UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
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 (I.R.S. Employer
incorporation or organization) Identification No.)
1545 Route 206, Suite 300
Bedminster, New Jersey 07921
(Address, including zip code, of principal executive offices)
(908) 470-2100
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding
----- -----------
Common Stock, par value $0.01 853,765 shares,
per share. as of May 12, 2000
<PAGE>
KMC TELECOM HOLDINGS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
ITEM 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets, December 31,
1999 and March 31, 2000...................................... 2
Unaudited Condensed Consolidated Statements of Operations,
Three Months Ended March 31, 1999 and 2000................... 3
Unaudited Condensed Consolidated Statements of Cash Flows,
Three Months Ended March 31, 1999 and 2000................... 4
Notes to Unaudited Condensed Consolidated Financial
Statements................................................... 5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.... 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................. 17
ITEM 2. Changes in Securities and Use of Proceeds..................... 17
ITEM 3. Defaults Upon Senior Securities............................... 17
ITEM 4. Submission of Matters to a Vote of Security Holders........... 17
ITEM 5. Other Information............................................. 17
ITEM 6. Exhibits and Reports on Form 8-K.............................. 17
SIGNATURES............................................................ 19
<PAGE>
PART I - FINANCIAL INFORMATION
KMC Telecom Holdings, Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
----------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................ $ 85,966 $ 97,678
Restricted investments........................... 37,125 37,125
Accounts receivable, net of allowance for
doubtful accounts of $5,551 and $5,853 in 1999
and 2000, respectively.......................... 27,373 34,612
Prepaid expenses and other current assets........ 1,375 136,123
---------- -----------
Total current assets................................. 151,839 305,538
Long term restricted investments..................... 51,446 58,279
Networks, property and equipment, net................ 639,324 726,042
Intangible assets, net............................... 3,602 3,844
Deferred financing costs, net........................ 38,816 46,454
Other assets......................................... 1,013 1,353
---------- -----------
$ 886,040 $1,141,510
========== ===========
Liabilities, redeemable and nonredeemable equity
(deficiency)
Current liabilities:
Accounts payable................................. $ 167,490 $ 208,689
Accrued expenses................................. 37,047 54,916
Deferred revenue................................. 4,309 6,631
---------- -----------
Total current liabilities............................ 208,846 270,236
Notes payable........................................ 235,000 499,417
Senior discount notes payable........................ 301,137 310,422
Senior notes payable................................. 275,000 275,000
---------- -----------
Total liabilities.................................... 1,019,983 1,355,075
Commitments and contingencies
Redeemable equity:
Senior redeemable, exchangeable, PIK preferred
stock, par value $.01 per share; authorized:
630 shares in 1999 and 2000; shares issued
and outstanding:
Series E, 65 shares in 1999 and 67 shares in
2000 ($67,380 liquidation
preference) ............................... 50,770 53,464
Series F, 44 shares in 1999 and 46 shares in
2000 ($45,792 liquidation
preference)................................ 41,370 43,632
Redeemable cumulative convertible preferred stock,
par value $.01 per share; 499 shares
authorized; shares issued and outstanding:
Series A, 124 shares in 1999 and 2000 ($12,380
liquidation preference)...................... 71,349 90,552
Series C, 175 shares in 1999 and 2000
($17,500 liquidation preference)............. 40,301 49,669
Redeemable common stock, 224 shares issued and
outstanding.................................. 33,755 39,846
Redeemable common stock warrants................. 12,925 14,483
---------- -----------
Total redeemable equity.............................. 250,470 291,646
---------- -----------
Nonredeemable equity (deficiency):
Common stock, par value $.01 per share; 3,000
shares authorized, 629 shares and 630 shares
issued and outstanding in 1999 and 2000,
respectively.................................... 6 6
Unearned compensation............................ (9,163) (10,304)
Accumulated deficit.............................. (375,256) (494,913)
---------- ----------
Total nonredeemable equity (deficiency).............. (384,413) (505,211)
---------- -----------
$ 886,040 $1,141,510
========== ===========
See accompanying notes.
</TABLE>
<PAGE>
KMC Telecom Holdings, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 2000
---------- ---------
<S> <C> <C>
Revenue...................................... $ 11,078 $ 29,151
Operating expenses:
Network operating costs.................. 15,026 28,807
Selling, general and administrative...... 16,634 39,326
Stock option compensation expense........ 3,869 13,308
Depreciation and amortization............ 5,523 13,737
---------- ---------
Total operating expenses............... 41,052 95,178
---------- ---------
Loss from operations......................... (29,974) (66,027)
Interest income.............................. 942 1,969
Interest expense............................. (10,327) (27,164)
---------- --------
Net loss before cumulative effect of change
in accounting principle.................... (39,359) (91,222)
Cumulative effect of change in accounting
principle.................................. - (1,705)
---------- ---------
Net loss..................................... (39,359) (92,927)
Dividends and accretion on redeemable
preferred stock............................ (11,444) (33,527)
---------- ---------
Net loss applicable to common shareholders... $ (50,803) $(126,454)
========== ==========
Net loss per common share before cumulative
effect of change in accounting principle... $ (59.87) $ (146.19)
Cumulative effect of change in accounting
principle.................................. - (2.00)
---------- ----------
Net loss per common share.................... $ (59.87) $ (148.19)
========== ==========
Weighted average number of common shares
outstanding................................ 848,565 853,341
========== ==========
Pro forma amounts assuming the change in
accounting principle was applied
retroactively:
Net loss applicable to common shareholders... $ (50,983) $(124,749)
========== ==========
Net loss per common share.................... $ (60.08) $ (146.19)
========== ==========
See accompanying notes.
</TABLE>
<PAGE>
KMC Telecom Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 2000
-------- -------
<S> <C> <C>
Operating Activities
Net loss............................................. $ (39,359) $ (92,927)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 5,523 13,737
Non-cash interest expense........................ 8,291 9,061
Non-cash stock option compensation expense....... 3,869 13,308
Changes in assets and liabilities:
Accounts receivable............................ (3,717) (7,239)
Prepaid expenses and other current assets...... 89 (348)
Other assets................................... (34) (7,229)
Accounts payable............................... (5,146) (45,416)
Accrued expenses............................... 2,369 13,554
Deferred revenue............................... 3,122 2,322
----------- ---------
Net cash used in operating activities................ (24,993) (101,177)
----------- ---------
Investing Activities
Construction of networks and purchases of equipment.. (36,479) (145,850)
Acquisitions of franchises, authorizations and
related assets..................................... (303) (395)
Purchases of investments, net........................ (1,080) -
----------- ---------
Net cash used in investing activities................ (37,862) (146,245)
----------- ---------
Financing Activities
Proceeds from issuance of preferred stock and related
warrants, net of issuance costs.................... 58,200 -
Proceeds from exercise of stock options.............. 333 -
Proceeds from credit facilities, net of issuance costs 30,933 259,134
----------- ---------
Net cash provided by financing activities............ 89,466 259,134
----------- ---------
Net increase in cash and cash equivalents............ 26,611 11,712
Cash and cash equivalents, beginning of period....... 21,181 85,966
----------- ---------
Cash and cash equivalents, end of period............. $ 47,792 $ 97,678
=========== =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest, net of
amounts capitalized................................ $ 464 $ 3,332
=========== =========
See accompanying notes.
</TABLE>
<PAGE>
KMC Telecom Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2000
1. Basis of Presentation and Organization
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 IV of Virginia, Inc., KMC Telecom V, Inc., KMC
Telecom Financial Services LLC, KMC Telecom.com, Inc. and KMC Telecom Financing,
Inc., are collectively referred to herein as the Company. All significant
intercompany accounts and transactions have been eliminated in consolidation.
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.
The unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting. Accordingly, they do not include certain information and
note disclosures required by generally accepted accounting principles for annual
financial reporting and should be read in conjunction with the financial
statements and notes thereto of KMC Telecom Holdings, Inc. as of and for the
year ended December 31, 1999.
The unaudited interim financial statements reflect all adjustments which
management considers necessary for a fair presentation of the results of
operations for these periods. The results of operations for the interim periods
are not necessarily indicative of the results for the full year.
The balance sheet of KMC Telecom Holdings, Inc. at December 31, 1999 was
derived from the audited consolidated balance sheet at that date.
Certain reclassifications have been made to the 1999 Unaudited Condensed
Consolidated Financial Statements to conform with the 2000 presentation.
2. Accounting Change
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 principles to revenue recognition in financial statements. Through
December 31, 1999, the Company recognized installation revenue upon completion
of the installation. Effective January 1, 2000, in accordance with the
provisions of SAB 101, the Company is recognizing installation revenue over the
average contract period. The cumulative effect of this change in accounting
principle resulted in a charge of approximately $1.7 million which was recorded
in the quarter ended March 31, 2000. For the quarter ended March 31, 2000, the
net effect on revenues of adopting this change in accounting principle was
approximately $230,000.
<PAGE>
3. Networks, Property and Equipment
Networks and equipment are comprised of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
----------- ---------
(in thousands)
<S> <C> <C>
Fiber optic systems.............................. $ 164,985 $ 197,023
Telecommunications equipment..................... 421,718 438,936
Furniture and fixtures........................... 21,397 23,745
Leasehold improvements........................... 1,811 1,766
Construction-in-progress......................... 66,380 115,113
---------- --------
676,291 776,583
Less accumulated depreciation.................... (36,967) (50,541)
----------- ---------
$ 639,324 $ 726,042
=========== =========
</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 for the three months ended March 31, 1999 and 2000 amounted to $539,000
and $2.2 million, respectively.
4. Intangible Assets
Intangible assets are comprised of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
----------- ---------
(in thousands)
<S> <C> <C>
Franchise costs.................................... $ 2,015 $ 2,218
Authorizations and rights-of-way................... 2,052 2,198
Building access agreements......................... 637 637
Other.............................................. 401 447
----------- ---------
5,105 5,500
Less accumulated amortization...................... (1,503) (1,656)
----------- ---------
$ 3,602 $ 3,844
=========== =========
</TABLE>
<PAGE>
5. Accrued Expenses
Accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
----------- ----------
(in thousands)
<S> <C> <C>
Accrued compensation............................. $ 11,423 $ 9,860
Accrued costs related to financing activities.... 7,316 11,080
Accrued interest payable......................... 8,544 19,828
Accrued telecommunications costs................. 3,794 4,345
Other accrued expenses........................... 5,970 9,803
============ ==========
$ 37,047 $ 54,916
============ ==========
</TABLE>
6. Amended Senior Secured Credit Facility
During the quarter ended March 31, 2000, KMC Telecom, Inc., KMC Telecom
II, Inc., KMC Telecom of Virginia, Inc. and KMC Telecom III, Inc. (collectively,
the "Borrowers"), amended, restated and combined the Senior Secured Credit
Facility and the Lucent Facility, in a single 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 Corporation, Canadian Imperial Bank of Commerce, First
Union National Bank and Lucent Technologies, Inc. (collectively, 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"). At March
31, 2000, the outstanding loan balances on the Revolver, the Term Loan and the
Lucent Term Loan, were approximately $164 million, $75 million, and $260
million, respectively.
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 quarterly payment date beginning April 1, 2003.
The initial quarterly commitment reduction is 5.0%, reducing to 3.75% on July 1,
2003, then 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 Amended Senior Secured Credit
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
<PAGE>
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.
Borrowings under the Amended Senior Secured Credit Facility will bear
interest payable, at the Borrowers' option, at either (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. The
Borrowers were being charged a weighted average interest rate of 10.31% at March
31, 2000. If a payment default were to occur, the interest rate will be
increased by four percentage points. If any other event of default were to
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, the proceeds of which will be
applied toward this requirement, and currently contemplates raising the $85
million balance through private or public sales of securities in the capital
markets. If the $185 million is not funded by July 31, 2000 then the applicable
interest rate associated with this facility will increase by 100 basis points
until the $185 million amount is fully funded. Additional affirmative and
negative covenants include, among others, covenants restricting the ability of
the Borrowers to consolidate or merge with any person, sell or lease assets not
in the ordinary course of business, sell or enter into long term leases of dark
fiber, redeem stock, pay dividends or make any other payments (including
payments of principal or interest on loans) to 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 9
to 1.
<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 thereunder. 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.
7. 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>
Three Months Ended
March 31,
1999 2000
------- -------
(in thousands)
<S> <C> <C>
On-net................................................ $ 4,919 $ 25,741
Resale................................................ 6,159 3,410
-------- --------
Total................................................. $ 11,078 $ 29,151
======== ========
</TABLE>
8. Commitments and Contingencies
Purchase Commitments
As of March 31, 2000, the Company has outstanding commitments aggregating
approximately $40 million related to purchases of telecommunications equipment
and fiber optic cable and its obligations under its agreements with certain
suppliers.
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
<PAGE>
dates to their earliest potential redemption date (October 22, 2003). At March
31, 2000, the aggregate redemption value of the redeemable equity was
approximately $386 million, reflecting per share redemption amounts of $1,454
for the Series A Preferred Stock, $571 for the Series C Preferred Stock and $300
for the redeemable common stock and redeemable common stock warrants.
9. Net Loss Per Common Share
The following table sets forth the computation of net loss per common
share-basic (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 2000
--------- --------
<S> <C> <C>
Numerator:
Net loss before cumulative effect of
change in accounting principle.......... (39,359) $ (91,222)
Cumulative effect of change in accounting
principle............................... - (1,705)
---------- ----------
Net loss.................................. (39,359) (92,927)
Dividends and accretion on redeemable
preferred stock......................... (11,444) (33,527)
---------- ---------
Numerator for net loss applicable to
common shareholders..................... $ (50,803) $(126,454)
========== ==========
Denominator:
Denominator for net loss per common share
- weighted average number of common shares
outstanding.............................. 848,565 853,341
========== ========
Net loss per common share before cumulative
effect of change in accounting principle -
basic........................................ $ (59.87) $ (146.19)
Cumulative effect of change in accounting
principle.................................... - (2.00)
--------- ----------
Net loss per common share - basic.............. $ (59.87) $ (148.19)
========== ==========
</TABLE>
Options and warrants to purchase an aggregate of 364,495 and 520,531 shares
of common stock were outstanding as of March 31, 1999 and 2000, respectively,
but a computation of diluted net loss per common share has not been presented,
as the effect would be anti-dilutive.
10. Significant Contracts
In March 2000, the Company entered into an agreement with Qwest
Communications Corporation, pursuant to which (i) the Company took delivery of
approximately $134 million of portal equipment from the provider and (ii) the
Company agreed to install and maintain this equipment, in over 90 cities
throughout the United States, principally to handle Internet service provider
traffic on behalf of the provider. The services agreement is for a term of 42
months, commencing August 1, 2000 and expiring on January 31, 2004. The Company
expects to enter into a financing transaction to fund the cost of this
equipment. This equipment is recorded in other current assets and accounts
payable at March 31, 2000.
<PAGE>
11. Subsequent Events
Amended and Restated Interest Rate Swap Agreement
In April 2000, the Company entered into an amended and restated interest
rate swap agreement (the "Amended Swap") with a commercial bank to reduce the
impact of changes in interest rates on its outstanding variable rate debt. The
Amended Swap effectively fixes the Company's interest rate on $325 million of
outstanding variable rate borrowings under the Amended Senior Secured Credit
Facility (see Note 6) through April 2003 after which time the Amended Swap is
reduced to $225 million through January 2004 and then finally reduced to $100
million until termination of the Amended Swap in April 2005. 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.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. The following discussion
should be read in conjunction with the Unaudited Condensed Consolidated
Financial Statements, including the notes thereto, included elsewhere in this
Form 10-Q.
RESULTS OF OPERATIONS
As a result of the development and rapid growth of the Company's business during
the periods presented, the period-to-period comparisons of the Company's results
of operations are not necessarily meaningful and should not be relied upon as an
indication of future performance.
Three Months Ended March 31, 2000 Compared To
Three Months Ended March 31, 1999
Revenue. On an as reported basis, revenue increased 163% from $11.1
million for the three months ended March 31, 1999 (the "1999 First Quarter") to
$29.2 million for the three months ended March 31, 2000 (the "2000 First
Quarter"). This increase is primarily attributable to the fact that we derived
revenues from 35 markets during the 2000 First Quarter compared to 22 markets
during the 1999 First Quarter. In addition, after adjusting 1999 revenues for
the reversal of reciprocal compensation to Internet service providers in
Louisiana, each of our systems that generated revenues during the 1999 First
Quarter generated increased revenues during the 2000 First Quarter.
During the 1999 First Quarter, 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 $800,000 related to the 1999 First Quarter.
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
<PAGE>
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.
Our management will continue to consider the circumstances surrounding
this dispute periodically in determining whether reserves against unpaid
balances are warranted. As of March 31, 2000, no reserves are considered
necessary by management. We recognized reciprocal compensation revenue of $6.4
million, or 22% of our total revenue, during the 2000 First Quarter,
approximately 63% of which relates to our interconnection agreement with
BellSouth.
On an as reported basis, On-net special access, private line and switched
services revenue ("On-net revenue") increased 426% from $4.9 million in the 1999
First Quarter to $25.8 million in the 2000 First Quarter, while revenue derived
from the resale of switched services ("Resale revenue") decreased 45% from $6.2
million to $3.4 million over the same period. On-net revenues 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. On-net revenues represented 88% of total revenue in the 2000
First Quarter, compared to 44% of total revenue in the 1999 First Quarter.
Network Operating Costs. Network operating costs increased 92% from $15.0
million for the 1999 First Quarter to $28.8 million for the 2000 First Quarter.
This increase of approximately $13.8 million was due primarily to the increase
in the number of markets in which we operated in the 2000 First Quarter as
compared to the 1999 First Quarter. The detailed components of this increase are
$6.1 million in direct costs associated with providing on-net services, resale
services and leasing unbundled network element services, $4.5 million in
personnel costs, $1.0 million in consulting and professional services costs,
$900,000 in network support services, $700,000 in telecommunications costs and
$600,000 in other direct operating costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 138% from $16.6 million for the 1999 First
Quarter to $39.3 million in the 2000 First Quarter. This increase of
approximately $22.7 million is due primarily to the increase in the number of
markets in which we operated in the 2000 First Quarter as compared to the 1999
First Quarter. The detailed components of this increase are $11.8 million in
personnel costs, $1.1 million in professional costs, $1.0 million in facility
costs, $900,000 in travel related costs, $800,000 in telecommunications costs,
as well as increases in other marketing and general and administrative costs
aggregating approximately $7.1 million.
Stock Option Compensation Expense. Stock option compensation expense, a
non-cash charge, increased 241% from $3.9 million in the 1999 First Quarter to
$13.3 million for the 2000 First Quarter. This increase is due primarily to an
increase in the estimated fair value of the Company's Common Stock, as well as
the grant of additional option awards during the 2000 First Quarter.
Depreciation and Amortization. Depreciation and amortization expense
increased 149% from $5.5 million for the 1999 First Quarter to $13.7 million for
the 2000 First Quarter. This increase is due primarily to depreciation expense
associated with the greater number of networks in commercial operation during
the 2000 First Quarter.
<PAGE>
Interest Income. Interest income increased 122% from $900,000 in the 1999
First Quarter to $2.0 million in the 2000 First Quarter. The increase is due
primarily to larger average cash, cash equivalent and restricted cash balances
during the 2000 First Quarter as compared to the 1999 First Quarter.
Interest Expense. Interest expense increased 164% from $10.3 million in
the 1999 First Quarter to $27.2 million in the 2000 First Quarter. The increase
is due primarily to the issuance of the Senior Notes in May 1999, higher
borrowings under the Amended Senior Secured Credit Facility and additional
accretion on the Senior Discount Notes. We capitalized interest related to
network construction projects of $539,000 during the 1999 First Quarter and $2.2
million during the 2000 First Quarter.
Net Loss Before Cumulative Effect of Change in Accounting Principle. For
the reasons stated above, net loss before cumulative effect of change in
accounting principle increased 131% from $39.4 million for the 1999 First
Quarter to $91.2 million for the 2000 First Quarter.
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.
During the 2000 First Quarter, we amended, restated and combined our prior
Senior Secured Credit Facility and our prior Lucent Facility in a single $700.0
million facility (See Note 6 of the Notes to Unaudited Condensed Consolidated
Financial Statements). Under the Amended Senior Secured Credit Facility, our
subsidiaries which own our 35 existing networks and the 2 networks which are to
be completed during 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 and other general corporate purposes.
At May 12, 2000 we had $540.4 million of indebtedness outstanding under
the Amended Senior Secured Credit Facility and had an additional $159.6 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. If this $185 million cash capital contribution is not
made by July 31, 2000, however, the applicable interest rate associated with the
facility will increase by 100 basis points until the $185 million amount is
fully funded. 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 was $259.1
million for the 2000 First Quarter. Our net cash used in operating and investing
activities was $247.4 million for the 2000 First Quarter.
We made capital expenditures of $49.4 million in the 1999 First Quarter
versus $100.3 million for the 2000 First Quarter. Continued significant capital
expenditures are expected to be made in 2000 and thereafter. The majority of
<PAGE>
these expenditures are expected to be made for network construction and the
purchase of switches and related equipment to facilitate the offering of our
services. 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.
In addition to the capital expenditures above, we took delivery of
approximately $134 million of portal equipment in March 2000 in association with
entering into an agreement with Qwest Communications Corporation (See Note 10 of
the Notes to Unaudited Condensed Consolidated Financial Statements). We expect
to enter into a financing transaction to fund the cost of this equipment,
however, we can give no assurance that we will be able to obtain such financing.
At March 31, 2000, we had outstanding commitments aggregating
approximately $40.0 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 2 networks currently planned for completion
during 2000, as well as operating losses and capital expenditure requirements
for all of our 37 markets at least through the end of the first quarter of 2001.
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, 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.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in
interest rates. A substantial portion 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.
For other information regarding an April 2000 amendment and restatement of the
swap agreement, see Note 11 of the Notes to Unaudited Condensed Consolidated
Financial Statements contained in Item 1.
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
March 31,
2000 2000 2001 2002 2003 2004 Thereafter Total
-------- ---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt:
Fixed Rate:
Senior Discount Notes,
Interest payable at
12 1/2%,
Maturing 2008 $241.6 $- $- $- $- $- $310.4 $310.4
Senior Notes,
Interest payable at
13 1/2%,
Maturing 2009 277.1 - - - - - 275.0 275.0
Variable rate:
Amended Senior
Secured Credit
Facility, interest
variable (10.31% at
March 31, 2000)(a) 499.4 - - .6 44.1 79.1 375.6 499.4
Interest rate swap:
Variable rate for
fixed rate (5.8) - - - - - - -
Total $1,012.3 $- $- $.6 $44.1 $79.1 $961.0 $1,084.8
</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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) On February 1, 2000, an institutional investor exercised 4,250
warrants to purchase 925 shares of Common Stock pursuant to a Warrant Agreement
dated as of January 29, 1998. 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 imposes substantial
restrictions upon transfer of the securities and the certificates representing
the securities have been legended to that effect.
(b) On February 28, 2000, an institutional investor exercised 700
warrants to purchase 152 shares of Common Stock pursuant to a Warrant Agreement
dated as of January 29, 1998. 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 imposes substantial
restrictions upon transfer of the securities and the certificates representing
the securities have been legended to that effect.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Amendment No. 1, dated as of March 28, 2000, to 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.
<PAGE>
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
(b)(i) A report on Form 8-K was filed by the Registrant on March 15,
2000 pursuant to Item 5 thereof reporting certain information with respect to a
change in its management. Such information was disclosed in a Press Release,
dated March 10, 2000, filed as an exhibit to such report.
(b)(ii) A report on Form 8-K was filed by the Registrant on March
17, 2000 pursuant to Item 5 thereof reporting its unaudited financial results
for the year ended December 31, 1999. Such financial results were disclosed in a
Press Release, dated March 17, 2000, filed as an exhibit to such report.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Dated: May 15, 2000
KMC TELECOM HOLDINGS, INC.
(Registrant)
By: /s/ William F. Lenahan
-----------------------------
William F. Lenahan
Chief Executive Officer
(Principal Executive Officer)
By: /s/ William H. Stewart
-----------------------------
William H. Stewart
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
Exhibit Index
No. Description
--- -----------
10.1 Amendment No. 1, dated as of March 28, 2000, to 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.
27.1 Financial Data Schedule.
AMENDMENT NO. 1
TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
AMENDMENT NO. 1 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
("AMENDMENT") dated as of March 28, 2000, is 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"; KMC, KMC II, KMC III, KMC
Virginia, Leasing I , Leasing II, Leasing III, Telecom.com and Services 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, 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 Amended and Restated 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 February 15, 2000, 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 1.02 is hereby amended to delete the proviso contained in
the definition of "Applicable Margin" and to substitute the following therefor:
"provided, however, in the event that the Required Contribution is not
obtained on or prior to July 31, 2000, each such margin shall be increased
beginning on August 1, 2000 and continuing until such time as the Required
Contribution has been obtained, by 100 basis points."
1
<PAGE>
1.2 SECTION 1.02 is hereby further amended to delete the proviso to
the definition of "TERM B LOAN COMMITMENT AMOUNT".
1.3 SECTION 1.02 is hereby further amended to add the following new
definition in the appropriate alphabetical location:
"KMC HOLDINGS STOCK SALE" shall mean the sale to one or more Persons
of at least $100,000,000 of Equity Interests in KMC Holdings, which may include
the sale of redeemable, exchangeable preferred Equity Interests with terms and
conditions substantially as described in Exhibit A to that certain letter
agreement dated March 22, 2000 between Lucent and KMC Holdings.
1.4 SECTION 2.02(A) is hereby amended to delete clause (II) thereof.
1.5 SECTION 2.02(D) is hereby amended to delete the amount
$200,000,000 in clause (II) thereof, and to replace such amount with the amount
$241,000,000.
1.6 SECTION 2.05(B) is hereby amended to delete the penultimate
sentence thereof.
1.7 SECTION 5.18 is amended to delete the text thereof and to
substitute the following therefor:
"The Borrowers shall obtain the Required Contribution on or prior to
April 1, 2001."
1.8 SECTION 6.08(7) is hereby amended to delete the date "August 31,
2000" and to substitute therefor the date "April 1, 2001".
1.9 SECTION 7.01(A) is hereby amended to add the following sentence
thereto:
"In the calculation of such ratio, the amount of unrestricted cash
balances of the Borrowers in excess of $20,000,000 shall be subtracted from
Total Debt."
2. CONDITIONS PRECEDENT. This Amendment shall become effective as of
the date above written, if, and only if, the Agents have received on or prior to
March 30, 2000, duly executed originals of this Amendment from the Borrowers,
the Requisite Lenders and the Agents, and duly executed originals of Amendment
No. 1 to the KMC Holdings Guaranty from KMC Holdings.
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
2
<PAGE>
and warranties shall be deemed to have been remade as of the date of delivery of
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 III, INC.
KMC TELECOM OF VIRGINIA, INC.
KMC TELECOM.COM, INC.
In each case:
By: /s/ William H. Stewart
----------------------------
Name: William H. Stewart
Title: CFO
KMC TELECOM LEASING I LLC
By: KMC TELECOM INC., as its Sole Member
By: /s/ William H. Stewart
----------------------------
Name: William H. Stewart
Title: CFO
KMC TELECOM LEASING II LLC
By: KMC TELECOM II, INC., as its Sole
Member
By: /s/ William H. Stewart
----------------------------
Name: William H. Stewart
Title: CFO
4
<PAGE>
KMC TELECOM LEASING III LLC
KMC III SERVICES LLC
In each case:
By: KMC TELECOM III, INC., as its Sole
Member
By: /s/ William H. Stewart
----------------------------
Name: William H. Stewart
Title: CFO
FIRST UNION NATIONAL BANK, as the
Agent and as a Lender
By: /s/ Mark L. Cook
------------------------------
Name: Mark L. Cook
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:------------------------------
Name:------------------------------
Title:
CANADIAN IMPERIAL BANK OF COMMERCE,
as a Lender
By: /s/ Ellen Marshall
------------------------------
Name: Ellen Marshall
Title: Managing Director
CIBC World Markets Corp., as Agent
5
<PAGE>
GENERAL ELECTRIC CAPITAL CORPORATION,
as a Lender
By: /s/ Mark F. Mylon
------------------------------
Name: Mark F. Mylon
Title: Manager-Operations
LUCENT TECHNOLOGIES INC., as a Lender
By: /s/ Dina Fede
------------------------------
Name: Dina Fede
Title: Director
BANKBOSTON, N.A., as a Lender
By:------------------------------
Name:------------------------------
Title:
CREDIT SUISSE FIRST BOSTON, as a Lender
By: /s/ Joel Glodowski
------------------------------
Name: Joel Glodowski
Title: Managing Director
By: /s/ Robert Hetu
------------------------------
Name: Robert Hetu
Title: Vice President
DRESDNER BANK AG NEW YORK AND GRAND
CAYMAN BRANCHES, as a Lender
By: /s/ William F. Lernbert
------------------------------
Name: William F. Lernbert
Title: Vice President
By: /s/ Brian Schneider
------------------------------
Name: Brian Schneider
Title: Assistant Vice President
6
<PAGE>
MORGAN STANLEY SENIOR FUNDING, INC.,
as a Lender
By: /s/ T. Morgan Edwards II
------------------------------
Name: T. Morgan Edwards II
Title: Vice President
By:------------------------------
Name:------------------------------
Title:
MORGAN STANLEY DEAN WITTER PRIME
INCOME TRUST, as a Lender
By:------------------------------
Name:------------------------------
Title:
UNION BANK OF CALIFORNIA, N.A.,
as a Lender
By:------------------------------
Name:------------------------------
Title:
KEYPORT LIFE INSURANCE COMPANY,
as a Lender
By: /s/ James R. Fellows
------------------------------
Name: James R. Fellows
Title: Vice President
STEIN ROE FLOATING RATE LIMITED LIABILITY
COMPANY, as a Lender
By: /s/ James R. Fellows
------------------------------
Name: James R Fellows
Title: Vice President
Stein Roe & Farnham Incorporated,
as 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, 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 Amended and Restated Loan and Security
Agreement dated as of February 15, 2000 (as amended, restated, supplemented or
otherwise modified from time to time, the "LOAN 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 Telecom Leasing
III LLC, KMC Telecom.com, KMC III Services 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.1 to Amended and Restated Loan and Security
Agreement dated as of March 28, 2000 (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 28th day of March, 2000.
KMC TELECOM HOLDINGS, INC.
By: /s/ William H. Stewart
----------------------------
Name: William H. Stewart
Title: CFO and Executive Vice President
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET OF KMC TELECOM HOLDINGS, INC. AS OF MARCH 31, 2000 AND THE
RELATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-1-2000
<PERIOD-END> Mar-31-2000
<CASH> 97,678,000
<SECURITIES> 0
<RECEIVABLES> 40,465,000
<ALLOWANCES> (5,853,000)
<INVENTORY> 0
<CURRENT-ASSETS> 305,538,000
<PP&E> 776,583,000
<DEPRECIATION> (50,541,000)
<TOTAL-ASSETS> 1,141,510,000
<CURRENT-LIABILITIES> 270,236,000
<BONDS> 585,422,000
291,646,000
0
<COMMON> 6,000
<OTHER-SE> (505,217,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,141,510,000
<SALES> 0
<TOTAL-REVENUES> 29,151,000
<CGS> 0
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<OTHER-EXPENSES> 66,371,000
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<INTEREST-EXPENSE> 27,164,000
<INCOME-PRETAX> (91,222,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (91,222,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,705,000)
<NET-INCOME> (92,927,000)
<EPS-BASIC> (148.19)
<EPS-DILUTED> (148.19)
</TABLE>
