United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 1998.
|_| 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 - 56365
MJD COMMUNICATIONS, INC.
-----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3725229
- ------------------------------------ ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
521 East Morehead Street, Suite 250
Charlotte, North Carolina 28202
------------------------- ---------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (704) 344-8150.
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. Yes |X| 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|
As of March 24, 1999, the registrant had outstanding 1,810,146.80 shares
of common stock and no shares of the registrant's common stock were held by
non-affiliates.
<PAGE>
MJD COMMUNICATIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
ITEM PAGE
NUMBER NUMBER
- ------ ------
- Index..............................................................2
PART I
1. Business...........................................................3
2. Properties........................................................10
3. Legal Proceedings.................................................11
4. Submission of Matters to a Vote of Security Holders...............12
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters...........................................................13
6. Selected Financial Data...........................................14
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .........................................16
7A. Quantitative and Qualitative Disclosures about Market Risk........23
8. Financial Statements and Supplementary Data.......................24
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...........................................25
PART III
10. Directors and Executive Officers of the Registrant................26
11. Executive Compensation............................................28
12. Security Ownership and Beneficial Management .....................31
13. Certain Relationships and Related Transactions....................33
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8K...35
Independent Auditors Report and Schedule
- Signatures........................................................36
- Exhibit Index
<PAGE>
PART I
ITEM 1. BUSINESS
Company Overview
MJD Communications, Inc. ("MJD" or the "Company") is a provider of
telecommunications services to customers in rural communities offering a full
array of services which include local, intrastate and interstate access,
enhanced services, Internet services, cable television service and wireless
telephony. As of December 31, 1998, the Company believes that it was the
eighteenth largest telephone company in the United States, and the largest
telephone company in the United States that focuses primarily on acquiring and
operating rural telecommunications companies.
The Company believes that the rural telecommunications market is an
attractive investment opportunity due to the limited competition, stable
economic and demographic characteristics and a favorable regulatory environment;
in particular, pursuant to existing state and federal regulations, the Company
is able to charge rates which enable it to recover its operating and capital
costs, plus a reasonable (as determined by the relevant regulatory authority)
rate of return on its invested capital. The Company's rural local exchange
carriers ("RLECs") which serve this market are characterized by stable operating
results and strong cash flow margins. As of December 31, 1998, the Company had
successfully completed the acquisition of seventeen RLECs located in ten states
(Colorado, Illinois, Kansas, Maine, New Hampshire, New York, South Dakota,
Washington, Oklahoma and Vermont) serving over 130,000 access lines. MJD's
strategy is to improve operating margins and reduce trailing acquisition
multiples by integrating many of the corporate and administrative functions of
the acquired companies and increasing revenues through innovative marketing
strategies for enhanced and ancillary services. The Company believes that the
attractive operating characteristics of rural markets and the Company's ability
to draw on its existing corporate resources create the opportunity to achieve
and maintain substantial operating efficiencies. During 1998, the Company
launched its competitive access exchange carrier ("CLEC") subsidiary, FairPoint
Communications Corp. ("FairPoint"), a wholly owned subsidiary. Through
FairPoint, the Company is extending its service offering to markets adjacent to
its RLECs. For the year ended December 31, 1998, FairPoint had entered fourteen
markets and has provisioned approximately 7,000 access lines which brought total
access lines under MJD ownership or management to approximately 137,000.
The Company was formed in 1991 to seek consolidation opportunities in the
RLEC market. The Company's senior management team has significant industry
experience and a demonstrated track record of acquiring and integrating RLECs.
As of December 31, 1998, senior management owned 24.6% of the common stock of
the Company on a fully diluted basis. The Company's primary equity investors are
investment partnerships affiliated with Kelso & Company ("Kelso") and Carousel
Capital Partners, L.P. ("Carousel" and collectively with Kelso, the "Equity
Investors"), each of which owned 37.7% of the common stock of the Company on a
fully diluted basis as of December 31, 1998. MJD benefits from the Equity
Investors' financial and management expertise and financial support. The Equity
Investors have invested a total of $47.8 million of equity capital in MJD
through December 31, 1998.
<PAGE>
Acquisition History
The following summarizes each RLEC the Company has acquired to date:
<TABLE>
<CAPTION>
Access Lines as
of Purchase
Location of December 31, Date Price
RLEC Acquired Operations 1998 Acquired (in millions)
- ------------------------------- --------------- ---------------- ------------ -------------
<S> <C> <C> <C> <C>
Sunflower Telephone Company, Kansas/Colorado 4,901 May 1993 $19.7
Inc.
Northland Telephone Company Maine/New 21,486 August 1994 $39.7
of Maine, Inc. Hampshire
STE/NE Acquisition Corp. d/b/a Vermont 5,675 August 1994 $12.0
Northland Telephone Company
of Vermont
Sidney Telephone Company Maine 1,417 January 1996 $ 3.0
Big Sandy Telecom, Inc. Colorado 934 June 1996 $ 3.1
Bluestem Telephone Company Kansas 1,008 August 1996 $ 3.9
Odin Telephone Exchange, Inc. Illinois 1,147 August 1996 $ 5.0
Kadoka Telephone Co. South Dakota 572 January 1997 $ 2.9
Columbine Telephone Company, Colorado 1,195 April 1997 $ 4.6
Inc.
Chautauqua & Erie Telephone New York 11,715 July 1997 $22.0
Corporation
C-R Communications, Inc. Illinois 936 October 1997 $ 4.0
Taconic Telephone Corp. New York 26,602 March 1998 $67.5
Ellensburg Telephone Company Washington 25,660 April 1998 $91.2
Chouteau Telephone Company Oklahoma 3,542 June 1998 $18.6
Utilities, Inc. Maine 22,859 November 1998 $46.8
Ravenswood Communications, Inc. Illinois 2,014 February 1999 $ 9.5
Columbus Grove Telephone Ohio 1,834 February 1999 $ 5.0
Company
Total: 133,497
</TABLE>
Industry Overview
The local exchange carrier ("LEC") industry is composed of a few large
companies such as the regional bell operating companies ("RBOCs") and a very
large number of relatively small independent companies ("RLECs"). These small,
independent telephone companies provide telephone service to more than five
million residences and businesses in secondary and rural marketplaces.
According to USTA data, there are over 1,250 independent telephone
companies with less than 25,000 access lines in the U.S., many of which could be
potential acquisition candidates for the Company. A majority of these small
telephone companies operate in sparsely populated rural areas where competition
from bypass companies including competitive access providers, cable television
operators or wireless telecommunications companies (such as cellular or PCS
providers) is limited due to the generally unfavorable economics of constructing
and operating such competitive systems. Most RLECs are privately held by
families or small groups of individuals. The Company believes that the owners of
these small
<PAGE>
companies are increasingly interested in selling such companies as the growing
technical, administrative and regulatory complexities of the local telephone
business challenge the capabilities of the existing management. In addition,
certain large telephone companies are selling many of their small rural
exchanges to focus their attention on their major metropolitan operations that
generate the bulk of their consolidated revenue and which are increasingly
threatened by competition. The Company believes that these companies cannot
continue to invest time and capital in rural operations that make up a
relatively insignificant portion of their consolidated operations. Given these
circumstances, the Company believes that it will continue to have numerous
opportunities to acquire RLECs and rural telephone operations currently owned by
the large telephone companies.
Rural Telephone Industry. RLECs typically exhibit stable economic and
demographic characteristics often associated with rural America. All of the
Company's telephone company subsidiaries qualify as "RLECs" under the
Telecommunications Act and are therefore entitled to benefit from a number of
cost recovery mechanisms associated with the "rural carrier" designation.
Because RLECs serve primarily rural areas and small towns, they tend to
have unique characteristics that differentiate them from larger local exchange
carriers ("LECs"). For instance, the per minute cost of operating both telephone
switches and interoffice facilities is higher in rural areas as RLECs typically
have fewer, more geographically dispersed customers and lower calling volumes.
Also, the distance from the telephone switch to the customer is typically longer
in rural areas, which results in increased distribution facilities costs. These
relatively high costs tend to discourage competitors from entering territories
served by RLECs. As a result, RLECs are not generally faced with the threat of
competition, as compared to the RBOCs which often serve densely populated areas
where significant economies of scale are achievable.
Revenue Components. An RLEC generates revenue from: (i) the provision of
basic local telephone service to customers within its service areas; (ii) the
provision of network access to inter-exchange carriers ("IXCs") for origination
and termination of interstate and intrastate long distance phone calls; (iii)
USSF payments; and (iv) the provision of ancillary services such as billing and
collection, long distance resale, enhanced services, wireless services, cable
television services, Internet services and customer premises equipment sales.
Capital Expenditures. Generally, RLECs' capital expenditures are (i)
capital expenditures for maintenance and (ii) expenditures for any expansions
required for growth within the RLEC's service area. Occasionally, RLECs are
required to make significant capital investments in a particular year to replace
a central switch, or to rebuild or upgrade elements or components of the RLEC's
outside plant.
Due to the relatively high cost associated with serving rural telephone
properties, affordable universal telephone service could not be provided without
the support mechanisms historically made available to RLECs. The government has
preserved these support mechanisms in the Telecommunications Act with an
established system of cost recovery mechanisms that ensure a minimum rate of
return on capital investment in rural telephone assets. As a result, RLECs are
entitled to recover a minimum rate of return on all capital invested in
regulated telephone assets.
Services
The Company offers a broad portfolio of high-quality telecommunications
services for residential, business, government and carrier customers in each of
its markets. The Company believes it is able to efficiently and reliably provide
all of the telecommunications services required by its customers, thereby
enhancing the Company's ability to build upon its recognized market brand
identity within each of its markets. These services include dial tone for local,
intrastate and interstate access, and such other services as long distance,
Internet services, cable television services, entertainment and wireless
telephony.
<PAGE>
Generation of Revenue
The Company primarily generates revenue through: (i) the provision of
basic local telephone service to customers within its service areas; (ii) the
provision of network access to IXCs for origination and termination of
interstate and intrastate long distance phone calls; (iii) USSF payments; and
(iv) the provision of ancillary services such as billing and collection, long
distance resale, enhanced services, wireless services, cable television
services, Internet services and customer premises equipment sales.
The following chart summarizes each component of the Company's revenue
sources for the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
% 1996 % 1997 % 1998
Revenue Source Revenue Revenue Revenue Description
- ------------------- ------- ------- ------- ----------------------------------------------
<S> <C> <C> <C> <C>
Basic Local Service 18.4% 16.0% 19.2% Enables the local customer to originate
and receive an unlimited number of calls
within a defined "exchange" area. The
customer is charged a flat monthly fee
which is regulated by state agencies.
Intrastate Access 32.0% 29.5% 26.3% Enables an IXC to utilize the Company's
local network to originate or terminate an
intrastate call. The access charge is paid
by the IXC to the Company and is
regulated by state regulatory agencies.
Interstate Access 31.0% 27.7% 27.7% Enables an IXC to utilize the Company's
local network to originate or terminate an
interstate call. The access charge is paid
by the IXC to the Company and is
regulated by the FCC.
USSF Revenue 10.4% 9.0% 5.2% The Company receives funds to subsidize
the cost of providing high cost local
telephone service in rural locations. The
funds are allocated and distributed to the
Company from pools of funds generated
by IXCs and LECs.
Other Services 8.2% 17.8% 21.6% The Company generates revenues from
billing and collection, local and long
distance resale, enhanced services,
wireless services, cable services, Internet
services and customer premises
equipment sales.
</TABLE>
Basic Local Service
Basic local service includes basic local lines, ISDN, Centrex, foreign
exchange, private lines and switched data services. The Company provides basic
local services to residential, business and government customers, generally for
a fixed monthly charge. The amount that the Company can charge for local service
is determined by rate proceedings involving the appropriate state regulatory
authorities.
<PAGE>
Network Access Charges
Network access charges relate to long distance or toll calls that
typically involve more than one company to complete the call. Since toll calls
are generally billed to the customer originating the call, a mechanism is
required to compensate each company providing services to complete the call. The
Company bills access charges to the other company involved in completing the
call for the use of the Company's facilities to access the customer, as
described below:
Intrastate Access Charges. The Company generates intrastate access revenue
when an intrastate long distance call (which involves an IXC) is originated by a
customer within the same state but in another local access and transport area
("LATA," i.e., the calling area controlled by a LEC). The IXC pays the Company
an intrastate access payment for either terminating or originating the call. The
Company records the details of the call through its carrier access billing
system ("CABS") and receives the access payment from the IXC. When a customer of
the Company originates the call, the Company typically provides billing and
collecting for the IXC through a billing and collection agreement. The access
charge for the Company's intrastate service is regulated and approved by the
state regulatory authority.
Interstate Access Charges. The Company generates interstate access revenue
when an interstate long distance call is originated by a customer calling from a
LATA in one state to a LATA in another state. The Company bills interstate
access charges in the same manner as it bills intrastate access charges;
however, the interstate access charge is regulated and approved by the FCC
instead of the state regulatory authority.
USSF Revenue
The USSF supplements the amount of local service revenue received by the
Company to ensure that basic local service rates for customers in high cost
rural areas are consistent with rates charged in lower cost urban and suburban
areas. The USSF is funded by monthly customer fees charged to IXCs and
administered by the USAC which then distributes funds to the Company on a
monthly basis based upon the Company's costs for providing local service.
Other Services
The Company seeks to leverage its local presence and network
infrastructure by offering services to customers such as long distance, enhanced
services, wireless services, cable services, Internet services, billing and
collection for IXCs and customer premises equipment sales.
Long Distance Resale. In 1997, the Company began offering long distance
services to its customers in select markets. The Company offers switched and
dedicated long distance services in its select markets through resale agreements
with national IXCs. In addition, in late 1997, the Company began offering
wholesale long distance services to other independent telephone companies. As of
December 31, 1998, the Company's RLECs provided long distance service to 27,996
customers or approximately 37.7% of the Company's total access lines in selected
markets, and provided wholesale long distance service to seven independent
companies.
Enhanced Services. The Company's digital switch platform allows it to
offer enhanced services such as call waiting, call forwarding, call return,
continuous redial, caller ID, voice mail, teleconferencing, video conferencing,
store-and-forward fax and follow-me numbers. As of December 31, 1998,
approximately 36% of the Company's customers subscribed to one or more enhanced
services.
Wireless Services. The Company owns interests in various RSA or MSA
properties. The Company resells cellular services in certain of its markets and
may expand this wireless reseller strategy to other markets.
Cable and Direct Broadcast Satellite ("DBS") Services. The Company
currently offers cable television services to customers in its New York,
Colorado and Oklahoma telephone markets. The Company continually evaluates
opportunities to expand these markets or add DBS resale to its existing markets
where appropriate.
<PAGE>
Internet Services. The Company offers dedicated and dial-up Internet
access services in certain of its service areas. The Company operates and
manages its own servers or is an agent for a third-party Internet service
provider. The Company currently provides Internet services to over 4,048
customers in select markets, representing an average penetration rate in such
markets of 7.8%.
Billing and Collection. Many IXCs provide long distance services to the
Company's RLEC customers and elect to use the Company's billing and collection
services. The Company charges IXCs a billing and collection fee for each call
record generated by the IXC's customer.
Customer Premises Equipment Sales. In its New York markets, the Company
sells and services equipment on its customers' premises. This equipment includes
private branch exchanges, key systems, telephone sets and accessories. In
addition, the Company offers inside wire maintenance plans to most of its
customers.
CLEC Services. The Company has extended its service offerings to markets
adjacent to its RLEC franchise areas. The Company is or plans to offer an array
of telecommunications services, such as local, long distance, data and wireless
to customers in rural and small urban markets (populations between 25,000 and
75,000) within approximately 200 miles of a Company owned RLEC. During 1998,
FairPoint entered and began offering telecommunications services in fourteen
markets and at December 31, 1998 had provisioned approximately 7,000 access
lines. The Company entered these markets on a resale basis and once reaching
meaningful market share will migrate its customers to its own facilities-based
services connected to the Company's RLEC network and switching facilities.
Following Fairpoint's initial success, the Company plans to continue providing
services to these existing markets and entering additional markets in 1999.
Sales and Marketing
The Company's marketing approach emphasizes locally-managed,
customer-oriented sales, marketing and service. The Company differentiates
itself from its competitors by providing superior product and customer support
services in its markets. As of December 31, 1998, the Company had 147 employees
engaged in sales, marketing and customer service (excluding CLEC (as defined)
and long distance employees).
Each of the Company's RLECs generally has a long history in the
communities it serves. It is the Company's policy to maintain and build upon its
RLECs' strong market identity as this is a significant competitive advantage. As
the Company markets new services and through its CLEC offers like services to
out of franchise rural communities, it will seek to capitalize on its market
identity to capture greater market recognition and market share.
The Company has two basic groups of customers: (i) local customers located
in the Company's LATAs who pay for local phone service and (ii) the IXCs which
pay the Company for access to customers located within the Company's LATAs. In
general, the vast majority of the Company's local customers are residential, as
opposed to business, which is typical for rural telephone companies. In
addition, no single customer within any of the Company's RLECs represents more
than one half of one percent of such RLEC's total revenue.
Competition
The Company believes that the Telecommunications Act of 1996 (the
"Telecommunications Act") and other recent actions taken by the FCC and state
regulatory authorities promote competition in the provision of
telecommunications services; however, many of the competitive threats now
confronting the
<PAGE>
large telephone companies do not currently exist in the RLEC marketplace. Since
the enactment of the Communications Act of 1934 and its reaffirmation in the
Telecommunications Act, regulations promoting "universal service" have allowed
RLECs to maintain advanced technology while keeping prices affordable for rural
customers. In light of the high cost per access line of installing lines and
switches and providing telephone service in sparsely-populated rural areas, a
system of cost recovery mechanisms has been established to, among other things,
keep rural customer telephone charges at a "reasonable" level and yet allow
owners of rural telephone companies to earn a fair return on their investment.
These cost recovery mechanisms have resulted in robust RLEC telecommunications
networks. All of the Company's telephone operating subsidiaries currently
qualify as RLECs as defined under the Telecommunications Act.
In markets where the Company implements its CLEC strategy, the Company
will compete with incumbent local exchange carriers ("ILEC") and possibly other
CLECs.
The Company will be subject to competition for suitable acquisition
candidates from other competitors engaged in the acquisition of RLECs. There are
over 1,250 small independent companies that are potential acquisition
candidates. However, a continuing trend toward business combinations and
alliances in the telecommunications industry may increase competition for such
acquisition candidates.
Network Facilities
As of December 31, 1998, (i) the Company's RLEC franchise areas included
92 exchanges serving approximately 130,000 access lines that were located across
approximately 12,146 square miles and (ii) the Company maintained over 12,200
miles of copper plant and 991 miles of fiber optic plant that interconnect the
Company's remote central offices with IXCs serving the Company's subscribers.
The Company's central office host and remote sites have advanced digital
switches manufactured by Nortel or Siemens and current generic software which
allows the Company to provide advanced calling features, products and services
to its rural subscribers. The outside plant consists of transport and
distribution delivery networks connecting the Company's host central office with
remote central offices and ultimately to the Company's customers. Fiber optic
technology is being deployed throughout the Company's network and is the primary
transport technology between the Company's host and remote central offices and
interconnection points with the RBOCs, GTE, long distance carriers or other
RLECs. Where topography and geography permit, cable is generally buried,
reducing the risk of service interruption from adverse weather.
The Company's fiber optic transport systems are primarily synchronous
optical networks ("SONET"). This type of network allows the Company to build and
design more durable networks, while utilizing the less durable asynchronous
optical systems for limited local or specialized applications. The Company's
fiber optic transport system is capable of supporting increasing customer demand
for high bandwidth transport services and applications.
The Company has integrated numerous elements of its network to offer a
variety of services and applications that meet increasingly sophisticated rural
communications customers. These network elements include SS7 signaling networks,
voice messaging platforms, switch based large Meet-Me Conference Bridges,
switched 56Kb/sec digital data and ISDN lines, and numerous customer located key
and PBX systems. As the telecommunications industry is subject to rapid and
significant changes in technology, customer demand and competitive pressures,
the Company consistently endeavors to introduce additional elements of
functionality to its network, including Frame Relay and ATM switches, Local
Number Portability, Advanced Intelligent Network (AIN) services, and Voice over
I/P (Internet) opportunities.
The Company has been segmenting its rural copper plant network into
Carrier Serving Areas ("CSA's"), effectively multiplying embedded copper plant
capacity and enabling unencumbered service deployment throughout the Company's
service areas. The Company's strategy is to push the intelligence and
unencumbered capabilities of host digital central office switch and transport
closer to its increasingly sophisticated rural communications customers by
deploying remote switches throughout the Company's service areas.
The Company plans to prudently invest capital to maintain, replace and
upgrade its entire telecommunications infrastructure. The Company continually
reviews expenditures to ensure they are economically justifiable and result from
an integrated network planning process.
<PAGE>
Employees
As of December 31, 1998, the Company employed a total of 706 full-time
employees, of whom 83 were represented by unions. The Company has collective
bargaining agreements with (i) Local 23-26 of the International Brotherhood of
Electrical Workers (AFL-CIO) 107 covering 7 employees employed by its Northland
Telephone Company of Vermont subsidiary; (ii) Local 1115 of the Communications
Workers of America, covering 15 employees employed by its Chautauqua & Erie
Telephone Corp. subsidiary in New York; and (iii) Local 166 of the International
Brotherhood Electrical Workers (AFL-CIO), covering 61 employees employed by its
Taconic Telephone Corp. subsidiary in New York. The contracts expire in February
1999, January 2000 and March 2000, respectively.
<PAGE>
ITEM 2. PROPERTIES
The Company owns most of its administrative and maintenance facilities,
rolling stock, central office and remote switching platforms and outside plant.
Administrative and maintenance facilities are generally located in or near
community centers. Central offices are often within the administrative building
and outlying customer service centers. Auxiliary battery or other non-utility
power sources are at each central office to provide uninterrupted service in the
event of an electrical power failure. Transport and distribution network
facilities (outside plant) include fiber optic backbone and copper wire
distribution facilities which connect customers to remote switch locations or to
the central office and to points of presence or interconnection with the IXCs.
These facilities are located on land pursuant to permits, easements or other
agreements. Rolling stock includes service vehicles, construction equipment and
other required maintenance equipment.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company currently and from time to time is involved in litigation and
regulatory proceedings incidental to the conduct of its business, but the
Company is not a party to any lawsuit or proceeding which, in the opinion of the
Company, is likely to have a material adverse effect on the Company.
On April 6, 1998, Latin World Communications, Inc., ("LWC") and Debra A.
Boudrot, LWC's principal (collectively, "Plaintiffs") sued B. Stephen May
("May"), who is a former officer of ST Long Distance (a subsidiary of STE),
Siesta Telecom, Inc. ("Siesta"), which is a company controlled by Mr. May, and
ST Long Distance in the Circuit Court for the Twelfth Judicial Circuit, Sarasota
County, Florida. From March 1997 through early 1998, ST Long Distance provided
long distance services to Plaintiffs in connection with Plaintiffs' prepaid
telephone card distribution business. Plaintiffs have alleged, among other
things, that Mr. May, Siesta and ST Long Distance have engaged in fraud,
misappropriation of trade secrets, unfair competition, deceptive trade practices
and trade slander; and that Mr. May, Siesta and ST Long Distance have breached
various contractual obligations to the Plaintiffs and received certain
overpayments from the Plaintiffs. Plaintiffs seek approximately $1 million in
damages relating to such alleged overpayments, as well as injunctive relief
relating to certain other matters. Despite the fact that LWC was unprofitable in
the year ended December 31, 1997 and without any substantiation by any third
party, on the basis of a three-month period in 1997 in which LWC claims it was
profitable, the Plaintiffs have also alleged that ST Long Distance is
responsible for lost profits of between $12 million and (assuming LWC's profits
were to grow at a rate of 20% annually) $38 million, which LWC would have
generated in the 10-year period after the cessation of the LWC/ST Long Distance
business relationship. The Company intends to vigorously contest all of the
Plaintiffs' allegations, and believes that it has no liability to the
Plaintiffs. In particular, the Company believes the Plaintiffs' claim for lost
profits are entirely speculative, frivolous and without merit. While the outcome
of such litigation cannot be predicted, the Company does not believe that such
litigation, even if determined adversely to the Company, would have a material
adverse effect on its financial condition or results of operations.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted during the fourth quarter of the
fiscal year to a vote of the security holders of MJD:
1. Consent by and among the Stockholders of MJD Communications, Inc.
dated November 23, 1998 to an increase in the authorized capital stock of
MJD by amendment to the Certificate of Incorporation. The amendment was
unanimously approved by the Stockholders.
2. Waiver and Consent by and among the Stockholders of MJD
Communications, Inc. dated October 27, 1998 regarding the dissolution of
MJD Partners, L.P. ("Partners"), the distribution of the assets of
Partners and the waiver of certain restrictions under the Stockholders'
Agreement dated July 31, 1997. The Waiver and Consent was unanimously
approved by the Stockholders of MJD.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(All share numbers and purchase price amounts have
been adjusted to give effect to the stock split which
occurred in November 1998.)
There is no established public market for the common equity of the
Company. Substantially all of the Company's equity securities are owned by
Carousel Capital Partners, L.P. ("Carousel"), Kelso Investment Associates V,
L.P. ("KIAV"), Kelso Equity Partners V, L.P. ("KEPV," and together with KIAV,
"Kelso") and the Company's executive officers and directors.
There are 2,086,816 shares of common stock that are subject to outstanding
options or warrants to purchase, or securities convertible into, common equity
of MJD.
There are no shares of common stock that could be sold pursuant to Rule
144 under the Securities Act or that MJD has agreed to register under the
Securities Act for sale by the security holders.
There are no shares that are being, or have been publicly proposed to be,
publicly offered by MJD (unless such common equity is being offered pursuant to
an employee benefit plan or dividend reinvestment plan), the offering of which
could have a material effect on the market price of MJD's common equity.
The ability of the Company to pay dividends is governed by restrictive
covenants contained in the indenture governing its publicly held debt as well as
restrictive covenants in the Company's bank lending arrangement. The Company
currently has no intention of paying cash dividends on its equity securities for
the foreseeable future.
In March 1998, the Company sold 491,598.6 shares of Class A Voting Common
Stock to Kelso, Carousel and the Company's officers and directors for a purchase
price of $34.25 per share. The proceeds from the sale of these securities were
used by the Company to finance its acquisition of Taconic Telephone Corp. (See
Item 13, "Certain Relationships and Related Transactions--Purchase of Common
Stock by Management.")
In April 1998, the Company sold 437,944 shares of Class A Voting Common
Stock to Kelso and Carousel for a purchase price of $34.25 per share. The
proceeds from the sale of these securities were used by the Company to finance
its acquisition of Ellensburg Telephone Company.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(dollars in thousands)
The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for, and as of the end of, each of the
years in the five-year period ended December 31, 1998, are derived from the
consolidated financial statements of MJD Communications, Inc. and its
subsidiaries, which in the case of the consolidated financial statements for the
years ended December 31, 1995, 1996, 1997 and 1998 have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The consolidated
financial statement data for the year ended December 31, 1994 are derived from
consolidated financial statements of the Company which were audited by other
independent certified public accountants. Dollar amounts are presented in
thousands.
<TABLE>
<CAPTION>
Actual
-------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
--------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Operating revenues:
Switched services...................... $ 12,656 $ 22,763 $ 27,973 $ 39,257 $ 72,124
Other.................................. 1,369 1,986 2,383 8,506 19,883
--------- -------- ---------- ---------- ----------
Total operating revenues.................. 14,025 24,749 30,356 47,763 92,007
--------- -------- ---------- ---------- ----------
Operating expenses:
Plant operations....................... 1,886 3,746 4,181 6,857 14,293
Corporate and customer service......... 3,991 6,433 7,577 11,581 22,275
Depreciation and amortization.......... 3,099 5,757 6,644 8,777 20,089
Cost of services resold................ -- -- 97 4,791 6,163
Other.................................. 1,081 1,407 1,658 3,318 12,625
--------- -------- ---------- ---------- ----------
Total operating expenses.................. 10,057 17,343 20,157 35,324 75,445
--------- -------- ---------- ---------- ----------
Income from operations.................... 3,968 7,406 10,198 12,439 16,562
--------- -------- ---------- ---------- ----------
Other income (expense):
Net income (loss) on sale of
investments and other assets........ 1,030 (30) (3) (19) 651
Interest income........................ 143 225 180 212 442
Dividend income........................ 553 664 667 1,182 1,119
Interest expense....................... (3,772) (7,267) (9,605) (9,293) (27,170)
Other nonoperating, net................ 29 33 (15) 140 885
--------- -------- ---------- ---------- ----------
Total other income (expense).............. (2,017) (6,375) (8,776) (7,778) (24,073)
--------- -------- ---------- ---------- ----------
Earnings (loss) before income taxes and
extraordinary item..................... 1,951 1,031 1,423 4,661 (7,511)
Income tax (expense) benefit.............. (940) (547) (1,462) (1,876) 2,112
--------- -------- ---------- ---------- ----------
Earnings (loss) before extraordinary item
and minority interest.................. 1,011 484 (39) 2,785 (5,399)
Extraordinary item........................ -- -- -- (3,611) (2,521)
--------- -------- ---------- ---------- ----------
Earnings (loss) before minority interest.. 1,011 484 (39) (826) (7,920)
Minority interest income of subsidiaries.. (14) (6) (33) (62) (80)
--------- -------- ---------- ---------- ----------
Net earnings (loss)....................... $ 997 $ 478 $ (72) $ (888) (8,000)
========= ======== ========== ========== ==========
Balance Sheet Data:
Cash and cash equivalents................. $ 5,016 $ 3,672 $ 4,253 $ 6,822 $ 13,241
Working capital........................... 1,406 1,026 596 108 9,557
Property, plant and equipment net......... 37,616 37,048 41,615 61,207 142,321
Total assets.............................. 82,281 79,218 97,020 144,613 440,891
Long-term debt............................ 66,991 64,180 73,958 131,912 368,112
Redeemable preferred stock................ 6,618 6,701 10,689 130 --
Total stockholders' equity (deficit)...... (333) 103 (2,142) (10,939) 9,886
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Actual
-------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
--------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Other Financial Data:
Adjusted EBITDA(1)........................ $ 8,808 $ 14,050 $ 17,639 $ 22,669 $ 39,668
Capital expenditures...................... 1,768 4,439 8,439 8,262 12,433
Ratio of earnings to fixed charges(2)..... 1.5x 1.1x 1.1x 1.5x --
Summary Cash Flow Data:
Net cash provided by operating activities. $ 5,504 $ 6,039 $ 9,772 $ 9,839 $ 14,867
Net cash provided by (used in) investing
activities............................. (50,846) (4,481) (19,790) (38,967) (225,522)
Net cash provided by financing activities. 49,937 (2,903) 10,599 31,697 217,074
Operating Data:
Access lines in service................... 28,205 28,737 34,017 48,731 129,649
</TABLE>
- ----------
(1) Adjusted EBITDA represents net earnings (loss) plus interest expense,
income taxes, depreciation and amortization, and extraordinary items.
Adjusted EBITDA is presented because management believes it provides
useful information regarding the Company's ability to incur and/or service
debt. Management expects that investors may use this data to analyze and
compare other telecommunications companies with the Company in terms of
operating performance, leverage and liquidity. Adjusted EBITDA is not a
measurement of financial performance under generally accepted accounting
principles and should not be construed as a substitute for consolidated
net earnings (loss) as a measure of performance, or for cash flow as a
measure of liquidity. The definition of EBITDA in the Indenture is
designed to determine EBITDA for the purposes of contractually limiting
the amount of debt which the Company may incur. Adjusted EBITDA presented
herein differs from the definition of EBITDA in the Indenture, which
excludes from the calculation of EBITDA (i) net income of Unrestricted
Subsidiaries (as defined in the Indenture) unless such net income is
actually dividended to the Company or a Restricted Subsidiary and (ii) net
income of any Restricted Subsidiary to the extent there is any restriction
on the ability of such Restricted Subsidiary to pay dividends to the
Company (except that the Company's equity in the net income of any such
Restricted Subsidiary is included to the extent of dividends actually
received by the Company from such Restricted Subsidiary). The definition
of EBITDA in the Indenture is a component of the term "Pro Forma EBITDA"
in the Indenture, which is used in a financial covenant calculation
therein. Pro Forma EBITDA, as defined in the Indenture, differs from
Adjusted EBITDA primarily because it is calculated after giving effect to
cost savings the Company believes will be achieved during the applicable
period. Adjusted EBITDA as calculated by the Company is not necessarily
comparable to similarly captioned amounts of other companies.
(2) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes, minority interest
and extraordinary items, plus fixed charges. Fixed charges include
interest expense on all indebtedness, capitalized interest and rental
expense on operating leases representing that portion of rental expense
deemed to be attributable to interest. The Company had a deficiency of
$7,511 to cover fixed charges in 1998.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
General. MJD was founded in 1991 to participate in the consolidation
opportunities that exist in the highly fragmented, independent, largely
privately held and operated, rural segment of the telecommunications industry.
The Company is actively acquiring and operating rural local telephone carriers
("RLEC"). For the year ended December 31, 1998, the Company owned and operated
17 RLECs located in ten states. As of December 31, 1998, the Company believes
that it was the eighteenth largest telephone company in the United States, with
approximately 130,000 access lines, and the largest telephone company in the
United States that focuses primarily on acquiring and operating rural
telecommunications service companies. Also, during 1998 the Company launched its
competitive access exchange carrier ("CLEC"), FairPoint Communications Corp
("FairPoint"), a wholly owned subsidiary. By year end 1998, FairPoint was
providing telecommunications services in fourteen markets and provisioned
approximately 7,000 access lines. With the inclusion of FairPoint, total access
lines under management by the Company was 137,000 at December 31, 1998.
For the year ended December 31, 1998, the Company had revenue and adjusted
EBITDA of approximately $92.0 million and approximately $39.7 million,
respectively. The Company provided net cash of approximately $14.9 million from
operating activities, used net cash of approximately $225.5 million in investing
activities and provided net cash of approximately $217.1 million from financing
activities for the year ended December 31, 1998.
The Company's operations have been characterized by stable growth and cash
flow that typifies the stable economic and demographic characteristics of its
rural service areas. The primary reason for the growth in the Company's cash
flow has been the acquisition of additional RLECs. During 1998, the Company
acquired four RLECs that significantly contributed to the Company's growth for
the year ended December 31, 1998. As a result of these four acquisitions, the
Company acquired approximately 78,700 access lines and various cable television,
Internet and wireless assets. See Note 2 to Consolidated Financial Statements
for additional information.
Total Minutes of Use Growth Under MJD Ownership
The following chart illustrates Minutes of Use ("MOU") growth experienced
by the Company:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------------ ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Sunflower-Kansas ... 50,895,394 51,274,642 52,393,074 60,791,553 69,506,448
Sunflower-Colorado . 5,122,171 4,998,707 5,338,954 5,474,730 5,511,144
Northland-Maine .... 91,695,162* 227,850,913 245,268,456 291,489,937 349,727,547
Northland-Vermont .. 23,123,900* 55,819,538 63,293,970 68,263,915 79,443,225
Sidney ............. 21,169,908 23,411,177 24,808,248
Big Sandy .......... 8,018,156* 17,149,198 18,502,564
Bluestem ........... 2,657,899* 7,308,376 12,709,165
Odin ............... 6,775,410* 17,128,665 17,568,669
Kadoka ............. 6,686,692 6,476,420
Columbine .......... 13,165,980* 20,348,139
Chautauqua & Erie .. 76,854,224* 161,719,750
C-R ................ 4,443,983* 18,881,863
Taconic ............ 307,410,445*
Ellensburg ......... 252,951,181*
Chouteau ........... 32,206,913*
Utilities .......... 46,998,323*
Total .......... 170,836,627 339,943,800 404,915,827 592,168,430 1,424,770,044
=========== =========== =========== =========== =============
</TABLE>
* Period includes less than 12 months.
<PAGE>
Access Line Growth Under MJD Ownership
The following chart illustrates access lines at the individual RLECs for the
fiscal year indicated:
1994 1995 1996 1997 1998
-------- -------- -------- -------- -------
Sunflower--Kansas ..... 4,097 4,140 4,232 4,343 4,553
Sunflower--Colorado ... 302 305 326 332 348
Northland of Maine .... 18,629 18,978 19,728 20,493 21,486
Northland of Vermont .. 5,177 5,314 5,409 5,510 5,675
Sidney ................ 1,295 1,359 1,417
Big Sandy ............. 865 893 934
Bluestem .............. 1,018 992 1,008
Odin .................. 1,144 1,164 1,147
Kadoka ................ 580 572
Columbine ............. 1,085 1,195
C&E ................... 11,070 11,715
C-R ................... 910 936
Taconic ............... 26,602
Ellensburg ............ 25,660
Chouteau .............. 3,542
Utilities ............. 22,859
Total ............. 28,205 28,737 34,017 48,731 129,649
====== ====== ====== ====== =======
Note: Data is as of December 31 of the relevant year.
The 1998 acquisitions represented 78,700 access lines or 60.6% of the
total access lines at December 31, 1998. For the RLECs acquired prior to 1998,
access lines were 50,986, an increase of 4.6% compared to prior year, 1997.
Revenues: The Company generates revenue primarily through: (i) the
provision of basic local telephone service to customers within its service areas
(including federal USSF revenues, which accounted for approximately 5.2 % for
the year ended December 31, 1998); (ii) the provision of network access to Inter
Exchange Carriers ("IXCs") for origination and termination of interstate and
intrastate long distance telephone calls; and (iii) the provision of ancillary
services such as billing and collection, long distance resale, enhanced
services, wireless services, cable services, Internet services, customer
premises equipment sales and FairPoint. The revenues listed in clauses (i) and
(ii) above are classified by the Company as "Switched Services." The revenues
listed in clause (iii) above are classified by the Company as "Other revenue."
% of Revenue
----------------------------------------------
Revenue Source 1996 1997 1998
- -------------- ------------- ------------ ------------
Basic Local Service .................... 18.4% 16.0% 19.2%
Interstate and Intrastate Access ....... 63.0% 57.2% 54.0%
USSF ................................... 10.4% 9.0% 5.2%
Other Services ......................... 8.2% 17.8% 21.6%
The Company's historically stable revenues are the result of the basic
utility of telecommunications services, the highly regulated nature of the
telecommunications industry and underlying cost recovery settlement and support
mechanisms. The Company's subscribers are predominantly residential. Basic local
service allows the user to place unlimited calls within a defined local calling
area. Universal Service Support Fund ("USSF") revenues are a support payment
paid to the Company to support the high cost of its operations in rural markets.
Access revenues are generated by providing IXCs access to the Company's local
network and its customers. Other revenue is generated from the ancillary
services described above.
The Company's RLECs have two basic groups of customers: (i) local
customers located in the RLEC's LATA(s) who pay for local telephone service and
(ii) the IXCs which pay the RLEC, directly or via National Exchange Carrier
Association ("NECA") for access to customers located within the RLEC's LATA(s).
The RLECs provide access service to numerous IXCs and also bill and collect long
distance charges from customers on behalf of the IXCs. The amount of access
charge revenue associated with a particular IXC varies depending upon the RLEC's
local customers' long distance calling patterns and choice of long distance
carrier.
<PAGE>
Operating Expenses: The Company's operating expenses are categorized as
plant operations, corporate and customer service, depreciation and amortization,
cost of services resold and other general and administrative expenses. Year to
year changes in such expenses are influenced by access line growth and general
business inflationary adjustments. Plant operations expenses consist of
operating expenses incurred by the Company in connection with the operation of
its central offices and outside plant facilities and related operations.
Corporate and customer service expenses consist of expenses generated by the
Company's general management, accounting, engineering, marketing and customer
service functional groups. Cost of services resold are the expenses incurred to
provide long distance resale by the Company's long distance subsidiary, ST Long
Distance ("STLD") and local and long distance resale by FairPoint. Other general
and administrative expenses are expenses such as property taxes, operating
expenses at STLD and FairPoint and other miscellaneous expenses.
Other (Income) Expenses: The Company's other income includes interest
income, dividends, gain or loss on sale of assets and other miscellaneous,
non-operating income. The Company's other expenses consist primarily of interest
on the Company's debt and other non-operating expenses.
Results of Operations
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Operating Revenue. Net revenue increased $44.2 million or 92.6% to $92.0
million in the year ended December 31, 1998 from $47.8 million in the year ended
December 31, 1997. The acquisition in 1998 of Taconic Telephone Corp.,
Ellensburg Telephone Company, Chouteau Telephone Company, and Utilities, Inc.
(collectively, the "1998 Acquisitions") as well as the full year results for the
RLECs acquired by the Company in 1997 (collectively, the "1997 Acquisitions"),
provided for 87.6 % of the increase. The Company's CLEC, FairPoint, reported
first year revenues of $1.1 million or 2.5% of the increase in revenues reported
in 1998. For the RLECs owned and operated for a comparable period in 1998 and
1997, net revenue improved approximately $1.0 million or 2.3% to $43.9 million
in 1998 from $42.9 million in 1997.
Basic local service revenue increased $10.1 million to $17.7 million for
the year ended December 31, 1998 from $7.6 million for the year ended December
31, 1997. This revenue increase is primarily attributable to an increase in
access lines. The Company's access lines increased to 129,649 access lines from
48,731 access lines at December 31,1998 and 1997, respectively. The inclusion of
access lines from the RLECs acquired by the Company during 1998 provided an
increase of approximately 78,700 access lines and internal growth by RLECs owned
and operated by the Company at December 31, 1997 provided an increase of
approximately 2,300 access lines. Revenue contribution from the RLECs acquired
in 1998 and 1997 provided $9.6 million of the increase in basic local service
revenue for the year ended December 31, 1998. For the RLECs owned and operated
for a comparable period by the Company, basic local service revenue increased by
$0.4 million to $6.9 million for the year ended December 31, 1997 from $6.5
million for the year ended December 31, 1997.
USSF revenue increased $0.4 million to $4.7 million for the year ended
December 31, 1998 from $4.3 million for the year ended December 31, 1997. For
the RLECs owned and operated for a comparable period by the Company, USSF
revenues decreased by $0.3 million to $3.7 million dollars for the year ended
December 31, 1998 from $4.0 million for the year ended December 31, 1997.
Interstate and intrastate revenues increased $22.4 million to $49.7
million for the year ended December 31, 1998 from $27.3 million for the year
ended December 31, 1997. This revenue increase is attributable to an increase in
access lines and MOUs and an increase in interstate and intrastate settlement
revenue administered by NECA or a respective state's settlement methodologies.
Revenue contribution from the RLECs acquired in 1998 and 1997 provided $17.2
million and $4.3 million, respectively, of the increase in interstate and
intrastate revenue for the year ended December 31, 1998. For the RLECs owned and
operated for a comparable period by the Company, interstate and intrastate
revenues increased by $0.9 million to $26.0 million for the year ended December
31, 1998 from $25.1 million for the year ended December 31, 1997.
Other revenues increased $11.4 million to $19.9 million for the year ended
December 31, 1998 from $8.5 million for the year ended December 31, 1997.
Revenue contribution from the RLECs acquired by the Company during 1998 and 199
provided $6.8 million and $2.4 million, respectively, of the increase in other
revenue for the year ended December 31, 1998. FairPoint reported first year
revenue of $1.1 million. For the RLECs owned and operated for a comparable
period by the Company, other revenues increased by $1.0 million to $8.4 million
for the year ended December 31, 1998 from $7.4 million for the year ended
December 31, 1997.
<PAGE>
Operating Expenses. Operating expenses, which include plant operations,
corporate and customer service, depreciation and amortization, cost of services
resold and other general and administrative expenses increased $40.1 million or
113.6% to $75.4 million in the year ended December 31, 1998 from $35.3 million
during the year ended December 31, 1997. The increase was primarily attributable
to the operating expenses incurred by the 1998 Acquisitions and the 1997
Acquisitions, which contributed an aggregate of $31.6 million of the increase.
Expenses associated with the start up and operation of FairPoint were $5.8
million or 14.5% of the expense increase in 1998. For RLECs owned and operated
for a comparable period in 1998 and 1997, operating expense increased
approximately $2.6 million or 8.3% to $34.0 million in 1998 from $31.4 million
in 1997. This increase can be attributed to a $3.0 million increase in corporate
and customer service expenses associated with the dramatic growth experienced by
the Company in 1998.
Income from Operations. As a result of the factors described above, income
from operations increased $4.1 million or 33.1% to $16.6 million in the year
ended December 31, 1998 from $12.4 million in the year ended December 31, 1997.
As a percentage of revenues, the income from operations was 18.0% in 1998 as
compared to 26.0% in 1997. The income from operations decline in 1998 is
primarily attributed to the expenses associated with the launch of FairPoint.
For RLECs owned and operated for comparable periods in 1998 and 1997, the income
from operations decreased $1.8 million to $9.7 million in 1998 from $11.5
million in 1997 and the income from operations margin decreased to 22.4% from
26.9%. The decrease was attributed to an increase in corporate and customer
services expenses.
Other Income (Expense). Net other expense increased $16.3 million or
209.5% to $24.1 million in the year ended December 31, 1998 from $7.8 million
during the year ended December 31, 1997. The increase was due to primarily
interest expense associated with the additional debt incurred to complete the
1998 Acquisitions. The increase in other expenses was partially offset by a net
gain from sale of assets of $0.7 million and an increase of $0.2 million in
dividend and interest income from the Company's investments.
Extraordinary Item. For the year ended December 31, 1998, the Company
recognized an extraordinary loss of $2.5 million (net of taxes) related to the
early retirement of debt.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Operating Revenue. Net revenue increased $17.4 million or 57.3% to $47.8
million in the year ended December 31, 1997 from $30.4 million in the year ended
December 31, 1996. Revenue from the acquisitions in 1997 of Kadoka Telephone
Co., Columbine Telephone Company, Chautauqua & Erie Telephone Corp. ("C&E") and
C-R Communications, Inc. (collectively, the "1997 Acquisitions") as well as the
full year results for the RLECs acquired by the Company in 1996 (collectively,
the "1996 Acquisitions"), provided for 46.4% of the increase. The company's long
distance resale subsidiary, STLD, reported first year revenues of $4.0 million
or 23.0% of the increase in total revenues reported in 1997. For RLECs owned and
operated for a comparable period in 1997 and 1996, net revenue increased
approximately $5.3 million or 19.2% to $32.9 million in 1997 from $27.6 million
in 1996.
Basic local service revenue increased $2.0 million to $7.6 million for the
year ended December 31, 1997 from $5.6 million for the year ended December 31,
1996. This revenue increase is primarily attributable to an increase in access
lines. The Company's access lines increased 14,714 to 48,731 access lines from
34,017 access lines for the years ended December 31, 1997 and 1996,
respectively. The inclusion of access lines from the RLECs acquired by the
Company during 1997 provided an increase of 13,645 access lines and internal
growth by RLECs owned and operated by the Company at December 31, 1997 provided
an increase of 1,069 access lines. Revenue contribution from the RLECs acquired
in 1997 and 1996 provided $1.6 million of the increase in basic local service
revenue for the year ended December 31, 1997. For the RLECs owned and operated
for a comparable period by the Company, basic local service revenue increased by
$0.4 million to $6.5 million for the year ended December 31, 1997 from $5.6
million for the year ended December 31, 1996.
USSF revenues increased $1.1 million to $4.3 million for the year ended
December 31, 1997 from $3.2 million for the year ended December 31, 1996. For
the RLECs owned and operated for a comparable period by the Company, USSF
revenues increased by $0.4 million to $3.6 million dollars for the year ended
December 31, 1997 from $3.2 million for the year ended December 31, 1996.
Interstate and intrastate revenues increased $8.2 million to $27.3 million
for the year ended December 31, 1997 from $19.1 million for the year ended
December 31, 1996. This revenue increase is attributable to an increase in
access lines and MOUs and an increase in interstate and intrastate settlement
revenue administered by NECA or a respective state's settlement methodologies.
Revenue contribution from the RLECs acquired in 1997 and 1996 provided $1.5
million and $2.8 million, respectively, of the increase in interstate and
intrastate revenues for the year ended December 31, 1997. For the RLECs owned
and operated for a comparable period by the Company, interstate and intrastate
revenues increased by $3.9 million to $23.1 million for the year ended December
31, 1997 from $19.1 million for the year ended December 31, 1996.
<PAGE>
Other revenues increased $6.1 million to $8.5 million for the year ended
December 31, 1997 from $2.4 million for the year ended December 31, 1996.
Revenue contribution from the RLECs acquired by the Company during 1997 and 1996
provided $0.1 million and $1.2 million, respectively, of the increase in other
services revenues for the year ended December 31, 1997. The Company's long
distance resale subsidiary, STLD, reported first year revenues of $4.0 million
or 65.6% of the increase in total revenues reported in 1997. For the RLECs owned
and operated for a comparable period by the Company, other revenues increased by
$0.6 million to $3.1 million for the year ended December 31, 1997 from $2.5
million for the year ended December 31, 1996.
Operating Expenses. Operating expenses, which include plant operations,
corporate and customer service, depreciation and amortization, cost of services
resold and other general and administrative expenses increased $15.2 million or
75.2% to $35.3 million in the year ended December 31, 1997 from $20.1 million
during the year ended December 31, 1996. The increase was primarily attributable
to the operating expenses incurred by the acquisitions of businesses in 1997 and
1996, which contributed an aggregate of $6.3 million to the increase. Expenses
allocated with the start up and operations of STLD were $5.4 million or 35.5% of
the total expense increase in 1997. For RLECs owned and operated for a
comparable period in 1997 and 1996, operating expense increased approximately
$3.6 million or 19.4% to $22.2 million in 1997 from $18.6 million in 1996. Most
of this increase can be attributed to a $1.2 million increase in corporate and
customer service, a $0.9 million change in other expense related to a change in
regulatory treatment for a reciprocal use agreement with Bell Atlantic
Corporation, and and an increase in toll costs related to new ISP activity.
Income from Operations. As a result of the factors described above, income
from operations increased $2.2 million or 22.0% to $12.4 million in the year
ended December 31, 1997 from $10.2 million in the year ended December 31, 1996.
As a percentage of revenues, income from operations margin was 26.0% in 1997 as
compared to 33.6% in 1996. For RLECs owned and operated for comparable periods
in 1997 and 1996, the income from operations increased $1.8 million or 20.2% to
$10.7 million in 1997 from $8.9 million in 1996 and the income from operations
margin increased to 32.5% from 32.4%.
Other Income (Expense). Net other expense decreased $1.0 million or 11.4%
to $7.8 million in the year ended December 31, 1997 from $8.8 million during the
year ended December 31, 1996. The improvement was because there was a decrease
in interest expense of approximately $0.3 million and an increase of $0.5
million in dividend and interest income from the company's investments.
Extraordinary Item. For the year ended December 31, 1997, the Company
recognized an extraordinary loss of $3.6 million (net of taxes) related to the
early retirement of debt.
Liquidity and Capital Resources
Implementation of the Company's acquisition strategy has required a
significant portion of the Company's capital resources. The Company historically
has used the proceeds of bank debt and private equity offerings, supplemented by
the Company's available cash flow, to fund the implementation of the Company's
acquisition strategy.
On March 30, 1998, the Company closed a $315.0 million senior secured
credit facility (the "Credit Facility") which included (i) $75.0 million of term
debt (Tranche C) amortized over nine years, (ii) $155.0 million of term debt
(Tranche B) amortized over eight years and (iii) an $85.0 million reducing
revolving credit facility (the "Revolver") with a term of six and one-half
years. All obligations of the Company under the Credit Facility are guaranteed
by four of the intermediary subsidiaries of the Company; ST Enterprises, Ltd.,
MJD Holdings Corp., MJD Services Corp. and MJD Ventures, Inc. The ability of
such subsidiaries to guarantee the obligations of the Company under certain
circumstances may be restricted. The Company is obligated to comply with certain
financial ratios and tests, including the following (which ratios became less
restrictive as a result of the Company achieving a ratio of senior debt to
annualized EBITDA ratio of less than 4.0 to 1.0): (i) maintain a ratio of
annualized EBITDA to interest expense of 1.5 to 1.0; (ii) maintain a ratio of
debt to annualized EBITDA of not more than 6.5 to 1.0; and (iii) maintain a
ratio of senior debt to annualized EBITDA of not more than 4.0 to 1.0. The
Company is currently in compliance with all covenants under the Credit Facility.
See Note 5 to Consolidated Financial Statements for additional information.
On May 5, 1998, the Company consummated its debt offering consisting of
$125.0 million in aggregate principal amount of 9 1/2% Senior Subordinated Notes
due 2008 (the "Fixed Rate Notes"), and $75.0 million in aggregate principal
amount of Floating Rate Callable Securities due 2008 (the "Floating Rate Notes")
(together with the Fixed Rate Notes, "the Notes"). Proceeds were used to reduce
the tranche A and tranche B debt outstanding under the Credit Facility. The
Notes are general unsecured obligations of the Company, subordinated in right of
payment to all existing and future senior debt (as defined in the indenture
relating to the Notes) of the Company, and effectively subordinated to all
existing and future debt and other liabilities (including trade payables and
accrued liabilities) of the Company's subsidiaries. Interest on the Notes is
payable semi-annually. Interest on the Fixed Rate Notes is fixed at 9 1/2% and
interest on the Floating Rate
<PAGE>
Notes is equal to a rate per annum at LIBOR (as defined in the Indenture) plus
418.75 basis points. On November 2, 1998, the Company consummated an exchange
offer pursuant to a Registration Statement on Form S-4 filed with the Securities
and Exchange Commission (File # 333-56365, declared effective October 1, 1998 by
exchanging its 9 1/2% Senior Subordinated Notes due 2008, Series B (the "Fixed
Rate Exchange Notes") and Floating Rate Callable Securities due 2008, Series B
(the " Floating Rate Exchange Notes") which have been registered under the
Securities Act of 1933, as amended, for like principal amounts of the Fixed Rate
Notes and the Floating Rate Notes, respectively. The Company is currently in
compliance with all covenants under the Credit Facility. See Note 5 to
Consolidated Financial Statements for additional information.
Certain funds managed by Kelso & Company and certain funds managed by
Carousel Capital Corp. (collectively the "Equity Investors") invested an
additional $16.3 million on March 30, 1998 to finance the acquisition of Taconic
Telephone Corp. and an additional $15.0 million on April 30, 1998 to finance the
acquisition of Ellensburg Telephone Company, resulting in a total of $47.8
million of equity capital invested in MJD by the Equity Investors through
December 31, 1998.
In addition to debt service, the Company's principal liquidity
requirements are generally expected to be for general corporate purposes,
capital expenditures and to finance the Company's pending acquisition
activities. The Company believes that the proceeds from the Credit Facility, the
Notes and the sale of non-core assets during 1999 provide sufficient resources
to fund the pending acquisitions that will close in the first half of 1999. The
Company's annual capital expenditures for existing operations have historically
been significant. Because existing regulations allow the Company to recover its
operating costs, plus a reasonable return on its invested capital in regulated
telephone assets, capital expenditures constitute an attractive use of the
Company's cash flow. The Company has historically generated sufficient cash flow
from operations to meet all of its capital expenditure requirements for existing
operations. In 1998 and 1997 and 1996, the Company spent approximately $12.4
million, $8.3 million and $8.4 million, respectively, on capital expenditures.
The Company's entry into additional markets as a CLEC is expected to
result in the Company's incurring initial operating losses. The Company invested
approximately $5.0 million in 1998 and it expects to invest approximately $15.0
million in 1999, to expand into ten additional markets bringing its total
markets to 24 by the end of 1999. In addition, FairPoint plans to build
facilities to migrate its customers to the Company's existing networks, which
will require substantial capital expenditures in 1999 and 2000. The Credit
Facility limits the funding of such losses and capital expenditures to (i) $5.0
million per year so long as the senior debt leverage ratio exceeds 4.0x and (ii)
$15.0 million per year whenever such leverage ratio is under 4.0x. The terms of
the Notes also impose certain restrictions on the Company's ability to fund
FairPoint's expansion. If FairPoint's plan proves to be successful, the Company
believes it will be able to raise separate financing for FairPoint's future
capital requirements as permitted under the Credit Facility and the Indenture
for the Notes.
Net cash provided by operating activities was $14.9 million and $9.8
million for the years ended December 31, 1998 and 1997, respectively. Net cash
used in investing activities was $225.5 million and $39.0 million for the year
ended December 31, 1998 and 1997, respectively. These cash flows primarily
reflect expenditures relating to acquisitions of RLECs of $217.1 million and
$30.8 million for the years ended December 31, 1998 and 1997, respectively and
capital expenditures of $12.4 and $8.3 for the years ended December 31, 1998 and
1997, respectively. Net cash provided by financing activities was $217.1 and
$31.7 million for the years ended December 31, 1998 and 1997, respectively.
These cash flows primarily represent borrowings, the proceeds of which were
$510.6 in 1998 and $71.1 in 1997, and from the proceeds of the issuance of
common stock of $31.8 million and $15.9 million in 1998 and 1997, respectively.
A majority of the 1998 proceeds were used to repay long-term debt of $307.8 and
to complete the 1998 acquisitions. A majority of the 1997 proceeds were utilized
to repay long-term debt of $22.1 million and repurchase preferred stock and
warrants for an aggregate amount of $31.5 million. See Note 9 to Consolidated
Financial Statements for additional information.
Net cash provided by operating activities was $9.8 million for each of the
years ended December 31, 1997 and 1996. Net cash used in investing activities
was $39.0 million and $19.8 million for the years ended December 31, 1997 and
1996, respectively. These cash flows primarily reflect expenditures relating to
acquisitions of telephone properties of $30.8 million and $11.3 million for the
years ended December 31, 1997 and 1996, respectively, and capital expenditures
of $8.3 million and $8.4 million for the years ended December 31, 1997 and 1996,
respectively. Net cash provided by financing activities was $31.7 million and
$10.6 million for the years ended December 31, 1997 and 1996, respectively.
These cash flows primarily represent borrowings, the proceeds of which were
$71.1 million and proceeds from the issuance of common stock of $15.9 million in
1997. A majority of the 1997 proceeds were utilized to repay long-term debt of
$22.1 million and repurchase preferred stock and warrants for an aggregate
amount of $31.5 million. On July 31, 1997, a recapitalization (the
"Recapitalization") of the Company was completed. For additional information,
see Note 9 to the Consolidated Financial Statements.
<PAGE>
Adjusted EBITDA is not a measure of performance under generally accepted
accounting principles and should not be construed as a substitute for
consolidated net earnings (loss) as a measure of performance, or as a substitute
for cash flow as a measure of liquidity. Adjusted EBITDA presented herein
differs from the definition of EBITDA in the indenture applicable to the
covenants for the Notes. The definition of EBITDA in such indenture is designed
to determine EBITDA for the purposes of contractually limiting the amount of
debt which the Company may incur. Adjusted EBITDA as calculated by the Company
is not necessarily comparable to similarly captioned amounts of other companies.
Adjusted EBITDA is presented because management believes it provides
useful information regarding the Company's ability to incur and/or service debt.
Increases or decreases in Adjusted EBITDA may indicate improvements or
decreases, respectively, in the Company's free cash flows available to incur
and/or service debt and cover fixed charges. Management expects that, because
Adjusted EBITDA is commonly used in the telecommunications industry as a measure
of performance, investors may use this data to analyze and compare other
telecommunications companies with the Company in terms of operating performance,
leverage and liquidity.
Adjusted EBITDA increased 75.0% to $39.7 million for the twelve months
ended December 31, 1998 from $22.7 million in the year ended December 31, 1997.
Adjusted EBITDA reported by the RLECs was $44.8 million, by STLD was $(0.5)
million and by FairPoint was $(4.6) million for the year ended December 31,
1998. Adjusted EBITDA increased 28.5% from $17.6 million in the year ended
December 31, 1996 to $22.7 million in the year ended December 31, 1997. Adjusted
EBITDA reported by the RLECs was $24.1 million and by STLD was $(1.4) million
for the year ended December 31, 1997. Adjusted EBITDA reported by the RLECs was
$17.6 million for the year ended December 31, 1996.
The Company may secure additional funding through the sale of public or
private debt and equity securities or enter into another bank credit facility to
fund future acquisitions. If the Company's growth occurs more rapidly than is
currently anticipated or if its operating results are below expectations, there
can be no assurance that the Company will be successful in raising sufficient
additional capital on terms that it will consider acceptable, or that the
Company's operations will produce positive cash flow in sufficient amounts to
meet its debt obligations. The Company's failure to raise and generate
sufficient funds may require it to delay or abandon some of its planned future
growth or expenditures, which could have a material adverse effect on the
Company's growth and its ability to compete in the telecommunications industry.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The Company
anticipates adopting this accounting pronouncement in 2000; however, management
believes it will not have a significant impact on the Company's consolidated
financial statements.
Inflation
The Company does not believe inflation has a significant effect on its
operations.
Year 2000
The Year 2000 issue concerns the inability of computer systems and certain
other equipment to properly recognize and process data that uses two digits
rather than four to designate particular years. The Company has initiated a Year
2000 Project Plan ("the Plan") to assess whether its systems that process date
sensitive information will perform satisfactorily leading up to and beyond
January 1, 2000. The goal of the Plan is to correct, prior to January 1, 2000,
any Year 2000-related problem with critical systems, the failure of which could
have a material adverse effect on the Company's operations. The Plan includes
steps to (i) identify each critical system element that requires date code
remediation, (ii) establish a plan to remediate such systems, (iii) implement
all required remediations and (iv) selectively test the remediated systems.
Thus far, the identification phase has identified Year 2000 issues in the
following critical Company-owned systems; (i) switching and transmission
hardware and software used by the Company to route and deliver telephone calls;
(ii) network support systems, including customer services systems and (iii)
billing and collection systems used by the Company to invoice and process most
of its customer payments. In addition, the Company (i) receives critical
services from providers of utilities and other services to facilities that house
employees and switching, transmission and other equipment and (ii) is dependent
upon outside vendors for, among other things, the provision of critical network
components. The Company is also critically reliant upon the systems of other
telecommunication carriers with which the Company's systems interconnect
<PAGE>
for the routing and delivery of telephone calls. The Company has also identified
potential Year 2000 related liability with respect to the telephone equipment
manufactured by unaffiliated parties that the Company has sold or leased to its
customers. The identification, planning and remediation phases of the Plan are
materially complete as they relate to Company-owned systems.
Based on work completed under the Plan to date, the Company currently
intends to take the following additional steps under its Plan with respect to
Company-owned systems, third-party vendors and other telecommunications
carriers:
o The Company generally plans to remediate Company-owned switching,
transmission, billing and collection and other critical systems
through the revision or replacement of current system components.
Necessary changes to Company-owned systems are in process and are
expected to be completed by mid-year 1999. The selective testing and
verification of such changes are expected to be completed during
1999. Due to the large number of system components requiring
remediation, the Company does not intend to test every remediated
system but will rely upon the results of selective testing to
determine the effectiveness of remediation efforts.
o With respect to critical services provided by utilities and other
third parties, the Company is in the process of contacting all such
suppliers and plans to have contacted all such suppliers before the
end of first quarter 1999. Thus far, a majority of those suppliers
contacted have responded that their systems and service delivery
mechanisms are Year 2000 compliant or can be made so through
currently available modifications. The Company plans to continue
monitoring all third-party remediation efforts and to make
contingency plans for the delivery of such services as necessary.
o The Year 2000 compliance status of other telecommunications carriers
with which the Company's switching systems interconnect is not yet
known. The Company is making inquiries with these carriers to
determine their compliance status and expects to obtain the results
of compliance tests during second quarter 1999, although there can
be no assurance that carriers will supply this information.
While the Company currently believes that it will be able to remediate and
selectively test Company-owned systems in time to minimize any detrimental
effect on its operations, there can be no assurance that such steps will be
successful. Failure by the Company to timely and effectively remediate its
systems, or the failure of critical vendors and suppliers and other
telecommunications carriers to remediate affected systems, could have a material
adverse impact on the Company's business, financial condition, results of
operations and prospects. Because the impact of Year 2000 issues on the Company
is materially dependent on the mitigation efforts of parties outside the
Company's control, the Company cannot assess with certainty the magnitude of any
such potential adverse impact. However, based upon risk assessment work
conducted thus far, the Company believes that the most reasonably likely worst
case scenario of the failure by the Company, its suppliers or other
telecommunications carriers with which the Company interconnects to resolve Year
2000 issues would be an inability by the Company (i) to provide
telecommunications services to the Company's customers, (ii) to route and
deliver telephone calls originating from or terminating with other
telecommunications carriers, (iii) to timely and accurately process service
requests and (iv) to timely and accurately bill its customers. In addition to
lost earnings, these failures could also result in loss of customers due to
service interruptions and billing errors, substantial claims by customers and
increased expenses associated with Year 2000 litigation, stabilization of
operations and executing mitigation and contingency plans.
Contingency planning to maintain and restore services in the event of
natural disasters, power failures and systems-related problems is a routine part
of the Company's operations. The Company believes that such contingency plans
will assist the Company in responding to the failure by outside service
providers to successfully address Year 2000 issues. In addition, the Company is
currently identifying and considering various Year 2000-specific contingency
plans, including identification of alternate vendors and service providers and
manual alternatives to system operations. These Year 2000-specific contingency
plans are expected to be materially completed during the first quarter of 1999,
but their review and development will continue into 1999.
Although the total costs to implement the Plan cannot be precisely
estimated, the Company anticipates spending approximately of $1.0 million. The
costs incurred to date and estimated remaining costs are for outside
consultants, software and hardware applications. These costs will be expensed as
incurred, unless new systems are purchased that should be capitalized in
accordance with generally accepted accounting principles. The Company does not
separately track the internal costs incurred for the Year 2000 project, and such
cost are principally the related payroll costs for its information systems
group. Some of the costs represent ongoing investment in systems upgrades, the
timing of which is being accelerated in order to facilitate Year 2000
compliance. In some instances, such upgrades will position the Company to
provide more and better-quality
<PAGE>
services to its customers than they currently receive. The Company expects to
fund these costs with cash provided by operations. Cost estimates and statements
of the Company's plans discussed above are forward-looking statements that are
derived using numerous assumptions of future events, many of which are outside
the Company's control, including the availability and future cost of trained
personnel and various other resources, third party modification plans, the
absence of systems requiring remediation that have not yet been discovered, and
other factors.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to material future earnings or cash flow exposures
from changes in interest rates on long-term debt as approximately 82% of the
Company's debt is at fixed rates or effectively at fixed rates through the use
of interest rate swaps. At December 31, 1998, the fair value of the Company's
long-term debt is estimated by discounting the future cash flows of each
instrument at rates currently offered to the Company for similar debt
instruments of comparable maturities. At December 31, 1998, the Company had
long-term debt with a carrying value of approximately $368.1 million and
estimated fair value of approximately $370.0 million. The market risk is
estimated as the potential decrease in fair value of the Company's long-term
debt resulting from a hypothetical increase of 91.6 basis points in interest
rates (ten percent of the rates currently offered to the Company). An increase
in interest rates would result in approximately a $0.7 million decrease in fair
value of the Company's long-term debt.
During 1998, the Company entered into interest rate swaps to manage its exposure
to fluctuations in interest rates of its variable rate debt. The fair value of
these swaps was approximately $(1.7) million at December 31, 1998. The negative
fair value indicates an estimated amount the Company would have to pay to cancel
the contracts or transfer them to other parties. Pertaining to its Credit
Facility, the Company used an interest rate swap agreement with a notational
amount of $25 million to effectively convert a portion of its variable interest
rate exposure to a fixed rate of 9.91%. The swap agreement expires on September
29, 2000. As to its Floating Rate Notes, the Company used two interest rate swap
agreements, with notational amounts of $50 million and $25 million,
respectively, to effectively convert its variable interest rate exposure to a
fixed rate of 10.01% and 9.95%, respectively. Both swap agreements expire on
November 1, 2001.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors
MJD Communications, Inc.:
We have audited the accompanying consolidated balance sheets of MJD
Communications, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 financial position of MJD Communications,
Inc. and subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
February 19, 1999
Lincoln, Nebraska
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
-------- -------
(Dollars in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,241 6,822
Accounts receivable, net of allowance for doubtful accounts of
$369 in 1998 and $49 in 1997 19,112 8,313
Prepaid and other assets 3,283 1,249
Income taxes recoverable -- 757
-------- -------
Total current assets 35,636 17,141
-------- -------
Property, plant, and equipment, net 142,321 61,207
-------- -------
Other assets:
Investments 37,894 11,424
Goodwill, net of accumulated amortization 203,867 50,433
Debt issue costs, net of accumulated amortization 16,121 2,981
Covenants not to compete, net of accumulated amortization 2,938 988
Other 2,114 439
-------- -------
Total other assets 262,934 66,265
-------- -------
Total assets $440,891 144,613
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity (Deficit) 1998 1997
--------- --------
(Dollars in thousands
except share data)
<S> <C> <C>
Current liabilties:
Accounts payable $ 10,153 5,055
Current portion of long-term debt 3,502 5,409
Demand notes payable 754 879
Current portion of obligation for covenants not to compete 881 256
Accrued interest payable 3,947 2,819
Accrued property taxes 1,847 1,171
Other accrued liabilities 4,407 1,444
Income taxes payable 588 --
--------- --------
Total current liabilities 26,079 17,033
--------- --------
Long-term liabilities:
Long-term debt, net of current portion 364,610 126,503
Put warrant obligation 4,169 3,456
Unamortized investment tax credits 632 199
Obligation for covenants not to compete, net of current portion 2,162 756
Deferred income taxes 26,729 6,983
Other liabilities 3,189 132
--------- --------
Total long-term liabilities 401,491 138,029
--------- --------
Minority interest 435 360
--------- --------
Redeemable preferred stock -- 130
--------- --------
Common stock subject to put option, 87,600 shares in 1998 3,000 --
--------- --------
Stockholders' equity (deficit):
Common stock:
Class A voting, par value $.01 per share, authorized 3,000,000
shares, issued and outstanding 1,722,547 and 880,600 shares
in 1998 and 1997, respectively 17 9
Additional paid-in capital 45,735 16,906
Accumulated deficit (35,866) (27,854)
--------- --------
Total stockholders' equity (deficit) 9,886 (10,939)
--------- --------
Total liabilities and stockholders' equity $ 440,891 144,613
========= ========
</TABLE>
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Operating revenues:
Switched services $ 72,124 39,257 27,973
Other 19,883 8,506 2,383
-------- ------- -------
Total operating revenues 92,007 47,763 30,356
-------- ------- -------
Operating expenses:
Plant operations 14,293 6,857 4,181
Corporate and customer service 22,275 11,581 7,577
Depreciation and amortization 20,089 8,777 6,644
Cost of services resold 6,163 4,791 97
Other general and administrative 12,625 3,318 1,658
-------- ------- -------
Total operating expenses 75,445 35,324 20,157
-------- ------- -------
Income from operations 16,562 12,439 10,199
-------- ------- -------
Other income (expense):
Net gain (loss) on sale of investments and other assets 651 (19) (3)
Interest income 442 212 180
Dividend income 1,119 1,182 667
Interest expense (27,170) (9,293) (9,605)
Other nonoperating, net 885 140 (15)
-------- ------- -------
Total other expense (24,073) (7,778) (8,776)
-------- ------- -------
Earnings (loss) before income taxes
and extraordinary item (7,511) 4,661 1,423
Income tax (expense) benefit 2,112 (1,876) (1,462)
-------- ------- -------
Earnings (loss) before extraordinary item (5,399) 2,785 (39)
Extraordinary item - loss on early retirement of debt, net of
income tax benefit of $1,755 in 1998 and $2,296 in 1997 (2,521) (3,611) --
-------- ------- -------
Loss before minority interest (7,920) (826) (39)
Minority interest in income of subsidiaries (80) (62) (33)
-------- ------- -------
Net loss $ (8,000) (888) (72)
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Total
Class A Additional Retained stockholders'
common paid-in earnings equity
stock capital (deficit) (deficit)
----- ------- -------- --------
(Dollars in thousands, except share data)
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 4 146 (47) 103
Net loss -- -- (72) (72)
Accretion of redeemable preferred stock -- (146) (2,027) (2,173)
----- ------- ------- -------
Balance, December 31, 1996 4 -- (2,146) (2,142)
Net loss -- -- (888) (888)
Issuance of 487,580 shares of common stock 5 15,870 -- 15,875
Conversion of redeemable preferred stock -- 112 -- 112
Capital contribution -- 924 -- 924
Repurchase of redeemable preferred stock -- -- (24,541) (24,541)
Redeemable preferred stock dividends -- -- (279) (279)
----- ------- ------- -------
Balance, December 31, 1997 9 16,906 (27,854) (10,939)
Net loss -- -- (8,000) (8,000)
Preferred stock dividends -- -- (12) (12)
Issuance of 929,540 shares of common stock 9 31,828 -- 31,837
Reclassification of 87,600 shares of common stock
subject to put option (1) (2,999) -- (3,000)
----- ------- ------- -------
Balance, December 31, 1998 $ 17 45,735 (35,866) 9,886
===== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (8,000) (888) (72)
--------- ------- -------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 21,534 9,093 6,914
Provision for uncollectible revenue 303 -- 5
Deferred income taxes (1,653) 207 429
Income from equity method investments (931) -- --
Deferred patronage dividends (265) (585) (304)
Minority interest in income of subsidiaries 80 62 33
Increase (decrease) in put warrant obligation 714 (295) 2,072
Net (gain) loss on sale of investments and other assets (630) 17 3
Loss on early retirement of debt 2,897 1,864 --
Amortization of investment tax credits (131) (31) (16)
Changes in assets and liabilities arising from
operations, net of acquisitions:
Accounts receivable 6,075 (1,563) (465)
Prepaid and other assets 253 (106) (19)
Accounts payable (1,398) 1,664 773
Accrued interest payable 1,128 720 105
Accrued liabilities 689 636 338
Income taxes recoverable/payable (5,798) (956) (24)
--------- ------- -------
Total adjustments 22,867 10,727 9,844
--------- ------- -------
Net cash provided by operating activities 14,867 9,839 9,772
--------- ------- -------
Cash flows from investing activities:
Acquisitions of telephone properties, net of cash acquired (217,080) (30,845) (11,262)
Acquisition of property, plant, and equipment (12,433) (8,262) (8,439)
Proceeds from sale of property, plant, and equipment 107 121 70
Organizational costs (158) -- --
Distributions from investments 118 63 9
Payment on covenant not to compete (219) (94) (19)
Acquisition of investments (8) (241) (149)
Proceeds from sale of investments 4,088 403 --
Payments received on direct financing leases -- 249 --
Increase (decrease) in other assets/liabilities, net 63 (361) --
--------- ------- -------
Net cash used in investing activities $(225,522) (38,967) (19,790)
--------- ------- -------
</TABLE>
6 (Continued)
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of long-term debt $ 510,583 71,134 12,824
Repayment of long-term debt (307,763) (22,104) (3,673)
Net proceeds from issuance of preferred stock -- -- 1,816
Repurchase of preferred stock and warrants (175) (31,487) --
Dividends paid to preferred stockholders (12) (279) --
Net proceeds from the issuance of common stock 31,837 15,875 --
Loan origination costs (17,345) (1,949) (326)
Payment of early retirement benefits -- (25) (21)
Dividends paid to minority stockholders (6) (4) (4)
Release of restricted funds -- 561 --
Repayment of capital lease obligation (45) (25) (17)
--------- ------- -------
Net cash provided by financing activities 217,074 31,697 10,599
--------- ------- -------
Net increase in cash and cash equivalents 6,419 2,569 581
Cash and cash equivalents, beginning of year 6,822 4,253 3,672
--------- ------- -------
Cash and cash equivalents, end of year $ 13,241 6,822 4,253
========= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(1) Organization and Summary of Significant Accounting Policies
Organization
MJD Communications, Inc. (MJD) provides management services to its
wholly-owned subsidiaries: S T Enterprises, Ltd. (STE); MJD Ventures, Inc.
(Ventures); MJD Services Corp. (Services); MJD Holdings Corp. (Holdings),
FairPoint Communications Corp. (FairPoint) and MJD Capital Corp. STE,
Ventures, Services, and Holdings also provide management services to their
wholly-owned subsidiaries.
Collectively, the wholly-owned subsidiaries of STE, Ventures, Services,
and Holdings primarily provide telephone local exchange services in
various states. Operations also include resale of long distance services,
internet services, cable services, equipment sales, and installation and
repair services. MJD Capital Corp. leases equipment to other subsidiaries
of MJD. FairPoint is a competitive local exchange carrier (CLEC) reselling
local and long distance services in various states.
STE's wholly-owned subsidiaries include Sunflower Telephone Company
(Sunflower); Northland Telephone Company of Maine, Inc. and Northland
Telephone Company of Vermont, Inc. (The Northland Companies); S T
Communications, Inc.; S T Paging, Inc.; and S T Long Distance, Inc. (S T
Long Distance), Venture's wholly-owned subsidiaries include Sidney
Telephone Company (Sidney), C-R Communications, Inc. (C-R), Taconic
Telephone Corp. (Taconic), Ellensburg Telephone Company (Ellensburg),
Chouteau Telephone Company (Chouteau), Utilities, Inc. (Utilities) and
Telephone Services Company (TSC). Services' wholly-owned subsidiaries
include Bluestem Telephone Company (Bluestem); Big Sandy Telecom, Inc.
(Big Sandy); Columbine Telecom Company (Columbine); and Odin Telephone
Exchange, Inc. (Odin). Holdings' wholly-owned subsidiaries include Kadoka
Telephone Co. (Kadoka) and Chautauqua & Erie Telephone Corporation (C&E).
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of MJD
Communications, Inc. and its subsidiaries (the Company). All intercompany
transactions and accounts have been eliminated in consolidation.
The consolidated financial statements have been prepared using generally
accepted accounting principles applicable to regulated entities. The
Company's telephone subsidiaries follow the accounting for regulated
enterprises prescribed by Statement of Financial Accounting Standards
(SFAS) No. 71, ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION.
This accounting recognizes the economic effects of rate regulation by
recording costs and a return on investment, as such amounts are recovered
through rates authorized by regulatory authorities. Accordingly, SFAS No.
71 requires the Company's telephone subsidiaries to depreciate telephone
plant over useful lives that would otherwise be determined by management.
SFAS No. 71 also requires deferral of certain costs and obligations based
upon approvals received from regulators to permit recovery of such amounts
in future years. The Company's telephone subsidiaries periodically review
the applicability of SFAS No. 71 based on the developments in their
current regulatory and competitive environments.
8 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Revenue Recognition From Telephone Operations
Revenues from telephone services are recognized from primarily three
sources: access, pooling, and miscellaneous. Local access charges are
billed to local end users under tariffs approved by each state's Public
Utilities Commission. Access revenues are derived on the intrastate
jurisdiction by billing access charges to interexchange carriers and to
regional bell operating companies. These charges are billed based on toll
or access tariffs approved by the local state's Public Utilities
Commission. Access charges for the interstate jurisdiction are billed in
accordance with tariffs filed by the National Exchange Carrier Association
(NECA) or by the individual company and approved by the Federal
Communications Commission.
Revenues are determined on a bill and keep basis or a pooling basis. If on
a bill and keep basis, the Company bills the charges to either the access
provider or the end user and keeps the revenue. If the Company
participates in a pooling environment (interstate or intrastate), the toll
or access billed are contributed to a revenue pool. The revenue is then
distributed to individual companies based on their company-specific
revenue requirement. This distribution is based on individual state Public
Utilities Commission's (intrastate) or Federal Communications Commission's
(interstate) approved separation rules and rates of return. Distribution
from these pools can change relative to changes made to expenses, plant
investment, or rate of return. Some companies participate in federal and
certain state universal service programs that are pooling in nature but
are regulated by rules separate from those described above. These rules
vary by state.
Miscellaneous revenues are derived by billing to either end users, access
providers, or other parties, services such as directory advertising,
billing and collecting services, rent, etc. These services are typically
billed under contract or under tariff supervision.
The costs of services resold are based primarily on the direct costs
associated with owned and leased transmission capacity and the cost of
transmitting and terminating traffic on other carriers' facilities.
Revenues and costs of services resold are recognized as services are
provided to local and long-distance end users.
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and temporary
cash investments and trade receivables. The Company places its cash and
temporary cash investments with high quality financial institutions.
Concentrations of credit risk with respect to trade receivables are
limited due to the Company's large number of customers in several states.
The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical
trends, and other information.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
9 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Investments
Investments consist of stock in CoBank, ACB (CoBank), Rural Telephone Bank
(RTB), the Rural Telephone Finance Cooperative (RTFC), and various
cellular companies and partnerships and other minority equity investments
in nonregulated entities. For the investments in partnerships, the equity
method of accounting is used. All other investments are stated at cost. To
determine if an impairment of an investment exists, the Company monitors
and evaluates the financial performance of the business in which it
invests and compares the carrying value of the investee to the fair values
of similar investments, which in certain instances, is based on
traditional valuation models utilizing multiples of cash flows. When
circumstances indicate that a decline in the fair value of the investment
has occurred and the decline is other than temporary, the Company records
the decline in value as a realized loss and a reduction in the cost of the
security. The Company did not incur any losses from other than temporary
declines in fair value in 1998, 1997, and 1996.
The Company currently receives patronage dividends from its investments in
businesses organized as cooperatives for federal income tax purposes
(CoBank and RTFC stock). Patronage dividends represent cash distributions
of the cooperative's earnings and notices of allocations of earnings to
the Company. Deferred and uncollected patronage dividends are included as
part of the basis of the investment until collected. The RTB investment
pays dividends annually based on the discretion of its Board of Directors.
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost. Repairs and
maintenance are charged to expense as incurred; major renewals and
improvements are capitalized. For telephone companies, the original cost
of depreciable property retired, together with removal cost, less any
salvage realized, is charged to accumulated depreciation. For all other
companies, the original cost and accumulated depreciation are removed from
the accounts and any gain or loss is included in the results of
operations. The telephone companies capitalize estimated costs of debt and
equity funds used for construction purposes for projects greater than
$100,000. Depreciation is determined using the straight-line method for
financial reporting purposes.
Debt Issue Costs
Debt issue costs are being amortized over the life of the related debt,
ranging from eight to ten years. Accumulated amortization of loan
origination costs was $1,255,730 and $664,753 at December 31, 1998 and
1997, respectively.
Intangible Assets
The covenants not to compete are being amortized over their useful life of
five years. Accumulated amortization of covenants not to compete was
$437,500 and $137,500 at December 31, 1998 and 1997, respectively.
10 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Goodwill consists of the difference between the purchase price incurred in
acquisitions using the purchase method of accounting and the fair value of
net assets acquired. Goodwill is being amortized using the straight-line
method over an estimated useful life of forty years. Accumulated
amortization of goodwill was approximately $6.9 million and $3.6 million
at December 31, 1998 and 1997, respectively.
The Company reviews its long-lived assets, including goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Pension and Other Postretirement Plans
Two of the Company's subsidiaries sponsor defined benefit plans covering
substantially all of their employees. The benefits are based on years of
service and the employee's compensation levels prior to retirement.
Benefits under these plans were frozen in connection with the Company's
acquisition of the companies. Two of the Company's subsidiaries also
sponsor other postretirement health care benefits for substantially all
retirees. The Company measures the cost of its obligations based on its
best estimate. The net periodic costs of pension and other postretirement
benefit plans are recognized as employees render the services necessary to
earn the postretirement benefits.
Derivative Financial Instruments
The Company uses interest rate swaps to manage its exposure to
fluctuations in interest rates of its variable rate debt. Amounts
receivable or payable under interest rate swap agreements are accrued at
each balance sheet date and included as adjustments to interest expense.
Comprehensive Income
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
effective January 1, 1998, which establishes standards for the reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. Comprehensive income includes the
reported net income of a company adjusted for items that are currently
accounted for as direct entries to equity, such as the mark-to-market
adjustment on securities available-for-sale. The Company does not have any
elements of comprehensive income other than the elements currently
recognized in the consolidated statements of operations.
11 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Reclassifications
Certain amounts previously reported in 1997 and 1996 for cost of services
resold have been reclassified to conform to the current period
presentation in the accompanying consolidated statements of operations.
The reclassifications had no effect on operating income as previously
reported.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and reported amounts
of revenues and expenses, to prepare these consolidated financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(2) Acquisitions
Certain subsidiaries of MJD acquired telephone properties through a number
of acquisitions in 1997 and 1998.
On January 1, 1997, the Company acquired 100% of the outstanding common
stock of Kadoka for approximately $2.9 million. On April 18, 1997, the
Company acquired certain telephone exchanges of Columbine Telephone
Company, Inc. through the purchase of certain assets for approximately
$4.6 million. On July 31, 1997, the Company acquired 100% of the
outstanding common stock of C&E including its wholly-owned subsidiaries
for approximately $22.0 million. On October 15, 1997, the Company acquired
100% of the outstanding common stock of C-R for $4.0 million.
On March 30, 1998, the Company acquired 100% of the outstanding common
stock of Taconic for approximately $67.5 million. On April 30, 1998, the
Company acquired 100% of the common stock of Ellensburg for approximately
$91.2 million. On June 1, 1998, the Company acquired 100% of the common
stock of Chouteau for $18.6 million. On November 6, 1998, the Company
acquired all of the common stock of Utilities for $46.8 million.
Acquisition costs were approximately $1.2 million and $.6 million in 1998
and 1997, respectively. The acquisitions have been accounted for using the
purchase method and, accordingly, the results of their operations have
been included in the Company's consolidated financial statements from the
date of acquisition. The excess of the purchase price and acquisition
costs over the fair value of the net identifiable assets acquired was
approximately $156.5 million and $17.3 million and has been recognized as
goodwill in 1998 and 1997, respectively. Certain of the Company's
allocations of purchase price for 1998 acquisitions are preliminary.
Adjustments to goodwill may emerge as certain preacquisition contingencies
are resolved, but in no event later than twelve months from the
acquisition date.
12 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
The allocation of the total net purchase price for the 1998 and 1997
acquisitions are shown on the table below:
1998 1997
--------- -------
(Dollars in thousands)
Current assets $ 27,539 5,947
Property, plant, and equipment 85,161 18,906
Excess cost over fair value of net assets
acquired 156,540 17,338
Other assets 30,577 3,569
Current liabilities (15,967) (1,093)
Noncurrent liabilities (58,606) (10,454)
--------- -------
Total net purchase price $ 225,244 34,213
========= =======
The Company has entered into agreements to acquire six additional rural
local exchange carriers in 1999. The aggregate purchase price for the
acquisitions is expected to approximate $27.3 million and will be financed
through existing debt facilities.
The following unaudited pro forma information presents the combined
results of operations of the Company as though the acquisitions in 1998
and 1997 and those acquisitions completed or that are probable of
completion in 1999 occurred on January 1, 1997. These results include
certain adjustments, including amortization of goodwill, increased
interest expense on debt related to the acquisitions, and related income
tax effects. The pro forma financial information does not necessarily
reflect the results of operations if the acquisitions had been in effect
at the beginning of each period or which may be attained in the future.
Pro forma years
ended December 31,
---------------------
1998 1997
--------- --------
(Dollars in thousands)
(unaudited)
Revenues $ 119,797 112,298
Earnings (loss) before extraordinary item (11,098) (4,002)
Net loss (13,700) (5,889)
13 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(3) Property, Plant, and Equipment
A summary of property, plant, and equipment as of December 31, 1998 and
1997 is shown on the table below:
Estimated
life (in years) 1998 1997
-------------- --------- --------
(Dollars in thousands)
Land - $ 1,442 879
Buildings 3 - 40 19,101 8,649
Telephone equipment 5 - 50 263,029 112,357
Cable equipment 3 - 15 5,332 398
Furniture and equipment 4 - 48 9,333 3,196
Vehicles and equipment 4 - 20 10,610 4,769
Computer software 3 - 5 365 246
--------- --------
Total property, plant, and
equipment 309,212 130,494
Accumulated depreciation (166,891) (69,287)
--------- --------
Net property, plant, and
equipment $ 142,321 61,207
========= ========
The composite depreciation rate for property and equipment was 7.39% in
1998, 6.66% in 1997, and 6.74% in 1996. Construction expenditures for 1999
are expected to approximate $22 million. The Company anticipates funding
construction from operations.
(4) Investments
The investments consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- ------
(Dollars in thousands)
<S> <C> <C>
Investment in cellular companies and partnerships $27,047 4,552
RTB stock 6,934 2,365
CoBank stock and unpaid deferred CoBank patronage 1,958 1,690
RTFC secured certificates and unpaid deferred RTFC patronage 1,055 373
Other nonmarketable minority equity investments 900 2,444
------- ------
Total investments $37,894 11,424
======= ======
</TABLE>
14 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(5) Long-term Debt
Long-term debt consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- --------
(Dollars in thousands)
<S> <C> <C>
Senior secured notes payable, variable rates ranging from 8.00%
to 9.86% at December 31, 1998, due 2006 $ 141,841 --
Senior subordinated notes due 2008:
Fixed rate, 9.50% 125,000 --
Variable rate, 9.10% at December 31, 1998 75,000 --
Senior notes payable to CoBank, paid March 30, 1998 -- 120,930
Senior notes payable to RTFC:
Fixed rates ranging from 8.80% to 9.20%, due 2008 4,918 1,399
Variable rates ranging from 6.65% to 8.80% at
December 31, 1998, due 2008 to 2012 7,362 5,687
Subordinated promissory notes payable, 7.00%, due 2005 7,000 --
First mortgage notes payable to Rural Utilities Service, fixed
rates ranging from 8.72% to 10.78%, due 2009 to 2016 6,679 --
Subordinated promissory notes, paid March 30, 1998 -- 3,500
Other debt, 5.75% to 9.50%, due 1999 to 2002 312 396
--------- --------
Total outstanding long-term debt 368,112 131,912
Less current portion (3,502) (5,409)
--------- --------
Total long-term debt, net of current portion $ 364,610 126,503
========= ========
</TABLE>
The approximate aggregate maturities of long-term debt for each of the
five years subsequent to December 31, 1998 are as follows:
Fiscal year (Dollars in thousands)
1999 $ 3,502
2000 3,867
2001 4,216
2002 4,521
2003 4,690
Thereafter 347,316
---------
$ 368,112
=========
15 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
On March 30, 1998, the Company closed a $315 million senior secured credit
facility (the "Credit Facility") which committed $75 million of term debt
(tranche C) amortized over nine years, $155 million of term debt (tranche
B) amortized over eight years, and an $85 million reducing revolving
credit facility with a term of 6.5 years. Approximately $142 million
senior secured notes payable were outstanding under the Credit Facility at
December 31, 1998. Borrowings under the facility bear interest at a rate
based, at the option of the Company, on the participating banks' prime
rate or Euro dollar rate, plus an incremental rate of 3.0%, 2.75%, and
2.5% for the Euro dollar margin and 2.0%, 1.75%, and 1.50% for the prime
rate margins for the tranche C, tranche B, and revolver facility,
respectively. The Credit Facility is secured by a perfected first priority
pledge of the stock of certain subsidiaries of the Company as well as the
promissory notes evidencing intercompany advances. The Credit Facility is
also guaranteed by four of the Company's intermediary holding companies,
subject to contractual or regulatory restrictions. The Company pays fees
of 1/2 of 1% per annum on the aggregate unused portion of the revolver and
tranche B commitment, in addition to an annual administrative agent's fee.
The Company used an interest rate swap agreement, with a notional amount
of $25 million, to effectively convert a portion of its variable interest
rate exposure to a fixed rate of 9.91%. The swap agreement expires on
September 29, 2000.
The Credit Facility contains various restrictions, including those
relating to payment of dividends by the Company. In management's opinion,
the Company has complied with all such requirements. At December 31, 1998,
there were no retained earnings available for payment of cash dividends
under the most restrictive provisions of such agreement.
On May 5, 1998, the Company consummated a debt offering consisting of $125
million in aggregate principal amount of Senior Subordinated Notes due
2008 (the "Fixed Rate Notes"), and $75 million in aggregate principal
amount of Floating Rate Callable Securities due 2008 (the "Floating Rate
Notes"). The notes are unsecured obligations of the Company and are
subordinated to all existing and future senior indebtedness. Interest on
the notes is payable semiannually. Interest on the Fixed Rate Notes is
9.5% and interest on the Floating Rate Notes is equal to a rate per annum
at LIBOR plus 418.75 basis points. As to the Floating Rate Notes, the
Company used two interest rate swap agreements, with notional amounts of
$50 million and $25 million, respectively, to effectively convert its
variable interest rate exposure to a fixed rate of 10.01% and 9.95%,
respectively. The swap agreements expire on November 1, 2001 and November
1, 2000, respectively.
The Fixed Rate Notes are redeemable, in whole or in part, at the option of
the Company, at any time on or after May 1, 2003 at redemption prices
(expressed as a percentage of the principal amount) declining annually
from 104.75 beginning May 1, 2003 to 100% beginning May 1, 2006 and
thereafter, together with accrued interest to the redemption date and
subject to certain conditions. Not withstanding the foregoing, on or prior
to May 1, 2001, the Company may redeem up to 35% of the aggregate
principal amount of the Fixed Rate Notes at a redemption price of 109.5%
of the principal amount thereof plus accrued and unpaid interest, if any,
to the redemption date, with the proceeds of an equity offering.
The Floating Rate Notes are redeemable, in whole or in part, at any time
at the option of the Company, at redemption prices (expressed as a
percentage of the principal amount) declining annually from 105.00%
beginning May 1, 1998 to 100% beginning May 1, 2003 and thereafter,
together with accrued interest to the redemption date and subject to
certain conditions.
16 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
The notes indenture places certain restrictions on the ability of the
Company to (i) incur additional indebtedness, (ii) make restricted
payments (dividends, redemptions, and certain other payments), (iii) incur
liens, (iv) issue and sell stock of a subsidiary, (v) sell or otherwise
dispose of property, business, or assets, (vi) enter into sale and
leaseback transactions, (vii) engage in business other than the
telecommunications business, and (viii) engage in transactions with
affiliates. In management's opinion, the Company has complied with all
such requirements. At December 31, 1998, there were no retained earnings
available for payment of cash dividends under the most restrictive
provisions of the indenture.
The debt agreements of certain of the Company's consolidated subsidiaries
include restrictive covenants that limit the amount of dividends that may
be paid by the subsidiary to its parent, MJD. Those covenants most
restrictive to the subsidiaries' ability to transfer cash to MJD include
the maintenance of a minimum debt to equity ratio. At December 31, 1998,
the subsidiaries represented approximately $4.1 million of consolidated
net assets of the Company, of which approximately $0.2 million was
restricted as to the payment of dividends to MJD.
The Company is exposed to credit losses in the event of nonperformance by
the counterparties to its interest rate swap agreements. The Company
anticipates, however, that the counterparties will be able to fully
satisfy their obligations under the contracts.
The Company also has $754,000 unsecured demand notes payable to various
individuals and entities with interest payable at 5.75%.
The Company has available two lines of credit, with a total maximum limit
of $1,500,000, expiring in 1999. No borrowings have been made under these
two lines of credit at December 31, 1998.
Substantially all assets of the Company are collateralized to secure the
Credit Facility.
(6) Employee Benefit Plans
The Company sponsors a voluntary 401(k) savings plan (the Plan) that
covers substantially all eligible employees. Each Plan year, the Company
contributes to the Plan an amount of matching contributions determined by
the Company at its discretion. For the Plan years ended December 31, 1998,
1997, and 1996, the Company matched 100% of each employee's contribution
up to 3% of compensation and 50% of additional contributions up to 6%. The
Plan also allows for a profit sharing contribution that is made based upon
management discretion. Total Company contributions to the Plan were
$1,163,906, $422,069, and $324,873 for the years ended December 31, 1998,
1997, and 1996, respectively.
C&E and Taconic also sponsor defined contribution 401(k) retirement
savings plans for union employees. C&E and Taconic match contributions to
these plans based upon a percentage of pay of all qualified personnel and
make certain profit sharing contributions. Contributions to the plans were
approximately $154,000 in 1998.
17 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Two of the Company's subsidiaries, which were acquired in 1998, have a
defined benefit pension plan covering substantially all of their
employees. The benefits are based on years of service and the employee's
compensation before retirement. The plans' benefits were frozen in 1998 in
connection with the Company's acquisition of the subsidiaries. There is no
additional minimum pension liability required to be recognized. There are
also two of the Company's subsidiaries, which were acquired in 1998 that
sponsor health care plans that provide postretirement medical benefits and
other benefits to employees who meet minimum age and service requirements
upon retirement. The liabilities for both the defined benefit pension
plans and the postretirement medical benefits plans were not material to
the consolidated financial statements at December 31, 1998.
(7) Income Taxes
Income tax (expense) benefit before extraordinary item consists of the
following components:
1998 1997 1996
------- ------ ------
(Dollars in thousands)
Current:
Federal $ 346 (1,426) (913)
State (17) (274) (136)
------- ------ ------
Total current income tax
(expense) benefit 329 (1,700) (1,049)
------- ------ ------
Investment tax credits 130 31 16
------- ------ ------
Deferred:
Federal 1,047 (130) (338)
State 606 (77) (91)
------- ------ ------
Total deferred income
tax (expense) benefit 1,653 (207) (429)
------- ------ ------
Total income tax
(expense) benefit $ 2,112 (1,876) (1,462)
======= ====== ======
Total income tax (expense) benefit in 1998, 1997, and 1996 was different
than that computed by applying U. S. federal income tax rates to earnings
before income taxes. The reasons for the differences are shown on the
following page.
18 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
1998 1997 1996
------- ------ ------
(Dollars in thousands)
Computed "expected" tax (expense) benefit $ 2,553 (1,585) (484)
State income tax (expense) benefit, net of
federal income tax benefit 389 (232) (149)
Amortization of investment tax credits 130 31 16
Goodwill amortization (887) (186) (104)
Change in fair value of put warrant obligation (242) 100 (704)
Other 169 (4) (37)
------- ------ ------
Total income tax
(expense) benefit $ 2,112 (1,876) (1,462)
======= ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below:
1998 1997
------- ------
(Dollars in thousands)
Deferred tax assets:
Federal and state tax loss carryforwards $ 1,032 123
Employee benefits 1,010 14
Allowance for doubtful accounts 211 --
Alternative minimum tax credits 1,296 721
Warrants issued in connection with early
retirement of debt 291 291
------- -----
Total gross deferred tax assets 3,840 1,149
Less, valuation allowance -- --
------- -----
Net deferred tax assets 3,840 1,149
------- -----
Deferred tax liabilities:
Property, plant, and equipment, principally
due to depreciation differences 17,242 4,287
Goodwill, due to amortization differences 1,903 1,172
Basis in investments 11,424 2,673
------- -----
Total gross deferred tax liabilities 30,569 8,132
------- -----
Net deferred tax liabilities $26,729 6,983
======= =====
19 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
The Company has federal net operating loss carryforwards of approximately
$2.0 million expiring in 2018 and minimum tax credits of approximately
$1.3 million which may be carried forward indefinitely. Management has
concluded that no valuation allowance is required because the full benefit
of the deferred tax assets will be realized through the future reversals
of the deferred tax liabilities.
(8) Warrants
In connection with the issuance of subordinated notes in 1994, the Company
issued detachable warrants to purchase 10,000 shares of STE's common stock
at the stated par value of $.01 per share. In conjunction with the
retirement of the subordinated notes in 1997, STE issued additional
warrants to purchase 2,857 shares of STE's common stock. This noncash
transaction was recognized as part of the loss on the early retirement of
debt described in note 9. The warrants are currently exercisable, have no
expiration date, and contain certain put and call provisions. The warrants
may not be put back to STE prior to July 31, 1999. The agreement
stipulates that the put/call price of the warrants shall be equal to STE's
net equity, as defined in the agreement, multiplied by the ratio of
exercisable warrants to the number of shares of common stock outstanding
on a fully-diluted basis on the date of the put or call.
The Company recorded the obligation for the warrants based on the fair
value of STE's common stock as determined by management, at the issuance
date of the warrants. At each balance sheet date, the warrants are valued
utilizing cash flow models that management also uses in valuing potential
acquisitions. Those models estimate fair value using earnings before
interest, taxes, depreciation, and amortization (EBITDA), and multiples of
EBITDA for recent acquisitions of similar companies. The increase or
decrease in fair value of the obligation for the warrants is recognized in
earnings as interest expense. At December 31, 1998 and 1997, the estimated
fair value of the obligation for the warrants. As determined by
management, was approximately $4.2 million and $3.5 million, respectively.
During 1998, the Company notified the STE warrant holders of its intention
to exercise its call option in 1999. The STE warrant holders have disputed
the Company's right to call the warrants prior to July 31, 1999, as well
as the Company's valuation of the warrants. As a consequence, the Company
has offered to engage a mutually agreeable third party to perform an
independent appraisal. Management is unable to anticipate the effects, if
any, such an appraisal would have on the valuation of the warrants in the
accompanying consolidated financial statements.
In addition, the Company previously issued warrants to purchase 7.69
shares, representing 7.14% of Sidney's common stock. The Company estimated
the fair value of the warrants at the date of issuance and included the
fair value in the initial allocation of purchase price for Sidney's common
stock, with the related value of the warrants issued to minority
shareholders included in the obligation for minority interests. The
warrants are currently exercisable and have no expiration date. There are
no put/call provisions associated with these warrants.
20 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(9) Stockholders' Equity and Recapitalization
Effective July 31, 1997, a recapitalization of the Company was completed.
The Company issued 442,340 shares of its Class A common stock to unrelated
third parties and members of management for proceeds of approximately
$15.1 million (net of offering expenses of $925,602). These proceeds,
together with additional borrowings of $39.2 million from CoBank and the
issuance of subordinated promissory notes in the amount of $3.5 million,
were utilized to repurchase and retire the remaining Series A preferred
stock, all shares of Series C preferred stock not owned by members of
management, and all the warrants and contingent warrants (the Warrants) to
purchase the Company's Class A common stock not owned by members of
management for approximately $35.0 million. The difference between the
carrying value of the Series A and Series C preferred stock, and the
Warrants and the price at which the stock was repurchased and retired
($24.5 million), was charged to retained earnings as it represents a
return to the preferred shareholders. In conjunction with the
recapitalization, STE also retired the subordinated notes payable of
$11,562,133. As a result of retiring the subordinated debt of STE, the
Company recognized an extraordinary loss of approximately $3.6 million
(net of taxes of $2.3 million), consisting of prepayment penalties of
approximately $4.0 million, the write-off of existing deferred financing
costs of approximately $1.1 million, and the issuance of additional put
warrants valued at $750,000. The additional put warrants were issued to
the holders of the STE warrants and debt in consideration of their consent
to retire the STE debt (see also note 8).
In connection with the recapitalization, the Company amended its
certificate of incorporation so that Series A (11% cumulative, redeemable,
convertible, and nonvoting) preferred stock and Series B (11% cumulative,
redeemable, convertible, and nonvoting) preferred stock are no longer
authorized.
During 1997, a shareholder of MJD contributed the net assets of Holdings,
totaling $150,000, in consideration for 1,450 shares of Class A common
stock. Also in 1997, existing subordinated notes payable to stockholders
of the Company in the amount of $923,500 were contributed as additional
capital.
In October 1997, an additional 43,794 shares of Class A common stock were
issued for proceeds of $1.5 million.
On March 30, 1998 and April 30, 1998, the Company issued a total of
929,540 shares of its Class A common stock to unrelated third parties and
members of management for proceeds of approximately $31.8 million. These
proceeds were used to finance the acquisition of Taconic and Ellensburg.
On November 24, 1998, the Company effected a ten-for-one stock split,
which has been given retroactive effect in the accompanying consolidated
financial statements. The stock split resulted in a reclassification of
$4,473 from additional paid-in capital to common stock. In conjunction
with the stock split, the Company amended and restated its Articles of
Incorporation to authorize the issuance of 3,000,000 shares of Class A
common stock. At December 31, 1998, the Company is authorized to issue up
to 290,000 shares of Series C (14% cumulative, redeemable, and nonvoting)
preferred stock.
21 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
The Company sponsors a stock option plan (the 1995 Plan) that covers
officers, directors, and employees of the Company. The Company may issue
qualified or nonqualified stock options to purchase up to 56,840 shares of
the Company's Class A common stock to employees that will vest equally
over five years from the date of employment of the recipient and are
exercisable during years five through ten. In 1995, the Company granted
options to purchase 42,640 shares at $5 per share. There were no options
granted since 1995. Since the Company applies APB Opinion No. 25 in
accounting for its plan, no compensation cost has been recognized for its
stock options in the consolidated financial statements. Had the Company
recorded compensation cost based on the fair value at the grant date for
its stock options following SFAS No. 123, the Company's net income for
1998, 1997, and 1996 would not have been significantly reduced. The per
share weighted average fair value of stock options granted during 1995 was
$13 on the date of grant using the Black Scholes option-pricing model with
the following assumptions: expected dividend yield of 0.0%, risk-free
interest rate of 6.41%, and expected term of five years. Because the
Company was nonpublic on the date of grant, no assumption as to the
volatility of the stock price was made.
Stock option activity for 1998, 1997, and 1996 under the plan is
summarized as follows:
1998 1997 1996
------ ------ ------
Outstanding at January 1 42,640 42,640 42,640
Granted -- -- --
Exercised -- -- --
Canceled -- -- --
------ ------ ------
Outstanding at December 31 42,640 42,640 42,640
====== ====== ======
Exercisable at December 31 39,086 30,558 22,030
====== ====== ======
In August 1998, the Company adopted the MJD Communications, Inc. Stock
Incentive Plan (the 1998 Plan). The 1998 Plan provides for grants of up to
256,220 nonqualified stock options to executives and members of
management, at the discretion of the compensation committee of the Board
of Directors. Options vest in 25% increments on the second, third, fourth,
and fifth anniversaries of an individual grant. In the event of a change
in control, outstanding options will vest immediately. In October 1998,
the compensation committee of the Board of Directors approved a grant of
233,200 options at an exercise price of $34.25 per share. Pursuant to the
terms of the grant, options become exercisable only in the event that the
Company is sold, an initial public offering of the Company's common stock
occurs, or other changes in control, as defined, occur. The number of
options that may become ultimately exercisable also depends upon the
extent to which the price per share obtained in the sale of the Company
would exceed a minimum selling price of $85.63 per share. Options have a
term of ten years from an effective grant date of May 1998. The Company
will accrue for compensation expense for the excess of the estimated fair
value of its common stock over the exercise price of the options when and
if a sale of the Company, at the prices necessary to result in exercisable
options under the grant, becomes imminent or likely.
22 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
In December 1998, the Company adopted the FairPoint Communications Corp.
Stock Incentive Plan (the FairPoint Plan) for employees of its subsidiary,
FairPoint. Under the FairPoint Plan, participating employees may be
granted options to purchase common stock of FairPoint at exercise prices
not less than the fair value of FairPoint common stock at the date of the
grant. Shares issued to employees under the FairPoint Plan are subject to
a call option by FairPoint. Under the call option, FairPoint may
repurchase those shares held by terminating employees at fair value if the
shares were held by the employee for a minimum holding period of not less
than six months. The FairPoint Plan also provides for the reacquisition of
common shares by FairPoint in the event of death or disability of the
option-holder. No options were granted under the FairPoint Plan in 1998.
(10) Redeemable Preferred Stock
The following is a summary of the Company's preferred stock:
<TABLE>
<CAPTION>
Series A preferred Series B preferred Series C preferred
------------------ ------------------ ------------------
Shares Amount Shares Amount Shares Amount
------- ------- ------ ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 69,100 $ 6,615 900 $ 86 -- $ --
Conversion of preferred stock 900 86 (900) (86) -- --
Issuance of preferred stock to an
unrelated third party and members
of management -- -- -- -- 183,060 1,816
Accretion of preferred stock -- 2,037 -- -- -- 136
------- ------- ----- ---- -------- -------
Balance at December 31, 1996 70,000 8,738 -- -- 183,060 1,952
Conversion of preferred stock (900) (112) -- -- -- --
Repurchase of preferred stock (69,100) (8,626) -- -- (170,044) (1,822)
------- ------- ----- ---- -------- -------
Balance at December 31, 1997 -- -- -- -- 13,016 130
Repurchase of preferred stock -- -- -- -- (13,016) (130)
------- ------- ----- ---- -------- -------
Balance at December 31, 1998 -- $ -- $ -- -- $ --
======= ======= ===== ==== ======== =======
</TABLE>
The Series A preferred stock, Series B preferred stock, and Series C
preferred stock not owned by management were purchased and retired in
connection with the 1997 recapitalization (see also note 9). The Series C
preferred stock owned by management was purchased and retired in 1998.
On June 7 and July 31, 1996, the Company collectively issued 183,060
shares of its Series C preferred stock for proceeds of $1,830,600, or $10
per share. The Company incurred issuance costs in the amount of $15,042
which are reflected as a reduction in the proceeds received. As part of
the recapitalization in 1997 discussed in note 9, 170,044 shares of the
stock were repurchased.
In conjunction with the issuance of the Series C preferred stock in 1996,
the Company issued warrants to purchase 11,689.9 shares of the Company's
Class A common stock. In association with the recapitalization, the
Company repurchased warrants to purchase 10,860.5 shares and contingent
warrants to purchase 6,480 shares. There are no contingent warrants
outstanding at December 31, 1997 and 1998. The remaining warrants for
829.4 shares are currently exercisable, carry an exercise price of $.01
per share, and expire July 31, 2016. There are no put/call provisions
associated with these warrants.
23 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(11) Related Party Transactions
During 1998, certain major shareholders of the Company pledged 87,600
shares of the Company's common stock as collateral under various loan
agreements. Under the terms of the loan agreements, the Company is
required, in the event of default by the shareholders, to repurchase the
pledged shares for the lesser of (i) 100% of outstanding indebtedness plus
accrued and unpaid interest, or (ii) $3.0 million. The Company has
classified $3.0 million of equity as temporary equity for the value of
common stock issued and subject to put options under these arrangements.
During 1997, the Company entered into an agreement with MJD Partners, L.P.
(Partners), a major shareholder of the Company. Under the terms of the
agreement, Partners provided senior management and acquisition services to
the Company. Partners was paid $1,020,000 under this agreement and this
expense was classified with corporate expenses in 1997. This agreement was
terminated on March 31, 1998, at which time $225,000 had been paid to
Partners during 1998.
In connection with the recapitalization, described in note 9, the Company
entered into financial advisory agreements, dated July 31, 1997, with
certain equity investors, pursuant to which the equity investors provide
certain consulting and advisory services related but not limited to equity
financings and strategic planning. Pursuant to these agreements, the
Company pays annual advisory fees to the equity investors on a quarterly
basis until December 31, 2007. During 1998, due to additional equity
investment in the Company, the annual fees were increased from $100,000 to
$400,000 per year. During 1998 and 1997, the Company paid $250,000 and
$45,833, respectively, in such fees to the equity investors and this
expense was classified with corporate expenses. The agreements also
provide that the Company will reimburse the equity investors for travel
relating to the Company's Board of Directors meetings. During 1998, the
Company reimbursed the equity investors $117,204 for travel and other
expenses. In the event of additional equity investments in the Company by
the equity investors, the parties have agreed to negotiate in good faith
to increase the advisory fee.
The Company also has entered into a consulting agreement dated as of July
31, 1997 with an entity controlled by a certain shareholder pursuant to
which the shareholder has agreed to provide general consulting and advice
to the Company as reasonably requested from time to time. Pursuant to the
terms of the agreement, the consulting company is paid an annual fee of
$120,000 in monthly installments plus all of the shareholder's
out-of-pocket business expenses up to $30,000. The term of the agreement
is one year, subject to automatic renewal for successive periods of one
year each thereafter. The Company incurred expenses of $103,306 in 1998
related to this consulting agreement. The agreement was paid by MJD
Partners during 1997 and through March of 1998.
In 1996, a law firm, in which a partner of such law firm is also a partner
in Partners, was paid a total of $321,251, of which ($138,368) was for
general counsel services, which have been classified with corporate
expenses, and ($182,883) for acquisition-related services, which have been
capitalized as direct costs of acquisitions of subsidiaries. In 1997, this
same law firm was paid $1,070,132 of which ($38,872) was for general
counsel services, which have been classified with corporate expenses,
($819,361) for services related to financings, which have been recorded as
debt issue costs and equity issue costs, and ($211,899) for new
acquisitions, which have been capitalized as direct costs of acquisitions
of subsidiaries. In 1998, this same law firm was paid $2,307,900, of which
($289,156) was for general counsel, which are classified with corporate
expenses, ($1,228,902) for services related to financings, which have been
recorded as debt issue costs, and ($789,842) new acquisitions, which have
been capitalized as direct costs of acquisitions of subsidiaries.
24 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(12) Supplemental Cash Flow Information
For the years ended December 31, 1998, 1997, and 1996, the Company paid
interest of $24,111,997, $8,301,646, and $7,204,795, respectively.
For the years ended December 31, 1998, 1997, and 1996, the Company paid
income taxes of $3,585,977, $529,352, and $1,084,766, respectively.
In conjunction with the recapitalization in 1997, the Company issued
subordinated promissory notes for $3.5 million for the repurchase of the
Series A and Series C preferred stock. These subordinated promissory notes
were paid during 1998.
(13) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
quarter quarter quarter quarter Total
-------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1998:
Revenue $ 14,555 23,079 25,642 28,731 92,007
Earnings (loss) before extraordinary item
and minority interest 634 (428) (1,517) (4,088) (5,399)
Net loss (1,912) (440) (1,548) (4,100) (8,000)
======== ======= ======= ======= =======
1997:
Revenue 8,901 9,474 13,118 16,270 47,763
Earnings before extraordinary item
and minority interest 689 535 836 725 2,785
Net earnings (loss) 667 535 (2,778) 688 (888)
======== ======= ======= ======= =======
</TABLE>
During the first quarter of 1998, the Company recognized a loss on the
early retirement of debt of $4,276,159. During the third quarter of 1997,
the Company recognized a loss on early retirement of debt of $5,908,104.
The losses had the effect of reducing net earnings by $2,520,943 and
$3,611,624 in 1998 and 1997, respectively.
(14) Disclosures About the Fair Value of Financial Instruments
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable, and
Demand Notes Payable
The carrying amount approximates fair value because of the short maturity
of these instruments.
Investments
Investments do not have a readily determinable fair value (not publicly
traded). The investments are stated at cost which management believes is
not impaired. On an annual basis, management determines a fair value of
its investments based on the financial performance of the investee, the
fair value of similar investments, and in certain instances, based on
traditional valuation models used by industry analysts. At December 31,
1998, the Company had investments with a carrying value of approximately
$37.9 million and estimated fair value of approximately $47.2 million.
25 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Long-term Debt
The fair value of the Company's long-term debt is estimated by discounting
the future cash flows of each instrument at rates currently offered to the
Company for similar debt instruments of comparable maturities. At December
31, 1998, the Company had long-term debt with a carrying value of
approximately $368.1 million and estimated fair value of approximately
$370.0 million.
Derivative Financial Instruments
The Company entered into interest rate swaps to manage its exposure to
fluctuations in interest rates of its variable rate debt in 1998. The fair
value of these swaps was approximately $(1.7) million at December 31,
1998. The negative fair value indicates an estimated amount the Company
would have to pay to cancel the contracts or transfer them to other
parties.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumption could significantly
affect the estimates.
(15) Major Customers
Compensation for interstate access services is based on reimbursement of
costs and an allowed rate of return. This compensation is received from
the NECA in the form of monthly settlements. Such compensation amounted to
27.3%, 30.0%, and 30.8% of revenues in 1998, 1997, and 1996, respectively.
The Company also derives significant revenues from Bell Atlantic,
principally from network access and billing and collecting service. Such
compensation amounted to 10.4%, 16.3%, and 20.1% of revenues in 1998,
1997, and 1996, respectively.
(16) Legal Proceedings
The Company currently and from time to time is involved in litigation and
regulatory proceedings incidental to the conduct of its business, but the
Company is not a party to any lawsuit or proceeding which, in the opinion
of the Company, is likely to have a material adverse effect on the
Company.
On April 6, 1998, Latin World Communications, Inc., ("LWC") and Debra A.
Boudrot, LWCs principal (collectively, "Plaintiffs") sued B. Stephen May
("May"), who is a former officer of S T Long Distance (a subsidiary of
STE), Siesta Telecom, Inc. ("Siesta"), which is a company controlled by
May, and S T Long Distance in the Circuit Court for the Twelfth Judicial
Circuit, Sarasota County, Florida. From March 1997 through early 1998, S T
Long Distance provided long distance services to Plaintiffs in connection
with Plaintiffs' prepaid telephone card distribution business. Plaintiffs
have alleged, among other things, that May, Siesta, and S T Long Distance
have engaged in fraud, misappropriation of trade secrets, unfair
competition, deceptive trade practices, and trade slander, and that May,
Siesta, and S T Long Distance have breached various contractual
obligations to the Plaintiffs and received certain overpayments from the
Plaintiffs. Plaintiffs seek approximately $1 million in damages relating
to such alleged overpayments, as well as injunctive relief relating to
26 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
certain other matters. Despite the fact that LWC was unprofitable in the
year ended December 31, 1997 and without any substantiation by any third
party, on the basis of a three-month period in 1997 in which LWC claims it
was profitable, the Plaintiffs have also alleged that S T Long Distance is
responsible for lost profits of between $12 million and (assuming LWC's
profits were to grow at a rate of 20% annually) $38 million, which LWC
would have generated in the 10-year period after the cessation of the
LWC/S T Long Distance business relationship. The Company intends to
vigorously contest all of the Plaintiffs' allegations, and believes that
it has no liability to the Plaintiffs. In particular, the Company believes
the Plaintiff's claim for lost profits are entirely speculative, frivolous
and without merit. While the outcome of such litigation cannot be
predicted, the Company does not believe that such litigation, even if
determined adversely to the Company, would have a material adverse effect
on its financial condition or results of operations.
(17) Reportable Segments
The Company has two reportable segments: incumbent local exchange carrier
(ILEC) operations and competitive local exchange carrier (CLEC)
operations. The ILEC operations provide local, long distance and other
telecommunications services to customers in rural communities in which
competition currently does not exist for local telecommunications
services. The CLEC operations provide local and long distance
telecommunications services to customers in markets outside of the
Company's ILEC markets. The Company began its CLEC operations during 1998,
therefore, prior to 1998, the Company's business consisted of one
reportable segment.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on EBITDA. The Company generally accounts for
intersegment sales and transfers as if the sales or transfers were to
third parties, that is, at current market prices.
The Company's reportable segments are strategic business units that offer
similar telecommunications related products and services in different
markets. They are managed separately because each segment requires
different marketing and operational strategies related to the providing of
local and long distance telecommunications services.
27 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
The Company utilizes the following information for purposes of making
decisions about allocating resources to a segment and assessing a
segment's performance:
ILEC CLEC
Operations Operations Total
---------- ----------- ----------
Year ended December 31, 1998:
Revenues from external
customers $ 88,946 3,061 92,007
Intersegment revenues -- 516 516
Interest expense 27,170 -- 27,170
Depreciation and amortization 20,034 55 20,089
Income tax benefit 267 1,845 2,112
EBITDA 42,099 (4,952) 37,147
Segment assets 435,617 5,576 441,193
Expenditures for segment assets 10,914 1,521 12,435
A reconciliation of reportable segment amounts to the Company's
consolidated balances for the year ended December 31, 1998 is as follows:
Revenues:
Total revenue for reportable segments $ 92,523
Elimination of intersegment revenue (516)
---------
Total consolidated revenue $ 92,007
=========
EBITDA to net loss:
EBITDA $ 37,147
Other components of EBITDA:
Depreciation and amortization (20,089)
Interest expense (27,170)
Income tax expense 2,112
---------
Net loss $ (8,000)
=========
Assets:
Total assets for reportable segments $ 441,193
Consolidating and eliminating adjustments (302)
---------
Consolidated total $ 440,891
=========
28
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are listed below.
Executive officers are generally elected annually by the Board of Directors to
serve, subject to the discretion of the Board of Directors, until their
successors are appointed. There are currently eight members of the Board of
Directors.
Name Age Position
- --------------------------- ----- ------------------------------------------
Daniel G. Bergstein........ 55 Co-Founder, Director
Meyer Haberman............. 57 Co-Founder, Director
Jack H. Thomas............. 57 Co-Founder, Chairman of the Board of
Directors, Chief Executive Officer
Eugene B. Johnson.......... 51 Co-Founder, Vice Chairman of the Board of
Directors, Executive Vice President,
Assistant Secretary
Walter E. Leach, Jr........ 47 Senior Vice President, Chief Financial
Officer and Secretary
John P. Duda............... 51 President and Chief Executive Officer--
Telecom Group
G. Brady Buckley .......... 39 President and Chief Executive Officer of
FairPoint Communications Corp.
Timothy W. Henry........... 43 Vice President of Finance and Treasurer
George E. Matelich......... 42 Director
Reid G. Leggett............ 43 Director
Nelson Schwab, III......... 54 Director
Frank K. Bynum, Jr......... 36 Director
Daniel G. Bergstein. Mr. Bergstein is a founder and has been a director of the
Company since 1991. Since 1988, Mr. Bergstein has been a senior partner in the
New York office of the national law firm Paul, Hastings, Janofsky & Walker LLP,
where he is the Chairman of the Firm's Corporate Department as well as its
National Telecommunications Practice. Mr. Bergstein is a corporate and
securities lawyer, specializing in mergers and acquisitions and corporate
finance transactions.
Meyer Haberman. Mr. Haberman is a founder and has been a director of the Company
since 1991. Since 1973, Mr. Haberman has been the principal shareholder,
President and Chief Executive Officer of Interquest Incorporated, an
international management consulting and executive search firm which he founded.
Jack H. Thomas. Mr. Thomas is a founder and has been a director of the Company
since 1991. He has acted as President and Chief Executive Officer since 1993.
Mr. Thomas has served as Chairman of the Board of Directors of the Company since
August 1998. From 1985 to 1993, Mr. Thomas was Chief Operating Officer of C-TEC
Corporation, a diversified telecommunications concern which at the time owned
Commonwealth Telephone Company, a 240,000 access line LEC. From 1982 to 1985,
Mr. Thomas served as Vice President, Operations of United Telephone Company of
Ohio and was a member of its board of directors. Prior to his service with
United Telephone Company of Ohio, Mr. Thomas worked for nearly twenty years at
C&P Telephone (now a Bell System company) in various positions including
division manager during the 1976-1982 period.
Eugene B. Johnson. Mr. Johnson is a founder and has been a director of the
Company since 1991. Mr. Johnson has served as Senior Vice President of the
Company since 1993 and Executive Vice President since February 1998. Mr. Johnson
has served as Vice Chairman of the Company since August 1998. From 1987 to 1993,
Mr. Johnson served as President and principal shareholder of JC&A, Inc., an
investment banking and brokerage firm providing services to the cable
television, telephone and related industries. From 1985 to 1987, Mr. Johnson
served as the director of the mergers and acquisitions department of Cable
Investments, Inc., an investment banking firm. From 1980 to 1985, Mr. Johnson
served as President of a cable television construction and engineering company.
Mr. Johnson currently is a director of OPASTCO, the primary industry
organization for small independent telephone companies and serves on its
membership education and finance committees.
<PAGE>
Walter E. Leach, Jr. Mr. Leach has served as Chief Financial Officer and
Secretary of the Company since October 1994 and Senior Vice President since
February of 1998. From 1984 through September 1994, Mr. Leach served as
Executive Vice President of Independent Hydro Developers, where he had
responsibility for all project acquisition, financing and development
activities. From 1980 to 1984, Mr. Leach served as Vice President, Investor
Relations for The Pillsbury Company and served as Treasurer, Assistant Treasurer
and Controller for Burger King Corporation. Mr. Leach's career also includes
various finance-related positions at Sambo's Restaurants, Inc. and First Union
National Bank where he was the Manager of their New York City office. He is
currently a member of the finance committee of the National Telephone
Cooperative Association ("NTCA").
John P. Duda. Mr. Duda has served as Chief Operating Officer of the Company
since January 1994 and President and Chief Executive Officer of the Company's
Telecom Group since August 1998. From 1993 to 1994, Mr. Duda served as Vice
President, Operations and Engineering of Rochester Tel Mobile Communications.
From 1985 to 1993, Mr. Duda served as State Vice President--Minnesota, Nebraska
and Wyoming and Director of Network Planning and Operations for Pennsylvania and
New Jersey for Sprint and from 1970 to 1985 he served in various management
positions with C&P Telephone and Bell Atlantic including District
Manager--Planning and New Technology for Bell Atlantic Corporation. Mr. Duda is
currently on the United States Telephone Association's Board of Directors and
serves on its Executive, Regulatory Policy and Midsize Company committees. He
also serves on OPASTCO's Separations and Access Committee.
G. Brady Buckley. Mr. Buckley has served as President and Chief Executive
Officer of FairPoint Communications Corp. since July 1998. From 1996 to 1998,
Mr. Buckley served as President of American Telco, Inc., a Houston, Texas based
telecommunications firm that was the first company to provide combined local and
long distance phone service in Texas. From 1992 to 1996, Mr. Buckley was Vice
President of Worldcom and responsible for all New England operations including
sales, marketing, finance, operations, and administration. From 1988 to 1992,
Mr. Buckley was Vice President of First Phone of New England, a start-up company
that provided long distance telecommunications service to business firms in the
Northeast. From 1982 to 1987, Mr. Buckley served in several sales and management
positions at Sprint.
Timothy W. Henry. Mr. Henry has served as Vice President of Finance and
Treasurer of the Company since December 1997. From 1992 to December 1997, Mr.
Henry served as Vice President/Portfolio Manager at CoBank, ACB, and managed a
$225 million telecommunications loan portfolio which included responsibility for
CoBank's relationship with the Company.
George E. Matelich. Mr. Matelich has served as a Director of the Company since
July 1997. Mr. Matelich is currently a Managing Director of Kelso & Company
("Kelso"), with which he has been associated since 1985. Mr. Matelich serves on
the Boards of Directors of CCA Holdings Corp., CCT Holdings Corp., Charter
Communications Long Beach Inc., Harris Specialty Chemicals, Inc. and Humphreys
Inc. Mr. Matelich is also a Trustee of the University of Puget Sound.
Reid G. Leggett. Mr. Leggett has served as a Director of the Company since July
1997. Mr. Leggett is currently serving as a Managing Director of Carousel
Capital Partners, L.P., with which he has been associated since 1996. From 1988
to 1996, Mr. Leggett served as Managing Director of Bowles Hollowell Conner &
Co. From 1993 to 1996, Mr. Leggett served as President and Managing Director of
Bowles Hollowell Conner & Co.
Nelson Schwab III. Mr. Schwab has served as a Director of the Company since July
1997. Mr. Schwab is currently serving as a Managing Director of Carousel Capital
Partners, L.P., with which he has been associated since 1996. From 1992 to 1995,
Mr. Schwab was Chairman and Chief Executive Officer of Paramount Parks. From
1984 to 1992, Mr. Schwab served as Chairman and Chief Executive Officer of Kings
Entertainment Company ("KECO") from which Paramount Parks acquired its regional
theme parks in 1992. Mr. Schwab serves on the Boards of Directors of Burlington
Industries Inc., First Union National Bank of North Carolina, Summit Properties,
Inc., and two privately-held middle market companies.
Frank K. Bynum, Jr. Mr. Bynum has served as a Director of the Company since May
1998. He is also a Managing Director of Kelso. Prior to joining Kelso in 1987,
he was an Investment Analyst with The New York Life Insurance Company ("New York
Life"). While with New York Life, Mr. Bynum served primarily in the Risk Capital
Group, which focused on leveraged buyout and venture capital investments. Mr.
Bynum received a B.A. in History from the University of Virginia. Mr. Bynum is a
director of Cygnus Publishing, Inc., Hillside Broadcasting of NC, Hosiery
Corporation of America, IXL Holdings, Inc. and 21st Century Newspapers, Inc.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued for
services rendered to the Company in all capacities, for the year ended December
31, 1998, by the Chief Executive Officer and each of the other executive
officers of the Company employed as of December 31, 1998 (the "Named Executive
Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
---------------------------------------- ----------------
Number of
Other Securities
Annual Underlying All other
Name and Principal Position Year Salary Bonus Compensation Options/SARs Compensation
- -------------------------------- ------- ---------- --------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Jack H. Thomas.................. 1998 $309,000 $150,000 $86,851 65,000 ___
Chief Executive Officer and 1997 300,000 82,500 69,128 ___ ___
President 1996 260,000 70,000 68,528 ___ ___
Eugene B. Johnson............... 1998 $240,000 $120,000 $52,525 59,750 ___
Executive Vice President 1997 240,000 62,000 29,535 ___ ___
and Assistant Secretary 1996 182,000 56,000 31,990 ___ ___
John P. Duda....................
President and Chief 1998 $140,000 $49,000 $41,775 20,500 ___
Executive Officer--Telecom 1997 131,000 31,000 24,018 ___ ___
Group 1996 123,000 35,000 22,188 ___ ___
Walter E. Leach, Jr.............
Senior Vice President, 1998 $130,000 $62,942 $34,255 32,500 ___
Chief Financial Officer 1997 108,000 32,400 15,598 ___ ___
and Secretary 1996 100,000 27,000 13,372 ___ ___
G. Brady Buckley, 1998* $125,000 $90,000 $ 0 ___ ___
CEO and President-FairPoint 1997 ___ ___
Communications, Inc............. 1996 ___ ___
</TABLE>
* Represents six months of compensation.
Stock Option Plan
The Company's Stock Option Plan (the "Plan") was adopted on February 22,
1995. The Plan provides for the grant of options to purchase up to an aggregate
of 56,840 shares of the Company's common stock (the "Common Stock"). The Plan is
administered by the Board of Directors which makes discretionary grants of
options to officers or directors and employees of the Company.
Options granted under the Plan may be Incentive Stock Options, which
qualify for favorable Federal income tax treatment under Section 422A of the
Internal Revenue Code of 1986, or Nonstatutory Stock Options.
The selection of participants, allotment of shares, determination of price
and other conditions of purchase of such options are determined by the Board, in
its sole discretion. Each option grant is evidenced by a written Incentive Stock
Option Agreement or Nonstatutory Stock Option Agreement dated as of the date of
grant and executed by the Company and the optionee. Such agreement also sets
forth the number of options granted, the option price, the option term and such
other terms and conditions as may be determined by the Board of Directors. As of
December 31, 1998, the Board of Directors had granted options to purchase at $5
per share a total of 42,640 shares of the Company's Class A Voting Common Stock
to officers, directors and employees.
<PAGE>
Options granted under the Plan are nontransferable, other than by will or
by the laws of descent and distribution.
1998 Stock Incentive Plan
In August 1998, the Company adopted the MJD Communications, Inc. Stock
Incentive Plan (the "1998 Plan"). The 1998 Plan provides for grants of up to
256,220 nonqualified stock options to executives and members of management, at
the discretion of the compensation committee of the Board of Directors. Options
vest in 25% increments on the second, third, fourth, and fifth anniversaries of
an individual grant. In the event of a change in control, outstanding options
will vest immediately. In October 1998, the compensation committee of the Board
of Directors approved a grant of 233,200 options at an exercise price of $34.25
per share. Pursuant to the terms of the grant, options become exercisable only
in the event that the Company is sold, an initial public offering of the
Company's common stock occurs, or other changes in control, as defined, occur.
The number of options that may ultimately become exercisable also depends upon
the extent to which the price per share obtained in the sale of the Company
would exceed a minimum selling price of $85.63 per share. Options have a term of
ten years from an effective grant date of May 1998. The Company will accrue as a
compensation expense for the excess of the estimated fair value of its common
stock over the exercise price of the options when and if a sale of the Company,
at the prices necessary to result in exercisable options under the grant,
becomes imminent or likely.
In December 1998, FairPoint Communications Corp. ("FairPoint") adopted the
FairPoint Communications Corp. Stock Incentive Plan (the "FairPoint Plan") for
its employees. Under the FairPoint Plan, participating employees may be granted
options to purchase common stock of FairPoint at exercise prices not less than
the fair value of FairPoint common stock at the date of the grant. Shares issued
to employees under the FairPoint Plan are subject to a call option by FairPoint.
Under the call option, FairPoint may repurchase those shares held by terminating
employees at fair value if the shares were held by the employee for a minimum
holding period of not less than six months. The FairPoint Plan also provides for
the reacquisition of common shares by FairPoint in the event of death or
disability of the option-holder. No options were granted under the FairPoint
Plan during fiscal year 1998.
Warrants
Certain members of management were issued warrants pursuant to their
purchases of Series C Preferred Stock of the Company in 1996. The Series C
Preferred Stock has since been redeemed by the Company. The warrants are
exercisable into 829 shares of Common Stock at an exercise price of $0.01 per
share.
Warrants Issued to Management
<TABLE>
<CAPTION>
Issued to Shares Date of Issue Expiration
- ---------- ----------- ----------------- ------------
<S> <C> <C> <C>
Jack H. Thomas......................................... 37.0 6/7/96 7/16/16
Jack H. Thomas......................................... 66.3 8/1/96 7/16/16
Eugene B. Johnson...................................... 73.9 6/7/96 7/16/16
Eugene B. Johnson...................................... 132.5 8/1/96 7/16/16
John P. Duda........................................... 59.1 6/7/96 7/16/16
John P. Duda........................................... 106.0 8/1/96 7/16/16
Walter E. Leach, Jr.................................... 53.1 6/7/96 7/16/16
Walter E. Leach, Jr.................................... 95.1 8/1/96 7/16/16
Daniel Bergstein/JED Communications Assoc., Inc........ 73.9 6/7/96 7/16/16
Daniel Bergstein/JED Communications Assoc., Inc........ 132.5 8/1/96 7/16/16
Total............................................... 829.4
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
The following table sets forth the information with respect to the Named
Executive Officers concerning the exercise of options during fiscal year 1998,
the number of securities underlying options at the 1998 year end and the year
end value of all unexercised in-the-money options held by such individuals.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Value of Unexercised
Unexercised In-The-Money
Options/SARs At Options/SARs At Fiscal
Shares Fiscal Year-End (#) Year-End ($)
acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable(1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack H. Thomas.......... -- -- 14,210/0 $706,947.50
Eugene B. Johnson....... -- -- 10,660/0 530,335.00
Walter E. Leach, Jr..... -- -- 5,688/1,422 282,978.00
John P. Duda............ -- -- 10,660/0 530,335.00
- ----------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Represents the difference between the exercise price and the fair market
value of the Company's common stock at December 31, 1998.
Employee Agreements
The Company has entered into severance agreements (the "Severance
Agreements") with John P. Duda, Jack H. Thomas, Eugene B. Johnson and
Walter E. Leach, Jr. (each an "Executive" and, collectively, the
"Executives"). Each of the Severance Agreements provides that upon the
termination of the Executive's employment due to a Change of Control (as
defined below), the Executive is entitled to receive from the Company in a
lump sum payment an amount equal to such Executive's base salary as of the
date of termination for a period ranging from twelve months to twenty-four
months. For purposes of the previous sentence, a "Change of Control" shall
be deemed to have occurred if: (a) certain stockholders of the Company no
longer own, either directly or indirectly, shares of capital stock of the
Company entitling them to 51% in the aggregate of the voting power for the
election of the directors of the Company, as a result of a merger or
consolidation of the Company, a transfer of capital stock of the Company
or otherwise, or (b) the Company sells, assigns, conveys, transfers,
leases or otherwise disposes of, in one transaction or a series of related
transactions, all or substantially all of its property or assets to any
other person or entity. In addition, the Company has agreed to maintain
the Executives' long term disability and medical benefits for a similar
period. In the event that any Executive's employment with the Company is
terminated without cause and not as a result of a Change of Control, such
Executive is entitled to receive a lump sum payment from the Company in an
amount equal to such Executive's base salary for a period ranging from six
months to twelve months and is also entitled to long term disability and
medical benefits for a similar period. In the event that any Executive's
employment is terminated for cause, such Executive is not entitled to any
benefits pursuant to the Severance Agreements.
- --------
1/ Please provide information with respect to Brady Buckley.
<PAGE>
ITEM 12. SECURITY OWNERSHIP AND BENEFICIAL MANAGEMENT
The following table sets forth information regarding beneficial ownership
of the Company's common stock ("Common Stock") as of December 31, 1998 for
(i) each of the Named Executive Officers and each director of the Company,
(ii) all officers and directors of the Company as a group, and (iii) each
stockholder of the Company who beneficially owns 5% or more of the
Company's Common Stock.
<TABLE>
<CAPTION>
Number of
Shares Percent of
Beneficially Outstanding
Owned (1) Shares (1)
------------------- --------------------
<S> <C> <C>
Executive Officers and Directors:
Daniel G. Bergstein (2).......................... 152,580.0 8.4%
Meyer Haberman (9)............................... 95,362.5 5.3%
Jack H. Thomas (3)............................... 111,573.5 6.1%
Eugene B. Johnson (4)............................ 55,005.0 3.0%
John P. Duda (5)................................. 16,030.0 0.8%
G. Brady Buckley ................................ 0.0 0.0%
Walter E. Leach, Jr. (6)......................... 10,588.0 0.5%
Timothy W. Henry................................. 850.0 0.05%
George E. Matelich (7)........................... 697,788.4 38.5%
Frank K. Bynum, Jr. (7).......................... 697,788.4 38.5%
Reid G. Leggett (8).............................. 697,788.4 38.5%
Nelson Schwab III (8)............................ 697,788.4 38.5%
All Executive Officers and Directors as a group
(10 stockholders)............................. 1,838,987.0 99.0%
5% Stockholders:
Carousel Capital Partners, L.P. (8).............. 697,788.4 38.5%
201 North Tryon Street, Suite 2450
Charlotte, North Carolina 28202
Kelso Investment Associates V, L.P. and
Kelso Equity Partners V, L.P. (8)................ 697,788.4 38.5%
320 Park Avenue, 24th Floor
New York, New York 10022
</TABLE>
- ----------
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares beneficially owned by them, subject to community property laws
where applicable. The percentage of beneficial ownership is based on
1,810,146.8 shares of common stock outstanding as of December 31, 1998.
Vested options granted to purchase 39,086 shares and warrants to purchase
829.4 shares result in 1,850,061.2 fully diluted shares as of December 31,
1998.
(2) Includes 152,580 shares owned by JED Communications Associates, Inc., a
corporation owned 100% by Mr. Bergstein and his immediate family. Excludes
warrants to purchase 62.2 shares of Common Stock.
(3) Includes 14,210 shares of Common Stock issuable upon exercise of options
that are either currently exercisable or exercisable during the next 60
days. Excludes warrants to purchase 103.3 shares of Common Stock.
(4) Includes 10,660 shares of Common Stock issuable upon exercise of options
that are either currently exercisable or exercisable during the next 60
days. Excludes warrants to purchase 206.4 shares of Common Stock.
<PAGE>
(5) Includes 10,660 shares of Common Stock issuable upon exercise of options
that are either currently exercisable or exercisable during the next 60
days. Excludes warrants to purchase 165.1 shares of Common Stock.
(6) Includes 5,688 shares of Common Stock issuable upon exercise of options
that are either currently exercisable or exercisable during the next 60
days. Excludes warrants to purchase 148.2 shares of Common Stock.
(7) Includes 630,418.5 shares owned by Kelso Investment Associates V, L.P.
("KIAV") and 67,369.9 shares owned by Kelso Equity Partners V, L.P.
("KEPV"). KIAV and KEPV, due to their common control, could be deemed to
beneficially own each others' shares, but each disclaims such beneficial
ownership. Joseph S. Schuchert, Frank T. Nickell, Thomas R. Wall, IV,
George E. Matelich, Michael B. Goldberg, David I. Wahrhaftig and Frank K.
Bynum, Jr. may be deemed to share beneficial ownership of shares of Common
Stock owned of record by KIAV and KEPV, by virtue of their status as
general partners of the general partner of KIAV and as general partners of
KEPV. Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig and
Bynum share investment and voting power with respect to securities owned
by KIAV and KEPV, but disclaim beneficial ownership of such securities.
The business address for each such person and KIAV and KEPV is c/o Kelso &
Company, 320 Park Avenue, 24th Floor, New York, New York 10022.
(8) Includes 697,788.4 shares owned by Carousel Capital Partners, L.P.
("Carousel"). Reid Leggett and Nelson Schwab III may be deemed to share
beneficial ownership of the shares of Common Stock owned of record by
Carousel, by virtue of their status as general partners of Carousel.
Messrs. Leggett and Schwab share investment and voting power with respect
to securities owned by Carousel, but disclaim beneficial ownership of such
securities. The business address for each such person and Carousel is 201
North Tryon Street, Suite 2450, Charlotte, North Carolina 28202.
(9) Includes 9,000 shares owned by Mr. Haberman's wife with respect to which
shares Mr. Haberman disclaims beneficial ownership.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Services Agreements
On July 31, 1997, the Company entered into Management Services Agreement
with MJD Partners, L.P. ("Partners LP") pursuant to which Partners LP
provided certain management services to the Company, including,
maintaining and supervising the engineering and operations of the Company
and its subsidiaries, monitoring the payment of all expenses and capital
expenditures, and advising and assisting the Company and its subsidiaries
regarding various other matters. The Management Services Agreement was
terminated on April 1, 1998 and, in lieu thereof, Messrs. Thomas and
Johnson received compensation directly from the Company. Between January
1, 1998 and April 1, 1998, Partners LP was paid $225,000, a significant
portion of which was for compensation paid to Messrs. Thomas and Johnson.
Financial Advisory Agreements
On July 31, 1997, the Company entered into Financial Advisory Agreements
with each of the Equity Investors, pursuant to which the Equity Investors
provide certain consulting and advisory services related, but not limited
to, equity financings and strategic planning. Pursuant to these
agreements, the Company pays annual advisory fees in an aggregate amount
of $400,000 to the Equity Investors, payable on a quarterly basis until
December 31, 2007. During 1998, the Company paid $367,204 in such fees and
related expenses to the Equity Investors.
Consulting Agreement
The Company has entered into a consulting agreement dated as of July 31,
1997 with an entity controlled by Daniel G. Bergstein pursuant to which
Mr. Bergstein has agreed to provide general consulting and advice to the
Company as reasonably requested from time to time. Pursuant to the terms
of the agreement, the consulting company is paid an annual fee of $120,000
in monthly installments plus all of Mr. Bergstein's out-of-pocket business
expenses up to $30,000. The term of the agreement is one year, subject to
automatic renewal for successive periods of one year each thereafter. The
agreement was renewed in 1998. Fees and related expenses paid in 1998 were
$103,306.
Legal Services
Daniel G. Bergstein, a senior partner of Paul, Hastings, Janofsky & Walker
LLP ("Paul Hastings"), is a Director of the Company and a significant
stockholder. Paul Hastings regularly provides legal services to the
Company. In the year ended December 31, 1998, Paul Hastings was paid
approximately $2,308,000 by the Company for legal services.
Stockholders Agreement and Registration Rights Agreement
The Company and its stockholders entered into a Stockholders Agreement
dated as of July 31, 1997 (the "Stockholders Agreement") which contains
certain provisions, including but limited to: (i) the designation of
members to the Board of Directors of the Company (including, initially,
two members to be designated by Carousel, one member by Kelso and four
members by Partners L.P.), (ii) certain restrictions on transfers of
shares by the stockholders of the Company, (iii) the requirement that
stockholders take certain actions upon the approval by a majority of the
stockholders in connection with an initial public offering or a sale of
the Company, (iv) the requirement of the Company to sell shares to the
stockholders under certain circumstances upon authorization of an issuance
or sale of additional shares, (v) certain of the participation rights of
certain stockholders in connection with a sale of shares by other
stockholders, and (vi) the right of the Company to purchase all (but not
less than all) of the shares of a stockholder in the event of resignation
or termination of employment or death or disability. The Stockholders
Agreement also provides that the Company must obtain consent from the
Equity Investors in order for the Company to incur debt in excess of $5
million. In addition,
<PAGE>
the Board shall increase to nine members with the two additional members
to be designated for nomination and election by Kelso. During 1998, upon
Kelso investing additional equity, a second representative was added to
the Board increasing the number of board members from seven to eight.
The Company and its stockholders entered into a Registration Rights
Agreement dated as of July 31, 1997 (the "Registration Rights Agreement")
pursuant to which the stockholders have the right in certain circumstances
and, subject to certain conditions, to require the Company to register
shares of Common Stock held by them under the Securities Act. Under the
Registration Rights Agreement, except in limited circumstances, the
Company is obligated to pay all expenses in connection with such
registration.
Contingent Liabilities
Daniel G. Bergstein and Meyer Haberman (collectively, the "Borrowers")
entered into certain Time Promissory Notes in an aggregate amount not
exceeding $3,000,000 ("Notes"). JED Communications Associates, Inc.
("JED"), a corporation owned 100% by Mr. Bergstein and his immediate
family, and Meyer Haberman entered into Pledge Agreements ("Pledge
Agreements" and collectively with the Notes, the "Loan Documents"), in
October 1998, with Bankers Trust Company ("BT"). Pursuant to the Loan
Documents, the Borrowers will be (i) entitled to borrow money from BT and
(ii) JED and Meyer Haberman were required to pledge certain of their
shares of common stock of the Company (the "Shares") to BT as collateral
for loans extended under the Loan Documents. In conjunction with such
transactions, the Company entered into a certain Purchase Agreement and
Subordination Agreement in October 1998, with BT, pursuant to which the
Company may be required, in the event of a default by the Borrowers of
their respective obligations under the Loan Documents, to purchase the
Shares and will have the option to purchase, the Notes, Pledge Agreements
and other instruments and documents relating thereto from BT. The Company
entered into such agreements in order to retain control of the Shares and
because such agreements provide for the purchase of such Shares by the
Company at a substantial discount to the current fair market value of the
Shares.
Purchase of Common Stock by Management
In conjunction with the Credit Facility, 15,700 shares of the Company's
common stock were purchased by certain members of management for $537,741
as follows.
<PAGE>
Aggregate
Name of management Per Share Number Purchase
personnel Price(a) of Shares (b) Price
- ------------------------- ------------ -------------- -------------
John P. Duda................... $34.25 1,000 $ 34,250.0
Jack. H. Thomas................ $34.25 2,000 $ 68,500.0
Eugene B. Johnson.............. $34.25 4,000 $ 137,000.0
Walter E. Leach, Jr............ $34.25 2,000 $ 68,500.0
Michael J. Stein............... $34.25 2,750 $ 94,187.5
Pamela D. Clark................ $34.25 450 $ 15,412.5
Lisa R. Hood................... $34.25 150 $ 5,137.5
Timothy W. Henry............... $34.25 850 $ 29,112.5
Patrick R. Eudy................ $34.25 1,500 $ 51,375.0
Patrick L. Morse............... $34.25 1,000 $ 34,250.0
- ----------
(a) The price per share has been adjusted to reflect the stock split which
occurred in November, 1998.
(b) The number of shares have been adjusted to reflect the stock split which
occurred in November, 1998.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
MJD COMMUNICATIONS, INC.
Independent Auditors' Report and Schedule
Form 10-K Securities and Exchange Commission
December 31, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors
MJD Communications, Inc.:
Under date of February 19, 1999, we reported on our audits of the consolidated
balance sheets of MJD Communications, Inc. and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the years in the
three-year period ended December 31, 1998, which are included in the Form 10-K.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule in the Form 10-K. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the schedule based on
our audits.
In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Lincoln, Nebraska
February 19, 1999
<PAGE>
Schedule II
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Additions
Balance at Additions charged to Deductions Balance at
beginning of due to costs and from allowance end of
Description year acquisitions expenses (note) year
------------ ------------ ---------- ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998,
allowance deducted from asset
accounts, allowance for
doubtful receivables $ 49 240 303 223 369
==== === === === ===
Year ended December 31, 1997,
allowance deducted from asset
accounts, allowance for
doubtful receivables $ 58 -- -- 9 49
==== === === === ===
Year ended December 31, 1996,
allowance deducted from asset
accounts, allowance for
doubtful receivables $254 -- 5 201 58
==== === === === ===
</TABLE>
Note: Customers' accounts written-off, net of recoveries.
See accompanying independent auditors' report.
<PAGE>
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.
MJD COMMUNICATIONS, INC.
By: /s/ WALTER E. LEACH, JR.
--------------------------------------
Walter E. Leach, Jr.
Senior Vice President, Chief Financial
Officer and Secretary
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons in
the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
Daniel G. Bergstein /s/ Director March 29, 1999
- -----------------------
Daniel G. Bergstein
Meyer Haberman/s/ Director March 29, 1999
- -----------------------
Meyer Haberman
Jack H. Thomas/s/ Director, Chairman March 29, 1999
- ----------------------- of the Board
Jack H. Thomas of Directors,
and Chief
Executive Officer
Eugene B. Johnson/s/ Director, Vice March 29, 1999
- ----------------------- Chairman of the
Eugene B. Johnson Board of Directors,
Executive
Vice President
and Secretary
George E. Matelich/s/ Director March 29, 1999
- -----------------------
George E. Matelich
Reid G. Leggett/s/ Director March 29, 1999
- -----------------------
Reid G. Leggett
<PAGE>
Nelson Schwab, III/s/ Director March 29, 1999
- -----------------------
Nelson Schwab, III
Frank K. Bynum, Jr./s/ Director March 29, 1999
- -----------------------
Frank K. Bynum, Jr.
Walter E. Leach Jr./s/ Senior Vice March 29, 1999
- ----------------------- President, Chief
Walter E. Leach Jr. Financial Officer
and Secretary
(Principal
Financial Officer)
Lisa R. Hood/s/ Controller March 29, 1999
- ----------------------- (Principal
Lisa R. Hood Accounting
Officer)
*By: Walter E. Leach, Jr./s/
- ----------------------------
Attorney-in-Fact
<PAGE>
Exhibit Index
EXHIBIT PAGE
NUMBER DESCRIPTION NO.
- ------- ----------- ----
2.1 Stock Purchase Agreement, dated March 6, 1997 among the
Company, MJD Partners, L.P. Carousel Capital Partners, L.P.,
Kelso Investment Associates V, L.P. and Kelso Equity Partners,
V, L.P., as amended*
2.2 Stock Purchase Agreement dated as of March 28, 1996 among MJD
Services Corp., Rick A. Moore, Tom D. Moore, Penta-Gen
Investments, Inc., and Odin Telephone Exchange, Inc.*
2.3 Agreement and Plan of Merger dated as of March 27, 1998 by and
among MJD Ventures, Inc., Utilities Acquisition Corp. and
Utilities, Inc.*
2.4 Agreement and Plan of Merger, dated as of August 6, 1996 among
MJD Holdings Corp., C&E Acquisitions Corp. and Chatauqua and
Erie Telephone Corporation*
2.5 Stock Purchase Agreement, dated as of September 24, 1996 among
MJD Holdings Corp., Kadoka Telephone Co., Bruce G. Conlee and
Virginia L. Conlee*
II-1
<PAGE>
EXHIBIT PAGE
NUMBER DESCRIPTION NO.
- ------- ----------- ----
2.6 Stock Purchase Agreement, dated as of June 24, 1997 among MJD
Ventures, Inc., Gary Porter, Virginia M. Porter, Renee Porter,
C-R Communications, Inc., C-R Telephone Company and certain
stockholders*
2.7 Agreement and Plan of Merger, dated as of September 2, 1997
among MJD Holdings Corp., Taconic Acquisition Corp. and Taconic
Telephone Corp.*
2.8 Agreement and Plan of Merger, dated December 31, 1997 among MJD
Ventures, Inc., Ellensburg Acquisition Corp. and Ellensburg
Telephone Company*
2.9 Agreement and Plan of Merger, dated as of March 12, 1998 among
MJD Communications, Inc., Chouteau Acquisitions Corp., Chouteau
Telephone Company and certain shareholders of Chouteau
Telephone Company*
2.10 Stock Purchase Agreement, dated as of October 16, 1998 among MJD
Services Corp., Carla J. Brownlee and Ravenswood Communications, Inc.
3.1 Amended and Restated Certificate of Incorporation of the
Company*
3.2 Amended and Restated By-Laws of the Company*
4.1 Indenture, dated as of May 5, 1998, between the Company and
United States Trust Company of New York, as trustee, relating
to the Company's $125,000,000 9 1/2% Senior Subordinated Notes
due 2008 and $75,000,000 Floating Rate Callable Securities due
2008*
4.2 Form of Initial Fixed Rate Security*
4.3 Form of Initial Floating Rate Security*
4.4 Form of Exchange Fixed Rate Security*
4.5 Form of Exchange Floating Rate Security*
4.6 Form of Purchase Agreement dated as of April 30, 1998 between
the Company and the Initial Purchasers named therein*
4.7 Registration Agreement dated as of April 30, 1998 between the
Company and the Initial Purchasers named therein*
10.1 Credit Agreement dated as of March 30, 1998 among the Company,
various lending institutions, NationsBanc of Texas, N.A. and
Bankers Trust Company
10.2 Form of B Term Note*
10.3 Form of C Term Note--Floating Rate*
10.4 Form of C Term Note--Fixed Rate*
10.5 Form of RF Note*
10.6 Form of AF Note*
10.7 Subsidiary Guarantee, dated as of March 30, 1998, by MJD
Holdings Corp., MJD Ventures, Inc., MJD Services Corp., ST
Enterprises, Ltd. for the benefit of Bankers Trust Company*
10.8 Pledge Agreement, dated as of March 30, 1998 among MJD
Communications, Inc., ST Enterprises, Ltd., MJD Holdings Corp.,
MJD Services Corp., MJD Ventures, Inc., C-R Communications,
Inc., as pledgors, and Bankers Trust Company, as collateral
agent and pledgee*
10.9 Capital Contribution Agreement, dated as of March 27, 1998
among Kelso Investment Associates V, L.P., Kelso Equity
Partners V, L.P., Carousel Capital Partners, L.P., MJD
Communications, Inc. and Bankers Trust Company*
10.10 Stockholder's Agreement, dated as of July 31, 1997 among Kelso
Investment Associates V, L.P., Kelso Equity Partners V, L.P.,
Carousel Capital Partners V, L.P., the Company and MJD
Partners, L.P.*
10.11 Registration Rights Agreement, dated as of July 31, 1997 among
Kelso Investment Associates V, L.P., Kelso Equity Partners,
L.P., the Company and MJD Partners, L.P.*
10.12 Financial Advisory Agreements, dated as of July 31, 1997 among
the Company, MJD Holdings Corp. and affiliates of each of Kelso
Investment Associates V, L.P., Kelso Equity Partners, L.P. and
Carousel Capital Partners, L.P.*
10.13 Share Exchange Agreement, dated as of July 31, 1997 between the
Company and MJD Partners, L.P.*
10.14 Contribution Agreement, dated as of July 31, 1997 between Meyer
Haberman, Jack H. Thomas, Eugene B. Johnson and Bugger
Associates, Inc. and MJD Partners, L.P.*
II-2
<PAGE>
EXHIBIT PAGE
NUMBER DESCRIPTION NO.
- ------- ----------- ----
10.15 Contribution Agreement, dated as of July 31, 1997 between MJD
Partners, L.P. and the Company*
10.16 Amended and Restated Class A Voting Common Stock Purchase
Warrants of the Company*
10.17 Consulting Agreement, dated as of July 31, 1997 between MJD
Partners, Inc. and Bugger Associates, Inc.*
10.18 Severance Agreement, dated as of July 31, 1997 between ST
Enterprises, LTD and John P. Duda*
10.19 Severance Agreement, dated as of July 31, 1997 among the
Company, MJD Partners, Inc. and Eugene B. Johnson*
10.20 Severance Agreement, dated as of July 31, 1997 between the
Company and Walter E. Leach, Jr.*
10.21 Severance Agreement, dated as of July 31, 1997 among the
Company, MJD Partners, Inc. and Jack H. Thomas*
10.22 Amendment to Credit Agreement dated as of July 30, 1998, among
the Company, various lending institutions, NationsBanc of
Texas, N.A. and Bankers Trust Company*
10.23 Form of Purchase Agreement and Subordination Agreement between
Bankers Trust Company and the Company*
12 Ratio of Earnings to fixed charges calculation (filed herewith)
21 Subsidiaries of the Company
23.6 Consent of KPMG Peat Marwick
27 Financial Data Schedule
- ----------
* Previously filed.
II-3
STOCK PURCHASE AGREEMENT
among
MJD SERVICES CORP.,
CARLA J. BROWNLEE,
and
RAVENSWOOD COMMUNICATIONS, INC.
dated as of October 16, 1998
<PAGE>
TABLE OF CONTENTS
This Table of Contents is not part of this Agreement but is attached for
convenience only.
ARTICLE I.
PURCHASE OF STOCK......................................................2
Section 1.1 Purchase and Sale.................................2
Section 1.2 Purchase Price....................................2
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF THE SELLER...........................2
Section 2.1 Corporate Organization............................2
Section 2.2 Authorization.....................................3
Section 2.3 No Violation......................................3
Section 2.4 Affiliates and Investments........................4
Section 2.5 Stock Record Book.................................4
Section 2.6 Corporate Books...................................4
Section 2.7 Title to Stock....................................5
Section 2.8 Options and Rights................................5
Section 2.9 Financial Statements..............................5
Section 2.10 Employees.........................................6
Section 2.11 Absence of Certain Changes........................7
Section 2.12 Contracts.........................................8
(a) Generally..................................8
(b) Compliance.................................9
Section 2.13 True and Complete Copies..........................9
Section 2.14 Title and Related Matters........................10
(a) Owned Property............................10
(b) Leased Property...........................10
(c) Liens.....................................10
(d) Utilities.................................11
(e) Condition.................................11
Section 2.15 Litigation.......................................11
Section 2.16 Tax Matters......................................12
(a) Generally.................................12
(b) Good Faith................................12
(c) Claims....................................12
(d) Course of Business........................13
(e) Withholdings..............................13
-i-
<PAGE>
(f) Partnerships..............................13
(g) Accounting Method Adjustments.............13
(h) Tax Exemptions............................13
(i) Tax Return Reviews........................13
(j) Power of Attorney.........................13
(k) True and Complete Copies..................14
Section 2.17 Bank and Brokerage Accounts......................14
Section 2.18 Compliance with Applicable Laws, Regulations
and Orders......................................14
Section 2.19 Employee Benefit Plans...........................14
Section 2.20 Intellectual Property............................18
Section 2.21 Environmental Matters............................18
(a) Generally.................................18
(b) Property..................................19
(c) Transportation............................19
(d) Notification of Release...................19
(e) Liens.....................................19
(f) Site Assessments..........................19
Section 2.22 Capital Expenditures and Investments.............20
Section 2.23 Dealings with Affiliates.........................20
Section 2.24 Insurance........................................20
Section 2.25 Commissions......................................20
Section 2.26 Permits and Reports..............................21
Section 2.27 Absence of Undisclosed Liabilities...............21
Section 2.28 Disclosure.......................................22
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.......................22
Section 3.1 Corporate Organization...........................22
Section 3.2 Authorization....................................23
Section 3.3 No Violation.....................................23
Section 3.4 Investment Intent................................23
Section 3.5 Commissions......................................23
Section 3.6 Litigation.......................................23
Section 3.7 Disclosure.......................................24
ARTICLE IV.
COVENANTS OF THE SELLER AND THE COMPANY...............................24
Section 4.1 Regular Course of Business.......................24
(a) Generally.................................24
-ii-
<PAGE>
(b) Compensation..............................24
(c) Insurance.................................25
(d) Claims....................................25
(e) Supplement................................25
Section 4.2 Amendments.......................................25
Section 4.3 Capital Changes..................................25
Section 4.4 Dividends........................................25
Section 4.5 Capital Expenditures.............................25
Section 4.6 Borrowing........................................25
Section 4.7 Property.........................................26
Section 4.8 Other Commitments................................26
Section 4.9 Financial Information............................26
Section 4.10 Consents and Authorizations......................26
Section 4.11 Access...........................................26
Section 4.12 Notice of Transfer...............................26
Section 4.13 Payment of Stamp Tax.............................27
Section 4.14 Disclosure.......................................27
Section 4.15 Cooperation with Purchaser.......................27
Section 4.16 Payment of Estate Tax Liability..................27
Section 4.17 Purchase Price Escrow Agreement..................27
ARTICLE V.
COVENANTS OF THE PURCHASER............................................28
Section 5.1 Consents and Authorizations......................28
Section 5.2 Insurance Continuation...........................28
Section 5.3 Filings..........................................28
Section 5.4 Notice of Transfer...............................28
Section 5.5 Cooperation with Seller and Company..............28
Section 5.6 Supplement.......................................29
ARTICLE VI.
OTHER AGREEMENTS......................................................29
Section 6.1 Agreement to Defend..............................29
Section 6.2 Further Assurances...............................29
Section 6.3 Consents.........................................29
Section 6.4 No Solicitation or Negotiation...................30
Section 6.5 No Termination of the Obligations by
Subsequent Dissolution..........................30
Section 6.6 Public Announcements.............................30
Section 6.7 Records and Information..........................30
(a) Retention of Records......................30
-iii-
<PAGE>
(b) Access to Information.....................31
(c) Provisions of Corporate Records...........31
(d) Witnesses.................................31
Section 6.8 Insurance Policies and Claims Administration.....32
(a) Insurance Coverage Prior to the Closing
Date....................................32
(b) Insurance Coverage After the Closing
Date ...................................32
Section 6.9 Other Tax Matters................................33
(a) Tax Returns...............................33
(b) Information...............................33
(c) Amended Returns...........................33
ARTICLE VII.
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER........................34
Section 7.1 Representations and Warranties; Covenants
and Deliveries..................................34
Section 7.2 Consents and Approvals...........................35
Section 7.3 No Material Adverse Change.......................35
Section 7.4 No Proceeding or Litigation......................35
Section 7.5 Secretary's Certificate..........................35
Section 7.6 Certificates of Good Standing....................36
Section 7.7 Opinion of Seller's Counsel......................36
Section 7.8 Resignations.....................................36
Section 7.9 Other Documents..................................36
Section 7.10 Liens............................................36
Section 7.11 Delivery of Minute Books and Investment
Certificates....................................36
Section 7.12 Delivery of Unaudited Financial Statements ......36
ARTICLE VIII.
CONDITIONS TO THE OBLIGATIONS OF THE SELLER...........................36
Section 8.1 Representations and Warranties...................36
Section 8.2 Consents and Approvals...........................37
Section 8.3 No Proceeding or Litigation......................37
Section 8.4 Secretary's Certificate..........................37
Section 8.5 Opinion of Purchaser's Counsel...................38
Section 8.6 Certificates of Good Standing....................38
Section 8.7 Other Documents..................................38
-iv-
<PAGE>
ARTICLE IX.
CLOSING...............................................................38
Section 9.1 Closing..........................................38
Section 9.2 Closing Date Payment and Receipt of Shares ......38
ARTICLE X.
TERMINATION AND ABANDONMENT...........................................40
Section 10.1 Methods of Termination...........................40
(a) Mutual Consent............................40
(b) Seller's Failure to Perform...............40
(c) Purchaser's Failure to Perform............40
(d) Failure to Close by July 31, 1999.........40
(e) Material Adverse Change...................40
(f) Remedies..................................40
Section 10.2 Procedure Upon Termination.......................41
(a) Return of Records.........................41
(b) Confidentiality...........................41
(c) Breakup Fee...............................41
Section 10.3 Exclusive Remedy.................................42
ARTICLE XI.
SURVIVAL OF TERMS; INDEMNIFICATION....................................42
Section 11.1 Survival; Limitations............................42
Section 11.2 Escrow of Liquid Assets..........................43
Section 11.3 Indemnification by the Seller....................43
(a) Misrepresentation or Breach...............43
(b) Taxes.....................................43
(c) Third Party Claims. .....................43
(d) Related Expenses..........................44
Section 11.4 Indemnification by the Purchaser.................44
(a) Misrepresentation or Breach...............44
(b) Taxes.....................................44
(c) Third Party Claims........................44
(d) Related Expenses..........................44
Section 11.5 Third Party Claims...............................44
(a) Generally.................................44
(b) Counsel...................................46
Section 11.6 Other Claims.....................................46
-v-
<PAGE>
Section 11.7 Continued Liability for Indemnity Claims ........48
Section 11.8 Exclusive Remedy.................................48
ARTICLE XII.
GENERAL PROVISIONS....................................................48
Section 12.1 Amendment and Modification.......................48
Section 12.2 Waiver...........................................48
Section 12.3 Certain Definitions..............................48
Section 12.4 Notices..........................................54
Section 12.5 Assignment.......................................55
Section 12.6 Governing Law....................................55
Section 12.7 Counterparts; Construction.......................55
Section 12.8 Headings.........................................55
Section 12.9 Entire Agreement.................................55
Section 12.10 No Benefit.......................................55
Section 12.11 Delays or Omissions..............................56
Section 12.12 Severability.....................................56
Section 12.13 Expenses.........................................56
Section 12.14 Time of the Essence..............................56
SCHEDULES
2.3 No Violations
2.4 Affiliates and Investments
2.5 Stock Record Books
2.6 Corporate Books
2.7 List of Shareholders/Liens on Shares
2.10(a) Employees, Officers, Directors, Consultants and
Independent Contractors
2.10(c) Employment and Labor Agreements
2.11 Absence of Certain Changes
2.12 Contracts - General
2.14(a) Title and Related Matters - Owned Property
2.14(b) Title and Related Matters - Leased Property
2.14(e) Title and Related Matters - Condition
2.15 Litigation
2.16 Tax Matters
2.17 Bank and Brokerage Accounts
2.19(a) Employee Benefit Plans
-vi-
<PAGE>
2.19(i) Employee Benefit Plans - Other
2.20 Intellectual Property
2.21 Environmental Matters
2.22 Capital Expenditures and Investments
2.23 Dealings with Affiliates
2.24 Insurance
2.26 Permits and Reports
2.27 Absence of Undisclosed Liabilities
3.3 Consents and Authorizations of Purchaser
4.1(b) New Employees and Changes to Compensation
4.7 Assets to be Sold by the Company
4.14 Article IV Disclosure Statement
6.6 Public Announcements
EXHIBITS
A Other Stockholders
4.17 Purchase Price Escrow Agreement
7.7 Opinion of Seller's Counsel
8.5 Opinion of Purchaser's Counsel
11.2 Indemnity Escrow Agreement
-vii-
<PAGE>
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of the
16th day of October, 1998 ("Execution Date"), among MJD Services Corp., a
Delaware corporation (the "Purchaser"), Carla J. Brownlee, an Illinois resident
("Brownlee" or the "Seller"), and Ravenswood Communications, Inc., an Illinois
corporation ("Ravenswood" or the "Company").
RECITALS
WHEREAS, Brownlee owns 405 shares of Ravenswood's no par value common
stock, which 405 shares constitute all of the issued and outstanding shares of
capital stock of Ravenswood (the "Ravenswood Capital Stock");
WHEREAS, Ravenswood owns all of the issued and outstanding shares of
capital stock of The El Paso Telephone Company, an Illinois corporation
("Telephone") (the "Telephone Capital Stock") and all of the issued and
outstanding shares of capital stock of El Paso Long Distance Company ("Long
Distance"), an Illinois corporation (the "Long Distance Capital Stock");
WHEREAS, Telephone owns all of the issued and outstanding shares of
capital stock of Gemcell, Inc.("Gemcell"), an Illinois corporation (the "Gemcell
Capital Stock") (any and all shares, options, warrants, rights and interests,
legal or equitable, in or with respect to the Ravenswood Capital Stock, the
Telephone Capital Stock, the Long Distance Capital Stock and/or the Gemcell
Capital Stock hereinafter referred to collectively as the "Shares");
WHEREAS, Ravenswood is a holding company, the assets of which as of the
Execution Date include the capital stock of Telephone and of Long Distance;
WHEREAS, Telephone, Long Distance and Gemcell directly or indirectly
provide local exchange, long distance, cellular and Internet services throughout
mid-central Illinois, and Telephone is an operating telephone company that
provides wireline telecommunications services, with at least 1,900 access lines
(collectively the businesses of Ravenswood, Telephone, Long Distance and Gemcell
are hereinafter referred to as the "Business" or the "business");
<PAGE>
WHEREAS, the Seller desires to sell, and the Purchaser desires to
purchase, on the terms and subject to the conditions set forth in this
Agreement, the Shares;
WHEREAS, a dispute existed whereby certain Persons have claimed, as
beneficiaries of the estate of Robert C. Gordon, ownership interests in and to a
portion of the shares of the Telephone Capital Stock; and
WHEREAS, the Seller has resolved and provided a mechanism for the
resolution of such dispute, and Seller has agreed to transfer to the Purchaser
title to all of the Shares, free and clear of all Liens other than Permitted
Liens.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements set forth herein, the parties hereto agree as follows:
ARTICLE I.
PURCHASE OF STOCK
Section 1.1 Purchase and Sale. At the Closing Date, on the terms and
subject to the conditions set forth in this Agreement, the Seller agrees to sell
to the Purchaser, and the Purchaser agrees to purchase from the Seller, the
Shares.
Section 1.2 Purchase Price. In consideration for the conveyance of the
Shares, the Purchaser shall pay to the Seller on the Closing Date, as provided
in Section 9.2 hereof, an amount per share of $24,691.36 for each of the 405
shares of Ravenswood Capital Stock (the "Purchase Price").
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller hereby represents and warrants to the Purchaser as follows (to
the extent a representation is modified by a knowledge requirement, it shall
speak to the knowledge of Brownlee and the Company) with respect to each of
Ravenswood, Telephone, Long
-2-
<PAGE>
Distance, Gemcell and all Affiliates thereof even though such representation
and/or warranty shall use only the word Company (in other words, if any
representation or warranty or covenant or agreement would be untrue as to any of
Ravenswood, Telephone, Long Distance, Gemcell or any of their Affiliates then
Brownlee must so disclose any such untruth):
Section 2.1 Corporate Organization. The Company is a corporation duly
organized, validly existing and in good standing with perpetual duration under
the laws of its jurisdiction of incorporation, with full corporate power and
authority to own, operate and lease its properties and to conduct its business
as presently conducted. The Seller is a resident of Illinois. The Company is
qualified to do business and is in good standing in every jurisdiction in which
the conduct of its business, the ownership or lease of its properties, or the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby requires it to be so qualified. True, complete
and correct copies of the Company's charter and by-laws as presently in effect
have been delivered to the Purchaser. The reverse triangular merger effected by
the Company as of September 26, 1996 was duly authorized by the shareholders and
directors of each affected entity, and has been fully consummated and concluded
of record, all in accordance with Illinois law so as to establish Ravenswood as
a holding company owning all of the outstanding capital stock of Telephone.
True, complete and correct copies of all of the merger documents, the ICC order
approving same, and all of the replacement Share certificates as presently in
effect have been delivered to the Purchaser. All such replaced share
certificates have been cancelled and affixed in the appropriate stock transfer
records.
Section 2.2 Authorization. The Seller and Ravenswood each has full power
and authority to execute and deliver this Agreement and, subject to Sections 2.3
and 2.26, to consummate the transactions contemplated hereby. The Board of
Directors (and as appropriate, the stockholders) of Ravenswood has duly
authorized the execution, delivery and performance of this Agreement, and no
other corporate proceedings on its part are necessary to authorize the
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby. Assuming due execution of this Agreement
by the Purchaser, this Agreement constitutes a legal, valid and binding
obligation of each of the
-3-
<PAGE>
Seller and Ravenswood enforceable against each such party in accordance with its
terms, subject to equitable considerations and the effect of bankruptcy and
other laws affecting the rights of creditors generally. The Seller will, at the
Closing, have full power and authority to deliver the Shares and the
certificates evidencing the Shares to the Purchaser, free and clear of all Liens
as provided for herein except Permitted Liens.
Section 2.3 No Violation. Except as set forth on Schedule 2.3, the
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby by each of the Seller and Ravenswood do not
and will not, subject to obtaining the consents and approvals referred to in
Schedules 2.3 and 2.26, (a) conflict with or result in a breach of the terms,
conditions or provisions of, (b) constitute a default or event of default under
(with due notice, lapse of time or both), (c) result in the creation of any Lien
upon the Company or its capital stock or assets pursuant to, (d) give any third
party the right to accelerate any obligation under, (e) result in a violation
of, or (f) require any authorization, consent, approval, exemption or other
action by, or notice to, any Person pursuant to (i) the charter or by-laws of
the Company, (ii) any applicable Regulation (including, without limitation, the
Hart-Scott-Rodino Antitrust Improvements Act of 1976), (iii) any Order to which
either the Seller or the Company is subject, or (iv) any Contract to which the
Seller or the Company or any of their properties are subject. The Seller and
Ravenswood have complied with all applicable Regulations and Orders in
connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby by each of Seller and Ravenswood, subject
to the requirements which are conditions to the Closing.
Section 2.4 Affiliates and Investments. Except as set forth in Schedule
2.4, the Company has no Affiliates or investments in any Person. Attached as
Schedule 2.4 is a true and complete corporate organizational chart for the
Company. Except as set forth on Schedule 2.4, the transactions contemplated by
this Agreement by each of Seller and Ravenswood will not conflict with or result
in a breach of the terms, conditions or provisions of any agreement to which the
Company is a party or with respect to any such Affiliates or investments, nor
shall the transactions contemplated by this Agreement trigger any purchase, put,
call or right of first refusal rights in any Person. Any such investments
-4-
<PAGE>
constitute an asset of the Company and the Company is the only Person with any
rights thereto. Except as set forth on Schedule 2.4, the Company does not owe
any indebtedness to or on account of any of such Affiliates or investments, nor
has the Company guaranteed any indebtedness on behalf of, or have any other
contingent obligations with respect to, any such Affiliates or investments, and
the Company has not pledged any such investments or Affiliates or any other of
its assets in connection with any obligations relating to any such investment or
Affiliate. Except as set forth in Schedule 2.4, the Company is not a general
partner in any of its investments, nor is any employee of the Company an officer
or director of any such investment entity. Except as set forth in Schedule 2.4,
the Company is not a party to any Shareholders' or Stockholders' Agreements with
respect to any of the entities discussed on Schedule 2.4 hereto. Also set forth
on Schedule 2.4 hereto is a listing of all dividends and/or distributions made
with respect to any such Affiliates and/or investments since December 31, 1990.
Section 2.5 Stock Record Book. Except as set forth in Schedule 2.5, the
stock record book of the Company is complete and correct in all material
respects. No shares of capital stock of the Company are currently reserved for
issuance for any purpose or upon the occurrence of any event or condition. The
Shares constitute all of the outstanding capital stock of the Company and the
Seller owns all outstanding capital stock of Ravenswood. Ravenswood is the true
and lawful owner of all of the outstanding capital stock of Telephone and of
Long Distance. Telephone is the true and lawful owner of all of the outstanding
capital stock of Gemcell. Schedule 2.7 sets forth the total number of authorized
shares of capital stock for each of Ravenswood, Telephone, Long Distance and
Gemcell.
Section 2.6 Corporate Books. Except as set forth in Schedule 2.6, the
corporate minute books of Ravenswood, Telephone, Long Distance and Gemcell are
complete and correct in all material respects and contain signed minutes of all
of the proceedings of the shareholders and directors of Ravenswood, Telephone,
Long Distance and Gemcell since incorporation. A true and complete list of the
directors and officers of Ravenswood, Telephone, Long Distance and Gemcell as of
the Execution Date is set forth in Schedule 2.6.
-5-
<PAGE>
Section 2.7 Title to Stock. The Shares are owned of record by the Seller,
Ravenswood and Telephone and only the Seller, Ravenswood and Telephone in such
amount as forth on Schedule 2.7 hereto. Schedule 2.7 additionally sets forth the
total number of authorized shares of capital stock for each of Ravenswood,
Telephone, Long Distance and Gemcell. No shares of preferred stock or other
class of capital stock are authorized, issued or outstanding. The Shares have
been duly authorized and validly issued and are fully paid and nonassessable.
The Shares were issued pursuant to applicable exemptions from registration under
Federal securities laws and the securities laws of the State of Illinois, are
owned by the Seller, Ravenswood and Telephone and will be sold pursuant hereto
free and clear of all Liens, except Permitted Liens. Upon payment of the
Purchase Price pursuant to the Assignment Agreements described in Schedule 2.7
(the "Assignment Agreements"), the Seller will convey to the Purchaser good and
marketable title to the Shares, free and clear of all Liens, except Permitted
Liens. The assignments, endorsements, stock powers and other instruments of
transfer delivered by the Seller to the Purchaser at the Closing will be
sufficient to transfer the Seller's entire interest and all of the interests,
legal and beneficial, of all other Persons in and to the Shares and thereby in
the Ravenswood Capital Stock, the Telephone Capital Stock, the Long Distance
Capital Stock, the Gemcell Capital Stock and in the capital stock of each other
Affiliate of the Company and in each investment of the Company. Except as set
forth in Schedule 2.4, no dividends or other distributions are owed by the
Company in connection with any of the Shares and none have been made to any
stockholder of the Company since at least December 31, 1990.
Section 2.8 Options and Rights. There are no outstanding subscriptions,
options, warrants, rights, puts, calls or other Contracts by which the Company
is bound to issue or to repurchase or otherwise acquire shares of its capital
stock, or pursuant to which any Person has a right to purchase or to acquire,
through conversion or otherwise, shares of the Company's capital stock.
Section 2.9 Financial Statements.
Subject to the third and fourth sentences of this Section, the Seller has
delivered to the Purchaser correct and complete copies of (i) the audited
balance sheets of Ravenswood and its subsidiaries (consolidated) as of December
31, 1997 and
-6-
<PAGE>
December 31, 1996 and of Telephone and its subsidiary (consolidated) as of
December 31, 1995 and December 31, 1996, and the related statements of income,
cash flow and retained earnings for the fiscal year reporting periods then
ended, together with all notes and schedules thereto (the "Financial
Statements"), and (ii) the unaudited monthly balance sheets of the Company as of
July 31, 1998 and the related monthly statements of income for the period then
ended (the July 31, 1998 statements, with all unaudited statements delivered
hereafter, the "Unaudited Financial Statements"). The Financial Statements have
been audited without qualification by Kiesling Associates LLP, independent
auditors for the Company. The Financial Statements (a) have been prepared in
accordance with the books and records of the Company and (b) fairly present the
financial condition and results of operations and cash flows of the Company as
of, and for the respective periods ended on, such dates, all in conformity with
GAAP consistently applied. The Unaudited Financial Statements (a) have been
prepared in accordance with the books and records of the Company, and (b) fairly
present the financial condition and results of operations of the Company as of,
and for the respective periods ended on, such dates, all in conformity with GAAP
consistently applied, except for adjustments and notes that would result from an
audit. Since December 31, 1997 and except as fully set forth in the Financial
Statements and the Unaudited Financial Statements, the Company has no
liabilities (whether accrued, absolute, contingent, unliquidated or otherwise,
whether due or to become due, whether known or unknown, and regardless of when
asserted) arising out of transactions or events heretofore entered into or any
action or inaction or state of facts existing, with respect to, or based upon
transactions or events heretofore occurring.
Section 2.10 Employees.
(a) Schedule 2.10(a) sets forth a list of all of the Company's
employees, officers, directors, consultants and independent contractors,
together with a description of any Contract regarding the terms of service and
the rate and basis for total compensation of such persons.
(b) The Company has paid or made provision for the payment of all
salaries and accrued wages, accrued vacation and sick leave, and any other form
of accrued, but unpaid, compensation, and has complied in all material respects
with all
-7-
<PAGE>
applicable Regulations relating to the employment of labor, including those
relating to wages, hours, collective bargaining and the payment and withholding
of taxes, and has withheld and paid to the appropriate governmental authority,
or is holding for payment not yet due to such authority, all amounts required by
law or agreement to be withheld from the wages or salaries of its employees. No
amounts have been accrued on the Company's books for vacation or sick leave in
excess of the current year's obligations and no such obligations exist. No
contracts or provisions exist that would obligate the Company to pay any
severance compensation to any employee should his or her employment with the
Company be terminated for any reason from and after the Execution Date hereof.
No contracts or provisions exist that would obligate the Company to pay any
amounts to any Person upon the change of control of the Company.
(c) Except as set forth on Schedule 2.10(c) hereto, the Company is
not a party to any (i) outstanding employment agreements or contracts with
officers or employees that are not terminable at will, or that provide for
payment of any bonus or commission or severance compensation, (ii) agreement,
policy or practice that requires it to pay termination or severance pay to
salaried, exempt, non-exempt or hourly employees, (iii) collective bargaining
agreement or other labor union contract applicable to persons employed by the
Company, nor do the Seller or the Company know of any activities or proceedings
of any labor union to organize any such employees. The Company has furnished to
Purchaser complete and correct copies of all such agreements, if any
("Employment and Labor Agreements"). The Company has not breached or otherwise
failed to comply with any provisions of any Employment or Labor Agreement.
(d) Except as set forth in Schedule 2.10 hereto, (i) there is no
unfair labor practice charge or complaint pending before the National Labor
Relations Board ("NLRB"), (ii) there is no labor strike, material slowdown or
material work stoppage or lockout actually pending or, to the Seller's or
Company's knowledge, threatened, against or affecting the Company, and the
Company has not experienced any strike, material slow down or material work
stoppage, lockout or other collective labor action by or with respect to
employees of the Company, (iii) there are no charges with respect to or relating
to the Company pending before the Equal Employment Opportunity Commission or any
state or local
-8-
<PAGE>
agency responsible for the prevention of unlawful employment practices, and (iv)
the Company has not received formal notice from any federal, state, or local
agency responsible for the enforcement of labor or employment laws of an
intention to conduct an investigation of the Company and, to the knowledge of
the Seller and Company, no such investigation is in progress.
Section 2.11 Absence of Certain Changes. Except as set forth in Schedule
2.11, since December 31, 1997, there has been no (a) Material Adverse Change in
the business, properties, financial statements, business prospects, condition
(financial or otherwise) or results of operations of the Company, (b) theft,
damage, destruction, removal or loss of assets or properties, whether covered by
insurance or not, having a Material Adverse Effect on the business, properties,
business prospects, condition (financial or otherwise) or results of operations
of the Company, (c) declaration, setting aside or payment of any dividend or
distribution (whether in cash, stock or property) in respect of the Shares, the
Telephone Capital Stock, the Long Distance Capital Stock, or the Gemcell Capital
Stock or any redemption of the Shares, the Telephone Capital Stock, the Long
Distance Capital Stock, or the Gemcell Capital Stock, (d) increase in the
compensation payable to or to become payable by the Company to its employees,
officers, directors, consultants or independent contractors except in the
ordinary course of business, (e) entry by the Company into any Contract not in
the ordinary course of business, including, without limitation, any borrowing or
capital expenditure, (f) change in accounting methods or principles used by the
Company, except for any such change which is necessitated by a change in GAAP,
or required by the FCC, ICC or RTB (which such changes shall be set forth on
Schedule 2.11 hereto), (g) operation of the Company's business other than in the
ordinary course, (h) sale, assignment or transfer of any assets or properties of
the Company except in the ordinary course of business, (i) amendment or
termination of any of the Company's Permits or Contracts, (j) waiver or release
of any material right or claim of the Company, (k) labor dispute or union
activity which affects the operation of the Company, and (l) agreement by either
the Seller or the Company to take any of the actions described in the preceding
clauses (a) through (k), except as contemplated by this Agreement.
-9-
<PAGE>
Section 2.12 Contracts.
(a) Generally. Except as listed in Schedule 2.12, the Company is not
a party to any Contract relating to:
(i) Bonus, pension, profit sharing, retirement, stock option,
employee stock purchase or other plans providing for deferred
compensation.
(ii) Collective bargaining agreements or any other Contract
with any labor union.
(iii) Hospitalization insurance or other welfare benefit plans
or practices.
(iv) Loans to its employees, officers, directors, or
Affiliates.
(v) The borrowing or loaning of money to or from any Person or
the mortgaging, pledging or otherwise placing a Lien on any asset of the
Company, including, but not limited to, any Contract with respect to the
Company's indebtedness to Rural Telephone Bank (RTB).
(vi) A guarantee of any obligation.
(vii) The ownership, lease (whether as lessee or lessor) or
operation of any property, real or personal that includes expenditures or
receipts in excess of $10,000 on a per item or aggregate basis.
(viii) Intangible property (including Proprietary Rights).
(ix) Warranties with respect to its services rendered or its
products sold or leased.
(x) Registration or preemptive rights with respect to any
securities.
(xi) Prohibitions preventing it from freely engaging in any
business.
-10-
<PAGE>
(xii) The purchase, acquisition, disposition or supply of
inventory and other property and assets that involves on a per item or
aggregate basis, expenditures or receipts in excess of $10,000 or other
than in the ordinary course of business.
(xiii) Employees, independent contractors, consultants, or
other agents.
(xiv) Sales, commissions, advertising or marketing.
(xv) Unconditional purchase or payment obligations that
involves on a per item or aggregate basis, expenditures or receipts in
excess of $10,000.
(xvi) Any investment or Affiliate of the Company, including,
but not limited to, those shown on Schedule 2.4 hereto.
(xvii) Any other Contract not of the type covered by any of
the foregoing items of this Section 2.12(a) requiring total payments by
the Company in excess of ten thousand dollars ($10,000).
(b) Compliance. The Company has performed all obligations required
to be performed by it, and is not in receipt of any claim of default or breach
or notice of audit, under any Contract to which it is subject (including,
without limitation, those required to be disclosed on Schedule 2.12). Except as
disclosed in Schedule 2.12, no event has occurred which with the passage of time
or the giving of notice or both would result in a material default, breach or
event of non-compliance by the Company under any Contract to which it is
subject. Except as disclosed in Schedule 2.12, the Company has no present
expectation or intention of not fully performing all of its obligations under
any Contract to which it is subject and has no knowledge of any breach or
anticipated breach by any other party to any Contract to which it is subject.
Section 2.13 True and Complete Copies. Except as otherwise provided in
Sections 2.5, 2.6, 2.9, 2.14, 2.19(j), 2.26(i) and 2.28 hereof, the Seller and
the Company have delivered to the Purchaser true and complete copies of all
Contracts and documents listed in
-11-
<PAGE>
the Schedules to this Agreement, as well as of all minute books and stock books
of Ravenswood, Telephone, Long Distance and Gemcell.
Section 2.14 Title and Related Matters.
(a) Owned Property. Set forth in Schedule 2.14(a) is a description
of all real property and personal property owned or used by the Company. The
Company has good and marketable title to all such property, free and clear of
all Liens, except Permitted Liens and those liens shown on Schedule 2.14(a)
hereto. All properties used in the Company's business operations as of December
31, 1997 are reflected in the Financial Statements in accordance with and to the
extent required by GAAP and, as of the Execution Date, are fully set forth on
Schedule 2.14(a) hereto. The Seller has delivered, with respect to any real
property owned by the Company, true and complete copies of all deeds, title
policies, environmental assessments, surveys and other title documents relating
to such real property. Further, the Company has good and marketable title to
each of its investments set forth on Schedule 2.4 hereto, free and clear of all
Liens except Permitted Liens, except as set forth on Schedule 2.14(a) hereto.
(b) Leased Property. Set forth in Schedule 2.14(b) is a description
of all real and personal property leased or used by the Company. Except as
otherwise set forth in Schedule 2.14(b), the Company's leases are in full force
and effect and are valid and enforceable in accordance with their respective
terms. There exists no event of default or event which constitutes or would
constitute (with notice or lapse of time or both) a default by the Company or,
to Seller's knowledge, any other Person under any such lease, and neither the
Seller nor the Company have received notice of such default or event. All rent
and other amounts due and payable with respect to each of the Company's leases
have been paid through the Execution Date. Except as set forth in Schedule
2.14(b), neither the Seller nor the Company have received notice that the
landlord with respect to any real property or personal property lease would
refuse to renew such lease upon expiration of the period thereof upon
substantially the same terms, except for rent increases consistent with past
experience or market rentals. The Seller has delivered, with respect to any
leased real or personal property, true and complete copies of all such leases
and all amendments or supplements thereto.
-12-
<PAGE>
(c) Liens. Except as set forth in Schedule 2.14(c), the real
property owned or leased by the Company and the buildings, structures and
improvements included within such real property (collectively, the
"Improvements") comply in all material respects with all applicable
restrictions, building ordinances and zoning ordinances and all applicable
Regulations of the applicable health and fire departments. Except as set forth
in Schedule 2.14(c), no alteration, repair, improvement or other work which
could give rise to a Lien has been performed with respect to such Improvements
within the last one hundred twenty (120) days. The Company's owned or leased
real property and its continued use, occupancy and operation as currently used,
occupied and operated does not constitute a nonconforming use under any
Regulation or Order affecting such real property, and the continued existence,
use, occupancy and operation of such Improvements is not dependent on any
special permit, exception, approval or variance. There is no pending or, to the
Seller's or Company's knowledge, threatened or proposed action or proceeding by
any Authority to modify the zoning classification of, to condemn or take by the
power of eminent domain (or to purchase in lieu thereof), to classify as a
landmark, to impose special assessments on or otherwise to take or restrict in
any way the right to use, develop or alter all or any part of the Company's
owned or leased real property.
(d) Utilities. The real property owned or leased by the Company has
access, sufficient for the conduct of the Company's business as presently
conducted and proposed to be conducted after the Closing in substantially the
same manner as conducted prior to Closing, to public roads and to all utilities,
including electricity, sanitary and storm sewer, potable water, natural gas and
other utilities used in the operation of the Company's business as presently
conducted. To Seller's knowledge, access to all such public roads and utilities
will be available after the Closing Date in the same manner and to the same
extent as at the Closing Date.
(e) Condition. Except as set forth on Schedule 2.14(e), since
December 31, 1997, the Company has not sold, transferred, leased, distributed or
disposed of any of its assets or properties, except for (i) transactions in the
ordinary and regular course of business, or (ii) as otherwise consented to in
writing by the Purchaser. The Company owns, or has all rights necessary to use,
all properties and assets necessary for the conduct of its business as presently
conducted. The assets and properties owned, leased or
-13-
<PAGE>
used by the Company in the conduct of the Business as now conducted are in good
condition (reasonable wear and tear excepted), are suitable for their respective
uses, and comply in all material respects with all applicable Regulations.
Further such assets and properties constitute all of the assets and properties
necessary for the Company to conduct its Business as now conducted.
Section 2.15 Litigation. Except as set forth in Schedule 2.15, there is
(a) no Claim pending or, to the Seller's knowledge, threatened against the
Company, (b) no Claim by the Company pending or threatened against any Person,
(c) no outstanding Order relating to the Company and (d) no Claim by any Person
relating to the Shares. No Stockholder of the Company dissented to the Company's
merger/reorganization and the time to do so under Illinois law has expired.
Section 2.16 Tax Matters.
(a) Generally. Except as set forth in Schedule 2.16, Ravenswood,
Telephone, Long Distance and Gemcell have timely filed all federal, state and
local tax reports, returns, information returns and any other documents required
to be filed by each (collectively, "Tax Returns") and have duly paid all Taxes
shown to be due and payable on such Tax Returns and all estimated or advance
payments required by law. All Taxes for periods ending on or prior to or
including the Closing Date have been fully paid or reserved against on the
Unaudited Financial Statements and on the books of Ravenswood, Telephone, Long
Distance and Gemcell in accordance with GAAP. All Taxes which are required to be
withheld or collected by Ravenswood, Telephone, Long Distance and Gemcell have
been duly withheld or collected and, to the extent required, have been paid to
the proper federal, state and local authorities or properly segregated or
deposited as required by applicable Regulations. There are no Liens for Taxes
upon any property or assets of Ravenswood, Telephone, Long Distance or Gemcell
except for Liens for Taxes not yet due and payable or for Taxes being contested
in a manner permitted by applicable law (all as disclosed on Schedule 2.16
hereto). Except as disclosed in Schedule 2.16, neither Ravenswood, Telephone,
Long Distance nor Gemcell have requested an extension of time within which to
file any Tax Return and none have waived the statute of limitations on the right
of the IRS or any other taxing authority to assess or collect additional Taxes
or to contest the information reported on any Tax Return.
-14-
<PAGE>
All Taxes owed by any affiliated group of which Ravenswood, Telephone, Long
Distance or Gemcell has at any time been a member (whether or not shown on any
Tax Return) have been paid for each taxable period during which Ravenswood,
Telephone, Long Distance or Gemcell was a member of the affiliated group.
Neither Ravenswood, Telephone, Long Distance nor Gemcell has any liability for
the unpaid Taxes of any Person under Treasury Regulation ss. 1.1502-6 (or any
similar provision of state and local law), as a transferee or successor, by
contract, or otherwise. The merger of the Company and Telephone referred to in
Section 2.1 hereof qualified as a tax-free reorganization pursuant to IRC
Section 368(a)(2)(E). All filings and/or notifications required to be made with
the Internal Revenue Service and/or with the Illinois Department of Revenue
and/or with the Illinois Secretary of State as a result of such
merger/reorganization have been fully and timely made.
(b) Good Faith. All Tax Returns described in Section 2.16(a) have
been prepared in good faith and are correct and complete in all respects, and
there is no basis for assessment of any addition to the Taxes shown thereon.
(c) Claims. Except as disclosed in Schedule 2.16, (i) there are no
proceedings, examinations or claims currently pending by any taxing Authority in
connection with any Tax Returns described in Section 2.16(a) nor with respect to
the periods to which such Tax Returns relate and (ii) there are no unresolved
issues or unpaid deficiencies or outstanding or proposed assessments relating to
any such proceedings, examinations, claims or Tax Returns. None of the Tax
Returns described in Section 2.16(a) currently is under audit or has been
audited. The items relating to the Business, properties and operations of the
Company on the Tax Returns filed by the Company (including the supporting
schedules filed therewith), copies of which have been supplied to the Purchaser,
state accurately, in all respects, the information requested with respect to the
Company, which information was derived from the books and records of the
Company.
(d) Course of Business. The Company has not taken any action in
anticipation of the Closing that would have the effect of deferring any
liability for Taxes of the Company to any period (or portion thereof) ending
after the Closing Date.
-15-
<PAGE>
(e) Withholdings. All payments for withholding Taxes, unemployment
insurance and other amounts required to be withheld and deposited or paid to any
relevant taxing Authorities have been so withheld, deposited or paid by or on
behalf of the Company.
(f) Partnerships. Except as disclosed in Schedule 2.16, the Company
is not subject to any joint venture, partnership or other arrangement or
Contract which is treated as a partnership for federal income tax purposes. Any
tax-sharing agreement between the Company and any other Person shall terminate
as of the Closing Date, except as disclosed on Schedule 2.16, and any such
tax-sharing agreement is fully disclosed on Schedule 2.16 hereto.
(g) Accounting Method Adjustments. Except as disclosed in Schedule
2.16, the Company will not be required to recognize after the Closing Date any
taxable income in respect of accounting method adjustments required to be made
under any Regulation relating to Taxes, including without limitation, the Tax
Reform Act of 1986 and the Revenue Act of 1987.
(h) Tax Exemptions. None of the assets of the Company constitutes
tax-exempt bond financed property or tax-exempt use property within the meaning
of Section 168 of the IRC, and the Company is not subject to a lease, safe
harbor lease or other arrangement as a result of which the Company is not
treated as the owner of leased property for federal income tax purposes.
(i) Tax Return Reviews. An accurate and complete description of the
most recent review, if any, of the Tax Returns of the Company by the IRS or any
other taxing Authority is set forth in Schedule 2.16.
(j) Power of Attorney. Except as set forth in Schedule 2.16 hereto,
no power of attorney has been granted by the Company with respect to any matter,
including, without limitation, the payment of Taxes, which is currently in
force.
(k) True and Complete Copies. The Seller and the Company have
delivered to the Purchaser true and complete copies of all Tax Returns filed by
the Company with respect to its 1992, 1993, 1994, 1995, 1996 and 1997 fiscal
years.
-16-
<PAGE>
Section 2.17 Bank and Brokerage Accounts. Set forth in Schedule 2.17
hereto is a list of all of the bank and brokerage accounts maintained by the
Company and the authorized signatories for each such account.
Section 2.18 Compliance with Applicable Laws, Regulations and Orders. The
Company has been and is presently in material compliance with all laws,
ordinances, codes, rules, Regulations and Orders applicable to the conduct of
its Business, including, without limitation, all applicable Regulations relating
to health, sanitation, fire, zoning, building and occupational safety.
Section 2.19 Employee Benefit Plans.
(a) Set forth on Schedule 2.19 hereto is a true and complete list
of:
(i) each employee pension benefit plan, as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974 ("ERISA"),
maintained by the Company or to which the Company or the Seller is
required to make contributions ("Pension Benefit Plan"); and
(ii) each employee welfare benefit plan, as defined in Section
3(1) of ERISA, maintained by the Company or to which the Company or the
Seller is required to make contributions ("Welfare Benefit Plan").
True and complete copies of all Pension Benefit Plans and Welfare
Benefit Plans (collectively, "ERISA Plans") have been delivered to or made
available to Purchaser together with, as applicable with respect to each such
ERISA Plan, trust agreements, summary plan descriptions, all IRS determination
letters or applications therefor with respect to any Pension Benefit Plan
intended to be qualified pursuant to Section 401(a) of the Internal Revenue Code
of 1986, as amended (the "IRC"), and valuation or actuarial reports,
accountant's opinions, financial statements, IRS Form 5500s (or 5500-C or
5500-R) and summary annual reports for the last three years.
(b) With respect to the ERISA Plans, except as set forth on Schedule
2.19:
-17-
<PAGE>
(i) there is no ERISA Plan which is a "multiemployer" plan as
that term is defined in Section 3(37) of ERISA ("Multiemployer Plan");
(ii) no event has occurred or (to the knowledge of the Seller
or the Company) is threatened or about to occur which would constitute a
prohibited transaction under Section 406 of ERISA or under Section 4975 of
the IRC;
(iii) each ERISA Plan has operated since its inception in
accordance with the reporting and disclosure requirements imposed under
ERISA and the IRC and has timely filed Form 5500 (or 5500-C or 5500-R) and
predecessors thereof; and
(iv) no ERISA Plan is liable for any federal, state or local
Taxes.
(c) Each Pension Benefit Plan intended to be qualified under Section
401(a) of the IRC:
(i) has been qualified, from its inception, under Section
401(a) of the IRC, and the trust established thereunder has been exempt
from taxation under Section 501(a) of the IRC and is currently in
compliance with applicable federal laws;
(ii) has been operated, since its inception, in accordance
with its terms and there exists no fact which would adversely affect its
qualified status; and
(iii) is not currently under investigation, audit or review by
the IRS or (to the knowledge of the Seller or Company) no such action is
contemplated or under consideration and the IRS has not asserted that any
Pension Benefit Plan is not qualified under Section 401(a) of the IRC or
that any trust established under a Pension Benefit Plan is not exempt
under Section 501(a) of the IRC.
(d) With respect to each Pension Benefit Plan which is a defined
benefit plan under Section 414(j) and each defined contribution plan under
Section 414(i) of the IRC:
-18-
<PAGE>
(i) no liability to the Pension Benefit Guaranty Corporation
("PBGC") under Sections 4062-4064 of ERISA has been incurred by the
Company since the effective date of ERISA and all premiums due and owing
to the PBGC have been timely paid;
(ii) the PBGC has not notified the Company or any Pension
Benefit Plan of the commencement of proceedings under Section 4042 of
ERISA to terminate any such plan;
(iii) no event has occurred since the inception of any Pension
Benefit Plan or (to the knowledge of the Seller or the Company) is
threatened or about to occur which would constitute a reportable event
within the meaning of Section 4043(b) of ERISA;
(iv) No Pension Benefit Plan ever has incurred any
"accumulated funding deficiency" (as defined in Section 302 of ERISA and
Section 412 of the IRC); and
(v) if any of such Pension Benefit Plans were to be terminated
on the Closing Date (A) no liability under Title IV of ERISA would be
incurred by the Company, and (B) all benefits accrued to the day prior to
the Closing Date (whether or not vested) would be fully funded in
accordance with the actuarial assumptions and method utilized by such plan
for valuation purposes.
(e) With respect to each Pension Benefit Plan, Schedule 2.19
contains a list of all Pension Benefit Plans to which ERISA has applied which
have been or are being terminated, or for which a termination is contemplated,
and a description of the actions taken by the PBGC and the IRS with respect
thereto.
(f) The aggregate of the amounts of contributions by the Company to
be paid or accrued under ERISA Plans is not expected to exceed approximately
$130,000.00 for the time period commencing January 1, 1998 and ending December
31, 1998 (which amount consists of the following components: $26,311 of
anticipated SEPP contributions, $93,634 of anticipated premium expenses for
health, life, disability and dental insurance, and $10,055 for miscellaneous
adjustments to such amounts), all of which has been properly accrued or reserved
for on the Financial Statements and Unaudited Financial Statements. To the
extent required in
-19-
<PAGE>
accordance with GAAP, the Company's Financial Statements reflect in the
aggregate an accrual of all amounts of employer contributions accrued but unpaid
by the Company under the ERISA Plans as of the date of the Financial Statements.
(g) With respect to any Multiemployer Plan (1) the Company has not,
since its formation, made or suffered a "complete withdrawal" or "partial
withdrawal" as such terms are respectively defined in Sections 4203 and 4205 of
ERISA; (2) there is no withdrawal liability of the Company under any
Multiemployer Plan, computed as if a "complete withdrawal" by the Company had
occurred under each such Plan as of December 31, 1997; and (3) the Company has
not received notice to the effect that any Multiemployer Plan is either in
reorganization (as defined in Section 4241 of ERISA) or insolvent (as defined in
Section 4245 of ERISA).
(h) With respect to the Welfare Benefit Plans:
(i) There are no liabilities of the Company under Welfare
Benefit Plans with respect to any condition which relates to a claim filed
on or before the Closing Date; and
(ii) No claims for benefits are in dispute or in litigation.
(i) Set forth on Schedule 2.19 hereto is a true and complete list
of:
(i) each employee stock purchase, employee stock option,
employee stock ownership, deferred compensation, performance, bonus,
incentive, vacation pay, holiday pay, insurance, severance, retirement,
excess benefit or other plan, trust or arrangement which is not an ERISA
Plan whether written or oral, which the Company maintains or is required
to make contributions to; and
(ii) each other agreement, arrangement, commitment and
understanding of any kind, whether written or oral, with any current or
former employee, officer, director or consultant of the Company pursuant
to which payments may be required to be made at any time following the
Execution Date (including, without limitation, any employment, deferred
-20-
<PAGE>
compensation, severance, supplemental pension, termination or consulting
agreement or arrangement).
(j) True and complete copies of all of the written plans,
arrangements and agreements referred to on Schedule 2.19 ("Compensation
Commitments") have been provided to Purchaser together with, where prepared by
or for the Company, any valuation, actuarial or accountant's opinion or other
financial reports with respect to each Compensation Commitment for the last
three years. An accurate and complete written summary has been provided to
Purchaser with respect to any Compensation Commitment which is unwritten.
(k) Each Compensation Commitment:
(i) since its inception, has been implemented in all material
respects in accordance with its terms;
(ii) is not currently under investigation, audit or review by
the IRS or any other federal or state agency and (to the knowledge of the
Seller and Company) no such action is contemplated or under consideration;
(iii) has no liability for any federal, state, local or
foreign Taxes;
(iv) has no claims subject to dispute or litigation;
(v) has met all applicable requirements, if any, of the IRC;
and
(vi) has been implemented since its inception in material
compliance with the reporting and disclosure requirements imposed under
ERISA and the IRC.
Section 2.20 Intellectual Property. Schedule 2.20 sets forth a complete
and accurate list of the Proprietary Rights owned or used by the Company. The
Company has no written documents relating to the Company's ownership or use of
the Proprietary Rights listed in Schedule 2.20, except as listed therein. No
other Person has any rights to such Proprietary Rights, except pursuant to
agreements or licenses specified in Schedule 2.20. To the Seller's and Company's
knowledge, no other Person is infringing,
-21-
<PAGE>
violating or misappropriating any such Proprietary Right. If necessary, the
Company owns or holds valid licenses to use all Proprietary Rights used in the
operation of its business as presently conducted, with all such licenses
specified in Schedule 2.20.
Section 2.21 Environmental Matters. The Company has obtained all
Environmental Permits required in connection with the operation of its business.
The Company is and has been, and is capable of continuing to be in compliance in
all respects with (i) the terms and conditions of all such Environmental
Permits, and (ii) all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables of any
applicable Environmental Law or Regulation, Order, code, plan, decree, judgment,
injunction or demand letter issued, entered, promulgated or approved thereunder.
The Company currently possesses and maintains such Environmental Permits in its
name, and no amendments or modifications to such Environmental Permits or
filings with any permitting Authority are required to permit the acquisition of
the Shares as contemplated hereby. In addition, except as set forth in Schedule
2.21:
(a) Generally. No notice, notification, demand, request for
information, citation, summons or order has been issued, no complaint has been
filed, no penalty has been assessed and no investigation or review is pending
or, to the Seller's and Company's knowledge, threatened by any Authority or
other entity with respect to the Company relating to any Environmental Permit,
license or authorization required in connection with the conduct of the business
of the Company or with respect to the generation, treatment, storage, recycling,
transportation, disposal or Release of any substance regulated under
Environmental Laws ("Hazardous Materials").
(b) Property.
(i) The Company has not handled any Hazardous Material on any
property now or previously owned or leased by the Company.
(ii) No PCB or asbestos is or has been present at any property
now or previously owned or leased by the Company.
-22-
<PAGE>
(iii) There are no underground storage tanks for Hazardous
Materials, active or abandoned, at any property now or previously owned or
leased by the Company.
(iv) There has been no Release of Hazardous Materials at, on
or under any property now or previously owned or leased by the Company.
(c) Transportation. The Company has not (i) transported or arranged
for the transportation of any Hazardous Material to any location which to
Company's knowledge is listed on the National Priorities List under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"), listed for possible inclusion on the National Priorities
List by the Environmental Protection Agency in the Comprehensive Environmental
Response and Liability Information System ("CERCLIS") or on any similar state
list or which is the subject of federal, state or local enforcement actions or
other investigations, or (ii) stored, treated, transported or disposed, or
arranged for storage, treatment, transport or disposal of any Hazardous
Materials, other than in compliance with Environmental Law.
(d) Notification of Release. No oral or written notification of a
Release of a Hazardous Material has been filed by or on behalf of the Company,
and no property now or to Company's or Seller's knowledge previously owned or
leased by the Company is listed or to Company's or Seller's knowledge proposed
for listing on the National Priorities List under CERCLA, on CERCLIS or on any
similar state list of sites requiring investigation or clean-up.
(e) Liens. There are no Liens arising under or pursuant to any
Environmental Laws on any of the real property owned or leased by the Company,
and no government actions have been taken or are threatened which could subject
any of such properties to such Liens. The Company is not required to place any
notice or restriction relating to the presence of Hazardous Materials at any
property owned by it in any deed to such property.
(f) Site Assessments. There have been no Phase I or Phase II
environmental site assessments conducted by or which are in the possession of
the Seller or the Company in relation to any property or facility now or
previously owned or leased by the Company.
-23-
<PAGE>
Section 2.22 Capital Expenditures and Investments. The Company has no
outstanding Contracts or commitments for capital expenditures and investments,
except as set forth in Schedule 2.22 attached hereto, which schedule includes a
list of all disbursements on account of capital expenditures and investments by
the Company since December 31, 1997. There has been no order or ruling from the
ICC or any other regulatory body and, to Seller's knowledge, none is threatened
or expected by the Company requiring or recommending that the Company undertake
any capital expenditures or investments.
Section 2.23 Dealings with Affiliates. Schedule 2.23 sets forth a complete
and accurate list of all oral or written Contracts between the Company and any
one or more of its Affiliates. Except as set forth in Schedule 2.23, since
December 31, 1997, the Company has not made any payments, loaned any funds or
property or made any credit arrangement with any Affiliate or employee except
for the payment of employee salaries in the ordinary course of business.
Section 2.24 Insurance. The Company currently is covered by insurance
policies which provide for coverages that are usual and customary as to amount
and scope in the business of the Company, descriptions of which policies,
including the names of the insurer and the insured, the amount of premiums, and
the types and amounts of coverage, are set forth on Schedule 2.24. All of such
policies are in full force and effect, all premiums with respect thereto have
been paid or accrued therefor, and no notice of cancellation or termination has
been received with respect to any such policy. Such policies are sufficient for
compliance with (i) all applicable Regulations and (ii) all Contracts to which
the Company is a party. The Company has not breached or otherwise failed to
perform its obligations under any of such policies, nor has the Company received
any adverse notice from any of the insurers party to such policies with respect
to any alleged breach or failure in connection with any of such policies. Such
policies will not terminate or lapse by reason of the execution and delivery of
this Agreement or the consummation of the transactions contemplated hereby.
Except as set forth on Schedule 2.24, there are no pending or, to the Seller's
or Company's knowledge, threatened claims under any policy relating to the
Company. Also set forth on Schedule 2.24 is a true and complete listing of any
and all claims made by the Company under any policy since December 31, 1993.
-24-
<PAGE>
Section 2.25 Commissions. There are and will be no claims for brokerage
commissions, finder's fees, fees for fairness opinions or financial advisory
services or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement made by or
on behalf of the Seller, the Company, or any of their Affiliates.
Section 2.26 Permits and Reports. Schedule 2.26 hereto sets forth a list
of all permits, licenses, registrations, certificates, orders, approvals or
other authorizations from any Authority or other Person including, without
limitation, the FCC and the ICC and all applicable municipalities ("Permits")
issued to or held by the Company in connection with its operations as presently
conducted. Such Permits are the only Permits that are required for the Company
to conduct its business as presently conducted. Each such Permit is in full
force and effect, and the Company has not received notice that any suspension,
cancellation or modification of the terms of any such Permit is threatened. The
Company is in full compliance with the terms of each such Permit, and the Seller
is not aware of any reason not set forth in said Permit why any such Permit
would not be renewed, upon substantially the same terms as currently exist, upon
expiration of such Permit. The El Paso, Illinois territory served by Telephone
constitutes one (1) entire study area. Except as set forth in Schedule 2.26,
upon receipt of authorization, consent, approval or exemption from or notice to
the applicable Person, as set forth in Schedule 2.3 hereto, each Permit issued
to or held by the Company will continue in full force and effect following the
Closing Date. Except as set forth on Schedule 2.26, (i) all returns, reports,
applications, statements and other documents required to be filed by the Company
with the FCC, the ICC and any other Authority or municipality (including taxing
authorities) with respect to the Business on or before the Execution Date have
been duly filed or properly extended as permitted by law (details of such
extensions, if any, are set forth on Schedule 2.26 hereto) and are true and
complete in all material respects, and (ii) all reporting requirements of the
FCC, the ICC and other Authorities or municipalities (including taxing
authorities) having jurisdiction thereof have been complied with in all material
respects. A listing of all returns, reports, applications, statements and other
documents filed by the Company within the past five (5) years with the FCC, the
ICC and any other Authority or municipality (including taxing authorities) is
-25-
<PAGE>
attached hereto as Schedule 2.26; true and complete copies of all such returns,
reports, applications, statements, Permits and other documents set forth on
Schedule 2.26 have been previously provided to Purchaser by the Seller.
Section 2.27 Absence of Undisclosed Liabilities. The Company does not have
any liability of any nature whatsoever (whether known or unknown, due or to
become due, accrued, absolute, contingent or otherwise), including, without
limitation, any unfunded obligation under employee benefit plans or arrangements
as described in Section 2.19 hereof or liabilities for Taxes (as defined in
Section 2.16 hereof) or liabilities for under-reporting, under-billing or
under-collection of revenues or underpayment of revenues to a third party or
liabilities relating to investments or subsidiaries, except for (i) liabilities
stated or reserved against in the Financial Statements or Unaudited Financial
Statements, (ii) current liabilities incurred in the ordinary course of business
and consistent with past practice after the date of the Financial Statements or
Unaudited Financial Statements or which, individually and in the aggregate, do
not have, and cannot reasonably be expected to have, a Material Adverse Effect,
and (iii) liabilities disclosed on Schedule 2.27 hereto. All obligations and
liabilities relating in any way to the Company's investments and Affiliates are
set forth on Schedule 2.4 hereto, setting forth the maximum amount of the
Company's potential obligations and the expected payment schedule therefor. The
Company is not a party to any Contract, or subject to any articles of
incorporation or bylaw provision, any other corporate limitation or any legal
requirement which has, or can reasonably be expected to have, a Material Adverse
Effect. Any and all long term obligations and liabilities of the Company as of
the Execution Date and not otherwise set forth in the Financial Statements or
Schedule 2.12 are set forth on Schedule 2.27 hereto.
Section 2.28 Disclosure. Neither this Agreement nor any of the
attachments, schedules, exhibits, written statements, documents, certificates or
other items prepared for or supplied to the Purchaser by or on behalf of the
Seller or the Company with respect to the transactions contemplated hereby
contains any untrue statement of a material fact or omits any material fact
necessary to make each statement contained herein or therein not misleading.
-26-
<PAGE>
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Seller with respect to
itself and its Assignee as follows even though such representation and/or
warranty shall only use the word Purchaser (in other words, if any
representation or warranty or covenant or agreement would be untrue as to
Purchaser or Assignee then Purchaser must so disclose any such untruth:
Section 3.1 Corporate Organization. The Purchaser is a corporation duly
organized, validly existing and in good standing with perpetual duration under
the laws of its jurisdiction of incorporation, with full corporate power and
authority to own, operate and lease its properties and to conduct its business
as presently conducted and proposed to be conducted. The Purchaser is qualified
to do business and is in good standing in every jurisdiction in which the
conduct of its business, the ownership or lease of its properties, or the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby requires it to be so qualified. True, complete
and correct copies of the Purchaser's charter and by-laws as presently in effect
have been delivered to the Seller.
Section 3.2 Authorization. The Purchaser has full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The Board of Directors of the Purchaser has
duly authorized the execution, delivery and performance of this Agreement, and
no other corporate proceedings on its part are necessary to authorize the
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby. This Agreement constitutes a legal, valid
and binding obligation of the Purchaser enforceable against the Purchaser in
accordance with its terms, subject to equitable considerations and the effect of
bankruptcy and other laws affecting the rights of creditors generally.
Section 3.3 No Violation. Except as set forth on Schedule 3.3 hereto, the
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby by the Purchaser do not and will not (a)
conflict with or result in a breach of the terms, conditions or
-27-
<PAGE>
provisions of, (b) constitute a default or event of default under (with due
notice, lapse of time or both), (c) result in the creation of any Lien upon the
Purchaser or its capital stock or assets pursuant to, (d) give any third party
the right to accelerate any obligation under, (e) result in a violation of or
(f) require any authorization, consent, approval, exemption or other action by,
or notice to, any Person pursuant to the charter or by-laws of the Purchaser,
any applicable Regulation (including, without limitation, the Hart-Scott-Rodino
Antitrust Improvements Act of 1976), any Order to which the Purchaser is subject
or any Contract to which the Purchaser or any of its properties are subject. The
Purchaser has complied with all applicable Regulations and Orders in connection
with the execution, delivery and performance of this Agreement and the
transactions contemplated hereby, subject to the requirements which are
conditions to the Closing.
Section 3.4 Investment Intent. The Purchaser represents and warrants to
the Seller that it is purchasing the Shares for investment purposes and not with
a view to distribution thereof and agrees that it shall not make any sale,
transfer, or other disposition of the Shares in violation of the Securities Act
of 1933, as amended, or the Regulations thereunder or under any other applicable
securities laws.
Section 3.5 Commissions. There are and will be no claims for brokerage
commissions, finder's fees, fees for fairness opinions or financial advisory
services or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement made by or
on behalf of Purchaser or any of its Affiliates.
Section 3.6 Litigation. Except as set forth in Schedule 3.6, there is (a)
no Claim pending or, to Purchaser's knowledge, threatened against Purchaser
relating to the transactions contemplated by this Agreement, (b) no Claim by
Purchaser pending or threatened against any Person relating to the transactions
contemplated by this Agreement, (c) no outstanding Order relating to Purchaser
and to the transactions contemplated by this Agreement, and (d) no Claim by any
person relating to the transactions contemplated by this Agreement.
-28-
<PAGE>
Section 3.7 Disclosure. Neither this Agreement nor any of the attachments,
schedules, exhibits, written statements, documents, certificates or other items
prepared for or supplied to the Seller or the Company by or on behalf of the
Purchaser with respect to the transactions contemplated hereby contains any
untrue statement of a material fact or omits any material fact necessary to make
each statement contained herein or therein not misleading.
ARTICLE IV.
COVENANTS OF THE SELLER AND THE COMPANY
Subject to the provisions of Section 4.14 hereof, from and after December
31, 1997 until the Closing Date, the Seller and Ravenswood agree that they shall
have acted and shall act, or refrain from acting where so required, to comply
(and in the case of the Seller, to cause the Company to comply) with the
following (the term "Company" as used in this Article IV shall mean and include
Ravenswood, Telephone, Long Distance, Gemcell and any and all of their
Affiliates):
Section 4.1 Regular Course of Business.
(a) Generally. The Company shall operate its business diligently and
in good faith, consistent with past management practices, shall maintain all of
its properties in customary repair, order and condition, shall maintain (except
for expiration due to lapse of time or cancellation by another party pursuant to
the terms thereof) in the ordinary course of business all leases and Contracts
in effect without material change except as expressly provided herein or as
agreed to by the Purchaser and shall comply with the provisions of all
Regulations, Orders and Permits applicable to the Company and the conduct of its
business. The Company shall comply, without material modification, with all
Contracts and commitments relating to capital expenditures as set forth on
Schedule 2.22. The Company shall maintain its financial and accounting records
in a manner consistent with that employed at December 31, 1997, except for
changes required by reason of a concurrent change in GAAP or required by the
FCC, ICC or RTB, all of which changes are set forth on Schedule 2.11 hereto.
-29-
<PAGE>
(b) Compensation. The Company shall not hire any employee and shall
not grant any increase in the compensation of any employee, officer, board
member, consultant or independent contractor, other than as required by law or
in the ordinary course and consistent with past practices, and only to the
extent set forth in Schedule 4.1(b) hereto.
(c) Insurance. The Company shall maintain current its insurance
policies with the coverage and in the amounts set forth in Schedule 2.24.
(d) Claims. The Company shall promptly notify the Purchaser of any
Claims that may be commenced against it, as well as of any threatened, suspected
or expected Claims of which the Company or the Seller may be aware.
(e) Supplement. From time to time prior to the Closing Date, the
Seller shall promptly notify the Purchaser of any changes with respect to the
information set forth in this Agreement or the Schedules hereto and of any
matters hereafter arising which, if in existence at the Execution Date, would
have been required to be set forth in this Agreement or the Schedules hereto.
Section 4.2 Amendments. No change or amendment shall be made to the
charter or by-laws of the Company, and the Company shall not merge into or
consolidate with any other Person or change the character of its business.
Section 4.3 Capital Changes. The Company shall not issue, sell, purchase
or redeem any shares of its capital stock of any class or issue or sell any
securities convertible into, or options, warrants or other rights to subscribe
for, any shares of its capital stock. The Company shall not pledge or otherwise
encumber any shares of its capital stock, nor shall the Company allow the
transfer of any shares of its capital stock on its stock transfer ledger or
other books and records.
Section 4.4 Dividends. The Company shall not declare, pay or set aside for
payment any dividend or other distribution in respect of its capital stock,
except for dividends normally declared and paid consistent in amounts with past
practices on Ravenswood Capital Stock, Telephone Capital Stock, Long Distance
Capital Stock or Gemcell Capital Stock.
-30-
<PAGE>
Section 4.5 Capital Expenditures. The Company shall not make any capital
expenditures, or commitments with respect thereto, except as provided in
Schedule 2.22 or if less than $10,000 for any individual or aggregate unbudgeted
project or matter. Except with respect to a $500,000 loan from Ravenswood to
Seller, the Company shall not make or accept any loan or advance to or from any
of its Affiliates or Affiliates of the Seller.
Section 4.6 Borrowing. The Company shall not incur, assume or guarantee
any indebtedness or obligation not reflected on the Financial Statements, except
for amounts not to exceed ten thousand dollars ($10,000) per occurrence or
$50,000 in the aggregate in the ordinary course of business or under existing
borrowing facilities set forth on Schedule 2.12 hereto. Further, the Company
shall not incur, assume or guarantee any indebtedness or obligation of any of
its Affiliates or investments.
Section 4.7 Property. The Company shall not sell, transfer, or dispose of
any of its assets and properties, other than in the ordinary course of business
or as described in Schedule 4.7, or allow any of its assets and properties to
become subject to a Lien other than a Permitted Lien.
Section 4.8 Other Commitments. Except as set forth in this Agreement or
permitted in writing by the Purchaser from and after the Execution Date, the
Company shall not enter into any transaction, make any commitment or incur any
obligation other than (a) in the ordinary course of business, (b) the
distribution and loan described in Sections 4.4 and 4.5, respectively, (c) the
payment of expenses set forth in Section 12.13, and (d) the transactions
described in Schedule 4.7.
Section 4.9 Financial Information. From and after the Execution Date, the
Company shall supply the Purchaser with a copy of its internal monthly Unaudited
Financial Statements within forty-five (45) days after the end of each month.
Section 4.10 Consents and Authorizations. The Seller and the Company
shall, promptly after the Execution Date, commence efforts to obtain the
consents, waivers and authorizations listed in Schedules 2.3 and 2.26. The
Seller and the Company shall diligently pursue and use their reasonable efforts
to obtain such
-31-
<PAGE>
consents, waivers and authorizations as promptly as practicable prior to the
Closing Date, provided, however, that this provision shall not require Seller or
the Company to waive any conditions to its obligations hereunder.
Section 4.11 Access. The Seller and the Company shall afford to the
Purchaser and its counsel, accountants, agents and other authorized
representatives and to financial institutions specified by the Purchaser
reasonable access during business hours to the Company's plants, properties,
books and records in order that the Purchaser may have full opportunity to make
such reasonable investigations (including any environmental assessment) as it
shall desire to make of the affairs of the Company. The Company shall cause its
officers, employees and auditors to furnish such additional financial and
operating data and other information as the Purchaser shall from time to time
reasonably request.
Section 4.12 Notice of Transfer. The Seller and the Company shall act and
cooperate jointly with Purchaser in providing any required notices to the
appropriate Authority regarding any issues of ownership or control or change
thereof (including, without limitation, any such issues relating to the
Permits).
Section 4.13 Payment of Stamp Tax. All transfer (including any real estate
transfer tax), documentary, sales, use, stamp, registration and other such Taxes
and fees (including any penalties and interest) incurred in connection with this
Agreement shall be borne equally by the Seller and the Purchaser when due, and
the parties will file on a timely basis all necessary Tax Returns and other
documentation with respect to all such transfer, documentary, sales, use, stamp,
registration and other Taxes and fees, and, if required by applicable
Regulation, will, and will cause its Affiliates to, join in the execution of any
such Tax Returns and other documentation.
Section 4.14 Disclosure. To the extent the Company shall have taken any
actions contrary to any of the covenants set forth in this Article IV, from and
after December 31, 1997 and prior to the Execution Date, such actions are set
forth on Schedule 4.14 hereto. From and after the Execution Date, the Company
shall not take any actions contrary to any of the covenants set forth in this
Article IV without the prior written consent of the Purchaser.
-32-
<PAGE>
Section 4.15 Cooperation with Purchaser. Each of the Seller and the
Company shall cooperate with Purchaser as shall be reasonably necessary for
Purchaser to consummate this transaction, including, subject to Section 4.11,
giving access to the Company's properties and business records as shall be
necessary for Purchaser to, among other things, obtain surveys of the real
property, a title commitment with respect to the real property and/or
environmental assessments.
Section 4.16 Payment of Estate Tax Liability. On or before the Closing
Date, Seller shall pay the outstanding balance due of any federal estate taxes
due and owing on the Estate of Robert C. Gordon and shall cause the removal of
any and all liens relating thereto.
Section 4.17 Purchase Price Escrow Agreement. On or before the Closing
Date, Seller and those Persons listed on Schedule 6.6, subheading A(1-7) shall
by mutual agreement execute the escrow agreement in substantially the form
attached hereto as Exhibit 4.17 (the "Purchase Price Escrow Agreement") (or with
such changes as are approved in writing by Purchaser), to effectuate the payment
of the Purchase Price as described in Sections 1.2 and 9.2. Seller shall furnish
Purchaser with an original of the fully executed Purchase Price Escrow
Agreement.
ARTICLE V.
COVENANTS OF THE PURCHASER
From and after the Execution Date until the Closing Date, the Purchaser
agrees that it shall have acted and shall act, or refrain from acting where so
required, to comply with the following (the term "Purchaser" as used in this
Article V shall mean and include any Assignee).
Section 5.1 Consents and Authorizations. The Purchaser shall, promptly
after the Execution Date, commence efforts to obtain the consents, waivers and
authorizations listed in Schedule 3.3. The Purchaser shall diligently pursue and
use its reasonable efforts to obtain such consents, waivers and authorizations
as promptly as practicable prior to the Closing Date, provided, however, that
this provision shall not require Purchaser to waive any condition to its
obligations hereunder.
-33-
<PAGE>
Section 5.2 Insurance Continuation. The Purchaser shall provide Seller and
James E. Brownlee, each as a retired director of Ravenswood, coverage, at the
Company's expense, under such health, medical, dental and/or similar plan as the
Company has in effect from time to time, until the third (3rd) anniversary of
the Closing; provided, however, the Purchaser or the Seller may at any time
elect to satisfy this obligation by the payment of a lump sum sufficient to fund
such coverage. Additionally, the Purchaser shall provide the Company's officers
and directors who resign in connection with this transaction with continuing
directors' and officers' liability insurance coverage as provided in Section
6.8(b) hereof.
Section 5.3 Filings. Seller, Company and Purchaser shall cooperate with
one another in jointly preparing, applying for and making the filings and
authorizations or regulatory approvals required in connection with the
execution, delivery and performance of this Agreement, including, without
limitation, approval of the ICC. Purchaser assumes the economic burden of such
applications and filings, including, without limitation, the filing fee
associated with the ICC filing.
Section 5.4 Notice of Transfer. The Purchaser shall cooperate with the
Seller and the Company in providing any required notices to the appropriate
Authority regarding any issues of ownership or control or change thereof
(including, without limitation, any such issues relating to the Permits).
Section 5.5 Cooperation with Seller and Company. Purchaser shall cooperate
with each of Seller and Company as shall be reasonably necessary for Seller and
Company to consummate this transaction, and shall provide Company with any and
all reports produced pursuant to any environmental assessment undertaken
pursuant to Section 4.11 hereof.
Section 5.6 Supplement. From time to time prior to the Closing Date, the
Purchaser shall promptly notify the Seller and the Company of any changes with
respect to the information set forth in this Agreement or the Schedules attached
hereto and of the other matters hereafter arising which, if in existence at the
Execution Date, would have been required to be set forth in this Agreement or
the Schedules hereto.
-34-
<PAGE>
ARTICLE VI.
OTHER AGREEMENTS
The parties hereto further agree as follows:
Section 6.1 Agreement to Defend. In the event any claim of the nature
specified in Section 7.4 or Section 8.3 hereof is commenced, whether before or
after the Closing Date, the parties hereto agree to cooperate and use all
reasonable efforts to defend against and respond thereto.
Section 6.2 Further Assurances. On the terms and subject to the conditions
of this Agreement, the parties hereto shall use all reasonable efforts at their
own expense (except as otherwise provided herein) to take, or cause to be taken,
all action, and to do, or cause to be done, all things necessary, proper or
advisable under applicable Regulations to consummate and make effective as
promptly as possible the transactions contemplated by this Agreement, and to
cooperate with each other in connection with the foregoing, including, without
limitation, using all reasonable efforts (a) to obtain all necessary waivers,
consents and approvals from other parties to loan agreements, leases, mortgages
and other Contracts, (b) to obtain all necessary consents, approvals and
authorizations as are required to be obtained under any Regulations or in
connection with any Permits, (c) to lift or rescind any injunction or
restraining order or other Order adversely affecting the ability of the parties
to consummate the transactions contemplated hereby, and (d) to fulfill all
conditions to the obligations of the parties under this Agreement, provided,
however, that this provision shall not require Seller, Company or Purchaser to
waive any conditions to its obligations hereunder. Each of the parties hereto
further covenants and agrees that it shall use all reasonable efforts to prevent
a threatened or pending preliminary or permanent injunction or other Order.
Section 6.3 Consents. Without limiting the generality of Section 6.2, each
of the parties hereto shall use all reasonable efforts to obtain all waivers,
Permits, authorizations, consents and approvals of all Persons and Authorities
necessary, proper or
-35-
<PAGE>
advisable in connection with the consummation of the transactions contemplated
by this Agreement prior to the Closing Date.
Section 6.4 No Solicitation or Negotiation. Unless and until this
Agreement is terminated, neither the Seller nor the Company shall, and each
shall use reasonable efforts to cause its Affiliates, and the directors,
officers, employees, representatives, agents, advisors, accountants,
shareholders and attorneys of each of them, not to initiate or solicit, directly
or indirectly, any inquiries or the making of any proposal with respect to, or
engage in negotiations concerning, or provide any confidential information or
data to any Person with respect to, or have any discussions with any Person
relating to, any acquisition, business combination or purchase of all or any
significant asset of, or any equity interest in, directly or indirectly, the
Company, or otherwise facilitate any effort or attempt to do or seek any of the
foregoing and shall immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing.
Section 6.5 No Termination of the Obligations by Subsequent Dissolution.
Each of the parties hereto specifically agrees that its obligations hereunder,
including, without limitation, obligations pursuant to this Article VI, shall
not be terminated by the dissolution of such party, whether by operation of law,
Regulations or otherwise.
Section 6.6 Public Announcements. Prior to the Closing Date, no party
hereto nor any Affiliate, representative or shareholder of such party shall
disclose any of the terms of this Agreement to any third party without the prior
written consent of the other parties hereto, except (i) to those persons listed
in Schedule 6.6, (ii) as required to obtain the consents, waivers and
authorizations listed in Schedules 2.3, 2.26 and 3.3, (iii) in connection with
the Purchaser's financing of the transactions contemplated hereby, (iv) as
required by applicable law, and (v) in connection with any securities law
filing. Subject to the forgoing sentence, prior to the Closing Date, the form,
content and timing of all press releases, public announcements or publicity
statements with respect to this Agreement and the transactions contemplated
hereby shall be subject to the prior approval of both the Seller and the
Purchaser, which approval shall not be unreasonably
-36-
<PAGE>
withheld; provided, however, that either party may withhold such approval in its
sole discretion with respect to any of the foregoing which discloses any of the
financial terms of this transaction.
Section 6.7 Records and Information.
(a) Retention of Records. Except as otherwise required by Regulation
or agreed to in writing, each of the Seller and the Purchaser shall retain, and
shall cause its Affiliates to retain, for a period of at least four (4) years,
or the period required by applicable Regulation, following the Closing Date, all
records, books, contracts, instruments, computer data and other data and
information (collectively, "Information") relating to the Company.
(b) Access to Information. From and after the Closing Date, the
Seller shall afford to the Purchaser and its authorized accountants, counsel and
other designated representatives reasonable access (including using reasonable
efforts to give access to Persons or firms possessing Information) and
duplicating rights during normal business hours to all Information within the
Seller's possession relating to the Company, insofar as such access is
reasonably required by the Purchaser. Similarly, the Purchaser shall afford to
the Seller and its authorized accountants, counsel, and other designated
representatives reasonable access (including reasonable efforts to give access
to Persons or firms possessing Information) and duplicating rights during normal
business hours to Information within the Purchaser's possession relating to the
Company or its business as conducted prior to the Closing Date, insofar as such
access is reasonably required by the Seller.
(c) Provisions of Corporate Records. The Seller shall arrange, as
soon as practicable following the Closing Date, to the extent not previously
delivered in connection with the transactions contemplated herein, for
transportation at the Seller's cost to the Purchaser of the records in the
Seller's possession relating to the Company, the corporate minute books, stock
ledgers and certificates and corporate seals of the Company, and all Contracts
and litigation files relating to the Company, except to the extent (i) such
items are already in the possession of any of the Purchaser or the Company, (ii)
it is necessary or appropriate for the Seller to retain such records for use in
preparation of Tax Returns under the provisions hereof, or (iii) it is with
respect to any Claim
-37-
<PAGE>
concerning the Estate of Robert C. Gordon. The Seller may make and retain copies
of all or any such records or documents at her expense.
(d) Witnesses. At all times from and after the Closing Date, each of
the Seller, the Company and the Purchaser shall use reasonable efforts to make
available to the other, upon written request, its and its Affiliates' officers,
directors, employees and agents as witnesses to the extent that such Persons may
reasonably be required in connection with any legal, administrative or other
proceedings in which the requesting party may from time to time be involved, at
no cost; provided, however, that a party producing such witnesses shall be
entitled to receive from the requesting party, upon presentation therefor,
payment for such out-of-pocket costs and disbursements as may be reasonably
incurred in producing such witnesses.
Section 6.8 Insurance Policies and Claims Administration.
(a) Insurance Coverage Prior to the Closing Date. The Seller shall
be responsible for the administration of all claims under the Company's
insurance policies relating to periods prior to the Closing Date. The Purchaser
will, if requested by the Seller, assist the Seller in performing this
obligation, at no cost to the Seller. If any claim is asserted against the
Company relating to periods prior to the Closing Date, the Seller shall, if
requested by the Purchaser, promptly assert and pursue coverage and payment for
such claim with the appropriate insurance carrier, and the Purchaser shall, and
shall cause the Company to, provide reasonable cooperation and assistance to the
Seller in asserting and pursuing such coverage. In particular, the Purchaser
shall, upon request by the Seller, cause the Company to file all necessary
claims and take all such other action as may reasonably be requested by the
Seller to pursue such coverage. As between the Seller, on the one hand, and the
Purchaser and the Company, on the other hand, the Purchaser and the Company
shall be entitled to recover all insurance proceeds with respect to any claim,
except to the extent the Seller has previously provided indemnification therefor
to the Purchaser or the Company under Article XI of this Agreement. If the
Purchaser shall pursue coverage and payment for any claim relating to periods
prior to the Closing Date on behalf of the Company, then the Seller shall
provide reasonable cooperation and assistance to the Company and the Purchaser.
-38-
<PAGE>
(b) Insurance Coverage After the Closing Date. The Purchaser shall
be responsible for establishing and maintaining the Company's property and
casualty insurance (including, without limitation, primary and excess general
liability, automobile, workers' compensation, property, director and officer
liability, fire, crime, surety and other similar insurance policies) for the
activities and claims of the Company and its Affiliates on and after the Closing
Date, either through the continuation of the Company's policies in place as at
the Closing Date, or the establishment of new policies, in the Purchaser's sole
discretion. Notwithstanding the foregoing, it is the intent of the parties that
those persons who served in the capacity of officer or director of the Company
prior to the Closing, and who resign from such positions in connection with the
transaction contemplated by this Agreement, be provided with continuing director
and officer liability insurance at the Company's expense and that Seller and
James E. Brownlee be provided with the insurance contemplated by Section 5.2, at
Company's expense. The Purchaser therefore agrees to cause the Company, at the
Company's expense, to provide "tail" insurance coverage for such individuals,
from the date of Closing until the third (3rd) anniversary thereof.
Section 6.9 Other Tax Matters.
(a) Tax Returns. The Purchaser, the Seller, the Company and their
successors shall cooperate in the preparation of all Tax Returns and reports and
shall make available all necessary records and timely take all action necessary
to allow for the preparation and filing of all Tax Returns and reports. Within
ten (10) days following the Closing, the Seller shall deliver or shall cause to
be delivered to the Purchaser all books, records, returns, schedules, work
papers, and other documents (including without limitation, appraisals and other
background information) which are in the possession of the Seller or the Company
and which relate to any Taxes of the Company for any taxable period. Prior to
the delivery of the materials described in the preceding sentence, the Seller
shall cooperate with the Purchaser in providing access to such materials as is
reasonably required by the Purchaser.
The parties hereto agree that the Seller shall prepare, and pay (or have
fully reserved for on the Company's Audited and Unaudited Financials) all taxes
arising therefrom, all Tax Returns
-39-
<PAGE>
for the Company for the periods ending on or before the Closing Date and for all
taxes arising as a result of the transactions contemplated by this Agreement.
Upon mutual agreement between the Seller and the Purchaser, the Company may
prepare any such required tax returns. The Purchaser shall prepare, and pay all
taxes arising therefrom, all Tax Returns for the Company for the periods ending
after the Closing Date.
(b) Information. The Purchaser and the Seller agree to furnish or
cause to be furnished to each other, as promptly as practicable, such
information (including access to books and records) and assistance relating to
the Company as is reasonably requested for the filing of any Tax Return, in
determining a Tax liability or right to refund, for the preparation of any audit
or other proceeding, and for the prosecution of any claim, suit or proceeding
relating to a proposed Tax adjustment. The Purchaser and the Seller shall
cooperate with each other in the conduct of any Tax audit or other Tax
proceedings involving the Company. The parties shall execute and deliver such
powers of attorney and other documents as are reasonably requested to carry out
the administration of the Tax provisions of this Agreement.
(c) Amended Returns. From and after the Closing Date, Purchaser may
file an amended Tax Return for any period ending on or prior to the Closing Date
without the consent of the Seller. Any additional Taxes resulting from such an
amended Tax Return shall be the responsibility of, and shall be paid solely
by(i) the Seller (through indemnification pursuant to Article XI hereof), to the
extent such Taxes result from an amended Tax Return filed to correct any
"understatement," as such term is defined in Section 6662 of the IRC, by the
Seller or the Company with respect to all reporting periods ending on or before
the Closing Date, and (ii) the Company in all other events. The Purchaser shall
provide the Seller with notice of and a reasonable opportunity to participate in
the preparation of any such amended Tax Return, and the Seller agrees to provide
the Purchaser with reasonable cooperation and assistance in connection
therewith. Notwithstanding the foregoing, any and all determinations regarding
any and all such Tax Returns shall ultimately be made by the Purchaser, in its
sole discretion.
ARTICLE VII.
-40-
<PAGE>
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER
The obligations of the Purchaser under this Agreement shall be subject to
the satisfaction of each of the following conditions unless waived in writing by
the Purchaser:
Section 7.1 Representations and Warranties; Covenants and Deliveries. The
representations and warranties of the Seller and the Company contained in
Article II hereof and elsewhere in this Agreement and all information contained
in any Exhibit, Schedule or attachment hereto shall be true and correct in all
material respects when made and on the Closing Date as though then made except
for such representations or warranties that are expressly made as of another
date, which shall be true and correct in all material respects as of such other
date. The Seller and the Company shall have performed and complied in all
material respects with all agreements, covenants and conditions required by this
Agreement to be performed and complied with by them prior to the Closing Date.
The Seller shall have delivered to the Purchaser a certificate, dated the
Closing Date, in a form reasonably satisfactory to the Purchaser, certifying to
the foregoing, and providing such supplemental information, agreements and
disclosures as shall be necessary to make such representations and warranties as
accurate on the Closing Date as on the date originally given or specifying those
respects in which particular covenants have not been performed in all material
respects or in which such representations and warranties are not true and
correct in all material respects (in which event, if the Closing occurs, any
claim (including any claim for indemnification) with respect to matters so
specified shall be thereafter waived by Purchaser). The Purchaser agrees and
acknowledges that any federal or state regulation or deregulation, or any
changes in Regulations applicable to federal or state regulation of the
Business, occurring between the Execution Date and the Closing Date, even if
such changes have or are reasonably expected to have a negative effect on the
Business and its results of operations, shall not constitute a breach of the
representations and warranties contained in Section 2.11 or any other Section
and shall not constitute a failure of a condition precedent to the Purchaser's
obligations hereunder. The Seller shall deliver to the Purchaser all of the
certificates, stock powers, settlement and release agreements and other
documentation referenced in Section 9.2 hereof, evidencing the transfer to the
Purchaser of clear title to all of the Shares
-41-
<PAGE>
at the Closing, all in form and substance satisfactory to the Purchaser and its
counsel in their sole discretion.
Section 7.2 Consents and Approvals. The Seller, the Company and the
Purchaser shall have obtained all consents, approvals, Orders, qualifications,
licenses, Permits or other authorizations specified in Schedules 2.3, 2.26 and
3.3 hereto and, to the extent not listed in Schedules 2.3, 2.26 and 3.3 hereto,
required by all applicable Regulations, Orders and Contracts binding on any of
the Seller, the Company or the Purchaser or any of their respective properties
and assets, with respect to the execution, delivery and performance of this
Agreement, the financing and consummation of the transactions contemplated
herein and the conduct of the business of the Company in the same manner after
the Closing Date as before the Closing Date, free of any special terms,
conditions or restrictions which Purchaser determines, in good faith and
following consultation with Seller, will materially and adversely affect the
actual, prospective operational and financial benefits to Purchaser of the
transactions contemplated by this Agreement. For purposes of this Agreement, all
such approvals and consents shall be deemed to have been obtained after the
grant thereof has become final, non-appealable and not subject to
reconsideration.
Section 7.3 No Material Adverse Change. There shall have been no Material
Adverse Change in the Business, properties (not otherwise covered by insurance),
Financial Statements, Unaudited Financial Statements, business prospects,
condition (financial or otherwise) or results of operations of the Company since
December 31, 1997 through the Closing Date. The Purchaser shall have received a
certificate, dated the Closing Date, from the Seller, in a form reasonably
satisfactory to the Purchaser, certifying to the foregoing.
Section 7.4 No Proceeding or Litigation. No proceeding, litigation or
Order (exclusive of Orders promulgated by or pertaining to the FCC, the ICC or
any similar regulatory Authority, the existence or occurrence of which shall be
governed by Section 7.2 hereof) shall be in effect which would prevent the
consummation of the transactions contemplated hereby.
Section 7.5 Secretary's Certificate. The Purchaser shall have received
certificates, signed by the Secretary of Ravenswood
-42-
<PAGE>
and the Secretary of Telephone, Long Distance and Gemcell, each dated the
Closing Date, as to the charter and by-laws of Ravenswood and of Telephone, Long
Distance and Gemcell and as to the resolutions adopted by the shareholders and
directors of each in connection with this Agreement in a form reasonably
satisfactory to the Purchaser.
Section 7.6 Certificates of Good Standing. At the Closing, the Company
shall have delivered to the Purchaser certificates issued by the appropriate
governmental authorities evidencing the good standing of the Company and each of
its Affiliates in their respective jurisdictions of incorporation and in each
jurisdiction in which each is qualified to do business as a foreign corporation
as of a date not more than fifteen (15) days prior to the Closing Date.
Section 7.7 Opinion of Seller's Counsel. The Seller shall deliver at
Closing an opinion of counsel to the Seller addressed to Purchaser and
Purchaser's lender in substantially the form attached hereto as Exhibit 7.7.
Section 7.8 Resignations. The Seller shall have caused all directors and
officers of the Company and of all of its Affiliates to have resigned from all
such positions.
Section 7.9 Other Documents. The Purchaser shall have been furnished with
such other and further documents and certificates, including evidence of the
payment of the estate tax liability contemplated by Section 4.16, execution of
the Purchase Price Escrow Agreement, and certificates of the Seller, the Company
or the Company's officers, directors and others, as the Purchaser shall
reasonably request to evidence compliance with the conditions set forth in this
Agreement.
Section 7.10 Liens. The Seller shall have removed all Liens on the Shares
and on the assets and properties of the Company other than Permitted Liens.
Section 7.11 Delivery of Minute Books and Investment Certificates. The
Seller shall deliver at Closing all original minute books and stock transfer
records of Ravenswood, Telephone, Long Distance and Gemcell, as well as any and
all original certificates, if any, evidencing the Company's investments.
-43-
<PAGE>
Section 7.12 Delivery of Unaudited Financial Statements. The Seller shall
have delivered Unaudited Financial Statements to the Purchaser as provided in
Section 4.9 hereof.
ARTICLE VIII.
CONDITIONS TO THE OBLIGATIONS OF THE SELLER
The obligations of the Seller under this Agreement shall be subject to the
satisfaction of each of the following conditions unless waived in writing by the
Seller:
Section 8.1 Representations and Warranties. The representations and
warranties of the Purchaser contained in Article III hereof and elsewhere in
this Agreement and all information contained in any Exhibit, Schedule or
attachment hereto shall be true and correct in all material respects when made
and on the Closing Date as though then made, except for such representations or
warranties that are expressly made as of another date, which shall be true and
correct in all material respects as of such other date. The Purchaser shall have
performed and complied in all material respects with all agreements, covenants
and conditions required by this Agreement to be performed and complied with by
it prior to the Closing Date. An officer of the Purchaser in his capacity as
such shall have delivered to the Seller a certificate, dated the Closing Date,
certifying to the foregoing, and providing such supplemental information,
agreements and disclosures as shall be necessary to make such representations
and warranties as accurate on the Closing Date as on the date originally given
or specifying those respects in which particular covenants have not been
performed in all material respects or in which such representations and
warranties are not true and correct in all material respects (in which event, if
the closing occurs, any claim (including any claim for indemnification) with
respect to matters as specified shall be thereafter waived by Seller).
Section 8.2 Consents and Approvals. The Purchaser, the Seller and the
Company shall have obtained all consents, approvals, orders, qualifications,
licenses, Permits or other authorizations specified in Schedules 2.3, 2.26 and
3.3 hereto and, to the extent not listed in Schedules 2.3, 2.26 and 3.3 hereto,
required by all
-44-
<PAGE>
applicable Regulations, Orders and Contracts binding on the Purchaser, the
Seller or the Company or any of their respective properties and assets, with
respect to the execution, delivery and performance of this Agreement, free of
any special terms, conditions or restrictions which Seller determines, in good
faith and following consultation with Purchaser, will materially and adversely
affect the actual, prospective operational and financial benefits to Seller of
the transactions contemplated by this Agreement. For purposes of this Agreement,
all such approvals and consents shall be deemed to have been obtained after the
grant thereof has become final, non-appealable and not subject to
reconsideration.
Section 8.3 No Proceeding or Litigation. No proceeding, litigation or
Order (exclusive of Orders promulgated by or pertaining to the FCC, the ICC or
any similar regulatory Authority, the existence or occurrence of which shall be
governed by Section 8.2 hereof) shall be in effect which would prevent the
consummation of the transactions contemplated hereby.
Section 8.4 Secretary's Certificate. The Seller shall have received a
certificate, signed by the Secretary or the Assistant Secretary of the
Purchaser, dated the Closing Date, as to the charter and by-laws of the
Purchaser and the resolutions adopted by the directors of the Purchaser in
connection with this Agreement in a form reasonably satisfactory to the Seller.
Section 8.5 Opinion of Purchaser's Counsel. Purchaser shall deliver at
Closing an opinion of counsel to Purchaser addressed to Seller in substantially
the form attached hereto as Exhibit 8.5.
Section 8.6 Certificates of Good Standing. At the Closing, Purchaser shall
have delivered to Seller certificates issued by the appropriate governmental
authorities evidencing the good standing of Purchaser in its jurisdiction of
incorporation, as of a date not more than fifteen (15) days prior to the Closing
Date.
Section 8.7 Other Documents. The Seller and Company shall have been
furnished with such other and further documents and certificates, including
certificates of Purchaser's officers, directors and others, as Seller or Company
shall reasonably request
-45-
<PAGE>
to evidence compliance with the conditions set forth in this Agreement.
ARTICLE IX.
CLOSING
Section 9.1 Closing. Unless this Agreement shall have been terminated or
abandoned pursuant to the provisions of Article X hereof, a closing of the
transactions contemplated by this Agreement (the "Closing") shall be held on or
before January 4, 1999 (effective as of 12:01 A.M. on January 1, 1999) (or on
such date either before or after January 4, 1999 as the parties hereto shall
mutually agree, which shall occur and be effective at least ten (10) days after
receipt of all ICC and other approvals required as a precondition to Closing,
and which shall, to the extent reasonably feasible, occur and be effective on
the first day of a month) (the "Closing Date") in the offices of the Purchaser's
counsel, or at such other location as the parties hereto shall mutually agree;
provided, that the Closing shall occur as soon as practicable after the
satisfaction of the conditions contained in Articles VII and VIII hereof.
Section 9.2 Closing Date Payment and Receipt of Shares. On the Closing
Date:
(a) the Seller will assign and transfer to the Purchaser good and
valid title in and to the Shares, free and clear of all Liens except Permitted
Liens, by delivering to the Purchaser (i) stock certificates representing the
Shares, duly endorsed for transfer or accompanied by duly executed stock powers
endorsed in blank with requisite stock transfer tax stamps, if any, attached,
(ii) a fully executed original of the Purchase Price Escrow Agreement, and duly
executed settlement and release agreements, in form and substance satisfactory
to the Purchaser and its counsel, in their sole discretion, on behalf of the
persons listed in Schedule 6.6, subheading A(1-7) (if not otherwise contained
within said escrow agreement) and any and all other third parties who or which
claim, or have claimed an interest, legal or equitable, in any of the Shares as
beneficiaries of the estate of Robert C. Gordon (including, without way of
limitation, Lois Beach, Linda Frey, Russell Haas, Eugene Koos, the Alpha Iota
Chapter of Sigma
-46-
<PAGE>
Chi Fraternity at Illinois Wesleyan University, and Illinois Wesleyan
University), waiving and forever releasing any and all such Claims, and (iii)
any and all such additional documentation as is deemed necessary by the
Purchaser and its counsel, in their sole discretion, to evidence the transfer to
the Purchaser of title to the Shares at the Closing, free and clear of all Liens
except Permitted Liens;
(b) the Purchaser shall, by wire transfer of same-day funds, deposit
in an escrow account at First Federal Savings and Loan Association the amount of
One Million Dollars ($1,000,000.00) (the "Indemnity Escrow Funds"), all as
provided in the Indemnity Escrow Agreement referred to in Section 11.2 hereof;
(c) the Purchaser shall, by wire transfer of same-day funds, pay to
the escrow account established under Section 4.17, the aggregate amount of the
Purchase Price for all of the Shares, less the Indemnity Escrow Funds, less
$500,000 (from the amount otherwise payable to the Seller) with respect to
payment of the principal of Seller's promissory note to Ravenswood as provided
in Section 4.5 hereof, and concurrently therewith Seller shall pay to Purchaser
the accrued interest on such promissory note, said accrued interest amount to be
determined by the parties at least two (2) days before Closing;
(d) the parties shall deliver to each other the documents required
under this Agreement to be delivered at or prior to the Closing; and
(e) Upon delivery of the remainder of the Purchase Price to the
escrow account as provided in Section 9.2(c), the Purchaser shall have no
further obligation whatsoever with respect to the maintenance, investment or
distribution of such funds or the determination of the Person or Persons
entitled thereto, and the Purchaser shall be deemed to have completely fulfilled
all of its duties hereunder with respect thereto and any and all Shares shall be
deemed paid for in full by Purchaser.
-47-
<PAGE>
ARTICLE X.
TERMINATION AND ABANDONMENT
Section 10.1 Methods of Termination. This Agreement may be terminated and
the transactions herein contemplated may be abandoned at any time:
(a) Mutual Consent. By mutual written consent of the Purchaser and
the Seller.
(b) Seller's Failure to Perform. By the Purchaser if as of the
Closing Date any of the conditions specified in Article VII hereof have not been
satisfied (and remain so unsatisfied for more than ten (10) days after the
Purchaser has notified the Seller in writing thereof) or waived by Purchaser or
if either the Seller or the Company is otherwise in default in any material
respect under this Agreement (and remains in default for more than ten (10)
business days after the Purchaser has notified the Seller in writing in
reasonable detail of such default).
(c) Purchaser's Failure to Perform. By the Seller if as of the
Closing Date any of the conditions specified in Article VIII hereof have not
been satisfied (and remain so unsatisfied for more than ten (10) days after the
Seller has notified the Purchaser in writing thereof) or waived by Seller or if
the Purchaser is otherwise in default in any material respect under this
Agreement (and remains in default for more than ten (10) business days after the
Seller has notified the Purchaser in writing in reasonable detail of such
default).
(d) Failure to Close by July 31, 1999. By either party in the event
the Closing has not occurred by July 31, 1999, unless such failure to close
shall be due to a breach of this Agreement by the party seeking to terminate the
Agreement.
(e) Material Adverse Change. By the Purchaser if a Material Adverse
Change shall be shown (in the sole discretion of Purchaser) in the Financial
Statements made as of December 31, 1997 or in any of the Unaudited Financial
Statements and written notice of termination of this Agreement shall have been
given by the Purchaser within thirty (30) business days of Purchaser's receipt
of such Financial Statements or Unaudited Financial Statements.
-48-
<PAGE>
(f) Remedies. In the event of any failure to perform as described in
this Section 10.1, the nonbreaching party shall have such remedies for breach of
contract as are allowed by law in addition to or in substitution of the right of
termination; provided, however, that in the event the parties hereto (singly or
collectively) are unable to obtain all satisfactory and necessary approvals,
consents, authorizations, waivers and Permits from each applicable Authority in
connection with the transactions contemplated by this Agreement, following good
faith efforts to do so, or in the event of a Material Adverse Change or any
proceeding, litigation or Order as described in Sections 7.4 or 8.3 hereof which
result from actions, events or circumstances which are beyond the control of the
party affected by such Material Adverse Change, then in such event the sole and
exclusive remedy of the parties hereto shall be termination of this Agreement,
and the parties hereto shall specifically not have, and hereby waive, all such
other remedies as may be allowed by law or equity. In the event the transactions
contemplated hereby are not consummated following a breach by the Seller or the
Company of the provisions of Section 6.4 hereof, the Purchaser's sole and
exclusive remedy shall be the Breakup Fee, as provided in Section 10.2(c)
hereof, and the Purchaser shall specifically not have, and hereby waives, all
such other remedies as may be afforded by law or equity.
(g) Notwithstanding Sections 10.1(b) and 10.1(c), a party shall not
be deemed to be in default in any material respect under this Agreement where
such default (a "Resulting Default") is caused directly or primarily by the
other party, and such Resulting Default shall be abated day-for-day for the time
period such Resulting Default was caused or continues to be caused by the other
party.
Section 10.2 Procedure Upon Termination. If this Agreement is terminated
as provided herein:
(a) Return of Records. Each party shall as promptly as practicable
redeliver to the party furnishing the same, all data, information and other
written material (including all copies thereof) of any other party relating to
the transactions contemplated hereby, whether obtained before or after the
execution hereof.
-49-
<PAGE>
(b) Confidentiality. All information received by any party hereto
with respect to the business of any other party (other than information which is
a matter of public knowledge or which has heretofore been or is hereafter
published in any publication for public distribution or filed as public
information with any Authority) shall not at any time be used by such party, or
disclosed to third parties, all as provided in the Confidentiality Agreement.
(c) Breakup Fee. In the event the transactions contemplated hereby
are not consummated following a breach by the Seller or the Company of the
provisions of Section 6.4 hereof, the Seller and the Company shall jointly and
severally pay to the Purchaser, within ten (10) business days following the
termination of this Agreement, a "Breakup Fee" in the amount of Four Hundred
Thousand and No/100 Dollars ($400,000.00), in readily available funds. Such
amount shall be considered liquidated damages and not a penalty.
Section 10.3 Exclusive Remedy. The parties hereby expressly agree that if
the closing of the transactions contemplated by this Agreement does not occur,
the remedies provided under this Article X shall be the sole and exclusive
remedies for any and all Claims by either party against the other for matters
arising under this Agreement. In the event the closing of the transactions
contemplated by this Agreement does occur, this Article X shall be superseded by
Article XI and Article X shall have no further legal effect.
ARTICLE XI.
SURVIVAL OF TERMS; INDEMNIFICATION
Section 11.1 Survival; Limitations.
(a) All of the terms and conditions of this Agreement, together with
the representations, warranties and covenants contained herein or in any
instrument or document delivered or to be delivered pursuant to this Agreement
and the agreements of the parties to indemnify each other as set forth in this
Article XI, shall survive the execution of this Agreement and the Closing Date
for two (2) years from such date (the "Indemnification Period"),
-50-
<PAGE>
notwithstanding any investigation heretofore or hereafter made by or on behalf
of any party hereto and shall continue for, and all claims with respect thereto
shall be made prior to the end of, the Indemnification Period; provided,
however, that with respect to any income tax liability of the Company, Telephone
or any of their Affiliates attributable to any activities or transactions
occurring by any of them on or prior to the Closing Date, the agreement of the
Seller to indemnify Purchaser and its Affiliates shall survive until, and all
claims with respect thereto shall be made prior to, the expiration of the
applicable statute of limitations prescribed by Section 6501 of the IRC.
(b) Notwithstanding anything in this Agreement to the contrary, each
of the parties hereto shall be required to indemnify one another pursuant to the
provisions of this Article XI only to the extent that Claims indemnifiable by
such party exceed Twenty-Five Thousand Dollars ($25,000) in the aggregate, and
only with respect to such excess. Additionally, the liability of each of the
parties hereto with respect to indemnity pursuant to any provision contained in
this Article XI shall be limited to One Million Dollars ($1,000,000) in the
aggregate and, with respect to Seller's obligation, shall be satisfied only from
the funds held in the Escrow Account described in Section 11.2. Except as
provided in this Article XI, neither party shall be liable to or obligated to
indemnify the other party for any consequential, special, punitive or exemplary
damage.
Section 11.2 Escrow of Liquid Assets. One Million Dollars ($1,000,000.00)
of the Purchase Price otherwise payable to the Seller for her Shares shall be
maintained in an escrow account (the "Indemnity Escrow Account"), in First
Federal Savings and Loan Association, pursuant to the terms and provisions of an
Indemnity Escrow Agreement to be executed at Closing substantially in the form
attached hereto as Exhibit 11.2 (the "Indemnity Escrow Agreement"). In the event
of a claim for indemnity against Seller pursuant to Article XI, the Purchaser's
sole recourse shall be to make a claim directly from the Indemnity Escrow
Account for payment of any such indemnity in the manner provided in the
Indemnity Escrow Agreement.
Section 11.3 Indemnification by the Seller. After the Closing Date,
subject to the limitations set forth in Sections 11.1 and 11.2 hereof, the
Purchaser and its subsidiaries and Affiliates
-51-
<PAGE>
(including, without limitation, Ravenswood, Telephone, Long Distance and
Gemcell) and their respective officers, directors, employees, shareholders,
representatives and agents shall be indemnified and held harmless by the Seller,
her heirs, successors, representatives and assigns, against and in respect of
any and all damage, loss, liability, cost or expense (including, the reasonable
fees and expenses of counsel and any Tax liability resulting from any indemnity
payment made hereunder) resulting from, or in respect of, any of the following:
(a) Misrepresentation or Breach. Any misrepresentation or breach of
warranty of the Seller or the Company under this Agreement, or contained in any
Schedule or Exhibit to this Agreement or from any misrepresentation in or
omission from any certificate, Schedule, Exhibit, related agreement, Financial
Statement, Unaudited Financial Statement or instrument delivered by or on behalf
of the Seller or the Company hereunder.
(b) Taxes. All Taxes of the Seller or the Company, or any of their
Affiliates attributable to any period beginning or ending prior to or on the
Closing Date, including but not limited to any Taxes that may result should the
reverse triangular merger of the Company consummated as of September 26, 1996
not be held to be tax-free under the IRC, provided, however, that Seller's
indemnity obligation with respect to Taxes resulting from amended returns filed
by Purchaser shall be governed by the provisions of Section 6.9(c) hereof.
(c) Third Party Claims. Any Claim of a third party arising out of
the business or operations of the Company prior to or on the Closing Date,
including, without way of limitation, any and all Claims arising from or
pertaining to in any way the real property formerly owned by the Company and
located at the corner of Central and First Streets and/or known as 88 North
Central Street, El Paso, Illinois, which property formerly housed the Clifton
Hotel, or any Claim resulting from or arising out of the ownership, management
or use of the Shares and/or the business of the Company prior to or on the
Closing Date, including, without way of limitation, any and all such Claims by
or on behalf of any and all Persons who or which claim any right, title or
interest, legal or equitable, as beneficiaries of the estate or otherwise of
Robert C. Gordon, in or to any of the Shares, including, without way of
limitation, the Ravenswood Capital Stock or the Telephone Capital
-52-
<PAGE>
Stock, or the proceeds thereof (including, without way of limitation, claims of
improper, incorrect or incomplete payment by the Escrow Agent pursuant to the
terms of the Purchase Price Escrow Agreement).
(d) Related Expenses. All expenses and costs, including but not
limited to legal fees, reasonably paid or incurred in connection with any such
indemnified Claim.
Section 11.4 Indemnification by the Purchaser. After the Closing, subject
to the limitation set forth in Section 11.1, the Seller, her heirs, successors,
representatives and assigns shall be indemnified and held harmless by the
Purchaser against and in respect of any and all damage, loss, liability, cost or
expense (including, unless otherwise provided herein, the reasonable fees and
expenses of counsel and any Tax liability resulting from any indemnity payment
made hereunder) resulting from, or in respect of, any of the following:
(a) Misrepresentation or Breach. Any misrepresentation or breach of
warranty of the Purchaser, or nonfulfillment of any obligation on the part of
the Company (to be performed after the Closing) or the Purchaser under this
Agreement, or contained in any Schedule or Exhibit to this Agreement or from any
misrepresentation in or omission from any certificate, Schedule, Exhibit,
related agreement or instrument delivered by or on behalf of the Purchaser
hereunder.
(b) Taxes. All Taxes of the Purchaser or of the Company attributable
to any period which begins after the Closing Date.
(c) Third Party Claims. Any Claim of a third party arising out of
the business or operations of the Company after the Closing Date.
(d) Related Expenses. All expenses and costs, including but not
limited to legal fees, reasonably paid or incurred in connection with any such
indemnified Claim.
Section 11.5 Third Party Claims.
(a) Generally. Subject to the limitations of Section 11.1, the
following procedures shall be applicable with respect to
-53-
<PAGE>
indemnification for third party Claims. Promptly after receipt by the party
seeking indemnification hereunder (hereinafter referred to as the "Indemnitee")
of notice of the commencement of any action or the assertion of any Claim,
liability or obligation by a third party (whether by legal process or
otherwise), against which Claim, liability or obligation another party to this
Agreement (hereinafter the "Indemnitor") is, or may be, required under this
Agreement to indemnify such Indemnitee, the Indemnitee shall, if a claim thereon
is to be, or may be, made against the Indemnitor, immediately notify the
Indemnitor in writing of the commencement or assertion thereof and give the
Indemnitor a copy of such Claim or process and all legal pleadings. Subject to
the limitations of Section 11.1, the Indemnitee's failure to give timely notice
as required by this Section 11.5(a) shall not serve to eliminate or limit the
Indemnitor's obligation to indemnify the Indemnitee unless such failure
prejudices the rights of the Indemnitor, and then only to the extent of such
prejudice. Moreover, the Indemnitee shall have the right to take any actions or
steps it deems reasonable to avoid the occurrence of any prejudice to the rights
of the Indemnitee. The Indemnitor shall have the right to assume the defense of
such action with counsel of reputable standing unless with respect to such
action (A) injunctive or equitable remedies have been sought therein in respect
of the Indemnitee or its business or (B) such action is for an alleged amount of
less than Five Thousand Dollars ($5,000); provided, that the Indemnitee and
counsel to the Indemnitee shall have the right to participate in the defense of
any and all Claims pursuant to the provisions of Section 11.5(b) hereof. The
Indemnitor and the Indemnitee shall reasonably cooperate in the defense of such
Claims. Subject to the limitations of Section 11.1 hereof, if the Indemnitee
shall be required by judgment or a settlement agreement to pay any amount in
respect of any obligation or liability against which the Indemnitor has agreed
to indemnify or reimburse the Indemnitee under Article XI of this Agreement, the
Indemnitor shall immediately pay such amount to the Indemnitee in order to
enable the Indemnitee to make such payment, or otherwise shall promptly
reimburse the Indemnitee in an amount equal to the amount of such payment, in
either case, plus all out-of-pocket expenses (including legal fees and expenses)
incurred by such Indemnitee at the specific request of the Indemnitor, as
provided above, or as otherwise authorized by Section 11.5(b) hereof, in
connection with such obligation or liability subject to this Article XI;
provided, however, that in the event the Seller is the Indemnitor with
-54-
<PAGE>
respect to such Claim, then such payment and reimbursement (plus out-of-pocket
expenses, as provided above) shall be made from and solely out of the Indemnity
Escrow Funds, and the Indemnitor and the Indemnitee shall jointly instruct the
Indemnity Escrow Agent, in writing, to make such payment and reimbursement from
and out of the Indemnity Escrow Account. No Indemnitor, in the defense of any
such Claim, shall, except with the consent of the Indemnitee, consent to entry
of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnitee of a release from all liability with respect to such Claim. In the
event that the Indemnitor does not accept the defense of any matter for which it
is entitled to assume such defense as provided in this Section 11.5(a), the
Indemnitee shall have the full right to defend against any such Claim and shall
be entitled to settle or agree to pay in full such Claim in its sole discretion.
With respect to any matter as to which the Indemnitor is not entitled to assume
the defense pursuant to the terms of this Section 11.5(a), the Indemnitee shall
not enter into any settlement for which an indemnification Claim will be made
hereunder without the approval of the Indemnitor, which shall not be
unreasonably withheld.
(b) Counsel. An Indemnitee shall have the right to employ its own
counsel, but the fees and expenses of such counsel shall be at the expense of
the Indemnitee unless (i) the employment of such counsel shall have been
authorized in writing by the Indemnitor in connection with the defense of such
Claim and the Indemnitor has agreed in writing to pay such fees and expenses,
(ii) the Indemnitor shall not have employed counsel in the defense of such Claim
(which counsel may be in-house counsel unless and until a lawsuit has been
commenced) or (iii) the Claim in any manner relates to or arises from any
dispute as to the ownership of the Shares or the entitlement to the proceeds
thereof. In either of which events, such fees and expenses of not more than one
additional counsel for the Indemnitee shall be borne by the Indemnitor, subject
to the limitations of Section 11.1(b).
Section 11.6 Other Claims.
(a) Subject to the limitations of Sections 7.1, 8.1 and 11.1, in the
event an Indemnitee should have a claim under this Article XI against an
Indemnitor that does not involve a third party Claim, the Indemnitee shall
promptly give notice (the
-55-
<PAGE>
"Indemnitee Notice") and the details thereof, including copies of all relevant
information and documents, to the Indemnitor within a period of thirty (30) days
following the discovery of the claim by the Indemnitee (the "Claim Notice
Period"). The failure by any Indemnitee to give the Indemnitee Notice within the
Claim Notice Period shall not impair the Indemnitee's rights hereunder except to
the extent that the Indemnitor demonstrates that it has been prejudiced thereby.
The Indemnitor will notify the Indemnitee within a period of twenty (20) days
after the receipt of the Indemnitee Notice by the Indemnitor (the "Indemnity
Response Period") whether the Indemnitor disputes its liability to the
Indemnitee under this Article XI with respect to such Claim. Subject to the
limitations of Section 11.1, if the Indemnitor notifies the Indemnitee that it
does not dispute the Claim described in such Indemnitee Notice or fails to
notify the Indemnitee within the Indemnity Response Period whether the
Indemnitor disputes the claim described in such Indemnitee Notice, the actual
damages as finally determined will be conclusively deemed to be a liability of
the Indemnitor under this Article XI and the Indemnitor shall pay the amount of
such damages to the Indemnitee on demand; provided, however, that in the event
the Seller is the Indemnitor with respect to such claim, then such payment shall
be made from and solely out of the Indemnity Escrow Funds. If the Indemnitor
notifies the Indemnitee within the Indemnitee Response Period that the
Indemnitor disputes its liability with respect to such Claim, the Indemnitor and
the Indemnitee will proceed in good faith to negotiate a resolution of such
dispute, and if not resolved through negotiations within a period of thirty (30)
days from the date of such notice or such longer period as may be agreed to by
the parties in writing, such dispute shall be resolved by arbitration in
accordance with Section 11.6(b) hereof.
(b) Any dispute required to be submitted to arbitration pursuant to
this Section 11.6(b) shall be finally and conclusively determined in accordance
with the Commercial Arbitration Rules of the American Arbitration Association
(the "Rules of Arbitration") then in effect by the decision of three (3)
arbitrators (the "Board of Arbitration") selected in accordance with the Rules
of Arbitration. The Board of Arbitration shall meet in Charlotte, North Carolina
and shall render a decision in writing (concurred in by a majority of the
members of the Board of Arbitration) with respect to and stating the amount, if
any, which the Indemnitor,
-56-
<PAGE>
subject to the limitations of Section 11.1, is required to pay to the Indemnitee
in respect of the claim made by the Indemnitee. The decision of the Board of
Arbitration shall be rendered as soon as practical following commencement of
proceedings with respect thereto. The Board of Arbitration shall cause its
written decision to be delivered to the Indemnitee and the Indemnitor and, to
the extent the Indemnity Escrow Account is still in existence, to the Escrow
Agent. Any decision made by the Board of Arbitration shall be final, binding and
conclusive on the Indemnitee and the Indemnitor and entitled to be enforced to
the fullest extent permitted by law and entered in any court of competent
jurisdiction.
The parties hereto hereby consent to the jurisdiction of the
foregoing Board of Arbitration and to the jurisdiction of any local, state or
federal court located in the State of North Carolina for the purpose of
enforcing the decision or award of the Board of Arbitration or otherwise. The
parties hereto agree that all service of process may be made on any such party
by personal delivery or by registered or certified mail addressed to the
appropriate party at the address for such party set forth in this Agreement.
Subject to the limitations of Section 11.1, all fees, costs and
expenses of the prevailing party in any arbitration, including, but not limited
to, attorneys' fees, shall be paid by the losing party and shall be awarded to
the prevailing party as part of the decision of the Board of Arbitration. For
purposes hereof, a "Prevailing Party" shall mean the party which substantially
prevails in its position in arbitration. Each and every arbitration proceeding
commenced pursuant to this Section 11.6(b) shall be consolidated with any
arbitration proceedings simultaneously or previously commenced (but not
concluded) under this Section 11.6(b).
Section 11.7 Continued Liability for Indemnity Claims.
The liability of any Indemnitor hereunder with respect to claims
hereunder shall continue for so long as any claims for indemnification may be
made hereunder pursuant to this Article XI and, with respect to any such
indemnification claims duly and timely made, thereafter until the Indemnitor's
liability therefore is finally determined and satisfied.
-57-
<PAGE>
Section 11.8 Exclusive Remedy. The parties hereby expressly agree that if
the closing of the transactions contemplated by this Agreement does occur the
indemnification to be provided under and pursuant to Article XI shall be the
sole and exclusive remedy for any and all Claims by either party against the
other for matters arising under this Agreement.
ARTICLE XII.
GENERAL PROVISIONS
Section 12.1 Amendment and Modification. Subject to applicable
Regulations, this Agreement may be amended, modified and supplemented at any
time with respect to any of the terms contained herein, by a written agreement
signed by all of the parties hereto.
Section 12.2 Waiver. The failure of any party hereto to comply with any
obligation, covenant, agreement or condition herein may be waived in writing by
the other parties hereto, but such waiver shall not operate as a waiver of, or
estoppel with respect to, any subsequent or other failure. Whenever this
Agreement requires or permits approvals or consent by or on behalf of any party
hereto, such approval or consent shall be given in writing, and except where
specifically stated to be in a party's sole discretion, shall not be
unreasonably withheld, conditioned or delayed.
Section 12.3 Certain Definitions.
"Affiliate" shall mean, with regard to any Person, any Person which,
directly or indirectly controls, is controlled by, or is under common control
with, such Person and, with respect to any Person who is an individual, the
spouse, ancestors and descendants (lineal or by marriage) thereof. "Control"
(including, with correlative meaning, the terms "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 and policies of such Person, whether through the ownership of voting
securities, by Contract or otherwise. Neither Associated Network Partners, Inc.,
Illinois Valley Cellular RSA 2, Inc., Illinois Valley Cellular RSA 2-I
Partnership, Illinois Valley Cellular RSA 2-II Partnership, nor
-58-
<PAGE>
Illinois Valley Cellular RSA 2-III Partnership shall be deemed an Affiliate for
purposes of this definition, but all such entities shall be deemed investments
for purposes of this Agreement.
"Agreement" shall have the meaning ascribed to such term in the preamble
hereof, as the same may be amended from time to time.
"Authority" shall mean any governmental authority, including, without
limitation, the FCC and the ICC and any other governmental, regulatory or
administrative body, agency, commission, board of arbitrators, or any court or
judicial authority, whether federal, state, or local.
"Business Day" shall mean any day that is not a Saturday or Sunday and
that in El Paso, Illinois, or Charlotte, North Carolina, is not a day on which
banking institutions are generally authorized or obligated by Regulation to
close.
"CERCLA" shall have the meaning ascribed to such term in Section 2.21(c)
hereof.
"CERCLIS" shall have the meaning ascribed to such term in Section 2.21(c)
hereof.
"Claim" shall mean any action, written claim, complaint, lawsuit, written
demand, suit, notice of a violation, litigation, proceeding, arbitration or
other dispute noticed in writing, or otherwise, whether civil, criminal,
administrative or otherwise, by any Authority or other Person, including, by way
of example and not limitation, any of the foregoing brought by or on behalf of a
Person asserting any right, title or interest, legal or equitable, as
beneficiaries of the estate of Robert C. Gordon, in or to any of the Shares,
including, without way of limitation, the Ravenswood Capital Stock or the
Telephone Capital Stock, or the proceeds thereof.
"Closing" shall have the meaning ascribed to such term in Section 9.1
hereof.
"Closing Date" shall have the meaning ascribed to such term in Section 9.1
hereof.
-59-
<PAGE>
"Company" shall have the meaning ascribed to such term in the preamble
hereof, but with respect to all representations, warranties, covenants and
agreements contained herein or in any Exhibit or Schedule hereto shall mean
Ravenswood Communications, Inc., The El Paso Telephone Company, El Paso Long
Distance Company and Gemcell, Inc.
"Confidentiality Agreement" shall mean that confidentiality agreement
signed by the parties hereto and dated December 6, 1996.
"Contract" shall mean any agreement, contract, commitment, instrument or
other binding arrangement or understanding, whether written or oral.
"Environmental Law" shall mean any Regulation or Order, including, but not
limited to, any term or condition included in a validly issued Permit to
construct or operate a facility subject to any Regulation or Order, which
relates to or otherwise imposes liability or standards of conduct concerning
environmental matters, mining or reclamation of mined land, discharges,
emissions, releases or threatened releases of noises, odors or any pollutants,
contaminants or hazardous or toxic wastes, substances or materials, whether as
matter or energy, into ambient air, water or land or otherwise relating to the
manufacture, processing, generation, distribution, use, treatment, storage,
disposal, cleanup, transport or handling of pollutants, contaminants or
hazardous wastes, substances or materials, including (but not limited to)
CERCLA, the Superfund Amendments and Reauthorization Act of 1986, as amended,
the Resource Conservation and Recovery Act of 1976, as amended, the Toxic
Substances Control Act of 1976, as amended, the Federal Water Pollution Control
Act Amendments of 1972, the Clean Water Act of 1977, as amended, any so-called
"superlien" law and any other similar Regulation by any Authority in effect on
or before the Closing Date.
"Environmental Permit" shall mean a Permit relating to or required by any
Environmental Law.
"ERISA" shall have the meaning ascribed to such term in Section 2.19
hereof.
"ERISA Plans" shall have the meaning ascribed to such term in Section 2.19
hereof.
-60-
<PAGE>
"Execution Date" shall have the meaning ascribed to such term in the
preamble hereof.
"FCC" shall mean the Federal Communications Commission.
"Financial Statements" shall have the meaning ascribed to such term in
Section 2.9 hereof.
"GAAP" shall mean United States generally accepted accounting principles,
consistently applied, as in existence at the Execution Date and/or at the
Closing Date.
"Hazardous Materials" shall have the meaning ascribed to such term in
Section 2.21(a) hereof.
"Improvements" shall have the meaning ascribed to such term in Section
2.14(c) hereof.
"ICC" shall mean the Commerce Commission of the State of Illinois.
"Indemnitee" shall have the meaning ascribed to such term in Section
11.5(a) hereof.
"Indemnitor" shall have the meaning ascribed to such term in Section
11.5(a) hereof.
"Indemnity Escrow Account" shall have the meaning ascribed to such term in
Section 11.2 hereof.
"Indemnity Escrow Agreement" shall have the meaning ascribed to such term
in Section 11.2 hereof.
"Indemnity Escrow Funds" shall have the meaning ascribed to such term in
Section 9.2 hereof.
"Information" shall have the meaning ascribed to such term in Section
6.7(a) hereof.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations promulgated thereunder.
"IRS" means the Internal Revenue Service.
-61-
<PAGE>
"Knowledge," "known," or "know" shall mean knowledge of a particular fact
or matter of an individual if such individual is actually aware of such fact or
other matter, or if such individual is serving or has served as an officer
and/or director of the entity to which such representation or warranty pertains
and should have been actually aware of such fact or other matter, given the
level of responsibility and supervisory authority generally associated with such
position(s).
"Lien" shall mean any security interest, lien, mortgage, pledge,
hypothecation, encumbrance, claim, easement, restriction (on transfer or
otherwise) or interest of another Person of any kind or nature, including,
without way of limitation, any and all of the foregoing which in any manner
relate to or arise from Claims by or on behalf of any Person who or which claims
any right, title or interest, legal or equitable, as beneficiary of the estate
of Robert C. Gordon, in or to any of the Shares, including, without way of
limitation, the Ravenswood Capital Stock or the Telephone Capital Stock, or the
proceeds thereof.
"Material Adverse Change" shall mean any developments or changes which
would have a Material Adverse Effect.
"Material Adverse Effect" shall mean, with respect to any Person, any
circumstances, state of facts or matters which could reasonably be expected,
either individually or in conjunction with any other circumstance, state of
facts or matter, to have a material adverse effect in respect of such Person's
business, business prospects, properties, assets, condition (financial or
otherwise) or results of operations; provided, however, that Material Adverse
Effect shall not include any federal or state regulation or deregulation, or any
changes in Regulations applicable to federal or state regulation of the
Business, occurring between the Execution Date and the Closing Date, and any
actions agreed to by the Purchaser.
"Order" shall mean any judgment, decree (consent or otherwise), order,
injunction (preliminary or permanent), stipulation, ruling, decree or consent of
or by an Authority that is adopted or otherwise takes effect on or before the
Closing Date.
"Ordinary Course of Business," "ordinary course," or "ordinary and
regular" shall mean action consistent with past practice and
-62-
<PAGE>
taken in the ordinary course of the normal day-to-day operations of such Person.
"PCB" shall mean polychlorinated biphenyls.
"Permits" shall have the meaning ascribed to such term in Section 2.26
hereof.
"Permitted Liens" shall mean (i) statutory Liens for Taxes not yet due and
payable, or being contested in good faith to the extent set forth in Schedule
2.16 hereto, (ii) such imperfections or irregularities of title, easements,
charges or encumbrances as do not interfere with the present use of the
properties or assets subject thereto or affected thereby, do not otherwise
impair present business operations at such properties, and do not have a
Material Adverse Effect on the value of such properties and assets, (iii) Liens
reflected in the Financial Statements, (iv) Liens imposed by law and incurred in
the ordinary course of business for obligations not yet due to carriers,
warehousemen, laborers and materialmen, (v) exceptions of record and standard
exceptions contained in title insurance policies or commitments for issuances
thereof as delivered to Purchaser by Seller, (vi) ownership interest of
Ravenswood in Telephone and Long Distance, and of Telephone in Gemcell, (vii)
limitations imposed pursuant to the Regulations of any applicable Authority, and
(viii) prior to the Closing Date, statutory Liens for Taxes due from the Estate
of Robert C. Gordon (all of which statutory Tax Liens will be removed and
cancelled of record prior to the Closing Date).
"Person" shall mean any corporation, partnership, joint venture,
organization, entity, Authority or natural person, together with any and all
heirs, successors, representatives and assigns thereof, and shall specifically
include, without way of limitation, the city of El Paso, Illinois.
"Pension Benefit Plan" shall have the meaning ascribed to such term in
Section 2.19 hereof.
"Proprietary Rights" shall mean all (i) patents, patent applications,
patent disclosures and all related continuation, continuation-in-part,
divisional, reissue, reexamination, utility, model, certificate of invention and
design patents, registrations and applications for registrations, (ii)
trademarks, service marks,
-63-
<PAGE>
logos, trade names and corporate names and registrations and applications for
registration thereof and (iii) copyrights and registrations and applications for
registration thereof.
"Purchase Price" shall have the meaning ascribed to such term in Section
1.2 hereof.
"Purchase Price Escrow Agreement" shall have the meaning ascribed to such
term in Section 4.17 hereof.
"Purchaser" shall have the meaning ascribed to such term in the preamble
hereof, but with respect to all representations, warranties, covenants and
agreements contained herein or in any Exhibit or Schedule hereto shall mean the
Purchaser and any Assignee described in Section 12.5.
"Regulation" shall mean any law, statute, regulation, ordinance,
requirement, rule, executive order or binding action of or by an Authority that
is adopted or otherwise takes effect on or before the Closing Date.
"Release" shall have the meaning ascribed to such term in Section 9601(22)
of Title 42 of the United States Code.
"Seller" shall have the meaning ascribed to such term in the preamble
hereof.
"Shares" shall have the meaning ascribed to such term in the recitals.
"Tax Returns" shall have the meaning ascribed to such term in Section
2.16(a) hereof.
"Tax" or "Taxes" means any income, gross receipt, net proceeds,
alternative or add-on minimum, ad valorem, value added, estimated, turnover,
sales, use, property, personal property (tangible and intangible), invested
capital, stamp, leasing, lease, user, excise, duty, franchise, transfer,
license, withholding, payroll, employment, fuel, excess profits, occupational
and interest equalization, windfall profits, severance and other taxes, charges,
fees, levies or other assessments of any kind whatsoever (including interest,
penalties, fines and additions thereto) imposed by any taxing Authority,
federal, state or local.
-64-
<PAGE>
"Unaudited Financial Statements" shall have the meaning ascribed to such
term in Section 2.9 hereof.
"Welfare Benefit Plan" shall have the meaning ascribed to such term in
Section 2.19 hereof.
Section 12.4 Notices. All notices, claims, requests, demands or other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given when delivered by hand, by first class certified
mail, return receipt requested, with postage paid, or by receipted overnight
courier service to the intended recipient at the address specified below or at
such other address as shall be designated by such party in any notice to the
other parties.
Notices to Purchaser: With a Copy to:
--------------------- ---------------
MJD Services Corp. Underwood Kinsey Warren &
521 East Morehead Street Tucker, P.A.
Suite 250 201 S. College Street,
Charlotte, NC 28202 Suite 2020
ATTN: Eugene B. Johnson, Charlotte, NC 28244
Executive Vice President ATTN: Shirley J. Linn, Esq.
(704) 344-8150 (Phone) (704) 333-1200 (Phone)
(704) 344-8121 (Fax) (704) 377-9630 (Fax)
Notices to the Seller,
or the Company With a Copy to:
---------------------- ---------------
Carla J. Brownlee, President David I. Reader, Esq.
Ravenswood Communications, Inc. Kraskin, Lesse & Cosson, L.L.P.
2652 N. 3853 Road 2120 L. Street, Suite 520
Sheridan, IL 60551 Washington, DC 20037
(815) 496-2981 (Phone) (202) 296-8890 (Phone)
(815) 496-2412 (Fax) (202) 296-8893 (Fax)
And
Troy A. Fodor, Esq.
Law Offices of Douglas G. Brown
913 South Sixth Street
-65-
<PAGE>
Springfield, Illinois 62730
(217) 753-3925 (Phone)
(217) 753-3937 (Fax)
Section 12.5 Assignment. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties
hereto; provided, that the Purchaser may, without the prior written consent of
the Seller or any other party hereto, assign its rights and obligations
hereunder and under any other Contracts or documents executed or delivered in
connection herewith to (i) an Affiliate of the Purchaser, including but not
limited to MJD Holdings Corp. or MJD Ventures, Inc. ("Assignee"), or (ii) its
lenders as collateral in connection with the financing of the transactions
contemplated hereby, provided, however, that Purchaser shall remain liable to
perform the obligations of Purchaser under this Agreement, and provided,
further, however, that Purchaser shall notify Seller of the Assignee within five
(5) days of the assignment.
Section 12.6 Governing Law. This Agreement shall be governed by the laws
of the State of North Carolina, without regard to its principles of conflict of
laws.
Section 12.7 Counterparts; Construction. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. No rule of construction
requiring interpretation against the drafting party hereof will apply in the
interpretation of this Agreement.
Section 12.8 Headings. The Article and Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
Section 12.9 Entire Agreement. This Agreement and the Confidentiality
Agreement embody the entire agreement and understanding of the parties hereto
with regard to the subject matter hereof and supersedes all prior agreements,
representations,
-66-
<PAGE>
warranties, promises, covenants, arrangements and understandings, oral or
written, express or implied, among the parties with respect to such subject
matter. There are no agreements, representations, warranties, promises,
covenants, arrangements or understandings among the parties with respect to such
subject matter other than those expressly set forth or referred to herein.
Section 12.10 No Benefit. This Agreement shall not be construed so as to
confer any right or benefit upon any Person other than the signatories to this
Agreement and each of their respective successors and permitted assigns.
Section 12.11 Delays or Omissions. No delay or omission to exercise any
right, power or remedy accruing to any party hereto upon any breach or default
of another party hereto under this Agreement shall impair any such right, power
or remedy of such party nor shall it be construed to be a waiver of any such
breach or default or an acquiescence therein or of or in any similar breach or
default thereafter occurring.
Section 12.12 Severability. Unless otherwise provided herein, if any
provision of this Agreement shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
Section 12.13 Expenses. Except as otherwise provided herein, each of the
parties hereto shall bear its own expenses, including, without limitation, legal
fees, taxes and expenses, with respect to this Agreement and the transactions
contemplated hereby (which, with respect to such expenses incurred by or on
behalf of the Seller or the Company, shall be paid by the Seller and not by the
Company); provided, however, that the first Fifty Thousand Dollars ($50,000) of
such of Seller's expenses may be paid by the Company and on behalf of Seller
(and provided further, however, that notwithstanding the foregoing, the Seller
shall be solely responsible for the payment of any and all fees, costs and
expenses, including without limitation, attorneys fees, arising in connection
with claims with respect to title to and ownership of the Shares and with
respect to the Estate of Robert C. Gordon). Further the parties hereto agree
that the Company shall pay the fees and expenses of its ICC and its FCC counsel
with respect to the transactions contemplated by this Agreement, that Purchaser
-67-
<PAGE>
shall pay the fees and expenses, including filing fees, of any filings made with
any Authority including filings with the ICC and FCC, and that Purchaser shall
bear the cost of any environmental assessment and/or environmental consultant.
Section 12.14 Time of the Essence. Time is strictly of the essence with
respect to the provisions of this Agreement.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
-68-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Execution Date.
MJD SERVICES CORP.
_________________________________
By:______________________________
Title:___________________________
______________________________(SEAL)
CARLA J. BROWNLEE
RAVENSWOOD COMMUNICATIONS, INC.
_________________________________
By:______________________________
Title:___________________________
-69-
<PAGE>
Exhibit A
Other Stockholders
None.
<PAGE>
Exhibit 4.17
Purchase Price Escrow Agreement
<PAGE>
Exhibit 7.7
Opinion of Seller's Counsel
<PAGE>
Exhibit 8.5
Opinion of Purchaser's Counsel
<PAGE>
UNDERWOOD KINSEY WARREN & TUCKER, P.A.
ATTORNEYS AT LAW
CHARLOTTE PLAZA BUILDING, SUITE 2020
201 SOUTH COLLEGE STREET
CHARLOTTE, NORTH CAROLINA 28244-2020
RUSSELL M. BLACK
KIMBERLYE FAYSSOUX CORNELSON
RICHARD L. FARLEY
C. RALPH KINSEY, JR. TELEPHONE
SHIRLEY J. LINN 704-333-1200
JOHN H. NORTHEY III
FRANCIS M. PINCKNEY III
CARLTON A. SHANNON, JR. FACSIMILE
WILLIAM L. SITTON, JR. 704-377-9630
SUSAN L. SOWELL
ROBERT B. TUCKER, JR.
WILLIAM E. UNDERWOOD, JR.
JOSEPH WARREN III
[Closing Date]
Ms. Carla J. Brownlee
2652 N. 3853 Road
Sheridan, IL 60551
Dear Ms. Brownlee:
We have acted as counsel to MJD Services Corp., a Delaware corporation
("MJD" or "Purchaser"), in connection with the purchase by Purchaser of all of
the capital stock of Ravenswood Communications, Inc. (the "Company") from you
("Seller"), pursuant to a Stock Purchase Agreement entered into as of October
16, 1998 (the "Purchase Agreement") by, between and among Purchaser, the
Company, and Seller.
This opinion is being delivered to you pursuant to Section 8.5 of the
Purchase Agreement. Capitalized terms used herein which are not otherwise
defined herein shall have the meanings set forth in the Purchase Agreement.
In connection with this transaction, we have reviewed the Articles of
Incorporation and Bylaws (the "Organizational Documents") of the Purchaser, the
Purchase Agreement and such other instruments and documents as are executed and
delivered pursuant to the Purchase Agreement, and have examined such other
records and information and have conducted such other
<PAGE>
Ms. Carla J. Brownlee
[Closing Date]
Page 2
investigations as we have deemed necessary to render the opinion set forth
below. As to facts material to our opinion, we have relied upon the factual
representations of Purchaser in the Purchase Agreement, certificates from
certain state authorities and on those certificates delivered at Closing.
We have assumed the conformity of all copies to the originals of all
documents reviewed by us, the genuineness of all signatures (other than those of
the shareholders, directors and officers of Purchaser) and the authenticity of
all documents submitted to us (whether originals or copies).
For the purposes of our opinion, we have assumed that the Purchase
Agreement and all other instruments and documents executed and delivered
pursuant thereto have been duly authorized, executed and delivered by all of the
parties thereto other than Purchaser.
Whenever a statement herein is qualified by the phrases "known to us" or
"to our knowledge", or similar phrases, it is intended to indicate that during
the course of our representation of Purchaser and the transactions contemplated
by the Purchase Agreement, and having made inquiry of certain officers of
Purchaser as to such matters, no information that would give us actual knowledge
of the inaccuracy of such statement has come to our attention. However, we have
not undertaken any independent investigation or review to determine the accuracy
of any such statement. No inference as to our knowledge of any matters bearing
on the accuracy of any such statement should be drawn from our representation of
Purchaser.
Based upon the foregoing, and subject to the assumptions and
qualifications herein set forth, it is our opinion that:
1. MJD is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware with full corporate power and
authority to carry on the business in which it is engaged, to own, lease and
operate its properties,
<PAGE>
Ms. Carla J. Brownlee
[Closing Date]
Page 3
and to enter into and to perform its obligations under the Purchase Agreement.
2. The execution and delivery of the Purchase Agreement was duly
authorized and approved by the Board of Directors of MJD. The Purchase Agreement
is a valid and binding obligation of MJD enforceable in accordance with its
terms, except that (i) such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or similar laws now or hereafter in
effect relating to creditors' rights in the event of future bankruptcy,
insolvency or reorganization of Purchaser, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought. All persons who have executed this Purchase
Agreement on behalf of MJD have been duly authorized to do so by all necessary
corporate action.
3. To our knowledge, MJD has given all notices to and has obtained from
all state and federal regulatory authorities any approvals, consents, permits
and authorizations required in order to consummate the transactions contemplated
in the Purchase Agreement.
The opinions expressed herein are based upon and limited to matters
governed by the laws of the State of North Carolina and the State of Delaware,
and we express no opinion as to any matter governed by the laws of any other
jurisdiction. We are not authorized to practice law in the State of Delaware and
the opinions set forth herein are rendered solely upon our review of applicable
provisions of Delaware corporation law as currently published in standard
compilations and such consultations with Delaware local counsel as we have
deemed necessary or appropriate.
This opinion is given as of the date hereof and we assume no obligation to
update or supplement this opinion to reflect any facts or circumstances which
may hereafter come to our attention or any changes in laws which may hereafter
occur. This opinion
<PAGE>
Ms. Carla J. Brownlee
[Closing Date]
Page 4
is limited to matters herein, and no opinion may be inferred or implied beyond
the matters expressly stated herein.
This opinion is being furnished to you in connection with the transactions
contemplated by the Purchase Agreement. This opinion is solely for your benefit
and is not to be used, circulated, quoted or otherwise referred to for any other
purpose nor relied upon by any other person or entity without our prior written
consent.
Finally, the opinions expressed herein represent our reasonable judgment
as to the matters of law addressed herein, based upon the facts presented or
assumed, and are not, and should not be construed or considered as, a guaranty.
Very truly yours,
UNDERWOOD KINSEY WARREN & TUCKER, P.A.
<PAGE>
Exhibit 4.17
PURCHASE PRICE ESCROW AGREEMENT
<PAGE>
Exhibit 11.2
INDEMNITY ESCROW AGREEMENT
<PAGE>
Exhibit 11.2
INDEMNITY ESCROW AGREEMENT
THIS INDEMNITY ESCROW AGREEMENT (the "Indemnity Escrow Agreement") is made
as of ____________ ___, _____, between CARLA J. BROWNLEE, a resident of the
State of Illinois ("Brownlee"), MJD SERVICES CORP., a Delaware corporation
("Purchaser") and FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION, a
__________________ (the "Indemnity Escrow Agent").
STATEMENT OF PURPOSE
On or about October 16, 1998, Ravenswood Communications, Inc., Brownlee
and Purchaser, entered into a Stock Purchase Agreement (the "Purchase
Agreement"), and pursuant to the provisions of Section 9.2 of the Purchase
Agreement, Brownlee and Purchaser agreed that One Million Dollars ($1,000,000)
(the "Indemnity Escrow Funds") of the total purchase price otherwise payable to
Brownlee would be deposited with Indemnity Escrow Agent to secure Brownlee's
agreement to indemnify Purchaser as set forth in Sections 11.1, 11.2 and 11.3 of
the Purchase Agreement, all in accordance with the terms of this Indemnity
Escrow Agreement.
The Indemnity Escrow Agent has agreed to serve as escrow agent under this
Indemnity Escrow Agreement and to accept delivery of the Indemnity Escrow Funds
in accordance with the terms and conditions set out in this Indemnity Escrow
Agreement.
AGREEMENT
In consideration of the premises, and the agreements set out below, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties enter into the following Indemnity Escrow
Agreement:
1. Deposit with Indemnity Escrow Agent. At Closing of the sale and
purchase of the Shares from Brownlee as provided in the Purchase Agreement,
Purchaser shall deliver to the Indemnity
<PAGE>
Escrow Agent the sum of One Million Dollars ($1,000,000) to be held,
administered and distributed by the Indemnity Escrow Agent pursuant to the terms
of this Indemnity Escrow Agreement.
2. Indemnity Escrow Funds. Upon receipt of the Indemnity Escrow Funds, the
Indemnity Escrow Agent shall deposit the Indemnity Escrow Funds into an escrow
account (the "Indemnity Escrow Account") and shall hold, administer, invest and
distribute the Indemnity Escrow Funds in accordance with the terms of this
Indemnity Escrow Agreement. All references in this Indemnity Escrow Agreement to
Indemnity Escrow Funds shall include any investment of such funds and all
investment earnings thereon.
3. Purposes of Indemnity Escrow. The Indemnity Escrow Funds shall be used
solely for the purposes set forth in Sections 11.1, 11.2 and 11.3 of the
Purchase Agreement. The Escrow Funds shall not constitute an asset of Brownlee
until the distribution thereof to Brownlee in accordance with the terms of the
Purchase Agreement and of this Escrow Agreement.
4. Term. The term of this Indemnity Escrow Agreement ("Indemnity Escrow
Period") shall expire on the expiration of the Indemnification Period, as
defined in Section 11.1 of the Purchase Agreement, except that it shall be
automatically extended as necessary to provide for the disposition of any Claims
filed by Purchaser with the Indemnity Escrow Agent during such period, in
accordance with the procedures set forth in Section 5 hereof.
5. Disbursement of Indemnity Escrow Funds.
(a) In the event Purchaser determines that it is entitled to all or
any portion of the Indemnity Escrow Funds pursuant to Sections 11.1, 11.2
or 11.3 of the Purchase Agreement, Purchaser shall deliver written notice
to the Indemnity Escrow Agent and Brownlee, stating the factual basis for,
and the amount of, such entitlement ("Claim"). The written notice from
Purchaser to Brownlee shall include copies of all relevant information and
documents and shall be given within a period of thirty (30) days following
the discovery of the Claim by the Purchaser, provided however the failure
by Purchaser to give written notice within such
-2-
<PAGE>
time period shall not impair the Purchaser's rights hereunder except to
the extent that Brownlee demonstrates that she is prejudiced thereby.
Within twenty (20) days following receipt by Brownlee of such written
notice of the Claim, Brownlee may deny all or any portion of the Claim by
delivering written notice to the Indemnity Escrow Agent and Purchaser,
indicating the amount or portion of the Claim which is denied and the
factual basis for such denial ("Denial").
(b) In the event that Brownlee fails to timely deliver a Denial to
the Indemnity Escrow Agent, the Indemnity Escrow Agent shall immediately
release and distribute to Purchaser an amount equal to the Claim.
(c) In the event the Indemnity Escrow Agent receives a timely Denial
from Brownlee as to all or any portion of a Claim, the Indemnity Escrow
Agent shall (i) immediately distribute to Purchaser an amount, if any,
equal to the portion of the Claim that Brownlee has not denied, and (ii)
within sixty (60) days of receipt of such Denial, file an action in
interpleader with any Illinois court of competent jurisdiction to resolve
such disagreement and deposit with the registry of the court an amount
equal to the denied portion of the Claim, unless a joint instruction is
received by the Indemnity Escrow Agent from Brownlee and the Purchaser as
to the disposition of the denied portion of the Claim prior to the
expiration of such sixty (60) day period. If the Denial does not state the
amount or portion of the Claim denied, the entire Claim shall be deemed
denied. Purchaser and Brownlee agree to thereafter apply to such court for
an order submitting the matter to arbitration pursuant to Section 11.6(b)
of the Purchase Agreement.
(d) The Indemnity Escrow Agent shall distribute any portion of the
Indemnity Escrow Funds remaining in the Indemnity Escrow Agent's
possession, which are not the subject of a pending Claim, immediately upon
the expiration of the Indemnity Escrow Period to the escrow account
established under Section 4.17 of the Purchase Agreement, as Brownlee has
so instructed, for distribution in accordance with the provisions of the
agreement governing such account (the "Purchase Price Escrow Agreement"),
free and discharged
-3-
<PAGE>
from any further obligation with respect to the same hereunder.
6. Release From Indemnity Escrow. As and when all of the Indemnity Escrow
Funds are either distributed as provided hereunder or deposited with the
registry of the court in interpleader, the Indemnity Escrow Agent shall be
released and discharged from any further obligation hereunder without further
action of any party. Compliance by the Indemnity Escrow Agent with any final,
non-appealable order or a judgment of a court concerning the subject matter of
any such dispute or agreement shall thereupon release and relieve the Indemnity
Escrow Agent from all obligations and responsibility with respect to the
Indemnity Escrow Funds to which such order or judgment relates.
7. Investment of Indemnity Escrow Funds. The Indemnity Escrow Agent shall
hold the Indemnity Escrow Funds delivered to it under the terms of this
Indemnity Escrow Agreement and shall invest the Indemnity Escrow Funds held by
it (i) in interest bearing demand deposit accounts with commercial banks whose
accounts are insured by the Federal Deposit Insurance Corporation or another
appropriate and comparable authority (for example, the Federal Home Loan Bank
Board), or (ii) in any other investment upon which Brownlee and the Purchaser
shall agree.
8. Agreement of Indemnity Escrow Agent. The Indemnity Escrow Agent hereby
agrees to receive the Indemnity Escrow Funds and hold the same intact, and to
deposit the Indemnity Escrow Funds in accordance with the terms of this
Indemnity Escrow Agreement, and shall not permit any withdrawal except under the
terms of this Indemnity Escrow Agreement. The Indemnity Escrow Agent shall be
responsible only for the safekeeping and the deposit of the Indemnity Escrow
Funds and the disbursements or delivery in accordance with the terms of this
Indemnity Escrow Agreement. The Indemnity Escrow Agent shall not be responsible
for the appropriateness, sufficiency or accuracy of information contained in any
written notice.
9. Performance of Indemnity Escrow Agent.
(a) There are no implied duties under this Indemnity Escrow
Agreement. The duties, obligations and acts of the Indemnity Escrow Agent
shall be construed as purely
-4-
<PAGE>
ministerial in nature. Indemnity Escrow Agent shall be responsible for
only those duties expressly set forth in this Indemnity Escrow Agreement.
In performing any of its duties under this Indemnity Escrow Agreement, or
upon the claimed failure to perform its duties under this Indemnity Escrow
Agreement, Indemnity Escrow Agent shall not be liable to anyone for any
damages, losses, or expenses which they may incur as a result of the
Indemnity Escrow Agent so acting, or failing to act; provided, however,
Indemnity Escrow Agent shall be liable for damages arising out of its
willful default or gross negligence under this Indemnity Escrow Agreement.
Accordingly, Indemnity Escrow Agent shall not incur any such liability
with respect to (i) any action taken or omitted to be taken in good faith
upon advice of its counsel given with respect to any questions relating to
the duties and responsibilities of the Indemnity Escrow Agent hereunder or
(ii) any action taken or omitted to be taken in reliance upon any
document, including any written notice or instructions provided for in
this Indemnity Escrow Agreement, not only as to its due execution and to
the validity and effectiveness of its provisions but also as to the truth
and accuracy of any information contained in any notice or document, which
the Indemnity Escrow Agent shall in good faith believe to be genuine, to
have been signed or presented by a proper person or persons and to conform
with the provisions of this Indemnity Escrow Agreement.
(b) Brownlee and the Purchaser agree to indemnify and hold harmless
Indemnity Escrow Agent against any and all losses, claims, damages,
liabilities and expenses, including without limitation, reasonable costs
of investigation and counsel fees and disbursements which may be imposed
by Indemnity Escrow Agent or incurred by it in connection with its
acceptance of this appointment as Indemnity Escrow Agent or the
performance of its duties, including, without limitation, reasonable
attorneys fees and costs attributable to any interpleader action commenced
by the Indemnity Escrow Agent or any other litigation arising from this
Indemnity Escrow Agreement or involving the subject matter of this
Indemnity Escrow Agreement; provided, however, that if Indemnity Escrow
Agent shall be found guilty of willful default or gross negligence under
this Indemnity Escrow Agreement, then, in that event, Indemnity Escrow
Agent shall
-5-
<PAGE>
itself bear all such losses, claims, damages, liabilities and expenses.
10. Fees of Indemnity Escrow Agent. For its ordinary services hereunder
(which shall include receipt, investment and disbursement of the Indemnity
Escrow Funds in the manner described in this Indemnity Escrow Agreement), the
Indemnity Escrow Agent shall receive compensation of one thousand eight hundred
seventy-five dollars ($1,875.00) to be paid equally by Purchaser and Brownlee
upon execution of this Indemnity Escrow Agreement and shall receive such
additional reasonable compensation during the term hereof as is commensurate
with its services provided hereunder as Indemnity Escrow Agent; any such
additional compensation to be similarly paid equally by Purchaser and Brownlee.
11. Resignation of Indemnity Escrow Agent. The Indemnity Escrow Agent or
successor at any time may resign by giving thirty (30) business days written
notice to the parties hereto, and such resignation shall take effect at the end
of such thirty (30) business days if all of the Indemnity Escrow Funds have been
tendered into the registry or custody of an Illinois court in the manner
provided in Section 5 hereof, or upon the earlier appointment, with the approval
of Brownlee and the Purchaser, of a successor. From and after the effective date
of such resignation or appointment of a successor, the Indemnity Escrow Agent
shall not be obligated to perform any of the duties of the Indemnity Escrow
Agent hereunder and will not be liable for any nonperformance thereof nor for
any act or failure to act whatsoever on the part of any successor Indemnity
Escrow Agent. If Brownlee and the Purchaser are unable to agree upon a successor
Indemnity Escrow Agent within thirty (30) days following notice of the Indemnity
Escrow Agent's resignation, the Indemnity Escrow Agent shall commence an action
in interpleader and deposit the Indemnity Escrow Funds with the registry of the
court in the manner provided in Section 5 hereof.
12. Successor to Indemnity Escrow Agent. Any corporation resulting from
any merger or consolidation to which the Indemnity Escrow Agent or any successor
to it shall be a party, or any corporation in any manner succeeding to all or
substantially all of the business of the Indemnity Escrow Agent or any
successor, shall be the successor escrow agent hereunder without the
-6-
<PAGE>
execution or filing of any paper or any further acts on the part of any of the
parties hereto. In the event of a resignation of the Indemnity Escrow Agent
pursuant to paragraph 11 of this Indemnity Escrow Agreement, any person(s) or
corporation hereafter agreed upon by the parties shall be the successor escrow
agent hereunder.
13. Instructions and Notices. In executing and performing its duties
hereunder, except as otherwise provided, the Indemnity Escrow Agent shall be
entitled to rely upon instructions of Brownlee and the Purchaser. Any notice,
payment, demand, instruction or communication required or permitted to be given
by this Indemnity Escrow Agreement shall be in writing and shall be given by
hand delivery, overnight messenger or certified mail, return receipt requested,
addressed to the appropriate party at the address stated below:
If to Brownlee:
Ms. Carla J. Brownlee
2652 N. 3853 Road
Sheridan, IL 60551
If to Purchaser:
MJD Services Corp.
521 East Morehead Street, Suite 520
Charlotte, NC 28202
Attention: Eugene B. Johnson,
Executive Vice President
If to Indemnity Escrow Agent:
First Federal Savings and Loan Association
301 Fairway Drive
Bloomington, Illinois 61701
Attention: Donald Fernandes, President
Any notice sent by overnight messenger or hand delivery shall be deemed
made on the date received, and any notice sent by certified mail shall be deemed
made three (3) days after mailing.
-7-
<PAGE>
14. Governing Law. This Indemnity Escrow Agreement shall be governed by
and construed in accordance with the laws of the State of North Carolina.
15. Headings. The headings in this Indemnity Escrow Agreement are inserted
for convenience and identification only and are in no way intended to interpret,
define or limit the scope, extent or intent of this Indemnity Escrow Agreement
or any provision of this Indemnity Escrow Agreement.
16. Severability. Each provision of this Indemnity Escrow Agreement is
intended to be severable. If any term or provision of this Indemnity Escrow
Agreement is illegal or invalid for any reason whatsoever, such illegality or
invalidity shall not affect the validity or enforcement of the remainder of this
Indemnity Escrow Agreement.
17. Counterparts. This Indemnity Escrow Agreement and any amendment hereto
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.
18. Amendment. No modification or amendment to this Indemnity Escrow
Agreement shall be valid unless produced in writing and signed by all of the
parties hereto.
19. Successors. This Indemnity Escrow Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
successors, legal representatives, assigns and transferees, as the case may be.
Indemnity Escrow Agent shall not be bound by or incur any liability with respect
to this Indemnity Escrow Agreement or any other agreement or understanding
between Brownlee and the Purchaser, except as in this Indemnity Escrow Agreement
expressly provided.
IN WITNESS WHEREOF, the parties hereto have caused this Indemnity Escrow
Agreement to be executed as of the date first above written.
____________________________(SEAL)
CARLA J. BROWNLEE
-8-
<PAGE>
MJD SERVICES CORP.
__________________________________
By: ______________________________
Its: _____________________________
Indemnity Escrow Agent
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION
By: _______________________________
Its: ______________________________
-9-
<PAGE>
Schedule 2.3
No Violations
Approval of the ICC to the change of control and reorganization
contemplated by this transaction.
<PAGE>
Schedule 2.4
Subsidiaries and Investments
[Please confirm and supplement all of the following:]
1. Illinois Valley Cellular RSA 2, Inc. Illinois Valley Cellular RSA 2, Inc. is
a switching company for the three RSA 2 Partnerships referred to below. It
provides switching services and microwave links for the three cellular
partnerships. The El Paso Telephone Company is the record owner of 12.5% (700
shares of common stock, evidenced by share certificates _________) of the
currently issued and outstanding stock of Illinois Valley Cellular RSA 2, Inc.,
an Illinois corporation ("IVC RSA 2, Inc."). The El Paso Telephone Company paid
$_____________ for its shares. There is no Shareholders' Agreement with respect
to the stock of IVC RSA 2, Inc.
The El Paso Telephone Company is the guarantor of a loan in the amount of
$1,035,000.00 made by the Rural Telephone Finance Cooperative ("RTFC"), to IVC
RSA 2, Inc., pursuant to the terms of a Guaranty as dated ________________
(August 3, 1992?), by The El Paso Telephone Company (the "Guaranty"). The El
Paso Telephone Company's maximum liability pursuant to the Guaranty is limited
in amount to $140,000.00. The maturity date of such note is five (5) years from
its date of execution. [Has it accordingly expired?] Although the note is
unexecuted, the executed Loan Agreement is dated October 30, 1992.
Additionally, Illinois Valley Cellular RSA 2, Inc. borrowed $317,393.00
from the RTFC pursuant to the terms of that certain Secured Promissory Note as
dated October 1, 1994. Said loan [was/was not] guaranteed by The El Paso
Telephone Company.
There exists an unexecuted, undated copy of an agreement between IVC RSA
2, Inc. and nine local independent telephone companies (one of which includes
The El Paso Telephone Company (the nine independents are referred to as
"Telco's") regarding what appears to be an indemnification by IVC RSA 2, Inc.
should any of the Telco's have to pay on a $125,000 guaranty of certain RTFC
debt. It is believed that the $125,000 guaranty referenced in such agreement is
an earlier version of the $140,000 guaranty.
<PAGE>
Pursuant to the terms of an Indemnity Agreement with respect thereto, if IVC RSA
2, Inc. can't reimburse a particular Telco, the others will do so pro rata.
The El Paso Telephone Company was paid a $_____________ dividend from
Illinois Valley Cellular RSA 2, Inc. in 1996, and a $____________ dividend in
1997.
Gemcell, Inc. is a general partner holding a 62/3% interest in each of the
following partnerships (Gemcell, Inc.'s original investment in these three
partnerships was $_________.):
A. Illinois Valley Cellular RSA 2-I Partnership ("IVC RSA 2-I"), pursuant to
that certain Partnership Agreement as dated November 8, 1989 (the "IVC RSA
2-I Partnership Agreement").
Gemcell, Inc.'s interest in IVC RSA 2-I is subject to dilution in
the event of an additional capital call, as provided in Paragraph 5.2 of
the IVC RSA 2-I Partnership Agreement. The Operating Partner can make a
capital call pursuant to certain guidelines set forth in the Partnership
Agreement. Marsailles Telephone Company was elected as the operating
partner for IVC RSA 2-I in August 1991. It is believed that subsequent
thereto Marsailles Telephone Company transferred its partnership interest
to Marsailles Cellular, Inc., which has been recognized as operating
partner since such time. Marsailles Cellular, Inc. is also the operating
partner of IVC RSA 2-II and IVC RSA 2-III. Additionally, Paragraphs 7.5
and 7.6 of said Partnership Agreement contain restrictions on Gemcell,
Inc.'s rights to compete with IVC RSA 2-I in the business of sales or
resales of cellular service and equipment.
Regarding the transferability of Gemcell, Inc.'s partnership
interest, Article X of the IVC RSA 2-I Partnership Agreement contains
transfer restrictions. Specifically, Paragraph 10.1 provides a right of
first
-2-
<PAGE>
refusal in favor of all other partners prior to any transfer of Gemcell,
Inc.'s partnership interest. Per said paragraph, an assignment is deemed
to have occurred if in any single transaction or any series of
transactions, controlling interest in Gemcell, Inc. is transferred.
Notwithstanding the foregoing, Paragraph 10.1 goes on to provide that an
"assignment shall not be deemed to have occurred due to the transfer of
any or all of the outstanding capital stock of any corporate Partner or
its direct or indirect parent except in the instance where the cellular
interest hereunder is the only substantial asset in such company." This
provision appears to negate the existence of any right of first refusal
requirements under the circumstances. Unauthorized transfers can result,
among other things, in a declaration of default and mandatory withdrawal,
pursuant to the provisions of Article XI of said Partnership Agreement.
Regarding potential liability, Gemcell, Inc. has unlimited liability
as a general partner pursuant to the provisions of Illinois law.
Additionally, the IVC RSA 2-I Partnership Agreement requires, at Paragraph
12.3, that partners make additional capital contributions in the event
deficit capital accounts exist at liquidation of either the partnership or
of a partner's interest. Additionally, the IVC RSA 2-I partners are
required under Paragraph 13.2 of said Partnership Agreement to indemnify
the Operating Partner, the Network Partner, and any officers, directors,
employees or agents of the foregoing against certain losses and damages.
IVC RSA 2-I is a party to a switching contract with Illinois Valley
Cellular RSA 2, Inc.
B. Illinois Valley Cellular RSA 2-II Partnership ("IVC RSA 2-II"), pursuant
to that certain Partnership Agreement as dated November ____, 1989 (the
"IVC RSA 2-II Partnership Agreement").
The IVC RSA 2-II Partnership Agreement contains provisions regarding
capital calls, dilution, restoration of deficit balances, restricted
competition, transferability of partnership interests, liability and
indemnification
-3-
<PAGE>
identical to those discussed above with respect to the IVC RSA 2-I
Partnership Agreement.
IVC RSA 2-II is a party to a switching contract with Illinois Valley
Cellular RSA 2, Inc.
C. Illinois Valley Cellular RSA 2-III Partnership ("IVC RSA 2-III"), pursuant
to that certain Partnership Agreement as dated November 6, 1989 (the "IVC
RSA 2-III Partnership Agreement").
The IVC RSA 2-III Partnership Agreement contains provisions
regarding capital calls, dilution, restoration of deficit balances,
restricted competition, transferability of partnership interests,
liability and indemnification identical to those discussed above with
respect to the IVC RSA 2-I Partnership Agreement.
IVC RSA 2-III is a party to a switching contract with Illinois
Valley Cellular RSA 2, Inc.
Each of the foregoing three (3) partnerships is a party to three (3)
separate loans from the Rural Telephone Finance Cooperative ("RTFC").
Specifically:
(i) IVC RSA 2-I
(1) Loan 1: $4,033,333.00, as evidenced by that certain
Secured Promissory Note as dated November 25, 1992.
(2) Loan 2: $873,111.00, as evidenced by that certain Secured
Promissory Note as dated February 4, 1993.
(3) Loan 3: $836,020.00, as evidenced by that certain Secured
Promissory Note as dated October 1, 1994.
(ii) IVC RSA 2-II
(1) Loan 1: $501,111.00, as evidenced by that certain Secured
Promissory Note as dated March 12, 1992.
-4-
<PAGE>
(2) Loan 2: $418,788.00, as evidenced by that certain Secured
Promissory Note as dated ______________(December 9, 1992?).
(3) Loan 3: $874,458.00, as evidenced by that certain Secured
Promissory Note as dated October 1, 1994.
(iii) IVC RSA 2-III
(1) Loan 1: $1,361,111.00, as evidenced by that certain
Secured Promissory Note as dated March 12, 1992.
(2) Loan 2: $583,444.00, as evidenced by that certain Secured
Promissory Note as dated December 7, 1992.
(3) Loan 3: $1,281,802.00, as evidenced by that certain
Secured Promissory Note as dated October 1, 1994.
With respect to the loan described as "Loan 2" to IVC RSA 2-I,
Gemcell, Inc. pledged its partnership interests in IVC RSA 2-II and IVC
RSA 2-III to the RTFC, pursuant to the provisions of that certain
Partnership Interest Pledge and Security Agreement as dated February 4,
1993, and as subsequently amended October 1, 1994, to include the loan
described above as "Loan 3" to IVC RSA 2-I.
With respect to the loan described as "Loan 2" to IVC RSA 2-II,
Gemcell, Inc. pledged its partnership interest in IVC RSA 2-III to the
RTFC, pursuant to the provisions of that certain Partnership Interest
Pledge and Security Agreement as dated December 9, 1992, and as
subsequently amended October 1, 1994, to include the loan described above
as "Loan 3" to IVC RSA 2-II.
With respect to the loan described as "Loan 2" to IVC RSA 2-III,
Gemcell, Inc. pledged its partnership interest in IVC RSA 2-II to the
RTFC, pursuant to the provisions of that certain Partnership Interest
Pledge and Security Agreement as dated December 7, 1992, and as
subsequently amended October 1, 1994, to include the loan described above
as "Loan 3" to IVC RSA 2-III.
-5-
<PAGE>
See Schedule 2.14(a) for recording information relating to such
pledged partnership interests.
IVC RSA 2-I is owned 40% by Contel Cellular of Illinois, Inc. (now
GTE), as a general partner, and 60% by the subsidiaries or affiliates of
nine (9) independent telephone companies (the Company's subsidiary,
Gemcell, Inc. owns a 6.66% general partnership interest.) The same
information is also true as to RSA 2-II and RSA 2-III, except that in RSA
2-II Centel Cellular Company (now Sprint) is the 40% general partner and
in RSA 2-III Illinois SMSA Limited Partnership and Chicago SMSA Limited
Partnership, both of which are controlled by Ameritech Mobile
Communications, Inc., are each a 20% general partner.
2. See Schedule 2.17 for listing of checking and money market accounts, as well
as Certificates of Deposit held by the Company.
3. ANPI membership (Associated Network Partners, Inc.). Associated Network
Partners, Inc. ("ANPI") is a C corporation started by a number of independent
LECs in the State of Illinois to act as a buyers club for interexchange
telephone capacity so that the participating LECs or their affiliates could pool
their minutes in order to get volume discounts. Ravenswood Communications, Inc.
is a "Participant" under contract with ANPI and, separately, a shareholder of
ANPI. Like each other participant, its single share of common stock is
non-transferable, has no appurtenant rights to board membership and is, by
agreement, worth $100 if Ravenswood Communications, Inc. ceases being a
Participant. As a Participant, Ravenswood Communications, Inc. has a monthly
commitment to ANPI to purchase at least $__________ worth of toll services (this
amount is basically based on ___% of a Participant's historical usage). Under
certain limited circumstances, that commitment could rise to $_____________ per
month. (ANPI, in turn, has a much larger monthly commitment to its facilities
providers, which commitment is less than the overall participant commitment to
ANPI.) There are certain penalties if Ravenswood Communications, Inc. does not
purchase at least its minimum worth of toll services. Basically, it would be
required to pay for such toll services, whether it purchases them or not. ANPI
is not subject to net profits since the toll services it purchases are sold to
-6-
<PAGE>
its participants at cost with an administrative charge assessed to match ANPI's
administrative costs. As can be more fully determined from the Participation
Agreement, so long as ANPI's participants meet their contractual commitments,
ANPI is not subject to a net loss. As also can be more fully determined from the
Participation Agreement, while Ravenswood Communications, Inc. does not have
contingent liabilities for the actions of ANPI, it does indemnify ANPI for any
injury caused to ANPI by the actions of Ravenswood Communications, Inc. There is
no annual or recurring fee for being a Participant.
-7-
<PAGE>
Schedule 2.6
Corporate Books
Directors and Officers for Ravenswood Communications, Inc.:
Directors:
Officers: President
Vice President
Secretary
Treasurer
Directors and Officers for The El Paso Telephone Company:
Directors:
Officers: President
Vice President
Secretary
Treasurer
Directors and Officers for El Paso Long Distance Company:
Directors:
Officers: President
Vice President
Secretary
Treasurer
Directors and Officers for Gemcell, Inc.:
Directors:
Officers: President
Vice President
Secretary
Treasurer
<PAGE>
Schedule 2.7
List of Shareholders/Liens on Shares
Carla J. Brownlee 405 Shares, as evidenced by stock
certificate(s) __________________,
issued __________________________.
<PAGE>
Schedule 2.10
Employees
a. Ravenswood Communications, Inc.
Employees:
Full-time Employees:
Part-time Employees:
b. The El Paso Telephone Company
Employees:
Full-time Employees:
Part-time Employees:
c. El Paso Long Distance Company
Employees:
Full-time Employees:
Part-time Employees:
d. Gemcell, Inc.
Employees:
Full-time Employees:
<PAGE>
Part-time Employees:
<PAGE>
Schedule 2.10
Employees
(Continued)
Vacation Schedule
<PAGE>
Schedule 2.11
Certain Changes
<PAGE>
Schedule 2.12
Contracts
<PAGE>
Schedule 2.14(a)
Owned Property/Liens
A. Real Property:
B. Personal Property:
C. Liens:
1. [Please provide information regarding any REA/RUS/RTB Liens on real and
personal property:]
2. Liens on capital stock of the Company or any subsidiaries as collateral:
Gemcell, Inc. has pledged its partnership interests (and certain rights
pertaining thereto) in Illinois Valley Cellular RSA 2-II Partnership and
Illinois Valley Cellular RSA 2-III Partnership to the Rural Telephone Finance
Cooperative, as more particularly detailed in that Uniform Commercial Code
Financing Statement filed with the Illinois Secretary of State on _____________,
bearing File No. __________. Additional information is set forth under Item 1 of
Schedule 2.4.
3. Other:
Except as expressly provided above, no other Liens exist.
<PAGE>
Schedule 2.14(b)
Leased Property
<PAGE>
Schedule 2.14(e)
Condition
<PAGE>
Schedule 2.15
Litigation
<PAGE>
Schedule 2.16
Tax Matters
<PAGE>
Schedule 2.17
Bank and Brokerage Accounts
[Please provide pertinent account information, including name and address of
bank, contact persons authorized signatories and account numbers]
Ravenswood Communications, Inc.
The El Paso Telephone Company
El Paso Long Distance Company
Gemcell, Inc.
<PAGE>
Schedule 2.19
Employee Benefit Plans
<PAGE>
Schedule 2.20
Intellectual Property
<PAGE>
Schedule 2.21
Environmental Matters
<PAGE>
Schedule 2.22
Capital Expenditures and Investments
<PAGE>
Schedule 2.23
Dealings with Affiliates
<PAGE>
Schedule 2.24
Insurance
<PAGE>
Schedule 2.26
Permits
The contemplated transaction would effect a transfer of control in The El
Paso Telephone Company ("Telephone"). Since Telephone is an Illinois public
utility, any changes in control require the prior approval of the ICC, for which
provision has been made in Sections 7.2 and 8.2 of this Agreement.
<PAGE>
Schedule 2.27
Absence of Undisclosed Liabilities/Corporate Debt
<PAGE>
Schedule 3.3
Consents and Authorizations of Purchaser
Approval of the Board of Directors and shareholders of Ravenswood, of Telephone,
of Long Distance and of Gemcell was obtained on _________________________.
Approval of the Board of Directors of MJD Ventures, Inc. was obtained on
___________________.
<PAGE>
Schedule 4.14
Article IV Disclosure Statement
Exhibit 12
MJD Communications, Inc
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
Year ended December 31,
1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
INCOME FROM CONTINUING
OPERATIONS BEFORE TAXES 1,951,149 1,030,846 1,422,181 4,661,050 (7,510,418)
PLUS: FIXED CHARGES 3,812,248 7,366,827 7,751,254 9,897,286 28,002,978
--------- --------- --------- --------- ----------
EARNINGS (AS DEFINED) 5,763,397 8,397,673 9,173,435 14,558,336 20,492,560
========= ========= ========= ========= ==========
INTEREST EXPENSE 3,771,606 7,178,722 7,533,563 9,587,604 27,170,655
RENT EXPENSE (INTEREST PORTION) 40,642 164,657 186,741 257,341 705,676
CAPITALIZED INTEREST -- 23,448 30,950 52,341 126,647
--------- --------- --------- --------- ----------
TOTAL FIXED CHARGES 3,812,248 7,366,827 7,751,254 9,897,286 28,002,978
========= ========= ========= ========= ==========
"EARNINGS" DIVIDED BY FIXED CHARGES 1.5 1.1 1.2 1.5 0.7
========= ========= ========= ========= ==========
</TABLE>
Schedule 2.3
No Violations
Except as set forth on Schedule 2.3, the execution, delivery and
performance of the Stock Purchase Agreement and the consummation of the
transactions contemplated thereby by each of the Seller and Ravenswood do not
and will not, subject to obtaining the consents and approvals referred to in
Schedules 2.3 and 2.26, (a) conflict with or result in a breach of the terms,
conditions or provisions of, (b) constitute a default or event of default under
(with due notice, lapse of time or both), (c) result in the creation of any Lien
upon the Company or its capital stock or assets pursuant to, (d) give any third
party the right to accelerate any obligation under, (e) result in a violation
of, or (f) require any authorization, consent, approval, exemption or other
action by, or notice to, any Person pursuant to:
(i) the charter or by-laws of the Company:
Approval by Boards of Directors and Shareholders have been
obtained prior to the execution of the Agreement, and copies thereof
shall be provided to Purchaser as a condition precedent to Closing.
(ii) any applicable Regulation:
1. Section 7-204 of the Public Utilities Act, 220 ILCS 5/7-204,
which is applicable to Ravenswood and/or one or more of its Affiliates,
provides that no reorganization shall take place without prior approval of
the Illinois Commerce Commission. The transactions contemplated by the
Stock Purchase Agreement would be a reorganization under said statute, and
therefore require ICC approval. MJD Communications, Inc., Purchaser,
Ravenswood and Telephone shall seek to obtain ICC approval by filing a
joint application for approval of the reorganization of Telephone in
accordance with Section 7-204 of The Public Utilities Act and for all
other appropriate relief.
2. The Communications Act of 1934, as amended, and the rules and
regulations of the Federal Communications Commission prohibit a change of
control over the FCC licenses listed in Schedule 2.26 without prior
approval of the FCC.
1
<PAGE>
Schedule 2.3
No Violations
(Continued)
(iii) any Order to which either the Seller or the Company is subject:
Internal Revenue Service (Reference Number 0920405465). IRC
Section 6166 installment obligation: Seller elected under IRC
Section 6166 to pay the federal estate tax of her father, Robert C.
Gordon, in installments. This obligation is secured by the Company's
capital stock. The balance is accelerated upon disposition of the
Shares and shall be paid at or prior to closing pursuant to Section
4.16.
(iv) any Contract to which the Seller, Company or any of their properties
are subject:
1. The following claimants, in July, 1996, assigned to Seller by
individual but identical agreements (the "Assignment Agreements") any and
all rights they have or may have to the Estate of Robert C. Gordon under
any document purporting to be the Last Will and Testament of Robert C.
Gordon, to wit: Nancy Ales, Herbert Arbuckle, William Davis, Linda Morris,
Leta Manninga (by Power of Attorney Ann Armstrong), D. Evalyn Tate, and
the City of El Paso. Each of the Assignment Agreements provides that the
proceeds of the sale of the Company will be placed in escrow and
distributed by the escrow agent pursuant to a formula set forth therein.
Each such claimant has a right to receive a portion of the proceeds of the
sale of the Company's capital stock and thus also has a right to receive
notice of the sale of the Company.
2. The following persons who in June, 1998 settled certain
litigation with Seller and assigned to her by individual separate
instruments any and all rights they have or may have to the Estate of
Robert C. Gordon under any document purporting to be the Last Will and
Testament of Robert C. Gordon, to wit: Linda Frey, Eugene Koos, Russell
Haas, Lois Beach, Jim Frey and the Alpha Iota Chapter of Sigma Chi
Fraternity at Illinois Wesleyan University, Bloomington, Illinois, will
have been paid for said assignment prior to closing, and Seller has
obtained releases with respect thereto in a form satisfactory to Purchaser
and Purchaser's counsel. Illinois Wesleyan University, which in December
of 1996 assigned to Seller any and all rights it has or may have to the
Estate of Robert C. Gordon under any document purporting to be the Last
Will and Testament of Robert C. Gordon, has already been paid for said
assignment, and Seller has obtained releases with respect thereto in a
form satisfactory to Purchaser and Purchaser's counsel.
2
<PAGE>
3
<PAGE>
Schedule 2.3
No Violations
(Continued)
3. The Rural Telephone Bank is entitled to notice of the change of
control and reorganization contemplated by the Stock Purchase Agreement
pursuant to the Mortgage and Security Agreement dated February, 1980.
Notice will be given by Seller and Purchaser jointly upon execution of the
Agreement.
4. AT&T Communications of Illinois, Inc. is entitled to notice of
the change of control and reorganization contemplated by the Stock
Purchase Agreement pursuant to that certain agreement between itself and
El Paso Telephone Company regarding billing and collecting services.
Notice will be given by Seller and Purchaser jointly upon execution of the
Agreement.
5. The Company has other contracts in place, such as the Franchise
from the City of El Paso, which require notice to and approval by the
other party thereto of any assignment of the contract, however these
contracts do not appear to require approval for a change of control or
reorganization. All such contracts are included in the list of contracts
contained in either Schedule 2.12 or 2.27. Notice will be given by Seller
and Purchaser jointly upon execution of the Agreement.
4
<PAGE>
Schedule 2.4
Affiliates and Investments
I. Corporate Organizational Chart
A diagram showing the current corporate structure of Ravenswood and
its Affiliates is attached hereto. The diagram does not show other
separate entities in which Ravenswood or its affiliates have investments
or ownership interests.
II. Affiliates and Investments/Ownership Interests with identifying information:
A. Affiliates
1. Name: The El Paso Telephone Company
Status: Illinois Corporation
Interest: 100% stock ownership by Ravenswood
2. Name: El Paso Long Distance Company
Status: Illinois Corporation
Interest: 100% stock ownership by Ravenswood
3. Name: Gemcell, Inc.
Status: Illinois Corporation
Interest: 100% stock ownership by Telephone
B. Other Investments or Ownership Interests
1. Name: Illinois Valley Cellular RSA 2-I
Partnership ("IVC RSA 2-I")
Status: Illinois General Partnership
Owner of Interest: Gemcell, Inc.
Interest Owned: 6 2/3% undivided interest
Ownership Instrument: Partnership Agreement dated Nov. 8,
1989 ("IVC RSA 2-I Partnership
Agreement")
1
<PAGE>
Schedule 2.4
Affiliates and Investments
(Continued)
II. Affiliates and Investments/Ownership Interests with identifying information:
(Continued)
B. Other Investments or Ownership Interests (Continued)
2. Name: Illinois Valley Cellular RSA 2-II
Partnership ("IVC RSA 2-II")
Status: Illinois General Partnership
Owner of Interest: Gemcell, Inc.
Interest Owned: 6 2/3% undivided interest
Ownership Instrument: Partnership Agreement dated Nov. 7,
1989 ("IVC RSA 2-II Partnership
Agreement")
3. Name: Illinois Valley Cellular RSA 2-III
Partnership ("IVC RSA 2-III")
Status: Illinois General Partnership
Owner of Interest: Gemcell, Inc.
Interest Owned: 6 2/3% undivided interest
Ownership Instrument: Partnership Agreement dated Nov. 6,
1989 ("IVC RSA 2-III Partnership
Agreement")
4. Name: Illinois Valley Cellular RSA 2,
Inc. ("IVC RSA2, Inc.")
Status: Illinois Corporation
Owner of Interest: The El Paso Telephone Company
Interest Owned: 700 shares of NPV common stock
(12.5%)
Ownership Instrument: Certificate Nos. 3, 12 and 20,
dated Dec. 5, 1991, July 1, 1992
and Dec. 4, 1992, respectively
2
<PAGE>
Schedule 2.4
Affiliates and Investments
(Continued)
II. Affiliates and Investments/Ownership Interests with identifying information:
(Continued)
B. Other Investments or Ownership Interests (Continued)
5. Name: Associated Network Partners, Inc.
("ANPI")
Status: Illinois Corporation
Owner of Interest: Ravenswood Communications, Inc.(1)
[El Paso Long Distance Company]
Interest Owned: 1 share of NPV common stock
Ownership Instrument: Certificate No. 8, dated March 8,
199_
6. Name/Issuer: Illuminet Holdings, Inc.
State of Incorporation: Delaware
Owner of Interest: The El Paso Telephone Company
Interest Owned: 8,462 shares of common stock
Par Value: $.01 per share
Ownership Instrument: Certificate No. 101, dated August
11, 1997
7. Name/Issuer: Rural Telephone Bank, established
by Act of Congress, Approved May 7,
1971
Owner of Interest: The El Paso Telephone Company
Interest Owned: 80,007 shares of Class B stock
Par Value: $1.00 per share
Ownership Instrument: Certificate No. B2619, dated May
23, 1986 Stock Register No. 487
- ----------
(1) The Certificate representing this stock ownership is currently issued
to Ravenswood, however the appropriate entity to own this stock is El Paso Long
Distance Company, and the Company has initiated steps to remedy this clerical
error with ANPI management. ANPI has revised all agreements, but has not yet
issued a new stock certificate.
3
<PAGE>
Schedule 2.4
Affiliates and Investments
(Continued)
II. Affiliates and Investments/Ownership Interests with identifying information:
(Continued)
B. Other Investments or Ownership Interests (Continued)
8. Name/Issuer: Rural Telephone Bank, established
by Act of Congress, Approved May 7,
1971
Owner of Interest: The El Paso Telephone Company
Interest Owned: 15,947 shares of Class B stock
Par Value: $1.00 per share
Ownership Instrument: Certificate No. B2512, dated Dec.
23, 1985 Stock Register No. 850096
(1985 Patronage Refund)
9. Name/Issuer: Rural Telephone Bank, established
by Act of Congress, Approved May 7,
1971
Owner of Interest: The El Paso Telephone Company
Interest Owned: 15,733 shares of Class B stock
Par Value: $1.00 per share
Ownership Instrument: Certificate No. B2642, dated Jan.
14, 1987 Stock Register No. 860095
(1986 Patronage Refund)
10. Name/Issuer: Rural Telephone Bank, established
by Act of Congress, Approved May 7,
1971
Owner of Interest: The El Paso Telephone Company
Interest Owned: 75,565 shares of Class B stock
Par Value: $1.00 per share
Ownership Instrument: Certificate No. B3122, dated
Oct.16, 1989 (1980 through 1987
Patronage Refund)
11. Name/Issuer: Rural Telephone Bank, established
by Act of Congress, Approved May 7,
1971
Owner of Interest: The El Paso Telephone Company
Interest Owned: 46,498 shares of Class B stock
Par Value: $1.00 per share
Ownership Instrument: Certificate No. B3240, dated March
7, 1990 (1988 & 1989 Patronage
Refund)
4
<PAGE>
Schedule 2.4
Affiliates and Investments
(Continued)
II. Affiliates and Investments/Ownership Interests with identifying information:
(Continued)
B. Other Investments or Ownership Interests (Continued)
12. Name/Issuer: Rural Telephone Bank, established
by Act of Congress, Approved May 7,
1971
Owner of Interest: The El Paso Telephone Company
Interest Owned: 296,388 shares of Class B stock
Par Value: $1.00 per share
Ownership Instrument: Certificate No. B3546, dated March
14,1994 (1980 through 1984 & 1987
through 1993 Patronage Refund)
13. Name/Issuer: Rural Telephone Bank, established
by Act of Congress, Approved May 7,
1971
Owner of Interest: The El Paso Telephone Company
Interest Owned: 277,565 shares of Class B stock
Par Value: $1.00 per share
Ownership Instrument: uncertificated shares (Patronage
Refunds for certain years)
14. See Schedule 2.17 for listing of checking and money market
accounts, as well as Certificates of Deposit held by the
Company.
5
<PAGE>
Schedule 2.4
Affiliates and Investments
(Continued)
III. Affiliate Agreements/Relationships
A. Indebtedness to or on Account of Affiliates or Investments:
Gemcell, Inc. has outstanding loans from The El Paso Telephone
Company (made in connection with Gemcell's investments in the three
cellular partnerships and including allocations for tax consequences
of earned but unpaid profits by the cellular partnerships) currently
totaling $228,092.49.
B. Guarantees of Indebtedness on Behalf of and Contingent Obligations with
Respect to Affiliates or Investments:
1. The El Paso Telephone Company is the guarantor of a loan in the
amount of $1,035,000.00 (evidenced by Promissory Note dated October 30,
1992) made by the Rural Telephone Finance Cooperative ("RTFC"), to IVC RSA
2, Inc., pursuant to the terms of a Guaranty as dated July 31, 1992, by
The El Paso Telephone Company (the "Guaranty"). The El Paso Telephone
Company's maximum liability pursuant to the Guaranty is limited in amount
to $140,000.00. The maturity date of such note is five (5) years from its
date of execution, however the guaranty by its terms applies to future
advances, and since there was a future advance to IVC RSA 2, Inc. in the
amount of $317,393.00 (evidenced by Promissory Note dated October 1, 1994,
which has a five (5) year maturity date), the guarantee may not yet have
expired. RTFC has advised Mr. Michael J. Stein, Vice President of C-R
Telephone Company by letter dated March 5, 1998, and Carla J. Brownlee by
letter dated August 5, 1998, that the initial loan to IVC RSA 2, Inc. has
been repaid and that the guaranties provided by the shareholders in
connection therewith have ceased to be obligations of the respective
shareholders. The El Paso Telephone Company has supplied RTFC with a
letter of credit from Woodford County Bank as security for said guaranty.
The El Paso Telephone Company's maximum obligation under the guarantee and
letter of credit was not to exceed $140,000.00. The impact of the
guarantees was socialized by the execution of an Indemnity Agreement
between IVC RSA 2, Inc. and each of the guarantors (being the eight
shareholders of IVC RSA 2, Inc.), including Telephone, so that IVC RSA 2,
Inc. is required in the first instance to make all payments on the loan
and to pay any default so
6
<PAGE>
that the guarantors will not be called upon to do so. In the event of IVC
RSA 2, Inc.'s inability to cure any default, the eight guarantors have
agreed with each other under the
Schedule 2.4
Affiliates and Investments
(Continued)
III. Affiliate Agreements/Relationships (Continued)
B. Guarantees of Indebtedness on Behalf of and Contingent Obligations with
Respect to Affiliates or Investments: (Continued)
Indemnity Agreement that they will bear the loss equally so that no
company is required to pay more or less than any other company.
2. The Participation Agreement between Ravenswood/Long Distance and
ANPI contains provisions which requires the Company to make certain
contingent contributions as well as other contributions to ANPI as
required pursuant to the terms of the agreement.
3. The IVC RSA 2-I Partnership Agreement, the IVC RSA 2-II
Partnership Agreement and the IVC RSA 2-III Partnership Agreement each
contain provisions which require the partners to make capital
contributions to fund the construction, expansion and/or operation of the
cellular service, as well as financial obligations and operating and
management expenses, if required pursuant to the terms of the agreements.
The corresponding result of failing to make a capital contribution is that
the party's partnership interest is diluted in favor of the partners who
make up the deficiency.
4. Gemcell, Inc. is a general partner in each of the three cellular
partnerships identified herein, and therefore has contingent obligations
with respect thereto. Each of the foregoing three (3) partnerships is a
party to three (3) separate loans from the Rural Telephone Finance
Cooperative ("RTFC"). Specifically:
a. IVC RSA 2-I
(1) Loan 1: $4,033,333.00, as evidenced by that
certain Secured Promissory Note as dated November
25, 1992.
7
<PAGE>
(2) Loan 2: $873,111.00, as evidenced by that certain
Secured Promissory Note as dated February 4, 1993.
8
<PAGE>
Schedule 2.4
Affiliates and Investments
(Continued)
III. Affiliate Agreements/Relationships (Continued)
B. Guarantees of Indebtedness on Behalf of and Contingent Obligations with
Respect to Affiliates or Investments: (Continued)
(3) Loan 3: $836,020.00, as evidenced by that certain
Secured Promissory Note as dated October 1, 1994.
b. IVC RSA 2-II
(1) Loan 1: $501,111.00, as evidenced by that certain
Secured Promissory Note as dated March 12, 1992.
(2) Loan 2: $418,778.00, as evidenced by that certain
undated Secured Promissory Note issued on Dec. 9,
1992.
(3) Loan 3: $874,458.00, as evidenced by that certain
Secured Promissory Note as dated October 1, 1994.
c. IVC RSA 2-III
(1) Loan 1: $1,361,111.00, as evidenced by that
certain Secured Promissory Note as dated March 12,
1992.
(2) Loan 2: $583,444.00, as evidenced by that certain
Secured Promissory Note as dated December 7, 1992.
(3) Loan 3: $1,281,802.00, as evidenced by that
certain Secured Promissory Note as dated October
1, 1994.
5. Gemcell, Inc. has pledged its partnership interests in IVC RSA
2-II and IVC RSA 2-III as security for certain loans from the RTFC to one
or more of the cellular partnerships as more fully described below in Item
III(C).
9
<PAGE>
10
<PAGE>
Schedule 2.4
Affiliates and Investments
(Continued)
III. Affiliate Agreements/Relationships (Continued)
C. Pledges of Interests in Affiliates, Investments or Other Assets in
Connection with Obligations Relating to Affiliates or Investments:
1. With respect to a loan in the amount of $873,111.00 (evidenced by
Secured Promissory Note dated February 4, 1993) from the RTFC to IVC RSA
2-I, Gemcell, Inc. pledged its partnership interests in IVC RSA 2-II and
IVC RSA 2-III to the RTFC, pursuant to the provisions of that certain
Partnership Interest Pledge and Security Agreement as dated February 4,
1993, and as subsequently amended October 1, 1994, to include a loan in
the amount of $836,020.00 (evidenced by Secured Promissory Note dated
October 1, 1994) to IVC RSA 2-I.
2. With respect to a loan in the amount of $418,778.00 (evidenced by
undated Secured Promissory Note issued on December 9, 1992) from the RTFC
to IVC RSA 2-II, Gemcell, Inc. pledged its partnership interest in IVC RSA
2-III to the RTFC, pursuant to the provisions of that certain Partnership
Interest Pledge and Security Agreement as dated December 9, 1992, and as
subsequently amended October 1, 1994, to include a loan in the amount of
$874,458.00 (evidenced by Secured Promissory Note dated October 1, 1994)
to IVC RSA 2-II.
3. With respect to a loan in the amount of $583,444.00 (evidenced by
undated Secured Promissory Note issued on December 7, 1992) from the RTFC
to IVC RSA 2-III, Gemcell, Inc. pledged its partnership interest in IVC
RSA 2-II to the RTFC, pursuant to the provisions of that certain
Partnership Interest Pledge and Security Agreement as dated December 7,
1992, and as subsequently amended October 1, 1994, to include a loan in
the amount of $1,281,802.00 (evidenced by Secured Promissory Note dated
October 1, 1994) to IVC RSA 2-III.
D. General Partner and Officer/director Status of Company or its Employees
with Respect to Investments and Affiliates:
Gemcell, Inc. is a general partner in IVC RSA 2-I, IVC RSA
2-II and IVC RSA 2-III. In addition, William P. Davis is a director
on the Board of Directors of IVC RSA 2, Inc., as well as the offices
which Mr. Davis holds in the Affiliates
11
<PAGE>
of Ravenswood. Seller is an officer and director of Ravenswood and
each of its Affiliates.
Schedule 2.4
Affiliates and Investments
(Continued)
III. Affiliate Agreements/Relationships (Continued)
E. Shareholders' or Stockholders' Agreements with Respect to Affiliates or
Investments:
1. The IVC RSA 2-I Partnership Agreement, the IVC RSA 2-II
Partnership Agreement and the IVC RSA 2-III Partnership Agreement each
contain provisions which restrict the parties' rights to sell, transfer,
assign or exchange their interests therein without first offering the
interests to the other partners. Said provisions do not apply to
transactions where there is a change of control of the parent of the
partner, and therefore do not affect the transaction contemplated by the
Stock Purchase Agreement.
2. Ravenswood/Long Distance(2) is a party to a Share Redemption
Agreement with respect to its ANPI stock, which agreement restricts the
right to sell, transfer, pledge, hypothecate, or otherwise dispose of said
stock except to a corporate affiliate that assumes the Participation
Agreement with ANPI or through redemption by ANPI. The Share Redemption
Agreement does not have any provision restricting change of control of the
shareholder's parent corporation or requiring consent therefor.
IV. Dividends and/or Distributions (After December 31, 1990)
A. Distributions from Ravenswood Communications, Inc. to Carla J. Brownlee
1. 1996 - $4,860
2. 1997 - $6,075
3. 1998 - $6,075
- ----------
(2) See footnote 1.
12
<PAGE>
Schedule 2.4
Affiliates and Investments
(Continued)
IV. Dividends and/or Distributions (After December 31, 1990) (Continued)
B. Distributions from The El Paso Telephone Company:
1. 1991, 1992 and 1993 - $9,600/year at the rate of $12/share. -
$4860 to Carla J. Brownlee, $1140 to Grace Gordon & $3990 to David
Gordon
2. 1994 - $4,860 to Carla J. Brownlee
3. 1995 - $8,100 to Carla J. Brownlee
4. 1996 - $4,860 to Carla J. Brownlee
5. 1997 - $16,075 to Ravenswood - $10,000 to open Ravenswood
account & annual distribution at $15/share
6. 1998 - $556,075(3) to Ravenswood
C. Distributions from El Paso Long Distance: None.
D. Distributions from Gemcell: None.
E. Distributions from cellular partnerships to Gemcell:
1. IVC RSA 2-I: 1997 - $25,740 to Gemcell
2. IVC RSA 2-II: None.
3. IVC RSA 2-III: None.
F. Distributions from Illinois Valley Cellular RSA 2, Inc.
1. 1996 - $26,880 to Telephone
2. 1997 - $36,250 to Telephone
G. Illuminet Holding, Inc.: 1993 - $736.50
- ----------
(3) Annual distribution plus distributions to fund $500,000 loan from
Ravenswood to Seller to settle litigation with claimants and to fund items
described in Sections 4.4, 4.8 & 12.13 of the Stock Purchase Agreement.
13
<PAGE>
H. Rural Telephone Bank: Patronage shares issued in varying
amounts for varying periods as shown
above.
Schedule 2.4
Affiliates and Investments
(Continued)
V. Miscellaneous Affiliate/Investment Information
El Paso Telephone Company and C-R Telephone Company formed Central
Illinois Data Services, Inc. On April 18, 1994. CIDS was formed to provide
billing services. CIDS never undertook any business, and was dissolved
December 30, 1996.
14
<PAGE>
Schedule 2.5
Stock Record Books
The stock record book of The El Paso Telephone Company is complete and
correct in all material respects. The stock record book begins with Certificate
141 issued September 8, 1953 and contains all stock transfer entries from that
date and Certificate forward to and including Certificate 227 issued to
Ravenswood effective September 26, 1996. The stock record book contains canceled
Certificates which can be traced back to show proper transfers of certificates
representing all 800 authorized shares such that 405 shares are owned by
Ravenswood and the remaining 395 shares have been transferred to the company as
treasury stock and the former Certificate representing such 395 shares canceled.
The stock record book of El Paso Long Distance Company is complete and
correct in all material respects. The stock records are included in the
corporate minute book.
The stock record book of Ravenswood Communications, Inc. is complete and
correct in all material respects. The stock records are included in the
corporate minute book.
The stock record book of Gemcell, Inc. is complete and correct in all
material respects. The stock records are included in the corporate minute book.
1
<PAGE>
Schedule 2.6
Corporate Books
The corporate minute books (4 books) of The El Paso Telephone Company is
complete and correct in all material respects. The minute books begins with
minutes for the first meeting of the Shareholders and Board of Directors held
September 20, 1901 and contain minutes for meetings to and including September
8, 1998. The minute books do not contain minutes for any meetings in the years
1945 through and including 1947. It is believed that meetings were held in the
years 1945 to 1947. There is a notation dated January 11, 1949 at the beginning
of the second minute book that all prior minutes had been lost. The first minute
book was ultimately recovered, but the years 1945 to 1947 do not appear in
either the first or the second book. The minutes for the year 1948 appear in the
second minute book.
The corporate minute book of El Paso Long Distance Company is complete and
correct in all material respects. The minute book begins with minutes for the
first meeting of the Shareholders and Board of Directors held July 1, 1996 and
contains minutes for meetings to and including September 8, 1998.
The corporate minute book of Ravenswood Communications, Inc. is complete
and correct in all material respects. The minute book begins with minutes for
the first meeting of the Shareholders and Board of Directors held July 1, 1996
and contains minutes for meetings to and including September 8, 1998.
The corporate minute book of Gemcell, Inc. is complete and correct in all
material respects. The minute book begins with minutes for the first meeting of
the Shareholders and Board of Directors held September 21, 1983 and contains
minutes for meetings to and including September 8, 1998. The minute book does
not contain minutes for any meetings in the years 1984 through and including
1988 and 1991. With respect to the year 1991, which is the year that the former
controlling shareholder, Robert C. Gordon, died, no annual meeting for Gemcell
was held. With respect to the years 1984 to 1988, it is not known whether
meetings were held.
Directors and Officers for Ravenswood Communications, Inc.:
Directors: James E. Brownlee
Carla J. Brownlee
Officers: President - Carla J. Brownlee
Vice President - n/a
Secretary - Carla J. Brownlee
Treasurer - Carla J. Brownlee
1
<PAGE>
Assistant Secretary - James E. Brownlee
Schedule 2.6
Corporate Books
(Continued)
Directors and Officers for The El Paso Telephone Company:
Directors: James E. Brownlee
Carla J. Brownlee
William P. Davis
Officers: President - Carla J. Brownlee
Vice President - William P. Davis
Secretary - William P. Davis
Treasurer - William P. Davis
Directors and Officers for El Paso Long Distance Company:
Directors: James E. Brownlee
Carla J. Brownlee
Officers: President - Carla J. Brownlee
Vice President - n/a
Secretary - Carla J. Brownlee
Treasurer - Carla J. Brownlee
Assistant Secretary - James E. Brownlee
Directors and Officers for Gemcell, Inc.:
Directors: James E. Brownlee
Carla J. Brownlee
William P. Davis
Officers: President - Carla J. Brownlee
Vice President - William P. Davis
Secretary - William P. Davis
Treasurer - William P. Davis
2
<PAGE>
Schedule 2.7
List of Shareholders/Liens on Shares
I. Shareholders and Shares:
A. Name: Ravenswood Communications, Inc.
Shareholder: Carla J. Brownlee
Shares Outstanding: 405
Shares Authorized: 1000
Class/Par Value: Common; No Par
B. Name: The El Paso Telephone Company
Shareholder: Ravenswood Communications, Inc.
Shares Outstanding: 405
Shares Authorized 800
Class/Par Value: Common; $25 par value
C. Name: El Paso Long Distance Company
Shareholder: Ravenswood Communications, Inc.
Shares Outstanding: 1,000
Shares Authorized: 1000
Class/Par Value: Common; No Par
D. Name: Gemcell, Inc.
Shareholder: The El Paso Telephone Company
Shares Outstanding: 2,000
Shares Authorized: 3000
Class/Par Value: Common; No Par
II. Liens Affecting Title to Stock:
A. Internal Revenue Service. Seller elected under IRC Section 6166 to pay
the federal estate tax of her father, Robert C. Gordon, in installments. As of
May 15, 1998, the outstanding amount was $24,355.21, which amount is secured by
the Company's capital stock. The balance is accelerated upon disposition of the
Shares. To be paid pursuant to Section 4.16.
B. Rural Telephone Bank. Substantially all of the assets of The El Paso
Telephone Company (which include stock of its Affiliates) are pledged as
security for the loans described n Schedule 2.12.
1
<PAGE>
2
<PAGE>
Schedule 2.7
List of Shareholders/Liens on Shares
(Continued)
C. Assignment Agreements. The following claimants, in July, 1996, assigned
to Seller by individual but identical agreements (the "Assignment Agreements")
any and all rights they have or may have to the Estate of Robert C. Gordon under
any document purporting to be the Last Will and Testament of Robert C. Gordon,
to wit: Nancy Ales, Herbert Arbuckle, William Davis, Linda Morris, Leta Manninga
(by Power of Attorney, Ann Armstrong), D. Evalyn Tate, and the City of El Paso.
Each of the Assignment Agreements provides that the proceeds of the sale of the
Company will be placed in escrow and distributed by the escrow agent pursuant to
a formula set forth therein. Each such claimant has a right to receive a portion
of the proceeds of the sale of the Company's capital stock and thus also has a
right to receive notice of the sale of the Company.
III. Dividends and/or Distributions (After December 31, 1990):
A. Distributions from Ravenswood Communications, Inc.
1. 1996 - $4,860 to Carla J. Brownlee
2. 1997 - $6,075 to Carla J. Brownlee
3. 1998 - $6,075 to Carla J. Brownlee
B. Distributions from The El Paso Telephone Company:
1. 1991, 1992 and 1993 - $9,600/year at the rate of $12/share.
- $4860 to Carla J. Brownlee, $1140 to Grace Gordon & $3990 to David
Gordon
2. 1994 - $4,860 to Carla J. Brownlee
3. 1995 - $8,100 to Carla J. Brownlee
4. 1996 - $4,860 to Carla J. Brownlee
5. 1997 - $16,075 to Ravenswood
- $10,000 to open Ravenswood account & annual distribution at
$15/share
6. 1998 - $556,075(4) to Ravenswood
C. Distributions from El Paso Long Distance to Ravenswood: None
D. Distributions from Gemcell to The El Paso Telephone: None
- ----------
(4) Annual distribution plus distributions to fund $500,000 loan from
Ravenswood to Seller to settle litigation with claimants and to fund items
described in Sections 4.4, 4.8 & 12.13 of the Stock Purchase Agreement.
3
<PAGE>
4
<PAGE>
Schedule 2.10(a)
Employees, Officers, Directors, Consultants and Independent Contractors
I. Employees:
Attached to this Schedule 2.10(a) is a listing of all employees,
together with a description of their services and the rate and basis for
total compensation. All such employees, other than Carla J. Brownlee,
shall continue to be employed by the Company after Closing. Ms. Brownlee's
duties shall be performed by existing personnel of Purchaser and its
affiliates. There are no employment contracts except to the extent that
the Employee Handbook may be deemed to be a contract by a court of
competent jurisdiction. There is an Employee Handbook ("Handbook"), which
has previously been provided to Purchaser. Certain of The El Paso
Telephone Company's employees, namely Kathy Knoll, D. Evalyn Tate and
Kathy Gieselman, perform allocated services to El Paso Long Distance
Company in the form of billing services, and Kathy Knoll acts as sales
representative for Gemcell, Inc.(5)
A. Ravenswood Communications, Inc.
Full-time Employees: 0
Part-time Employees: 0
B. The El Paso Telephone Company
Full-time Employees: 12
Part-time Employees: 1
C. El Paso Long Distance Company
Full-time Employees: 0
Part-time Employees: 3 (as detailed above)
D. Gemcell, Inc.
Full-time Employees: 0
Part-time Employees: 1 (as detailed above)
II. Officers and Directors:
- ----------
(5) Kathy Knoll recently resigned and her position has not been filled.
1
<PAGE>
Company directors and officers are listed in Schedule 2.6. Directors
who are not otherwise employees are paid $200 for attending a meeting. The
only such director is James E. Brownlee.
Schedule 2.10(a)
Employees, Officers, Directors, Consultants and Independent Contractors
(Continued)
III. Consultants and Independent Contractors:
Legal services to the Company are provided by Troy A. Fodor, Esq.
(Springfield, Illinois), and Kraskin, Lesse & Cosson, L.L.P. (Washington,
D.C.). Accounting services to the Company are provided by Kiesling
Associates, L.L.P. Company cost consultants are GVNW, Inc. Engineering
services are provided by Communications Engineers, Inc.
IV. Description of Employee Plans, Programs, Policies, Agreements or
Arrangements:
2
<PAGE>
1. Name of Plan, Program,
Policy, Agreement or
Arrangement: Attendance/Illness
Type/Description of Benefit: Program is described on page 2 of
the Handbook.
2. Name of Plan, Program, Maternity Leave
Policy, Agreement or Jury Duty
Arrangement: Funeral Leave
Coffee Breaks
Sickness/disability
Type/Description of Benefit: Program is described on page 3 of
the Handbook.
3. Name of Plan, Program, Employee Education
Policy, Agreement or Holidays
Arrangement: Insurance
Lunch Hours
Type/Description of Benefit: Program is described on page 4 of
the Handbook. Insurance is
described in Schedule 2.24.
3
<PAGE>
Schedule 2.10(a)
Employees, Officers, Directors, Consultants and Independent Contractors
(Continued)
IV. Description of Employee Plans, Programs, Policies, Agreements or
Arrangements: (Continued)
4. Name of Plan, Program,
Policy, Agreement or
Arrangement: Vacation
Type/Description of Benefit: Program is described on page 4 of
the Handbook.
5. Name of Plan, Program,
Policy, Agreement or
Arrangement: SEPP
Type/Description of Benefit: Program is described on page 6 of
the Handbook, and Schedule 2.19.
6. Name of Plan, Program,
Policy, Agreement or
Arrangement: Free Local telephone Service
Type/Description of Benefit: Employees receive free local
service within the Company's
service area. There is no formal
document for this plan.
7. Name of Plan, Program,
Policy, Agreement or
Arrangement: Credit union arrangement
Type/Description of Benefit: Automatic savings set up for
employees. Funded solely by
participating employees. CEFCU is
the credit union. There is no
formal document for this plan.
4
<PAGE>
Schedule 2.10(c)
Employment and Labor Agreements
I. Contracts With Officers or Employees:
To the extent that such may be deemed to be a contract by a court of
competent jurisdiction, the Company has in place an Employee Handbook
which is more fully described in Schedule 10(a).
5
<PAGE>
Schedule 2.11
Absence of Certain Changes
(a) Material Changes in Business, Properties, Financial Statements, Condition or
Results of Operations of the Company:
$500,000 distribution from The El Paso Telephone Company to
Ravenswood Communications, Inc. and related $500,000 loan from Ravenswood
Communications, Inc. to Seller for the purpose of paying settlement of
litigation involving claims against ownership of Company stock - loan to
be repaid to Ravenswood by Seller on or before the Closing Date.
(c) Dividend or Distribution and Redemption of Shares since December 31, 1997:
1. Distributions from Ravenswood Communications, Inc.
1998 -$6,075 to Carla J. Brownlee
2. Distributions from The El Paso Telephone Company:
1998 - $556,075 to Ravenswood(6)
3. Distributions from El Paso Long Distance to Ravenswood: None.
4. Distributions from Gemcell to The El Paso Telephone Company: None.
5. Redemptions: None.
(d) Increases to Compensation of Employees, Officers, Directors, Consultants or
Independent Contractors since December 31, 1997:
Each of the employees received a COLA of 3% effective January 1,
1998. In addition, one of the Technicians received a $0.51 per hour raise
effective June 24, 1998, and the Bookkeeper received a $0.61 per hour
raise effective January 20, 1998. All such increases are included in the
compensation levels set forth in Schedule 2.10(a).
- ----------
(6) Annual distribution plus distributions to fund $500,000 loan from
Ravenswood to Seller to settle litigation with claimants and to fund items
described in Sections 4.4, 4.8 & 12.13 of the Stock Purchase Agreement.
1
<PAGE>
Schedule 2.11
Absence of Certain Changes
(Continued)
(e) Contracts Not in the Ordinary Course of Business since December 31, 1997:
1. There was an increased maintenance expense for changing out
ballasts of florescent lights in the office building. The contractor who
performed the work was CLS Lighting, and the amount of the contract was
$4,029.36.
2. The City of El Paso was paid approximately $1200.00 to pave the
parkway for additional parking for the office building.
3. Penn Landscaping was paid approximately $2400.00 for landscaping
at the office building.
4. There are ongoing verbal negotiations for The El Paso Telephone
Company to provide internet services, including billing, to Leonore Mutual
Telephone Company, McNabb Telephone Company and Tonica Telephone Company.
There is no draft agreement at this time.
5. The El Paso Telephone Company cashed in a Certificate of Deposit
early and realized lost interest/penalty in the amount of $1407.95.
(h) Sale, Assignment or Transfer of Assets or Properties since December 31,
1997:
Proposed purchase by Seller of her Company owned car and Compac
laptop computer.
Transfer by way of Quit-Claim Deed to Carla J. Brownlee of a part of
Lot 1 in Block 42 of the Original Town, now City, of El Paso, described as
beginning at the Northeast corner of said Lot 1; thence South 77 feet;
thence West 54 feet, thence North 77 feet; thence East 54 feet to the
place of beginning, situated in Woodford County, Illinois, such property
also being known as 88 North Central, El Paso, Illinois.
(i) Amendment or Termination of Contracts since December 31, 1997:
None.
2
<PAGE>
Schedule 2.11
Absence of Certain Changes
(Continued)
(l) Agreements to take actions described in clauses (a) through (k) of Section
2.11 of the Stock Purchase Agreement since December 31, 1997:
1. $500,000 distribution from The El Paso Telephone Company to
Ravenswood Communications, Inc. and related $500,000 loan from Ravenswood
Communications, Inc. to Seller for the purpose of paying settlement of
litigation involving claims against ownership of Company stock - to be
repaid on or before the Closing Date.
2. Proposed purchase by Seller of her Company owned car and laptop
computer.
3. Transaction expenses to be paid pursuant to Section 12.13 of the
Stock Purchase Agreement.
3
<PAGE>
Schedule 2.12
Contracts - General
I. Contracts Relating to Bonus, Pension, Profit Sharing, Retirement, Stock
Option, Employee Stock Purchase or Other Plans Providing for Deferred
Compensation:
See Schedule 2.10(a).
III. Contracts Relating to Hospitalization Insurance or Other Welfare Benefit
Plans or Practices:
See Schedule 2.19(a).
IV. Contracts Relating to Loans to its Employees, Officers, Directors, or
Affiliates:
$500,000 loan from Ravenswood Communications, Inc. to Seller for the
purpose of paying settlement of litigation involving claims against
ownership of Company stock - to be repaid on or before the Closing Date.
V. Contracts Relating to the Borrowing or Loaning of Money to or from Any
Person or the Mortgaging, Pledging or Otherwise Placing a Lien on Any Asset of
the Company:
A. Loans to the Company from Third Parties
Parties: Rural Telephone Bank (lender) and El Paso Telephone
Company (debtor)
Term: 35 year
Interest: 8%
Original Principal Amount: $1,906,800
Documents: Telephone Loan Contract dated September 28,
1979
Mortgage Note dated February 12, 1980 for
$493,000
Mortgage Note dated February 12, 1980 for
$1,413,800
Mortgage and Security Agreement dated February
12, 1980
1
<PAGE>
Schedule 2.12
Contracts - General
(Continued)
V. Contracts Relating to the Borrowing or Loaning of Money to or from Any
Person or the Mortgaging, Pledging or Otherwise Placing a Lien on Any Asset of
the Company: (Continued)
B. Loans to Affiliates
1. Parties: Ravenswood Communications, Inc. and
Carla J. Brownlee
Term: Demand Note
Interest Rate: 6.65%
Principal Amount: $500,000.00
Purpose: Payment of settlement agreement of Frey
litigation
2. Parties: El Paso Telephone Company (lender) and
Gemcell (debtor)
Current Amount: $228,092.49
Purpose: Capital contributions to cellular
partnerships and income taxes on
unrealized partnership profits. No
written promissory note exists.
Transactions represented by
intercompany accounting entries only.
See Schedule 2.4(IIIA).
VI. Contract Relating to Guarantee of Obligations:
See Schedule 2.4.
VII. Contract Relating to the Ownership, Lease or Operation of Real or Personal
Property:
The Company leases certain office equipment, more particularly a
Pitney Bowes postage meter and an Elan credit card machine. The Company
also has access to certain rights-of-way owned by railroad companies
pursuant to agreements that may be considered leases. None of these items,
however, require expenditures in excess of $10,000 annually on a per item
or aggregate basis
2
<PAGE>
3
<PAGE>
Schedule 2.12
Contracts - General
(Continued)
VIII. Contracts Relating to Intangible Property:
The Company utilizes various computer software products that are the
intellectual property of third parties. The Company has paid all
appropriate license fees in connection with all such products. The
following is a list of agreements containing such licenses, excluding "off
the shelf" or "shrink-wrap" type license:
A. Software License Agreement dated December 2, 1993 between
Telephone and Communications Software Consultants, Inc.
("CommSoft").
B. IBM Customer Agreement with Telephone.
C. DCO System Contract between Telephone and Stromberg-Carlson
accepted June 6, 1990.
D. Switching Products Contract between Telephone and Siemens dated
February 5, 1998.
IX. Contracts Relating to Warranties with Respect to its Services Rendered or
its Products Sold or Leased:
The Company does not provide warranties on the services it provides,
and its tariffs specifically limit liability in the same manner as other
telephone companies. The Company does provide certain telephone hardware
to customers which may have limited warranties, specifically the Company
leases telephone key systems to certain customers. Only one such system
currently has time remaining on the warranty.
XII. Contracts Relating to the Purchase, Acquisition, Disposition or Supply of
Inventory and Other Property or Assets Involving Expenditures or Receipts in
Excess of $10,000:
A. The Company makes purchases of equipment, inventory and supplies from
time to time from Siemens, and the aggregate expenditures for such may exceed
$10,000 in any given year. No minimum annual purchases are required, however,
and such contract may be terminated at will by the Company without any penalty
or continuing obligation.
4
<PAGE>
5
<PAGE>
Schedule 2.12
Contracts - General
(Continued)
XIII. Contracts Relating to Employees, Independent Contractors, Consultants, or
Other Agents:
See Schedule 2.10(a).
See Schedule 2.19(a), with respect to the Company's insurance
policies and SEPP, to the extent that such could be construed as employment
related Contracts.
XIV. Contracts Relating to Sales, Commissions, Advertising or Marketing:
The Company has an agreement with Consolidated Communications
Directory Company pursuant to which Directory Company retains a percentage
of advertising sold in the Company's telephone directory in exchange for
printing the directory and providing other services as set forth in the
agreement.
Gemcell, Inc. has agreements in place with Illinois Valley Cellular
and 360 Communications pursuant to which it is paid a commission for
selling contracts for cellular service.
XV. Contracts Relating to Unconditional Purchase or Payment Obligations:
ANPI Participation Agreement as described in Schedule 2.4.
XVI. Contracts Relating to Any Investment or Affiliate:
See Schedule 2.4.
XVII. Any Other Contract Requiring Total Payments by the Company in Excess of
Ten Thousand Dollars ($10,000). Unless specifically noted, the Contracts listed
below do not require purchases or expenditures exceeding $10,000 (singly or in
the aggregate on a per Contract basis), and all such Contracts may be terminated
at will by Purchaser without any penalty or continuing obligation:
A. The Company makes expenditures which may exceed $10,000 in any given
year to CommSoft for services.
6
<PAGE>
Schedule 2.12
Contracts - General
(Continued)
XVII. Any Other Contract Requiring Total Payments by the Company in Excess of
Ten Thousand Dollars ($10,000): (continued)
B. The Company makes expenditures which may exceed $10,000 in any given
year to Consolidated Communications, Inc. for internet access in connection with
its internet business.
C. The Company makes expenditures which may exceed $10,000 in any given
year to GTE for internet access and telecommunications access services.
D. The Company makes expenditures which may exceed $10,000 in any given
year to AT&T in connection with the Company's billing and collection activities.
The expenditures represent PARS (purchase of accounts receivable).
E. The Company makes expenditures which may exceed $10,000 in any given
year to El Paso Long Distance Company in connection with the Company's billing
and collection activities. The expenditures represent PARS (purchase of accounts
receivable).
F. The Company makes expenditures which may exceed $10,000 in any given
year to Illuminet in connection with the Company's billing and collection
activities. The expenditures represent PARS (purchase of accounts receivable)..
G. The Company makes expenditures which may exceed $10,000 in any given
year to NECA to rebate back excess contributions from the fund.
H. See also attached List of Contracts
7
<PAGE>
Schedule 2.14(a)
Title and Related Matters - Owned Property
I. Real Property owned or used by the Company:
A. Common address: 48 West First Street, El Paso, Illinois, and 52
and 54 North Central Street, El Paso, Illinois
Improvements: Telephone Company Central Office Building &
surrounds including warehouse and apartment
Tax Nos.: No. 16-05-308-051;
No. 16-05-308-058; No. 16-05-308-059;
No. 16-05-308-060;
Legal Description: Lots 1 (partial), 2 and 3 and the East Half of
Lot 4 in Block 42 in the Original Town, now City
of El Paso, Woodford County, Illinois. See also
attached letter from Attorney James Stoller
Ownership Evidence: Warranty Deed from Robert C. Gordon dated
1/19/88
Warranty Deed from David C. Gordon dated 1/19/98
(each such deed conveying a 1/2
interest)
Chicago Title Insurance Policy issued 2/24/88
(Number 14 0185 04 004541)
Warranty Deed from Helen A. Gordon dated Dec. 2,
1981 (W 9' of S 50' of Lot 2, Block 42,
El Paso)
Environmental assessments: See Schedule 2.21
Surveys: N/A
1
<PAGE>
Schedule 2.14(a)
Title and Related Matters - Owned Property
(Continued)
I. Real Property owned or used by the Company: (Continued)
B. Common address: El Paso, Illinois
Improvements: Company storage area (pole yard)
Tax No.: 16-05-406-002
Legal Description: See attached letter from Attorney James Stoller
Environmental assessments: N/A
Surveys: N/A
C. Common address: Kappa Blacktop, Kappa, Illinois
Improvements: (Lot with Remote Switch)
Tax Nos. & legal desc.: 16-32-206-024
Legal Description: See attached letter from Attorney James Stoller
Environmental assessments: N/A
Surveys: N/A
II. Easements, Licenses & Permits with respect to Real Property owned or used
by the Company:
A. Easements:
1. Glenn C. Kingdon, Trustee - dated Feb. 3, 1992
2. Harlow & Harriette Blunner - dated Jan. 2, 1992
3. Woodford County Bank, Trustee, William Volz Trust - Aug. 9,
1988
4. Heller Ford Sales, Inc. - Aug. 11, 1988
5. Effie S. Dilley, by Roger D. Dilley, Guardian - dated June 11,
1990
6. George E. & Elaine B. Thomas - dated Oct. 12, 1990
7. Winifred A. Stewart - dated Oct. 26, 1990
8. Virgil E. & Joyce M. Krug - dated Oct. 25, 1990
9. Michael E. & Tammie Krug - dated Oct. 25, 1990
10. Dennis Cleary - dated Oct. 24, 1990
11. Charles C. & Mary K. Krug - dated Oct. 24, 1990
12 Dennis R. Schreck - dated May 20, 1990
13. City of El Paso - dated April 30, 1980
2
<PAGE>
Schedule 2.14(a)
Title and Related Matters - Owned Property
(Continued)
II. Easements, Licenses & Permits with respect to Real Property owned or used
by the Company:
A. Easements: (Continued)
14. City of El Paso (city property near clay street)
B. Permits - private persons
1. Robert Morse
- Letter agreement dated Nov. 9, 1988 (temp. U.S. 51 project)
- Letter agreement dated June 6, 1991 (Kappa Cable Relocation)
2. E.A. Blackmore - Subscriber Field Survey dated April 16, 1980
3. Gene B. Schertz - Subscriber Field Survey dated April 16, 1980
4. Lucelle M. Hynes - Subscriber Field Survey dated April 16,
1980
5. James O. Talbert - Subscriber Field Survey dated April 16,
1980
6. Leta Geiselman - Subscriber Field Survey dated April 16, 1980
7. Mrs. Jack Pfister - Subscriber Field Survey dated April 11,
1980
8. William Volz - Subscriber Field Survey dated March 20, 1980
9. Eugene Heller - Subscriber Field Survey dated March 28, 1980
C. License agreements with railroad companies as set forth on Schedule
2.14(b).
D. Permits - Government Authorities
1. Illinois Department of Transportation - Highway Permits -
permit dated April 28, 1998
(U.S. Route 251, Sections 5, 31 & 32 - Station 880+00 to
Station 961+00) - permit dated July 19, 1979
(U.S. Route 24, SBI 8, Section 31RS-1 - 1 mile to 1 2 miles
w/o U.S. 51) - permit dated July 14, 1980
(U.S. Route 51, SBI 2, Sections 63, 64 & 65RS - Station
1173+36 to 632+28) - permit dated July 14, 1980
(U.S. Route 24, SBI 8, Sections 30R & 31RS - 3 miles e/o El
Paso to 4 miles west)
3
<PAGE>
Schedule 2.14(a)
Title and Related Matters - Owned Property
(Continued)
II. Easements, Licenses & Permits with respect to Real Property owned or used
by the Company: (Continued)
D. Permits - Government Authorities: (Continued)
2. Woodford County
- Resolution dated May 13, 1980 (Highways 4,6,9 & 16)
- permit dated April 22, 1980
3. Palestine Township
- permit dated April 17, 1980
4. Greene Township - permit
dated April 17, 1980
5. Gridley Township
- permit dated April 17, 1980
6. Panola Township - permit
dated April 17, 1980
7. El Paso Township - permit
dated July 9, 1980
8. El Paso
- permit dated June 26, 1979
9. Woodford County
- permit dated April 22, 1980 (Highways 6,15,16,4 & 9)
III. Personal Property owned or used by the Company:
A list or lists of the personal property owned or used by the
Company in connection with its business operations is attached hereto.
Said personal property can be described generally and broken down into the
following categories: (i) office furniture and equipment, (ii) computer
equipment and related hardware, (iii) central office switch and related
hardware and equipment, (iv) vehicles and outside plant, test equipment
inventory, (vi) internet equipment. Additionally, Seller has provided
Purchaser with a copy of the Company's continuing property record, as
prepared by Kiesling Associates, LLP.
IV. Liens on Real and Personal Property owned or used by the Company:
4
<PAGE>
The El Paso Telephone Company has pledged substantially all of its
assets to Rural Telephone Bank as security for the loans described in
Schedule 2.12 pursuant to a Mortgage and Security Agreement dated February
12, 1980.
Schedule 2.14(a)
Title and Related Matters - Owned Property
(Continued)
V. Liens on Investments:
A. The El Paso Telephone Company has pledged substantially all of its
assets to Rural Telephone Bank (which include stock of its Affiliates) as
security for the loans described in Schedules 2.3 and 2.12 pursuant to a
Mortgage and Security Agreement dated February 12, 1980.
B. Internal Revenue Service (Reference Number 0920405465) - IRC Section
6166 installment obligation: Seller elected under IRC Section 6166 to pay the
federal estate tax of her father, Robert C. Gordon, in installments. This
obligation is secured by the Company's capital stock. The balance is accelerated
upon disposition of the Shares and shall be paid by Seller at or prior to
Closing pursuant to Section 4.16.
C. The following claimants, in July, 1996, assigned to Seller by
individual but identical agreements (the "Assignment Agreements") any and all
rights they have or may have to the Estate of Robert C. Gordon under any
document purporting to be the Last Will and Testament of Robert C. Gordon, to
wit: Nancy Ales, Herbert Arbuckle, William Davis, Linda Morris, Leta Manninga
(by Power of Attorney Ann Armstrong), D. Evalyn Tate, and the City of El Paso.
Each of the Assignment Agreements provides that the proceeds of the sale of the
Company will be placed in escrow and distributed by the escrow agent pursuant to
a formula set forth therein. Each such claimant has a right to receive a portion
of the proceeds of the sale of the Company or the Company's capital stock, and
thus also has a right to receive notice of the sale of the Company. .
D. Illinois Wesleyan University, which in December 1996 assigned to Seller
any and all rights it has or may have to the Estate of Robert C. Gordon under
any document purporting to be the Last Will and Testament of Robert C. Gordon,
has already been paid for said assignment, and Seller has obtained a release
with respect thereto in a form satisfactory to Purchaser and Purchaser's
counsel.
E. The following persons who in June, 1998 settled certain litigation with
Seller and assigned to her by individual separate instruments any and all rights
they have or may have to the
5
<PAGE>
Estate of Robert C. Gordon under any document purporting to be the Last Will and
Testament of Robert C. Gordon, to wit: Linda Frey, Eugene Koos, Russell Haas,
Lois Beach, Jim
6
<PAGE>
Schedule 2.14(a)
Title and Related Matters - Owned Property
(Continued)
V. Liens on Investments: (Continued)
Frey and the Alpha Iota Chapter of Sigma Chi Fraternity at Illinois Wesleyan
University, Bloomington, Illinois, will have been paid for said assignment prior
to closing. Seller has obtained releases with respect thereto in a form
satisfactory to Purchaser and Purchaser's counsel.
F. With respect to a loan in the amount of $873,111.00 (evidenced by
Secured Promissory Note dated February 4, 1993) from the RTFC to IVC RSA 2-I,
Gemcell, Inc. pledged its partnership interests in IVC RSA 2-II and IVC RSA
2-III to the RTFC, pursuant to the provisions of that certain Partnership
Interest Pledge and Security Agreement as dated February 4, 1993, and as
subsequently amended October 1, 1994, to include a loan in the amount of
$836,020.00 (evidenced by Secured Promissory Note dated October 1, 1994) to IVC
RSA 2-I.
G. With respect to a loan in the amount of $418,778.00 (evidenced by
undated Secured Promissory Note issued on December 9, 1992) from the RTFC to IVC
RSA 2-II, Gemcell, Inc. pledged its partnership interest in IVC RSA 2-III to the
RTFC, pursuant to the provisions of that certain Partnership Interest Pledge and
Security Agreement as dated December 9, 1992, and as subsequently amended
October 1, 1994, to include a loan in the amount of $874,458.00 (evidenced by
Secured Promissory Note dated October 1, 1994) to IVC RSA 2-II.
H. With respect to a loan in the amount of $583,444.00 (evidenced by
undated Secured Promissory Note issued on December 7, 1992) from the RTFC to IVC
RSA 2-III, Gemcell, Inc. pledged its partnership interest in IVC RSA 2-II to the
RTFC, pursuant to the provisions of that certain Partnership Interest Pledge and
Security Agreement as dated December 7, 1992, and as subsequently amended
October 1, 1994, to include a loan in the amount of $ 1,281,802.00 (evidenced by
Secured Promissory Note dated October 1, 1994) to IVC RSA 2-III.
I. The IVC RSA 2-I Partnership Agreement, the IVC RSA 2-II Partnership
Agreement and the IVC RSA 2-III Partnership Agreement each contain provisions
which require the partners to make capital contributions to fund the
construction, expansion and/or operation of the cellular service, as well as
financial obligations and operating and management expenses, if required
pursuant to the terms of the agreements. The corresponding result of failing to
make a capital contribution is that the party's partnership interest is diluted
in favor of the partners who make up the deficiency. Gemcell, Inc. is a general
partner in each of the three cellular partnerships identified herein, and
therefore has contingent obligations with respect thereto.
7
<PAGE>
Each of the foregoing three (3) partnerships is a party to three (3) separate
loans from the RTFC as more particularly described in Schedule 2.4.
Schedule 2.14(b)
Title and Related Matters - Leased Property
I. A description of all real and personal property leased or used by the
Company is set forth below:
A. The Company has the use of and access to certain real estate
rights-of-way pursuant to the following license agreements with certain railroad
companies:
1. Toledo, Peoria & Western Railway Corporation ("TP&W")
a. Contract No. 174241 dated September 1, 1974(7)
- telephone cable under and across tracks at Mile
Post 77+3928'
- current annual license fee = $154.65
b. Contract No. 180033(8)
- telephone cable under and across tracks
- current annual license fee = $166.86(9)
c. Contract No. 180057 (in dispute)(10) dated April 5,
1990
- telephone cable under and across tracks at
station 4133+08.8
- current annual license fee = $119.00(11)
2. Illinois Central Railroad Company
- ICG 3571 dated December 11, 1974 (Mackinaw River -
near Kappa, IL)
- telephone cable under Bridge A-808.5
- current annual license fee = none(12)
B. Personal Property
The Company's postage meter is leased from Pitney Bowes
Credit Corp. and the credit card machine is leased from Elan.
- ----------
(7) No complete copy of agreement exists.
(8) No copy of agreement exists.
(9) Based on last invoice to the Company dated September 1, 1998.
(10) Underlying land rights acquired from railroad by City. Company has
franchise from city which would grant access. Railroad has not
billed the Company since 1994.
(11) Based on last invoice to the Company dated July 28, 1994.
(12) The Company has ceased using this right-of-way and has moved all
lines.
1
<PAGE>
Schedule 2.14(e)
Title and Related Matters - Condition
I. Assets or properties sold, transferred, leased, distributed or disposed of
except for transactions in the ordinary and regular course of business since
December 31, 1997:
Proposed purchase by Seller of her Company owned car (1994 Pontiac
Bonneville) and Compac laptop computer.
See also Schedule 2.11, Section (h).
1
<PAGE>
Schedule 2.15
Litigation
(a) Claims Pending or to Seller's Knowledge Threatened Against the Company:
1. In addition to any Orders or rules and regulations of the ICC and FCC
which are generally applicable to all telecommunications carriers, The El Paso
Telephone Company, has been required to file quarterly reports pursuant to 83
Ill.Adm.Code 240 in connection with the status of a loan from RTFC which was
approved in ICC Docket No. 94-0003. The note and loan agreements relative to
this matter were never executed and the funds were never drawn down. The Company
will not be drawing these funds and will be submitting a final report to the ICC
under Code Part 240.
2. ICC Docket Nos. 97-0601: Investigation pertaining to all local exchange
carriers within the State of Illinois, including the Company, regarding non-cost
based access charge rate elements in the intrastate access charges of incumbent
local exchange carriers in Illinois. The ICC instituted this proceeding as an
investigation. This docket and others consolidated therewith are the result of
FCC Orders that require a plan to gradually convert implicit federal universal
service support mechanisms to an explicit universal service mechanism. All
incumbent LECs were made parties to this docket which concerns mirroring of
interstate access charge tariffs. ICC Docket No. 97-0602: Investigation
pertaining to all local exchange carriers within the State of Illinois,
including the Company, regarding implicit Universal Service subsidies in
intrastate access charges and to investigate how these subsidies should be
treated in the future. The docket is consolidated with 97-0601.
3. ICC Docket No. 98-0195: Investigation into certain payphone issues as
directed in Docket No. 97-0225, pertaining to all local exchange carriers within
the State of Illinois, including the Company.
1
<PAGE>
Schedule 2.15
Litigation
(Continued)
(b) Claims by the Company Pending or Threatened Against Any Person:
1. El Paso Telephone Company turned in an NSF check for $1,700 written for
services by one of its subscribers to the Woodford County State's Attorney for
investigation and possible criminal prosecution. The Company has an unasserted
claim for services rendered to said subscriber totaling $10,000, which includes
the $1,700.
2. There are other unasserted claims against subscribers who are behind in
their payments, however all such matters are being handled in the ordinary
course of business.
(c) Outstanding Order Relating to the Company:
A temporary Restraining Order and Permanent Injunction was entered
against the Company and others in a "friendly lawsuit" in County of McLean
v. Illinois Bell Telephone Company et al, Eleventh Judicial Circuit,
McLean County, No. 95-CH-25. The Order, which was entered July 10, 1995,
requires the Company to provide the County and its Emergency Telephone
System Board access to certain of the Company's records, such as
non-published and/or non-listed subscriber telephone numbers and
addresses, for 9-1-1 purposes.
(d) Claims by Any Person Relating to the Shares:
1. The following claimants, in July, 1996, assigned to Seller by
individual but identical agreements (the "Assignment Agreements") any and all
rights they have or may have to the Estate of Robert C. Gordon under any
document purporting to be the Last Will and Testament of Robert C. Gordon, to
wit: Nancy Ales, Herbert Arbuckle, William Davis, Linda Morris, Leta Manninga
(by Power of Attorney Ann Armstrong), D. Evalyn Tate, and the City of El Paso.
Each of the Assignment Agreements provides that the proceeds of the sale of the
Company will be placed in escrow and distributed by the escrow agent pursuant to
a formula set forth therein. Each such claimant has a right to receive a portion
of the proceeds of the sale of the Company or the Company's capital stock, and
thus also has a right to receive notice of the sale of the Company.
2
<PAGE>
2. Illinois Wesleyan University, which in December 1996 assigned to Seller
any and all rights it has or may have to the Estate of Robert C. Gordon under
any document purporting to
3
<PAGE>
Schedule 2.15
Litigation
(Continued)
be the Last Will and Testament of Robert C. Gordon, has already been paid for
said assignment, and Seller has obtained a release with respect thereto in a
form satisfactory to Purchaser and Purchaser's counsel.
3. The following persons who in June, 1998 settled certain litigation with
Seller and assigned to her by individual separate instruments any and all rights
they have or may have to the Estate of Robert C. Gordon under any document
purporting to be the Last Will and Testament of Robert C. Gordon, to wit: Linda
Frey, Eugene Koos, Russell Haas, Lois Beach, Jim Frey and the Alpha Iota Chapter
of Sigma Chi Fraternity at Illinois Wesleyan University, Bloomington, Illinois,
will have been paid for said assignment prior to closing. Seller has obtained
releases with respect thereto in a form satisfactory to Purchaser and
Purchaser's counsel.
4
<PAGE>
Schedule 2.16
Tax Matters
I. Extensions of Time to File Tax Return:
The Company's 1997 State and Federal Income Tax Returns have not
been filed. An extension was granted to September 15, 1998, and the return
was filed.
II. Tax Returns Under Audit:
The Company's 1995 returns were audited in 1997. There were no
adjustments as a result of said audit.
III. Joint Venture, Partnership or Other Arrangement Treated as a
Partnership for Federal Income Tax Purposes:
Gemcell, Inc. is a 6.6667% partner in each of Illinois Valley
Cellular RSA 2 partnerships described in Schedule 2.4.
Gemcell's partnership in the IVC partnerships will not terminate at
Closing.
1
<PAGE>
Schedule 2.17
Bank and Brokerage Accounts
I. A list of all of the bank and brokerage accounts maintained by the Company
is set forth below:
A. The El Paso Telephone Company
1. Money Market and CD Accounts
Bank One - 2404 E. Oakland, Bloomington, IL #3170010377 (MM)
Bank of Chenoa - Rt. 24, Chenoa, IL #37-0262590 (CD)
Citizens Savings Bank - 1722 E. Hamilton, Bloomington, IL #1-6-802143 (CD)
First of America - 1616 E. Empire, Bloomington, IL #72-08107487 (CD)
Flanagan State Bank - Flanagan, IL #37-0262590 (CD)
Heartland Bank - 99 N. Elm Street, El Paso, IL #902365 (MM)
Magna Bank - 1304 E. Empire Street, Bloomington, IL #0007025092 (MM)
2. Checking Account
Heartland Bank - 99 N. Elm Street, El Paso, IL #00424110
B. Ravenswood Checking Account
Heartland Bank - 99 N. Elm Street, El Paso, IL #60111279
C. El Paso Long Distance Company Checking Account
Heartland Bank - 99 N. Elm Street, El Paso, IL #00424374
D. Gemcell, Inc. Checking Account
Heartland Bank - 99 N. Elm Street, El Paso, IL #00428396
II. The authorized signatories for each account listed above is set forth
below:
A. Carla J. Brownlee, President
- all
B. William P. Davis
- all, except Flanagan State Bank #37-0262590 (CD - El Paso
Telephone) and Heartland Bank #60111279 (checking - Ravenswood).
1
<PAGE>
Schedule 2.19(a)
Employee Benefit Plans
I. Employee Pension Benefit Plan:
The Company has a defined contribution pension plan, a SEPP, which covers
all classes of full-time employees which meet certain age and length of service
requirements. The Company's contribution is 6% of the employee's gross payroll.
The Company's policy is to fund costs accrued. Costs appear in Note 5 to the
Financial Statements. The trustee of the SEPP is Heartland Bank, 99 Elm Street,
El Paso, Illinois.
II. Employee Welfare Benefit Plan:
A. Insurance Policies Issued by National Farmers Union Standard Insurance
Company (Insured - Ravenswood Communications, Inc.):
Type: Workmen's Compensation
Policy No.: 2WC0152123
Date: February 10, 1998
Limits: $100,000 - each accident
$500,000 - disease (policy limit)
$100,000 - disease (each employee)
Annual Premium: $7,280
B. Insurance Policies Issued by American Community Mutual Insurance
Company (Insured - Ravenswood Communications, Inc.):
Type: Group Health
Policy Number: 85069
Effective Date: May 5, 1998
Coverage: Dental, Vision, Prescription Drugs, Life
($10,000), Accidental Death ($10,000), Group
Health
Annual Premium: $96,638.52
C. Insurance Policies Issued by Bankers Life and Casualty Company (Insured
- - Eleanor Crawford, a Retiree of El Paso Telephone Company)
Type: Supplemental Medical Insurance
Policy No.: 76,300,863
1
<PAGE>
Effective Date: October 3, 1997
Annual Premium: $1,495.84
Schedule 2.19(a)
Employee Benefit Plans
(Continued)
II. Employee Welfare Benefit Plan: (Continued)
D. Self Insurance
Type: Short Term Disability
Coverage: 80% of employees weekly salary for up to 10
weeks according to longevity. Fully described
in Handbook, See Schedule 2.10(a).
2
<PAGE>
Schedule 2.19(i)
Employee Benefit Plans - Other
I. Employee Stock Purchase, Employee Stock Option, Employee Stock Ownership,
Deferred Compensation, Performance, Bonus, Incentive, Vacation Pay, Holiday Pay,
Insurance, Severance, Retirement, Excess Benefit or Other Plans, Trusts or
Arrangements Which Are Not Erisa Plans:
See Schedules 2.10(a) and 2.19(a).
II. Any Other Agreement, Arrangement, Commitment and Understanding with Any
Current or Former Employee, Officer, Director or Consultant of the Company
Pursuant to Which Payments May Be Required to Be Made at Any Time Following the
Execution Date:
See Schedules 2.10(a), 2.19(a) and 2.24.
Continuing health and tail insurance as set forth in Sections 5.2 and
6.8(b).
1
<PAGE>
Schedule 2.20
Intellectual Property
I. A list of the Proprietary Rights owned or used by the Company are set forth
below:
A. The Company utilizes and has several corporate logos and names to
identify itself.
1. Company Names:
a. Ravenswood Communications, Inc.
b. The El Paso Telephone Company
c. El Paso Long Distance Company
d. Gemcell, Inc.
2. Corporate Logos and Slogans:
a. The El Paso Telephone Company:
(1) A telephone surrounded by a circle with the slogan
"Call Before You Travel" beneath the circle, and the name El
Paso under the telephone.
(2) Letterhead depicting likeness of the Company's
central office.
b. El Paso Long Distance Company: A globe depicting the
Western Hemisphere with an arrow running left to right and the
slogan "Bringing the World to You" beneath the arrow.
c. Ravenswood Communications, Inc.: Letterhead depicting the
likeness of a raven on the branch of a tree.
B. The Company utilizes and has utilized promotional material to develop
the corporate image and brand identity.
C. No State or Federal trademark or servicemark filings have been made
with respect to the above.
II. Licenses to Use Proprietary Rights Used in the Operation of The Business:
The Company does use software and hardware which are the
Intellectual Property of third parties in the ordinary course of business.
All appropriate licenses and right to use fees have been paid allowing the
Company use of said property. See Schedule 2.12 (VIII).
1
<PAGE>
Schedule 2.21
Environmental Matters
Telephone has in the past used and to a much lesser extent currently uses
wooden telephone poles to hang its telephone lines. To the extent that any past
or current placement of such poles might be found by a court or administrative
agency of competent jurisdiction to be an environmental concern, disclosure is
hereby made. Seller is not aware of any such rulings.
A small brick building previously located on a parcel of Telephone's
existing vacant real estate known as the pole yard (Tax No. 16-05-406-002) was
demolished and its remnants have been removed. A permit for such demolition was
properly applied for and obtained from all applicable Authorities. Seller is
unaware of any Hazardous Materials having been disposed of in connection with
the demolition of such building, other than in full compliance with
Environmental Law.
Telephone uses a below ground concrete receptacle to collect oil which is
drained from the Company's vehicles as part of routine maintenance. Such
receptacle uses a separation system to filter and collect spent oil, which is
periodically extracted and disposed of. Such receptacle, and the process by
which spent oil is extracted and disposed of, complies with all applicable
ordinances, codes, and Environmental Laws.
There is a french drain, approximately two (2) feet square, located in
Telephone's garage building, which disperses into the surrounding soil. Seller
is unaware of any Hazardous Materials having been disposed of through such drain
or of any contamination of the surrounding soil.
At the Purchaser's request, LAW Engineering and Environmental Services,
Inc. has conducted a Phase I and a limited Phase II environmental review of
Telephone's real property, and has taken and analyzed soil samples from the
areas surrounding the oil separator and floor drain described above. The
Purchaser has received a verbal report of LAW Engineering and Environmental
Services, Inc.'s findings, which verbal report was to the effect that substances
tested for within the soil surrounding the receptacle and the french drain
referenced above were within acceptable levels for commercial properties, and,
upon receipt of the full written report, the contents of such report will be
automatically incorporated herein by reference, as if fully set forth herein,
and the disclosures made above will be deemed modified, as though the contents
of such full report were fully set forth herein.
1
<PAGE>
Schedule 2.22
Capital Expenditures and Investments
I. A copy of Telephone's 1998 capital expenditures budget (Budget) is attached
hereto. There are no capital budgets for any other Affiliate.
II. The following is a list of capital expenditures made by the Company pursuant
to the Budget since December 31, 1997 to the Execution Date:
The pedestal upgrades shown on the budget are a work in progress in 1998.
The outside plant capacity upgrades shown on the budget are mostly
completed. All materials have been ordered and paid for, however there is an
open work order on the labor to complete the upgrades.
The new service van shown on the budget was purchased in 1997.
The landscaping with respect to the front of the building shown on the
budget was completed already in 1998.
The new facsimile machine shown on the budget has already been purchased
in 1998.
The marketing expense, mailers, newspaper and advertising publications
shown on the budget are an ongoing expense in 1998, but are mostly completed.
1
<PAGE>
Schedule 2.23
Dealings with Affiliates
I. A list of all oral or written Contracts between the Company and any one or
more of its Affiliates is set forth below:
A. Parties: The El Paso Telephone Company/El Paso Long
Distance
Subject Matter: The El Paso Telephone Company provides to El
Paso Long Distance facilities and personnel.
The costs of these facilities and personnel to
El Paso Long Distance is allocated pursuant to
such agreement.
Written Contract: Facilities and Personnel Sharing Agreement,
dated January 1, 1997.
B. Parties: The El Paso Telephone Company/El Paso Long
Distance
Subject Matter: The El Paso Telephone Company provides to El
Paso Long Distance billing and collection
functions. The El Paso Telephone Company
charges $4 per bill for this service.
Written Contract: There is no signed written agreement.
C. Parties: The El Paso Telephone Company (lender) and
Gemcell (debtor)
Subject Matter: advances currently totaling $228,092.49 to meet
capital contributions to cellular partnerships
and income taxes on unrealized partnership
profits.
Written Contract: There is no signed written agreement.
II. Payments, Loans or Credit Arrangements with Affiliates or Employees Except
in the Ordinary Course of Business since December 31, 1997:
A. Parties: Ravenswood Communications, Inc./Carla J.
Brownlee
Subject Matter: $500,000 loan from Ravenswood Communications,
Inc. to Seller, to be repaid on or before the
Closing Date.
Purpose: Payment of settlement agreement of Frey
litigation.
B. Parties: The El Paso Telephone Company/Ravenswood
Communications, Inc.
Subject Matter: $500,000 distribution from The El Paso
Telephone Company to Ravenswood Communications,
Inc.
1
<PAGE>
Schedule 2.24
Insurance
I. The Company currently is covered by insurance policies which provide for
coverages that are usual and customary as to amount and scope in the business of
the Company, descriptions of which policies, including the names of the insurer
and the insured, the amount of premiums, and the types and amounts of coverage,
are set forth below:
A. Insurance Policies Issued by National Farmers Union Standard Insurance
Company (Insured - Ravenswood Communications, Inc.):
Type: Directors and Officers Liability
Policy No.: 2DO0297402
Effective Date: February 10, 1998
Limits: $1 million per occurrence
Annual Premium: $3,048
Type: Workmen's Compensation
Policy No.: 2WC0152123
Date: February 10, 1998
Limits: $100,000 - each accident
$500,000 - disease (policy limit)
$100,000 - disease (each employee)
Annual Premium: $7,280
Type: General Liability
Policy No.: 2RU0152121
Effective Date: February 10, 1998
$2,497,000 - Real and Personal Property
$50,000 - Personal Property of Others
$250,000 - Value Protection Group (aggregate
limit)
$1 million - bodily injury, property damage,
personal injury, advertising injury
$2 million - products, completed operations
hazard (aggregate limit)
$1,000/person, $10,000/occurrence - premises
medical coverage
$50,000/occurrence - fire, legal liability,
real property
$1 million - telephone directory liability
(aggregate limit)
1
<PAGE>
Annual Premium: $9,629
Schedule 2.24
Insurance
(Continued)
A. Insurance Policies Issued by National Farmers Union Standard Insurance
Company (Insured - Ravenswood Communications, Inc.): (Continued)
Type: Automobile Liability
Policy No.: 2RU0152121
Effective Date: February 10, 1998
Limits: $1 million/occurrence (bodily injury; property
damage)
$1 million/occurrence (uninsured motorist)
$1 million/occurrence (underinsured motorist)
$2,000 each (auto medical payment)
Annual Premium: Included as part of annual premium set forth
under General Liability
Type: Umbrella
Policy No.: 2CB152122
Effective Date: February 10, 1998
Limits: $1 million/occurrence
$2 million aggregate
Annual Premium: Included as part of annual premium set forth
under General Liability
Type: Auto Physical Damage
Policy No.: 2RU0152121
Effective Date: February 2, 1998
Limits: Comprehensive - actual cash value less $100
deductible
Collision - actual cash value less $250
deductible
Annual Premium: Included as part of annual premium set forth
under General Liability
Type: Crime
Policy No.: 2RU0152121
Effective Date: February 10, 1998
Limits: $500,000 limit of liability/occurrence less
$250 deductible/occurrence covering employee
dishonesty, forgery, alteration, theft,
disappearance, destruction, robbery and safe
burglary.
2
<PAGE>
Annual Premium: Included as part of annual premium set forth
under General Liability
3
<PAGE>
Schedule 2.24
Insurance
(Continued)
B. Insurance Policies Issued by American Community Mutual Insurance
Company (Insured - Ravenswood Communications, Inc.):
Type: Group Health
Policy Number: 85069
Effective Date: May 5, 1998
Coverage: Dental, Vision, Prescription Drugs, Life
($10,000), Accidental Death ($10,000), Group
Health
Annual Premium: $96,638.52
C. Insurance Policies Issued by Bankers Company (Insured - Eleanor
Crawford, a Retiree of El Paso Telephone Company)
Type: Supplemental Medical Insurance
Policy No.: 76,300,863
Effective Date: October 3, 1997
Annual Premium: $1,495.84
D. Self Insurance
Type: Short Term Disability
Coverage: 80% of employees weekly salary for up to 10
weeks according to longevity. Fully described
in Handbook, See Schedule 2.10.
II. Claims made by the Company under any policy since December 31, 1993:
Insurer: National Farmers Union Standard
Date of Loss: May 8, 1997
Claim No. RU29710955
Description: Loss of two payphones in a fire.
Claimant: Ravenswood Communications, Inc.
4
<PAGE>
Schedule 2.26
Permits and Reports
I. A list of all permits, licenses, registrations, certificates, orders,
approvals or other authorizations from any Authority or other Person including,
without limitation, the FCC and the ICC and all applicable municipalities
("Permits") issued to or held by the Company in connection with its operations
as presently conducted is set forth below:
A. FCC Permits and Reports
1. FCC Tariff No. 1 filed by El Paso Long Distance Company, and made
effective on July 1, 1996, establish rates and regulations for domestic
interstate services.
2. International Section 214 application filed 6/26/96; File No.
ITC-96-351 granted 8/7/96. The change of control contemplated by the Stock
Purchase Agreement requires consent of the FCC, which will be jointly
applied for as detailed in Schedules 2.3 and 3.3. Other than with respect
to such 214 Authorization, the transactions contemplated by the Stock
Purchase Agreement do not require FCC approval.
3. Interstate Tariff filed 6/28/96; effective 6/27/96.
4. El Paso Long Distance concurs in Geneseo Long Distance Company's
International Tariff which was filed July 30, 1996; effective July 31,
1996.
B. Illinois Permits and Reports
1. Certificate of Service Authority - The El Paso Telephone Company:
ICC granted a Certificate of Public Convenience and Necessity to El Paso
Telephone Company for the construction, operation and maintenance of
telephone facilities and transaction of a telephone public utility in its
El Paso exchange in ICC Docket No. 78-0401 on March 7, 1979.
2. El Paso Telephone Co. Tariffs
a. Tariff ICC No. 10: Regulations, rates and charges applying
to the provision of access service for connection to the intrastate
communications facilities for Intrastate Customers within the
operating territory of the El Paso Telephone Company.
Received November 15, 1985
Commission Action December 11, 1985.
1
<PAGE>
2
<PAGE>
Schedule 2.26
Permits and Reports
(Continued)
b. Tariff ICC No. 13: Access Service Regulations, Rates and
Charges applying to the provision of Access Service for connection
to intrastate communication facilities for Intrastate Customers
within the operating territory of the El Paso Telephone Company in
the State of Illinois as provided herein Rate Centers, El Paso.
Received December 30, 1993
Commission Action January 24, 1994
c. ICC No. 14: Non-Competitive Telecommunications Services
Tariff. Schedule of Rates and Charges together with rules and
regulations provided in the territory served by the El Paso
Telephone Company within the State of Illinois as follows: El Paso,
Illinois
Received March 17, 1997
Commission Action April 9, 1997
3. Certificate of Service Authority - El Paso Long Distance Company:
Certificate of Service Authority to provide resold long
distance service for El Paso Long Distance Company in ICC Docket No.
95-0594 on January 10, 1996.
4. El Paso Long Distance Company Tariff
ICC No. 1: Interexchange Telecommunications Service. This
tariff contains rules, regulations, descriptions and rates
applicable to the furnishing of competitive interexchange
telecommunications services offered by El Paso Long Distance Company
within the State of Illinois. This tariff is filed pursuant to
Section 13-502(b) of the Public Utilities Act. El Paso Long Distance
Company declares all services contained in this tariff to be
competitive.
Received June 25, 1996
Commission Action October 23, 1996
5. The following is a list of all returns, reports, applications,
statements and other documents filed by El Paso Telephone Company within
the past 5 years:
a. Annual Reports with ICC (each year)
b. Annual Reports with Illinois Secretary of State (each
year)
c. Quarterly Code Part 240 Reports with ICC (each year
since 1994)
d. Gross Revenue Returns with ICC (each year) e. REA (RTB)
annual filing
3
<PAGE>
e. REA (RTB) annual filing
Schedule 2.26
Permits and Reports
(Continued)
f. Interstate Telecommunications Relay Services (TRS) Fund
Worksheet
g. Universal Service Worksheet (FCC Form 457)
h. USAC Certification of Deminimus Exemption
i. USAC Service Provider Information Form (FCC Form 498)
j. North American Numbering Plan Administration (NANPA)
Funding Worksheet (FCC 496)
k. Illinois Income Tax Return
l. Illinois Employer's Quarterly Withholding Tax Return
m. Illinois Employer's Contribution and Wage Report
n. Illinois Telecommunications Excise Tax Return
o. Illinois Invested Capital Tax Return
p. Illinois Sales and Use Tax Return
q. Illinois Infrastructure Maintenance Fees Return
r. Federal Income Tax return
s. Employer's Quarterly Federal Tax Return
t. Employer's Annual Federal Unemployment (FUTA) Tax Return
u. Employer's Quarterly FUI Taxable Wage Report
v. Quarterly Federal Excise Tax Return
w. See list of ICC dockets below and I.A. above.
x. FCC 43.61 International Report.
y. FCC Regulatory Fees (FCC Form 159).
z. Self certification of status as a rural telephone
company.
C. Local Permits
Franchise Ordinance from City of El Paso dated March 4, 1996,
authorizing use of City streets and rights-of-way for location of
telephone facilities.
II. Authorizations, Consents, Notifications or Filing; Continued Effect of
Permits:
A. The contemplated transaction would effect a transfer of control
in The El Paso Telephone Company ("Telephone"). Since Telephone is an
Illinois public utility, any changes in control require the prior approval
of the ICC, for which provision has been made in Sections 7.2 and 8.2 of
this Agreement.
4
<PAGE>
Schedule 2.26
Permits and Reports
(Continued)
B. The contemplated transaction would effect a transfer of control
in El Paso Long Distance Company ("Long Distance"). Since Long Distance
holds an FCC tariff to provide interstate telecommunications service, and
an ICC tariff to provide intrastate telecommunications services, any
changes in control require the prior approval of the FCC and ICC,
respectively, for which provision has been made in Sections 7.2 and 8.2 of
this Agreement.
III. A list of all returns, reports, applications, statements and other
documents filed by the Company within the past five (5) years with the FCC, the
ICC and any other Authority or municipality (including taxing authorities) is
set forth below:
A. Returns and Reports: See above.
B. Applications:
ICC Docket No. 98-0173: Pursuant to Petition filed on March 3, 1998, the
ICC granted proprietary status to all Annual
Reports of El Paso Long Distance Company by Order
dated April 22, 1998.
ICC Docket No. 97-0428: Pursuant to Petition filed on September 12, 1997,
El Paso Telephone Company was designated by the
ICC as an eligible telecommunications carrier
pursuant to 45 USC 214(e) to receive universal
service support by Order dated December 17, 1997.
ICC Docket No. 95-0594: Pursuant to Petition filed on November 28, 1995,
the ICC approved a reorganization pursuant to 220
ILCS 5/7-204 and a Certificate of Service
Authority to provide resold long distance service
for El Paso Long Distance Company by Order dated
January 10, 1996. The reorganization involved a
reverse triangular merger and resulted in
Ravenswood Communications, Inc. owning all of the
stock of El Paso Telephone Company and El Paso
Long Distance Company.
5
<PAGE>
Schedule 2.26
Permits and Reports
(Continued)
ICC Docket No. 94-0003: Pursuant to Petition filed on January 4, 1994, the
ICC approved a Loan Agreement with the Rural
Telephone Finance Cooperative and the execution
and issuance of a mortgage and security agreement
and a promissory note in the amount of $2,611,111,
by Order dated February 24, 1994. The note and
loan agreements relative to this matter were never
executed and the funds were never drawn down. The
Company will not be drawing these funds and will
be submitting a final report to the ICC under Code
Part 240. .
ICC Docket No. 94-0182: Pursuant to a Petition filed on May 11, 1994, the
ICC approved a stock purchase agreement and the
sale of certain equipment to Central Illinois Data
Services, Inc. by Order dated October 3, 1995. ICC
also approved agreements between CIDS and El Paso
and CIDS and C-R to provide billing services.
Further, the ICC approved an agreement between El
Paso and CIDS for the use of El Paso employees and
facilities. El Paso and C-R are the sole
shareholders of CIDS and under the approved
agreement each will own 230 shares of common stock
in CIDS.
ICC Docket No. 93-0426: Pursuant to Petition filed on November 26, 1993,
the ICC approved the purchase by El Paso Telephone
Company of the shares in El Paso Telephone Company
owned by Grace Gordon (70 shares) and David Gordon
(325 shares) for $395,000 by Order dated February
24, 1994.
6
<PAGE>
Schedule 2.26
Permits and Reports
(Continued)
ICC Docket 94-0365: By Petition filed on September 15, 1994, The El
Paso Telephone Company and the other eight
independent telephone companies whose cellular
subsidiaries are Partners in the cellular
partnerships referred to elsewhere in these
schedules petitioned the ICC for approval to make
additional investments of up to $50,000 in their
respective cellular subsidiaries. The ICC granted
the Petition by Order dated October 18, 1995 and
authorized El Paso to loan up to an additional
$50,000 to Gemcell, Inc. At the time of this
docket, Illinois law required all telephone
companies, including small companies such as C-R,
to obtain approval from the Illinois Commerce
Commission ("ICC") under Sections 7-101 and 7-102
of affiliated interest transactions and
investments in other entities. The ICC had
previously approved by Order dated August 21, 1991
in ICC Docket No. 90-0385 El Paso's to advance of
up to $250,000 in Gemcell to the three cellular
Partnerships.
7
<PAGE>
Schedule 2.27
Absence of Undisclosed Liabilities
None.
1
<PAGE>
Schedule 3.3
Consents and Authorizations of Purchaser
1. Section 7-204 of the Public Utilities Act, 220 ILCS 5/7-204, which is
applicable to Ravenswood and/or one or more of its Affiliates, provides that no
reorganization shall take place without prior approval of the Illinois Commerce
Commission ("ICC"). The transactions contemplated by the Stock Purchase
Agreement would be a reorganization under said statute, and therefore require
ICC approval. MJD Communications, Inc., Purchaser, Ravenswood and Telephone
shall seek to obtain ICC approval by filing a joint application for approval of
the reorganization of Telephone in accordance with Section 7-204 of such Act and
for all other appropriate relief.
2. The Communications Act of 1934, as amended, and the rules and
regulations of the Federal Communications Commission prohibit a change of
control over any FCC license without the prior approval of the FCC. The parties
will apply for FCC approval of the transfer of control of El Paso Long Distance
Company's International Section 214 Authorization (ITC-96-351, granted August 6,
1996).
3. Approval of the Board of Directors of MJD Services Corp. was obtained
on August 20, 1998.
4. The Rural Telephone Bank is entitled to notice of the change of control
and reorganization contemplated by the Stock Purchase Agreement pursuant to the
Mortgage and Security Agreement dated February, 1980. Notice will be given by
Seller and Purchaser jointly upon execution of the Agreement.
5. AT&T Communications of Illinois, Inc. is entitled to notice of the
change of control and reorganization contemplated by the Stock Purchase
Agreement pursuant to that certain agreement between itself and El Paso
Telephone Company regarding billing and collecting services. Notice will be
given by Seller and Purchaser jointly upon execution of the Agreement.
6. The Company has other contracts in place, such as the Franchise from
the City of El Paso, which require notice to and approval by the other party
thereto of any assignment of the contract, however these contracts do not appear
to require approval for a change of control or reorganization. All such
contracts are included in the list of contracts contained in either Schedule
2.12 or 2.26. Notice will be given by Seller and Purchaser jointly upon
execution of the Agreement.
1
<PAGE>
Schedule 4.1(b)
New Employees and Changes to Compensation
See Schedule 2.11(d).
1
<PAGE>
Schedule 4.14
Article IV Disclosure Statement
None.
1
<PAGE>
Schedule 4.7
Assets to be Sold by the Company
The Company shall sell and the Seller shall purchase Seller's Company
owned car (1994 Pontiac Bonneville) and Compac laptop computer at net book
value.
1
<PAGE>
Schedule 6.6
Public Announcements
Except as set forth below and as set forth in the Agreement, no party to
the Stock Purchase Agreement or any Affiliate, representative or shareholder of
such party shall disclose any of the terms of said Agreement to any third party
prior to Closing:
A. Seller and/Company:
1. Nancy Ales
2. Herbert Arbuckle
3. William Davis
4. Linda Morris
5. Ann Armstrong, as (i) Power of Attorney for Leta Manninga, (ii)
individually, and (iii) as agent for Judy Bohlander and Lois Vogel
6. D. Evalyn Tate
7. City of El Paso
8. All governmental authorities or contract parties requiring notice or
from whom consent to the transaction will be required.
B. Purchaser:
1. All governmental authorities or contract parties requiring notice or
from whom consent to the transaction will be required.
2. Purchaser's Lender.
1
Schedule 2.12
List of Contracts
LIST OF CONTRACTS
TELEPHONE SERVICES CONTRACTS
Parties: AT&T Communications of Illinois, Inc. and
El Paso Telephone Company
Date: May 25, 1984
Term: Automatic renewal until terminated by 6 months notice
Consents and Approvals: No assignment without prior written consent, but no
change of control provision. Therefore, not applicable.
Nature of Agreement: Provision of telecommunication facilities and services
Parties: AT&T Communications of Illinois, Inc.
Amendment #4 to Revised Article 8-1
Date: July 1, 1990
Term: None
Consents and Approvals: N/A
Nature of Agreement: Customer billing and related billing information
Parties: AT&T Communications of Illinois, Inc.
Amendment #3 to Revised Article 8-1
Date: January 1, 1990
Term: None
Consents and Approvals: N/A
Nature of Agreement: Customer billing
Parties: AT&T Communications of Illinois, Inc.
Amendment #2 to Revised Article 8-1
Date: July 1, 1988
Term: None
Consents and Approvals: N/A
Nature of Agreement: Customer billing
6
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
Parties: AT&T Communications of Illinois, Inc.
Amendment #1 to Revised Article 8-1
Date: January 1, 1988
Term: None
Consents and Approvals: N/A
Nature of Agreement: Customer billing
Parties: AT&T Communications of Illinois, Inc.
and El Paso Telephone Company
Date: (Undated)
Term: None
Consents and Approvals: N/A
Nature of Agreement: Customer billing and collections
Parties: AT&T Communications of Illinois, Inc.
and El Paso Telephone Company Article 20-2
Date: May 1, 1989
Term: Contract in effect until terminated by either party
upon 90 days notice
Consents and Approvals: Subject to provisions of Article 1
Nature of Agreement: Sales, leads, marketing services
Parties: AT&T Communications of Illinois, Inc. and El Paso
Telephone Company Article 20-2 (new offer service)
Letter Agreement
Date: January 13, 1992
Term: That which is in force under Article 20-2
Consents and Approvals: Subject to provisions of Article 1
Nature of Agreement: 800 starter line service
Parties: AT&T Communications of Illinois, Inc.
and El Paso Telephone Company Article 31 Amendment #4
Date: November 10, 1993
Term: Not chosen
Consents and Approvals: N/A
Nature of Agreement: Invoicing of settlements
7
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
(No such contract was signed, AT&T Article 31 was terminated in December, 1997)
Parties: AT&T Communications of Illinois, Inc.
and El Paso Telephone Company Article 31 Amendment #4A
Date: Unsigned copy quarterly option
Term: Not chosen
Consents and Approvals: N/A
Nature of Agreement: Mutual honoring of credit card calling card account numbers
(No such contract was signed, AT&T Article 31 was
terminated in December, 1997)
Parties: AT&T Communications of Illinois, Inc.
and El Paso Telephone Company Article 31 Amendment #4B
Date: Semi Annual option unsigned
Term: None
Consents and Approvals: N/A
Nature of Agreement: Mutual honoring of credit card calling card account numbers
(No such contract was signed, AT&T Article 31 was
terminated in December, 1997)
Parties: AT&T Communications of Illinois, Inc.
and El Paso Telephone Company Article 31 Amendment #4C
Date: Annual option unsigned
Term: None
Consents and Approvals: N/A
Nature of Agreement: Mutual honoring of credit card calling card account numbers
(No such contract was signed, AT&T Article 31 was
terminated in December, 1997)
Parties: AT&T Communications of Illinois, Inc.
and El Paso Telephone Company Article 31 Original
Date: July 1, 1990
Term: Contract until terminated pursuant to its terms
Consents and Approvals: N/A
Nature of Agreement: Mutual honoring of credit cards and calling card account
numbers
8
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
9
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
Parties: AT&T Communications of Illinois, Inc. and El Paso
Telephone Company Revised Article 31 Attachment B
Date: July 1, 1990
Term: Contract until terminated pursuant to its terms
Consents and Approvals: All goes to Article 8
Nature of Agreement: Mutual honoring of credit cards and calling card account
numbers
Parties: AT&T Communications of Illinois, Inc. and El Paso
Telephone Company Revised Article 31 Amendment 1
Date: July 1, 1990
Term: Contract until terminated pursuant to its terms
Consents and Approvals: N/A
Nature of Agreement: Mutual honoring of credit cards and calling card account
numbers
Parties: AT&T Communications of Illinois, Inc. and El Paso
Telephone Company Revised Article 31 Attachment A-2
Date: July 1, 1990
Term: Contract until terminated pursuant to its terms
Consents and Approvals: None
Nature of Agreement: Settlement provisions for messaging
Parties: AT&T Communications of Illinois, Inc. and El Paso
Telephone Company Revised Article 31 Attachment C
Date: July 1, 1990
Term: Contract until terminated pursuant to its terms
Consents and Approvals: None
Nature of Agreement: Operator system and database performance
Parties: AT&T Communications of Illinois, Inc. and El Paso
Telephone Company Revised Article 31 Amendment 2
Date: May 1, 1991
Term: Contract until terminated pursuant to its terms
Consents and Approvals: None
Nature of Agreement: Mutual honoring of credit cards
10
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
Parties: AT&T Communications of Illinois, Inc.
and El Paso Telephone Company Article 33
Date: June 25, 1991
Term: 90 days notice
Consents and Approvals: As per Article 8-1
Nature of Agreement: Marketing cards
Parties: AT&T Communications of Illinois, Inc.
and El Paso Telephone Company Non-Disclosure Agreement
Date: August 1, 1989
Term: 3 years
Consents and Approvals: N/A
Nature of Agreement: For 891 AT&T calling card
Parties: AT&T Communications of Illinois, Inc.
and El Paso Telephone Company Settlement Agreement
Date: May 18, 1990
Term: None
Consents and Approvals: N/A
Nature of Agreement: Settlement of AT&T claim for damages ($17,772)
Parties: AT&T Communications of Illinois, Inc.
and El Paso Telephone Company
Article 8-2
Date: (Undated)
Term: None
Consents and Approvals: Notice required
Nature of Agreement: Customer billing and related billing information
Parties: GTE North, Inc. and El Paso Telephone Company
Date: December 18, 1997
Term: 36 month term auto renewal on 60 day notice
Consents and Approvals: No required consent
Nature of Agreement: Network service agreement, digital channel service
11
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
Parties: GTE North, Inc. and El Paso Telephone Company
Date: May 21, 1996
Term: Contract in effect unless term on conditions of
termination
Consents and Approvals: Not assignable without consent
Nature of Agreement: 800 database carrier selection Service Agreement
Parties: GTE North, Inc. and El Paso Telephone Company
Date: May 21, 1996
Term: Contract in effect unless terminated in accordance with
provisions of term
Consents and Approvals: Not assignable without consent
Nature of Agreement: SS7 contract
Parties: GTE North, Inc. and El Paso Telephone Company
Date: September 1, 1988
Term: Continued until terminated in account with terms
Consents and Approvals: None
Nature of Agreement: Directory assistance
Parties: GTE North, Inc. and El Paso Telephone Company
Date: February 6, 1996
Term: Cancel on 60 days notice
Consents and Approvals: N/A
Nature of Agreement: Release by El Paso Telephone Company to GTE authorizing
Illinois Bell to provide data for provision of
directory assistance service
Parties: GTE North, Inc. and El Paso Telephone Company
Date: June 10, 1982
Term: Auto renewal - 1 year term on 60 days written notice
Consents and Approvals: N/A
Nature of Agreement: Operator office agreement
12
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
Parties: GTE North, Inc. and El Paso Telephone Company
Date: October 9, 1991
Term: Continued unless term in accordance with termination
guidelines
Consents and Approvals: Not assignable without consent
Nature of Agreement: Repair answering service
Parties: GTE North, Inc. and El Paso Telephone Company
Date: January 6, 1993
Term: Continued until terminated in accordance with terms
Consents and Approvals: None
Nature of Agreement: Directory assistance compensation
Parties: GTE North, Inc. and El Paso Telephone Company
Date: January 1, 1986
Term: 60 days notice to terminate
Consents and Approvals: None
Nature of Agreement: Revenue distribution for terminating Feature Group A access
Parties: ANPI and El Paso Long Distance Company (fix Ravenswood
glitch)
Date: March 4, 1996
Term: 3 years term pursuant to provisions
Consents and Approvals: Required for assignment
Nature of Agreement: Purchase of toll service for resale
Parties: ANPI and El Paso Long Distance Company (fix Ravenswood
glitch)
Date: March 4, 1996
Term: Same as underlying contract
Consents and Approvals: N/A
Nature of Agreement: Schedule 1.3 to original volume commitment and discounts
Parties: ANPI and El Paso Long Distance Company (fix Ravenswood
glitch)
Date: March 4, 1996
Term: Same as underlying perpetual contract
Consents and Approvals: Required for assignment
13
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
Nature of Agreement: Stock Purchase Agreement
Parties: CR and El Paso Telephone Company (oral contract with
Connecting Point, successor of CR's former internet
business)
Date: July 15, 1996
Term: 1 year term on 90 days written notice
Consents and Approvals:
Nature of Agreement: Provides telephone service for Internet connection -
utilization of El Paso Telephone Company concentrator
Parties: Netex and El Paso Telephone Company
Date: (No written contract - just call when needed)
Term: None
Consents and Approvals: N/A
Nature of Agreement: Consulting contract for computers and Internet problems
Parties: DP Consultants and El Paso Telephone Company
Date: (No written contract - just call when needed)
Term: None
Consents and Approvals: N/A
Nature of Agreement: Fee for service consultants for computer and Internet
problems
VENDOR CONTRACT
Parties: Siemens Stromberg Carlson and El Paso Telephone Company
Date: January 10, 1996
Term: NA - Purchase Order
Consents and Approvals: Not assignable without consent - related software
license agreement
Nature of Agreement: Switching products - upgrades
Parties: Siemens Stromberg Carlson and El Paso Telephone Company
Date: January 9, 1995
Term: NA - Purchase Order
Consents and Approvals: Not assignable without consent - related software
license agreement
Nature of Agreement: Voice mail, Class I and II upgrades
14
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
Parties: Sun Microsystems and El Paso Telephone Company
Date: October 7, 1996 - December 7, 1997
Term: Purchase Order #04714 renewal - 1 year (continued from
above)
Consents and Approvals: N/A
Nature of Agreement: System maintenance contract
Parties: Sun Microsystems and El Paso Telephone Company
Date: February 18, 1998
Term: 1 year
Consents and Approvals: N/A
Nature of Agreement: Maintenance of hardware/software
Parties: IBM and El Paso Telephone Company Five year and AS400
Date: December 30, 1994
Term: Run December 30, 1999 - 60 months, 5 year, 30 days
written notice
Consents and Approvals: N/A
Nature of Agreement: Maintenance Agreement for 9404F20 extended maintenance
option
Parties: Multiprocess, Inc. and El Paso Telephone Company
Date: September 3, 1997
Term: Continued 12 months auto renewal 60 days notice to
cancel
Consents and Approvals: None
Nature of Agreement: Maintenance Agreement hardware/software dataview system
Parties: Curtiss and El Paso Telephone Company
Date: None (no written contract)
Term: None
Consents and Approvals: N/A
Nature of Agreement: Provides paper products for billing and correspondence
Parties: CDS Office Technologies and El Paso Telephone Company
15
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
Date: April, 1998
Consents and Approvals: N/A
Nature of Agreement: Maintenance of UF-770 fax machine
SERVICE CONTRACTS
Parties: Elan and El Paso Telephone Company
Date: July 1, 1994
Term: Renew yearly for fee
Consents and Approvals: No assignment without consent
Nature of Agreement: Employee credit card for purchases
Parties: Elan and El Paso Telephone Company
Date: July 1, 1994
Term: Continued 30 days written notice to term
Consents and Approvals: No assignment without consent
Nature of Agreement: Provide credit card service to telephone customers,
collection service
Parties: Ameritech and El Paso Telephone Company
Date: October 3, 1994
Term: Continued until terminated
Consents and Approvals: Not assignable without consent
Nature of Agreement: Maintenance of batteries
Parties: Commsoft, Inc. and El Paso Telephone Company
Date: October 10, 1996
Term: Continued until terminated
Consents and Approvals: Not assignable without consent
Nature of Agreement: Maintenance and upgrade of AS400 software for Model D-35
Parties: Commsoft, Inc. and El Paso Telephone Company
Date: December 2, 1993
Term: Continued until terminated
Consents and Approvals: Not assignable without consent
16
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
Nature of Agreement: Software license agreement addendum I and Addendum II -
CABS
17
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
Parties: Commsoft, Inc. and El Paso Telephone Company
Date: December 21, 1995
Term: Continued until terminated
Consents and Approvals: Not assignable without consent
Nature of Agreement: Internet billing system
Parties: Commsoft, Inc. and El Paso Telephone Company
Date: September 1, 1994
Term: Continued until terminated
Consents and Approvals: Not assignable without consent
Nature of Agreement: Maintenance agreement for software
Parties: Aramark and El Paso Telephone Company
Date: May 1, 1997
Term: Continued until terminated
Consents and Approvals: None
Nature of Agreement: Provision of uniform for service men
Parties: Pitney Bowes Credit Corp. and El Paso Telephone Company
Date: December 29, 1997
Term: 2 years
Consents and Approvals: Not assignable without consent
Nature of Agreement: Lease and maintenance of postage meter
Parties: mc(2) and El Paso Telephone Company
Date: February, 1998
Term: 12 month, 30 days written notice
Consents and Approvals: N/A
Nature of Agreement: Service contract with gas company for discounted rates
Parties: Advanced Matix Technology, Inc. and El Paso Telephone
Company
Date: June 8, 1998
Effective June 8, 1998
Term: 12 months (or additional 180,000 pages)
18
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
Purpose: Computer printer maintenance agreement
Parties: Cisco Systems Inc. and El Paso Telephone Company
Date: June 4, 1998
Term: Purchase Order
Purpose: Router maintenance agreement (internet equipment)
Parties: Network MCI, Inc. and El Paso Telephone Company
Date: July 28, 1998
Term: I year
Purpose: Access to MCI T1 long distance facilities (internet
related)
Parties: VeriSign, Inc. and El Paso Telephone Company
Term: 1 year - undated and unsigned
Purpose: Secure Sewer Certificate Agreement (internet related)
EMPLOYEE AND INDEPENDENT CONTRACTORS CONTRACTS
Parties: SEPP (Pension plan)
Date: June, 1997
Nature of Agreement: Pension plan - deposits in individual IRAS
Trustee: Heartland Bank
Employee and Independent Contractors as set forth in Schedule 2.10(a).
Employee Policy Handbook as more particularly described in Schedule 2.10(a). (To
the extent it could be found to be a contract.)
Employee Group Health Insurance and other employee insurance policies as more
particularly described in Schedule 2.24.
19
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
LOAN AGREEMENTS
Parties: Rural Telephone Bank (lender) and El Paso Telephone
Company (debtor)
Term: 35 year
Interest: 8%
Principal Amount: $1,906,800
Documents: Telephone Loan Contract dated September 28,
1979 Mortgage Note dated February 12, 1980
for $493,000 Mortgage Note dated February
12, 1980 for $1,413,800 Mortgage and
Security Agreement dated February 12, 1980
LOANS TO AFFILIATES
Parties: Ravenswood Communications, Inc. and Carla J. Brownlee
Term: Demand Note
Interest Rate: 6.65 %
Principal Amount: $500,000.00
Purpose: Payment of settlement agreement of Frey litigation
Parties: El Paso Telephone Company (lender) and Gemcell (debtor)
Amount: $228,092.49
Purpose: Capital contributions to cellular partnerships and
income taxes on unrealized partnership profits. No
written agreement, book entries only.
Investment in Affiliates and Guarantees as set forth in Schedule 2.4.
SERVICE AGREEMENTS
Parties: Times Newspapers and El Paso Telephone Company
Date: March 2, 1998
Term: 1 year
Consents and Approvals: None
20
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
Nature of Agreement: ROP advertising "C" contract for 125-299 inches column
per year.
Parties: Consolidated Communications Directories, Inc. and El
Paso Telephone Company
Date: Addendum June 5, 1997, Original March 24, 1997
Term: 5 years with addendum stating new owner may cancel
contract by written notice - 60 days.
Consents and Approvals: None noted.
Nature of Agreement: Telephone Directory Publishing Agreement.
Parties: EPLDC and El Paso Telephone Company
Date: December 30, 1996
Term: 60 day written termination
Consents and Approvals: No assignment without written consent.
Nature of Agreement: Facilities & Personnel Sharing Agreement
Parties: Praxair and El Paso Telephone Company
Nature of Agreement: Cylinder rental for compressed air.
Parties: UPS and El Paso Telephone Company
Nature of Agreement: Daily pickup and delivery of packages
21
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
CELLULAR SALES CONTRACTS
Parties: 360(degree) Communications Co. and Gemcell, Inc.
Date: December 16, 1997
Term: 1 year - automatic renewal at 1 year
Consents and Approvals:
Nature of Agreement: Dealer of cellular service agreement to resell cellular
service
Parties: Illinois Valley Cellular RSA2 Partnership and Gemcell,
Inc.
Date: November 6, 1996
Term: 1 year
Nature of Agreement: Cellular service agreement to resell cellular service
MISCELLANEOUS CONTRACTS
Parties: City of El Paso and El Paso Telephone Company
Date: March 4, 1996
Term: 10 years
Consents and Approvals: None noted
Nature of Agreement: City Franchise Agreement
Parties: USA Today and El Paso Telephone Company
Date: March 4, 1998
Term: Yearly renewal
Consents and Approvals: None
Nature of Agreement: 52-week subscription
Parties: El Paso Journal and El Paso Telephone Company
Date: (Start date unknown - long ago)
Term: Yearly renewal
Consents and Approvals: None
Nature of Agreement: Newspaper subscription
22
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
23
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
Parties: American Express Co. and El Paso Telephone Company
Date: 1992
Term: Yearly renewal for fee
Consents and Approvals: Not assignable
Nature of Agreement: Credit card membership
Parties: Caseys General Stores, Inc. and El Paso Telephone
Company
Date: 1993
Term: Yearly renewal
Consents and Approvals: Not assignable without consent
Nature of Agreement: Credit card membership
Parties: F.S. (Farm Service) and El Paso Telephone Company
Date: (Start date unknown - long ago)
Term: Perpetual
Consents and Approvals: Not assignable without consent
Nature of Agreement: Credit card membership
Parties: Penn Landscaping and El Paso Telephone Company
Date: May 21, 1998
Nature of Agreement: Landscaping - approximately $2400. (One time occurrence)
Parties: City of El Paso and El Paso Telephone Company
Date: May 22, 1998
Nature of Agreement: Paving parkway for parking - approximately $1200. (One time
occurrence)
24
<PAGE>
Schedule 2.12
List of Contracts
(Continued)
VERBAL OR ORGANIZATIONAL CONTRACTS
El Paso Telephone Company belongs to the following organizations:
OPASTCO
NTCA
USTA
ISECA
U.S. Chambers
NECA
ITA
IITA
El Paso Chamber of Commerce
ITAC
25
PURCHASE PRICE ESCROW AGREEMENT
THIS PURCHASE PRICE ESCROW AGREEMENT (the "Purchase Price Escrow
Agreement") is made as of this ___ day of ___________, _____, by and between
NANCY ALES, HERB ARBUCKLE, WILLIAM P. DAVIS, LETA MANNINGA, by and through her
power of attorney, ANN ARMSTRONG, ANN ARMSTRONG, individually and as agent for
Judy Bohlander and Lois Vogel, LINDA MORRIS, DELIA EVALYN TATE, each a resident
of the State of Illinois, and the CITY OF EL PASO, an Illinois municipal
corporation (each of the foregoing collectively referred to as the "Settlers"),
CARLA J. BROWNLEE, a resident of the State of Illinois ("Brownlee") and FIRST
FEDERAL SAVINGS AND LOAN ASSOCIATION, a ________________ (the "Purchase Price
Escrow Agent").
RECITALS
WHEREAS, Brownlee's father, Robert C. Gordon, had a controlling interest
in The El Paso Telephone Company (the "Telephone Company") at the time of his
death in 1991, owning 405 of the authorized, issued and outstanding shares of
common stock thereof, and
WHEREAS, Mr. Gordon's estate was administered on an intestate basis and
all of his assets, including his 405 shares of stock in the Telephone Company,
were distributed to Brownlee, and
WHEREAS, Brownlee has paid and/or is making payments with respect to all
of the state and federal taxes associated with Mr. Gordon's estate, and
WHEREAS, a document purporting to be the Last Will and Testament of Robert
C. Gordon (the "Purported Will") was subsequently located which would have given
25 shares of stock in the Telephone Company to the City of El Paso, and the
remainder of Mr. Gordon's shares of stock in the Telephone Company
proportionately to certain employees thereof, including, among others, Nancy
Ales, Herb Arbuckle, William P. Davis, Leta Manninga, Linda Morris and Delia
Evalyn Tate, based on their years of continuous service at the time of his
death, and
WHEREAS, after Mr. Gordon's death, but before the discovery of the
Purported Will, Brownlee negotiated an agreement with the then
<PAGE>
minority shareholders of the Telephone Company pursuant to which the Telephone
Company redeemed the minority shareholders' 395 shares of the Telephone
Company's stock, and
WHEREAS, at the time of the discovery of the Purported Will, the Telephone
Company was in the process of a corporate reorganization which resulted in the
transfer or conversion of Brownlee's 405 shares of its stock for 405 shares of
common stock of Ravenswood Communications, Inc. ("Ravenswood") and the ownership
by Ravenswood of all of the issued and outstanding shares of the Telephone
Company, and
WHEREAS, Brownlee entered into separate agreements with Nancy Ales, Herb
Arbuckle, William P. Davis, Ann Armstrong as Power of Attorney for Leta
Manninga, Ann Armstrong, individually and as agent for Judy Bohlander and Lois
Vogel, Linda Morris, Delia Evalyn Tate and the City of El Paso (the "Settlement
Agreements") whereby Brownlee agreed to sell the Telephone Company and each such
Settler assigned to her any interests they may have in the Telephone Company
under the Purported Will in exchange for a percentage of the proceeds of the
sale thereof, and
WHEREAS, the Settlement Agreements provide that after reimbursing Brownlee
for certain expenses the proceeds of the sale shall be delivered to an escrow
agent and that said proceeds shall be divided between Brownlee and the Settlers
based on certain predetermined percentages, and
WHEREAS, each of the Settlers also executed a Release and Covenant Not to
Sue in connection with the Settlement Agreements, which fully released Brownlee
and one another from any and all liability, actions, or claims in any way
related to the Purported Will or the shares of Telephone Company owned by Robert
C. Gordon at the time of his death or the Shares (as defined below), and
WHEREAS, Brownlee has settled certain litigation with other potential
claimants under the Purported Will for the sum of Five Hundred Thousand Dollars
($500,000), which amount was borrowed by Brownlee from Ravenswood pursuant to a
promissory note which is to be repaid by Brownlee from her portion of the
proceeds of the sale of the Shares, and
-2-
<PAGE>
WHEREAS, on or about October 16, 1998, Ravenswood, Brownlee and MJD
Services Corp. (the "Purchaser") entered into a Stock Purchase Agreement (the
"Purchase Agreement") whereby the Purchaser agreed to purchase from Brownlee all
of the shares of Ravenswood (the "Shares"), which will result in the acquisition
by the Purchaser of all the issued and outstanding shares of stock of the
Telephone Company, El Paso Long Distance Company and Gemcell, Inc., for an
aggregate purchase price of Ten Million Dollars ($10,000,000) ("Purchase
Price"), and
WHEREAS, the Purchase Agreement provides in part that Five Hundred
Thousand Dollars ($500,000) of the Purchase Price will be retained by the
Purchaser to repay the loan from Ravenswood to Brownlee (with Brownlee paying
the interest thereon directly) and that One Million Dollars ($1,000,000) of the
Purchase Price (the "Indemnity Holdback Funds") will be deposited with an escrow
agent for the duration of the Indemnification Period, as defined in Section 11.1
of the Purchase Agreement, to secure Brownlee's agreement to indemnify Purchaser
as set forth in the Purchase Agreement, and
WHEREAS, Brownlee, Purchaser and First Federal Savings and Loan
Association, as "Indemnity Escrow Agent", have entered into a separate escrow
agreement regarding the Indemnity Holdback Funds (the "Indemnity Escrow
Agreement") which provides in part that the Indemnity Escrow Agent distribute
any portion of the Indemnity Holdback Funds remaining in its possession which
are not the subject of a pending Claim, immediately upon the expiration of the
Indemnification Period to the Purchase Price Escrow Account established pursuant
to this Purchase Price Escrow Agreement, and
WHEREAS, this Purchase Price Escrow Agreement provides for acceptance of
the Initial Purchase Price Escrow Funds (as defined below) by the Purchase Price
Escrow Agent, establishment of a Purchase Price Escrow Account, and distribution
of the funds from the Purchase Price Escrow Account to Brownlee and the Settlers
as herein provided, and
WHEREAS, the Purchase Price Escrow Agent has agreed to serve as escrow
agent under this Purchase Price Escrow Agreement and to accept delivery of the
Initial Purchase Price Escrow Funds and the Subsequent Purchase Price Escrow
Funds (as defined below) (collectively, the "Escrow Funds") and make
distribution from the
-3-
<PAGE>
Purchase Price Escrow Account in accordance with the terms and conditions set
out in this Purchase Price Escrow Agreement.
AGREEMENT
In consideration of the premises, and the agreements set out below, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties enter into the following Purchase Price
Escrow Agreement:
1. Purpose of Escrow. The Escrow Funds shall be used solely for the purposes
set forth herein. The Escrow Funds shall not constitute an asset of
Brownlee or the Settlers until the distribution thereof pursuant to this
Escrow Agreement.
2. Term. The term of this Purchase Price Escrow Agreement (the "Purchase
Price Escrow Period") shall expire on the sixtieth (60th) day following
expiration of the Indemnification Period, as defined in Section 11.1 of
the Purchase Agreement, except that it shall be automatically extended as
necessary to provide for the disposition of any Claims filed by Purchaser
with the Indemnity Escrow Agent during such period, in accordance with the
procedures set forth in Section 5 of the Indemnity Escrow Agreement.
3. Initial Deposit with Purchase Price Escrow Agent. At Closing of the sale
and purchase of the Shares as provided in the Purchase Agreement,
Purchaser shall deliver to the Purchase Price Escrow Agent the sum of
Eight Million Five Hundred Thousand Dollars ($8,500,000) (the "Initial
Purchase Price Escrow Funds") to be held, administered and distributed by
the Purchase Price Escrow Agent pursuant to the terms of this Purchase
Price Escrow Agreement. In addition, One Million Dollars ($1,000,000) of
the Ten Million Dollars ($10,000,000) aggregate Purchase Price shall be
delivered to the Indemnity Escrow Agent pursuant to the Indemnity Escrow
Agreement. The remaining Five Hundred Thousand Dollars ($500,000) of the
Purchase Price shall be retained by the Purchaser to repay the loan from
Ravenswood to Brownlee (with Brownlee paying the interest thereon
directly).
4. Initial Purchase Price Escrow Funds. Upon receipt of the Initial Purchase
Price Escrow Funds, the Escrow Agent shall
-4-
<PAGE>
deposit the Initial Purchase Price Escrow Funds in an escrow account (the
"Purchase Price Escrow Account") and shall hold, administer, invest and
distribute the Initial Purchase Price Escrow Funds in accordance with the
terms of this Purchase Price Escrow Agreement.
5. Disbursement of Initial Purchase Price Escrow Funds.
(a) Within thirty (30) days of the date of the Closing on the sale
of the Shares, Brownlee shall submit to the Purchase Price Escrow Agent
and the Settlers a report of the expenses incurred by Brownlee in
connection with the sale of the Shares, as approved by Brownlee, including
but not limited to all brokerage, advertising, accounting, legal and
escrow fees and expenses, but not including any expenses which shall have
been paid or reimbursed by the Telephone Company or Ravenswood pursuant to
the Purchase Agreement. Said expenses shall include the state and federal
taxes paid by Brownlee in connection with the estate of Robert C. Gordon,
but shall not include any expenses for legal services rendered before July
8, 1996 or expenses of litigation with other potential claimants under the
Purported Will. In addition, neither the Five Hundred Thousand Dollars
($500,000) paid by Brownlee to settle the litigation with the other
potential claimants under the Purported Will, nor the interest to be paid
on the related promissory note to Ravenswood, shall be considered an
expense of the sale for purposes of the calculations under this Section 5.
The report shall include copies of all bills or invoices evidencing said
expenses. Upon receipt of the report, the Purchase Price Escrow Agent
shall promptly distribute to Brownlee a portion of the Initial Purchase
Price Escrow Funds sufficient to cover all such expenses.
(b) Based upon said report from Brownlee, the Purchase Price Escrow
Agent shall determine the initial net proceeds of the sale of the Shares
for distribution to Brownlee and the Settlers ("Initial Net Proceeds").
The Initial Net Proceeds shall be determined by first subtracting from the
Ten Million Dollars ($10,000,000) aggregate Purchase Price the One Million
Dollars ($1,000,000) of Indemnity Holdback Funds. From the amount so
derived shall be subtracted all expenses incurred by Brownlee in
connection with the sale of the Shares as shown in her report.
-5-
<PAGE>
(c) Within thirty (30) days of the date Brownlee submits the report
to the Purchase Price Escrow Agent, but in no event later than sixty (60)
days after the Closing on the sale of the Shares, the Purchase Price
Escrow Agent shall deliver to Brownlee and each Settler a check in an
amount equal to the respective percentage of the Initial Net Proceeds to
which each is entitled under the terms of the Settlement Agreements.
Exhibit 5(c) sets forth a hypothetical calculation of expenses and
necessary adjustments to the Initial Net Proceeds to be allocated among
and distributed to Brownlee and the Settlers. Each of the Settlers
acknowledges and agrees that Exhibit 5(c) is for illustrative purposes
only, that the percentage shown thereon applicable to such Settler is
correct, and that the actual amount received by each such Settler may vary
from that shown on Exhibit 5(c), depending upon whether the actual
expenses of sale are higher or lower than those shown on Exhibit 5(c).
(d) Any funds remaining in the Purchase Price Escrow Account after
all Settlers have been paid shall be immediately paid over by the Purchase
Price Escrow Agent to Brownlee, except to the extent that a certain
portion thereof may be required to remain in the Purchase Price Escrow
Account to keep it open for future uses as set forth herein, as determined
by Brownlee.
(e) Brownlee and each Settler shall (i) be responsible for the
determination and payment of all federal and state income taxes resulting
from any of the provisions of the Settlement Agreement and/or this
Purchase Price Escrow Agreement, (ii) hold the other parties hereto
harmless for any liability for such taxes which are determined to be the
legal liability of such other party, and (iii) execute and deliver such
tax and other information documents as the Purchase Price Escrow Agent
shall reasonably request or require in connection with its obligations
hereunder.
6. Subsequent Deposit with Purchase Price Escrow Agent. Pursuant to the
provisions of the Indemnity Escrow Agreement, the Indemnity Escrow Agent
shall distribute any portion of the funds remaining in the escrow account
established pursuant to the Indemnity Escrow Agreement, which are not the
subject of
-6-
<PAGE>
a pending Claim, immediately upon the expiration of the Indemnity Escrow
Agreement to the Purchase Price Escrow Account established pursuant to
this Purchase Price Escrow Agreement (the "Subsequent Purchase Price
Escrow Funds") to be held, administered and distributed by the Purchase
Price Escrow Agent pursuant to the terms of this Purchase Price Escrow
Agreement.
7. Subsequent Escrow Funds. Upon receipt of the Subsequent Purchase Price
Escrow Funds, the Purchase Price Escrow Agent shall deposit the Subsequent
Purchase Price Escrow Funds in the Purchase Price Escrow Account and shall
hold, administer, invest and distribute the Subsequent Purchase Price
Escrow Funds in accordance with the terms of this Purchase Price Escrow
Agreement.
8. Disbursement of Subsequent Purchase Price Escrow Funds.
(a) Within thirty (30) days of the date of receipt by the Purchase
Price Escrow Agent of the Subsequent Purchase Price Escrow Funds, Brownlee
shall submit to the Purchase Price Escrow Agent and the Settlers a report
of any additional expenses incurred by Brownlee in connection with the
sale of the Shares. The report shall include copies of all bills or
invoices evidencing said expenses. Upon receipt of the report, the
Purchase Price Escrow Agent shall promptly distribute to Brownlee a
portion of the Subsequent Purchase Price Escrow Funds sufficient to cover
all such expenses paid by her.
(b) Based upon said report from Brownlee, the Purchase Price Escrow
Agent shall determine the subsequent net proceeds of the sale of the
Shares for distribution to Brownlee and the Settlers ("Subsequent Net
Proceeds"). The Subsequent Net Proceeds shall be determined by subtracting
from the Subsequent Purchase Price Escrow Funds all such expenses incurred
by Brownlee in connection with the sale of the Shares as shown in her
report under Section 8(a) above.
(c) Within thirty (30) days of the date Brownlee submits the report
to the Purchase Price Escrow Agent, but in no event later than sixty (60)
days after the receipt by the Purchase Price Escrow Agent of the
Subsequent Purchase Price Escrow Funds, the Purchase Price Escrow Agent
shall deliver to
-7-
<PAGE>
Brownlee and each Settler a check in an amount equal to the respective
percentage of the Subsequent Net Proceeds to which each is entitled under
the terms of the Settlement Agreements. Exhibit 8(c) sets forth a
hypothetical calculation of expenses and necessary adjustments to the
Subsequent Net Proceeds to be allocated among and distributed to Brownlee
and the Settlers. Each of the Settlers acknowledges and agrees that
Exhibit 8(c) is for illustrative purposes only, that the percentage shown
thereon applicable to such Settler is correct, and that the actual amount
received by each Settler may vary from that shown on Exhibit 8(c),
depending upon (i) whether any Claims are made by the Purchaser against
the Indemnity Holdback Funds under the terms of the Indemnity Escrow
Agreement, and if so, the amount of such Claims and the resulting amount
of funds remaining in the Indemnity Escrow Account at the expiration of
the Indemnity Escrow Period, and (ii) whether the actual expenses of sale
are higher or lower than those shown on Exhibit 8(c).
(d) Any funds remaining in the Purchase Price Escrow Account after
all Settlers have been paid shall be paid over to Brownlee.
(e) Brownlee and each Settler shall be responsible for the
determination and payment of all federal and state income taxes resulting
from any of the provisions of the Settlement Agreement and/or this
Purchase Price Escrow Agreement and will hold the other parties hereto
harmless for any liability for such taxes which are determined to be the
legal liability of such other party.
9. Dispute Resolution In the event the Purchase Price Escrow Agent receives a
written notice of a dispute between Brownlee and any of the Settlers prior
to having distributed any or all of the Initial Net Proceeds or Subsequent
Net Proceeds, the Purchase Price Escrow Agent shall (i) immediately
distribute to the parties any amounts not in dispute, and (ii) within
sixty (60) days of receipt of such written notice, file an action in
interpleader with any Illinois court of competent jurisdiction to resolve
such disagreement and deposit with the registry of the court an amount
equal to the disputed portion of the Escrow Funds, unless a joint
instruction is received by the Purchase Price Escrow Agent from Brownlee
and the Settlers
-8-
<PAGE>
as to the disposition of the disputed portion of the Escrow Funds prior to
the expiration of such sixty (60) day period. If the written notice does
not state the amount or portion of the Escrow Funds which are in dispute,
all Escrow Funds shall be deemed to be in dispute.
10. Full and Final Payment. The Settlers hereby recognize and agree that the
sums to be paid to them hereunder shall be a full and final payment for
the rights conveyed under the Settlement Agreements, including, without
limitation, any and all rights they may have, or claim to have, under the
Purported Will, in any assets owned by Robert C. Gordon at the time of his
death, including, but not limited to, shares of capital stock and/or
assets of the Telephone Company, G & G Services, El Paso Long Distance
Company, Gemcell, Inc. or Ravenswood, as such companies are presently or
hereafter organized or constituted (collectively, the "Companies"). The
Settlers acknowledge and agree that upon Purchaser's delivery of the
Indemnity Holdback Funds to the Indemnity Escrow Agent and delivery of the
Initial Purchase Price Escrow Funds to the Purchase Price Escrow Agent,
pursuant to the terms of the Indemnity Escrow Agreement and this Purchase
Price Escrow Agreement, respectively, then Purchaser shall have no
obligation hereunder or otherwise to the Settlers, and the provisions of
this Section 10 and of Sections 11 and 12 below shall immediately be
effective with respect to and for the benefit of the Purchaser and its
Affiliates (as defined below).
11. Release and Covenant Not to Sue. The Settlers hereby fully release and
agree to hold harmless, indemnify and defend the Purchaser and the
Companies, together with their respective past, present or future
officers, directors, owners, shareholders, agents, representatives, parent
entities, affiliates, subsidiaries, purchasers, predecessors, successors
and assigns (collectively, the "Affiliates" of such party), from any and
all liability, actions, or claims in any way related to or arising out of,
or claimed to be related to or arising out of, the Purported Will or to
the assets or capital stock of any or all of the Companies (collectively,
the "Released Claims"), and the Settlers hereby agree not to institute any
legal action or file any suit, whether in law or
-9-
<PAGE>
equity, against any such party or parties with respect to any of the
Released Claims.
12. Incorporation and Extension of Prior Agreements. The terms of the
Settlement Agreements and Appendix D thereto are hereby reaffirmed and
incorporated into this Purchase Price Escrow Agreement by reference as if
fully set forth herein, and the Settlers acknowledge and agree that the
release and indemnification terms of such documents are hereby extended
to, and shall apply with full force and effect for the benefit of the
Purchaser and its Affiliates, as though the Purchaser and its Affiliates
were parties originally released thereunder.
13. Release of Purchase Price Escrow Agent. As and when all of the Escrow
Funds are either distributed as provided hereunder or deposited with the
registry of the court in interpleader, the Purchase Price Escrow Agent
shall be released and discharged from any further obligation hereunder
without further action of any party. Compliance by the Purchase Price
Escrow Agent with any final, non-appealable order or a judgment of a court
concerning the subject matter of any such dispute or agreement shall
thereupon release and relieve the Purchase Price Escrow Agent from all
obligations and responsibility with respect to the Escrow Funds to which
such order or judgment relates.
14. Investment of Escrow Funds. The Purchase Price Escrow Agent shall hold the
Escrow Funds delivered to it under the terms of this Purchase Price Escrow
Agreement and shall invest the Escrow Funds held by it (i) in interest
bearing demand deposit accounts with commercial banks whose accounts are
insured by the Federal Deposit Insurance Corporation or another
appropriate and comparable authority (for example, the Federal Home Loan
Bank Board), or (ii) in any other investment upon which Brownlee and the
Settlers shall agree.
15. Agreement of Purchase Price Escrow Agent. The Purchase Price Escrow Agent
hereby agrees to receive the Escrow Funds and hold the same intact, and to
deposit the Escrow Funds in accordance with the terms of this Purchase
Price Escrow Agreement, and shall not permit any withdrawal except under
the terms of this Purchase Price Escrow Agreement. The
-10-
<PAGE>
Purchase Price Escrow Agent shall be responsible only for the safekeeping
and the deposit of the Escrow Funds and the disbursements or delivery in
accordance with the terms of this Purchase Price Escrow Agreement. The
Purchase Price Escrow Agent shall not be responsible for the
appropriateness, sufficiency or accuracy of information contained in any
written notice.
16. Performance of Purchase Price Escrow Agent.
(a) There are no implied duties under this Purchase Price Escrow
Agreement. The duties, obligations and acts of the Purchase Price Escrow
Agent shall be construed as purely ministerial in nature. The Purchase
Price Escrow Agent shall be responsible for only those duties expressly
set forth in this Purchase Price Escrow Agreement. In performing any of
its duties under this Purchase Price Escrow Agreement, or upon the claimed
failure to perform its duties under this Purchase Price Escrow Agreement,
the Purchase Price Escrow Agent shall not be liable to anyone for any
damages, losses, or expenses which they may incur as a result of the
Purchase Price Escrow Agent so acting, or failing to act; provided,
however, the Purchase Price Escrow Agent shall be liable for damages
arising out of its willful default or gross negligence under this Purchase
Price Escrow Agreement. Accordingly, the Purchase Price Escrow Agent shall
not incur any such liability with respect to (i) any action taken or
omitted to be taken in good faith upon advice of its counsel given with
respect to any questions relating to the duties and responsibilities of
the Purchase Price Escrow Agent hereunder, or (ii) any action taken or
omitted to be taken in reliance upon any document, including any written
notice or instructions provided for in this Purchase Price Escrow
Agreement, not only as to its due execution and to the validity and
effectiveness of its provisions but also as to the truth and accuracy of
any information contained in any notice or document, which the Purchase
Price Escrow Agent shall in good faith believe to be genuine, to have been
signed or presented by a proper person or persons and to conform with the
provisions of this Purchase Price Escrow Agreement.
(b) Brownlee and the Settlers each agree to indemnify and hold
harmless the Purchase Price Escrow Agent against any
-11-
<PAGE>
and all losses, claims, damages, liabilities and expenses, including
without limitation, reasonable costs of investigation and counsel fees and
disbursements which may be imposed on the Purchase Price Escrow Agent or
incurred by it in connection with its acceptance of this appointment as
Purchase Price Escrow Agent or the performance of its duties, including,
without limitation, reasonable attorneys' fees and costs attributable to
any interpleader action commenced by the Purchase Price Escrow Agent or
any other litigation arising from this Purchase Price Escrow Agreement or
involving the subject matter of this Purchase Price Escrow Agreement;
provided, however, that if the Purchase Price Escrow Agent shall be found
guilty of willful default or gross negligence under this Purchase Price
Escrow Agreement, then, in that event, the Purchase Price Escrow Agent
shall itself bear all such losses, claims, damages, liabilities and
expenses.
17. Fees of the Purchase Price Escrow Agent. For its ordinary services
hereunder (which shall include receipt, investment and disbursement of the
Escrow Funds in the manner described in this Purchase Price Escrow
Agreement), the Purchase Price Escrow Agent shall receive compensation of
One Thousand Eight Hundred Seventy Five and No/100 Dollars ($1,875.00) to
be paid from the Escrow Funds as an expense of the sale and shall receive
such additional reasonable compensation during the term hereof as is
commensurate with its services provided hereunder as Purchase Price Escrow
Agent; any such additional compensation to be similarly paid from the
Escrow Funds as an expense of the sale.
18. Resignation of Escrow Agent. The Purchase Price Escrow Agent or its
successor at any time may resign by giving thirty (30) business days
written notice to the parties hereto, and such resignation shall take
effect at the end of such thirty (30) business days if all of the Escrow
Funds have been tendered into the registry or custody of an Illinois court
in the manner provided in Section 9 hereof, or upon the earlier
appointment, with the approval of Brownlee and each Settler, of a
successor. From and after the effective date of such resignation or
appointment of a successor, the Purchase Price Escrow Agent shall not be
obligated to perform any of the duties of the Purchase Price Escrow Agent
hereunder and will not be liable for any nonperformance thereof nor for
any act
-12-
<PAGE>
or failure to act whatsoever on the part of any successor Purchase Price
Escrow Agent. If Brownlee and the Settlers are unable to agree upon a
successor Purchase Price Escrow Agent within thirty (30) days following
notice of the Purchase Price Escrow Agent's resignation, the Purchase
Price Escrow Agent shall commence an action in interpleader and deposit
the Escrow Funds with the registry of the court in the manner provided in
Section 9 hereof.
19. Successor to Purchase Price Escrow Agent. Any corporation resulting from
any merger or consolidation to which the Purchase Price Escrow Agent or
any successor to it shall be a party, or any corporation in any manner
succeeding to all or substantially all of the business of the Purchase
Price Escrow Agent or any successor, shall be the successor escrow agent
-13-
<PAGE>
hereunder without the execution or filing of any paper or any further acts on
the part of any of the parties hereto. In the event of a resignation of the
Purchase Price Escrow Agent pursuant to Section 18 of this Purchase Price Escrow
Agreement, any person(s) or corporation hereafter agreed upon by the parties
shall be the successor escrow agent hereunder.
20. Instructions and Notices. In executing and performing its duties
hereunder, except as otherwise provided, the Purchase Price Escrow Agent
shall be entitled to rely upon instructions of Brownlee. Any notice,
payment, demand, instruction or communication required or permitted to be
given by this Purchase Price Escrow Agreement shall be in writing and
shall be given by hand delivery, overnight messenger or certified mail,
return receipt requested, addressed to the appropriate party at the
address stated below:
If to Brownlee:
Carla J. Brownlee
2652 N. 3853 Road
Sheridan, IL 60551
If to the
Settlers: [Name and address of Each Settler]
_________________________________________________
_________________________________________________
_________________________________________________
If to the
Purchase Price
Escrow Agent: First Federal Savings and Loan Association
301 Fairway Drive
Bloomington, Illinois 61701
Attention: Donald Fernandes, President
Any notice sent by overnight messenger or hand delivery shall be deemed
made on the date received, and any notice sent by certified mail shall be deemed
made three (3) days after mailing.
21. Governing Law. This Purchase Price Escrow Agreement shall be governed by
and construed in accordance with the laws of the State of Illinois.
-14-
<PAGE>
22. Headings. The headings in this Purchase Price Escrow Agreement are
inserted for convenience and identification only and are in no way
intended to interpret, define or limit the scope, extent or intent of this
Purchase Price Escrow Agreement or any provision of this Purchase Price
Escrow Agreement.
23. Severability. Each provision of this Purchase Price Escrow Agreement is
intended to be severable. If any term or provision of this Purchase Price
Escrow Agreement is illegal or invalid for any reason whatsoever, such
illegality or invalidity shall not affect the validity or enforcement of
the remainder of this Purchase Price Escrow Agreement.
24. Counterparts. This Purchase Price Escrow Agreement and any amendment
hereto 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.
25. Amendment. No modification or amendment to this Purchase Price Escrow
Agreement shall be valid unless produced in writing and signed by all of
the parties hereto.
26. Successors. This Purchase Price Escrow Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
successors, legal representatives, assigns and transferees, as the case
may be. The Purchase Price Escrow Agent shall not be bound by or incur any
liability with respect to this Purchase Price Escrow Agreement or any
other agreement or understanding between Brownlee and the Settlers, except
as in this Purchase Price Escrow Agreement expressly provided.
[This space left intentionally blank]
-15-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Purchase Price
Escrow Agreement to be executed as of the date first above written.
- ----------------------- ----------------------- --------------------------
Carla J. Brownlee Date Witness
- ----------------------- ----------------------- --------------------------
Nancy Ales Date Witness
- ----------------------- ----------------------- --------------------------
Herb Arbuckle Date Witness
- ----------------------- ----------------------- --------------------------
William P. Davis Date Witness
- ----------------------- ----------------------- --------------------------
Ann Armstrong, POA, for Date Witness
Leta Manninga
- ----------------------- ----------------------- --------------------------
Ann Armstrong Date Witness
- ----------------------- ----------------------- --------------------------
Judy Bohlander Date Witness
- ----------------------- ----------------------- --------------------------
Lois Vogel Date Witness
- ----------------------- ----------------------- --------------------------
Linda Morris Date Witness
- ----------------------- ----------------------- --------------------------
-16-
<PAGE>
Delia Evalyn Tate Date Witness
CITY OF EL PASO
By:
--------------------
Mayor
ATTEST:
---------------- -----------------------
City Clerk Date
FIRST FEDERAL SAVINGS
AND LOAN ASSOCIATION
By:
--------------------
Its:
------------------- ----------------------- --------------------------
Date Witness
* * * * * *
STATE OF
-------------------
COUNTY OF
------------------
I, the undersigned Notary Public for said County and State, do hereby
certify that Carla J. Brownlee personally appeared before me this day, and
acknowledged the due execution of the foregoing instrument.
WITNESS my hand and notarial seal, this __________ day of
_________________, 199_.
----------------------------------------
Notary Public
-17-
<PAGE>
My Commission Expires:
- ------------------------------
(Seal)
STATE OF
-------------------
COUNTY OF
------------------
I, the undersigned Notary Public for said County and State, do hereby
certify that Nancy Ales personally appeared before me this day, and acknowledged
the due execution of the foregoing instrument.
WITNESS my hand and notarial seal, this _________ day of
_________________, 199_.
----------------------------------------
Notary Public
My Commission Expires:
- ------------------------------
(Seal)
* * * * * *
STATE OF
-------------------
COUNTY OF
------------------
-18-
<PAGE>
I, the undersigned Notary Public for said County and State, do hereby
certify that Herb Arbuckle personally appeared before me this day, and
acknowledged the due execution of the foregoing instrument.
WITNESS my hand and notarial seal, this _________ day of
_________________, 199_.
----------------------------------------
Notary Public
My Commission Expires:
- ------------------------------
(Seal)
STATE OF
-------------------
COUNTY OF
------------------
I, the undersigned Notary Public for said County and State, do hereby
certify that William P. Davis personally appeared before me this day, and
acknowledged the due execution of the foregoing instrument.
WITNESS my hand and notarial seal, this _________ day of
_________________, 199_.
----------------------------------------
Notary Public
My Commission Expires:
- ------------------------------
(Seal)
-19-
<PAGE>
* * * * * *
STATE OF
-------------------
COUNTY OF
------------------
I, the undersigned Notary Public for said County and State, do hereby
certify that Ann Armstrong, Power of Attorney for Leta Manninga, personally
appeared before me this day, and acknowledged the due execution of the foregoing
instrument.
WITNESS my hand and notarial seal, this _________ day of
_________________, 199_.
----------------------------------------
Notary Public
My Commission Expires:
- ------------------------------
(Seal)
STATE OF
-------------------
COUNTY OF
------------------
I, the undersigned Notary Public for said County and State, do hereby
certify that Ann Armstrong personally appeared before me this day, and
acknowledged the due execution of the foregoing instrument, individually and as
agent for Judy Bohlander and Lois Vogel.
WITNESS my hand and notarial seal, this _________ day of
_________________, 199_.
-20-
<PAGE>
----------------------------------------
Notary Public
My Commission Expires:
- ------------------------------
(Seal)
* * * * * *
STATE OF
-------------------
COUNTY OF
------------------
I, the undersigned Notary Public for said County and State, do hereby
certify that Linda Morris personally appeared before me this day, and
acknowledged the due execution of the foregoing instrument.
WITNESS my hand and notarial seal, this _________ day of
_________________, 199_.
----------------------------------------
Notary Public
My Commission Expires:
- ------------------------------
(Seal)
STATE OF
-------------------
COUNTY OF
------------------
-21-
<PAGE>
I, the undersigned Notary Public for said County and State, do hereby
certify that Delia Evalyn Tate personally appeared before me this day, and
acknowledged the due execution of the foregoing instrument.
WITNESS my hand and notarial seal, this _________ day of
_________________, 199_.
----------------------------------------
Notary Public
My Commission Expires:
- ------------------------------
(Seal)
* * * * * *
STATE OF ILLINOIS
COUNTY OF
------------------
I, the undersigned a Notary Public of the County and State aforesaid,
certify that ____________________________ personally came before me this day and
acknowledged that he/she is ____________ City Clerk for the City of El Paso, a
municipal corporation and that by authority duly given and as the act of the
municipal corporation, the foregoing instrument was signed in its name by its
Mayor, sealed with its corporate seal and affixed by him/her as its
_________________ City Clerk.
Witness my hand and official stamp or seal, this _________ day of
__________________, 199_.
----------------------------------------
Notary Public
My Commission Expires:
-22-
<PAGE>
- ------------------------------
(Seal)
STATE OF
-------------------
COUNTY OF
------------------
I, a Notary Public of the County and State aforesaid, certify that
__________________________________ personally came before me this day and
acknowledged that he/she is ___________________ Secretary of FIRST FEDERAL
SAVINGS AND LOAN ASSOCIATION, and that by authority duly given and as the act of
such entity, the foregoing instrument was signed in its name by its ____________
President, sealed with its corporate seal and attested by __________________ as
its ____________________ Secretary.
Witness my hand and official stamp or seal, this _______ day of
________________, 199_.
----------------------------------------
Notary Public
My Commission Expires:
- ------------------------------
(Seal)
-23-
<PAGE>
EXHIBIT 5(c)
ILLUSTRATIVE DISTRIBUTION OF INITIAL NET PROCEEDS
(For hypothetical and discussion purposes only)
Calculation of Initial Net Proceeds
Purchase Price $10,000,000
Indemnity Holdback 1,000,000
-----------
Adjusted Net Proceeds $ 9,000,000
Sale Expenses 200,000
-----------
Initial Net Proceeds $ 8,800,000
-----------
Allocation of Initial Net Proceeds Among Settlers
In accordance with Appendix C to the Settlement Agreement (Appendix B of
the City of El Paso's Agreement), each Settler's share of the Initial Net
Proceeds is as follows:
Percentage
Settler From Appendix Share
------- ------------- -----
Nancy Ales 3.909% $ 343,992
Herb Arbuckle 4.887% $ 430,056
William P. Davis 3.909% $ 343,992
Ann Armstrong as
POA for Leta
Manninga 9.122% $ 802,736
Linda Morris 4.561% $ 401,368
Delia Evalyn Tate 8.145% $ 716,760
City of El Paso 3.086% $ 271,568
TOTAL $3,310,472
Distribution of Initial Net Proceeds Between Brownlee and Settlers
Initial Net Proceeds $8,800,000
Settlers' Share From Appendix C
to the Settlement Agreement (Ap-
pendix B of the City of El Paso's
<PAGE>
Agreement)
$8,800,000 x 37.619% $3,310,472
Brownlee's Share
(Initial Net Proceeds less Settlers'
Share less $500,000 Repayment of
Ravenswood Loan)
$8,800,000 - $3,310,472 - $500,000 $4,989,528
<PAGE>
EXHIBIT 8(c)
ILLUSTRATIVE DISTRIBUTION OF SUBSEQUENT NET PROCEEDS
(For hypothetical and discussion purposes only)
Calculation of Subsequent Net Proceeds
Indemnity Holdback $1,000,000
Sales Expenses 20,000
----------
Subsequent Net Proceeds $ 980,000
----------
Allocation of Subsequent Net Proceeds Among Settlers
In accordance with Appendix C to the Settlement Agreement (Appendix B of
the City of El Paso's Agreement), each Settler's share of the Subsequent Net
Proceeds is as follows:
Percentage
Settler From Appendix Share
------- ------------- -----
Nancy Ales 3.909% $ 38,308
Herb Arbuckle 4.887% $ 47,893
William P. Davis 3.909% $ 38,308
Ann Armstrong as
POA for Leta
Manninga 9.122% $ 89,395
Linda Morris 4.561% $ 44,698
Delia Evalyn Tate 8.145% $ 79,821
City of El Paso 3.086% $ 30,243
TOTAL $368,666
Distribution of Subsequent Net Proceeds Between Brownlee and Settlers
Subsequent Net Proceeds $980,000
Settlers' Share From Appendix C
to the Settlement Agreement (Ap-
pendix B of the City of El Paso's
<PAGE>
Agreement)
$980,000 x 37.619% $368,666
Brownlee's Share
(Subsequent Net Proceeds less Set-
tlers' Share)
$980,000 - $368,666 $611,334
<TABLE>
<CAPTION>
<S> <C>
Exact Corporate Name State of Incorporation
MJD Communications, Inc. Delaware
ST Enterprises, Ltd. Kansas
Sunflower Telephone Company, Inc. Kansas
STE Finance Company, Inc. Kansas
Northland Telephone Company of Maine, Inc. Maine
STE/NE Acquisition Corp. d/b/a
Northland Telephone Company of Vermont Delaware
Northland Telecommunication, Inc.
St Paging, Inc. Kansas
ST Communications, Inc. Kansas
ST Long Distance, Inc. Delaware
ST Computer Resources, Inc. Kansas
ST Broadcasting Company, Inc. Kansas
Breadbasket Enterprises, Inc. Kansas
MJD Ventures, Inc. Delaware
Sidney Telephone Company Maine
C-R Communications, Inc. Illinois
C-R Telephone Company Illinois
Taconic Telephone Corp. New York
Ellensburg Telephone Company Washington
Chouteau Telephone Company Oklahoma
Utilities, Inc. Maine
Telephone Service Company Maine
Ravenswood Communications, Inc. Illinois
Columbus Grove Telephone Company Ohio
MJD Services Corp. Delaware
Bluestem Telephone Company Delaware
Big Sandy Telecom, Inc. Delaware
Odin Telephone Exchange, Inc. Illlinois
Columbine Acquisition Corp. Delaware
Kadoka Telephone Co. South Dakota
MJD Telecom, Inc. Delaware
MJD Holdings, Inc. Delaware
C&E Telephone Co. New York
MJD Capital Corp. South Dakota
Fairpoint Communications Corp. Delaware
MJD Incorporated Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 13,241
<SECURITIES> 0
<RECEIVABLES> 19,481
<ALLOWANCES> 369
<INVENTORY> 0
<CURRENT-ASSETS> 35,636
<PP&E> 309,212
<DEPRECIATION> 166,891
<TOTAL-ASSETS> 440,891
<CURRENT-LIABILITIES> 26,079
<BONDS> 200,000
0
0
<COMMON> 17
<OTHER-SE> 9,869
<TOTAL-LIABILITY-AND-EQUITY> 440,891
<SALES> 92,007
<TOTAL-REVENUES> 92,007
<CGS> 6,163
<TOTAL-COSTS> 75,445
<OTHER-EXPENSES> 24,073
<LOSS-PROVISION> 303
<INTEREST-EXPENSE> 27,170
<INCOME-PRETAX> (7,511)
<INCOME-TAX> 2,112
<INCOME-CONTINUING> (5,399)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,521)
<CHANGES> 0
<NET-INCOME> (8,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
