1999 among KMC Telecom
Holdings, Inc., The Chase Manhattan Bank, as Warrant Agent, Newcourt
Commercial Finance Corporation and Lucent Technologies Inc.
(incorporated herein by reference to Exhibit 10.2 to KMC Telecom
Holdings, Inc. 's Form 10-Q for the quarterly period ended March 31,
1999).
*4.18 Warrant Agreement dated as of April 30, 1999 among KMC Telecom Holdings,
Inc., The Chase Manhattan Bank, as Warrant Agent, First Union Investors,
Inc., Harold N. Kamine and Nassau Capital Partners L.P. (incorporated
herein by reference to Exhibit 4.4 to KMC Telecom Holdings, Inc. 's Form
10-Q for the quarterly period ended June 30, 1999).
*4.19 Amendment No. 1 dated as of April 30, 1999 to the Warrant Agreement
dated as of February 4, 1999, among KMC Telecom Holdings, Inc., The
Chase Manhattan Bank, as Warrant Agent, Newcourt Commercial Finance
Corporation, Lucent Technologies Inc. and First Union Investors, Inc.
(incorporated herein by reference to Exhibit 4.7 to KMC Telecom
Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30,
1999).
*4.20 Amendment No. 2 dated as of June 1, 1999 to the Warrant Agreement dated
as of February 4, 1999, among KMC Telecom Holdings, Inc., The Chase
Manhattan Bank, as Warrant Agent, Newcourt Commercial Finance
Corporation, Lucent Technologies Inc. and First Union Investors, Inc.
(incorporated herein by reference to Exhibit 4.8 to KMC Telecom
Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30,
1999).
*4.21 Securities Purchase Agreement dated as of February 4, 1999 among KMC
Telecom Holdings, Inc., Newcourt Commercial Finance Corporation and
Lucent Technologies Inc. (incorporated herein by reference to Exhibit
10.1 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period
ended March 31, 1999).
*4.22 Securities Purchase Agreement dated as of April 30, 1999 between KMC
Telecom Holdings, Inc. and First Union Investors, Inc. (incorporated
herein by reference to Exhibit 4.2 to KMC Telecom Holdings, Inc.'s Form
10-Q for the quarterly period ended June 30, 1999).
*4.23 Amendment No. 1 dated as of June 1, 1999 to Securities Purchase
Agreement among KMC Telecom Holdings, Inc., First Union Investors, Inc.,
Newcourt Commercial Finance Corporation and Lucent Technologies Inc.
(incorporated herein by reference to Exhibit 4.3 to KMC Telecom
Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30,
1999).
*4.24 Warrant Registration Rights Agreement dated as of January 26, 1998
between KMC Telecom Holdings, Inc. and Morgan Stanley & Co.
Incorporated. (incorporated herein by reference to Exhibit 4.8 to KMC
Holdings' S-4).
102
<PAGE>
*4.25 Warrant Registration Rights Agreement dated as of February 4, 1999 among
KMC Telecom Holdings, Inc., Newcourt Commercial Finance Corporation and
Lucent Technologies Inc. (incorporated herein by reference to Exhibit
10.3 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period
ended March 31, 1999).
*4.26 Warrant Registration Rights Agreement dated as of April 30, 1999 between
KMC Telecom Holdings, Inc. and First Union Investors, Inc. (incorporated
herein by reference to Exhibit 4.5 to KMC Telecom Holdings, Inc.'s Form
10-Q for the quarterly period ended June 30, 1999).
*4.27 Amendment No. 1 dated as of April 30, 1999 to Warrant Registration
Rights Agreement among KMC Telecom Holdings, Inc., Newcourt Commercial
Finance Corporation and Lucent Technologies Inc. (incorporated herein by
reference to Exhibit 4.6 to KMC Telecom Holdings, Inc.'s Form 10-Q for
the quarterly period ended June 30, 1999).
*4.28 Preferred Stock Registration Rights Agreement dated as of April 30, 1999
between KMC Telecom Holdings, Inc. and First Union Investors, Inc.
(incorporated herein by reference to Exhibit 4.9 to KMC Telecom
Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30,
1999).
*4.29 Amendment No. 1 dated as of June 1, 1999 to Preferred Stock Registration
Rights Agreement among KMC Telecom Holdings, Inc., First Union
Investors, Inc., Newcourt Commercial Finance Corporation and Lucent
Technologies Inc. (incorporated herein by reference to Exhibit 4.10 to
KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended
June 30, 1999).
*10.1 Purchase Agreement dated January 26, 1998 by and between KMC Telecom
Holdings, Inc. and Morgan Stanley & Co. Incorporated (incorporated
herein by reference to Exhibit 10.1 to KMC Holdings' S-4).
*10.2 Loan and Security Agreement dated as of December 22, 1998 among KMC
Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC
Telecom Leasing I LLC, KMC Telecom Leasing II LLC, the additional
subsidiaries from time to time parties thereto, the financial
institutions signatory thereto from time to time as "Lenders", First
Union National Bank as Administrative Agent for the Lenders and Newcourt
Commercial Finance Corporation (formerly known as AT&T Commercial
Corporation), as Collateral Agent for the Lenders. (incorporated herein
by reference to Exhibit 10.2 to KMC Telecom Holdings, Inc.'s Form 10-K
for the fiscal year ended December 31, 1998).
*10.3 Amendment No. 1 to Loan and Security Agreement dated as of March 3, 1999
to Loan and Security Agreement dated as of December 22, 1998, among KMC
Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC
Telecom Leasing I LLC, KMC Telecom Leasing II LLC, the additional
subsidiaries from time to time parties thereto, the financial
institutions signatory thereto from time to time as "Lenders", First
Union National Bank as Administrative Agent for the Lenders and Newcourt
Commercial Finance Corporation (formerly known as AT&T Commercial
Corporation), as Collateral Agent for the Lenders. (incorporated herein
by reference to Exhibit 10.3 to KMC Telecom Holdings, Inc.'s Form 10-K
for the fiscal year ended December 31, 1998).
*10.4 Waiver and Amendment No. 3 to Loan and Security Agreement dated as of
October 29, 1999 to Loan and Security Agreement dated as of December 22,
1998, among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom of
Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC,
the financial institutions from time to time parties thereto as
"Lenders", First Union National Bank as Administrative Agent for the
Lenders and Newcourt Commercial Finance Corporation (formerly known as
AT&T Commercial Finance Corporation), as Collateral Agent for the
Lenders. (incorporated herein by reference to Exhibit 10.4 to KMC
Telecom Holdings, Inc.'s Registration Statement on Form S-4
(Registration No. 333-91237 and 333-91237-01) filed on November 18, 1999
(the "KMC Holdings 1999 S-4").
103
<PAGE>
10.5 Amendment No. 4 to Loan and Security Agreement dated as of December 31,
1999 to Loan and Security Agreement dated as of December 22, 1998, among
KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc.,
KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC, the financial
institutions from time to time parties thereto as "Lenders", First Union
National Bank as Administrative Agent for the Lenders and Newcourt
Commercial Finance Corporation (formerly known as AT&T Commercial
Finance Corporation), an affiliate of The CIT Group, Inc., as Collateral
Agent for the Lenders.
10.6 Amended and Restated Loan and Security Agreement dated as of February
15, 2000 by and among KMC Telecom Inc., KMC Telecom II, Inc., KMC
Telecom III, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I
LLC, KMC Telecom Leasing II LLC, KMC Telecom Leasing III LLC, KMC
Telecom.com, Inc., KMC III Services LLC, the financial institutions from
time to time parties thereto as "Lenders", First Union National Bank as
Administrative Agent for the Lenders, First Union National Bank, as
Administrative Agent for the Lenders and Newcourt Commercial Finance
Corporation (formerly known as AT&T Commercial Finance Corporation), an
affiliate of The CIT Group, Inc., as Collateral Agent for the Lenders.
*10.7 General Agreement by and among KMC Telecom Inc., KMC Telecom II, Inc.
and Lucent Technologies Inc. dated September 24, 1997, as amended on
October 15, 1997 (incorporated herein by reference to Exhibit 10.7 to
KMC Holdings' S-4).
10.8 Amendment Number Two to the General Agreement by and among KMC Telecom
Inc., KMC Telecom II, Inc., KMC Telecom Leasing I LLC, KMC Telecom
Leasing II LLC and Lucent Technologies Inc. dated as of December 22,
1998.
10.9 Amendment Number Three to the General Agreement by and among KMC
Telecom Inc., KMC Telecom II, Inc., KMC Telecom III, Inc., KMC Telecom
of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II
LLC, KMC Telecom Leasing III LLC and Lucent Technologies Inc. dated as
of November 15, 1999.
10.10 Amendment Number Four to the General Agreement by and among KMC Telecom
Inc., KMC Telecom II, Inc., KMC Telecom III, Inc., KMC Telecom IV,
Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC
Telecom Leasing II LLC, KMC Telecom Leasing III LLC, KMC Telecom
Leasing IV LLC, KMC III Services LLC and Lucent Technologies Inc. dated
as of February 15, 2000.
*10.11 Professional Services Agreement between KMC Telecom Inc. and Lucent
Technologies, Inc. dated September 4, 1997. (incorporated herein by
reference to Exhibit 10.8 to KMC Holdings' S-4).
*10.12 Memorandum of Agreement between KMC Telecom Holdings, Inc. and EFTIA OSS
Solutions Inc., dated as of October 26, 1998. (incorporated herein by
reference to Exhibit 10.6 to KMC Telecom Holdings, Inc.'s Form 10-K for
the fiscal year ended December 31, 1998).
*10.13 Master License Agreement dated December 31, 1998 by and between Billing
Concepts Systems, Inc. and KMC Telecom Holdings, Inc. (incorporated
herein by reference to Exhibit 10.7 to KMC Telecom Holdings, Inc.'s Form
10-K for the fiscal year ended December 31, 1998).
*10.14 Lease Agreement dated January 1, 1996 between Cogeneration Services Inc.
(now known as Kamine Development Corp.) and KMC Telecom Inc.
(incorporated herein by reference to Exhibit 10.8 to KMC Telecom
Holdings, Inc.'s Form 10-K for the fiscal year ended December 31, 1998).
*10.15 1998 Stock Purchase and Option Plan for Key Employees of KMC Telecom
Holdings, Inc. and Affiliates. (incorporated herein by reference to
Exhibit 4 to KMC Holdings, Inc.'s Form 10-Q for the quarterly period
ended September 30, 1998).
*10.16 Specimen of Non-Qualified Stock Option Agreement for options granted
under the 1998 Stock Purchase and Option Plan for Key Employees of KMC
Telecom Holdings, Inc. and Affiliates. (incorporated herein by reference
to Exhibit 10.10 to KMC Holdings, Inc.'s Form 10-Q for the quarterly
period ended September 30, 1998).
104
<PAGE>
*10.17 Amendment No. 1 made as of June 7, 1999 to 1998 Stock Purchase and
Option Plan for Key Employees of KMC Telecom Holdings, Inc. and
Affiliates (incorporated herein by reference to Exhibit 10.1 to KMC
Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June
30, 1999).
21.1 Subsidiaries of KMC Telecom Holdings, Inc.
24.1 Powers of Attorney (Appears on signature page).
27.1 Financial Data Schedule.
- - -----------------------------------------------
* EXHIBITS FILED PREVIOUSLY.
105
AMENDMENT NO. 7 TO
THE AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
AMENDMENT NO. 7 dated as of January 1, 2000 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, Newcourt Commercial
Finance Corporation (as successor to AT&T Credit Corporation), General Electric
Capital Corporation, First Union National Bank (as successor to 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 amendment 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 SECTION 4.3.1 OF THE STOCKHOLDERS AGREEMENT.
Section 4.3 of the Stockholders Agreement is amended to read as follows:
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
eight (8) 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 eight
(8), as provided for below. Each 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 (w) three individuals designated
by Nassau to serve initially as Nassau Directors, (x) subject to
paragraph (b) of Section 4.4, three individuals (one of whom shall be
<PAGE>
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, (y) 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 an independent director beginning November 1,
1997, and (z) one additional director who shall mutually acceptable to
Nassau, Kamine and either AT&T or the Majority Series C Holders,
provided that it is agreed that Roscoe C. Young II shall be mutually
acceptable to each of the foregoing; (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 an
independent director to the compensation committee of the Board of
Directors.
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>
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/
-----------------------------
Name: Harold N. Kamine
Title:Chairman of the Board
NASSAU CAPITAL PARTNERS L.P.
By: Nassau Capital L.L.C., its General Partner
By: /s/
---------------------------
Name: John G. Quigly
Title: Member
NAS PARTNERS I L.L.C.
By: /s/
-----------------------------
Name: John G. Quigley
Title:Member
HAROLD N. KAMINE
in his individual capacity
/s/
---------------------------------
Harold N. Kamine
NEWCOURT COMMERCIAL FINANCE
CORPORATION
By: /s/
-----------------------------
Name: Charles Brown
Title:Vice President
<PAGE>
FIRST UNION NATIONAL BANK
By: /s/
-----------------------------
Name: Pearce Landry
Title:Vice President
CORESTATES HOLDINGS, INC.
By: /s/
-----------------------------
Name: Tracey M. Chaffin
Title:Vice President
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/
-----------------------------
Name: Mark F. Mylon
Title:Manager - Operations
AMENDMENT NO. 4
TO
LOAN AND SECURITY AGREEMENT
AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT ("AMENDMENT") dated
as of December 31, 1999, is among KMC TELECOM INC., a Delaware corporation
("KMC"), KMC TELECOM II, INC., a Delaware corporation ("KMC II"), KMC TELECOM OF
VIRGINIA, INC., a Virginia public service company ("KMC VIRGINIA"), 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,
KMC Virginia, Leasing I and Leasing II being hereinafter collectively referred
to hereinafter as the "BORROWERS"), the financial institutions from time to time
parties thereto (the "LENDERS"), FIRST UNION NATIONAL BANK, as administrative
agent for the Lenders (the "AGENT") and NEWCOURT COMMERCIAL FINANCE CORPORATION
(f/k/a AT&T COMMERCIAL FINANCE CORPORATION), an affiliate of The CIT Group,
Inc., as collateral agent for the Lenders (the "COLLATERAL AGENT"; the Agent
together with the Collateral Agent being referred to as the "AGENTS").
WHEREAS, the Borrowers, the Agents and the Lenders are parties to
that certain Loan and Security Agreement (the "LOAN AGREEMENT"; undefined
capitalized terms used herein shall have the meanings assigned thereto in the
Loan Agreement) dated as of December 22, 1998, as amended by Amendment No.1
thereto dated as of March 3, 1999, Amendment No. 2 thereto dated as of August
13, 1999, and Waiver and Amendment No. 3 thereto dated as of October 29, 1999,
pursuant to which the Lenders have agreed to make certain "Loans" and other
financial accommodations to the Borrowers; and
WHEREAS, the Borrowers have requested that the Agents and the
Lenders amend the Loan Agreement in the manner set forth herein, and the Agents
and the Lenders have 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, the Agents and the Lenders agree
as follows:
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:
1.1 SECTION 7.01(b) is hereby amended to add the following proviso
thereto: ---------------
"PROVIDED, HOWEVER, that as of the last day of each fiscal quarter
occurring on or after December 31, 1999, the Borrowers shall on a combined basis
have revenues at least equal to the amount set forth below for such date:
<PAGE>
FISCAL QUARTER ENDING MINIMUM REVENUES
December 31, 1999 $18,000,000
March 31, 2000 $23,821,000
June 30, 2000 $31,338,000
September 30, 2000 $37,803,000
December 31, 2000 $44,482,000
March 31, 2001 $54,678,000"
1.2 SECTION 7.01(c)(i) is hereby amended to delete the proviso
thereto and to substitute the following proviso therefor:
"PROVIDED, HOWEVER, that as of the last day of each fiscal quarter
occurring on or after December 31, 1999 through and including December 31, 2000,
the Borrowers shall not permit the EBITDA losses for all the Borrowers on a
combined basis for the two fiscal quarters then ending to exceed the amount set
forth below for such date:
FISCAL QUARTER ENDING EBITDA LOSSES
December 31, 1999 ($50,400,000)
March 31, 2000 ($38,700,000)
June 30, 2000 ($25,001,000)
September 30, 2000 ($13,823,000)
December 31, 2000 ($4,157,000)"
1.3 SECTION 7.01(c)(ii) shall be deleted in its entirety and
replaced with the following new SECTION 7.01(c)(ii):
"As of the last day of the fiscal quarter ending March 31, 2001, the
Borrowers shall not permit EBITDA for all the Borrowers on a combined basis for
the two fiscal quarters then ending to be less than $1,688,000."
2. CONDITIONS PRECEDENT. This Amendment shall become effective as of
the date above written, if, and only if, the Agents have received duly executed
originals of this Amendment from the Borrowers, the Requisite Lenders and the
Agents on or prior to January __, 2000.
3. REPRESENTATIONS AND WARRANTIES OF THE BORROWERS. The Borrowers
hereby represent and warrant as follows:
(a) This Amendment and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of the Borrowers and are
enforceable against the Borrowers in accordance with their terms.
(b) Upon the effectiveness of this Amendment, the Borrowers hereby
reaffirm all representations and warranties made in the Loan Agreement, and to
the extent the same are not amended hereby, agree that all such representations
and warranties shall be deemed to have been remade as of the date of delivery of
2
<PAGE>
this Amendment, unless and to the extent that any such representation and
warranty is stated to relate solely to an earlier date, in which case such
representation and warranty shall be true and correct as of such earlier date.
(c) As of the date hereof, and after giving effect to this
Amendment, each Borrower shall be in compliance with all the terms and
provisions set forth in the Loan Agreement, as amended hereby, on its part to be
observed or performed, and no Event of Default or Default shall have occurred
and be continuing.
4. REFERENCE TO AND EFFECT ON THE LOAN AGREEMENT.
(a) Upon the effectiveness of Section 1 hereof, on and after the
date hereof, each reference in the Loan Agreement to "this Loan Agreement,"
"hereunder," "hereof," "herein" or words of like import shall mean and be a
reference to the Loan Agreement as amended 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.
(b) The Loan Agreement, as amended hereby, and all 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.
(c) Except as expressly provided herein, the execution, delivery and
effectiveness of this Amendment shall not operate as a waiver of any right,
power or remedy of the Agents or the Lenders, nor constitute a waiver of any
provision of the Loan Agreement or any other documents, instruments and
agreements executed and/or delivered in connection therewith.
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
YORK.
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 thereto.
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.
3
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the
day and year first above written.
THE BORROWERS: KMC TELECOM INC.
KMC TELECOM II, INC.
KMC TELECOM OF VIRGINIA, INC.
In each case:
By: /s/
-----------------------
Name: James D. Grenfell
Title: CFO
KMC TELECOM LEASING I LLC
By: KMC TELECOM INC., as its Sole Member
By: /s/
-----------------------
Name: James D. Grenfell
Title: CFO
KMC TELECOM LEASING I LLC
By: KMC TELECOM II, INC., as its Sole Member
By: /s/
-----------------------
Name: James D. Grenfell
Title: CFO
4
<PAGE>
FIRST UNION NATIONAL BANK, as the
Agent and as a Lender
By: /s/
-------------------------
Name: Elizabeth Elmore
Title: Senior Vice President
NEWCOURT COMMERCIAL FINANCE CORPORATION
(f/k/a AT&T COMMERCIAL FINANCE
CORPORATION), an affiliate of The CIT
Group, Inc., as the Collateral Agent and
as a Lender
By: /s/
-------------------------
Name: Michael Monahan
Title: Vice President
CANADIAN IMPERIAL BANK OF
COMMERCE, as a Lender
By: /s/
-------------------------
Name: Tefta Chilaga
Title: Executive Director, CIBC World
Markets Corp. As Agent
GENERAL ELECTRIC CAPITAL
CORPORATION, as a Lender
By: /s/
-------------------------
Name: Mark F. Mylon
Title: Manager-Operations
BANKBOSTON, N.A., as a Lender
By: /s/
--------------------------
Name: Michael A. Ashton
Title: Vice President
5
<PAGE>
CREDIT SUISSE FIRST BOSTON, as a
Lender
By: /s/
--------------------------
Name: Jeffery Ulmer
Title: Vice President
By: /s/
--------------------------
Name: Douglas E. Maher
Title: Vice President
DRESDNER BANK AG NEW YORK AND
GRAND CAYMAN BRANCHES, as a Lender
By: /s/
--------------------------
Name: John P. Fleseler
Title: Senior Vice President
By: /s/
--------------------------
Name: Constance Loosemore
Title: Assistant Vice President
MORGAN STANLEY SENIOR FUNDING,
INC., as a Lender
By: /s/
--------------------------
Name: T. Morgan Edwards II
Title: Vice President
By:
--------------------------
Name:
Title:
MORGAN STANLEY DEAN WITTER
PRIME INCOME TRUST, as a Lender
By: /s/
--------------------------
Name: Shelia Finnely
Title: Senior Vice President
6
<PAGE>
UNION BANK OF CALIFORNIA, N.A., as a
Lender
By: /s/
--------------------------
Name: Keith M. Wilson
Title: Vice President
KEYPORT LIFE INSURANCE COMPANY,
as a Lender
By: /s/
--------------------------
Name: Brian W. Good
Title: Vice President & Portfolio Manager
STEIN ROE FLOATING RATE LIMITED
LIABILITY COMPANY, as a Lender
By: /s/
--------------------------
Name: Brian W. Good
Title: Vice President
Stein Roe & Farnham Incorporated,
Advisor to the Stein Roe Floating Rate
Limited Liability Company
7
<PAGE>
REAFFIRMATION OF GUARANTY
Reference is hereby made to (i) that certain Guaranty dated as of
December 22, 1998 (as amended, restated, supplemented or otherwise modified from
time to time, the "GUARANTY") by KMC Telecom Holdings, Inc., a Delaware
corporation (the "GUARANTOR"), in favor of Newcourt Commercial Finance
Corporation (formerly known as AT&T Commercial Finance Corporation), an
affiliate of The CIT Group, Inc., as collateral agent for the ratable benefit of
the "Lenders" (defined below) (in such capacity, the "COLLATERAL AGENT"), (ii)
that certain Loan and Security Agreement dated as of December 22, 1998 (as
amended, restated, supplemented or otherwise modified from time to time, the
"LOAN AGREEMENT") among KMC Telecom, Inc., KMC Telecom II, Inc., KMC Telecom of
Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC (each of
the foregoing being referred to collectively as the "BORROWERS"), the financial
institutions from time to time parties thereto (the "Lenders"), First Union
National Bank, as administrative agent for the Lenders (the "Agent"), and the
Collateral Agent, and (iii) that certain Amendment No. 4 to Loan and Security
Agreement dated as of December 31, 1999 (the "AMENDMENT") among the Borrowers,
the Lenders, the Agent and the Collateral Agent.
The Guarantor, by its signature below, without in any way
establishing a course of dealing, hereby (i) acknowledges and consents to the
execution and delivery of the Amendment by the parties thereto, (ii) agrees that
the Amendment shall not limit or diminish the obligations of the Guarantor to
guarantee all of the "Obligations" of each Borrower under and as defined in the
Loan Agreement and such other amounts as are more specifically described in the
Guaranty, (iii) reaffirms all of its obligations under the Guaranty, and (iv)
agrees that the Guaranty remains in full force and effect and is hereby ratified
and confirmed.
IN WITNESS WHEREOF, this instrument has been executed and delivered
as of this 31st day of December, 1999.
KMC TELECOM HOLDINGS, INC.
By: /s/
--------------------------
Name: James D. Grenfell
Title: CFO, Executive Vice President and
Secretary
8
- - ------------------------------------------------------------------------------
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
DATED AS OF FEBRUARY 15, 2000
AMONG
KMC TELECOM INC.,
KMC TELECOM II, INC.,
KMC TELECOM III, INC.,
KMC TELECOM OF VIRGINIA, INC.,
KMC TELECOM LEASING I LLC,
KMC TELECOM LEASING II LLC,
KMC TELECOM LEASING III LLC,
KMC TELECOM.COM, INC.
AND
KMC III SERVICES LLC
AS BORROWERS,
THE FINANCIAL INSTITUTIONS FROM TIME TO
TIME PARTIES HERETO,
AS LENDERS,
AND
FIRST UNION NATIONAL BANK
AS ADMINISTRATIVE AGENT FOR THE LENDERS
AND
NEWCOURT COMMERCIAL FINANCE CORPORATION,
AN AFFILIATE OF THE CIT GROUP, INC.,
AS COLLATERAL AGENT FOR THE LENDERS
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
AMENDMENT AND RESTATEMENT; DEFINITIONS.....................................2
SECTION 1.01. Amendment and Restatement...................................2
SECTION 1.02. Definitions.................................................2
SECTION 1.03. Accounting Terms...........................................23
SECTION 1.04. Others Defined in New York Uniform Commercial Code.........23
ARTICLE II
LOANS AND LETTERS OF CREDIT...............................................23
SECTION 2.01. Agreement to Lend..........................................24
SECTION 2.02. Loans......................................................24
SECTION 2.03. Procedure for Loan Request and Borrowing Commitment........25
SECTION 2.04. The Notes..................................................27
SECTION 2.05. Interest on Loans..........................................28
SECTION 2.06. Conversion or Continuation.................................29
SECTION 2.07. Special Provisions Governing LIBOR Loans...................30
SECTION 2.08. Payments...................................................32
SECTION 2.09. Optional and Mandatory Prepayment of Loans; Optional
and Mandatory Reduction of Revolving Loan Commitment
Amount.....................................................33
SECTION 2.10. Letters of Credit..........................................35
SECTION 2.11. Fees.......................................................40
SECTION 2.12. Manner of Payment; Special Tax Considerations..............41
SECTION 2.13. Maximum Lawful Interest Rate...............................46
SECTION 2.14. Funding Issues.............................................46
SECTION 2.15. Joint and Several Liability; Contribution..................47
ARTICLE III
REPRESENTATIONS AND WARRANTIES............................................48
SECTION 3.01. Organization; Powers.......................................48
SECTION 3.02. Corporate Authorization....................................48
SECTION 3.03. Financial Statements.......................................49
SECTION 3.04. No Material Adverse Change.................................49
SECTION 3.05. Litigation.................................................49
SECTION 3.06. Tax Returns................................................49
SECTION 3.07. No Defaults................................................49
SECTION 3.08. Properties.................................................49
SECTION 3.09. Licenses, Material Agreements, Intellectual Property.......49
SECTION 3.10. Compliance With Laws.......................................50
SECTION 3.11. ERISA......................................................50
SECTION 3.12. Investment Company Act; Public Utility Holding
Company Act................................................51
SECTION 3.13. Federal Reserve Regulations................................51
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SECTION 3.14. Collateral.................................................51
SECTION 3.15. Chief Place of Business....................................52
SECTION 3.16. Other Corporate Names......................................52
SECTION 3.17. Insurance..................................................52
SECTION 3.18. Milestone Plan.............................................52
SECTION 3.19. Capitalization and Subsidiaries............................52
SECTION 3.20. Real Property, Leases and Easements........................52
SECTION 3.21. Solvency...................................................53
SECTION 3.22. Brokers, etc...............................................53
SECTION 3.23. No Material Misstatements..................................53
SECTION 3.24. Year 2000 Problems.........................................53
ARTICLE IV
CONDITIONS FOR LOANS......................................................53
SECTION 4.01. Conditions Precedent to Initial Loan on or after the
Closing Date...............................................54
SECTION 4.02. Conditions Precedent to All Loans..........................58
ARTICLE V
AFFIRMATIVE COVENANTS.....................................................60
SECTION 5.01. Corporate and Franchise Existence..........................60
SECTION 5.02. Compliance with Laws, Etc..................................60
SECTION 5.03. Maintenance of Properties..................................60
SECTION 5.04. Insurance..................................................60
SECTION 5.05. Obligations and Taxes......................................65
SECTION 5.06. Financial Statements, Reports, etc.........................66
SECTION 5.07. Litigation and Other Notices...............................68
SECTION 5.08. Mortgages; Landlord Consents; Licenses and Other
Agreements.................................................68
SECTION 5.09. ERISA......................................................69
SECTION 5.10. Access to Premises and Records.............................69
SECTION 5.11. Design and Construction....................................69
SECTION 5.12. Environmental Notices......................................69
SECTION 5.13. Amendment of Organizational Documents......................69
SECTION 5.14. Third Party Agreements and Delivery and Acceptance
Certificates...............................................70
SECTION 5.15. Accounts Payable...........................................70
SECTION 5.16. Intellectual Property. Such Borrower shall enter into
Intellectual Property Documents, in form and substance
satisfactory to the Collateral Agent, with respect to
all of the Intellectual Property owned by such Borrower....70
SECTION 5.17. Fiscal Year................................................70
SECTION 5.18. Required Contribution. The Borrowers shall obtain the
Required Contribution on or prior to August 31, 2000.......70
SECTION 5.19. Subsidiary Guarantees and Pledges..........................70
SECTION 5.20. Accounting; Maintenance of Records.........................71
SECTION 5.21. Further Assurances.........................................71
ARTICLE VI
NEGATIVE COVENANTS........................................................71
ii
<PAGE>
SECTION 6.01. Liens, etc.................................................71
SECTION 6.02. Use of Proceeds............................................72
SECTION 6.03. Sale of Assets, Consolidation, Merger, etc.................72
SECTION 6.04. Dividends and Distributions; Sale of Equity Interests......72
SECTION 6.05. Management Fees and Permitted Corporate Overhead...........73
SECTION 6.06. Guarantees; Third Party Sales and Leases...................73
SECTION 6.07. Investments................................................73
SECTION 6.08. Subsidiaries; Permitted Acquisitions.......................74
SECTION 6.09. Permitted Activities.......................................75
SECTION 6.10. Disposition of Licenses, etc...............................75
SECTION 6.11. Transactions with Affiliates...............................75
SECTION 6.12. ERISA......................................................75
SECTION 6.13. Indebtedness...............................................76
SECTION 6.14. Prepayment and Debt Documents..............................76
SECTION 6.15. Sale and Leaseback Transactions............................77
SECTION 6.16. Margin Regulation..........................................77
SECTION 6.17. Management and Tax Sharing Agreements......................77
ARTICLE VII
FINANCIAL COVENANTS.......................................................77
SECTION 7.01. Financial Covenants Prior to Achieving Positive EBITDA.....77
SECTION 7.02. Financial Covenants After Achieving Positive EBITDA........78
ARTICLE VIII
COLLATERAL SECURITY.......................................................80
SECTION 8.01. Collateral Security........................................80
SECTION 8.02. Preservation of Collateral and Perfection of Security
Interests Therein..........................................81
SECTION 8.03. Appointment of the Collateral Agent as the
Borrowers'Attorney-in-Fact.................................81
SECTION 8.04. Collection of Accounts and Restricted Account
Arrangements...............................................81
SECTION 8.05. Cure Rights................................................82
ARTICLE IX
EVENTS OF DEFAULT; REMEDIES...............................................82
SECTION 9.01. Events of Default..........................................82
SECTION 9.02. Termination of Commitment; Acceleration....................85
SECTION 9.03. Waivers....................................................85
SECTION 9.04. Rights and Remedies Generally..............................86
SECTION 9.05. Entry Upon Premises and Access to Information..............86
SECTION 9.06. Sale or Other Disposition of Collateral by the Agent.......86
SECTION 9.07. Governmental Approvals.....................................87
SECTION 9.08. Appointment of Receiver or Trustee.........................88
SECTION 9.09. Right of Setoff............................................88
ARTICLE X
THE AGENT AND THE COLLATERAL AGENT........................................89
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<PAGE>
SECTION 10.01. Appointment of Agent......................................89
SECTION 10.02. Agent's Reliance, Etc.....................................90
SECTION 10.03. FUNB and Affiliates.......................................90
SECTION 10.04. Lender Credit Decision....................................90
SECTION 10.05. Indemnification...........................................91
SECTION 10.06. Successor Agent...........................................91
SECTION 10.07. Payments; Non-Funding Lenders; Information; Actions
in Concert................................................92
SECTION 10.08. Collateral Matters........................................93
SECTION 10.09. Agency for Perfection.....................................94
SECTION 10.10. Concerning the Collateral and the Related Loan
Documents and the Collateral Agent........................94
ARTICLE XI
MISCELLANEOUS.............................................................94
SECTION 11.01. Notices; Action on Notices, etc...........................95
SECTION 11.02. No Waivers; Amendments....................................95
SECTION 11.03. Governing Law and Jurisdiction............................96
SECTION 11.04. Expenses..................................................96
SECTION 11.05. Equitable Relief..........................................97
SECTION 11.06. Indemnification; Limitation of Liability; Lucent
Relationships.............................................97
SECTION 11.07. Survival of Representations and Warranties, etc...........98
SECTION 11.08. Successors and Assigns; Assignments; Participations.......98
SECTION 11.09. Severability.............................................101
SECTION 11.10. Cover Page, Table of Contents and Section Headings.......101
SECTION 11.11. Counterparts.............................................101
SECTION 11.12. Application of Payments..................................101
SECTION 11.13. Marshalling; Payments Set Aside..........................101
SECTION 11.14. SERVICE OF PROCESS.......................................102
SECTION 11.15. WAIVER OF JURY TRIAL, ETC................................102
SECTION 11.16. Confidentiality..........................................102
SECTION 11.17. Entire Agreement, etc....................................103
SECTION 11.18. No Strict Construction...................................103
iv
<PAGE>
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-1 Form of Revolving Loan Note
EXHIBIT E-2 Form of Term A Loan Note
EXHIBIT E-3 Form of Term B Loan Note
EXHIBIT F Form of Periodic Reporting Certificate
EXHIBIT G Form of Guaranty
EXHIBIT H-1 Form of Notice of Borrowing
EXHIBIT H-2 Form of Notice of Continuation/Conversion
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 K-3 Form of Opinion of Borrowers' Local 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 Assignment Agreement
EXHIBIT P Form of Accession Agreement
EXHIBIT Q Form of Contribution Agreement
EXHIBIT R Form of Delivery and Acceptance Certificate
v
<PAGE>
EXHIBIT S Form of Trademark Security Agreement
EXHIBIT T Form of General Reaffirmation and Modification
Agreement
EXHIBIT U Form of Guaranty and Security Agreement
vi
<PAGE>
SCHEDULES
SCHEDULE 1.01(a) Applicable Margin
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
ANNEXES
ANNEX A.....- Commitment Amounts
ANNEX B.....- Financial Covenant Information
ANNEX C.....- Revolving Loan Commitment Reductions and Term Loan
Amortizations
vii
<PAGE>
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ("AGREEMENT") dated
as of February 15, 2000 among KMC TELECOM INC., a Delaware corporation ("KMC"),
KMC TELECOM II, INC., a Delaware corporation ("KMC II"), KMC TELECOM III, INC.,
a Delaware corporation ("KMC III"), KMC TELECOM OF VIRGINIA, INC., a Virginia
public service company ("KMC VIRGINIA"), 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 TELECOM LEASING III LLC, a
Delaware limited liability company ("LEASING III"), KMC TELECOM.COM, INC., a
Delaware corporation ("TELECOM.COM"), KMC III Services LLC, a Delaware limited
liability company ("SERVICES"), the Additional Borrowers from time to time
parties hereto (KMC, KMC II, KMC Virginia, Leasing I, Leasing II, Leasing III,
Telecom.com, Services and any Additional Borrowers being collectively referred
to hereinafter as the "BORROWERS" and sometimes individually as a "BORROWER"),
the financial institutions signatory hereto from time to time, as "Lenders",
FIRST UNION NATIONAL BANK, as administrative agent for the Lenders (in such
capacity, the "AGENT") and NEWCOURT COMMERCIAL FINANCE CORPORATION, formerly
known as AT&T Commercial Finance Corporation and an affiliate of The CIT Group,
Inc., as collateral agent for the Lenders (in such capacity, the "COLLATERAL
AGENT").
RECITALS
A. The Borrowers (other than KMC III, Leasing III, Telecom.com and
Services), the Lenders, the Agent and the Collateral Agent, are parties to a
certain Loan and Security Agreement dated as of December 22, 1998, as amended
pursuant to that certain Amendment No. 1 thereto dated as of March 3, 1999, that
certain Amendment No. 2 thereto dated as of August 13, 1999, that certain Waiver
and Amendment No. 3 thereto dated as of October 29, 1999, and that certain
Amendment No. 4 thereto dated as of December 31, 1999 (such Loan and Security
Agreement, as so amended being hereinafter referred to as the "EXISTING
AGREEMENT"), pursuant to which the Lenders have provided loans to the Borrowers
other than KMC III, Leasing III, Telecom.com and Services (the "EXISTING LOANS")
and issued letters of credit for the account of the Borrowers other than KMC
III, Leasing III, Telecom.com and Services and for which the Borrowers other
than KMC III, Leasing III, Telecom.com and Services have incurred Letter of
Credit Obligations (the "EXISTING LETTER OF CREDIT OBLIGATIONS").
B. The Borrowers, the Lenders, the Agent and the Collateral Agent have
agreed to amend the Existing Agreement in certain respects, to, among other
things, increase the Commitment Amount to $700,000,000 and to add KMC III,
Leasing III, Telecom.com and Services as Borrowers and to refinance the
obligations of KMC III, Leasing III and Services under that certain Amended and
Restated Loan and Security Agreement dated as of December 30, 1999 among KMC
III, Leasing III, Services, the financial institutions from time to time parties
thereto as lenders, Lucent Technologies Inc., as Agent for said lenders and
State Street Bank and Trust Company as Collateral Agent for said Lenders (the
"Lucent Loan Agreement") and have agreed to execute this Agreement as an
amendment and restatement of the Existing Agreement, in order to incorporate
such amendments and the Existing Agreement into a single document.
1
<PAGE>
C. It is the intent of the parties hereto that the execution and delivery
of this Agreement not effectuate a refinancing or novation of the Existing Loans
and Existing Letter of Credit Obligations, but rather a modification to the
terms governing the repayment of the Existing Loans and Existing Letter of
Credit Obligations, which Existing Loans and Existing Letter of Credit
Obligations remain outstanding as of the date hereof and remain secured by the
Collateral.
ARTICLE I
AMENDMENT AND RESTATEMENT; DEFINITIONS
SECTION 1.01. AMENDMENT AND RESTATEMENT. The Borrowers, the Agent, the
Collateral Agent and the Lenders hereby agree that, effective upon the execution
and delivery of this Agreement by each such party: (a) the terms and provisions
of the Existing 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 any Borrower pursuant to SECTION 8.01 of the
Existing Agreement shall remain effective as of the date any such grant first
became effective, and (b) the Existing Loans shall constitute the initial
outstanding Loans under this Agreement, the Existing Letter of Credit
Obligations shall constitute the initial outstanding Letter of Credit
Obligations under this Agreement, and the Existing Loans and Existing Letter of
Credit Obligations shall be payable solely in accordance with the terms of this
Agreement, the Notes and any Loan Documents delivered pursuant hereto or
modified in accordance with the General Reaffirmation. No party hereto shall
have any obligations under the Existing Agreement, except to the extent that any
obligations thereunder may be restated in this Agreement or the other Loan
Documents. The Borrowers, the Agent, the Collateral Agent and the Lenders agree
that the execution and delivery of this Agreement shall not effectuate a
novation or refinancing of the Existing Loans and Existing Letter of Credit
Obligations, but rather a substitution of certain of the terms governing the
payment and performance of the Existing Loans and Existing Letter of Credit
Obligations.
SECTION 1.02. DEFINITIONS. As used in this Agreement, the following
words and terms shall have the meanings specified below:
"ACCESS LINES" shall mean the total number of installed business lines
that provide service to a business customer of a Borrower including "resale",
"on-net" and "unbundled network element"; PROVIDED, that resale shall constitute
no more than twenty-five percent (25%) of the total Access Lines.
"ACCOUNTS" shall mean all present and future rights of any 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 BORROWER" shall mean any Subsidiary of KMC Holdings, KMC,
KMC II, KMC III, KMC Virginia, Leasing I, Leasing II, Leasing III, Telecom.com
or Services that enters into an accession agreement substantially in the form of
EXHIBIT P hereto, is acceptable to the Requisite Lenders, and the outstanding
Equity Interests of which are pledged to the Agent pursuant to a pledge
agreement substantially in the form of EXHIBIT L attached hereto.
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<PAGE>
"ADDITIONAL PURCHASE AGREEMENT" shall mean a purchase agreement between
any Borrower and an Additional Vendor relating to the purchase of
Telecommunications Equipment on terms and conditions reasonably satisfactory to
the Agents, if such purchase agreement contemplates Telecommunications Equipment
purchases in excess of $5,000,000 in any one year or $15,000,000 in the
aggregate, otherwise on the terms and conditions reasonably satisfactory to the
Collateral Agent.
"ADDITIONAL VENDOR" shall mean a vendor of Telecommunications Equipment
other than Lucent, which Additional Vendor shall be reasonably satisfactory to
the Agents if the Additional Purchase Agreement the Additional Vendor is a party
to contemplates Telecommunications Equipment purchases in excess of $5,000,000
in any one year or $15,000,000 in the aggregate, otherwise on the terms and
conditions reasonably satisfactory to the Collateral Agent.
"AFFILIATE" shall mean any Person other than any Lender directly or
indirectly controlling, controlled by or under common control with any Borrower
and any officer or shareholder of such Person or any Borrower, which shareholder
beneficially owns at least ten percent (10%) of the Equity Interests of such
Person or any 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 Equity Interests of a Person
shall be deemed to constitute control; and provided, further, that in no event
shall any of the Agents or the Lenders be deemed to be an Affiliate of any
Borrower or of KMC Holdings.
"AGED EQUIPMENT" shall mean Telecommunications Equipment, which has
been in commercial operation for more than twelve months.
"AGENTS" shall mean collectively, the Agent, the Collateral Agent, the
Documentation Agent and the Syndication Agent.
"APPLICABLE MARGIN" shall mean with respect to (i) each Loan bearing
interest based upon the Base Rate, the margin determined in accordance with the
criteria set forth on SCHEDULE 1.01(A) hereto, and (ii) each Loan bearing
interest based upon the LIBO Rate, the margin determined in accordance with the
criteria set forth on SCHEDULE 1.01(A) hereto, which margins shall be calculated
based upon the financial statements provided pursuant to SECTION 5.06, with any
readjustments being effective five Business Days following the Agent's receipt
thereof; provided, however, that in the event that the Required Contribution is
obtained on or prior to August 31, 2000, each such margin shall be reduced
effective as of five (5) Business Days after receipt by Borrowers of the
Required Contribution by twenty-five (25) basis points.
"ASSIGNMENT AGREEMENT" shall mean an assignment agreement entered into
in connection with an assignment pursuant to SECTION 11.08 hereof substantially
in the form of EXHIBIT O hereof.
3
<PAGE>
"BASE LIBO RATE" shall mean, during any Interest Period, the rate of
interest per annum (rounded upward to the nearest whole multiple of 1/16 of
1.0%, if such rate is not such a multiple) equal to the rate of interest
notified to the Agent by the Reference Bank at which Dollar deposits in the
approximate amount of the Loans to be made or continued as, or converted into,
LIBOR Loans for such Interest Period and having a maturity comparable to such
Interest Period would be offered by the London lending office of the Reference
Bank in the London interbank market at approximately 11:00 a.m. (London time)
two (2) Business Days prior to the commencement of such Interest Period.
"BASE RATE" shall mean the higher of (i) a rate per annum equal to the
corporate base rate, prime rate or base rate of interest, as applicable,
announced by the Reference Bank from time to time, changing when and as such
rate changes, it being understood that such rate of interest is not necessarily
the lowest or best rate charged by the Reference Bank to its customers, and (ii)
the sum of the Federal Funds Effective Rate plus one-half percent (0.50%) per
annum.
"BASE RATE LOAN" shall mean a Loan, or portion thereof, during any
period in which it bears interest at a rate based upon the Base Rate.
"BASE RATE REVOLVING LOAN" shall mean a Revolving Loan during any
period for which it is a Base Rate Loan.
"BASE RATE TERM A LOAN" shall mean any portion of the Term A Loans
during any period for which such portion is a Base Rate Loan.
"BASE RATE TERM B LOAN" shall mean any portion of the Term B Loans
during any period for which such portion is a Base Rate Loan.
"BASE RATE TERM LOAN" shall mean a Base Rate Term A Loan or a Base Rate
Term B Loan.
"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 any
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.
"BORROWER" shall mean any of KMC, KMC II, KMC III, KMC Virginia,
Leasing I, Leasing II, Leasing III, Telecom.com, Services and any Additional
Borrower.
"BORROWING BASE" shall mean at any time the sum of the following
amounts: (i) the aggregate cost of Telecommunications Equipment financed under
this Agreement, minus any reserves established by the Collateral Agent with
respect to Aged Equipment, (ii) the cash portion of the purchase price of
Permitted Acquisitions, plus fees and expenses in connection with the Permitted
Acquisitions; provided, however, that such fees and expenses may only be
included in the Borrowing Base with respect to any Permitted Acquisition if the
appraisal required by clause (8) of SECTION 6.08 with respect to such Permitted
Acquisition indicates that the fair market value of the assets being acquired in
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such Permitted Acquisition equals or exceeds the sum of the purchase price for
such assets and such fees and expenses, and (iii) transaction costs incurred in
connection with the execution, delivery and performance of the Loan Documents.
"BUSINESS" shall mean with respect to (i) each of KMC, KMC II, KMC III
and KMC Virginia, the business of constructing, operating and maintaining the
Systems owned by them and all operations related thereto or in support thereof,
(ii) each of Leasing I, Leasing II and Leasing III the business of owning and
leasing Switch Equipment, (iii) Services, the business of owning software,
installation and other soft costs related to the Systems and providing services
for the Systems, and (iv) Telecom.com, the business of developing and providing
intranet services.
"BUSINESS DAY" shall mean (a) 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 and (b) with respect to all notices,
determinations, fundings and payments in connection with the LIBO Rate or LIBOR
Loans, any day that is a Business Day pursuant to CLAUSE (A) above and that is
also a day on which trading is carried on by and between banks in the London
interbank market.
"CAPITALIZATION" shall mean funded equity capitalization of KMC
Holdings.
"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.
"CASH ADVANCE" shall mean any Term B Loan which is not a Credit
Advance.
"CHANGE OF CONTROL" shall mean (A) Harold N. Kamine ceases to have
senior management responsibilities with respect to the Borrowers or KMC
Holdings, (B) KMC Holdings no longer beneficially owns, directly or indirectly,
all of the outstanding Equity Interests of each Borrower, (C) 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
KMC Holdings on a fully diluted basis and such ownership represents a greater
percentage of the total voting power of the Voting Stock of KMC Holdings, on a
fully diluted basis, than is held by the Existing Stockholders on such date, or
(D) 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 KMC Holdings'
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.
"CLEC" shall mean a competitive local exchange carrier.
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"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 any Borrower in or upon which a security
interest, lien or mortgage is granted to the Collateral Agent by any 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, which was executed and
delivered pursuant to the Existing Agreement, together with the addenda thereto
to be executed and delivered by KMC III, Leasing III, Telecom.com and Services
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, which was
executed and delivered pursuant to the Existing Agreement, together with the
addenda thereto to be executed and delivered by KMC III, Leasing III,
Telecom.com and Services pursuant to SECTION 4.01 hereof.
"COLLECTION ACCOUNTS" AND "COLLECTION AGENT" shall have the meanings
given to such terms in SECTION 8.04 hereof.
"COMMITMENT" shall mean Lenders' commitment to lend as set forth in
SECTION 2.01 hereof.
"COMMITMENT AMOUNT" shall mean (a) as to any Lender, the aggregate of
such Lender's Revolving Loan Commitment Amount, Term Loan A Commitment Amount
and Term Loan B Commitment Amount as set forth opposite such Lender's name on
ANNEX A to this Agreement or in the most recent Assignment Agreement executed by
such Lender and (b) as to all Lenders, the aggregate of all Lenders' Revolving
Loan Commitment Amounts, Term Loan A Commitment Amounts and Term Loan B
Commitment Amounts, which aggregate commitment shall be Seven Hundred Million
Dollars ($700,000,000) on the Closing Date, as such amount may be adjusted from
time to time in accordance with this Agreement
"COMMON STOCK" shall mean with respect to any Person, all Equity
Interests of such Person that are 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.
"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; PROVIDED, that with respect to KMC Holdings, unless
otherwise indicated, its Subsidiaries shall not include any Excluded
Subsidiaries.
"CONSOLIDATED DEBT" shall mean, with respect to KMC Holdings on a
consolidated basis, at any date, the sum of the following determined on a
consolidated basis, without duplication, in accordance with GAAP: (a) all
liabilities, obligations and indebtedness for borrowed money, including, but not
limited to, obligations evidenced by bonds, debentures, notes or other similar
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instruments of any Borrower or KMC Holdings, (b) all obligations to pay the
deferred purchase price of property or services of any Borrower or KMC Holdings
(exclusive of rent for real property under leases that would not be capitalized
in accordance with GAAP), including, but not limited to, all obligations under
noncompetition agreements, except trade payables arising in the ordinary course
of business not more than ninety (90) days past due, (c) all obligations of any
Borrower or KMC Holdings as lessee under capital leases (exclusive of the
interest component thereof), (d) all Debt of any other Person secured by a Lien
on any asset of any such Borrower or KMC Holdings, (e) all guaranty obligations
of any Borrower or KMC Holdings, (f) all obligations, contingent or otherwise,
of any Borrower or KMC Holdings relative to the face amount of letters of
credit, whether or not drawn, and banker's acceptances issued for the account of
any Borrower or KMC Holdings, (g) all obligations to redeem, repurchase,
exchange, defease or otherwise make payments in respect of capital stock or
other securities of any Borrower or KMC Holdings at any time prior to the third
annual anniversary of the Term Loan Termination Date, and (h) all termination
payments which would be due and payable by any Borrower or KMC Holdings pursuant
to any hedging agreement. "Consolidated Debt" shall not include any intercompany
Debt between the Borrowers or between any Borrower and KMC Holdings.
"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.
"CONTRIBUTED CAPITAL" shall mean, with respect to the Borrowers, at any
date of determination, all contributed capital to such Borrowers including all
funded equity and all Qualified Intercompany Loans.
"CONTRIBUTION AGREEMENT" shall mean the Contribution Agreement among
the Borrowers (other than KMC III, Leasing III, Telecom.com and Services)
substantially in the form of EXHIBIT Q, which was executed and delivered in
connection with the Existing Agreement, as amended to add KMC III, Leasing III,
Telecom.com and Services as parties thereto pursuant to the General
Reaffirmation.
"COUNSEL" shall mean Sidley & Austin or such successor counsel selected
by the Collateral Agent.
"CREDIT ADVANCE" shall mean a Term B Loan made to refinance a trade
payable owing by any of the Borrowers to Lucent under a Lucent Purchase
Agreement.
"CREDIT SUPPORT" shall have the meaning given to such term in SECTION
2.10.
"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 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
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should be, in accordance with GAAP, recorded as capital or operating leases, (v)
all Guarantees of such Person, including without limitation, all debt of any
other Person secured by a Lien on property of such Person, (vi) all
reimbursement obligations, contingent or otherwise, with respect to letters of
credit or banker's acceptances issued for the account of any Borrower, and (vii)
all indebtedness, obligations or other liabilities in respect of any Interest
Rate Agreement, PROVIDED that Debt shall not include any liability for Federal,
state, local or other taxes, and PROVIDED, FURTHER, 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
that with respect to any high-yield Debt, the amount thereof shall not include
fees incurred in raising such Debt or overfunded amounts set aside solely to pay
interest. 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
any 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 be included.
"DEFAULT" shall mean any event which but for the passage of time or
giving of notice would constitute an Event of Default.
"DOCUMENTATION AGENT" shall mean General Electric Capital Corporation.
"DOLLARS" or "$" shall mean lawful money of the United States of
America.
"EASEMENTS" shall have the meaning given to such term in SECTION 3.20
hereof.
"EBITDA" shall mean, with respect to any Person, for any period, an
amount equal to (i) Net Income PLUS (ii) the sum of the following, to the extent
deducted in determining Net Income: (A) income and franchise taxes, (B) interest
expense, (C) amortization, depreciation and other non-cash charges, MINUS (iii)
the sum of interest income plus extraordinary gains, as determined in accordance
with GAAP as calculated at the end of such period.
"ELIGIBLE FRONTING ASSIGNEE" shall mean (a) Lucent or any Affiliate of
Lucent, (b) any commercial bank or financial institution (including any credit
corporation) that either (i) has total assets in excess of $1,000,000,000 and
either (x) has a combined capital and surplus and undivided profits in excess of
$250,000,000 or (y) has long-term indebtedness rated "BBB+" or better by
Standard & Poor's Ratings Service or "Baa1" or better by Moody's Investors
Services, Inc., or (ii) has an Affiliate that satisfies the criteria described
in the foregoing clause (i), or (c) any fund that is regularly engaged in the
making, purchasing or investing in loans or securities that is controlled by an
institution described in clause (b) above, and in each case, Lucent, as
assignor, and such Person described in clause (a), (b) or (c) above, as
assignee, complies with the provisions of SECTION 11.08(C) below.
"ENVIRONMENTAL LAWS" shall mean all federal, state and local laws,
rules, regulations, ordinances, programs, permits, guidance, orders and consent
decrees or other binding determination of any Governmental Authority relating to
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protection of the environment, the handling, disposal or Release of Contaminants
and occupational safety and health. Such laws and regulations include but are
not limited to the Resource Conservation and Recovery Act, 33 U.S.C. ss. 6901 ET
SEQ., as amended; the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. ss. 9601 ET SEQ., as amended; the Toxic Substances
Control Act, 15 U.S.C. ss. 2601 ET SEQ., as amended; the Clean Water Act, 33
U.S.C. ss. 1251 ET SEQ., as amended; the Clean Air Act, 42 U.S.C. ss. 7401 ET
SEQ., as amended; state and federal environmental lien and environmental cleanup
programs; the Occupational Safety and Health Act, 29 U.S.C. ss. 651 ET SEQ.; and
U.S. Department of Transportation regulations related to the transportation of
hazardous materials, each as from time to time hereafter in effect.
"EQUITY AFFILIATE" shall mean, 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.
"EQUITY INTEREST" shall mean, with respect to any Person, any and all
shares or other equivalents (however designated) of capital stock, membership
units, 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.
"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 any 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 any Borrower and (iii) any member of the same
affiliated service group (within the meaning of Section 414(m) of the IRC) as
any Borrower, any corporation described in CLAUSE (i) above or any partnership
or trade or business described in CLAUSE (ii) above.
"EUROCURRENCY LIABILITIES" shall have the meaning assigned to that term
in Regulation D of the Federal Reserve Board, as in effect from time to time.
"EVENT OF DEFAULT" shall have the meaning given to such term in ARTICLE
IX hereof.
"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
which is not reimbursable by insurance, 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,
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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 any fiscal quarter, 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 Lenders, 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.
"EXCLUDED LETTERS OF CREDIT" shall have the meaning ascribed to such
term in SECTION 6.13(viii).
"EXCLUDED SUBSIDIARY" shall mean (a) any Subsidiary of KMC Holdings
which is neither a Borrower under this Agreement nor a Person which directly or
indirectly beneficially owns Equity Interests in any Borrower, PROVIDED that (i)
at the time such other Subsidiary was created or acquired, no Default or Event
of Default shall have occurred and be continuing before or after giving effect
to the creation or acquisition of such Subsidiary, and (ii) no portion of the
Required Contributions, the proceeds of KMC's 12 1/2 % Senior Discount Notes due
2008, the proceeds of KMC's 13 1/2 % Senior Notes due 2009, the proceeds of the
Equity Interests of KMC Holdings issued on or prior to the Closing Date or the
Revolving Loan Commitment Amount shall have been or shall be used to fund the
acquisition or operations of such Subsidiary, and KMC Holdings has external
sources of funding (other than the Required Contributions and the Revolving Loan
Commitment Amount) to finance the acquisition and operations of such Subsidiary,
(b) KMC Telecom Financing, Inc., a Delaware corporation, (c) KMC Financial
Services LLC, a Delaware limited liability company, or (d) any other Subsidiary
of KMC Holdings which KMC Holdings or any Borrower requests the Lenders to
designate as such, and which designation is agreed to by the Required Lenders.
"EXISTING STOCKHOLDERS" shall mean Harold N. Kamine, his Equity
Affiliates, Nassau Capital Partners L.P., NAS Partners I L.L.C. or their
respective successors, and their Equity Affiliates.
"FCC" shall mean the Federal Communications Commission or any successor
commission or agency of the United States of America having jurisdiction over
any Borrower or any System.
"FEDERAL FUNDS EFFECTIVE RATE" shall mean, for any period, a
fluctuating interest rate per annum equal for each day during such period to (a)
the weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by federal funds brokers, as
published for such day (or if such day is not a Business Day, for the preceding
Business Day) by the Federal Reserve Bank of New York in the Composite Closing
Quotations for U.S. Government Securities; or (b) if such rate is not so
published for any day which is a Business Day, the average of the quotations at
approximately 10:30 a.m. (New York time) for such day on such transactions
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received by the Reference Bank from three federal funds brokers of recognized
standing selected by it.
"FEDERAL RESERVE BOARD" shall mean the Board of Governors of the
Federal Reserve System or any successor thereto.
"FEE LETTERS" shall mean (i) that certain letter agreement dated
September 25, 1998 among the Borrowers, KMC Holdings, the Collateral Agent,
Capital Syndications Corporation ("CSC"), General Electric Capital Corporation
("GECC"), GECC Capital Market Groups, Inc. ("GECG"), the Agent, First Union
Capital Markets, a Division of Wheat First Securities, Inc. ("FUCM") and
Canadian Imperial Bank of Commerce ("CIBC"), (ii) that certain letter agreement
dated September 25, 1998 among the Borrowers, KMC Holdings, the Collateral
Agent, CSC, GECC, GECG, the Agent and FUCM, (iii) that certain letter agreement
dated December 22, 1998 among the Borrowers, KMC Holdings, the Collateral Agent,
CSC, GECC, GECG, the Agent, FUCM and CIBC, and (iv) that certain letter
agreement dated February 14, 2000 between the Borrowers and Lucent.
"FINANCIALS" shall have the meaning given to such term in SECTION 3.03.
"FIXED CHARGES" shall mean with respect to any period for the Borrowers
on a combined basis, the sum of the following amounts calculated at the end of
such period with respect to such period without duplication and in accordance
with GAAP:
(i) the product of two multiplied by scheduled principal and interest
payments with respect to Debt for the six month period then ending, (ii) capital
expenditures for the four quarter period then ending, (iii) the product of two
multiplied by income tax payments for the six month period then ending, and (iv)
the product of two multiplied by cash dividend payments for the six month period
then ending.
"FIXED CHARGE COVERAGE RATIO" shall have the meaning assigned to such
term in SECTION 7.02(c).
"FRONTING COMMITMENT" shall mean a portion of the Term B Loan
Commitment Amount that is assigned by Lucent pursuant to an Assignment Agreement
designating the assigned portion of the Term B Loan Commitment Amount as a
"Fronting Commitment".
"FUNB" shall mean First Union National Bank, a national banking
association.
"GENERAL REAFFIRMATION" shall mean the General Reaffirmation and
Modification Agreement in the form of EXHIBIT T hereto.
"GOVERNMENTAL APPROVAL" shall mean, with respect to any Borrower, any
license, permit, franchise or certificate of public convenience and necessity
issued to any Borrower by the FCC, any PUC or any other Governmental Authority
in connection with any System.
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"GOVERNMENTAL AUTHORITY" shall mean any federal, state or local
governmental authority 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.
"HOLDINGS III" shall mean KMC Telecom III Holdings, Inc., a Delaware
corporation.
"INDENTURES" shall mean (i) that certain Indenture dated as of January
29, 1998 between KMC Holdings, as Issuer and The Chase Manhattan Bank, as
Trustee, relating to KMC Holdings' 12 1/2 percent Senior Discount Notes due
2008, together with the First Supplemental Indenture relating thereto dated as
of May 24, 1999 and (ii) that certain Indenture dated as of May 24, 1999 between
KMC Holdings, as Issuer and The Chase Manhattan Bank, as Trustee, relating to
KMC Holdings' 13 1/2 percent Senior Notes due 2009.
"INTELLECTUAL PROPERTY DOCUMENTS" shall mean (i) the Trademark Security
Agreement, in the form of EXHIBIT S attached hereto, executed by the Borrowers
(other than KMC III, Leasing III, Telecom.com and Services) in favor of the
Collateral Agent for the benefit of the Agents and the Lenders, as amended,
restated or otherwise modified from time to time and (ii) any other trademark,
patent or copyright security agreement executed pursuant to SECTION 5.16 by any
Borrower.
"INTEREST EXPENSE" shall mean for any period, the total interest
expense (including, without limitation, interest expense attributable to capital
leases) determined on a combined basis, without duplication, for the Borrowers
in accordance with GAAP.
"INTEREST PERIOD" shall mean, with respect to each LIBOR Loan, the
interest period applicable to such LIBOR Loan as set forth in the applicable
Notice of Borrowing or Notice of Conversion or Continuation.
"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
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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 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 HOLDINGS GUARANTY" shall mean that certain unlimited guaranty of
KMC Holdings in the form of EXHIBIT G hereto and executed and delivered by KMC
Holdings in connection with the Existing Agreement, as amended by the General
Reaffirmation.
"KMC TELECOM.COM" shall mean KMC Telecom.com, a Delaware corporation.
"LENDING OFFICE" shall mean, with respect to a Lender or Agent, any
office, branch, subsidiary or affiliate of such Lender or the Agent.
"LETTER OF CREDIT" shall mean a letter of credit issued or caused to be
issued for the account of a Borrower or with respect to which Credit Support is
provided, in any case pursuant to SECTION 2.10.
"LETTER OF CREDIT OBLIGATIONS" shall mean without duplication, the sum
of the aggregate maximum undrawn face amount of all outstanding Letters of
Credit and unpaid reimbursement obligations with respect to all Letters of
Credit.
"LIBO RATE" shall mean, for any Interest Period with respect to LIBOR
Loans comprising part of the same borrowing, the rate of interest per annum
equal to the per annum rate of interest displayed on the Dow Jones Market Screen
Page 3750, as being the one-month, two-month, three-month or six-month, as
applicable, reserve adjusted "London Interbank Offered Rate", provided, however,
that if such rate is not displayed or published, then the rate of interest per
annum (rounded upward to the nearest whole multiple of 1/16 of 1.0%, if such
rate is not such a multiple) determined by the Agent as follows:
LIBO Rate = BASE LIBO RATE
-------------------------------
1.00 - LIBOR Reserve Percentage
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"LIBOR INTEREST PAYMENT DATE" shall mean, with respect to a LIBOR Loan,
the last day of each Interest Period applicable to such Loan, and, if such
Interest Period has a duration of more than three months, on each day which
occurs during such Interest Period every three months from the first day of such
Interest Period.
"LIBOR INTEREST RATE DETERMINATION DATE" shall mean each date of
calculating the LIBO Rate for purposes of determining the interest rate with
respect to an Interest Period. The LIBOR Interest Rate Determination Date for
any LIBOR Loan shall be the second Business Day prior to the first day of the
related Interest Period for such LIBOR Loan.
"LIBOR LOAN" shall mean a Loan, or portion thereof, during any period
in which it bears interest at a rate based upon the LIBO Rate.
"LIBOR RESERVE PERCENTAGE" shall mean for any day for any Interest
Period the maximum reserve percentage (expressed as a decimal, rounded upward to
the next 1/100th of 1.0%) in effect on such day (whether or not applicable to
any Lender) for United States domestic banks under regulations issued from time
to time by the Federal Reserve Board for determining the maximum reserve
requirement (including any emergency, supplemental or other marginal reserve
requirement) with respect to Eurocurrency Liabilities having a term comparable
to such Interest Period.
"LIBOR REVOLVING LOAN" shall mean a Revolving Loan during any period
for which it is a LIBOR Loan.
"LIBOR TERM A LOAN" shall mean any portion of the Term A Loans during
any period for which such portion is a LIBOR Loan.
"LIBOR TERM B LOAN" shall mean any portion of the Term B Loans during
any period for which such portion is a LIBOR Loan.
"LIBOR TERM LOAN" shall mean a LIBOR Term A Loan or a LIBOR Term B
Loan.
"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.
"LOAN" shall mean a Revolving Loan or a Term Loan.
"LOAN DOCUMENTS" shall mean this Agreement, the Existing Agreement,
each "Loan Document" under and as defined in the Existing Agreement, the
Collateral Assignment of Leases, the Collateral Assignment of Licenses, the
Mortgages, the Notes, the Pledge Agreements, the KMC Holdings Guaranty, the
Intellectual Property Documents, the Fee Letters, all other 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 any
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Borrower and the Agent, the Collateral Agent, or the Lenders and all other
written matter whether heretofore, now, or hereafter executed by or on behalf of
any Borrower or any other Person in connection with the transactions
contemplated hereby and delivered to the Agent, the Collateral Agent or the
Lenders, together with all agreements and documents referred to therein or
contemplated thereby; PROVIDED, HOWEVER, that the documents executed in
connection with the purchase by Newcourt Communications Finance Corporation
(formerly known as AT&T Credit Corporation) or any Lender of Equity Interests in
KMC or KMC Holdings shall not constitute Loan Documents.
"LUCENT" shall mean Lucent Technologies Inc.
"LUCENT LOAN AGREEMENT" shall have the meaning given to such term in
Recital B.
"LUCENT PURCHASE AGREEMENT" shall mean an agreement between any
Borrower and Lucent for the purchase of Telecommunications Equipment, on terms
and conditions satisfactory to the Agents.
"MANAGEMENT AGREEMENT" shall mean that certain Management Agreement
dated as of December 18, 1998 among KMC Holdings, the Borrowers, KMC Telecom
Financing, Inc., a Delaware corporation, and KMC Financial Services, LLC, a
Delaware limited liability company, as amended by Amendment Nos. 1, 2 and 3
thereto.
"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
2.13 hereof.
"MILESTONE PLAN" shall mean the 39-city Milestone Plan of the Borrowers
attached as EXHIBIT A hereto, as such Milestone Plan may be amended from time to
time with the prior written consent of the Requisite Lenders.
"MORTGAGES" shall mean mortgages or deeds of trust in favor of the
Collateral Agent, with respect to any Borrower's (i) owned Real Property and
(ii) other interests in those items of real property and Easements, as specified
by the Collateral Agent, which mortgages and deeds of trust shall be in form and
substance satisfactory to the Collateral Agent.
"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 any 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.
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"NOTE" shall mean any Revolving Loan Note, any Term A Loan Note or any
Term B Loan Note.
"NOTICE OF BORROWING" shall mean a notice substantially in the form of
EXHIBIT H-1 attached hereto.
"NOTICE OF CONVERSION/CONTINUATION" shall have the meaning given to
such term in SECTION 2.06(b).
"OBLIGATIONS" shall mean all the obligations of any Borrower now or
hereafter existing under this Agreement or any other Loan Document to which any
Borrower is a party, whether for principal, interest, fees, expenses,
reimbursement, indemnification or otherwise. Obligations shall include, without
limitation, all interest, charges, expenses, fees, attorneys' fees and
disbursements, and paralegals' fees which accrue after the commencement of any
case or proceeding in bankruptcy after the insolvency of, or for the
reorganization of any Borrower, whether or not allowed in such proceeding, and
Obligations shall not include any reimbursement obligations with respect to
Excluded Letters of Credit.
"PAYMENT ACCOUNT" shall mean the Agent's account at First Union
National Bank, ABA No. 053000219, Account # 5000000016905, KMC reference:
Payment Account.
"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 April 3, 2000.
"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 ACQUISITION" shall have the meaning set forth in SECTION
6.08 hereof.
"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.
"PLAN" shall mean any employee benefit plan as defined in Section 3(3)
of ERISA (other than a Multiemployer Plan) in respect of which any 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 a pledge agreement substantially in the
form of the pledge agreements executed and delivered pursuant to the Existing
Agreement, copies of which are attached as EXHIBIT L hereto.
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"PREPAYMENT PREMIUM" shall mean (A) for the Revolving Loans, (i) with
respect to the period commencing on the Closing Date and ending on February 1,
2001, one and one-half percent (1.5%) of the amount prepaid, (ii) with respect
to the period commencing thereafter and ending on February 1, 2002, one-half
percent (0.5%) of the amount prepaid, and (iii) at all times thereafter, zero
percent (0%), and (B) for the Term A Loans and the Term B Loans, (i) with
respect to the period commencing on the Closing Date and ending on February 1,
2001, two percent (2.0%) of the amount prepaid, (ii) with respect to the period
commencing thereafter and ending on February 1, 2002, one percent (1.0%) of the
amount prepaid, and (iii) at all times thereafter, zero percent (0%).
"PRINCIPAL PAYMENTS" shall mean, for any period, total required Debt
amortization (including, without limitation, the principal payments attributable
to capital leases) determined on a combined basis, without duplication, for the
Borrowers in accordance with GAAP.
"PRO RATA SHARE" shall mean with respect to all matters relating to any
Lender (a) with respect to the Revolving Loans and the Letters of Credit, the
percentage obtained by dividing (1) at any time on or prior to the Revolving
Credit Commitment Termination Date, the Revolving Loan Commitment Amount of such
Lender by the aggregate Revolving Loan Commitment Amount of all Lenders, and (2)
at any time after the Revolving Credit Commitment Termination Date, the
aggregate outstanding principal balance of the sum of the Revolving Loans held
by that Lender plus the Letters of Credit Obligations incurred by such Lender by
the sum of the aggregate outstanding principal balance of the Revolving Loans
held by all Lenders plus the aggregate Letter of Credit Obligations incurred by
all the Lenders, (b) with respect to the Term A Loans, the percentage obtained
by dividing the aggregate outstanding principal balance of the Term A Loans held
by that Lender, by the aggregate outstanding principal balance of the Term A
Loans held by all Lenders, and (c) with respect to the Term B Loans, the
percentage obtained by dividing (1) at any time on or prior to the Term B Loan
Commitment Termination Date, the Term B Loan Commitment Amount of that Lender by
the Term B Loan Commitment Amount of all Lenders, and (2) at any time after the
Term B Loan Commitment Termination Date, the aggregate outstanding principal
balance of the Term B Loans held by that Lender, by the aggregate outstanding
principal balance of the Term B Loans held by all Lenders.
"PUC" shall mean any state Governmental Authority having utility or
telecommunications regulatory authority over any Borrower or any System.
"PURCHASE DEBT" shall have the meaning given to such term in SECTION
6.13(iv).
"QUALIFIED INTERCOMPANY LOAN" shall mean a loan to a Borrower from KMC
Holdings, which loan is expressly subordinated to the Obligations on terms and
conditions satisfactory to the Agents, has a maturity date occurring on or after
the third annual anniversary of the Term Loan Termination Date, and requires no
cash payment of principal or interest prior to the scheduled maturity date of
such loan.
"REAL PROPERTY" shall have the meaning given to such term in SECTION
3.20 hereof.
"REFERENCE BANK" shall mean First Union National Bank.
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"REGISTER" shall have the meaning given to such term in SECTION
11.08(C)(iii).
"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.
"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.
"REQUIRED CONTRIBUTION" shall mean cash capital contributions to the
Borrowers from KMC Holdings in such amount as is necessary to fully fund the
Milestone Plan, but in any event at least $185,000,000.
"REQUISITE LENDERS" shall mean (1) as long as one Lender holds
thirty-three and one-third percent (33 1/3%) or more of the Term B Loan
Commitment Amounts, Lenders who collectively hold at least seventy five percent
(75%) of the sum of the following amounts: (i) the Aggregate Revolving Loan
Commitment Amounts until such commitments expire or terminate, and thereafter,
the aggregate outstanding balance of the Revolving Loans; (ii) the aggregate
outstanding balance of the Term A Loans; and (iii) the aggregate Term B Loan
Commitment Amounts until such commitments expire, terminate or are fully drawn
upon, and thereafter, the aggregate outstanding balance of the Term B Loans; and
(2) thereafter, Lenders who hold at least sixty-six and two-thirds percent (66
2/3%) of the sum of the amounts listed above.
"REQUISITE REVOLVING LENDERS" shall mean (a) Lenders having at least
sixty-six and two-thirds percent (66 2/3%) of the aggregate Revolving Loan
Commitment Amount of all Lenders, or (b) if the Revolving Loan Commitment has
been terminated, at least sixty-six and two-thirds percent (66 2/3%) of the
aggregate outstanding amount of the sum of all Revolving Loans plus Letter of
Credit Obligations incurred by all the Lenders.
"REVOLVING CREDIT COMMITMENT TERMINATION DATE" shall mean April 1,
2007.
"REVOLVING LENDERS" shall mean, as of any date of determination on or
prior to the Revolving Credit Commitment Termination Date, Lenders having a
Revolving Loan Commitment Amount, and thereafter Lenders having outstanding
Revolving Loans or Letter of Credit Obligations.
"REVOLVING LOAN" shall mean any loan made to the Borrower pursuant to
the provisions of SECTION 2.01(b) below.
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"REVOLVING LOAN COMMITMENT AMOUNT" shall mean (a) as to any Revolving
Lender, the aggregate commitment of such Revolving Lender to make Revolving
Loans and/or incur Letter of Credit Obligations as set forth opposite such
Revolving Lender's name on ANNEX A to this Agreement or in the most recent
Assignment Agreement executed by such Revolving Lender and (b) as to all
Revolving Lenders, the aggregate commitment of all Revolving Lenders to make
Revolving Loans and/or incur Letter of Credit Obligations, which aggregate
commitment shall be One Hundred Seventy-Five Million Dollars ($175,000,000) on
the Closing Date, as such amount may be adjusted from time to time in accordance
with this Agreement.
"REVOLVING LOAN NOTE" shall mean a promissory note of the Borrower
delivered under the Existing Agreement and substantially in the form of EXHIBIT
E-1 attached hereto.
"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.
"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 Equity Interests
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.
"SUPPORTING LETTER OF CREDIT" shall have the meaning given to such in
SECTION 2.10(j).
"SWITCH EQUIPMENT" shall mean any Lucent 5-ESS telecommunications
switch or other telecommunications/data switch for the provision of CLEC
telephony service, data transport, internet access and other related services.
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"SYNDICATION AGENT" shall mean Canadian Imperial Bank of Commerce.
"SYSTEM" shall mean each telephone, telecommunications or information
system (including, without limitation, any voice, video transmission, data or
Internet services) and any related, ancillary or complementary services, as
described in the Milestone Plan, and all replacements, enhancements or additions
thereto.
"TAX SHARING AGREEMENT" shall mean that certain Tax Allocation
Agreement dated as of December 18, 1998 among KMC Holdings, the Borrowers, KMC
Telecom Financing, Inc., a Delaware corporation, and KMC Financial Services,
LLC, a Delaware limited liability company, as amended by Amendment Nos. 1, 2 and
3 thereto.
"TAXES" shall mean any and all license, documentation, recording and
registration fees, and all taxes, including, without limitation, income (other
than net income taxes, franchise taxes and capital taxes imposed on the Lenders,
the Agent or the Collateral Agent other than by withholding), gross receipts,
sales, value-added, use, excise, personal property (tangible and intangible),
real estate and stamp, documentary, transfer or recording taxes, levies,
imposts, deductions, duties, assessments, fees, charges, and withholdings of any
nature whatsoever, whether or not presently in existence, together with any
penalties, fines, additions to tax, or interest thereon, imposed by any taxing
authority or other Governmental Authority.
"TELECOMMUNICATIONS EQUIPMENT" shall mean fiber optic cable, Switch
Equipment, transmission equipment and other ancillary hardware necessary for the
installation and operation of a switch room or central office and co-location
with other telecommunications providers that will enable a Borrower to offer
CLEC telephony, data transport, internet access and other related
state-of-the-art telecommunications services, as well as all software associated
with the network operating center and back office systems (including, without
limitation, billing systems, operations systems and support, customer service
and data services) and other related software and hardware products integral to
developing and operating viable CLEC telephony, data transport, internet access
and related state of the art telecommunications businesses, together with all
related support, construction and installation costs associated with an
operational system, provided that such costs are capitalized in accordance with
GAAP.
"TERM A LENDERS" shall mean those Lenders who have made Term A Loans.
"TERM A LOAN" shall mean any loan made to the Borrowers pursuant to
SECTION 2.01(a) of the Existing Agreement and which under the Existing Agreement
was characterized as a "Term Loan".
"TERM A LOAN COMMITMENT AMOUNT" shall mean (a) as to any Term A Lender,
the commitment of such Term A Lender to make a Term A Loan under the Existing
Agreement, which commitment has been fully drawn upon, as set forth opposite
such Term A Lender's name on Annex A to this Agreement and (b) as to all Term A
Lenders, the aggregate commitment of all Term A Lenders to make Term A Loans
under the Existing Agreement, which commitment has been fully drawn upon.
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"TERM A LOAN NOTE" shall mean a promissory note of a Borrower delivered
under the Existing Agreement and substantially in the form of EXHIBIT E-2
attached hereto.
"TERM A LOAN TERMINATION DATE" shall mean July 1, 2007.
"TERM B LENDERS" shall mean those Lenders having Term B Loan Commitment
Amounts or who have made Term B Loans.
"TERM B LOAN" shall mean any loan made to the Borrowers pursuant to
SECTION 2.01(a) below.
"TERM B LOAN COMMITMENT AMOUNT" shall mean (a) as to any Term B Lender,
the commitment of such Term B Lender to make Term B Loans as set forth opposite
such Term B Lender's name on ANNEX A to this Agreement or in the most recent
Assignment Agreement executed by such Term B Lender and (b) as to all Term B
Lenders, the aggregate commitment of all Term B Lenders to make Term B Loans,
which aggregate commitment shall be Four Hundred Fifty Million Dollars
($450,000,000) on the Closing Date; PROVIDED, HOWEVER, that until such time as
both the Required Contribution has been made and the ratio of Total Debt to
Contributed Capital becomes equal to or less than 1.0 to 1.0, the aggregate
commitment of all Term B Lenders to make Term B Loans shall not exceed Three
Hundred Fifty Million Dollars ($350,000,000) and the commitment of each Term B
Lender shall be proportionately reduced from the amount set forth opposite such
Term B Lender's name on ANNEX A to this Agreement or in the most recent
Assignment Agreement executed by such Term B Lender.
"TERM B LOAN COMMITMENT TERMINATION DATE" shall mean the second annual
anniversary of the Closing Date.
"TERM B LOAN NOTE" shall mean a promissory note of a Borrower
substantially in the form of EXHIBIT E-3 attached hereto.
"TERM B LOAN TERMINATION DATE" shall mean July 1, 2007.
"TERM LOAN" shall mean a Term A Loan or a Term B Loan.
"TERMINATION EVENT" shall mean (i) a Reportable Event with respect to a
Benefit Plan; (ii) the withdrawal of any Borrower or any ERISA Affiliate from a
Benefit Plan during a plan year in which any 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 any 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 any Borrower or any ERISA Affiliate from a Multiemployer Plan.
"THIRD PARTY INTERACTIVES" shall mean all Persons with whom any
Borrower exchanges data electronically in the ordinary course of business,
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including without limitation, customers, suppliers, third-party vendors,
subcontractors, processors-converters, shippers and warehousemen.
"TOTAL DEBT" shall mean, with respect to the Borrowers, at any date,
the sum of the following determined on a combined basis, without duplication:
(a) all liabilities, obligations and indebtedness for borrowed money, including,
but not limited to, obligations evidenced by bonds, debentures, notes or other
similar instruments, (b) all obligations to pay the deferred purchase price of
property or services (exclusive of any rent for real property pursuant to a
lease that would not be capitalized in accordance with GAAP), including, but not
limited to, all obligations under non-competition agreements, except trade
payables arising in the ordinary course of business not more than ninety (90)
days past due, (c) all obligations as lessee under capital leases (exclusive of
the interest component thereof), (d) all Debt of any other Person secured by a
Lien on any asset of any Borrower, (e) all guaranty obligations, (f) all
obligations, contingent or otherwise, relative to the face amount of letters of
credit, whether or not drawn and banker's acceptances issued for the account of
any Borrower, (g) all obligations to redeem, repurchase, exchange, defease or
otherwise make payments in respect of capital stock or other securities at any
time prior to the third annual anniversary of the Term A Loan Termination Date,
and (h) all termination payments which would be due and payable by any Borrower
thereof pursuant to any Interest Rate Agreement or hedging agreement. "Total
Debt" shall not include any intercompany Debt between the Borrowers or between
any Borrower and KMC Holdings.
"TOTAL LEVERAGE RATIO" shall mean the ratio of (i) Total Debt as of the
last day of the most recently ended fiscal quarter, to (ii) the product of (A)
two multiplied by (B) EBITDA of the Borrowers on a combined basis, for the most
recently ended two fiscal quarters.
"UNUSED LETTER OF CREDIT SUBFACILITY" shall mean an amount equal to the
lesser of (i) $10,000,000 minus the Letter of Credit Obligations, and (ii) the
undrawn portion of the Revolving Loan Commitment Amount of all Lenders.
"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).
"YEAR 2000 CORRECTIVE ACTIONS" shall mean, as to each Borrower, all
actions necessary to eliminate such Person's Year 2000 Problems, including,
without limitation, computer code enhancements and revisions, upgrades and
replacements of Year 2000 Date-Sensitive Systems/Components, and coordination of
such enhancements, revisions, upgrades and replacements with Third Party
Interactives.
"YEAR 2000 CORRECTIVE PLAN" shall mean, with respect to each Borrower,
a comprehensive plan to eliminate all of its Year 2000 Problems, including
without limitations (i) computer code enhancements or revisions, (ii) upgrades
or replacements of Year 2000 Date-Sensitive Systems/Components, (iii) test and
validation procedures, (iv) an implementation time line and budget and (v)
designation of specific employees who will be responsible for planning,
coordinating and implementing each phase or subpart of the Year 2000 Corrective
Plan.
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"YEAR 2000 DATE-SENSITIVE SYSTEM/COMPONENT" shall mean, as to any
Person, any system software, network software, applications software, database,
computer file, embedded microchip, firmware or hardware that accepts, creates,
manipulates, sorts, sequences, calculates, compares or outputs calendar-related
data accurately; such systems and components shall include, without limitation,
mainframe computers, file server/client system, computer workstations, routers,
hubs, other network-related hardware, and other computer-related software,
firmware or hardware and information processing and delivery systems of any kind
and telecommunications systems and other communications processors, security
systems, alarms, elevators and HVAC systems.
"YEAR 2000 IMPLEMENTATION TESTING" shall mean, as to each Borrower, (i)
the performance of test and validation procedures regarding Year 2000 Corrective
Actions on a unit basis and a system wide basis, (ii) the performance of test
and validation procedures regarding data exchanges among the Borrowers' Year
2000 Date-Sensitive Systems/Components and data exchanges with Third Party
Interactives, and (iii) the design and implementation of additional Corrective
Actions, the need for which has been demonstrated by test and validation
procedures.
"YEAR 2000 PROBLEMS" shall mean, with respect to each Borrower,
limitations on the capacity or readiness of any such Borrower's Year 2000
Date-Sensitive Systems/Components to accurately accept, create, manipulate,
sort, sequence, calculate, compare or output calendar date information with
respect to calendar year 1999 or any subsequent calendar year beginning on or
after January 1, 2000 (including leap year computations), including, without
limitation, exchanges of information among Year 2000 Date-Sensitive
Systems/Components of the Borrowers and exchanges of information among the
Borrowers and Year 2000 Date-Sensitive Systems/Components of Third Party
Interactives and functionality of peripheral interfaces, firmware and embedded
microchips.
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 ("GAAP") applied on a consistent
basis.
SECTION 1.04. OTHERS DEFINED IN NEW YORK UNIFORM COMMERCIAL CODE. All
other terms contained in this Agreement (and which are not otherwise
specifically defined herein) shall have the meanings provided by the Uniform
Commercial Code of the State of New York (the "CODE") to the extent the same are
used or defined therein.
ARTICLE II
LOANS AND LETTERS OF CREDIT
SECTION 2.01. AGREEMENT TO LEND. (a) Each Term B Lender severally
agrees, on the terms and conditions hereinafter set forth, to make on and after
the Closing Date and until but not including the Term B Loan Commitment
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Termination Date, one or more Term B Loans to the Borrowers in an amount not to
exceed the Term B Loan Commitment Amount of such Term B Lender.
(b) Each Revolving Lender severally agrees, on the terms and
conditions hereinafter set forth, to make on and after the Closing Date and
until but not including the Revolving Credit Commitment Termination Date, one or
more Revolving Loans to the Borrowers in an amount not to exceed when combined
with Revolving Loans that were made under the Existing Agreement and remain
outstanding, the Revolving Loan Commitment Amount of such Revolving Lender less
such Lender's Pro Rata Share of the Letter of Credit Obligations.
(c) Term A Loans have been made to the Borrowers in the aggregate
amount of $75,000,000 under the Existing Agreement and constitute the "Term
Loans" as defined in the Existing Agreement. No additional Term A Loans shall be
made to the Borrowers.
(d) At any time that the Total Leverage Ratio is greater than 6:1 as
determined by reference to the financial statements delivered pursuant to
SECTION 5.06, the maximum amount of Revolving Loans that may be borrowed from
all Revolving Lenders shall not exceed the Borrowing Base.
(d) Term Loans which are repaid or prepaid may not be reborrowed.
Revolving Loans which are repaid or prepaid may be reborrowed.
SECTION 2.02. LOANS. (a) The proceeds of the Revolving Loans shall
be used by the Borrowers to purchase Telecommunications Equipment, to pay
transaction costs incurred in connection with the execution, delivery and
performance of the Loan Documents, for financing Permitted Acquisitions and for
working capital and other general corporate purposes, all as specified in the
Notice of Borrowing and in accordance with the Milestone Plan; provided,
however, that at any time that the Total Leverage Ratio is greater than 6:1 as
determined by reference to the financial statements delivered pursuant to
SECTION 5.06, proceeds of Revolving Loans may be used only to pay transaction
costs incurred in connection with the execution and delivery of the Loan
Documents, to purchase Telecommunications Equipment, and to finance Permitted
Acquisitions. Subject to the provisions of SECTION 2.02(d), the proceeds of the
Term B Loans shall be used by the Borrowers to (i) purchase Telecommunications
Equipment pursuant to the Lucent Purchase Agreement, (ii) to purchase non-Lucent
Telecommunications Equipment (such Term B Loans not to exceed an aggregate
amount of $45,000,000), and (iii) to refinance the obligations of KMC III,
Leasing III and Services under the Lucent Loan Agreement. Loans with respect to
Telecommunications Equipment purchases may not be made to finance (i) soft costs
(including installation, delivery and engineering costs) in excess of fifteen
percent (15%) of the invoiced price for the related Switch Equipment or (ii) any
support or installation costs associated with an operational system that would
not be capitalized in accordance with GAAP.
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(b) Each Base Rate Loan shall be in a minimum principal amount of
$1,000,000 and increments of $250,000 in excess thereof. Each LIBOR Loan shall
be in a minimum principal amount of $5,000,000 and increments of $1,000,000 in
excess thereof.
(c) In any calendar month not more than six (6) Revolving Loans may
be requested, and no more than one Term B Loan may be requested.
(d) The proceeds of any Term B Loan consisting of a Cash Advance
shall be used exclusively to finance or reimburse invoices for
Telecommunications Equipment purchased from Lucent by KMC, KMC II or KMC III
during the period commencing on the date that is twelve months prior to the
Closing Date and ending on the Term B Loan Termination Date; provided, that (i)
the maximum principal amount of any Term B Loan consisting of a Cash Advance
shall not exceed $100,000,000, (ii) the principal amount of all Term B Loans
consisting of Cash Advances to reimburse invoices for Telecommunications
Equipment purchased from Lucent during the twelve month period prior to the
Closing Date ("Pre-Closing Invoices") shall not exceed $200,000,000 in the
aggregate and (iii) the Borrowers may not use the proceeds of any Term B Loan
consisting of a Cash Advance to reimburse Pre-Closing Invoices after the second
anniversary of the Closing Date.
SECTION 2.03. PROCEDURE FOR LOAN REQUEST AND BORROWING COMMITMENT.
(a) A Borrower requesting a Loan shall deliver to each of the Agent and the
Collateral Agent a Notice of Borrowing substantially in the form of EXHIBIT H-1
attached hereto on or before 11:00 a.m. (New York time) at least five (5)
Business Days prior to the date on which such Loan is requested to be made if
such Loan is requested to be a LIBOR Loan and at least two (2) Business Days
prior to the date on which such Loan is requested to be made if such Loan is
requested to be a Base Rate Loan, which notice, once given, shall be
irrevocable; provided, however, that (i) only the Collateral Agent shall receive
the attachments to the Notice of Borrowing, as outlined below, (ii) if the
requested Loan is a Term B Loan consisting of a Cash Advance in excess of
$50,000,000, the Notice of Borrowing shall be delivered as least seven (7)
Business Days prior to the date on which such Loan is requested to be made, and
(iii) the applicable Borrower(s) shall provide to Lucent simultaneously with the
provision of the Notice of Borrowing to the Agent and the Collateral Agent a
list of the invoices (including dollar amounts) to be financed or reimbursed
with the proceeds of the requested Term B Loan. In the case of a Loan the
proceeds of which will be used to purchase or reimburse any Borrower for
Telecommunications Equipment (including any Telecommunications Equipment being
purchased or reimbursed under the Lucent Purchase Agreement), the Notice of
Borrowing delivered to the Collateral Agent will include a schedule supporting
one hundred percent (100%) of Telecommunications Equipment requested to be
funded. Such schedule will detail all invoices for equipment, third party labor,
permits, other third party costs and all capitalized internal costs of the
Borrowers with respect to such Telecommunications Equipment permitted under
GAAP. All invoices over $25,000 will be attached to such schedule delivered to
the Collateral Agent who shall review such invoices and verify that, when
combined with the above described capitalized internal costs, such invoices will
support at least seventy percent (70%) of the total requested funding. In
addition, if the Telecommunications Equipment is being purchased or reimbursed
under the Lucent Purchase Agreement, a certificate of delivery and acceptance in
the form of EXHIBIT R shall be attached to the Notice of Borrowing delivered to
the Collateral Agent. In the case of a Loan the proceeds of which will be used
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to pay or reimburse any Borrower for transaction costs, the Notice of Borrowing
delivered to the Collateral Agent will include a copy of the invoice from the
provider of the service or other appropriate supporting documentation. In the
case of a Loan, the proceeds of which will be used for working capital or other
general corporate purposes, the Notice of Borrowing delivered to the Collateral
Agent will contain a certification that the making of such Loan does not violate
any provision of either Indenture or the terms of the preferred Equity Interests
of KMC Holdings. The Notice of Borrowing shall, with respect to any Loans
requested, specify whether such requested Loans are to be Base Rate Loans or
LIBOR Loans, and if such requested Loans are to be LIBOR Loans, the requested
Interest Period for such Loans.
(b) The Agent agrees, promptly upon (i) receipt of a Notice of
Borrowing and (ii) acknowledgment by the Collateral Agent that the Borrowers
have delivered and the Collateral Agent has reviewed to its satisfaction (x)
each of the invoices or certificates required to be provided to the Collateral
Agent pursuant to SECTION 2.03(A) above and (y) each of the collateral
documents, including, without limitation, all third party agreements and the
related consents to collateral assignments required pursuant to SECTION 5.08 of
the Loan Agreement, as requested by the Collateral Agent, to notify each
Revolving or Term B Lender of the date and amount of the Loan proposed
thereunder and the amount of such Lender's Pro Rata Share therein. So long as no
Event of Default has occurred and is continuing and upon fulfillment of the
applicable conditions set forth in ARTICLE IV, each such Lender severally
agrees, on or before 12:00 P.M. (New York time) on the date of each proposed
Loan, to pay into the Payment Account, an amount equal to such Lender's Pro Rata
Share of such Loan in dollars and in same day funds; PROVIDED, that if a
Fronting Commitment is assigned by Lucent to an Eligible Fronting Assignee,
then, until Notice(s) of Borrowing are provided by the Borrowers to fully draw
upon such Fronting Commitment, (i) Lucent shall not be required to make any
additional Term B Loans and (ii) the amount of the Term B Loan to be made by the
assignee of such Fronting Commitment pursuant to each Notice of Borrowing shall
equal the amount of the Term B Loan that would have been made by such assignee
pursuant to such Notice of Borrowing without giving effect to such assignment
plus either (A) the amount of the Term B Loan that would have been made by
Lucent pursuant to such Notice of Borrowing without giving effect to such
assignment or, if less, (B) the remaining amount of such Fronting Commitment;
PROVIDED FURTHER, however, that with respect to Lucent's Pro Rata Share of any
Term B Loan consisting of a Credit Advance, Lucent, in lieu of making a payment
into the Payment Account, shall credit the Borrowers on their applicable trade
payables to Lucent in an amount equal to such Pro Rata Share. After the Agent's
receipt of such Lender's Loan proceeds, the Agent shall make available such
proceeds to the Borrower requesting the Loan 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 Dollars in immediately available funds.
(c) Unless the Agent has received written notice from a Lender prior
to the date of any proposed Loan that such Lender will not make available to the
Agent such Lender's Pro Rata Share of such Loan, the Agent may, but is not
obligated to, assume that such Lender has made its Pro Rata Share of such Loan
available to the Agent on the date of such Loan in accordance with PARAGRAPH (b)
above, and the Lenders may, in reliance upon such assumption, make available to
the Borrower on such date a corresponding amount. If such Pro Rata Share is not,
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in fact, paid to Agent by such Lender when due (other than in the case of Lucent
with respect to its Pro Rata Share of a Term B Loan consisting of a Credit
Advance), the Agent will be entitled to recover such amount on demand from such
Lender or the Borrower which received the proceeds of such Loan without set-off,
counterclaim or deduction of any kind, together with interest thereon, for each
day from the date such amount is made available to such Borrower until the date
such amount is repaid to the Agent either by such Borrower or such Lender, at,
(1) in the case of such Borrower, the interest rate applicable to such Loan, and
(2) in the case of such Lender, the Federal Funds Effective Rate. Nothing in
this SECTION 2.03(c) or elsewhere in this Agreement or the other Loan Documents
shall be deemed to require Agent to advance funds on behalf of any Lender or to
relieve any Lender from its obligation to fulfill its Commitment hereunder or to
prejudice any rights that the Borrower may have against any Lender as a result
of any default by such Lender hereunder. Without limiting the foregoing, with
respect to any Lender which for any reason fails to make timely payment to the
Agent of its Pro Rata Share of any Loan (other than in the case of Lucent with
respect to its Pro Rata Share of a Term B Loan consisting of a Credit Advance),
the Agent, in addition to other rights and remedies which it may have, shall be
entitled to withhold or set off from any payments due to such Lender hereunder,
an amount equal to the Pro Rata Share required to have been paid by such Lender
plus interest as described above, and to withhold from such Lender any right of
consent provided to such Lender by ARTICLE V or VI of this Agreement and to
bring an action or suit against such Lender in a court of competent jurisdiction
to recover such Pro Rata Share thereof and any related interest thereon. If such
Lender shall repay to the Agent such corresponding amount, such amount so repaid
shall constitute such Lender's applicable Pro Rata Share of such Loan for
purposes of this Agreement. If both such Lender and such Borrower shall have
repaid the corresponding amount, the Agent shall promptly return to such
Borrower its corresponding amount.
(d) The Borrowers commit to the Lenders to request Revolving Loans
to be made during calendar year 2001 in an aggregate amount equal to the undrawn
portion of the Revolving Loan Commitment Amount.
SECTION 2.04. THE NOTES. Each Borrower has executed and delivered to
each Revolving Lender a Revolving Loan Note and to each Term A Lender
(characterized as a "Term Lender" under the Existing Agreement) a Term A Loan
Note (characterized as a "Term Loan Note" under the Existing Agreement) to
evidence the Commitment of that Lender. Each Revolving Loan Note is in the
principal amount of the Revolving Loan Commitment Amount of the applicable
Lender, dated the "Initial Funding Date" (as defined in the Existing Agreement),
shall mature on the Revolving Credit Commitment Termination Date and is
substantially in the form of EXHIBIT E-1. Each Term A Loan Note is in the
principal amount of the Term A Loan Commitment Amount (characterized as the
"Term Loan Commitment Amount" under the Existing Agreement) of the applicable
Term A Lender, dated the "Initial Funding Date" (as defined in the Existing
Agreement), shall mature on the Term A Loan Termination Date (characterized as
the "Term Loan Termination Date" under the Existing Agreement) and is
substantially in the form of EXHIBIT E-2. Each Borrower shall execute and
deliver to each Term B Lender a Term B Note to evidence the Term B Loan
Commitment Amount of that Lender. Each Term B Note shall be in the principal
amount of the Term B Loan Commitment Amount, dated the Closing Date, shall
mature on the Term B Loan Commitment Termination Date and shall be substantially
in the form of EXHIBIT E-3. The Notes payable to a Lender shall represent the
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obligation of such Borrower to pay the amount of each Lender's Revolving Loan
Commitment Amount, Term A Loan Commitment Amount or Term B Loan Commitment
Amount or, if less, the applicable Lender's Pro Rata Share of the aggregate
unpaid principal amount of all Loans to such Borrower and Letter of Credit
Obligations incurred by such Lender together with interest thereon as prescribed
in SECTION 2.05. The aggregate principal amount of all the Notes shall not
exceed the aggregate Commitments of all the Lenders. The Agent is hereby
authorized by such Borrower to record in the Register the date and amount of
each Revolving Loan, Term A Loan or Term B Loan made to such Borrower, as
applicable, and to record therein the date and amount of each payment on each
Loan made to such Borrower, and such recordations shall be conclusive evidence
against such Borrower of the amounts owing to the Lenders with respect to the
Loans in the absence of manifest error; PROVIDED, HOWEVER, that the failure of
the Agent 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. Subject to the
provisions of SECTIONS 2.05(b), 2.06 and 2.07, each Loan shall bear interest at
the rate per annum equal to (i) the Base Rate plus the Applicable Margin,
computed on the basis of a 365 or 366 day year, as applicable, and the actual
number of days elapsed , or (ii) the LIBO Rate plus the Applicable Margin,
computed on the basis of a 360 day year, and the actual number of days elapsed,
as selected by the Borrowers in the Notices of Borrowing and the Notices of
Continuation/Conversion.
(b) DEFAULT INTEREST. Subject to the third sentence of this Section
2.05(b), if any 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 three days, then the Borrowers
shall, on demand, from the Agent, 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 the Requisite Lenders.
Subject to the next sentence, if any other Event of Default shall occur and be
continuing and shall be declared by the Agent upon the direction of the
Requisite Lenders, 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 the Requisite Lenders; PROVIDED, that if an Event of
Default described in the first sentence of this CLAUSE (b) shall occur at any
time that an Event of Default described in this second sentence has occurred and
is continuing, then the rate of interest described in the first sentence of this
CLAUSE (b) shall apply. In the event that the Borrowers fail to obtain the
Required Contribution on or prior to August 31, 2000, then beginning on
September 1, 2000 and continuing until such time as the Required Contribution
has been obtained, all of the margins set forth on SCHEDULE 1.01(a) shall be
automatically increased by 100 basis points, and if any Event of Default occurs
while such increased margins are in effect, and the interest rates on the Loans
would be subject to increase by four percent (4.00%) per annum or two percent
(2.00%) per annum, as described above, then the interest rates on the Loans
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shall instead be increased by three percent (3.00%) per annum rather than four
percent (4.00%) per annum or by one percent (1.00%) per annum rather than two
percent (2.00%) per annum, as applicable. After the occurrence and during the
continuance of any Event of Default, the Borrowers shall be subject to the
limitations on borrowings of, conversions into and continuations as LIBOR Loans
set forth in SECTION 2.07(g).
SECTION 2.06. CONVERSION OR CONTINUATION. (a) Subject to the
provisions of SECTION 2.07, each Borrower shall have the option (i) to convert
(A) all or any part of its outstanding Term Loans or (B) all or any part of its
outstanding Revolving Loans, in a minimum amount of $5,000,000 and integral
multiples of $1,000,000 in excess of that amount, from a Term Loan or Revolving
Loans that are Base Rate Loans to LIBOR Term Loans or LIBOR Revolving Loans, as
the case may be; (ii) to convert (A) all or any part of its outstanding Term
Loan or (B) all or any part of its outstanding Revolving Loans from LIBOR Loans
to Base Rate Loans on the expiration of the Interest Period applicable thereto;
and (iii) upon the expiration of any Interest Period applicable to its
outstanding LIBOR Term Loan or any outstanding LIBOR Revolving Loan, to continue
(A) all of such LIBOR Term Loan or (B) all or any portion of such LIBOR
Revolving Loan equal to $5,000,000 and integral multiples of $1,000,000 in
excess of that amount as a LIBOR Term Loan or LIBOR Revolving Loan, as
applicable; PROVIDED, HOWEVER, that no outstanding Loans may be converted into,
or continued as, LIBOR Loans when any Default or Event of Default has occurred
and is continuing. Any conversion or continuation made with respect to less than
the entire outstanding balance of a Borrower's Revolving Loans or Term Loans
must be applied pro rata to such Borrower's Revolving Loans or Term Loans, as
applicable, according to the outstanding principal balance of such Revolving
Loans or Term Loans.
(b) Whenever a Borrower elects to convert or continue Loans under
this SECTION 2.06, such Borrower shall deliver to the Agent a written notice
substantially in the form of that attached hereto as EXHIBIT H-2 (a "NOTICE OF
CONVERSION/ CONTINUATION"), signed by an authorized officer of such Borrower (i)
no later than 10:00 a.m. (New York time) two (2) Business Days in advance of the
requested conversion date, in the case of a conversion into Base Rate Loans, and
(ii) no later than 10:00 a.m (New York time) three (3) Business Days in advance
of the requested conversion or continuation date, in the case of a conversion
into, or continuation of, LIBOR Loans. The Notice of Conversion/Continuation
shall specify (1) the conversion or continuation date (which shall be a Business
Day), (2) the amount and type of the Loans to be converted or continued, (3) the
nature of the requested conversion or continuation, and (4) in the case of a
conversion into, or continuation of, LIBOR Loans, the requested Interest Period.
Promptly after receipt of a Notice of Conversion/Continuation pursuant to this
SECTION 2.06(b), the Agent shall notify the Revolving Lenders, the Term A
Lenders or the Term B Lenders, as applicable, by telecopy, telephone or other
similar form of transmission, of the requested conversion or continuation. In
the event that a Borrower should fail to provide a Notice of
Conversion/Continuation with respect to any LIBOR Loans as provided above, such
Loans shall, on the last day of the Interest Period with respect to such Loans,
convert to Base Rate Loans.
(c) Any Notice of Conversion/Continuation for conversion to, or
continuation of, Loans made pursuant to this SECTION 2.06 shall be irrevocable
and the applicable Borrower shall be bound to convert or continue in accordance
therewith.
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SECTION 2.07. SPECIAL PROVISIONS GOVERNING LIBOR LOANS.
Notwithstanding any other provisions to the contrary contained in this
Agreement, the following provisions shall govern with respect to LIBOR Loans as
to the matters covered:
(a) AMOUNT OF LIBOR LOANS. Each continuation of or conversion to
LIBOR Term Loans, and each election of, continuation of or conversion to LIBOR
Revolving Loans, shall be in a minimum amount of $5,000,000 and in integral
multiples of $1,000,000 in excess of that amount.
(b) DETERMINATION OF INTEREST PERIOD. By giving notice as set forth
in SECTION 2.06(b), a Borrower shall have the option, subject to the other
provisions of this SECTION 2.07, to specify whether the Interest Period for such
LIBOR Loan shall be a one, two, three or six month period. The determination of
Interest Periods shall be subject to the following provisions:
(i) In the case of immediately successive Interest Periods, each
successive Interest Period shall commence on the day on which the
preceding Interest Period expires.
(ii) If any Interest Period would otherwise expire on a day which is
not a Business Day, the Interest Period shall be extended to expire on the
next succeeding Business Day; PROVIDED, HOWEVER, that if the next
succeeding Business Day occurs in the following calendar month, then such
Interest Period shall expire on the immediately preceding Business Day.
(iii) A Borrower may not select an Interest Period for any LIBOR
Loan, which Interest Period expires later than the maturity date of such
Loan.
(iv) A Borrower may not select an Interest Period with respect to
any portion of such Borrower's Term Loans which extends beyond an
installment payment date for such Term Loans unless, after giving effect
to such selection, the portion of such Term Loans not subject to Interest
Periods ending after such installment payment date is equal to or greater
than the principal due on such installment payment date.
(v) A Borrower may not select an Interest Period with respect to any
portion of such Borrower's Revolving Loans which extends beyond any date
on which the Revolving Loan Commitment Amounts are scheduled to be reduced
unless, after giving effect to such selection, the portion of the
Revolving Loans not subject to Interest Periods ending after any such date
is equal to or greater than any amount of the Revolving Loans required to
be prepaid as a result of any such reduction.
(vi) There shall be no more than eight (8) Interest Periods in
effect at any one time with respect to all the Loans and no more than four
(4) Interest Periods in effect at any one time with respect to the Term B
Loans.
(c) DETERMINATION OF INTEREST RATE. As soon as practicable after
10:00 a.m. (New York time) on the LIBOR Interest Rate Determination Date, the
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Agent shall determine (which determination shall, absent manifest error, be
presumptively correct) the interest rate for the LIBOR Loans for which an
interest rate is then being determined and shall promptly give notice thereof
(in writing or by telephone confirmed in writing) to the applicable Borrower. In
the event that on any LIBOR Interest Rate Determination Date the Agent shall
have determined (which determination shall, absent manifest error, be
presumptively correct and binding upon all parties) that:
(i) adequate and fair means do not exist for ascertaining the
applicable interest rates by reference to which the LIBO Rate then being
determined is to be fixed; or
(ii) the LIBO Rate plus the Applicable Margin for any Interest
Period for such Loans will not adequately reflect the cost to any Lender
of making, funding or maintaining its LIBOR Loan for such Interest Period,
the Agent shall forthwith so notify the applicable Borrower and the
Lender, whereupon:
(A) each LIBOR Loan will automatically, on the last day of the
then existing Interest Period therefor, convert into a Base
Rate Loan; and
(B) the obligation of the Lenders to make, or to convert Loans
into, LIBOR Loans shall be suspended until the Agent shall
notify the applicable Borrower and the Lenders that the
circumstances causing such suspension no longer exist.
(d) ILLEGALITY. Notwithstanding any other provision of this
Agreement, if any Lender shall notify the Agent that the introduction of or any
change in or in the interpretation of any law or regulation makes it unlawful,
or any central bank or other Governmental Authority asserts that it is unlawful,
for any Lender to perform its obligations hereunder to make LIBOR Loans or to
fund or maintain LIBOR Loans hereunder, (i) the obligation of the Lenders to
make, or to convert Loans into or to continue Loans as, LIBOR Loans shall be
suspended until the Agent shall notify the Borrowers and the Lenders that the
circumstances causing such suspension no longer exist and (ii) the Borrowers
shall on the termination of the Interest Period then applicable thereto, or on
such earlier date required by law, prepay in full all LIBOR Loans then
outstanding together with accrued interest thereon, or convert all such LIBOR
Loans into Base Rate Loans in accordance with SECTION 2.06.
(e) COMPENSATION. In addition to such amounts as are required to be
paid by the Borrowers pursuant to the other Sections of this ARTICLE II, the
Borrowers agree to compensate any Lender for all losses, expenses and
liabilities, including, without limitation, any loss or expense incurred by
reason of the liquidation or reemployment of deposits or other funds acquired by
such Lender to fund or maintain such Lender's LIBOR Loans (including the
Applicable Margin component thereof) to the Borrowers, which such Lender may
sustain (i) if for any reason a funding of any LIBOR Loans does not occur on a
date specified therefor in a Notice of Borrowing or Notice of
Conversion/Continuation, or a successive Interest Period does not commence after
notice therefor is given pursuant to SECTION 2.06 as a result of any act or
omission of any Borrower, (ii) if any voluntary or mandatory prepayment of any
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LIBOR Loans occurs for any reason on a date which is not the last scheduled day
of an Interest Period, (iii) as a consequence of any required conversion of
LIBOR Loans to Base Rate Loans as a result of any of the events indicated in
SECTION 2.07(d), or (iv) as a consequence of any other failure by a Borrower to
repay LIBOR Loans when required by the terms of this Agreement.
(f) BOOKING OF LIBOR LOANS. The Lenders may make, carry or transfer
LIBOR Loans at, to, or for the account of, any of their respective branch
offices or the office of any of their respective affiliates.
(g) LIBOR LOANS AFTER EVENT OF DEFAULT. Unless the Requisite Lenders
shall otherwise agree, after the occurrence of and during the continuance of any
Event of Default, the Borrowers may not borrow Revolving Loans or Term B Loans
as LIBOR Loans or elect to have any Loans continued as, or converted to, LIBOR
Loans after the expiration of any Interest Period then in effect for such Loans.
SECTION 2.08. PAYMENTS. (a) Interest on each LIBOR Loan shall be
payable in arrears on each LIBOR Interest Payment Date and, if such LIBOR Loan
is paid in full other than on such LIBOR Interest Payment date, on such other
date. Interest on each Base Rate Loan will be payable in arrears on each Payment
Date and, if such Base Rate Loan is paid in full other than on such Payment
Date, on such other date.
(b) Subject to the provisions of SECTIONS 2.09 and 9.02, the
outstanding principal balance of the Term A Loans made to the Borrowers shall be
payable in twenty-two consecutive quarterly installments beginning on the
fourteenth Payment Date (i.e. the Payment Date occurring on April 1, 2002) and
continuing on each Payment Date thereafter through and including the Term A Loan
Termination Date in the amounts set forth on ANNEX C hereto. Subject to the
provisions of SECTIONS 2.09 and 9.02, the outstanding principal balance of the
Term B Loans made to the Borrowers shall be payable in seventeen consecutive
quarterly installments beginning on the nineteenth Payment Date (i.e. the
Payment Date occurring on July 1, 2003) and continuing on each Payment Date
thereafter through and including the Term B Loan Termination Date in the amounts
set forth on ANNEX C hereto. Subject to the provisions of SECTIONS 2.09 and
9.02, the outstanding principal balance of the Revolving Loans made to the
Borrowers shall be payable on the Revolving Credit Commitment Termination Date.
(c) Payments made with respect to the Loans by each Borrower shall
be applied by the Agent 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 upon the occurrence and during the continuance of an
Event of Default, all payments and prepayments with respect to the Obligations
and all proceeds of Collateral shall be applied in the following order by the
Agent; provided, further, that the order of priority set forth in the following
clauses may be altered upon direction from the Requisite Lenders to the Agent:
(1) first, to pay Obligations in respect of any expenses then due
and payable by the Borrowers to the Agents, the Lenders or any
Person which is not a Lender that has issued a Letter of Credit;
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(2) second, to pay Obligations in respect of any reimbursement or
indemnities then due and payable to the Agents, the Lenders or any
Person which is not a Lender that has issued a Letter of Credit
(excluding any reimbursement obligations with respect to any Letters
of Credit);
(3) third, to pay Obligations in respect of any fees due and owing
to the Agent or the Collateral Agent;
(4) fourth, to pay Obligations in respect of the commitment fee and
any other fees and commissions then due and owing to the Agents, the
Lenders or any Person which is not a Lender that has issued a Letter
of Credit;
(5) fifth, to pay Obligations in respect of any accrued and unpaid
interest due in respect of Loans and Letter of Credit Obligations;
(6) sixth, to pay termination payments due and payable pursuant to
any Interest Rate Agreement or hedging agreement that constitutes a
Loan Document;
(7) to the ratable payment or prepayment of principal of any
outstanding Loans and reimbursement obligations with respect to
Letters of Credit;
(8) to provide required cash collateral, if required pursuant to
SECTION 2.10(j); and
(9) to the ratable payment of all other Obligations.
SECTION 2.09. OPTIONAL AND MANDATORY PREPAYMENT OF LOANS; OPTIONAL
AND MANDATORY REDUCTION OF REVOLVING LOAN COMMITMENT AMOUNT. (a) Provided that
no Event of Default has occurred and is continuing, the Borrowers shall have the
right upon the provision of sixty (60) days' prior written notice to the Agent,
which notice, once given, shall be irrevocable, on any Payment Date with respect
to any Base Rate Term Loans and on the last day of the applicable Interest
Period with respect to any LIBOR Term Loans, to prepay the outstanding principal
of the Base Rate Term Loans in a minimum principal amount of $1,000,000 and
increments of $250,000 in excess thereof, or the outstanding principal of the
LIBOR Term Loans in a minimum principal amount of $5,000,000 and increments of
$1,000,000 in excess thereof, together in each case with accrued interest
thereon and the aggregate Prepayment Premium applicable thereto. The amount of
principal so prepaid shall be applied to the remaining principal payments of the
type of Loans prepaid (i.e. Base Rate Term Loans or LIBOR Term Loans) in the
inverse order of maturity.
(b) Upon the occurrence of any Event of Loss in excess of $1,000,000
with respect to any item of Collateral that is not repaired or replaced, or any
Events of Loss which, in the aggregate, exceed $5,000,000 with respect to any
item or items of Collateral that are not repaired or replaced (in each case,
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 Borrower which suffered such
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Event of Loss shall make a principal prepayment within thirty (30) days of such
Event of Loss in an amount equal to the replacement value of the item of
Collateral which suffered such Event of Loss, together with accrued interest
thereon (but without the Prepayment Premium) with such principal payment to be
applied, PRO RATA, to outstanding principal balance of the Revolving Loans and
the Term Loans.
(c) In the event that any Borrower finances any Telecommunications
Equipment (exclusive of soft costs that exceed fifteen percent (15%) of the
invoiced price of the related Telecommunications Equipment) with a financing
source other than a Loan pursuant to this Agreement, then thirty (30) days
following such financing the Revolving Loan Commitment Amounts of all the
Revolving Lenders shall be reduced by the actual or imputed principal amount of
any such financing, and any prepayments of the Revolving Loans required by the
provisions of CLAUSE (h) below shall be accompanied by any applicable Prepayment
Premium thereon.
(d) The Borrowers shall prepay the Revolving Loans and the Term
Loans on a pro rata basis in a principal amount equal to (i) all of the net
proceeds of any sales of assets of any Borrower other than sales in the ordinary
course of business, which proceeds are not reinvested within 270 days after
receipt thereof in replacement assets, plus the applicable Prepayment Premium,
and (ii) the proceeds of insurance policies paid to any Borrower and not applied
within 270 days after any such payment to replacing, rebuilding or restoring the
Collateral which was the subject of insurance loss, without any Prepayment
Premium, in each case, within five (5) days after the expiration of the
applicable 270 day period.
(e) On the first Payment Date of each year, commencing in 2002, the
Revolving Loan Commitment Amounts of all the Lenders shall be reduced by an
amount equal to fifty percent (50%) of Excess Operating Cash Flow for the
preceding fiscal year until the Borrowers have achieved and maintained for at
least two consecutive fiscal quarters, a Total Leverage Ratio of less than 5:1,
as determined by reference to the financial statements delivered pursuant to
SECTION 5.06.
(f) Provided that no Event of Default has occurred and is
continuing, commencing January 1, 2002, the Borrowers shall have the right upon
the provision of thirty days' prior written notice to the Agent, which notice,
once given, shall be irrevocable, on any Payment Date, to reduce the Revolving
Loan Commitment Amount of all the Lenders. Each such reduction shall be in a
minimum principal amount of $1,000,000 and increments of $250,000 in excess
thereof. Any Revolving Loans that must be prepaid in connection with such
reduction in the Revolving Loan Commitment Amount pursuant to CLAUSE (h) below,
shall be accompanied by any applicable Prepayment Premium thereon.
(g) The Revolving Loan Commitment Amount of all the Lenders shall be
reduced on each Payment Date beginning April 1, 2003 as set forth on ANNEX C
hereto. In addition, in the event that at any time more than fifteen percent
(15.0%) of the average outstanding principal balance of Revolving Loans during
the immediately preceding 90-day period is repaid and is not reborrowed within
120 days after such repayment, then on such date, the Revolving Loan Commitment
Amount of all the Lenders shall be reduced by an amount equal to such amount
that was not reborrowed. Any Revolving Loans that must be prepaid in connection
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with such reduction in the Revolving Loan Commitment Amount pursuant to SECTION
2.09(h) below, shall be accompanied by any applicable Prepayment Premium.
(h) On each date that the Revolving Loan Commitment Amount is
reduced, the Borrowers shall prepay first, the Revolving Loans, and second,
provide to the Agent cash collateral with respect to the Letter of Credit
Obligations in such amounts such that the sum of the outstanding principal
balance of the Revolving Loans plus the Letter of Credit Obligations does not
exceed the Revolving Loan Commitment Amount of all the Revolving Lenders after
giving effect to the reduction thereof effective on such date, together with any
applicable Prepayment Premium thereon. Any reduction in the Revolving Loan
Commitment Amount of all the Lenders shall be allocated to each Revolving Lender
based on its Pro Rata Share. All prepayments of principal shall be applied to
the remaining principal payments of the type of Loans prepaid in the inverse
order of maturity. The Letter of Credit Obligations shall be reduced on a
dollar-for-dollar basis by the cash collateral.
(i) All mandatory prepayments of the Term Loans shall be applied to
the remaining principal installments of the Term Loans in the inverse order of
maturity.
SECTION 2.10. LETTERS OF CREDIT.
(a) AGREEMENT TO CAUSE ISSUANCE. Subject to the terms and conditions
of this Agreement, and in reliance upon the representations and warranties of
the Borrowers herein set forth, the Agent agrees to (1) cause Letters of Credit
to be issued by Lenders who are willing to do so or (2) provide credit support
or enhancement or otherwise confirm payment (any such credit support,
enhancement or payment confirmation being referred to as "CREDIT SUPPORT") to
banks other than Lenders, which banks are acceptable to the Agent, which issue
Letters of Credit for the respective accounts of the Borrowers in accordance
with this SECTION 2.10 from time to time during the term of this Agreement.
(b) AMOUNTS; OUTSIDE EXPIRATION DATE. The Agent shall not have any
obligation to cause any Letter of Credit to be issued by a Lender or to provide
Credit Support for any Letter of Credit at any time if: (1) the maximum undrawn
face amount of the Letter of Credit is greater than the Unused Letter of Credit
Subfacility; or (2) such Letter of Credit has an expiration date later than
thirty (30) days prior to the Revolving Credit Commitment Termination Date, or
more than one (1) year from the date of issuance.
(c) OTHER CONDITIONS. In addition to being subject to the
satisfaction of the applicable conditions precedent contained in ARTICLE IV, the
obligation of the Agent to cause any Letter of Credit to be issued by a Lender
or to provide Credit Support for any Letter of Credit is subject to the
following conditions precedent having been satisfied in a manner satisfactory to
the Agent:
(1) the applicable Borrower shall have delivered to the proposed
issuer of such Letter of Credit, at such times and in such manner as such
proposed issuer may prescribe, an application in form and substance
satisfactory to such proposed issuer for the issuance of the Letter of
Credit and such other documents as may be required pursuant to the terms
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thereof, and the form and terms of the proposed Letter of Credit shall be
satisfactory to the Agent and such proposed issuer; and
(2) as of the date of issuance, no order of any court, arbitrator or
Governmental Authority shall purport by its terms to enjoin or restrain
money center banks generally from issuing letters of credit of the type
and in the amount of the proposed Letter of Credit, and no law, rule or
regulation applicable to money center banks generally and no request or
directive (whether or not having the force of law) from any Governmental
Authority with jurisdiction over money center banks generally shall
prohibit, or request that the proposed issuer of such Letter of Credit
refrain from, the issuance of letters of credit generally or the issuance
of such Letters of Credit.
(d) ISSUANCE OF LETTERS OF CREDIT.
(1) REQUEST FOR LETTER OF CREDIT. The applicable Borrower shall give
the Agent five (5) Business Days' prior written notice, containing the
original signature of an authorized officer of such Borrower, of such
Borrower's request for the issuance of a Letter of Credit or the provision
of Credit Support for a Letter of Credit. Such notice shall be irrevocable
and shall specify the original face amount of the Letter of Credit, the
effective date (which date shall be a Business Day) of issuance of such
proposed Letter of Credit, whether such Letter of Credit may be drawn in a
single or in partial draws, the date on which such proposed Letter of
Credit is to expire (which date shall be a Business Day), the purpose for
which such Letter of Credit is to be issued, and the beneficiary of such
Letter of Credit. The applicable Borrower shall attach to such notice the
form of the proposed Letter of Credit.
(2) RESPONSIBILITIES OF THE AGENT; ISSUANCE. The Agent shall
determine, as of the Business Day immediately preceding the requested
effective date of issuance of the Letter of Credit set forth in the notice
from the applicable Borrower pursuant to SECTION 2.10(d)(1), the amount of
the applicable Unused Letter of Credit Subfacility. If (A) the undrawn
face amount of the proposed Letter of Credit is not greater than the
applicable Unused Letter of Credit Subfacility, and (B) the Agent has
received a certificate from such Borrower stating that the applicable
conditions set forth in ARTICLE IV have been satisfied, the Agent shall
cause such Letter of Credit to be issued on such proposed effective date
of issuance.
(3) NOTICE OF ISSUANCE. The Agent shall promptly give each Lender
written notice of the issuance of each Letter of Credit.
(4) NO EXTENSIONS OR AMENDMENT. No Letter of Credit shall be
extended or amended unless the requirements of this SECTION 2.10(d) are
met as though a new Letter of Credit were being requested and issued.
(e) PAYMENTS PURSUANT TO LETTERS OF CREDIT.
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(1) PAYMENT OF LETTER OF CREDIT OBLIGATIONS. The Borrowers agree to
reimburse the issuer for any draw under any Letter of Credit, and the
Agent, for the account of the Lenders, upon any payment pursuant to any
Credit Support, immediately upon demand, and to pay the issuer of the
Letter of Credit the amount of all other Obligations and other amounts
payable to such issuer under or in connection with any Letter of Credit
immediately when due, irrespective of any claim, set-off, defense or other
right which a Borrower may have at any time against such issuer or any
other Person.
(2) REVOLVING LOANS TO SATISFY REIMBURSEMENT OBLIGATIONS. In the
event that the issuer of any Letter of Credit honors a draw under such
Letter of Credit, or the Agent shall have made any payment pursuant to any
Credit Support, and the Borrowers shall not have repaid such amount to the
issuer of such Letter of Credit or the Agent, as applicable, pursuant to
SECTION 2.10(e)(1), the Agent shall, upon receiving notice of such
failure, notify each Revolving Lender of such failure, and each Revolving
Lender shall unconditionally pay to the Agent, for the account of such
issuer or the Agent, as applicable, as and when provided hereinbelow, an
amount equal to such Revolving Lender's Pro Rata Share of the amount of
such payment in Dollars and in same day funds. If the Agent so notifies
the Revolving Lenders prior to 12:00 p.m. (New York time) on any Business
Day, each Revolving Lender shall make available to the Agent the amount of
such payment, as provided in the immediately preceding sentence, on such
Business Day. Such amounts paid by the Revolving Lenders to the Agent
shall constitute Revolving Loans which shall be deemed to have been
requested by the applicable Borrower pursuant to SECTION 2.03.
(f) PARTICIPATIONS.
(1) PURCHASE OF PARTICIPATIONS. Immediately upon issuance of any
Letter of Credit in accordance with SECTION 2.10(d), each Revolving Lender
shall be deemed to have irrevocably and unconditionally purchased and
received without recourse or warranty, an undivided interest and
participation in such Letter of Credit (if issued by a Revolving Lender)
or the Credit Support provided through the Agent to such issuer in
connection with the issuance of such Letter of Credit, as applicable,
equal to such Revolving Lender's Pro Rata Share of the face amount of such
Letter of Credit or the amount of such Credit Support (including, without
limitation, all obligations of the Borrowers with respect thereto, and any
security therefor or guaranty pertaining thereto).
(2) SHARING OF REIMBURSEMENT OBLIGATION PAYMENTS. Whenever the Agent
receives a payment from a Borrower on account of reimbursement obligations
in respect of a Letter of Credit or Credit Support as to which the Agent
has previously received for the account of the issuer thereof payment from
a Revolving Lender pursuant to this SECTION 2.10(f)(2), the Agent shall
promptly pay to such Lender such Revolving Lender's Pro Rata Share of such
payment from such Borrower in Dollars. Each such payment shall be made by
the Agent on the Business Day on which the Agent receives immediately
available funds paid to such Person pursuant to the immediately preceding
sentence, if received prior to 11:00 a.m. (New York time) on such Business
Day and otherwise on the next succeeding Business Day.
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(3) DOCUMENTATION. Upon the request of any Revolving Lender, the
Agent shall furnish to such Revolving Lender copies of any Letter of
Credit, reimbursement agreement executed in connection therewith,
application for any Letter of Credit and Credit Support provided through
the Agent in connection with the issuance of any Letter of Credit, and
such other documentation as may reasonably be requested by such Revolving
Lender.
(4) OBLIGATIONS IRREVOCABLE. The obligations of each Revolving
Lender to make payments to the Agent with respect to any Letter of Credit
or with respect to any Credit Support provided through the Agent with
respect to a Letter of Credit, and the obligations of the Borrowers to
make payments to the Agent, for the account of the Revolving Lenders,
shall be irrevocable, not subject to any qualification or exception
whatsoever and shall be made in accordance with the terms and conditions
of this Agreement (assuming, in the case of the obligations of the
Revolving Lenders to make such payments, that the Agent has provided
Credit Support for such Letter of Credit in accordance with the terms of
SECTION 2.10(d)), including, without limitation, any of the following
circumstances:
(i) any lack of validity or enforceability of this Agreement or any
of the other Loan Documents;
(ii) the existence of any claim, set-off, defense or other right
which a Borrower may have at any time against a beneficiary named in a
Letter of Credit or any transferee of any Letter of Credit (or any Person
for whom any such transferee may be acting), any Lender, the Agent, the
Collateral Agent, the issuer of such Letter of Credit, or any other
Person, whether in connection with this Agreement, any Letter of Credit,
the transactions contemplated herein or any unrelated transactions
(including any underlying transactions between a Borrower or any other
Person and the beneficiary named in any Letter of Credit);
(iii) any draft, certificate or any other document presented under
the Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(iv) the surrender or impairment of any security for the performance
or observance of any of the terms of any of the Loan Documents; or
(v) the occurrence of any Default or Event of Default.
(g) RECOVERY OR AVOIDANCE OF PAYMENTS. In the event any payment by
or on behalf of a Borrower received by the Agent with respect to a Letter of
Credit or Credit Support provided for any Letter of Credit (or any guaranty by a
Borrower or reimbursement obligation of a Borrower relating thereto) and
distributed by the Agent to the Revolving Lenders on account of their respective
participations therein, is thereafter set aside, avoided or recovered from the
Agent in connection with any receivership, liquidation or bankruptcy proceeding,
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the Revolving Lenders shall, upon demand by the Agent, pay to the Agent their
respective Pro Rata Shares of such amount set aside, avoided or recovered,
together with interest at the rate required to be paid by the Agent upon the
amount required to be repaid by it.
(h) COMPENSATION FOR LETTERS OF CREDIT.
The Borrowers agree to pay the fees set forth in SECTION 2.11 with
respect to any Letters of Credit.
(i) INDEMNIFICATION; EXONERATION.
(1) INDEMNIFICATION. In addition to amounts payable as elsewhere
provided in this SECTION 2.10, the Borrowers hereby agree to protect,
indemnify, pay and save the Lenders and the Agent harmless from and
against any and all claims, demands, liabilities, damages, losses, costs,
charges and expenses (including reasonable attorneys' fees) which any
Lender or the Agent may incur or be subject to as a consequence, direct or
indirect, of the issuance of any Letter of Credit or the provision of any
Credit Support in connection therewith. The agreements contained in this
SECTION 2.10(i)(1) shall survive the payment in full of the Obligations.
(2) ASSUMPTION OF RISK BY THE BORROWERS. As among the Borrowers, the
Lenders and the Agent, each Borrower assumes all risks of the acts and
omissions of, or misuse of any of the Letters of Credit by, the respective
beneficiaries of such Letters of Credit. In furtherance and not in
limitation of the foregoing, the Lenders and the Agent shall not be
responsible for: (A) the form, validity, sufficiency, accuracy,
genuineness or legal effect of any document submitted by any Person in
connection with the application for and issuance of and presentation of
drafts with respect to any of the Letters of Credit, even if it should
prove to be in any or all respects invalid, insufficient, inaccurate,
fraudulent or forged; (B) the validity or sufficiency of any instrument
transferring or assigning or purporting to transfer or assign any Letter
of Credit or the rights or benefits thereunder or proceeds thereof, in
whole or in part, which may prove to be invalid or ineffective for any
reason; (C) the failure of the beneficiary of any Letter of Credit to
comply duly with conditions required in order to draw upon such Letter of
Credit; (D) errors, omissions, interruptions or delays in transmission or
delivery of any messages, by mail, cable, telegraph, telex or otherwise,
whether or not they be in cipher; (E) errors in interpretation of
technical terms; (F) any loss or delay in the transmission or otherwise of
any document required in order make a drawing under any Letter of Credit
or of the proceeds thereof; (G) the misapplication by the beneficiary of
any Letter of Credit of the proceeds of any drawing under such Letter of
Credit; or (H) any consequences arising from causes beyond the control of
the Lenders or the Agent, including, without limitation, any act or
omission, whether rightful or wrongful, of any present or future de jure
or de facto Governmental Authority. None of the foregoing shall affect,
impair or prevent the vesting of any rights or powers of the Agent or any
Lender under this SECTION 2.10(i).
(3) EXONERATION. In furtherance and extension, and not in
limitation, of the specific provisions set forth above, any action taken
or omitted by the Agent or any Lender under or in connection with any of
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the Letters of Credit or any related certificates, if taken or omitted in
good faith, shall not put the Agent or any Lender under any resulting
liability to any Borrower or relieve any Borrower of any of its
obligations hereunder to any such Person.
(j) SUPPORTING LETTER OF CREDIT; CASH COLLATERAL. If,
notwithstanding the provisions of SECTION 2.10(b), any Letter of Credit is
outstanding upon the termination of this Agreement, then upon such termination
the Borrowers shall cause the termination of such Letter of Credit. If, at the
Agent's election, any such Letter of Credit remains outstanding, then the
Borrowers shall deposit with the Agent, for the ratable benefit of the Agent and
the Revolving Lenders, with respect to each Letter of Credit then outstanding,
as the Agent shall specify, either (A) a standby letter of credit (a "SUPPORTING
LETTER OF CREDIT") in form and substance satisfactory to the Required Revolving
Lenders, issued by an issuer satisfactory to the Agent in an amount equal to the
greatest amount for which such Letter of Credit may be drawn, plus any fees and
expenses associated with such Letter of Credit, under which Supporting Letter of
Credit the Agent is entitled to draw amounts necessary to reimburse the Agent
and the Revolving Lenders for payments made by the Agent and the Revolving
Lenders under such Letter of Credit or under any Credit Support provided through
the Agent with respect thereto and any fees and expenses associated with such
Letter of Credit, or (B) cash in amounts necessary to reimburse the Agent and
the Revolving Lenders for payments made by the Agent or the Revolving Lenders
under such Letter of Credit or under any Credit Support provided through the
Agent with respect thereto, and any fees and expenses associated with such
Letter of Credit. Such Supporting Letter of Credit or deposit of cash shall be
held by the Agent, for the ratable benefit of the Agent and the Revolving
Lenders, as security for, and to provide for the payment of, the aggregate
undrawn face amount of such Letters of Credit remaining outstanding.
SECTION 2.11. FEES. (a) The Borrowers shall pay and the Borrowers
shall be jointly and severally liable to the Agent for the account of the
Revolving Lenders for payment of a nonutilization fee calculated on a per annum
basis and equal to the percentage corresponding to the criteria set forth below
of the average drawn portion of the Revolving Loan Commitment Amount for the
quarterly period preceding a Payment Date, which fee shall be payable on each
Payment Date following such last day of a quarter beginning on the Payment Date
following the "Initial Funding Date" (as defined in the Existing Agreement)
until and including the Payment Date following the Revolving Credit Commitment
Termination Date:
Average Drawn Portion
of Revolving Loan Commitment
Amount for the Quarterly Period
Preceding a Payment Date Percentage
------------------------------- -----------
Less than or equal to
$58,333,333 1.25%
Greater than $58,333,333 and
less than or equal to 1.00%
$116,666,666
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Greater than $116,66,666 and
less than or equal to 0.75%
$175,000,000
In the event that at any time the Borrowers fail to comply with the requirements
of SECTION 2.03(d) for any calendar year, each of the above described
nonutilization fees shall be increased by 100 basis points for the entire such
calender year with payment of such increment in the nonutilization fee being due
and payable not later than the last Business Day of such calendar year.
(b) The Borrowers shall pay and the Borrowers shall be jointly and
severally liable to the Agent for the account of the Term B Lenders for payment
of a commitment fee calculated on a per annum basis and equal to one and
one-half percent (1.50%) of the average of the unused Term B Loan Commitment
Amount for the quarterly period preceding a Payment Date, which fee shall be
payable on each Payment Date following such last day of a quarter beginning on
the Payment Date following the Closing Date until and including the Payment Date
following the Term B Loan Commitment Termination Date.
(c) The Borrowers shall pay the Agent and the Collateral Agent and
shall be jointly and severally liable to the Agent and the Collateral Agent,
respectively, for payment of an annual administration fee and a collateral
monitoring fee at the times and in the amounts set forth in the Fee Letters.
(d) The Borrowers shall on the Closing Date pay the Agent for the
ratable benefit of the Revolving Lenders and the Term A Lenders an amendment fee
of $1,250,000 and any fee then due under the fee letter dated as of February 14,
2000 between the Borrowers and Lucent.
(e) The Borrowers shall pay and the Borrowers shall be jointly and
severally liable to the Agent (i) for the account of the Revolving Lenders for
payment in arrears on each Payment Date of a fee equal to equal to the product
of the Applicable Margin in effect with respect to LIBOR Loans for the preceding
calendar quarter on an annualized basis, multiplied by the average Letter of
Credit Obligations outstanding during such calendar quarter, and (ii) for the
account of any Person which issues any Letter of Credit, for payment in arrears
on each Payment Date of a fee equal to (A) the product of one-eighth percent
(0.125%) per annum multiplied by the average face amount of Letters of Credit
issued by such Person and outstanding during the preceding calendar quarter, and
(B) if such Person is not a Lender, any additional fees as may be charged by
such Person in connection with the issuance or maintenance of such Letter of
Credit.
(f) All fees once paid shall be nonrefundable.
SECTION 2.12. MANNER OF PAYMENT; SPECIAL TAX CONSIDERATIONS. (a) All
payments by the Borrowers hereunder and under the Notes shall be made to the
Agent by wire transfer or other electronic payment method to the Payment Account
or to such bank account as the Agent may designate, for the account of the
Lenders in Dollars in immediately available funds by 11:00 a.m., New York time,
on the date on which such payment shall be due. The Agent will promptly
thereafter cause to be distributed like funds relating to the payment of
principal or interest or other fees ratably (other than amounts payable pursuant
to SECTION 2.14) to each Lender in accordance with SECTION 10.07 hereof.
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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.
(b) (1) Any and all payments by each Borrower hereunder shall be
made free and clear of and without deduction for any and all Taxes. If any
Borrower shall be required by law to deduct any Taxes from or in respect of any
sum payable hereunder or under the other Loan Documents to any Lender or Agent,
(A) the sum payable shall be increased as may be necessary so that after making
all required deductions (including deductions applicable to additional sums
payable under this SECTION 2.12) such Lender or Agent receives an amount equal
to the sum it would have received had no such deductions been made, (B) such
Borrower shall make such deductions, and (C) such Borrower shall pay the full
amount deducted to the relevant taxation authority or other authority in
accordance with applicable law. If a withholding tax of the United States of
America or any other Governmental Authority shall be or become applicable (y)
after the date of this Agreement, to the payments by any Borrower made to the
Lending Office or any other office that a Lender may claim as its Lending
Office, or (z) after such Lender's selection and designation of any other
Lending Office, to such payments made to such other Lending Office, such Lender
shall use reasonable efforts to make, fund and maintain its Loans through
another Lending Office of such Lender in another jurisdiction so as to reduce,
but not increase, the applicable Borrower's liability hereunder, if the making,
funding or maintenance of such Loans through such other Lending Office of such
Lender does not, in the judgment of such Lender, otherwise materially adversely
affect such Loans, such Lender's obligations under its Commitment or such
Lender. Notwithstanding anything to the contrary hereunder, if a Person becomes
a Lender under this Agreement pursuant to SECTION 11.08 hereof, the Borrowers
shall in no event be required to increase any payment pursuant to paragraph (b)
of this SECTION 2.12 by an amount that would exceed the amount of any increase
that would be required to be made under paragraph (b) of this SECTION 2.12 to
the assigning Lender.
(2) The Borrowers will jointly and severally indemnify each Lender
and the Agents and hold them harmless for the full amount of Taxes (including,
without limitation, any Taxes imposed by any Governmental Authority on amounts
payable under this SECTION 2.12 or any other 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) paid by such Lender or
the Agent (as the case may be) and any liability (including penalties, interest,
and expenses) arising therefrom or with respect thereto. This indemnification
shall be made within thirty (30) days after the date such Lender or the Agent
(as the case may be) makes written demand therefor. A certificate as to any
additional amount payable to any Lender or the Agent under this SECTION 2.12
submitted to the Borrowers and the Agent (if a Lender is so submitting) by such
Lender or the Agent shall show in reasonable detail the amount payable and the
calculations used to determine such amount. With respect to such deduction or
withholding for or on account of any Taxes and to confirm that all such Taxes
have been paid to the appropriate Governmental Authorities, the applicable
Borrower shall promptly (and in any event not later than thirty (30) days after
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receipt) furnish to each Lender and the Agent such certificates, receipts and
other documents as may be required (in the judgment of such Lender or the Agent)
to establish any tax credit to which such Lender or the Agent may be entitled.
(3) Within thirty (30) days after the date of any payment of Taxes
on amounts payable hereunder by any Borrower, such Borrower will furnish to the
Agent, at its address referred to in SECTION 11.01, the original or a certified
copy of a receipt evidencing payment thereof.
(4) Without prejudice to the survival of any other agreement of any
Borrower hereunder, the agreements and obligations of such Borrower contained in
this SECTION 2.12 shall survive the payment in full of principal and interest
hereunder and the termination of this Agreement.
(5) Without limiting the obligations of the Borrowers under this
SECTION 2.12, each Lender that is not created or organized under the laws of the
United States of America or a political subdivision thereof shall deliver to the
Borrowers and the Agent on or before the effective date hereof, or, if later,
the date on which such Lender becomes a Lender pursuant to SECTION 11.08 hereof,
a true and accurate certificate executed in duplicate by a duly authorized
officer of such Lender, in a form satisfactory to the Borrowers and the Agent,
to the effect that (A) such Lender is capable under the provisions of an
applicable tax treaty concluded by the United States of America (in which case
the certificate shall be accompanied by two original, executed copies of Form
1001 of the IRS or any successor form) or under Section 1442 of the IRC (in
which case the certificate shall be accompanied by two original, executed copies
of Form 4224 of the IRS or any successor form) of receiving payments of interest
hereunder exempt from or at a reduced deduction or withholding of United States
federal income tax or (B) if such Lender is not a "bank" within the meaning of
Section 881(c)(3)(A) of the IRC and intends to claim exemption from U.S. federal
withholding tax under Section 871(h) or Section 881(c) of the IRC with respect
to payments of "portfolio interest", (i) that such Lender is not a "bank" within
the meaning of Section 881(c) of the IRC, is not a ten percent (10%) shareholder
(within the meaning of Section 871(h)(3)(B) of the IRC) of any Borrower and is
not a controlled foreign corporation related to any Borrower (within the meaning
of Section 864(d)(4) of the IRC), (ii) that such Lender claims complete
exemption from U.S. federal withholding tax on payments of interest by the
Borrowers under this Agreement and the other Loan Documents and (iii) that such
Lender has received in replacement of any Note held by or assigned to it, a "QFL
Note" (as defined below) in accordance with this SECTION 2.12(b). Each such
Lender further agrees to deliver to the Borrowers and the Agent from time to
time a true and accurate certificate executed in duplicate by a duly authorized
officer of such Lender substantially in a form satisfactory to the Borrowers and
the Agent, before or promptly upon the occurrence of any event requiring a
change in the most recent certificate previously delivered by it to the
Borrowers and the Agent pursuant to this SECTION 2.12(b)(5). Further, each
Lender which delivers a certificate accompanied by Form 1001 of the IRS (or any
successor form or forms required under the IRC or the applicable regulations
promulgated thereunder) covenants and agrees to deliver to the Borrowers and the
Agent within fifteen (15) days prior to January 1, 1999, and every third
anniversary of such date thereafter, on which this Agreement is still in effect,
another such certificate and two accurate and complete original signed copies of
Form 1001 (or any successor form or forms required under the IRC or the
applicable regulations promulgated thereunder), and each Lender that delivers a
certificate accompanied by Form 4224 of the IRS (or any successor form or forms
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required under the IRC or the applicable regulations promulgated thereunder)
covenants and agrees to deliver to the Borrowers and the Agent within fifteen
(15) days prior to the beginning of each subsequent taxable year of such Lender
during which this Agreement is still in effect, another such certificate and two
accurate and complete original signed copies of IRS Form 4224 (or any successor
form or forms required under the IRC or the applicable regulations promulgated
thereunder). Each such certificate shall certify as to one of the following:
(a) that such Lender is capable of receiving payments of interest
hereunder exempt from or at a reduced deduction or withholding of United
States of America federal income tax;
(b) that such Lender is not capable of receiving payments of
interest hereunder exempt from or at a reduced deduction or withholding of
United States of America federal income tax as specified therein but is
capable of recovering the full amount of any such deduction or withholding
from a source other than the Borrowers and will not seek any such recovery
from the Borrowers; or
(c) that, as a result of the adoption of or any change in any law,
treaty, rule, regulation, guideline or determination of a Governmental
Authority or any change in the interpretation or application thereof by a
Governmental Authority after the date such Lender became a party hereto,
such Lender is not capable of receiving payments of interest hereunder
without deduction or withholding of United States of America federal
income tax as specified therein and that it is not capable of recovering
the full amount of the same from a source other than the Borrowers.
Each Lender shall promptly furnish to the Borrowers and the Agent
such additional documents as may be reasonably required by the Borrowers or the
Agent to establish any exemption from or reduction of any Taxes required to be
deducted or withheld and which may be obtained without undue expense to such
Lender
(6) For a period with respect to which a Lender has failed to
provide the Agent and the Borrowers with the appropriate form described in this
SECTION 2.12(b)(5) (other than if such failure is due to a change in law
occurring subsequent to the date on which a form originally was required to be
provided), such Lender shall not be entitled to indemnification under this
SECTION 2.12 with respect to Taxes imposed by the United States by reason of
such failure; PROVIDED, HOWEVER, that should a Lender become subject to Taxes
because of its failure to deliver a form required hereunder, the Borrowers shall
take such steps as such Lender shall reasonably request to assist such Lender to
recover such Taxes.
(7) Any Lender that is not a "bank" within the meaning of Section
881(c)(3)(A) of the IRC and satisfies the applicable requirements of SECTION
2.12(b)(5) (a "Qualified Foreign Lender") shall upon receipt of the written
request of the Agent or the Borrowers and may, upon its own written request to
the Agent, exchange any Note held by or assigned to it for a qualified foreign
lender Note (a "QFL Note"). A QFL Note shall be in the form of the applicable
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Note attached as Exhibit E-1, E-2 or E-3 but shall contain the following legend:
"This Note is a QFL Note, and as such, ownership of the obligation represented
by such QFL Note may be transferred only in accordance with Section 2.12 of the
Loan and Security Agreement." Any QFL Note issued in replacement of any existing
Note pursuant to this Section shall be (i) dated the date of such existing Note,
(ii) issued in the name of the Borrowers and (iii) issued in the same principal
amount as such existing Note. Any Note replaced pursuant to this Section is
sometimes referred to herein as a "Replaced Note".
(8) The Borrowers agree that, upon the request of or delivery of a
request to a Qualified Foreign Lender pursuant to paragraph (7) of this SECTION
2.12(b), they shall execute and deliver a QFL Note to the Agent in replacement
of the Replaced Note surrendered in connection with such request conforming to
the requirements of this paragraph. Each Qualified Foreign Lender shall
surrender its Note in connection with any replacement, of a QFL Note and the
existing Note to be replaced by such QFL Note in accordance with this paragraph,
the Agent shall forward the QFL Note to the Lender which has surrendered its
Note for replacement by such QFL Note and shall forward the surrendered Note to
the Borrowers marked "canceled". Once issued, QFL Notes (i) shall be deemed to
and shall be "Notes" for all purposes under the Loan Documents, (ii) may not be
exchanged for Notes which are not QFL Notes, notwithstanding anything to the
contrary in the Loan Documents and (iii) shall at all times thereafter be QFL
Notes, including, without limitation, following any transfer or assignment
thereof.
(9) Notwithstanding anything to the contrary in the Loan Documents,
the QFL Notes are registered obligations as to both principal and interest with
the Borrowers and transfer of the obligations underlying such QFL Note may be
effected only by surrender of the QFL Note to the Borrowers and either
reissuance by the Borrowers of such QFL Note to the transferee or issuance by
the Borrowers of a new QFL Note to the transferee. A QFL Note shall only
evidence a Lender's or an assignee's right, title and interest in and to the
related obligation, and in no event is a QFL Note to be considered a bearer
instrument or obligation. This SECTION 2.12 shall be construed so that the
obligations underlying the QFL Notes are at all times maintained in "registered
form" within the meaning of Sections 871(h)(2) and 881(c)(3) of the IRC.
(c)(1) If a Borrower pays any additional amount under this SECTION
2.12 and, as a result, any Lender, together with the Agent, subsequently, in
their sole discretion and based on their own interpretation of any relevant laws
(but acting in good faith) receive or are granted a final and non-appealable
credit against or deduction from or in respect of any tax payable by such
Lender, or obtain any other final and non-appealable relief in respect of any
tax, which in the opinion of such Lender and the Agent, acting in good faith, is
both reasonably identifiable and quantifiable by them without requiring any
Lender, the Agent or their professional advisers to expend a material amount of
time or incur a material cost in so identifying or quantifying (any of the
foregoing, to the extent so reasonably identifiable and quantifiable, being
referred to as a "SAVING"), such Lender shall, to the extent that it can do so
without prejudice to the retention of the Saving, reimburse such Borrower
promptly after such identification and quantification with the amount of such
Saving; PROVIDED, HOWEVER, that any such Saving shall be reduced by any costs
incurred by such Lender or the Agent in obtaining such Saving.
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(2) Nothing in this SECTION 2.12(c) shall require any Lender to
disclose to any Person any information regarding its tax affairs or to arrange
its tax and other affairs in any particular manner.
SECTION 2.13. 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 any Borrower for the account of any Lender include interest in
excess of the Maximum Rate, such 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 2.14. FUNDING ISSUES. (a) INCREASED COSTS. If, due to either
(i) the introduction after the date hereof of, or any change after the date
hereof in or in the interpretation of, any applicable law, rule or regulation by
any Governmental Authority, central bank or comparable agency charged with the
interpretation or administration thereof or (ii) compliance by any Lender after
the date hereof with any final request or final directive issued after the date
hereof (whether or not having the force of law) by any such Governmental
Authority, central bank or comparable agency, and, as a result of any of the
events set forth in the above clauses (i) and (ii), (x) there shall be any
increase in the cost to such Lender in maintaining its Commitment under this
Agreement or funding or maintaining its Pro Rata Share of the Loans under this
Agreement, or (y) any Lender is subjected to any charge or withholding on its
obligations hereunder, or changes in the basis of taxation of payments to any
Lender in connection with any of the foregoing (except for changes in the rate
of tax on overall net income of any Lender) (collectively, "INCREASED COSTS"),
then the Borrowers shall, from time to time, pay, to the Agent for the benefit
of such Lender within 15 days after such Lender shall have provided notice to
the Agent (and the Agent shall have provided notice to the Borrowers) of such
Increased Cost, an amount sufficient to compensate such Lender for such
Increased Cost, as provided herein. A certificate setting forth in reasonable
detail the computation of the amount of such Increased Cost (which increase in
cost shall be determined by such Lender's reasonable allocation of the aggregate
of such cost increases resulting from such event), submitted to the Borrowers by
such Lender, shall be conclusive and binding for all purposes, absent manifest
error.
(b) INCREASED CAPITAL. If any Lender which is subject to minimum
capital requirements determines that compliance by such Lender, 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 Lender, or any corporation
controlling such Lender, and such Lender reasonably determines that the amount
of such capital is increased by or based upon any commitment to lend hereunder
or making or maintaining Loans, its commitment to participate (as provided for
in SECTION 2.10(f)) in any Letter of Credit or any Credit Support provided
through the Agent in connection with the issuance of any Letter of Credit, or
other commitments of this type, then, upon demand by such Person, the Borrowers
agree to, within five (5) days of such demand, pay to such Person, from time to
time as specified by such Person, additional amounts sufficient to compensate
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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 such Person's commitment to
participate in any Letter of Credit or Credit Support. 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.
(c) REPLACEMENT OF LENDER. If any Borrower, as a result of the
requirements of either SECTION 2.14(a) or SECTION 2.14(b), shall be required to
pay any particular Lender (an "AFFECTED LENDER") the additional amounts referred
to in such Section, which costs are not imposed by the other Lenders, and such
additional amounts are material, then such Borrower shall be entitled to either
prepay such Affected Lender without any Prepayment Premium but with any payments
required by SECTION 2.07(e), or find a replacement Lender, reasonably acceptable
to the Agents (the Agents' consent to such replacement Lender not to be
unreasonably withheld), to replace the Affected Lender. The Affected Lender and
the replacement Lender shall execute an Assignment Agreement with respect to all
of the Affected Lender's Commitments and all Loans owing to the Affected Lender
and comply with the other provisions of SECTION 11.08(c). Upon the payment by
the replacement Lender to the Affected Lender of the then outstanding principal
amount of Loans owing to the Affected Lender, together with accrued interest
thereon, and the payment by the Borrower to the Affected Lender of any
compensation required with respect to LIBOR Loans pursuant to SECTION 2.07(e),
the replacement Lender shall succeed to all of the Affected Lender's rights and
obligations under this Agreement and the other Loan Documents.
SECTION 2.15. JOINT AND SEVERAL LIABILITY; CONTRIBUTION. (a)
Notwithstanding anything to the contrary in this Agreement or the other Loan
Documents, 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. The Agent and the Collateral
Agent 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 any Borrower shall, as a result of the operation of SECTION 2.15,
pay any Obligation of any 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 such
other Borrower, as set forth in the Contribution Agreement. 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 any Lender or
any of the Agents to keep it informed of the financial condition of any other
Borrower. The provisions of this section shall, to the extent expressly
inconsistent with any provision in any Loan Document, supersede such
inconsistent provision.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
Each Borrower represents and warrants to the Agent, the Collateral
Agent and the Lenders that:
SECTION 3.01. ORGANIZATION; POWERS. (a) Such Borrower (i) is a
corporation or limited liability company 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 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 such
Borrower is a party, and the Loans hereunder:
(a) have been duly authorized by such Borrower's Board of Directors
or managers and, if necessary, such Borrower's stockholders or members;
(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 other organizational documents, as
the case may be, 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
(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.
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SECTION 3.03. FINANCIAL STATEMENTS. The Borrowers have furnished to
the Agent and the Lenders the audited consolidated financial statements of KMC
Holdings dated as of December 31, 1998, and the unaudited consolidated financial
statements for the fiscal quarter ended September 30, 1999 , 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 Holdings' 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 such Borrower 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,
threatened, 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 any 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 material Governmental Approvals, which
Governmental Approvals are necessary or appropriate for the construction and
operation of the Systems as are presently operating, as contemplated in the
Milestone Plan, other than immaterial municipal business permits. Such
Governmental Approvals are correctly listed on SCHEDULE 3.09(a) and constitute
the only Governmental Approvals 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
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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 the
Agent and the Lenders.
(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 (the "INTELLECTUAL PROPERTY"), 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 Intellectual
Property owned or possessed by or licensed to such Borrower. Such Borrower has
entered into Intellectual Property Documents with respect to its Intellectual
Property, as requested by the Collateral Agent.
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
Laws. Except as disclosed on SCHEDULE 3.10, to such Borrower's knowledge, none
of the operations of such Borrower is subject to any judicial or administrative
proceeding alleging the violation of any Environmental Laws. Except as disclosed
on SCHEDULE 3.10, such Borrower neither knows nor reasonably should know that
any 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 employees 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 to any
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Plan which breach could result in a Material Adverse Effect. 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 and which could result in a Material
Adverse Effect, 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 U 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 T, U or X of said Board of Governors.
SECTION 3.14. COLLATERAL. The security interests granted by ARTICLE
VIII hereof, together with the security interests granted pursuant to the
Existing Agreement 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 the
Collateral Agent in favor of the Lenders in the Collateral of such Borrower
described in SECTION 8.01.
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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, Bedminster, New Jersey 07921. If any change in any such
location occurs, such Borrower shall notify the Agent and the Collateral Agent
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 the Agent and the Collateral Agent 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 the Borrowers for the
periods set forth therein. Such document has been prepared on the basis of the
assumptions set forth therein, which the Borrowers believe are reasonable in
light of current and reasonably foreseeable business conditions.
SECTION 3.19. CAPITALIZATION AND SUBSIDIARIES. The classes of Equity
Interests, number of authorized shares, number of outstanding shares and par
values or other designations of the Equity Interests or other equity securities
or beneficial interests of such Borrower are correctly set forth on SCHEDULE
3.19. All the outstanding shares of Equity Interests 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 Equity Interests or other
equity securities or beneficial interests or other securities convertible into
or exchangeable for shares of Equity Interests 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 Equity Interests or other equity securities or
beneficial interests of such Borrower, or (C) Subsidiaries of such Borrower. KMC
Holdings beneficially owns, directly or indirectly, all of the Equity Interests
of such Borrower.
SECTION 3.20. REAL PROPERTY, LEASES AND EASEMENTS. Such Borrower
leases or owns the real property described on SCHEDULE 3.20. Set forth on
SCHEDULE 3.20 is a list of (i) all real property leased or owned by such
Borrower (the "REAL PROPERTY") and (ii) all easements, rights of way, rights of
occupancy, licenses and similar rights with respect to real property granted to
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such Borrower not otherwise disclosed to the Collateral Agent and the Lenders on
a title report delivered to the Collateral Agent and the Lenders 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 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 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,
and such Borrower covenants and agrees to indemnify and hold harmless the Agent,
the Collateral Agent and the Lenders from and against, any broker's fee,
finder's fee or commission in connection with such transactions.
SECTION 3.23. NO MATERIAL MISSTATEMENTS. Neither any report,
financial statement, exhibit or schedule furnished by or on behalf of such
Borrower to the Agent, the Collateral Agent or any 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. YEAR 2000 PROBLEMS. Each Borrower has completed and
implemented a Year 2000 Corrective Plan and Year 2000 Corrective Actions, has
completed Year 2000 Implementation Testing and has eliminated all Year 2000
Problems, except where the failure to correct the same could not reasonably be
expected to have a Material Adverse Effect.
ARTICLE IV
CONDITIONS FOR LOANS
The obligations of each Lender to make Loans hereunder are subject
to the accuracy, as of the Closing Date and as of the date of making of each of
the Loans after the Closing Date, of the representations and warranties
contained in ARTICLE III (except that any representations or warranties that
relate to a specified date shall only be reaffirmed as of such date) and the
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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 ON OR AFTER THE
CLOSING DATE. In the case of the Loans to be made on the Closing Date and
Letters of Credit to be issued or Credit Support for any Letters of Credit to be
incurred on the Closing Date:
(a) All then applicable legal matters incident to this Agreement and
the other Loan Documents shall be reasonably satisfactory to Counsel.
(b) The Agent and the Collateral Agent , as applicable, shall have
received payment in full of the fees set forth in the Fee Letters, and all the
other documented out-of-pocket costs and expenses of the Agent and the
Collateral Agent incurred on or prior to the Closing 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) (1) The Agent and the Collateral Agent shall have received the
following items, in each case in form and substance satisfactory to the Agent
and the Collateral Agent:
(i) the Financials;
(ii) the Milestone Plan showing in reasonable detail and
specifying any material underlying assumptions, for the
subsequent nine (9) year period, the Borrower'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 Closing Date, of the secretary or
assistant secretary of each of the Borrowers or the sole
members of the Borrowers, as applicable, and KMC Holdings,
certifying (A) (1) the names and true signatures of the
officers authorized to sign each Loan Document to which any
Borrower or KMC Holdings is a party, (2) the resolutions of
the Board of Directors of each Borrower or KMC Holdings, as
applicable, approving the transactions contemplated by the
Loan Documents to which each is a party, (3) each
Borrower's, or KMC Holdings' , as applicable, bylaws, and
(B) only with respect to the certificate of KMC Holdings,
(1) true and correct copies of the Indentures, (2) true and
correct copies of the Management Agreement and the Tax
Sharing Agreement and (3) evidence satisfactory to the Agent
and the Collateral Agent that Holdings III has either been
dissolved or merged into KMC Holdings;
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(iv) the written opinions of special, regulatory and local
counsel for the Borrowers and KMC Holdings, dated the
Closing Date, addressed to the Agent, the Collateral Agent
and the Lenders satisfactory to (and containing only such
qualifications and limitations as are satisfactory to)
Counsel, which opinions shall be substantially in the forms
set forth in EXHIBITS K-1, K-2 and K-3, respectively,
attached hereto;
(v) certificates of appropriate public officials dated not more
than 30 days prior to the Closing 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;
(vi) each Borrower's and KMC Holdings' Certificate or Articles of
Incorporation (or other constituent or organizational
documents, as the case may be), in each case, as amended,
modified or supplemented on or prior to the Closing Date,
each certified to be true, correct and complete by the
Secretary of State of the state in which such Person is
organized;
(vii)the General Reaffirmation and Modification Agreement in the
form of EXHIBIT T hereto duly executed and delivered by the
Borrowers and KMC Holdings;
(viii) the Term B Loan Notes duly executed and delivered by the
Borrowers;
(ix) this Agreement duly executed and delivered by the Borrowers;
and
(x) Addenda to that certain Trademark Security Agreement dated
as of December 22, 1998 between the Borrowers other than KMC
III, Leasing III, Telecom.com and Services, and the
Collateral Agent, duly executed and delivered by KMC III,
Leasing III, Telecom.com and Services.
(2) The Collateral Agent shall have received the following items in
each case in form and substance satisfactory to the Collateral Agent:
(i) Pledge Supplement duly executed by KMC Holdings with respect
to the Equity Interests of KMC III and Telecom.com, together
with, in each case, for all such Equity Interests which are
certificated, stock certificates and undated stock powers
executed in blank in form and substance satisfactory to the
Collateral Agent and for all such Equity Interests which are
limited liability company interests, pledge instructions and
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initial transaction statements in form and substance
satisfactory to the Collateral Agent;
(ii) a Pledge Agreement duly executed by KMC III with respect to
the Equity Interests of Leasing III and Services, together
with for all such Equity Interests which are certificated,
stock certificates and undated stock powers executed in
blank in form and substance satisfactory to the Collateral
Agent and for all such Equity Interests which are limited
liability company interests, pledge instructions and initial
transaction statements in form and substance satisfactory to
the Collateral Agent;
(iii)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;
(iv) with respect to each Borrower's then existing Collection
Accounts, Restricted Account Agreements substantially in the
form of such agreements executed and delivered pursuant to
the Existing Agreement, copies of which are attached as
EXHIBIT N hereto, duly executed by the applicable Borrower
and the financial institutions maintaining the Collection
Accounts (except to the extent previously delivered pursuant
to the Existing Agreement);
(v) Addenda to the Collateral Assignment of Licenses duly
executed by KMC III, Leasing III, Telecom.com and Services,
and an updated Schedule I thereto certified as being
complete and correct by all the Borrowers, together with
consents to assignment of licenses and rights from Persons
designated by the Collateral Agent 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 the Collateral Agent;
(vi) Addenda to the Collateral Assignment of Leases duly executed
by KMC III, Leasing III, Telecom.com and Services, and an
updated Schedule I thereto certified as being complete and
correct by all the Borrowers, 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 the Collateral Agent with
respect to those leased properties specified by the
Collateral Agent, together with landlord waivers in the form
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of EXHIBIT D hereto executed by the appropriate landlord
with respect to those leased properties specified by the
Collateral Agent;
(vii)Completed environmental questionnaires and indemnity
agreement executed by KMC III, Leasing III, Telecom.com and
Services and Phase I Environmental Reports with respect to
premises described on Schedule 3.10 (if any); and
(viii) Access Agreements executed and delivered by Kamine
Development Corp. with respect to KMC III's, Leasing III's ,
Telecom.com's and Services' premises located at 1545 Route
206, Suite 300, Bedminster, New Jersey in form and substance
satisfactory to the Collateral Agent.
(d) The Agents or the Collateral Agent, as applicable, shall have
satisfactorily completed their review of any Lucent Purchase Agreement, any
Additional Purchase Agreements, construction and maintenance contracts, right of
way agreements and interconnection agreements related to the Systems being
financed with the Loans made on the Closing Date.
(e) The Collateral Agent shall have received evidence satisfactory
to the Collateral Agent that the Collateral Agent's security interests in the
Collateral have been properly perfected and constitute first and prior security
interests subject only to Permitted Liens, including by (i) filing Mortgages,
the Collateral Assignment of Licenses, the Collateral Assignment of Leases,
leasehold mortgages and UCC-1 financing statements (including, without
limitation, fixture filings) in certain filing and recording offices, (ii)
filing the Trademark Security Agreement in the United States Patent and
Trademark Office, (iii) obtaining consents to the Collateral Assignments of
Licenses and the Collateral Assignments of Leases and (iv) taking possession of
stock certificates and other instruments, in each case, as requested by the
Collateral Agent.
(f) The Collateral Agent shall have received evidence satisfactory
to the Collateral Agent, 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.
(g) The Agent shall have received evidence satisfactory to the Agent
that no Borrower has any Debt other than as described in SECTION 6.13 and that
the holders of any such Debt described in CLAUSES (v) and (vii) of SECTION 6.13
have executed subordination and standstill agreements satisfactory to the Agent.
(h) The Collateral Agent, as it may require, shall have obtained or
waived in writing with respect to each real estate and material equipment lease
and each mortgage of any 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
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mortgages by making payment directly to the applicable lessors and mortgagees
and (ii) landlord waivers and consents, as the Collateral Agent may require,
with respect to each leased facility.
(i) The Agents shall have satisfactorily completed their 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.
(j) All right of way agreements with respect to each System under
construction shall be sufficient to allow full operation of such System and
shall, upon request of the Collateral Agent, be assignable to the Collateral
Agent or its designee.
(k) Lucent shall have executed and delivered to the Collateral
Agent, in form and substance satisfactory to the Agents, a reaffirmation of the
Consent and Subordination Agreement dated December 22, 1998 among Lucent, the
Borrowers other than KMC III, Leasing III, Telecom.com and Services, and the
Collateral Agent.
(l) The obligations of KMC III and Leasing III under the Lucent Loan
Agreement shall be discharged in full with the proceeds of the Loans to be made
on the Closing Date.
SECTION 4.02. CONDITIONS PRECEDENT TO ALL LOANS. In the case of each
Loan hereunder and the obligation to issue Letters of Credit or provide Credit
Support therefor:
(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,
except that any representations or warranties that relate to a specified date
shall only be reaffirmed 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 any 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.
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(f) The Agent shall have received a Notice of Borrowing for the Loan
and acceptance certificate and invoices required by SECTION 2.03.
(g) The Collateral Agent shall have first priority Liens on all
personal and real property assets that comprise or relate to each System to be
funded by such Loan, shall have received collateral assignments of all material
third party agreements relating to such Systems, consented to by the applicable
third parties, as requested by the Collateral Agent, and shall have received
evidence that all necessary Governmental Approvals for such System have been
obtained.
(h) The Collateral Agent shall have received copies of such lien
waivers and other acknowledgments from Persons constructing the Systems, any
subcontractors or vendors (including Lucent or each Additional Vendor) with
respect to the construction of the Systems as the Collateral Agent may
reasonably request.
(i) All fees and expenses which are due and payable to the Agent and
the Collateral Agent on or prior to the date of the advance of such Loan shall
have been paid.
(j) The Agents or the Collateral Agent, as applicable, shall have
satisfactorily completed their review of any Additional Purchase Agreements,
construction and maintenance contracts related to the Systems being financed
with such Loan and the interconnection agreements for each System being financed
with such Loan.
(k) The Collateral Agent shall have obtained or waived in writing
with respect to each real estate and material equipment lease, each mortgage,
and each material third party agreement relating to the Systems 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, as the Collateral Agent may request,
(ii) landlord waivers and consents, as the Collateral Agent may require, with
respect to each leased facility, and (iii) consents to collateral assignment, as
the Collateral Agent may require, with respect to each such material third party
agreement.
(l) There shall not have occurred in the opinion of the Agents, any
material adverse change in any two of the three members of Borrower's or KMC
Holdings' senior management team, which shall comprise its Chief Executive
Officer, Chief Financial Officer and Chief Operating Officer.
(m) If a Loan is requested to finance Aged Equipment, the Collateral
Agent, if it so elects, shall have obtained an appraisal of such Aged Equipment
from an appraiser selected by the Collateral Agent, which appraisal shall be
satisfactory to the Collateral Agent and the cost of which shall be borne by
such Borrower.
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ARTICLE V
AFFIRMATIVE COVENANTS
Each Borrower covenants and agrees that so long as this Agreement
shall remain in effect, any Commitment hereunder shall be outstanding or any
Obligations hereunder or under any of the other Loan Documents are unpaid,
unless the Requisite Lenders shall have otherwise given prior written consent:
SECTION 5.01. CORPORATE AND FRANCHISE EXISTENCE. Such Borrower shall
preserve and maintain its corporate existence, rights, franchises, licenses and
privileges in the 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,
including, without limitation, Environmental Laws, regulations promulgated by
the FCC and any PUC, and other telecommunications laws and regulations, 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 Collateral
Agent 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 Collateral Agent. Such
coverage shall be in such form, with terms, conditions, limits and deductibles
as shall be acceptable to the Collateral Agent.
(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
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including, but not limited to, fire and extended coverage, collapse,
flood, earth movement and windstorm, and comprehensive boiler and
machinery coverage (including electrical malfunction and mechanical
breakdown). 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 Collateral Agent 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 $20,000,000 combined property, delay in
start-up and extra expense 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 seven (7) 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 per
occurrence and $2,000,000 in the aggregate. 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 $500,000. 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
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vehicles against bodily injury or property damage. Such coverage shall
have a limit of not less than $1,000,000; and
(vi) EXCESS/UMBRELLA LIABILITY. Such Borrower shall maintain excess
or umbrella liability insurance in an amount not less than $30,000,000
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) 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 $5,000,000. 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
(ii) 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 $5,000,000 written in any combination of primary and
excess/umbrella policies, and
(iii) 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 $5,000,000 written in any combination
of primary and excess/umbrella policies.
(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
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damage, including but not limited to fire and extended coverage, collapse,
flood, earth movement and windstorm, 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 with property, business interruption and extra
expense insurance in a combined amount of $30,000,000 per System. 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 seven (7) 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 per
occurrence and $2,000,000 in the aggregate. 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 $500,000. 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
(vi) EXCESS/UMBRELLA LIABILITY. Such Borrower shall maintain excess
or umbrella liability insurance in an amount not less than $30,000,000
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
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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 Collateral Agent
shall be an additional 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 Collateral Agent shall be an additional
insured with respect to policies described in SECTION 5.04(b)(iii), (b)(v),
(b)(vi), (d)(iii), (d)(v) and (d)(vi). Such Borrower and the Collateral
Agent 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 Agent, the Collateral Agent or any 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 Collateral Agent
shall not be invalidated by any action or inaction of such Borrower, or any
other Person, and shall insure the Collateral Agent 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 Agent, the Collateral Agent or the Lenders, 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 Agent, the Collateral
Agent or the Lenders with respect to their interests 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 Collateral Agent,
such cancellation or change shall not be effective as to the Collateral
Agent until thirty (30) days, except in the case of non-payment of premium
which shall be ten (10) days, after receipt by the Collateral Agent of
written notice sent by registered mail from such insurer.
(f) CERTIFICATIONS. On the Closing Date, and at each policy renewal,
but not less than annually, such Borrower shall provide to the Collateral Agent
approved certification from each insurer or by an authorized representative of
each insurer. Such certification shall identify the underwriters, the type of
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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
Collateral Agent with an opinion from an independent insurance broker,
acceptable to the Collateral Agent, 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 Collateral Agent 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 Collateral Agent, which amounts
shall be applied by the Collateral Agent, upon request by such Borrower and
provision to the Collateral Agent of detailed information, including a
construction schedule and cost estimates, which establish to the reasonable
satisfaction of the Collateral Agent 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 Collateral Agent, in which case such
amounts shall be applied in the Requisite Lenders' sole discretion to the
repayment of the Obligations or such restoration, replacement or rebuilding.
(i) GENERAL. The Collateral Agent 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 Collateral
Agent, the Agent or any Lender any duty or obligation to verify the existence or
adequacy of the insurance coverage maintained by such Borrower, nor shall the
Collateral Agent, the Agent or any Lender be responsible for any representations
or warranties made by or on behalf of such Borrower to any insurance broker,
company or underwriter. The Collateral Agent or the Agent, at its sole option,
may obtain such insurance if not provided by such Borrower; in such event, such
Borrower shall reimburse the Collateral Agent or the Agent 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 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
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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 the Agent and the Lenders (except as otherwise provided herein):
(a) within one hundred twenty (120) days after the end of each fiscal
year, annual consolidated and consolidating financial statements for KMC
Holdings, and combined financial statements for the Borrowers, including the
balance sheets and statements of operations, stockholders' equity (consolidated
only) 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 the Agent, and accompanied by
such independent certified public accounting firm's unqualified opinion;
(b) within forty-five (45) days after the end of the first three
fiscal quarters during each fiscal year and within one hundred twenty (120) days
after the end of the fourth fiscal quarter (i) consolidated and consolidating
unaudited balance sheets and statements of operations, and consolidated
statements of stockholders' equity and cash flows for KMC Holdings, and combined
unaudited balance sheets, statements of operations, stockholders' equity and
cash flows of the Borrowers as of the end of each such fiscal quarter, as
applicable, and for the then elapsed portion of the fiscal year and (ii) a
statement of revenues and EBITDA for the Borrowers as of the end of each such
fiscal quarter, as applicable, and for the then elapsed portion of the fiscal
year, calculated for each city where a System has been constructed in accordance
with the Milestone Plan;
(c) within forty-five (45) days after the end of each month during
each fiscal year (or within one hundred twenty (120) days after the end of each
December), a detailed statement of operations for the Borrowers on a combined
basis for such month and year-to-date period with comparisons to the
corresponding projections for such month and year-to-date period set forth in
the Milestone Plan; PROVIDED, that such Borrowers shall only be required to
deliver the statement described in this SECTION 5.06(c) on a quarterly basis at
any time that, and only for so long as, the Borrowers on a combined basis have
achieved positive EBITDA;
(d) concurrently with provision of the financial statements referred
to in CLAUSES (a), (b) and (c) above, a certificate of KMC Holdings' independent
certified public accountant or KMC Holdings' chief financial officer, as
applicable, to the effect that the financial statements referred to in CLAUSE
(a), (b) and (c) above, present fairly the financial position and results of
operations of KMC Holdings, and the Borrowers 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;
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(e) concurrently with the provision of (i) the financial statements
referred to in CLAUSE (a) above and (ii) any statements delivered pursuant to
CLAUSE (b) above in respect of the periods ending March 31, June 30 or 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 the Borrowers propose to take to
cure such Event of Default or Default;
(f) (i) not later than December 1 of each calendar year, consolidating
and consolidated projected annual statements of operations, balance sheets and
cash flow statements for KMC Holdings for the succeeding fiscal year, such
statements to be reasonably acceptable to the Agents, and (ii) not later than
January 15 of each calendar year, an annual operating budget on a quarterly
basis for such calendar year, with each such budget to be in compliance with the
Milestone Plan;
(g) to the Collateral Agent, all material agreements or licenses
affecting the Governmental Approvals of any Borrower or any System promptly
after any execution, or material amendment thereto;
(h) to the Collateral Agent, promptly upon their becoming available,
copies of any material periodic or special documents, statements or other
information filed by any 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;
(i) immediately upon any officer of any Borrower obtaining knowledge
of any condition or event (i) which either constitutes an Event of Default or a
Default, (ii) which renders any representation or warranty contained herein
materially false or misleading, or when made, renders any document 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 (f) 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;
(j) 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 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;
(k) evidence in the manner set forth in SECTION 5.04(e) of insurance
complying with SECTION 5.04;
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(l) following the written request of the Agent, 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 Agent;
(m) 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
(n) 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 the Agent may reasonably request.
SECTION 5.07. LITIGATION AND OTHER NOTICES. Such Borrower shall give
the Agent 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 $250,000
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 $250,000; (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 adverse 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 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, such Borrower shall with respect to
each System (a) promptly execute and deliver to the Collateral Agent (1)
Mortgages in favor of and satisfactory to the Collateral Agent with respect to
any real property purchased by such Borrower on which a switch or network
operating center is located, and at the request of the Collateral Agent, with
respect to any other real property purchased by such Borrower, together with
lender's title policies for any such real property satisfactory to the
Collateral Agent, if requested by the Collateral Agent, (2) leasehold mortgages
or collateral assignments of leases, landlord waivers or consents, and
appropriate Uniform Commercial Code fixture financing statements, in each case
satisfactory to the Collateral Agent with respect to any real property leased by
such Borrower and on which Switch Equipment or a network operating center is
located, and at the request of the Collateral Agent, with respect to any other
leased real property of such Borrower, (3) Mortgages or collateral assignments
and consents satisfactory to the Collateral Agent with respect to such
Borrower's Easements and rights of way, as requested by the Collateral Agent,
(4) collateral assignments of leases and lessor consents, satisfactory to and as
requested by the Collateral Agent, with respect to any long-haul fiber leased by
such Borrower and (5) with respect to each System, collateral assignments and
consents to such assignments from the applicable third Persons, for each other
material lease, license, contract or other agreement or instrument entered into
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by such Borrower after the date hereof, as required by the Collateral Agent and
(b) (1) update Schedule 1 to the Collateral Assignment of Licenses to cover all
Governmental Approvals obtained by such Borrower after the Closing Date and
agreements entered into by such Borrower after the Closing Date with third
Persons, (2) obtain consents to collateral assignments from the licensors
granting the Governmental Approvals referred to in CLAUSE (b)(1) above and from
those third Persons referred to in CLAUSE (b)(1) above that are specified by the
Collateral Agent, such consents to collateral assignment to be in form and
substance satisfactory to the Collateral Agent and (3) update Schedule 1 to the
Collateral Assignment of Leases to cover all leases referred to in CLAUSE (a)(2)
above.
SECTION 5.09. ERISA. Such Borrower shall comply in all material
respects with the applicable provisions of ERISA and furnish to the Agent, (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 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 the Agents 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. Such Borrower shall design,
construct, equip and operate its Systems substantially as previously disclosed
to Lenders in the Milestone Plan and in accordance with prudent industry
standards.
SECTION 5.12. ENVIRONMENTAL NOTICES. If such Borrower shall (a)
receive written notice that any violation of any Environmental Law may have been
committed or is about to be committed by such Borrower, (b) receive written
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
Environmental Law or requiring such Borrower to take any action in connection
with any Release of any Contaminant into the environment, or (c) receive any
written 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
the Agent 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 the Agent and the Collateral Agent of any amendment to its
Certificate or Articles of Incorporation or other organizational documents
within ten (10) days of the occurrence of any such event, and provide the Agent
with copies of any amendments certified by the secretary of such Borrower and of
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all other relevant documentation. Such Borrower shall promptly deliver to the
Collateral Agent such financing statements executed by such Borrower which the
Collateral Agent may request as a result of any such event.
SECTION 5.14. THIRD PARTY AGREEMENTS AND DELIVERY AND ACCEPTANCE
CERTIFICATES. Such Borrower shall provide the Collateral Agent with (i) copies
of all interconnection agreements, right of way agreements, easement agreements,
real property leases, construction agreements, equipment purchase agreements,
fiber leases, telephone line leases, state and local franchise agreements and
other agreements with municipalities, that in each case relate to each System of
such Borrower, promptly after execution of each such agreement; PROVIDED,
HOWEVER, that with respect to certain of the foregoing categories of agreements
specified by the Collateral Agent, such Borrower shall be permitted to provide
the Collateral Agent with inventories of the particular types of agreements in
lieu of delivering copies of the agreements, which inventories shall be (x) in
form and substance satisfactory to the Collateral Agent and (y) updated by the
applicable Borrower promptly following the execution of any additional agreement
of the type inventoried; PROVIDED, FURTHER, HOWEVER, that nothing in the
foregoing proviso shall limit the Collateral Agent's ability to, at any time,
request and receive a copy of any third party agreement from the applicable
Borrower, and (ii) with respect to each System, copies of delivery and
acceptance certificates substantially in the form of EXHIBIT R hereto with
respect to each item of Telecommunications Equipment with an invoiced purchase
price in excess of $250,000, in each case, where such certificates are not
required to be delivered to the Collateral Agent pursuant to SECTION 2.03(a),
promptly after completion of such System or acceptance of such item of
Equipment, as applicable.
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 any account payable as long as
the validity thereof shall be contested in good faith by appropriate protest or
proceedings and such Borrower shall have set aside adequate reserves on its
books with respect thereto in accordance with GAAP.
SECTION 5.16. INTELLECTUAL PROPERTY. Such Borrower shall enter into
Intellectual Property Documents, in form and substance satisfactory to the
Collateral Agent, with respect to all of the Intellectual Property owned by such
Borrower.
SECTION 5.17. FISCAL YEAR. Such Borrower shall maintain a fiscal year
ending on December 31.
SECTION 5.18. REQUIRED CONTRIBUTION. The Borrowers shall obtain the
Required Contribution on or prior to August 31, 2000.
SECTION 5.19. SUBSIDIARY GUARANTEES AND PLEDGES. Such Borrower shall
(i) cause each Person which becomes a Subsidiary of such Borrower and does not
become a Borrower under this Agreement to execute a Guaranty and Security
Agreement in the form of EXHIBIT U hereto, and (ii) execute a Pledge Agreement
pursuant to which all of the Equity Interests in such Person will be pledged to
the Collateral Agent, PROVIDED, that in the event such Person is an indirect
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Subsidiary of such Borrower, such Borrower shall cause each applicable
Subsidiary of such Borrower to pledge all of the Equity Interests in such Person
to the Collateral Agent.
SECTION 5.20. ACCOUNTING; MAINTENANCE OF RECORDS. Such Borrower shall
maintain a system of accounting established and administered in accordance with
GAAP. Such Borrower shall keep and maintain, and cause each of its Subsidiaries
to keep and maintain, in all material respects, proper books of record and
account in which entries in conformity with GAAP shall be made of all dealings
and transactions in relation to their respective businesses and activities.
SECTION 5.21. FURTHER ASSURANCES. Such Borrower agrees to do such
further acts and things and to execute and deliver to the Agent or the
Collateral Agent such additional assignments, agreements, powers and
instruments, at such Borrower's expense, as the Agent or the Collateral Agent
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
the Agent or the Collateral Agent its rights, powers and remedies hereunder and
thereunder.
ARTICLE VI
NEGATIVE COVENANTS
Each Borrower covenants and agrees with the Agent, the Collateral
Agent and the Lenders that as long as this Agreement shall remain in effect, any
Commitment hereunder shall be outstanding or any Obligations hereunder or under
any of the Loan Documents shall be unpaid, unless the Requisite Lenders shall
have otherwise given prior written consent:
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"):
(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
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for which such Borrower shall have set aside adequate 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 on cash securing the reimbursement obligations under the
Excluded Letters of Credit.
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 the Requisite Lenders, sell, lease, transfer or
otherwise dispose of any Collateral, except for (a) sales of inventory in the
ordinary course of business, and (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 $250,000 in the aggregate;
PROVIDED, HOWEVER, that if no Event of Default has then occurred or is
continuing or would result therefrom, any Borrower, upon provision of thirty
days prior written notice to the Agent and upon compliance with SECTION 8.02,
may merge with another Borrower.
SECTION 6.04. DIVIDENDS AND DISTRIBUTIONS; SALE OF EQUITY INTERESTS.
(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 the
Borrowers, EBITDA equaled at least eighty-five percent (85%) of "Estimated
EBITDA" (as defined below) and such Estimated EBITDA is a positive number, (B)
during the previous four fiscal quarters of the Borrowers, the Borrowers
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maintained a Fixed Charge Coverage Ratio of at least 1.10 to 1.00, (C) with
respect to the next four fiscal quarters of the Borrowers, EBITDA for the
Borrowers, as projected in the most recent financial information furnished
pursuant to SECTION 5.06(e), is projected to equal at least eighty-five percent
(85%) of Estimated EBITDA for such fiscal quarters and such Estimated EBITDA is
a positive number, 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 the Agent and the Lenders pursuant to SECTION
5.06(e), is projected to equal at least 1.10 to 1.00, the Borrowers may pay to
KMC Holdings dividends in the amount necessary to make (i) scheduled principal
and interest payments under the Indentures, and any other amounts due under the
Indentures (including Sections 4.14 and 7.07 thereunder), and (ii) required
payments of cash dividends due to the holders of KMC Holdings' Series E and F
Senior Redeemable, Exchangeable PIK Preferred Stock. Estimated EBITDA shall mean
"EBITDA" as calculated in the Milestone Plan.
(b) Such Borrower shall not sell or issue any additional Equity
Interests.
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,
the Management Agreement 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 2.15.
SECTION 6.07. INVESTMENTS. Such Borrower shall not, directly or
indirectly, make any Investments except:
(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;
(iii) 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;
(iv) Investments in commercial paper rated P1 or A1 by Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group respectively;
and
(v) 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), (ii), (iii) or (iv).
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SECTION 6.08. SUBSIDIARIES; PERMITTED ACQUISITIONS. Such Borrower
shall not create or acquire any Subsidiary or acquire all or any significant
portion of the assets or Equity Interests of another Person; provided, however,
that each Borrower may acquire all the Equity Interests of, or all or any
significant portion of the assets of, another Person, if such acquisition meets
the following requirements (each such acquisition constituting a "Permitted
Acquisition"):
(1) no Default or Event of Default shall have occurred and be
continuing or would result from such transaction or transactions
or the incurrence of any Debt by any Borrower or KMC Holdings in
connection therewith;
(2) If such acquisition is being effectuated by means of the
acquisition of Equity Interests of any Person (or the formation
of a new Subsidiary in order to acquire assets of another
Person), such acquired Person (unless merged with and into a
Borrower) shall become a Borrower hereunder pursuant to an
Accession Agreement and shall deliver such documentation as is
reasonably required by the Agent to evidence the enforceability
of such Accession Agreement;
(3) The Collateral Agent shall, immediately upon the consummation of
such acquisition, obtain a first priority Lien, for the benefit
of the Lenders and as collateral for the payment of the
Obligations, in the assets being purchased or acquired by virtue
of an acquisition of Equity Interests and the Borrowers shall
have complied in all respects with the provisions of SECTION 8.02
with respect to such assets;
(4) The assets being acquired shall be substantially similar, related
or incidental to the Businesses;
(5) After giving effect to such acquisition, the representations and
warranties set forth in ARTICLE III hereof shall be true and
correct in all material respects on and as of the date of such
acquisition with the same effect as though made on and as of such
date and including with respect to any Person that becomes a new
Borrower pursuant to paragraph (2) above;
(6) The purchase is consummated pursuant to a negotiated acquisition
agreement on a non-hostile basis;
(7) The Borrowers shall have submitted a revised Milestone Plan
demonstrating (i) PRO FORMA compliance with the applicable
Financial Covenants set forth in Article VII after giving effect
to such Acquisition, and (ii) that if such acquisition is made
after the Required Contribution has been obtained or after August
31, 2000, that the Milestone Plan remains fully funded and that
if such acquisition is made before the Required Contribution has
been obtained, that the acquisition does not result in the
Milestone Plan becoming less fully funded than it was prior to
giving effect to such acquisition;
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(8) The Borrowers shall have delivered an appraisal to the Agent and
the Collateral Agent reasonably satisfactory to the Collateral
Agent, which appraisal establishes that in the aggregate the
purchase price of the assets being acquired in such acquisition
(measured by appropriate market multiples) does not exceed the
fair market value of such assets; and
(9) The aggregate cash consideration paid by the Borrowers for all
such acquisitions shall not exceed $60,000,000.
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 without the prior written consent of the Requisite
Lenders.
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, the
assignment, transfer or disposal of which would result in a Material Adverse
Effect, without the prior written consent of the Requisite Lenders.
SECTION 6.11. TRANSACTIONS WITH AFFILIATES. Except for the Management
Agreement, the Tax Sharing Agreement, or 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;
(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;
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(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 the
Borrowers of $5,000,000 at any time ("PURCHASE DEBT");
(v) additional unsecured Debt subordinate to the payment of the
Obligations on terms and conditions approved by the Agents but in no event
to exceed an aggregate amount for the Borrowers of $1,000,000 in principal
amount outstanding at any time;
(vi) performance bonds and bid bonds executed solely in connection
with the construction of Systems in the ordinary course of business;
(vii) Qualified Intercompany Loans;
(viii)Debt to the Agent consisting of reimbursement obligations for
letters of credit in an aggregate outstanding amount not to exceed $250,000
at any one time for the account of the Borrower and not issued pursuant to
SECTION 2.10 (the "EXCLUDED LETTERS OF CREDIT"); and
(ix) Debt consisting of indebtedness, obligations or other liabilities
in respect of any Interest Rate Agreement with the Agent, the Collateral
Agent, any Lender or any other party acceptable to, and pursuant to
documentation in form and substance acceptable to, the Agent.
SECTION 6.14. PREPAYMENT AND DEBT DOCUMENTS. (a) Such Borrower shall
not voluntarily prepay any Debt, except the Obligations in accordance with the
terms hereof.
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(b) Such Borrower shall not amend any agreement relating to Debt other
than the Obligations in any manner which would increase the amount of principal,
interest or fees on such debt, or accelerate any payments of such Debt.
SECTION 6.15. SALE AND LEASEBACK TRANSACTIONS. Such Borrower shall
not, directly or indirectly, enter into any arrangement with any Person
providing for such Borrower to lease or rent property that any Borrower or KMC
Holdings has sold or will sell or otherwise transfer to such Person.
SECTION 6.16. 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
any 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 T, 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 6.17. MANAGEMENT AND TAX SHARING AGREEMENTS. Such Borrower
shall not amend the Management Agreement or the Tax Sharing Agreement in any
manner that would have a material adverse effect on the Lenders, the Borrowers
or the transactions contemplated hereby.
ARTICLE VII
FINANCIAL COVENANTS
Each Borrower covenants and agrees with the Agent and the Lenders that
as long as this Agreement shall remain in effect, any Commitment hereunder shall
be outstanding or the Obligations hereunder or under any of the Loan Documents
shall be unpaid, unless the Requisite Lenders shall have otherwise given prior
written consent:
SECTION 7.01. FINANCIAL COVENANTS PRIOR TO ACHIEVING POSITIVE EBITDA.
Until the earlier to occur of (i) March 31, 2002 and (ii) the date on which the
Borrowers shall have achieved positive EBITDA for all the Borrowers on a
combined basis for two consecutive fiscal quarters and a Total Leverage Ratio
equal to or less than 9:1 as determined by reference to the financial statements
submitted pursuant to SECTION 5.06:
(a) TOTAL DEBT TO CONTRIBUTED CAPITAL. The Borrowers shall not at any
time permit the ratio of the Total Debt to Contributed Capital to exceed 1.00 to
1.00.
(b) MINIMUM REVENUES. As of the last day of each fiscal quarter, the
Borrowers shall on a combined basis have revenues at least equal to 85% of the
amount projected for such date in the Milestone Plan, which amount is set forth
in ITEM 1 on ANNEX B attached hereto.
(c) EBITDA.
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(i) As of the last day of each fiscal quarter occurring on or after
the Closing Date and on or prior to June 30, 2001, the Borrowers shall not
permit the EBITDA losses for all the Borrowers on a combined basis for the
two fiscal quarters then ending to exceed the greater of (A) 115% of such
losses projected for each such date in the Milestone Plan, which amount is
set forth in ITEM 2 on ANNEX B attached hereto and (B)an amount equal to
$7,500,000 more than the aggregate amount of EBITDA losses projected for
each such date in the Milestone Plan, which latter amount is set forth in
ITEM 2 on ANNEX B attached hereto.
(ii) As of the last day of each fiscal quarter thereafter, the
Borrowers shall not permit EBITDA for all the Borrowers on a combined basis
for the two fiscal quarters then ending to be less than the greater of (A)
85% of the amount of EBITDA projected for each such date in the Milestone
Plan, which amount is set forth in ITEM 3 on ANNEX B attached hereto and
(B) an amount equal to $7,500,000 less than the aggregate amount of EBITDA
projected for each such date in the Milestone Plan, which latter amount is
set forth as ITEM 3 on ANNEX B attached hereto.
(d) CAPITAL EXPENDITURES. As of the last day of each fiscal quarter,
the Borrowers shall not permit capital expenditures on a combined, cumulative
basis beginning on the Closing Date to exceed the amount projected for each such
date in the Milestone Plan by more than $25,000,000, which amount is set forth
in ITEM 4 on ANNEX B attached hereto, unless any such excess is funded with cash
capital contributions or Qualified Intercompany Loans from KMC Holdings that are
not part of the Required Contribution.
(e) MINIMUM ACCESS LINES. As of the last day of each fiscal quarter
beginning March 31, 2000, the Borrowers shall have in place at least
seventy-five percent (75%) of the Access Lines projected for each such date in
the Milestone Plan, which amounts are set forth in ITEM 5 on Annex B attached
hereto.
SECTION 7.02. FINANCIAL COVENANTS AFTER ACHIEVING POSITIVE EBITDA. On
and after the earlier of (i) March 31, 2002, and (ii) the date on which the
Borrowers have achieved positive EBITDA on a combined basis for two consecutive
fiscal quarters and a Total Leverage Ratio equal to or less than 9:1 as
determined by reference to the financial statements submitted pursuant to
SECTION 5.06:
(a) MAXIMUM TOTAL LEVERAGE RATIO. As of the last day of each fiscal
quarter, the Borrowers shall not permit the Total Leverage Ratio to be greater
than the following:
<TABLE>
<CAPTION>
MAXIMUM TOTAL
FISCAL QUARTER ENDING LEVERAGE RATIO
<S> <C>
On or prior to December 31, 2001 9.00 to 1.00
March 31, 2002 8.00 to 1.00
June 30, 2002 6.00 to 1.00
September 30, 2002 4.00 to 1.00
December 31, 2002 4.00 to 1.00
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March 31, 2003 3.00 to 1.00
June 30, 2003 3.00 to 1.00
September 30, 2003 3.00 to 1.00
December 31, 2003 3.00 to 1.00
Last Day of each 2.00 to 1.00
Fiscal Quarter Thereafter
</TABLE>
(b) MINIMUM DEBT SERVICE COVERAGE RATIO. As of the last day of each
fiscal quarter, the Borrowers shall not permit the ratio of (1) EBITDA for the
Borrowers on a combined basis for the most recently ended six month period, to
(2) Interest Expense for the most recently ended six month period plus Principal
Payments required during the most recently ended six month period to be less
than the following:
<TABLE>
<CAPTION>
MINIMUM DEBT SERVICE
FISCAL QUARTER ENDING COVERAGE RATIO
<S> <C>
On or prior to December 31, 2001 1.15 to 1.00
March 31, 2002 - December 31, 2003 1.50 to 1.00
Last Day of each Fiscal 2.00 to 1.00
Quarter Thereafter
</TABLE>
(c) MINIMUM FIXED CHARGE COVERAGE RATIO. As of the last day of any
fiscal quarter, the Borrowers shall not permit the ratio of (1) the product of
two times the EBITDA for the Borrowers on a combined basis for the most recently
ended six month period to (2) Fixed Charges for the Borrowers (such ratio being
referred to as the "FIXED CHARGE COVERAGE RATIO") to be less than the following:
<TABLE>
<CAPTION>
MINIMUM FIXED CHARGE
FISCAL QUARTER ENDING COVERAGE RATIO
<S> <C>
January 1, 2002 - December 31, 2002 0.50 to 1.00
March 31, 2003 - June 30, 2004 0.75 to 1.00
September 30, 2004 - December 31, 2004 1.00 to 1.00
Last Day of each Fiscal 1.10 to 1.00
Quarter Thereafter
</TABLE>
(d) MAXIMUM CONSOLIDATED LEVERAGE RATIO. As of the last day of any
fiscal quarter, the Borrowers shall not permit the ratio of (1) Consolidated
Debt to (2) the product of two times the sum of EBITDA for KMC Holdings and its
Subsidiaries (excluding its Excluded Subsidiaries) on a consolidated basis for
the most recently ended six month period to be greater than the following:
<TABLE>
<CAPTION>
MAXIMUM TOTAL
FISCAL QUARTER ENDING LEVERAGE RATIO
<S> <C>
On or Prior to March 31, 2002 20.00 to 1.00
June 30, 2002 15.00 to 1.00
September 30, 2002 10.00 to 1.00
December 31, 2002 10.00 to 1.00
March 31, 2003 8.00 to 1.00
June 30, 2003 8.00 to 1.00
September 30, 2003 8.00 to 1.00
December 31, 2003 8.00 to 1.00
Last Day of Each Fiscal 6.00 to 1.00
Quarter Thereafter
</TABLE>
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ARTICLE VIII
COLLATERAL SECURITY
SECTION 8.01. COLLATERAL SECURITY. (a) To secure payment and
performance of all of the Obligations, each of KMC III, Leasing III, Telecom.com
and Services hereby grants, and each of the other Borrowers hereby reaffirms,
grants and hereby regrants, to the Collateral Agent for the benefit of the
Collateral Agent, the Agent and the Lenders, 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,
Telecommunications 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 improvements to, substitutions
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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.
SECTION 8.02. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY
INTERESTS THEREIN. Such Borrower shall execute and deliver to the Collateral
Agent for the benefit of the Collateral Agent, the Agent and the Lenders, prior
to the Closing Date, and at any time or times thereafter at the request of the
Collateral Agent, all financing statements or other documents (and pay the cost
of filing or recording the same in all public offices deemed necessary by the
Collateral Agent), as the Collateral Agent may request, in a form satisfactory
to the Collateral Agent, to perfect and keep perfected the security interest in
the Collateral granted by such Borrower to the Collateral Agent or to otherwise
protect and preserve the Collateral and the Collateral Agent's security interest
therein or to enforce the Collateral Agent's security interest in the
Collateral. Should such Borrower fail to do so, the Collateral Agent 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 THE COLLATERAL AGENT AS THE BORROWERS'
ATTORNEY-IN-FACT. Such Borrower hereby irrevocably designates, makes,
constitutes and appoints the Collateral Agent (and all persons designated by the
Collateral Agent) as such Borrower's true and lawful attorney-in-fact, and
authorizes the Collateral Agent, in such Borrower's or the Collateral Agent'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 the Collateral Agent 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 the
Collateral Agent, and open and deal with all mail addressed to such Borrower;
(ix) do all acts and things which are necessary, in the Collateral Agent'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 the Collateral Agent'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
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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 Closing Date, deliver (to the extent not previously delivered pursuant
to the Existing Agreement) to the Collateral Agent, 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 the Collateral Agent 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 the Collateral Agent's account specified in such
Restricted Account Agreement until such time as the Collection Agent receives
written notice from the Collateral Agent rescinding such instruction. Such
Borrower shall, following the occurrence and during the continuance of an Event
of Default and any subsequent request by the Collateral Agent therefor, take
such further action as the Collateral Agent may reasonably deem desirable to
effect the transfer of exclusive ownership and control of the Restricted
Accounts and all Collection Accounts to the Collateral Agent. 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 the Collateral
Agent 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 the Collateral Agent a
duly executed and delivered Restricted Account Agreement with respect to such
Collection Account. Such Borrower shall notify the Collateral Agent 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
Collateral Agent, and the Collateral Agent 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) Any Borrower shall fail to pay the principal of or interest on its
Notes 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
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(b) Any 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, 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 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 any Borrower or KMC
Holdings 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 KMC Holdings 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) Any 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 $250,000 with
respect to any Borrower or in excess of $1,000,000 with respect to KMC Holdings,
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 $250,000 with respect to any
Borrower or in excess of $1,000,000 with respect to KMC Holdings, 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 $250,000 with respect to any Borrower or in excess of
$1,000,000 with respect to KMC Holdings; or any such indebtedness in excess of
$250,000 with respect to any Borrower or in excess of $1,000,000 with respect to
KMC Holdings 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) Any 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 any Borrower or KMC
Holdings, or any Borrower or KMC Holdings takes any action to authorize any of
the foregoing matters, and in the case of any such proceeding instituted against
any Borrower or KMC Holdings (but not instituted by any 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 any Borrower or KMC
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Holdings or any substantial part of its property) shall be granted or shall
occur; or
(g) a Termination Event occurs which the Requisite Lenders in good
faith believe would subject any 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 the Requisite Lenders in good faith believe that the approval of such
waiver could subject any 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 any Borrower or any System 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 any Borrower 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, and in each case, such event is also reasonably likely to result
in a Material Adverse Effect; 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, and such
determination is reasonably likely to result in a Material Adverse Effect; 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 with respect to Collateral having an
aggregate value of $500,000 or greater shall fail to be perfected or to have its
intended priority, or any Borrower or any Affiliate thereof shall contest the
validity of any Lien granted under, or shall disaffirm its obligations under any
Loan Document; or
(l) any Borrower shall 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 unless such Borrower is contesting
such default in good faith by appropriate protest or proceedings and shall have
set aside adequate reserves in accordance with GAAP; or
(m) for any reason, any Borrower ceases to operate any System or
ceases to own any of its Governmental Approvals necessary for the continuing
operation of any System, and such cessation is reasonably likely to result in a
Material Adverse Effect; or
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(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 any 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) any Borrower 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 and such event is reasonably likely to result in a Material Adverse
Effect; or
(p) any 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 Law; or
(q) a Change of Control shall occur; or
(r) KMC Holdings shall fail to observe or perform any covenant,
condition or agreement to be observed or performed by KMC Holdings in the KMC
Holdings Guaranty or in the Pledge Agreement executed and delivered by it in
favor of the Collateral Agent; or
(s) any Borrower shall fail to observe or perform any covenant,
condition or agreement to be observed or performed by such Borrower in any
material agreement (other than a Loan Document or an agreement referred to in
SECTION 9.01(d)), such Borrower fails to cure such breach within ten (10)
Business Days after written notice thereof, and such failure is reasonably
likely to result in a Material Adverse Effect, unless such Borrower is
contesting such covenant, condition or agreement by appropriate protest or
proceedings and shall have set aside adequate reserves in accordance with GAAP.
SECTION 9.02. TERMINATION OF COMMITMENT; ACCELERATION. Upon the
occurrence and at any time during the continuance of any Event of Default, the
Agent shall upon direction from the Requisite Lenders:
(a) by notice to the Borrowers, terminate Lenders' Commitment to make
Loans hereunder; or
(b) 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.
SECTION 9.03. WAIVERS. Demand, presentment, protest and notices of
nonpayment, protest, dishonor and acceptance are hereby waived by each Borrower.
Each Borrower also waives the benefit of all valuation, appraisal and exemption
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laws and the posting of any bond required of the Collateral Agent, the Agent or
any Lender in connection with any judicial process to realize on the Collateral,
to enforce any judgment or other court order entered in favor of the Collateral
Agent, the Agent or any Lender or to enforce by specific performance, temporary
restraining order, or preliminary or permanent injunction, this Agreement or any
other Loan Documents. Each Borrower waives the right, if any, to the benefit of,
or to direct the application of, any Collateral. Each Borrower hereby
acknowledges that none of the Collateral Agent, the Agent or any Lender has any
obligation to resort to any Collateral or make claim against any other Person
before seeking payment or performance from any Borrower.
SECTION 9.04. RIGHTS AND REMEDIES GENERALLY. If an Event of Default
occurs and is continuing, the Agent and the Collateral Agent 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 the Collateral Agent or the Agent after the
occurrence of an Event of Default may be for cash, credit or any combination
thereof, and the Collateral Agent or the Agent 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. The Agent or the Collateral
Agent, may, in its sole discretion, cause the Collateral to remain on the
premises of any Borrower, at the expense of the Borrowers, pending sale or other
disposition of the Collateral. The Agent or the Collateral Agent shall have the
right to conduct such sales on the premises of any Borrower, at the expense of
the Borrowers, or elsewhere, on such occasion or occasions as it may see fit.
SECTION 9.05. ENTRY UPON PREMISES AND ACCESS TO INFORMATION. If an
Event of Default occurs and is continuing, the Agent and the Collateral Agent
shall have the right to enter upon the premises of any 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 the Agent or the Collateral Agent or
any agent of the Agent or the Collateral Agent, for such time as the Agent or
the Collateral Agent may desire, in order effectively to collect or liquidate
the Collateral, and/or the Agent or the Collateral Agent may require any
Borrower to assemble the Collateral and make it available to the Agent or the
Collateral Agent at a place or places to be designated by the Agent or the
Collateral Agent. If an Event of Default occurs and is continuing, the Agent or
the Collateral Agent shall have the right to obtain access to any 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 the Agent or the Collateral Agent deems appropriate.
SECTION 9.06. SALE OR OTHER DISPOSITION OF COLLATERAL BY THE AGENT.
Any notice required to be given by the Agent or the Collateral Agent of a sale,
lease or other disposition or other intended action by the Agent or the
Collateral Agent 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 11.01 below, at least ten
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days prior to such proposed action shall constitute fair and reasonable notice
to the Borrowers of any such action. The net proceeds realized by the Agent or
the Collateral Agent 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 the Agent or
the Collateral Agent in connection therewith, shall be applied as provided
herein toward satisfaction of the Obligations. The Agent or the Collateral
Agent, as applicable, 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 the
Collateral Agent's security interest in the Collateral. The Borrowers agree that
the Collateral Agent has no obligation to preserve rights to the Collateral
against any other parties. The Agent and the Collateral Agent are 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 the Agent's and the Collateral Agent's
benefit until the Obligations are paid in full.
SECTION 9.07. GOVERNMENTAL APPROVALS. In connection with the
enforcement by the Agent or the Collateral Agent 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 the Agent or the Collateral Agent, any
receiver referred to 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
the Agent or the Collateral Agent 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 the Agent or the
Collateral Agent, 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 the Agent or the Collateral Agent
reasonably deems necessary or desirable. Each Borrower agrees that the Agent or
the Collateral Agent 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 the Agent and the Collateral Agent
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 ANY LENDER, THE
AGENT OR THE COLLATERAL AGENT THAT MAY REQUIRE FCC, ANY PUC OR ANY OTHER
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GOVERNMENTAL AUTHORITY APPROVAL SHALL BE SUBJECT TO OBTAINING SUCH APPROVAL.
PENDING THE RECEIPT OF ANY FCC, ANY PUC OR ANY OTHER GOVERNMENTAL AUTHORITY
APPROVAL, NO BORROWER SHALL DO ANYTHING TO DELAY, HINDER, INTERFERE OR OBSTRUCT
THE EXERCISE OF THE AGENT'S OR THE COLLATERAL AGENT'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, the Agent or the Collateral
Agent 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 the Agent or the Collateral Agent 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 any Borrower's Governmental
Approvals to the receiver or trustee.
SECTION 9.09. RIGHT OF SETOFF. In addition to any rights now or
hereafter granted under applicable law and not by way of limitation of any such
rights, upon the occurrence and during the continuance of any Event of Default,
each Lender and each holder of any Note is hereby authorized at any time or from
time to time, without notice to any Borrower or to any other Person, any such
notice being hereby expressly waived, to set off and to appropriate and to apply
any and all balances held by it at any of its offices for the account of any
Borrower (regardless of whether such balances are then due to such Borrower) and
any other properties or assets any time held or owing by that Lender or that
holder to or for the credit or for the account of any Borrower against and on
account of any of the Obligations which are not paid when due. Any Lender or
holder of any Note exercising a right to set off or otherwise receiving any
payment on account of the Obligations in excess of its Pro Rata Share thereof
shall purchase for cash (and the other Lenders or holders shall sell) such
participation in each such other Lender's or holder's Pro Rata Share of the
Obligations as would be necessary to cause such Lender to share the amount so
set off or otherwise received with each other Lender or holder in accordance
with their respective Pro Rata Shares. Each Borrower agrees, to the fullest
extent permitted by law, that (a) any Lender or holder may exercise its right to
set off with respect to amounts in excess of its Pro Rata Share of the
Obligations and may sell participations in such amount so set off to other
Lenders and holders and (b) any Lender or holder so purchasing a participation
in the Loans made or other Obligations held by other Lenders or holders may
exercise all rights of set-off, bankers' lien, counterclaim or similar rights
with respect to such participation as fully as if such Lender or holder were a
direct holder of the Loans and the other Obligations in the amount of such
participation. Notwithstanding the foregoing, if all or any portion of the
set-off amount or payment otherwise received is thereafter recovered from the
Lender that has exercised the right of set-off, the purchase of participations
by that Lender shall be rescinded and the purchase price restored without
interest. Each Borrower hereby agrees that the foregoing provisions are intended
to be 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).
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ARTICLE X
THE AGENT AND THE COLLATERAL AGENT
SECTION 10.01. APPOINTMENT OF AGENT. (a) First Union National Bank is
hereby appointed to act as contractual representative on behalf of all Lenders
under this Agreement and the other Loan Documents. The Agent agrees to act as
such contractual representative upon the express conditions contained in this
ARTICLE X. The provisions of this SECTION 10.01 are solely for the benefit of
the Agent and the Lenders and no Borrower or any other Person shall have any
rights as a third party beneficiary of any of the provisions hereof. In
performing its functions and duties under this Agreement and the other Loan
Documents, the Agent shall act solely as an agent of the Lenders and does not
assume and shall not be deemed to have assumed any obligation toward or
relationship of agency or trust with or for any Borrower or any other Person.
The Agent shall have no duties or responsibilities except for those expressly
set forth in this Agreement and the other Loan Documents. Notwithstanding the
use of the defined term "Agent", it is expressly understood and agreed that the
Agent shall not have any fiduciary responsibilities to any Lender by reason of
this Agreement and that the Agent is merely acting as the representative of the
Lenders with only those duties as are expressly set forth in this Agreement and
the other Loan Documents. In its capacity as the Lenders' contractual
representative, the Agent (i) does not assume any fiduciary duties to any of the
Lenders, (ii) is a "representative" of the Lenders within the meaning of Section
9-105 of the UCC and (iii) is acting as an independent contractor, the rights
and duties of which are limited to those expressly set forth in this Agreement
and the other Loan Documents. Each of the Lenders agrees to assert no claim
against the Agent on any agency theory or any other theory of liability for
breach of fiduciary duty, all of which claims each Lender waives. Neither the
Agent nor any of its Affiliates nor any of their respective officers, directors,
employees, agents or representatives shall be liable to any Lender for any
action taken or omitted to be taken by it hereunder or under any other Loan
Document, or in connection herewith or therewith, except for damages caused by
its or their own gross negligence or willful misconduct.
(b) If the Agent shall request instructions from all Lenders,
Requisite Lenders, Requisite Revolving Lenders or all affected Lenders with
respect to any act or action (including failure to act) in connection with this
Agreement or any other Loan Document, then the Agent shall be entitled to
refrain from such act or taking such action unless and until the Agent shall
have received instructions from all Lenders, Requisite Lenders, Requisite
Revolving Lenders or all affected Lenders, as the case may be, and the Agent
shall not incur liability to any Person by reason of so refraining. The Agent
shall be fully justified in failing or refusing to take any action hereunder or
under any other Loan Document (a) if such action would, in the opinion of the
Agent, be contrary to law or the terms of this Agreement or any other Loan
Document, (b) if such action would, in the opinion of the Agent, expose the
Agent to liabilities beyond the limits of this Agreement or (c) if the Agent
shall not first be indemnified to its satisfaction against any and all liability
and expense which may be incurred by it by reason of taking or continuing to
take any such action. Without limiting the foregoing, no Lender shall have any
right of action whatsoever against the Agent as a result of the Agent acting or
refraining from acting hereunder or under any other Loan Document in accordance
with the instructions of all Lenders, Requisite Lenders, Requisite Revolving
Lenders or all affected Lenders, as applicable.
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SECTION 10.02. AGENT'S RELIANCE, ETC. Neither the Agent nor any of its
Affiliates nor any of their respective directors, officers, agents or employees
shall be liable for any action taken or omitted to be taken by it or them under
or in connection with this Agreement or the other Loan Documents, except for
damages caused by its or their own gross negligence or willful misconduct.
Without limitation of the generality of the foregoing, the Agent: (a) may treat
the payee of any Note as the holder thereof until the Agent receives written
notice of the assignment or transfer thereof signed by such payee and in form
satisfactory to the Agent; (b) may consult with legal counsel, independent
public accountants and other experts selected by it and shall not be liable for
any action taken or omitted to be taken in good faith by it in accordance with
the advice of such counsel, accountants or experts; (c) makes no warranty or
representation to any Lender and shall not be responsible to any Lender for any
statements, warranties or representations made in or in connection with this
Agreement or the other Loan Documents; (d) shall not have any duty to ascertain
or to inquire as to the performance or observance of any of the terms, covenants
or conditions of this Agreement or the other Loan Documents on the part of any
Borrower or to inspect the Collateral (including the books and records); (e)
shall not be responsible to any Lender for the due execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement or
the other Loan Documents or any other instrument or document furnished pursuant
hereto or thereto; and (f) shall incur no liability under or in respect of this
Agreement or the other Loan Documents by acting upon any notice, consent,
certificate or other instrument or writing (which may be by telecopy, telegram,
cable or telex) believed by it to be genuine and signed or sent by the proper
party or parties.
SECTION 10.03. FUNB AND AFFILIATES. With respect to its Commitments
hereunder, FUNB shall have the same rights and powers under this Agreement and
the other Loan Documents as any other Lender and may exercise the same as though
it were not the Agent; and the term "Lender" or "Lenders" shall, unless
otherwise expressly indicated, include FUNB in its individual capacity. FUNB and
its Affiliates may lend money to, invest in, and generally engage in any kind of
business with, any Borrower, any of its Affiliates and any Person who may do
business with or own securities of any Borrower or any such Affiliate, all as if
FUNB were not the Agent and without any duty to account therefor to Lenders.
FUNB and its Affiliates may accept fees and other consideration from any
Borrower for services in connection with this Agreement or otherwise without
having to account for the same to Lenders. FUNB may also purchase or hold Equity
Interests or warrants in KMC Holdings or any Borrower and make subordinated
loans to any Borrower. Each Lender acknowledges the potential conflict of
interest between FUNB as a Lender holding disproportionate interests in the
Loans, FUNB as a member or subordinated debt holder, of the Borrower and FUNB as
Agent.
SECTION 10.04. LENDER CREDIT DECISION. Each Lender acknowledges that
it has, independently and without reliance upon the Agent or any other Lender
and based on the financial information given it by the Borrowers and such other
documents and information as it has deemed appropriate, made its own credit and
financial analysis of the Borrowers and its own decision to enter into this
Agreement. Each Lender also acknowledges that it will, independently and without
reliance upon the Agent or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement. Each
Lender acknowledges the potential conflict of interest of each other Lender as a
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result of Lenders holding disproportionate interests in the Loans, and expressly
consents to, and waives any claim based upon, such conflict of interest.
SECTION 10.05. INDEMNIFICATION. Each of the Lenders agrees to
indemnify the Agent (to the extent not reimbursed by the Borrowers and without
limiting the obligations of Borrowers hereunder), ratably according to their
respective Pro Rata Shares, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever which may be imposed
on, incurred by, or asserted against the Agent in any way relating to or arising
out of this Agreement or any other Loan Document or any action taken or omitted
by the Agent in connection therewith; PROVIDED, HOWEVER, that no Lender shall be
liable for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements resulting
from the Agent's gross negligence or willful misconduct. Without limiting the
foregoing, each Lender agrees to reimburse the Agent promptly upon demand for
its ratable share of any out-of-pocket expenses (including counsel fees)
incurred by the Agent in connection with the preparation, execution, delivery,
administration, modification, amendment or enforcement (whether through
negotiations, legal proceedings or otherwise) of, or legal advice in respect of
rights or responsibilities under, this Agreement and each other Loan Document,
to the extent that the Agent is not reimbursed for such expenses by the
Borrowers.
SECTION 10.06. SUCCESSOR AGENT. The Agent may resign at any time by
giving not less than thirty (30) days' prior written notice thereof to Lenders
and the Borrowers. Upon any such resignation, the Requisite Lenders shall have
the right to appoint a successor Agent. If no successor Agent shall have been so
appointed by the Requisite Lenders and shall have accepted such appointment
within 30 days after the resigning Agent's giving notice of resignation, then
the resigning Agent may, on behalf of Lenders, appoint a successor Agent, which
shall be a Lender, if a Lender is willing to accept such appointment, or
otherwise shall be a commercial bank or financial institution or a subsidiary of
a commercial bank or financial institution if such commercial bank or financial
institution is organized under the laws of the United States of America or of
any State thereof and has a combined capital and surplus of at least
$300,000,000. If no successor Agent has been appointed pursuant to the
foregoing, by the 30th day after the date such notice of resignation was given
by the resigning Agent, such resignation shall become effective and the
Requisite Lenders shall thereafter perform all the duties of Agent hereunder
until such time, if any, as the Requisite Lenders appoint a successor Agent as
provided above. Any successor Agent appointed by the Requisite Lenders hereunder
shall be subject to the approval of Borrowers, such approval not to be
unreasonably withheld or delayed; PROVIDED that such approval shall not be
required if a Default or an Event of Default shall have occurred and be
continuing. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall succeed to and become vested with
all the rights, powers, privileges and duties of the resigning Agent. Upon the
earlier of the acceptance of any appointment as Agent hereunder by a successor
Agent or the effective date of the resigning Agent's resignation, the resigning
Agent shall be discharged from its duties and obligations under this Agreement
and the other Loan Documents, except that any indemnity rights or other rights
in favor of such resigning Agent shall continue. After any resigning Agent's
resignation hereunder, the provisions of this SECTION 10.06 shall inure to its
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benefit as to any actions taken or omitted to be taken by it while it was Agent
under this Agreement and the other Loan Documents.
SECTION 10.07. PAYMENTS; NON-FUNDING LENDERS; INFORMATION; ACTIONS IN
CONCERT.
(a) LOANS; PAYMENTS. Whenever the Agent receives a payment of
principal, interest, fee or premium (if any) or other payment, or whenever the
Agent makes an application of funds, in connection with the Loans or the Notes
(including, without limitation, any payment or application from any Collateral),
the Agent will on the date such payment is received or applied, if on or prior
to 11:00 a.m. (Eastern time) on such date, or otherwise on the next Business
Day, pay over to each Lender as instructed by such Lender in writing, an amount
equal to such Lender's Pro Rata Share of such payment provided that such Lender
has funded all Loans required to be made by it and has purchased all
participation required to be purchased by it under this Agreement and the other
Loan Documents as of such date. To the extent that any Lender (a "NON-FUNDING
LENDER") has failed to fund all such payments and Loans or failed to fund the
purchase of all such participation, the Agent shall be entitled to set off the
funding short-fall against that Non-Funding Lender's Pro Rata Share of all
payments received from the Borrowers. All payments by Agent shall be made by
wire transfer to such Lender's account (as specified by such Lender) not later
than 2:00 p.m. (Eastern time) on the applicable Business Day.
(b) RETURN OF PAYMENTS. (i) If Agent pays an amount to a Lender under
this Agreement in the belief or expectation that a related payment has been or
will be received by the Agent from the Borrowers and such related payment is not
received by Agent, then the Agent will be entitled to recover such amount from
such Lender on demand without set-off, counterclaim or deduction of any kind.
(ii) If the Agent determines at any time that any amount received by
the Agent under this Agreement must be returned to any Borrower or paid to
any other Person pursuant to any insolvency law or otherwise, then,
notwithstanding any other term or condition of this Agreement or any other
Loan Document, the Agent will not be required to distribute any portion
thereof to any Lender. In addition, each Lender will repay to Agent on
demand any portion of such amount that the Agent has distributed to such
Lender, together with interest at such rate, if any, as the Agent is
required to pay to any Borrower or such other Person, without set-off,
counterclaim or deduction of any kind.
(c) NON-FUNDING LENDERS. The failure of any Non-Funding Lender to make
any portion of its Loans or any payment required by it hereunder on the date
specified therefor shall not relieve any other Lender (each such other Lender,
an "OTHER LENDER") of its obligations to make any such Loan on such date, but
neither any Other Lender nor the Agent nor the Collateral Agent shall be
responsible for the failure of any Non-Funding Lender to make any Loan.
Notwithstanding anything set forth herein to the contrary, a Non-Funding Lender
shall not have any voting or consent rights under or with respect to any Loan
Document or constitute a "Lender" (or be included in the calculation of
"Requisite Lenders" or "Requisite Revolving Lenders" hereunder) for any voting
or consent rights under or with respect to any Loan Document.
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(d) DISSEMINATION OF INFORMATION. The Agent will use reasonable
efforts to provide Lenders with any notice of Default or Event of Default
received by the Agent from, or delivered by the Agent to, the Borrowers, with
notice of any Event of Default of which the Agent has actually become aware and
with notice of any action taken by the Agent following any Event of Default;
PROVIDED, however, that the Agent shall not be liable to any Lender for any
failure to do so, except to the extent that such failure is attributable to the
Agent's gross negligence or willful misconduct. Lenders acknowledge that the
Borrowers are required to provide financial statements and other documents to
Lenders pursuant to this Agreement and agree that the Agent shall have no duty
to provide the same to Lenders.
(e) ACTIONS IN CONCERT. Anything in this Agreement to the contrary
notwithstanding, each Lender hereby agrees with each other Lender that no Lender
shall take any action to protect or enforce its rights arising out of this
Agreement or the Notes (including exercising any rights of set-off) without
first obtaining the prior written consent of the Agent, the Collateral Agent and
Requisite Lenders, it being the intent of Lenders that any such action to
protect or enforce rights under this Agreement and the Notes shall be taken in
concert and at the direction or with the consent of Agent and the Collateral
Agent.
SECTION 10.08. COLLATERAL MATTERS.
(a) The Lenders hereby irrevocably authorize the Collateral Agent, at
its option and in its reasonable business judgment, to release any Lien upon any
Collateral (i) upon the termination of the Commitments and payment and
satisfaction of all Loans and all other Obligations and which the Collateral
Agent has been notified in writing are then due and payable; (ii) constituting
property being sold or disposed of if the applicable Borrower certifies to the
Collateral Agent that the sale or disposition is made in compliance with SECTION
6.03 (and the Collateral Agent may rely conclusively on any such certificate,
without further inquiry); or (iii) constituting property leased to the
applicable Borrower under a lease which has expired or been terminated in a
transaction permitted under this Agreement or which will expire imminently and
which has not been, and is not intended by such Borrower to be, renewed or
extended and with respect to which such Borrower has not exercised any purchase
option. Except as provided above, the Collateral Agent will not release any of
the Liens without the prior written authorization of the Requisite Lenders;
PROVIDED that the Collateral Agent may not release the Liens on Collateral
valued in the aggregate in excess of $500,000 without the prior written
authorization of the Requisite Lenders and may not release all or substantially
all of the Collateral without the consent of the Lenders. Upon request by the
Collateral Agent or the Borrowers at any time, the Lenders will confirm in
writing the Collateral Agent's authority to release any Liens upon particular
types or items of Collateral pursuant to this SECTION 10.08(a).
(b) Upon receipt by the Collateral Agent of any authorization required
pursuant to SECTION 10.08(a) from the Requisite Lenders or Lenders, as
applicable, of the Collateral Agent's authority to release any Liens upon
particular types or items of Collateral, and upon at least five (5) Business
Days' prior written request by the applicable Borrower, and provided that no
Event of Default has occurred and is then continuing, the Collateral Agent shall
(and is hereby irrevocably authorized by the Lenders to) execute such documents
as may be necessary to evidence the release of the Liens upon such Collateral;
PROVIDED, HOWEVER, that (i) the Collateral Agent shall not be required to
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execute any such document on terms which, in the Collateral Agent's opinion,
would expose the Collateral Agent to liability or create any obligation or
entail any consequence other than the release of such Liens without recourse or
warranty, and (ii) such release shall not in any manner discharge, affect or
impair the Obligations or any Liens (other than those expressly being released)
upon (or obligations of the applicable Borrower in respect of) all interests
retained by the applicable Borrower, including (without limitation) the proceeds
of any sale, all of which shall continue to constitute part of the Collateral.
(c) The Collateral Agent shall have no obligation whatsoever to any of
the Lenders to assure that the Collateral exists or is owned by any Borrower or
is cared for, protected or insured or has been encumbered, or, other than a duty
to act without recklessness, willful misconduct or gross (but not mere)
negligence, that the Liens have been properly or sufficiently or lawfully
created, perfected, protected or enforced or are entitled to any particular
priority, or to exercise at all or in any particular manner or under any duty of
care, disclosure or fidelity, or to continue exercising, any of the rights,
authorities and powers granted or available to the pursuant to this SECTION
10.08 or pursuant to any of the Loan Documents, it being understood and agreed
that in respect of the Collateral, or any act, omission or event related
thereto, the Collateral Agent may act in any manner it may deem appropriate, in
its reasonable business judgment, given the Collateral Agent's own interest in
the Collateral in its capacity as one of the Lenders and that the Collateral
Agent shall have no other duty or liability whatsoever to any Lender as to any
of the foregoing.
SECTION 10.09. AGENCY FOR PERFECTION. Each Lender hereby appoints each
other Lender as agent for the purpose of perfecting the Lenders' security
interest in assets which, in accordance with Article 9 of the UCC can be
perfected only by possession. Should any Lender (other than the Collateral
Agent) obtain possession of any such Collateral, such Lender shall notify the
Collateral Agent thereof, and, promptly upon the Collateral Agent's request
therefor shall deliver such Collateral to the Collateral Agent.
SECTION 10.10. CONCERNING THE COLLATERAL AND THE RELATED LOAN
DOCUMENTS AND THE COLLATERAL AGENT. (a) Each Lender authorizes and directs the
Collateral Agent to enter into this Agreement and the other Loan Documents
relating to the Collateral, for the ratable benefit of the Lenders. Each Lender
agrees that any action taken by the Collateral Agent or Requisite Lenders in
accordance with the terms of this Agreement or the other Loan Documents relating
to the Collateral, and the exercise by the Collateral Agent or the Requisite
Lenders of their respective powers set forth therein or herein, together with
such other powers that are reasonably incidental thereto, shall be binding upon
all of the Lenders.
(b) The Collateral Agent with respect to the administration of the
Collateral shall have the same rights, obligations and status as the Agent as
are set forth in SECTION 10.01, 10.02, 10.03, 10.04, 10.05, and 10.06 above.
ARTICLE XI
MISCELLANEOUS
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SECTION 11.01. 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 telecopy communications equipment of the sending party, delivered by such
equipment) addressed, if to the Borrowers, at KMC Telecom Inc., 1545 Route 206,
Suite 300, Bedminster, NJ 07921; Attention: President; (telecopy no. (908)
719-8775, confirmation no. (908) 470-2200) 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), if to the Agent, at First
Union National Bank, Communications/Media Finance-PA4829, 1339 Chestnut Street,
Philadelphia, PA 19107, Attention: Elizabeth Elmore (telecopy no. (215)
786-7721, confirmation no. (215) 786-4321), and if to the Collateral Agent, at
Newcourt Commercial Finance Corporation, c/o The CIT Group, Inc. - Structured
Finance Group, Two Gatehall Drive, First Floor, Parsippany, NJ 07054, Attention:
Media and Communications, Vice President-Credit (telecopy no. (973) 355-7643,
confirmation no. (973) 355-7630), with copies to Newcourt Commercial Finance
Corporation, c/o The CIT Group, Inc. - Structured Finance Group, Two Gatehall
Drive, First Floor, Parsippany, NJ 07054, Attention: Vice President - Credit
(telecopy no. (973) 355-7641, confirmation no. (973) 355-7630) and Attention:
Vice President - Legal (telecopy no. (973) 355-7645, confirmation no. (973)
355-7609). 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 telecopy 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 the Agent or the Collateral Agent may
act upon any notice, consent, certificate, cable, telex or other instrument or
writing believed by the Agent or the Collateral Agent to be genuine, that the
Agent or the Collateral Agent may consult with legal counsel, selected by the
Agent or the Collateral Agent and shall not be liable to any Borrower for any
action taken or omitted to be taken in good faith by Lender in accordance with
the advice of such counsel.
SECTION 11.02. NO WAIVERS; AMENDMENTS. (a) No failure or delay of the
Agent, the Collateral Agent or any 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 any
Borrower therefrom shall in any event be effective unless the same shall be in
writing and signed by the Agent and the Requisite Lenders (or, if applicable,
all Lenders), 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
any Borrower in any case shall entitle any Borrower to any other or further
notice or demand in similar or other circumstances.
(b) Subject to the provisions of this SECTION 11.02(b), the Requisite
Lenders (or the Agent with the consent in writing of the Requisite Lenders) and
the Borrowers may enter into agreements supplemental hereto for the purpose of
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adding or modifying any provisions to the Loan Documents or changing in any
manner the rights of the Lenders or the Borrowers hereunder or waiving any Event
of Default or Default hereunder; PROVIDED, any Interest Rate Agreement which
constitutes a Loan Document may be amended or modified solely with the consent
of the parties thereto; PROVIDED, FURTHER, HOWEVER, that no such supplemental
agreement shall, without the consent of each Lender affected thereby:
(i) Postpone or extend the Revolving Credit Commitment Termination
Date, the maturity date for the Loans or any other date fixed for any
payment of principal of, or interest on, the Loans or any fees or other
amounts payable to such Lender except with respect to (A) any modifications
of the provisions relating to prepayments of Loans and other Obligations
and (B) a waiver of the application of the default rate of interest
pursuant to SECTION 2.05(b) hereof.
(ii) Reduce the principal amount of any Loans, or reduce the rate or
extend the time of payment of interest or fees thereon.
(iii) Reduce the percentage specified in the definition of Requisite
Lenders or Requisite Revolving Lenders or any other percentage of Lenders
specified to be the applicable percentage in this Agreement to act on
specified matters or amend the definition of "Pro Rata Share".
(iv) Increase the amount of any Commitment of any Lender hereunder or
increase or decrease any Lender's Pro Rata Share.
(v) Permit any Borrower to assign its rights under this Agreement.
(vi) Release all or substantially all of the Collateral.
(vii) Amend this SECTION 11.02(b).
No amendment of any provision of this Agreement relating to the Agent or the
Collateral Agent shall be effective without the written consent of the Agent or
the Collateral Agent, as applicable.
SECTION 11.03. 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 YORK WITHOUT GIVING EFFECT TO ANY CONFLICTS OF
LAWS PRINCIPLES. THE BORROWERS, THE AGENT, THE COLLATERAL AGENT AND THE LENDERS
CONSENT TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED IN THE
CITY AND STATE OF NEW YORK AND WAIVE ANY OBJECTION RELATING TO IMPROPER VENUE OR
FORUM NON CONVENIENS TO THE CONDUCT OF ANY PROCEEDING BY SUCH COURT.
SECTION 11.04. EXPENSES. The Borrowers will pay, and have joint and
several liability for, all documented out-of-pocket third-party expenses
(including in each case all reasonable attorneys' and paralegals' fees and
related expenses and costs), (i) incurred by the Agent, the Collateral Agent and
the Documentation Agent in connection with the negotiation, preparation and
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execution of the Loan Documents (whether or not the transactions contemplated
hereby shall be consummated), subject, however, to the limitations set in those
certain letters dated September 25, 1998 between KMC Holdings and the Agent, and
KMC Holdings and the Documentation Agent, with respect to the fees and expenses
of counsel for the Agent and the Documentation Agent, (ii) incurred by the
Agents, in connection with the administration of the Loan Documents, and the
creation, perfection, priority and protection of the Liens in the Collateral,
and (iii) incurred by any Agent or any Lender in connection with the enforcement
of the rights of any Agent or any Lender in connection with this Agreement, any
other Loan Documents or the Collateral, or any restructuring or workout of this
Agreement or the other Loan Documents.
SECTION 11.05. 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 the Agent, the Collateral
Agent and the Lenders; therefore, such Borrower agrees that the Agent or the
Collateral Agent, if it so requests, shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages.
SECTION 11.06. INDEMNIFICATION; LIMITATION OF LIABILITY; LUCENT
RELATIONSHIPS. (a) The Borrowers jointly and severally agree to protect,
indemnify and hold harmless the Agent, the Collateral Agent each Lender and each
of their respective officers, affiliates, directors, employees, attorneys,
accountants, consultants, representatives and agents (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 the Agent, the
Collateral Agent or any Lender of any obligations due or past due under any
contract or agreement to which any 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 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 in
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 the Agent, the Collateral Agent
or the Lenders contained herein, the making of Loans, the management of such
Loans or the Collateral (including any liability under Environmental Laws) 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 no Borrower shall have any 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
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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 the Agent, the Collateral Agent, any
Lender or any of their respective affiliates, directors, officers, employees,
agents, attorneys, accountants, representatives or consultants 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.
(c) The Borrowers agree not to, and hereby irrevocably waive any right
to, (i) assert in any action or proceeding relating to any of the Loan Documents
or the transactions contemplated thereby, any claim, counterclaim, cross claim
or defense arising from any act or omission of Lucent other than in Lucent's
capacity as a Lender under the Loan Documents, and (ii) assert any right of
setoff in lieu of making payment under the Loan Documents arising from any act
or omission of Lucent other than in Lucent's capacity as a Lender under the Loan
Documents.
SECTION 11.07. SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. All
warranties and representations made by any 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 11.16, the indemnification obligations
of each Borrower in SECTION 11.06, and to the extent the second sentence of
SECTION 11.13 is applicable, all covenants of each Borrower, survive the
repayment of the Obligations.
SECTION 11.08. SUCCESSORS AND ASSIGNS; ASSIGNMENTS; PARTICIPATIONS.
(a) GENERAL. The terms and provisions of the Loan Documents shall be
binding upon and inure to the benefit of the Borrowers, the Agent, the
Collateral Agent and the Lenders and their respective successors and assigns,
except that (i) no Borrower shall have any right to assign its rights or
obligations under the Loan Documents and (ii) any assignment by any Lender must
be made in compliance with SUBSECTION (c) below. With respect to any Borrower,
successors and assigns shall include, without limitation, any receiver, trustee
or debtor-in-possession of or for such Borrower. Notwithstanding the foregoing,
any Lender may at any time, without the consent of the Borrowers or the Agent,
assign all or any portion of its rights under this Agreement and its Notes to a
Federal Reserve Bank or to an affiliate of such Lender or as collateral security
for any loan or financing or in connection with any securitization or other
similar transaction; PROVIDED, HOWEVER, that no such assignment shall release
the transferor Lender from its obligations hereunder. The Agent shall be
entitled to utilize its Register to determine the payee of any Note for all
purposes hereof. Any request, authority or consent of any Person, who at the
time of making such request or giving such authority or consent is the holder of
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any Note, shall be conclusive and binding on any subsequent holder, transferee
or assignee of such Note or of any Note or Notes issued in exchange therefor.
(b) Participations.
(i) Subject to the terms set forth in this Section 11.08(b), any
Lender may, in the ordinary course of its business and in accordance with
applicable law, at any time sell to one or more banks or other entities
("Participants") participating interests in any Loan owing to such Lender,
any Note held by such Lender, any Commitment of such Lender or any other
interest of such Lender under the Loan Documents on a pro rata or non-pro
rata basis in an aggregate principal amount of at least $5,000,000. Notice
of such participation to the Agent shall be required prior to any
participation becoming effective with respect to a Participant which is not
a Lender or an Affiliate thereof. In the event of any such sale by a Lender
of participating interests to a Participant, such Lender's obligations
under the Loan Documents shall remain unchanged, such Lender shall remain
solely responsible to the other parties hereto for the performance of such
obligations, such Lender shall remain the holder of any such Note for all
purposes under the Loan Documents, such Lender shall be solely responsible
for any withholding taxes or any filing or reporting requirements in
connection therewith relating to such Participant, all amounts payable by
the Borrowers under this Agreement shall be determined as if such Lender
had not sold such participating interests, and the Borrowers and the Agent
shall continue to deal solely and directly with such Lender in connection
with such Lender's rights and obligations under the Loan Documents except
that, for purposes of Section 2.13 hereof, the Participants shall be
entitled to the same rights as if they were Lenders, provided that no
Participant shall be entitled to receive any greater amount pursuant to
Section 2.13 than such Lender would have been entitled to receive in
respect of the amount of the participation transferred to such Participant
had no transfer occurred.
(ii) Each Lender shall retain the sole right to approve, without the
consent of any Participant, any amendment, modification or waiver of any
provision of the Loan Documents other than any amendment, modification or
waiver with respect to any Loan or Commitment in which such Participant has
an interest which forgives principal, interest or fees or reduces the
interest rate or fees payable pursuant to the terms of this Agreement with
respect to any such Loan or Commitment, postpones any date fixed for any
regularly-scheduled payment of principal of, or interest or fees on, any
such Loan or Commitment, or releases all or substantially all of the
Collateral, if any, securing any such Loan.
(iii) The Borrowers agree that each Participant shall be deemed to
have the right of setoff provided in SECTION 9.09 hereof in respect of its
participating interest in amounts owing under the Loan Documents to the
same extent as if the amount of its participating interest were owing
directly to it as a Lender under the Loan Documents, PROVIDED that each
Lender shall retain the right of setoff provided in SECTION 9.09 hereof
with respect to the amount of participating interests sold to each
Participant except to the extent such Participant exercises its right of
setoff. The Lenders agree to share with each Participant, and each
Participant, by exercising the right of setoff provided in SECTION 9.09
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hereof, agrees to share with each Lender, any amount received pursuant to
the exercise of its right of setoff, such amounts to be shared in
accordance with SECTION 9.09 as if each Participant were a Lender.
(c) Assignments.
(i) Any Lender may, in the ordinary course of its business and in
accordance with applicable law, at any time assign to one or more banks or
other entities ("PURCHASERS") all or a portion of its rights and
obligations under this Agreement (including, without limitation, its
Commitment and the Loans owing to it hereunder) in accordance with the
provisions of this SECTION 11.08(c). Each assignment shall be of a
constant, and not a varying, ratable percentage of all of the assigning
Lender's rights and obligations under this Agreement. Such assignment shall
be evidenced by an Assignment Agreement substantially in the form of
EXHIBIT O attached hereto and shall not be permitted hereunder unless such
assignment is either for all of such Lender's rights and obligations under
the Loan Documents or, for Loans and Commitments in an aggregate principal
amount equal to the lesser of $5,000,000 (which minimum amount may be
waived by the Requisite Lenders after the occurrence of a Default) and such
Lender's Commitment Amount.
(ii) Upon (i) delivery to the Agent of a notice of assignment (a
"NOTICE OF ASSIGNMENT"), together with any consent required hereunder, and
(ii) payment of a $3,500 processing fee to the Agent for processing such
assignment if such assignment is to a Person which is not an affiliate of
the assigning Lender, such assignment shall become effective on the
effective date specified in such Notice of Assignment. The assigning Lender
shall be obligated to reimburse the Agent for all other costs and expenses
associated with the preparation and execution of such assignment (including
reasonable attorneys' fees arising out of such preparation and execution of
such assignment). The Notice of Assignment shall contain a representation
by the Purchaser to the effect that none of the consideration used to make
the purchase of the Commitment and Loans under the applicable assignment
agreement are "plan assets" as defined under ERISA and that the rights and
interests of the Purchaser in and under the Loan Documents will not be
"plan assets" under ERISA. On and after the effective date of such
assignment, such Purchaser, if not already a Lender, shall for all purposes
be a Lender party to this Agreement and any other Loan Documents executed
by the Lenders and shall have all the rights and obligations of a Lender
under the Loan Documents, to the same extent as if it were an original
party hereto, and no further consent or action by the Borrowers, the
Lenders or the Agent shall be required to release the transferor Lender
with respect to the percentage of the aggregate Commitment and Loans
assigned to such Purchaser. Upon the consummation of any assignment to a
Purchaser pursuant to this SECTION 11.08(C)(ii), the transferor Lender, the
Agent and the Borrowers shall make appropriate arrangements so that
replacement Notes are issued to such transferor Lender and new Notes or, as
appropriate, replacement Notes, are issued to such Purchaser, in each case
in principal amounts reflecting their Commitment and their Loans, as
adjusted pursuant to such assignment.
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(iii) The Agent shall maintain at its address referred to in SECTION
11.01 a copy of each assignment delivered to and accepted by it pursuant to
this SECTION 11.08 and a register (the "REGISTER") for the recordation of
the names and addresses of the Lenders and the Commitment of and principal
amount of the Loans owing to, each Lender from time to time and whether
such Lender is an original Lender or the assignee of another Lender
pursuant to an assignment under this SECTION 11.08. The entries in the
Register shall be conclusive and binding for all purposes, absent manifest
error, and the Borrowers, the Agent and the Lenders may treat each Person
whose name is recorded in the Register as a Lender hereunder for all
purposes of this Agreement. The Register shall be available for inspection
by the Borrowers or any Lender at any reasonable time and from time to time
upon reasonable prior notice.
SECTION 11.09. 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 11.10. 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 11.11. 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 11.12. 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 the Agent or any Lender from
such Borrower or with respect to any of the Collateral, and such Borrower does
hereby irrevocably agree that the Agent or any 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 the Agent or any Lender may deem advisable,
notwithstanding any entry by the Agent or any Lender upon any of its books and
records, subject, however, to the provisions of SECTION 2.08(c).
SECTION 11.13. MARSHALLING; PAYMENTS SET ASIDE. Neither the Agent nor
the Collateral Agent shall be under any obligation to marshall any assets in
favor of any Borrower or any other party or against or in payment of any or all
of the Obligations. To the extent that any Borrower makes a payment or payments
to any Agent or any Lender or the Agent, the Collateral Agent or any 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 originally
intended to be satisfied shall be revived and continued in full force and effect
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as if such payment had not been made or such enforcement or setoff had not
occurred.
SECTION 11.14. 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 11.01 AND SERVICE SO MADE SHALL BE DEEMED TO
BE COMPLETED FIVE (5) BUSINESS DAYS AFTER SAME SHALL HAVE BEEN POSTED AS
AFORESAID.
SECTION 11.15. WAIVER OF JURY TRIAL, ETC. EACH OF THE BORROWERS, THE
AGENT, THE COLLATERAL AGENT AND THE LENDERS WAIVES ANY RIGHT TO HAVE A JURY
PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR
OTHERWISE, BETWEEN THE AGENT, THE COLLATERAL AGENT OR ANY LENDER AND ANY
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, THE AGENT, THE COLLATERAL AGENT AND THE LENDERS 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 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 11.16. CONFIDENTIALITY. No 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 the Fee Letters; 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 Agent in writing of any circumstances of which such
Borrower is aware that may lead to such a requirement or order, so as to allow
the Agent 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 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.
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SECTION 11.17. ENTIRE AGREEMENT, ETC. This Agreement (including all
schedules and exhibits referred to herein), the Notes, the Fee Letters and all
other Loan Documents constitute the entire contract among 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 11.18. 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., as a Borrower
By: /s/
----------------------------------------------
Name: James D. Grenfell
Title: Chief Financial Officer
KMC TELECOM II, INC., as a Borrower
By: /s/
----------------------------------------------
Name: James D. Grenfell
Title: Chief Financial Officer
KMC TELECOM III, INC., as a Borrower
By: /s/
----------------------------------------------
Name: James D. Grenfell
Title: Chief Financial Officer
KMC TELECOM OF VIRGINIA, INC., as a Borrower
By: /s/
----------------------------------------------
Name: James D. Grenfell
Title: Chief Financial Officer
<PAGE>
KMC TELECOM LEASING I LLC, as a Borrower
BY: KMC TELECOM INC., as Sole Member
By: /s/
----------------------------------------------
Name: James D. Grenfell
Title: Chief Financial Officer
KMC TELECOM LEASING II LLC, as a Borrower
BY: KMC TELECOM II, INC., as Sole Member
By: /s/
----------------------------------------------
Name: James D. Grenfell
Title: Chief Financial Officer
KMC TELECOM LEASING III LLC, as a Borrower
BY: KMC TELECOM III, INC., as Sole Member
By: /s/
----------------------------------------------
Name: James D. Grenfell
Title: Chief Financial Officer
KMC TELECOM.COM, INC., as a Borrower
By: /s/
----------------------------------------------
Name: James D. Grenfell
Title: Chief Financial Officer
KMC III SERVICES LLC, as a Borrower
BY: KMC Telecom III, Inc., as Sole Member
By: /s/
----------------------------------------------
Name: James D. Grenfell
Title: Chief Financial Officer
<PAGE>
NEWCOURT COMMERCIAL FINANCE CORPORATION, an
affiliate of The CIT Group, Inc., as a Lender and
as Collateral Agent
By: /s/
----------------------------------------------
Name: Michael V. Monahan
Title: Vice President
FIRST UNION NATIONAL BANK, as a Lender and as
Administrative Agent
By: /s/
----------------------------------------------
Name: Elizabeth Elmore
Title: Senior Vice President
GENERAL ELECTRIC CAPITAL CORPORATION, as a
Lender
By: /s/
----------------------------------------------
Name: Mark F. Mylon
Title: Manager-Operations
CANADIAN IMPERIAL BANK OF COMMERCE, as
a Lender
By: /s/
----------------------------------------------
Name: Ellen Marshall
Title: Managing Director
CIBC World Markets Corp., as Agent
LUCENT TECHNOLOGIES INC., as a Lender
By: /s/
----------------------------------------------
Name: Dina Fede
Title: Director-Customer Finance
<PAGE>
BANKBOSTON, N.A., as a Lender
By: /s/
----------------------------------------------
Name: Michael A. Ashton
Title: Vice President
CREDIT SUISSE FIRST BOSTON, as a Lender
By: /s/
----------------------------------------------
Name: Jeffrey B. Ulmer
Title: Vice President
By: /s/
----------------------------------------------
Name: Douglas E. Maher
Title: Vice President
DRESDNER BANK AG NEW YORK AND
GRAND CAYMAN BRANCHES, as a Lender
By: /s/
----------------------------------------------
Name: John P. Flesler
Title: Senior Vice President
By: /s/
----------------------------------------------
Name: Constance Loosemore
Title: Assistant Vice President
MORGAN STANLEY SENIOR FUNDING, INC.,
as a Lender
By: /s/
----------------------------------------------
Name: T. Morgan Edwards II
Title: Vice President
By: /s/
----------------------------------------------
Name:
Title:
<PAGE>
MORGAN STANLEY DEAN WITTER
PRIME INCOME TRUST, as a Lender
By: /s/
----------------------------------------------
Name: Shelia Finnely
Title: Senior Vice President
UNION BANK OF CALIFORNIA, as a Lender
By: /s/
----------------------------------------------
Name: Keith M. Wilson
Title: Vice President
KEYPORT LIFE INSURANCE COMPANY, as a Lender
By: /s/
----------------------------------------------
Name: Brian W. Good
Title: Vice President & Portfolio Manager
STEIN ROE FLOATING RATE LIMITED
LIABILITY COMPANY, as a Lender
By: /s/
----------------------------------------------
Name: Brian W. Good
Title: Vice President,
Stein Roe & Farnham Incorporated
as Advisor to the Stein Roe Floating
Rate Limited Liability Company
<PAGE>
ANNEX A
COMMITMENT AMOUNTS
REVOLVING LOANS
<TABLE>
<CAPTION>
Lender Revolving Loan Commitment Amount
<S> <C>
Newcourt Commercial Finance Corporation $ 22,500,000
Canadian Imperial Bank of Commerce $ 22,500,000
First Union National Bank $ 37,500,000
General Electric Capital Corporation $ 22,500,000
BankBoston, N.A. $ 14,000,000
Credit Suisse First Boston $ 17,500,000
Dresdner Bank AG New York & Grand $ 14,000,000
Cayman Branches
Morgan Stanley Senior Funding, Inc. $ 17,500,000
Union Bank of California, N.A. $ 7,000,000
TOTAL $175,000,000
</TABLE>
<PAGE>
TERM A LOANS
<TABLE>
<CAPTION>
Lender Term A Loan Commitment Amount
<S> <C>
Newcourt Commercial Finance Corporation $ 3,250,000
Canadian Imperial Bank of Commerce $ 3,250,000
First Union National Bank $ 3,250,000
General Electric Capital Corporation $ 3,250,000
BankBoston, N.A. $ 6,000,000
Credit Suisse First Boston $ 7,500,000
Dresdner Bank AG New York & Grand $ 6,000,000
Cayman Branches
Keyport Life Insurance Company $ 5,000,000
Morgan Stanley Dean Witter Prime $25,000,000
Income Trust
Morgan Stanley Senior Funding, Inc. $ 7,500,000
Stein Roe Floating Rate Limited $ 2,000,000
Liability Compan
Union Bank of California, N.A. $ 3,000,000
TOTAL $75,000,000
</TABLE>
TERM B LOANS
<TABLE>
<CAPTION>
Lender Term B Loan Commitment Amount
<S> <C>
Lucent Technologies Inc. $450,000,000
TOTAL COMMITMENTS $700,000,000
</TABLE>
<PAGE>
ANNEX B
FINANCIAL COVENANT INFORMATION
<TABLE>
<CAPTION>
ITEM 2
FISCAL QUARTER ENDING MINIMUM REVENUES
<S> <C>
March 31, 2000 $ 24,935,000
June 30, 2000 $ 33,833,000
September 30, 2000 $ 43,122,000
December 31, 2000 $ 52,827,000
March 31, 2001 $ 65,937,000
June 30, 2001 $ 80,205,000
September 30, 2001 $ 92,926,000
December 31, 2001 $103,370,000
</TABLE>
ITEM 2
<TABLE>
<CAPTION>
115% OF EBITDA EBITDA LOSSES
FISCAL QUARTER ENDING LOSSES LESS $7,500,000
<S> <C> <C>
March 31, 2000 ($72,368,000) ($70,429,000)
June 30, 2000 ($78,372,000) ($75,649,000)
September 30, 2000 ($64,507,000) ($63,593,000)
December 31, 2000 ($49,948,000) ($50,933,000)
March 31, 2001 ($25,563,000) ($29,729,000)
June 30, 2001 $ 1,082,000(1) ($ 6,227,000)
</TABLE>
ITEM 3
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING 85% OF EBITDA
EBITDA LESS $7,500,000
<S> <C> <C>
September 30, 2001 $20,668,000 $16,815,000
December 31, 2001 $37,435,000 $36,541,000
</TABLE>
- - ---------------------
(1) This is a positive number.
<PAGE>
<TABLE>
<CAPTION>
ITEM 4 CUMULATIVE CAPITAL EXPENDITURES
- - ------ PLUS $25,000,000
FISCAL QUARTER ENDING -------------------------------
- - ---------------------
<S> <C>
March 31, 2000 742,645,000
June 30, 2000 825,986,000
September 30, 2000 895,254,000
December 31, 2000 935,558,000
March 31, 2001 963,623,000
June 30, 2001 992,069,000
September 30, 2001 1,031,824,000
December 31, 2001 1,060,558,000
</TABLE>
<TABLE>
<CAPTION>
ITEM 5 75% OF MINIMUM ACCESS LINES
- - ------ ---------------------------
FISCAL QUARTER ENDING
<S> <C>
March 31, 2000 106,672
June 30, 2000 137,394
September 30, 2000 168,485
December 31, 2000 203,380
March 31, 2001 246,606
June 30, 2001 296,940
September 30, 2001 349,859
December 31, 2001 403,132
</TABLE>
<PAGE>
ANNEX C
REVOLVING LOAN COMMITMENT REDUCTIONS
<TABLE>
<CAPTION>
PAYMENT DATE COMMITMENT REDUCTION
<S> <C>
April 1, 2003 5.00%
July 1, 2003 3.75%
October 1, 2003 3.75%
January 1, 2004 3.75%
April 1, 2004 3.75%
July 1, 2004 6.25%
October 1, 2004 6.25%
January 1, 2005 6.25%
April 1, 2005 6.25%
July 1, 2005 6.25%
October 1, 2005 6.25%
January 1, 2006 6.25%
April 1, 2006 6.25%
July 1, 2006 7.50%
October 1, 2006 7.50%
January 1, 2007 7.50%
April 1, 2007 7.50%
</TABLE>
<PAGE>
TERM A LOAN REDUCTIONS
<TABLE>
<CAPTION>
Percentage of Outstanding Principal
PAYMENT DATE Balance of Term A Loans
TO BE REPAID
<S> <C>
April 1, 2002 0.25%
July 1, 2002 0.25%
October 1, 2002 0.25%
January 1, 2003 0.25%
April 1, 2003 0.25%
July 1, 2003 0.25%
October 1, 2003 0.25%
January 1, 2004 0.25%
April 1, 2004 0.25%
July 1, 2004 0.25%
October 1, 2004 0.25%
January 1, 2005 0.25%
April 1, 2005 0.25%
July 1, 2005 0.25%
October 1, 2005 0.25%
January 1, 2006 0.25%
April 1, 2006 0.25%
July 1, 2006 0.25%
October 1, 2006 0.25%
January 1, 2007 0.25%
April 1, 2007 47.50%
July 1, 2007 47.50%
</TABLE>
<PAGE>
TERM B LOAN REDUCTIONS
<TABLE>
<CAPTION>
Percentage of Outstanding Principal
PAYMENT DATE Balance of Term B Loans
TO BE REPAID
<S> <C>
July 1, 2003 5.00%
October 1, 2003 3.75%
January 1, 2004 3.75%
April 1, 2004 3.75%
July 1, 2004 3.75%
October 1, 2004 6.25%
January 1, 2005 6.25%
April 1, 2005 6.25%
July 1, 2005 6.25%
October 1, 2005 6.25%
January 1, 2006 6.25%
April 1, 2006 6.25%
July 1, 2006 6.25%
October 1, 2006 7.50%
January 1, 2007 7.50%
April 1, 2007 7.50%
July 1, 2007 7.50%
</TABLE>
<PAGE>
SCHEDULE 1.01(A)
APPLICABLE MARGIN FOR REVOLVING LOANS
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------
Applicable Applicable
Margin for Margin for
Base Rate LIBOR
Loans Loans
- - -------------------------------------------------------------------------------
<S> <C> <C>
Total Leverage Ratio > 12.0x or EBITDA negative 3.00% 4.00%
-
The Total Leverage Ratio > = 10.0x and < 12.0x 2.75% 3.75%
The Total Leverage Ratio > = 8.0x and < 10.0x 2.50% 3.50%
The Total Leverage Ratio > = 6.0x and < 8.0x 2.25% 3.25%
The Total Leverage Ratio < 6.0x 2.00% 3.00%
- - -------------------------------------------------------------------------------
</TABLE>
APPLICABLE MARGIN FOR TERM A LOANS
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------
Applicable Applicable
Margin for Margin for
Base Rate LIBOR
Loans Loans
- - -------------------------------------------------------------------------------
<S> <C> <C>
The Total Leverage Ratio > = 12.0x or EBITDA 3.25% 4.25%
negative 3.00% 4.00%
The Total Leverage Ratio > = 10.0x and < 12.0x 2.75% 3.75%
The Total Leverage Ratio > = 8.0x and < 10.0x 2.50% 3.50%
The Total Leverage Ratio > = 6.0x and < 8.0x 2.25% 3.25%
The Total Leverage Ratio < 6.0x
- - -------------------------------------------------------------------------------
</TABLE>
<PAGE>
APPLICABLE MARGIN FOR TERM B LOANS
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------
Applicable Applicable
Base Rate LIBOR
Margin Margin
- - -------------------------------------------------------------------------------
<S> <C> <C>
The Consolidated Leverage Ratio > 12.0x or EBITDA 3.25% 4.25%
-
negative
The Consolidated Leverage Ratio > 10.0x and < 12.0x 3.00% 4.00%
-
The Consolidated Leverage Ratio > 8.0x and < 10.0x 2.75% 3.75%
-
The Consolidated Leverage Ratio > 6.0x and < 8.0x 2.50% 3.50%
-
The Consolidated Leverage Ratio < 6.0x 2.25% 3.25%
- - -------------------------------------------------------------------------------
</TABLE>
AMENDMENT NUMBER TWO
TO THE GENERAL AGREEMENT AMONG
KMC TELECOM INC., KMC TELECOM II, INC.,
KMC TELECOM LEASING I LLC, KMC TELECOM LEASING II LLC
AND LUCENT TECHNOLOGIES INC.
This Amendment Number Two (hereinafter this "Amendment Two") is made
effective as of December 22, 1998, by and among KMC Telecom Inc., a Delaware
corporation, KMC Telecom II, Inc., a Delaware corporation, KMC Telecom Leasing I
LLC, a Delaware limited liability company and KMC Telecom Leasing II LLC, a
Delaware limited liability company, each 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 Global Service Providers Group, with offices located at 600 Mountain
Avenue, Murray Hill, New Jersey 07074 (hereinafter "Seller").
WHEREAS, Customer and Seller previously entered into that certain General
Agreement (Contract Number LNM970313MP), effective March 6, 1997, as modified
and amended by Amendment Number 1 (Contract Number LNM 970922MP), effective as
of October 15, 1997 (as so amended, the "General Agreement"), setting forth the
terms and conditions pursuant to which Seller agreed to supply and Customer
agreed to procure certain of Seller's Products, Licensed Materials and Services
(as such terms are defined therein);
WHEREAS, Customer and Seller desire to amend and modify the General
Agreement as set forth herein; and
WHEREAS, all terms used herein but not defined herein shall have the
meanings ascribed to them in the 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. SCOPE OF GENERAL AGREEMENT
The definition of "Customer" contained in the General Agreement is hereby
amended to additionally include KMC Telecom of Virginia, Inc., a Virginia public
service company ("KMC-Virginia"), KMC Telecom III, Inc., a Delaware corporation
("KMC III") and KMC Telecom Leasing III LLC, a Delaware limited liability
company ("KMC Leasing III"); it being the intent and understanding among the
parties that KMC-Virginia, KMC III, and KMC Leasing III shall be authorized to
procure Products, Licensed Materials and Services from Seller under and pursuant
to the terms and conditions of the General Agreement.
<PAGE>
2. TERM OF GENERAL AGREEMENT
Section 1.2 of the General Agreement is hereby amended to provide that the
Term shall expire on March 5, 2003.
3. PURCHASE COMMITMENT AND FINANCIAL CONSIDERATIONS
In consideration for the discounts, allowances and incentives set forth in
Appendix A of the General Agreement (as modified hereby), KMC III and KMC
Leasing III agree to procure directly and exclusively from Seller, consistent
with the purchase requirements set forth in the financing documents between the
parties, Seller's Products, and related Licensed Materials and Services which
are available and may become available during the Term, in each case meeting
Customer's requirements for up to 27 Tier III cities and up to 100 Tier IV
cities, so long as at all times the purchase price therefor (taking into account
all of the terms and conditions of the competitive offer) is competitive with
the purchase price generally offered by any other third-party vendor of the
particular Product, Licensed Material or Service in question in the United
States. Either party's obligation to perform under this Amendment is contingent
on Seller providing financing for all Seller's Products, and related Licensed
Materials and Services to be sold to Customer hereunder in accordance with that
certain Loan and Security Agreement, dated as of February __, 1999, among KMC
III, KMC Leasing III, the financial institutions signatory thereto, Seller as
agent and __________ as collateral agent.
4. DEFINITIONS
The following definitions are hereby added to Section A-1.2, "Definitions"
of Appendix A:
o "Data Networking Products" means Seller's intelligent switching,
access and applications and network services Products, including but
not limited to the PacketStar(TM) Access Concentrator(TM),
PathStar(TM) Access Server, PortMaster(R) Integrated Access
Concentrator and PacketStarTM IP GateWay 1000. The table of Data
Networking Products in Section 6 may be expanded or amended from
time to time by mutual agreement of the parties.
5. MODIFICATIONS TO APPENDIX A
The provision of Appendix A of the General Agreement shall be revised in
the following respects:
(A) The first sentence of Section A-1.5 "Network Standardization" shall be
replaced with the following: "Subject to the provisions of Section 3 of
Amendment Two, Customer agrees to standardize its network exclusively on
Seller's 5ESS(R)-2000 Switch Systems Products, Transmission Systems Products,
fiber optic cable and associated apparatus, access systems, voice messaging
systems, Power Systems and Data Networking Products during the Term, such that
in the event Customer requires any equipment and/or software which is
functionally comparable to Sellers Products and related Licensed Materials
available for purchase under this Agreement, then Customer agrees to purchase
all of its requirements for such equipment and software from Seller.
2
<PAGE>
(B) The parties acknowledge that, effective June 30, 1998, the
Transmission Systems discounts available to Customer were amended and that
effective as of June 30, 1998, the table entitled "Transmission Systems Products
Discount Schedule" in Section A-1.15 of Appendix A is replaced with the
following:
- - --------------------------------------------------------------------------------
TRANSMISSION SYSTEMS PRODUCTS* DISCOUNT
- - --------------------------------------------------------------------------------
DDM PLUS 27%
- - --------------------------------------------------------------------------------
DDM-2000 FiberReach OC-1 25%
- - --------------------------------------------------------------------------------
DDM-2000 OC-3 hardware & Software 45%
- - --------------------------------------------------------------------------------
DDM-2000 OC-12 Shelf 85%
- - --------------------------------------------------------------------------------
DDM-2000 OC-12 Commons 43%
- - --------------------------------------------------------------------------------
DDM-2000 OC-12 Optics 50%
- - --------------------------------------------------------------------------------
DDM-2000 OC-12 Software 43%
- - --------------------------------------------------------------------------------
Dual 2Fiber OC-48 A/D Ring Term 70%**
Two Systems (ED8C902-30 G-3 e/w the following):
TG3 (DS1) Cp LAA18
System Controller LAA23B
System Memory 4 Mbyte LAA25
Line Controller (4 Mg) A/D & ring LAA28
Overhead Controller LAA21
Adapter Plate
Filler Plate
- - --------------------------------------------------------------------------------
FT-2000 OC-48 Lightwave System Commons (spares) 50%
- - --------------------------------------------------------------------------------
FT-2000 OC-48 Low Speed Cards (DS3, IS3, OC-3, OC-12) 40%
- - --------------------------------------------------------------------------------
FT-2000 OC-48 Lightwave System Optics 65%
- - --------------------------------------------------------------------------------
FT-2000 OC-48 Lightwave System Software 65%
- - --------------------------------------------------------------------------------
SLC(R)-2000 Multi Services Distant Terminals (MSDT) 35%
- - --------------------------------------------------------------------------------
SLC(R)-2000 Access System - Common Units 40%
- - --------------------------------------------------------------------------------
SLC(R)-2000 Access System - POTS/SPOTS Units 35%
- - --------------------------------------------------------------------------------
SLC(R)-2000 Access System - Special Service Units 40%
- - --------------------------------------------------------------------------------
SLC(R)-2000 Access System - Software 00%
- - --------------------------------------------------------------------------------
SLC(R)-SERIES 5 Carrier System - Common Units 35%
- - --------------------------------------------------------------------------------
SLC(R)-SERIES 5 Carrier System - POTS/SPOTS Units 35%
- - --------------------------------------------------------------------------------
SLC(R)-SERIES 5 Carrier System - Special Service Units 35%
- - --------------------------------------------------------------------------------
DACS IV 2000 Systems see 1.15.1 below
- - --------------------------------------------------------------------------------
3
<PAGE>
- - --------------------------------------------------------------------------------
TRANSMISSION SYSTEMS PRODUCTS* DISCOUNT
- - --------------------------------------------------------------------------------
DACS II Systems (hardware & Software) 27%
- - --------------------------------------------------------------------------------
* The above Products do not include cabling 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.
** This 70% discount only applies to Lucent order code ED8C902-30 G-3 which is
equipped with a dual bay, two complete OC-48 systems and commons for one shelf.
For commons ordered singularly, the 50% discount shall apply.
6. ADDITIONS TO APPENDIX A
The following sections are hereby added to Appendix A of the General
Agreement.
6.1 PRICING PLAN
A new Section A-1.22 is hereby added to Appendix A of the General
Agreement:
"A-1.22 PRICING PLAN FOR DATA NETWORKING PRODUCTS
In consideration for the Customer purchase commitment set forth in Section
3 of this Amendment No. 2, Seller will provide the discounts set forth below for
all purchases of the Data Networking Products described therein which are made
by Customer during the Term:
- - --------------------------------------------------------------------------------
DATA NETWORKING PRODUCTS DISCOUNT
- - --------------------------------------------------------------------------------
PacketStar(TM) Access Concentrator 10 30%
- - --------------------------------------------------------------------------------
PacketStar(TM) Access Concentrator 60 40%
- - --------------------------------------------------------------------------------
PacketStar(TM) Access Concentrator 120 40%
- - --------------------------------------------------------------------------------
PathStar(TM) Access Server (PSAS) 40%
- - --------------------------------------------------------------------------------
PortMaster(R)4 Integrated Access Concentrator (PM4) 30%
- - --------------------------------------------------------------------------------
PacketStar(TM) IP GateWay 1000 25%"
- - --------------------------------------------------------------------------------
6.2 SUPPORT SERVICES FOR DATA NETWORKING PRODUCTS
A new Section A-1.23 is hereby added to Appendix A:
4
<PAGE>
"1.23 SUPPORT SERVICES
In addition to its obligations under the "Warranty" clause of the General
Agreement, Seller will make available maintenance and other technical support
services to Customer for Seller's Data Networking Products under mutually
agreed-upon, separate support agreement(s)."
6.3 TRAINING INCENTIVE FOR DATA NETWORKING PRODUCTS
A new Section A-1.24 is hereby added to Appendix A:
"1.24 TRAINING INCENTIVE
In consideration for Customer's purchase commitment set forth in Section 3
of this Amendment, (a) for each one million two hundred fifty thousand dollars
($1,250,000) in Customer's purchases of Seller's PathStar(TM) Access Server
Products, Seller will provide Customer with two (2) tuition-free seats at a five
(5) day course related to Data Networking Products; and (b) for each one million
two hundred fifty thousand dollars ($1,250,000) in Customer's purchases of
Seller's PortMaster(R) 4 Integrated Access Concentrator, PacketStar(TM) IP
GateWay 1000, PacketStar(TM) Access Concentrator 10, PacketStar(TM) Access
Concentrator 60, or PacketStar(TM) Access Concentrator 120 Products, Seller will
provide Customer with two (2) tuition-free seats at a five (5) day course
related to Data Networking Products. Seller, at its option, may offer training
regionally.
Customer shall use the foregoing training days earned by it within twelve
(12) months after the shipment of the relevant Data Networking Products.
Customer shall responsible for all associated travel and living expenses for
Customer personnel in connection with attendance at the foregoing courses. In
the event that Seller sends its personnel to a Customer site for on-site
training, Customer shall be responsible for all reasonable travel and living
expenses for the instructor and for providing equipment needed for hands-on
training. It is understood and agreed that any such equipment used in a training
setting must not be part of Customer's network product environment."
7. ENTIRE AGREEMENT
Except as specifically modified, amended or supplemented herein, all terms
and conditions of the General Agreement shall remain in full force and effect.
The terms and conditions contained in this Amendment Two and those
nonconflicting terms and conditions of the General Agreement supersede all prior
oral and written understandings among the parties and shall constitute the
entire agreement among the parties with respect to the subject matter herein.
This Amendment Two shall not be modified or amended except by a writing signed
by an authorized representative of each of the parties.
5
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment Two to be
executed by their duly authorized representatives on the date(s) indicated.
KMC TELECOM INC. KMC TELECOM LEASING I LLC
By: KMC Telecom I, Inc., as Sole
Member
By: /s/ By: /s/
----------------------------------- -----------------------------------
Typed Name: Michael A. Sternberg Typed Name: Michael A. Sternberg
--------------------------- ---------------------------
Title: President Title: President
-------------------------------- --------------------------------
Date: Date:
--------------------------------- ---------------------------------
KMC TELECOM II, INC. KMC TELECOM LEASING II LLC
By: KMC Telecom II, Inc., as Sole
Member
By: /s/ By: /s/
----------------------------------- -----------------------------------
Typed Name: Michael A. Sternberg Typed Name: Michael A. Sternberg
--------------------------- ---------------------------
Title: President Title: President
-------------------------------- --------------------------------
Date: Date:
--------------------------------- ---------------------------------
KMC TELECOM III, INC. KMC TELECOM LEASING III LLC
By: KMC Telecom III, Inc., as Sole
Member
By: /s/ By: /s/
----------------------------------- -----------------------------------
Typed Name: Michael A. Sternberg Typed Name: Michael A. Sternberg
--------------------------- ---------------------------
Title: President Title: President
-------------------------------- --------------------------------
Date: Date:
--------------------------------- ---------------------------------
KMC TELECOM OF VIRGINIA, INC. LUCENT TECHNOLOGIES INC.
By: /s/ By: /s/
----------------------------------- -----------------------------------
Typed Name: Michael A. Sternberg Typed Name: Mark Wilson
--------------------------- ---------------------------
Title: President Title: Vice President - Sales
-------------------------------- --------------------------------
Date: Date:
--------------------------------- ---------------------------------
6
AMENDMENT NUMBER THREE
TO THE GENERAL AGREEMENT AMONG
KMC TELECOM INC., KMC TELECOM II, INC.,
KMC TELECOM III, INC., KMC TELECOM OF VIRGINIA, INC.,
KMC TELECOM LEASING I LLC, KMC TELECOM LEASING II LLC,
KMC LEASING III LLC AND LUCENT TECHNOLOGIES INC.
This Amendment Number Three (hereinafter this "Amendment Three") is
made effective as of November 15, 1999, by and among KMC Telecom Inc., a
Delaware corporation, KMC Telecom II, Inc., a Delaware corporation, KMC Telecom
III, Inc., a Delaware corporation, KMC Telecom of Virginia, Inc., a Virginia
public service company, KMC Telecom Leasing I LLC, a Delaware limited liability
company, KMC Telecom Leasing II LLC, a Delaware limited liability company, and
KMC Telecom Leasing III LLC, a Delaware limited liability company, each 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 Global Service Providers Group,
with offices located at 600 Mountain Avenue, Murray Hill, New Jersey 07074
(hereinafter "Seller").
WHEREAS, Customer and Seller previously entered into that certain
General Agreement (Contract Number LNM97O313MP), effective March 6, 1997, as
modified and amended by Amendment Number One (Contract Number LNM970922MP),
effective as of October 15, 1997 and Amendment Number Two, effective December
22, 1998 (as so amended, the "General Agreement"), setting forth the terms and
conditions pursuant to which Seller agreed to supply and Customer agreed to
procure certain of Seller's Products, Licensed Materials and Services (as such
terms are defined therein); and
1
<PAGE>
WHEREAS, Customer and Seller desire to amend and modify the
General Agreement as set forth 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 GENERAL AGREEMENT
The definition of "Customer" contained in the General Agreement is
hereby amended to additionally include KMC Telecom IV, Inc., a Delaware
corporation ("KMC IV") and KMC Telecom Leasing IV LLC, a Delaware limited
liability company ("KMC Leasing IV"); it being the intent and understanding
among the parties that KMC IV and KMC Leasing IV shall be authorized to procure
Products Licensed Materials and Services from Seller under and pursuant to the
terms and conditions of the General Agreement.
FINANCING
Customer's obligations under this Amendment are contingent on
Seller providing financing subject to terms and conditions to be mutually
agreed.
PURCHASE COMMITMENT AND FINANCIAL CONSIDERATIONS
In consideration for the discounts, allowances and incentives set
forth in Appendix A of the General Agreement (as modified hereby), Customer
agrees to procure directly and exclusively from Seller, consistent with the
provisions of Section 2 above, Seller's Products and related Licensed
Materials and Services which are available and may become available during
the Term, in each case meeting the Customer's technical requirements for
conversion of Customer's existing Tier I, II, III and IV cities to packet
technology and/or growth to the existing TOM technology, and for KMC IV's and
KMC Leasing IV's nine (9) additional Tier III cities and ninety-eight (98)
2
<PAGE>
additional Tier IV cities, so long as at all times the purchase price
therefor (taking into account all of the terms and conditions of the
competitive offer) is competitive with the purchase price generally offered
by any other third-party vendor of the particular Product, Licensed Material
or Service in question in the United States.
MODIFICATIONS TO APPENDIX A
The provisions of Appendix A of the General Agreement shall be
revised in the following respects:
The table entitled "Discount Schedule for 5ESS(R)-2000 Switch Products"
in Section A-1.7 of Appendix A and the paragraph below the table are
replaced with the following:
- - --------------------------------------------------------------------------------
INITIAL PERIPHERAL
PRODUCT TYPE SWITCH DISCOUNT LARGE GROWTH DISCOUNT GROWTH DISCOUNT
- - --------------------------------------------------------------------------------
5ESS Switch 83% 77% 25%
- - --------------------------------------------------------------------------------
5ESS CDX Switch 83% 77% 25%
- - --------------------------------------------------------------------------------
5ESS VCDX Switch 83% 77% 25%
- - --------------------------------------------------------------------------------
The parties acknowledge that the above discounts were effective October 1, 1999.
Large Growth is defined as the addition of seven (7) or more STSX-1 cards. Any
other growth shall be considered Peripheral Growth. Dedicated hardware and
Software for PRIs only shall receive a seventy-seven percent (77%) discount.
The following products shall be added to the table in Section A-1.22,
"Pricing Plan for Data Networking Products" (this Section was added
in Amendment Two). Unless otherwise specified in writing by Lucent,
the Warranty Periods for Data Networking Products are twelve (12)
months for the hardware and ninety (90) days for the Software.
- - --------------------------------------------------------------------------
DATA NETWORKING PRODUCTS DISCOUNT
- - --------------------------------------------------------------------------
MAX TNT(TM) WAN Access Switch 30%
- - --------------------------------------------------------------------------
PacketStar(TM)PSAX 2300 Access Concentrator 45%
- - --------------------------------------------------------------------------
GX 550(TM)Smart Core ATM Switch 35%
- - --------------------------------------------------------------------------
Stinger(TM) DSL Access Concentrator 35%
- - --------------------------------------------------------------------------
Copper Mountain CopperEdge(TM) 200* 32%
- - --------------------------------------------------------------------------
Copper Mountain CopperEdge(TM) 150* 32%
- - --------------------------------------------------------------------------
PacketStar(TM) PSAX 50 Broadband Service Unit 35%
- - --------------------------------------------------------------------------
3
<PAGE>
- - --------------------------------------------------------------------------
DATA NETWORKING PRODUCTS DISCOUNT
- - --------------------------------------------------------------------------
PacketStar(TM) PSAX 100 Broadband Service Unit 35%
- - --------------------------------------------------------------------------
PacketStar(TM) PSAX 600 Broadband Service Concentrator 35%
- - --------------------------------------------------------------------------
Cajun(TM) 330R Stackable Switching System 35%
- - --------------------------------------------------------------------------
Cajun(TM) 550R Stackable Switching System 35%
- - --------------------------------------------------------------------------
ConnectStar(TM) Interworking Call Router (formerly 35%
Broadband Interworking Connection Router (BICR))
- - --------------------------------------------------------------------------
* The Warranty Period for these Products is twelve (12) months.
The following Access Products shall be added tothe table entitled
"Transmission Systems Products Discount Schedule" in Section A-1.15
(this table was replaced in Amendment Two).
- - ---------------------------------------------------------------------------
ACCESS PRODUCTS DISCOUNT
- - ---------------------------------------------------------------------------
CopperCom Gateway(TM) * 19%
- - ---------------------------------------------------------------------------
CopperCom MXR(TM) * 19%
- - ---------------------------------------------------------------------------
VINA ConnectReach * 50%
- - ---------------------------------------------------------------------------
VINA ConnectReach Plus * 40%
- - ---------------------------------------------------------------------------
7 R/E(TM) Connection Gateway (previously PacketStar(TM) 50%
Connection Gateway (PCG))**
- - ---------------------------------------------------------------------------
* The Warranty Period for these Products is twelve (12) months.
** The Warranty Periods for the 7 R/E Connection Gateway are twelve (12) months
for the hardware and eighteen (18) months for the Software.
The following new Section A-1.25 is hereby added to Appendix A:
A-1.25 PRICING PLAN FOR OPTICAL NETWORKING PRODUCTS
In consideration for the Customer purchase commitment set forth in Section 3
of this Amendment Three, Seller will provide the discounts set forth below
for all purchases of the Optical Networking Product(s) described therein
which are made by Customer during the Term. This table of Optical Networking
Products may be expanded or amended from time to time by mutual agreement of the
parties.
4
<PAGE>
- - ---------------------------------------------------------------------------
OPTICAL NETWORKING PRODUCTS DISCOUNT
- - ---------------------------------------------------------------------------
WaveStar(TM) TDM 2.5G 50%
- - ---------------------------------------------------------------------------
The following new Section A-1.26 is hereby added to Appendix A:
A-1.26 PRICING PLAN FOR 7R/E(TM) PACKET SOLUTIONS
Seller will provide firm price quotations to Customer for its 7R/E(TM) Packet
Solutions purchases. To constitute a 7R/E Packet Solution it must contain at
least a minimum of one unit each of a Call Feature Server, One-Link Manager, and
Packet Gateway purchased and installed at one time (it also may contain more
than one unit of each of these components) in addition to other 7R/E hardware
and Software elements (hereinafter referred to as "7R/E Packet Solution"). A
7R/E Packet Solution does not include the 5ESS(R) Switch or circuit switching
network elements that may interface with the 7R/E Packet Solution products. List
Prices are not yet finalized for 7R/E components. Seller commits to a minimum
twenty percent (20%) price savings for a 7R/E configuration utilizing pure
packet access when compared to a comparable 5ESS TDM configuration. Access
vehicles (e.g., RLAGs, IADs, etc.) are not included in the 7R/E pricing. The
Warranty Period for 7R/E hardware (whether or not the hardware is part of a 7R/E
Packet Solution) is twelve (12) months. The Warranty Period for Software
licensed with a new 7R/E Packet Solution installation (all three elements set
forth above required to constitute a Packet Solution must be installed at the
same time for this twelve (12) month Software warranty to apply) is twelve (12)
months. The Warranty Period for any other 7R/E Software including, but not
limited to, upgrades or updates to the initial Software or new releases of
Software is three (3) months.
ADDITIONAL CONSIDERATIONS
At Customer's request, Seller is providing Customer with a copy of its schedule
of anticipated release dates for certain of its Products. This Schedule is
attached hereto as Exhibit B. If there is a slip in the availability date that
impacts Customer's deployment schedule, Seller will, at Seller's expense, either
5
<PAGE>
(a) provide Customer with an acceptable substitute and change it out to the
required Product when available, or (b) purchase on Customer's behalf an
acceptable non-Lucent substitute and change it out to the required Product when
available. In the event Seller purchases non-Lucent Products in accordance with
Subparagraph (b), said purchases will be treated as a Lucent Product for the
purposes of the purchase commitment and will be subject to the terms and
conditions of the financing agreement. Additionally, Seller will provide to
Customer, concurrently with the signing of this Amendment, a list of the
Products currently being purchased by Customer from Seller. This list will
include a description of the product, comcode, current list price and the
current discounted price. Lastly, at Customer's request, attached hereto as
Exhibit C is a summary that compares the older city pricing and the planned city
pricing, showing the expected savings by location.
ENTIRE AGREEMENT
Except as specifically modified, amended or supplemented herein, all terms and
conditions of the General Agreement shall remain in full force and effect. The
terms and conditions contained in this Amendment Three and those nonconflicting
terms and conditions of the General Agreement supersede all prior oral and
written understandings among the parties and shall constitute the entire
agreement among the parties with respect to the subject matter herein. This
Amendment Three shall not be modified or amended except by a writing signed by
an authorized representative of each of the parties.
6
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment Three to be executed
by their duly authorized representatives on the date(s) indicated.
KMC TELECOM INC. KMC TELECOM LEASING I LLC
By KMC Telecom Inc., as Sole Member
By: /s/ By: /s/
------------------------------ ------------------------------------
Typed Name: Michael A. Stenberg Typed Name: Michael A. Stenberg
---------------------- ----------------------------
Title: President Title: President
--------------------------- ---------------------------------
Date: Date:
---------------------------- ----------------------------------
KMC TELECOM II, INC. KMC TELECOM LEASING II LLC
By: KMC Telecom II, Inc., as Sole
Member
By: /s/ By: /s/
------------------------------ ------------------------------------
Typed Name: Michael A. Stenberg Typed Name: Michael A. Stenberg
---------------------- ----------------------------
Title: President Title: President
--------------------------- ---------------------------------
Date: Date:
---------------------------- ----------------------------------
KMC TELECOM III, INC. KMC TELECOM LEASING III LLC
By KMC Telecom III, Inc., as Sole
Member
By: /s/ By: /s/
------------------------------ ------------------------------------
Typed Name: Michael A. Stenberg Typed Name: Michael A. Stenberg
---------------------- ----------------------------
Title: President Title: President
--------------------------- ---------------------------------
Date: Date:
---------------------------- ----------------------------------
7
<PAGE>
KMC TELECOM IV, INC. KMC TELECOM LEASING IV LLC
By KMC Telecom IV, Inc., as Sole
Member
By: /s/ By: /s/
------------------------------ ------------------------------------
Typed Name: Michael A. Stenberg Typed Name: Michael A. Stenberg
---------------------- ----------------------------
Title: President Title: President
--------------------------- ---------------------------------
Date: Date:
---------------------------- ----------------------------------
By: By:
KMC TELECOM OF VIRGINIA, INC. LUCENT TECHNOLOGIES INC.
By: /s/ By: /s/
------------------------------ ------------------------------------
Typed Name: Michael A. Stenberg Typed Name: Bill Plunkett
---------------------- ----------------------------
Title: President Title:
--------------------------- ---------------------------------
Date: Date:
---------------------------- ----------------------------------
8
<PAGE>
EXHIBIT A
Financing Term Sheet
A copy of the Financing Term Sheet
shall be placed behind this page
9
<PAGE>
EXHIBIT B
- - -------------------------------------------------------------------------------
PRODUCT RELEASE SCHEDULE
- - -------------------------------------------------------------------------------
CI OR FSA GA
- - -------------------------------------------------------------------------------
WAVESTAR TDM 2.5G
- - -------------------------------------------------------------------------------
R. 1.0 4/99
- - -------------------------------------------------------------------------------
R. 2.0 6/99 9/99
- - -------------------------------------------------------------------------------
R. 3.0 w/UPSR Ring Termination 12/99 3/00
- - -------------------------------------------------------------------------------
R. 4.0 6/00 9/00
- - -------------------------------------------------------------------------------
R. 5.0 3/01
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
WAVESTAR TDM 10G 2-FIBER
- - -------------------------------------------------------------------------------
R. 1.0 12/99 3/00
- - -------------------------------------------------------------------------------
R. 2.0 9/00
- - -------------------------------------------------------------------------------
R. 3.0 3/01
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
WAVESTAR TDM 10G (OC-192 4F)
- - -------------------------------------------------------------------------------
R. 1.0 6/00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
WAVESTAR OLS 40G/80G
- - -------------------------------------------------------------------------------
R. 3.3 10/99
- - -------------------------------------------------------------------------------
R. 6.0 9/15/00
- - -------------------------------------------------------------------------------
R. 7.0 3/15/01
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
WAVESTAR OLS 400G
- - -------------------------------------------------------------------------------
R. 2.0 9/30/99
- - -------------------------------------------------------------------------------
R. 3.0 3/31/00
- - -------------------------------------------------------------------------------
R. 4.0 12/15/00
- - -------------------------------------------------------------------------------
R. 5.0 9/15/01
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
WAVESTAR ISTN
- - -------------------------------------------------------------------------------
R. 1.0 12/99 6/00
- - -------------------------------------------------------------------------------
R. 2.0 6/00 12/00
- - -------------------------------------------------------------------------------
R. 3.0 3/01
- - -------------------------------------------------------------------------------
R. 4.0 9/01
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
WAVESTAR BANDWIDTH MANAGER
- - -------------------------------------------------------------------------------
R. 1.0 - 1.1 Now
- - -------------------------------------------------------------------------------
R. 1.2 Now
- - -------------------------------------------------------------------------------
R. 1.3 10/99 12/99
- - -------------------------------------------------------------------------------
R. 2.0 (w/TL1 cut through for DDM & FT) 1/00 3/31/00
- - -------------------------------------------------------------------------------
R. 3 6/30/00
- - -------------------------------------------------------------------------------
R. 4.0 3/01
- - -------------------------------------------------------------------------------
R. 5.0 9/01
- - -------------------------------------------------------------------------------
<PAGE>
- - -------------------------------------------------------------------------------
PRODUCT RELEASE SCHEDULE
- - -------------------------------------------------------------------------------
CI OR FSA GA
- - -------------------------------------------------------------------------------
WAVESTAR ALL METRO OLS
- - -------------------------------------------------------------------------------
R. 1.0 3/31/00
- - -------------------------------------------------------------------------------
R. 2.0 12/15/00
- - -------------------------------------------------------------------------------
R. 3.0 6/15/01
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
WAVESTAR OPTICAIR OLS
- - -------------------------------------------------------------------------------
R. 1.0 3/00
- - -------------------------------------------------------------------------------
R. 2.0 3/01
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
FT-2000 OC-48
- - -------------------------------------------------------------------------------
R. 9.1 1/00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
ANYMEDIA ACCESS SYSTEM
- - -------------------------------------------------------------------------------
R. 1.0 9/98
- - -------------------------------------------------------------------------------
R. 1.2 4/99 6/99
- - -------------------------------------------------------------------------------
R. 1.5 6/99 8/99
- - -------------------------------------------------------------------------------
R. 1.7 - HDT 8/99
- - -------------------------------------------------------------------------------
R. 1.2.4 - as a PAS Server 1/00 3/00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
DDM-2000 - OC3/12
- - -------------------------------------------------------------------------------
R. 15.0 10/99 12/99
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
DDM-2000 BAM
- - -------------------------------------------------------------------------------
R. 1.0 06/01
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
FIBERREACH
- - -------------------------------------------------------------------------------
R. 4.0 (TARP) 09/00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
VINA TECH
- - -------------------------------------------------------------------------------
ConnectReach Plus Now
- - -------------------------------------------------------------------------------
ConnectReach Now
- - -------------------------------------------------------------------------------
R. 1.0 7/99
- - -------------------------------------------------------------------------------
VFDE 12/99
- - -------------------------------------------------------------------------------
R. 2.0 8/99
- - -------------------------------------------------------------------------------
R. 3.0 11/99
- - -------------------------------------------------------------------------------
R. 3.0.6 11/99
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
COPPER MOUNTAIN
- - -------------------------------------------------------------------------------
CPE for Voice and Data w/PAS interop 10/99 11/99
- - -------------------------------------------------------------------------------
CPE for Voice and Data w/o PAS, standalone 10/99
- - -------------------------------------------------------------------------------
CE200 Now
- - -------------------------------------------------------------------------------
CE150 (for MTU use) Now
- - -------------------------------------------------------------------------------
<PAGE>
- - -------------------------------------------------------------------------------
PRODUCT RELEASE SCHEDULE
- - -------------------------------------------------------------------------------
CI OR FSA GA
- - -------------------------------------------------------------------------------
HDSL 2 - Data 12/99
- - -------------------------------------------------------------------------------
HDSL 2 - Derived Voice w/ PAS 11/99
- - -------------------------------------------------------------------------------
SDSL - Data Now
- - -------------------------------------------------------------------------------
SDSL - Derived Voice w/ PAS 7/99 11/99
- - -------------------------------------------------------------------------------
IDSL - Data Now
- - -------------------------------------------------------------------------------
IDSL - Derived Voice w/ PAS 11/99
- - -------------------------------------------------------------------------------
Rel. 2.4 01/00
- - -------------------------------------------------------------------------------
Rel. 2.9 03/00
- - -------------------------------------------------------------------------------
Rel. 3.0 07/00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
DACS II
- - -------------------------------------------------------------------------------
Rel. 8.2 (Digital Signal Processing Platform) Now
- - -------------------------------------------------------------------------------
Rel. 8.3 (Low Density SONET and SDH Unit) Now
- - -------------------------------------------------------------------------------
Rel. 9.0 (Integrated Communications Interface Pack) 4Q99
- - -------------------------------------------------------------------------------
Rel. 9.1 (ATM Processing Shelf) 4Q99
- - -------------------------------------------------------------------------------
Rel. 10.0 (High Speed Unit - SONET) 1Q00
- - -------------------------------------------------------------------------------
Rel. 10.1 (High Speed Unit - SDH) 3Q00
- - -------------------------------------------------------------------------------
Rel. 11.0 (High Density Unit) 3Q00
- - -------------------------------------------------------------------------------
Rel. 12.0 (NextGen DACS) 2001
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
DACS 4/4/1
- - -------------------------------------------------------------------------------
R. 2.0 05/00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
FT-2000 OC-48
- - -------------------------------------------------------------------------------
R. 9.0 TARP 01/00
- - -------------------------------------------------------------------------------
R. 9.1 01/00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
5ESS ANYMEDIA SWITCH
- - -------------------------------------------------------------------------------
5E14 Software Release 4Q99 1q00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
7 R/E PACKET SOLUTIONS
- - -------------------------------------------------------------------------------
7 R/E Packet Local Solution R1 (IP) 12/99 06/00
- - -------------------------------------------------------------------------------
7 R/E Packet Local Solution R2 (IP) 06/00 12/00
- - -------------------------------------------------------------------------------
7 R/E Packet Local Solution R3 (ATM) 12/00 06/01
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
7 R/E Packet Tandem/Toll Solution R1.0 10/99 04/00
- - -------------------------------------------------------------------------------
7 R/E Packet Tandem/Toll Solution R1.1 11/99 05/00
- - -------------------------------------------------------------------------------
7 R/E Packet Tandem/Toll Solution R1.2 03/00 09/00
- - -------------------------------------------------------------------------------
7 R/E Packet Tandem/Toll Solution R2.0 06/00 12/00
- - -------------------------------------------------------------------------------
7 R/E Packet Tandem/Toll Solution R3.0 12/00 06/01
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
7 R/E PACKET DRIVER
- - -------------------------------------------------------------------------------
Release 1.3 - Modem pooling w/TNT 12/99 06/00
- - -------------------------------------------------------------------------------
<PAGE>
- - -------------------------------------------------------------------------------
PRODUCT RELEASE SCHEDULE
- - -------------------------------------------------------------------------------
CI OR FSA GA
- - -------------------------------------------------------------------------------
Release 1.4 - Internet Telephony, OneLink 03/00 09/00
- - -------------------------------------------------------------------------------
Release 2.0 - Data Offload on TNT 06/00 12/00
- - -------------------------------------------------------------------------------
Release 2.1 - IP and VPN feature enhancements 09/00 03/01
- - -------------------------------------------------------------------------------
Release 3.0 (Phase 2) - Integrated VtoA Offer - 12/00 06/01
IWG
- - -------------------------------------------------------------------------------
Phase 3 - Packet SM and 7R/E Elements 2H01 1H02
- - -------------------------------------------------------------------------------
Phase 4 - Renaissance existing SMs 2002 2002
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
PATHSTAR ACCESS SERVER
- - -------------------------------------------------------------------------------
Rel. 1.0 4/99 5/99
- - -------------------------------------------------------------------------------
Rel. 2.0 6/99 7/99
- - -------------------------------------------------------------------------------
Rel. 3.0 2/00 3/00
- - -------------------------------------------------------------------------------
Rel. 4.0 1Q00 1Q00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
PACKETSTAR CONNECTION GATEWAY
- - -------------------------------------------------------------------------------
Rel. 1 4/99 7/99
- - -------------------------------------------------------------------------------
Rel. 2 9/99 12/99
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
AC120
- - -------------------------------------------------------------------------------
UPSR 1Q00 1Q00
- - -------------------------------------------------------------------------------
APS (2 node configs only) 7/99 9/99
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
PSAX2300
- - -------------------------------------------------------------------------------
Rel. 6.1 Now
- - -------------------------------------------------------------------------------
Rel. 6.1.1 12/99
- - -------------------------------------------------------------------------------
Rel. 6.2 03/00
- - -------------------------------------------------------------------------------
Rel. 7.0 4Q00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
COPPERCOM GATEWAY
- - -------------------------------------------------------------------------------
Redundancy
- - -------------------------------------------------------------------------------
GSC (1:1) 1Q00
- - -------------------------------------------------------------------------------
ATM (1:1) 1Q00
- - -------------------------------------------------------------------------------
T1 (1:N) 1Q00
- - -------------------------------------------------------------------------------
Power (1:1) Now
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Voice
- - -------------------------------------------------------------------------------
Loop/Ground Start Now
- - -------------------------------------------------------------------------------
PCM Now
- - -------------------------------------------------------------------------------
ADPCM 32 Now
- - -------------------------------------------------------------------------------
ADPCM 16 1Q00
- - -------------------------------------------------------------------------------
Echo Cancellation Now
- - -------------------------------------------------------------------------------
Fax Auto Detect 1Q00
- - -------------------------------------------------------------------------------
Silence Suppression 2Q00
- - -------------------------------------------------------------------------------
<PAGE>
- - -------------------------------------------------------------------------------
PRODUCT RELEASE SCHEDULE
- - -------------------------------------------------------------------------------
CI OR FSA GA
- - -------------------------------------------------------------------------------
GR-203
- - -------------------------------------------------------------------------------
Multiple I/F Groups Now
- - -------------------------------------------------------------------------------
EOC/Alarms/PPS Now
- - -------------------------------------------------------------------------------
Lucent Certification 11/15/99
- - -------------------------------------------------------------------------------
Flow Through Provisioning 1Q00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
T1 Line Card
- - -------------------------------------------------------------------------------
T1-4 port Now
- - -------------------------------------------------------------------------------
T1-8 port 2Q00
- - -------------------------------------------------------------------------------
STS-1 2Q00
- - -------------------------------------------------------------------------------
Hot Remove 1Q00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
ATM Line Card
- - -------------------------------------------------------------------------------
ATM - DS3 - Dual Port Now
- - -------------------------------------------------------------------------------
ATM - OC3 - Dual Port 2Q00
- - -------------------------------------------------------------------------------
ATM - DS3 - Quad Port 2Q00
- - -------------------------------------------------------------------------------
Data Pass Through 1Q00
- - -------------------------------------------------------------------------------
Daisy Chaining 1Q00
- - -------------------------------------------------------------------------------
Hot Remove 1Q00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Management
- - -------------------------------------------------------------------------------
Craft Interface Now
- - -------------------------------------------------------------------------------
Element Management System Rel 1 4Q99
- - -------------------------------------------------------------------------------
Element Management System Rel 2 1Q00
- - -------------------------------------------------------------------------------
Lucent Integration Under Review
- - -------------------------------------------------------------------------------
Alarm Contacts 1Q00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Voice of Frame Relay
- - -------------------------------------------------------------------------------
Interworking Function FRF.8 Now
- - -------------------------------------------------------------------------------
PCM Now
- - -------------------------------------------------------------------------------
Configurable ATM/Frame Now
- - -------------------------------------------------------------------------------
ADPCM 32 1Q00
- - -------------------------------------------------------------------------------
ADPCM 16 1Q00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Packet Trunk Interface
- - -------------------------------------------------------------------------------
PTI Logic Card 2Q00
- - -------------------------------------------------------------------------------
MGCP 2Q00
- - -------------------------------------------------------------------------------
10/100/1000 Mbps I/F 2Q00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
xDSL Modems
- - -------------------------------------------------------------------------------
SDSL Now
- - -------------------------------------------------------------------------------
ADSL Now
- - -------------------------------------------------------------------------------
<PAGE>
- - -------------------------------------------------------------------------------
PRODUCT RELEASE SCHEDULE
- - -------------------------------------------------------------------------------
CI OR FSA GA
- - -------------------------------------------------------------------------------
Voice
- - -------------------------------------------------------------------------------
16 Ports Now
- - -------------------------------------------------------------------------------
Loop Start Now
- - -------------------------------------------------------------------------------
Ground Start 1Q00
- - -------------------------------------------------------------------------------
PCM Now
- - --------------------------------------------------------------------------------
ADPCM 32 Now
- - -------------------------------------------------------------------------------
ADPCM 16 1Q00
- - -------------------------------------------------------------------------------
Echo Cancellation Now
- - -------------------------------------------------------------------------------
Silence Suppression 2Q00
- - --------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Data
- - -------------------------------------------------------------------------------
RIP 1 & 2 Now
- - -------------------------------------------------------------------------------
RFC 1483 Now
- - -------------------------------------------------------------------------------
PPP Now
- - -------------------------------------------------------------------------------
Classical IP Now
- - -------------------------------------------------------------------------------
NAT Now
- - -------------------------------------------------------------------------------
DHCP Now
- - -------------------------------------------------------------------------------
Firewall Now
- - -------------------------------------------------------------------------------
10Base T Now
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Management
- - -------------------------------------------------------------------------------
Console Port Now
- - -------------------------------------------------------------------------------
Telnet over Ethernet Now
- - -------------------------------------------------------------------------------
Proxy Through Gateway 1Q00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
COPPERCOM MXR
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
xDSL Modems
- - -------------------------------------------------------------------------------
SDSL Now
- - -------------------------------------------------------------------------------
ADSL Now
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Voice
- - -------------------------------------------------------------------------------
16 Ports Now
- - -------------------------------------------------------------------------------
Loop Start Now
- - -------------------------------------------------------------------------------
Ground Start 1Q00
- - -------------------------------------------------------------------------------
PCM Now
- - -------------------------------------------------------------------------------
ADPCM 32 Now
- - -------------------------------------------------------------------------------
ADPCM 16 1Q00
- - -------------------------------------------------------------------------------
Echo Cancellation Now
- - -------------------------------------------------------------------------------
Silence Suppression 2Q00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Data
- - -------------------------------------------------------------------------------
RIP 1 & 2 Now
- - -------------------------------------------------------------------------------
<PAGE>
- - -------------------------------------------------------------------------------
PRODUCT RELEASE SCHEDULE
- - -------------------------------------------------------------------------------
CI OR FSA GA
- - -------------------------------------------------------------------------------
RFC 1483 Now
- - -------------------------------------------------------------------------------
PPP Now
- - -------------------------------------------------------------------------------
Classical IP Now
- - -------------------------------------------------------------------------------
NAT Now
- - -------------------------------------------------------------------------------
DHCP Now
- - -------------------------------------------------------------------------------
Firewall Now
- - -------------------------------------------------------------------------------
10Base T Now
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Management
- - -------------------------------------------------------------------------------
Console Port Now
- - -------------------------------------------------------------------------------
Telnet over Ethernet Now
- - -------------------------------------------------------------------------------
Proxy Through Gateway 1Q00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
CAJUN 330R
- - -------------------------------------------------------------------------------
OC 12 ATM Uplink 03/00
- - -------------------------------------------------------------------------------
OC 3 ATM Uplink 05/00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
CAJUN 550R
- - -------------------------------------------------------------------------------
OC 12 ATM Uplink 03/00
- - -------------------------------------------------------------------------------
OC 3 ATM Uplink 05/00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
GX 550
- - -------------------------------------------------------------------------------
Jade
- - -------------------------------------------------------------------------------
OC3/STM-1, OC12/STM-4 Now
- - -------------------------------------------------------------------------------
Full Redundancy (excluding GR253 APS) Now
- - -------------------------------------------------------------------------------
CBX 500 Rel. 3.0 SW functionality Now
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Jade.1
- - -------------------------------------------------------------------------------
Rapid upgrade Now
- - -------------------------------------------------------------------------------
IP Navigator Now
- - -------------------------------------------------------------------------------
Amethyst & Jade NMS merge Now
- - -------------------------------------------------------------------------------
Priority reroute Now
- - -------------------------------------------------------------------------------
OC-48/STM-16 software support Now
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Jade M2
- - -------------------------------------------------------------------------------
GR 253 Direct Trunk APS for OC12/STM-4 Now
- - -------------------------------------------------------------------------------
GR 253 Direct Trunk APS for OC48/STM-16 Now
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Eurpoa (Rel. 8.0)
- - -------------------------------------------------------------------------------
BIO 2 06/00
- - -------------------------------------------------------------------------------
GR 253 OC-3/STM-1, OC-12//STM-4, OC-48/STM-16 06/00
Direct Trunk / UNI APS
- - -------------------------------------------------------------------------------
Frame BIO 06/00
- - -------------------------------------------------------------------------------
<PAGE>
- - -------------------------------------------------------------------------------
PRODUCT RELEASE SCHEDULE
- - -------------------------------------------------------------------------------
CI OR FSA GA
- - -------------------------------------------------------------------------------
4 port OC-3/STM-1 FOS/POS 06/00
- - -------------------------------------------------------------------------------
1 port OC-12/STM-4 FOS/POS 06/00
- - -------------------------------------------------------------------------------
IP Navigator & Frame Relay 06/00
- - -------------------------------------------------------------------------------
4 port DS3 ATM via GX 250 06/00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
MAX TNT
- - -------------------------------------------------------------------------------
Re. 8.0 01/00
- - -------------------------------------------------------------------------------
96 Modem Cards 02/00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
STINGER
- - -------------------------------------------------------------------------------
TAOS 7.11.1 Now
- - -------------------------------------------------------------------------------
TAOS 8.0.x 2Q00
- - -------------------------------------------------------------------------------
24-port ADSl and HDSL2 Line Interface Modules 2Q00
- - -------------------------------------------------------------------------------
<PAGE>
EXHIBIT C
OLD PRICE / NEW PRICE
CITY COMPARISON
OLD NEW
TDM QUOTES REDUCTION
KMC Central Office $2,816,827 $2,567,658 -8.85%
ILEC Tandem $483,473 $422,106 -12.69%
LSO Cob $966,946 $844,212 -12.69%
AT&T Cob $123,476 $122,350 -0.91%
MCI Cob $200,410 $146,926 -26.69%
IXC Cob $200,410 $146,926 -26.69%
Fees/Make Ready $500,000 $500,000 0.00%
Shipping (5%) $264,577 $212,509 -19.68%
Subtotal $5,556,119 $4,962,687 -10.68%
Switching Machine $2,551,741 51,950,000* -23.58%
Grand Total $8,107,860 $6,912,687 -14.74%
* List price not yet firm. This price is budgetary and exemplifies a model with
pure packet access. Seller commits to a minimum twenty percent (20%) price
savings when compared to a 5ESS TDM Switch configuration. Access vehicles (e.g.,
RLAGs, IADs, etc.) are not included in the pricing.
AMENDMENT NUMBER FOUR
TO THE GENERAL AGREEMENT AMONG
KMC TELECOM INC., KMC TELECOM II, INC., KMC TELECOM III, INC.,
KMC TELECOM IV, INC., KMC TELECOM OF VIRGINIA, INC.,
KMC TELECOM LEASING I LLC, KMC TELECOM LEASING II LLC,
KMC TELECOM LEASING III LLC, KMC TELECOM LEASING IV LLC
AND LUCENT TECHNOLOGIES INC.
This Amendment Number Four (hereinafter this "AMENDMENT FOUR") is made
effective as of February 15, 2000, by and among KMC Telecom Inc., a Delaware
corporation, KMC Telecom II, Inc., a Delaware corporation, KMC Telecom III,
Inc., a Delaware corporation, KMC Telecom IV, Inc., a Delaware corporation, KMC
Telecom of Virginia, Inc., a Virginia public service company, KMC Telecom
Leasing I LLC, a Delaware limited liability company, KMC Telecom Leasing II LLC,
a Delaware limited liability company, KMC Telecom Leasing III LLC, a Delaware
limited liability company, KMC Telecom Leasing IV LLC, a Delaware limited
liability company, each 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 Global Service Providers Group, with offices located at 600 Mountain Avenue,
Murray Hill, New Jersey 07074 (hereinafter "SELLER").
WHEREAS, Customer and Seller previously entered into that certain General
Agreement (Contract Number LNM970313MP), effective March 6, 1997, as modified
and amended by Amendment Number One (Contract Number LNM970922MP), effective as
of October 15, 1997, as further modified and amended by Amendment Number Two,
effective as of December 22, 1998, as further modified and amended by Amendment
Number Three, effective as of November 15, 1999 (as so amended, the "GENERAL
AGREEMENT"), setting forth the terms and conditions pursuant to which Seller
agreed to supply and Customer agreed to procure certain of Seller's Products,
Licensed Materials and Services (as such terms are defined therein); and
WHEREAS, Customer and Seller desire to amend and modify the General
Agreement as set forth herein; and
WHEREAS, all terms used herein but not defined herein shall have the
meanings ascribed to them in the 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:
<PAGE>
1. SCOPE OF GENERAL AGREEMENT
The definition of "Customer" contained in the General Agreement is hereby
amended to additionally include KMC III Services LLC, a Delaware limited
liability company ("KMC SERVICES"), it being the intent and understanding among
the parties that KMC Services 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 force and effect.
The terms and conditions contained in this Amendment Four and those
nonconflicting terms and conditions of the General Agreement supersede all prior
oral and written understandings among the parties and shall constitute the
entire agreement among the parties with respect to the subject matter herein.
This Amendment Number Four shall not be modified or amended except by a writing
signed by an authorized representative of each of the parties.
3. COUNTERPARTS
This Amendment Number Four may be executed in any number of 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 instrument.
4. GOVERNING LAW
This Amendment Number Four shall be governed by the laws of the State of
New York.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment Number
Four to be executed by their duly authorized representatives as of the day and
year first above written.
KMC TELECOM INC. KMC TELECOM LEASING I LLC
By: KMC Telecom Inc., as Sole Member
By: /s/ By: /s/
-------------------------- --------------------------------
Name: James D. Grenfell Name: James D. Grenfell
Title:Chief Financial Officer Title:Chief Financial Officer
KMC TELECOM II, INC. KMC TELECOM LEASING II LLC
By: KMC Telecom II, Inc., as Sole
Member
By: /s/ By: /s/
----------------------------- --------------------------------
Name: James D. Grenfell Name: James D. Grenfell
Title:Chief Financial Officer Title:Chief Financial Officer
KMC TELECOM III, INC. KMC TELECOM LEASING III LLC
By: KMC Telecom III, Inc., as Sole
Member
By: /s/ By: /s/
----------------------------- --------------------------------
Name: James D. Grenfell Name: James D. Grenfell
Title:Chief Financial Officer Title:Chief Financial Officer
KMC TELECOM IV, INC. KMC TELECOM LEASING IV LLC
By: KMC Telecom IV, Inc., as Sole
Member
By: /s/ By: /s/
----------------------------- --------------------------------
Name: James D. Grenfell Name: James D. Grenfell
Title:Chief Financial Officer Title:Chief Financial Officer
KMC TELECOM OF VIRGINIA, INC. KMC III SERVICES LLC
By: KMC Telecom III, Inc., as Sole
Member
By: /s/ By: /s/
----------------------------- --------------------------------
Name: James D. Grenfell Name: James D. Grenfell
Title:Chief Financial Officer Title:Chief Financial Officer
<PAGE>
LUCENT TECHNOLOGIES INC.
By: /s/
-----------------------------
Name: William H. Pittman
Title:Area Vice President
SUBSIDIARIES OF KMC TELECOM HOLDINGS, INC.
COMPANY STATE OF INCORPORATION/ORGANIZATION
KMC Telecom Inc. Delaware
KMC Telecom II, Inc. Delaware
KMC Telecom III, Inc. Delaware
KMC Telecom IV, Inc. Delaware
KMC Telecom V, Inc. Delaware
KMC Telecom of Virginia, Inc. Virginia
(subsidiary of KMC Telecom Inc.)
KMC Telecom of Virginia IV, Inc. Virginia
(subsidiary of KMC Telecom of
Virginia, Inc.)
KMC Telecom Leasing I LLC Delaware
(subsidiary of KMC Telecom Inc.)
KMC Telecom Leasing II LLC Delaware
(subsidiary of KMC Telecom II, Inc.)
KMC Telecom Leasing III LLC Delaware
(subsidiary of KMC Telecom III, Inc.)
KMC Telecom Leasing IV LLC Delaware
(subsidiary of KMC Telecom IV, Inc.)
KMC Telecom.com, Inc. Delaware
KMC III Services LLC Delaware
(formerly KMC III LLC)
(subsidiary of KMC Telecom
III, Inc.)
KMC Telecom Financing, Inc. Delaware
KMC Financial Services LLC Delaware
(formerly KMC Services LLC)
KMC Network Technologies LLC Delaware
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.1
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF KMC TELECOM HOLDINGS, INC. AS OF DECEMBER 31, 1999 AND THE RELATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Dec-1-1999
<CASH> 85,966,000
<SECURITIES> 0
<RECEIVABLES> 32,924,000
<ALLOWANCES> (5,551,000)
<INVENTORY> 0
<CURRENT-ASSETS> 151,839,000
<PP&E> 676,291,000
<DEPRECIATION> (36,967,000)
<TOTAL-ASSETS> 886,040,000
<CURRENT-LIABILITIES> 208,846,000
<BONDS> 576,137,000
250,470,000
0
<COMMON> 6,000
<OTHER-SE> (384,419,000)
<TOTAL-LIABILITY-AND-EQUITY> 886,040,000
<SALES> 0
<TOTAL-REVENUES> 64,313,000
<CGS> 0
<TOTAL-COSTS> 110,309,000
<OTHER-EXPENSES> 114,713,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69,411,000
<INCOME-PRETAX> (225,716,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (225,716,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (225,716,000)
<EPS-BASIC> (360.88)
<EPS-DILUTED> (360.88)
</TABLE>
