<PAGE>
As filed with the Securities and Exchange Commission on April 14, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
PaeTec Corp.
(Exact Name of Registrant as Specified in its Charter)
Delaware 4813 16-1551094
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
290 Woodcliff Drive
Fairport, New York 14450
(716) 340-2500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Daniel J. Venuti, Esq.
Executive Vice President and General Counsel
PaeTec Corp.
290 Woodcliff Drive
Fairport, New York 14450
(716) 340-2500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Richard J. Parrino, Esq. Robert Evans III, Esq.
Charles E. Sieving, Esq. Shearman & Sterling
Hogan & Hartson L.L.P. 599 Lexington Avenue
8300 Greensboro Drive New York, New York 10022
McLean, Virginia 22102 (212) 848-4000
(703) 610-6100
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed maximum
Title of each class of aggregate Amount of
securities to be registered offering price(1) registration fee
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<S> <C> <C>
Class A Common Stock, $.01 par value....... $100,000,000 $26,400
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- -------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933.
---------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
Exhibit 10.10.2
FIRST AMENDMENT TO STOCK RIGHTS AGREEMENT
This is the First Amendment to Stock Rights Agreement (the
"Amendment"), dated August 13, 1998, between EDWARD J. BUTLER, JR.
("Shareholder"), PAETEC CORP., a Delaware corporation with its principal place
of business at 290 Woodcliff Drive, Fairport, New York 14450 (the "Company"),
PAETEC COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary
of the Company with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 ("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. Shareholder holds 250,000 shares of Class A common stock of the
Company, subject to certain restrictions contained in a Stock Rights Agreement,
dated July 17, 1998, among the parties (the "Agreement").
B. The Company has now offered to issue to Shareholder 15,000 shares
of Class B common stock at a purchase price of $.833 per share, subject to
certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Amendment for the purpose of confirming Shareholder's equity interest in the
Class B common stock of the Company and outlining the rights of Shareholder and
the restrictions imposed by the Company with respect to the Class B common stock
to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares. The Company confirms its offer to issue
------------------
15,000 shares of Class B common stock (the "Class B Shares") to Shareholder at a
price of $.833 per share, payable in full upon issuance of the Class B Shares.
A stock certificate evidencing the Class B Shares shall be issued in the name of
Shareholder upon receipt of this executed Amendment and payment in full of the
purchase price.
2. Incorporation of Agreement by Reference. All of the provisions
---------------------------------------
of the Agreement shall apply to the Class B Shares issued to Shareholder
pursuant to this Amendment, except to the extent that a provision of this
Amendment expressly supersedes any provision of the Agreement. Additionally, to
the extent that any provision of this Amendment contradicts any provision
contained in the Agreement with respect to the Shares (as defined in the
Agreement), the provision of this Amendment shall control.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated April 14, 2000
PROSPECTUS
Shares
[LOGO] PaeTec Corp.
Class A Common Stock
-----------------
This is PaeTec's initial public offering of Class A common stock. PaeTec is
selling all of the shares of Class A common stock. The U.S. underwriters are
offering shares in the U.S. and Canada and the international managers are
offering shares outside the U.S. and Canada.
We expect the public offering price to be between $ and $ per share.
Currently, no public market exists for the shares. After pricing of the
offerings, we expect that the shares will be quoted on the Nasdaq National
Market under the symbol "PAET."
We have two types of common stock: Class A common stock and Class B common
stock. Holders of each class generally have the same rights, except for
differences in voting rights. Holders of our Class A common stock have one vote
per share, while holders of our Class B common stock have 20 votes per share.
Immediately following the offerings, without giving effect to any exercise of
the underwriters' over-allotment options, shares of our outstanding Class B
common stock will represent approximately % of the combined voting power of
our common stock.
Investing in the Class A common stock involves risks that are described in
the "Risk Factors" section beginning on page 7 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price......................... $ $
Underwriting discount......................... $ $
Proceeds, before expenses, to PaeTec.......... $ $
</TABLE>
The U.S. underwriters may also purchase up to an additional shares of
Class A common stock from PaeTec at the initial public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. The international managers may similarly purchase up to an
additional shares of Class A common stock from PaeTec.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares will be ready for delivery on or about , 2000.
-----------
Merrill Lynch & Co. Bear, Stearns & Co. Inc.
-----------
The date of this prospectus is , 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Consolidated Financial and Operating Data....................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 30
Regulation of Our Services............................................... 50
Management............................................................... 56
Transactions Involving Related Parties................................... 66
Security Ownership of Certain Beneficial Owners and Management........... 71
Description of Capital Stock............................................. 74
Shares Eligible for Future Sale.......................................... 79
U.S. Tax Consequences to Non-U.S. Holders................................ 81
Underwriting............................................................. 84
Legal Matters............................................................ 88
Experts.................................................................. 88
Where You Can Find Additional Information................................ 88
Index to Consolidated Financial Statements and Unaudited Pro Forma
Financial Information................................................... F-1
</TABLE>
---------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
<PAGE>
SUMMARY
This summary contains important information about PaeTec and the
offerings. We caution you, however, that the summary may not contain all of the
information that may be important to you. You should read the entire
prospectus, including the risk factors and our consolidated financial
statements and related notes, before making an investment decision.
Our Company
We are a fast growing integrated communications provider, or ICP,
offering broadband communications solutions, including data, voice and an
expanding array of applications and integration services. We currently deliver
our services to medium-sized and large businesses, institutions and other
communications-intensive users in 25 markets. We actively market our services
through approximately 235 members of our direct sales force and over 340
outside sales agencies. By delivering a wide range of integrated communications
solutions through our consultative sales and service approach, we seek to
maximize our sales of value-added services and help our customers manage their
complex communications needs in a rapidly evolving market.
Since our inception in May 1998, we have rapidly expanded our sales
force, developed our back office systems and built our network to roll out and
sell our offerings and implement our business plan. In some of our more
significant accomplishments to date, we have:
. installed over 31,200 access lines on our network as of March 1, 2000
to existing customers, which include General Electric Company,
Starwood Hotels & Resorts Worldwide, Inc., Texas Instruments
Incorporated, Florida State University and the Massachusetts Institute
of Technology;
. attracted a skilled and experienced work force with over 650
employees, including 235 sales personnel, and promoted significant
employee ownership of our company;
. established advanced, efficient and flexible back office systems
capable of handling our service offerings, and received a
recommendation for ISO-9002 registration, which we believe will result
in our becoming one of the first U.S. telecommunications providers to
have obtained this internationally recognized registration of quality
management systems;
. issued over $210 million of total equity, including a recent cash
equity investment of $134 million from institutional investors led by
Madison Dearborn Partners and The Blackstone Group, and obtained a $70
million senior credit facility;
. completed five acquisitions, including the acquisition of Campuslink
Communications Systems, Inc., a leading managed broadband services
provider for the university campus market which delivers high speed
Internet access, enhanced voice and video services to over 24,000
students;
. through our acquisition of Pinnacle Software Corporation, launched an
applications services provider program for businesses and for
institutions that include colleges, hospitals and governmental
agencies; and
. created a Web hosting, Web development and e-commerce subsidiary which
increases our ability to serve specialized markets and affinity group
customers.
Our current network, which includes eight Lucent 5ESS AnyMedia switches,
allows us to offer our services in markets encompassing over 31% of the total
business access lines in the United States. We selected our initial markets
based on the concentration of potential customers, amount of communications
1
<PAGE>
traffic originating and terminating in the markets, size and strength of the
local economy, ability to interconnect to established or incumbent networks,
degree of competition and regulatory environment. We expect to expand our
network to an additional ten major metropolitan areas by the end of 2001 and
additional markets beginning in 2002. Upon completion of this deployment, which
we are implementing in three phases, we expect to have a nationwide footprint
supported exclusively by packet-switching technology.
While many communications providers continue to focus primarily on
access, transport and basic voice and Internet access services, we seek to
increasingly differentiate ourselves from other providers by combining network,
applications and integration services to deliver complete solutions in a
seamless manner. Although we are also an experienced provider of basic network
services, we believe that our services strategy, which we organize around the
following four layers, should reduce customer turnover and increase our profit
margins.
Network Access Layer--We have developed, installed and continue to invest
in an advanced network that facilitates delivery of our service offerings. We
currently connect the majority of our customers to our network through leased
T1 digital transmission links. However, we will increasingly offer our
customers a variety of access methods, including digital subscriber line, or
DSL, technologies, wireless connections and T1 and T3 digital transmission
links. Intra-city and inter-city network transport and access elements are
generally readily available, and we expect costs of leasing these elements to
continue to decline. To take advantage of these conditions, we have adopted a
smart-build network strategy in which we combine transport facilities we lease
with switches, routers and other network electronics we own and operate. This
strategy provides us with control over the quality and flexibility of our
service offerings, reduces our capital investments and allows us to bring
services more quickly to market. As it becomes economically attractive for us
to do so, we plan to purchase an increasing portion of the transport capacity
we need to handle growing traffic volumes.
Network Services Layer--We use our network access layer as the platform
to offer a range of network services. These services include voice services,
such as local dial tone services, domestic and international long distance
services and calling card services, as well as data services, such as Internet
access and virtual private networks. As our network evolves, we will continue
to supplement our network service offerings, which we expect will include Voice
over IP, a technology used to transmit voice conversations over a network using
a communications protocol known as Internet Protocol, or IP.
Applications Services Layer--We believe that many communications-
intensive users are principally interested in the applications that our network
and services facilitate. Consequently, we will offer a growing range of
applications services to meet our customers' business and communications needs.
Our current and planned applications services include voice applications, such
as conference calling and voice mail, and data applications services, such as
e-commerce, Web hosting and development, applications hosting, telemanagement
of cable and circuit inventory, and customer trouble management. We also offer
an expanding selection of customized applications services, such as community
intranets, for specialized markets that include universities, hospitals and
governmental entities.
Network Integration Layer--As part of our end-to-end solutions offerings,
we provide our customers with a variety of services to help them implement and
manage networks on their premises. Our network integration services include
equipment sales, installation and maintenance, network management, network
design and implementation, wide area network support and billing and customer
care. We believe that our ability to fulfill our customers' integration needs
complements our emphasis on the sale of network and applications services and
enhances our ability to attract and retain customers.
2
<PAGE>
Our Management
Our management team has an established record of accomplishments in the
telecommunications industry. Many members of our senior management team worked
together for several years at ACC Corp., which was the first competitive local
exchange carrier, or CLEC, to use a smart-build strategy. ACC was acquired by
Teleport Communications Group, which is now a division of AT&T Corp., for
approximately $1 billion in 1998. Our executive management team has an average
of 18 years of experience in the telecommunications industry. Arunas A.
Chesonis, our Chairman of the Board and Chief Executive Officer, served as
President of ACC and has over 15 years of industry experience. Our management
and employee ranks also include experienced personnel in all key functional
areas, including sales, engineering, customer service, operations support
systems, billing, finance and other back office functions.
Our Business Strategy
Our objective is to become the most customer- and employee-oriented
network-based services provider to medium-sized and large businesses and
institutions in our markets. As part of our business strategy, we plan to:
. offer a full range of bundled broadband services to communications-
intensive users;
. pursue a consultative sales strategy with direct and agent sales
forces;
. implement efficient and integrated back office systems;
. design and install an advanced capital-efficient network; and
. supplement internal growth with strategic acquisitions.
Other Information
PaeTec was organized under the laws of the State of Delaware. Our
principal executive offices are located at 290 Woodcliff Drive, Fairport, New
York 14450, and our main telephone number at that address is (716) 340-2500. We
maintain our general corporate Web site at www.paetec.com. The contents of our
Web sites are not part of this prospectus.
In this prospectus, the terms "PaeTec," "our company," "we," "us" and
"our" refer to PaeTec Corp. and its subsidiaries as a combined entity, except
when we make it clear that these terms refer only to PaeTec Corp.
Unless we indicate otherwise, the information in this prospectus:
. assumes that the initial public offering price of the Class A common
stock will be $ per share, which is the midpoint of the range we
show on the cover page of this prospectus;
. assumes that the underwriters will not exercise their over-allotment
options; and
. reflects the conversion of all of our outstanding Series A convertible
preferred stock, which we refer to in this prospectus as the "Series A
preferred stock," into 17,866,666 shares of Class A common stock upon
completion of the offerings.
Unless we indicate otherwise, we have derived the industry data in this
prospectus from publicly available trade journals, government reports and other
public sources. We have not independently verified this information, but
believe it to be reliable.
3
<PAGE>
The Offerings
<TABLE>
<C> <S> <C>
Class A common stock offered by PaeTec:
U.S. offering........................ shares
International offering............... shares
---
Total............................ shares
Shares outstanding before
the offerings.......................... shares of Class A common stock
shares of Class B common stock
---
shares of common stock
Shares outstanding after
the offerings.......................... shares of Class A common stock
shares of Class B common stock
---
shares of common stock
Voting rights:
Class A common stock................. One vote per share
Class B common stock................. 20 votes per share
Use of proceeds......................... We estimate that our net proceeds from the
offerings without exercise of the over-allotment
options will be approximately $ million. We
intend to use the net proceeds to fund our capital
expenditures, market expansion and product
development, hire additional personnel, fund our
operating losses, fund potential acquisitions, and
provide for working capital and for other general
corporate purposes.
Risk factors............................ See "Risk Factors" and other information included
in this prospectus for a discussion of factors you
should carefully consider before deciding whether
to invest in shares of our Class A common stock.
Proposed Nasdaq National Market symbol.. "PAET"
</TABLE>
The number of shares of our common stock we show as outstanding after the
offerings excludes:
. 3,362,236 shares of Class A common stock subject to outstanding
options at a weighted average exercise price of $3.76 per share as of
March 1, 2000;
. 80,000 shares of Class A common stock subject to outstanding warrants
at a weighted average exercise price of $5.00 per share as of March 1,
2000; and
. any shares that we may issue if the underwriters exercise their over-
allotment options.
4
<PAGE>
Summary Consolidated Financial And Operating Data
We derived the summary consolidated financial data presented below for
the period from our inception on May 19, 1998 to December 31, 1998, for the
year ended December 31, 1999, and as of December 31, 1998 and 1999 from our
consolidated financial statements, which have been audited by Deloitte & Touche
LLP, independent auditors. You should also read the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes that
appear elsewhere in this prospectus. We have presented the following data in
thousands, except per share amounts and the information shown under "Operating
Data."
<TABLE>
<CAPTION>
Period from inception
(May 19, 1998) Year ended
to December 31, 1998 December 31, 1999(1)
--------------------- --------------------
<S> <C> <C>
Statement of Operations Data:
Revenue........................... $ 150 $ 23,347
Cost of services.................. 96 16,809
------- --------
Gross margin...................... 54 6,538
Selling, general and
administrative expenses.......... 5,770 40,294
Depreciation and amortization..... 243 4,508
------- --------
Loss from operations.............. (5,959) (38,264)
Other income, net................. 107 355
Interest expense.................. -- (2,434)
------- --------
Net loss.......................... $(5,852) $(40,343)
======= ========
Net loss per share, basic and
diluted.......................... $ (0.67) $ (1.93)
======= ========
Other Financial Data:
Capital expenditures.............. $12,027 $ 41,781
EBITDA(2)......................... (5,716) (33,756)
Cash used by operating
activities....................... (3,229) (39,759)
Cash used by investing
activities....................... (12,027) (37,407)
Cash provided by financing
activities....................... 17,690 82,167
Balance Sheet Data (at period end):
Cash and cash equivalents......... $ 2,434 $ 7,435
Property and equipment, net....... 11,784 62,384
Total assets...................... 15,716 121,986
Long-term debt.................... -- 69,166
Total stockholders' equity........ 12,635 30,061
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1999
--------------------
<S> <C>
Operating Data:
Markets served(3)........................................ 25
Number of switches deployed.............................. 8
Access line equivalents installed(4)..................... 21,200
Sales force employees.................................... 211
Total employees.......................................... 590
</TABLE>
- --------
(1) Includes the operating results of Campuslink from September 9, 1999, which
is the date we completed our acquisition of Campuslink.
(2) We have included data with respect to EBITDA because it is a measurement of
financial performance commonly used in our industry. When we refer to
"EBITDA," we mean net earnings or loss before
5
<PAGE>
interest expense, income taxes, depreciation and amortization. EBITDA is not
a measurement of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income or loss
as a measure of performance, or to cash flow as a measure of liquidity.
EBITDA is not necessarily comparable with similarly titled measures for
other companies.
(3) Each market represents a metropolitan statistical area as defined by the
U.S. Census Bureau.
(4) Calculated by multiplying the number of T1 transmission links by 24, which
is the number of transmission channels in each transmission link. The
number of access line equivalents shown excludes access line equivalents
sold or installed by our Campuslink business unit.
6
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors before deciding
whether to buy our Class A common stock. You should also refer to the other
information in this prospectus, including "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," as well as
our consolidated financial statements and related notes. Our business,
financial condition and results of operations could be harmed as a result of
any of the following risks. In that case, the price of our Class A common stock
could decline and you could lose all or a part of your investment.
Risks Involving Our Business
We have a limited operating history, which limits the information available to
you to make an informed investment decision.
We formed our company in May 1998 and began generating revenue in
November 1998, although Campuslink, which we acquired in September 1999, has
conducted business since 1993. As a result, you have limited operating and
financial information to evaluate our performance and future prospects, and
determine whether you should invest in our Class A common stock. We expect to
increase the number of markets in which we operate and expand the scope of
services that we offer. Because these markets and services will be new, it is
difficult to assess their potential contribution to our future revenues or
earnings.
Our consolidated financial statements in this prospectus include only
audited consolidated financial statements of our company from inception on May
19, 1998 to December 31, 1998 and from January 1, 1999 to December 31, 1999.
Accordingly, you must consider the risks and difficulties we face as an early
stage company. For additional operating and financial information about us, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes included elsewhere
in this prospectus.
We have incurred operating losses and negative cash flow since our inception
and expect to continue to have substantial operating losses and negative cash
flow in the future.
We have incurred losses from operating activities and negative cash flow
since we began operations. We expect that we will continue to incur significant
and increasing operating and net losses, negative EBITDA and negative cash flow
from operations due to the expansion of the number of markets we serve and the
expansion of services we offer. As of December 31, 1999, we had an accumulated
deficit of approximately $46.2 million on a consolidated basis. We cannot
assure you that we will obtain a customer base sufficient to support the costs
of our operations, or that in future periods our operations will achieve or
sustain profitability or positive cash flow.
We may not be able to raise the additional capital we need to expand our
business and develop our network and services.
We will require significant amounts of additional capital to fund the
expansion of our business and service offerings and to fund future operating
losses. We may seek to meet our additional capital needs by issuing debt or
additional equity securities or borrowing funds from one or more lenders. We
cannot assure you that we will have timely access to additional financing
sources on acceptable terms, if at all. Our ability to incur additional debt is
substantially limited by the terms of our credit facility. We currently
estimate that our aggregate capital requirements will be funded through the end
of 2001 upon completion of the offerings. We expect to continue to make
substantial capital expenditures thereafter and will therefore have additional
capital requirements after 2001.
7
<PAGE>
The actual amount and timing of our future capital requirements may
differ substantially from our estimate due to factors such as:
. unforeseen changes to our business plan;
. regulatory, technological or competitive developments;
. changes in the demand for our services;
. unforeseen delays;
. cost overruns;
. strategic acquisition costs and effects of acquisitions on our
business plan, capital requirements and growth projections; and
. new opportunities.
If we do not have acceptable access to sources of additional financing, we may
be forced to delay or abandon our plans to expand our markets, operations,
facilities, network and services, which could harm our business and competitive
position. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" for additional
information about our future capital requirements.
Our services may not achieve sufficient market acceptance to become profitable.
Our success will depend upon the willingness of our target customers to
accept us as an alternative provider of local, long distance, high-speed data
and Internet services. The lack of acceptance by these customers would have a
negative effect on our business.
The market for many of our proposed services has only recently begun to
develop and is highly competitive and evolving rapidly. We cannot assure you
that the market for these services will develop or that businesses or
institutions will use high-speed data, Internet or similar services to the
degree or in the manner we currently anticipate. As a result, we cannot predict
the extent to which our high-speed data and Internet services will achieve
market acceptance. If we do not develop and market services that are widely
accepted by businesses at profitable prices, we will not be successful. If we
are unable to react quickly to changes in market conditions, if the market
fails to develop or develops more slowly than we expect, or if our services do
not achieve market acceptance, our business and prospects will be adversely
affected.
We may not be able to execute our business plan if we cannot effectively manage
our growth.
Because we have a limited operating history, we cannot assure you that we
will be able to manage our anticipated growth effectively. Our plans to expand
rapidly will place significant demands on our management and employees,
operational and financial systems, and procedures and controls. To manage
effectively the expansion and development of our operations, we must accomplish
the following in a timely manner, at reasonable costs and on satisfactory terms
and conditions:
. identify, recruit and retain qualified personnel;
. purchase, install and operate additional switching equipment and
other network elements;
. achieve a sufficient customer base;
. develop and implement processes for provisioning and customer care;
. implement interconnection arrangements with the incumbent local
exchange carriers;
. secure adequate financing;
8
<PAGE>
. obtain required governmental consents and maintain regulatory
compliance;
. build and maintain strategic alliances and relationships;
. adapt to technological developments and changes in our industry;
. control costs;
. significantly expand our back office systems; and
. complete the implementation of, and maintain, effective quality
controls.
If we fail to manage our expected growth effectively, our business, financial
condition and results of operations will be adversely affected. See "Business"
for additional information about our expansion plans.
We may not be successful in integrating acquired companies into our operations,
which could slow our growth.
We supplement our internal growth with a program of strategic
acquisitions. Our acquisitions may not improve, and may actually harm, our
business, financial condition and results of operations in the short or long
term. Acquisitions will enhance our business and earnings only if we can
successfully integrate acquired businesses into our operations. The integration
of acquired companies involves a number of other risks, including the
following:
. we may be unable to retain skilled management, technical, sales and
back office personnel of acquired companies;
. customers of acquired companies may resist our marketing programs,
pricing levels or service system;
. we may not successfully incorporate new assets into our service
offerings;
. the attention we can devote to any one acquired company will be
restricted by our allocation of limited management resources among
various integration efforts;
. our acquisition and integration activities may cause disruptions of
our ongoing business;
. we may be unable to maintain uniform standards, controls, procedures
and policies throughout all of our acquired companies; and
. our relationships with vendors may be impaired.
Even if acquired companies eventually contribute to an increase in our
profitability, the acquisitions may adversely affect our earnings in the short
term. Our earnings may decrease as a result of transaction-related expenses we
record for the quarter in which we complete an acquisition. Our earnings may be
further reduced by the higher operating and administrative expenses we may
incur in the quarters immediately following an acquisition as we seek to
integrate the acquired business into our operations. The amortization of
goodwill and depreciation resulting from acquisitions will also contribute to
reduced earnings.
If we are unable to install additional switches, convert our network to a
packet-switching technology or expand our data service offerings, our business
may be adversely affected.
Phases two and three of our network deployment plan call for us to
install additional switches nationwide and convert our existing circuit-
switching network to a packet-switching network. We cannot assure you that we
will complete the installation of additional switches and the conversion to
packet-switching technology in a timely manner and at a commercially reasonable
cost, or that we will not face technological problems that cannot be resolved.
In addition, although we intend to offer an expanding array of Internet and
other data services, we cannot assure you that we will successfully implement
these services. If we are unable
9
<PAGE>
successfully to install or operate new switching equipment, convert our network
to a packet-switching technology or implement new data services, our business,
financial condition and results of operations will be adversely affected. See
"Business--Our Network" for additional information on our network strategy.
The success of our communications services will depend on our ability to keep
pace with rapid technological changes in our industry.
If we cannot obtain new communications technology on satisfactory terms,
we may not be able to continue to increase our revenues and number of
customers. The rapid changes in communications technology influence the demand
for our services. We need to be able to anticipate these changes and to develop
or obtain new and enhanced products and services quickly and accurately enough
to remain competitive in this changing market. We currently rely on third
parties to develop and provide us with new technology. Because some of these
new technologies may be protected by intellectual property laws and may not be
available to us, we cannot assure you that we will obtain timely access to new
technology we may need to compete effectively on satisfactory terms, if at all.
Our success depends on our ability to retain our senior management and to
continue to attract and retain qualified personnel and independent sales
agents.
Our future success depends on the continued employment of our senior
management team, particularly Arunas A. Chesonis, our Chairman of the Board and
Chief Executive Officer, and the other senior managers identified in the
"Management" section of this prospectus. Our existing management team has
extensive experience in the telecommunications industry and has developed and
directed our business strategy since our formation. We have not entered into
employment agreements with any members of our senior management team, although
our stock rights agreements with some of these members contain severance
provisions. The loss of the services of one or more of our senior managers
could impair our ability to execute our strategy, which could hinder our
introduction of new services, our entry into new markets and our expansion in
general. We also could be less prepared for technological or marketing
problems, which could reduce our ability to serve our customers and lower the
quality of our services.
We face intense competition for qualified personnel, including technical
and sales personnel. We also rely on a large number of independent sales agents
to market and sell our services. If we are unable to attract and retain
experienced and motivated personnel, including a large and effective direct
sales force, and a substantial number of sales agents, our business, financial
condition and results of operations could be adversely affected.
If we are unable to maintain or enhance our back office information systems, we
may not be able to expand quickly or compete effectively.
Sophisticated back office information systems are vital to our growth and
our ability to monitor costs, bill customers, initiate, implement and track
customer orders and achieve operating efficiencies. Our plans for the continued
development and implementation of these systems, which are discussed in more
detail under the heading "Business--Our Back Office Systems," primarily depend
on our selecting products and services
10
<PAGE>
offered by third-party vendors and efficiently integrating those products and
services into our existing operations. For example, we are currently
implementing software created by MetaSolv Software, Inc. to help us develop
operations support systems for managing customer, network and equipment orders.
We cannot assure you that we will successfully implement this software or other
products, services and systems on a timely basis, or at all, or that our
existing or new systems will perform as expected, because:
. our vendors may fail to deliver proposed products and services in a
timely and effective manner or at acceptable costs;
. we may fail to identify adequately all of our information and
processing needs;
. our information systems may fail or be inadequate;
. we may be unable to integrate these products or services in an
effective manner;
. we may fail to upgrade systems as necessary; or
. third-party vendors may cancel or fail to renew license agreements
that relate to these systems.
If any of these events were to occur, our expansion could be delayed and our
reputation could be harmed.
We depend on some of our primary competitors for key elements of our network.
We depend on our primary competitors, such as incumbent local exchange
carriers, competitive local exchange carriers, competitive access providers and
long distance providers, in each of our markets. To offer local service in a
target market, we must interconnect with the incumbent local exchange carrier
in that market. In addition, as part of our smart-build network strategy, we
lease key elements of our network from other providers. For our business
strategy to be successful, we must negotiate or adopt interconnection
agreements with incumbent local exchange carriers and negotiate and renew
satisfactory agreements with providers of transport capacity and wholesalers of
long distance and international services. We also must ensure that these
providers process our provisioning requests on a timely basis, maintain their
networks in good working order and provide us with adequate capacity.
We cannot assure you that the incumbent local exchange carriers and other
network providers will comply with their contractual and, in the case of the
incumbent local exchange carriers, legally required network provisioning
obligations, or that the provisioning process will be completed for our
customers on a timely and otherwise satisfactory basis. Moreover, we cannot
assure you that the rates to be charged to us under future interconnection,
lease or resale agreements with other providers will allow us to offer usage
rates low enough to attract a sufficient number of customers and to operate our
networks at satisfactory profit margins.
Network failures or system breaches could cause delays or adversely affect the
quality of our services.
In operating our network, we may be unable to connect and manage a large
number of customers or a large quantity of traffic at high transmission speeds.
Any failure to achieve or maintain high-capacity data transmission could
significantly reduce consumer demand for our services and adversely affect our
business. In addition, our network may be disrupted by computer viruses, break-
ins, human error, natural disasters and other disruptive problems. We cannot
assure you that the network security and stability measures we implement will
not be circumvented in the future or otherwise prevent the disruption of our
services. The costs and resources required to eliminate computer viruses and
other security problems may result in interruptions, delays or cessation of
services to our customers, which could hurt our business, financial condition
and results of operations.
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<PAGE>
Expansion of our network according to our smart-build strategy may result in
increased costs which we may not be able to offset as planned.
The expansion of our existing network and the construction of networks in
new markets according to our smart-build strategy is a significant undertaking
which may cost more than we presently expect. Our strategy of initially leasing
rather than building our own transport facilities may cause our cost of service
to be significantly higher than that of other communications providers, which
could place us at a competitive disadvantage. We incur operating expenses for
leased facilities that are proportionately higher than those incurred by fiber-
based competitive local exchange carriers or integrated communications
providers. We cannot assure you that the effect of these higher, anticipated
operating expenses on our profit margins will be mitigated by a higher revenue
per line as a result of our focus on communications-intensive medium-sized and
large businesses. Our inability to offset these higher anticipated operating
expenses could have a material adverse effect on our business, financial
condition and results of operations.
Our off-network offering of long distance services depends on our ability to
establish effective resale agreements.
In our offering of switched long distance services for traffic not
carried on our network, we rely on other carriers to provide transmission and
international service through resale agreements. These agreements typically
provide for the resale of long distance services on a per minute basis and may
contain minimum volume commitments. Negotiation of these agreements involves
estimates of future supply and demand for transmission capacity, as well as
estimates of the calling pattern and traffic levels of our future customers. If
we fail to meet our minimum volume commitments, we will be obligated to pay
underutilization charges. If we underestimate our need for transmission
capacity, we must obtain additional capacity through alternative means, which
may prove to be more expensive than we currently estimate.
Intense competition in the communications services industry could cause us to
lose customers and revenue and could make it more difficult for us to enter new
markets or expand in our existing markets.
We face intense competition in all of our markets. This competition could
result in loss of customers and lower revenue for us. It could also make it
more difficult for us to enter new markets. Existing local telephone companies,
including Bell Atlantic Corporation, BellSouth Corporation and GTE Corp.,
currently dominate their local telecommunications markets. Bell Atlantic
recently obtained authority to provide long distance services in the State of
New York, and Bell Atlantic and other regional Bell operating companies are
seeking similar authority in a number of other states. These companies will
become more powerful competitors as they obtain authority to provide long
distance services in addition to local services.
In addition, three major competitors, AT&T Corp., MCI WorldCom, Inc. and
Sprint Corporation, dominate the long distance market and MCI WorldCom and
Sprint have proposed to merge. Hundreds of other companies also compete in the
long distance marketplace. AT&T, MCI WorldCom and Sprint also offer local
telecommunications services in many locations. We also compete with other
communications services companies which, like us, compete with the existing
local telephone companies in some markets.
Our other competitors may include cable television companies, providers
of communications network facilities dedicated to particular customers,
providers of digital access and data services, microwave and satellite
carriers, wireless telecommunications providers, private networks owned by
large end-users, and telecommunications management companies. These and other
firms may enter the markets where we focus our sales efforts. Many of our
existing and potential competitors have financial and other resources far
greater than our own. In addition, the trend toward mergers and strategic
alliances in the communications industry may strengthen some of our
competitors, which could put us at a significant competitive disadvantage. For
additional information on the competition in our industry, see "Business--
Competition."
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<PAGE>
Our need to comply with extensive government regulation could increase our
costs and slow our growth.
Our ability to provide communications services is subject to significant
regulation, and is affected by regulatory developments, at the federal, state
and, to a lesser extent, local levels. Delays in receiving required regulatory
approvals or the enactment of new, adverse regulation or regulatory
requirements may slow our growth and have a material adverse effect on our
business, financial condition and results of operations.
The Federal Communications Commission, or FCC, exercises jurisdiction
over us with respect to interstate and international services and issues
regulations that affect our operations and services. In addition, state
regulatory commissions exercise jurisdiction over us because we provide
intrastate services. We generally are required to obtain regulatory
authorization from, or file tariffs with, state agencies in the states in which
we operate. If and when we seek to build our own transmission facilities, local
authorities will regulate our access to municipal rights-of-way. Constructing a
network is also subject to numerous local regulations such as building codes
and licensing. These regulations vary on a city-by-city and county-by-county
basis.
Decisions of regulatory authorities and the courts that review these
authorities may greatly affect the rates, terms and conditions of our
interconnection agreements and arrangements. We cannot assure you that these
decisions will be favorable to us or our business plan. For example, a decision
on January 25, 1999 by the Supreme Court vacated the FCC's rule that determined
which network elements the incumbent local exchange carriers must provide to
competitors on an unbundled basis. On September 15, 1999, the FCC reaffirmed
its earlier decision with respect to six of the seven previously designated
network elements. It eliminated the requirement that incumbent local exchange
carriers provide unbundled access to operator and directory assistance
services, concluding that competitors are able to self-provision those services
or obtain them from alternative sources. With respect to local circuit
switching, the FCC ruled that incumbent local exchange carriers need not
provide unbundled access to enable competitors to serve customers with four or
more lines in the densest portions of the top 50 metropolitan statistical
areas, which are the areas in which competitive switching facilities are most
widely deployed. The implementation of these and other FCC rules may lead to
further litigation, which could make negotiating and enforcing interconnection
agreements more difficult and protracted and may require renegotiation of our
existing agreements. Other recent developments that may impair our ability to
maintain acceptable interconnection agreements with the incumbent local
exchange carriers include increased pricing flexibility for, and relaxation of
regulatory oversight of, incumbent local exchange carriers.
We cannot assure you that the FCC or state commissions will grant us
required authority or refrain from taking action against us if we are found to
have provided services without obtaining the necessary authorizations or to
have violated other requirements of their rules and orders. Regulators or
others could challenge our compliance with rules and orders that apply to us.
These challenges could cause us to incur substantial legal and administrative
expenses. See "Regulation of Our Services" for additional information on the
regulation of our business.
The access charges we receive for terminating calls of other providers may be
reduced, which could adversely affect our business.
We provide access services to long distance service providers. Access
charges are required by government regulation to be just, reasonable and not
unreasonably discriminatory. Disputes have arisen regarding the regulation of
access charges, and these may be resolved in a manner adverse to us. For
example, AT&T has stated that it believes it does not have to pay these access
charges to any integrated communications provider unless it is contractually
obligated to do so. In addition, Sprint has asserted that it is only obligated
to pay access charges of integrated communications providers to the extent that
these access charges do not exceed those of the incumbent local exchange
carrier. The FCC has initiated a rulemaking proceeding seeking comment on
whether to impose regulatory restrictions on the access charges received by
competitive local exchange carriers. The positions and the policies, if any,
that the FCC adopts regarding the access charges
13
<PAGE>
imposed by competitive local exchange carriers and integrated communications
providers such as PaeTec could have a material adverse effect on our business,
financial condition and results of operations. For additional information on
the regulation of access charges, see "Regulation of Our Services."
We may have difficulty servicing and refinancing our substantial indebtedness.
We cannot assure you that our business will generate sufficient cash
flows from operations or that our currently anticipated growth in revenues and
cash flow will be realized on schedule or in an amount sufficient to enable us
to pay our indebtedness or to fund our other liquidity needs. As of March 1,
2000, we had $29.7 million of total indebtedness and $149.5 million of
stockholders' equity. We anticipate incurring additional indebtedness in the
future, including under our senior credit facility and by issuing debt
securities.
We may have to refinance our senior credit facility before the borrowing
period terminates on December 31, 2000. Our ability to refinance our
indebtedness will depend on our financial condition at the time, the terms of
our other indebtedness and factors that are beyond our control, such as market
conditions. We may not be able to refinance our existing or future indebtedness
when required. To the extent we are not able to refinance our indebtedness, we
may not have sufficient cash flow to make required payments on our
indebtedness.
Covenants in our credit facility restrict our capacity to borrow and invest,
which could impair our ability to expand or finance our operations.
Our senior credit facility imposes operating and financial restrictions
that limit our discretion on some business matters, which could make it more
difficult for us to expand, finance our operations or engage in other business
activities that may be in our interest. These restrictions limit our ability
to:
. incur additional debt;
. pay dividends or make other distributions;
. make investments or other restricted payments;
. enter into sale and leaseback transactions;
. pledge or mortgage assets;
. enter into transactions with related persons;
. sell assets; and
. consolidate, merge or sell all or substantially all of our assets.
Our indebtedness may limit our flexibility in responding to important
business developments, which could place us at a competitive disadvantage. Our
indebtedness may:
. limit our ability to obtain necessary financing in the future;
. limit our ability to refinance all or a portion of our indebtedness
on or before maturity;
. limit our ability to fund planned capital expenditures;
. require us to use a significant portion of our cash flow from
operations to pay our debt obligations rather than for other
purposes, such as working capital or capital expenditures; and
. make us more vulnerable to a downturn in our business.
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<PAGE>
Risks Involving Our Class A Common Stock
Members of our management, as Class B stockholders, possess superior voting
rights that give them the ability to control major corporate decisions.
We have two types of common stock, Class A common stock, which carries
one vote per share, and Class B common stock, which carries 20 votes per share.
Under our certificate of incorporation, holders of our Class B common stock
have the exclusive right to elect three members to our board of directors.
Members of our senior management and their family trusts are the beneficial
owners of all of our outstanding Class B common stock. These holders will
control approximately % of the combined voting power of our common stock
immediately following the offerings. All of our Class B stockholders have
granted Arunas A. Chesonis, our Chairman of the Board and Chief Executive
Officer, proxies authorizing him to vote their shares of Class B common stock
in his sole and absolute discretion. As a result of the possession of superior
voting rights by the Class B stockholders, and their grant of proxies to Mr.
Chesonis, holders of our Class A common stock will be subject to the following
risks:
. immediately after the offerings, the Class B stockholders as group
and, so long as the proxies remain in effect, Mr. Chesonis
individually will have the ability to elect at least a majority of
our directors, subject to the provisions of the voting agreement to
which Mr. Chesonis is a party, and to control other major decisions
involving our company or its assets;
. the superior voting rights of the Class B common stock could render
more difficult or discourage a takeover attempt even if a change of
control of our company would be beneficial to our stockholders; and
. the interests of our Class B stockholders may conflict with the
interests of our Class A stockholders.
See "Management--Membership of the Board of Directors" for more information
about the board membership provisions of the voting agreement to which Mr.
Chesonis is a party and "Description of Capital Stock--Common Stock" for more
information about the relative rights of our Class A common stock and our Class
B common stock.
Conflicts of interest may arise from investments made by some of our
institutional investors in other telecommunications companies.
Two of our principal institutional investors, Madison Dearborn Partners
and The Blackstone Group, and their affiliates currently have significant
investments in telecommunications services companies other than PaeTec. These
institutional investors and their affiliates may invest in the future in other
entities that compete with us. In addition, principals of these institutional
investors who will continue to serve as PaeTec directors following the
offerings also serve as directors of other telecommunications services
companies. As a result, these directors may be subject to conflicts of interest
during their tenure as directors of PaeTec. Because of the potential conflicts,
these directors may be required periodically to disclose financial or business
opportunities to us and to the other companies to which they owe fiduciary
duties.
Provisions in our organizational documents and in the Delaware General
Corporation Law may prevent takeover attempts that could be beneficial to our
stockholders.
Provisions of our certificate of incorporation, our bylaws and the
Delaware General Corporation Law could discourage a takeover of us even if a
change of control of our company would be beneficial to the interests of our
stockholders. These provisions include a requirement that our board of
directors be divided into three classes, with approximately one-third of the
directors to be elected each year. This classification of directors makes it
more difficult for an acquirer or for other stockholders to change the
composition of the
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<PAGE>
board of directors. In addition, our certificate of incorporation authorizes
the board of directors to provide for the issuance of up to 5,000,000 shares of
our preferred stock, in one or more series, which the board of directors could
issue without stockholder approval and with terms and conditions, and having
rights, privileges and preferences, to be determined by the board of directors.
The ability to issue preferred stock could discourage unsolicited acquisition
proposals or make it more difficult for a third party to gain control over us,
or otherwise could adversely affect the market price of our common stock. We
are also subject to section 203 of the Delaware General Corporation Law, which
prohibits us from engaging in some business combinations with stockholders that
beneficially own 15% or more of our voting stock, or with the affiliates of
those stockholders, unless our directors or stockholders approve the business
combination in the manner prescribed by this statute.
You will experience immediate and substantial dilution in your investment.
The initial public offering price of our Class A common stock is
substantially higher than the net tangible book value per share of our common
stock. As a result, you will experience immediate and substantial dilution in
net tangible book value when you buy shares of our Class A common stock in the
offerings. This means that you will pay a higher price per share than the
amount of our total assets, minus our total liabilities, divided by the number
of outstanding shares. Holders of our Class A common stock will experience
further dilution to the extent that outstanding options or warrants to purchase
our common stock are exercised or we issue additional shares of our common
stock at prices lower than the then-current net tangible book value.
Our stock price could fluctuate significantly in the future as a result of our
operating performance and conditions in our industry.
In recent years, stock markets have experienced extreme price and volume
fluctuations. The trading price of our Class A common stock could be subject to
wide fluctuations in response to a number of factors. These factors include the
following:
. fluctuations in the quarterly operating results of PaeTec or other
communications services companies, which could affect the
attractiveness of our stock compared to the securities of
communications services companies with better results or compared to
the securities of companies in other businesses;
. changes in general conditions in the economy or the communications
industry, which could affect the demand for our products and services
and our operating results;
. our failure to complete and successfully integrate acquisitions of
other companies, which could adversely affect our operating results
and our ability to grow;
. changes in earnings estimates by analysts; and
. announcements of new contracts or product offerings by us or our
competitors.
As a result, investors in our Class A common stock may not be able to resell
their shares at or above the initial public offering price. In the past, some
companies that have experienced volatility in the market price of their stock
have been the subject of securities class action litigation. If we were to
become the subject of class action litigation, we could incur substantial costs
and our management team's attention and resources could be diverted from our
business.
We do not anticipate paying any dividends on our Class A common stock.
We do not anticipate paying any cash dividends on our Class A common
stock in the foreseeable future. Our senior credit facility agreement contains
provisions that effectively prohibit us from paying cash dividends.
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<PAGE>
Future sales of our common stock in the public market could lower our stock
price and impair our ability to raise funds in new stock offerings.
Future sales of a substantial number of shares of our common stock in the
public market, or the perception that such sales could occur, could adversely
affect the prevailing market price of our Class A common stock and could make
it more difficult for us to raise funds through a public offering of our equity
securities. Immediately following the offerings, there will be shares of
our common stock outstanding. Of these shares, the shares of Class A common
stock sold in the offerings will be freely tradable in the public market
without registration under the Securities Act, unless the shares are held by
"affiliates" of PaeTec, as that term is defined in Rule 144 under the
Securities Act. Assuming Merrill Lynch does not release any PaeTec stockholders
from the lockup agreements described below, additional shares of Class A
common stock will be eligible for sale in the public market 180 days after the
date of this prospectus.
Under lockup agreements with the underwriters, our executive officers and
directors and other existing stockholders have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of any
shares of common stock for a period of 180 days from the date of this
prospectus. We have entered into a similar lockup agreement with the
underwriters. However, Merrill Lynch, in its sole discretion, may consent to
the release of all or any portion of the shares subject to the lockup
agreements at any time without prior notice to our other stockholders or to any
public market in which our common stock trades.
We have granted the following registration rights with respect to
35,035,849 shares of our outstanding Class A common stock and all 2,635,000
shares of our outstanding Class B common stock:
. demand registration rights, in which stockholders holding 23,785,849
shares, or % of our outstanding Class A common stock immediately
after completion of the offerings, are entitled to require us to
register the sale of their shares under the Securities Act on up to
four occasions on SEC Form S-1 and on an unlimited number of
occasions on SEC Form S-2 or S-3;
. shelf registration rights, in which stockholders holding 23,785,849
shares, or % of our outstanding Class A common stock immediately
after completion of the offerings, are entitled to require us, at any
time between the first anniversary and the third anniversary of the
completion date, to register the sale of their shares under the
Securities Act on a continuous or delayed basis; and
. piggyback registration rights, in which stockholders holding
35,035,849 shares, or % of our outstanding Class A common stock
immediately after completion of the offerings, and all of our
outstanding Class B common stock are entitled to require us to
include their shares in a registration of our securities for sale by
us or by our other security holders.
Any shares of Class B common stock registered for sale to the public will
automatically convert into an equal number of shares of Class A common stock
when sold. The sale of shares into the public market upon exercise of
registration rights may further adversely affect the market price of our common
stock.
Our forward-looking statements are speculative and may prove to be wrong.
Much of the information in this prospectus consists of forward-looking
statements based on our current expectations. These statements are inherently
predictive and speculative, and you must not assume that they will prove to be
correct. You can often identify these statements by forward-looking words such
as:
. "may";
. "will," "intend," "plan to";
. "expect," "anticipate," "believe," "estimate"; and
. "continue" or similar words.
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You should read these statements very carefully because they:
. discuss our future plans or expectations;
. contain projections of our financial condition or results of
operations; or
. state other forward-looking information.
When you consider these forward-looking statements, you should keep in
mind the risk factors above and the other cautionary statements in this
prospectus because they provide examples of risks, uncertainties and events
that may cause our actual results to differ materially from the expectations we
describe or imply in our forward-looking statements.
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USE OF PROCEEDS
We estimate that we will receive $ million in net proceeds from the
offerings, at an initial public offering price of $ per share, after we
deduct an estimated $ million of underwriting discounts and commissions and
other expenses of the offerings payable by us. We estimate that our net
proceeds will be $ million if the underwriters' over-allotment options are
exercised in full, after deducting estimated underwriting discounts and
commissions and other offering expenses of $ million.
We expect to use the net proceeds to:
. fund our capital expenditures, market expansion and product
development;
. hire additional personnel;
. fund our operating losses;
. fund potential acquisitions; and
. provide for working capital and for other general corporate purposes.
The amounts we actually spend in these areas may vary significantly and
will depend on a number of factors, including our future revenues. We also may
use a portion of the net proceeds to acquire or invest in complementary
technologies, services or products.
Pending these uses, we will invest the net proceeds of the offerings in
U.S. Government securities or other short-term, interest-bearing, investment
grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock and we
do not anticipate that we will pay cash dividends on our common stock in the
foreseeable future. The current policy of our board of directors is to retain
any earnings to support our operations and to finance the expansion of our
business. Our senior credit facility agreement contains provisions that
effectively prohibit us from paying cash dividends.
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CAPITALIZATION
The following table shows our capitalization as of December 31, 1999:
. on an actual basis;
. as adjusted to reflect transactions completed in February 2000 in
which we raised gross proceeds of $134 million through the sale of
the Series A preferred stock and repaid $47.1 million of
indebtedness, of which $2.1 million was current indebtedness; and
. as further adjusted to reflect the sale of shares of Class A
common stock in the offerings at an initial public offering price of
$ per share after deducting estimated underwriting discounts and
commissions and other offering expenses and the mandatory conversion
of the Series A preferred stock into 17,866,666 shares of Class A
common stock upon completion of the offerings.
You should read this table together with the sections of this prospectus
entitled "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and related notes and the other financial information that appears
elsewhere in this prospectus.
<TABLE>
<CAPTION>
At December 31, 1999
-------------------------------
As As further
Actual adjusted adjusted
------- -------- ----------
(in thousands, except share data)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 7,435 $ 7,435 $
Short-term investments......................... -- 80,700
------- -------- ----
Total cash and cash equivalents and short-
term investments ......................... 7,435 88,135
======= ======== ====
Long-term debt:
Credit facility(1)........................... 65,000 20,000
Other financing, excluding current
maturities.................................. 4,166 4,166
------- -------- ----
Total long-term debt, excluding current
maturities.............................. 69,166 24,166
------- -------- ----
Stockholders' equity:
Preferred stock:
Series A convertible preferred stock, $.01
par value (134,000 authorized shares,
134,000 issued and outstanding (as
adjusted)).................................. -- 127,700(2)
Common stock:
Class A common stock, $.01 par value (
authorized shares, 21,732,633 (actual),
24,332,681 (as adjusted) and (as
further adjusted) issued and outstanding,
respectively)(3).......................... 217 243
Class B common stock, $.01 par value
(7,500,000 authorized shares, 5,285,048
(actual) and 2,635,000 (as adjusted and as
further adjusted) issued and outstanding,
respectively)............................. 53 27
Additional paid-in capital................. 75,986 75,986
Accumulated deficit........................ (46,195) (46,195)
------- -------- ----
Total stockholders' equity............... 30,061 157,849
------- -------- ----
Total capitalization................... $99,227 $182,015
======= ======== ====
</TABLE>
- --------
(1) The maximum amount that may be outstanding under this revolving facility is
$70 million. As adjusted, $50 million was available under this facility.
(2) Reflects transaction fees of approximately $6.2 million.
(3) Excludes, as of March 1, 2000, 3,362,236 shares of Class A common stock
subject to outstanding options and 80,000 shares of Class A common stock
subject to outstanding warrants.
20
<PAGE>
DILUTION
Purchasers of the Class A common stock in the offerings will suffer an
immediate and substantial dilution in pro forma net tangible book value per
share. Dilution is the amount by which the initial public offering price paid
by purchasers of shares of our Class A common stock exceeds the pro forma net
tangible book value per share of our common stock after the offerings. Pro
forma net tangible book value per share represents the amount of our total
tangible assets reduced by our total liabilities, divided by the pro forma
number of shares of common stock outstanding as of December 31, 1999, assuming
the conversion of all outstanding shares of the Series A preferred stock into
17,866,666 shares of Class A common stock upon the completion of the offerings.
Our pro forma net tangible book value as of December 31, 1999 was approximately
$ million, or $ per share of common stock.
After giving effect to the sale of shares of Class A common stock in
the offerings at an initial public offering price of $ per share and the
application of the estimated net proceeds from the offerings, our pro forma net
tangible book value as of December 31, 1999 would have been $ million, or
$ per share. This represents an immediate increase in pro forma net tangible
book value of $ per share to existing stockholders and an immediate dilution
of $ per share to new investors purchasing shares in the offerings. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.......................... $
====
Pro forma net tangible book value per share as of December 31,
1999.......................................................... $
----
Pro forma increase in net tangible book value per share
attributable to new investors.................................
Pro forma net tangible book value per share after the offerings..
----
Pro forma dilution per share to new investors.................... $
====
</TABLE>
If the underwriters' over-allotment options are exercised in full, our
pro forma net tangible book value after the offerings would be $ per share,
which would represent an increase in pro forma net tangible book value of $
per share and pro forma dilution to new investors of $ per share.
The following table illustrates, on the pro forma basis described above
as of December 31, 1999, the difference between existing stockholders and new
investors with respect to the number of shares purchased from us, the total
consideration paid and the average price per share paid, in each case as of
December 31, 1999:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.... 44,884,347 % $210,256,398 % $4.68
New Investors............
Total.................
</TABLE>
All of the foregoing computations assume outstanding options and warrants
to purchase Class A common stock are not exercised. At December 31, 1999,
options to purchase 2,960,485 shares of Class A common stock at a weighted
average exercise price of $2.65 per share and warrants to purchase 40,000
shares of Class A common stock at a weighted average exercise price of $5.00
per share were outstanding. If all those options and warrants had been
exercised, the dilution to new investors would be $ per share. To the extent
that any options or warrants are granted in the future and are exercised, there
will be further dilution to new investors.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
We derived the selected consolidated financial data presented below for
the period from our inception on May 19, 1998 to December 31, 1998, for the
year ended December 31, 1999, and as of December 31, 1998 and 1999 from our
consolidated financial statements, which have been audited by Deloitte & Touche
LLP, independent auditors. You should also read the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes that
appear elsewhere in this prospectus. We have presented the following data in
thousands, except per share amounts and the information shown under "Operating
Data."
<TABLE>
<CAPTION>
Period from inception
(May 19, 1998) Year ended
to December 31, 1998 December 31, 1999(1)
--------------------- --------------------
<S> <C> <C>
Statement of Operations Data:
Revenue........................... $ 150 $ 23,347
Cost of services.................. 96 16,809
------- --------
Gross margin...................... 54 6,538
Selling, general and
administrative expenses.......... 5,770 40,294
Depreciation and amortization..... 243 4,508
------- --------
Loss from operations.............. (5,959) (38,264)
Other income, net................. 107 355
Interest expense.................. -- (2,434)
------- --------
Net loss.......................... $(5,852) $(40,343)
======= ========
Net loss per share, basic and
diluted.......................... $ (0.67) $ (1.93)
======= ========
Other Financial Data:
Capital expenditures.............. $12,027 $ 41,781
EBITDA(2)......................... (5,716) (33,756)
Cash used by operating
activities....................... (3,229) (39,759)
Cash used by investing
activities....................... (12,027) (37,407)
Cash provided by financing
activities....................... 17,690 82,167
Balance Sheet Data (at period end):
Cash and cash equivalents......... $ 2,434 $ 7,435
Property and equipment, net....... 11,784 62,384
Total assets...................... 15,716 121,986
Long-term debt.................... -- 69,166
Total stockholders' equity........ 12,635 30,061
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1999
--------------------
<S> <C>
Operating Data:
Markets served(3)........................................ 25
Number of switches deployed.............................. 8
Access line equivalents installed(4)..................... 21,200
Sales force employees.................................... 211
Total employees.......................................... 590
</TABLE>
- --------
(1) Includes the operating results of Campuslink from September 9, 1999, which
is the date we completed our acquisition of Campuslink.
(2) We have included data with respect to EBITDA because it is a measurement of
financial performance commonly used in our industry. When we refer to
"EBITDA," we mean net earnings or loss before interest expense, income
taxes, depreciation and amortization. EBITDA is not a measurement of
financial
22
<PAGE>
performance under generally accepted accounting principles and should not
be considered an alternative to net income or loss as a measure of
performance, or to cash flow as a measure of liquidity. EBITDA is not
necessarily comparable with similarly titled measures for other companies.
(3) Each market represents a metropolitan statistical area as defined by the
U.S. Census Bureau.
(4) Calculated by multiplying the number of T1 transmission links by 24, which
is the number of transmission channels in each transmission link. The
number of access line equivalents shown excludes access line equivalents
sold or installed by our Campuslink business unit.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our
consolidated financial statements and related notes and the other financial
information that appears elsewhere in this prospectus.
Overview
We are a fast growing integrated communications provider offering
broadband communications solutions, including data, voice and an expanding
array of applications and integration services. We currently deliver our
services to medium-sized and large businesses, institutions and other
communications-intensive users in 25 markets located in or near eight
metropolitan areas and encompassing over 31% of the total business access lines
in the United States. Our business is rapidly evolving, but we have had limited
operations.
Since our inception in May 1998, our principal activities have consisted
of:
. hiring technical, sales and other key personnel;
. raising capital;
. acquiring switches, routers and other equipment and facilities;
. developing, acquiring and integrating operations support systems and
other back office systems capable of handling our service offerings;
. acquiring five businesses, including Campuslink;
. negotiating interconnection agreements; and
. commencing operations in our current markets.
Therefore, we believe that our revenue and operating results during this period
are not indicators of our future performance. For risks related to our limited
operations, see "Risk Factors--We have a limited operating history, which
limits the information available to you to make an informed investment
decision."
We have developed, installed and continue to invest in an advanced
network that facilitates delivery of our service offerings. We have adopted a
smart-build network strategy in which we combine transport facilities we lease
with switches, routers and other network electronics we own and operate. This
strategy provides us with control over the quality and flexibility of our
service offerings, reduces our capital investments and allows us to bring
services more quickly to market. As it becomes economically attractive for us
to do so, we plan to purchase an increasing portion of the transport capacity
we need to handle growing traffic volumes.
To supplement our internal growth, we pursue an acquisition strategy that
will allow us to increase penetration of our current markets and expand into
new markets. We seek acquisition candidates that will enhance our ability to
sell and deliver value-added services. Accordingly, we focus our acquisition
efforts on interconnect companies that sell, install and maintain data and
voice networks for customers, enhanced service providers and local and long
distance providers. We believe that our acquisition of these types of
businesses will bring experienced back office, technical and customer service
personnel to our company, enhance our suite of service offerings and increase
our customer base. The operating results of each of the four businesses we have
acquired through December 31, 1999 are included in our consolidated statements
of operations from the dates of those acquisitions.
As a result of our development activities, we have experienced
significant operating losses. We had net losses of $5.9 million in fiscal 1998
and net losses of $40.3 million in 1999. Until we establish a sufficient
24
<PAGE>
revenue-generating client base in a market, we do not expect to achieve
operating income in that market. We expect to continue to experience increasing
operating losses as we continue to expand our operations.
Revenue. We derive revenue primarily from usage charges, monthly
recurring fees and initial non-recurring charges. Usage fees consist of fees
paid by our customers for each call made, fees paid by the incumbent local
exchange carriers in our markets as reciprocal compensation when we terminate
calls made by incumbent carrier customers, and access charges paid by carriers
for long distance traffic originated and terminated by us. We are paid usage
fees both by our customers and by other carriers. Monthly recurring charges
include the fees paid by our customers for lines in service and additional
features on those lines, and include fees provided over the length of a
customer's service contract. Monthly recurring charges are paid by our end-user
customers. For particular long-term service and infrastructure projects, our
customers pay initial non-recurring charges for infrastructure design,
installation services and equipment costs.
In 1999, approximately 5% of our revenue consisted of reciprocal
compensation. We do not expect that reciprocal compensation as a percentage of
our revenue will significantly increase and, accordingly, do not expect that
reciprocal compensation will constitute a material component of our future
revenue. Some incumbent local exchange carriers have disputed reciprocal
compensation charges related to Internet access service billed by competitive
local exchange carriers and ICPs. See "Regulation of Our Services--Federal
Regulation" for more information about this issue.
Cost of Services. Cost of services consists primarily of leased transport
charges, usage costs for local and long distance calls, and installation costs.
Our leased transport charges are the payments we make to lease the transmission
facilities used to connect our customers to our switching centers and to other
carriers' networks. Because we pursue a strategy of leasing rather than
building our own transport facilities, cost of services is a more significant
component of total costs for us than for our competitors who own their
transmission facilities. Usage costs for local and long distance are the costs
that we incur for calls made by our customers. For particular long-term service
and infrastructure projects, installation costs are one-time costs we incur in
designing systems and purchasing and installing equipment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include selling and marketing, customer service,
billing, corporate administration and personnel costs. We expect that we will
incur significant selling and marketing costs, primarily reflecting salaries of
our direct sales force and commissions paid to our direct sales force and sales
agents, as we continue to expand into new geographic markets, add new sales
offices and enlarge our current service offerings. In addition, our significant
investment in back office systems will result in a higher concentration of
selling, general and administrative costs during our initial years of
operation.
Depreciation and Amortization. Depreciation and amortization include
depreciation of our telecommunications network and equipment, amortization of
goodwill and other intangible assets related to acquisitions, and amortization
of costs related to securing our existing loan facilities.
Results of Operations
Year Ended December 31, 1999
We generated revenue of $23.3 million in 1999. Of this revenue, $7.7
million, or 33.0%, reflected the inclusion of Campuslink's operating results
from September 9, 1999, which was the date we completed our acquisition of
Campuslink. Excluding the Campuslink results, we derived our 1999 revenue
principally from usage charges and monthly recurring fees. The increase in this
1999 revenue compared to our fiscal 1998 revenue was attributable to the longer
period in which we generated operating revenue. During 1999, we expanded our
service offerings, activated eight switches and significantly increased the
number of employees and sales offices in our markets. Campuslink experienced
revenue growth in 1999 as a result of the increase in
25
<PAGE>
the number of properties it served from 51 properties as of January 1, 1999 to
60 properties as of December 31, 1999. Approximately 26.0% of Campuslink's 1999
revenues were attributable to installation projects. We received $5.0 million,
or 21.4%, of our 1999 revenue from our sale of products and services to one of
the customers we serve as a result of our acquisition of Campuslink. Of this
amount, $1.9 million, or 38.0%, was attributable to initial non-recurring
charges for installation services and equipment costs. We expect that revenues
generated by this customer in 2000 will represent less than 10% of our total
revenue in 2000 as we continue to enter into new markets and expand our
business.
Cost of services in 1999 totaled $16.8 million and largely represented
usage costs and leased transport charges. Excluding the effect of our
acquisition of Campuslink, which contributed cost of services of $6.0 million,
cost of services as a percentage of revenue was 68.8%.
Selling, general and administrative expenses in 1999 totaled $40.3
million. We incurred these expenses primarily to develop and staff our back
office systems and to hire and train our growing sales force.
Depreciation and amortization of $4.5 million in 1999 was principally
attributable to depreciation of equipment we placed in service and to
amortization of debt issuance costs.
Interest expense totaled $2.4 million in 1999, as interest on borrowings
more than offset the interest we earned on our investment of cash balances.
Period from Our Inception, May 19, 1998, to December 31, 1998
We first realized operating revenue in November 1998. During the period
from our inception on May 19, 1998 to December 31, 1998, we generated operating
revenue of $0.2 million, primarily from the resale of long distance phone
services.
Cost of services in fiscal 1998 totaled $0.1 million and principally
represented the wholesale cost to us of long distance services.
Selling, general and administrative expenses in fiscal 1998 totaled $5.8
million. These costs consisted primarily of the payroll and professional costs
we incurred in connection with our organization, initial financing activities
and commencement of operations.
Depreciation and amortization of $0.2 million in fiscal 1998 was
primarily attributable to depreciation of office equipment we placed in
service.
We generated interest income of $0.1 million in fiscal 1998 from our
investment of cash balances in short-term investments.
Seasonality
Our operating results will reflect some seasonality relating to the
portion of our revenue we derive from sales to the university campus market. We
expect that we generally will experience lower revenue and income from
operations in the summer months, when smaller student enrollments at the
universities and colleges we serve result in a reduced demand for our services.
Inflation
Inflation did not have a material impact on our operations during any of
the periods covered in our discussion and analysis of results of operations.
26
<PAGE>
Liquidity and Capital Resources
We have incurred losses from operating activities and negative cash flow
since we began operations. We expect that we will continue to incur significant
and increasing operating and net losses and negative cash flow from operations
due to continued capital expenditures, the increase in the number of markets we
serve and the expansion of services we offer. As of December 31, 1999, we had
an accumulated deficit of $46.2 million. Our net cash used for operating
activities was approximately $3.2 million in fiscal 1998 and $39.8 million in
1999. The net cash used for operating activities during 1999 was primarily
attributable to our net losses.
We historically have depended on the proceeds from the sale of equity
securities and borrowings to fund a significant portion of our investing
activities, which have consisted primarily of the purchase and installation of
property and equipment. We made capital expenditures of $12.0 million in fiscal
1998 and $41.8 million in 1999. We expect that significant capital expenditures
will be required in future periods in connection with our continued market
expansion and product development. Net cash used in our investing activities
was $12.0 million in fiscal 1998 and $37.4 million in 1999. The net cash used
for investing activities was primarily applied to capital expenditures.
In fiscal 1998, the $17.7 million of net cash provided by financing
activities was primarily attributable to issuances of our common stock. In
1999, net cash provided by financing activities totaled $82.2 million. Net
proceeds of $27.6 million from common stock issuances and $65.0 million of
borrowings under our credit facility accounted for substantially all of the net
cash provided by financing activities in 1999.
We currently have a senior secured credit facility under which a
syndicate of lenders provides us with funding of up to $70.0 million. We are
required to apply the proceeds of the facility to fund capital expenditures,
permitted acquisitions and a portion of our working capital requirements. We
have granted the lenders under this facility a security interest in
substantially all of our assets. Interest on this facility is based, at our
option, on a designated base rate or LIBOR plus, in each case, a specified
margin. On January 1, 2001, any borrowings outstanding under this facility as
of December 31, 2000 will convert into a six-year term loan. No principal
payments under the facility are due before this conversion. As of March 1,
2000, $25.0 million of borrowings were outstanding under this facility. For a
description of the operating and financial restrictions imposed under our
credit facility agreement, see "Risk Factors--Covenants in our credit facility
restrict our capacity to borrow and invest, which could impair our ability to
expand or finance our operations." As of December 31, 1999, we were not in
compliance with a credit facility covenant that restricts our EBITDA losses
from exceeding specified amounts. Our lenders have waived the application of
this restriction for the reporting period ended December 31, 1999 and have
agreed to modify this covenant for fiscal 2000 to conform with our operating
plan for the current year.
On September 9, 1999, we completed our acquisition of Campuslink by
merger. In this transaction, we assumed a total of $7.3 million of Campuslink
indebtedness owed to four of Campuslink's former principal stockholders. After
the merger was completed, we repaid $5.2 million of this indebtedness and
issued notes to the former stockholders representing the remaining $2.1 million
of the indebtedness. We repaid the outstanding balances on these notes, plus
all accrued interest, on March 2, 2000.
In connection with our acquisition of Campuslink, we assumed three term
notes in the total principal amount of approximately $5.6 million. Campuslink
used these notes to finance the purchase and installation of telecommunication
equipment at institutions with which Campuslink has exclusive service
agreements. In November 1999, we repaid the outstanding balance on one of these
notes. On December 31, 1999, the outstanding balances on the remaining two
notes totaled $4.7 million.
On February 4, 2000, we sold 134,000 shares of our Series A convertible
preferred stock to institutional investors led by Madison Dearborn Partners and
The Blackstone Group for a total purchase price of $134 million. These shares
are convertible at the holder's option into 17,866,666 shares of our Class A
common stock at a price of $7.50 per share, subject to adjustment for dilutive
issuances of our common stock
27
<PAGE>
or other securities. Cumulative dividends at an annual rate of 8.0% will accrue
on the preferred stock beginning on February 4, 2001 if the preferred stock is
not earlier converted. We will require conversion of all of the Series A
preferred stock into Class A common stock upon completion of the offerings and
expect to issue the preferred stock investors a total of 17,866,666 shares of
Class A common stock in connection with this conversion.
We intend to use the net proceeds from the offerings, together with cash
on hand and borrowings expected to be available under our credit facility, to
fund our capital expenditures, market expansion and product development, hire
additional personnel, fund our operating losses, fund potential acquisitions,
and provide for working capital and for other general corporate purposes.
Expansion of our network, operations and services will require
significant capital expenditures. In 1999, we made capital expenditures of
approximately $41.8 million, principally for communications switching
equipment. We currently estimate that our aggregate capital expenditures will
total approximately $120.0 million in 2000 and 2001, of which we expect to
incur a total of approximately $50.0 million in 2000 and approximately $70.0
million in 2001. We expect to make substantial capital expenditures thereafter.
We will make capital expenditures primarily for the following purposes:
. acquisition and installation of switches and related equipment;
. market expansion;
. continued development of our network; and
. infrastructure enhancements, principally for our back office systems.
At April 10, 2000, we had entered into agreements with vendors to purchase
approximately $10.5 million of equipment and services. The actual amount and
timing of our capital requirements may differ materially from our estimate as a
result of regulatory, technological and competitive developments in our
industry.
We will be dependent on additional capital to fund our growth, as well as
to fund continued operating losses and working capital. We believe that the net
proceeds from the offerings, together with cash on hand, cash flow from
operations and borrowings we expect to be available under our credit facility,
will provide sufficient capital to fund our business as currently planned
through the end of 2001. After that date, we will need to have secured
additional financing to fund our capital expenditures and working capital
requirements. If our plans or assumptions change or prove to be inaccurate, the
foregoing sources of funds may prove to be insufficient to fund our currently
planned growth and operations. In addition, if we complete acquisitions in
accordance with our business strategy, we may be required to seek additional
capital sooner than we currently anticipate. We may seek to obtain this capital
from equity and debt financings or from other financing arrangements, such as
vendor financing. We cannot assure you that additional financing arrangements
will be available to us or, if available, that we can secure them on terms we
find acceptable. If we fail to generate sufficient cash flow from our operating
activities or otherwise fail to obtain sufficient funds for our cash needs, we
may have to delay or abandon some of our development and expansion plans.
The successful implementation of our strategy, including expanding our
network and obtaining and retaining a significant number of customers, and our
achievement of significant and sustained growth in our cash flow are necessary
for us to be able to meet our debt service and other cash requirements. We
cannot assure you that we will successfully implement our strategy or that we
will be able to generate sufficient cash flow from operating activities to
improve our earnings before fixed charges, or to meet our debt service
obligations and working capital requirements. Our ability to meet our
obligations will depend upon our future performance, which will be subject to
prevailing economic conditions and to financial, business and other factors.
28
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
Our major market risk exposure is to changing interest rates. Our policy
is to manage interest rates through a combination of fixed-rate and variable-
rate debt and through use of interest rate swap contracts to manage our
exposure to fluctuations in interest rates on our variable-rate debt. At March
1, 2000, substantially all of our long-term debt consisted of variable-rate
instruments that accrue interest at floating rates. At the same date, through
an interest rate swap contract, we had capped our interest rate exposure at
6.29% on $25.0 million of floating-rate debt through December 31, 2000. We do
not use foreign currency forward contracts or commodity contracts and do not
have any material foreign currency exposure.
Information Systems and the Year 2000 Issue
We developed and implemented a Year 2000 plan to guide us through the
evaluation, testing, remediation and implementation of all facets of the Year
2000 transition, including, among other things, the monitoring of any potential
adverse impact arising from services and equipment provided to us by our
vendors within the telecommunications industry. In the hours after the Year
2000 date change, our network operations and information technology teams
validated and monitored our network elements, software and hardware operations,
and the business operation processes. To our knowledge, we experienced no
networking problems arising from the transition of our network into the year
2000. However, we may not have identified and resolved all significant Year
2000 problems. Further remediation efforts may involve significant time and
expense. In addition, we sell our products and services to companies in a
variety of industries, each of which may be experiencing different Year 2000
issues. Customer difficulties with Year 2000 issues might require us to devote
additional resources to resolve underlying problems.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activity," which we are required to adopt in 2001. This
statement will require us to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges of underlying transactions must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of the derivative will
either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. We do not believe that our adoption of this statement,
which will occur in the first quarter of 2001, will have a material adverse
effect on our financial condition, results of operations or cash flows.
29
<PAGE>
BUSINESS
We are a fast growing integrated communications provider offering
broadband communications solutions, including data, voice and an expanding
array of applications and integration services. We currently deliver our
services to medium-sized and large businesses, institutions and other
communications-intensive users in 25 markets encompassing over 31% of the total
business access lines in the United States. We actively market our services
through approximately 235 members of our direct sales force and over 340
outside sales agencies. By delivering a wide range of integrated communications
solutions through our consultative sales and service approach, we seek to
maximize our sales of value-added services and help our customers manage their
complex communications needs in a rapidly evolving market.
Our Market Opportunity
We operate in both the high-speed data and voice communications markets.
We believe that these markets are experiencing dramatic growth which is being
significantly driven by the Internet and e-commerce. We also believe many
medium-sized and large businesses and institutions are inadequately supplied
with highly reliable data and other value-added voice communications services
and solutions. As a result, we emphasize the marketing and sale of value-added
products and services, such as network services, applications services and
integration services, to these communications-intensive users.
Overall Market Size and Growth. The overall market of regulated, switched
and unswitched data and voice traffic in the U.S. is estimated to have
generated a total of $212.8 billion in revenues in 1998 and is expected to grow
to $252.2 billion by 2002, according to International Data Corporation, or IDC.
The number of total switched access lines in the U.S. is expected to grow from
187.5 million lines in 1998 to 232.6 million lines by 2002. Our strategy is to
focus on business users, a segment which represents a significant component of
this large market. For example, IDC estimates that the number of switched
business access lines in the U.S. will grow from 63.3 million lines in 1998 to
84.6 million lines, or 36.4% of the total switched access lines, in 2002.
We believe that a significant market opportunity also exists for
providers of data and Internet services. High-speed connectivity has become
important to medium-sized and large businesses and institutions as a result of
the considerable increase in Internet usage and e-commerce. The Internet has
become a substantial vehicle for commerce and business operations, as
businesses establish Web sites, intranets and extranets to expand their market
reach and improve their efficiency. Accordingly, to remain competitive, our
target customers increasingly need high-speed Internet connections to maintain
complex Web sites, access critical business information and communicate with
employees, clients and business partners. According to Forrester Research, the
market for business Internet and data network services in the U.S. is expected
to grow from $3.7 billion in 1998 to $40.3 billion in 2002, representing a
compound annual growth rate of 81.7%.
Our Markets. We selected our 25 initial markets based on the
concentration of potential customers, amount of communications traffic
originating and terminating in the markets, size and strength of the local
economy, ability to interconnect to established or incumbent networks, degree
of competition and regulatory environment. Although we are subject to intense
competition in many of our markets and plan to face significant competition as
we enter new markets, we believe that there is a significant market opportunity
for us in each of the markets we enter.
We are deploying our network in the three phases, as we describe in more
detail under "Our Network" in this section. We expect to have access to over
45% of the total business access lines in the U.S. when we complete phase two
and to have access to over 50% of the total business access lines in the U.S
when we complete phase three.
30
<PAGE>
The following table presents information about our phase one markets:
Phase One
<TABLE>
<CAPTION>
Estimated
total
business PaeTec lines in
access PaeTec switch service as of
Metropolitan Area Markets lines(1) in-service date March 1, 2000
- ----------------- ------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
Boston, MA................... 4 2,000,000 4/10/99 6,600
Rochester, NY................ 3 800,000 4/29/99 6,500
Miami, FL.................... 3 1,000,000 6/11/99 3,400
Philadelphia, PA............. 2 1,200,000 6/11/99 3,100
Albany, NY................... 3 900,000 8/24/99 3,500
Washington, D.C. area........ 3 2,200,000 10/13/99 700
New York, NY................. 4 4,600,000 11/1/99 5,700
Los Angeles, CA.............. 3 5,100,000 12/10/99 1,700
--- ---------- ------
Totals..................... 25 17,800,000 31,200
=== ========== ======
</TABLE>
After focusing on further penetration of our existing markets and
expansion of our service offerings during 2000, we plan to enter the following
markets in 2001 as part of phase two of our network deployment plan:
Phase Two
<TABLE>
<CAPTION>
Estimated total
Metropolitan Area business access lines(1)
- ----------------- ------------------------
<S> <C>
San Francisco, CA...................................... 1,100,000
San Jose, CA........................................... 700,000
Orlando, FL............................................ 300,000
Tampa, FL.............................................. 500,000
Atlanta, GA............................................ 700,000
Chicago, IL............................................ 2,000,000
Detroit, MI............................................ 1,100,000
Cleveland, OH.......................................... 400,000
Pittsburgh, PA......................................... 500,000
Dallas, TX............................................. 1,200,000
---------
Total................................................ 8,500,000
=========
</TABLE>
- --------
(1) Sources: Federal Communications Commission, Statistics of Common Carriers
as of December 31, 1998, and U.S. Census Bureau data. The access line data
we present in the phase two table represent only the estimated total
business access lines within the metropolitan areas shown and exclude
business access lines in surrounding markets.
We expect to initiate phase three of our network deployment plan in 2002.
Our objectives for this phase will include completion of our transition to a
packet-switching network, completion of our national network and expansion into
additional markets to complete our planned nationwide footprint.
Our Business Strategy
Our objective is to become the most customer- and employee-oriented
network-based services provider to medium-sized and large businesses and
institutions in our markets. To accomplish this objective, we seek to:
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Offer a full range of bundled broadband services to communications-
intensive users. We focus our growth initiatives on the delivery of
communications services to users that can benefit from our value-added
approach. We believe that our target customer base, which is composed primarily
of medium-sized and large businesses, institutions and other communications-
intensive users, has complex communications needs that are often underserved by
traditional telephone companies. We offer communications solutions based on our
advanced network and access capabilities. Many communications providers
continue to focus primarily on access, transport and basic voice and Internet
access services. We intend to increasingly differentiate ourselves from these
providers through superior customer service that combines network, applications
and integration services to deliver complete solutions.
Pursue a consultative sales strategy with direct and agent sales
forces. We believe that our sales and service approach, in which we consult
with our customers to design services tailored to their particular needs, is an
effective strategy for attracting and retaining customers with complex
communications needs. We establish local sales offices and hire sales personnel
in each of our markets to provide an experienced, locally based account
management team which offers face-to-face sales and personalized client care
for our entire product line. In order to achieve superior sales coverage and
results, we market our services through our direct sales force and through
independent agents from sales agencies located throughout our markets. We hire
seasoned sales professionals and reinforce the experience of our employees and
sales agents with intensive training in our service offerings. We seek to
motivate our sales employees, sales agents and agent support personnel with
commissions and long-term equity incentives.
Implement efficient and integrated back office systems. Our strategy
requires that we implement efficient operations support systems and other back
office systems that can support rapid and sustained growth. To realize this
objective, we have assembled a team of engineering and information technology
professionals experienced in the telecommunications industry. This team is
working with third-party vendors to develop an end-to-end system that will
coordinate multiple tasks, including installation, billing and client care.
Unlike legacy systems currently in use, which require multiple entries of
client information to perform multiple tasks, our system will require only a
single entry to transfer client information from sales to service to billing.
Our customized system also will integrate our back office systems to minimize
the time between client order and service installation and to reduce our costs.
As a result of this focus on advanced back office systems, we received a
recommendation for ISO-9002 registration, which we believe will result in our
becoming one of the first U.S. telecommunications providers to have obtained
this internationally recognized registration of quality management systems.
Design and install an advanced capital-efficient network. We follow a
smart-build strategy by initially leasing fiber capacity and other transport
facilities and owning our own switches, routers and integrated network node
equipment for voice, data and video switching. Currently, we lease 100% of our
transport requirements, but we expect to purchase inter-city and intra-city
transport capacity when it becomes economically attractive for us to do so. We
believe that this smart-build strategy allows us to enter new markets rapidly
and to apply an increased amount of our initial capital expenditures in each
market to the critical areas of sales and marketing of value-added services and
to our operations support systems. We also believe that this strategy has
resulted in lower, less risky capital investment than the investments of other
communications providers that initially build their own facilities.
Supplement internal growth with strategic acquisitions. To supplement our
internal growth, we pursue an acquisition strategy that will allow us to
increase penetration of our current markets and expand into new markets. We
seek acquisition candidates that will enhance our ability to sell and deliver
value-added services. Accordingly, we focus our acquisition efforts on
interconnect companies that sell, install and maintain data and voice networks
for customers, enhanced service providers and local and long distance
providers. We believe that our acquisition of these types of businesses will
bring experienced back office, technical and customer service personnel to our
company, enhance our suite of service offerings and increase our customer base.
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Our Services
We provide a wide range of communications services to both end-users and
wholesale customers. Our service offerings are organized around a value-added
services model that includes network access, network services, applications
services and integration services layers. Our sales and marketing initiatives,
as well as our investments, focus on bundling the products and services in the
latter three layers. We believe this bundling adds value for our customers and
increases our share of our customers' expenditures on communications and
applications services.
We are focusing our efforts on expanding our range of services in each
layer so that our customers can meet an increasing number of their voice and
data communications needs through us. We believe our ability to bundle a suite
of value-added communications services will enable us to penetrate our target
markets rapidly and build customer loyalty. We have built our network,
developed our back office and trained our employees and sales agents to support
our increasing array of services.
Our service offerings are organized according to four value-added
components, which are layered as follows:
[A graphic showing four layers of services stacked vertically appears here. In
the bottom layer, the following text appears: "Network Access," which is
centered and slightly above the words "Fiber," "T1/T3," "xDSL," and "Wireless";
in the second layer, the following text appears: "Network Services," which is
centered and slightly above the words "Voice over IP," "Voice over DSL" and
"Bandwidth on Demand," which appear in red and are slightly above the words
"Local Exchange," "Long Distance," "Internet Connectivity," "Collection,"
"Virtual Private Network" and "Calling Card Services," which appear in blue; in
the third layer, the following text appears: "Applications Services," which is
centered and slightly above the words "Community Intranets," which appear in
red and are slightly above the words "E-Commerce," "Web Development," "Web
Hosting," "Data Management," "Billing Services," "Applications Hosting,"
"Voicemail" and "Conference Calling," which appear in blue; in the top layer,
the following text appears: "Integration Services," which is centered and
slightly above the words "Security Consulting," which appear in red and are
slightly above the words "Equipment Sales, Installation and Maintenance,"
"Network Management," "Billing and Custom Care," "Design and Implementation,"
"Wide Area Network Support" and "Cabling Infrastructure," which appear in blue.
At the bottom of the graphic appears a color code: a blue block with the words
"Current Offerings" beside it represents PaeTec's current offerings and a red
block with the words "Future Offerings" beside it represents PaeTec's planned
future service offerings.]
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Network Access Layer
We have developed, installed and continue to invest in an advanced
network that facilitates the delivery of our network and applications services
offerings. We currently connect the majority of our customers to our network
through leased T1 digital transmission links. However, we will increasingly
offer our customers a variety of other access methods, including DSL
technologies, wireless connections and T1 and T3 digital transmission links.
When appropriate to support our growth, we negotiate agreements with specified
volumes and contract durations to reduce costs.
We currently obtain most of our T1 or T3 transmission links from regional
incumbent local exchange carriers or other providers such as AT&T, MCI Worldcom
and Time Warner Telecom Inc. Our strategy is to form relationships with
multiple providers of fiber capacity for inter-city and intra-city transport to
improve reliability through alternate network paths and to lower our costs
through competitive procurement. Our membership in the Associated
Communications Companies of America, an 11-member buying consortium, provides
us with additional opportunities to benefit from competitive pricing from
multiple suppliers. Members of this consortium include Qwest Communications
International, Inc., Broadwing, Inc., McLeodUSA Incorporated and ITC/\DeltaCom,
Inc.
Alternative access methods such as DSL and wireless services offer
attractive pricing and are growing rapidly in accessibility. We seek agreements
with DSL providers that will provide us with multiple sources for DSL
connectivity in each of our current and prospective markets. In August 1999, we
signed such an agreement with Network Access Solutions, Inc., a DSL provider
with an initial focus on markets in the Northeast U.S.
To provide voice and data services, we currently use multi-service
digital subscriber lines, or MSDSL, from Network Access Solutions, as a lower-
cost alternative to leased T1 transmission links. We also will use symmetrical
digital subscriber lines, or SDSL, to provide Internet access at competitive
costs. We are currently evaluating technologies to allow voice and video
services to be provided over SDSL lines. In selected target markets, we will
smart-build our own DSL collocations where we believe this strategy is
justified by a known customer base and favorable competitive conditions.
We plan to use wireless access methods, primarily for Internet access, as
a low-cost alternative to T1 transmission links that can be provisioned
quickly. We have formed a relationship with CyberTech Wireless, Inc., a fixed
wireless carrier based in Rochester, New York, to provide wireless services in
upstate New York markets, and anticipate expanding the relationship into
additional cities in 2000 and 2001. We will evaluate additional relationships
of a similar nature as part of our plan to gain wireless access alternatives in
all of our current and prospective markets.
Network Services Layer
We use our network access layer as the platform to offer a range of
network services. These services include voice services, such as local dial
tone services, domestic and international long distance services and calling
card services, as well as data services, such as Internet access and virtual
private networks. As our network evolves, we will continue to supplement our
network service offerings, which we expect will include Voice over IP.
Local Exchange Services. We offer local exchange services that include
local dialtone as well as enhanced features such as call waiting, call
forwarding, call return and caller ID. We also receive originating and
terminating access revenues for interexchange calls, including inbound and
Internet traffic, which are terminated on our network. As of December 31, 1999,
we have entered into interconnection agreements with nine incumbent or
independent local exchange carriers for our markets in 13 states and the
District of Columbia. These agreements allow us to interconnect our network
with the networks of the incumbent carriers,
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<PAGE>
to offer local exchange services to our current customer base and to enter new
markets with minimal capital expenditures. For information about these
agreements, see "Regulation of Our Services--Federal Regulation."
Long Distance Services. We offer a full range of basic long distance
services, including interLATA, intraLATA, international, 1+ outbound calling
and 800/888/887 inbound toll-free services. We also offer ancillary services
such as operator assistance, calling cards and pre-paid long distance. We
provide our own dedicated long distance service by integrating our Lucent 5ESS
AnyMedia switches and switching control platforms with our leased transport
facilities. We are able to offer switched long distance for traffic not carried
on our network under partnership arrangements with other carriers.
Internet Connectivity and Data Networking and Management Services. We
offer our customers an expanding array of Internet connectivity and data
networking and management services. Our goal is to provide end-to-end value-
added networking solutions which are customized to meet specific customer
needs. We currently provide Internet services through our partnership with
Verio, Inc., a Tier-1 Internet service provider, or ISP. Our agreement with
Verio, which we entered into in June 1999, enables us to provide our customers
with seamless Internet connectivity by allowing us to connect our switching
equipment directly to Verio's points of presence. As part of the partnership,
Verio has agreed to refer some of their customers to us for their
communications needs. We currently offer or intend to offer the following data
services:
. Broadband dedicated Internet access services. We offer integrated
voice and Internet access over a single T1 digital transmission link
and very high speed Internet services over multiple T1 lines. With
this service, our customers are able to benefit from a simplified
network that provides integrated voice and Internet services at
competitive prices. We plan to expand our Internet access offerings
to include very high speed services over T3 or optical circuits.
. DSL-based Internet and virtual private network services. We offer
DSL-based services to business and other institutional customers
through partnerships with national and regional DSL providers. These
services afford low-cost Internet access to our customers that buy
only Internet access, and will provide connectivity to virtual
private networks.
. Virtual private network, or VPN, services. These services allow
businesses seeking a cost-effective means of linking multiple
locations into a secure network to take advantage of the Internet for
mission-critical applications. We market our VPN services mainly to
customers seeking to create a secure, outsourced wide area network
for intranet and extranet applications.
. Internet access for specialized markets. Through our Campuslink
business unit, we manage the provision of broadband Internet services
by universities to over 24,000 college students, who use the Internet
to access research materials, lectures and other online educational
resources. Student networks, which we manage from Campuslink's
central network operations center in Ann Arbor, Michigan, typically
employ fast-switched ethernet technologies from Cisco Systems, Inc.
and other major providers.
. Networks for planned communities. In Los Angeles, at Playa Vista, one
of the nation's largest urban planned communities, we plan, beginning
in mid-2001, to provide high-speed Internet access, as well as other
value-added voice and video services, to over 10,000 residents and
businesses through a broadband network. We plan to expand this
offering to other large, planned community developments.
. Data Management Services. We currently offer Web server collocation
services to customers who prefer to own and have physical access to
their servers, but require the performance, reliability and security
afforded by an Internet data center. In our standard collocation
services, we provide secure space for a customer-owned server in our
Internet data center, redundant power, network connections and
management 24 hours a day, 365 days a year, monitoring and support by
our customer support center. The customer using these services
performs management and maintenance of the server and all
applications loaded onto the server. In our managed
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<PAGE>
collocation services, we offer the customer additional options if the
customer does not want to perform all of the tasks associated with
the operation and maintenance of the server. We also expect to have
the capacity to offer our customers off-site data storage services
that will provide real time data protection.
Voice Over IP. We plan to convert our network to a packet-switching
network as we continue to implement our three-phase network deployment.
Packet-switching technology will allow us to offer Voice over IP, or VoIP, a
technology used to transmit voice conversations over a data network using
Internet Protocol, and to add and integrate network service offerings. These
offerings will include unified messaging, which integrates voice mail, e-mail,
fax mail, video and other types of messages over a local area network, and
other converged voice, data and video applications. We believe VoIP should
lower the cost of transporting voice traffic, allowing us to offer competitive
prices for our voice services while improving our profit margins.
Applications Services Layer
We believe that many communications-intensive users are principally
interested in the applications that our network and services facilitate.
Consequently, we will offer a growing range of applications services to meet
our customers' business and communications needs. Our current and planned
applications services include voice applications, such as conference calling
and voice mail, and data applications services, such as e-commerce, Web
hosting and development, applications hosting, telemanagement of cable and
circuit inventory, and customer trouble management. We also offer an expanding
selection of customized applications services, such as community intranets,
for specialized markets that include universities, hospitals and governmental
entities.
Enhanced Voice Services. We offer a variety of enhanced voice services,
including voice mail and conference calling, and plan to offer additional
services, such as unified messaging, as part of our growing suite of
applications services. We plan to extend our offerings to include converged
voice and data applications for communications-intensive customers, including
contact centers, telemarketers and Web-based services companies.
E-commerce. Through our subsidiary, PaeTec Online, Inc., we have added
e-commerce services to our suite of value-added services. Our approach to e-
commerce emphasizes communities of interest and links business users and their
customers through Web sites that are simple and inexpensive to establish and
maintain. We believe this approach based on shared interests will appeal
particularly to PaeTec's affinity group customers and to the higher education
markets we serve primarily through our Campuslink business unit. Our internal
graphic design and software engineering staffs design and implement our e-
commerce services, which we market through the same channels as our other
communications services.
Web Hosting. We offer Web-hosting solutions with varying degrees of
customization and value-added content, including custom Web hosting, shared
server hosting, dedicated server hosting and collocation. We currently operate
OnNet Mall, which enables our business customers to establish, customize and
operate an Internet storefront with minimal investment and difficulty. We plan
to continue to broaden our expertise through our OnNet Mall offerings and
apply that knowledge to expand further the suite of value-added services,
including business to business e-commerce services, that we market to our
business customers.
Billing services. Many large organizations use a number of separate,
stand-alone software packages to perform their billing functions. We offer a
billing product designed to allow our customers to provide billing services to
their customers through integrated voice management software that can track
and allocate the costs of voice and data communications charges at the
individual, departmental and general ledger levels. Customers using our Web
Manager software are able to access their accounts to determine accrued
charges and monthly bills and to perform rate inquiries.
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<PAGE>
Applications Hosting. Many enterprises and institutions wish to outsource
the hosting and support of their business applications software to avoid
capital expenditures and staffing expenses. We plan to expand our applications
hosting offerings beyond our current e-mail hosting service. We plan to offer,
among other applications, group productivity and unified messaging software to
medium-sized enterprises and telemanagement software to higher education,
healthcare, governmental and commercial enterprises.
Community Intranets. We plan to develop customized community intranets to
complement our network services business in specialized markets such as higher
education and student housing. The community intranet we have developed for
Playa Vista in Los Angeles will provide community residents with access to
personal productivity applications, local transportation schedules, local
service providers and merchants, in addition to serving as a portal to the
Internet.
Integration Services Layer
As part of our end-to-end solutions offerings, we provide our customers
with a variety of services to help them implement and manage networks on their
premises. We offer these services primarily to support our sale of local, long
distance and data services and to enhance customer retention. Our network
integration services include equipment sales, installation and maintenance,
network management, network design and implementation, wide area network
support and billing and customer care. We provide a number of these services in
partnership with national and regional integration service providers
specializing in technologies from major equipment manufacturers, such as Lucent
Technologies Inc., Nortel Networks Corporation, Cisco Systems and International
Business Machines Corp.
Customer Premise Equipment Sales, Installation, Maintenance and
Repair. We sell, install and repair customer premise equipment such as private
branch exchanges, referred to as PBXs, local area networks, or LANs, servers
and routers. We have formed, or are forming, relationships with local customer
premise equipment installation companies in our markets for the purpose of
selling, installing and repairing customer premise equipment not otherwise
provided by us. We also furnish and install fiber optic and cable television
cable for our institutional customers and multiple dwelling unit customers.
Network Management. Some of our customers outsource to us the operations
and management of their network. Our network operations center in Ann Arbor,
Michigan, which operates 24 hours a day, 365 days a year, is equipped with
advanced network, service and element management tools that enable us to
deliver managed network services to our customers. Our field network
technicians and maintenance partners provide corresponding on-premise network
management services. Through our Campuslink unit, we manage PBX voice switches,
data LANs and video networks for over 60 campus locations. Customers may obtain
reports of our on-network performance through Web-based access to our systems
and make service requests through Web-based reporting systems. We assign
account managers to each customer to provide personal support.
Network Design and Implementation. We offer design, installation and
maintenance services for customer premises networks, including LANs and wide
area networks, or WANs.
Billing and Customer Care. Many higher education institutions prefer to
outsource the management of campus telecommunications services programs.
Through our Campuslink business unit, we provide billing and customer care
services for the telecommunications resale programs of over 60 campus locations
representing over 50,000 students. Our student customers can speak to our
customer care representatives seven days a week or access automated account
information over the Web. We believe that our customer care and billing center
can be expanded to support the expected significant increase in the use of
these services in the business sector as well as the continued growth in the
demand for these services in the higher education marketplace.
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Network and Security Consulting. We help organizations to develop and
implement a comprehensive network security plan to protect their computers
against unauthorized access. The key components of such a plan are firewalls,
which are systems or combinations of systems that enforce a boundary between
two or more networks. In addition, we provide the installation, configuration
and support of firewall-to-firewall VPN solutions, including encryption. We are
expanding these services to include virus protection and Universe Resource
Locator-filtering software, external network vulnerability scans, penetration
testing, internal network audits and customized security training and
consulting.
Applications Support. To complement our applications hosting services, we
plan to offer database administration support for Oracle and other databases,
Unix and Windows NT systems administration, systems operations and programming
support.
Wholesale Services
In addition to the services we provide to end-users, we offer wholesale
voice, data and enhanced services to switch-based and switchless resellers,
cellular, interactive voice response and VoIP service providers, CLECs, Web
services providers and ISPs. We offer or plan to offer the following wholesale
services:
. domestic and international termination services;
. dedicated voice and data private line services;
. origination services for CLECs and other carriers;
. design of local resale service for CLECs and other carriers;
. local access to ISPs by direct inward dial or primary rate interface
connectivity;
. broadband Internet connectivity for ISPs and Web services
applications;
. DSL services;
. network optimization management software for CLECs and interexchange
carriers; and
. collocation services.
We provide our regional customers with the flexibility to extend their
coverage areas without extending their operational centers or investing in
additional personnel through the use of our centralized switching centers. We
believe that this has allowed us to become the primary wholesale vendor for
several fast-growing Internet and Web-based service providers.
Sales and Customer Service
Our goal is to be the nation's most customer-oriented network-based
provider of communications services. We target medium-sized and large
businesses, institutions and other intensive users of communications services
that we believe can benefit from our value-added services. For each prospective
customer, we conduct a profitability and pricing analysis for use in preparing
proposals. This procedure ensures that we maintain our focus on obtaining
customers that meet our internal profitability standards, while illustrating
the potential benefits that a customer may realize by using a broader bundle of
our services.
Direct Sales. As of March 1, 2000, we conducted our direct marketing
activities through 235 employee sales representatives, of whom 17 were sales
managers. As of the same date, we maintained a total of 23 sales offices in 12
states. These sales offices are not only used to target businesses and other
customers operating within our markets, but also to solicit and service
national accounts and the private student housing accounts managed by our
Campuslink business unit.
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We pursue a decentralized sales strategy, which grants our sales
representatives substantial responsibility to negotiate the pricing and other
terms of our customer agreements, subject to meeting specified profit margin
and profitability requirements. For this strategy to succeed, we must be able
to attract, train, motivate and retain skilled sales professionals. We seek to
recruit sales representatives with experience working for long distance
telephone companies, integrated communications providers, competitive and
incumbent local exchange carriers, telecommunications equipment manufacturers
and network systems integrators in our existing and target markets.
We require each new member of our direct sales force to participate in an
initial in-house training program, which includes seminars, on-the-job training
and direct one-on-one supervision by experienced sales personnel. We also
require members of our direct sales force to participate in an ongoing training
program designed to enhance their knowledge of the communications industry, the
four layers around which we organize our services and the needs of our targeted
customers.
We seek to motivate our direct sales force with a compensation program
that emphasizes commissions and eligibility for options to purchase our common
stock. Our sales commission program is designed to reward account profitability
and retention as well as the addition of new customers.
Agent Sales. The efforts of our direct sales force are complemented by
marketing activities conducted by independent sales agents. As of March 1,
2000, we marketed our services through over 340 sales agencies nationwide. We
seek to select sales agencies that are well known to medium-sized and large
businesses and institutions in their markets and train our sales agents on how
to retain and develop the customer accounts they introduce to PaeTec. We
maintain an incentive program for our agents in which they are eligible to
receive warrants to purchase our common stock if they achieve and maintain
specified revenue objectives. As of March 1, 2000, 21 of our employees were
dedicated to developing and supporting our agent program.
Marketing. In our target markets, we seek to position PaeTec as the high-
quality alternative for communications services by offering network
reliability, superior customer support and a broad spectrum of communications
services and solutions at competitive prices. We intend to build our reputation
and brand identity by working closely with our customers to develop services
tailored to their particular needs. We implement targeted advertising and
promotional efforts that emphasize the breadth of our communications solutions
and our ability to deliver a cost-effective integrated services package to our
target customer base.
Each of our sales teams is led by a sales vice president, who is
responsible for the acquisition and retention of all accounts in the applicable
market and reports directly to the regional president. Each team includes
branch sales managers, account managers, sales engineers and field technicians.
Our sales teams use a variety of methods to qualify leads and schedule initial
appointments, including building canvassing and customer referrals.
To support direct marketing programs, our marketing staff builds and
maintains a prospect database for each primary market based on the number of
access lines, usage of long distance service, demographic data and geographic
proximity to its local exchange networks. Before entering a market, we develop
a profile of prospective customers using our own databases as well as those of
third parties. We initially target high-volume communications users with name
recognition in the local business community. Securing these "anchor tenants" as
customers facilitates sales efforts in the local market and provides locally
known references.
Several months before beginning service in a new market, we establish a
local sales team with industry experience in that market and knowledge of the
target customer base. We seek sales representatives with the experience and
relationships to sell our products and services before we initiate network
operations in the market. This pre-selling effort is designed to shorten the
period between the date we first establish a point of presence in that market
and the date we first generate revenues. The local sales representatives make
the initial contacts and sales and serve as the principal customer liaison. At
the time of the first sale, we assign the
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customer to an account manager who has responsibility for account follow-up and
the sale of additional services. As we develop new services, the account
managers will target existing customers to deepen account penetration. We also
staff each local sales office with support specialists who assist the sales
force and with a sales engineer who coordinates switching the customer to
PaeTec service.
Customer Service. We believe that customer service has become a critical
element in attracting and retaining customers in the communications industry.
Our customer service strategy is designed to allow us to meet our customer
needs rapidly and efficiently. The principal sales representative for each
customer provides the first line of customer service by identifying and
resolving any customer concerns before the delivery of service. Once we have
begun to deliver service, we assign an account development representative to
each customer to supervise all aspects of customer relations, including account
collections and complaint resolution, and to provide a single point of contact
for all customer service issues. Both the principal sales representative and
the account development representative work with our network operations center
when technical assistance is needed. The operations center staff evaluates any
out-of-service condition and directs remedial action to be implemented by our
technical personnel or, where appropriate, our equipment vendors or external
service providers. In addition, the operations center staff maintains contact
with the customer and prepares reports documenting the service issue and any
corrective action taken. The account development representative or sales
representative also may assist in liaison with the customer until the out-of-
service condition has been corrected.
Customer Agreements. Our services agreements generally have initial terms
of one to five years, with indefinite renewal terms that may be terminated by
the customer following a specified notice period. Some of our Campuslink
service agreements have initial terms of up to ten years. We generate a
majority of our revenues under contracts with initial terms of three to five
years.
We received approximately 21% of our 1999 revenue from our sale of
services to GMH Associates, Inc., one of the customers we serve as a result of
our acquisition of Campuslink. GMH Associates is the largest provider of
student housing in the country, with 15 locations serving approximately 16,000
students as of March 20, 2000. We expect that sales generated by this customer
in 2000 will represent less than 10% of our overall revenue in 2000 as we
continue to enter into new markets and expand our business. No other individual
customer accounted for more than 10% of our revenue in fiscal 1998 or 1999.
Our Network
Deployment. We are deploying our network in the three phases. Phase one
of our plan represented our initial market entry strategy and enabled us to
begin serving customers and generating revenue. We completed phase one at the
end of 1999 with the installation and activation of our initial group of eight
Lucent 5ESS AnyMedia switches. During phase one, we rolled out service in eight
metropolitan areas encompassing 25 markets in Albany, Boston, Los Angeles,
Miami, New York, Philadelphia, Rochester and the Washington, D.C. area.
We are currently implementing phase two of our deployment, which we
expect will be completed by the end of 2001. In this phase, we will focus on
broadening the range of our data and applications offerings in our current
markets, entering additional markets and expanding our sales channels. We will
expand our network and begin the migration from circuit-switching technology to
a packet-switching technology able to transport the growing convergence of
voice, data and video traffic. As part of this expansion process, we have
already installed three high-capacity Cisco routers and plan to install five
additional Cisco routers by mid-2000. During phase two, we expect to expand our
offerings to a minimum of ten additional markets, including Atlanta, Chicago,
Cleveland, Dallas, Detroit, Orlando, Pittsburgh, San Francisco, San Jose and
Tampa.
We expect to initiate phase three of our deployment in 2002. Our
objectives for this phase will include completion of our transition to a
packet-switching network, completion of our national network and expansion into
additional markets to complete our planned nationwide footprint.
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Current Switching Infrastructure. We selected the Lucent 5ESS AnyMedia
switches as our initial switches because of their record in delivering local
and long distance services and their advanced data-ready capabilities. As the
first ICP to offer long distance and local services on a single Lucent
switching platform, we have been able to accelerate our roll out of new
offerings while eliminating the need to replicate databases. We believe our
switching infrastructure has allowed us to generate increased revenues by
providing services to customers more quickly and at a reduced cost.
Our current switches have an array of custom features and are connected
by signal transfer points to the Signaling System 7, or SS7, network. SS7
network services utilize common channel signaling, which reduces connect-time
delays and efficiently directs calls throughout the network. Where feasible,
the links between switches and network nodes will be on synchronous optical
network rings, referred to as SONET rings, which are designed to reduce the
possibility of service interruptions. SONET technology is a fiber optic
switching technology that provides for redundant paths for each communication
circuit, so that network traffic is automatically routed to an alternate path
in the event of a network outage in one path.
Initially, in accordance with our smart-build strategy, we have leased
transmission facilities instead of building our own fiber facilities. We
provide customer connectivity by connecting our switches to the customer by
transmission facilities which we lease from a variety of telecommunications
carriers. Very large customers have a fiber terminal located on their premises.
Smaller customers generally will share a common, centrally located terminal. We
may serve major customers who are difficult to reach by using high-speed
digital microwave. We also may reach other customers through collocation with
incumbent local exchange carriers, or ILECs, and the use of unbundled loop
facilities. This approach involves:
. leasing existing ILEC copper wire connections throughout a local
market area, also called the "local loop," which connect customers to
the central offices or "hubs" of an ILEC network; and
. installing, or physically locating, transmission equipment in these
central offices to route customer traffic through them to our own
switch.
As our customer base grows, we may replace ILEC loops with our own
facilities if we believe this investment is warranted in view of strategic,
operational and financial factors. As it becomes economically attractive for us
to do so, we plan to purchase an increasing portion of our transport capacity.
With our own switching infrastructure and operations support system, we
currently are able to control the types of services we offer, how these
services are packaged and how they are integrated to serve our customers. We
generally attempt to limit our reliance on incumbent local exchange carriers to
the use of unbundled local loops to reach customers in low-density locations
and to interconnection for termination of calls to incumbent local exchange
carrier customers. Based on our switching technology, we are able to offer
basic and enhanced local and long distance services characteristic of a full
service telecommunications provider. We also employ a variety of network
technologies and resale facilities to transmit voice, data and video signals to
our customers at a reduced cost. We customize the mix and delivery of these
services to fit the market, customer and regulatory requirements.
Planned National Backbone Network. By the end of phase two of our network
deployment, we plan to have operational a primarily packet-based national
backbone network that we believe will enable us to offer high-quality broadband
Internet access and transport for voice, data and video services. This planned
backbone network will consist of high-capacity fiber optic transport facilities
which will allow us to transport traffic between our switches on our own
network. We believe the cost-effective packet-switching technology we plan to
employ for our network backbone will facilitate the expansion of our network to
support growth, as well as provide flexibility for the deployment of new
service offerings and network reliability. In a circuit-switched network, the
communication circuit, or path, is set up and dedicated to the participants in
the communication. For the duration of the connection, all resources on that
circuit are unavailable to other users. Packet-based technology breaks
communication down into packets, allowing the same data path to be shared among
many
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users in the network. This type of communication between sender and receiver is
known as connectionless, rather than dedicated. Most traffic over the Internet,
which is a connectionless network, uses packet-switching technology.
We expect that our backbone will be an end-to-end Internet Protocol, or
IP, network employing a technology known as multiprotocol label switching that
should enable us to accelerate network traffic flow and make it easier and less
costly to manage our network. This technology generally reduces the "overhead"
bandwidth capacity required for network management tasks, making more of the
network capacity available for revenue-generating customer traffic. In addition
to moving network traffic faster, we anticipate this technology will allow us
to offer differentiated levels of service at higher prices for performance-
sensitive applications such as video conferencing.
Our planned backbone network will consist of multiple regional network
nodes, or connection points, which will connect to network nodes located close
to the customer within each market. This design will provide network switching
presence close to the customer to reduce access and switching costs, and should
allow us to expand our network to meet customer demand while maintaining
service quality. We expect that each region will have one primary integrated
network node, or PINN, site, which we expect will be collocated with our Lucent
5ESS switches by means of a high-capacity Cisco router. Each PINN will be
interconnected with other regional PINNs to form a core backbone network that
we expect will have multiple, geographically diverse connections and equipment
to enhance reliability and performance. This regional design should allow us to
improve performance, because traffic generally will not have to be routed
outside specific regions.
We plan to employ Voice over IP gateway technologies in each PINN to
allow us to integrate our Lucent 5ESS circuit switches into our packet-switched
network. We believe the gateways will enable us to transport inter-city voice
traffic over our backbone network at low incremental cost, while maintaining
service quality. We expect that use of Voice over IP gateways also will allow
us to offer voice services to the customer's premises at competitive rates. We
plan to employ software that will allow us to manage voice call routing and
processing over the IP network gateways and to integrate new service platforms
with our existing connectivity to the SS7 network.
We plan to establish secondary integrated network nodes in each of our
markets to aggregate customer traffic. Each of these secondary nodes will be
connected to a PINN with high-speed SONET network connections. The secondary
nodes will consist of high-capacity Cisco routers, which we believe will allow
us to aggregate large numbers of customers and connect them efficiently to the
high speed core of our network. With this network design, we expect to be able
to access customer sites using a variety of methods, including leased lines,
DSL, wireless, frame relay and asynchronous transfer mode, or ATM,
connectivity. We expect that our packet-switched network will have the
following characteristics:
. Scalability. Our network will incorporate advanced switching
technologies and fiber and data products that will give us the
ability to provision additional bandwidth quickly as customer demand
grows.
. Flexibility. We plan to employ management technologies at the network
core level and a combination of switching and routing at the edge of
our network to permit customers to access the network at high speeds.
We believe these features will provide our customers with the ability
to manage bandwidth and quality of service by type of application for
those applications, such as voice or video, that are sensitive to
time delays.
. Availability. Our network will incorporate features intended to
eliminate performance bottlenecks and circuit failures that might
otherwise interrupt the flow of customer traffic. As our business
grows, we will seek additional fiber capacity from our partners to
add network capacity quickly.
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. Performance. Our network will employ transmission speeds that will
provide connectivity that is much faster than most Internet business
connections available today.
. Accessibility. Our network will provide high-speed connectivity to
the Internet through both public and private connection points with
other providers.
. Manageability. All network management traffic will be run over a
separate network. As a result, management activities will not
interfere with increased network usage. We plan to have support staff
on site or on call for all network locations 24 hours a day.
Our Back Office Systems
Our information systems and procedures for operations support and other
back office systems enable us to price our services competitively, to meet the
needs of our customers and to interface with the incumbent local exchange
carriers. We believe our information systems also provide us with a long-term
competitive advantage by enabling us to implement services in our markets
rapidly and to shorten the time between our receipt of a customer order and our
generation of revenue from that customer.
The following table shows our principal back office systems and their
operational status as of March 1, 2000:
<TABLE>
<CAPTION>
Function Provider Product Status
-------- -------- ------- ------
<S> <C> <C> <C>
Billing and accounts Daleen Technologies BillPlex
receivable Installed and operational
Carrier access billing Cathy Hudson Associates Carrier access billing system Installed and operational
Network management Harris Corp. Network management system Installed and operational
Switch mediation Lucent Technologies Billdats Installed and operational
Local switch Lucent Technologies ConnectVu Installed and operational
provisioning
Fraud management Lucent Technologies Fraud management system Installed and operational
Long distance switch Lucent Technologies Service management system Installed and operational
provisioning
General ledger and Oracle Financials Installed and operational
accounts payable
Trouble tickets, order MetaSolv Software Telecom business solutions Installed and scheduled to be
flow management, operational in May 2000
circuit design and
inventory
Flow-through Harmonycom Harmony Expected to be installed and operational
provisioning and in the first quarter of 2001
service impact
analysis
</TABLE>
We believe that advanced back office systems are necessary to provide our
employees with the means to provide our customers with consistent, high-quality
service. We have therefore developed our back office systems and procedures
according to an internal quality management system based on the internationally
recognized standards required for ISO-9002 registration. We have sought this
registration to measure our ability to respond to customer service
requirements. We have completed all of the important steps required to obtain
this third-party verification by documenting the processes we use to respond
to, monitor and fulfill customer requests and to manage the maintenance and
upkeep of the back office and other equipment we use to provide our services.
By standardizing the way we deliver our services, we believe we have achieved
greater operational efficiencies.
We have developed the information systems and procedures for operating
system support and other back office systems necessary to enter, schedule, fill
and track a customer's order from the point of sale to the installation and
testing of service. These information systems also link our trouble management,
inventory, billing, collection, facility management and customer service
systems. We have entered into an agreement with MetaSolv Software, Inc. to
develop operations support systems for managing customer, network and equipment
orders. MetaSolv's software will manage our ordering, service provisioning,
network inventory management and design, trouble resolution, gateway
interconnections and work-flow management business functions. We have
implemented an equipment management system and circuit inventory to track our
current network facilities and the capacity of synchronized transport signals
throughout our network. We also have a maintenance and trouble ticketing system
that provides the basis for troubleshooting. In addition, we have
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implemented service order management and tracking systems that will be linked
to the billing system described below and electronic gateways to incumbent
local exchange carriers for provisioning, local number portability and new
service offerings.
We have entered into an agreement with Daleen Technologies, Inc. as our
billing system provider. The Daleen billing system was launched in October 1998
and will be able to accommodate the anticipated growth in our customer base.
This billing system provides us with data regarding payments and credit
history, creates reports that track accounts receivable aging and churn, and
tracks agent commissions and margin reports. We have implemented additional
billing enhancements and have evaluated additional software for traffic
analysis, line cost audit and operational financial reporting. We also have
implemented Web Front, an advanced delivery system that currently provides
customers with Web-based access to their accounts. We expect that this system
will also integrate customer bills with traffic reports for on-line access and
enable customers to activate or change facilities without our direct
involvement.
We believe that our ability to provide our customers with a single
integrated bill for all services is a key factor in satisfying and retaining
our customers. Our bills are available in a variety of formats that can be
tailored to a customer's specific needs. For example, we provide account codes
that enable a customer to track expenses by employee, department or division.
To help manage its costs, a customer also is able to use codes to restrict
calling by individuals.
We have entered into an agreement with Harmonycom, Inc. to provide us
with flow-through provisioning and service impact analysis. Harmonycom is a
Cisco Systems partner whose software gives us the ability to integrate our
MetaSolv operations support systems, customer information databases, network
and element management systems and trouble reporting systems. This feature
allows us to provision and track customer connections throughout our network.
When an order is entered into an ordering system, the Harmonycom software will
automatically provision all the network elements within our network to deliver
service to the customer, keep track of IP address assignments and place orders
and receive port information from network access providers. The Harmony system
also will automatically transfer customer-specific data to our network
management systems once a customer begins receiving service and will allow us
to determine the impact on customers of any network element outage.
Acquisitions
To supplement our internal growth, we pursue an acquisition strategy that
will allow us to increase penetration of our current markets and expand into
new markets. We seek acquisition candidates that will enhance our ability to
sell and deliver value-added services. Accordingly, we focus our acquisition
efforts on interconnect companies that sell, install and maintain data and
voice networks for customers, enhanced service providers and local and long
distance providers. We believe that our acquisition of these types of
businesses will bring experienced back office, technical and customer service
personnel to our company, enhance our suite of service offerings and increase
our customer base.
We have completed five acquisitions since our inception. As a result of
our acquisition of Campuslink on September 9, 1999, we significantly increased
our customer base, our force of skilled technical and sales employees and our
suite of data service offerings. Organized in November 1993, Campuslink
provides integrated telephone, video, data and other communications services
primarily to colleges and universities and the privatized student housing
market. Campuslink currently provides these services under multi-year contracts
to approximately 35 colleges and universities and approximately 20 privatized
housing complexes with a combined resident population of over 50,000. These
projects include a ten-year service agreement with The United States Military
Academy at West Point and service agreements with GMH Associates, the largest
provider of privatized student housing in the country, with 15 locations
serving approximately 16,000 students as of March 20, 2000.
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We believe our acquisition of Campuslink has given us the ability to:
. accelerate our penetration of selected markets by taking advantage of
the significant geographic overlap between Campuslink's customer base
and our existing and planned switches and target markets;
. provide additional network services at lower cost by moving
Campuslink's local resale traffic to our facilities-based network;
. provide customers with a full range of communications solutions by
adding Campuslink's customer premise equipment solutions to our
network-oriented solutions;
. use the high bandwidth of Campuslink dedicated circuits to offer
additional data and e-commerce services to over 24,000 Campuslink
customers; and
. build upon Campuslink's significant back office capabilities and
established customer service organization.
We expanded our operations in the southeast United States through our
acquisition in November 1998 of the customer base of Standard Communications,
Inc., a long distance reseller headquartered in Tarpon Springs, Florida and
doing business as SCI Long Distance Telephone, and our acquisition in August
1999 of East Florida Communications, Inc., a local and long distance reseller
and equipment provider headquartered in Daytona Beach, Florida. In June 1999,
we enhanced our software engineering capabilities through our acquisition of
the professional staff of Telperion Development Corporation, an Internet-
intranet consulting company headquartered in Newark, New York.
On April 13, 2000, we acquired Pinnacle Software Corporation, a
professional services and software company headquartered in Pittsford, New
York. Our acquisition of Pinnacle enables us to provide applications software
systems to customers representing a total of nearly one million subscribers in
the higher education, Fortune 1000, medical and state and local government
markets. This acquisition allows us to offer software and service solutions
aimed at helping organizations of all sizes manage large voice, data and video
networks with integrated services that include customer billing, inventory
control, asset management, help desk management, cable management and switch
provisioning. Pinnacle had $3.7 million in revenues in 1999 and employed over
30 information technology professionals as of March 20, 2000. In consideration
for our acquisition of Pinnacle, we paid $6 million in cash and issued 500,000
shares of our Class A common stock. In the acquisition agreement, we agreed
that, if our Class A common stock does not reach a specified value during the
18-month valuation period beginning on April 13, 2000, we will be required to
adjust the consideration we paid to the former Pinnacle stockholders in
connection with the acquisition. Generally, we have the option to pay any
adjusted consideration in cash, in additional shares of Class A common stock,
or in a combination of cash and additional shares.
We also have recently entered into a binding agreement to acquire the
assets of Data Voice Networks, Inc., which designs and implements data networks
for small to medium-sized businesses and distributes data products for Cisco
Systems and other vendors. Data Voice Networks, which is headquartered near
Philadelphia, Pennsylvania, had $7.2 million in revenues in 1999 and had over
20 employees as of March 20, 2000. We expect to complete our acquisition of
Data Voice Networks in May 2000.
Competition
The telecommunications industry is highly competitive. We believe that
the principal competitive factors affecting our business will be pricing levels
and policies, customer service, accurate billing and variety of services.
Incumbent Local Exchange Carriers. As a result of the growth of the
overall market and the number of customers that will be open to alternatives,
we believe that our primary competition will continue to be the incumbent local
exchange carriers in each of our target markets for the foreseeable future. In
most of the
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markets we target, we will compete principally with the regional Bell operating
companies, all of which are pursuing the ability to provide long distance
service in their service territories. Bell Atlantic has received authorization
from the FCC to provide in-region long distance service in New York, and many
industry experts expect more of the regional Bell operating companies to be
successful in entering the long distance market in a few states in 2000. If
they succeed, they will also be able to offer a full suite of local and long
distance services to their customers in direct competition with us.
ILECs generally have long-standing relationships with their customers,
have financial, technical and marketing resources substantially greater than
ours and have the potential to subsidize competitive services with revenues
from a variety of other businesses. Recent regulatory initiatives, which allow
ICPs such as PaeTec to interconnect with ILEC facilities, provide increased
business opportunities for PaeTec. These interconnection opportunities,
however, have been and likely will continue to be accompanied by increased
pricing flexibility for and relaxation of regulatory oversight of ILECs. Recent
FCC administrative decisions and initiatives provide ILECs with increased
pricing flexibility for their private line and special access and switched
access services. In addition, the FCC recently adopted rules that provide for
increased ILEC pricing flexibility and deregulation for some of these access
services after designated competitive levels are reached. Under specified
circumstances, these decisions could enable some of the ILECs to offer
discounts to large customers through contract tariffs, engage in aggressive
volume and term discount pricing practices for their customers, or seek to
charge competitors excessive fees for interconnection to their networks. These
actions could have a material adverse effect on providers, including PaeTec,
that compete with the ILECs.
Interexchange Carriers, Competitive Access Carriers, Competitive Local
Exchange Carriers and Other Market Entrants. We also face, and expect to
continue to face, competition from other current and potential market entrants.
These include long distance carriers seeking to enter into, reenter or expand
their presence in the local exchange market, such as AT&T, MCI WorldCom, and
Sprint, and other CLECs and ICPs, resellers of local exchange services,
competitive access providers, cable television companies, electric utilities,
microwave carriers, wireless telephone system operators, Internet service
providers and private networks built by large end-users. AT&T, MCI WorldCom and
Sprint and other major long distance carriers are currently offering or are
planning to offer local telecommunications services and are building facilities
that will allow them to enter the local exchange market.
A continuing trend toward consolidation of telecommunications companies
and the formation of strategic alliances within the telecommunications
industry, as well as the development of new technologies, could give rise to
significant new competitors to PaeTec and could put us at a competitive
disadvantage.
The Telecommunications Act of 1996 includes provisions that impose
specified regulatory requirements on all local exchange carriers, including
ICPs such as PaeTec, while granting the FCC expanded authority to reduce the
level of regulation applicable to any or all telecommunications carriers,
including ILECs. The manner in which these provisions of the statute are
implemented and enforced could have a material adverse effect on our ability to
compete successfully against ILECs and other telecommunications service
providers.
Technological advances and the entry of new competitors in wireless
communications also will provide competition for PaeTec. National carriers such
as Sprint, AT&T and Nextel Communications, Inc., in addition to the regional
wireless providers Bell Atlantic and SBC Communications Inc., will be providing
local exchange services. Recent advances in technologies also allow these
carriers to provide not only voice but also data transmission and Internet
access. The introduction of fixed wireless applications has facilitated the
creation of companies, such as Teligent, Inc., NextLink Communications, Inc.
and WinStar Communications, Inc., which are in the process of installing
equipment and building networks that may offer the same types of services that
we offer or intend to offer.
Advances in digital transmission technologies have created opportunities
for voice services to be transmitted over the Internet. ISPs such as America
Online, Inc., Earthlink, Inc. and others are exploring ways to become service
providers or to exploit their market position through new initiatives and
strategic partnerships with large, well-funded IXCs and ILECs.
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<PAGE>
Competition for Provision of Long Distance Services. The long distance
telecommunications industry has numerous entities competing for the same
customers and a high average turnover rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. Prices in the long distance market have declined
significantly in recent years and are expected to continue to decline. We
expect to face increasing competition from companies offering long distance
data and voice services over the Internet. These companies could enjoy a
significant cost advantage because they do not currently pay carrier access
charges or universal service fees.
Competition for Provision of Internet-Based Services. The market for
Internet-based services is extremely competitive. There are no substantial
barriers to entry, and we expect that competition will intensify in the future.
Our current and prospective competitors generally may be divided into the
following three groups:
. Internet service providers, such as Concentric Network Corp., Exodus
Communications, Inc., Globix Corporation, PSINet Inc., UUNET
Technologies Inc., Global Frontiers, Inc., BBN Corp., a unit of GTE
Corporation, Digex, Inc., Verio, Applied Theory Communications, Inc.
and other national and regional providers;
. telecommunications companies, such as AT&T, Cable & Wireless P.L.C.,
Sprint, MCI WorldCom, the regional Bell operating companies, CLECs
and various cable companies; and
. IT integrators and outsourcing firms, such as the "Big 5" accounting
firms, EDS Corp. and similar entities.
Most of these competitors have greater market presence, engineering and
marketing capabilities, and financial, technological and personnel resources
than we have. As a result, as compared to us, our competitors may be able to
develop and expand their network infrastructures and services offerings more
efficiently or more quickly, adapt more swiftly to new or emerging technologies
and changes in customer requirements, take advantage of acquisitions and other
opportunities more readily, and devote greater resources to the marketing and
sale of their products and services. Further, they may succeed in developing
and expanding their communications and network infrastructures more quickly
than we can.
We believe that new competitors, including large computer hardware,
software, media and other technology and telecommunications companies, will
enter the tailored, value-added network services market, resulting in even
greater competition. Some telecommunications companies and online services
providers are currently offering or have announced plans to offer Internet or
online services, or to expand their network services. Other companies,
including America Online, BBN Corp. and PSINet, have also obtained or expanded
their Internet access products and services as a result of acquisitions. These
acquisitions may permit our competitors to devote greater resources to the
development and marketing of new competitive products and services and the
marketing of existing competitive products and services. In addition, the
ability of some of our competitors to bundle other services and products with
virtual private network services or Internet access services could place us at
a competitive disadvantage.
Properties
We occupy our corporate headquarters and network operations center in
Fairport, New York, which consists of approximately 20,000 square feet of
office space, under a lease which expires in December 2000. Our new 100,000-
square-foot corporate headquarters is being built in Perinton, New York. We
intend to occupy this new facility beginning in the fourth quarter of 2000
under a 20-year lease expiring in December 2020.
In addition to our corporate headquarters, we maintain 23 sales offices
in various locations in the U.S. under leases expiring between January 2001 and
December 2007. These offices contain a total of approximately
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100,000 square feet of office space and range in area from approximately 2,000
square feet to approximately 20,000 square feet. The following table lists the
location of each of our sales offices:
<TABLE>
<CAPTION>
<S> <C> <C>
California Maryland New York
Culver City Columbia Albany
Irvine Buffalo
Michigan Fairport
Connecticut Ann Arbor Jericho
Stamford North Syracuse
New Hampshire New York
Florida Manchester Tarrytown
Boca Raton
Daytona Beach New Jersey Pennsylvania
Lakeland Roseland King of Prussia
Miami Voorhees
Rhode Island
Massachusetts Providence
Waltham
Virginia
Sterling
</TABLE>
We maintain eight leased switch sites that contain a total of
approximately 49,000 square feet of equipment space, which we generally occupy
with our switching equipment and the collocation equipment of our customers and
other end-users. Our leases for the switch sites, which range in area from
approximately 6,000 square feet to approximately 10,000 square feet, expire
between October 2003 and February 2009. The following table lists the location
of each of our switch sites:
California Massachusetts Pennsylvania
Los Angeles Boston Philadelphia
Florida New York Virginia
Miami Albany Sterling
New York
Rochester
We intend to lease additional sales offices and switch sites as we
expand. We believe that necessary space will be available on a commercially
reasonable basis to accommodate our anticipated growth.
Intellectual Property
Our ability to compete depends in part upon our proprietary rights in our
technology and business procedures and systems. We rely on a combination of
contractual restrictions and copyright, trademark and trade secret laws to
establish and protect these proprietary rights. It is our policy to require
employees, consultants and, when possible, vendors to execute confidentiality
agreements upon the commencement of their relationships with us. These
agreements provide that confidential information developed or made known during
the course of a relationship with us must be kept confidential and not
disclosed to third parties except in specific circumstances.
We have received a federal trademark registration for the "PaeTec
Communications" mark and the "Campuslink" mark from the U.S. Patent and
Trademark Office. We also have filed applications for the federal registration
of the following trademarks used in our business: "Where phone service has
become an art,"
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"Where communications has become an art," "TecPath," "Network Advisor," "OnNet
Mall," "Campusscape" and "Collegescape." Federal registration of trademarks is
effective for an initial period of 20 years and is renewable for as long as we
continue to use the trademarks. We consider our trademarks to be of material
importance to our business plans.
Employees
As of March 1, 2000, we employed over 650 full-time employees, none of
whom is covered by a collective bargaining agreement. We believe our relations
with our employees are good.
Legal Proceedings
Eagle Communications, Inc., a business partner of ACC National TeleCom
Corp., initiated a legal proceeding in April 1999 in the Supreme Court of the
County of New York against our subsidiary, PaeTec Communications, Inc., and
four of our executive officers, Richard E. Ottalagana, John P. Baron, Daniel J.
Venuti and Edward J. Butler, Jr., all of whom were formerly employed by ACC or
one of its affiliates. Eagle Communications seeks injunctive relief and
unspecified damages based on claims of alleged unfair competition, tortious
interference with contractual relations and with prospective economic
relations, unjust enrichment, and misappropriation and use of trade secrets
claims. The defendants have denied liability with respect to all of these
claims. The court has issued a preliminary injunction prohibiting the
defendants from using or disclosing the details of a revenue sharing policy
belonging to Eagle Communications, and has denied preliminary injunctive relief
with respect to all other claims. The parties to this suit are currently
conducting discovery proceedings. No trial date has been scheduled.
PaeTec is not a party to any other pending legal proceedings that we
believe would, individually or in the aggregate, have a material adverse effect
on our business, financial condition or results of operations.
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REGULATION OF OUR SERVICES
The following summary of regulatory developments and legislation
applicable to our services does not describe all present and proposed federal,
state, and local regulation and legislation affecting the telecommunications
industry and Internet service. Existing federal and state regulations are
currently subject to judicial proceedings, legislative hearings, and
administrative proposals that could change, in varying degrees, the manner in
which our company operates. We cannot predict the outcome of these proceedings
or their impact upon the telecommunications and Internet service industries or
upon us.
Overview
Our services are subject to varying degrees of federal, state and local
regulation. The FCC exercises jurisdiction over our facilities and services to
the extent they are used to provide, originate or terminate interstate or
international common carrier communications. State regulatory commissions
retain jurisdiction over the same facilities and services to the extent they
are used to originate or terminate intrastate common carrier communications. In
addition, as a result of the passage of the Telecommunications Act of 1996,
which we refer to as the "Telecom Act," state and federal regulators share
responsibility for implementing and enforcing the domestic pro-competitive
policies of the Telecom Act.
Through our subsidiaries, we hold various federal and state regulatory
authorizations. We occasionally join other industry members in seeking
regulatory reform at the federal and state levels to open additional
telecommunications markets to competition.
Federal Regulation
We are regulated by the FCC as a non-dominant common carrier subject to
minimal regulation under Title II of the Communications Act of 1934, which we
refer to as the "Communications Act." The Communications Act was substantially
amended by the Telecom Act, which was signed into law on February 8, 1996. This
legislation provides for comprehensive reform of the nation's
telecommunications laws and is designed to enhance competition in the local
telecommunications marketplace by:
. removing state and local entry barriers;
. requiring incumbent local exchange carriers to provide
interconnection to their facilities;
. facilitating the end user's choice to switch service providers from
incumbent local exchange carriers to competitive providers such as
us; and
. requiring access to rights-of-way.
In general, the FCC has a policy of encouraging new competitors, such as
us, in the telecommunications industry and preventing anti-competitive
practices. Therefore, the FCC has established different levels of regulation of
dominant carriers and non-dominant carriers. As a non-dominant carrier, our
interstate services are not subject to material federal regulation, although we
are required to file tariffs with the FCC for our common carrier services.
Under the Communications Act, we are subject to the general requirement
that our charges and regulations for communications services must be "just and
reasonable" and that we may not make any "unjust or unreasonable
discrimination" in our charges or regulations. The FCC must grant its approval
prior to any change in control of any carrier providing interstate or
international services, of any entity controlling such a carrier, or the
assignment of any authorizations held by such a carrier. Carriers such as
PaeTec are also subject to a variety of miscellaneous regulations that, for
instance, govern the documentation and verifications necessary to change a
consumer's long distance carrier, require the filing of periodic reports and
restrict interlocking directors and management. As a non-dominant carrier, we
are not currently subject to price cap or rate of return regulation at the
federal level, nor are we required to obtain specific FCC authorization for the
installation, acquisition or operation of our domestic interexchange network
facilities.
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The FCC requires all common carriers, including non-dominant carriers
such as PaeTec, to receive an authorization to construct and operate specified
international telecommunications facilities, and to provide or resell
telecommunications services between the United States and international points.
The FCC also has jurisdiction to act upon complaints against any common carrier
for failure to comply with its statutory obligations. The FCC generally has the
power to modify or terminate a carrier's authority to offer interexchange or
international service for failure to comply with federal laws or the rules of
the FCC, and may impose fines or other penalties for violations. Although the
FCC does not require non-dominant carriers to file tariffs with respect to
interexchange access, it does require non-dominant carriers to file tariffs
containing the rates, terms and conditions for international and domestic long-
distance service. The FCC permits non-dominant carriers to file "contract
tariffs," which may embody rates, terms and conditions that are individually
negotiated with customers, as long as those rates, terms and conditions are
made available to similarly situated customers.
Under the Telecom Act, any entity other than a regional Bell operating
company, including cable television companies and electric and gas utilities,
may enter any telecommunications market, subject to reasonable state regulation
of safety, quality and consumer protection. The regional Bell operating
companies must comply with requirements described below before they may provide
inter-LATA long distance services originating in their respective regions.
The FCC's role with respect to local telephone competition arises
principally from the Telecom Act. The Telecom Act preempts state and local laws
to the extent that they prevent competitive entry into the provision of any
telecommunications service and gives the FCC jurisdiction over important issues
related to local competition. However, state and local governments retain
authority over significant aspects of the provision of local
telecommunications. The Telecom Act imposes a variety of new duties on local
exchange carriers, including competitive local exchange carriers like PaeTec,
in order to promote competition in local exchange and access services. These
duties include requirements to:
. interconnect directly or indirectly with other carriers;
. permit resale of services;
. permit users to retain their telephone numbers when changing
carriers;
. provide competing carriers access to poles, ducts, conduits and
rights-of-way at regulated prices; and
. establish reciprocal compensation arrangements for the transport and
termination of telecommunications.
Incumbent local exchange carriers are also subject to additional duties.
These duties include obligations of the incumbent local exchange carriers to:
. negotiate interconnection agreements with their competitors;
. offer collocation of competitors' equipment at their premises;
. make available elements of their networks, including network
facilities, features and capabilities, on non-discriminatory, cost-
based terms; and
. offer wholesale versions of their retail services for resale at
discounted rates.
Collectively, these requirements recognize that local exchange
competition is dependent upon cost-based and non-discriminatory interconnection
with and use of incumbent local exchange carrier networks. Incumbent local
exchange carriers are required to negotiate in good faith with carriers
requesting any or all of the foregoing arrangements. If the negotiating
carriers cannot reach agreement within a prescribed time, either carrier may
request binding arbitration of the disputed issues by the state regulatory
commission. In addition, a carrier is permitted to "adopt" all or portions of
agreements between the incumbent local exchange carrier and other carriers.
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In August 1996, the FCC released a decision establishing rules
implementing the ILEC interconnection obligations described above. On January
25, 1999, the United States Supreme Court affirmed the FCC's broad authority to
issue rules implementing the Telecom Act. The Supreme Court held that the FCC
had pricing jurisdiction over unbundled network elements, and authority to
issue rules allowing a competitive local exchange carrier the ability to "pick
and choose" among the most favorable terms from the existing agreements of
other competitive local exchange carriers. The Supreme Court, however, also
vacated an FCC rule establishing which network elements the ILEC must provide
to competitors on an unbundled basis, and required the FCC to re-examine its
rules regarding which unbundled network elements must be made available to
competitors in light of the Telecom Act's "necessary or impair" standard. On
September 15, 1999, the FCC adopted a decision in which it reaffirmed that six
of the seven previously designated unbundled network elements met the
"necessary or impair" standard and must be made available to competitors. The
FCC held, however, that a few ILEC network elements previously required to be
made available on an unbundled basis, including packet switches, digital
subscriber line access multiplexers, or DSLAMs, circuit switches in some urban
markets, and operator service/directory assistance functions, would no longer
be subject to that requirement. Other issues left unresolved by the Supreme
Court, including the reasonableness of the pricing methodology proposed by the
FCC, have been remanded by that court to the federal court of appeals for
further consideration. The full impact of the Supreme Court decision cannot be
measured at this time.
On August 6, 1998, the FCC took action regarding the deployment of
advanced communications services, which include wireline, broadband
telecommunications services, such as services that rely on xDSL technology.
Generally, the FCC clarified that the Telecom Act's section 251
interconnection, unbundling and resale obligations of ILECs extend to their
provision of advanced communications services, and proposed measures to promote
the deployment of advanced communications services by both ILECs and CLECs.
Among the proposals that generally were favorable to CLECs and ICPs are those
for expanded physical collocation rights and strengthened rights to order
unbundled network elements required to provide advanced communications
services. However, the FCC also tentatively interpreted the Telecom Act as
permitting ILECs to deploy advanced communications services through separate
affiliates that would not be regulated as ILECs and would not be subject to the
Telecom Act's section 251 interconnection, unbundling and resale obligations.
The FCC has sought comment on this conclusion and its possible implementation.
We cannot predict the final outcome of these proceedings or any appeals that
might ensue. In December 1999, the FCC also released an order requiring ILECs
to make available unbundled access to spectrum on their local loops, which was
intended to enable CLECs to provide advanced services such as digital
subscriber line to customers who continue to purchase basic local service from
the ILECs.
In connection with offering local exchange services, we have entered into
interconnection agreements with the following incumbent local exchange
carriers:
. Frontier Corporation, now a subsidiary of Global Crossing Ltd., for
our New York markets;
. Southern New England Telephone, now a subsidiary of SBC, for our
Connecticut markets;
. Bell Atlantic, for our markets in Virginia, Maryland, the District of
Columbia, Delaware, Pennsylvania, New Jersey, New York, Rhode Island,
Massachusetts, New Hampshire and Vermont;
. BellSouth, for our Florida markets;
. Pacific Bell, for our California markets; and
. GTE, for our Florida and California markets.
Each interconnection agreement allows us to enter new markets with
minimal capital expenditures and to offer local exchange service to our current
customer base. Each agreement currently permits us to provide local service on
a resale basis or by purchasing all unbundled network elements required to
provide local service on a facilities basis, without using company-owned
facilities. The terms of each interconnection agreement, including pricing
terms agreed to by PaeTec and the ILEC, have been approved by state regulatory
authorities, although they remain subject to review and modification by such
authorities. The interconnection agreements do not resolve all operational
issues and we and the ILECs continue to seek resolution of those issues.
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In addition to promoting local competition, the Telecom Act contains
special provisions replacing prior antitrust restrictions that prohibited the
regional Bell operating companies from providing long distance services and
engaging in telecommunications equipment manufacturing. The Telecom Act
permitted the regional Bell operating companies to enter the long distance
market immediately in states where they were not offering local exchange
service. Further, provisions of the Telecom Act permit a regional Bell
operating company to enter the long distance market in states where it was
providing local exchange service if it satisfies several procedural and
substantive requirements, including:
. obtaining the FCC's approval upon a showing that the regional Bell
operating company has entered into interconnection agreements or,
under some circumstances, has offered to enter into these agreements
in those states in which it seeks long distance relief;
. satisfying a 14-point checklist of competitive requirements; and
. obtaining the FCC's determination that the regional Bell operating
company's entry into long distance markets is in the public interest.
On December 22, 1999, the FCC determined that Bell Atlantic-New York had
taken the statutorily required steps to open its local telecommunications
market to competition, and authorized Bell Atlantic to offer long distance
service in the state of New York. The FCC's decision is being appealed in
federal court, but Bell Atlantic may still offer long distance service in the
meantime. We expect that more regional Bell operating companies, possibly
including Bell Atlantic in additional states beyond New York, will soon begin
to satisfy the statutory conditions and obtain FCC approval to provide such
service. Once the regional Bell operating companies are allowed to offer in-
region long distance services, we believe they will offer single-source local
and long distance service, which will give rise to increased competition to us.
No other petition by a regional Bell operating company for in-region long
distance entry has been approved by the FCC as of the date of this prospectus.
It is likely, however, that regional Bell operating companies will file
additional petitions in 2000. These petitions may receive approval, allowing
additional regional Bell operating companies, beside Bell Atlantic in New York,
to offer long distance services in one or more states. This may have an
unfavorable effect on our business. We are legally able to offer our customers
both long distance and local exchange services, which the regional Bell
operating companies currently may not do. The FCC also issued an order on
February 15, 2000, which permits a regional Bell operating company to offer
high speed, interLATA data services, or advanced services, within their
operating regions through a separate subsidiary, without first having to
demonstrate that they have met the FCC interconnection regulations discussed
above, under narrowly defined circumstances. In its order, the FCC adopted a
two-prong test to judge LATA boundary modification requests by a regional Bell
operating company to provide advanced services. The first prong of the test is
satisfied when the FCC determines that granting the LATA boundary modification
is necessary to encourage the deployment of advanced services on a reasonable
and timely basis. The second prong of the test is satisfied when the FCC
determines that granting the modification would not materially affect the Bell
operating company's incentive under the Telecom Act to open its local
telecommunications markets to competition to obtain long distance authority. To
date, no Bell operating company has requested or received permission from the
FCC to offer interLATA advanced services.
On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy regime. The FCC's May 8, 1997 order
established new subsidies for telecommunications and information services
provided to qualifying schools and libraries with an annual cap of $2.5 billion
and for services provided to rural health care providers with an annual cap of
$400 million. The FCC also expanded the federal subsidies for local exchange
telephone services provided in high-cost areas and to low-income consumers.
Providers of interstate telecommunications service, such as PaeTec, must pay
for a portion of these programs, but we also may be eligible to obtain
subsidies for certain services that we provide. The net financial effect of
these regulations on us cannot be determined at this time. Currently, the FCC
is assessing these payments on the basis of a provider's end-user revenue for
the previous year, and is allowing carriers to pass through the cost of these
payments to their customers. The FCC is considering revisions to its rules for
subsidizing service provided to consumers in high-cost areas, which may result
in further substantial increases
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in the overall cost of the subsidy program. On July 30, 1999, a federal court
of appeals issued a decision that upheld most aspects of the universal service
regulatory regime, and reversed and remanded certain points. In November 1999,
the FCC also issued an order revising its rules for calculating the size of the
universal service fund. The revised rules shift more of the costs of universal
service to the federal program, and are likely to increase the overall cost to
interstate telecommunications carriers. Various states are also in the process
of implementing their own universal service programs, which may also increase
our overall costs. The FCC, as well as state regulatory commissions, are
continuing to make changes to their universal service rules and policies, and
it is difficult to predict how those changes, and any judicial review, might
affect us.
With respect to our service offerings, we have filed tariffs with the FCC
stating the rates, terms and conditions for our interstate services. Our
tariffs are subject to "streamlined" tariff regulations, are generally not
subject to pre-effective review by the FCC, and may be amended on one day's
notice. We provide our interstate services in competition with interexchange
carriers and, with respect to access services, the ILECs. With limited
exceptions, the current policy of the FCC for most interstate access services
dictates that ILECs charge all customers the same price for the same service.
Thus, for many of their access services, the ILECs generally cannot lower
prices to those customers likely to contract for their services without also
lowering charges for the same service to all customers in the same geographic
area, including charges for customers whose telecommunications requirements
would not justify the use of these lower prices. The FCC, however, has
permitted ILECs to establish pricing zones based on access traffic density and
charge different prices in each zone. Moreover, the FCC may permit ILECs to
offer special rate packages to very large customers, as it has done in a few
cases, or permit other forms of rate flexibility. The FCC has adopted rules
reducing the regulation of ILECs that are subject to competition in their
service areas and providing these ILECs with additional flexibility in pricing
their interstate switched and special access as discussed in the following
paragraph.
We provide access services to long distance service providers. Access
charges are required by government regulation to be just, reasonable and not
unreasonably discriminatory. Disputes have arisen regarding the level and
regulation of access charges and these disputes may be resolved adversely to
us. The FCC initiated a rulemaking proceeding late last year seeking comment on
whether to impose regulatory restrictions on the access charges received by
ICPs and any such ruling could have an adverse impact on the level of access
charges.
ILECs around the country have been contesting whether the obligation to
pay reciprocal compensation to CLECs or ICPs should apply to local telephone
calls from an ILEC's customers to Internet service providers served by CLECs or
ICPs. A majority of state commissions and several federal and state courts have
ruled that the reciprocal compensation arrangements in existing interconnection
agreements before them apply to calls to Internet service providers, but a few
state commissions and reviewing courts have reached the opposite conclusion.
Some of these rulings are subject to appeal. Additional disputes over the
appropriate treatment of Internet service provider traffic are pending in other
states.
On February 26, 1999, the FCC released a Declaratory Ruling determining
that Internet service provider traffic is interstate for jurisdictional
purposes, but that its current rules neither require nor prohibit the payment
of reciprocal compensation for these calls. In the absence of a federal rule,
the FCC determined that state commissions have authority to interpret and
enforce the reciprocal compensation provisions of existing interconnection
agreements, and to determine the appropriate treatment of Internet service
provider traffic in arbitrating new agreements. The FCC also requested comment
on alternative federal rules to govern compensation for these calls in the
future. Since the FCC ruling, some state commissions have revisited this issue.
In May 1999, the Massachusetts state commission reversed a previous decision
and refused to mandate reciprocal compensation for ISP traffic, instead
encouraging ILECs and ICPs to negotiate mutually agreeable compensation terms.
Taking advantage of this opportunity, PaeTec negotiated "intercarrier
compensation" arrangements with Bell Atlantic under which PaeTec is now
receiving payments on Internet traffic for all of its Bell Atlantic
jurisdictions. Other state commissions reviewing the matter subsequent to the
FCC decision have ruled that the interconnection agreements before them do
require payment of reciprocal compensation for that
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traffic. Internet service providers are among our customers, and adverse
decisions in FCC or state proceedings or on judicial review of such decisions
could limit PaeTec's ability to service this group of customers profitably.
State Regulation
The Telecom Act is intended to increase competition in the
telecommunications industry, especially in the local exchange market. With
respect to local services, ILECs are required to allow interconnection to their
networks and to provide unbundled access to network facilities, as well as a
number of other procompetitive measures. Because the implementation of the
Telecom Act is subject to numerous state rulemaking proceedings on these
issues, it is currently difficult to predict how quickly full competition for
local services, including local dial tone, will be introduced. To provide
intrastate services, we generally must obtain a certificate of public
convenience and necessity from the state regulatory agency and comply with
state requirements for telecommunications utilities, including state tariffing
requirements. As of March 1, 2000, we have satisfied state requirements to
provide local service in 20 states and the District of Columbia and have
satisfied state requirements to provide intrastate long distance service in 48
states.
State regulatory agencies have regulatory jurisdiction when PaeTec
facilities and services are used to provide intrastate services. A portion of
PaeTec's current traffic is classified as intrastate and is therefore subject
to state regulation. State agencies, like the FCC, require PaeTec to file
periodic reports, pay various fees and assessments and comply with rules
governing quality of service, consumer protection and similar issues. Although
the specific requirements vary from state to state, they tend to be more
detailed than the FCC's regulation because of the strong public interest in the
quality of basic local exchange service. We are not currently subject to price
cap or rate of return regulation in any of our current or planned markets. We
cannot assure you, however, that the imposition of new regulatory burdens in a
particular state will not affect the profitability of our services in that
state. States may have to approve the transfer of a carrier's authority to
operate or the transfer of its assets to a new entity. States also may have to
approve a change in the control over an entity controlling a carrier subject to
state regulation. Some states also regulate a carrier's issuance of securities
or incurrence of debts.
Local Regulation
Our network is subject to numerous local regulations such as building
codes, municipal franchise requirements and licensing. Such regulations vary on
a city-by-city and county-by-county basis. In some of the areas where we
provide service, we may be subject to municipal franchise requirements and may
be required to pay license or franchise fees based on a percentage of gross
revenue or other formula. It is possible that some municipalities that do not
currently impose fees could seek to impose fees in the future, and that,
following the expiration of existing franchises, fee levels could be increased.
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MANAGEMENT
Directors and Executive Officers
The table below shows information about our directors and executive
officers:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Arunas A. Chesonis...... 37 Chairman of the Board, President and Chief Executive Officer
John P. Baron........... 39 President, Northern and Western Regions
Bradford M. Bono........ 31 President, Eastern and Southern Regions, and Director
Edward J. Butler, Jr.... 39 President, Wholesale Markets Group
Joseph D. Ambersley..... 50 Executive Vice President, Mergers and Acquisitions
Richard E. Ottalagana... 56 Executive Vice President and Treasurer
Richard J. Padulo....... 55 Executive Vice President, Engineering and Operations
Daniel J. Venuti........ 40 Executive Vice President, Secretary and General Counsel
Timothy J. Bancroft..... 50 Vice President, Finance
Joseph J. Golden........ 39 President, Data Services
Robert I. Schwartz...... 52 President, Campuslink Services
James A. Kofalt......... 57 Director
James H. Kirby.......... 32 Director
Lawrence H. Guffey...... 32 Director
</TABLE>
Arunas A. Chesonis has served as our Chairman of the Board, President and
Chief Executive Officer since our inception in May 1998. Mr. Chesonis became
President of ACC Corp., a competitive local exchange carrier and the parent
company for all ACC-owned operations in the United States, Canada, Germany and
the United Kingdom, in February 1994 and was elected to its Board of Directors
in October 1994. Mr. Chesonis was also President and Chief Operating Officer
for ACC Global Corp., which coordinated all purchasing and network optimization
for international terminations and fiber capacity for ACC worldwide. Mr.
Chesonis joined ACC in May 1987 as Vice President of Operations for the U.S.
business unit and was named President of ACC Long Distance Corp. in January
1989. Mr. Chesonis was also President of ACC's Canadian operations and Managing
Director of ACC's U.K. enterprise. Before he joined ACC, Mr. Chesonis held
several positions within Rochester Telephone Corporation, now known as Frontier
Communications Corporation, a subsidiary of Global Crossing Ltd. Mr. Chesonis
has served on the Board of Directors of CyberTech Wireless, Inc., a fixed
wireless carrier, since February 2000. Mr. Chesonis holds a B.S. degree in
Civil Engineering from Massachusetts Institute of Technology and an M.B.A.
degree from the University of Rochester.
John P. Baron has served as President, Northern Region, of our
subsidiary, PaeTec Communications, Inc., and as one of our Executive Vice
Presidents since June 1998. Mr. Baron also was appointed President, Western
Region, of PaeTec Communications in April 2000. From September 1995 until he
joined PaeTec, Mr. Baron served as Vice President of Sales and Customer Service
for the U.S. operations of ACC Long Distance Corp., or ACC TeleCom. During his
employment with ACC TeleCom, Mr. Baron also managed Account Development,
Customer Service, Sales Support, Information Processing, University Sales and
Service, and Marketing. From September 1992 to September 1995, Mr. Baron served
as President of ETI Technical College, a four-year engineering college in
Cleveland, Ohio. Mr. Baron holds a B.S. degree in Neuroscience from the
University of Rochester and an M.B.A. degree from Syracuse University.
Bradford M. Bono has served as President, Eastern Region, of PaeTec
Communications and as one of our Executive Vice Presidents and directors since
June 1998. Mr. Bono also was appointed President, Southern Region, of PaeTec
Communications in April 2000. From August 1997 until he joined PaeTec, Mr. Bono
served as Vice President of Alternate Channel Sales for ACC TeleCom. In 1991,
Mr. Bono co-founded Vista International Communications Inc., a regional
interexchange carrier, where he served as Executive Vice President and Chief
Operating Officer and as director from 1991 until 1997, when Vista was acquired
by ACC TeleCom. Mr. Bono holds a B.A. degree in Political Science from the
University of Delaware.
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Edward J. Butler, Jr. has served as President, Wholesale Markets Group,
of PaeTec Communications and as one of our Executive Vice Presidents since July
1998. From August 1988 to July 1998, Mr. Butler served in several positions
with ACC TeleCom. From 1995 to 1998, Mr. Butler served as Director of Carrier
Services for ACC TeleCom. Before he joined ACC TeleCom's Carrier Services team,
Mr. Butler spent seven years in both the University Services and Commercial
Markets sales management departments at ACC TeleCom. Mr. Butler holds a B.S.
degree in Communications from the State University of New York at Buffalo.
Joseph D. Ambersley has served as one of our Executive Vice Presidents
since June 1998 and was appointed Executive Vice President, Mergers and
Acquisitions, of PaeTec Communications in April 2000. Mr. Ambersley also served
as President, Southern Region, of PaeTec Communications between June 1998 and
April 2000. For seven years before joining PaeTec, Mr. Ambersley served as Vice
President of Carrier Sales at National Telecommunications of Florida, a
regional interexchange carrier. Before joining National Telecommunications of
Florida, Mr. Ambersley was Vice President of Carrier Sales for ATC/Microtel, a
national fiber optic provider and interexchange carrier. Between 1995 and 1998,
Mr. Ambersley was also a member of the Board of Directors of America's Carriers
Telecommunications Association, a national trade association representing
interexchange carriers. He has served as the Secretary and Treasurer of the
Association of Communications Companies of America since 1995. Mr. Ambersley
holds a B.S. degree from Florida State University and an M.Ed. degree from
Rollins College.
Richard E. Ottalagana has served as our Executive Vice President and
Treasurer since June 1998. From 1993 until April 1998, Mr. Ottalagana served as
Vice President and General Manager of ACC National TeleCom Corp., where he had
responsibility for the start-up of ACC's competitive local exchange carrier
operations. During the 20 years before he joined ACC, Mr. Ottalagana held
managerial positions with Rochester Telephone Corporation, now known as
Frontier Communications Corporation, in several areas, including sales,
operations, engineering, labor relations, operator services, regulatory,
accounting and finance. For over ten years, Mr. Ottalagana also served as
Chairman of the Board of the Summit Federal Credit Union. Mr. Ottalagana holds
a B.S. degree in Accounting from Rider University.
Richard J. Padulo has served as Executive Vice President, Engineering and
Operations, of PaeTec Communications and as one of our Executive Vice
Presidents since joining PaeTec in June 1998. From 1992 until he joined PaeTec,
Mr. Padulo served as Director of Engineering and Operations for ACC TeleCom. In
1994, Mr. Padulo participated in the start up of ACC's local telephone
subsidiary, ACC National TeleCom Corp., where he assisted with business
planning and assumed the position of Director of Engineering and Operations.
Daniel J. Venuti has served as our Executive Vice President, Secretary
and General Counsel since June 1998. From March 1994 until he joined PaeTec,
Mr. Venuti served as Vice President and General Counsel for ACC TeleCom. From
September 1984 until February 1994, Mr. Venuti practiced law with Bond,
Schoeneck & King, LLP. Mr. Venuti holds a B.A. degree in Political Science from
Syracuse University and a J.D. degree from the State University of New York at
Buffalo School of Law.
Timothy J. Bancroft has served as our Vice President, Finance, since June
1998. From June 1993 to June 1998, Mr. Bancroft served as the Vice President-
Finance for a subsidiary of Citizens Communications, Inc., a company engaged in
telecommunications and utilities businesses. From 1971 until June 1993, Mr.
Bancroft held several financial positions with Rochester Telephone Corporation,
now known as Frontier Communications Corporation. Mr. Bancroft holds a B.S.
degree in Business Administration from the Rochester Institute of Technology.
Joseph J. Golden has served as President, Data Services, of PaeTec
Communications since September 1999. From May 1997 until he joined PaeTec, Mr.
Golden served as Chief Executive Officer and director of Campuslink
Communications Systems, Inc. From January 1995 to May 1997, Mr. Golden served
as Vice President of the Diversified Industries Division of Electronic Data
Systems, Inc., a large outsourcing and systems integration company. From 1982
to 1995, Mr. Golden held positions at Electronic Data Systems of
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increasing responsibility in systems engineering, customer account management
and sales and operations management. Mr. Golden holds a B.A. degree in
Economics from Middlebury College.
Robert I. Schwartz has served as President, Campuslink Services, of
PaeTec Communications since September 1999. Before he joined PaeTec, Mr.
Schwartz served as a director and President of Campuslink, which he founded in
November 1993. Mr. Schwartz holds a B.S. degree in Engineering from Cornell
University and an M.B.A. degree from Hofstra University.
James A. Kofalt has served on our board of directors since September
1999. From 1995 until he joined our board of directors, Mr. Kofalt served as
the Chairman of the Board of Directors of Campuslink. Mr. Kofalt also serves as
the Chairman of the Board of Directors of Correctnet Global Information
Solutions, Inc., Chairman of Alliance Cabletel Holdings, L.P., and as a
director of Classic Communications, Inc. He also served from 1995 to 1996 as
Chairman of the Board of Directors of Optel, Inc., a provider of private cable
television and telephone services. From 1976 to 1994, Mr. Kofalt held various
management positions with Cablevision Systems Corporation, a provider of cable
television services, including President, Chief Operating Officer and director.
Mr. Kofalt received his B.S. degree from The United States Military Academy at
West Point.
James H. Kirby has served on our board of directors since February 2000.
Mr. Kirby is a director of Madison Dearborn Partners, Inc., a Chicago-based
private investment firm, where he specializes in investing in companies in the
communications industry. Before joining Madison Dearborn Partners in 1996, Mr.
Kirby worked in investment banking and private equity investing at Lazard
Freres & Co. LLC and The Beacon Group LLC. He presently serves on the boards of
directors of CompleTel Europe N.V., a publicly traded CLEC active in France and
Germany, and several private companies, including Madison River Telephone
Company LLC., IPlan LLC, GigaRed LLC, Orblynx, Inc., Reiman Holding Company,
LLC and Wireless One Network, L.P. Mr. Kirby holds an A.B. degree from
Princeton University and an M.B.A. degree from the Harvard Graduate School of
Business Administration.
Lawrence H. Guffey has served on our board of directors since February
2000. He is a Senior Managing Director of The Blackstone Group, where he works
in Blackstone's Principal Investment Group, with primary responsibility for the
management of the investment activities of Blackstone Communications Partners I
L.P. Mr. Guffey also currently serves as a director of Centennial
Communications Corp., FiberNet, L.L.C., and Enterprise Software, Inc. Before
joining Blackstone in 1991, Mr. Guffey was a financial analyst with Trammel
Crow Ventures, a real estate investing firm. Mr. Guffey holds a B.A. degree
from Rice University.
Executive officers serve at the discretion of our board of directors. For
information concerning legal proceedings involving some of our executive
officers and directors, see "Business--Legal Proceedings."
Membership of the Board of Directors
General. Our bylaws provide that our board of directors will consist of
at least three members. Directors are elected at the annual meeting of
stockholders. Effective upon completion of our initial public offering, the
board of directors will be divided into three classes serving staggered three-
year terms. The initial terms of the three classes will expire in 2001, 2002
and 2003, respectively. Upon the expiration of the initial term of each class,
the nominees for that class will be elected for a term of three years to
succeed the directors whose terms of office expire.
Under our certificate of incorporation, holders of our Class B common
stock have the exclusive right to elect three members to the board of
directors. The holders of our Class A common stock and our Class B common stock
vote together as one class for the election of all other members of board of
directors.
All of the holders of our Class B common stock have granted to Arunas A.
Chesonis proxies authorizing Mr. Chesonis to vote their shares of Class B
common stock in his sole and absolute discretion. As a result of the superior
voting rights of our Class B common stock and the authority conferred on Mr.
Chesonis
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by these proxies, Mr. Chesonis has the ability to elect at least a majority of
our board of directors, subject to the provisions of the voting agreement
described below. See "Description of Capital Stock--Common Stock" for more
information about these proxies.
Membership Rights of Bradford M. Bono. In a stock rights agreement we
entered into with Bradford M. Bono, we agreed that, as long as Mr. Bono is
employed by us and wishes to serve as a director, we would take all actions
within our control which are necessary to cause his election to our board of
directors. Mr. Bono currently serves as a director and has informed us that he
wishes to continue as a director following completion of the offerings.
Voting Agreement. In connection with our sale of the Series A preferred
stock to institutional investors in February 2000, we entered into a voting
agreement containing board membership provisions with the following principal
stockholders:
. the purchasers of the Series A preferred stock;
. the former stockholders of Campuslink;
. Arunas A. Chesonis;
. Christopher E. Edgecomb; and
. Jeffrey P. Sudikoff.
Some of the board membership provisions will remain in effect after completion
of the offerings. These provisions obligate us to take all actions within our
control which are necessary or desirable for the election of the following
persons to our board of directors:
. at least one designee of the Campuslink stockholders;
. at least one designee of Madison Dearborn Capital Partners III, L.P.,
Madison Dearborn Special Equity III, L.P. and Special Advisors Fund
I, LLC, which, together with the permitted transferees of their
PaeTec securities, we refer to as the "Madison Dearborn investors";
. at least one designee of Blackstone CCC Capital Partners L.P.,
Blackstone CCC Offshore Capital Partners L.P. and Blackstone Family
Investment Partnership III L.P., which, together with the permitted
transferees of their PaeTec securities, we refer to as the
"Blackstone investors"; and
. any other persons nominated by Mr. Chesonis for election to the board
of directors.
The Campuslink stockholders may be entitled to designate more than one person
for election as a director based on the size of the board of directors and the
percentage of our outstanding common stock they hold. In addition, the Madison
Dearborn investors will be entitled to designate a second member to the board
of directors if the number of directors constituting our entire board of
directors is increased to nine or more and the Madison Dearborn investors
continue to own at least 50% of the number of shares of common stock issuable
upon the conversion of the Series A preferred stock they originally purchased,
so long as those shares constitute 5% or more of our outstanding common stock.
The foregoing board membership rights will terminate in the case of:
. the Campuslink stockholders, when they cease to own beneficially at
least 5% of our outstanding common stock;
. the Madison Dearborn investors, when they cease to own beneficially
at least (a) one-third of the number of shares of common stock
issuable upon conversion of the Series A preferred stock they
originally purchased and (b) 5% of our outstanding common stock;
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. the Blackstone investors, when they cease to own beneficially at
least (a) one-third of the number of shares of common stock issuable
upon conversion of the Series A preferred stock they originally
purchased and (b) 5% of our outstanding common stock; and
. Mr. Chesonis, when he no longer serves as at least one of the
Chairman of the Board or Chief Executive Officer of PaeTec or ceases
to own beneficially, or otherwise ceases to have the right to vote,
any shares of our Class B common stock.
All of the stockholders who are parties to the voting agreement have
agreed to vote their shares of common stock for each of the foregoing
designees.
Under the voting agreement, one director representative of the Madison
Dearborn investors and one director representative of the Blackstone investors
will be entitled to serve on any committee of our board of directors.
Immediately following completion of the offerings, Mr. Kofalt will
continue to serve on the board of directors as the designee of the Campuslink
stockholders, Mr. Kirby will continue to serve as the designee of the Madison
Dearborn investors and Mr. Guffey will continue to serve as the designee of the
Blackstone investors.
Board Committees
Effective upon the completion of the offerings, the board of directors
will have a standing audit committee and a standing compensation committee.
The audit committee, among other things, will be responsible for
recommending to the full board of directors the selection of our independent
auditors, reviewing the scope of the audit plan and the results of each audit
with management and the independent auditors, reviewing the adequacy of our
system of internal accounting controls in consultation with the independent
auditors, reviewing generally the activities and recommendations of the
independent auditors, and exercising oversight with respect to our code of
conduct and other policies and procedures regarding adherence with legal
requirements. The members of the audit committee will be non-employee
directors.
The compensation committee will be responsible for establishing the
compensation and benefits of our executive officers, monitoring compensation
arrangements for management employees for consistency with corporate objectives
and stockholders' interests, and administering our stock incentive plans, our
other management compensation plans and our employee stock purchase plan. The
members of the compensation committee will be non-employee directors.
Director Compensation
Directors who are also officers or employees of PaeTec do not receive any
additional compensation for serving on the board of directors or any of its
committees. Following the completion of the offerings, each non-employee
director will receive options to purchase shares of Class A common stock upon
that director's initial election or appointment to the board of directors. Each
non-employee director will receive an annual fee for service on the board of
directors and its committees and additional fees for each meeting attended.
Directors are reimbursed for their reasonable out-of-pocket expenses incurred
in attending meetings.
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Executive Compensation
The following table shows the compensation paid for the year ended
December 31, 1999 to our chief executive officer and to each of our other four
most highly compensated executive officers for 1999. We refer to these five
executive officers as the named executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation(1)
------------------ All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($)(2)
--------------------------- ---- --------- -------- ------------------
<S> <C> <C> <C> <C>
Arunas A. Chesonis ................. 1999 124,615 12,100 2,769
Chairman, President and Chief
Executive Officer
John P. Baron....................... 1999 124,615 12,100 2,492
President, Northern and Western
Regions
Bradford B. Bono.................... 1999 124,615 12,100 2,769
President, Eastern and Southern
Regions
Richard E. Ottalagana............... 1999 124,615 12,100 2,778
Executive Vice President and
Treasurer
Daniel J. Venuti.................... 1999 124,615 12,100 2,769
Executive Vice President, Secretary
and General Counsel
</TABLE>
- --------
(1) In accordance with SEC rules, information about other annual compensation
in the form of perquisites and other personal benefits has been omitted
because these perquisites and other personal benefits constituted less than
10% of the total annual salary and bonus for the named executive officers.
(2) The amounts shown in this column consist of matching contributions by
PaeTec to our 401(k) savings and retirement plan.
In 1999, the named executive officers were not granted and did not
exercise options to purchase our common stock. As of December 31, 1999, no
named executive officer held options to purchase our common stock. See
"Security Ownership of Certain Beneficial Owners and Management" for
information concerning the ownership of our common stock by the named executive
officers.
Stock Rights Agreements
We entered into stock rights agreements with the following executive
officers when we first sold them shares of our common stock: Arunas A.
Chesonis, Joseph D. Ambersley, John P. Baron, Bradford B. Bono, Edward J.
Butler, Jr., Richard E. Ottalagana, Richard J. Padulo, Daniel J. Venuti and
Timothy J. Bancroft. Among other things, the stock rights agreements provide
for repurchase rights, noncompetition protection, piggyback registration rights
and co-sale rights.
Repurchase Rights. If an executive officer other than Mr. Chesonis who is
a party to a stock rights agreement voluntarily resigns or is terminated for
cause before the fourth anniversary of the date we hired the executive officer,
we have the right to repurchase a portion of the shares of common stock the
executive officer purchased under the agreement. The purchase price for these
shares will be, in the case of Class A common stock, equal to the price the
executive officer first paid for the shares or, in the case of Class B common
stock, equal to the fair market value of the shares. If we merge with another
company or sell all or substantially all of our assets, or if someone acquires
more than 50% of our capital stock, our repurchase option will terminate
automatically. In the case of Messrs. Ottalagana and Padulo, a reduction after
the third year of employment to a part time or consulting status will not be
considered to be a voluntary resignation.
Noncompetition Protection. The noncompetition provisions provide that for
a period of one year after the termination of the executive officer's
employment with us for any reason, the executive officer will not
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solicit any of our clients or customers, or compete, directly or indirectly,
against us in any lines of business we are conducting when the executive
officer's employment is terminated.
Under Mr. Chesonis's stock rights agreement, if we terminate his
employment for any reason, or if his employment is terminated as a result of
his death, disability, voluntary resignation or withdrawal, we will make
severance payments to Mr. Chesonis for one year after termination of
employment. In the case of our other executive officers, if the termination is
without cause, we will make severance payments to the executive officer for one
year after termination of his employment, while if the executive officer's
termination results from the executive officer's death, disability or voluntary
resignation or if we terminate the executive officer for cause, we will not
have to make a severance payment. The severance payment in all cases will equal
the executive officer's base annual salary immediately before termination. If
the executive officer dies or becomes disabled or if we terminate the executive
officer's employment without cause, the one-year period during which the
noncompetition covenant is to be in effect will be counted as a year of
employment for purposes of determining the percentage of shares that are
subject to our repurchase option. If we terminate the employment for cause or
the executive officer resigns voluntarily, we may waive the non-competition
covenant or count the one-year period during which the noncompetition covenant
is to be in effect as a year of employment for purposes of determining the
percentage of shares that are subject to our repurchase option. In connection
with our acquisition of Campuslink, Joseph Golden and Robert Schwartz have
entered into incentive stock option agreements with PaeTec that contain similar
noncompetition provisions.
Registration Rights. If we register any of our equity securities under
the Securities Act, whether or not for our own account, the executive officers
who are parties to stock rights agreements are entitled to require us to
include all or a portion of their shares of Class A common stock and Class B
common stock in that registration, subject to our right to exclude some or all
of these shares under specified conditions in the case of underwritten
offerings. We will pay all of the expenses of these registrations, except for
underwriting discounts and commissions.
Co-Sale Rights. Each executive officer who is a party to a stock rights
agreement, other than Mr. Chesonis, is entitled to participate in a private
sale by Mr. Chesonis of his shares of common stock on a pro rata basis at the
same price and on the same terms and conditions which are applicable to Mr.
Chesonis. These co-sale rights are not applicable to some types of transfers by
Mr. Chesonis, including transfers to family members or transfers securing debt.
Conversion of Class B Common Stock. Each stock rights agreement also
provides that each share of Class B common stock owned by the executive
officer, and each share owned by a permitted transferee of the officer, will
automatically convert into one share of Class A common stock on the date that
the officer ceases to be employed by us unless, at that date, Mr. Chesonis:
. is our Chairman of the Board or Chief Executive Officer;
. is the beneficial owner of shares of Class B common stock; and
. has, and personally exercises, the power under a proxy to vote the
shares of Class B common stock owned by the executive officer and the
officer's permitted transferees on all matters on which the Class B
common stock is entitled to vote.
Executive officers who purchased shares of our Class B common stock have
executed a proxy giving Mr. Chesonis the right to vote all shares of Class B
common stock owned by those executive officers and their permitted transferees.
See "Description of Capital Stock--Common Stock" for more information about
these proxies.
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PaeTec Corp. 1998 Incentive Compensation Plan
We adopted the PaeTec Corp. 1998 Incentive Compensation Plan on July 1,
1998. The purpose of the plan is to enable us to recruit, reward, retain and
motivate employees on a basis competitive with industry practices. Under the
plan, we may grant our employees options that are intended to qualify as
"incentive stock options" under Section 422 of the Internal Revenue Code, non-
qualified stock options, and stock appreciation rights. Up to 5,300,000 shares
of Class A common stock may become subject to awards under this plan.
As of March 1, 2000, we have granted options, which we intended to be
incentive stock options, to purchase up to an aggregate of 3,362,236 shares of
our Class A common stock to substantially all of our employees who are not
executive officers. The exercise prices of these options range from $0.40 to
$7.50 per share. In addition, we have granted options to purchase 6,800 shares
of our Class A common stock to Timothy J. Bancroft, options to purchase 100,000
shares of our Class A common stock to Joseph J. Golden and options to purchase
75,000 shares of our Class A common stock to Robert I. Schwartz. The exercise
prices of these options range from $2.50 to $5.00 per share. Generally, initial
option grants to employees from our inception through December 1999 vest with
respect to 60% of the shares subject to the option in four equal annual
installments and with respect to 40% of the shares over a four-year term
beginning January 1, 2000. Initial option grants to employees beginning in
January 2000 and other option grants generally vest with respect to all of the
shares subject to the option in four equal annual installments beginning on the
first anniversary of the option grant date.
Our board of directors currently administers the plan and has the
authority to designate eligible participants and determine the types of awards
to be granted and the conditions and limitations applicable to those awards.
Upon completion of the offerings, the plan will be administered by the
compensation committee. The administrator of the plan may authorize amendments
to the plan without stockholder approval except in circumstances prescribed by
applicable law or regulation.
No awards may be granted under the plan after June 30, 2008.
Options. The plan's administrator determines the exercise price of each
option granted under the plan, except that the price of incentive stock options
may not be less than the market value of the Class A common stock on the option
grant date. The option price for incentive stock options granted to any ten
percent stockholder, who is a person who owns more than 10% of the total
combined voting power of all classes of stock of PaeTec Corp. or any
subsidiary, may not be less than 110% of the market value of the Class A common
stock on the option grant date. The aggregate fair market value of the Class A
common stock, as determined on the option grant date, with respect to which any
incentive stock options granted to one optionee are exercisable for the first
time during any calendar year may not exceed $100,000.
Each option will become vested and exercisable at the times and under the
conditions our board of directors determines. However, no incentive stock
option may be exercisable before six months after the optionee starts working
for us or more than ten years after the option grant date, or five years in the
case of an incentive stock option granted to a ten percent stockholder. The
board of directors or, after completion of the offerings, the compensation
committee may accelerate the vesting of any option in its discretion.
Subject to approval by the plan's administrator, payment of the exercise
price for shares of Class A common stock purchased upon exercise of an option
may be made in cash, through the transfer to us of shares of Class A common
stock with a market value equal to the exercise price, or a combination of
these methods.
Upon termination of an option holder's employment for any reason, all
unvested stock options held by the option holder will terminate immediately and
all vested stock options will remain exercisable for 30 days following the
employment termination date, or one year following the employment termination
date in the case of death or disability. In the case of non-qualified stock
options, these termination provisions may be modified by the plan's
administrator.
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Awards under the plan may not be transferred except by will or the laws
of descent and distribution.
Stock Appreciation Rights. A stock appreciation right, or SAR, is a right
to receive, in the form of Class A common stock, cash or a combination of
Class A common stock and cash, the spread or difference between the fair
market value of the Class A common stock subject to a SAR on the date it is
exercised and the fair market value of the stock subject to a SAR on the date
the SAR was granted. SARs may be granted in conjunction with, or independent
of, options. The plan's administrator determines:
. the time or times at which and the circumstances under which a SAR
may be exercised in whole or in part;
. the time or times at which and the circumstances under which a SAR
will cease to be exercisable;
. the method of exercise;
. the method of settlement;
. the form of consideration payable in settlement;
. whether or not a SAR will be in tandem or in combination with any
other grant; and
. any other terms and conditions of any SAR.
Exercisability of SARs may be subject to achievement of one or more
performance objectives. SARs issued in connection with incentive stock options
are required to meet additional conditions.
Employee Stock Purchase Plan
Our board of directors has authorized an employee stock purchase plan
that provides for the issuance of up to 1,000,000 shares of Class A common
stock following completion of the offerings. All employees whose customary
employment is more than 20 hours per week and for more than five months in any
calendar year are eligible to participate in the stock purchase plan, provided
that any employee who would own 5% or more of our total combined voting power
immediately after an offering date under the plan is not eligible to
participate. Eligible employees must authorize us to deduct an amount from
their pay during offering periods established by the compensation committee.
The purchase price for shares under the plan will be determined by the
compensation committee, but may not be less than 85% of the lesser of the
market price of the common stock on the first or last business day of each
offering period.
401(k) Plan
We maintain a 401(k) retirement and savings plan for all of our
employees. The 401(k) plan is intended to qualify under section 401(k) of the
Internal Revenue Code, so that all contributions and the income earned on
those contributions are not taxable to our employees until they make
withdrawals from the plan. Subject to statutory limits, participants of the
401(k) plan may elect to invest up to 15% of their current compensation and we
may make a matching contribution of up to half of the first 6% of an
employee's annual compensation deferred under the plan. All of the
contributions to the 401(k) plan made by our employees are fully vested at all
times, while any matching contributions we make vest in four equal annual
installments, beginning on the first anniversary of the participant's hire
date. Benefits under the 401(k) plan are paid upon a participant's retirement,
death, disability or termination of employment, and are based on the amount of
a participant's contributions plus vested employer contributions, as adjusted
for gains, losses and earnings.
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Director Liability and Indemnification of Directors and Officers
Our certificate of incorporation provides for the elimination and
limitation of the personal liability of directors for monetary damages to the
fullest extent permitted by the Delaware General Corporation Law. The Delaware
General Corporation Law provides that a corporation may eliminate or limit the
personal liability of each director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director except for
liability for any breach of the director's duty of loyalty to the corporation
or its stockholders, for acts or omissions not in good faith or that involve
intentional misconduct, or a knowing violation of law, in respect of unlawful
dividend payments or stock redemptions or repurchases and for any transaction
from which the director derives an improper personal benefit. Our certificate
of incorporation provides that if the Delaware General Corporation Law is
amended to authorize the further elimination or limitation of the liability of
a director, the liability of the directors will be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so
amended. The effect of this provision is to eliminate the rights of PaeTec and
its stockholders, through stockholder derivative suits on behalf of PaeTec, to
recover monetary damages against a director for breach of the fiduciary duty of
care as a director, including breaches resulting from negligent or grossly
negligent behavior, except in the situations described above. The provision
does not limit or eliminate the rights of PaeTec or any stockholder to seek
non-monetary relief such as an injunction or rescission upon breach of a
director's duty of care. This provision is consistent with section 102(b)(7) of
the Delaware General Corporation Law, which is designed, among other things, to
encourage qualified individuals to serve as directors of Delaware corporations.
Our bylaws provide that, to the fullest extent permitted by the Delaware
General Corporation Law, we will indemnify, and advance expenses to, each of
our currently acting and former directors and officers.
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TRANSACTIONS INVOLVING RELATED PARTIES
Since our inception in May 1998, we and our subsidiaries have engaged in
transactions with our directors, director nominees and executive officers, with
owners of more than 5% of a class of our common stock, and with companies of
which these persons serve as executive officers or in which they beneficially
own over 10% of the equity interests.
Sales of Common Stock to Executive Officers
The table below shows the number of shares purchased, and the purchase
price paid, by each of our current executive officers for common stock issued
by us in 1998, 1999 and 2000:
<TABLE>
<CAPTION>
Shares of Class
A Shares of Class B
Common Stock/ Common Stock/
Aggregate Aggregate
Name Purchase Price Purchase Price
- ---- ---------------- --------------------
<S> <C> <C>
Arunas A. Chesonis........................ 43,620/$218,100 2,500,000/$2,000,000
Joseph D. Ambersley....................... 280,000/$175,000 30,000/$25,000
John P. Baron............................. 290,000/$200,000 30,000/$25,000
Bradford M. Bono.......................... 530,000/$275,000 30,000/$25,000
Edward J. Butler, Jr...................... 269,000/$157,500 15,000/$12,500
Richard E. Ottalagana..................... 280,000/$175,000 30,000/$25,000
Richard J. Padulo......................... 265,000/$137,500 15,000/$12,500
Daniel J. Venuti.......................... 280,000/$175,000 30,000/$25,000
Timothy J. Bancroft....................... 32,953/$116,633 5,000/$4,165
Joseph J. Golden.......................... 44,418/$111,045 0/$0
Robert I. Schwartz........................ 53,896/$199,995 0/$0
</TABLE>
Under our stock rights agreements with some of these officers, we have
granted the officers piggyback registration rights with respect to some or all
of their shares. For information about these registration rights, see
"Management--Stock Rights Agreements."
Transactions With Preferred Stock Investors
In February 2000, we sold 134,000 shares of a new issue of preferred
stock, designated our Series A Convertible Preferred Stock, at a purchase price
of $1,000 per share, or $134 million in the aggregate, to institutional
investors. We refer to these investors, together with the permitted transferees
of their PaeTec securities, as the "preferred stock investors." The preferred
stock investors include the Madison Dearborn investors, consisting initially of
Madison Dearborn Capital Partners III, L.P., Madison Dearborn Special Equity
III, L.P. and Special Advisors Fund I, LLC, and the Blackstone investors,
consisting initially of Blackstone CCC Capital Partners L.P., Blackstone CCC
Offshore Capital Partners L.P. and Blackstone Family Investment Partnership III
L.P.
Our certificate of incorporation provides that we may require the holders
of the Series A preferred stock to convert all, and not less than all, of their
preferred stock into shares of Class A common stock upon the closing of an
initial public offering of our Class A common stock that meets specified
financial criteria. Because the offerings will satisfy these criteria, we will
require conversion of all of the Series A preferred stock into Class A common
stock upon completion of the offerings. We expect to issue the preferred stock
investors a total of 17,866,666 shares of Class A common stock in connection
with this conversion.
Investor Rights. In the preferred stock investment agreement, we agreed
that we would not take specified actions relating to our business, our capital
stock and other aspects of our operations without the prior
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approval of the holders of a majority of our shares held by the Madison
Dearborn investors and the holders of a majority of our shares held by the
Blackstone investors. We also granted the preferred stock investors a variety
of rights relating to their ownership of our capital stock, including
preemptive rights to subscribe to additional issuances of our capital stock and
other securities and the right to require us to repurchase their PaeTec
securities in specified circumstances. The approval rights of the preferred
stock investors and most of these other rights relating to their ownership of
PaeTec capital stock will terminate upon the completion of the offerings.
Following the offerings, for so long as any group of preferred stock investors
continues to hold PaeTec common stock received upon conversion of the Series A
preferred stock or related securities with an original purchase price of at
least $10 million under the investment agreement, those investors will be
entitled to visit and inspect our properties, examine our corporate and
financial records and discuss our operations and affairs with our directors,
officers and independent public accountants.
Voting Agreement. At the time of the investment, we and some of our
principal stockholders, including Arunas A. Chesonis and the Campuslink
stockholders, entered into a voting agreement with the preferred stock
investors. In this agreement, we agreed to take all actions within our control
necessary or desirable for the election of designees of the Campuslink
stockholders, the Madison Dearborn investors, the Blackstone investors and Mr.
Chesonis to our board of directors, and all of the stockholders who are parties
to the agreement agreed to vote their PaeTec shares for each of these
designees. Mr. James H. Kirby, the designee of the Madison Dearborn investors,
and Mr. Lawrence H. Guffey, the designee of the Blackstone investors, were
elected to our board of directors under these board membership provisions. For
information about the operation of these provisions after completion of the
offerings, see "Management--Membership of the Board of Directors."
Registration Rights Agreement. In a registration rights agreement we
entered into at the time of the investment, we granted the preferred stock
investors the following registration rights with respect to their PaeTec common
stock:
. we granted the Madison Dearborn investors and the Blackstone
investors demand registration rights which entitle them to require us
to register the sale of their shares under the Securities Act on up
to two occasions, in the case of the Madison Dearborn Investors, and
on one occasion, in the case of the Blackstone investors, on a
registration statement on SEC Form S-1, and on an unlimited number of
occasions on a registration statement on SEC Form S-2 or S-3;
. we granted the preferred stock investors shelf registration rights
which entitle them, at any time between the first anniversary and the
third anniversary of the completion of the offerings, to require us
to register the sale of their shares under the Securities Act on a
continuous or delayed basis; and
. we granted the preferred stock investors piggyback registration
rights which entitle them to require us to include their shares in a
registration of our common stock or other securities for sale by us
or by our other security holders.
The foregoing registration rights extend to all common stock the
preferred stock investors will acquire upon the conversion of the Series A
preferred stock and all common stock they may acquire in any other manner and
at any other time, subject to the following limitations:
. neither the Madison Dearborn investors nor the Blackstone investors
may exercise their demand or shelf registration rights if an offering
of our common stock by such group of stockholders would have a
reasonably anticipated aggregate gross offering price of less than
$20 million if, at such time, those stockholders are free to sell
their common stock under Rule 144 of the Securities Act without
limitation as to volume or manner of sale restrictions; or
. subject to the foregoing limitation, no preferred stock investor may
exercise any registration rights with respect to our common stock if
we issue certificates representing such
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common stock without any legend restricting the transfer thereof
under the Securities Act or state securities laws.
These registration rights are subject to other conditions, including
notice requirements, timing restrictions and volume limitations which may be
imposed by the underwriters of an offering. We generally are required to bear
the expense of all these registrations, except for underwriting discounts and
commissions.
Acquisition of Campuslink
On September 9, 1999, we completed our acquisition of Campuslink by our
merger of a PaeTec subsidiary with and into Campuslink, which was the
surviving corporation in the merger. We issued a total of 5,919,183 shares of
our Class A common stock in the merger. These shares represented 28.6% of our
Class A common stock and 21.9% of the total number of shares of our common
stock outstanding immediately after the merger. We also issued options to
purchase 100,000 shares of our Class A common stock to Joseph J. Golden at an
exercise price of $5.00 per share and options to purchase 75,000 shares of our
Class A common stock to Robert I. Schwartz at the same exercise price. Messrs.
Golden and Schwartz have served as executive officers of PaeTec since we
acquired Campuslink.
In connection with the acquisition, we assumed a total of $7.3 million
of Campuslink indebtedness owed to four of Campuslink's former principal
stockholders, Alliance Cabletel Holdings, L.P., Kline Hawkes California SBIC,
L.P., The Union Labor Life Insurance Company Separate Account P and Pacific
Capital Group, Inc., and to Kocom Communications, a partner in Alliance
Cabletel. Each of the four former Campuslink stockholders held more than 5% of
our outstanding common stock as a result of the merger. Of the assumed
indebtedness, we repaid $5.2 million upon the closing of the merger. To
evidence the remaining $2.1 million of this indebtedness, we issued notes to
these entities in the following approximate principal amounts: Alliance
Cabletel ($1.3 million); Kline Hawkes ($0.1 million); Union Labor Life ($0.1
million); Pacific Capital Group ($0.3 million); and Kocom Communications ($0.3
million). The notes, which we repaid using proceeds from our sale of the
Series A preferred stock in February 2000, bore interest at an initial annual
interest rate of 8.25%, which was subject to adjustment from time to time to
reflect changes in a specified prime lending rate. We were required to pay
interest on the notes quarterly and to repay the notes in full upon the
earlier of June 30, 2002 or the completion by us of one or more specified
financing transactions.
We have placed 876,000 of the shares of Class A common stock issuable in
the merger in an escrow account to satisfy the indemnification obligations of
Campuslink under the merger agreement. The escrowed shares not applied to
satisfy these obligations will be released to the former Campuslink
stockholders on December 31, 2000 or a later date if there are indemnification
claims pending on December 31, 2000. We have placed an additional 1,780,000
shares of Class A common stock in the escrow account to secure post-closing
obligations of Campuslink relating to Campuslink's financial statements and to
Campuslink's procurement of consents to the merger from some of its
significant customers with which Campuslink has exclusive service agreements.
Of these additional shares, we released from escrow 300,000 shares in
September 1999 and 1,100,000 shares in April 2000.
In connection with the acquisition, Arunas A. Chesonis, Christopher E.
Edgecomb and Jeffrey P. Sudikoff, who at the time held the largest percentages
of our outstanding Class B common stock, entered into a stockholders'
agreement with PaeTec and the former Campuslink stockholders. This agreement
provides the former Campuslink stockholders with co-sale rights with respect
to transfers of PaeTec securities by Mr. Chesonis, Mr. Edgecomb or Mr.
Sudikoff and preemptive rights with respect to new issuances of capital stock
and other securities by PaeTec. These rights will terminate upon the
completion of the offerings.
Under the stockholders' agreement, Mr. Chesonis agreed to vote shares of
our stock over which he has voting rights to elect one or more individuals
designated by the former Campuslink stockholders to our board of directors.
These provisions of the stockholders' agreement were restated in the voting
rights agreement executed in connection with our sale of the Series A
preferred stock to the preferred stock investors. See
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"Management--Other Board Membership Rights" for more information about the
voting agreement. James A. Kofalt has been elected to our board of directors
under these board membership provisions and Mr. Kofalt, or another designee of
the Campuslink stockholders, will be entitled to continue to serve as a
director after completion of the offerings. In the stockholders' agreement, we
also agreed not to engage in certain transactions without the approval of the
director or directors nominated by Campuslink. These approval rights will
terminate upon completion of the offerings.
In connection with the acquisition, we entered into a registration rights
agreement with the former Campuslink stockholders. This registration rights
agreement was amended and restated in February 2000 in connection with our sale
of the Series A preferred stock to the preferred stock investors. In the
amended agreement, we have granted the Campuslink stockholders registration
rights which are substantially similar to the registration rights we granted to
the Blackstone investors under the same agreement, as we describe above under
"Transactions With Preferred Stock Investors."
Transactions With Newcourt Commercial Finance Corporation
In November 1998, we entered into a senior debt agreement with Newcourt
Commercial Finance Corporation to establish a $49 million credit facility. At
the time we entered into the credit facility, we sold Newcourt 600,000 shares
of our Class A common stock at a price of $2.50 per share. These shares
represented more than 5% of our outstanding Class A common stock at the time of
the sale. In 1999, Newcourt purchased another 217,800 shares of our Class A
common stock at a price of $5.00 per share. We granted Newcourt piggyback
registration rights with respect to its shares and protections against dilutive
future issuances of Class A common stock, any securities convertible into Class
A common stock and any warrants, options or other rights to subscribe for or
purchase Class A common stock. Newcourt was also granted the right, which is
subject to exceptions and will terminate upon completion of the offerings, to
maintain a specified percentage ownership in PaeTec. Newcourt also purchased
5,000 shares of the Series A preferred stock in February 2000 upon the same
terms and conditions as the other preferred stock investors.
In October 1999, we amended our credit facility with Newcourt. The
amendment to this facility increased our maximum borrowing availability from
$49 million to $70 million. We pay interest under our credit facility at
floating annual rates based, at our option, on a designated base rate or LIBOR,
plus a specified margin. We made interest payments to Newcourt of $1.9 million
in 1999 and $0 in fiscal 1998. In 1999, we also paid Newcourt fees of $78,702
based on the committed but unused portion of our facility. As of March 1, 2000,
$25 million of borrowings were outstanding under the facility.
In October 1999, we entered into a $10 million unsecured credit facility
with Newcourt, Canadian Imperial Bank of Commerce and Merrill Lynch Capital
Corp., as lenders. We granted the lenders warrants to purchase shares of our
Class A common stock which would have been exercisable if the commitments of
the lenders had not been terminated before April 11, 2000 or if there had been
an outstanding balance on the facility on that date. We made no borrowings
under this facility. These warrants were canceled when we terminated the
facility in February 2000.
Transactions With STAR Telecommunications and its Affiliates
In August 1998, we sold 1,200,000 shares of our Class A common stock at a
price of $0.69 per share to STAR Telecommunications, which is a public
facilities-based international long distance provider. These shares represented
more than 5% of our outstanding common stock at the time of the sale. In
September 1998, we sold STAR Telecommunications an additional 1,700,000 shares
of our Class A common stock at a price of $2.50 per share. Under our August
1998 agreement with STAR Telecommunications, we granted that company piggyback
registration rights with respect to its shares, protections against dilutive
future issuances of Class A common stock and securities convertible into Class
A common stock, and preemptive rights to subscribe to additional stock
issuances to maintain its ownership percentage in PaeTec.
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In August 1998, at the time we first sold our common stock to STAR
Telecommunications, our two companies entered into leases that allow us to
collocate some of our switching equipment within the STAR Telecommunications
switching centers. Those leases have initial terms of ten years. We were not
required to make any lease payments in our 1998 fiscal year. Beginning in May
1999, we make total monthly payments of approximately $19,000 under the leases.
Assuming the leases remain in effect through the end of their initial terms, we
estimate that we will make total lease payments of approximately $4.6 million
to STAR Telecommunications.
In the second half of 1999, STAR Telecommunications sold all of its
shares of our Class A common stock and is no longer a stockholder of PaeTec.
In August 1998, in transactions which occurred at the time we first sold
our common stock to STAR Telecommunications, we sold 2,400,000 shares of our
Class B common stock at a price of $0.83 per share to Christopher E. Edgecomb,
the Chairman of the Board and Chief Executive Officer of STAR
Telecommunications. At that time, Mr. Chesonis, our Chairman of the Board and
Chief Executive Officer, was also a director of STAR Telecommunications. Mr.
Edgecomb was granted various rights with respect to his PaeTec shares. These
rights included piggyback registration rights, protections against dilutive
future issuances of common stock and securities convertible into common stock,
preemptive rights to subscribe to additional stock issuances, and co-sale
rights to include Mr. Edgecomb's shares in any sale of PaeTec common stock by
Mr. Chesonis, on the same terms. Mr. Edgecomb's protections against dilutive
future issuances and his preemptive rights will terminate upon completion of
the offerings. At the time he purchased his shares, Mr. Edgecomb entered into a
stockholders' agreement with Mr. Chesonis and Mr. Sudikoff in which he granted
Mr. Chesonis proxies to vote his shares of Class B common stock in Mr.
Chesonis's sole and absolute discretion. Mr. Chesonis agreed to vote all shares
of our common stock he owns or controls, or which are covered by proxies given
to him, to elect Mr. Edgecomb or the designee of Messrs. Edgecomb and Sudikoff
to our board of directors, until Messrs. Edgecomb and Sudikoff together ceased
to own a total of 4,800,000 shares of our Class B common stock. Mr. Edgecomb
served on our board of directors from August 1998 to February 2000 under this
agreement. In February 2000, Messrs. Edgecomb and Sudikoff converted all of
their shares of Class B common stock into shares of Class A common stock.
Other Transactions
Two members of Arunas A. Chesonis's immediate family are employed by us.
From our inception through December 31, 1999, we have paid them an aggregate of
$198,294 in salary and bonuses and have issued them options to purchase a total
of 5,277 shares of our Class A common stock at exercise prices ranging from
$2.50 to $7.50 per share. In addition, from time to time, a third member of Mr.
Chesonis's immediate family performs consulting services for PaeTec. From our
inception through December 31, 1999, we have paid this individual a total of
$12,339 for these services.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows information regarding the beneficial ownership
of our outstanding Class A common stock and Class B common stock as of March 1,
2000 by:
. each person or entity known by us to own beneficially more than 5% of
the outstanding shares of our Class A common stock or our Class B
common stock;
. each of our directors;
. each of our named executive officers; and
. all of our directors and executive officers as a group.
According to SEC rules, a person is deemed to be a "beneficial owner" of
a security if that person has or shares the power to vote or direct the voting
of the security or the power to dispose or direct the disposition of the
security. More than one person may be deemed to be a beneficial owner of the
same securities. Except as we otherwise indicate by footnote, we believe that
the beneficial owners of the common stock listed below, based on information
furnished by those owners, have sole voting and investment power with respect
to the shares shown.
Shares of our Class B common stock are convertible into shares of Class A
common stock on a one-for-one basis at the holder's option. Therefore, the
number of shares of Class A common stock we show as beneficially owned by a
stockholder also includes the number of Class A shares the stockholder would
acquire as a result of the conversion of the Class B shares beneficially owned
by that stockholder.
Information concerning beneficial ownership and voting power is
calculated based on:
. the 45,033,720 shares of Class A common stock and Class B common
stock outstanding as of March 1, 2000, giving effect to the
conversion as of that date of the Series A preferred stock into
17,866,666 shares of Class A common stock; and
. the shares of Class A common stock or Class B common stock as to
which the stockholder has the right to acquire voting or investment
power within 60 days after March 1, 2000.
In addition, the information shown for beneficial ownership of our common
stock after completion of the offerings gives effect to the issuance of
shares of Class A common stock in the offerings. The shares of Series A
preferred stock are convertible into shares of Class A common stock at any time
at the holder's option.
The information on common stock voting power also reflects the superior
voting rights of the Class B common stock. Each share of Class A common stock
is entitled to one vote and each share of Class B common stock is entitled to
20 votes. See "Description of Capital Stock--Common Stock" for additional
information concerning the respective voting rights of the Class A common stock
and Class B common stock.
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<TABLE>
<CAPTION>
Percent of voting
power as a
single class
-------------------
Class A Common Stock
------------------------------------------------- Class B Before After
Before offerings After offerings Common Stock offerings offerings
------------------------ ------------------------ -------------------- --------- ---------
Name of Beneficial Owner
- ------------------------ Number Percent Number Percent Number Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Executive Officers and
Directors:
Arunas A. Chesonis...... 2,818,620(1) 6.2% 2,818,620(1) % 2,635,000(2) 100.0% 56.4% %
John P. Baron........... 370,000(3) * 370,500(3) 30,000(4) 1.1 *
Bradford M. Bono........ 600,000(5) 1.3 600,000(5) 30,000 1.1 *
Lawrence H. Guffey...... 6,666,666(6) 14.8 6,666,666(6) -- -- 7.1
James H. Kirby.......... 9,363,333(7) 20.8 9,363,333(7) -- -- 10.0
James A. Kofalt......... 2,520,478(8) 5.6 2,520,478(8) -- -- 2.7
Richard E. Ottalagana... 360,000(5)(9) * 360,000(5)(9) 30,000 1.1 *
Daniel J. Venuti........ 295,500(5) * 295,500(5) 30,000 1.1 *
All directors and
executive officers as a
group (14 persons) .... 24,044,864(10) 53.3 24,044,864(10) 2,635,000 100.0 78.8
Other Stockholders:
Alliance Cabletel
Holdings, L.P.......... 2,465,478(11) 5.5 2,465,478(11) -- -- 2.6
Blackstone investors.... 6,666,666(12) 14.8 6,666,666(12) -- -- 7.1
Kline Hawkes California
SIBC, L.P.............. 2,213,652(13) 4.9 2,213,652(13) -- -- 2.4
Madison Dearborn
investors.............. 9,333,333(14) 20.7 9,333,333(14) -- -- 9.9
Gary Winnick............ 3,335,478(15) 7.4 3,335,478(15) -- -- 3.5
</TABLE>
- --------
* Less than one percent.
(1) Includes 2,450,000 shares of Class B common stock beneficially owned by
Mr. Chesonis and convertible into shares of Class A common stock on a one-
for-one basis.
(2) Includes 185,000 shares of Class B common stock over which Mr. Chesonis
has voting power under proxies granted to him that are irrevocable other
than in specified circumstances. See "Description of Capital Stock--Common
Stock" for additional information concerning these proxies.
(3) Includes 30,000 shares of Class B common stock and 4,500 shares of Class A
common stock held by trusts for the benefit of Mr. Baron's children, for
which Mr. Baron's brother serves as trustee. Mr. Baron disclaims
beneficial ownership of these shares. The 30,000 Class B shares are
convertible into shares of Class A common stock on a one-for-one basis.
(4) Includes 30,000 shares of Class B common stock held by trusts for the
benefit of Mr. Baron's children, for which Mr. Baron's brother serves as
trustee. Mr. Baron disclaims beneficial ownership of these shares.
(5) Includes 30,000 shares of Class B common stock beneficially owned by the
holder and convertible into shares of Class A common stock on a one-for-
one basis.
(6) Consists of 6,666,666 shares of Class A common stock issuable upon
conversion of 50,000 shares of Series A preferred stock owned by the
Blackstone investors identified in footnote (12). Mr. Guffey is a member
of Blackstone Management Associates III L.L.C., a general partner of each
of the Blackstone investors. Mr. Guffey disclaims beneficial ownership of
these shares.
(7) Includes 9,333,333 shares of Class A common stock issuable upon conversion
of 70,000 shares of Series A preferred stock owned by the Madison Dearborn
investors identified in footnote (14). Mr. Kirby is a principal of Madison
Dearborn Partners, LLC, the ultimate general partner of Madison Dearborn
Capital Partners III, L.P. and Madison Dearborn Special Equity III, L.P.,
and the manager of Special Advisors Fund I, LLC. Because of his service in
these positions, Mr. Kirby may be deemed to be the beneficial owner of
these shares.
(8) Includes 2,465,478 shares owned by Alliance Cabletel Holdings, L.P. Mr.
Kofalt is Chairman of Alliance Cabletel and the sole stockholder and
president of Kocom Communications, Inc., the general partner of Alliance
Cabletel. Because of these positions, Mr. Kofalt may be deemed to be the
beneficial owner of these shares.
(9) Includes 150,000 shares of Class A common stock held by a trust for the
benefit of Mr. Ottalagana's daughter, for which Mr. Ottalagana's wife
serves as trustee. Mr. Ottalagana disclaims beneficial ownership of these
shares.
(10) Includes options to purchase 72,669 shares of Class A common stock
exercisable within 60 days of March 1, 2000.
(11) Consists of 523,124 shares held in an escrow account for the benefit of
Alliance Cabletel in connection with our acquisition of Campuslink and
1,482,204 shares beneficially owned by Alliance Cabletel. The address of
Alliance Cabletel is 360 North Crescent Drive, Beverly Hills, California
90210.
(12) The Blackstone investors include Blackstone CCC Capital Partners L.P.,
Blackstone CCC Offshore Capital Partners L.P. and Blackstone Family
Investment Partnership III L.P. The shares shown consist of 5,301,117
shares of Class A common stock issuable upon conversion of 39,758.38
shares of Series A preferred stock owned of record by Blackstone CCC
Capital Partners L.P., 965,549 shares of Class A common stock issuable
upon conversion of 7,241.62 shares of Series A preferred stock owned of
record by Blackstone CCC Offshore Partners L.P. and 400,000 shares of
Class A common stock issuable upon conversion of 3,000 shares of Series A
preferred stock owned of record by Blackstone Family Investment
Partnership III L.P. The address of the Blackstone investors is 345 Park
Avenue, New York, New York 10154.
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(13) Includes 361,477 shares held in an escrow account in connection with our
acquisition of Campuslink. The business address of Kline Hawkes California
SIBC, L.P. is 11726 San Vicente Boulevard, Los Angeles, California 90049.
(14) The Madison Dearborn investors include Madison Dearborn Capital Partners
III, L.P., Madison Dearborn Special Equity III, L.P. and Special Advisors
Fund I, LLC. The shares shown consist of 9,111,029 shares of Class A
common stock issuable upon conversion of 68,332.72 shares of Series A
preferred stock owned of record by Madison Dearborn Capital Partners III,
L.P., 202,304 shares of Class A common stock issuable upon conversion of
1,517.28 shares of Series A preferred stock owned of record by Madison
Dearborn Special Equity III, L.P. and 20,000 shares of Class A common
stock issuable upon conversion of 150 shares of Series A preferred stock
owned of record by Special Advisors Fund I, LLC. The address of the
Madison Dearborn investors is Three First National Plaza, Suite 3800,
Chicago, Illinois 60670.
(15) Includes 870,000 shares of Class A common stock beneficially owned by GKW
Unified Holdings, LLC and 2,465,478 shares beneficially owned by Alliance
Cabletel Holdings, L.P. GKW Unified Holdings is the majority limited
partner in Alliance Cabletel. Mr. Winnick is the sole stockholder,
Chairman and Chief Executive Officer of Pacific Capital Group, Inc., the
managing member of GKW Unified Holdings. Because of his service in these
positions, Mr. Winnick may be deemed to be the beneficial owner of these
shares. Mr. Winnick's business address is 360 North Crescent Drive,
Beverly Hills, California 90210.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock summarizes provisions of
our certificate of incorporation and bylaws as they will be amended before
completion of the offerings.
Authorized and Outstanding Capital Stock
Upon completion of the offerings, our authorized capital stock will
consist of 300,000,000 shares of Class A common stock, $.01 par value per
share, 7,500,000 shares of Class B common stock, $.01 par value per share, and
5,000,000 shares of preferred stock, $.01 par value per share. As of the date
of this prospectus, there were shares of Class A common stock outstanding,
2,685,000 shares of Class B common stock outstanding and 134,000 shares of
Series A preferred stock outstanding. Upon completion of the offerings, after
giving effect to the issuance of shares of Class A common stock by us and
the conversion of the outstanding Series A preferred stock into 17,866,666
shares of Class A common stock, there will be shares of Class A common
stock outstanding, 2,685,000 shares of Class B common stock outstanding and no
shares of preferred stock outstanding.
All outstanding shares of our capital stock are, and the shares of Class
A common stock we will issue in the offerings will be, fully paid and
nonassessable.
Common Stock
Class A common stock. Holders of Class A common stock are entitled:
. to one vote for each share held of record on all matters submitted to
a vote of the stockholders;
. to receive, on a pro rata basis, dividends and distributions, if any,
as the board of directors may declare out of legally available funds;
and
. upon a liquidation, dissolution or winding up of PaeTec, to share
equally and ratably in any assets remaining after the payment of all
debt and other liabilities, subject to the prior rights, if any, of
holders of preferred stock.
Holders of our Class A common stock do not have any preemptive, cumulative
voting, subscription, conversion, redemption or sinking fund rights. The Class
A common stock is not subject to future calls or assessments by us.
Before the date of this prospectus, there has been no public market for
the Class A common stock. We expect that the shares of our Class A common stock
will be approved for quotation on the Nasdaq National Market, subject to notice
of issuance, under the symbol "PAET."
We will appoint a transfer agent and registrar for the Class A common
stock before completion of the offerings.
Class B common stock. Holders of our Class B common stock have the same
powers, preferences and rights as holders of our Class A common stock, except
in the following four respects:
. holders of our Class B common stock are entitled to 20 votes per
share;
. holders of our Class B common stock are entitled, to the exclusion of
holders of our Class A common stock, to elect three members to our
board of directors;
. the affirmative vote of holders of a majority of our outstanding
Class B common stock is required to approve specified amendments to
our certificate of incorporation and bylaws; and
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. each share of Class B common stock is convertible into one share of
Class A common stock in circumstances specified in our certificate of
incorporation and described below.
The sole beneficial owners of our Class B common stock are the following
members of our senior management and their family trusts: Arunas A. Chesonis,
Joseph D. Ambersley, John P. Baron, Bradford M. Bono, Edward J. Butler, Jr.,
Richard E. Ottalagana, Richard J. Padulo, Daniel J. Venuti and Timothy J.
Bancroft. All of the holders of our Class B common stock have granted to Mr.
Chesonis proxies authorizing him to vote their shares of Class B common stock
in his sole and absolute discretion. Mr. Chesonis is our Chairman of the Board
and Chief Executive Officer and the owner of record, as of the date of this
prospectus, of 2,450,000 shares of our Class B common stock. Upon completion of
the offerings, holders of our Class B common stock as a group will control
approximately % of the total voting power of all our outstanding common stock.
As a result of the superior voting rights of our Class B common stock and the
authority conferred on Mr. Chesonis by the proxies, Mr. Chesonis has the
ability to elect at least a majority of our board of directors, subject to the
provisions of the voting agreement to which he is a party, and to determine the
outcome of corporate actions requiring stockholder approval. See "Management--
Membership of the Board of Directors" for information about the board
membership provisions of the voting agreement.
By its terms, any proxy granted to Mr. Chesonis may be revoked, and the
voting authority the proxy confers on Mr. Chesonis may be terminated, if any
one of the following events occurs:
. Mr. Chesonis ceases to be our Chief Executive Officer;
. Mr. Chesonis and/or a trust of which he is the sole trustee, a
limited liability company of which he is the sole member or a limited
partnership of which he is the sole general partner cease to own
directly or beneficially at least 2,000,000 shares of our Class B
common stock; or
. all of the Class B common stock held by the stockholder who granted
the proxy is converted into Class A common stock.
Under our certificate of incorporation, any holder of Class B common
stock may elect at any time to convert some or all of such holder's shares into
an equal number of shares of Class A common stock. In addition, our certificate
of incorporation provides that the following shares of Class B common stock
will automatically and immediately convert into Class A common stock:
. any share of Class B common stock that is transferred by a holder to
any person other than a "permitted transferee," as defined in our
certificate of incorporation;
. all shares of Class B common stock held by an executive officer other
than Mr. Chesonis upon the termination of such executive officer's
employment with PaeTec and each PaeTec subsidiary, unless, at the
date of such termination of employment, (a) Mr. Chesonis is the
Chairman of the Board or Chief Executive Officer of PaeTec, (b) Mr.
Chesonis beneficially owns shares of Class B common stock and (c) Mr.
Chesonis has, and personally exercises, the power to vote the shares
of Class B common stock of such executive officer and the executive
officer's permitted transferees under a proxy granted to Mr. Chesonis
by such holders; and
. all outstanding shares of Class B common stock, at such time as (a)
Mr. Chesonis no longer serves as at least one of the Chairman of the
Board or Chief Executive Officer of PaeTec or (b) Mr. Chesonis ceases
to have, and to exercise personally, the power, whether by ownership,
proxy or otherwise, to vote shares of Class B common stock
representing a majority of the total voting power represented by all
shares of Class B common stock then outstanding.
Under the terms of our investment agreement with the preferred stock
investors, for so long as the Madison Dearborn investors or the Blackstone
investors have the right to nominate persons for election to our board of
directors, we may not issue additional shares of Class B common stock without
the prior approval of the holders of a majority of our shares held by the
Madison Dearborn investors or the holders of a majority of our shares held by
the Blackstone investors.
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Preferred Stock
Under our certificate of incorporation, the board of directors has the
authority, without further action by our stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series and to fix the voting powers,
designations, preferences and the relative participating, optional or other
special rights and qualifications, limitations and restrictions of each series,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series. Upon completion of the offerings, no shares of any of our authorized
preferred stock will be outstanding. Because the board of directors has the
power to establish the preferences and rights of the shares of any additional
series of preferred stock, it may afford holders of any preferred stock
preferences, powers and rights, including voting rights, senior to the rights
of holders of the common stock, which could adversely affect the holders of the
common stock.
Warrants
We have adopted an agent incentive plan under which we have authorized
the grant to our independent sales agents of warrants to purchase up to a total
of 500,000 shares of our Class A common stock. Under the plan, agents who
achieve specified monthly sales goals may be granted warrants entitling them to
purchase shares of our Class A common stock at exercise prices equal to the
fair market value of the Class A common stock on the dates the warrants are
granted. The warrants may only be exercised if we complete the offerings and
may first be exercised one year after the date on which the offerings are
completed or such earlier date as may be permitted under securities laws.
Warrants issued under the plan generally will vest in five equal annual
installments beginning at the date of grant, subject to the warrant holder's
continued achievement of the sales levels for which the warrant was granted.
Each warrant is exercisable for ten years, and the exercise price may be paid
in cash or by cashless exercise. To the extent a warrant is vested, it may be
transferred to a sub-agent of the warrant holder. As of March 1, 2000, we have
awarded warrants exercisable for 80,000 shares under the plan.
Anti-takeover Effect of Our Charter and Bylaw Provisions
Our certificate of incorporation and bylaws contain provisions, in
addition to the provisions granting superior voting rights to the holders of
our Class B common stock, that could make it more difficult to complete an
acquisition of PaeTec by means of a tender offer, a proxy contest or otherwise.
Classified Board of Directors. Our certificate of incorporation provides
that the board of directors will be divided into three classes of directors,
with the classes as nearly equal in number as possible. As a result,
approximately one-third of the board of directors will be elected each year.
The classification of the board of directors will it make it more difficult for
an acquiror or for other stockholders to change the composition of the board of
directors. The certificate of incorporation provides that, subject to any
rights of holders of preferred stock to elect additional directors under
specified circumstances, the number of directors will be fixed in the manner
provided in the bylaws. The bylaws provide that the number of directors will be
fixed from time to time exclusively by resolution adopted by directors
constituting a majority of the total number of directors that we would have if
there were no vacancies on the board of directors. In addition, our certificate
of incorporation provides that, subject to any rights of holders of preferred
stock, and unless the board of directors otherwise determines, newly created
directorships resulting from any increase in the authorized number of directors
and any vacancies on the board of directors will be filled only by the
affirmative vote of a majority of the remaining directors, though less than a
quorum.
No Stockholder Action by Written Consent. The certificate of
incorporation provides that, subject to the rights of any holders of preferred
stock to act by written consent instead of a meeting, stockholder action may be
taken only at an annual meeting or special meeting of stockholders and may not
be taken by written consent instead of a meeting, unless the action to be taken
by written consent of stockholders and the taking of this action by written
consent have been expressly approved in advance by the board of directors.
Failure to satisfy any of the requirements for a stockholder meeting could
delay, prevent or invalidate stockholder action.
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Stockholder Advance Notice Procedure. Our bylaws establish an advance
notice procedure for stockholders to make nominations of candidates for
election as directors or to bring other business before an annual meeting of
our stockholders.
The bylaws provide that any stockholder wishing to nominate persons for
election as directors at an annual meeting must deliver to our secretary a
written notice of the stockholder's intention to do so. The stockholder
generally is required to furnish the notice no earlier than 120 days and no
later than 90 days before the first anniversary of the preceding year's annual
meeting. The notice must include the following information:
. the information regarding each proposed nominee that would be
required to be disclosed under SEC rules and regulations in
solicitations of proxies for the election of directors in an election
contest or otherwise;
. the written consent of each proposed nominee to serve as a director
of PaeTec; and
. as to the stockholder giving the notice and the beneficial owner, if
any, of common stock on whose behalf the nomination is made, (a) the
name and address of record of the stockholder and the name and
address of the beneficial owner, (b) the class and number of shares
of PaeTec's capital stock which are owned beneficially and of record
by the stockholder and the beneficial owner, (c) a representation
that the stockholder is a holder of record of PaeTec's capital stock
entitled to vote at such meeting and intends to appear, in person or
by proxy, at the meeting to propose such nomination and (d) a
representation whether the stockholder or the beneficial owner, if
any, intends or is part of a group which intends to (A) deliver a
proxy statement or form of proxy to holders of at least the
percentage of PaeTec's outstanding capital stock required to elect
the nominee or (B) otherwise solicit proxies from stockholders in
support of the nomination.
We may require any proposed nominee to furnish such other information as we may
reasonably require to determine the eligibility of such proposed nominee to
serve as a director of PaeTec.
In addition, the bylaws require that notice of proposals by stockholders
to be brought before any annual meeting must be delivered to PaeTec no earlier
than 120 days and no later than 90 days before the first anniversary of the
preceding year's annual meeting. The notice must include the following
information:
. a brief description of the business desired to be brought before the
meeting, the text of the proposal or business, including the text of
any resolutions proposed for consideration and in the event that such
business includes a proposal to amend our bylaws, the language of the
proposed amendment, the reasons for conducting such business at the
meeting and any material interest in such business of the stockholder
and the beneficial owner, if any, on whose behalf the proposal is
made; and
. as to the stockholder giving the notice and the beneficial owner, if
any, of common stock on whose behalf the proposal is made,
substantially the same information that must be furnished with
respect to a stockholder wishing to nominate a candidate for election
as a director.
Section 203 of the Delaware General Corporation Law
PaeTec is subject to section 203 of the Delaware General Corporation Law,
which, with specified exceptions, prohibits a Delaware corporation from
engaging in any "business combination" with any "interested stockholder" for a
period of three years following the time that the stockholder became an
interested stockholder unless:
. before that time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder;
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<PAGE>
. upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares
owned by persons who are directors and also officers and by employee
stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer; or
. at or after that time, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned
by the interested stockholder.
Section 203 defines "business combination" to include the following:
. any merger or consolidation of the corporation with the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to specified exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
. any receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
In general, section 203 defines an "interested stockholder" as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by that entity or person.
The application of section 203 may make it difficult and expensive for a
third party to pursue a takeover attempt we approve even if a change in control
of PaeTec would be beneficial to the interests of our stockholders.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offerings, we will have outstanding shares of
Class A common stock, assuming none of the underwriters' over-allotment options
are exercised. Of these shares, the shares to be sold in the offerings,
plus any shares issued upon exercise of the underwriters' over-allotment
options, will be freely tradable in the public market without restriction under
the Securities Act, unless the shares are held by "affiliates" of PaeTec, as
that term is defined in Rule 144 under the Securities Act.
The remaining shares of Class A common stock outstanding upon
completion of the offerings, as well as any shares of Class A common stock we
may issue in the future upon conversion of Class B common stock, will be
"restricted securities" as that term is defined under Rule 144. Restricted
securities may be sold in the public market only if they are registered or if
they qualify for an exemption from registration, such as the exemption afforded
by Rule 144.
Under lockup agreements with the underwriters, our executive officers and
directors and other existing stockholders have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of any
shares of common stock for a period of 180 days from the date of this
prospectus. We have entered into a similar lockup agreement with the
underwriters. However, Merrill Lynch, in its sole discretion, may consent to
the release of all or any portion of the shares subject to lockup agreements at
any time without prior notice to our other stockholders or to any public market
in which our common stock trades. See "Underwriting" for more information about
these lockup agreements.
Taking into account the lockup agreements, and assuming Merrill Lynch
does not release stockholders from these agreements, the following shares will
be eligible for sale in the public market at the following times:
. 180 days after the date of this prospectus, approximately shares
of Class A common stock will be eligible for sale in the public
market, of which shares will be subject to volume, manner of
sale and other limitations under Rule 144; and
. the remaining shares of Class A common stock will be eligible for
sale under Rule 144 from time to time upon the expiration of Rule
144's one-year holding period.
In general, under Rule 144, a person who has beneficially owned
restricted shares of Class A common stock for at least one year would be
entitled to sell, within any three-month period, a number of shares of Class A
common stock that does not exceed the greater of:
. 1% of the then-outstanding shares of Class A common stock, which will
total approximately shares immediately after completion of the
offerings; or
. the average weekly trading volume of the Class A common stock during
the four calendar weeks preceding the filing of a notice with the SEC
with respect to the sale.
Sales under Rule 144 are also subject to manner of sale and notice requirements
and to the availability of current public information about PaeTec. Under Rule
144(k), a person who has not been our affiliate at any time during the three
months before a sale and who has beneficially owned the shares proposed to be
sold for at least two years may sell these shares without complying with the
volume limitations and other conditions of Rule 144.
Through March 1, 2000, we have granted our employees, directors and other
persons options to purchase shares of Class A common stock under our 1998
incentive compensation plan. After the completion of the offerings, we intend
to file a registration statement on Form S-8 to register up to 5,000,000 shares
of common stock reserved for issuance under this plan and up to 1,000,000
shares of common stock authorized for issuance under our employee stock
purchase plan. The registration statement will become effective automatically
upon filing.
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Shares issued under these plans after the filing of this registration statement
may be sold in the open market, subject, in the case of some holders, to the
lockup agreements described above and to the Rule 144 limitations applicable to
affiliates.
We have granted some of our stockholders registration rights with respect
to their shares of Class A common stock and Class B common stock. As of March
1, 2000, 35,035,849 shares of our Class A common stock, representing % of our
outstanding Class A common stock immediately after completion of the offerings,
and 2,635,000 shares of our Class B common stock, representing all of our
outstanding Class B common stock, were entitled to the benefits of these
registration rights. We have granted the following types of registration
rights:
. demand registration rights, in which stockholders holding 23,785,849
shares, or % of our outstanding Class A common stock immediately
after completion of the offerings, are entitled to require us to
register the sale of their shares under the Securities Act on up to
four occasions on SEC Form S-1 and on an unlimited number of
occasions on SEC Form S-2 or S-3;
. shelf registration rights, in which stockholders holding 23,785,849
shares, or % of our outstanding Class A common stock immediately
after completion of the offerings, are entitled to require us, at any
time between the first anniversary and the third anniversary of the
completion date, to register the sale of their shares under the
Securities Act on a continuous or delayed basis; and
. piggyback registration rights, in which stockholders holding
35,035,849 shares, or % of our outstanding Class A common stock
immediately after completion of the offerings, and all of our
outstanding Class B common stock are entitled to require us to
include their shares in a registration of our securities for sale by
us or by our other security holders.
These registration rights may not be exercised during the 180-day lockup period
under the lockup agreements. In addition, these registration rights are subject
to various conditions, including notice requirements, timing restrictions and
volume limitations which may be imposed by the underwriters of an offering. We
generally are required to bear the expense of all these registrations, except
for underwriting discounts and commissions. See "Transactions Involving Related
Parties" for more information about the most significant registration rights we
have granted. Any shares of Class B common stock registered for sale to the
public will automatically convert into an equal number of shares of Class A
common stock when sold.
Before the offerings, there has been no public market for our Class A
common stock. A significant public market for the Class A common stock may not
develop or be sustained after the offerings. Future sales of substantial
amounts of our Class A common stock in the public market, or the possibility
that these sales may occur, could adversely affect prevailing market prices for
our Class A common stock or our future ability to raise capital through an
offering of equity securities.
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U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of selected U.S. federal income and
estate tax consequences of the ownership and disposition of the Class A common
stock that may be relevant to you if you are a non-U.S. holder. For purposes of
the following discussion, a "non-U.S. holder" is any beneficial owner of Class
A common stock other than a person that is for U.S. federal income tax
purposes:
. a citizen or resident of the U.S.;
. a corporation, partnership or other entity treated as a corporation
or partnership for federal tax purposes, created or organized in or
under the laws of the U.S., any state thereof or the District of
Columbia, other than a partnership that is not treated as a U.S.
person under any applicable U.S. Treasury regulations;
. an estate whose income is subject to U.S. federal income tax
regardless of its source; or
. a trust, if a court within the U.S. is able to exercise primary
supervision over the administration of the trust and one or more U.S.
persons have the authority to control all substantial decisions of
the trust.
This discussion does not address all aspects of U.S. income and estate taxes
and does not deal with foreign, state and local consequences that may be
relevant to holders of Class A common stock in light of their personal
circumstances. Further, this discussion is based on provisions of the Internal
Revenue Code of 1986, as amended, existing and proposed U.S. Treasury
regulations issued under the Internal Revenue Code and administrative and
judicial interpretations, in each case as of the date hereof, all of which are
subject to change, possibly with retroactive effect, or to different
interpretations. We advise each prospective purchaser of the Class A common
stock in the offerings to consult a tax advisor with respect to current and
possible future tax consequences of acquiring, holding and disposing of Class A
common stock as well as any tax consequences that may arise under the laws of
any U.S. state, municipality or other taxing jurisdiction.
Dividends
PaeTec has not paid any cash dividends on its common stock and does not
intend to pay cash dividends on its common stock in the foreseeable future. For
a description of PaeTec's dividend policy, see "Dividend Policy." However, if
dividends are paid on the shares of our common stock, these distributions
generally will constitute dividends for U.S. federal income tax purposes to the
extent paid from our current or accumulated earnings and profits, as determined
under U.S. federal income tax principles. To the extent these distributions
exceed those earnings and profits, the distributions will constitute a return
of capital that is applied against, and will reduce, your basis in the common
stock, but not below zero, and then will be treated as gain from the sale of
stock. Dividends paid to a non-U.S. holder of Class A common stock generally
will be subject to withholding of U.S. federal income tax at a 30% rate or any
lower rate that may specified by an applicable income tax treaty. To receive a
reduced treaty rate, a non-U.S. holder must furnish to us or our paying agent a
completed Form W-8BEN or substitute form certifying to the holder's
qualification for the reduced rate. However, dividends that
. are effectively connected with the conduct of a trade or business by
the non-U.S. holder within the U.S. or
. if an income tax treaty applies, that are attributable to a permanent
establishment or, in the case of an individual, a fixed base in the
United States, as provided in that treaty,
are not subject to U.S. federal withholding tax, provided that the non-U.S.
holder furnishes to us or our paying agent a completed Form W-8ECI or
substitute form certifying to the exemption. However, dividends exempt from
U.S. withholding because they are effectively connected with a trade or
business or they are attributable to a U.S. permanent establishment are subject
to U.S. federal income tax on a net income basis at applicable graduated
individual or corporate rates. Any such effectively connected dividends
received by a foreign corporation may, under some circumstances, be subject to
an additional "branch profits tax" at a 30% rate or any lower rates that may be
specified by an applicable income tax treaty.
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Under current U.S. Treasury regulations, dividends paid before January 1,
2001 to an address outside the U.S. are presumed to be paid to a resident of
such country, unless the payer has knowledge to the contrary, for purposes of
the withholding tax discussed above and, under the current interpretation of
U.S. Treasury regulations, for purposes of determining the applicability of a
tax treaty rate. For dividends paid after December 31, 2000:
. a non-U.S. holder of Class A common stock that wishes to claim the
benefit of an applicable treaty rate, and to avoid back-up
withholding as discussed below, would be required to satisfy
applicable certification and other requirements;
. in the case of Class A common stock held by a foreign partnership,
the certification requirement generally will be applied to the
partners of the partnership, and the partnership will be required to
provide information, including a U.S. taxpayer identification number;
and
. pass-through rules will apply for tiered partnerships.
A non-U.S. holder of Class A common stock eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund of any
excess amounts withheld by filing with the IRS an appropriate claim for refund
and the required information.
Gain on Disposition of Class A Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income
tax with respect to gain recognized on a sale or other disposition of Class A
common stock unless:
1. the gain is (a) effectively connected with a trade or business of the
non-U.S. holder in the U.S. or a U.S. partnership, trust or estate in
which the non-U.S. holder is a partner or beneficiary and (b) if
required by an applicable tax treaty, attributable to a permanent
establishment or fixed base of the non-U.S. holder in the U.S.;
2. in the case of a non-U.S. holder who is an individual and holds the
Class A common stock as a capital asset, the holder is present in the
U.S. for 183 or more days in the taxable year of the sale, or other
disposition and other conditions are met;
3. PaeTec is or has been a "U.S. real property holding corporation" for
U.S. federal income tax purposes at any time within the shorter of
the five-year period preceding the disposition or the period the non-
U.S. holder held the Class A common stock; or
4. the non-U.S. holder is subject to tax under the provisions of U.S.
tax law applicable to specified expatriates.
PaeTec has not determined whether it is or has been within the prescribed
period a "U.S. real property holding corporation" for federal income tax
purposes. If PaeTec is, has been or becomes a U.S. real property holding
corporation, so long as the Class A common stock continues to be regularly
traded on an established securities market within the meaning of section
897(c)(3) of the Internal Revenue Code, only a non-U.S. holder who holds or
held, at any time during the shorter of the five-year period preceding the date
of disposition or the holder's holding period, more than 5% of the common stock
will be subject to U.S. federal income tax on the disposition of the common
stock.
An individual non-U.S. holder described in clause 1 above will be taxed
on the net gain derived from the sale under the regular graduated U.S. federal
income tax rates, unless an applicable treaty provides otherwise. An individual
non-U.S. holder described in clause 2 above will be subject to a flat 30% tax
on the gain derived from the sale, which may be offset by U.S. capital losses,
notwithstanding the fact that the individual is not considered a resident of
the U.S. If a non-U.S. holder that is a foreign corporation falls under clause
1 above, it will be taxed on its gain under regular graduated U.S. federal
income tax rates and, in addition, may be subject to the branch profits tax
equal to 30% of its effectively connected earnings and profits within the
meaning of the Internal Revenue Code for the taxable year, as adjusted for
specified items, unless it qualifies for a lower rate under an applicable
income tax treaty and demonstrates that it qualifies.
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Federal Estate Tax
Class A common stock owned or treated as owned by an individual who is
not a citizen or resident, as defined for U.S. federal income or estate tax
purposes, of the U.S. at the time of death will be includable in the
individual's gross estate for U.S. federal estate tax purposes unless an
applicable estate tax treaty provides otherwise, and therefore may be subject
to U.S. federal estate tax.
Information Reporting and Backup Withholding Tax
Under U.S. Treasury regulations, PaeTec must report annually to the IRS
and to each non-U.S. holder the amount of dividends paid to the holder and the
tax withheld with respect to such dividends, regardless of whether withholding
was required. Copies of the information returns reporting such dividends and
withholding also may be required to be made available to the tax authorities in
the country in which the non-U.S. holder resides under the provisions of an
applicable income tax treaty.
Under current law, backup withholding, which generally is a withholding
tax imposed at the rate of 31% on specified payments to persons that fail to
furnish certain information under the U.S. information reporting requirements,
generally will not apply to:
. dividends paid to non-U.S. holders that are subject to withholding at
the 30% rate, or lower treaty rate, as discussed above under
"Dividends"; or
. for dividends paid before January 1, 2001, dividends paid to a non-
U.S. holder at an address outside the U.S., unless the payer has
knowledge that the payee is a U.S. person.
For dividends paid after December 31, 2000, a non-U.S. holder of common
stock that fails to certify its non-U.S. holder status in accordance with
applicable U.S. treasury regulations may be subject to backup withholding at a
rate of 31% on payments of dividends.
Payment of the proceeds of a sale of Class A common stock by or through a
U.S. office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner certifies under penalties of perjury that
it is a non-U.S. holder, or otherwise establishes an exemption. In general,
backup withholding and information reporting will not apply to a payment of the
proceeds of a sale of common stock by or through a foreign office of a broker.
If, however, the broker is, for U.S. federal income tax purposes, a U.S.
person, a controlled foreign corporation as defined in the Internal Revenue
Code, a foreign person that derives 50% or more of its gross income for
specified periods from the conduct of a trade or business in the U.S., or a
foreign partnership with particular U.S. connections, for payments made after
December 31, 2000, such payments will be subject to information reporting, but
not backup withholding, unless:
. the broker has documentary evidence in its records that the
beneficial owner is a non-U.S. holder and other specified conditions
are met; or
. the beneficial owner otherwise establishes an exemption.
In addition, effective after December 31, 2000, back-up withholding may
apply to the payment of disposition proceeds by or through a non-U.S. office of
a broker in the foregoing cases unless specified certification requirements are
satisfied or an exemption is otherwise established and the broker has no actual
knowledge or reason to know that the holder is a U.S. person.
Any amounts withheld under the backup withholding rules do not constitute
a separate U.S. federal income tax. Rather, any amounts withheld under the
backup withholding rules may be allowed as a refund or a credit against the
holder's U.S. federal income tax liability, if any, if the required information
is furnished to the IRS.
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UNDERWRITING
We intend to offer the shares in the U.S. and Canada through the U.S.
underwriters and elsewhere through the international managers. Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Bear, Stearns & Co. Inc. are acting as
U.S. representatives of the U.S. underwriters named below. Subject to the terms
and conditions described in a U.S. purchase agreement between us and the U.S.
underwriters, and concurrently with the sale of shares to the international
managers, we have agreed to sell to the U.S. underwriters, and the U.S.
underwriters severally have agreed to purchase from us, the number of shares
listed opposite their names below.
<TABLE>
<CAPTION>
Number of
U.S. Underwriters Shares
----------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
Bear, Stearns & Co. Inc. ........................................
---
Total.......................................................
===
</TABLE>
We have also entered into an international purchase agreement with the
international managers for sale of the shares outside the U.S. and Canada for
whom Merrill Lynch International and Bear, Stearns & Co. Inc. are acting as
lead managers. Subject to the terms and conditions in the international
purchase agreement, and concurrently with the sale of shares to the U.S.
underwriters pursuant to the U.S. purchase agreement, we have agreed to sell to
the international managers, and the international managers severally have
agreed to purchase from us, shares. The initial public offering price per
share and the total underwriting discount per share are identical under the
U.S. purchase agreement and the international purchase agreement.
The U.S. underwriters and the international managers have agreed to
purchase all of the shares sold under the U.S. and international purchase
agreements if any of these shares are purchased. If an underwriter defaults,
the U.S. and international purchase agreements provide that the purchase
commitments of the nondefaulting underwriters may be increased or the purchase
agreements may be terminated. The closings for the sale of shares to be
purchased by the U.S. underwriters and the international managers are
conditioned on one another.
We have agreed to indemnify the U.S. underwriters and the international
managers against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the U.S. underwriters and
international managers may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters
of officers' certificates and legal opinions. The underwriters reserve the
right to withdraw, cancel or modify offers to the public and to reject orders
in whole or in part.
Commissions and Discounts
The U.S. representatives have advised us that the U.S. underwriters
propose initially to offer the shares to the public at the initial public
offering price listed on the cover page of this prospectus and to dealers at
that price less a concession not in excess of $ per share. The U.S.
underwriters may allow, and the dealers may reallow, a discount not in excess
of $ per share to other dealers. After the initial public offering, the
public offering price, concession and discount may be changed.
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The following table shows the public offering price, underwriting
discount and proceeds before expenses to PaeTec. The information assumes either
no exercise or full exercise by the U.S. underwriters and the international
managers of their over-allotment options.
<TABLE>
<CAPTION>
Per Share Without Option With Option
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price............... $ $ $
Underwriting discount............... $ $ $
Proceeds, before expenses, to
PaeTec............................. $ $ $
</TABLE>
The expenses of the offerings, not including the underwriting discount,
are estimated at $ and are payable by PaeTec.
Over-allotment Options
We have granted options to the U.S. underwriters to purchase up to
additional shares of our Class A common stock at the public offering price less
the underwriting discount. The U.S. underwriters may exercise these options for
30 days from the date of this prospectus solely to cover any over-allotments.
If the U.S. underwriters exercise these options, each will be obligated,
subject to conditions contained in the purchase agreements, to purchase a
number of additional shares proportionate to that U.S. underwriter's initial
amount reflected in the above table.
We have also granted options to the international managers, exercisable
for 30 days after the date of this prospectus, to purchase up to additional
shares to cover any over-allotments on terms similar to those granted to the
U.S. underwriters.
Intersyndicate Agreement
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their
activities. Under the intersyndicate agreement, the U.S. underwriters and the
international managers may sell shares to each other for purposes of resale at
the initial public offering price, less an amount not greater than the selling
concession. Under the intersyndicate agreement, the U.S. underwriters and any
dealer to whom they sell shares will not offer to sell or sell shares to
persons who are non-U.S. or non-Canadian persons or to persons they believe
intend to resell to persons who are non-U.S. or non-Canadian persons, except in
the case of transactions under the intersyndicate agreement. Similarly, the
international managers and any dealer to whom they sell shares will not offer
to sell or sell shares to U.S. persons or Canadian persons or to persons they
believe intend to resell to U.S. or Canadian persons, except in the case of
transactions under the intersyndicate agreement.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, approximately % of the shares offered by this
prospectus, or shares, for sale to some of our directors, officers,
employees, existing stockholders and persons having business relationships with
us. If these persons purchase reserved shares, this will reduce the number of
shares available for sale to the general public. Any reserved shares that are
not orally confirmed for purchase within one business day of the pricing of the
offerings will be offered by the underwriters to the general public on the same
terms as the other shares offered by this prospectus.
No Sales of Similar Securities
We, our executive officers and directors and other existing stockholders
have agreed, with exceptions described below, not to sell or transfer any
common stock for 180 days after the date of this prospectus without first
obtaining the written consent of Merrill Lynch. Specifically, we and these
other persons have agreed not to directly or indirectly
. offer, pledge, sell or contract to sell any common stock,
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. sell any option or contract to purchase any common stock,
. purchase any option or contract to sell any common stock,
. grant any option, right or warrant for the sale of any common stock,
. lend or otherwise dispose of or transfer any common stock,
. request or demand that we file a registration statement related to
the common stock, or
. enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock
whether any such swap or transaction is to be settled by delivery of
shares or other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the
person executing the agreement or for which the person executing the agreement
later acquires the power of disposition.
The restrictions in the foregoing lockup agreements will not apply to
transfers by stockholders of common stock to PaeTec, to family trusts, by gift,
will or intestate succession or in accordance with agreements entered into
before the offerings and disclosed to Merrill Lynch. Each transferee of our
common stock will be required to execute and deliver a lockup agreement
containing the terms described above.
Quotation on the Nasdaq National Market
We expect that the shares of our Class A common stock will be approved
for quotation on the Nasdaq National Market, subject to notice of issuance,
under the symbol "PAET."
Before the offerings, there has been no public market for our Class A
common stock. The initial public offering price will be determined through
negotiations among us and the U.S. representatives and lead managers. In
addition to prevailing market conditions, the factors to be considered in
determining the initial public offering price are
. the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us,
. our financial information,
. the history of, and the prospects for, our company and the industry
in which we compete,
. an assessment of our management, our past and present operations, and
the prospects for, and timing of, our future revenues,
. the present state of our development, and
. the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offerings the shares will not trade in the public
market at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares in the
aggregate to accounts over which they exercise discretionary authority.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
Class A common stock. However, the U.S. representatives may
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engage in transactions that stabilize the price of the Class A common stock,
such as bids or purchases to peg, fix or maintain that price.
If the underwriters create a short position in the Class A common stock
in connection with the offerings, which would occur if they sell more shares
than are listed on the cover of this prospectus, the U.S. representatives may
reduce that short position by purchasing shares in the open market. The U.S.
representatives may also elect to reduce any short position by exercising all
or part of the over-allotment options described above. Purchases of the Class A
common stock to stabilize its price or to reduce a short position may cause the
price of the Class A common stock to be higher than it might be in the absence
of such purchases.
The U.S. representatives may also impose a penalty bid on underwriters
and selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriters' short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Class A common stock. In addition,
neither we nor any of the underwriters makes any representation that the U.S.
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
Other Relationships
Merrill Lynch and its affiliates and some of the other underwriters and
their affiliates have engaged in, and may in the future engage in, investment
banking and other commercial dealings in the ordinary course of business with
us. They have received customary fees and commissions for these transactions.
87
<PAGE>
LEGAL MATTERS
The validity of the shares of Class A common stock offered by this
prospectus will be passed upon for PaeTec by Hogan & Hartson L.L.P., McLean,
Virginia. Selected legal matters are being passed upon for the underwriters by
Shearman & Sterling, New York, New York.
EXPERTS
The consolidated financial statements of PaeTec Corp. and subsidiaries as
of December 31, 1998 and 1999 and for the period from May 19, 1998 (inception)
to December 31, 1998 and for the year ended December 31, 1999 included in this
prospectus and the related consolidated financial statement schedule included
elsewhere in the registration statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein and
elsewhere in the registration statement, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of Campuslink Communications
Systems, Inc. and subsidiaries as of and for the year ended June 30, 1998 and
as of and for the six months ended December 31, 1998 have been included herein
in reliance upon the report of Arthur Andersen LLP, independent public
accountants, appearing elsewhere herein and given on the authority of said firm
as experts in auditing and accounting in giving said report.
The consolidated financial statements of Campuslink Communications
Systems, Inc. and subsidiaries as of and for the year ended June 30, 1997
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1,
including exhibits, schedules and amendments filed with the registration
statement, under the Securities Act with respect to the Class A common stock to
be sold in the offerings. This prospectus does not contain all of the
information contained in the registration statement. For further information
about us and our Class A common stock, we refer you to the registration
statement. For additional information, please refer to the exhibits and
schedules that have been filed with our registration statement on Form S-1.
Statements in this prospectus concerning the contents of any contract or any
other document are not necessarily complete. If a contract or document has been
filed as an exhibit to the registration statement, we refer you to that
exhibit. Each statement in this prospectus relating to a contract or document
filed as an exhibit to the registration statement is qualified by the filed
exhibits.
You may read and copy all or any portion of the registration statement or
any other information that we file with the SEC at the following locations of
the SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661-
2511
88
<PAGE>
You may obtain information on the operation of the SEC's public reference
room by calling the SEC at 1-800-SEC-0330. Our SEC filings, including the
registration statement, will also be available to the public on the SEC's
Internet site at http://www.sec.gov.
As a result of the offerings, we will become subject to the information
and reporting requirements of the Securities Exchange Act, which will require
us to file periodic reports, proxy statements and other information with the
SEC.
We intend to provide our stockholders annual reports containing financial
statements audited by our independent auditors and to make available quarterly
reports containing unaudited financial data for the first three quarters of
each fiscal year.
89
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION
PaeTec Corp. and Subsidiaries
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1999............ F-3
Consolidated Statements of Operations for the period from May 19, 1998
(inception) to December 31, 1998 and for the year ended December 31,
1999................................................................... F-4
Consolidated Statements of Stockholders' Equity for the period from May
19, 1998 (inception) to December 31, 1998 and for the year ended
December 31, 1999...................................................... F-5
Consolidated Statements of Cash Flows for the period from May 19, 1998
(inception) to December 31, 1998 and for the year ended December 31,
1999................................................................... F-6
Notes to Consolidated Statements for the period from May 19, 1998
(inception) to December 31, 1998 and for the year ended December 31,
1999................................................................... F-7
Campuslink Communications Systems, Inc. and Subsidiaries
Report of Independent Public Accountants.................................. F-17
Independent Auditors' Report.............................................. F-18
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1997 and 1998 and December
31, 1998............................................................... F-19
Consolidated Statements of Operations and Changes in Accumulated Deficit
for the years ended June 30, 1997 and 1998, and for the six months
ended December 31, 1998, June 30, 1998 and June 30, 1999............... F-20
Consolidated Statements of Cash Flows for the years ended June 30, 1997
and 1998, and for the six months ended December 31, 1998, June 30, 1998
and June 30, 1999...................................................... F-21
Notes to Consolidated Financial Statements for the years ended June 30,
1997 and 1998, and for the six months ended December 31, 1998, June 30,
1998 and June 30, 1999................................................. F-22
Selected Unaudited Pro Forma Financial Information
Pro Forma PaeTec Unaudited Combined Condensed Financial Information for
the year ended December 31, 1999......................................... F-30
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of PaeTec Corp.
Fairport, New York
We have audited the accompanying consolidated balance sheets of PaeTec
Corp. and subsidiaries (the Company) as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1999 and for the period from May 19, 1998
(inception) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of PaeTec Corp. and subsidiaries
as of December 31, 1999 and 1998, and the results of their operations and their
cash flows for the year ended December 31, 1999 and for the period from May 19,
1998 (inception) to December 31, 1998 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Rochester, New York
March 22, 2000
F-2
<PAGE>
PAETEC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(Dollar amounts in thousands except share amounts)
<TABLE>
<CAPTION>
1998 1999
ASSETS ------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,434 $ 7,435
Accounts receivable, net of allowance for doubtful
accounts of $2 and $2,360, respectively.................. 158 10,839
Prepaid expenses and other current assets................. 193 806
------- --------
Total current assets.................................... 2,785 19,080
------- --------
PROPERTY AND EQUIPMENT, net................................. 11,784 62,384
GOODWILL, net of accumulated amortization of $599 in 1999... -- 38,139
OTHER ASSETS, net of accumulated amortization of $192 in
1999....................................................... 1,147 2,383
------- --------
TOTAL ASSETS................................................ $15,716 $121,986
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade................................... $ 2,118 $ 12,265
Accrued expenses.......................................... 884 2,876
Accrued payroll and related liabilities................... 79 2,482
Accrued usage taxes....................................... -- 1,654
Current portion of long-term debt......................... -- 3,482
------- --------
Total current liabilities............................... 3,081 22,759
------- --------
LONG-TERM DEBT.............................................. -- 69,166
COMMITMENTS (Note 8)
STOCKHOLDERS' EQUITY:
Class A common stock, $.01 par value; 27,500,000
authorized shares; 8,999,952 and 21,732,633 shares issued
and outstanding, respectively............................ 90 217
Class B common stock, $.01 par value; 7,500,000 authorized
shares; 6,285,048 and 5,285,048 shares issued and
outstanding, respectively................................ 63 53
Additional paid-in capital................................ 18,334 75,986
Accumulated deficit....................................... (5,852) (46,195)
------- --------
Total stockholders' equity.............................. 12,635 30,061
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $15,716 $121,986
======= ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PAETEC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM MAY 19, 1998 (INCEPTION) TO DECEMBER 31, 1998
AND YEAR ENDED DECEMBER 31, 1999
(Dollar amounts in thousands except share and per share amounts)
<TABLE>
<CAPTION>
1998 1999
--------- ----------
<S> <C> <C>
REVENUE................................................. $ 150 $ 23,347
COST OF SERVICES........................................ 96 16,809
--------- ----------
GROSS MARGIN............................................ 54 6,538
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............ 5,770 40,294
DEPRECIATION AND AMORTIZATION........................... 243 4,508
--------- ----------
LOSS FROM OPERATIONS.................................... (5,959) (38,264)
OTHER INCOME, net....................................... 107 355
INTEREST EXPENSE........................................ -- (2,434)
--------- ----------
NET LOSS................................................ $ (5,852) $ (40,343)
========= ==========
BASIC AND DILUTED NET LOSS PER COMMON SHARE............. $ (0.67) $ (1.93)
========= ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING.... 8,786,000 20,862,000
========= ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PAETEC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM MAY 19, 1998 (INCEPTION) TO DECEMBER 31, 1998
AND YEAR ENDED DECEMBER 31, 1999
(Dollar amounts in thousands except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional
--------------- Paid-In Accumulated Comprehensive
Class A Class B Capital Deficit Income Total
------- ------- ---------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, May 19, 1998... $-- $-- $ -- $ -- $ --
Issuance of 8,999,952
shares of Class A
common stock........... 90 -- 14,043 -- 14,133
Issuance of 6,285,048
shares of Class B
common stock........... -- 63 4,291 -- 4,354
Net loss................ -- -- -- (5,852) $ (5,852) (5,852)
---- ---- ------- -------- ======== --------
BALANCE, December 31,
1998................... 90 63 18,334 (5,852) 12,635
Conversion of 1,000,000
Class B Shares into
Class A Shares......... 10 (10) -- -- --
Stock issued in
connection with:
Private offering,
5,600,000 shares, net
of expenses totalling
$425................... 56 -- 27,519 27,575
Acquisition of
businesses, 5,939,183
shares................. 59 -- 30,041 30,100
Exercise of stock
options, 193,498
shares................. 2 -- 92 -- 94
Net loss................ -- -- -- (40,343) $(40,343) (40,343)
---- ---- ------- -------- ======== --------
BALANCE, December 31,
1999................... $217 $ 53 $75,986 $(46,195) $ 30,061
==== ==== ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PAETEC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM MAY 19, 1998
(INCEPTION) TO DECEMBER 31, 1998 AND YEAR ENDED DECEMBER 31, 1999
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $ (5,852) $(40,343)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization............................ 243 4,508
Changes in assets and liabilities which provided (used)
cash:
Accounts receivable..................................... (159) (7,565)
Prepaid expenses and other current assets............... (193) (171)
Other assets............................................ (349) (423)
Accounts payable........................................ 2,118 2,889
Accrued expenses........................................ 884 (2,711)
Accrued payroll and related liabilities................. 79 2,403
Accrued usage taxes..................................... -- 1,654
-------- --------
Net cash used by operating activities.................. (3,229) (39,759)
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment....................... (12,027) (37,761)
Other..................................................... -- 354
-------- --------
Net cash used by investing activities.................. (12,027) (37,407)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 18,487 27,575
Proceeds from exercise of stock options................... -- 94
Proceeds from long-term borrowings........................ -- 65,000
Repayments on debt........................................ -- (9,350)
Payment for debt issuance costs........................... (797) (1,152)
-------- --------
Net cash provided by financing activities.............. 17,690 82,167
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................. 2,434 5,001
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. -- 2,434
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD................... $ 2,434 $ 7,435
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest expense............................ $ -- $ 2,267
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Purchases of property and equipment included in accounts
payable................................................. $ -- $ 4,020
======== ========
Notes payable assumed in a business combination.......... $ -- $ 15,970
======== ========
Notes payable issued in connection with a business
acquisition............................................. $ -- $ 1,028
======== ========
Common stock issued in connection with business
acquisitions............................................ $ -- $ 30,100
======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PAETEC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Period From May 19, 1998 (Inception) to December 31, 1998 and Year Ended
December 31, 1999
(Dollar amounts in thousands except share and per share amounts)
1. DESCRIPTION OF BUSINESS
The consolidated financial statements include the accounts of PaeTec
Corp. and its wholly-owned subsidiaries, PaeTec Communications, Inc., PaeTec
Capital Corp., PaeTec Virginia, Inc., Campuslink Communications Systems, Inc.
("CCS"), East Florida Communications, Inc. ("EF"), and PaeTec International,
Inc., and its majority-owned subsidiary, PaeTec Online, Inc. (collectively "the
Company"). The minority interest for PaeTec Online, Inc. ("PaeTec Online") is
not significant.
The Company operates in one segment and is a nationwide integrated
communications provider, or ICP, that offers broadband communications
solutions, including data, voice and an expanding array of applications and
integrated services, primarily to business and institutional customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation--The accompanying consolidated financial statements include
the accounts of PaeTec Corp. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Cash and Cash Equivalents--For purposes of reporting cash flows, the
Company includes as cash and cash equivalents instruments with original
maturities of three months or less.
Property and Equipment--Property and equipment are stated at cost less
accumulated depreciation. Interest is capitalized in connection with the
installation of integrated network and related equipment. The capitalized
interest is recorded as part of such assets and is amortized over the asset's
estimated useful life. In 1999, $0.8 million of interest cost was capitalized.
No interest expense was incurred in 1998. Depreciation is computed using the
straight-line method over estimated useful lives:
<TABLE>
<S> <C>
Switches and switch-related equipment............................. 5-12 years
Computer hardware and purchased software.......................... 3-10 years
Equipment......................................................... 5-10 years
Office equipment, furniture and fixtures.......................... 3-7 years
</TABLE>
Goodwill--Goodwill represents the excess of cost over the net assets of
businesses acquired. See Note 9. These costs are being amortized over twenty
years using the straight-line method.
Other Assets--Other assets consist primarily of deferred financing costs,
deposits and miscellaneous other assets. Deferred financing costs are being
amortized over the term of the related debt instruments.
Long-Lived Assets--The Company reviews the carrying value of its long-
lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of these assets 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. No impairment charge has been recorded in the accompanying
consolidated financial statements for 1998 or 1999.
F-7
<PAGE>
PAETEC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition--Revenue derived from various telecommunications
services is recognized in the month in which the service is provided. Revenue
derived from installation type contracts is recognized upon completion of the
installation and acceptance by the respective customers.
Stock Based Compensation--Certain employees of the Company participate in
the Company's stock compensation plans. The Company accounts for compensation
cost under these plans using the intrinsic value method of accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. Compensation expense is recorded for awards of shares over
the period earned.
Concentration of Credit Risk--Financial instruments that potentially
subject the Company to credit risk consist of cash, cash equivalents and
accounts receivable. Cash and cash equivalents in certain accounts as of
December 31, 1998 and 1999 exceeded the federal insured limit by $2.2 million
and $6.6 million. The Company has not experienced any losses in such accounts.
The Company grants credit to the majority of its customers based on an
evaluation of the customer's financial condition, generally without requiring
collateral. Exposure to losses on accounts receivables is principally dependent
on each customer's financial condition. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses.
Approximately 21% of the Company's revenue during the year ended December
31, 1999 was from one customer. The accounts receivable balance as of December
31, 1999 related to this customer was $0.8 million. The Company expects that
revenue from this customer will account for a decreasing proportion of the
Company's overall revenue as penetration into new markets and geographic
regions continues. No other individual customer accounted for more than 10% of
the Company's revenues during 1998 nor 1999.
Financial Instruments--The fair value of a financial instrument
represents the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or
liquidation. The fair values of the Company's financial instruments are as
follows:
. Cash and cash equivalents, accounts receivables, certain other
current assets, accounts payable and accrued expenses, and current
maturities of long-term debt: the amounts reported in the
accompanying consolidated balance sheets approximate fair value.
. The fair value of interest rate hedges approximates the estimated
amounts that the Company would receive or pay to terminate the
contracts as of December 31, 1999. (See Note 4).
. Long-term debt as reported in the accompanying consolidated balance
sheet approximates fair market value.
Net Loss Per Common Share--For 1998 and 1999, basic and diluted net loss
per common share is computed based on the actual weighted average common shares
outstanding. Common stock equivalents, which consist of stock options and
warrants, are excluded from the net loss per common share calculations in 1998
and 1999 because the effect would be antidilutive due to the net loss in those
periods.
Comprehensive Income--Comprehensive income includes all changes in
stockholders' equity during a period except those resulting from investments by
owners and distributions to owners. For 1998 and 1999, the Company's only
component of comprehensive income is its net loss for those periods.
Use of Estimates in Financial Statements--The preparation of consolidated
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and
F-8
<PAGE>
PAETEC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
liabilities at the date of the financial statements and the reported amounts of
expenses during the reporting period. Actual results could differ from those
estimates.
New Accounting Pronouncement--In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
pronouncement requires all derivative instruments to be measured at fair value
and recorded on a company's balance sheet as an asset or liability, depending
upon a company's underlying rights or obligations associated with the
derivative instruments. The Company does not believe that adoption of this
pronouncement, which will occur in the first quarter of 2001, will have a
material adverse effect on its future financial position, results of operations
or cash flows.
3. PROPERTY AND EQUIPMENT, NET
Property and equipment as of December 31, 1998 and 1999 consists of the
following:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Switches and switch-related equipment....................... $ -- $41,759
Computer hardware and purchased software.................... 1,985 10,515
Equipment................................................... 450 10,852
Office equipment, furniture and fixtures.................... 44 2,449
Construction-in-progress.................................... 9,548 769
------- -------
12,027 66,344
Accumulated depreciation.................................... 243 3,960
------- -------
Property and equipment, net................................. $11,784 $62,384
======= =======
</TABLE>
Construction-in-progress consists primarily of costs associated with the
build-out of the Company's network switch sites and back office systems.
Depreciation expense for 1998 and 1999 totalled $0.2 million and $3.7 million,
respectively.
4. LONG-TERM DEBT
Long-term debt as of December 31, 1999 consists of the following:
<TABLE>
<S> <C>
Senior Secured Debt, as described below............................. $65,000
Notes payable to individuals assumed by the Company in an
acquisition, interest due quarterly at 8.25% per annum, principal
due on June 30, 2002 or earlier if the Company obtains financing of
$5 million or greater.............................................. 2,094
Note payable to a commercial lender assumed by the Company in an
acquisition, payable in monthly installments of $76 including
interest at 10.4%, maturing in 2005................................ 4,058
Note payable to a commercial lender assumed by the Company in an
acquisition, payable in monthly installments of $17 including
interest at 9.18%, maturing in 2004................................ 688
Notes payable to individuals issued in connection with an
acquisition, payable in monthly installments of $81 including
interest at 5%, maturing in 2000................................... 718
Other............................................................... 90
-------
72,648
Less: current portion............................................... 3,482
-------
$69,166
=======
</TABLE>
F-9
<PAGE>
PAETEC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Principal payments on long-term debt are as follows:
<TABLE>
<S> <C>
2000................................................................. $ 3,482
2001................................................................. 7,243
2002................................................................. 10,561
2003................................................................. 10,629
2004................................................................. 13,870
Thereafter........................................................... 26,863
-------
$72,648
=======
</TABLE>
Senior Secured Debt--Effective November 16, 1998, the Company and a
lender entered into a loan and security agreement (the "Senior Debt
Agreement"). The Senior Debt Agreement originally provided for $49 million in
borrowing capacity for the Company to be used for capital purchases and other
operating funding requirements. The Senior Debt Agreement also provided for
future syndication of future borrowings to other lenders.
On October 29, 1999, the Company and its lenders signed an amended and
restated Senior Debt Agreement, which provided for $70 million in borrowing
capacity. Borrowings under the Senior Debt Agreement are secured by
substantially all of the Company's assets. The Senior Debt Agreement contains
covenants which require the Company to maintain certain financial ratios and
restrict the Company's ability to pay dividends and to incur additional
indebtedness. As of December 31, 1999, the Company was not in compliance with
the covenant related to the loss before interest expense, income taxes,
depreciation and amortization. On January 25, 2000, the lenders under the
amended and restated Senior Debt Agreement granted the Company an unconditional
waiver of this covenant for the reporting period ended December 31, 1999. The
Company's lenders have agreed to modify this covenant for the year ending
December 31, 2000 to conform with the Company's operating plan.
Interest on borrowings under the Senior Debt Agreement are based, at the
Company's option, on a base rate or LIBOR plus, in each case, a specified
margin. The specified margin reduces once the Company meets certain performance
measures. The borrowing period for the Senior Debt Agreement ends December 31,
2000. Borrowings under the Senior Debt Agreement as of that date convert to a
term loan with a maturity of six years. The Senior Debt Agreement is subject to
a commitment fee that ranges from .75% to 1.5% per annum depending on the
outstanding balance. As of December 31, 1999, the applicable rate was .75% per
annum times the unused portion of the facility.
Senior Unsecured Debt--As of December 31, 1999, the Company had available
a $10 million senior unsecured loan agreement with a syndicate of lenders. No
borrowings were made under this unsecured facility and the lenders' commitment
and any other rights under the agreement were terminated by the Company on
February 4, 2000.
Interest Rate Swap--The Company has entered into an interest rate swap
agreement ("SWAP") designated as a partial hedge of the Company's portfolio of
variable rate debt. The purpose of this swap is to fix the interest rates on
variable rate debt and reduce certain exposures to interest rate fluctuations.
As of December 31, 1999, the Company had an interest rate swap with a notional
amount of $25 million, and a portfolio of variable rate debt outstanding in the
amount of $71.9 million. Under this agreement, the Company will pay the
counterparty interest at a weighted average fixed rate of 6.29%, and the
counterparty will pay the Company interest at a variable rate equal to LIBOR.
The weighted average LIBOR rate applicable to this
F-10
<PAGE>
PAETEC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
agreement was 6.03% at December 31, 1999. The notional amounts do not represent
amounts exchanged by the parties, and thus are not a measure of exposure of the
Company. The amounts exchanged are normally based on the notional amounts and
other terms of the swap. The weighted average variable rates are subject to
change over time as LIBOR fluctuates. Terms expire on this swap on December 29,
2000.
Neither the Company nor the counterparty is required to collateralize its
respective obligations under this swap. The Company is exposed to loss if the
counterparty defaults. As of December 31, 1999, the Company had no exposure to
credit loss on interest rate swaps. The Company does not believe that any
reasonably likely change in interest rates would have a material effect on the
consolidated financial statements of the Company. Risk management strategies,
such as interest rate swaps, are reviewed and approved by senior management
before being implemented. The Company's policy is to limit the maximum amount
of positions that can be taken in any given instruments.
5. INCOME TAXES
The Company had approximately $4.7 million and $49.5 million of net
operating loss carryforwards for federal income tax purposes at December 31,
1998 and 1999, respectively. In addition, the Company has approximately $22
million of net operating loss carryforwards that are subject to an annual
limitation per the Internal Revenue Code. The net operating loss carryforwards
will expire in the years 2018 and 2019, respectively, if not previously
utilized. The Company has recorded a valuation allowance equal to the net
deferred tax assets at December 31, 1998 and 1999, due to the uncertainty of
future operating results. The valuation allowance will be reduced at such time
as management believes it is more likely than not that the net deferred tax
assets will be realized. Any reductions in the valuation allowance will reduce
future income tax provisions.
The Company's deferred tax assets (liabilities) as of December 31, 1998
and 1999 consist of the following:
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Current:
Allowance for doubtful accounts......................... $ 1 $ 850
Noncurrent:
Start-up costs capitalized for tax purposes............. 433 336
Basis difference in fixed assets........................ (24) (2,614)
Acquired net operating loss carryforwards............... -- 7,900
Net operating loss carryforwards........................ 1,697 18,059
------- --------
Gross deferred tax assets................................. 2,107 24,531
Valuation allowance....................................... (2,107) (24,531)
------- --------
Net deferred tax assets................................... $ -- $ --
======= ========
</TABLE>
The difference between income taxes computed at the statutory U.S.
federal income tax rate and the Company's income tax expense is as follows:
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Federal benefit at statutory rate......................... $ 1,990 $ 13,717
State taxes, net of federal benefit....................... 117 807
Valuation allowance....................................... (2,107) (14,524)
------- --------
Income tax expense........................................ $ -- $ --
======= ========
</TABLE>
F-11
<PAGE>
PAETEC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. STOCKHOLDERS' EQUITY
The authorized capital stock of the Company consists of two classes of
common stock designated as Class A common stock and Class B common stock. The
shares of Class A common stock and Class B common stock are identical in all
respects, except for voting rights and certain conversion rights with respect
to the shares of Class B common stock. Shares of Class B common stock may be
owned only by the holders of Class B common stock and their permitted
transferees (as defined in the Company's Certificate of Incorporation). Any
share of Class B common stock transferred to any other person will
automatically convert into one share of Class A common stock. In addition, any
holder of Class B common stock may elect at any time to convert the holder's
shares into Class A common stock on a one-for-one basis. The Class A common
stock has no conversion rights. The Class A common stock and the Class B common
stock are entitled to vote on all matters which come before the stockholders,
voting together as a single class on all matters, except as described below and
as otherwise required by law. Each share of Class A common stock has one vote
and each share of Class B common stock has 20 votes on all matters on which
holders of common stock are entitled to vote. Holders of Class B common stock
are entitled to elect three members of the Board of Directors and to vote with
the holders of Class A common stock to elect any additional directors.
Holders of common stock are entitled to share ratably in dividends when
and as declared by the Company's board of directors out of funds legally
available. On liquidation and dissolution of the Company, each holder of common
stock is entitled to share ratably in all assets remaining after payment of all
liabilities.
The Company's Stock Option Plan--The Company's 1998 Incentive
Compensation Plan (the "Option Plan") provides for the issuance of up to an
aggregate 5,300,000 shares of the Company's Class A common stock. The Option
Plan is designed to create an incentive for the Company's employees and is
administered by a committee of the Board of Directors.
Options granted upon hire vest over a four-year term from the date of
grant for sixty percent of the options, while the remaining forty percent vest
over a four-year term beginning January 1, 2000. Options granted are not
exercisable after the expiration of ten years from the date of grant of those
options.
The Company adopted the disclosures-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock Based Compensation
(SFAS No. 123). No compensation cost has been recognized with respect to the
Option Plan in connection with awards to employees, since the exercise price of
the options on the date of grant approximated fair market value. If
compensation cost for the Option Plan had been recorded based on the fair value
at the date of grant for awards consistent with the provisions of SFAS No. 123,
the Company's net loss and net loss per common share in 1998 and 1999 would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1999
------ -------
<S> <C> <C>
Net loss--as reported........................................ $5,852 $40,343
Net loss--pro forma.......................................... $5,877 $40,927
Net loss per common share--as reported....................... $ 0.67 $ 1.93
Net loss per common share--pro forma......................... $ 0.68 $ 1.96
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model and using assumed risk-free
interest rates ranging from 4.70% to 6.40% and expected lives of seven years.
The volatility factor assumptions used in the Company's fair value model ranged
from 0% to
F-12
<PAGE>
PAETEC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
776%. In calculating the fair value of the stock options described above, the
following per share fair market values of the Company's common stock were used:
<TABLE>
<S> <C>
May 1998-August 17, 1998.............................................. $ .40
August 18, 1998-September 14, 1998.................................... $ .69
September 15, 1998-March 24, 1999..................................... $2.50
March 25, 1999-December 31, 1999...................................... $5.00
</TABLE>
A summary of activity under the Option Plan for 1998 and 1999 follows:
<TABLE>
<CAPTION>
Outstanding Weighted-Average
Options Exercise Price
----------- ----------------
<S> <C> <C>
Outstanding shares under option, May 19,
1998......................................... -- $ --
Options granted during 1998................... 1,506,875 $ .77
---------
Outstanding shares under option, December 31,
1998......................................... 1,506,875 $ .77
Options granted during 1999................... 1,647,108 $4.50
Options exercised during 1999................. (193,498) $ .52
---------
Outstanding shares under option, December 31,
1999......................................... 2,960,485 $2.65
=========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1999:
<TABLE>
<CAPTION>
Weighted-Average
Remaining
Range of Number Contractual Weighted-Average Number Weighted-Average
Exercise Price Outstanding Life-Years Exercise Price Exercisable Exercise Price
-------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$.40-$7.50 2,960,485 8.52 $2.65 432,611 $1.59
</TABLE>
PaeTec Online Stock Option Plan--In 1999, the Company's majority-owned
subsidiary, PaeTec Online, implemented the 1999 Incentive Compensation Plan
(the "Online Plan") which provides for the issuance of up to an aggregate of
1,500,000 shares of PaeTec Online's common stock. The Online Plan is designed
to create an incentive for PaeTec Online's employees and is administered by a
committee of the Board of Directors.
During 1999, 485,000 options were granted under the PaeTec Online Stock
Option Plan at exercise prices ranging from $.25 per share to $.50 per share.
These options are convertible directly into PaeTec Online stock or into PaeTec
Corp. stock at a conversion ratio of 50 to 1. All options granted during 1999
were outstanding at December 31, 1999, with a weighted average exercise price
of $.25 per share and a weighted average remaining contractual life of 9.75
years. Options granted under this plan vest over a four year period, and are
not exercisable after the expiration of ten years from the date of grant of
those options. There were no options exercisable at December 31, 1999 under
this plan.
The Company's pro forma net loss and net loss per common share, as
reflected in this Note, would not be materially different as a result of the
issuance of these options.
Agent Warrant Plan--In 1999, the Company implemented an Agent Warrant
Plan (the "Warrant Plan") which provides for the issuance of 500,000 shares of
the Company's Class A common stock based upon the achievement and maintenance
of certain revenue goals by its independent sales agents. The Warrant Plan is
F-13
<PAGE>
PAETEC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
designed to create an incentive for the Company's sales agents and is
administered by a committee of the Board of Directors.
The warrants vest 20% in the first year. Vesting of the remaining 80% is
dependent upon the maintenance of certain revenue levels by the warrant holder.
Warrants are not exercisable until the Company completes an initial public
offering.
As of December 31, 1999, 40,000 warrants with an exercise price of $5,
had been granted under the Warrant Plan to employees of the Company. Warrants
will be accounted for as a variable stock compensation plan under the fair
value provisions of SFAS 123.
7. EMPLOYEE BENEFIT PLAN
The Company has a 401 (k) retirement savings plan under which employees
can contribute up to 15% of their annual salary. Employees are eligible for
participation upon employment. The Company's discretionary contributions for
1998 and 1999 totalled $-0- and $0.4 million, respectively.
8. COMMITMENTS
Operating Leases--The Company has entered into various operating lease
agreements, with expiration dates through 2007, for office space and equipment.
Total rent expense for 1998 and 1999 was $0.2 million and $2.3 million,
respectively. Future minimum lease obligations related to the Company's
operating leases as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000................................................................ $ 2,285
2001................................................................ 2,261
2002................................................................ 2,070
2003................................................................ 1,914
2004................................................................ 1,365
Thereafter through 2007............................................. 4,570
-------
$14,465
=======
</TABLE>
Other Commitments--On December 16, 1999, the Company entered into an
agreement with Empire Professional Soccer, LLC for the naming rights of a new
soccer stadium to be constructed in the Rochester, New York area. No payments
are due until construction of the new stadium begins. The Company's future
obligations related to this agreement amount to approximately $12.8 million.
Assuming construction occurs according to the current plan, payments for the
years ending December 31 are scheduled as follows:
<TABLE>
<S> <C>
2000................................................................ $ --
2001................................................................ 500
2002................................................................ 500
2003................................................................ 500
2004................................................................ 500
Thereafter through 2022............................................. 10,800
-------
$12,800
=======
</TABLE>
This obligation is transferable with the prior consent of Empire
Professional Soccer, LLC.
F-14
<PAGE>
PAETEC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. ACQUISITIONS
On August 31, 1999, the Company acquired EF for a purchase price of $1.4
million in cash, stock, assumed obligations and a promissory note. EF is a
provider of local, long distance, and telephone equipment services to business
customers throughout Florida and had operating revenues of $4.1 million in
1998. On September 9, 1999, the Company acquired CCS for approximately $44.0
million which was paid by the issuance of 5,919,183 shares of the Company's
Class A common stock, 161,628 options to purchase Class A common stock at an
exercise price of $2.50 per share, and through the assumption of $14.0 million
of CCS's outstanding debt. Options granted as a part of this transaction vest
immediately. CCS provides local, long distance, high speed internet access, and
cable television services to more than 50,000 residents at over 60 locations
throughout the United States, including college campuses and apartment
complexes. In addition, CCS designs, installs, and maintains private, voice,
data, and video for college, residential and corporate campuses. CCS had
unaudited revenues of approximately $16.5 million in its former fiscal year
ended June 30, 1999.
These acquisitions have been accounted for using the purchase method of
accounting and only results of operations of the acquired companies from the
dates of the acquisitions to December 31, 1999 have been included in the
consolidated results of operations. A portion of the purchase price, including
direct expenses of $0.2 million, has been allocated to net tangible and
intangible assets acquired based on their estimated fair values. The fair value
of assets acquired from these acquisitions totalled $16.9 million, while
liabilities assumed totalled $10.0 million. The balance of the purchase price
has been recorded as goodwill which is being amortized over twenty years using
the straight line method of amortization. The following reflects the unaudited
pro forma results of operations as if the acquisitions had taken place for all
of 1998 and at the beginning of 1999.
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Revenue................................................. $ 16,512 $ 36,210
Net loss................................................ $(11,287) $(46,875)
Net loss per common share............................... $ (0.77) $ (1.88)
</TABLE>
10. SUBSEQUENT EVENTS
On February 10, 2000, the Company completed a $134 million private equity
transaction before issuance costs of approximately $6.2 million. The private
equity transaction consisted of the sale of 134,000 shares of Series A
Convertible Preferred Stock ("Preferred Stock"), which have a par value of $.01
per share. The shares of Preferred Stock are convertible immediately at the
holder's option into shares of the Company's Class A common stock at a price
equal to $7.50 per share, the fair value of the Company's Class A common stock
on the date of this transaction. The Company has the right to require holders
of the Preferred Stock to convert their shares into Class A common stock upon
the completion of a qualified initial public offering. The proceeds of this
offering were used to reduce the outstanding balance on the Company's senior
secured debt by $45 million and to repay $2.1 million principal amount of notes
assumed in connection with the acquisition of CCS (see Note 9). The remaining
proceeds will be used to fund working capital requirements, capital
expenditures and future acquisitions.
On March 21, 2000, the Company signed a definitive agreement to acquire
Pinnacle Software Corporation ("Pinnacle"), a professional services and
software company headquartered in Pittsford, New York. Pinnacle provides
applications software systems to customers representing a total of nearly one
million subscribers in the higher education, Fortune 1000, medical and state
and local government markets. Pinnacle offers software and service solutions
aimed at helping organizations of all sizes manage large voice, data and video
networks with integrated services that include customer billing, inventory
control, asset management, help desk management, cable management, and switch
provisioning. Pinnacle had $3.7 million in revenues in fiscal 1999 and employed
over 30 information technology professionals as of March 20, 2000.
F-15
<PAGE>
On March 22, 2000, the Company signed a definitive agreement to acquire
selected assets of Data Voice Networks, Inc. ("DVN"), which designs and
implements data networks for small to medium sized businesses and distributes
data products for Cisco Systems and other vendors. DVN, which is headquartered
near Philadelphia, Pennsylvania, had $7.2 million in revenues in 1999 and had
over 20 employees as of March 20, 2000.
The aggregate purchase price for these pending acquisitions is
approximately $13.4 million, which will be paid in cash, stock and assumption
of certain liabilities.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Campuslink Communications Systems, Inc.:
We have audited the accompanying consolidated balance sheets of
CAMPUSLINK COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES (a Delaware
corporation) as of December 31, 1998 and June 30, 1998 and the related
consolidated statements of operations and changes in accumulated deficit, and
cash flows for the six month period ended December 31, 1998 and for the year
ended June 30, 1998. These 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Campuslink Communications
Systems, Inc. and subsidiaries as of December 31, 1998 and June 30, 1998, and
the results of their operations and their cash flows for the six month period
ended December 31, 1998 and the year ended June 30, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
September 20, 1999.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Campuslink Communications Systems, Inc.
Ann Arbor, Michigan
We have audited the accompanying consolidated balance sheet of Campuslink
Communications Systems, Inc. and subsidiaries (the "Company") as of June 30,
1997, and the related consolidated statements of operations and changes in
accumulated deficit, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Campuslink Communications
Systems, Inc. and subsidiaries as of June 30, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Rochester, New York
May 29, 1998
F-18
<PAGE>
CAMPUSLINK COMMUNICATIONS SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1998, DECEMBER 31, 1998
(Amounts In Thousands, Except Share Information)
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1997 1998 1998
-------- -------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ 671 $ 1,937 $ 743
Accounts receivable, net of allowance for
doubtful accounts of $271, $120 and $246,
respectively............................... 638 1,189 3,065
Prepaid expenses and other current assets... 127 235 307
-------- -------- --------
Total current assets...................... 1,436 3,361 4,115
-------- -------- --------
RESTRICTED CASH............................... -- -- 1,186
OFFICE EQUIPMENT, net......................... 600 712 671
OTHER ASSETS:
Exclusive service agreements, net........... 8,727 8,044 11,383
Other assets................................ 886 1,113 512
-------- -------- --------
Total other assets........................ 9,613 9,157 11,895
-------- -------- --------
TOTAL ASSETS.................................. $ 11,649 $ 13,230 $ 17,867
======== ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable............................ $ 715 $ 1,625 $ 2,492
Accrued expenses............................ 2,305 2,817 3,637
Current portion of long-term debt........... 100 4,682 6,686
-------- -------- --------
Total current liabilities................. 3,120 9,124 12,815
-------- -------- --------
LONG-TERM DEBT................................ 2,606 2,457 5,888
REDEEMABLE PREFERRED STOCK (at redemption
value):
Series B, par value $.001; 800 shares
authorized, issued and outstanding......... 1,911 2,101 2,276
Series C, par value $.001; 1,750 shares
authorized, issued and outstanding......... 3,758 4,177 4,406
Series D, par value $.001; 5,500 shares
authorized, issued and outstanding......... 11,072 12,393 12,971
-------- -------- --------
Total redeemable preferred stock.......... 16,741 18,671 19,653
-------- -------- --------
STOCKHOLDERS' DEFICIT:
Common stock, .001 par value; 7,250,000
shares authorized, 638,100 shares issued
and outstanding............................ 1 1 1
Warrants.................................... -- 104 104
Accumulated deficit......................... (10,819) (17,127) (20,594)
-------- -------- --------
Total stockholders' deficit............... (10,818) (17,022) (20,489)
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT... $ 11,649 $ 13,230 $ 17,867
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE>
CAMPUSLINK COMMUNICATIONS SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND CHANGES IN ACCUMULATED DEFICIT FOR THE YEARS ENDED JUNE 30, 1997 AND 1998,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998, AND FOR THE SIX MONTHS ENDED JUNE
30, 1998 AND 1999
(Amounts In Thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
------------------ ------------------------------------
June 30, June 30,
June 30, June 30, December 31, 1998 1999
1997 1998 1998 (Unaudited) (Unaudited)
-------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE................. $ 8,092 $ 10,257 $ 8,623 $ 3,681 $ 7,926
-------- -------- -------- -------- --------
OPERATING EXPENSES:
Line costs............ 6,088 6,513 6,146 2,099 5,512
Selling, general and
administrative
expenses............. 4,692 5,363 3,254 2,929 3,450
Depreciation and
amortization......... 1,345 1,835 901 975 996
Asset impairment...... -- 467 312 467 1,649
-------- -------- -------- -------- --------
Total operating
expenses........... 12,125 14,178 10,613 6,470 11,607
-------- -------- -------- -------- --------
LOSS FROM OPERATIONS.... (4,033) (3,921) (1,990) (2,789) (3,681)
INTEREST EXPENSE........ 417 457 495 316 651
-------- -------- -------- -------- --------
NET LOSS................ (4,450) (4,378) (2,485) (3,105) (4,332)
ACCUMULATED DEFICIT,
BEGINNING OF PERIOD.... (5,214) (10,819) (17,127) (13,163) (20,594)
DIVIDENDS ON REDEEMABLE
PREFERRED STOCK........ (1,155) (1,930) (982) (859) (958)
-------- -------- -------- -------- --------
ACCUMULATED DEFICIT, END
OF PERIOD.............. $(10,819) $(17,127) $(20,594) $(17,127) $(25,884)
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
CAMPUSLINK COMMUNICATIONS SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1998, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(Amounts In Thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
------------------ ------------------------------------
June 30, June 30, December 31, June 30, June 30,
1997 1998 1998 1998 1999
-------- -------- ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.............. $(4,450) $(4,378) $(2,485) $(3,105) $(4,332)
Adjustments to
reconcile net loss to
net cash (used)
provided by operating
activities:
Depreciation and
amortization......... 1,345 1,835 901 975 996
Amortization of
financing costs...... -- 63 41 63 --
Asset impairment...... -- 467 312 467 1,649
Changes in assets and
liabilities:
Accounts receivable.. (316) (551) (1,876) 297 163
Prepaid expenses and
other current
assets.............. (99) (67) (113) 178 61
Other assets......... 7 160 (17) 291 (3)
Accounts payable..... (909) 910 867 765 999
Accrued expenses..... (61) 512 819 7 923
------- ------- ------- ------- -------
Net cash (used)
provided by
operating
activities......... (4,483) (1,049) (1,551) (62) (451)
------- ------- ------- ------- -------
INVESTING ACTIVITIES:
Purchase of property
and equipment........ (552) (292) (66) (134) (46)
Acquisition of
exclusive service
agreements........... (3,006) (1,476) (4,245) (643) (1,604)
(Increase) decrease in
other assets......... -- (350) 419 (624) (816)
------- ------- ------- ------- -------
Net cash used by
investing
activities......... (3,558) (2,118) (3,892) (1,401) (2,466)
------- ------- ------- ------- -------
FINANCING ACTIVITIES:
Proceeds from issuance
of redeemable
preferred stock...... 10,268 -- -- -- --
Proceeds from notes
payable.............. 4,064 6,140 7,029 4,500 1,509
Repayment of notes
payable.............. (5,805) (1,707) (1,594) (1,369) (623)
------- ------- ------- ------- -------
Net cash provided by
financing
activities......... 8,527 4,433 5,435 3,131 886
------- ------- ------- ------- -------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS AND
RESTRICTED CASH....... 486 1,266 (8) 1,668 (1,129)
CASH AND CASH
EQUIVALENTS AND
RESTRICTED CASH,
BEGINNING OF PERIOD... 185 671 1,937 269 1,929
------- ------- ------- ------- -------
CASH AND CASH
EQUIVALENTS AND
RESTRICTED CASH, END
OF PERIOD............. $ 671 $ 1,937 $ 1,929 $ 1,937 $ 800
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid for
interest............. $ 89 $ 392 $ 315 $ 239 $ 548
======= ======= ======= ======= =======
SUPPLEMENTAL
DISCLOSURES OF NONCASH
INVESTING AND
FINANCING ACTIVITIES:
Conversion of
shareholder loan to
Series C redeemable
preferred stock...... $ 3,500 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
Issuance of common
stock in exchange for
debt................. $ 24 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
Dividends on
redeemable preferred
stock................ $ 1,180 $ 1,930 $ 982 $ 859 $ 958
======= ======= ======= ======= =======
Acquisition of
Exclusive Service
Agreements in
exchange for
assumption of debt... $ 964 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
Issuance of warrants
in conjunction with
debt................. $ -- $ 104 $ -- $ 104 $ --
======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE>
CAMPUSLINK COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended June 30, 1997 and 1998, For the Six Months Ended December
31, 1998 and
For the Six Months Ended June 30, 1998 and 1999
(Amounts In Thousands, Except Share Data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--Campuslink Communications Systems, Inc. and subsidiary (the
"Company"), founded in November 1993 and incorporated in the state of Delaware,
is an integrated communications provider to the higher-education and private-
student housing markets (the "Schools"). Typically, the Company provides
design, communication installation, and management of integrated
telecommunications systems at the Schools and funds certain infrastructure
costs to the Schools in exchange for an exclusive service agreement ("ESA") to
provide telecommunication services to the Schools. Once the infrastructure is
in place, the Company generates revenue through the resale of telephone, voice
mail, video, and data services in accordance with the ESA. The Company's
principal offices are in Ann Arbor, Michigan.
The Company operates ten ESAs through Select Switch Acquisition
Corporation, a wholly owned subsidiary, created in June 1997 to acquire the ten
ESAs and the related telecommunications assets. (Note 7)
The Company, in association with GMH Properties, operates fifteen ESAs
through Parklink Communications, Inc. created in July 1998 to account for ESAs
and related assets at private student housing facilities located throughout the
country.
Fiscal Year--Effective July 1, 1998, the Company changed its fiscal year
from June 30 to December 31.
Cash and Cash Equivalents--Cash and cash equivalents consist of overnight
deposits and commercial paper with acquired maturities of three months or less.
Office Equipment--Office equipment is recorded at cost. Expenditures for
maintenance, repairs, renewals, and betterments which do not materially extend
the useful life of the asset are expensed as incurred. Depreciation is computed
using the straight-line method over five years.
Exclusive Service Agreements--Exclusive service agreements (defined
above) consist of amounts paid in connection with agreements between the
Company and the Schools for the cost of equipment and installation. These ESAs
provide for the exclusive right to provide telecommunication services to the
Schools and are amortized over the life of the ESAs.
The Company, on a periodic basis, undertakes a review and valuation of
the net carrying value, recoverability, and amortization period of its ESAs.
For each ESA, the Company considers its financial structure as well as the
recoverability of the initial cost of the agreement based on a comparison of
estimated undiscounted operating cash flows under the contract with the net
book value of the ESA. Based on such analysis, the Company determined that
certain assets were other than temporarily impaired during 1998 and 1999.
Accordingly, the Company wrote down assets to their net realizable value at
June 30, 1998, December 31, 1998 and June 30, 1999. The accompanying
consolidated statements of operations and changes in accumulated deficit for
the year ended June 30, 1998 and for the six months ended December 31, 1998,
June 30, 1998 and June 30, 1999 includes $467, $312, $467 and $1,649,
respectively, related to these asset impairments. The Company's ESAs are
amortized over the respective term of the agreement. Amortization expense for
the years ended June 30, 1997 and 1998 and for the six months ended December
31, 1998, June 30, 1998 and 1999 was $1,186, $1,539, $794, $839 and $857,
respectively.
F-22
<PAGE>
CAMPUSLINK COMMUNICATIONS SYSTEMS , INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments--Statement of Financial Accounting
Standards ("SFAS") No. 107, Disclosures About Fair Value of Financial
Instruments, requires disclosures about the fair value of financial instruments
whether or not such instruments are recognized on the consolidated balance
sheet. Due to the short-term nature of the Company's financial instruments
other than debt, fair values are not materially different from their carrying
value. Based on the borrowing rates available to the Company, the carrying
value of debt approximated its fair value at June 30, 1997, 1998 and December
31, 1998.
Revenue Recognition--The Company recognizes revenue upon delivery of
various telecommunication services. The Company bills to the students directly
on a monthly basis for long-distance and out-of-area usage of telephone,
voicemail, video, and data services. Generally, the Company bills the Schools
for a guaranteed minimum technology fee (per student) at the beginning of each
school term. Such fees are recognized as revenue over the applicable period.
Billings to the Schools for administrative services are performed monthly.
Revenue derived from installation-type contracts is recognized upon completion
of the installation and acceptance by the respective Schools.
Concentration of Credit Risk--Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of
accounts receivable from students for the usage portion of revenue. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally does not require collateral.
Management Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from those estimates.
Principles of Consolidation--The consolidated financial statements
include the accounts of Campuslink Communications Systems, Inc., Select Switch
Acquisition Corporation, its wholly owned subsidiary, and Parklink
Communications, Inc., its majority owned subsidiary. All significant
intercompany balances and transactions are eliminated in consolidation.
Accounting for Stock-Based Compensation--In 1995, the Financial
Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 allows the Company to adopt either of two methods
for accounting for stock options. The Company has elected to account for its
stock-based compensation plans under Accounting principles Board, ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees.
Unaudited Financial Data--The interim financial data relating to the six
months ended June 30, 1998 and 1999 is unaudited; however, in the opinion of
the Company's management, the interim data includes all adjustments, consisting
of only normal recurring adjustments, necessary for a fair statement of the
results for the interim period. The results for the six months ended June 30,
1998 and 1999 are not necessarily indicative of the results to be expected for
the full year or any other interim period.
F-23
<PAGE>
CAMPUSLINK COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. ACCRUED LIABILITIES
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1997 1998 1998
-------- -------- ------------
<S> <C> <C> <C>
Accrued interest--shareholders............... $ 768 $ 794 $ 831
Accrued carrier charges...................... 933 523 1,018
Accrued taxes................................ -- -- 563
Deposits on installations.................... 308 1,099 348
Deferred revenue............................. -- -- 383
Consulting fees--shareholder................. 165 249 291
Other........................................ 131 152 203
------ ------ -------
Total........................................ $2,305 $2,817 $ 3,637
====== ====== =======
3. LONG-TERM DEBT
Long-term debt consists of the following:
<CAPTION>
June 30, June 30, December 31,
1997 1998 1998
-------- -------- ------------
<S> <C> <C> <C>
Note payable to certain shareholders,
repayable in 22 quarterly installments
maturing in 2002, with interest at 8% per
annum....................................... $1,742 $1,382 $ 1,209
ESA acquisition financing, repayable in 84
monthly installments maturing in 2004, with
interest at 9.18% per annum................. 964 845 806
Line of credit, interest at prime (7.75% at
December 31, 1998).......................... -- 3,250 4,875
ESA financing repayable in 60 monthly
installments maturing in 2002, with interest
at 10.88% per annum......................... -- 960 869
Notes payable to certain shareholders,
repayable on demand, with interest at 10%
per annum................................... -- 700 700
Note payable to certain shareholders,
repayable in 83 monthly installments
maturing in 2005, with interest at 10.4%,
per annum................................... -- -- 4,113
Other........................................ -- 2 2
------ ------ -------
Total........................................ 2,706 7,139 12,574
Less current portion......................... 100 4,682 6,686
------ ------ -------
Long-term portion............................ $2,606 $2,457 $ 5,888
====== ====== =======
</TABLE>
In May 1995, Alliance Cabletel Holdings, L.P. ("Alliance") made a $1,900
bridge loan to the Company. The bridge loan was restricted for use of payment
to a specific subcontractor in charge of installing the cabling infrastructure
related to an ESA. Alliance was granted a security interest in the School's ESA
and all revenue and receivables derived from the ESA. As of June 30, 1996, the
Company had not made any principal or interest payments on the bridge loan. In
November 1996, Alliance deferred all accrued interest on the bridge loan and
restructured the payment terms to 22 equal quarterly principal payments of $86
beginning on December 31, 1996, and reduced the interest rate from 10% to 8%.
In November 1996, Alliance was also granted a security interest in all of the
existing assets of the Company. It is not practical to estimate the fair value
of the bridge loan, which was negotiated for a specific transaction entered
into by the Company with certain of its shareholders. The note matures June 30,
2001.
F-24
<PAGE>
CAMPUSLINK COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1995, Alliance made a loan (the "Shareholder Loan") of $3,500
to the Company. The interest rate was 12% and was due on June 1, 1996, with an
automatic one-year extension if the Shareholder Loan was not repaid in full. On
November 19, 1996, the Shareholder Loan was converted into 1,750 shares of
Series C redeemable preferred stock. In connection with conversion, Alliance
was issued a warrant (the "Series C Warrant") to purchase 1,311,471 shares of
common stock at an exercise price of $.001 per share. The Series C Warrant is
exercisable, in whole or part, at any time for a period of five years from the
date of issuance (Note 4).
In connection with the acquisition of ten ESAs in June 1997, the Company
assumed notes payable in the amount of $964 payable to a financing institution.
The notes are guaranteed entirely by a telephone switch manufacturer and mature
in 2004. Based on the borrowing rates available to the Company, the Company's
carrying value of the notes approximated fair value at June 30, 1997, 1998 and
December 30, 1998.
On March 5, 1998, the Company entered in to a $2,000 line of credit at a
commercial bank. On May 4, 1998, this line of credit was increased to $3,500,
$4,500 in August 1998, and $5,250 in October 1998. The line of credit is due
and payable on March 1, 1999. The line of credit was not renewed at March 1,
1999. Certain shareholders of the Company provided payment to the bank for the
amount outstanding at March 1, 1999 and the Company assumed this debt, payable
to the shareholders. The interest rate on the line of credit is the prime rate
of the commercial bank. In April 1998, certain shareholders of the Company
provided a credit enhancement to the commercial bank. As consideration for
providing the credit enhancement, the Company has agreed to issue to certain
shareholders 505,903 warrants (the "Credit Line Warrants") to purchase the
Company's common stock at an exercise price of $.99 per share. The Company
recorded these warrants at $.14 per warrant, which the Company believes is
representative of the fair value. It is anticipated that the Credit Line
Warrants will have the same terms and conclusions as the warrants issued in
connection with the Series C, D-1, and D-2 preferred stock (Note 4).
On September 30, 1997, the Company borrowed $1,004 from a commercial
lender related to a five-year ESA. The term of the loan is 60 months at an
effective interest rate of 10.88%, with monthly payments of approximately $24.
The note is secured by the assets and operations of the ESA. The carrying value
of this note approximates fair market value at June 30, 1998 and December 31,
1998.
On April 8, 1998, the Company borrowed $700 in 10% demand notes from
certain shareholders to provide partial collateral for a bid bond related to a
specific proposal. In addition, the Company has deposited with its commercial
bank $500 as additional collateral for the same bid bond. As consideration for
the loan, the Company has agreed to issue 236,088 warrants (the "Bid Bond
Warrants") to purchase the Company's common stock at an exercise price of $.99
per share. The Company recorded these warrants at $.14 per warrant, which the
Company believes is representative of the fair value. It is anticipated that
the Bid Bond Warrants will have the same terms and conditions as the warrants
issued in connection with the Series C, D-1, and D-2 preferred stock (Note 4).
On December 31, 1998, the Company borrowed $4,154 from a commercial
lender related to an ESA. The term of the loan is 83 months at an effective
interest rate of 10.40%, with monthly payments of approximately $76. The note
is secured by the assets and operations of the ESA. The carrying value of this
note approximates fair market value at December 31, 1998.
F-25
<PAGE>
CAMPUSLINK COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future principal payments at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999................................................................. $ 6,686
2000................................................................. 1,213
2001................................................................. 1,308
2002................................................................. 1,083
2003................................................................. 878
Thereafter........................................................... 1,406
-------
Total.............................................................. $12,574
=======
</TABLE>
4. REDEEMABLE PREFERRED STOCK AND COMMON STOCK
Common Stock--The authorized capital stock of the Company consists of
7,250,000 shares of common stock with $.001 par value. All shares of common
stock participate equally in dividends payable to holders of common stock, when
and as declared by the board of directors, and in net assets available for
distribution to holders of common stock on liquidation or dissolution. Each
share has one vote on all matters submitted to a vote of the Company
stockholders and does not have cumulative voting rights in the election of
directors. All issued and outstanding shares of common stock are fully paid and
nonassessable, and the holders thereof do not have preemptive rights.
Redeemable Preferred Stock--The Board of Directors authorized 50,000
shares of preferred stock, $.001 par value, of which 800 shares have been
designated Series B preferred stock, 1,750 shares have been designated Series C
preferred stock, 2,750 shares have been designated as Series D-1 preferred
stock, and 2,750 shares have been designated as Series D-2 preferred stock.
Dividends accrue at a rate of 12% per annum, subject to adjustment in the event
certain conditions have not been met by the Company.
The Series B preferred stock has voting rights and is mandatorily
redeemable in equal installments commencing November 1, 2001, and continuing
thereafter each November 1 until all shares have been redeemed. In connection
with the issuance of the Series B preferred stock, the Company issued 455,000
shares of the Company's common stock for an exercise price of $.001 per share.
The redemption price is equal to the liquidation value of the shares of $2,000
per share plus an amount equal to the accrued but unpaid dividends on the
redemption date. Dividends are accrued at a rate of 12% per annum subject to
adjustment in the event certain conditions are not met by the Company. Accrued
and unpaid dividends amounted to $676 at December 31, 1998.
In November 1996, the Company completed the sale of $11,000 of Series D
preferred stock and converted the $3,500 Shareholder Loan into 1,750,000 shares
of Series C preferred stock and increased the dividend rate of the Series B
preferred stock from 10% to 12%. The proceeds were used to repay the Company's
existing lines of credit of $5,500 ($2,500 at June 30, 1996), accrued interest,
and accounts payable and to provide additional working capital for the Company.
The lines of credit expired upon repayment.
The Series C preferred stock consists of 1,750 shares that have voting
rights and are mandatorily redeemable in equal installments commencing November
1, 2001, and continuing thereafter each November 1 until all shares have been
redeemed. In connection with the issuance of the Series C preferred stock, the
Company issued the Series C warrant to purchase 1,311,471 shares of the
Company's common stock for an exercise price of $.001 per share. The Series C
warrant is exercisable, in whole or in part, at any time, for a period of five
years from date of issuance. The redemption price is equal to the liquidation
value of the shares
F-26
<PAGE>
CAMPUSLINK COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of $2,000 per share plus an amount equal to the accrued but unpaid dividends
on the redemption date. Dividends are accrued at a rate of 12% per annum
subject to adjustment in the event certain conditions are not met by the
Company. Accrued and unpaid dividends amounted to $906 at December 31, 1998.
The Series D preferred stock consists of 2,750,000 shares of Series D-1
($5,500) and 2,750,000 shares of Series D-2 ($5,500). In connection with the
issuance of the Series D-1 warrant and Series D-2 warrant to purchase 704,463
and 704,463 shares, respectively, of the Company's common stock for an
exercise price of $.001 per share. The Series D-1 and D-2 warrants are
exercisable, in whole or in part, at any time, for a period of five years from
date of issuance. The Series D-1 and D-2 preferred stock have the same
redemption, liquidation, and dividend rights as the Series C preferred stock
described above. The Series D-1 and D-2 preferred stock have voting rights
equal to the number of shares of common stock issuable pursuant to the Series
D-1 and D-2 warrants. Transaction fees of $732 were incurred in connection
with the issuance of the Series D-1 and D-2 preferred stock. Accrued and
unpaid dividends amounted to $2,703 at December 31, 1998.
In addition to the other securities issued in November 1996, the Company
also issued warrants to Alliance to acquire 915,092 shares of the Company's
common stock for an exercise price of $.001 per share. These warrants were
issued in connection with the deferral of interest and dividends accrued
through November 1996 and guarantees made by Alliance for credit facilities
utilized by the Company. The warrants are exercisable, in whole or in part, at
any time, for a period of five years from the date of issuance.
Accounting for Stock-Based Compensation--The Company accounts for its
stock-based compensation in accordance with APB Opinion No. 25, under which no
compensation cost has been recognized.
The Company has granted certain executives and directors warrants to
purchase the Company's stock. These warrants were issued at prices equal to
the estimated fair market value of the Company's common stock on the date of
issuance. The following table summarizes the Company's warrant activity:
<TABLE>
<S> <C> <C>
Outstanding, July 1, 1998.................................... $349,556 $3.52
Granted...................................................... -- --
-------- -----
Outstanding, December 31, 1998............................... $349,556 $3.52
======== =====
</TABLE>
No warrants have been exercised or forfeited.
The following table summarizes information about warrants outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
--------------------------------- ------------------------
Weighted Average
Range of Shares Remaining Shares
Exercise Under Contractual Weighted Average Under Weighted Average
Prices Warrant Life in Years Exercise Price Warrant Exercise Price
-------- ------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$2.01-
$4.88 349,556 3.60 $3.52 155,597 $3.13
</TABLE>
The Company has computed, for pro forma disclosure purposes, the value
of all warrants for shares of the Company's common stock granted to employees
and directors using an option pricing model prescribed by SFAS No. 123 and
using the following weighted average assumptions: risk-free interest rate of
6%, expected dividend yield of 0%, and expected lives of five years.
F-27
<PAGE>
CAMPUSLINK COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company did not grant warrants to employees or directors in 1998.
However, if the Company had accounted for past grants in accordance with SFAS
No. 123, the Company's net loss for the years ended June 30, 1997 and June 30,
1998 and for the six month periods ended December 31, 1998, June 30, 1998 and
June 30, 1999 would have increased as follows:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
------------------ -------------------------------
June 30, June 30, December 31, June 30, June 30,
1997 1998 1998 1998 1999
-------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Net loss--as reported.. $(4,450) $(4,378) $(2,485) $(3,105) $(4,332)
Net loss--pro forma.... $(4,490) $(4,443) $(2,520) $(3,145) $(4,372)
</TABLE>
5. INCOME TAXES
The Company has incurred losses since inception. Accordingly, as there is
no certainty of future profitability, a deferred tax asset has been recorded
and a valuation allowance provided in full in the accompanying consolidated
financial statements. The effective rate is 0% for all periods.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1997 1998 1998
-------- -------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......... $ 3,073 $ 4,489 $ 5,161
Other..................................... 137 86 151
------- ------- -------
Total deferred tax assets................... 3,210 4,575 5,312
Less--valuation allowance................... (3,210) (4,575) (5,312)
------- ------- -------
Net deferred tax assets..................... $ -- $ -- $ --
======= ======= =======
</TABLE>
The Company had approximately $15,200 of net operating loss carryforwards
for federal income tax purposes at December 31, 1998. These net operating loss
carryforwards begin to expire in 2009. A portion of the losses as of June 30,
1995 will be subject to limitation under Section 382 of the Internal Revenue
Code.
6. TRANSACTIONS WITH AFFILIATED COMPANIES
Alliance entered into an agreement with the Company to provide consulting
services to the Company and to be the financial advisor for a period of five
years. The Company is required to pay Alliance a consulting fee of $5 per month
during the first year of the term, $7 per month during the second and third
year of the term, and an amount to be negotiated in good faith thereafter. The
monthly fee shall accrue, but not be paid, until the Company has cumulative net
income of $1 million. Total consulting fees for the years ended June 30, 1997
and 1998 and for the six months ended December 31, 1998, June 30, 1998 and 1999
were $165, $84, $42, $42 and $42, respectively.
F-28
<PAGE>
CAMPUSLINK COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. ACQUISITION OF EXCLUSIVE SERVICE AGREEMENTS
On April 22, 1998, the Company was awarded an ESA requiring capital
expenditures of approximately $5,800. To fund the capital expenditures, in
April 1998, the Company received a 10% $1,200 demand note from certain
shareholders and in July 1998 received a $4,900 loan from a leasing company at
an interest rate of 10.48 and a term of seven years.
As of December 31, 1998, the Company has drawn down approximately $1,437
on the $4,900 loan. As of December 31, 1998, $1,186 was held as restricted cash
to support the $4,900 loan, performance bond, and final capital expenditures.
8. COMMITMENTS AND CONTINGENCIES
The Company has various operating leases for equipment and facilities.
Rent expense for the years ended June 30, 1997 and 1998 and for the six months
ended December 31, 1998, June 30, 1998 and 1999 totaled $77, $82, $62, $64, and
$93, respectively.
Future minimum commitments under all noncancellable operating leases at
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999.................................................................... $121
2000.................................................................... 87
2001.................................................................... 7
2002.................................................................... 2
2003.................................................................... 1
----
Total................................................................... $218
====
</TABLE>
The Company is involved in legal proceedings related to matters which are
incidental to its business. It is the opinion of management that the ultimate
resolution of these proceedings will not have a material adverse effect on the
Company's financial position or results of operations.
9. SUBSEQUENT EVENTS (UNAUDITED)
On January 1, 1999, the Company formed a joint venture with World-African
network to provide integrated telecommunication services to predominantly
African American higher-education and private-student housing markets.
On September 9, 1999, the Company was acquired by PaeTec Corp. for
approximately $44,000. The transaction was funded by approximately $30,000 in
PaeTec Corp. stock and the assumption of approximately $14,000 of the Company's
debt.
F-29
<PAGE>
SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial
information of PaeTec and Campuslink, which we refer to as "Pro Forma PaeTec"
has been prepared to demonstrate how these companies might have looked if the
merger and merger-related transactions had been completed as of the dates or at
the beginning of the period presented.
The pro forma information, while helpful in illustrating the financial
characteristics of the combined company under one set of assumptions, does not
attempt to predict or suggest future results. The pro forma information also
does not attempt to show how the combined company would actually have performed
had the companies been combined throughout these periods. If the companies had
actually been combined in prior periods, these companies might have performed
differently. You should not rely on pro forma financial information as an
indication of the results that would have been achieved if the merger related
transactions had taken place earlier or the future results that the companies
will experience now that those transactions have been completed.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with the historical financial statements of PaeTec and
Campuslink which are included in this document.
Pro Forma PaeTec
Unaudited Combined Condensed Financial Information
for the year ended December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
PaeTec Pro Forma
(1) Campuslink (2) Adjustments (3) Combined
-------- -------------- --------------- ---------
<S> <C> <C> <C> <C>
Revenue.................... $ 23,347 $ 9,682 $ -- $ 33,029
Cost of services........... 16,809 6,311 -- 23,120
-------- ------- ------- --------
Gross margin............... 6,538 3,371 -- 9,909
Selling, general and
administrative expenses... 40,294 6,033 -- 46,327
Depreciation and
amortization.............. 4,508 3,155 1,278 8,941
Other (income) expense,
net....................... (355) 46 -- (309)
Interest (income) expense.. 2,434 877 (80) 3,231
-------- ------- ------- --------
Net loss................... $(40,343) $(6,740) $(1,198) $(48,281)
======== ======= ======= ========
Basic and diluted net loss
per common share.......... $ (1.93) $ (1.94)
======== ========
</TABLE>
- --------
1. This column is derived from the audited consolidated financial statements of
PaeTec for the year ended December 31, 1999.
2. This column is derived from the unaudited accounting records of Campuslink
for the period from January 1, 1999 to September 8, 1999.
3. We have accounted for the acquisiton of Campuslink using the purchase method
of accounting. This column accounts for the additional amortization of
goodwill for the period from January 1, 1999 to September 8, 1999 and
eliminates certain interest expense that would not have been incurred had
the acquisition occurred on January 1, 1999.
F-30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 2000, (25 days after the date of this prospectus),
all dealers effecting transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
Shares
PaeTec Corp.
Class A Common Stock
---------------
PROSPECTUS
---------------
Merrill Lynch & Co.
Bear, Stearns & Co. Inc.
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE]
Subject to Completion
Preliminary Prospectus dated April 14, 2000
PROSPECTUS
Shares
PaeTec Corp.
Class A Common Stock
------------------
This is PaeTec's initial public offering of Class A common stock. PaeTec is
selling all of the shares of Class A common stock. The international managers
are offering shares outside the U.S. and Canada and the U.S. underwriters
are offering shares in the U.S. and Canada.
We expect the public offering price to be between $ and $ per share.
Currently, no public market exists for the shares. After pricing of the
offerings, we expect that the shares will be quoted on the Nasdaq National
Market under the symbol "PAET."
We have two types of common stock: Class A common stock and Class B common
stock. Holders of each class generally have the same rights, except for
differences in voting rights. Holders of our Class A common stock have one vote
per share while holders of our Class B common stock have 20 votes per share.
Immediately following the offerings, without giving effect to any exercise of
the underwriters' over-allotment options, shares of our outstanding Class B
common stock will represent approximately % of the combined voting power of
our common stock.
Investing in the Class A common stock involves risks that are described in
the "Risk Factors" section beginning on page 7.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price............................. $ $
Underwriting discount............................. $ $
Proceeds, before expenses, to us.................. $ $
</TABLE>
The international managers may also purchase up to an additional shares of
Class A common stock from PaeTec at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. The U.S. underwriters may similarly purchase up to an
additional shares of Class A common stock from PaeTec.
Neither the Securities and Exchange Commission nor any other state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares will be ready for delivery on or about , 2000.
-----------
Merrill Lynch International
Bear, Stearns & Co. Inc.
-----------
The date of this prospectus is , 2000.
<PAGE>
[ALTERNATE PAGE]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Consolidated Financial and Operating Data....................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 30
Regulation of Our Services............................................... 50
Management............................................................... 56
Transactions Involving Related Parties................................... 66
Security Ownership of Certain Beneficial Owners and Management........... 71
Description of Capital Stock............................................. 74
Shares Eligible for Future Sale.......................................... 79
U.S. Tax Consequences to Non-U.S. Holders................................ 81
Underwriting............................................................. 84
Legal Matters............................................................ 89
Experts.................................................................. 89
Where You Can Find Additional Information................................ 89
Index to Consolidated Financial Statements and Unaudited Pro Forma
Financial Information................................................... F-1
</TABLE>
---------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
This prospectus does not constitute an offer to sell or the solicitation
of an offer to buy the shares of our Class A common stock in any jurisdiction
in which such an offer or solicitation is unlawful. There are restrictions on
the offer and sale of the shares of our Class A common stock in the United
Kingdom. All applicable provisions of the Financial Services Act 1986 and the
Public Offers of Securities Regulations 1995 with respect to anything done by
any person in relation to the shares of Class A common stock in, from or
otherwise involving the United Kingdom must be complied with. See
"Underwriting."
<PAGE>
[ALTERNATE PAGE]
UNDERWRITING
We intend to offer the shares outside the U.S. and Canada through the
international managers and in the U.S. and Canada through the U.S.
underwriters. Merrill Lynch International and Bear, Stearns & Co. Inc. are
acting as lead managers for the international managers named below. Subject to
the terms and conditions described in an international purchase agreement among
us and the international managers, and concurrently with the sale of
shares to the U.S. Underwriters, we have agreed to sell to the international
managers, and the international managers severally have agreed to purchase from
us, the number of shares listed opposite their names below.
<TABLE>
<CAPTION>
Number
International Manager of Shares
--------------------- ---------
<S> <C>
Merrill Lynch International....................................
Bear, Stearns & Co. Inc. ......................................
---
---
---
---
Total.....................................................
===
</TABLE>
We have also entered into a U.S. purchase agreement with the U.S.
underwriters for sale of the shares in the U.S. and Canada for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Bear, Stearns & Co. Inc. are
acting as U.S. representatives. Subject to the terms and conditions in the U.S.
purchase agreement, and concurrently with the sale of shares to the
international managers pursuant to the international purchase agreement, we
have agreed to sell shares to the U.S. underwriters, and the U.S. underwriters
severally have agreed to purchase shares from us. The initial public
offering price per share and the total underwriting discount per share are
identical under the international purchase agreement and the U.S. purchase
agreement.
The international managers and the U.S. underwriters have agreed to
purchase all of the shares sold under the international and U.S. purchase
agreements if any of these shares are purchased. If an underwriter defaults,
the U.S. and international purchase agreements provide that the purchase
commitments of the nondefaulting underwriters may be increased or the purchase
agreements may be terminated. The closings for the sale of shares to be
purchased by the international managers and the U.S. underwriters are
conditioned on one another.
We have agreed to indemnify the international managers and the U.S.
underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the international managers and
U.S. underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters
of officers' certificates and legal opinions. The underwriters reserve the
right to withdraw, cancel or modify offers to the public and to reject orders
in whole or in part.
Commissions and Discounts
The lead managers have advised us that the international managers propose
initially to offer the shares to the public at the initial public offering
price listed on the cover page of this prospectus and to dealers at that price
less a concession not in excess of $ per share. The international managers
may allow, and the dealers may reallow, a discount not in excess of $ per
share to other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.
84
<PAGE>
[ALTERNATE PAGE]
The following table shows the public offering price, underwriting
discount and proceeds before expenses to PaeTec. The information assumes either
no exercise or full exercise by the international managers and the U.S.
underwriters of their over-allotment options.
<TABLE>
<CAPTION>
Per Share Without Option With Option
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price............... $ $ $
Underwriting discount............... $ $ $
Proceeds, before expenses, to
PaeTec............................. $ $ $
</TABLE>
The expenses of the offerings, not including the underwriting discount,
are estimated at $ and are payable by PaeTec.
Over-allotment Options
We have granted options to the international managers to purchase up to
additional shares at the public offering price less the underwriting
discount. The international managers may exercise these options for 30 days
from the date of this prospectus solely to cover any over-allotments. If the
international managers exercise these options, each international manager will
be obligated, subject to conditions contained in the purchase agreements, to
purchase a number of additional shares proportionate to that international
manager's initial amount reflected in the above table.
We have also granted options to the U.S. underwriters, exercisable for 30
days from the date of this prospectus, to purchase up to additional
shares to cover any over-allotments on terms similar to those granted to the
international managers.
Intersyndicate Agreement
The international managers and the U.S. underwriters have entered into an
intersyndicate agreement that provides for the coordination of their
activities. Under the intersyndicate agreement, the international managers and
the U.S. underwriters may sell shares to each other for purposes of resale at
the initial public offering price, less an amount not greater than the selling
concession. Under the intersyndicate agreement, the international managers and
any dealer to whom they sell shares will not offer to sell or sell shares to
U.S. or Canadian persons or to persons they believe intend to resell to persons
who are U.S. or Canadian persons, except in the case of transactions under the
intersyndicate agreement. Similarly, the U.S. underwriters and any dealer to
whom they sell shares will not offer to sell or sell shares to persons who are
non-U.S. or non-Canadian persons or to persons they believe intend to resell to
persons who are non-U.S. or non-Canadian persons, except in the case of
transactions under the intersyndicate agreement.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to % of the shares offered by this prospectus, or
shares, for sale to some of our directors, officers, employees, existing
stockholders and persons having business relationships with us. If these
persons purchase reserved shares, this will reduce the number of shares
available for sale to the general public. Any reserved shares that are not
orally confirmed for purchase within one business day of the pricing of the
offerings will be offered by the underwriters to the general public on the same
terms as the other shares offered by this prospectus.
No Sales of Similar Securities
We, our executive officers and directors and other existing stockholders
have agreed, with exceptions described below, not to sell or transfer any
common stock for 180 days after the date of this prospectus without
85
<PAGE>
[ALTERNATE PAGE]
first obtaining the written consent of Merrill Lynch. Specifically, we and
these other persons have agreed not to directly or indirectly
. offer, pledge, sell or contract to sell any common stock,
. sell any option or contract to purchase any common stock,
. purchase any option or contract to sell any common stock,
. grant any option, right or warrant for the sale of any common stock,
. lend or otherwise dispose of or transfer any common stock,
. request or demand that we file a registration statement related to
the common stock, or
. enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock
whether any such swap or transaction is to be settled by delivery of
shares or other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the
person executing the agreement or for which the person executing the agreement
later acquires the power of disposition.
The restrictions in the foregoing lockup agreements will not apply to
transfers by stockholders of common stock to PaeTec, to family trusts, by gift,
will or intestate succession or in accordance with agreements entered into
before the offerings and disclosed to Merrill Lynch. Each transferee of our
common stock will be required to execute and deliver a lockup agreement
containing the terms described above.
Quotation on the Nasdaq National Market
We expect that the shares of our Class A common stock will be approved
for quotation on the Nasdaq National Market, subject to notice of issuance,
under the symbol "PAET."
Before the offerings, there has been no public market for our Class A
common stock. The initial public offering price will be determined through
negotiations among us and the lead managers and the U.S. representatives. In
addition to prevailing market conditions, the factors to be considered in
determining the initial public offering price are
. the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us,
. our financial information,
. the history of, and the prospects for, our company and the industry
in which we compete,
. an assessment of our management, our past and present operations, and
the prospects for, and timing of, our future revenues,
. the present state of our development, and
. the foregoing factors in relation to market values and various
valuation measures of other companies engaged in activities similar
to ours.
An active trading market for the shares may not develop. It is also
possible that after the offerings the shares will not trade in the public
market at or above the initial public offering price.
86
<PAGE>
[ALTERNATE PAGE]
The underwriters do not expect to sell more than 5% of the shares in the
aggregate to accounts over which they exercise discretionary authority.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
Class A common stock. However, the U.S. representatives may engage in
transactions that stabilize the price of the Class A common stock, such as bids
or purchases to peg, fix or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offerings, which would occur if they sell more shares than
are listed on the cover of this prospectus, the U.S. representatives may reduce
that short position by purchasing shares in the open market. The U.S.
representatives may also elect to reduce any short position by exercising all
or part of the over-allotment options described above. Purchases of the Class A
common stock to stabilize its price or to reduce a short position may cause the
price of the Class A common stock to be higher than it might be in the absence
of such purchases.
The U.S. representatives may also impose a penalty bid on underwriters
and selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriters' short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Class A common stock. In addition,
neither we nor any of the underwriters makes any representation that the U.S.
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
U.K. Selling Restrictions
Each international manager has agreed that
. it has not offered or sold and will not offer or sell any shares of
Class A common stock to persons in the United Kingdom, except to
persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which do
not constitute an offer to the public in the United Kingdom within
the meaning of the Public Offers of Securities Regulations 1995;
. it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the Class A common stock in, from or otherwise involving
the United Kingdom; and
. it has issued or passed on and will only issue and pass on in the
United Kingdom any document received by it in connection with the
issuance of Class A common stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 as amended by the
Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1997 or is a person to whom such document may otherwise
lawfully be issued or passed on.
87
<PAGE>
[ALTERNATE PAGE]
No Public Offering Outside the U.S.
No action has been or will be taken in any jurisdiction except in the
U.S. that would permit a public offering of the shares of Class A common stock,
or the possession, circulation or distribution of this prospectus
or any other material relating to our company or shares of our Class A common
stock in any jurisdiction where action for that purpose is required.
Accordingly, the shares of our Class A common stock may not be offered or sold,
directly or indirectly, and neither this prospectus nor any other offering
material or advertisements in connection with the shares of Class A common
stock may be distributed or published, in or from any country or jurisdiction
except in compliance with any applicable rules and regulations of any such
country or jurisdiction.
Purchasers of the shares offered by this prospectus may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price on the cover page of
this prospectus.
Other Relationships
Merrill Lynch and its affiliates and some of the other underwriters and
their affiliates have engaged in, and may in the future engage in, investment
banking and other commercial dealings in the ordinary course of business with
us. They have received customary fees and commissions for these transactions.
88
<PAGE>
[ALTERNATE PAGE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 2000, (25 days after the date of this prospectus),
all dealers effecting transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
Shares
PaeTec Corp.
Class A Common Stock
--------------
PROSPECTUS
--------------
Merrill Lynch International
Bear, Stearns & Co. Inc.
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various fees and expenses, other than
the underwriting discounts and commissions, payable by PaeTec Corp. (the
"Registrant") in connection with the sale of the Class A common stock being
registered hereby. All amounts shown are estimates except for the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<CAPTION>
Amount
-------
<S> <C>
SEC registration fee.............................................. $26,400
NASD filing fee................................................... 10,500
Nasdaq National Market listing fee................................ *
Blue sky qualification fees and expenses.......................... *
Accounting fees and expenses...................................... *
Legal fees and expenses........................................... *
Printing and engraving expenses................................... *
Transfer agent and registrar fees................................. *
Miscellaneous expenses............................................ *
-------
Total........................................................... $ *
=======
</TABLE>
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Delaware General Corporation Law. Section 145(a) of the Delaware General
Corporation Law provides that a corporation may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that the person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the person in connection with such action,
suit or proceeding if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the person's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create
a presumption that the person did not act in good faith and in a manner which
the person reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that the person's conduct was unlawful.
Section 145(b) of the Delaware General Corporation Law states that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the corporation to procure a judgment in its favor by reason of
the fact that the person is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by the person in connection with the defense
or settlement of such action or suit if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and
II-1
<PAGE>
except that no indemnification shall be made in respect of any claim, issue or
matter as to which the person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery
or the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses as the Delaware Court of Chancery or such other
court shall deem proper.
Section 145(c) of the Delaware General Corporation Law provides that to
the extent that a present or former director or officer of a corporation has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) and (b) of Section 145, or in defense
of any claim, issue or matter therein, the person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by the
person in connection therewith.
Section 145(d) of the Delaware General Corporation Law states that any
indemnification under subsections (a) and (b) of Section 145 (unless ordered by
a court) shall be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the present or former
director, officer, employee or agent is proper in the circumstances because the
person has met the applicable standard of conduct set forth in subsections (a)
and (b) of Section 145. Such determination shall be made with respect to a
person who is a director or officer at the time of such determination (1) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, (2) by a committee of such
directors designated by majority vote of such directors, even though less than
a quorum, (3) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (4) by the stockholders.
Section 145(f) of the Delaware General Corporation Law states that the
indemnification and advancement of expenses provided by, or granted pursuant
to, the other subsections of Section 145 shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office.
Section 145(g) of the Delaware General Corporation Law provides that a
corporation shall have the power to purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against such
person and incurred by such person in any such capacity or arising out of such
person's status as such, whether or not the corporation would have the power to
indemnify such person against such liability under the provisions of Section
145.
Section 145(j) of the Delaware General Corporation Law states that the
indemnification and advancement of expenses provided by, or granted pursuant
to, Section 145 shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
Certificate of Incorporation. The Registrant's restated certificate of
incorporation filed as Exhibit 3.1 hereto provides that, to the fullest extent
permitted by the Delaware General Corporation Law, the Registrant's directors
will not be personally liable to the Registrant or its stockholders for
monetary damages resulting from a breach of their fiduciary duties as
directors. However, nothing contained in such provision will eliminate or limit
the liability of directors (1) for any breach of the director's duty of loyalty
to the Registrant or its stockholders, (2) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the
law, (3) under section 174 of the Delaware General Corporation Law or (4) for
any transaction from which the director derived an improper personal benefit.
II-2
<PAGE>
Bylaws. The Registrant's amended and restated bylaws provide for the
indemnification of the officers and directors of the Registrant to the fullest
extent permitted by the Delaware General Corporation law. The bylaws provide
that each person who was or is made a party to, or is threatened to be made a
party to, any civil or criminal action, suit or proceeding by reason of the
fact that such person is or was a director or officer of the Registrant shall
be indemnified and held harmless by the Registrant to the fullest extent
authorized by the Delaware General Corporation Law against all expense,
liability and loss, including, without limitation, attorneys' fees, incurred by
such person in connection therewith, if such person acted in good faith and in
a manner such person reasonably believed to be or not opposed to the best
interests of the Registrant and had no reason to believe that such person's
conduct was illegal.
Insurance. The Registrant maintains directors and officers liability
insurance, which covers directors and officers of the Registrant against
certain claims or liabilities arising out of the performance of their duties.
Underwriting Agreement. The U.S. Purchase Agreement and the International
Purchase Agreement will provide for the indemnification of the directors and
officers of the Company and certain controlling persons against specified
liabilities, including liabilities under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
The following sales and issuances of securities by PaeTec Corp. (the
"Company") to its employees were effected in reliance on the exemption from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), afforded by Section 4(2), Regulation D and Rule 701 thereunder. The
following sales and issuances of securities by the Company to other security
holders were effected in reliance on the exemption from registration under the
Securities Act afforded by Section 4(2) and Regulation D thereunder. Unless
otherwise indicated below, the consideration for all of such sales and
issuances was cash. The information below regarding the aggregate consideration
received by the Company is provided before deduction of offering expenses and
other related expenses.
Fiscal 1998 (May 19, 1998--December 31, 1998)
In July 1998, the Company issued 2,000,000 shares of Class A common stock
at a price of $.40 per share to founders of the Company. The Company received
aggregate consideration of $800,000.
In July 1998, the Company issued 2,500,000 shares of Class B common stock
at a price of $.48 per share to the Company's Chairman of the Board and Chief
Executive Officer. The Company received aggregate consideration of $1,200,000.
In August 1998, the Company issued 4,985,000 shares of Class B common
stock to its executive officers and other investors at a price of $.833 per
share. The Company received aggregate consideration of $4,152,505.
In August 1998, the Company issued 1,200,000 shares of Class A common
stock to an institutional investor at a price of $.694 per share. The Company
received aggregate consideration of $832,800.
In September 1998, the Company issued 4,000,000 shares of Class A common
stock to its executive officers and other investors at a price of $2.50 per
share. The Company received aggregate consideration of $10,000,000.
In November 1998, the Company issued 600,000 shares of Class A common
stock at a price of $2.50 per share to an institutional investor. The Company
received aggregate consideration of $1,500,000.
In fiscal 1998, the Company granted to its employees options under its
1998 Incentive Compensation Plan to purchase a total of 1,506,875 shares of
Class A common stock at exercise prices ranging from $.40 per share to $2.50
per share.
II-3
<PAGE>
1999
From April through August 1999, the Company issued a total of 5,600,000
shares of Class A common stock at a price of $5.00 per share to its executive
officers, other employees and other investors. The Company received aggregate
consideration of $28,000,000.
In September 1999, in consideration for the Company's acquisition of East
Florida Communications, Inc., the Company issued 20,000 shares of Class A
common stock at a value of $5.00 per share to former stockholders of East
Florida Communications, Inc.
In September 1999, in consideration for the Company's acquisition of
Campuslink Communications Systems, Inc., the Company issued 5,919,183 shares of
Class A common stock at a value of $5.00 per share to former stockholders of
that company.
In 1999, the Company granted options to its employees and directors under
its 1998 Incentive Compensation Plan to purchase a total of 1,647,108 shares of
Class A common stock at exercise prices ranging from $2.50 per share to $7.50
per share.
In 1999, the Company issued to its employees a total of 193,498 shares of
Class A common stock upon the exercise of options under its 1998 Incentive
Compensation Plan at exercise prices ranging from $.40 per share to $2.50 per
share. The Company received aggregate consideration of $93,597.
2000
In February 2000, the Company issued 133,334 shares of Class A common
stock at a price of $7.50 per share to institutional investors and 134,000
shares of Series A Convertible Preferred Stock to institutional investors. Each
share of Series A Convertible Preferred Stock is initially convertible at the
holder's option into 133 shares of Class A common stock at a conversion price
of $7.50 per share. The Company received aggregate consideration of $1,000,000
for the sale of such Class A common stock and aggregate consideration of
$134,000,000 for the sale of the Series A Convertible Preferred Stock.
From January 1, 2000 through April 13, 2000, the Company granted options
under its 1998 Incentive Compensation Plan to its employees to purchase a total
of 776,929 shares of Class A common stock at an exercise price of $7.50 per
share.
From January 1, 2000 through April 13, 2000, the Company issued to its
employees a total of 152,495 shares of Class A common stock upon the exercise
of options under its 1998 Incentive Compensation Plan at an exercise price of
$2.50 per share.
In April 2000, in consideration for the Company's acquisition of Pinnacle
Software Corporation, the Company issued 500,000 shares of Class A common stock
at a value of $7.50 per share to former stockholders of that company.
In May 2000, the Company issued shares of Class A common stock at a
value of $ per share to Data Voice Networks, Inc. in consideration for the
Company's purchase of assets from that company.
II-4
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
*1.1 Form of U.S. Purchase Agreement.
*1.2 Form of International Purchase Agreement.
*3.1 Form of Restated Certificate of Incorporation of PaeTec Corp. (the
"Company"), to be effective upon completion of the offerings.
*3.2 Form of Amended and Restated Bylaws of the Company, to be effective
upon completion of the offerings.
*4.1 Form of Stock Certificate for the Class A Common Stock, par value $.01
per share, of the Company.
*5.1 Opinion by Hogan & Hartson L.L.P. regarding the validity of the Class A
Common Stock.
10.1.1 Stock Purchase Agreement, dated July 17, 1998, among Arunas A.
Chesonis, the Company and PaeTec Communications, Inc.
10.1.2 First Amendment to Stock Purchase Agreement, dated as of February 4,
2000, among Arunas A. Chesonis, the Company and PaeTec Communications,
Inc.
10.2 Stock Purchase Agreement, dated July 20, 1998, among Algimantas K.
Chesonis, Arunas A. Chesonis, the Company and PaeTec Communications,
Inc.
10.3.1 Stock Purchase Agreement, dated as of August 13, 1998, between the
Company and Christopher E. Edgecomb, Trustee of the Christopher E.
Edgecomb Living Trust dated April 25, 1998.
10.3.2 First Amendment to Stock Purchase Agreement, dated as of February 4,
2000, between the Company and Christopher E. Edgecomb, Trustee of the
Christopher E. Edgecomb Living Trust dated April 25, 1998.
10.4.1 Stock Purchase Agreement, dated August 20, 1998, between the Company
and Jeffrey P. Sudikoff.
10.4.2 First Amendment to Stock Purchase Agreement, dated as of February 4,
2000, between the Company and Jeffrey P. Sudikoff.
10.5.1 Stock Purchase Agreement, dated as of November 16, 1998, between the
Company and Newcourt Commercial Financial Corporation (f/k/a AT&T
Commercial Financial Corporation).
10.5.2 First Amendment to Stock Purchase Agreement, dated as of February 4,
2000, between the Company and Newcourt Commercial Financial
Corporation.
10.6.1 Stock Rights Agreement, dated August 13, 1998, among Joseph D.
Ambersley, the Company, PaeTec Communications, Inc. and Arunas A.
Chesonis.
10.6.2 First Amendment to Stock Rights Agreement, dated August 13, 1998, among
Joseph D. Ambersley, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
10.6.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Joseph D. Ambersley, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
10.6.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Joseph D. Ambersley, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
10.7.1 Stock Rights Agreement, dated July 17, 1998, among Timothy J. Bancroft,
the Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
10.7.2 First Amendment to Stock Rights Agreement, dated September 30, 1998,
among Timothy J. Bancroft, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
10.7.3 Second Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Timothy J. Bancroft, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
10.8.1 Stock Rights Agreement, dated July 17, 1998, among John Baron, the
Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
10.8.2 First Amendment to Stock Rights Agreement, dated August 13, 1998, among
John Baron, the Company, PaeTec Communications, Inc. and Arunas A.
Chesonis.
</TABLE>
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<PAGE>
<TABLE>
<C> <S>
10.8.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among John Baron, the Company, PaeTec Communications, Inc. and Arunas
A. Chesonis.
10.8.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among John Baron, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
10.9.1 Stock Rights Agreement, dated July 17, 1998, among Bradford M. Bono,
the Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
10.9.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Bradford M. Bono, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
10.9.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Bradford M. Bono, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
10.9.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Bradford M. Bono, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
10.10.1 Stock Rights Agreement, dated July 17, 1998, among Edward J. Butler,
Jr., the Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
10.10.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Edward J. Butler, Jr., the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
10.10.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Edward J. Butler, Jr., the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
10.10.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Edward J. Butler, Jr., the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
10.11.1 Stock Rights Agreement, dated July 17, 1998, among Richard E.
Ottalagana, the Company, PaeTec Communications, Inc. and Arunas A.
Chesonis.
10.11.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Richard E. Ottalagana, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
10.11.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Richard E. Ottalagana, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
10.11.4 Letter Agreement relating to Stock Rights Agreement, dated October 15,
1998, among Richard E. Ottalagana, the Company and PaeTec
Communications, Inc.
10.11.5 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Richard E. Ottalagana, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
10.12.1 Stock Rights Agreement, dated July 17, 1998, among Richard J. Padulo,
the Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
10.12.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Richard J. Padulo, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
10.12.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Richard J. Padulo, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
10.12.4 Letter Agreement relating to Stock Rights Agreement, dated October 15,
1998, among Richard J. Padulo, the Company and PaeTec Communications,
Inc.
10.12.5 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Richard J. Padulo, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
10.13.1 Stock Rights Agreement, dated July 17, 1998, among Daniel J. Venuti,
the Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
10.13.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Daniel J. Venuti, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
10.13.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Daniel J. Venuti, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
10.13.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Daniel J. Venuti, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
10.14.1 Agreement and Plan of Reorganization, dated as of June 4, 1999, among
the Company, PaeTec Merger Corp. and Campuslink Communications
Systems, Inc.
</TABLE>
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<PAGE>
<TABLE>
<C> <S>
10.14.2 Agreement and Plan of Reorganization Amendment No. 1, dated as of July 15, 1999,
among the Company, PaeTec Merger Corp. and Campuslink Communications Systems,
Inc.
10.15 Stockholders' Agreement, dated as of September 9, 1999, among the Company,
Alliance Cabletel Holdings, L.P., Kline Hawkes California SBIC, L.P., The Union
Labor Life Insurance Company Separate Account P, the individuals and/or entities
lised on Schedule A thereto, Arunas A. Chesonis, Christopher Edgecomb, Trustee of
the Christopher E. Edgecomb Living Trust dated April 25, 1998, and Jeffrey
Sudikoff.
10.15.1 Amendment No. 1 to Stockholders' Agreement, dated as of October 13, 1999, among
the Company, Alliance Cabletel Holdings, L.P., Kline Hawkes California SBIC,
L.P., The Union Labor Life Insurance Company Separate Account P, the individuals
and/or entities listed on Schedule A thereto, Arunas A. Chesonis, Christopher
Edgecomb, Trustee of the Christopher E. Edgecomb Living Trust dated April 25,
1998, and Jeffrey Sudikoff.
10.15.2 First Amendment to Stockholders' Agreement, dated as of February 4, 2000, among
the Company, Alliance Cabletel Holdings, L.P., Kline Hawkes California SBIC,
L.P., The Union Labor Life Insurance Company Separate Account P, the individuals
and/or entities listed on Schedule A thereto, Arunas A. Chesonis, Christopher
Edgecomb, Trustee of the Christopher E. Edgecomb Living Trust dated April 25,
1998, and Jeffrey Sudikoff.
10.16.1 Amended and Restated Loan and Security Agreement, dated as of October 29, 1999,
among PaeTec Communications, Inc., PaeTec International, Inc., PaeTec Online,
Inc., PaeTec Communications of Virginia, Inc., PaeTec Capital Corp., Campuslink
Communications Systems, Inc., Select Switch Acquisition Co., Parklink
Communications, Inc. and East Florida Communications, Inc. (collectively, the
"PaeTec Subsidiaries"), as Borrowers; Newcourt Commercial Finance Corporation
("Newcourt"), as Collateral Agent; Canadian Imperial Bank of Commerce ("CIBC"),
as Administrative Agent; and the other financial institutions from time to time
parties thereto.
10.16.2 Amendment No. 1, dated as of March 28, 2000, to Amended and Restated Loan and
Security Agreement dated as of October 29, 1999, by and among the PaeTec
Subsidiaries, as Borrowers; CIBC, Newcourt and Merrill Lynch Capital Corp., as
Assigning Lenders; Union Bank of California, N.A.; General Electric Capital
Corporation, as Accepting Lender; and CIBC, as Administrative Agent.
10.17 Amended and Restated Guaranty, dated as of October 29, 1999, by the Company, in
favor of Newcourt Commercial Finance Corporation, as Collateral Agent for the
ratable benefit of the Lenders identified in the Amended and Restated Loan and
Security Agreement of even date therewith and filed as Exhibit 10.16 hereto.
* 10.18 Form of Proxy for the Class B Common Stock.
10.19 Voting Agreement, dated as of February 4, 2000, by and among the Company, Arunas
A. Chesonis, Christopher E. Edgecomb, Trustee of the Christopher E. Edgecomb
Living Trust dated April 25, 1998, Jeffrey Sudikoff, Madison Dearborn Capital
Partners III, L.P., Madison Dearborn Special Equity III, L.P., Special Advisors
Fund I, LLC, Blackstone CCC Capital Partners L.P., Blackstone CCC Offshore
Capital Partners L.P., Blackstone Family Investment Partnership III L.P., Ares
Leveraged Investment Fund L.P., Ares Leveraged Investment Fund L.P. II, Newcourt
Commercial Finance Corporation, and UnionBanCal Equities, Inc.
10.20 Amended and Restated Registration Rights Agreement, dated as of February 4, 2000,
by and among the Company, Alliance Cabletel Holdings, L.P., Kline Hawkes
California SBIC, L.P., The Union Labor Life Insurance Corporation Separate
Account P, and the other individuals and/or entities listed on Schedule A
thereto; Madison Dearborn Capital Partners III, L.P., Madison Dearborn Special
Equity III, L.P. and Special Advisors Fund I, LLC; Blackstone CCC Capital
Partners L.P., Blackstone CCC Offshore Capital Partners L.P. and Blackstone
Family Investment Partnership III L.P.; Ares Leveraged Investment Fund L.P. and
Ares Leveraged Investment Fund L.P. II; Newcourt Commercial Finance Corporation;
and UnionBanCal Equities, Inc.
10.21 PaeTec Corp. 1998 Incentive Compensation Plan, as amended.
10.22 PaeTec Communications, Inc. Agent Incentive Plan, as amended.
</TABLE>
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<PAGE>
<TABLE>
<C> <S>
10.23.1 Stock Rights Agreement, dated October 30, 1998, among Katherine A.
Chapman, the Company, PaeTec Communications, Inc. and Arunas A.
Chesonis.
10.23.2 First Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Katherine A. Chapman, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
10.24.1 Registration Rights Agreement, dated as of December 8, 1999, among
the Company and the persons or entities listed on Schedule 1 thereto.
10.24.2 First Amendment to Registration Rights Agreement, dated as of
February 4, 2000, among the Company and the persons or entities
listed on Schedule 1 thereto.
10.25 Letter to Investors, dated September 20, 1998, together with
Statement of Registration Rights.
10.26.1 Lease Agreement, dated as of July 7, 1999, between WillowBrook II
L.L.C. and the Company.
10.26.2 Lease Amendment, dated February 11, 2000, between WillowBrook II
L.L.C. and the Company.
10.26.3 Lease Amendment, dated March 7, 2000, between WillowBrook II L.L.C.
and the Company.
10.27.1 Standard Office Space Lease, dated as of July 10, 1998, between 290
Woodcliff Drive Company and PaeTec Communications, Inc.
10.27.2 Lease Modification Agreement #1, dated September 30, 1998, between
290 Woodcliff Drive Company and PaeTec Communications, Inc.
10.27.3 Lease Modification Agreement #2, dated October 11, 1999, between 290
Woodcliff Drive Company and PaeTec Communications, Inc.
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP, independent auditors.
23.2 Consent of Arthur Andersen L.L.P., independent accountants.
*23.3 Consent of Hogan & Hartson L.L.P.
24.1 Power of Attorney (included in signature page).
27.1 Financial Data Schedule.
</TABLE>
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* To be filed by amendment.
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<PAGE>
(b) Financial Statement Schedules
The following consolidated financial statement schedule is filed
herewith:
Schedule II--Valuation and Qualifying Accounts.
PAETEC CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
---------- --------------------- ----------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
of Period Expenses Accounts of Period
---------- ---------- ---------- ----------
Year Ended December 31, 1999
- ---------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ 2 $ 1,164 $1,194(1) $ 2,360
Valuation allowance for deferred
tax assets $2,107 $14,524 $7,900(2) $24,531
<CAPTION>
Period Ended December 31, 1998
- ------------------------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ -- $ 2 $ -- $ 2
Valuation allowance for deferred
tax assets $ -- $ 2,107 $ -- $ 2,107
</TABLE>
- --------
(1) Primarily represents allowance acquired through acquisitions.
(2) Represents a valuation allowance applicable to net operating loss
carryforwards that were acquired by the Company in an acquisition.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such
II-9
<PAGE>
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Fairport,
State of New York, on April 14, 2000.
Paetec Corp.
/s/ Arunas A. Chesonis
By: _________________________________
Arunas A. Chesonis
Chairman, President and Chief
Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Arunas
A. Chesonis, Daniel J. Venuti and Richard E. Ottalagana, and each of them, his
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, from such person and in each person's name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement or any Registration
Statement relating to this Registration Statement under Rule 462 and to file
the same, with all exhibits thereto and all documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed as of April 14, 2000 by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
/s/ Arunas A. Chesonis Chairman, President and Chief
______________________________________ Executive Officer (Principal
Arunas A. Chesonis Executive Officer)
/s/ Richard E. Ottalagana Executive Vice President (Principal
______________________________________ Financial Officer)
Richard E. Ottalagana
/s/ Timothy J. Bancroft Vice President-Finance (Principal
______________________________________ Accounting Officer)
Timothy J. Bancroft
/s/ Bradford M. Bono Director
______________________________________
Bradford M. Bono
/s/ James A. Kofalt Director
______________________________________
James A. Kofalt
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
/s/ James H. Kirby Director
______________________________________
James H. Kirby
/s/ Lawrence H. Guffey Director
______________________________________
Lawrence H. Guffey
</TABLE>
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<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
*1.1 Form of U.S. Purchase Agreement.
*1.2 Form of International Purchase Agreement.
*3.1 Form of Restated Certificate of Incorporation of PaeTec Corp. (the
"Company"), to be effective upon completion of the offerings.
*3.2 Form of Amended and Restated Bylaws of the Company, to be effective
upon completion of the offerings.
*4.1 Form of Stock Certificate for the Class A Common Stock, par value $.01
per share, of the Company.
*5.1 Opinion by Hogan & Hartson L.L.P. regarding the validity of the Class
A Common Stock.
10.1.1 Stock Purchase Agreement, dated July 17, 1998, among Arunas A.
Chesonis, the Company and PaeTec Communications, Inc.
10.1.2 First Amendment to Stock Purchase Agreement, dated as of February 4,
2000, among Arunas A. Chesonis, the Company and PaeTec Communications,
Inc.
10.2 Stock Purchase Agreement, dated July 20, 1998, among Algimantas K.
Chesonis, Arunas A. Chesonis, the Company and PaeTec Communications,
Inc.
10.3.1 Stock Purchase Agreement, dated as of August 13, 1998, between the
Company and Christopher E. Edgecomb, Trustee of the Christopher E.
Edgecomb Living Trust dated April 25, 1998.
10.3.2 First Amendment to Stock Purchase Agreement, dated as of February 4,
2000, among the Company and Christopher E. Edgecomb, Trustee of the
Christopher E. Edgecomb Living Trust dated April 25, 1998.
10.4.1 Stock Purchase Agreement, dated August 20, 1998, between the Company
and Jeffrey P. Sudikoff.
10.4.2 First Amendment to Stock Purchase Agreement, dated as of February 4,
2000, between the Company and Jeffrey P. Sudikoff.
10.5.1 Stock Purchase Agreement, dated as of November 16, 1998, between the
Company and Newcourt Commercial Financial Corporation (f/k/a AT&T
Commercial Financial Corporation).
10.5.2 First Amendment to Stock Purchase Agreement, dated as of February 4,
2000, between the Company and Newcourt Commercial Financial
Corporation.
10.6.1 Stock Rights Agreement, dated July 17, 1998, among Joseph D.
Ambersley, the Company, PaeTec Communications, Inc. and Arunas A.
Chesonis
10.6.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Joseph D. Ambersley, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
10.6.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Joseph D. Ambersley, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
10.6.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Joseph D. Ambersley, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
10.7.1 Stock Rights Agreement, dated August 13, 1998, among Timothy J.
Bancroft, the Company, PaeTec Communications, Inc. and Arunas A.
Chesonis.
10.7.2 First Amendment to Stock Rights Agreement, dated September 30, 1998,
among Timothy J. Bancroft, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
10.7.3 Second Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Timothy J. Bancroft, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
10.8.1 Stock Rights Agreement, dated July 17, 1998, among John Baron, the
Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
10.8.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among John Baron, the Company, PaeTec Communications, Inc. and Arunas
A. Chesonis.
10.8.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among John Baron, the Company, PaeTec Communications, Inc. and Arunas
A. Chesonis.
10.8.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among John Baron, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.9.1 Stock Rights Agreement, dated July 17, 1998, among Bradford M. Bono,
the Company, PaeTec Communications, Inc. and Arunas A. Chesonis
10.9.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Bradford M. Bono, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
10.9.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Bradford M. Bono, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
10.9.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Bradford M. Bono, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
10.10.1 Stock Rights Agreement, dated July 17, 1998, among Edward J. Butler,
Jr., the Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
10.10.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Edward J. Butler, Jr., the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
10.10.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Edward J. Butler, Jr., the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
10.10.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Edward J. Butler, Jr., the Company, PaeTec
Communications, Inc. and Arunas A. Chesonis.
10.11.1 Stock Rights Agreement, dated July 17, 1998, among Richard E.
Ottalagana, the Company, PaeTec Communications, Inc. and Arunas A.
Chesonis.
10.11.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Richard E. Ottalagana, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
10.11.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Richard E. Ottalagana, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
10.11.4 Letter Agreement relating to Stock Rights Agreement, dated October
15, 1998, among Richard E. Ottalagana, the Company and PaeTec
Communications, Inc.
10.11.5 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Richard E. Ottalagana, the Company, PaeTec
Communications, Inc. and Arunas A. Chesonis.
10.12.1 Stock Rights Agreement, dated July 17, 1998, among Richard J. Padulo,
the Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
10.12.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Richard J. Padulo, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
10.12.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Richard J. Padulo, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
10.12.4 Letter Agreement relating to Stock Rights Agreement, dated October
15, 1998, among Richard J. Padulo, the Company and PaeTec
Communications, Inc.
10.12.5 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Richard J. Padulo, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
10.13.1 Stock Rights Agreement, dated July 17, 1998, among Daniel J. Venuti,
the Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
10.13.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Daniel J. Venuti, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
10.13.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Daniel J. Venuti, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
10.13.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Daniel J. Venuti, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
10.14.1 Agreement and Plan of Reorganization, dated as of June 4, 1999, among
the Company, PaeTec Merger Corp. and Campuslink Communications
Systems, Inc.
10.14.2 Agreement and Plan of Reorganization Amendment No. 1, dated as of
July 15, 1999, among the Company, PaeTec Merger Corp. and Campuslink
Communications Systems, Inc.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.15 Stockholders' Agreement, dated as of September 9, 1999, among the
Company, Alliance Cabletel Holdings, L.P., Kline Hawkes California
SBIC, L.P., The Union Labor Life Insurance Company Separate Account
P, the individuals and/or entities lised on Schedule A thereto,
Arunas A. Chesonis, Christopher Edgecomb, Trustee of the Christopher
E. Edgecomb Living Trust dated April 25, 1998, and Jeffrey Sudikoff.
10.15.1 Amendment No. 1 to Stockholders' Agreement, dated as of October 13,
1999, among the Company, Alliance Cabletel Holdings, L.P., Kline
Hawkes California SBIC, L.P., The Union Labor Life Insurance Company
Separate Account P, the individuals and/or entities listed on
Schedule A thereto, Arunas A. Chesonis, Christopher Edgecomb, Trustee
of the Christopher E. Edgecomb Living Trust dated April 25, 1998, and
Jeffrey Sudikoff.
10.15.2 First Amendment to Stockholders' Agreement, dated as of February 4,
2000, among the Company, Alliance Cabletel Holdings, L.P., Kline
Hawkes California SBIC, L.P., The Union Labor Life Insurance Company
Separate Account P, the individuals and/or entities listed on
Schedule A thereto, Arunas A. Chesonis, Christopher Edgecomb, Trustee
of the Christopher E. Edgecomb Living Trust dated April 25, 1998, and
Jeffrey Sudikoff.
10.16.1 Amended and Restated Loan and Security Agreement, dated as of October
29, 1999, among PaeTec Communications, Inc., PaeTec International,
Inc., PaeTec Online, Inc., PaeTec Communications of Virginia, Inc.,
PaeTec Capital Corp., Campuslink Communications Systems, Inc., Select
Switch Acquisition Co., Parklink Communications, Inc. and East
Florida Communications, Inc. (collectively, the "PaeTec
Subsidiaries"), as Borrowers; Newcourt Commercial Finance
Corporation, as Collateral Agent; Canadian Imperial Bank of Commerce,
as Administrative Agent; and the other financial institutions from
time to time parties thereto.
10.16.2 Amendment No. 1, dated as of March 28, 2000, to Amended and Restated
Loan and Security Agreement dated as of October 29, 1999, by and
among the PaeTec Subsidiaries, as Borrowers; CIBC, Newcourt and
Merrill Lynch Capital Corp., as Assigning Lenders; Union Bank of
California, N.A.; General Electric Capital Corporation, as Accepting
Lender; and CIBC, as Administrative Agent.
10.17 Amended and Restated Guaranty, dated as of October 29, 1999, by the
Company, in favor of Newcourt Commercial Finance Corporation, as
Collateral Agent for the ratable benefit of the Lenders identified in
the Amended and Restated Loan and Security Agreement of even date
therewith and filed as Exhibit 10.16 hereto.
*10.18 Form of Proxy for the Class B Common Stock.
10.19 Voting Agreement, dated as of February 4, 2000, by and among the
Company, Arunas A. Chesonis, Christopher E. Edgecomb, Trustee of the
Christopher E. Edgecomb Living Trust dated April 25, 1998, Jeffrey
Sudikoff, Madison Dearborn Capital Partners III, L.P., Madison
Dearborn Special Equity III, L.P., Special Advisors Fund I, LLC,
Blackstone CCC Capital Partners L.P., Blackstone CCC Offshore Capital
Partners L.P., Blackstone Family Investment Partnership III L.P.,
Ares Leveraged Investment Fund L.P., Ares Leveraged Investment Fund
L.P. II, Newcourt Commercial Finance Corporation, and UnionBanCal
Equities, Inc.
10.20 Amended and Restated Registration Rights Agreement, dated as of
February 4, 2000, by and among the Company, Alliance Cabletel
Holdings, L.P., Kline Hawkes California SBIC, L.P., The Union Labor
Life Insurance Corporation Separate Account P, and the other
individuals and/or entities listed on Schedule A thereto; Madison
Dearborn Capital Partners III, L.P., Madison Dearborn Special Equity
III, L.P. and Special Advisors Fund I, LLC; Blackstone CCC Capital
Partners L.P., Blackstone CCC Offshore Capital Partners L.P. and
Blackstone Family Investment Partnership III L.P.; Ares Leveraged
Investment Fund L.P. and Ares Leveraged Investment Fund L.P. II;
Newcourt Commercial Finance Corporation; and UnionBanCal Equities,
Inc.
10.21 PaeTec Corp. 1998 Incentive Compensation Plan, as amended.
10.22 PaeTec Communications, Inc. Agent Incentive Plan, as amended.
10.23.1 Stock Rights Agreement, dated October 30, 1998, among Katherine A.
Chapman, the Company, PaeTec Communications, Inc. and Arunas A.
Chesonis.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.23.2 First Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Katherine A. Chapman, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
10.24.1 Registration Rights Agreement, dated as of December 8, 1999, among the
Company and the persons or entities listed on Schedule 1 thereto.
10.24.2 First Amendment to Registration Rights Agreement, dated as of February
4, 2000, among the Company and the persons or entities listed on
Schedule 1 thereto.
10.25 Letter to Investors, dated September 20, 1998, together with Statement
of Registration Rights.
10.26.1 Lease Agreement, made as of July 7, 1999, between WillowBrook II
L.L.C. and the Company.
10.26.2 Lease Amendment, dated February 11, 2000, between WillowBrook II
L.L.C. and the Company.
10.26.3 Lease Amendment, dated March 7, 2000, between WillowBrook II L.L.C.
and the Company.
10.27.1 Standard Office Space Lease, dated as of July 10, 1998, between 290
Woodcliff Drive Company and PaeTec Communications, Inc.
10.27.2 Lease Modification Agreement #1, dated September 30, 1998, between 290
Woodcliff Drive Company and PaeTec Communications, Inc.
10.27.3 Lease Modification Agreement #2, dated October 11, 1999, between 290
Woodcliff Drive Company and PaeTec Communications, Inc.
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche, LLP, independent auditors.
23.2 Consent of Arthur Andersen L.L.P., independent accountants.
*23.3 Consent of Hogan & Hartson L.L.P.
24.1 Power of Attorney (included in signature page).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
Exhibit 10.1.1
STOCK PURCHASE AGREEMENT
This is a Stock Rights Agreement (the "Agreement"), dated July 17,
1998, between ARUNAS A. CHESONIS ("Shareholder"), PAETEC CORP., a Delaware
corporation with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 (the "Company"), and PAETEC COMMUNICATIONS, INC., a
Delaware corporation and wholly-owned subsidiary of the Company with its
principal place of business at 290 Woodcliff Drive, Fairport, New York 14450
("Subsidiary").
RECITALS
A. The Company is a Delaware corporation having 110,000,000 shares of
authorized capital stock, 10,000,000 of which are designated preferred stock,
75,000,000 of which are designated Class A common and 25,000,000 of which are
designated Class B common.
B. Shareholder is one of the founding Shareholders of the Company and
is an employee of the Subsidiary. The Company previously offered to issue to
Shareholder 2,500,000 shares of Class B common stock at a purchase price of $.48
per share, subject to certain restrictions.
C. The Company, Subsidiary, and Shareholder enter into this Agreement
for the purpose of confirming Shareholder's equity interest in the Company and
outlining the rights of and restrictions imposed by the Company with respect to
the shares of stock held by the Shareholder.
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares.
------------------
(a) The Company confirms its previous offer to issue 2,500,000 shares
of Class B common stock (the "Shares") to Shareholder at a price of $.48 per
share payable in full upon issuance of the Shares. A stock certificate
evidencing the Shares shall be issued in the name of Shareholder upon receipt of
this executed Agreement and payment in full of the purchase price.
(b) In order to induce the Company to issue the Shares, Shareholder
represents and warrants to the Company as follows:
(i) Shareholder (A) understands that an investment in the Shares
is speculative due to factors including (but not limited to) the start-up nature
of the Company and
<PAGE>
the risk of economic loss from the operations of the Company, but believes that
such an investment is suitable for Shareholder based upon Shareholder's
financial needs, (B) can withstand a complete loss of the investment in the
Shares, and (C) has the net worth to undertake these risks.
(ii) Shareholder is acquiring the Shares for the personal
account of Shareholder, with no present intention of reselling, distributing or
otherwise transferring the Shares or any portion of the Shares to anyone else,
except that the Company acknowledges Shareholder's intention to resell 50,000 of
his Shares to Algimantas K. Chesonis shortly after the issuance of the Shares to
Shareholder.
(iii) Shareholder understands and acknowledges that the Shares
are being offered and sold under one or more exemptions provided in the
Securities Act of 1933, as amended (the "Securities Act"), Regulation D
promulgated thereunder and applicable New York State securities laws, and that
this transaction has not been reviewed or passed upon by the United States
Securities and Exchange Commission, the New York State Attorney General, or any
other federal or state agency.
(iv) Shareholder realizes that Shareholder must bear the
economic risk of investment for an indefinite period of time because (A) the
Shares have not been registered under the Securities Act and cannot be resold by
Shareholder unless they are subsequently registered under the Securities Act or
an exemption from registration is available, (B) the transferability of the
Shares is restricted by the terms of this Agreement, and (C) there currently is
no public market for the Shares, and Shareholder may not be able to liquidate
the investment in the Shares in the event of an emergency. Shareholder has
adequate means of providing for Shareholder's current financial needs and
personal contingencies, and has no need for liquidity of investment with respect
to the Shares.
(v) Shareholder believes that Shareholder, either alone or
together with the assistance of professional advisor(s), has knowledge and
experience in business and financial matters sufficient to make Shareholder
capable of evaluating the merits and risks of an investment in the Shares.
(vi) Shareholder is fully familiar with the business of the
Company and its present and proposed operations. Shareholder has been given
reasonable opportunity to ask representatives of the Company questions
concerning the Company and making an investment in the Shares. Shareholder has
obtained sufficient information to evaluate the merits and risks of an
investment in the Shares.
(vii) Shareholder confirms that Shareholder has been advised to
rely on professional accounting, tax, legal and financial advisers with respect
to an investment in the Shares and has obtained, to the extent Shareholder deems
it necessary, professional advice
2
<PAGE>
with respect to the risks inherent in an investment in the Shares and the
suitability of an investment in the Shares in light of Shareholder's financial
condition and investment needs.
2. Non-Competition.
---------------
(a) For a period of one year after termination of Shareholder's
employment with the Subsidiary (regardless of the reason for termination),
Shareholder shall not, directly or indirectly:
(i) solicit or serve clients or customers of the Company or any
affiliate of the Company (including the Subsidiary), whether for Shareholder's
own account or as an employee, shareholder, partner, officer, member, manager,
director, consultant, or other representative of any third party;
(ii) direct any business from, or enter into competition with,
the Company or any affiliate of the Company (including the Subsidiary) in any
line of business in which the Company or such affiliate was conducting
operations during Shareholder's employment; or
(iii) serve as an employee, shareholder, partner, officer, member,
manager, director, consultant or other representative of any third party which
engages in any line of business competitive with the Company or any affiliate of
the Company (including the Subsidiary) anywhere in the world.
Shareholder acknowledges that the foregoing limitations are reasonable in time
and scope and agrees not to raise any objection to the reasonableness of the
foregoing in any action or proceeding to enforce the terms of this Section.
(b) As consideration for the non-competition covenant set forth in
subparagraph (a) above, the Subsidiary agrees that, if Shareholder's employment
is terminated by the Subsidiary for any reason; or terminates due to the death,
disability, voluntary resignation, or withdrawal of Shareholder, Subsidiary
shall pay Shareholder or Shareholder's personal representative, during the one-
year period in which the covenant is in effect, an amount equal to the
annualized base salary paid to Shareholder immediately prior to termination of
Shareholder's employment. Payment shall be made in accordance with the
Subsidiary's customary payroll practices.
(c) Should Shareholder violate the terms of the non-competition
covenant set forth in subparagraph (a), the Company shall notify Shareholder in
writing of the alleged violation that constitutes a breach of this Agreement,
and Shareholder shall have 10 business days to cure the breach. If the breach
is not cured to the satisfaction of the Company, then in addition to any other
remedies available under law, the Company may discontinue any payments being
made to Shareholder pursuant to subparagraph (b) hereof.
3
<PAGE>
(d) Shareholder acknowledges that his/her services are unique and
extraordinary and are not readily replaceable, and hereby expressly agrees that,
in the event of a violation of the non-competition covenant set forth in
subparagraph (a), the Company and its affiliates (including Subsidiary) will be
irreparably harmed and the remedy of damages or other remedy at law will be
inadequate. Therefore, Shareholder agrees that, in the event of a threatened or
actual violation of the non-competition covenant, the Company shall be entitled
to obtain from any court of competent jurisdiction, an injunction restraining
Shareholder from committing the violation, without the necessity of proving
actual damage and in addition to any other relief available under this Agreement
or at law.
3. Piggy-Back Registration Rights.
------------------------------
(a) If at any time or from time to time the Company shall determine to
register any of its equity securities, either for its own account or the account
of a security holder or holders (other than a registration of securities
relating solely to employee benefit plans or to effect a merger or other
reorganization), the Company will promptly give to Shareholder written notice
thereof and, upon the written request of Shareholder, include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Shares specified
in the written request made within 10 business days after receipt of such
written notice from the Company.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise Shareholder as a part of the written notice given to Shareholder. In
such event the right of any Shareholder to registration pursuant to this Section
3 shall be conditioned upon Shareholder's participation in such underwriting,
and the inclusion of Shares in the underwriting shall be limited to the extent
provided herein. Shareholder (together with the Company and the other holders
distributing their securities through such underwriting) shall enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 3, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may exclude some or all of the Shares or securities of other holders
of similar registration rights from such registration. The Company shall so
advise Shareholder and other stockholders distributing their securities through
such underwriting, and the number of Shares or securities of other holders of
similar registration rights that may be included in the registration and
underwriting, as determined by the managing underwriter, shall be allocated on a
pro rata basis. If Shareholder disapproves of the terms of any such
underwriting, Shareholder may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. Any securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration, and shall
continue to be subject to the terms of this Section.
4
<PAGE>
(c) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 3 prior to the effectiveness of
such registration whether or not Shareholder has elected to include securities
in such registration.
(d) All expenses associated with the registration (including, without
limitation, registration, qualification and filing fees, printing expenses, blue
sky fees, and fees and disbursements of counsel and accountants for the Company)
shall be borne by the Company. Selling expenses, including underwriters'
discounts, shall be borne by Shareholder pro rata in proportion to the number of
securities being registered.
(e) In the case of each registration under this Section, the Company
will:
(i) prepare and file a registration statement with respect to
such securities and use its best efforts to cause such registration statement to
become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
(ii) furnish to Shareholder such reasonable number of copies of
the registration statement, preliminary prospectus, final prospectus and such
other documents as Shareholder may reasonably request in order to facilitate the
public offering of the Shares; and
(iii) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by Shareholder,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify as a foreign corporation or as a dealer in
securities or to file a general consent to service of process in any such states
or jurisdictions in which it has not already done so and except as may be
required by the Securities Act.
(f) The Company will indemnify Shareholder against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof), arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, or any violation by the Company of the Securities Act of 1933, the
Securities Exchange Act of 1934, state securities law or any rule or regulation
promulgated under such laws applicable to the Company in connection with any
such registration, qualification or compliance, and the Company will reimburse
Shareholder for any legal and any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, provided that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense
5
<PAGE>
arises out of or is based on any untrue statement or omission, or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by
Shareholder.
(g) Shareholder will, if Shares held by such Shareholder are included
in the securities as to which such registration is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a registration statement against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company, such
Shareholders, such directors, officers, persons, underwriters or control persons
for any legal or any other expenses reasonably incurred, as such expenses are
incurred, in connection with investigating or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by Shareholder and
stated to be specifically for use therein.
(h) Shareholder shall furnish to the Company such information
regarding Shareholder, the Shares held by Shareholder, and the distribution
proposed by Shareholder as the Company may request in writing and as shall be
required in connection with any registration referred to in this Agreement.
(i) The registration rights granted to Shareholder in this Section
shall expire at such time (if ever) as Shareholder is free to sell the Shares
under Rule 144 promulgated under the Securities Act (or any successor thereto)
without limitation as to volume or manner of sale restrictions.
4. Legend. Each certificate for Shares owned by Shareholder shall
------
bear the following legend:
The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be transferred in the absence of such registration
unless the Company receives an opinion of counsel reasonably
acceptable to it stating the such sale or transfer is exempt
from registration.
5. Notices. All notices and communications under this Agreement
-------
shall be in writing and shall be given by personal delivery or by registered or
certified mail, return receipt requested, addressed to the residence of
Shareholder set forth below or to such other
6
<PAGE>
address as may be designated by Shareholder, and to the principal office of the
Company. Notice shall be deemed given upon personal delivery or upon receipt.
6. Miscellaneous.
-------------
(a) Neither this Agreement, nor any action taken under it, shall be
construed as creating any limitation or restriction upon any right that
Subsidiary would otherwise have to terminate the employment of Shareholder at
any time for any reason.
(b) This Agreement may be modified or amended only upon the written
consent of all parties to the Agreement.
(c) This Agreement shall be interpreted, construed, and enforced in
accordance with the laws of the State of New York.
(d) Neither this Agreement, nor any rights or obligations under it,
may be assigned by any party without the prior written consent of the other
parties.
(e) This Agreement shall benefit and be binding upon the parties and
their successors, heirs, executors, personal representatives, and assigns.
(f) This Agreement sets forth the entire understanding and agreement
of the parties with respect to its subject matter and supersedes all prior
letters, agreements, covenants, communications, understandings, representations,
or warranties, whether oral or written, by any officer, employee, or
representative of either party.
(g) The waiver of any provision of this Agreement, or of any breach of
this Agreement, shall not constitute a subsequent waiver of any provision or
breach.
(h) In the event that Shareholder is a prevailing party in any
litigation arising under or in connection with this Agreement, the Company shall
pay the reasonable attorneys fees and expenses incurred by Shareholder in
connection with the litigation.
(i) If, at any time, any of the provisions of this Agreement shall be
deemed by a court or other body having jurisdiction over this Agreement to be
illegal, invalid, or unenforceable, those provisions shall be deemed severed
from this Agreement. The remaining provisions of this Agreement shall be valid
and binding as if this Agreement had never contained any illegal, invalid, or
otherwise unenforceable provisions, without the requirement that the amendment
be recorded in a writing signed by the parties.
7
<PAGE>
The parties' assent to the terms of this Agreement is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Richard E. Ottalagana
-------------------------------------
Title: Executive Vice President
PAETEC COMMUNICATIONS, INC.
By: /s/ Richard E. Ottalagana
-------------------------------------
Title: Executive Vice President
Address: /s/ Arunas A. Chesonis
----------------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
8
<PAGE>
Exhibit 10.1.2
FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT (this "Amendment") is
made as of this 4th day of February 2000 by and between PaeTec Corp., a Delaware
corporation (the "Company"), PaeTec Communications, Inc., a Delaware corporation
(the "Subsidiary"), and Arunas A. Chesonis (the "Shareholder").
RECITALS
--------
A. The Company, the Subsidiary and the Shareholder are parties to a
Stock Purchase Agreement dated as November 16, 1998 (the "Stock Purchase
Agreement").
B. The Board of Directors of the Company has authorized the issuance
and sale (the "Series A Preferred Stock Placement") of 134,000 shares of a new
series of preferred stock of the Company, designated the Series A Convertible
Preferred Stock, to the purchasers (the "Purchasers") listed on the Schedule of
Purchasers to, and pursuant to the terms and conditions of, an Equity Purchase
Agreement (the "Purchase Agreement").
C. As a condition to the consummation of the Series A Preferred Stock
Placement, the Purchasers have required that the Company, the Subsidiary the
Shareholder amend the Stock Purchase Agreement to clarify that, to the extent
that any securities are required to be excluded from a registration pursuant to
the "cut-back" provisions of the piggyback registration rights granted to the
Purchaser pursuant to the Stock Purchase Agreement, the securities to be
included in such registration shall be determined on a pro rata basis among the
--- ----
holders of shares participating in the offering pursuant to registration rights
granted by the Company, based on the number of shares of common stock requested
to be included by each such holder in such registration.
D. The parties hereto desire to amend the Stock Purchase Agreement to
induce the Purchasers to consummate the Series A Preferred Stock Placement.
AGREEMENT
---------
1. Defined Terms. All capitalized terms used in this Amendment
-------------
without definition shall have the meanings given to such terms in the Stock
Purchase Agreement.
<PAGE>
2. Amendment of Section 3(b). The fourth and fifth sentences of
-------------------------
Section 3(b) of the Stock Purchase Agreement are hereby deleted and replaced and
superseded in their entirety with the following sentence:
"Notwithstanding any other provision of this Section 3, if the managing
underwriter advises in writing the Company and the Shareholder that
marketing factors require a limitation of the number of shares of common
stock to be underwritten and sold in such offering, the managing
underwriter may exclude some or all of the shares of common stock to be
sold in such offering from such registration, and the shares to be included
in such registration shall be allocated pro rata among the holders of
--- ----
shares participating in the offering pursuant to registration rights
granted by the Company (including demand and piggyback registration
rights), based on the number of shares of common stock requested to be
included by each holder in such registration."
All other terms and conditions of the Stock Purchase Agreement remain in full
force and effect.
3. Binding Effect. This Amendment shall be binding upon and inure to
--------------
the benefit of the parties hereto and their heirs, executors, administrators,
successors and assigns.
4. Governing Law. This Amendment shall be governed by, and construed
-------------
and enforced in accordance with, the laws of the State of New York, except that
if any provision of this Amendment or any part of any such provision would be
illegal, invalid or enforceable under such laws in connection with a suit or
proceeding validly instituted in another jurisdiction, then the laws of such
other jurisdiction shall govern insofar as is necessary to sustain the legality,
validity or enforceability of such provision or any part of such provision.
5. Captions. Captions to the Sections in this Amendment are for the
--------
convenience of the parties only and shall not affect the meaning or
interpretation of this Amendment.
6. Enforceability and Interpretation. It is the intention of the
---------------------------------
parties to this Amendment that the terms and provisions contained in this
Amendment shall be enforceable to the fullest extent permitted by law. If any
term or provision of this Amendment or the application thereof to any Person or
circumstance is construed to be illegal, invalid or unenforceable, in whole or
in part, then such term or provision shall be construed in such a manner as to
permit its enforceability under applicable law to the fullest extent permitted
by such law. In
2
<PAGE>
any case, the remaining terms and provisions of this Amendment or the
application thereof to any Person or circumstance, except those terms and
provisions which have been held illegal, invalid or unenforceable, shall remain
in full force and effect.
7. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8. Additional Documents. Each party hereto agrees to execute any and
--------------------
all documents, instruments, certificates and communications deemed to be
necessary or advisable by the Company to effectuate the purposes of this
Amendment.
[signature page follows]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment with full force and effect as of the day and year first written
above.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
-------------------------------
Its: CEO, Chairman and President
-------------------------------
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
-------------------------------
Its: CEO, Chairman and President
-------------------------------
/s/ Arunas A. Chesonis
------------------------------------
Arunas A. Chesonis
4
<PAGE>
Exhibit 10.2
STOCK PURCHASE AGREEMENT
This is a Stock Purchase Agreement (the "Agreement"), dated July 20,
1998, among ALGIMANTAS K. CHESONIS, an individual residing at 17 Clarks
Crossing, Fairport, New York 14450 ("Purchaser"), ARUNAS A. CHESONIS, an
individual residing at 18 Buckthorn Run, Victor, New York 14564 ("Seller"),
PAETEC CORP., a Delaware corporation with its principal place of business at 290
Woodcliff Drive, Fairport, New York 14450 (the "Company"), and PAETEC
COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary of the
Company with its principal place of business at 290 Woodcliff Drive, Fairport,
New York 14450 (the "Subsidiary").
RECITALS
A. The Company has 110,000,000 shares of authorized capital stock,
10,000,000 of which are designated preferred stock, 75,000,000 of which are
designated Class A common stock, and 25,000,000 of which are designated Class B
common stock.
B. Seller is one of the founding shareholders of the Company and an
employee of the Subsidiary. The Company has issued to Seller 2,500,000 shares of
Class B common stock at a purchase price of $.48 per share, subject to certain
restrictions.
C. Purchaser, who is also an employee of Subsidiary, desires to
purchase, and Seller agrees to sell, 50,000 shares of the Class B common stock
of the Company, subject to the terms and conditions of this Agreement.
D. Purchaser, Seller, the Company, and the Subsidiary enter into this
Agreement for the purpose of confirming the terms of sale of the 50,000 shares
to Purchaser by Seller and outlining the rights of and restrictions imposed by
the Company with respect to the shares.
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Purchase of Shares. Seller hereby agrees to sell 50,000 shares of
------------------
Class B common stock (the "Shares") to Purchaser at a price of $.48 per share,
payable in full upon execution of this Agreement. Upon receipt of this executed
Agreement and payment in full of the purchase price, Seller shall return to the
Company his stock certificate evidencing 2,500,000 shares, and the Company shall
issue two new certificates, one to Seller evidencing his remaining 2,450,000
shares, and one to Purchaser evidencing his 50,000 Shares.
2. Representations and Warranties of Purchaser. In order to induce
-------------------------------------------
the Company to issue the Shares, Purchaser represents and warrants to the
Company as follows:
<PAGE>
(a) Purchaser (i) understands that an investment in the Shares is
speculative due to factors including (but not limited to) the start-up nature of
the Company and the risk of economic loss from the operations of the Company,
but believes that such an investment is suitable for Purchaser based upon
Purchaser's financial needs, (ii) can withstand a complete loss of the
investment in the Shares, and (iii) has the net worth to undertake these risks.
(b) Purchaser is acquiring the Shares for the personal account of
Purchaser, with no present intention of reselling, distributing or otherwise
transferring the Shares or any portion of the Shares to anyone else.
(c) Purchaser understands and acknowledges that the Shares are being
offered and sold under one or more exemptions provided in the Securities Act of
1933, as amended (the "Securities Act"), Regulation D promulgated thereunder and
applicable state securities laws, and that this transaction has not been
reviewed or passed upon by the United States Securities and Exchange Commission,
or any other federal or state agency.
(d) Purchaser realizes that Purchaser must bear the economic risk of
investment for an indefinite period of time because (i) the Shares have not been
registered under the Securities Act and cannot be resold by Purchaser unless
they are subsequently registered under the Securities Act or an exemption from
registration is available, and (ii) there currently is no public market for the
Shares, and Purchaser may not be able to liquidate the investment in the Shares
in the event of an emergency. Purchaser has no need for liquidity of investment
with respect to the Shares.
(e) Purchaser has substantial experience in evaluating and investing
in companies similar to the Company, and is capable of evaluating the merits and
risks of his investment in the Company and has the capacity to protect his own
interests.
(f) Purchaser is fully familiar with the business of the Company and
its present and proposed operations. Purchaser has been given reasonable
opportunity to ask representatives of the Company questions concerning the
Company and making an investment in the Shares. Purchaser has obtained
sufficient information to evaluate the merits and risks of an investment in the
Shares.
(g) Purchaser confirms that Purchaser has been advised to rely on
professional accounting, tax, legal and financial advisers with respect to an
investment in the Shares and has obtained, to the extent Purchaser deems it
necessary, professional advice with respect to the risks inherent in an
investment in the Shares and the suitability of an investment in the Shares in
light of Purchaser's financial condition and investment needs.
2
<PAGE>
3. Restriction on Transfer of Shares. Purchaser may not sell,
---------------------------------
transfer, pledge, assign, transfer, or otherwise encumber or dispose of, in any
manner or by any means, any Shares that are subject to the Company's Purchase
Option described in Section 4 of this Agreement. This restriction on transfer
does not apply to any Shares that, pursuant to Section 4, no longer are subject
to the Company's Purchase Option or to any additional shares of capital stock of
the Company that Purchaser might acquire in the future.
4. Purchase of Shares by Company upon Termination of Employment with
-----------------------------------------------------------------
Subsidiary. Upon termination of Purchaser's employment with the Subsidiary, the
- ----------
Company shall have an option, but shall not be obligated, to purchase (the
"Purchase Option") from Purchaser or Purchaser's personal representative all or
a portion of Purchaser's Shares, as set forth in the following subparagraphs.
(a) If Purchaser's employment with the Subsidiary terminates due
to voluntary separation or dismissal for Cause (as defined below), the number of
Shares that are subject to the Company's Purchase Option shall be determined as
follows:
(i) The Company shall have the option to purchase up to
100% of the Shares should Purchaser's employment terminate at any time prior to
the first anniversary of Purchaser's employment with the Subsidiary.
(ii) The Company shall have the option to purchase up to
60% of the Shares should Purchaser's employment terminate on the first
anniversary date, or at any time between the first and second anniversary dates,
of Purchaser's employment with the Subsidiary.
(iii) The Company shall have the option to purchase up to
40% of the Shares should Purchaser's employment terminate on the second
anniversary date, or at any time between the second and third anniversary dates,
of Purchaser's employment with the Subsidiary.
(iv) The Company shall have the option to purchase up to
20% of the Shares should Purchaser's employment terminate on the third
anniversary date, or at any time between the third and fourth anniversary dates,
of Purchaser's employment with the Subsidiary.
(b) If Purchaser's employment with the Subsidiary terminates
because of Purchaser's death or disability, Purchaser or Purchaser's personal
representative may negotiate a transfer of all or a portion of Purchaser's
Shares to the Company at any time. With respect to Shares that were subject to
the Company's Purchase Option and that are not transferred to the Company, the
transfer restrictions set forth in Section 3 above shall apply to the same
extent that they would have applied if Purchaser's employment had continued.
This restriction on transfer does not apply to any Shares that would no longer
have been subject to
3
<PAGE>
the Company's Purchase Option, or to any additional shares of capital stock of
the Company that Purchaser might acquire in the future.
(c) In the event that Purchaser's employment with the Subsidiary
terminates for any reason not addressed in subparagraphs (a) and (b) above, the
Company's Purchase Option, together with all transfer restrictions set forth in
Section 3, shall fully expire effective as of the date of termination.
(d) The Company's Purchase Option shall fully expire on the
fourth anniversary of Purchaser's employment with the Subsidiary. Shares as to
which the Company's Purchase Option has expired are no longer subject to the
transfer restrictions set forth in Section 3.
(e) To exercise its Purchase Option, the Company must notify
Purchaser or Purchaser's personal representative of its intention to exercise
its Purchase Option within 60 days after the date of termination of Purchaser's
employment with the Subsidiary. Should the Company fail to exercise the Purchase
Option within such 60-day period, the Shares shall no longer be subject to the
transfer restrictions set forth in Section 3.
(f) In the event of a consolidation or merger of the Company
with or into any other person or entity, a sale of all or substantially all of
the assets of the Company to another person or entity, or an acquisition of more
than 50% of the capital stock of the Company by another person or entity, the
Company's Purchase Option shall be terminated as of the effective date of the
transfer. Notwithstanding the foregoing, the Company's Purchase Option shall not
be terminated or in any other way affected by an initial public offering of
stock by the Company.
5. Company's Purchase Price and Payment Terms. The price for all
------------------------------------------
Shares purchased by the Company pursuant to the Purchase Option shall be $.48
per Share. Payment shall be made in full for all purchased Shares within 30
days after the date on which the Company delivers notice of its intention to
exercise the Purchase Option. Upon payment, Purchaser or Purchaser's personal
representative shall deliver all stock certificates for purchased Shares,
properly endorsed in blank, to the Company or its designee.
6. Proxy. Concurrently with the execution of this Agreement and the
-----
issuance of the Shares, Purchaser is executing and delivering an irrevocable
proxy appointing Arunas A. Chesonis Purchaser's attorney-in-fact and proxy to
vote all Shares now or hereafter owned by Purchaser at any meeting of
shareholders, regular or special, whenever called, and for whatever purpose. A
copy of the proxy shall be filed with the Secretary of the Company and
registered in the stock books of the Company. Any transfer of the Shares is
subject to the terms of this irrevocable proxy.
4
<PAGE>
7. Legends. Each certificate for Shares owned by Purchaser shall
-------
bear the following legends:
(a) The shares represented by this certificate were issued
to the shareholder with restrictions. Neither the shares,
nor any interest in them, may be sold, transferred, assigned,
pledged, hypothecated, or otherwise disposed of, if restricted
pursuant to a stock purchase agreement between the shareholder
and the Company, a copy of which is on file at the office of
the Company in Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be transferred in the absence of such registration
unless the Company receives an opinion of counsel reasonably
acceptable to it stating the such sale or transfer is exempt
from registration.
(c) The shares represented by this certificate are subject
to an irrevocable proxy in favor of Arunas A. Chesonis, a
copy of which is on file with the Company. Any transferee of
the shares represented by this certificate shall take the
shares subject to the terms of the irrevocable proxy.
With respect to Shares that are subject to the Purchase Option described in
Section 4 of this Agreement, however, Purchaser shall be entitled to a
certificate without the legend set forth in subparagraph (a), evidencing any
Shares as to which the Company's Purchase Option has expired.
8. Confidentiality; Non-Competition.
--------------------------------
(a) (i) Purchaser acknowledges that the Company has acquired
and developed and will continue to acquire and develop techniques, plans,
processes, computer programs, equipment, and lists of customers and their
particular requirements that may pertain to Company-related services and
equipment, and related trade secrets, know-how, research, and development, which
are proprietary and confidential in nature and are and will continue to be of
unique value to the Company and its business (all referred to as "Confidential
Information"). Purchaser shall keep and maintain as confidential and proprietary
to the Company all Confidential Information known or in the possession of
Purchaser.
(ii) Purchaser shall not (A) disclose any Confidential
Information at any time, directly or indirectly, in any manner to any person or
firm, except to other employees of the Company on a "need to know" basis, or (B)
solicit any officer,
5
<PAGE>
director, employee or agent of the Company or any affiliate of the Company to
become an officer, director, employee or agent of Purchaser or anyone else.
(iii) Upon termination of employment with the Subsidiary for
any reason, Purchaser shall, without demand therefor, deliver to the Company all
Confidential Information in Purchaser's possession. The obligations of this
subparagraph (a) shall survive the termination of this Agreement indefinitely.
(b) (i) For a period of one year after termination of
Purchaser's employment with the Subsidiary (regardless of the reason for
termination), Purchaser shall not, directly or indirectly:
(A) solicit or serve clients or customers of the
Company or any affiliate of the Company (including the Subsidiary), whether for
Purchaser's own account or as an employee, shareholder, partner, officer,
member, manager, director, consultant, or other representative of any third
party;
(B) direct any business from, or enter into
competition with, the Company or any affiliate of the Company (including the
Subsidiary) in any line of business in which the Company or such affiliate was
conducting operations during Purchaser's employment; or
(C) serve as an employee, shareholder, partner,
officer, member, manager, director, consultant or other representative of any
third party which engages in any line of business competitive with the Company
or any affiliate of the Company (including the Subsidiary) anywhere in the
world.
Purchaser acknowledges that the limitations of this subparagraph (b)(i) are
reasonable in time and scope and agrees not to raise any objection to the
reasonableness of the foregoing in any action or proceeding to enforce the terms
of this Section.
(ii) As consideration for the non-competition covenant set
forth in subparagraph (b)(i) above, the Subsidiary agrees that, if Purchaser's
employment is terminated by the Subsidiary without Cause, Subsidiary shall pay
Purchaser or Purchaser's personal representative during the one-year period in
which the covenant is in effect an amount equal to the annualized base salary
paid to Purchaser immediately prior to termination of Purchaser's employment.
Payment shall be made in accordance with the Subsidiary's customary payroll
practices. Continued payment of Purchaser's base salary under this subparagraph
(b)(ii) shall not be made if termination of Purchaser's employment is due to
Purchaser's death, disability, voluntary resignation or withdrawal or
termination for "Cause" (as defined below).
6
<PAGE>
(iii) As additional consideration for the non-competition
covenant set forth in subparagraph (b)(i) above, the Company agrees that (A) in
the event Purchaser's employment terminates due to the death or disability of
Purchaser or is terminated by Subsidiary without Cause, the one-year period
during which the non-competition covenant is to be in effect shall be counted as
a year of employment with Subsidiary for purposes of determining the percentage
of Shares that is subject to the Company's Purchase Option, and (B) in the event
Purchaser's employment is terminated by the Subsidiary for Cause or terminates
due to the voluntary resignation or withdrawal of Purchaser, the Company shall
have the option of (1) waiving the non-competition covenant set forth in
subparagraph (b)(i) above or (2) counting the one-year period during which the
non-competition covenant is to be in effect as a year of employment for purposes
of determining the percentage of Shares that is subject to the Company's
Purchase Option.
(c) (i) Should Purchaser violate the terms of the non-
competition covenant set forth in subparagraph (b)(i), the Company, the Company
shall notify Purchaser in writing of the alleged violation that constitutes a
breach of this Agreement, and Purchaser shall have 10 business days to cure the
breach. If the breach is not cured to the satisfaction of the Company, then in
addition to any other remedies available under law, the Company may (A)
discontinue any payments being made to Purchaser pursuant to subparagraph
(b)(ii) hereof, and (B) exercise its Purchase Option with respect to any
additional Shares that would have been subject to the Purchase Option had the
one-year period of the non-competition covenant not been counted as an
additional year of employment pursuant to the terms of subparagraph (b)(iii)
hereof. Exercise of the Purchase Option with respect to such additional Shares
shall be made in accordance with the terms of Sections 3 and 4 hereof, except
that the Company may exercise the Purchase Option at any time within 60 days
after the Company first becomes aware of Purchaser's violation of subparagraph
(b)(i).
(ii) In the event that the Company fails to make any
payment due to Purchaser pursuant to subparagraph (b)(ii) above, Purchaser shall
notify the Company in writing of the alleged failure to make payment that
constitutes a breach of this Agreement, and the Company shall have 5 business
days to cure the breach. If the breach is not cured to the satisfaction of
Purchaser, then the non-competition covenant set forth in subparagraph (b)(i)
shall be null and void and of no further force and effect.
(d) For purposes of subparagraph (b) above, termination for
"Cause" shall mean termination of Purchaser's employment with the Subsidiary due
to: (i) material failure or refusal to perform the duties assigned to Purchaser,
(ii) refusal of Purchaser to follow the reasonable directives of the Board of
Directors or Chief Executive Officer of the Subsidiary, (iii) conviction of a
felony, (iv) misappropriation of any funds or property of the Company or any
affiliate of the Company (including the Subsidiary), or (v) commission of any
act which could materially injure the business or reputation of, or materially
adversely affect the interests of Company or any affiliate of the Company
(including the Subsidiary).
7
<PAGE>
(e) Purchaser acknowledges that his/her services are unique and
extraordinary and are not readily replaceable, and hereby expressly agrees that,
in the event of a violation of the confidentiality covenant set forth in
subparagraph (a) or the non-competition covenant set forth in subparagraph (b),
the Company and its affiliates (including Subsidiary) will be irreparably harmed
and the remedy of damages or other remedy at law will be inadequate. Therefore,
Purchaser agrees that, in the event of a threatened or actual violation of the
confidentiality or non-competition covenant, the Company shall be entitled to
obtain from any court of competent jurisdiction, an injunction restraining
Purchaser from committing the violation, without the necessity of proving actual
damage and in addition to any other relief available under this Agreement or at
law.
(f) The Company and Purchaser believe that the covenants of this
Section 8 are reasonable. However, if at any time it shall be determined by any
court of competent jurisdiction that this Section 8 or any portion of it, as
written, is unenforceable because the restrictions are unreasonable, the Company
and Purchaser agree that such portions as shall have been determined to be
unreasonably restrictive shall be deemed so amended as to make the restrictions
reasonable in the determination of the court, and the covenants, as so modified,
shall be enforceable to the same extent as if the amendments had been made prior
to the date of any alleged breach of these covenants.
9. Piggy-Back Registration Rights.
------------------------------
(a) If at any time or from time to time the Company shall
determine to register any of its equity securities, either for its own account
or the account of a security holder or holders (other than a registration of
securities relating solely to employee benefit plans or to effect a merger or
other reorganization), the Company will promptly give to Purchaser written
notice thereof and, upon the written request of Purchaser, include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Shares specified
in the written request made within 10 days after receipt of such written notice
from the Company.
(b) If the registration of which the Company gives notice is for
a registered public offering involving an underwriting, the Company shall so
advise Purchaser as a part of the written notice given to Purchaser. In such
event the right of any Purchaser to registration pursuant to this Section 9
shall be conditioned upon Purchaser's participation in such underwriting, and
the inclusion of Shares in the underwriting shall be limited to the extent
provided herein. Purchaser (together with the Company and the other holders
distributing their securities through such underwriting) shall enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 9, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may exclude some or all of the Shares or securities of other holders
of similar registration rights from such registration. The Company shall so
8
<PAGE>
advise Purchaser and other stockholders distributing their securities through
such underwriting, and the number of Shares or securities of other holders of
similar registration rights that may be included in the registration and
underwriting, as determined by the managing underwriter, shall be allocated on a
pro rata basis. If Purchaser disapproves of the terms of any such underwriting,
Purchaser may elect to withdraw therefrom by written notice to the Company and
the managing underwriter. Any securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration, and shall continue to be
subject to the terms of this Section.
(c) The Company shall have the right to terminate or withdraw
any registration initiated by it under this Section 9 prior to the effectiveness
of such registration whether or not Purchaser has elected to include securities
in such registration.
(d) All expenses associated with the registration (including,
without limitation, registration, qualification and filing fees, printing
expenses, blue sky fees, and fees and disbursements of counsel and accountants
for the Company) shall be borne by the Company. Selling expenses, including
underwriters' discounts, shall be borne by Purchaser pro rata in proportion to
the number of securities being registered.
(e) In the case of each registration under this Section, the
Company will:
(i) prepare and file a registration statement with respect
to such securities and use its best efforts to cause such registration statement
to become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
(ii) furnish to Purchaser such reasonable number of copies
of the registration statement, preliminary prospectus, final prospectus and such
other documents as Purchaser may reasonably request in order to facilitate the
public offering of the Shares; and
(iii) use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by
Purchaser, provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify as a foreign corporation or as a
dealer in securities or to file a general consent to service of process in any
such states or jurisdictions in which it has not already done so and except as
may be required by the Securities Act.
(f) The Company will indemnify Purchaser against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof), arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or
9
<PAGE>
supplement thereto, incident to any such registration, or based on any omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or any violation by the
Company of the Securities Act of 1933, the Securities Exchange Act of 1934,
state securities law or any rule or regulation promulgated under such laws
applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse Purchaser for any
legal and any other expenses reasonably incurred, as such expenses are incurred,
in connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission, or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by
Purchaser.
(g) Purchaser will, if Shares held by such Purchaser are
included in the securities as to which such registration is being effected,
indemnify the Company, each of its directors and officers, each underwriter, if
any, of the Company's securities covered by such a registration statement
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Purchasers, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by Purchaser and stated to be specifically for use therein.
(h) Purchaser shall furnish to the Company such information
regarding Purchaser, the Shares held by Purchaser, and the distribution proposed
by Purchaser as the Company may request in writing and as shall be required in
connection with any registration referred to in this Agreement.
(i) The registration rights granted to Purchaser in this Section
shall expire at such time (if ever) as Purchaser is free to sell the Shares
under Rule 144 promulgated under the Securities Act (or any successor thereto)
without limitation as to volume or manner of sale restrictions.
10. Notices. All notices and communications under this Agreement
-------
shall be in writing and shall be given by personal delivery or by registered or
certified mail, return
10
<PAGE>
receipt requested, addressed to the respective residences of Purchaser and
Seller set forth at the beginning of this Agreement, and to the principal
offices of the Company and the Subsidiary. Notice shall be deemed given upon
personal delivery or upon receipt.
11. Miscellaneous.
-------------
(a) This Agreement may be modified or amended only upon the
written consent of the parties to this Agreement.
(b) This Agreement shall be interpreted, construed, and enforced
in accordance with the laws of the State of New York.
(c) Neither this Agreement, nor any rights or obligations under
it, may be assigned by any party without the prior written consent of the other
parties.
(d) This Agreement shall benefit and be binding upon the parties
and their successors, heirs, executors, personal representatives, and assigns.
(e) This Agreement sets forth the entire understanding and
agreement of the parties with respect to its subject matter and supersedes all
prior letters, agreements, covenants, communications, understandings,
representations, or warranties, whether oral or written, by any officer,
employee, or representative of either party.
(f) The waiver of any provision of this Agreement, or of any
breach of this Agreement, shall not constitute a subsequent waiver of any
provision or breach.
(g) Except as otherwise specifically set forth in subparagraph
8(f) of this Agreement, if at any time any of the provisions of this Agreement
shall be deemed by a court or other body having jurisdiction over this Agreement
to be illegal, invalid, or unenforceable, those provisions shall be deemed
severed from this Agreement. The remaining provisions of this Agreement shall be
valid and binding as if this Agreement had never contained any illegal, invalid,
or otherwise unenforceable provisions, without the requirement that the
amendment be recorded in a writing signed by the parties.
11
<PAGE>
The parties' assent to the terms of this Agreement is confirmed by
their signatures below.
/s/ Algimantas K. Chesonis
----------------------------------
Algimantas K. Chesonis
/s/ Arunas A. Chesonis
----------------------------------
Arunas A. Chesonis
PAETEC CORP.
By: /s/ Arunas A. Chesonis
-------------------------------
Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
-------------------------------
Title: President
12
<PAGE>
Exhibit 10.3.1
STOCK PURCHASE AGREEMENT
This is a Stock Purchase Agreement (the "Agreement"), dated as of
August 13, 1998, between PAETEC CORP., a Delaware corporation with its principal
place of business at 290 Woodcliff Drive, Fairport, New York 14450 (the
"Company"), and CHRISTOPHER E. EDGECOMB, TRUSTEE OF THE CHRISTOPHER E. EDGECOMB
LIVING TRUST DATED APRIL 25, 1998, whose mailing address is c/o Christopher E.
Edgecomb, CEO, STAR Telecommunications, Inc., 223 East De La Guerra, Santa
Barbara, California 93101 ("Purchaser").
RECITALS
A. The Company is a Delaware corporation having 110,000,000 shares of
authorized capital stock, 10,000,000 of which are designated preferred stock,
75,000,000 of which are designated Class A common and 25,000,000 of which are
designated Class B common.
B. The Purchaser desires to purchase, and the Company agrees to sell,
shares of the Class B common stock of the Company pursuant to the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Purchase of Shares.
------------------
(a) The Company hereby agrees to sell 2,400,000 shares of Class B
common stock (the "Shares") to Purchaser at a price of $.833 per share payable
in full upon execution of this Agreement. A stock certificate evidencing the
Shares shall be issued in the name of Purchaser upon receipt of this executed
Agreement and payment in full of the purchase price.
2. Representations and Warranties of Purchaser In order to induce
-------------------------------------------
the Company to issue the Shares, Purchaser represents and warrants to the
Company as follows:
(a) Purchaser (i) understands that an investment in the Shares is
speculative due to factors including (but not limited to) the start-up nature of
the Company and the risk of economic loss from the operations of the Company,
but believes that such an investment is suitable for Purchaser based upon
Purchaser's financial needs, (ii) can withstand a complete loss of the
investment in the Shares, and (iii) has the net worth to undertake these risks.
<PAGE>
(b) Purchaser is acquiring the Shares for his own account, with
no present intention of reselling, distributing or otherwise transferring the
Shares or any portion of the Shares to any third party.
(c) Purchaser understands and acknowledges that the Shares are
being offered and sold under one or more exemptions provided in the Securities
Act of 1933, as amended (the "Securities Act"), Regulation D promulgated
thereunder and applicable state securities laws, and that this transaction has
not been reviewed or passed upon by the United States Securities and Exchange
Commission, or any other federal or state agency.
(d) Purchaser is an "accredited investor" as defined under Rule
501 of Regulation D promulgated under the Securities Act in that Purchaser is a
trust with total assets in excess of $5,000,000, not formed for the specific
purpose of acquiring the securities offered, and the Trustee is an accredited
investor and a "sophisticated person" as described in Rule 506 (b)(ii) of
Regulation D.
(e) Purchaser realizes that Purchaser must bear the economic risk
of investment for an indefinite period of time because (i) the Shares have not
been registered under the Securities Act and cannot be resold by Purchaser
unless they are subsequently registered under the Securities Act or an exemption
from registration is available, and (ii) there currently is no public market for
the Shares, and Purchaser may not be able to liquidate the investment in the
Shares in the event of an emergency. Purchaser has no need for liquidity of
investment with respect to the Shares.
(f) Purchaser has substantial experience in evaluating and
investing in companies similar to the Company, and is capable of evaluating the
merits and risks of his investment in the Company and has the capacity to
protect his own interests.
(g) Purchaser is fully familiar with the business of the Company
and its present and proposed operations. Purchaser has been given reasonable
opportunity to ask representatives of the Company questions concerning the
Company and making an investment in the Shares. Purchaser has obtained
sufficient information to evaluate the merits and risks of an investment in the
Shares.
(h) Purchaser confirms that Purchaser has been advised to rely on
professional accounting, tax, legal and financial advisers with respect to an
investment in the Shares and has obtained, to the extent Purchaser deems it
necessary, professional advice with respect to the risks inherent in an
investment in the Shares and the suitability of an investment in the Shares in
light of Purchaser's financial condition and investment needs.
The foregoing representations and warranties of Purchaser, are true
and correct as of the date of this Agreement, shall be true and correct as of
the closing of the sale of the Shares, and shall survive the closing.
2
<PAGE>
3. Representations and Warranties of Company. In order to induce the
-----------------------------------------
Purchaser to purchase the Shares, the Company represents and warrants to the
Purchaser as follows:
(a) The Company's authorized capital consists of (i) 10,000,000
shares of preferred stock, no shares of which are issued and outstanding, (ii)
75,000,000 shares of Class A common stock, of which 2,000,000 shares are issued
and outstanding or are committed to be issued, (iii) and 25,000,000 shares of
Class B common stock, of which 2,500,000 shares are issued and outstanding or
are committed to be issued. A list of the current stockholders with the number
of class of shares owned by each is attached as Schedule 1. The Company intends
to issue 1,200,000 shares of Class A common stock and 2,600,000 shares of Class
B common stock concurrently with the sale of the Shares to Purchaser. In
addition, the Company has reserved an additional 500,000 shares of Class A
common stock for issuance to key executive employees of the Company and intends
to reserve an additional 4,300,000 shares of Class A common stock for issuance
under the Company's 1998 Incentive Compensation Plan. Except as described in
this Section Schedule 1, as of the date of the Agreement, there are no
outstanding subscriptions, options, warrants, calls, rights or other agreements
or commitments obligating the Company to issue, sell, deliver or transfer
(including any right of conversion or exchange under any outstanding security or
other instrument) any shares of the Company stock or any other securities. All
outstanding shares of Class A common stock and Class B common stock have been
duly and validly authorized and issued, are fully paid and non-assessable, and
have been issued free of any lien, security interest, pledge, charge or
encumbrance of any kind (collectively, "Encumbrances").
(b) The Company was incorporated on May 19, 1998 and has not yet
commenced business operations.
(c) The Company is a corporation duly organized and existing
under the laws of the State of Delaware and is in good standing under such laws.
The Company is duly qualified and licensed in each jurisdiction where the nature
of the business conducted by it requires such qualification, except where the
failure to qualify would not have a material adverse effect upon the Company's
financial condition or results of operations. The Company has the requisite
corporate power and authority to own or lease and operate its properties and
assets, and to carry on its business as proposed to be conducted. The Company
has delivered to the Purchaser true and complete copies of its Certificate of
Incorporation and Bylaws, as in effect as of the date hereof.
(d) The Company has all requisite corporate power to execute and
deliver this Agreement and to sell and issue the Shares hereunder, and to carry
out and perform its obligations under the terms of this Agreement.
(e) Neither the Company nor any subsidiary thereof owns, directly
or indirectly, of record or beneficially any capital stock or equity interest or
investment in any
3
<PAGE>
corporation, association or business entity, except with respect to PaeTec
Communications, Inc. and PaeTec International, Inc., each of which is a wholly
owned subsidiary of the Company (the"Subsidiaries"). Each of the Subsidiaries is
a corporation duly organized and existing under the laws of the State of
Delaware and is in good standing under such laws. Each Subsidiary has the
requisite corporate power and authority to own or lease and operate its
properties and assets, and to carry on its business as proposed to be conducted.
Neither the Company nor any Subsidiary is a partner or participant in any
partnership or joint venture.
(f) All corporate action on the part of the Company, its
directors and stockholders necessary for the authorization, execution, delivery
and performance by the Company of this Agreement and the consummation of the
transactions contemplated herein and for the authorization, issuance and
delivery of the Shares has been taken. This Agreement constitutes a valid and
binding obligation of the Company, enforceable in accordance with its terms,
subject to laws of general application relating to bankruptcy, insolvency, and
the relief of debtors and other laws of general application affecting
enforcement of creditors' rights generally, including rules of law governing
specific performance, injunctive relief or other equitable remedies. The Shares,
when issued in compliance with the provisions of this Agreement, will be validly
issued, fully paid and nonassessable and will be free of any Encumbrances, and
will be free of restrictions on transfer other than under state and/or federal
Securities laws.
(g) No consent, approval, qualification, order or authorization
of, or filing with, any governmental authority or any third party is required in
connection with Company's valid execution, delivery or performance of this
Agreement, or the offer, sale or issuance of the Shares by the Company, except
filings required pursuant to applicable federal and state securities laws and
blue sky laws, which filings the Company shall complete within the lesser of
fifteen (15) days of the date hereof or the required statutory period.
(h) The Company has good and marketable title to its properties
and assets and, with respect to the property and assets leased by the Company,
holds valid leasehold interests therein, in each case subject to no mortgage,
pledge, lien, security interest, conditional sale agreement, encumbrance or
charge, except (i) tax, materialmen's or like liens for obligations not yet due
or payable or being contested in good faith by appropriate proceedings, or (ii)
possible minor liens or encumbrances which do not materially detract from the
value of the property subject thereto or materially impair the operations of the
Company and which have arisen in the ordinary course of business.
(i) Subject to the truth and accuracy of the Purchaser's
representations set forth in this Agreement, the offer, sale and issuance of the
Shares as contemplated by this Agreement are exempt from the registration
requirements of the Securities Act, and from the qualification requirements of
the California and New York blue sky laws.
4
<PAGE>
(j) The Company is not in violation of any term of its
Certificate of Incorporation or its Bylaws, any term of any agreement to which
the Company is a party, or any judgment, decree, order, statute, rule or
regulation to which the Company is subject, that would have a material adverse
effect on the condition, financial or otherwise, prospects or operations of the
Company.
(k) The execution, delivery and performance by the Company of
this Agreement, and the issuance, sale and delivery of the Shares will not
violate any provision of law, the Certificate of Incorporation or Bylaws of the
Company or any order, judgment or decree of any court or any governmental
agency, or conflict with, result in a breach of, or constitute a default under,
any indenture, agreement or other instrument by which the Company, or any of its
respective assets, is bound, or result in the creation or imposition of any
Encumbrance on any of the assets of the Company.
(l) There are no actions, suits, proceedings or investigations
pending or threatened against the Company, and the Company is not aware of any
basis for the foregoing except for an action pending in Supreme Court, Monroe
County, New York titled ACC Corp., et al v. Arunas A. Chesonis, Richard
-----------------------------------------------
Ottalagana, John Baron, PaeTec Corporation, and PaeTec Communications, Inc.
- ---------------------------------------------------------------------------
(Index No. 7466-98). A copy of the complaint in this action has been furnished
to Purchaser. The Company is not a party to or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or governmental agency.
(m) The Company is insured with reputable insurers against all
risks normally insured against by companies in similar lines of business, and
all of the insurance policies maintained by the Company are in full force and
effect. A schedule listing all insurance policies that are material to the
Business has been furnished to Purchaser. The Company is not in default under
any such policy. All insurance policies maintained by the Company will remain in
full force and effect and may reasonably be expected to be renewed on comparable
terms following consummation of the transactions contemplated by this Agreement
(subject to continuing compliance with the applicable terms thereof and any
right of insurers to terminate without cause), and the Company has received no
notice or other indication from any insurer or agent of any intent to cancel or
not so renew any of such insurance policies.
(n) The Company does not have employment agreements with any of
its employees. Since its inception, the Company has not experienced any labor
disputes, union organization attempts or any work stoppage due to labor
disagreements in connection with its business. There is no labor strike,
dispute, request for representation, slowdown or stoppage actually pending or
threatened against or affecting the Company or any of the Subsidiaries. All
workers' compensation and unemployment compensation insurance premiums due have
been fully paid or accrued in the Company's financial statements.
5
<PAGE>
(o) All employee benefit plans within the meaning of Section 3(3)
of the Employment Retirement Income Security Act of 197s4, as amended, and the
related regulations and published interpretations ("ERISA"), are in full
compliance with the applicable provisions of ERISA (as amended through the date
of this Agreement), the regulations and published authorities thereunder, and
all other laws applicable with respect to all such employee benefit plans,
agreements and arrangements. The Company has performed all of its obligations
under all such plans, agreements and arrangements. To the best knowledge of the
Company, there are no actions (other than routine claims for benefits) pending
or threatened against such plans or their assets, or arising out of such plans,
agreements or arrangements, and, to the best knowledge of the Company, no facts
exist which could give rise to any such Actions.
(p) All group health plans of the Company and any Subsidiary have
been operated in compliance with the group health plan continuation coverage
requirements of Section 162(k) of the Internal Revenue Code to the extent such
requirements are applicable.
(q) There has been no act or omission by the Company or any
Subsidiary that has given rise to or may give rise to fines, penalties, taxes,
or related charges under Section 502(c) or (k) or Section 4071 of ERISA or
Chapter 43 of the Internal Revenue Code.
(r) Schedule 2 sets forth a complete list of all governmental
licenses, permits and authorizations necessary for the Company and the
Subsidiaries to operate their businesses as presently conducted and proposed to
be conducted, including without limitation, those required by the U.S. Federal
Communications Commission and by all relevant state public utilities
commissions. Such licenses, permits and authorizations are in full force and
effect and the Company knows of no threatened suspension, cancellation or
invalidation thereof.
(s) The Company has not issued to any other holder of the
securities of the Company registration rights that are superior to the rights
set forth in Section 4 of this Agreement.
(t) The proceeds from the sale of the Shares will be used by the
Company to fund expansion of the Company's switched-based telecommunications
business including the purchase of equipment, the opening of new sales offices,
for additional working capital, and for general corporate purposes.
(u) The financial statements of the Company for the two month
period ended June 30, 1998, compiled by John M. McMahon, CPA, a copy of which is
attached as Exhibit A, was prepared from the books and records of the Company
and fairly sets forth the financial position of the Company, subject to the
qualifications contained therein.
6
<PAGE>
(v) The foregoing representations and warranties of the Company
are true and correct as of the date of this Agreement, shall be true and correct
as of the closing of the sale of the Shares, and shall survive the closing. No
representation of warranty of the Company in this Agreement contains, or on the
closing date will contain, any untrue statement of material fact or omits, or on
the closing date will omit, any material fact necessary in order to make the
statements contained therein not misleading.
4. Piggy-Back Registration Rights.
------------------------------
(a) If at any time or from time to time the Company shall
determine to register any of its equity securities, either for its own account
or the account of a security holder or holders (other than a registration of
securities relating solely to employee benefit plans or to effect a merger or
other reorganization), the Company will promptly give to Purchaser written
notice thereof and, upon the written request of Purchaser, include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Shares specified
in the written request made within 10 days after receipt of such written notice
from the Company.
(b) If the registration of which the Company gives notice is for
a registered public offering involving an underwriting, the Company shall so
advise Purchaser as a part of the written notice given to Purchaser. In such
event the right of any Purchaser to registration pursuant to this Section 4
shall be conditioned upon Purchaser's participation in such underwriting, and
the inclusion of Shares in the underwriting shall be limited to the extent
provided herein. Purchaser (together with the Company and the other holders
distributing their securities through such underwriting) shall enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 4, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may exclude some or all of the Shares or securities of other holders
of similar registration rights from such registration. The Company shall so
advise Purchaser and other stockholders distributing their securities through
such underwriting, and the number of Shares or securities of other holders of
similar registration rights that may be included in the registration and
underwriting, as determined by the managing underwriter, shall be allocated on a
pro rata basis. If Purchaser disapproves of the terms of any such underwriting,
Purchaser may elect to withdraw therefrom by written notice to the Company and
the managing underwriter. Any securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration, and shall continue to be
subject to the terms of this Section.
(c) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 4 prior to the effectiveness of
such registration whether or not Purchaser has elected to include securities in
such registration.
7
<PAGE>
(d) All expenses associated with the registration (including,
without limitation, registration, qualification and filing fees, printing
expenses, blue sky fees, and fees and disbursements of counsel and accountants
for the Company) shall be borne by the Company. Underwriters' discounts and
related charges, shall be borne by Purchaser pro rata in proportion to the
number of securities being registered.
(e) In the case of each registration under this Section, the
Company will:
(i) prepare and file a registration statement with respect
to such securities and use its best efforts to cause such registration statement
to become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
(ii) furnish to Purchaser such reasonable number of copies
of the registration statement, preliminary prospectus, final prospectus and such
other documents as Purchaser may reasonably request in order to facilitate the
public offering of the Shares; and
(iii) use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by
Purchaser, provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify as a foreign corporation or as a
dealer in securities or to file a general consent to service of process in any
such states or jurisdictions in which it has not already done so and except as
may be required by the Securities Act.
(f) The Company will indemnify Purchaser against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof), arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, or any violation by the Company of the Securities Act of 1933, the
Securities Exchange Act of 1934, state securities law or any rule or regulation
promulgated under such laws applicable to the Company in connection with any
such registration, qualification or compliance, and the Company will reimburse
Purchaser for any legal and any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, provided that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission, or alleged untrue statement or omission, made in reliance upon and
in conformity with written information relating to Purchaser furnished to the
Company by an instrument duly executed by Purchaser.
8
<PAGE>
(g) Purchaser will, if Shares held by such Purchaser are included
in the securities as to which such registration is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a registration statement against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company, such
Purchasers, such directors, officers, persons, underwriters or control persons
for any legal or any other expenses reasonably incurred, as such expenses are
incurred, in connection with investigating or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
relating to Purchaser furnished to the Company by an instrument duly executed by
Purchaser and stated to be specifically for use therein, provided that in no
event shall any indemnity under this Section 4(g) exceed the net proceeds from
the offering received by Purchaser.
(h) If for any reason the indemnity set forth in paragraphs (f)
or (g) above is unavailable or insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, liabilities or expenses (or
actions in respect thereof), then the indemnifying party shall contribute to the
amount paid or payable by the indemnified party as a result of such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and the indemnified party on the other hand in connection
with statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the indemnifying party or the indemnified
party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
Notwithstanding the foregoing, Purchaser shall not be required to contribute any
amount in excess of the amount it would have been required to pay to an
indemnified party if the indemnity under paragraph (g) hereof was available. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(i) Purchaser shall furnish to the Company such information
regarding Purchaser, the Shares held by Purchaser, and the distribution proposed
by Purchaser
9
<PAGE>
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration referred to in this Agreement.
(j) The registration rights granted to Purchaser in this Section
shall expire (a) at such time (if ever) as Purchaser is free to sell the Shares
under Rule 144 promulgated under the Securities Act (or any successor thereto)
without limitation as to volume or manner of sale restrictions, and (b) Shares
held by Purchaser constitute less than one percent (1%) of the outstanding
shares of the common stock of the Company. The foregoing notwithstanding,
Purchaser's registration rights under this Section 4 shall expire after the
Company has offered Purchaser the cumulative opportunity to register all of the
Shares in two registered offerings, irrespective of whether Purchaser elects to
participate in these registrations.
5. Proxy. Concurrently with the execution of this Agreement and the
-----
issuance of the Shares, Purchaser is executing and delivering a Stockholders'
Agreement and a proxy appointing Arunas A. Chesonis, one of the founding
shareholders of the Company, Purchaser's attorney-in-fact and proxy to vote all
Shares now or hereafter owned by Purchaser at any meeting of shareholders,
regular or special, whenever called, and for whatever purpose. Copies of the
Stockholders' Agreement and of the proxy shall be filed with the Secretary of
the Company and the proxy shall be registered in the stock books of the Company.
Any transfer of the Shares is subject to the terms of the foregoing proxy.
6. Legend. Each certificate for Shares owned by Purchaser shall bear
------
the following legends:
The shares represented by this certificate have not
been registered under the Securities Act of 1933, as
amended, and may not be transferred in the absence of
such registration unless the Company receives an
opinion of counsel reasonably acceptable to it stating
that such sale or transfer is exempt from registration.
The shares represented by this certificate are subject
to a Stockholders' Agreement and to a Proxy in favor of
Arunas A. Chesonis, copies of which are on file with
the Company. Any transferee of the shares represented
by this certificate shall take the shares subject to
the terms of the Stockholders' Agreement and of the
Proxy.
10
<PAGE>
7. Share Adjustment
----------------
(a) If the Company hereafter issues shares of Class B common
stock, or any security convertible into its Class B common stock, for a purchase
price per share less than the purchase price per share specified in Section 1 of
this Agreement, the Company shall issue to Purchaser additional shares of common
shares, or securities convertible into common stock, such that the total of such
additional shares and the shares purchased hereunder shall equal the total
number of shares that would have been issued to Purchaser at such lower price
per share for the total purchase price specified in Section 1, with such
issuance of additional shares to be at no cost to Purchaser. Example. The total
price for 2,400,000 shares of Class B stock at $.833 per share as provided in
Section 1 is $1,999,200. If the Company hereafter issues shares of Class B
common stock for $.75 per share, the Company shall issue 265,600 additional
shares of Class B common stock to Purchaser. ($1,999,200 / .75 = 2,665,600 minus
2,400,000 = 265,600).
(b) If the Company hereafter issues shares of Class A common
stock, or any securities convertible into its shares of Class A common stock,
for a purchase price of less than $.694 per share, the Company shall issue to
Purchaser shares of Class A common stock, or securities convertible into shares
of Class A common stock based upon the percentage of the deficiency between
$.694 per share and the actual price per share. Thus for example, if the Company
hereafter sells 1,000,000 shares of Class A common stock at $.50 per share, the
deficiency is $.194 per share or 28%. The Company will then issue shares of
Class A common stock to Purchaser equal to 28% of the total number of shares
issued at less than $.694 per share or 280,000 shares.
(c) The provisions for share adjustment in Sections 7(a) and (b)
shall not apply to (i) the issuance of additional shares of Class A common stock
by the company to its employees either directly or under the Company's 1998
Incentive Compensation Plan, (ii) to shares issued or issuable by the Company as
consideration for the acquisition by the Company of capital stock or assets of
another business entity or in connection with a merger or consolidation, or to
the acquisition of real or tangible property for the Company in arms length
transactions with unrelated third parties, or (iii) to any Class A shares issued
after the Company has completed an initial public offering ("IPO") of its
shares.
8. Subsequent Offerings.
--------------------
(a) The Company contemplates making an additional private
offering for shares of its Class A common stock to raise $10,000,000 of
additional capital during September 1998 ("Third Tier"). Purchaser shall have
the option to purchase up to 400,000 shares of Class A common stock in such
offering on the same terms and conditions as shares of Class A common stock are
offered to existing shareholders at the time of the offering provided that the
price per share to Purchaser shall not exceed $2.50 per share.
11
<PAGE>
(b) In addition to the Third Tier offering referred to above, the
Company presently anticipates making the following private offerings of its
Class A common shares prior to its IPO:
Number of Price Per
Tier Shares Share
---- --------- ---------
Fourth 800,000 $2.50
Fifth 200,000 $5.00
(c) The anticipated offerings referred to in subsections (a) and
(b) are preliminary and are subject to change based on market conditions, the
financial needs of the Company, and other factors. Purchaser will not have
preemptive rights and will not have the right to purchase shares in future
offerings other than the right to participate in the Third Tier offering as
provided in Section 8(a), except that if the Company hereafter offers more
shares than listed in subsections (a) and (b) prior to its IPO, or if shares are
offered at a price per share less than as scheduled in these Sections, Purchaser
shall have the right to purchase a pro rata portion of the excess shares, or of
the shares offered at less than the offering prices set forth above, at the same
purchase price per share offered to others. Purchaser's pro rata right of
participation shall be determined by comparing the number of shares of Class A
common stock held by Purchaser to the number of shares of Class A common stock
and Class B common stock then outstanding, without regarding to the relative
voting rights attributable to either such class.
9. Notices. All notices and communications under this Agreement
-------
shall be in writing and shall be given by personal delivery or by registered or
certified mail, return receipt requested, addressed to the respective addresses
of Purchaser and Company set forth above or to such other address as may be
designated by Purchaser or Company. Notice shall be deemed given upon personal
delivery or upon receipt.
10. Confidentiality. Except as may be required by law, neither
---------------
Purchaser nor the Company will issue any press release or, make any public
announcement concerning the transactions contemplated by this Agreement without
the prior consent or approval of the other party.
11. Miscellaneous.
-------------
(a) This Agreement may be modified or amended only upon the
written consent of all parties to the Agreement.
(b) This Agreement shall be interpreted, construed, and enforced
in accordance with the laws of the State of New York.
12
<PAGE>
(c) Neither this Agreement, nor any rights or obligations under
it, may be assigned by any party without the prior written consent of the other
party.
(d) This Agreement shall benefit and be binding upon the parties
and their successors, heirs, executors, personal representatives, and assigns.
(e) This Agreement sets forth the entire understanding and
agreement of the parties with respect to its subject matter and supersedes all
prior letters, agreements, covenants, communications, understandings,
representations, or warranties, whether oral or written, by any officer,
employee, or representative of either party.
(f) The waiver of any provision of this Agreement, or of any
breach of this Agreement, shall not constitute a subsequent waiver of any
provision or breach.
The parties' assent to the terms of this Agreement is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
-----------------------------
Title: Chairman & CEO
/s/ Christopher E. Edgecomb
--------------------------------
CHRISTOPHER E. EDGECOMB,
TRUSTEE OF THE CHRISTOPHER E.
EDGECOMB LIVING TRUST DATED
APRIL 25, 1998
13
<PAGE>
Exhibit 10.3.2
FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT (this "Amendment") is
made as of this 4th day of February 2000 by and between PaeTec Corp., a Delaware
corporation (the "Company"), and Christopher E. Edgecomb, Trustee of the
Christopher E. Edgecomb Living Trust dated April 25, 1998 (the "Purchaser").
RECITALS
--------
A. The Company and the Purchaser are parties to a Stock Purchase
Agreement dated August 13, 1998 (the "Stock Purchase Agreement").
B. The Board of Directors of the Company has authorized the issuance
and sale (the "Series A Preferred Stock Placement") of 134,000 shares of a new
series of preferred stock of the Company, designated the Series A Convertible
Preferred Stock, to the purchasers (the "Purchasers") listed on the Schedule of
Purchasers to, and pursuant to the terms and conditions of, an Equity Purchase
Agreement (the "Purchase Agreement").
C. As a condition to the consummation of the Series A Preferred Stock
Placement, the Purchasers have required that the Company and the Purchaser amend
the Stock Purchase Agreement to clarify that to the extent that any securities
are required to be excluded from a registration pursuant to the "cut-back"
provisions of the piggyback registration rights granted to the Purchaser
pursuant to the Stock Purchase Agreement, the securities to be included in such
registration shall be determined on a pro rata basis among the holders of shares
--- ----
participating in the offering pursuant to registration rights granted by the
Company, based on the number of shares of common stock requested to be included
by each such holder in such registration.
D. The parties hereto desire to amend the Stock Purchase Agreement to
induce the Purchasers to consummate the Series A Preferred Stock Placement.
AGREEMENT
---------
1. Defined Terms. All capitalized terms used in this Amendment
-------------
without definition shall have the meanings given to such terms in the Purchase
Agreement.
1
<PAGE>
2. Amendment of Section 4(b). The fourth and fifth sentences of
-------------------------
Section 4(b) of the Stock Purchase Agreement are hereby deleted and replaced and
superseded in their entirety with the following sentence:
"Notwithstanding any other provision of this Section 4, if the managing
underwriter advises in writing the Company and the Purchaser that marketing
factors require a limitation of the number of shares of common stock to be
underwritten and sold in such offering, the managing underwriter may
exclude some or all of the shares of common stock to be sold in such
offering from such registration, and the shares to be included in such
registration shall be allocated pro rata among the holders of shares
--- ----
participating in the offering pursuant to registration rights granted by
the Company (including demand and piggyback registration rights), based on
the number of shares of common stock requested to be included by each
holder in such registration."
All other terms and conditions of the Stock Purchase Agreement remain in full
force and effect.
3. Binding Effect. This Amendment shall be binding upon and inure to
--------------
the benefit of the parties hereto and their heirs, executors, administrators,
successors and assigns.
4. Governing Law. This Amendment shall be governed by, and construed
-------------
and enforced in accordance with, the laws of the State of New York, except that
if any provision of this Amendment or any part of any such provision would be
illegal, invalid or enforceable under such laws in connection with a suit or
proceeding validly instituted in another jurisdiction, then the laws of such
other jurisdiction shall govern insofar as is necessary to sustain the legality,
validity or enforceability of such provision or any part of such provision.
5. Captions. Captions to the Sections in this Amendment are for the
--------
convenience of the parties only and shall not affect the meaning or
interpretation of this Amendment.
6. Enforceability and Interpretation. It is the intention of the
---------------------------------
parties to this Amendment that the terms and provisions contained in this
Amendment shall be enforceable to the fullest extent permitted by law. If any
term or provision of this Amendment or the application thereof to any Person or
circumstance is construed to be illegal, invalid or unenforceable, in whole or
in part, then such term or provision shall be construed in such a manner as to
permit its enforceability under applicable law to the fullest extent permitted
by such law. In any case, the remaining terms and provisions of this Amendment
or the application
-2-
<PAGE>
thereof to any Person or circumstance, except those terms and provisions which
have been held illegal, invalid or unenforceable, shall remain in full force and
effect.
7. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8. Additional Documents. Each party hereto agrees to execute any and
--------------------
all documents, instruments, certificates and communications deemed to be
necessary or advisable by the Company to effectuate the purposes of this
Amendment.
[signature page follows]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment with full force and effect as of the day and year first written
above.
PAETEC CORP.
By: /s/ Timothy J. Bancroft
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Its: Vice President- Finance
---------------------------------
/s/ Christopher E. Edgecomb
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Christopher E. Edgecomb, Trustee of the
Christopher E. Edgecomb Living Trust dated
April 25, 1998.
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<PAGE>
Exhibit 10.4.1
STOCK PURCHASE AGREEMENT
This is a Stock Purchase Agreement (the "Agreement"), dated August 20,
1998, between PAETEC CORP., a Delaware corporation with its principal place of
business at 290 Woodcliff Drive, Fairport, New York 14450 (the "Company"), and
JEFFREY P. SUDIKOFF, whose mailing address is c/o InterPacket Group, 501 Santa
Monica Boulevard, Suite 702, Santa Monica, California 90401 ("Purchaser").
RECITALS
A. The Company is a Delaware corporation having 110,000,000 shares of
authorized capital stock, 10,000,000 of which are designated preferred stock,
75,000,000 of which are designated Class A common and 25,000,000 of which are
designated Class B common.
B. The Purchaser desires to purchase, and the Company agrees to sell,
shares of the Class B common stock of the Company pursuant to the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Purchase of Shares.
------------------
(a) The Company hereby agrees to sell 2,400,000 shares of Class B
common stock (the "Shares") to Purchaser at a price of $.833 per share payable
in full upon execution of this Agreement. A stock certificate evidencing the
Shares shall be issued in the name of Purchaser upon receipt of this executed
Agreement and payment in full of the purchase price.
2. Representations and Warranties of Purchaser In order to induce
-------------------------------------------
the Company to issue the Shares, Purchaser represents and warrants to the
Company as follows:
(a) Purchaser (i) understands that an investment in the Shares is
speculative due to factors including (but not limited to) the start-up nature of
the Company and the risk of economic loss from the operations of the Company,
but believes that such an investment is suitable for Purchaser based upon
Purchaser=s financial needs, (ii) can withstand a complete loss of the
investment in the Shares, and (iii) has the net worth to undertake these risks.
<PAGE>
(b) Purchaser is acquiring the Shares for his own account, with no
present intention of reselling, distributing or otherwise transferring the
Shares or any portion of the Shares to any third party.
(c) Purchaser understands and acknowledges that the Shares are being
offered and sold under one or more exemptions provided in the Securities Act of
1933, as amended (the "Securities Act"), Regulation D promulgated thereunder and
applicable state securities laws, and that this transaction has not been
reviewed or passed upon by the United States Securities and Exchange Commission,
or any other federal or state agency.
(d) Purchaser is an "accredited investor" as defined under Rule 501 of
Regulation D promulgated under the Securities Act in that Purchaser is a natural
person whose individual net worth, or joint net worth with Purchaser's spouse,
at the time of purchase, exceeds $1,000,000 (inclusive of home, furnishings and
---------
automobile).
(e) Purchaser realizes that Purchaser must bear the economic risk of
investment for an indefinite period of time because (i) the Shares have not been
registered under the Securities Act and cannot be resold by Purchaser unless
they are subsequently registered under the Securities Act or an exemption from
registration is available, and (ii) there currently is no public market for the
Shares, and Purchaser may not be able to liquidate the investment in the Shares
in the event of an emergency. Purchaser has no need for liquidity of investment
with respect to the Shares.
(f) Purchaser has substantial experience in evaluating and investing
in companies similar to the Company, and is capable of evaluating the merits and
risks of his investment in the Company and has the capacity to protect his own
interests.
(g) Purchaser is fully familiar with the business of the Company and
its present and proposed operations. Purchaser has been given reasonable
opportunity to ask representatives of the Company questions concerning the
Company and making an investment in the Shares. Purchaser has obtained
sufficient information to evaluate the merits and risks of an investment in the
Shares.
(h) Purchaser confirms that Purchaser has been advised to rely on
professional accounting, tax, legal and financial advisers with respect to an
investment in the Shares and has obtained, to the extent Purchaser deems it
necessary, professional advice with respect to the risks inherent in an
investment in the Shares and the suitability of an investment in the Shares in
light of Purchaser's financial condition and investment needs.
The foregoing representations and warranties of Purchaser are true and
correct as of the date of this Agreement, shall be true and correct as of the
closing of the sale of the Shares, and shall survive the closing.
2
<PAGE>
3. Representations and Warranties of Company. In order to induce the
-----------------------------------------
Purchaser to purchase the Shares, the Company represents and warrants to the
Purchaser as follows:
(a) The Company's authorized capital consists of (i) 10,000,000
shares of preferred stock, no shares of which are issued and outstanding, (ii)
75,000,000 shares of Class A common stock, of which 2,000,000 shares are issued
and outstanding or are committed to be issued, (iii) and 25,000,000 shares of
Class B common stock, of which 2,500,000 shares are issued and outstanding or
are committed to be issued. A list of the current stockholders with the number
and class of shares owned by each is attached as Schedule 1. The Company intends
to issue 1,200,000 shares of Class A common stock and 2,600,000 shares of Class
B common stock concurrently with the sale of the Shares to Purchaser. In
addition, the Company has reserved an additional 500,000 shares of Class A
common stock for issuance to key executive employees of the Company and intends
to reserve an additional 4,300,000 shares of Class A common stock for issuance
under the Company's 1998 Incentive Compensation Plan. Except as described in
this Section and Schedule 1, as of the date of the Agreement, there are no
outstanding subscriptions, options, warrants, calls, rights or other agreements
or commitments obligating the Company to issue, sell, deliver or transfer
(including any right of conversion or exchange under any outstanding security or
other instrument) any shares of the Company stock or any other securities. All
outstanding shares of Class A common stock and Class B common stock have been
duly and validly authorized and issued, are fully paid and non-assessable, and
have been issued free of any lien, security interest, pledge, charge or
encumbrance of any kind (collectively, "Encumbrances").
(b) The Company was incorporated on May 19, 1998 and has not yet
commenced business operations.
(c) The Company is a corporation duly organized and existing under
the laws of the State of Delaware and is in good standing under such laws. The
Company is duly qualified and licensed in each jurisdiction where the nature of
the business conducted by it requires such qualification, except where the
failure to qualify would not have a material adverse effect upon the Company's
financial condition or results of operations. The Company has the requisite
corporate power and authority to own or lease and operate its properties and
assets, and to carry on its business as proposed to be conducted. The Company
has delivered to the Purchaser true and complete copies of its Certificate of
Incorporation and Bylaws, as in effect as of the date hereof.
(d) The Company has all requisite corporate power to execute and
deliver this Agreement and to sell and issue the Shares hereunder, and to carry
out and perform its obligations under the terms of this Agreement.
(e) Neither the Company nor any subsidiary thereof owns, directly
or indirectly, of record or beneficially any capital stock or equity interest or
investment in any
3
<PAGE>
corporation, association or business entity, except with respect to PaeTec
Communications, Inc. and PaeTec International, Inc., each of which is a wholly
owned subsidiary of the Company (the "Subsidiaries"). Each of the Subsidiaries
is a corporation duly organized and existing under the laws of the State of
Delaware and is in good standing under such laws. Each Subsidiary has the
requisite corporate power and authority to own or lease and operate its
properties and assets, and to carry on its business as proposed to be conducted.
Neither the Company nor any Subsidiary is a partner or participant in any
partnership or joint venture. The shares of capital stock of each Subsidiary
held by the Company are free of any Encumbrances.
(f) All corporate action on the part of the Company, its directors and
stockholders necessary for the authorization, execution, delivery and
performance by the Company of this Agreement and the consummation of the
transactions contemplated herein and for the authorization, issuance and
delivery of the Shares has been taken. This Agreement constitutes a valid and
binding obligation of the Company, enforceable in accordance with its terms,
subject to laws of general application relating to bankruptcy, insolvency, and
the relief of debtors and other laws of general application affecting
enforcement of creditors' rights generally, including rules of law governing
specific performance, injunctive relief or other equitable remedies. The Shares,
when issued in compliance with the provisions of this Agreement, will be validly
issued, fully paid and nonassessable and will be free of any Encumbrances, and
will be free of restrictions on transfer other than under state and/or federal
Securities laws.
(g) No consent, approval, qualification, order or authorization of, or
filing with, any governmental authority or any third party is required in
connection with Company's valid execution, delivery or performance of this
Agreement, or the offer, sale or issuance of the Shares by the Company, except
filings required pursuant to applicable federal and state securities laws and
blue sky laws, which filings the Company shall complete within the lesser of
fifteen (15) days of the date hereof or the required statutory period.
(h) The Company has good and marketable title to its properties and
assets and, with respect to the property and assets leased by the Company, holds
valid leasehold interests therein, in each case subject to no mortgage, pledge,
lien, security interest, conditional sale agreement, encumbrance or charge,
except (i) tax, materialmen's or like liens for obligations not yet due or
payable or being contested in good faith by appropriate proceedings, or (ii)
possible minor liens or encumbrances which do not materially detract from the
value of the property subject thereto or materially impair the operations of the
Company and which have arisen in the ordinary course of business.
(i) Subject to the truth and accuracy of the Purchaser's
representations set forth in this Agreement, the offer, sale and issuance of the
Shares as contemplated by this Agreement are exempt from the registration
requirements of the
4
<PAGE>
Securities Act, and from the qualification requirements of the California and
New York blue sky laws.
(j) The Company is not in violation of any term of its Certificate of
Incorporation or its Bylaws, any term of any agreement to which the Company is a
party, or any judgment, decree, order, statute, rule or regulation to which the
Company is subject, that would have a material adverse effect on the condition,
financial or otherwise, prospects or operations of the Company.
(k) The execution, delivery and performance by the Company of this
Agreement, and the issuance, sale and delivery of the Shares will not violate
any provision of law, the Certificate of Incorporation or Bylaws of the Company
or any order, judgment or decree of any court or any governmental agency, or
conflict with, result in a breach of, or constitute a default under, any
indenture, agreement or other instrument by which the Company, or any of its
respective assets, is bound, or result in the creation or imposition of any
Encumbrance on any of the assets of the Company.
(l) There are no actions, suits, proceedings or investigations pending
or threatened against the Company or its Subsidiaries, and the Company is not
aware of any basis for the foregoing except for an action pending in Supreme
Court, Monroe County, New York titled ACC Corp., et al v. Arunas A. Chesonis,
---------------------------------------
Richard Ottalagana, John Baron, PaeTec Corporation, and PaeTec Communications,
- ------------------------------------------------------------------------------
Inc. (Index No. 7466-98). A copy of the complaint in this action has been
- ---
furnished to Purchaser. The Company is not a party to or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
governmental agency.
(m) The Company is insured with reputable insurers against all risks
normally insured against by companies in similar lines of business, and all of
the insurance policies maintained by the Company are in full force and effect.
A schedule listing all insurance policies that are material to the Business has
been furnished to Purchaser. The Company is not in default under any such
policy. All insurance policies maintained by the Company will remain in full
force and effect and may reasonably be expected to be renewed on comparable
terms following consummation of the transactions contemplated by this Agreement
(subject to continuing compliance with the applicable terms thereof and any
right of insurers to terminate without cause), and the Company has received no
notice or other indication from any insurer or agent of any intent to cancel or
not so renew any of such insurance policies.
(n) The Company does not have employment agreements with any of its
employees. Since its inception, the Company has not experienced any labor
disputes, union organization attempts or any work stoppage due to labor
disagreements in connection with its business. There is no labor strike,
dispute, request for representation, slowdown or stoppage actually pending or
threatened against or affecting the Company or any of the Subsidiaries.
5
<PAGE>
All workers' compensation and unemployment compensation insurance premiums due
have been fully paid or accrued in the Company's financial statements.
(o) All employee benefit plans within the meaning of Section 3(3) of
the Employment Retirement Income Security Act of 197s4, as amended, and the
related regulations and published interpretations ("ERISA"), are in full
compliance with the applicable provisions of ERISA (as amended through the date
of this Agreement), the regulations and published authorities thereunder, and
all other laws applicable with respect to all such employee benefit plans,
agreements and arrangements. The Company has performed all of its obligations
under all such plans, agreements and arrangements. To the best knowledge of the
Company, there are no actions (other than routine claims for benefits) pending
or threatened against such plans or their assets, or arising out of such plans,
agreements or arrangements, and, to the best knowledge of the Company, no facts
exist which could give rise to any such Actions.
(p) All group health plans of the Company and any Subsidiary have been
operated in compliance with the group health plan continuation coverage
requirements of Section 162(k) of the Internal Revenue Code to the extent such
requirements are applicable.
(q) There has been no act or omission by the Company or any Subsidiary
that has given rise to or may give rise to fines, penalties, taxes, or related
charges under Section 502(c) or (k) or Section 4071 of ERISA or Chapter 43 of
the Internal Revenue Code.
(r) Schedule 2 sets forth a complete list of all governmental
licenses, permits and authorizations necessary for the Company and the
Subsidiaries to operate their businesses as presently conducted and proposed to
be conducted, including without limitation, those required by the U.S. Federal
Communications Commission and by all relevant state public utilities
commissions. Such licenses, permits and authorizations are in full force and
effect and the Company knows of no threatened suspension, cancellation or
invalidation thereof.
(s) The Company has not issued to any other holder of the securities
of the Company registration rights that are superior to the rights set forth in
Section 4 of this Agreement.
(t) The proceeds from the sale of the Shares will be used by the
Company to fund expansion of the Company's switched-based telecommunications
business including the purchase of equipment, the opening of new sales offices,
for additional working capital, and for general corporate purposes.
(u) The financial statements of the Company for the two month period
ended June 30, 1998, compiled by John M. McMahon, CPA, a copy of which is
6
<PAGE>
attached as Exhibit A, was prepared from the books and records of the Company
and fairly sets forth the financial position of the Company, subject to the
qualifications contained therein.
(v) The foregoing representations and warranties of the Company
are true and correct as of the date of this Agreement, shall be true and correct
as of the closing of the sale of the Shares, and shall survive the closing. No
representation of warranty of the Company in this Agreement contains, or on the
closing date will contain, any untrue statement of material fact or omits, or on
the closing date will omit, any material fact necessary in order to make the
statements contained therein not misleading.
4. Piggy-Back Registration Rights.
------------------------------
(a) If at any time or from time to time the Company shall
determine to register any of its equity securities, either for its own account
or the account of a security holder or holders (other than a registration of
securities relating solely to employee benefit plans or to effect a merger or
other reorganization), the Company will promptly give to Purchaser written
notice thereof and, upon the written request of Purchaser, include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Shares specified
in the written request made within 10 days after receipt of such written notice
from the Company.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise Purchaser as a part of the written notice given to Purchaser. In such
event the right of any Purchaser to registration pursuant to this Section 4
shall be conditioned upon Purchaser's participation in such underwriting, and
the inclusion of Shares in the underwriting shall be limited to the extent
provided herein. Purchaser (together with the Company and the other holders
distributing their securities through such underwriting) shall enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 4, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may exclude some or all of the Shares or securities of other holders
of similar registration rights from such registration. The Company shall so
advise Purchaser and other stockholders distributing their securities through
such underwriting, and the number of Shares or securities of other holders of
similar registration rights that may be included in the registration and
underwriting, as determined by the managing underwriter, shall be allocated on a
pro rata basis. If Purchaser disapproves of the terms of any such underwriting,
Purchaser may elect to withdraw therefrom by written notice to the Company and
the managing underwriter. Any securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration, and shall continue to be
subject to the terms of this Section.
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<PAGE>
(c) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 4 prior to the effectiveness of
such registration whether or not Purchaser has elected to include securities in
such registration.
(d) All expenses associated with the registration (including, without
limitation, registration, qualification and filing fees, printing expenses, blue
sky fees, and fees and disbursements of counsel and accountants for the Company)
shall be borne by the Company. Underwriters' discounts and related charges,
shall be borne by Purchaser pro rata in proportion to the number of securities
being registered.
(e) In the case of each registration under this Section, the Company
will:
(i) prepare and file a registration statement with respect to
such securities and use its best efforts to cause such registration statement to
become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
(ii) furnish to Purchaser such reasonable number of copies of the
registration statement, preliminary prospectus, final prospectus and such other
documents as Purchaser may reasonably request in order to facilitate the public
offering of the Shares; and
(iii) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by Purchaser,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify as a foreign corporation or as a dealer in
securities or to file a general consent to service of process in any such states
or jurisdictions in which it has not already done so and except as may be
required by the Securities Act.
(f) The Company will indemnify Purchaser against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, offering circular or
other document, or any amendment or supplement thereto, incident to any such
registration, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading,
or any violation by the Company of the Securities Act of 1933, the Securities
Exchange Act of 1934, state securities law or any rule or regulation promulgated
under such laws applicable to the Company in connection with any such
registration, qualification or compliance, and the Company will reimburse
Purchaser for any legal and any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, provided that the Company
will not be liable in
8
<PAGE>
any such case to the extent that any such claim, loss, damage, liability or
expense arises out of or is based on any untrue statement or omission, or
alleged untrue statement or omission, made in reliance upon and in conformity
with written information relating to Purchaser furnished to the Company by an
instrument duly executed by Purchaser.
(g) Purchaser will, if Shares held by such Purchaser are included
in the securities as to which such registration is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a registration statement against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company, such
Purchasers, such directors, officers, persons, underwriters or control persons
for any legal or any other expenses reasonably incurred, as such expenses are
incurred, in connection with investigating or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
relating to Purchaser furnished to the Company by an instrument duly executed by
Purchaser and stated to be specifically for use therein, provided that in no
event shall any indemnity under this Section 4(g) exceed the net proceeds from
the offering received by Purchaser.
(h) If for any reason the indemnity set forth in paragraphs (f)
or (g) above is unavailable or insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, liabilities or expenses (or
actions in respect thereof), then the indemnifying party shall contribute to the
amount paid or payable by the indemnified party as a result of such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and the indemnified party on the other hand in connection
with statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the indemnifying party or the indemnified
party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
Notwithstanding the foregoing, Purchaser shall not be required to contribute any
amount in excess of the amount it would have been required to pay to an
indemnified party if the indemnity under paragraph (g) hereof was available. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
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<PAGE>
(i) Purchaser shall furnish to the Company such information
regarding Purchaser, the Shares held by Purchaser, and the distribution proposed
by Purchaser as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration referred to in this
Agreement.
(j) The registration rights granted to Purchaser in this Section
shall expire (a) at such time (if ever) as Purchaser is free to sell the Shares
under Rule 144 promulgated under the Securities Act (or any successor thereto)
without limitation as to volume or manner of sale restrictions, and (b) Shares
held by Purchaser constitute less than one percent (1%) of the outstanding
shares of the common stock of the Company. The foregoing notwithstanding,
Purchaser's registration rights under this Section 4 shall expire after the
Company has offered Purchaser the cumulative opportunity to register all of the
Shares in two registered offerings, irrespective of whether Purchaser elects to
participate in these registrations.
5. Proxy. Concurrently with the execution of this Agreement and the
-----
issuance of the Shares, Purchaser is executing and delivering a Stockholders'
Agreement and a proxy appointing Arunas A. Chesonis, one of the founding
shareholders of the Company, Purchaser's attorney-in-fact and proxy to vote all
Shares now or hereafter owned by Purchaser at any meeting of shareholders,
regular or special, whenever called, and for whatever purpose. Copies of the
Stockholders' Agreement and of the proxy shall be filed with the Secretary of
the Company and the proxy shall be registered in the stock books of the Company.
Any transfer of the Shares is subject to the terms of the foregoing proxy.
6. Legend. Each certificate for Shares owned by Purchaser shall bear
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the following legends:
The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be transferred in the absence of such registration
unless the Company receives an opinion of counsel reasonably
acceptable to it stating that such sale or transfer is
exempt from registration.
The shares represented by this certificate are subject to a
Stockholders' Agreement and to a Proxy in favor of Arunas A.
Chesonis, copies of which are on file with the Company. Any
transferee of the shares represented by this certificate
shall take the shares subject to the terms of the
Stockholders' Agreement and of the Proxy.
7. Share Adjustment
----------------
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<PAGE>
(a) If the Company hereafter issues shares of Class B common
stock, or any security convertible into its Class B common stock, for a purchase
price per share less than the purchase price per share specified in Section 1 of
this Agreement, the Company shall issue to Purchaser additional shares of common
stock, or securities convertible into common stock, such that the total of such
additional shares and the shares purchased hereunder shall equal the total
number of shares that would have been issued to Purchaser at such lower price
per share for the total purchase price specified in Section 1 with such issuance
of additional shares to be at no cost to Purchaser. Example. The total price for
2,400,000 shares of Class B common stock at $.833 per share as provided in
Section 1 is $1,999,200. If the Company hereafter issues shares of Class B
common stock for $.75 per share, the Company shall issue 265,600 additional
shares of Class B common stock to Purchaser. ($1,999,200 / .75 = 2,665,600 minus
2,400,000 = 265,600).
(b) If the Company hereafter issues shares of Class A common
stock, or any securities convertible into its shares of Class A common stock,
for a purchase price of less than $.694 per share, the Company shall issue to
Purchaser shares of Class A common stock, or securities convertible into shares
of Class A common stock based upon the percentage of the deficiency between
$.694 per share and the actual price per share. Thus for example, if the Company
hereafter sells 1,000,000 shares of Class A common stock at $.50 per share, the
deficiency is $.194 per share or 28%. The Company will then issue shares of
Class A common stock to Purchaser equal to 28% of the total number of shares
issued at less than $.694 per share or 280,000 shares.
(c) The provisions for share adjustment in Sections 7(a) and (b)
shall not apply to (i) the issuance of additional shares of Class A common stock
by the company to its employees either directly or under the Company's 1998
Incentive Compensation Plan, (ii) to shares issued or issuable by the Company as
consideration for the acquisition by the Company of capital stock or assets of
another business entity or in connection with a merger or consolidation, or to
the acquisition of real or tangible property for the Company in arms length
transactions with unrelated third parties, or (iii) to any shares of Class A
stock issued after the Company has completed an initial public offering ("IPO")
of its shares.
8. Subsequent Offerings.
--------------------
(a) The Company contemplates making an additional private
offering of 4,000,000 shares of its Class A common stock to raise $10,000,000 of
additional capital during September 1998 ("Third Tier"). Purchaser shall have
the option to purchase up to 400,000 shares of Class A common stock in such
offering on the same terms and conditions as shares of Class A common stock are
offered to existing shareholders at the time of the offering provided that the
price per share to Purchaser shall not exceed $2.50 per share.
11
<PAGE>
(b) In addition to the Third Tier offering referred to above, the
Company presently anticipates making the following private offerings of its
Class A common shares prior to its IPO:
Number of Price Per
Tier Shares Share
---- --------- ---------
Fourth 800,000 $2.50
Fifth 200,000 $5.00
(c) The anticipated offerings referred to in subsections (a) and
(b) are preliminary and are subject to change based on market conditions, the
financial needs of the Company, and other factors. Purchaser will not have
preemptive rights and will not have the right to purchase shares in future
offerings other than the right to participate in the Third Tier offering as
provided in Section 8(a), except that if the Company hereafter offers more
shares than listed in subsections (a) and (b) prior to its IPO, or if shares are
offered at a price per share less than as scheduled in these Sections, Purchaser
shall have the right to purchase a pro rata portion of the excess shares, or of
the shares offered at less than the offering prices set forth above, at the same
purchase price per share offered to others. Purchaser's pro rata right of
participation shall be determined by comparing the number of shares of Class A
common stock held by Purchaser to the number of shares of Class A common stock
and Class B common stock then outstanding, without regarding to the relative
voting rights attributable to either such class.
9. Notices. All notices and communications under this
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Agreement shall be in writing and shall be given by personal delivery or by
registered or certified mail, return receipt requested, addressed to the
respective addresses of Purchaser and Company set forth above or to such other
address as may be designated by Purchaser or Company. Notice shall be deemed
given upon personal delivery or upon receipt.
10. Confidentiality. Except as may be required by law, neither
---------------
Purchaser nor the Company will issue any press release or, except as may be
required by law, make any public announcement concerning the transactions
contemplated by this Agreement without the prior consent or approval of the
other party.
11. Miscellaneous.
-------------
(a) This Agreement may be modified or amended only upon the
written consent of all parties to the Agreement.
(b) This Agreement shall be interpreted, construed, and
enforced in accordance with the laws of the State of New York.
12
<PAGE>
(c) Neither this Agreement, nor any rights or obligations under
it, may be assigned by any party without the prior written consent of the other
party.
(d) This Agreement shall benefit and be binding upon the parties
and their successors, heirs, executors, personal representatives, and assigns.
(e) This Agreement sets forth the entire understanding and
agreement of the parties with respect to its subject matter and supersedes all
prior letters, agreements, covenants, communications, understandings,
representations, or warranties, whether oral or written, by any officer,
employee, or representative of either party.
(f) The waiver of any provision of this Agreement, or of any
breach of this Agreement, shall not constitute a subsequent waiver of any
provision or breach.
The parties' assent to the terms of this Agreement is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
-----------------------------
Title: President
/s/ Jeffrey P. Sudikoff
-----------------------------
Jeffrey P. Sudikoff
13
<PAGE>
Exhibit 10.4.2
FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT (this "Amendment") is
made as of this 4th day of February 2000 by and between PaeTec Corp., a Delaware
corporation (the "Company"), and Jeffrey Sudikoff (the "Purchaser").
RECITALS
--------
A. The Company and the Purchaser are parties to a Stock Purchase
Agreement dated August 20, 1998 (the "Stock Purchase Agreement").
B. The Board of Directors of the Company has authorized the issuance
and sale (the "Series A Preferred Stock Placement") of 134,000 shares of a new
series of preferred stock of the Company, designated the Series A Convertible
Preferred Stock, to the purchasers (the "Purchasers") listed on the Schedule of
Purchasers to, and pursuant to the terms and conditions of, an Equity Purchase
Agreement (the "Purchase Agreement").
C. As a condition to the consummation of the Series A Preferred Stock
Placement, the Purchasers have required that the Company and the Purchaser amend
the Stock Purchase Agreement to clarify that to the extent that any securities
are required to be excluded from a registration pursuant to the "cut-back"
provisions of the piggyback registration rights granted to the Purchaser
pursuant to the Stock Purchase Agreement, the securities to be included in such
registration shall be determined on a pro rata basis among the holders of shares
--- ----
participating in the offering pursuant to registration rights granted by the
Company, based on the number of shares of common stock requested to be included
by each such holder in such registration.
D. The parties hereto desire to amend the Stock Purchase Agreement to
induce the Purchasers to consummate the Series A Preferred Stock Placement.
AGREEMENT
---------
1. Defined Terms. All capitalized terms used in this Amendment
-------------
without definition shall have the meanings given to such terms in the Purchase
Agreement.
2. Amendment of Section 4(b). The fourth and fifth sentences of
-------------------------
Section 4(b) of the Stock Purchase Agreement are hereby deleted and replaced and
superseded in their entirety with the following sentence:
<PAGE>
"Notwithstanding any other provision of this Section 4, if the managing
underwriter advises in writing the Company and the Purchaser that marketing
factors require a limitation of the number of shares of common stock to be
underwritten and sold in such offering, the managing underwriter may
exclude some or all of the shares of common stock to be sold in such
offering from such registration, and the shares to be included in such
registration shall be allocated pro rata among the holders of shares
--- ----
participating in the offering pursuant to registration rights granted by
the Company (including demand and piggyback registration rights), based on
the number of shares of common stock requested to be included by each
holder in such registration."
All other terms and conditions of the Stock Purchase Agreement remain in full
force and effect.
3. Binding Effect. This Amendment shall be binding upon and inure to
--------------
the benefit of the parties hereto and their heirs, executors, administrators,
successors and assigns.
4. Governing Law. This Amendment shall be governed by, and construed
-------------
and enforced in accordance with, the laws of the State of New York, except that
if any provision of this Amendment or any part of any such provision would be
illegal, invalid or enforceable under such laws in connection with a suit or
proceeding validly instituted in another jurisdiction, then the laws of such
other jurisdiction shall govern insofar as is necessary to sustain the legality,
validity or enforceability of such provision or any part of such provision.
5. Captions. Captions to the Sections in this Amendment are for the
--------
convenience of the parties only and shall not affect the meaning or
interpretation of this Amendment.
6. Enforceability and Interpretation. It is the intention of the
---------------------------------
parties to this Amendment that the terms and provisions contained in this
Amendment shall be enforceable to the fullest extent permitted by law. If any
term or provision of this Amendment or the application thereof to any Person or
circumstance is construed to be illegal, invalid or unenforceable, in whole or
in part, then such term or provision shall be construed in such a manner as to
permit its enforceability under applicable law to the fullest extent permitted
by such law. In any case, the remaining terms and provisions of this Amendment
or the application thereof to any Person or circumstance, except those terms and
provisions which have been held illegal, invalid or unenforceable, shall remain
in full force and effect.
-2-
<PAGE>
7. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8. Additional Documents. Each party hereto agrees to execute any and
--------------------
all documents, instruments, certificates and communications deemed to be
necessary or advisable by the Company to effectuate the purposes of this
Amendment.
[signature page follows]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment with full force and effect as of the day and year first written
above.
PAETEC CORP.
By: /s/ Timothy J. Bancroft
-----------------------------------
Its: Vice President, Finance
--------------------------------
/s/ Jeffrey Sudikoff
---------------------------------------
Jeffrey Sudikoff
-4-
<PAGE>
Exhibit 10.5.1
EXECUTION COPY
STOCK PURCHASE AGREEMENT
This is a Stock Purchase Agreement (this "Agreement") dated as of November
16, 1998 between PAETEC CORP., a Delaware corporation with its principal place
of business at 290 Woodcliff Drive, Fairport, New York 14450 (the "Company"),
and AT&T COMMERCIAL FINANCIAL CORPORATION, a Delaware corporation with its
principal place of business at Two Gatehall Drive, Parsippany, New Jersey 07054
("Purchaser").
RECITALS
A. In order to provide funds for the acquisition, construction and
operation of switch-based telecommunications systems owned and operated by the
Company in the United States of America, certain subsidiaries of the Company
have entered into a Loan and Security Agreement of even date herewith (the "Loan
Agreement") with Purchaser.
B. The obligation of Purchaser to make the initial Loan (as defined in
the Loan Agreement) under the Loan Agreement is subject to the execution and
delivery of this Agreement.
C. The Company is a Delaware corporation having 35,000,000 shares of
authorized capital stock, 27,500,000 of which are designated Class A common
stock, $.01 par value per share ("Class A Common Stock), and 7,500,000 of which
are designated Class B common stock, $.01 par value per share ("Class B Common
Stock").
D. Purchaser desires to purchase, and the Company agrees to sell, shares
of the Class A common stock of the Company pursuant to the terms and conditions
of this Agreement.
NOW, THEREFORE, in consideration of the commitment of Purchaser to make the
initial Loan under the Loan Agreement and of the mutual promises set forth in
this Agreement, the parties hereto agree as follows:
1. Purchase of Shares.
------------------
(a) The Company hereby agrees to sell to Purchaser, and Purchaser
hereby agrees to purchase from the Company, 600,000 shares (the "Shares") of the
Company's Class A Common Stock at a price of $2.50 per Share (the "Purchase
Price") payable in full on or before November 23, 1998. A stock certificate
evidencing the Shares shall be issued in the name of Purchaser upon receipt of
this executed Agreement and payment in full of the Purchase Price. Unless
otherwise requested by Purchaser, it will receive one certificate for the
Shares.
<PAGE>
2. Condition Precedent. Purchaser shall not be obligated to purchase,
-------------------
and the Company shall not be obligated to sell, the Shares until the closing of
the transactions contemplated by the Loan Agreement and the effectiveness of
Purchaser's commitment to make the initial Loan under pursuant thereto.
3. Representations and Warranties of Purchaser. In order to induce the
-------------------------------------------
Company to issue the Shares, Purchaser represents and warrants to the Company as
follows:
(a) Purchaser is acquiring the Shares for its own account, with no
present intention of reselling, distributing or otherwise transferring the
Shares or any portion of the Shares to any third party.
(b) Purchaser understands and acknowledges that the Shares are being
offered and sold under one or more exemptions provided in the Securities Act of
1933, as amended (the "Securities Act"), Regulation D promulgated thereunder and
applicable state securities laws, and that this transaction has not been
reviewed or passed upon by the United States Securities and Exchange Commission
(the "Commission"), or any other federal or state agency.
(c) Purchaser is a corporation, not formed for the specific purpose of
acquiring the Shares, with total assets in excess of $5,000,000.
(d) Purchaser realizes that Purchaser must bear the economic risk of
investment for an indefinite period of time because (i) the Shares have not been
registered under the Securities Act and cannot be resold by Purchaser unless
they are subsequently registered under the Securities Act or an exemption from
registration is available, and (ii) there currently is no public market for the
Shares, and Purchaser may not be able to liquidate the investment in the Shares
in the event of an emergency. Purchaser has no need for current liquidity of
investment with respect to the Shares.
4. Representations and Warranties of the Company. In order to induce
---------------------------------------------
Purchaser to purchase the Shares, the Company represents and warrants to
Purchaser as follows:
(a) The Company's authorized capital consists of (i) 27,500,000 shares
of Class A Common Stock, of which 8,399,952 shares are issued and outstanding or
are committed to be issued (ii) and 7,500,000 shares of Class B Common Stock, of
which 6,285,048 shares are issued and outstanding or are committed to be issued.
A list of the current stockholders with the number and class of shares owned by
each is attached hereto as Schedule 1. The Company has reserved 4,300,000
----------
shares of Class A Common Stock for issuance under the Company's 1998 Incentive
Compensation Plan. Except as described in this Section and Schedule 1, as of
----------
the date of this Agreement, there are no outstanding subscriptions, options,
warrants, calls, rights or other agreements or commitments obligating the
Company to issue, sell, deliver or transfer (including any right of conversion
or exchange under any outstanding security or other instrument) any shares of
the capital stock of the Company. Except as described in this Section and in
Schedule 1, there are no agreements, arrangements, rights or commitments of any
- ----------
character relating to the issuance, sale, purchase or redemption, or restricting
the transfer of, or the declaration of payment of dividends on, any shares of
the capital stock of the Company. Except as described in Schedule 1, no
----------
shareholder of the Company is a party to any voting agreement, voting trust,
2
<PAGE>
irrevocable proxy or other agreement affecting the voting rights of any shares
of capital stock of the Company or any agreement providing for any "put" or
"call" option, right of first refusal or offer or other right to acquire or
dispose of any shares of the Company's capital stock or options or warrants.
All outstanding shares of capital stock of the Company have been duly and
validly authorized and issued, are fully paid and non-assessable, and have been
issued free of any lien, security interest, pledge, charge or encumbrance of any
kind (collectively, "Encumbrances").
(b) The Company was incorporated on May 19,1998.
(c) The Company is a corporation duly organized and existing under the
laws of the State of Delaware and is in good standing under such laws. The
Company is duly qualified and licensed in each jurisdiction where the nature of
the business conducted by it requires such qualification, except where the
failure to qualify would not have a material adverse effect upon the Company's
financial condition or results of operations. The Company has the requisite
corporate power and authority to own or lease and operate its properties and
assets, and to carry on its business as proposed to be conducted.
(d) The Company has all requisite corporate power to execute and
deliver this Agreement and to sell and issue the Shares hereunder, and to carry
out and perform its obligations under the terms of this Agreement.
(e) Neither the Company nor any subsidiary thereof owns, directly or
indirectly, of record or beneficially, any capital stock or equity interest or
investment in any corporation, association or business entity, except with
respect to PaeTec Communications, Inc. and PaeTec International, Inc., each of
which is a wholly owned subsidiary of the Company (the "Subsidiaries"). Each of
the Subsidiaries is a corporation duly organized and existing under the laws of
the State of Delaware and is in good standing under such laws. Each Subsidiary
has the requisite corporate power and authority to own or lease and operate its
properties and assets, and to carry on its business as proposed to be conducted.
Neither the Company nor any Subsidiary is a partner or participant in any
partnership or joint venture. The shares of capital stock of each
Subsidiary held by the Company are free of any Encumbrances.
(f) All corporate action on the part of the Company, its directors and
stockholders necessary for the authorization, execution, delivery and
performance by the Company of this Agreement and the consummation of the
transactions contemplated herein and for the authorization, issuance and
delivery of the Shares has been taken. This Agreement constitutes a valid and
binding obligation of the Company, enforceable in accordance with its terms,
subject to laws of general application relating to bankruptcy, insolvency, and
the relief of debtors and other laws of general application affecting
enforcement of creditors' rights generally, including rules of law governing
specific performance, injunctive relief or other equitable remedies. The
Shares, when issued in compliance with the provisions of this Agreement, will be
validly issued, fully paid and nonassessable, free of preemptive rights and will
be free of any Encumbrances, and will be free of restrictions on transfer other
than under state and/or federal Securities laws.
3
<PAGE>
(g) No consent, approval, qualification, order or authorization of, or
filing with, any governmental authority or any third party is required in
connection with Company's valid execution, delivery or performance of this
Agreement, or the offer, sale or issuance of the Shares by the Company.
(h) The Company has good and marketable title to its properties and
assets and, with respect to the property and assets leased by the Company, holds
valid leasehold interests therein, in each case subject to no mortgage, pledge,
lien, security interest, conditional sale agreement, encumbrance or charge,
except (i) tax, materialmen's or like liens for obligations not yet due or
payable or being contested in good faith by appropriate proceedings, or (ii)
possible minor liens or encumbrances which do not materially detract from the
value of the property subject thereto or materially impair the operations of the
Company and which have arisen in the ordinary course of business.
(i) Subject to the truth and accuracy of Purchaser's representations
set forth in this Agreement, the offer, sale and issuance of the Shares as
contemplated by this Agreement are exempt from the registration requirements of
the Securities Act and from any applicable blue sky laws. Except as set forth
in Schedule 1, the Company has not offered the Shares to any Person other than
----------
Purchaser, and no securities of the same class as the Shares have been offered
and sold by Parent within the six-month period immediately prior to the date
hereof.
(j) The Company is not in violation of any term of its Certificate of
Incorporation or its By-laws, any term of any agreement to which the Company is
a party, or any judgment, decree, order, statute, rule or regulation to which
the Company is subject, that would have a material adverse effect on the
condition, financial or otherwise, prospects or operations of the Company. The
Company has delivered to Purchaser true and complete copies of its Certificate
of Incorporation and By-laws, as in effect on the date hereof.
(k) The execution, delivery and performance by the Company of this
Agreement, and the issuance, sale and delivery of the Shares will not violate
any provision of law, the Certificate of Incorporation or By-laws of the Company
or any order, judgment or decree of any court or any governmental agency, or
conflict with, result in a breach of, or constitute a default under, any
indenture, agreement or other instrument by which the Company, or any of its
respective assets, is bound, or result in the creation or imposition of any
Encumbrance on any of the assets of the Company.
(l) There are no actions, suits, proceedings or investigations pending
or threatened against the Company or its Subsidiaries, and the Company is not
aware of any basis for the foregoing except for an action pending in Supreme
Court, Monroe County, New York titled ACC Corp., et al v. Arunas A. Chesonis,
---------------------------------------
Richard Ottalagana, John Baron, PaeTec Corporation, and PaeTec Communications,
- ------------------------------------------------------------------------------
Inc. (Index No. 7466-98). A copy of the complaint in this action has been
- ----
furnished to Purchaser. The Company is not a party to or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
governmental agency.
(m) The Company is insured with reputable insurers against all risks
normally insured against by companies in similar lines of business, and all of
the insurance policies
4
<PAGE>
maintained by the Company are in full force and effect. A schedule listing all
insurance policies that are material to the business of the Company has been
furnished to Purchaser. The Company is not in default under any such policy. All
insurance policies maintained by the Company will remain in full force and
effect and may reasonably be expected to be renewed on comparable terms
following consummation of the transactions contemplated by this Agreement
(subject to continuing compliance with the applicable terms thereof and any
right of insurers to terminate without cause), and the Company has received no
notice or other indication from any insurer or agent of any intent to cancel or
not so renew any of such insurance policies.
(n) The Company does not have employment agreements with any of its
employees. Since its inception, the Company has not experienced any labor
disputes, union organization attempts or any work stoppage due to labor
disagreements in connection with its business. There is no labor strike,
dispute, request for representation, slowdown or stoppage actually pending or
threatened against or affecting the Company or any of the Subsidiaries. All
workers' compensation and unemployment compensation insurance premiums due have
been fully paid or accrued in the Company's financial statements.
(o) All employee benefit plans within the meaning of Section 3(3) of
the Employment Retirement Income Security Act of 1974, as amended, and the
related regulations and published interpretations ("ERISA"), are in full
compliance with the applicable provisions of ERISA (as amended through the date
of this Agreement), the regulations and published authorities thereunder, and
all other laws applicable with respect to all such employee benefit plans,
agreements and arrangements. The Company has performed all of its obligations
under all such plans, agreements and arrangements. To the best knowledge of the
Company, there are no actions (other than routine claims for benefits) pending
or threatened against such plans or their assets, or arising out of such plans,
agreements or arrangements, and, to the best knowledge of the Company, no facts
exist which could give rise to any such Actions.
(p) All group health plans of the Company and any Subsidiary have been
operated in compliance with the group health plan continuation coverage
requirements of Section 162(k) of the Internal Revenue Code to the extent such
requirements are applicable.
(q) There has been no act or omission by the Company or any Subsidiary
that has given rise to or may give rise to fines, penalties, taxes, or related
charges under Section 502(c) or (k) or Section 4071 of ERISA or Chapter 43 of
the Internal Revenue Code.
(r) The Company has not issued to any other holder of the securities
of the Company registration rights that are superior to the rights set forth in
Section 5 of this Agreement. Except as set forth in Schedule 1 or in Section 5,
- --------- ---------- ---------
the Company has not agreed to register any of its capital stock under the
Securities Act or under any state securities or "blue sky" law.
(s) The proceeds from the sale of the Shares will be used by the
Company to fund expansion of the Company's switched-based telecommunications
business including the purchase of equipment, the opening of new sales offices,
for additional working capital, and for general corporate purposes.
5
<PAGE>
(t) The financial statements of the Company for the period ended
September 30, 1998, compiled by the Company, a copy of which is attached hereto
as Exhibit A, were prepared from the books and records of the Company and fairly
---------
sets forth the financial position of the Company, subject to the qualifications
contained therein.
(u) No Person (as defined in the Loan Agreement) has, or as a result
of the transactions contemplated hereby will have, any right, interest or valid
claim against or upon the Company for any commission, fee or other compensation
as a finder or broker, or in any similar capacity.
(v) Each of the representations and warranties contained in Sections
3.03, 3.04, 3.06, 3.07, 3.08, 3.09, 3.10, 3.12, 3.13, 3.14, 3.15, 3.16, 3.18,
3.20, 3.21, 3.23 and 3.24 of the Loan Agreement are hereby incorporated herein
by reference with the same effect as if set forth herein in their entirety.
(w) The representations and warranties in this Agreement and in any
writing furnished or to be furnished by or on behalf of the Company pursuant
hereto or in connection herewith, including any representations and warranties
incorporated herein or therein by reference, do not contain and will not contain
any untrue statement of a material fact and do not omit and will not omit to
state any material fact required to make the statements herein or therein
contained, in the light of the circumstances under which they were made, not
misleading. No report, financial statement, exhibit or schedule furnished by or
on behalf of the Company to Purchaser in connection with the negotiation of this
Agreement and any other agreement or instrument related hereto, nor any other
information required to be furnished hereby or thereby, contains any material
misstatement of fact or omits to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
5. Piggy-Back Registration Rights.
------------------------------
(a) If at any time or from time to time the Company shall determine to
register any of its equity securities, either for its own account or the account
of a security holder or holders (other than a registration of securities
relating solely to employee benefit plans or to effect a merger or other
reorganization), the Company will promptly give to Purchaser written notice
thereof and, upon the written request of Purchaser, include in such registration
(and any related qualification under blue sky laws or other compliance), and in
any underwriting involved therein, all the Shares specified in the written
request made within 15 days after receipt of such written notice from the
Company.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise Purchaser as a part of the written notice given to Purchaser. In such
event the right of Purchaser to registration pursuant to this Section shall be
conditioned upon Purchaser's participation in such underwriting, and the
inclusion of the Shares in the underwriting shall be limited to the extent
provided herein. Purchaser (together with the Company and the other holders
distributing their securities through such underwriting) shall enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any
6
<PAGE>
other provision of this Section, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may exclude some or all of the Shares or
securities of other holders of similar registration rights from such
registration. The Company shall so advise Purchaser and other stockholders
distributing their securities through such underwriting, and the number of
Shares or securities of other holders of similar registration rights that may be
included in the registration and underwriting, as determined by the managing
underwriter, shall be allocated on a pro rata basis. If Purchaser disapproves of
the terms of any such underwriting, Purchaser may elect to withdraw therefrom by
written notice to the Company and the managing underwriter. Any securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration, and shall continue to be subject to the terms of this Section.
(c) If the Company hereafter grants rights to any shareholder to have
its shares registered under the Securities Act, such grant of rights shall
expressly be subject to the following "cut back" provision:
"If the managing underwriter of any offering of the Company's
securities determines that marketing factors require a limitation of
the number of shares to be underwritten, the managing underwriter may
exclude some or all of the shares of the party to whom registration
rights are granted or securities of other holders of similar rights
from such registration."
(d) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section prior to the effectiveness of
such registration whether or not Purchaser has elected to include securities in
such registration.
(e) All expenses associated with the registration (including, without
limitation, registration, qualification and filing fees, printing expenses, blue
sky fees, and fees and disbursements of counsel and accountants for the Company)
shall be borne by the Company. Underwriters' discounts and related charges,
shall be borne by Purchaser pro rata in proportion to the number of securities
being registered.
(f) In the case of each registration under this Section, the Company
will:
(i) prepare and file a registration statement with respect to
such securities and use its best efforts to cause such registration statement to
become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
(ii) furnish to Purchaser a reasonable number of copies of the
registration statement, any amendment or supplement thereto, any preliminary or
final prospectus, any prospectus supplement, any correspondence with the
Commission regarding such documents, and such other documents as Purchaser may
reasonably request in order to facilitate the public offering of the Shares;
(iii) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by Purchaser,
provided that the Company shall not be required in
7
<PAGE>
connection therewith or as a condition thereto to qualify as a foreign
corporation or as a dealer in securities or to file a general consent to service
of process in any such states or jurisdictions in which it has not already done
so and except as may be required by the Securities Act; and
(iv) otherwise take such other actions as are reasonably required
to comply with all applicable rules and regulations of the Commission, and make
available to its securities holders, as soon as reasonably practicable (but not
earlier than such information would be required to be filed with the Commission
under Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), an earnings statement covering the period of at
least twelve months beginning with the first month of the first fiscal quarter
after the effective date of such registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities Act.
(g) The Company will indemnify Purchaser and each person, if any, who
controls Purchaser within the meaning of the Securities Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any registration statement,
prospectus, offering circular or other document, or any amendment or supplement
thereto, incident to any such registration, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, or any violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under such laws applicable to the Company in connection
with any such registration, qualification or compliance, and the Company will
reimburse Purchaser for any legal and any other expenses reasonably incurred, as
such expenses are incurred, in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission, or alleged untrue statement or omission, made in reliance
upon and in conformity with written information relating to Purchaser furnished
to the Company specifically for inclusion in the registration statement by an
instrument duly executed by Purchaser.
(h) Purchaser will, if any of the Shares are included in the
securities as to which such registration is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a registration statement against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company, Purchaser,
such directors, officers, persons, underwriters or control persons for any legal
or any other expenses reasonably incurred, as such expenses are incurred, in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
relating
8
<PAGE>
to Purchaser furnished to the Company specifically for inclusion in the
registration statement by an instrument duly executed by Purchaser and stated to
be specifically for use therein, provided that in no event shall any indemnity
under this Section exceed the net proceeds from the offering received by
Purchaser.
(i) If for any reason the indemnity set forth in paragraphs (f) or (g)
above is unavailable or insufficient to hold harmless an indemnified party in
respect of any losses, claims, damages, liabilities or expenses (or actions in
respect thereof), then the indemnifying party shall contribute to the amount
paid or payable by the indemnified party as a result of such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and the indemnified party on the other hand in connection
with statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the indemnifying party or the indemnified
party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
Notwithstanding the foregoing, Purchaser shall not be required to contribute any
amount in excess of the amount it would have been required to pay to an
indemnified party if the indemnity under paragraph (h) above was available. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(j) Purchaser shall furnish to the Company such information regarding
Purchaser, the Shares held by Purchaser, and the distribution proposed by
Purchaser as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration referred to in this
Agreement.
(k) The registration rights granted to Purchaser in this Section shall
expire (a) at such time (if ever) as Purchaser is free to sell the Shares under
Rule 144 promulgated under the Securities Act (or any successor thereto) without
limitation as to volume or manner of sale restrictions, and (b) Shares held by
Purchaser constitute less than one percent (1%) of the outstanding shares of the
common stock of the Company. The foregoing notwithstanding, Purchaser's
registration rights under this Section 4 shall expire after the Company has
offered Purchaser the cumulative opportunity to register all of the Shares in
two registered offerings, irrespective of whether Purchaser elects to
participate in these registrations.
(l) In connection with the preparation and filing of each registration
statement, or amendment or supplement thereto, under the Securities Act, the
Company will grant Purchaser an opportunity to review and comment on such
registration statement, or amendment or supplement thereto; provided, however,
-------- -------
that Purchaser's comments on such registration statement, amendment or
supplement shall be limited to information pertaining to Purchaser; provided,
--------
further, that Purchaser shall conclude any review under this paragraph within
- -------
five business days of its receipt of such registration statement, amendment or
supplement.
9
<PAGE>
6. Affirmative Covenants: The Company covenants and agrees that so long
---------------------
as Purchaser shall hold at least 1% of the outstanding common stock of the
Company:
(a) The Company will maintain its corporate existence in good standing
and comply with all applicable laws and regulations of the United States or of
any state or states thereof or of any political subdivisions thereof and of any
government authority where failure to so comply would have a material adverse
impact on the Company or its business or operations.
(b) The Company will keep books of record and account in which full,
true and correct entries are made of the respective dealings, business and
affairs of the Company and its Subsidiaries, in accordance with generally
accepted accounting principles. The Company will employ certified public
accountants who are "independent" within the meaning of the accounting
regulations of the Commission. The Company will have annual audits made by such
independent public accountants in the course of which such accountants shall
make such examinations, in accordance with generally accepted auditing
standards, as will enable them to give such reports or opinions with respect to
the financial statements of the Company and its Subsidiaries as will satisfy the
requirements of the Commission in effect at such time with respect to reports or
opinions of accountants.
(c) The Company shall pay, indemnify and hold harmless Purchaser from
and against all transfer, stamp, documentary and other taxes, assessments and
charges (including interest and penalties) imposed by any governmental body or
agency in the State of New York by reason of the execution and delivery of this
Agreement or the issuance or delivery of the Shares.
7. Legend. Each certificate for Shares owned by Purchaser shall bear the
------
following legend:
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be
transferred in the absence of such registration unless the Company
receives an opinion of counsel reasonably acceptable to it stating
that such sale or transfer is exempt from registration.
Notwithstanding the foregoing, such restrictive legend requirements shall
terminate when the Company shall have received either a no-action letter from
the Commission or an opinion of counsel reasonably satisfactory in form and
substance to the Company that such legend is not required in order to ensure
compliance with the Securities Act. Whenever the restrictions imposed by this
Section shall terminate, as hereinabove provided, Purchaser shall be entitled to
receive from the Company, at the Company's expense, a new certificate
representing the Shares not bearing the restrictive legend set forth above.
8. Share Adjustment
----------------
(a) If the Company hereafter issues Common Shares (as defined below)
for a purchase price (calculated in accordance with paragraph (c) of this
Section) less than $2.50 per share, the Company shall issue to Purchaser
additional shares of Class A Common Stock, such that the total of such
additional shares and the shares purchased hereunder shall equal the total
10
<PAGE>
number of shares that would have been issued to Purchaser at such lower price
per share for the Purchase Price (as defined in Section 1), with such issuance
---------
of additional shares to be at no cost to Purchaser. Example. The total price
for 600,000 shares of Class A Common Stock at $2.50 per share is $1,500,000. If
the Company hereafter issues Common Shares for $2.00 per share, the Company
shall issue 150,000 additional shares of Class A Common Stock to Purchaser.
($1,500,000 / 2.0 = 750,000 minus 600,000 = 150,000).
(b) The provisions for share adjustment in paragraph (a) of this
Section shall not apply to (i) the issuance of additional shares of Class A
Common Stock by the Company to its employees either directly or under the
Company's 1998 Incentive Compensation Plan, or (ii) to shares issued or issuable
by the Company as consideration for the acquisition by the Company of capital
stock or assets of another business entity or in connection with a merger or
consolidation, or to the acquisition of real or tangible property for the
Company in arms length transactions with unrelated third parties.
(c) "Common Shares" shall mean all shares of Class A Common Stock, any
shares of Class A Common Stock which the Company has committed to issue or sell,
any warrants, options or other rights to subscribe for or purchase Class A
Common Stock or any equity securities convertible into or exchangeable for
shares of Class A Common Stock, whether or not the right to purchase, exchange
or convert thereunder are immediately exercisable. In measuring the purchase
price of Common Shares for the purposes of paragraph (a) of this Section, the
price per share for each Common Share shall equal the sum of (i) the total
amount received or receivable by the Company as consideration for the issue or
sale of such Common Share plus (ii) the amount of any additional consideration
payable to the Company upon the conversion or exchange of such Common Share.
9. Notices. All notices, requests and other communications provided for
-------
herein shall be in writing, and shall be deemed to have been made or given when
delivered, or mailed postage prepaid, or sent by telex, telegram or telecopier:
(a) if to the Company, to:
290 Woodcliff Drive
Fairport, New York 14550
Attention: Vice President - Finance
Telecopy: (716) 340-2563
with a copy to:
290 Woodcliff Drive
Fairport, New York 14550
Attention: General Counsel
Telecopy: (716) 340-2563
(b) if to Purchaser, to:
Two Gatehall Drive
Parsippany, New Jersey 07054
11
<PAGE>
Attention: Vice President/Media & Communications
with a copy to:
John M. O'Hare, Esq.
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
Telecopy: (312) 853-7036
10. No Public Announcement. Except as may be required by law, neither
----------------------
Purchaser nor the Company will issue any press release or, make any public
announcement concerning the transactions contemplated by this Agreement without
the prior consent or approval of the other party.
11. Miscellaneous.
(a) Any provision of this Agreement may be modified or amended only
upon the written consent of the Company and Purchaser. Any provision of this
Agreement may be waived if, but only if, such waiver is in writing and is signed
by the Company and Purchaser. The waiver of any provision of this Agreement, or
of any breach of this Agreement, shall not constitute a subsequent waiver of any
provision or breach. No failure or delay by the Company or Purchaser in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
(b) The representations, warranties, agreements and covenants shall
survive the execution of this Agreement, the purchase of the Shares contemplated
hereby and any disposition thereof, notwithstanding any investigation made at
any time by any of the parties hereto. Except as expressly provided herein, the
representations and warranties contained in paragraphs (a), (d), (f) and (g) of
Section 4 and in the first sentence of paragraph (c) of Section 4 shall remain
- --------- ---------
in full force and effect with respect to Purchaser for as long as Purchaser
shall beneficially own any Shares and with respect to any permitted assignee of
Purchaser, to the extent so assigned, for as long as such assignee shall
beneficially own any Shares.
(c) This Agreement shall be governed by and construed in accordance
with the substantive laws of the State of New York, as applied to contracts made
and performed within the State of New York, without regard to principles of
conflict of laws, except as to matters of corporate governance, which shall be
interpreted in accordance with the General Corporation Law of the State of
Delaware.
12
<PAGE>
(d) This Agreement shall be freely assignable by the parties hereto
and shall be binding upon, inure to the benefit of and be enforceable by the
parties hereto and their respective successors and assigns. No transfer of
Shares by Purchaser shall constitute an assignment by Purchaser of its right
hereunder in the absence of a written assignment by Purchaser of such rights.
Purchaser shall notify the Company of any such assignment of its rights
hereunder.
(e) This Agreement and the Loan Agreement, including the Schedules and
Exhibits referred to herein or therein, contain the entire understanding of the
parties hereto with regard to the subject matter contained herein and supersedes
all prior letters, agreements, covenants, communications, understandings,
representations, or warranties, whether oral or written, by any officer,
employee, or representative of either party.
(f) This Agreement may be executed in any number of counterparts, each
of which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
13
<PAGE>
The parties' assent to the terms of this Agreement is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
------------------------------
Name: Arunas A. Chesonis
Title: President
AT&T COMMERCIAL FINANCIAL
CORPORATION
By: /s/ Michael V. Monahan
------------------------------
Name: Michael V. Monahan
Title: Vice President
14
<PAGE>
Exhibit 10.5.2
FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT (this "Amendment") is
made as of this 4th day of February 2000 by and between PaeTec Corp., a Delaware
corporation (the "Company"), and Newcourt Commercial Finance Corp. (the
"Purchaser").
RECITALS
--------
A. The Company and the Purchaser (formerly known as AT&T Commercial
Finance Corporation) are parties to a Stock Purchase Agreement dated as November
16, 1998 (the "Stock Purchase Agreement").
B. The Board of Directors of the Company has authorized the issuance
and sale (the "Series A Preferred Stock Placement") of 134,000 shares of a new
series of preferred stock of the Company, designated the Series A Convertible
Preferred Stock, to the purchasers (the "Purchasers") listed on the Schedule of
Purchasers to, and pursuant to the terms and conditions of, an Equity Purchase
Agreement (the "Purchase Agreement").
C. As a condition to the consummation of the Series A Preferred Stock
Placement, the Purchasers have required that the Company and the Purchaser amend
the Stock Purchase Agreement to clarify that, to the extent that any securities
are required to be excluded from a registration pursuant to the "cut-back"
provisions of the piggyback registration rights granted to the Purchaser
pursuant to the Stock Purchase Agreement, the securities to be included in such
registration shall be determined on a pro rata basis among the holders of shares
--- ----
participating in the offering pursuant to registration rights granted by the
Company, based on the number of shares of common stock requested to be included
by each such holder in such registration.
D. The parties hereto desire to amend the Stock Purchase Agreement to
induce the Purchasers to consummate the Series A Preferred Stock Placement.
AGREEMENT
---------
1. Defined Terms. All capitalized terms used in this Amendment
-------------
without definition shall have the meanings given to such terms in the Stock
Purchase Agreement.
<PAGE>
2. Amendment of Section 5(b). The fourth and fifth sentences of
-------------------------
Section 5(b) of the Stock Purchase Agreement are hereby deleted and replaced and
superseded in their entirety with the following sentence:
"Notwithstanding any other provision of this Section 5, if the managing
underwriter advises in writing the Company and the Purchaser that marketing
factors require a limitation of the number of shares of common stock to be
underwritten and sold in such offering, the managing underwriter may
exclude some or all of the shares of common stock to be sold in such
offering from such registration, and the shares to be included in such
registration shall be allocated pro rata among the holders of shares
--- ----
participating in the offering pursuant to registration rights granted by
the Company (including demand and piggyback registration rights), based on
the number of shares of common stock requested to be included by each
holder in such registration."
All other terms and conditions of the Stock Purchase Agreement remain in full
force and effect.
3. Binding Effect. This Amendment shall be binding upon and inure to
--------------
the benefit of the parties hereto and their heirs, executors, administrators,
successors and assigns.
4. Governing Law. This Amendment shall be governed by, and construed
-------------
and enforced in accordance with, the laws of the State of New York, except that
if any provision of this Amendment or any part of any such provision would be
illegal, invalid or enforceable under such laws in connection with a suit or
proceeding validly instituted in another jurisdiction, then the laws of such
other jurisdiction shall govern insofar as is necessary to sustain the legality,
validity or enforceability of such provision or any part of such provision.
5. Captions. Captions to the Sections in this Amendment are for the
--------
convenience of the parties only and shall not affect the meaning or
interpretation of this Amendment.
6. Enforceability and Interpretation. It is the intention of the
---------------------------------
parties to this Amendment that the terms and provisions contained in this
Amendment shall be enforceable to the fullest extent permitted by law. If any
term or provision of this Amendment or the application thereof to any Person or
circumstance is construed to be illegal, invalid or unenforceable, in whole or
in part, then such term or provision shall be construed in such a manner as to
permit its enforceability under applicable law to the fullest extent permitted
by such law. In any case, the remaining terms and provisions of this Amendment
or the application
2
<PAGE>
thereof to any Person or circumstance, except those terms and provisions which
have been held illegal, invalid or unenforceable, shall remain in full force and
effect.
7. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8. Additional Documents. Each party hereto agrees to execute any and
--------------------
all documents, instruments, certificates and communications deemed to be
necessary or advisable by the Company to effectuate the purposes of this
Amendment.
[signature page follows]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment with full force and effect as of the day and year first written
above.
PAETEC CORP.
By: /s/ Timothy J. Bancroft
---------------------------------------
Its: Vice President, Finance
------------------------------------
NEWCOURT COMMERCIAL FINANCE CORP.
By: /s/ Charles Brown
---------------------------------------
Its: V. P.
------------------------------------
4
<PAGE>
Exhibit 10.6.1
STOCK RIGHTS AGREEMENT
This is a Stock Rights Agreement (the "Agreement"), dated July 17,
1998, between JOSEPH D. AMBERSLEY ("Shareholder"), PAETEC CORP., a Delaware
corporation with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 (the "Company"), PAETEC COMMUNICATIONS, INC., a
Delaware corporation and wholly-owned subsidiary of the Company with its
principal place of business at 290 Woodcliff Drive, Fairport, New York 14450
("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. The Company is a Delaware corporation having 110,000,000 shares
of authorized capital stock, 10,000,000 of which are designated preferred stock,
75,000,000 of which are designated Class A common and 25,000,000 of which are
designated Class B common. Founder is one of the founding shareholders of the
Company.
B. Shareholder is also one of the founding Shareholders of the
Company and is an employee of the Subsidiary. In order to induce Shareholder to
leave his former employer and join the Subsidiary as an employee, the Company
previously offered to issue to Shareholder 250,000 shares of Class A common
stock at a purchase price of $.40 per share, subject to certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Agreement for the purpose of confirming Shareholder's equity interest in the
Company and outlining the rights of and restrictions imposed by the Company with
respect to the shares of stock held by the Shareholder.
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares.
------------------
(a) The Company confirms its previous offer to issue 250,000 shares of
Class A common stock (the "Shares") to Shareholder at a price of $.40 per share
payable in full upon issuance of the Shares. A stock certificate evidencing the
Shares shall be issued in the name of Shareholder upon receipt of this executed
Agreement and payment in full of the purchase price.
<PAGE>
(b) In order to induce the Company to issue the Shares, Shareholder
represents and warrants to the Company as follows:
(i) Shareholder (A) understands that an investment in the Shares is
speculative due to factors including (but not limited to) the start-up nature of
the Company and the risk of economic loss from the operations of the Company,
but believes that such an investment is suitable for Shareholder based upon
Shareholder's financial needs, (B) can withstand a complete loss of the
investment in the Shares, and (C) has the net worth to undertake these risks.
(ii) Shareholder is acquiring the Shares for the personal account of
Shareholder, with no present intention of reselling, distributing or otherwise
transferring the Shares or any portion of the Shares to anyone else.
(iii) Shareholder understands and acknowledges that the Shares are
being offered and sold under one or more exemptions provided in the Securities
Act of 1933, as amended (the "Securities Act"), Regulation D promulgated
thereunder and applicable New York State securities laws, and that this
transaction has not been reviewed or passed upon by the United States Securities
and Exchange Commission, the New York State Attorney General, or any other
federal or state agency.
(iv) Shareholder realizes that Shareholder must bear the economic risk
of investment for an indefinite period of time because (A) the Shares have not
been registered under the Securities Act and cannot be resold by Shareholder
unless they are subsequently registered under the Securities Act or an exemption
from registration is available, (B) the transferability of the Shares is
restricted by the terms of this Agreement, and (C) there currently is no public
market for the Shares, and Shareholder may not be able to liquidate the
investment in the Shares in the event of an emergency. Shareholder has adequate
means of providing for Shareholder's current financial needs and personal
contingencies, and has no need for liquidity of investment with respect to the
Shares.
(v) Shareholder believes that Shareholder, either alone or together
with the assistance of professional advisor(s), has knowledge and experience in
business and financial matters sufficient to make Shareholder capable of
evaluating the merits and risks of an investment in the Shares.
(vi) Shareholder is fully familiar with the business of the Company
and its present and proposed operations. Shareholder has been given reasonable
opportunity to ask representatives of the Company questions concerning the
Company and making an investment in the Shares. Shareholder has obtained
sufficient information to evaluate the merits and risks of an investment in the
Shares.
(vii) Shareholder confirms that Shareholder has been advised to rely
on professional accounting, tax, legal and financial advisers with respect to an
investment in the Shares and has obtained, to the extent Shareholder deems it
necessary, professional advice with respect to the risks inherent in an
investment in the Shares and the suitability of an investment in the Shares in
light of Shareholder's financial condition and investment needs.
2
<PAGE>
2. Restriction on Transfer of Shares. Shareholder may not sell,
---------------------------------
transfer, pledge, assign, transfer, or otherwise encumber or dispose of, in any
manner or by any means, any Shares that are subject to the Company's Purchase
Option described in Section 3 of this Agreement. This restriction on transfer
does not apply to any Shares that, pursuant to Section 3, no longer are subject
to the Company's Purchase Option or to any additional shares of capital stock of
the Company that Shareholder might acquire in the future. Notwithstanding the
foregoing, Shareholder may pledge the Shares to Founder as collateral security
for a promissory note dated the date hereof, provided that the Shares so pledged
shall continue to be subject to the Company's Purchase Option described in
Section 3 below.
3. Repurchase of Shares upon Termination of Employment with
--------------------------------------------------------
Subsidiary. Upon termination of Shareholder's employment with the Subsidiary,
- ----------
the Company shall have an option, but shall not be obligated, to repurchase (the
"Purchase Option") from Shareholder or Shareholder's personal representative all
or a portion of Shareholder's Shares, as set forth in the following
subparagraphs.
(a) If Shareholder's employment with the Subsidiary terminates due to
voluntary separation or dismissal for Cause (as defined below), the number of
Shares that are subject to the Company's Purchase Option shall be determined as
follows:
(i) The Company shall have the option to repurchase up to 100% of the
Shares should Shareholder's employment terminate at any time prior to the first
anniversary of Shareholder's employment with the Subsidiary.
(ii) The Company shall have the option to repurchase up to 60% of the
Shares should Shareholder's employment terminate on the first anniversary date,
or at any time between the first and second anniversary dates, of Shareholder's
employment with the Subsidiary.
(iii) The Company shall have the option to repurchase up to 40% of the
Shares should Shareholder's employment terminate on the second anniversary date,
or at any time between the second and third anniversary dates, of Shareholder's
employment with the Subsidiary.
(iv) The Company shall have the option to repurchase up to 20% of the
Shares should Shareholder's employment terminate on the third anniversary date,
or at any time between the third and fourth anniversary dates, of Shareholder's
employment with the Subsidiary.
3
<PAGE>
(b) If Shareholder's employment with the Subsidiary terminates because
of Shareholder's death or disability, Shareholder or Shareholder's personal
representative may negotiate a transfer of all or a portion of Shareholder's
Shares back to the Company at any time. With respect to Shares that were
subject to the Company's Purchase Option and that are not transferred back to
the Company, the transfer restrictions set forth in Section 2 above shall apply
to the same extent that they would have applied if Shareholder's employment had
continued. This restriction on transfer does not apply to any Shares that would
no longer have been subject to the Company's Purchase Option, or to any
additional shares of capital stock of the Company that Shareholder might acquire
in the future.
(c) In the event that Shareholder's employment with the Subsidiary
terminates for any reason not addressed in subparagraphs (a) and (b) above, the
Company's Purchase Option, together with all transfer restrictions set forth in
Section 2, shall fully expire effective as of the date of termination.
(d) The Company's Purchase Option shall fully expire on the fourth
anniversary of Shareholder's employment with the Subsidiary. Shares as to
which the Company's Purchase Option has expired are no longer subject to the
transfer restrictions set forth in Section 2.
(e) To exercise its Purchase Option, the Company must notify
Shareholder or Shareholder's personal representative of its intention to
exercise its Purchase Option within 60 days after the date of termination of
Shareholder's employment with the Subsidiary. Should the Company fail to
exercise the Purchase Option within such 60-day period, the Shares shall no
longer be subject to the transfer restrictions set forth in Section 2.
(f) In the event of a consolidation or merger of the Company with or
into any other person or entity, a sale of all or substantially all of the
assets of the Company to another person or entity, or an acquisition of more
than 50% of the capital stock of the Company by another person or entity, the
Company's Purchase Option shall be terminated as of the effective date of the
transfer. Notwithstanding the foregoing, the Company's Purchase Option shall
not be terminated or in any other way affected by an initial public offering of
stock by the Company.
4. Repurchase Price and Payment Terms. The price for all Shares
----------------------------------
purchased by the Company pursuant to the Purchase Option shall be $.40 per
Share. Payment shall be made in full for all repurchased Shares within 30 days
after the date on which the Company delivers notice of its intention to exercise
the Purchase Option. Upon payment, Shareholder or Shareholder's personal
representative shall deliver all stock certificates for repurchased Shares,
properly endorsed in blank, to the Company or its designee.
4
<PAGE>
5. Non-Competition.
---------------
(a) For a period of one year after termination of Shareholder's
employment with the Subsidiary (regardless of the reason for termination),
Shareholder shall not, directly or indirectly:
(i) solicit or serve clients or customers of the Company or any
affiliate of the Company (including the Subsidiary), whether for Shareholder's
own account or as an employee, shareholder, partner, officer, member, manager,
director, consultant, or other representative of any third party;
(ii) direct any business from, or enter into competition with, the
Company or any affiliate of the Company (including the Subsidiary) in any line
of business in which the Company or such affiliate was conducting operations
during Shareholder's employment; or
(iii) serve as an employee, shareholder, partner, officer, member,
manager, director, consultant or other representative of any third party which
engages in any line of business competitive with the Company or any affiliate of
the Company (including the Subsidiary) anywhere in the world.
Shareholder acknowledges that the foregoing limitations are reasonable in time
and scope and agrees not to raise any objection to the reasonableness of the
foregoing in any action or proceeding to enforce the terms of this Section.
(b) As consideration for the non-competition covenant set forth in
subparagraph (a) above, the Subsidiary agrees that, if Shareholder's employment
is terminated by the Subsidiary without Cause, Subsidiary shall pay Shareholder
or Shareholder's personal representative during the one-year period in which the
covenant is in effect an amount equal to the annualized base salary paid to
Shareholder immediately prior to termination of Shareholder's employment.
Payment shall be made in accordance with the Subsidiary's customary payroll
practices. Continued payment of Shareholder's base salary under this
subparagraph (b) shall not be made if termination of Shareholder's employment is
due to Shareholder's death, disability, voluntary resignation or withdrawal or
termination for "Cause" (as defined below).
(c) As additional consideration for the non-competition covenant set
forth in subparagraph (a) above, the Company agrees that (i) in the event
Shareholder's employment terminates due to the death or disability of
Shareholder or is terminated by Subsidiary without Cause, the one-year period
during which the non-competition covenant is to be in effect shall be counted as
a year of employment with Subsidiary for purposes of determining the percentage
of Shares that is subject to the Company's Purchase Option, and (ii) in the
event Shareholder's employment is terminated by the Subsidiary for Cause or
terminates due to the
5
<PAGE>
voluntary resignation or withdrawal of Shareholder, the Company shall have the
option of (A) waiving the non-competition covenant set forth in subparagraph
(a) above or (B) counting the one-year period during which the non-competition
covenant is to be in effect as a year of employment for purposes of determining
the percentage of Shares that is subject to the Company's Purchase Option.
(d) (i) Should Shareholder violate the terms of the non-competition
covenant set forth in subparagraph (a), the Company, the Company shall notify
Shareholder in writing of the alleged violation that constitutes a breach of
this Agreement, and Shareholder shall have 10 business days to cure the breach.
If the breach is not cured to the satisfaction of the Company, then in addition
to any other remedies available under law, the Company may (1) discontinue any
payments being made to Shareholder pursuant to subparagraph (b) hereof, and (2)
exercise its Purchase Option with respect to any additional Shares that would
have been subject to the Purchase Option had the one-year period of the non-
competition covenant not been counted as an additional year of employment
pursuant to the terms of subparagraph (c) hereof. Exercise of the Purchase
Option with respect to such additional Shares shall be made in accordance with
the terms of Sections 3 and 4 hereof, except that the Company may exercise the
Purchase Option at any time within 60 days after the Company first becomes aware
of Shareholder's violation of subparagraph (a).
(ii) In the event that the Company fails to make any payment due to
Shareholder pursuant to Section 5(b) above, Shareholder shall notify the Company
in writing of the alleged failure to make payment that constitutes a breach of
this Agreement, and the Company shall have 5 business days to cure the breach.
If the breach is not cured to the satisfaction of Shareholder, then the non-
competition covenant set forth in subparagraph (a) shall be null and void and of
no further force and effect.
(e) For purposes of this Section 5, termination for "Cause" shall
mean termination of Shareholder's employment with the Subsidiary due to: (i)
material failure or refusal to perform the duties assigned to Shareholder, (ii)
refusal of Shareholder to follow the reasonable directives of the Board of
Directors or Chief Executive Officer of the Subsidiary, (iii) conviction of a
felony, (iv) misappropriation of any funds or property of the Company or any
affiliate of the Company (including the Subsidiary), or (v) commission of any
act which could materially injure the business or reputation of, or materially
adversely affect the interests of Company or any affiliate of the Company
(including the Subsidiary).
(f) Shareholder acknowledges that his/her services are unique and
extraordinary and are not readily replaceable, and hereby expressly agrees that,
in the event of a violation of the non-competition covenant set forth in
subparagraph (a), the Company and its affiliates (including Subsidiary) will be
irreparably harmed and the remedy of damages or other remedy at law will be
inadequate. Therefore, Shareholder agrees that, in the event of a threatened or
actual violation of the non-competition covenant, the Company shall be entitled
to obtain from any court of competent jurisdiction, an injunction restraining
Shareholder from committing the violation, without the necessity of proving
actual damage and in addition to any other relief available under this Agreement
or at law.
6
<PAGE>
6. Piggy-Back Registration Rights.
------------------------------
(a) If at any time or from time to time the Company shall determine
to register any of its equity securities, either for its own account or the
account of a security holder or holders (other than a registration of securities
relating solely to employee benefit plans or to effect a merger or other
reorganization), the Company will promptly give to Shareholder written notice
thereof and, upon the written request of Shareholder, include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Shares specified
in the written request made within 10 business days after receipt of such
written notice from the Company.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise Shareholder as a part of the written notice given to Shareholder. In
such event the right of any Shareholder to registration pursuant to this Section
6 shall be conditioned upon Shareholder's participation in such underwriting,
and the inclusion of Shares in the underwriting shall be limited to the extent
provided herein. Shareholder (together with the Company and the other holders
distributing their securities through such underwriting) shall enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 6, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may exclude some or all of the Shares or securities of other holders
of similar registration rights from such registration. The Company shall so
advise Shareholder and other stockholders distributing their securities through
such underwriting, and the number of Shares or securities of other holders of
similar registration rights that may be included in the registration and
underwriting, as determined by the managing underwriter, shall be allocated on a
pro rata basis. If Shareholder disapproves of the terms of any such
underwriting, Shareholder may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. Any securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration, and shall
continue to be subject to the terms of this Section.
(c) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 6 prior to the effectiveness of
such registration whether or not Shareholder has elected to include securities
in such registration.
(d) All expenses associated with the registration (including, without
limitation, registration, qualification and filing fees, printing expenses, blue
sky fees, and fees and disbursements of counsel and accountants for the Company)
shall be borne by the Company. Selling expenses, including underwriters'
discounts, shall be borne by Shareholder pro rata in proportion to the number of
securities being registered.
7
<PAGE>
(e) In the case of each registration under this Section, the Company
will:
(i) prepare and file a registration statement with respect to
such securities and use its best efforts to cause such registration statement to
become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
(ii) furnish to Shareholder such reasonable number of copies of
the registration statement, preliminary prospectus, final prospectus and such
other documents as Shareholder may reasonably request in order to facilitate the
public offering of the Shares; and
(iii) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by Shareholder,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify as a foreign corporation or as a dealer in
securities or to file a general consent to service of process in any such states
or jurisdictions in which it has not already done so and except as may be
required by the Securities Act.
(f) The Company will indemnify Shareholder against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof), arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, or any violation by the Company of the Securities Act of 1933, the
Securities Exchange Act of 1934, state securities law or any rule or regulation
promulgated under such laws applicable to the Company in connection with any
such registration, qualification or compliance, and the Company will reimburse
Shareholder for any legal and any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, provided that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission, or alleged untrue statement or omission, made in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by Shareholder.
(g) Shareholder will, if Shares held by such Shareholder are included
in the securities as to which such registration is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a
8
<PAGE>
registration statement against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, such Shareholders, such directors, officers, persons, underwriters
or control persons for any legal or any other expenses reasonably incurred, as
such expenses are incurred, in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by Shareholder and stated to be specifically for use therein.
(h) Shareholder shall furnish to the Company such information
regarding Shareholder, the Shares held by Shareholder, and the distribution
proposed by Shareholder as the Company may request in writing and as shall be
required in connection with any registration referred to in this Agreement.
(i) The registration rights granted to Shareholder in this Section
shall expire at such time (if ever) as Shareholder is free to sell the Shares
under Rule 144 promulgated under the Securities Act (or any successor thereto)
without limitation as to volume or manner of sale restrictions.
7. Co-Sale Rights.
--------------
(a) In the event that Founder receives a bona fide offer from any
person to purchase any of Founder's Common Stock (the "Founder's Shares") in a
private transaction exempt from registration under the Securities Act, Founder
shall give Shareholder notice of his intention to sell Founder's Shares,
describing the amount of Founder's Shares proposed to be transferred, the
identity of the proposed transferee, and the price and terms upon which he
proposes to make such transfer (the "Transfer Notice").
(b) Within fifteen (15) days after delivery of the Transfer Notice,
Shareholder may elect to sell up to Shareholder's pro rata share of the total
number of shares to be purchased by the transferee described in the Transfer
Notice by giving written notice thereof to Founder and tendering to Founder a
certificate representing the shares to be sold, properly endorsed for transfer,
with written instructions to transfer the shares to the transferee described in
the Transfer Notice upon receipt of payment for such shares from such transferee
for the benefit of Shareholder. Founder shall thereupon notify the transferee
of the co-sale arrangements hereunder, and instruct the transferee to deliver
payment for the shares to be purchased from Shareholder to Shareholder. For the
purpose of the co-sale right set forth in this Section, the pro rata share of
Shareholder shall be determined based on the number of
9
<PAGE>
Shares held by Shareholder that are subject to co-sale rights, divided by the
sum of (A) the total number of shares of common stock held by all stockholders
of the Company (including Shareholder) holding similar co-sale rights plus
(B) the number of shares of common stock held by Founder at the date of the
Transfer Notice (assuming conversion of all convertible securities and exercise
of all options and warrants). The resulting percentage shall then be multiplied
by the number of Shares proposed to be purchased by the transferee to determine
the actual number of Shares eligible for sale by Shareholder.
(c) In the event Shareholder declines to exercise the co-sale right
as allowed by this Section, Founder may, within 90 days after the date on which
Shareholder's co-sale rights lapsed, transfer some or all of Founder's Shares
which were the subject of the Transfer Notice at a price and on terms no less
favorable to the transferee(s) than specified in the Transfer Notice. Founder's
Shares transferred in accordance with the provisions of this Section shall no
longer be subject to the restrictions on Founder's Shares forth in this Section.
After the expiration of said 90-day period, Founder shall not transfer any of
Founder's Shares without again complying with this Section.
(d) Any transfer of Founder's Shares without consideration to a
family member of Founder or a trust or custodian for the benefit of Founder or a
family member of Founder, and transfers pursuant to a pledge to secure
indebtedness, shall not be subject to the provisions of this Section, provided
that the transferee agrees in writing to be bound by the provisions of this
Section with respect to any subsequent transfer of such shares.
8. Legend. Each certificate for Shares owned by Shareholder shall
------
bear the following legends:
(a) The shares represented by this certificate were issued to the
shareholder with restrictions. Neither the shares, nor any interest
in them, may be sold, transferred, assigned, pledged, hypothecated, or
otherwise disposed of, if restricted pursuant to a stock rights
agreement between the shareholder and the Company, a copy of which is
on file at the office of the Company in Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be transferred in the absence of such registration unless the Company
receives an opinion of counsel reasonably acceptable to it stating the
such sale or transfer is exempt from registration.
With respect to Shares that are subject to the Purchase Option described in
Section 3 of this Agreement, however, Shareholder shall be entitled to a
certificate without the legend set forth in subparagraph (a), evidencing any
Shares as to which the Company's Purchase Option has expired.
10
<PAGE>
9. Notices. All notices and communications under this Agreement
-------
shall be in writing and shall be given by personal delivery or by registered or
certified mail, return receipt requested, addressed to the respective residences
of Shareholder and Founder set forth below or to such other address as may be
designated by Shareholder or Founder, and to the principal office of the
Company. Notice shall be deemed given upon personal delivery or upon receipt.
10. Miscellaneous.
-------------
(a) Neither this Agreement, nor any action taken under it, shall be
construed as creating any limitation or restriction upon any right that
Subsidiary would otherwise have to terminate the employment of Shareholder at
any time for any reason.
(b) This Agreement may be modified or amended only upon the written
consent of all parties to the Agreement.
(c) This Agreement shall be interpreted, construed, and enforced in
accordance with the laws of the State of New York.
(d) Neither this Agreement, nor any rights or obligations under it,
may be assigned by any party without the prior written consent of the other
parties.
(e) This Agreement shall benefit and be binding upon the parties and
their successors, heirs, executors, personal representatives, and assigns.
(f) This Agreement sets forth the entire understanding and agreement
of the parties with respect to its subject matter and supersedes all prior
letters, agreements, covenants, communications, understandings, representations,
or warranties, whether oral or written, by any officer, employee, or
representative of either party.
(g) The waiver of any provision of this Agreement, or of any breach
of this Agreement, shall not constitute a subsequent waiver of any provision or
breach.
(h) In the event that Shareholder is a prevailing party in any
litigation arising under or in connection with this Agreement, the Company shall
pay the reasonable attorneys fees and expenses incurred by Shareholder in
connection with the litigation.
(i) If, at any time, any of the provisions of this Agreement shall be
deemed by a court or other body having jurisdiction over this Agreement to be
illegal, invalid, or unenforceable, those provisions shall be deemed severed
from this Agreement. The remaining
11
<PAGE>
provisions of this Agreement shall be valid and binding as if this Agreement had
never contained any illegal, invalid, or otherwise unenforceable provisions,
without the requirement that the amendment be recorded in a writing signed by
the parties.
The parties' assent to the terms of this Agreement is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
----------------------------------
Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
----------------------------------
Title: President
Address: /s/ Joseph D. Ambersley
--------------------------------------
Joseph D. Ambersley
4007 W. Madura Road
Gulf Breeze, Florida 32561
Address: /s/ Arunas A. Chesonis
--------------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
12
<PAGE>
Exhibit 10.6.2
FIRST AMENDMENT TO STOCK RIGHTS AGREEMENT
This is the First Amendment to Stock Rights Agreement (the
"Amendment"), dated August 13, 1998, between JOSEPH D. AMBERSLEY
("Shareholder"), PAETEC CORP., a Delaware corporation with its principal place
of business at 290 Woodcliff Drive, Fairport, New York 14450 (the "Company"),
PAETEC COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary
of the Company with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 ("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. Shareholder holds 250,000 shares of Class A common stock of the
Company, subject to certain restrictions contained in a Stock Rights Agreement,
dated July 17, 1998, among the parties (the "Agreement").
B. The Company has now offered to issue to Shareholder 30,000 shares
of Class B common stock at a purchase price of $.833 per share, subject to
certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Amendment for the purpose of confirming Shareholder's equity interest in the
Class B common stock of the Company and outlining the rights of Shareholder and
the restrictions imposed by the Company with respect to the Class B common stock
to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares. The Company confirms its offer to issue
------------------
30,000 shares of Class B common stock (the "Class B Shares") to Shareholder at a
price of $.833 per share, payable in full upon issuance of the Class B Shares.
A stock certificate evidencing the Class B Shares shall be issued in the name of
Shareholder upon receipt of this executed Amendment and payment in full of the
purchase price.
2. Incorporation of Agreement by Reference. All of the provisions
---------------------------------------
of the Agreement shall apply to the Class B Shares issued to Shareholder
pursuant to this Amendment, except to the extent that a provision of this
Amendment expressly supersedes any provision of the Agreement. Additionally, to
the extent that any provision of this Amendment contradicts any provision
contained in the Agreement with respect to the Shares (as defined in the
Agreement), the provision of this Amendment shall control.
<PAGE>
3. Repurchase Price. The Purchase Option of the Company, described
----------------
in Section 3 of the Agreement, shall apply to the Class B Shares. In the event
that the Company exercises its Purchase Option with respect to all or a portion
of the Class B Shares, however, the price for all Class B Shares repurchased by
the Company pursuant to the Purchase Option, described in Section 4 of the
Agreement, shall be the fair market value of the Class B Shares as of the date
of the exercise of the Purchase Option by the Company. "Fair market value"
shall be determined by the accounting firm then retained by the Company, which
shall promptly perform an appraisal. The determination shall be made in
accordance with generally accepted accounting principles and shall be binding on
all parties.
4. Stockholders' Agreement and Proxy. Concurrently with the
---------------------------------
execution of this Amendment and the issuance of the Class B Shares, Shareholder
is executing and delivering a Stockholders' Agreement and proxy appointing
Arunas A. Chesonis Shareholder's attorney-in-fact and proxy to vote all Class B
Shares now or hereafter owned by Shareholder at any meeting of shareholders,
regular or special, whenever called, and for whatever purpose. Copies of the
Stockholders' Agreement and proxy shall be filed with the Secretary of the
Company, and the proxy shall be registered in the stock books of the Company.
Any transfer of the Class B Shares is subject to the terms of the Stockholders'
Agreement and proxy.
5. Permitted Transfer of Shares and Class B Shares. The
-----------------------------------------------
restrictions on transfer of Shareholder's Shares (as defined in the Agreement),
set forth in Section 2 of the Agreement, shall apply equally to the Class B
Shares; provided, however, that those restrictions are modified, with respect to
both the Shares and Class B Shares, to permit Shareholder to sell, assign, or
transfer any or all of the Shares or Class B Shares held by Shareholder to the
following:
(a) Shareholder's spouse, parent(s), siblings, or natural or adopted
lineal descendants, or the spouses of Shareholder's parent(s), siblings, or
lineal descendants (collectively, together with the Shareholder, referred to as
"Shareholder's Family Members");
(b) the trustee of a trust (including a voting trust) principally for
the benefit of Shareholder and/or one or more of Shareholder's Family Members;
provided that the trust may also grant a general or special power of appointment
to one or more of Shareholder's Family Members and may permit trust assets to be
used to pay taxes, legacies, and other obligations of the trust or of the
estates of one or more of Shareholder's Family Members payable by reason of the
death of any of Shareholder's Family Members; and
(c) a corporation, partnership, or limited liability company, a
majority of the voting equity interest in which is owned by Shareholder or by
one or more of Shareholder's transferees under subparagraphs (a) or (b) of this
Section.
2
<PAGE>
6. Legends. Each certificate for Class B Shares owned by
-------
Shareholder shall bear the following legends:
(a) The shares represented by this certificate were issued to the
shareholder with restrictions. Neither the shares, nor any interest
in them, may be sold, transferred, assigned, pledged, hypothecated, or
otherwise disposed of, unless that transfer is expressly permitted by
a stock rights agreement, including any amendment thereto, between the
shareholder and the Company, a copy of which is on file at the office
of the Company in Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be transferred in the absence of such registration unless the Company
receives an opinion of counsel reasonably acceptable to it stating the
such sale or transfer is exempt from registration.
(c) The shares represented by this certificate are subject to a
Stockholders' Agreement and to a proxy in favor of Arunas A. Chesonis,
a copy of which is on file with the Company. Any transferee of the
shares represented by this certificate shall take the shares subject
to the terms of the Stockholders' Agreement and proxy.
With respect to Class B Shares that are subject to the Company's Purchase
Option, described in Section 3 of the Agreement, however, Shareholder shall be
entitled to a certificate without the legend set forth in subparagraph (a),
evidencing any Class B Shares as to which the Purchase Option has expired.
7. Non-competition. The non-competition covenant of Shareholder set
---------------
forth in subparagraph 5(a)(iii) of the Agreement is modified to read as
follows:
(iii) hold five percent (5%) or more of the shares of a
corporation, or serve as a partner, officer, member, manager,
director, consultant or other representative of any third party, which
engages in any line of business competitive with the Company or any
affiliate of the Company (including the Subsidiary) anywhere in the
world.
3
<PAGE>
The parties' assent to the terms of this Amendment is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
------------------------------
Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
------------------------------
Title: President
Address: /s/ Joseph D. Ambersley
---------------------------------
Joseph D. Ambersley
4007 W. Madura Road
Gulf Breeze, Florida 32561
Address: /s/ Arunas A. Chesonis
---------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
4
<PAGE>
Exhibit 10.6.3
SECOND AMENDMENT TO STOCK RIGHTS AGREEMENT
This is the Second Amendment to Stock Rights Agreement (the
"Amendment"), dated September 30, 1998, between JOSEPH D. AMBERSLEY
("Shareholder"), PAETEC CORP., a Delaware corporation with its principal place
of business at 290 Woodcliff Drive, Fairport, New York 14450 (the "Company"),
PAETEC COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary
of the Company with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 ("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. Shareholder holds 250,000 shares of Class A common stock of the
Company, subject to certain restrictions contained in a Stock Rights Agreement,
dated July 17, 1998, among the parties (the "Agreement"). Shareholder also
holds 30,000 shares of Class B common stock of the Company, subject to certain
restrictions contained in the Agreement and in the First Amendment to Stock
Rights Agreement dated August 13, 1998 (the "First Amendment").
B. The Company has now offered to issue to Shareholder 30,000
additional shares of Class A common stock at a purchase price of $2.50 per
share, subject to certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Amendment for the purpose of confirming Shareholder's additional equity interest
in the Class A common stock of the Company and outlining the rights of
Shareholder and the restrictions imposed by the Company with respect to the
additional Class A common stock to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares. The Company confirms its offer to issue
------------------
30,000 shares of Class A common stock (the "Additional Class A Shares") to
Shareholder at a price of $2.50 per share, payable in full upon issuance of the
Additional Class A Shares. A stock certificate evidencing the Additional Class
A Shares shall be issued in the name of Shareholder upon receipt of this
executed Amendment and payment in full of the purchase price.
2. Incorporation of Agreement and First Amendment by Reference. All
-----------------------------------------------------------
of the provisions of the Agreement shall apply to the Additional Class A Shares
issued to
<PAGE>
Shareholder pursuant to this Amendment, except to the extent that a provision of
this Amendment expressly supersedes any provision of the Agreement or First
Amendment. Sections 3 and 5 of the First Amendment, which modify Sections 4 and
2, respectively, of the Agreement, shall also apply to the Additional Class A
Shares.
3. Legends. Each certificate for Additional Class A Shares owned by
-------
Shareholder shall bear the following legends:
(a) The shares represented by this certificate were issued to the
shareholder with restrictions. Neither the shares, nor any interest
in them, may be sold, transferred, assigned, pledged, hypothecated, or
otherwise disposed of, unless that transfer is expressly permitted by
a stock rights agreement, including any amendment thereto, between the
shareholder and the Company, a copy of which is on file at the office
of the Company in Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be transferred in the absence of such registration unless the Company
receives an opinion of counsel reasonably acceptable to it stating the
such sale or transfer is exempt from registration.
With respect to Additional Class A Shares that are subject to the Company's
Purchase Option, described in Section 3 of the Agreement, however, Shareholder
shall be entitled to a certificate without the legend set forth in subparagraph
(a), evidencing any Additional Class A Shares as to which the Purchase Option
has expired.
The parties' assent to the terms of this Amendment is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
------------------------------------
Title: President
2
<PAGE>
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
-------------------------------
Title: President
Address: /s/ Joseph D. Ambersley
----------------------------------
Joseph D. Ambersley
4007 W. Madura Road
Gulf Breeze, Florida 32561
Address: /s/ Arunas A. Chesonis
----------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
3
<PAGE>
Exhibit 10.6.4
THIRD AMENDMENT TO STOCK RIGHTS AGREEMENT
THIS THIRD AMENDMENT TO STOCK RIGHTS AGREEMENT (this "Amendment") is
made as of this 4th day of February 2000 by and among Joseph D. Ambersley (the
"Stockholder"), PaeTec Corp., a Delaware corporation (the "Company"), PaeTec
Communications, Inc., a Delaware corporation and wholly-owned subsidiary of the
Company (the "Subsidiary"), and Arunas A. Chesonis ("Mr. Chesonis").
RECITALS
--------
A. The Company, the Subsidiary, the Stockholder and Mr. Chesonis are
parties to a Stock Rights Agreement dated as of July 17, 1998 (the "Stock Rights
Agreement") and amended as of August 13, 1998 ("Amendment No. 1") and September
30, 1998 ("Amendment No. 2").
B. The Board of Directors of the Company has authorized the issuance
and sale (the "Series A Preferred Stock Placement") of 134,000 shares of a new
series of preferred stock of the Company, designated the Series A Convertible
Preferred Stock, to the purchasers (the "Purchasers") listed on the Schedule of
Purchasers to, and pursuant to the terms and conditions of, an Equity Purchase
Agreement (the "Purchase Agreement").
C. As a condition to the consummation of the Series A Preferred Stock
Placement, the Purchasers have required that the Company, the Subsidiary, the
Stockholder and Mr. Chesonis further amend the Stock Rights Agreement (i) to
provide that all Class B Shares (as defined in the Stock Rights Agreement) shall
automatically convert into shares of Class A common stock, par value $0.01 per
share ("Class A Common Stock"), of the Company in specified circumstances and
(ii) to clarify that to the extent that any securities are required to be
excluded from a registration pursuant to the "cut-back" provisions of the
piggyback registration rights granted to the Stockholder pursuant to the Stock
Rights Agreement, the securities to be included in such registration shall be
determined on a pro rata basis among the holders of shares participating in the
--- ----
offering pursuant to registration rights granted by the Company, based on the
number of shares of common stock requested to be included by each such holder in
such registration.
D. The parties to the Stock Rights Agreement desire to amend the
Stock Rights Agreement to induce the Purchasers to consummate of the Series A
Preferred Stock Placement.
<PAGE>
AGREEMENT
---------
1. Defined Terms. All capitalized terms used in this Amendment
-------------
without definition shall have the meanings given to such terms in the Stock
Rights Agreement, as amended.
2. Automatic Conversion of Class B Shares. Notwithstanding
--------------------------------------
anything in the Stock Rights Agreement, Amendment No. 1 or Amendment No. 2 to
the contrary, the parties agree that, as provided in the Company's certificate
of incorporation as amended in connection with the Series A Preferred Stock
Placement, (the "Restated Certificate of Incorporation") each Class B Share
subject to the Stock Rights Agreement (as amended) shall automatically convert
into one share of Class A Common Stock upon the date (the "Termination Date")
that the Stockholder ceases to be employed by the Company or any subsidiary
thereof unless, at the Termination Date, Mr. Chesonis shall (i) be the Chairman
of the Board or Chief Executive Officer of the Company, (ii) be the beneficial
owner of shares of Class B common stock of the Company and (iii) have the power
pursuant to a proxy to vote the Class B Shares on all matters on which such
Class B Shares are entitled to vote, provided Mr. Chesonis personally exercises
such power and does not delegate the exercise thereof to any other person. If
subsequent to the Termination Date, any condition specified in clause (i), (ii)
or (iii) in the preceding sentence shall cease to be in effect, each Class B
Share shall immediately be converted into one share of Class A Common Stock.
All other terms and conditions of the Stock Rights Agreement, as amended, shall
continue to apply to such shares of Class A Common Stock upon such conversion.
In the event of any conflict between the provisions of this Section 2 and the
provisions of Article V of the Restated Certificate of Incorporation with
respect to such mandatory conversion, which shall include, without limitation,
any additional mandatory conversion events specified in such Article V the
provisions of Article V of the Restated Certificate of Incorporation shall
control.
3. Amendment of Section 6(b). The fourth and fifth sentences of
-------------------------
Section 6(b) of the Stock Rights Agreement are hereby deleted and replaced and
superseded in their entirety with the following sentence:
"Notwithstanding any other provision of this Section 6, if the managing
underwriter advises in writing the Company and the Stockholder that
marketing factors require a limitation of the number of shares of common
stock to be underwritten and sold in such offering, the managing
underwriter may exclude some or all of the shares of common stock to be
sold in such offering from such registration, and the shares to be included
in such registration shall be allocated pro rata among the holders of
--- ----
shares participating in the offering pursuant to registration rights
granted by the Company (including demand and
2
<PAGE>
piggyback registration rights), based on the number of shares of common
stock requested to be included by each holder in such registration."
4. Binding Effect. This Amendment shall be binding upon and inure to
--------------
the benefit of the parties hereto and their heirs, executors, administrators,
successors and assigns.
5. Governing Law. This Amendment shall be governed by, and construed
-------------
and enforced in accordance with, the laws of the State of New York, except that
if any provision of this Amendment or any part of any such provision would be
illegal, invalid or enforceable under such laws in connection with a suit or
proceeding validly instituted in another jurisdiction, then the laws of such
other jurisdiction shall govern insofar as is necessary to sustain the legality,
validity or enforceability of such provision or any part of such provision.
6. Captions. Captions to the Sections in this Amendment are for the
--------
convenience of the parties only and shall not affect the meaning or
interpretation of this Amendment.
7. Enforceability and Interpretation. It is the intention of the
---------------------------------
parties to this Amendment that the terms and provisions contained in this
Amendment shall be enforceable to the fullest extent permitted by law. If any
term or provision of this Amendment or the application thereof to any Person or
circumstance is construed to be illegal, invalid or unenforceable, in whole or
in part, then such term or provision shall be construed in such a manner as to
permit its enforceability under applicable law to the fullest extent permitted
by such law. In any case, the remaining terms and provisions of this Amendment
or the application thereof to any Person or circumstance, except those terms and
provisions which have been held illegal, invalid or unenforceable, shall remain
in full force and effect.
8. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9. Additional Documents. Each party hereto agrees to execute any and
--------------------
all documents, instruments, certificates and communications deemed to be
necessary or advisable by the Company to effectuate the purposes of this
Amendment.
[signature page follows]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment with full force and effect as of the day and year first written
above.
PAETEC CORP.
By: /s/ Aruna A. Chesonis
---------------------------------
Its: CEO, Chairman and President
---------------------------------
PAETEC COMMUNICATIONS, INC.
By: /s/ Aruna A. Chesonis
---------------------------------
Its: CEO, Chairman and President
---------------------------------
/s/ Aruna A. Chesonis
--------------------------------------
Arunas A. Chesonis
/s/ Joseph D. Ambersley
--------------------------------------
Joseph D. Ambersley
4
<PAGE>
Exhibit 10.7.1
STOCK RIGHTS AGREEMENT
This is a Stock Rights Agreement (the "Agreement"), dated August 13,
1998, between TIMOTHY J. BANCROFT ("Shareholder"), PAETEC CORP., a Delaware
corporation with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 (the "Company"), PAETEC COMMUNICATIONS, INC., a
Delaware corporation and wholly-owned subsidiary of the Company with its
principal place of business at 290 Woodcliff Drive, Fairport, New York 14450
("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. The Company is a Delaware corporation having 110,000,000 shares of
authorized capital stock, 10,000,000 of which are designated preferred stock,
75,000,000 of which are designated Class A common and 25,000,000 of which are
designated Class B common. Founder is one of the founding shareholders of the
Company.
B. Shareholder is an employee of the Subsidiary and is subject to the
terms of a non-competition covenant set forth in an Incentive Stock Option
Agreement, dated July 27, 1998, between Shareholder and the Company (the
"ISO Agreement").
C. The Company has offered to issue to Shareholder 5,000 shares of
Class B common stock of the Company at a purchase price of $.833 per share,
subject to certain restrictions.
D. The Company, Subsidiary, Shareholder, and Founder enter into this
Agreement for the purpose of confirming Shareholder's equity interest in the
Class B common stock of the Company and outlining the rights of Shareholder and
the restrictions imposed by the Company with respect to the Class B common stock
to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Modification of ISO Agreement Provisions. To the extent that any
----------------------------------------
provision of this Agreement modifies or contradicts any provision contained in
the ISO Agreement, this Agreement shall control.
2. Issuance of Shares.
------------------
(a) The Company confirms its offer to issue 5,000 shares of Class
B common stock (the "Class B Shares") to Shareholder at a price of $.833 per
share, payable in
<PAGE>
full upon issuance of the Class B Shares. A stock certificate evidencing the
Class B Shares shall be issued in the name of Shareholder upon receipt of this
executed Agreement and payment in full of the purchase price.
(b) In order to induce the Company to issue the Class B Shares,
Shareholder represents and warrants to the Company as follows:
(i) Shareholder (A) understands that an investment in the
Class B Shares is speculative due to factors including (but not limited to) the
start-up nature of the Company and the risk of economic loss from the operations
of the Company, but believes that such an investment is suitable for Shareholder
based upon Shareholder's financial needs, (B) can withstand a complete loss of
the investment in the Class B Shares, and (C) has the net worth to undertake
these risks.
(ii) Shareholder is acquiring the Class B Shares for the
personal account of Shareholder, with no present intention of reselling,
distributing or otherwise transferring the Class B Shares or any portion of the
Class B Shares to anyone else.
(iii) Shareholder understands and acknowledges that the
Class B Shares are being offered and sold under one or more exemptions provided
in the Securities Act of 1933, as amended (the "Securities Act"), Regulation D
promulgated thereunder and applicable New York State securities laws, and that
this transaction has not been reviewed or passed upon by the United States
Securities and Exchange Commission, the New York State Attorney General, or any
other federal or state agency.
(iv) Shareholder realizes that Shareholder must bear the
economic risk of investment for an indefinite period of time because (A) the
Class B Shares have not been registered under the Securities Act and cannot be
resold by Shareholder unless they are subsequently registered under the
Securities Act or an exemption from registration is available, (B) the
transferability of the Class B Shares is restricted by the terms of this
Agreement, and (C) there currently is no public market for the Class B Shares,
and Shareholder may not be able to liquidate the investment in the Class B
Shares in the event of an emergency. Shareholder has adequate means of providing
for Shareholder's current financial needs and personal contingencies, and has no
need for liquidity of investment with respect to the Class B Shares.
(v) Shareholder believes that Shareholder, either alone or
together with the assistance of professional advisor(s), has knowledge and
experience in business and financial matters sufficient to make Shareholder
capable of evaluating the merits and risks of an investment in the Class B
Shares.
(vi) Shareholder is fully familiar with the business of the
Company and its present and proposed operations. Shareholder has been given
reasonable
2
<PAGE>
opportunity to ask representatives of the Company questions concerning the
Company and making an investment in the Class B Shares. Shareholder has obtained
sufficient information to evaluate the merits and risks of an investment in the
Class B Shares.
(vii) Shareholder confirms that Shareholder has been advised
to rely on professional accounting, tax, legal and financial advisers with
respect to an investment in the Class B Shares and has obtained, to the extent
Shareholder deems it necessary, professional advice with respect to the risks
inherent in an investment in the Class B Shares and the suitability of an
investment in the Class B Shares in light of Shareholder's financial condition
and investment needs.
3. Restriction on Transfer of Class B Shares.
-----------------------------------------
(a) Shareholder may not sell, transfer, pledge, assign,
transfer, or otherwise encumber or dispose of, in any manner or by any means,
any Class B Shares that are subject to the Company's Purchase Option described
in Section 4 of this Agreement, except as set forth in subparagraph (b) below.
This restriction on transfer does not apply to any Class B Shares that, pursuant
to Section 4, no longer are subject to the Company's Purchase Option or to any
additional shares of capital stock of the Company that Shareholder might acquire
in the future.
(b) The restrictions on transfer of Shareholder's Class B
Shares, set forth in subparagraph (a) above, shall not operate to prohibit
Shareholder to selling, assigning, or transferring any or all of the Class B
Shares held by Shareholder to the following:
(i) Shareholder's spouse, parent(s), siblings, or natural
or adopted lineal descendants, or the spouses of Shareholder's parent(s),
siblings, or lineal descendants (collectively, together with the Shareholder,
referred to as "Shareholder's Family Members");
(ii) the trustee of a trust (including a voting trust)
principally for the benefit of Shareholder and/or one or more of Shareholder's
Family Members; provided that the trust may also grant a general or special
power of appointment to one or more of Shareholder's Family Members and may
permit trust assets to be used to pay taxes, legacies, and other obligations of
the trust or of the estates of one or more of Shareholder's Family Members
payable by reason of the death of any of Shareholder's Family Members; and
(iii) a corporation, partnership, or limited liability
company, a majority of the voting equity interest in which is owned by
Shareholder or by one or more of Shareholder's transferees under subparagraphs
(i) or (ii) of this subparagraph.
4. Repurchase of Class B Shares upon Termination of Employment with
----------------------------------------------------------------
Subsidiary. Upon termination of Shareholder's employment with the Subsidiary,
- ----------
the Company
3
<PAGE>
shall have an option, but shall not be obligated, to repurchase (the "Purchase
Option") from Shareholder or Shareholder's personal representative all or a
portion of Shareholder's Class B Shares, as set forth in the following
subparagraphs.
(a) If Shareholder's employment with the Subsidiary terminates
due to voluntary separation or dismissal for Cause (as defined below), the
number of Class B Shares that are subject to the Company's Purchase Option shall
be determined as follows:
(i) The Company shall have the option to repurchase up to
100% of the Class B Shares should Shareholder's employment terminate at any time
prior to the first anniversary of Shareholder's employment with the Subsidiary.
(ii) The Company shall have the option to repurchase up to
60% of the Class B Shares should Shareholder's employment terminate on the first
anniversary date, or at any time between the first and second anniversary dates,
of Shareholder's employment with the Subsidiary.
(iii) The Company shall have the option to repurchase up to
40% of the Class B Shares should Shareholder's employment terminate on the
second anniversary date, or at any time between the second and third anniversary
dates, of Shareholder's employment with the Subsidiary.
(iv) The Company shall have the option to repurchase up to
20% of the Class B Shares should Shareholder's employment terminate on the third
anniversary date, or at any time between the third and fourth anniversary dates,
of Shareholder's employment with the Subsidiary.
(b) If Shareholder's employment with the Subsidiary terminates
because of Shareholder's death or disability, Shareholder or Shareholder's
personal representative may negotiate a transfer of all or a portion of
Shareholder's Class B Shares back to the Company at any time. With respect to
Class B Shares that were subject to the Company's Purchase Option and that are
not transferred back to the Company, the transfer restrictions set forth in
Section 3 above shall apply to the same extent that they would have applied if
Shareholder's employment had continued. This restriction on transfer does not
apply to any Class B Shares that would no longer have been subject to the
Company's Purchase Option, or to any additional shares of capital stock of the
Company that Shareholder might acquire in the future.
(c) In the event that Shareholder's employment with the
Subsidiary terminates for any reason not addressed in subparagraphs (a) and (b)
above, the Company's Purchase Option, together with all transfer restrictions
set forth in Section 3, shall fully expire effective as of the date of
termination.
4
<PAGE>
(d) The Company's Purchase Option shall fully expire on the
fourth anniversary of Shareholder's employment with the Subsidiary. Class B
Shares as to which the Company's Purchase Option has expired are no longer
subject to the transfer restrictions set forth in Section 3.
(e) To exercise its Purchase Option, the Company must notify
Shareholder or Shareholder's personal representative of its intention to
exercise its Purchase Option within 60 days after the date of termination of
Shareholder's employment with the Subsidiary. Should the Company fail to
exercise the Purchase Option within such 60-day period, the Class B Shares shall
no longer be subject to the transfer restrictions set forth in Section 3.
(f) In the event of a consolidation or merger of the Company
with or into any other person or entity, a sale of all or substantially all of
the assets of the Company to another person or entity, or an acquisition of more
than 50% of the capital stock of the Company by another person or entity, the
Company's Purchase Option shall be terminated as of the effective date of the
transfer. Notwithstanding the foregoing, the Company's Purchase Option shall not
be terminated or in any other way affected by an initial public offering of
stock by the Company.
5. Repurchase Price and Payment Terms. The price for all Class B
----------------------------------
Shares repurchased by the Company pursuant to the Purchase Option shall be the
fair market value of the Class B Shares as of the date of the exercise of the
Purchase Option by the Company. "Fair market value" shall be determined by the
accounting firm then retained by the Company, which shall promptly perform an
appraisal. The determination shall be made in accordance with generally
accepted accounting principles and shall be binding on all parties.
Payment shall be made in full for all repurchased Class B Shares
within 30 days after the date on which the Company delivers notice of its
intention to exercise the Purchase Option. Upon payment, Shareholder or
Shareholder's personal representative shall deliver all stock certificates for
repurchased Class B Shares, properly endorsed in blank, to the Company or its
designee.
6. Stockholders' Agreement and Proxy. Concurrently with the
---------------------------------
execution of this Agreement and the issuance of the Class B Shares, Shareholder
is executing and delivering a Stockholders' Agreement and proxy appointing
Arunas A. Chesonis Shareholder's attorney-in-fact and proxy to vote all Class B
Shares now or hereafter owned by Shareholder at any meeting of shareholders,
regular or special, whenever called, and for whatever purpose. Copies of the
Stockholders' Agreement and proxy shall be filed with the Secretary of the
Company, and the proxy shall be registered in the stock books of the Company.
Any transfer of the Class B Shares is subject to the terms of the Stockholders'
Agreement and proxy.
5
<PAGE>
7. Legends. Each certificate for Class B Shares owned by Shareholder
-------
shall bear the following legends:
(a) The shares represented by this certificate were
issued to the shareholder with restrictions. Neither the
shares, nor any interest in them, may be sold, transferred,
assigned, pledged, hypothecated, or otherwise disposed of,
unless that transfer is expressly permitted by a stock rights
agreement, including any amendment thereto, between the
shareholder and the Company, a copy of which is on file at
the office of the Company in Fairport, New York.
(b) The shares represented by this certificate have not
been registered under the Securities Act of 1933, as amended,
and may not be transferred in the absence of such registration
unless the Company receives an opinion of counsel reasonably
acceptable to it stating the such sale or transfer is exempt
from registration.
(c) The shares represented by this certificate are
subject to a Stockholders' Agreement and to a proxy in favor
of Arunas A. Chesonis, a copy of which is on file with the
Company. Any transferee of the shares represented by this
certificate shall take the shares subject to the terms of
the Stockholders' Agreement and proxy.
With respect to Class B Shares that are subject to the Company's Purchase Option
described in Section 4 of this Agreement, however, Shareholder shall be entitled
to a certificate without the legend set forth in subparagraph (a), evidencing
any Class B Shares as to which the Purchase Option has expired.
8. Non-competition. The non-competition covenant between Shareholder
---------------
and the Company, set forth in subparagraph 8(a)(iii) of the ISO Agreement, is
modified to read as follows:
(iii) hold five percent (5%) or more of the shares of a
corporation, or serve as a partner, officer, member, manager,
director, consultant or other representative of any third party, which
engages in any line of business competitive with the Company or any
affiliate of the Company (including any subsidiary) anywhere in the
world.
9. Co-Sale Rights.
--------------
(a) In the event that Founder receives a bona fide offer from
any person to purchase any of Founder's Common Stock (the "Founder's Shares") in
a private transaction exempt from registration under the Securities Act, Founder
shall give Shareholder
6
<PAGE>
notice of his intention to sell Founder's Shares, describing the amount of
Founder's Shares proposed to be transferred, the identity of the proposed
transferee, and the price and terms upon which he proposes to make such transfer
(the "Transfer Notice").
(b) Within fifteen (15) days after delivery of the Transfer
Notice, Shareholder may elect to sell up to Shareholder's pro rata share of the
total number of shares to be purchased by the transferee described in the
Transfer Notice by giving written notice thereof to Founder and tendering to
Founder a certificate representing the shares to be sold, properly endorsed for
transfer, with written instructions to transfer the shares to the transferee
described in the Transfer Notice upon receipt of payment for such shares from
such transferee for the benefit of Shareholder. Founder shall thereupon notify
the transferee of the co-sale arrangements hereunder, and instruct the
transferee to deliver payment for the shares to be purchased from Shareholder to
Shareholder. For the purpose of the co-sale right set forth in this Section, the
pro rata share of Shareholder shall be determined based on the number of Shares
held by Shareholder that are subject to co-sale rights, divided by the sum of
(A) the total number of shares of common stock held by all stockholders of the
Company (including Shareholder) holding similar co-sale rights plus (B) the
number of shares of common stock held by Founder at the date of the Transfer
Notice (assuming conversion of all convertible securities and exercise of all
options and warrants). The resulting percentage shall then be multiplied by the
number of Shares proposed to be purchased by the transferee to determine the
actual number of Shares eligible for sale by Shareholder.
(c) In the event Shareholder declines to exercise the co-sale
right as allowed by this Section, Founder may, within 90 days after the date on
which Shareholder's co-sale rights lapsed, transfer some or all of Founder's
Shares which were the subject of the Transfer Notice at a price and on terms no
less favorable to the transferee(s) than specified in the Transfer Notice.
Founder's Shares transferred in accordance with the provisions of this Section
shall no longer be subject to the restrictions on Founder's Shares forth in this
Section. After the expiration of said 90-day period, Founder shall not transfer
any of Founder's Shares without again complying with this Section.
(d) Any transfer of Founder's Shares without consideration to a
family member of Founder or a trust or custodian for the benefit of Founder or a
family member of Founder, and transfers pursuant to a pledge to secure
indebtedness, shall not be subject to the provisions of this Section, provided
that the transferee agrees in writing to be bound by the provisions of this
Section with respect to any subsequent transfer of such shares.
10. Piggy-Back Registration Rights.
------------------------------
(a) If at any time or from time to time the Company shall
determine to register any of its equity securities, either for its own account
or the account of a security holder or holders (other than a registration of
securities relating solely to employee benefit plans or to effect a merger or
other reorganization), the Company will promptly give to
7
<PAGE>
Shareholder written notice thereof and, upon the written request of Shareholder,
include in such registration (and any related qualification under blue sky laws
or other compliance), and in any underwriting involved therein, all the Class B
Shares specified in the written request made within 10 business days after
receipt of such written notice from the Company.
(b) If the registration of which the Company gives notice is for
a registered public offering involving an underwriting, the Company shall so
advise Shareholder as a part of the written notice given to Shareholder. In such
event the right of any Shareholder to registration pursuant to this Section
shall be conditioned upon Shareholder's participation in such underwriting, and
the inclusion of Class B Shares in the underwriting shall be limited to the
extent provided herein. Shareholder (together with the Company and the other
holders distributing their securities through such underwriting) shall enter
into an underwriting agreement in customary form with the managing underwriter
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section, if the managing underwriter determines that marketing
factors require a limitation of the number of shares to be underwritten, the
managing underwriter may exclude some or all of the Class B Shares or securities
of other holders of similar registration rights from such registration. The
Company shall so advise Shareholder and other stockholders distributing their
securities through such underwriting, and the number of Class B Shares or
securities of other holders of similar registration rights that may be included
in the registration and underwriting, as determined by the managing underwriter,
shall be allocated on a pro rata basis. If Shareholder disapproves of the terms
of any such underwriting, Shareholder may elect to withdraw therefrom by written
notice to the Company and the managing underwriter. Any securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration, and
shall continue to be subject to the terms of this Section.
(c) The Company shall have the right to terminate or withdraw
any registration initiated by it under this Section prior to the effectiveness
of such registration whether or not Shareholder has elected to include
securities in such registration.
(d) All expenses associated with the registration (including,
without limitation, registration, qualification and filing fees, printing
expenses, blue sky fees, and fees and disbursements of counsel and accountants
for the Company) shall be borne by the Company. Selling expenses, including
underwriters' discounts, shall be borne by Shareholder pro rata in proportion to
the number of securities being registered.
(e) In the case of each registration under this Section, the
Company will:
(i) prepare and file a registration statement with respect
to such securities and use its best efforts to cause such registration statement
to become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
8
<PAGE>
(ii) furnish to Shareholder such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as Shareholder may reasonably request in order to
facilitate the public offering of the Class B Shares; and
(iii) use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by
Shareholder, provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify as a foreign corporation or as a
dealer in securities or to file a general consent to service of process in any
such states or jurisdictions in which it has not already done so and except as
may be required by the Securities Act.
(f) The Company will indemnify Shareholder against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof), arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, or any violation by the Company of the Securities Act of 1933, the
Securities Exchange Act of 1934, state securities law or any rule or regulation
promulgated under such laws applicable to the Company in connection with any
such registration, qualification or compliance, and the Company will reimburse
Shareholder for any legal and any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, provided that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission, or alleged untrue statement or omission, made in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by Shareholder.
(g) Shareholder will, if Class B Shares held by such Shareholder are
included in the securities as to which such registration is being effected,
indemnify the Company, each of its directors and officers, each underwriter, if
any, of the Company's securities covered by such a registration statement
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Shareholders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that
9
<PAGE>
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by Shareholder and
stated to be specifically for use therein.
(h) Shareholder shall furnish to the Company such information
regarding Shareholder, the Class B Shares held by Shareholder, and the
distribution proposed by Shareholder as the Company may request in writing and
as shall be required in connection with any registration referred to in this
Agreement.
(i) The registration rights granted to Shareholder in this
Section shall expire at such time (if ever) as Shareholder is free to sell the
Class B Shares under Rule 144 promulgated under the Securities Act (or any
successor thereto) without limitation as to volume or manner of sale
restrictions.
11. Notices. All notices and communications under this Agreement
-------
shall be in writing and shall be given by personal delivery or by registered or
certified mail, return receipt requested, addressed to the respective residences
of Shareholder and Founder set forth below or to such other address as may be
designated by Shareholder or Founder, and to the principal office of the
Company. Notice shall be deemed given upon personal delivery or upon receipt.
12. Miscellaneous.
-------------
(a) Neither this Agreement, nor any action taken under it, shall
be construed as creating any limitation or restriction upon any right that
Subsidiary would otherwise have to terminate the employment of Shareholder at
any time for any reason.
(b) This Agreement may be modified or amended only upon the
written consent of all parties to the Agreement.
(c) This Agreement shall be interpreted, construed, and enforced
in accordance with the laws of the State of New York.
(d) Neither this Agreement, nor any rights or obligations under
it, may be assigned by any party without the prior written consent of the other
parties.
(e) This Agreement shall benefit and be binding upon the parties
and their successors, heirs, executors, personal representatives, and assigns.
(f) This Agreement sets forth the entire understanding and
agreement of the parties with respect to its subject matter and supersedes all
prior letters, agreements,
10
<PAGE>
covenants, communications, understandings, representations, or warranties,
whether oral or written, by any officer, employee, or representative of either
party.
(g) The waiver of any provision of this Agreement, or of any
breach of this Agreement, shall not constitute a subsequent waiver of any
provision or breach.
(h) In the event that Shareholder is a prevailing party in any
litigation arising under or in connection with this Agreement, the Company shall
pay the reasonable attorneys fees and expenses incurred by Shareholder in
connection with the litigation.
(i) If, at any time, any of the provisions of this Agreement
shall be deemed by a court or other body having jurisdiction over this Agreement
to be illegal, invalid, or unenforceable, those provisions shall be deemed
severed from this Agreement. The remaining provisions of this Agreement shall be
valid and binding as if this Agreement had never contained any illegal, invalid,
or otherwise unenforceable provisions, without the requirement that the
amendment be recorded in a writing signed by the parties.
The parties' assent to the terms of this Agreement is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
-------------------------------
Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
-------------------------------
Title: President
11
<PAGE>
Address: /s/ Timothy J. Bancroft
-------------------------------
Timothy J. Bancroft
35 Little Spring Run
Fairport, New York 14450
Address: /s/ Arunas A. Chesonis
-------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
12
<PAGE>
Exhibit 10.7.2
FIRST AMENDMENT TO STOCK RIGHTS AGREEMENT
This is an Amendment to Stock Rights Agreement (the "Amendment"),
dated September 30, 1998, between TIMOTHY J. BANCROFT ("Shareholder"), PAETEC
CORP., a Delaware corporation with its principal place of business at 290
Woodcliff Drive, Fairport, New York 14450 (the "Company"), PAETEC
COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary of the
Company with its principal place of business at 290 Woodcliff Drive, Fairport,
New York 14450 ("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. Shareholder holds 5,000 shares of Class B common stock of the
Company, subject to certain restrictions contained in a Stock Rights Agreement,
dated August 13, 1998, among the parties (the "Agreement").
B. The Company has now offered to issue to Shareholder 5,000 shares
of Class A common stock at a purchase price of $2.50 per share, subject to
certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Amendment for the purpose of confirming Shareholder's equity interest in the
Class A common stock of the Company and outlining the rights of Shareholder and
the restrictions imposed by the Company with respect to the Class A common stock
to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares. The Company confirms its offer to issue 5,000
------------------
shares of Class A common stock (the "Class A Shares") to Shareholder at a price
of $2.50 per share, payable in full upon issuance of the Class A Shares. A
stock certificate evidencing the Class A Shares shall be issued in the name of
Shareholder upon receipt of this executed Amendment and payment in full of the
purchase price.
2. Incorporation of Agreement by Reference. Section 6 of the
---------------------------------------
Agreement ("Stockholders' Agreement and Proxy") shall not apply to the Class A
Shares issued to Shareholder pursuant to this Amendment. All other provisions
of the Agreement shall apply to the Class A Shares issued to Shareholder
pursuant to this Amendment, except to the extent that a provision of this
Amendment expressly supersedes any provision of the Agreement.
<PAGE>
3. Legends. Each certificate for Class A Shares owned by Shareholder
-------
shall bear the following legends:
(a) The shares represented by this certificate were issued to
the shareholder with restrictions. Neither the shares, nor any
interest in them, may be sold, transferred, assigned, pledged,
hypothecated, or otherwise disposed of, unless that transfer is
expressly permitted by a stock rights agreement, including any
amendment thereto, between the shareholder and the Company, a copy of
which is on file at the office of the Company in Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be transferred in the absence of such registration unless the Company
receives an opinion of counsel reasonably acceptable to it stating the
such sale or transfer is exempt from registration.
With respect to Class A Shares that are subject to the Company's Purchase
Option, described in Section 4 of the Agreement, however, Shareholder shall be
entitled to a certificate without the legend set forth in subparagraph (a),
evidencing any Class A Shares as to which the Purchase Option has expired.
The parties' assent to the terms of this Agreement is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
-------------------------------
Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
-------------------------------
Title: President
2
<PAGE>
Address: /s/ Timothy J. Bancroft
-------------------------------
Timothy J. Bancroft
35 Little Spring Run
Fairport, New York 14450
Address: /s/ Arunas A. Chesonis
-------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
3
<PAGE>
Exhibit 10.7.3
SECOND AMENDMENT TO STOCK RIGHTS AGREEMENT
THIS SECOND AMENDMENT TO STOCK RIGHTS AGREEMENT (this "Amendment") is
made as of this 4th day of February 2000 by and among Timothy J. Bancroft (the
"Stockholder"), PaeTec Corp., a Delaware corporation (the "Company"), PaeTec
Communications, Inc., a Delaware corporation and wholly-owned subsidiary of the
Company (the "Subsidiary"), and Arunas A. Chesonis ("Mr. Chesonis").
RECITALS
--------
A. The Company, the Subsidiary, the Stockholder and Mr. Chesonis are
parties to a Stock Rights Agreement dated as of August 30, 1998 (the "Stock
Rights Agreement") and amended as of September 30, 1998 ("Amendment No. 1").
B. The Board of Directors of the Company has authorized the issuance
and sale (the "Series A Preferred Stock Placement") of 134,000 shares of a new
series of preferred stock of the Company, designated the Series A Convertible
Preferred Stock, to the purchasers (the "Purchasers") listed on the Schedule of
Purchasers to, and pursuant to the terms and conditions of, an Equity Purchase
Agreement (the "Purchase Agreement").
C. As a condition to the consummation of the Series A Preferred Stock
Placement, the Purchasers have required that the Company, the Subsidiary, the
Stockholder and Mr. Chesonis further amend the Stock Rights Agreement (i) to
provide that all Class B Shares (as defined in the Stock Rights Agreement) shall
automatically convert into shares of Class A common stock, par value $0.01 per
share ("Class A Common Stock"), of the Company in specified circumstances and
(ii) to clarify that to the extent any securities are required to be excluded
from a registration pursuant to the "cut-back" provisions of the piggyback
registration rights granted to the Stockholder pursuant to the Stock Rights
Agreement, the securities to be included in such registration shall be
determined on a pro rata basis among the holders of shares participating in the
--- ----
offering pursuant to registration rights granted by the Company, based on the
number of shares of common stock requested to be included by each such holder in
such registration.
D. The parties to the Stock Rights Agreement desire to amend the
Stock Rights Agreement to induce the Purchasers to consummate of the Series A
Preferred Stock Placement.
<PAGE>
AGREEMENT
---------
1. Defined Terms. All capitalized terms used in this Amendment
-------------
without definition shall have the meanings given to such terms in the Stock
Rights Agreement, as amended.
2. Automatic Conversion of Class B Shares. Notwithstanding
--------------------------------------
anything in the Stock Rights Agreement or Amendment No. 1 to the contrary, the
parties agree that, as provided in the Company's certificate of incorporation as
amended in connection with the Series A Preferred Stock Placement (the "Restated
Certificate of Incorporation"), each Class B Share subject to the Stock Rights
Agreement (as amended) shall automatically convert into one share of Class A
Common Stock upon the date (the "Termination Date") that the Stockholder ceases
to be employed by the Company or any subsidiary thereof unless, at the
Termination Date, Mr. Chesonis shall (i) be the Chairman of the Board or Chief
Executive Officer of the Company, (ii) be the beneficial owner of shares of
Class B common stock of the Company and (iii) have the power pursuant to a proxy
to vote the Class B Shares on all matters on which such Class B Shares are
entitled to vote, provided Mr. Chesonis personally exercises such power and does
not delegate the exercise thereof to any other person. If subsequent to the
Termination Date, any condition specified in clause (i), (ii) or (iii) in the
preceding sentence shall cease to be in effect, each Class B Share shall
immediately be converted into one share of Class A Common Stock. All other
terms and conditions of the Stock Rights Agreement, as amended, shall continue
to apply to such shares of Class A Common Stock upon such conversion. In the
event of any conflict between the provisions of this Section 2 and the
provisions of Article V of the Restated Certificate of Incorporation with
respect to such mandatory conversion, which shall include, without limitation,
any additional mandatory conversion events specified in such Article V, the
provisions of Article V of the Restated Certificate of Incorporation shall
control.
3. Amendment of Section 6(b). The fourth and fifth sentences of
-------------------------
Section 10(b) of the Stock Rights Agreement are hereby deleted and replaced and
superseded in their entirety with the following sentence:
"Notwithstanding any other provision of this Section 6, if the managing
underwriter advises in writing the Company and the Stockholder that
marketing factors require a limitation of the number of shares of common
stock to be underwritten and sold in such offering, the managing
underwriter may exclude some or all of the shares of common stock to be
sold in such offering from such registration, and the shares to be included
in such registration shall be allocated pro rata among the holders of
--- ----
shares participating in the offering pursuant to registration rights
granted by the Company (including demand and piggyback registration
rights), based on the number of shares of
2
<PAGE>
common stock requested to be included by each holder in such registration."
4. Binding Effect. This Amendment shall be binding upon and inure to
--------------
the benefit of the parties hereto and their heirs, executors, administrators,
successors and assigns.
5. Governing Law. This Amendment shall be governed by, and construed
-------------
and enforced in accordance with, the laws of the State of New York, except that
if any provision of this Amendment or any part of any such provision would be
illegal, invalid or enforceable under such laws in connection with a suit or
proceeding validly instituted in another jurisdiction, then the laws of such
other jurisdiction shall govern insofar as is necessary to sustain the legality,
validity or enforceability of such provision or any part of such provision.
6. Captions. Captions to the Sections in this Amendment are for the
--------
convenience of the parties only and shall not affect the meaning or
interpretation of this Amendment.
7. Enforceability and Interpretation. It is the intention of the
---------------------------------
parties to this Amendment that the terms and provisions contained in this
Amendment shall be enforceable to the fullest extent permitted by law. If any
term or provision of this Amendment or the application thereof to any Person or
circumstance is construed to be illegal, invalid or unenforceable, in whole or
in part, then such term or provision shall be construed in such a manner as to
permit its enforceability under applicable law to the fullest extent permitted
by such law. In any case, the remaining terms and provisions of this Amendment
or the application thereof to any Person or circumstance, except those terms and
provisions which have been held illegal, invalid or unenforceable, shall remain
in full force and effect.
8. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9. Additional Documents. Each party hereto agrees to execute any and
--------------------
all documents, instruments, certificates and communications deemed to be
necessary or advisable by the Company to effectuate the purposes of this
Amendment.
[signature page follows]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment with full force and effect as of the day and year first written
above.
PAETEC CORP.
By: /s/ Aruna A. Chesonis
--------------------------------
Its: CEO, Chairman and President
--------------------------------
PAETEC COMMUNICATIONS, INC.
By: /s/ Aruna A. Chesonis
--------------------------------
Its: CEO, Chairman and President
--------------------------------
/s/ Aruna A. Chesonis
-------------------------------------
Arunas A. Chesonis
/s/ Timothy J. Bancroft
-------------------------------------
Timothy J. Bancroft
4
<PAGE>
Exhibit 10.8.1
STOCK RIGHTS AGREEMENT
This is a Stock Rights Agreement (the "Agreement"), dated July 17,
1998, between JOHN BARON ("Shareholder"), PAETEC CORP., a Delaware corporation
with its principal place of business at 290 Woodcliff Drive, Fairport, New York
14450 (the "Company"), PAETEC COMMUNICATIONS, INC., a Delaware corporation and
wholly-owned subsidiary of the Company with its principal place of business at
290 Woodcliff Drive, Fairport, New York 14450 ("Subsidiary"), and ARUNAS A.
CHESONIS ("Founder").
RECITALS
A. The Company is a Delaware corporation having 110,000,000 shares of
authorized capital stock, 10,000,000 of which are designated preferred stock,
75,000,000 of which are designated Class A common and 25,000,000 of which are
designated Class B common. Founder is one of the founding shareholders of the
Company.
B. Shareholder is also one of the founding Shareholders of the
Company and is an employee of the Subsidiary. In order to induce Shareholder to
leave his former employer and join the Subsidiary as an employee, the Company
previously offered to issue to Shareholder 250,000 shares of Class A common
stock at a purchase price of $.40 per share, subject to certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Agreement for the purpose of confirming Shareholder's equity interest in the
Company and outlining the rights of and restrictions imposed by the Company with
respect to the shares of stock held by the Shareholder.
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares.
------------------
(a) The Company confirms its previous offer to issue 250,000 shares of
Class A common stock (the "Shares") to Shareholder at a price of $.40 per share
payable in full upon issuance of the Shares. A stock certificate evidencing the
Shares shall be issued in the name of Shareholder upon receipt of this executed
Agreement and payment in full of the purchase price.
(b) In order to induce the Company to issue the Shares, Shareholder
represents and warrants to the Company as follows:
<PAGE>
(i) Shareholder (A) understands that an investment in the
Shares is speculative due to factors including (but not limited to) the start-up
nature of the Company and the risk of economic loss from the operations of the
Company, but believes that such an investment is suitable for Shareholder based
upon Shareholder's financial needs, (B) can withstand a complete loss of the
investment in the Shares, and (C) has the net worth to undertake these risks.
(ii) Shareholder is acquiring the Shares for the personal
account of Shareholder, with no present intention of reselling, distributing or
otherwise transferring the Shares or any portion of the Shares to anyone else.
(iii) Shareholder understands and acknowledges that the Shares
are being offered and sold under one or more exemptions provided in the
Securities Act of 1933, as amended (the "Securities Act"), Regulation D
promulgated thereunder and applicable New York State securities laws, and that
this transaction has not been reviewed or passed upon by the United States
Securities and Exchange Commission, the New York State Attorney General, or any
other federal or state agency.
(iv) Shareholder realizes that Shareholder must bear the
economic risk of investment for an indefinite period of time because (A) the
Shares have not been registered under the Securities Act and cannot be resold by
Shareholder unless they are subsequently registered under the Securities Act or
an exemption from registration is available, (B) the transferability of the
Shares is restricted by the terms of this Agreement, and (C) there currently is
no public market for the Shares, and Shareholder may not be able to liquidate
the investment in the Shares in the event of an emergency. Shareholder has
adequate means of providing for Shareholder's current financial needs and
personal contingencies, and has no need for liquidity of investment with respect
to the Shares.
(v) Shareholder believes that Shareholder, either alone or
together with the assistance of professional advisor(s), has knowledge and
experience in business and financial matters sufficient to make Shareholder
capable of evaluating the merits and risks of an investment in the Shares.
(vi) Shareholder is fully familiar with the business of the
Company and its present and proposed operations. Shareholder has been given
reasonable opportunity to ask representatives of the Company questions
concerning the Company and making an investment in the Shares. Shareholder has
obtained sufficient information to evaluate the merits and risks of an
investment in the Shares.
(vii) Shareholder confirms that Shareholder has been advised to
rely on professional accounting, tax, legal and financial advisers with respect
to an investment in the Shares and has obtained, to the extent Shareholder deems
it necessary, professional advice
2
<PAGE>
with respect to the risks inherent in an investment in the Shares and the
suitability of an investment in the Shares in light of Shareholder's financial
condition and investment needs.
2. Restriction on Transfer of Shares. Shareholder may not sell,
---------------------------------
transfer, pledge, assign, transfer, or otherwise encumber or dispose of, in any
manner or by any means, any Shares that are subject to the Company's Purchase
Option described in Section 3 of this Agreement. This restriction on transfer
does not apply to any Shares that, pursuant to Section 3, no longer are subject
to the Company's Purchase Option or to any additional shares of capital stock of
the Company that Shareholder might acquire in the future. Notwithstanding the
foregoing, Shareholder may pledge the Shares to Founder as collateral security
for a promissory note dated the date hereof, provided that the Shares so pledged
shall continue to be subject to the Company's Purchase Option described in
Section 3 below.
3. Repurchase of Shares upon Termination of Employment with
--------------------------------------------------------
Subsidiary. Upon termination of Shareholder's employment with the Subsidiary,
- ----------
the Company shall have an option, but shall not be obligated, to repurchase (the
"Purchase Option") from Shareholder or Shareholder's personal representative all
or a portion of Shareholder's Shares, as set forth in the following
subparagraphs.
(a) If Shareholder's employment with the Subsidiary terminates due to
voluntary separation or dismissal for Cause (as defined below), the number of
Shares that are subject to the Company's Purchase Option shall be determined as
follows:
(i) The Company shall have the option to repurchase up to 100%
of the Shares should Shareholder's employment terminate at any time prior to the
first anniversary of Shareholder's employment with the Subsidiary.
(ii) The Company shall have the option to repurchase up to 60% of
the Shares should Shareholder's employment terminate on the first anniversary
date, or at any time between the first and second anniversary dates, of
Shareholder's employment with the Subsidiary.
(iii) The Company shall have the option to repurchase up to 40% of
the Shares should Shareholder's employment terminate on the second anniversary
date, or at any time between the second and third anniversary dates, of
Shareholder's employment with the Subsidiary.
(iv) The Company shall have the option to repurchase up to 20% of
the Shares should Shareholder's employment terminate on the third anniversary
date, or at any time between the third and fourth anniversary dates, of
Shareholder's employment with the Subsidiary.
3
<PAGE>
(b) If Shareholder's employment with the Subsidiary terminates because
of Shareholder's death or disability, Shareholder or Shareholder's personal
representative may negotiate a transfer of all or a portion of Shareholder's
Shares back to the Company at any time. With respect to Shares that were
subject to the Company's Purchase Option and that are not transferred back to
the Company, the transfer restrictions set forth in Section 2 above shall apply
to the same extent that they would have applied if Shareholder's employment had
continued. This restriction on transfer does not apply to any Shares that would
no longer have been subject to the Company's Purchase Option, or to any
additional shares of capital stock of the Company that Shareholder might acquire
in the future.
(c) In the event that Shareholder's employment with the Subsidiary
terminates for any reason not addressed in subparagraphs (a) and (b) above, the
Company's Purchase Option, together with all transfer restrictions set forth in
Section 2, shall fully expire effective as of the date of termination.
(d) The Company's Purchase Option shall fully expire on the fourth
anniversary of Shareholder's employment with the Subsidiary. Shares as to
which the Company's Purchase Option has expired are no longer subject to the
transfer restrictions set forth in Section 2.
(e) To exercise its Purchase Option, the Company must notify
Shareholder or Shareholder's personal representative of its intention to
exercise its Purchase Option within 60 days after the date of termination of
Shareholder's employment with the Subsidiary. Should the Company fail to
exercise the Purchase Option within such 60-day period, the Shares shall no
longer be subject to the transfer restrictions set forth in Section 2.
(f) In the event of a consolidation or merger of the Company with or
into any other person or entity, a sale of all or substantially all of the
assets of the Company to another person or entity, or an acquisition of more
than 50% of the capital stock of the Company by another person or entity, the
Company's Purchase Option shall be terminated as of the effective date of the
transfer. Notwithstanding the foregoing, the Company's Purchase Option shall
not be terminated or in any other way affected by an initial public offering of
stock by the Company.
4. Repurchase Price and Payment Terms. The price for all Shares
----------------------------------
purchased by the Company pursuant to the Purchase Option shall be $.40 per
Share. Payment shall be made in full for all repurchased Shares within 30 days
after the date on which the Company delivers notice of its intention to exercise
the Purchase Option. Upon payment, Shareholder or Shareholder's personal
representative shall deliver all stock certificates for repurchased Shares,
properly endorsed in blank, to the Company or its designee.
4
<PAGE>
5. Non-Competition.
---------------
(a) For a period of one year after termination of Shareholder's
employment with the Subsidiary (regardless of the reason for termination),
Shareholder shall not, directly or indirectly:
(i) solicit or serve clients or customers of the Company or any
affiliate of the Company (including the Subsidiary), whether for Shareholder's
own account or as an employee, shareholder, partner, officer, member, manager,
director, consultant, or other representative of any third party;
(ii) direct any business from, or enter into competition with,
the Company or any affiliate of the Company (including the Subsidiary) in any
line of business in which the Company or such affiliate was conducting
operations during Shareholder's employment; or
(iii) serve as an employee, shareholder, partner, officer, member,
manager, director, consultant or other representative of any third party which
engages in any line of business competitive with the Company or any affiliate of
the Company (including the Subsidiary) anywhere in the world.
Shareholder acknowledges that the foregoing limitations are reasonable in time
and scope and agrees not to raise any objection to the reasonableness of the
foregoing in any action or proceeding to enforce the terms of this Section.
(b) As consideration for the non-competition covenant set forth in
subparagraph (a) above, the Subsidiary agrees that, if Shareholder's employment
is terminated by the Subsidiary without Cause, Subsidiary shall pay Shareholder
or Shareholder's personal representative during the one-year period in which the
covenant is in effect an amount equal to the annualized base salary paid to
Shareholder immediately prior to termination of Shareholder's employment.
Payment shall be made in accordance with the Subsidiary's customary payroll
practices. Continued payment of Shareholder's base salary under this
subparagraph (b) shall not be made if termination of Shareholder's employment is
due to Shareholder's death, disability, voluntary resignation or withdrawal or
termination for "Cause" (as defined below).
(c) As additional consideration for the non-competition covenant set
forth in subparagraph (a) above, the Company agrees that (i) in the event
Shareholder's employment terminates due to the death or disability of
Shareholder or is terminated by Subsidiary without Cause, the one-year period
during which the non-competition covenant is to be in effect shall be counted as
a year of employment with Subsidiary for purposes of determining the percentage
of Shares that is subject to the Company's Purchase Option, and (ii) in the
event Shareholder's employment is terminated by the Subsidiary for Cause or
terminates due to the
5
<PAGE>
voluntary resignation or withdrawal of Shareholder, the Company shall have the
option of (A) waiving the non-competition covenant set forth in subparagraph (a)
above or (B) counting the one-year period during which the non-competition
covenant is to be in effect as a year of employment for purposes of determining
the percentage of Shares that is subject to the Company's Purchase Option.
(d) (i) Should Shareholder violate the terms of the non-competition
covenant set forth in subparagraph (a), the Company, the Company shall notify
Shareholder in writing of the alleged violation that constitutes a breach of
this Agreement, and Shareholder shall have 10 business days to cure the breach.
If the breach is not cured to the satisfaction of the Company, then in addition
to any other remedies available under law, the Company may (1) discontinue any
payments being made to Shareholder pursuant to subparagraph (b) hereof, and (2)
exercise its Purchase Option with respect to any additional Shares that would
have been subject to the Purchase Option had the one-year period of the non-
competition covenant not been counted as an additional year of employment
pursuant to the terms of subparagraph (c) hereof. Exercise of the Purchase
Option with respect to such additional Shares shall be made in accordance with
the terms of Sections 3 and 4 hereof, except that the Company may exercise the
Purchase Option at any time within 60 days after the Company first becomes aware
of Shareholder's violation of subparagraph (a).
(ii) In the event that the Company fails to make any payment due
to Shareholder pursuant to Section 5(b) above, Shareholder shall notify the
Company in writing of the alleged failure to make payment that constitutes a
breach of this Agreement, and the Company shall have 5 business days to cure the
breach. If the breach is not cured to the satisfaction of Shareholder, then the
non-competition covenant set forth in subparagraph (a) shall be null and void
and of no further force and effect.
(e) For purposes of this Section 5, termination for "Cause" shall
mean termination of Shareholder's employment with the Subsidiary due to: (i)
material failure or refusal to perform the duties assigned to Shareholder, (ii)
refusal of Shareholder to follow the reasonable directives of the Board of
Directors or Chief Executive Officer of the Subsidiary, (iii) conviction of a
felony, (iv) misappropriation of any funds or property of the Company or any
affiliate of the Company (including the Subsidiary), or (v) commission of any
act which could materially injure the business or reputation of, or materially
adversely affect the interests of Company or any affiliate of the Company
(including the Subsidiary).
(f) Shareholder acknowledges that his/her services are unique and
extraordinary and are not readily replaceable, and hereby expressly agrees that,
in the event of a violation of the non-competition covenant set forth in
subparagraph (a), the Company and its affiliates (including Subsidiary) will be
irreparably harmed and the remedy of damages or other remedy at law will be
inadequate. Therefore, Shareholder agrees that, in the event of a threatened or
actual violation of the non-competition covenant, the Company shall be entitled
to obtain from any court of competent jurisdiction, an injunction restraining
Shareholder from
6
<PAGE>
committing the violation, without the necessity of proving actual damage and in
addition to any other relief available under this Agreement or at law.
6. Piggy-Back Registration Rights.
------------------------------
(a) If at any time or from time to time the Company shall determine to
register any of its equity securities, either for its own account or the account
of a security holder or holders (other than a registration of securities
relating solely to employee benefit plans or to effect a merger or other
reorganization), the Company will promptly give to Shareholder written notice
thereof and, upon the written request of Shareholder, include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Shares specified
in the written request made within 10 business days after receipt of such
written notice from the Company.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise Shareholder as a part of the written notice given to Shareholder. In
such event the right of any Shareholder to registration pursuant to this Section
6 shall be conditioned upon Shareholder's participation in such underwriting,
and the inclusion of Shares in the underwriting shall be limited to the extent
provided herein. Shareholder (together with the Company and the other holders
distributing their securities through such underwriting) shall enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 6, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may exclude some or all of the Shares or securities of other holders
of similar registration rights from such registration. The Company shall so
advise Shareholder and other stockholders distributing their securities through
such underwriting, and the number of Shares or securities of other holders of
similar registration rights that may be included in the registration and
underwriting, as determined by the managing underwriter, shall be allocated on a
pro rata basis. If Shareholder disapproves of the terms of any such
underwriting, Shareholder may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. Any securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration, and shall
continue to be subject to the terms of this Section.
(c) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 6 prior to the effectiveness of
such registration whether or not Shareholder has elected to include securities
in such registration.
(d) All expenses associated with the registration (including, without
limitation, registration, qualification and filing fees, printing expenses, blue
sky fees, and fees and disbursements of counsel and accountants for the Company)
shall be borne by the
7
<PAGE>
Company. Selling expenses, including underwriters' discounts, shall be borne by
Shareholder pro rata in proportion to the number of securities being registered.
(e) In the case of each registration under this Section, the Company
will:
(i) prepare and file a registration statement with respect to
such securities and use its best efforts to cause such registration statement to
become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
(ii) furnish to Shareholder such reasonable number of copies of
the registration statement, preliminary prospectus, final prospectus and such
other documents as Shareholder may reasonably request in order to facilitate the
public offering of the Shares; and
(iii) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by Shareholder,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify as a foreign corporation or as a dealer in
securities or to file a general consent to service of process in any such states
or jurisdictions in which it has not already done so and except as may be
required by the Securities Act.
(f) The Company will indemnify Shareholder against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof), arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, or any violation by the Company of the Securities Act of 1933, the
Securities Exchange Act of 1934, state securities law or any rule or regulation
promulgated under such laws applicable to the Company in connection with any
such registration, qualification or compliance, and the Company will reimburse
Shareholder for any legal and any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, provided that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission, or alleged untrue statement or omission, made in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by Shareholder.
(g) Shareholder will, if Shares held by such Shareholder are included
in the securities as to which such registration is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a
8
<PAGE>
registration statement against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, such Shareholders, such directors, officers, persons, underwriters
or control persons for any legal or any other expenses reasonably incurred, as
such expenses are incurred, in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by Shareholder and stated to be specifically for use therein.
(h) Shareholder shall furnish to the Company such information
regarding Shareholder, the Shares held by Shareholder, and the distribution
proposed by Shareholder as the Company may request in writing and as shall be
required in connection with any registration referred to in this Agreement.
(i) The registration rights granted to Shareholder in this Section
shall expire at such time (if ever) as Shareholder is free to sell the Shares
under Rule 144 promulgated under the Securities Act (or any successor thereto)
without limitation as to volume or manner of sale restrictions.
7. Co-Sale Rights.
--------------
(a) In the event that Founder receives a bona fide offer from any
person to purchase any of Founder's Common Stock (the "Founder's Shares") in a
private transaction exempt from registration under the Securities Act, Founder
shall give Shareholder notice of his intention to sell Founder's Shares,
describing the amount of Founder's Shares proposed to be transferred, the
identity of the proposed transferee, and the price and terms upon which he
proposes to make such transfer (the "Transfer Notice").
(b) Within fifteen (15) days after delivery of the Transfer Notice,
Shareholder may elect to sell up to Shareholder's pro rata share of the total
number of shares to be purchased by the transferee described in the Transfer
Notice by giving written notice thereof to Founder and tendering to Founder a
certificate representing the shares to be sold, properly endorsed for transfer,
with written instructions to transfer the shares to the transferee described in
the Transfer Notice upon receipt of payment for such shares from such transferee
for the benefit of Shareholder. Founder shall thereupon notify the transferee
of the co-sale arrangements hereunder, and instruct the transferee to deliver
payment for the shares to be purchased from Shareholder to Shareholder. For the
purpose of the co-sale right set forth in this Section, the pro rata share of
Shareholder shall be determined based on the number of
9
<PAGE>
Shares held by Shareholder that are subject to co-sale rights, divided by the
sum of (A) the total number of shares of common stock held by all stockholders
of the Company (including Shareholder) holding similar co-sale rights plus (B)
the number of shares of common stock held by Founder at the date of the Transfer
Notice (assuming conversion of all convertible securities and exercise of all
options and warrants). The resulting percentage shall then be multiplied by the
number of Shares proposed to be purchased by the transferee to determine the
actual number of Shares eligible for sale by Shareholder.
(c) In the event Shareholder declines to exercise the co-sale right
as allowed by this Section, Founder may, within 90 days after the date on which
Shareholder's co-sale rights lapsed, transfer some or all of Founder's Shares
which were the subject of the Transfer Notice at a price and on terms no less
favorable to the transferee(s) than specified in the Transfer Notice. Founder's
Shares transferred in accordance with the provisions of this Section shall no
longer be subject to the restrictions on Founder's Shares forth in this Section.
After the expiration of said 90-day period, Founder shall not transfer any of
Founder's Shares without again complying with this Section.
(d) Any transfer of Founder's Shares without consideration to a
family member of Founder or a trust or custodian for the benefit of Founder or a
family member of Founder, and transfers pursuant to a pledge to secure
indebtedness, shall not be subject to the provisions of this Section, provided
that the transferee agrees in writing to be bound by the provisions of this
Section with respect to any subsequent transfer of such shares.
8. Legend. Each certificate for Shares owned by Shareholder shall
------
bear the following legends:
(a) The shares represented by this certificate were issued to
the shareholder with restrictions. Neither the shares, nor any
interest in them, may be sold, transferred, assigned, pledged,
hypothecated, or otherwise disposed of, if restricted pursuant
to a stock rights agreement between the shareholder and the
Company, a copy of which is on file at the office of the
Company in Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be transferred in the absence of such registration unless
the Company receives an opinion of counsel reasonably acceptable
to it stating the such sale or transfer is exempt from registration.
With respect to Shares that are subject to the Purchase Option described in
Section 3 of this Agreement, however, Shareholder shall be entitled to a
certificate without the legend set forth
10
<PAGE>
in subparagraph (a), evidencing any Shares as to which the Company's Purchase
Option has expired.
9. Notices. All notices and communications under this Agreement
-------
shall be in writing and shall be given by personal delivery or by registered or
certified mail, return receipt requested, addressed to the respective residences
of Shareholder and Founder set forth below or to such other address as may be
designated by Shareholder or Founder, and to the principal office of the
Company. Notice shall be deemed given upon personal delivery or upon receipt.
10. Miscellaneous.
-------------
(a) Neither this Agreement, nor any action taken under it, shall
be construed as creating any limitation or restriction upon any right that
Subsidiary would otherwise have to terminate the employment of Shareholder at
any time for any reason.
(b) This Agreement may be modified or amended only upon the
written consent of all parties to the Agreement.
(c) This Agreement shall be interpreted, construed, and enforced
in accordance with the laws of the State of New York.
(d) Neither this Agreement, nor any rights or obligations under
it, may be assigned by any party without the prior written consent of the other
parties.
(e) This Agreement shall benefit and be binding upon the parties
and their successors, heirs, executors, personal representatives, and assigns.
(f) This Agreement sets forth the entire understanding and
agreement of the parties with respect to its subject matter and supersedes all
prior letters, agreements, covenants, communications, understandings,
representations, or warranties, whether oral or written, by any officer,
employee, or representative of either party.
(g) The waiver of any provision of this Agreement, or of any
breach of this Agreement, shall not constitute a subsequent waiver of any
provision or breach.
(h) In the event that Shareholder is a prevailing party in any
litigation arising under or in connection with this Agreement, the Company shall
pay the reasonable attorneys fees and expenses incurred by Shareholder in
connection with the litigation.
(i) If, at any time, any of the provisions of this Agreement
shall be deemed by a court or other body having jurisdiction over this Agreement
to be illegal, invalid, or unenforceable, those provisions shall be deemed
severed from this Agreement. The remaining
11
<PAGE>
provisions of this Agreement shall be valid and binding as if this Agreement had
never contained any illegal, invalid, or otherwise unenforceable provisions,
without the requirement that the amendment be recorded in a writing signed by
the parties.
The parties' assent to the terms of this Agreement is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
--------------------------------
Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
--------------------------------
Title: President
Address: /s/ John Baron
-----------------------------------
John Baron
116 Selborne Chase
Fairport, New York 14450
Address: /s/ Arunas A. Chesonis
-----------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
12
<PAGE>
Exhibit 10.8.2
FIRST AMENDMENT TO STOCK RIGHTS AGREEMENT
This is the First Amendment to Stock Rights Agreement (the
"Amendment"), dated August 13, 1998, between JOHN BARON ("Shareholder"), PAETEC
CORP., a Delaware corporation with its principal place of business at 290
Woodcliff Drive, Fairport, New York 14450 (the "Company"), PAETEC
COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary of the
Company with its principal place of business at 290 Woodcliff Drive, Fairport,
New York 14450 ("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. Shareholder holds 250,000 shares of Class A common stock of the
Company, subject to certain restrictions contained in a Stock Rights Agreement,
dated July 17, 1998, among the parties (the "Agreement").
B. The Company has now offered to issue to Shareholder 30,000 shares
of Class B common stock at a purchase price of $.833 per share, subject to
certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Amendment for the purpose of confirming Shareholder's equity interest in the
Class B common stock of the Company and outlining the rights of Shareholder and
the restrictions imposed by the Company with respect to the Class B common stock
to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares. The Company confirms its offer to issue
------------------
30,000 shares of Class B common stock (the "Class B Shares") to Shareholder at a
price of $.833 per share, payable in full upon issuance of the Class B Shares.
A stock certificate evidencing the Class B Shares shall be issued in the name of
Shareholder upon receipt of this executed Amendment and payment in full of the
purchase price.
2. Incorporation of Agreement by Reference. All of the provisions of
---------------------------------------
the Agreement shall apply to the Class B Shares issued to Shareholder pursuant
to this Amendment, except to the extent that a provision of this Amendment
expressly supersedes any provision of the Agreement. Additionally, to the
extent that any provision of this Amendment contradicts any provision contained
in the Agreement with respect to the Shares (as defined in the Agreement), the
provision of this Amendment shall control.
<PAGE>
3. Repurchase Price. The Purchase Option of the Company, described
----------------
in Section 3 of the Agreement, shall apply to the Class B Shares. In the event
that the Company exercises its Purchase Option with respect to all or a portion
of the Class B Shares, however, the price for all Class B Shares repurchased by
the Company pursuant to the Purchase Option, described in Section 4 of the
Agreement, shall be the fair market value of the Class B Shares as of the date
of the exercise of the Purchase Option by the Company. "Fair market value"
shall be determined by the accounting firm then retained by the Company, which
shall promptly perform an appraisal. The determination shall be made in
accordance with generally accepted accounting principles and shall be binding on
all parties.
4. Stockholders' Agreement and Proxy. Concurrently with the
---------------------------------
execution of this Amendment and the issuance of the Class B Shares, Shareholder
is executing and delivering a Stockholders' Agreement and proxy appointing
Arunas A. Chesonis Shareholder's attorney-in-fact and proxy to vote all Class B
Shares now or hereafter owned by Shareholder at any meeting of shareholders,
regular or special, whenever called, and for whatever purpose. Copies of the
Stockholders' Agreement and proxy shall be filed with the Secretary of the
Company, and the proxy shall be registered in the stock books of the Company.
Any transfer of the Class B Shares is subject to the terms of the Stockholders'
Agreement and proxy.
5. Permitted Transfer of Shares and Class B Shares. The restrictions
-----------------------------------------------
on transfer of Shareholder's Shares (as defined in the Agreement), set forth in
Section 2 of the Agreement, shall apply equally to the Class B Shares; provided,
however, that those restrictions are modified, with respect to both the Shares
and Class B Shares, to permit Shareholder to sell, assign, or transfer any or
all of the Shares or Class B Shares held by Shareholder to the following:
(a) Shareholder's spouse, parent(s), siblings, or natural or
adopted lineal descendants, or the spouses of Shareholder's parent(s), siblings,
or lineal descendants (collectively, together with the Shareholder, referred to
as "Shareholder's Family Members");
(b) the trustee of a trust (including a voting trust) principally
for the benefit of Shareholder and/or one or more of Shareholder's Family
Members; provided that the trust may also grant a general or special power of
appointment to one or more of Shareholder's Family Members and may permit trust
assets to be used to pay taxes, legacies, and other obligations of the trust or
of the estates of one or more of Shareholder's Family Members payable by reason
of the death of any of Shareholder's Family Members; and
(c) a corporation, partnership, or limited liability company, a
majority of the voting equity interest in which is owned by Shareholder or by
one or more of Shareholder's transferees under subparagraphs (a) or (b) of this
Section.
2
<PAGE>
6. Legends. Each certificate for Class B Shares owned by Shareholder
-------
shall bear the following legends:
(a) The shares represented by this certificate were issued to the
shareholder with restrictions. Neither the shares, nor any interest in
them, may be sold, transferred, assigned, pledged, hypothecated, or
otherwise disposed of, unless that transfer is expressly permitted by a
stock rights agreement, including any amendment thereto, between the
shareholder and the Company, a copy of which is on file at the office of
the Company in Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not be
transferred in the absence of such registration unless the Company receives
an opinion of counsel reasonably acceptable to it stating the such sale or
transfer is exempt from registration.
(c) The shares represented by this certificate are subject to a
Stockholders' Agreement and to a proxy in favor of Arunas A. Chesonis, a
copy of which is on file with the Company. Any transferee of the shares
represented by this certificate shall take the shares subject to the terms
of the Stockholders' Agreement and proxy.
With respect to Class B Shares that are subject to the Company's Purchase
Option, described in Section 3 of the Agreement, however, Shareholder shall be
entitled to a certificate without the legend set forth in subparagraph (a),
evidencing any Class B Shares as to which the Purchase Option has expired.
7. Non-competition. The non-competition covenant of Shareholder set
---------------
forth in subparagraph 5(a)(iii) of the Agreement is modified to read as
follows:
(iii) hold five percent (5%) or more of the shares of a
corporation, or serve as a partner, officer, member, manager,
director, consultant or other representative of any third party, which
engages in any line of business competitive with the Company or any
affiliate of the Company (including the Subsidiary) anywhere in the
world.
3
<PAGE>
The parties' assent to the terms of this Amendment is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
-------------------------------
Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
------------------------------
Title: President
Address: /s/ John Baron
---------------------------------
John Baron
116 Selborne Chase
Fairport, New York 14450
Address: /s/ Arunas A. Chesonis
---------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
4
<PAGE>
Exhibit 10.8.3
SECOND AMENDMENT TO STOCK RIGHTS AGREEMENT
This is the Second Amendment to Stock Rights Agreement (the
"Amendment"), dated September 30, 1998, between JOHN BARON ("Shareholder"),
PAETEC CORP., a Delaware corporation with its principal place of business at 290
Woodcliff Drive, Fairport, New York 14450 (the "Company"), PAETEC
COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary of the
Company with its principal place of business at 290 Woodcliff Drive, Fairport,
New York 14450 ("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. Shareholder holds 250,000 shares of Class A common stock of the
Company, subject to certain restrictions contained in a Stock Rights Agreement,
dated July 17, 1998, among the parties (the "Agreement"). Shareholder also holds
30,000 shares of Class B common stock of the Company, subject to certain
restrictions contained in the Agreement and in the First Amendment to Stock
Rights Agreement dated August 13, 1998 (the "First Amendment").
B. The Company has now offered to issue to Shareholder 30,000
additional shares of Class A common stock at a purchase price of $2.50 per
share, subject to certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Amendment for the purpose of confirming Shareholder's additional equity interest
in the Class A common stock of the Company and outlining the rights of
Shareholder and the restrictions imposed by the Company with respect to the
additional Class A common stock to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares. The Company confirms its offer to issue
------------------
30,000 shares of Class A common stock (the "Additional Class A Shares") to
Shareholder at a price of $2.50 per share, payable in full upon issuance of the
Additional Class A Shares. A stock certificate evidencing the Additional Class A
Shares shall be issued in the name of Shareholder upon receipt of this executed
Amendment and payment in full of the purchase price.
2. Incorporation of Agreement and First Amendment by Reference. All
-----------------------------------------------------------
of the provisions of the Agreement shall apply to the Additional Class A Shares
issued to
<PAGE>
Shareholder pursuant to this Amendment, except to the extent that a provision of
this Amendment expressly supersedes any provision of the Agreement or First
Amendment. Sections 3 and 5 of the First Amendment, which modify Sections 4 and
2, respectively, of the Agreement, shall also apply to the Additional Class A
Shares.
3. Legends. Each certificate for Additional Class A Shares owned by
-------
Shareholder shall bear the following legends:
(a) The shares represented by this certificate were issued to the
shareholder with restrictions. Neither the shares, nor any interest in
them, may be sold, transferred, assigned, pledged, hypothecated, or
otherwise disposed of, unless that transfer is expressly permitted by a
stock rights agreement, including any amendment thereto, between the
shareholder and the Company, a copy of which is on file at the office of
the Company in Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not be
transferred in the absence of such registration unless the Company receives
an opinion of counsel reasonably acceptable to it stating the such sale or
transfer is exempt from registration.
With respect to Additional Class A Shares that are subject to the Company's
Purchase Option, described in Section 3 of the Agreement, however, Shareholder
shall be entitled to a certificate without the legend set forth in subparagraph
(a), evidencing any Additional Class A Shares as to which the Purchase Option
has expired.
The parties' assent to the terms of this Amendment is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
-------------------------------
Title: President
2
<PAGE>
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
--------------------------------
Title: President
Address: /s/ John Baron
-----------------------------------
John Baron
116 Selborne Chase
Fairport, New York 14450
Address: /s/ Arunas A. Chesonis
-----------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
3
<PAGE>
Exhibit 10.8.4
THIRD AMENDMENT TO STOCK RIGHTS AGREEMENT
THIS THIRD AMENDMENT TO STOCK RIGHTS AGREEMENT (this "Amendment") is
made as of this 4th day of February 2000 by and among John Baron (the
"Stockholder"), PaeTec Corp., a Delaware corporation (the "Company"), PaeTec
Communications, Inc., a Delaware corporation and wholly-owned subsidiary of the
Company (the "Subsidiary"), and Arunas A. Chesonis ("Mr. Chesonis").
RECITALS
--------
A. The Company, the Subsidiary, the Stockholder and Mr. Chesonis are
parties to a Stock Rights Agreement dated as of July 17, 1998 (the "Stock Rights
Agreement") and amended as of August 13, 1998 ("Amendment No. 1") and September
30, 1998 ("Amendment No. 2").
B. The Board of Directors of the Company has authorized the issuance
and sale (the "Series A Preferred Stock Placement") of 134,000 shares of a new
series of preferred stock of the Company, designated the Series A Convertible
Preferred Stock, to the purchasers (the "Purchasers") listed on the Schedule of
Purchasers to, and pursuant to the terms and conditions of, an Equity Purchase
Agreement (the "Purchase Agreement").
C. As a condition to the consummation of the Series A Preferred Stock
Placement, the Purchasers have required that the Company, the Subsidiary, the
Stockholder and Mr. Chesonis further amend the Stock Rights Agreement (i) to
provide that all Class B Shares (as defined in the Stock Rights Agreement) shall
automatically convert into shares of Class A common stock, par value $0.01 per
share ("Class A Common Stock"), of the Company in specified circumstances and
(ii) to clarify that to the extent any securities are required to be excluded
from a registration pursuant to the "cut-back" provisions of the piggyback
registration rights granted to the Stockholder pursuant to the Stock Rights
Agreement, the securities to be included in such registration shall be
determined on a pro rata basis among the holders of shares participating in the
--- ----
offering pursuant to registration rights granted by the Company, based on the
number of shares of common stock requested to be included by each such holder in
such registration.
D. The parties to the Stock Rights Agreement desire to amend the
Stock Rights Agreement to induce the Purchasers to consummate of the Series A
Preferred Stock Placement.
<PAGE>
AGREEMENT
---------
1. Defined Terms. All capitalized terms used in this Amendment
-------------
without definition shall have the meanings given to such terms in the Stock
Rights Agreement, as amended.
2. Automatic Conversion of Class B Shares. Notwithstanding
--------------------------------------
anything in the Stock Rights Agreement, Amendment No. 1 or Amendment No. 2 to
the contrary, the parties agree that, as provided in the Company's certificate
of incorporation as amended in connection with the Series A Preferred Stock
Placement (the "Restated Certificate of Incorporation"), each Class B Share
subject to the Stock Rights Agreement (as amended) shall automatically convert
into one share of Class A Common Stock upon the date (the "Termination Date")
that the Stockholder ceases to be employed by the Company or any subsidiary
thereof unless, at the Termination Date, Mr. Chesonis shall (i) be the Chairman
of the Board or Chief Executive Officer of the Company, (ii) be the beneficial
owner of shares of Class B common stock of the Company and (iii) have the power
pursuant to a proxy to vote the Class B Shares on all matters on which such
Class B Shares are entitled to vote, provided Mr. Chesonis personally exercises
such power and does not delegate the exercise thereof to any other person. If
subsequent to the Termination Date, any condition specified in clause (i), (ii)
or (iii) in the preceding sentence shall cease to be in effect, each Class B
Share shall immediately be converted into one share of Class A Common Stock.
All other terms and conditions of the Stock Rights Agreement, as amended, shall
continue to apply to such shares of Class A Common Stock upon such conversion.
In the event of any conflict between the provisions of this Section 2 and the
provisions of Article V of the Restated Certificate of Incorporation with
respect to such mandatory conversion, which shall include, without limitation,
any additional mandatory conversion events specified in such Article V, the
provisions of Article V of the Restated Certificate of Incorporation shall
control.
3. Amendment of Section 6(b). The fourth and fifth sentences of
-------------------------
Section 6(b) of the Stock Rights Agreement are hereby deleted and replaced and
superseded in their entirety with the following sentence:
"Notwithstanding any other provision of this Section 6, if the managing
underwriter advises in writing the Company and the Stockholder that
marketing factors require a limitation of the number of shares of common
stock to be underwritten and sold in such offering, the managing
underwriter may exclude some or all of the shares of common stock to be
sold in such offering from such registration, and the shares to be included
in such registration shall be allocated pro rata among the holders of
--- ----
shares participating in the offering pursuant to registration rights
granted by the Company (including demand and
2
<PAGE>
piggyback registration rights), based on the number of shares of common
stock requested to be included by each holder in such registration."
4. Binding Effect. This Amendment shall be binding upon and inure to
--------------
the benefit of the parties hereto and their heirs, executors, administrators,
successors and assigns.
5. Governing Law. This Amendment shall be governed by, and construed
-------------
and enforced in accordance with, the laws of the State of New York, except that
if any provision of this Amendment or any part of any such provision would be
illegal, invalid or enforceable under such laws in connection with a suit or
proceeding validly instituted in another jurisdiction, then the laws of such
other jurisdiction shall govern insofar as is necessary to sustain the legality,
validity or enforceability of such provision or any part of such provision.
6. Captions. Captions to the Sections in this Amendment are for the
--------
convenience of the parties only and shall not affect the meaning or
interpretation of this Amendment.
7. Enforceability and Interpretation. It is the intention of the
---------------------------------
parties to this Amendment that the terms and provisions contained in this
Amendment shall be enforceable to the fullest extent permitted by law. If any
term or provision of this Amendment or the application thereof to any Person or
circumstance is construed to be illegal, invalid or unenforceable, in whole or
in part, then such term or provision shall be construed in such a manner as to
permit its enforceability under applicable law to the fullest extent permitted
by such law. In any case, the remaining terms and provisions of this Amendment
or the application thereof to any Person or circumstance, except those terms and
provisions which have been held illegal, invalid or unenforceable, shall remain
in full force and effect.
8. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9. Additional Documents. Each party hereto agrees to execute any and
--------------------
all documents, instruments, certificates and communications deemed to be
necessary or advisable by the Company to effectuate the purposes of this
Amendment.
[signature page follows]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment with full force and effect as of the day and year first written
above.
PAETEC CORP.
By: /s/ Aruna A. Chesonis
------------------------------------
Its: CEO, Chairman and President
------------------------------------
PAETEC COMMUNICATIONS, INC.
By: /s/ Aruna A. Chesonis
------------------------------------
Its: CEO, Chairman and President
------------------------------------
/s/ Aruna A. Chesonis
-----------------------------------------
Arunas A. Chesonis
/s/ John Baron
-----------------------------------------
John Baron
4
<PAGE>
Exhibit 10.9.1
STOCK RIGHTS AGREEMENT
This is a Stock Rights Agreement (the "Agreement"), dated July 17,
1998, between BRADFORD M. BONO ("Shareholder"), PAETEC CORP., a Delaware
corporation with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 (the "Company"), PAETEC COMMUNICATIONS, INC., a
Delaware corporation and wholly-owned subsidiary of the Company with its
principal place of business at 290 Woodcliff Drive, Fairport, New York 14450
("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. The Company is a Delaware corporation having 110,000,000 shares of
authorized capital stock, 10,000,000 of which are designated preferred stock,
75,000,000 of which are designated Class A common and 25,000,000 of which are
designated Class B common. Founder is one of the founding shareholders of the
Company.
B. Shareholder is also one of the founding Shareholders of the
Company and is an employee of the Subsidiary. In order to induce Shareholder to
leave his former employer and join the Subsidiary as an employee, the Company
previously offered to issue to Shareholder 250,000 shares of Class A common
stock and 250,000 shares of Class B common stock at a purchase price of $.40 per
share, subject to certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Agreement for the purpose of confirming Shareholder's equity interest in the
Company and outlining the rights of and restrictions imposed by the Company with
respect to the shares of stock held by the Shareholder.
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares.
------------------
(a) The Company confirms its previous offer to issue 500,000 shares of
Class A common stock (the "Shares") to Shareholder at a price of $.40 per share
payable in full upon issuance of the Shares. Stock certificates evidencing the
Shares shall be issued in the name of Shareholder upon receipt of this executed
Agreement and payment in full of the purchase price. Of those Shares, 250,000
shall be subject to possible recapture in accordance with Section 3 below (the
"Recapture Shares"); the remaining 250,000 shall not be subject to the
provisions of Section 3 below (the "Excluded Shares").
(b) In order to induce the Company to issue the Shares, Shareholder
represents and warrants to the Company as follows:
<PAGE>
(i) Shareholder (A) understands that an investment in the
Shares is speculative due to factors including (but not limited to) the start-up
nature of the Company and the risk of economic loss from the operations of the
Company, but believes that such an investment is suitable for Shareholder based
upon Shareholder's financial needs, (B) can withstand a complete loss of the
investment in the Shares, and (C) has the net worth to undertake these risks.
(ii) Shareholder is acquiring the Shares for the personal
account of Shareholder, with no present intention of reselling, distributing or
otherwise transferring the Shares or any portion of the Shares to anyone else.
(iii) Shareholder understands and acknowledges that the Shares
are being offered and sold under one or more exemptions provided in the
Securities Act of 1933, as amended (the "Securities Act"), Regulation D
promulgated thereunder and applicable New York State securities laws, and that
this transaction has not been reviewed or passed upon by the United States
Securities and Exchange Commission, the New York State Attorney General, or any
other federal or state agency.
(iv) Shareholder realizes that Shareholder must bear the
economic risk of investment for an indefinite period of time because (A) the
Shares have not been registered under the Securities Act and cannot be resold by
Shareholder unless they are subsequently registered under the Securities Act or
an exemption from registration is available, (B) the transferability of the
Shares is restricted by the terms of this Agreement, and (C) there currently is
no public market for the Shares, and Shareholder may not be able to liquidate
the investment in the Shares in the event of an emergency. Shareholder has
adequate means of providing for Shareholder's current financial needs and
personal contingencies, and has no need for liquidity of investment with respect
to the Shares.
(v) Shareholder believes that Shareholder, either alone or
together with the assistance of professional advisor(s), has knowledge and
experience in business and financial matters sufficient to make Shareholder
capable of evaluating the merits and risks of an investment in the Shares.
(vi) Shareholder is fully familiar with the business of the
Company and its present and proposed operations. Shareholder has been given
reasonable opportunity to ask representatives of the Company questions
concerning the Company and making an investment in the Shares. Shareholder has
obtained sufficient information to evaluate the merits and risks of an
investment in the Shares.
(vii) Shareholder confirms that Shareholder has been advised to
rely on professional accounting, tax, legal and financial advisers with respect
to an investment in the Shares and has obtained, to the extent Shareholder deems
it necessary, professional advice
2
<PAGE>
with respect to the risks inherent in an investment in the Shares and the
suitability of an investment in the Shares in light of Shareholder's financial
condition and investment needs.
(c) In order to induce Shareholder to enter into this Agreement, the
Company represents to Shareholder as follows:
(i) upon issuance, the Shares will be fully paid, lawfully
issued, and non-assessable, and will be free and clear of all liens, pledges,
and other encumbrances; and
(ii) the Shares represent not less than two percent (2%) of the
issued and outstanding shares of stock of the Company.
In addition, the Company covenants and agrees that the Shares will constitute
not less than two percent (2%) of the issued and outstanding shares of stock of
the Company after the Company's second round of financing, which is contemplated
by the Company to occur in the third quarter of 1998. After the second round of
financing, all shares of the Company's stock will be diluted equally.
2. Restriction on Transfer of Shares. Shareholder may not sell,
---------------------------------
transfer, pledge, assign, transfer, or otherwise encumber or dispose of, in any
manner or by any means, any Recapture Shares that are subject to the Company's
Purchase Option described in Section 3 of this Agreement. This restriction on
transfer does not apply to any Recapture Shares that, pursuant to Section 3, no
longer are subject to the Company's Purchase Option, or to any Excluded Shares,
or to any additional shares of capital stock of the Company that Shareholder
might acquire in the future.
3. Repurchase of Shares upon Termination of Employment with
--------------------------------------------------------
Subsidiary. Upon termination of Shareholder's employment with the Subsidiary,
- ----------
the Company shall have an option, but shall not be obligated, to repurchase (the
"Purchase Option") from Shareholder or Shareholder's personal representative all
or a portion of Shareholder's Shares, as set forth in the following
subparagraphs.
(a) If Shareholder's employment with the Subsidiary terminates due to
voluntary separation or dismissal for Cause (as defined below), Recapture Shares
that are subject to the Company's Purchase Option shall be determined as
follows:
(i) The Company shall have the option to repurchase up to 100%
of the Recapture Shares should Shareholder's employment terminate at any time
prior to the first anniversary of Shareholder's employment with the Subsidiary.
(ii) The Company shall have the option to repurchase up to 60%
of the Recapture Shares should Shareholder's employment terminate on the first
anniversary date,
3
<PAGE>
or at any time between the first and second anniversary dates, of Shareholder's
employment with the Subsidiary.
(iii) The Company shall have the option to repurchase up to 40%
of the Recapture Shares should Shareholder's employment terminate on the second
anniversary date, or at any time between the second and third anniversary dates,
of Shareholder's employment with the Subsidiary.
(iv) The Company shall have the option to repurchase up to 20%
of the Recapture Shares should Shareholder's employment terminate on the third
anniversary date, or at any time between the third and fourth anniversary dates,
of Shareholder's employment with the Subsidiary.
(b) If Shareholder's employment with the Subsidiary terminates because
of Shareholder's death or disability, Shareholder or Shareholder's personal
representative may negotiate a transfer of all or a portion of Shareholder's
Shares back to the Company at any time. With respect to Recapture Shares that
are not transferred back to the Company, the transfer restrictions set forth in
Section 2 above shall apply, to the same extent that they would have applied if
Shareholder's employment had continued. This restriction on transfer does not
apply to any Recapture Shares that would no longer have been subject to the
Company's Purchase Option, or to any Shares constituting Excluded Shares, or to
any additional shares of capital stock of the Company that Shareholder might
acquire in the future.
(c) In the event that Shareholder's employment with the Subsidiary
terminates for any reason not addressed in subparagraphs (a) and (b) above, the
Company's Purchase Option, together with all transfer restrictions set forth in
Section 2, shall fully expire effective as of the date of termination.
(d) The Company's Purchase Option shall fully expire on the fourth
anniversary of Shareholder's employment with the Subsidiary. Recapture Shares
as to which the Company's Purchase Option has expired are no longer subject to
the transfer restrictions set forth in Section 2.
(e) To exercise its Purchase Option, the Company must notify
Shareholder of its intention to exercise its Purchase Option within 60 days
after the date of termination of Shareholder's employment with the Subsidiary.
Should the Company fail to exercise the Purchase Option within such 60-day
period, the Recapture Shares shall no longer be subject to the transfer
restrictions set forth in Section 2.
(f) In the event of a consolidation or merger of the Company with or
into any other person or entity, a sale of all or substantially all of the
assets of the Company to another person or entity, or an acquisition of more
than 50% of the capital stock of the Company by another person or entity, the
Company's Purchase Option shall be terminated as
4
<PAGE>
of the effective date of the transfer. Notwithstanding the foregoing, the
Company's Purchase Option shall not be terminated or in any other way affected
by an initial public offering of stock by the Company.
4. Repurchase Price and Payment Terms. The price for all Shares
----------------------------------
purchased by the Company pursuant to the Purchase Option shall be $.40 per
Share. Payment shall be made in full for all repurchased Shares within 30 days
after the date on which the Company delivers notice of its intention to exercise
the Purchase Option. Upon payment, Shareholder shall deliver all stock
certificates for repurchased Shares, properly endorsed in blank, to the Company
or its designee.
5. Non-Competition.
---------------
(a) For a period of one year after termination of Shareholder's
employment with the Subsidiary (regardless of the reason for termination),
Shareholder shall not, directly or indirectly:
(i) solicit or serve clients or customers of the Company or any
affiliate of the Company (including the Subsidiary), whether for Shareholder's
own account or as an employee, shareholder, partner, officer, member, manager,
director, consultant, or other representative of any third party;
(ii) direct any business from, or enter into competition with,
the Company or any affiliate of the Company (including the Subsidiary) in any
line of business in which the Company or such affiliate was conducting
operations during Shareholder's employment; or
(iii) serve as an employee, shareholder, partner, officer,
member, manager, director, consultant or other representative of any third party
which engages in any line of business competitive with the Company or any
affiliate of the Company (including the Subsidiary) anywhere in the world.
Shareholder acknowledges that the foregoing limitations are reasonable in time
and scope and agrees not to raise any objection to the reasonableness of the
foregoing in any action or proceeding to enforce the terms of this Section.
(b) As consideration for the non-competition covenant set forth in
subparagraph (a) above, the Subsidiary agrees that, if Shareholder's employment
is terminated by the Subsidiary without Cause, Subsidiary shall pay Shareholder
or Shareholder's personal representative during the one-year period in which the
covenant is in effect an amount equal to the annualized base salary paid to
Shareholder immediately prior to termination of Shareholder's employment.
Payment shall be made in accordance with the Subsidiary's customary payroll
practices. Continued payment of Shareholder's base salary under this
5
<PAGE>
subparagraph (b) shall not be made if termination of Shareholder's employment is
due to Shareholder's death, disability, voluntary resignation or withdrawal or
termination for "Cause" (as defined below).
(c) As additional consideration for the non-competition covenant set
forth in subparagraph (a) above, the Company agrees that (i) in the event
Shareholder's employment terminates due to the death or disability of
Shareholder or is terminated by Subsidiary without Cause, the one-year period
during which the non-competition covenant is to be in effect shall be counted as
a year of employment with Subsidiary for purposes of determining the percentage
of Shares that is subject to the Company's Purchase Option, and (ii) in the
event Shareholder's employment is terminated by the Subsidiary for Cause or
terminates due to the voluntary resignation or withdrawal of Shareholder, the
Company shall have the option of (A) waiving the non-competition covenant set
forth in subparagraph (a) above or (B) counting the one-year period during which
the non-competition covenant is to be in effect as a year of employment for
purposes of determining the percentage of Shares that is subject to the
Company's Purchase Option.
(d) (i) Should Shareholder violate the terms of the non-competition
covenant set forth in subparagraph (a), the Company, the Company shall notify
Shareholder in writing of the alleged violation that constitutes a breach of
this Agreement, and Shareholder shall have 10 business days to cure the breach.
If the breach is not cured to the satisfaction of the Company, then in addition
to any other remedies available under law, the Company may (1) discontinue any
payments being made to Shareholder pursuant to subparagraph (b) hereof, and (2)
exercise its Purchase Option with respect to any additional Shares that would
have been subject to the Purchase Option had the one-year period of the non-
competition covenant not been counted as an additional year of employment
pursuant to the terms of subparagraph (c) hereof. Exercise of the Purchase
Option with respect to such additional Shares shall be made in accordance with
the terms of Sections 3 and 4 hereof, except that the Company may exercise the
Purchase Option at any time within 60 days after the Company first becomes aware
of Shareholder's violation of subparagraph (a).
(ii) In the event that the Company fails to make any payment due
to Shareholder pursuant to Section 5(b) above, Shareholder shall notify the
Company in writing of the alleged failure to make payment that constitutes a
breach of this Agreement, and the Company shall have 5 business days to cure the
breach. If the breach is not cured to the satisfaction of Shareholder, then the
non-competition covenant set forth in subparagraph (a) shall be null and void
and of no further force and effect.
(e) For purposes of this Section 5, termination for "Cause" shall mean
termination of Shareholder's employment with the Subsidiary due to: (i)
material failure or refusal to perform the duties assigned to Shareholder, (ii)
refusal of Shareholder to follow the reasonable directives of the Board of
Directors or Chief Executive Officer of the Subsidiary, (iii) conviction of a
felony, (iv) misappropriation of any funds or property of the Company or
6
<PAGE>
any affiliate of the Company (including the Subsidiary), or (v) commission of
any act which could materially injure the business or reputation of, or
materially adversely affect the interests of Company or any affiliate of the
Company (including the Subsidiary).
(f) Shareholder acknowledges that his/her services are unique and
extraordinary and are not readily replaceable, and hereby expressly agrees that,
in the event of a violation of the non-competition covenant set forth in
subparagraph (a), the Company and its affiliates (including Subsidiary) will be
irreparably harmed and the remedy of damages or other remedy at law will be
inadequate. Therefore, Shareholder agrees that, in the event of a threatened or
actual violation of the non-competition covenant, the Company shall be entitled
to obtain from any court of competent jurisdiction, an injunction restraining
Shareholder from committing the violation, without the necessity of proving
actual damage and in addition to any other relief available under this Agreement
or at law.
6. Piggy-Back Registration Rights.
------------------------------
(a) If at any time or from time to time the Company shall determine to
register any of its equity securities, either for its own account or the account
of a security holder or holders (other than a registration of securities
relating solely to employee benefit plans or to effect a merger or other
reorganization), the Company will promptly give to Shareholder written notice
thereof and, upon the written request of Shareholder, include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Shares specified
in the written request made within 10 business days after receipt of such
written notice from the Company.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise Shareholder as a part of the written notice given to Shareholder. In
such event the right of any Shareholder to registration pursuant to this Section
6 shall be conditioned upon Shareholder's participation in such underwriting,
and the inclusion of Shares in the underwriting shall be limited to the extent
provided herein. Shareholder (together with the Company and the other holders
distributing their securities through such underwriting) shall enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 6, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may exclude some or all of the Shares or securities of other holders
of similar registration rights from such registration. The Company shall so
advise Shareholder and other stockholders distributing their securities through
such underwriting, and the number of Shares or securities of other holders of
similar registration rights that may be included in the registration and
underwriting, as determined by the managing underwriter, shall be allocated on a
pro rata basis. If Shareholder disapproves of the terms of any such
underwriting, Shareholder may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. Any securities excluded or withdrawn
7
<PAGE>
from such underwriting shall be withdrawn from such registration, and shall
continue to be subject to the terms of this Section.
(c) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 6 prior to the effectiveness of
such registration whether or not Shareholder has elected to include securities
in such registration.
(d) All expenses associated with the registration (including, without
limitation, registration, qualification and filing fees, printing expenses, blue
sky fees, and fees and disbursements of counsel and accountants for the Company)
shall be borne by the Company. Selling expenses, including underwriters'
discounts, shall be borne by Shareholder pro rata in proportion to the number of
securities being registered.
(e) In the case of each registration under this Section, the Company
will:
(i) prepare and file a registration statement with respect to
such securities and use its best efforts to cause such registration statement to
become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
(ii) furnish to Shareholder such reasonable number of copies of
the registration statement, preliminary prospectus, final prospectus and such
other documents as Shareholder may reasonably request in order to facilitate the
public offering of the Shares; and
(iii) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by Shareholder,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify as a foreign corporation or as a dealer in
securities or to file a general consent to service of process in any such states
or jurisdictions in which it has not already done so and except as may be
required by the Securities Act.
(f) The Company will indemnify Shareholder against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof), arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, or any violation by the Company of the Securities Act of 1933, the
Securities Exchange Act of 1934, state securities law or any rule or regulation
promulgated under such laws applicable to the Company in connection with any
such registration, qualification or compliance, and the Company will reimburse
Shareholder for any legal and any other expenses reasonably
8
<PAGE>
incurred, as such expenses are incurred, in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action,
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense arises out of or is based on
any untrue statement or omission, or alleged untrue statement or omission, made
in reliance upon and in conformity with written information furnished to the
Company by an instrument duly executed by Shareholder.
(g) Shareholder will, if Shares held by such Shareholder are included
in the securities as to which such registration is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a registration statement against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company, such
Shareholders, such directors, officers, persons, underwriters or control persons
for any legal or any other expenses reasonably incurred, as such expenses are
incurred, in connection with investigating or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by Shareholder and
stated to be specifically for use therein.
(h) Shareholder shall furnish to the Company such information
regarding Shareholder, the Shares held by Shareholder, and the distribution
proposed by Shareholder as the Company may request in writing and as shall be
required in connection with any registration referred to in this Agreement.
(i) The registration rights granted to Shareholder in this Section
shall expire at such time (if ever) as Shareholder is free to sell the Shares
under Rule 144 promulgated under the Securities Act (or any successor thereto)
without limitation as to volume or manner of sale restrictions.
7. Co-Sale Rights.
--------------
(a) In the event that Founder receives a bona fide offer from any
person to purchase any of Founder's Common Stock (the "Founder's Shares") in a
private transaction exempt from registration under the Securities Act, Founder
shall give Shareholder notice of his intention to sell Founder's Shares,
describing the amount of Founder's Shares proposed to be transferred, the
identity of the proposed transferee, and the price and terms upon which he
proposes to make such transfer (the "Transfer Notice").
9
<PAGE>
(b) Within fifteen (15) days after delivery of the Transfer Notice,
Shareholder may elect to sell up to Shareholder's pro rata share of the total
number of shares to be purchased by the transferee described in the Transfer
Notice by giving written notice thereof to Founder and tendering to Founder a
certificate representing the shares to be sold, properly endorsed for transfer,
with written instructions to transfer the shares to the transferee described in
the Transfer Notice upon receipt of payment for such shares from such transferee
for the benefit of Shareholder. Founder shall thereupon notify the transferee
of the co-sale arrangements hereunder, and instruct the transferee to deliver
payment for the shares to be purchased from Shareholder to Shareholder. For the
purpose of the co-sale right set forth in this Section, the pro rata share of
Shareholder shall be determined based on the number of Shares held by
Shareholder that are subject to co-sale rights, divided by the sum of (A) the
total number of shares of common stock held by all stockholders of the Company
(including Shareholder) holding similar co-sale rights plus (B) the number of
shares of common stock held by Founder at the date of the Transfer Notice
(assuming conversion of all convertible securities and exercise of all options
and warrants). The resulting percentage shall then be multiplied by the number
of Shares proposed to be purchased by the transferee to determine the actual
number of Shares eligible for sale by Shareholder.
(c) In the event Shareholder declines to exercise the co-sale right as
allowed by this Section, Founder may, within 90 days after the date on which
Shareholder's co-sale rights lapsed, transfer some or all of Founder's Shares
which were the subject of the Transfer Notice at a price and on terms no less
favorable to the transferee(s) than specified in the Transfer Notice. Founder's
Shares transferred in accordance with the provisions of this Section shall no
longer be subject to the restrictions on Founder's Shares forth in this Section.
After the expiration of said 90-day period, Founder shall not transfer any of
Founder's Shares without again complying with this Section.
(d) Any transfer of Founder's Shares without consideration to a family
member of Founder or a trust or custodian for the benefit of Founder or a family
member of Founder, and transfers pursuant to a pledge to secure indebtedness,
shall not be subject to the provisions of this Section, provided that the
transferee agrees in writing to be bound by the provisions of this Section with
respect to any subsequent transfer of such shares.
8. Management Rights. The Subsidiary has hired Shareholder as a
-----------------
Regional President (East) of the Subsidiary at an annual salary of $120,000 per
year. It is not anticipated that Shareholder will participate in any stock
option plan contemplated by the Company or the Subsidiary, but Shareholder
shall, in any event, be treated similarly to other members of senior management
in connection with stock options and bonuses. Shareholder will be responsible
for sales, marketing, customer service, and account development activities
between Washington, D.C. and New York City, and will report to the Chief
Executive Officer. The Company will cause Shareholder to be appointed as a
director of the Company, the Subsidiary, and any other subsidiary of the
Company, whether now existing or created or acquired in the future, with the
exception of PaeTec International, Inc. As long as Shareholder
10
<PAGE>
is an employee of the Company or the Subsidiary, and is desirous of the same, he
will be a management nominee for such directorships. The Company represents that
it has adopted standard indemnification and limitation of liability provisions
covering the activities of Shareholder in the above capacities. Directors and
officers insurance has or, in the near future, will be obtained by the Company.
9 Legend. Each certificate for Shares owned by Shareholder shall
------
bear the following legends:
(a) The shares represented by this certificate were
issued to the shareholder with restrictions. Neither
the shares, nor any interest in them, may be sold,
transferred, assigned, pledged, hypothecated, or
otherwise disposed of, if restricted pursuant to a
stock rights agreement between the shareholder and the
Company, a copy of which is on file at the office of
the Company in Fairport, New York.
(b) The shares represented by this certificate have not
been registered under the Securities Act of 1933, as
amended, and may not be transferred in the absence of
such registration unless the Company receives an
opinion of counsel reasonably acceptable to it stating
the such sale or transfer is exempt from registration.
With respect to Recapture Shares, however, Shareholder shall be entitled to a
certificate without the legend set forth in subparagraph (a), evidencing any
Shares as to which the Company's Purchase Option has expired.
10. Notices. All notices and communications under this Agreement
-------
shall be in writing and shall be given by personal delivery or by registered or
certified mail, return receipt requested, addressed to the respective residences
of Shareholder and Founder set forth below or to such other address as may be
designated by Shareholder or Founder, and to the principal office of the
Company. Notice shall be deemed given upon personal delivery or upon receipt.
11. Miscellaneous.
-------------
(a) Neither this Agreement, nor any action taken under it, shall be
construed as creating any limitation or restriction upon any right that
Subsidiary would otherwise have to terminate the employment of Shareholder at
any time for any reason.
(b) This Agreement may be modified or amended only upon the written
consent of all parties to the Agreement.
11
<PAGE>
(c) This Agreement shall be interpreted, construed, and enforced in
accordance with the laws of the State of New York.
(d) Neither this Agreement, nor any rights or obligations under it,
may be assigned by any party without the prior written consent of the other
parties.
(e) This Agreement shall benefit and be binding upon the parties and
their successors, heirs, executors, personal representatives, and assigns.
(f) This Agreement sets forth the entire understanding and agreement
of the parties with respect to its subject matter and supersedes all prior
letters, agreements, covenants, communications, understandings, representations,
or warranties, whether oral or written, by any officer, employee, or
representative of either party.
(g) The waiver of any provision of this Agreement, or of any breach of
this Agreement, shall not constitute a subsequent waiver of any provision or
breach.
(h) In the event that Shareholder is a prevailing party in any
litigation arising under or in connection with this Agreement, the Company shall
pay the reasonable attorneys fees and expenses incurred by Shareholder in
connection with the litigation.
(i) If, at any time, any of the provisions of this Agreement shall be
deemed by a court or other body having jurisdiction over this Agreement to be
illegal, invalid, or unenforceable, those provisions shall be deemed severed
from this Agreement. The remaining provisions of this Agreement shall be valid
and binding as if this Agreement had never contained any illegal, invalid, or
otherwise unenforceable provisions, without the requirement that the amendment
be recorded in a writing signed by the parties.
The parties' assent to the terms of this Agreement is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
----------------------------------
Title: President
12
<PAGE>
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
--------------------------------
Title: President
Address: /s/ Bradford M. Bono
-----------------------------------
Bradford M. Bono
5 Bromley Court
Voorhees, New Jersey 08043
Address: /s/ Arunas A. Chesonis
------------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
13
<PAGE>
Exhibit 10.9.2
FIRST AMENDMENT TO STOCK RIGHTS AGREEMENT
This is the First Amendment to Stock Rights Agreement (the
"Amendment"), dated August 13, 1998, between BRADFORD M. BONO ("Shareholder"),
PAETEC CORP., a Delaware corporation with its principal place of business at 290
Woodcliff Drive, Fairport, New York 14450 (the "Company"), PAETEC
COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary of the
Company with its principal place of business at 290 Woodcliff Drive, Fairport,
New York 14450 ("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. Shareholder holds 500,000 shares of Class A common stock of the
Company, subject to certain restrictions contained in a Stock Rights Agreement,
dated July 17, 1998, among the parties (the "Agreement").
B. The Company has now offered to issue to Shareholder 30,000 shares
of Class B common stock at a purchase price of $.833 per share, subject to
certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Amendment for the purpose of confirming Shareholder's equity interest in the
Class B common stock of the Company and outlining the rights of Shareholder and
the restrictions imposed by the Company with respect to the Class B common stock
to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares. The Company confirms its offer to issue
------------------
30,000 shares of Class B common stock (the "Class B Shares") to Shareholder at a
price of $.833 per share, payable in full upon issuance of the Class B Shares.
A stock certificate evidencing the Class B Shares shall be issued in the name of
Shareholder upon receipt of this executed Amendment and payment in full of the
purchase price.
2. Incorporation of Agreement by Reference. All of the provisions of
---------------------------------------
the Agreement that apply to the Recapture Shares (as defined in the Agreement)
shall apply to the Class B Shares issued to Shareholder pursuant to this
Amendment, except to the extent that a provision of this Amendment expressly
supersedes any provision of the Agreement. Additionally, to the extent that any
provision of this Amendment contradicts any provision contained in the Agreement
with respect to the Recapture Shares or Excluded Shares (as defined in the
Agreement), the provision of this Amendment shall control.
<PAGE>
3. Repurchase Price. The Purchase Option of the Company, described
----------------
in Section 3 of the Agreement, shall apply to the Class B Shares. In the event
that the Company exercises its Purchase Option with respect to all or a portion
of the Class B Shares, however, the price for all Class B Shares repurchased by
the Company pursuant to the Purchase Option, described in Section 4 of the
Agreement, shall be the fair market value of the Class B Shares as of the date
of the exercise of the Purchase Option by the Company. "Fair market value"
shall be determined by the accounting firm then retained by the Company, which
shall promptly perform an appraisal. The determination shall be made in
accordance with generally accepted accounting principles and shall be binding on
all parties.
4. Stockholders' Agreement and Proxy. Concurrently with the
---------------------------------
execution of this Amendment and the issuance of the Class B Shares, Shareholder
is executing and delivering a Stockholders' Agreement and proxy appointing
Arunas A. Chesonis Shareholder's attorney-in-fact and proxy to vote all Class B
Shares now or hereafter owned by Shareholder at any meeting of shareholders,
regular or special, whenever called, and for whatever purpose. Copies of the
Stockholders' Agreement and proxy shall be filed with the Secretary of the
Company, and the proxy shall be registered in the stock books of the Company.
Any transfer of the Class B Shares is subject to the terms of the Stockholders'
Agreement and proxy.
5. Permitted Transfer of Recapture Shares and Class B Shares. The
---------------------------------------------------------
restrictions on transfer of Shareholder's Recapture Shares (as defined in the
Agreement), set forth in Section 2 of the Agreement, shall apply equally to the
Class B Shares; provided, however, that those restrictions are modified, with
respect to both the Recapture Shares and Class B Shares, to permit Shareholder
to sell, assign, or transfer any or all of the Recapture Shares or Class B
Shares held by Shareholder to the following:
(a) Shareholder's spouse, parent(s), siblings, or natural or
adopted lineal descendants, or the spouses of Shareholder's parent(s), siblings,
or lineal descendants (collectively, together with the Shareholder, referred to
as "Shareholder's Family Members");
(b) the trustee of a trust (including a voting trust) principally
for the benefit of Shareholder and/or one or more of Shareholder's Family
Members; provided that the trust may also grant a general or special power of
appointment to one or more of Shareholder's Family Members and may permit trust
assets to be used to pay taxes, legacies, and other obligations of the trust or
of the estates of one or more of Shareholder's Family Members payable by reason
of the death of any of Shareholder's Family Members; and
(c) a corporation, partnership, or limited liability company, a
majority of the voting equity interest in which is owned by Shareholder or by
one or more of Shareholder's transferees under subparagraphs (a) or (b) of this
Section.
2
<PAGE>
6. Legends. Each certificate for Class B Shares owned by Shareholder
-------
shall bear the following legends:
(a) The shares represented by this certificate were issued to
the shareholder with restrictions. Neither the shares, nor any
interest in them, may be sold, transferred, assigned, pledged,
hypothecated, or otherwise disposed of, unless that transfer is
expressly permitted by a stock rights agreement, including any
amendment thereto, between the shareholder and the Company, a copy of
which is on file at the office of the Company in Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be transferred in the absence of such registration unless the Company
receives an opinion of counsel reasonably acceptable to it stating the
such sale or transfer is exempt from registration.
(c) The shares represented by this certificate are subject to
a Stockholders' Agreement and to a proxy in favor of Arunas A.
Chesonis, a copy of which is on file with the Company. Any transferee
of the shares represented by this certificate shall take the shares
subject to the terms of the Stockholders' Agreement and proxy.
With respect to Class B Shares that are subject to the Company's Purchase
Option, described in Section 3 of the Agreement, however, Shareholder shall be
entitled to a certificate without the legend set forth in subparagraph (a),
evidencing any Class B Shares as to which the Purchase Option has expired.
7. Modification of Recital B. of Agreement. Recital B. of the
---------------------------------------
Agreement is modified to read as follows:
B. Shareholder is also one of the founding Shareholders
of the Company and is an employee of the Subsidiary. In order to
induce Shareholder to leave his former employer and join the
Subsidiary as an employee, the Company previously offered to issue to
Shareholder 250,000 shares of Class A common stock and 250,000 shares
of Class B common stock. After negotiation, the Company offered to
issue to Shareholder 500,000 shares of Class A common stock at a
purchase price of $.40 per share, subject to certain restrictions.
3
<PAGE>
The parties' assent to the terms of this Amendment is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
----------------------------------
Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
----------------------------------
Title: President
Address: /s/ Bradford M. Bono
-------------------------------------
Bradford M. Bono
5 Bromley Court
Voorhees, New Jersey 08043
Address: /s/ Arunas A. Chesonis
-------------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
4
<PAGE>
Exhibit 10.9.3
SECOND AMENDMENT TO STOCK RIGHTS AGREEMENT
This is the Second Amendment to Stock Rights Agreement (the
"Amendment"), dated September 30, 1998, between BRADFORD M. BONO
("Shareholder"), PAETEC CORP., a Delaware corporation with its principal place
of business at 290 Woodcliff Drive, Fairport, New York 14450 (the "Company"),
PAETEC COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary
of the Company with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 ("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. Shareholder holds 500,000 shares of Class A common stock of the
Company, subject to certain restrictions contained in a Stock Rights Agreement,
dated July 17, 1998, among the parties (the "Agreement"). Shareholder also
holds 30,000 shares of Class B common stock of the Company, subject to certain
restrictions contained in the Agreement and in the First Amendment to Stock
Rights Agreement dated August 13, 1998 (the "First Amendment").
B. The Company has now offered to issue to Shareholder 30,000
additional shares of Class A common stock at a purchase price of $2.50 per
share, subject to certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Amendment for the purpose of confirming Shareholder's additional equity interest
in the Class A common stock of the Company and outlining the rights of
Shareholder and the restrictions imposed by the Company with respect to the
additional Class A common stock to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares. The Company confirms its offer to issue
------------------
30,000 shares of Class A common stock (the "Additional Class A Shares") to
Shareholder at a price of $2.50 per share, payable in full upon issuance of the
Additional Class A Shares. A stock certificate evidencing the Additional Class
A Shares shall be issued in the name of Shareholder upon receipt of this
executed Amendment and payment in full of the purchase price.
2. Incorporation of Agreement and First Amendment by Reference. All
-----------------------------------------------------------
of the provisions of the Agreement shall apply to the Additional Class A Shares
issued to
<PAGE>
Shareholder pursuant to this Amendment, except to the extent that a provision of
this Amendment expressly supersedes any provision of the Agreement or First
Amendment. Sections 3 and 5 of the First Amendment, which modify Sections 4 and
2, respectively, of the Agreement, shall also apply to the Additional Class A
Shares.
3. Legends. Each certificate for Additional Class A Shares owned by
-------
Shareholder shall bear the following legends:
(a) The shares represented by this certificate were issued to the
shareholder with restrictions. Neither the shares, nor any interest in
them, may be sold, transferred, assigned, pledged, hypothecated, or
otherwise disposed of, unless that transfer is expressly permitted by
a stock rights agreement, including any amendment thereto, between the
shareholder and the Company, a copy of which is on file at the office
of the Company in Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be transferred in the absence of such registration unless the Company
receives an opinion of counsel reasonably acceptable to it stating the
such sale or transfer is exempt from registration.
With respect to Additional Class A Shares that are subject to the Company's
Purchase Option, described in Section 3 of the Agreement, however, Shareholder
shall be entitled to a certificate without the legend set forth in subparagraph
(a), evidencing any Additional Class A Shares as to which the Purchase Option
has expired.
The parties' assent to the terms of this Amendment is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
----------------------------------
Title: President
2
<PAGE>
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
---------------------------------
Title: President
Address: /s/ Bradford M. Bono
------------------------------------
Bradford M. Bono
5 Bromley Court
Voorhees, New Jersey 08043
Address: /s/ Arunas A. Chesonis
------------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
3
<PAGE>
Exhibit 10.9.4
THIRD AMENDMENT TO STOCK RIGHTS AGREEMENT
THIS THIRD AMENDMENT TO STOCK RIGHTS AGREEMENT (this "Amendment") is
made as of this 4th day of February 2000 by and among Bradford M. Bono (the
"Stockholder"), PaeTec Corp., a Delaware corporation (the "Company"), PaeTec
Communications, Inc., a Delaware corporation and wholly-owned subsidiary of the
Company (the "Subsidiary"), and Arunas A. Chesonis ("Mr. Chesonis").
RECITALS
--------
A. The Company, the Subsidiary, the Stockholder and Mr. Chesonis are
parties to a Stock Rights Agreement dated as of July 17, 1998 (the "Stock Rights
Agreement") and amended as of August 13, 1998 ("Amendment No. 1") and September
30, 1998 ("Amendment No. 2").
B. The Board of Directors of the Company has authorized the issuance
and sale (the "Series A Preferred Stock Placement") of 134,000 shares of a new
series of preferred stock of the Company, designated the Series A Convertible
Preferred Stock, to the purchasers (the "Purchasers") listed on the Schedule of
Purchasers to, and pursuant to the terms and conditions of, an Equity Purchase
Agreement (the "Purchase Agreement").
C. As a condition to the consummation of the Series A Preferred Stock
Placement, the Purchasers have required that the Company, the Subsidiary, the
Stockholder and Mr. Chesonis further amend the Stock Rights Agreement (i) to
provide that all Class B Shares (as defined in the Stock Rights Agreement) shall
automatically convert into shares of Class A common stock, par value $0.01 per
share ("Class A Common Stock"), of the Company in specified circumstances and
(ii) to clarify that to the extent any securities are required to be excluded
from a registration pursuant to the "cut-back" provisions of the piggyback
registration rights granted to the Stockholder pursuant to the Stock Rights
Agreement, the securities to be included in such registration shall be
determined on a pro rata basis among the holders of shares participating in the
--- ----
offering pursuant to registration rights granted by the Company, based on the
number of shares of common stock requested to be included by each such holder in
such registration.
D. The parties to the Stock Rights Agreement desire to amend the
Stock Rights Agreement to induce the Purchasers to consummate of the Series A
Preferred Stock Placement.
<PAGE>
AGREEMENT
---------
1. Defined Terms. All capitalized terms used in this Amendment
-------------
without definition shall have the meanings given to such terms in the Stock
Rights Agreement, as amended.
2. Automatic Conversion of Class B Shares. Notwithstanding
--------------------------------------
anything in the Stock Rights Agreement, Amendment No. 1 or Amendment No. 2 to
the contrary, the parties agree that, as provided in the Company's certificate
of incorporation as amended in connection with the Series A Preferred Stock
Placement (the "Restated Certificate of Incorporation"), each Class B Share
subject to the Stock Rights Agreement (as amended) shall automatically convert
into one share of Class A Common Stock upon the date (the "Termination Date")
that the Stockholder ceases to be employed by the Company or any subsidiary
thereof unless, at the Termination Date, Mr. Chesonis shall (i) be the Chairman
of the Board or Chief Executive Officer of the Company, (ii) be the beneficial
owner of shares of Class B common stock of the Company and (iii) have the power
pursuant to a proxy to vote the Class B Shares on all matters on which such
Class B Shares are entitled to vote, provided Mr. Chesonis personally exercises
such power and does not delegate the exercise thereof to any other person. If
subsequent to the Termination Date, any condition specified in clause (i), (ii)
or (iii) in the preceding sentence shall cease to be in effect, each Class B
Share shall immediately be converted into one share of Class A Common Stock.
All other terms and conditions of the Stock Rights Agreement, as amended, shall
continue to apply to such shares of Class A Common Stock upon such conversion.
In the event of any conflict between the provisions of this Section 2 and the
provisions of Article V of the Restated Certificate of Incorporation with
respect to such mandatory conversion, which shall include, without limitation,
any additional mandatory conversion events specified in such Article V, the
provisions of Article V of the Restated Certificate of Incorporation shall
control.
3. Amendment of Section 6(b). The fourth and fifth sentences of
-------------------------
Section 6(b) of the Stock Rights Agreement are hereby deleted and replaced and
superseded in their entirety with the following sentence:
"Notwithstanding any other provision of this Section 6, if the managing
underwriter advises in writing the Company and the Stockholder that
marketing factors require a limitation of the number of shares of common
stock to be underwritten and sold in such offering, the managing
underwriter may exclude some or all of the shares of common stock to be
sold in such offering from such registration, and the shares to be included
in such registration shall be allocated pro rata among the holders of
--- ----
shares participating in the offering pursuant to registration rights
granted by the Company (including demand and
2
<PAGE>
piggyback registration rights), based on the number of shares of common
stock requested to be included by each holder in such registration."
4. Binding Effect. This Amendment shall be binding upon and inure to
--------------
the benefit of the parties hereto and their heirs, executors, administrators,
successors and assigns.
5. Governing Law. This Amendment shall be governed by, and construed
-------------
and enforced in accordance with, the laws of the State of New York, except that
if any provision of this Amendment or any part of any such provision would be
illegal, invalid or enforceable under such laws in connection with a suit or
proceeding validly instituted in another jurisdiction, then the laws of such
other jurisdiction shall govern insofar as is necessary to sustain the legality,
validity or enforceability of such provision or any part of such provision.
6. Captions. Captions to the Sections in this Amendment are for the
--------
convenience of the parties only and shall not affect the meaning or
interpretation of this Amendment.
7. Enforceability and Interpretation. It is the intention of the
---------------------------------
parties to this Amendment that the terms and provisions contained in this
Amendment shall be enforceable to the fullest extent permitted by law. If any
term or provision of this Amendment or the application thereof to any Person or
circumstance is construed to be illegal, invalid or unenforceable, in whole or
in part, then such term or provision shall be construed in such a manner as to
permit its enforceability under applicable law to the fullest extent permitted
by such law. In any case, the remaining terms and provisions of this Amendment
or the application thereof to any Person or circumstance, except those terms and
provisions which have been held illegal, invalid or unenforceable, shall remain
in full force and effect.
8. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9. Additional Documents. Each party hereto agrees to execute any and
--------------------
all documents, instruments, certificates and communications deemed to be
necessary or advisable by the Company to effectuate the purposes of this
Amendment.
[signature page follows]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment with full force and effect as of the day and year first written
above.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
--------------------------------
Its: CEO, Chairman and President
--------------------------------
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
--------------------------------
Its: CEO, Chairman and President
--------------------------------
/s/ Arunas A. Chesonis
-------------------------------------
Arunas A. Chesonis
/s/ Bradford Bono
-------------------------------------
Bradford Bono
4
<PAGE>
Exhibit 10.10.1
STOCK RIGHTS AGREEMENT
This is a Stock Rights Agreement (the "Agreement"), dated July 17,
1998, between EDWARD J. BUTLER, JR. ("Shareholder"), PAETEC CORP., a Delaware
corporation with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 (the "Company"), PAETEC COMMUNICATIONS, INC., a
Delaware corporation and wholly-owned subsidiary of the Company with its
principal place of business at 290 Woodcliff Drive, Fairport, New York 14450
("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. The Company is a Delaware corporation having 110,000,000 shares
of authorized capital stock, 10,000,000 of which are designated preferred stock,
75,000,000 of which are designated Class A common and 25,000,000 of which are
designated Class B common. Founder is one of the founding shareholders of the
Company.
B. Shareholder is also one of the founding Shareholders of the
Company and is an employee of the Subsidiary. In order to induce Shareholder to
leave his former employer and join the Subsidiary as an employee, the Company
previously offered to issue to Shareholder 250,000 shares of Class A common
stock at a purchase price of $.40 per share, subject to certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Agreement for the purpose of confirming Shareholder's equity interest in the
Company and outlining the rights of and restrictions imposed by the Company with
respect to the shares of stock held by the Shareholder.
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares.
------------------
(a) The Company confirms its previous offer to issue 250,000 shares
of Class A common stock (the "Shares") to Shareholder at a price of $.40 per
share payable in full upon issuance of the Shares. A stock certificate
evidencing the Shares shall be issued in the name of Shareholder upon receipt of
this executed Agreement and payment in full of the purchase price.
(b) In order to induce the Company to issue the Shares, Shareholder
represents and warrants to the Company as follows:
<PAGE>
(i) Shareholder (A) understands that an investment in the
Shares is speculative due to factors including (but not limited to) the start-up
nature of the Company and the risk of economic loss from the operations of the
Company, but believes that such an investment is suitable for Shareholder based
upon Shareholder's financial needs, (B) can withstand a complete loss of the
investment in the Shares, and (C) has the net worth to undertake these risks.
(ii) Shareholder is acquiring the Shares for the personal
account of Shareholder, with no present intention of reselling, distributing or
otherwise transferring the Shares or any portion of the Shares to anyone else.
(iii) Shareholder understands and acknowledges that the Shares
are being offered and sold under one or more exemptions provided in the
Securities Act of 1933, as amended (the "Securities Act"), Regulation D
promulgated thereunder and applicable New York State securities laws, and that
this transaction has not been reviewed or passed upon by the United States
Securities and Exchange Commission, the New York State Attorney General, or any
other federal or state agency.
(iv) Shareholder realizes that Shareholder must bear the
economic risk of investment for an indefinite period of time because (A) the
Shares have not been registered under the Securities Act and cannot be resold by
Shareholder unless they are subsequently registered under the Securities Act or
an exemption from registration is available, (B) the transferability of the
Shares is restricted by the terms of this Agreement, and (C) there currently is
no public market for the Shares, and Shareholder may not be able to liquidate
the investment in the Shares in the event of an emergency. Shareholder has
adequate means of providing for Shareholder's current financial needs and
personal contingencies, and has no need for liquidity of investment with respect
to the Shares.
(v) Shareholder believes that Shareholder, either alone or
together with the assistance of professional advisor(s), has knowledge and
experience in business and financial matters sufficient to make Shareholder
capable of evaluating the merits and risks of an investment in the Shares.
(vi) Shareholder is fully familiar with the business of the
Company and its present and proposed operations. Shareholder has been given
reasonable opportunity to ask representatives of the Company questions
concerning the Company and making an investment in the Shares. Shareholder has
obtained sufficient information to evaluate the merits and risks of an
investment in the Shares.
(vii) Shareholder confirms that Shareholder has been advised to
rely on professional accounting, tax, legal and financial advisers with respect
to an investment in the Shares and has obtained, to the extent Shareholder deems
it necessary, professional advice
2
<PAGE>
with respect to the risks inherent in an investment in the Shares and the
suitability of an investment in the Shares in light of Shareholder's financial
condition and investment needs.
2. Restriction on Transfer of Shares. Shareholder may not sell,
---------------------------------
transfer, pledge, assign, transfer, or otherwise encumber or dispose of, in any
manner or by any means, any Shares that are subject to the Company's Purchase
Option described in Section 3 of this Agreement. This restriction on transfer
does not apply to any Shares that, pursuant to Section 3, no longer are subject
to the Company's Purchase Option or to any additional shares of capital stock of
the Company that Shareholder might acquire in the future. Notwithstanding the
foregoing, Shareholder may pledge the Shares to Founder as collateral security
for a promissory note dated the date hereof, provided that the Shares so pledged
shall continue to be subject to the Company's Purchase Option described in
Section 3 below.
3. Repurchase of Shares upon Termination of Employment with
--------------------------------------------------------
Subsidiary. Upon termination of Shareholder's employment with the Subsidiary,
- ----------
the Company shall have an option, but shall not be obligated, to repurchase (the
"Purchase Option") from Shareholder or Shareholder's personal representative all
or a portion of Shareholder's Shares, as set forth in the following
subparagraphs.
(a) If Shareholder's employment with the Subsidiary terminates due to
voluntary separation or dismissal for Cause (as defined below), the number of
Shares that are subject to the Company's Purchase Option shall be determined as
follows:
(i) The Company shall have the option to repurchase up to 100%
of the Shares should Shareholder's employment terminate at any time prior to the
first anniversary of Shareholder's employment with the Subsidiary.
(ii) The Company shall have the option to repurchase up to 60%
of the Shares should Shareholder's employment terminate on the first anniversary
date, or at any time between the first and second anniversary dates, of
Shareholder's employment with the Subsidiary.
(iii) The Company shall have the option to repurchase up to 40%
of the Shares should Shareholder's employment terminate on the second
anniversary date, or at any time between the second and third anniversary dates,
of Shareholder's employment with the Subsidiary.
(iv) The Company shall have the option to repurchase up to 20%
of the Shares should Shareholder's employment terminate on the third anniversary
date, or at any time between the third and fourth anniversary dates, of
Shareholder's employment with the Subsidiary.
3
<PAGE>
(b) If Shareholder's employment with the Subsidiary terminates because
of Shareholder's death or disability, Shareholder or Shareholder's personal
representative may negotiate a transfer of all or a portion of Shareholder's
Shares back to the Company at any time. With respect to Shares that were
subject to the Company's Purchase Option and that are not transferred back to
the Company, the transfer restrictions set forth in Section 2 above shall apply
to the same extent that they would have applied if Shareholder's employment had
continued. This restriction on transfer does not apply to any Shares that would
no longer have been subject to the Company's Purchase Option, or to any
additional shares of capital stock of the Company that Shareholder might acquire
in the future.
(c) In the event that Shareholder's employment with the Subsidiary
terminates for any reason not addressed in subparagraphs (a) and (b) above, the
Company's Purchase Option, together with all transfer restrictions set forth in
Section 2, shall fully expire effective as of the date of termination.
(d) The Company's Purchase Option shall fully expire on the fourth
anniversary of Shareholder's employment with the Subsidiary. Shares as to
which the Company's Purchase Option has expired are no longer subject to the
transfer restrictions set forth in Section 2.
(e) To exercise its Purchase Option, the Company must notify
Shareholder or Shareholder's personal representative of its intention to
exercise its Purchase Option within 60 days after the date of termination of
Shareholder's employment with the Subsidiary. Should the Company fail to
exercise the Purchase Option within such 60-day period, the Shares shall no
longer be subject to the transfer restrictions set forth in Section 2.
(f) In the event of a consolidation or merger of the Company with or
into any other person or entity, a sale of all or substantially all of the
assets of the Company to another person or entity, or an acquisition of more
than 50% of the capital stock of the Company by another person or entity, the
Company's Purchase Option shall be terminated as of the effective date of the
transfer. Notwithstanding the foregoing, the Company's Purchase Option shall
not be terminated or in any other way affected by an initial public offering of
stock by the Company.
4. Repurchase Price and Payment Terms. The price for all Shares
----------------------------------
purchased by the Company pursuant to the Purchase Option shall be $.40 per
Share. Payment shall be made in full for all repurchased Shares within 30 days
after the date on which the Company delivers notice of its intention to exercise
the Purchase Option. Upon payment, Shareholder or Shareholder's personal
representative shall deliver all stock certificates for repurchased Shares,
properly endorsed in blank, to the Company or its designee.
4
<PAGE>
5. Non-Competition.
---------------
(a) For a period of one year after termination of Shareholder's
employment with the Subsidiary (regardless of the reason for termination),
Shareholder shall not, directly or indirectly:
(i) solicit or serve clients or customers of the Company or any
affiliate of the Company (including the Subsidiary), whether for Shareholder's
own account or as an employee, shareholder, partner, officer, member, manager,
director, consultant, or other representative of any third party;
(ii) direct any business from, or enter into competition with,
the Company or any affiliate of the Company (including the Subsidiary) in any
line of business in which the Company or such affiliate was conducting
operations during Shareholder's employment; or
(iii) serve as an employee, shareholder, partner, officer,
member, manager, director, consultant or other representative of any third party
which engages in any line of business competitive with the Company or any
affiliate of the Company (including the Subsidiary) anywhere in the world.
Shareholder acknowledges that the foregoing limitations are reasonable in time
and scope and agrees not to raise any objection to the reasonableness of the
foregoing in any action or proceeding to enforce the terms of this Section.
(b) As consideration for the non-competition covenant set forth in
subparagraph (a) above, the Subsidiary agrees that, if Shareholder's employment
is terminated by the Subsidiary without Cause, Subsidiary shall pay Shareholder
or Shareholder's personal representative during the one-year period in which the
covenant is in effect an amount equal to the annualized base salary paid to
Shareholder immediately prior to termination of Shareholder's employment.
Payment shall be made in accordance with the Subsidiary's customary payroll
practices. Continued payment of Shareholder's base salary under this
subparagraph (b) shall not be made if termination of Shareholder's employment is
due to Shareholder's death, disability, voluntary resignation or withdrawal or
termination for "Cause" (as defined below).
(c) As additional consideration for the non-competition covenant set
forth in subparagraph (a) above, the Company agrees that (i) in the event
Shareholder's employment terminates due to the death or disability of
Shareholder or is terminated by Subsidiary without Cause, the one-year period
during which the non-competition covenant is to be in effect shall be counted as
a year of employment with Subsidiary for purposes of determining the percentage
of Shares that is subject to the Company's Purchase Option, and (ii) in the
event Shareholder's employment is terminated by the Subsidiary for Cause or
terminates due to the
5
<PAGE>
voluntary resignation or withdrawal of Shareholder, the Company shall have the
option of (A) waiving the non-competition covenant set forth in subparagraph (a)
above or (B) counting the one-year period during which the non-competition
covenant is to be in effect as a year of employment for purposes of determining
the percentage of Shares that is subject to the Company's Purchase Option.
(d) (i) Should Shareholder violate the terms of the non-competition
covenant set forth in subparagraph (a), the Company, the Company shall notify
Shareholder in writing of the alleged violation that constitutes a breach of
this Agreement, and Shareholder shall have 10 business days to cure the breach.
If the breach is not cured to the satisfaction of the Company, then in addition
to any other remedies available under law, the Company may (1) discontinue any
payments being made to Shareholder pursuant to subparagraph (b) hereof, and (2)
exercise its Purchase Option with respect to any additional Shares that would
have been subject to the Purchase Option had the one-year period of the non-
competition covenant not been counted as an additional year of employment
pursuant to the terms of subparagraph (c) hereof. Exercise of the Purchase
Option with respect to such additional Shares shall be made in accordance with
the terms of Sections 3 and 4 hereof, except that the Company may exercise the
Purchase Option at any time within 60 days after the Company first becomes aware
of Shareholder's violation of subparagraph (a).
(ii) In the event that the Company fails to make any payment due
to Shareholder pursuant to Section 5(b) above, Shareholder shall notify the
Company in writing of the alleged failure to make payment that constitutes a
breach of this Agreement, and the Company shall have 5 business days to cure the
breach. If the breach is not cured to the satisfaction of Shareholder, then the
non-competition covenant set forth in subparagraph (a) shall be null and void
and of no further force and effect.
(e) For purposes of this Section 5, termination for "Cause" shall
mean termination of Shareholder's employment with the Subsidiary due to: (i)
material failure or refusal to perform the duties assigned to Shareholder, (ii)
refusal of Shareholder to follow the reasonable directives of the Board of
Directors or Chief Executive Officer of the Subsidiary, (iii) conviction of a
felony, (iv) misappropriation of any funds or property of the Company or any
affiliate of the Company (including the Subsidiary), or (v) commission of any
act which could materially injure the business or reputation of, or materially
adversely affect the interests of Company or any affiliate of the Company
(including the Subsidiary).
(f) Shareholder acknowledges that his/her services are unique and
extraordinary and are not readily replaceable, and hereby expressly agrees that,
in the event of a violation of the non-competition covenant set forth in
subparagraph (a), the Company and its affiliates (including Subsidiary) will be
irreparably harmed and the remedy of damages or other remedy at law will be
inadequate. Therefore, Shareholder agrees that, in the event of a threatened or
actual violation of the non-competition covenant, the Company shall be entitled
to obtain from any court of competent jurisdiction, an injunction restraining
Shareholder from
6
<PAGE>
committing the violation, without the necessity of proving actual damage and in
addition to any other relief available under this Agreement or at law.
6. Piggy-Back Registration Rights.
------------------------------
(a) If at any time or from time to time the Company shall determine
to register any of its equity securities, either for its own account or the
account of a security holder or holders (other than a registration of securities
relating solely to employee benefit plans or to effect a merger or other
reorganization), the Company will promptly give to Shareholder written notice
thereof and, upon the written request of Shareholder, include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Shares specified
in the written request made within 10 business days after receipt of such
written notice from the Company.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise Shareholder as a part of the written notice given to Shareholder. In
such event the right of any Shareholder to registration pursuant to this Section
6 shall be conditioned upon Shareholder's participation in such underwriting,
and the inclusion of Shares in the underwriting shall be limited to the extent
provided herein. Shareholder (together with the Company and the other holders
distributing their securities through such underwriting) shall enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 6, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may exclude some or all of the Shares or securities of other holders
of similar registration rights from such registration. The Company shall so
advise Shareholder and other stockholders distributing their securities through
such underwriting, and the number of Shares or securities of other holders of
similar registration rights that may be included in the registration and
underwriting, as determined by the managing underwriter, shall be allocated on a
pro rata basis. If Shareholder disapproves of the terms of any such
underwriting, Shareholder may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. Any securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration, and shall
continue to be subject to the terms of this Section.
(c) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 6 prior to the effectiveness of
such registration whether or not Shareholder has elected to include securities
in such registration.
(d) All expenses associated with the registration (including, without
limitation, registration, qualification and filing fees, printing expenses, blue
sky fees, and fees and disbursements of counsel and accountants for the Company)
shall be borne by the
7
<PAGE>
Company. Selling expenses, including underwriters' discounts, shall be borne by
Shareholder pro rata in proportion to the number of securities being registered.
(e) In the case of each registration under this Section, the Company
will:
(i) prepare and file a registration statement with respect to
such securities and use its best efforts to cause such registration statement to
become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
(ii) furnish to Shareholder such reasonable number of copies of
the registration statement, preliminary prospectus, final prospectus and such
other documents as Shareholder may reasonably request in order to facilitate the
public offering of the Shares; and
(iii) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by Shareholder,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify as a foreign corporation or as a dealer in
securities or to file a general consent to service of process in any such states
or jurisdictions in which it has not already done so and except as may be
required by the Securities Act.
(f) The Company will indemnify Shareholder against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof), arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, or any violation by the Company of the Securities Act of 1933, the
Securities Exchange Act of 1934, state securities law or any rule or regulation
promulgated under such laws applicable to the Company in connection with any
such registration, qualification or compliance, and the Company will reimburse
Shareholder for any legal and any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, provided that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission, or alleged untrue statement or omission, made in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by Shareholder.
(g) Shareholder will, if Shares held by such Shareholder are included
in the securities as to which such registration is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a
8
<PAGE>
registration statement against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, such Shareholders, such directors, officers, persons, underwriters
or control persons for any legal or any other expenses reasonably incurred, as
such expenses are incurred, in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by Shareholder and stated to be specifically for use therein.
(h) Shareholder shall furnish to the Company such information
regarding Shareholder, the Shares held by Shareholder, and the distribution
proposed by Shareholder as the Company may request in writing and as shall be
required in connection with any registration referred to in this Agreement.
(i) The registration rights granted to Shareholder in this Section
shall expire at such time (if ever) as Shareholder is free to sell the Shares
under Rule 144 promulgated under the Securities Act (or any successor thereto)
without limitation as to volume or manner of sale restrictions.
7. Co-Sale Rights.
--------------
(a) In the event that Founder receives a bona fide offer from any
person to purchase any of Founder's Common Stock (the "Founder's Shares") in a
private transaction exempt from registration under the Securities Act, Founder
shall give Shareholder notice of his intention to sell Founder's Shares,
describing the amount of Founder's Shares proposed to be transferred, the
identity of the proposed transferee, and the price and terms upon which he
proposes to make such transfer (the "Transfer Notice").
(b) Within fifteen (15) days after delivery of the Transfer Notice,
Shareholder may elect to sell up to Shareholder's pro rata share of the total
number of shares to be purchased by the transferee described in the Transfer
Notice by giving written notice thereof to Founder and tendering to Founder a
certificate representing the shares to be sold, properly endorsed for transfer,
with written instructions to transfer the shares to the transferee described in
the Transfer Notice upon receipt of payment for such shares from such transferee
for the benefit of Shareholder. Founder shall thereupon notify the transferee
of the co-sale arrangements hereunder, and instruct the transferee to deliver
payment for the shares to be purchased from Shareholder to Shareholder. For the
purpose of the co-sale right set forth in this Section, the pro rata share of
Shareholder shall be determined based on the number of
9
<PAGE>
Shares held by Shareholder that are subject to co-sale rights, divided by the
sum of (A) the total number of shares of common stock held by all stockholders
of the Company (including Shareholder) holding similar co-sale rights plus (B)
the number of shares of common stock held by Founder at the date of the Transfer
Notice (assuming conversion of all convertible securities and exercise of all
options and warrants). The resulting percentage shall then be multiplied by the
number of Shares proposed to be purchased by the transferee to determine the
actual number of Shares eligible for sale by Shareholder.
(c) In the event Shareholder declines to exercise the co-sale right
as allowed by this Section, Founder may, within 90 days after the date on which
Shareholder's co-sale rights lapsed, transfer some or all of Founder's Shares
which were the subject of the Transfer Notice at a price and on terms no less
favorable to the transferee(s) than specified in the Transfer Notice. Founder's
Shares transferred in accordance with the provisions of this Section shall no
longer be subject to the restrictions on Founder's Shares forth in this Section.
After the expiration of said 90-day period, Founder shall not transfer any of
Founder's Shares without again complying with this Section.
(d) Any transfer of Founder's Shares without consideration to a
family member of Founder or a trust or custodian for the benefit of Founder or a
family member of Founder, and transfers pursuant to a pledge to secure
indebtedness, shall not be subject to the provisions of this Section, provided
that the transferee agrees in writing to be bound by the provisions of this
Section with respect to any subsequent transfer of such shares.
8. Legend. Each certificate for Shares owned by Shareholder shall
------
bear the following legends:
(a) The shares represented by this certificate were issued
to the shareholder with restrictions. Neither the shares,
nor any interest in them, may be sold, transferred, assigned,
pledged, hypothecated, or otherwise disposed of, if restricted
pursuant to a stock rights agreement between the shareholder
and the Company, a copy of which is on file at the office of
the Company in Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be transferred in the absence of such registration
unless the Company receives an opinion of counsel reasonably
acceptable to it stating the such sale or transfer is exempt
from registration.
With respect to Shares that are subject to the Purchase Option described in
Section 3 of this Agreement, however, Shareholder shall be entitled to a
certificate without the legend set forth
10
<PAGE>
in subparagraph (a), evidencing any Shares as to which the Company's Purchase
Option has expired.
9. Notices. All notices and communications under this Agreement
-------
shall be in writing and shall be given by personal delivery or by registered or
certified mail, return receipt requested, addressed to the respective residences
of Shareholder and Founder set forth below or to such other address as may be
designated by Shareholder or Founder, and to the principal office of the
Company. Notice shall be deemed given upon personal delivery or upon receipt.
10. Miscellaneous.
-------------
(a) Neither this Agreement, nor any action taken under it, shall be
construed as creating any limitation or restriction upon any right that
Subsidiary would otherwise have to terminate the employment of Shareholder at
any time for any reason.
(b) This Agreement may be modified or amended only upon the written
consent of all parties to the Agreement.
(c) This Agreement shall be interpreted, construed, and enforced in
accordance with the laws of the State of New York.
(d) Neither this Agreement, nor any rights or obligations under it,
may be assigned by any party without the prior written consent of the other
parties.
(e) This Agreement shall benefit and be binding upon the parties and
their successors, heirs, executors, personal representatives, and assigns.
(f) This Agreement sets forth the entire understanding and agreement
of the parties with respect to its subject matter and supersedes all prior
letters, agreements, covenants, communications, understandings, representations,
or warranties, whether oral or written, by any officer, employee, or
representative of either party.
(g) The waiver of any provision of this Agreement, or of any breach
of this Agreement, shall not constitute a subsequent waiver of any provision or
breach.
(h) In the event that Shareholder is a prevailing party in any
litigation arising under or in connection with this Agreement, the Company shall
pay the reasonable attorneys fees and expenses incurred by Shareholder in
connection with the litigation.
(i) If, at any time, any of the provisions of this Agreement shall be
deemed by a court or other body having jurisdiction over this Agreement to be
illegal, invalid, or unenforceable, those provisions shall be deemed severed
from this Agreement. The remaining
11
<PAGE>
provisions of this Agreement shall be valid and binding as if this Agreement had
never contained any illegal, invalid, or otherwise unenforceable provisions,
without the requirement that the amendment be recorded in a writing signed by
the parties.
The parties' assent to the terms of this Agreement is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
-------------------------------
Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
-------------------------------
Title: President
Address: /s/ Edward J. Butler, Jr.
----------------------------------
Edward J. Butler, Jr.
12 Kingsview Court
Williamsville, New York 14221
Address: /s/ Arunas A. Chesonis
----------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
12
<PAGE>
Exhibit 10.10.2
FIRST AMENDMENT TO STOCK RIGHTS AGREEMENT
This is the First Amendment to Stock Rights Agreement (the
"Amendment"), dated August 13, 1998, between EDWARD J. BUTLER, JR.
("Shareholder"), PAETEC CORP., a Delaware corporation with its principal place
of business at 290 Woodcliff Drive, Fairport, New York 14450 (the "Company"),
PAETEC COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary
of the Company with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 ("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. Shareholder holds 250,000 shares of Class A common stock of the
Company, subject to certain restrictions contained in a Stock Rights Agreement,
dated July 17, 1998, among the parties (the "Agreement").
B. The Company has now offered to issue to Shareholder 15,000 shares
of Class B common stock at a purchase price of $.833 per share, subject to
certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Amendment for the purpose of confirming Shareholder's equity interest in the
Class B common stock of the Company and outlining the rights of Shareholder and
the restrictions imposed by the Company with respect to the Class B common stock
to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares. The Company confirms its offer to issue
------------------
15,000 shares of Class B common stock (the "Class B Shares") to Shareholder at a
price of $.833 per share, payable in full upon issuance of the Class B Shares.
A stock certificate evidencing the Class B Shares shall be issued in the name of
Shareholder upon receipt of this executed Amendment and payment in full of the
purchase price.
2. Incorporation of Agreement by Reference. All of the provisions
---------------------------------------
of the Agreement shall apply to the Class B Shares issued to Shareholder
pursuant to this Amendment, except to the extent that a provision of this
Amendment expressly supersedes any provision of the Agreement. Additionally, to
the extent that any provision of this Amendment contradicts any provision
contained in the Agreement with respect to the Shares (as defined in the
Agreement), the provision of this Amendment shall control.
<PAGE>
3. Repurchase Price. The Purchase Option of the Company, described
----------------
in Section 3 of the Agreement, shall apply to the Class B Shares. In the event
that the Company exercises its Purchase Option with respect to all or a portion
of the Class B Shares, however, the price for all Class B Shares repurchased by
the Company pursuant to the Purchase Option, described in Section 4 of the
Agreement, shall be the fair market value of the Class B Shares as of the date
of the exercise of the Purchase Option by the Company. "Fair market value"
shall be determined by the accounting firm then retained by the Company, which
shall promptly perform an appraisal. The determination shall be made in
accordance with generally accepted accounting principles and shall be binding on
all parties.
4. Stockholders' Agreement and Proxy. Concurrently with the
---------------------------------
execution of this Amendment and the issuance of the Class B Shares, Shareholder
is executing and delivering a Stockholders' Agreement and proxy appointing
Arunas A. Chesonis Shareholder's attorney-in-fact and proxy to vote all Class B
Shares now or hereafter owned by Shareholder at any meeting of shareholders,
regular or special, whenever called, and for whatever purpose. Copies of the
Stockholders' Agreement and proxy shall be filed with the Secretary of the
Company, and the proxy shall be registered in the stock books of the Company.
Any transfer of the Class B Shares is subject to the terms of the Stockholders'
Agreement and proxy.
5. Permitted Transfer of Shares and Class B Shares. The
-----------------------------------------------
restrictions on transfer of Shareholder's Shares (as defined in the Agreement),
set forth in Section 2 of the Agreement, shall apply equally to the Class B
Shares; provided, however, that those restrictions are modified, with respect to
both the Shares and Class B Shares, to permit Shareholder to sell, assign, or
transfer any or all of the Shares or Class B Shares held by Shareholder to the
following:
(a) Shareholder's spouse, parent(s), siblings, or natural or adopted
lineal descendants, or the spouses of Shareholder's parent(s), siblings, or
lineal descendants (collectively, together with the Shareholder, referred to as
"Shareholder's Family Members");
(b) the trustee of a trust (including a voting trust) principally for
the benefit of Shareholder and/or one or more of Shareholder's Family Members;
provided that the trust may also grant a general or special power of appointment
to one or more of Shareholder's Family Members and may permit trust assets to be
used to pay taxes, legacies, and other obligations of the trust or of the
estates of one or more of Shareholder's Family Members payable by reason of the
death of any of Shareholder's Family Members; and
(c) a corporation, partnership, or limited liability company, a
majority of the voting equity interest in which is owned by Shareholder or by
one or more of Shareholder's transferees under subparagraphs (a) or (b) of this
Section.
2
<PAGE>
6. Legends. Each certificate for Class B Shares owned by
-------
Shareholder shall bear the following legends:
(a) The shares represented by this certificate were issued to the
shareholder with restrictions. Neither the shares, nor any interest
in them, may be sold, transferred, assigned, pledged, hypothecated, or
otherwise disposed of, unless that transfer is expressly permitted by
a stock rights agreement, including any amendment thereto, between the
shareholder and the Company, a copy of which is on file at the office
of the Company in Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be transferred in the absence of such registration unless the Company
receives an opinion of counsel reasonably acceptable to it stating the
such sale or transfer is exempt from registration.
(c) The shares represented by this certificate are subject to a
Stockholders' Agreement and to a proxy in favor of Arunas A. Chesonis,
a copy of which is on file with the Company. Any transferee of the
shares represented by this certificate shall take the shares subject
to the terms of the Stockholders' Agreement and proxy.
With respect to Class B Shares that are subject to the Company's Purchase
Option, described in Section 3 of the Agreement, however, Shareholder shall be
entitled to a certificate without the legend set forth in subparagraph (a),
evidencing any Class B Shares as to which the Purchase Option has expired.
7. Non-competition. The non-competition covenant of Shareholder set
---------------
forth in subparagraph 5(a)(iii) of the Agreement is modified to read as
follows:
(iii) hold five percent (5%) or more of the shares of a
corporation, or serve as a partner, officer, member, manager,
director, consultant or other representative of any third party, which
engages in any line of business competitive with the Company or any
affiliate of the Company (including the Subsidiary) anywhere in the
world.
3
<PAGE>
The parties' assent to the terms of this Amendment is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
-------------------------------
Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
-------------------------------
Title: President
Address: /s/ Edward J. Butler, Jr.
----------------------------------
Edward J. Butler, Jr.
12 Kingsview Court
Williamsville, New York 14221
Address: /s/ Arunas A. Chesonis
----------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
4
<PAGE>
Exhibit 10.10.3
SECOND AMENDMENT TO STOCK RIGHTS AGREEMENT
This is the Second Amendment to Stock Rights Agreement (the
"Amendment"), dated September 30, 1998, between EDWARD J. BUTLER, JR.
("Shareholder"), PAETEC CORP., a Delaware corporation with its principal place
of business at 290 Woodcliff Drive, Fairport, New York 14450 (the "Company"),
PAETEC COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary
of the Company with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 ("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. Shareholder holds 250,000 shares of Class A common stock of the
Company, subject to certain restrictions contained in a Stock Rights Agreement,
dated July 17, 1998, among the parties (the "Agreement"). Shareholder also
holds 15,000 shares of Class B common stock of the Company, subject to certain
restrictions contained in the Agreement and in the First Amendment to Stock
Rights Agreement dated August 13, 1998 (the "First Amendment").
B. The Company has now offered to issue to Shareholder 15,000
additional shares of Class A common stock at a purchase price of $2.50 per
share, subject to certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Amendment for the purpose of confirming Shareholder's additional equity interest
in the Class A common stock of the Company and outlining the rights of
Shareholder and the restrictions imposed by the Company with respect to the
additional Class A common stock to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares. The Company confirms its offer to issue
------------------
15,000 shares of Class A common stock (the "Additional Class A Shares") to
Shareholder at a price of $2.50 per share, payable in full upon issuance of the
Additional Class A Shares. A stock certificate evidencing the Additional Class
A Shares shall be issued in the name of Shareholder upon receipt of this
executed Amendment and payment in full of the purchase price.
2. Incorporation of Agreement and First Amendment by Reference. All
-----------------------------------------------------------
of the provisions of the Agreement shall apply to the Additional Class A Shares
issued to
<PAGE>
Shareholder pursuant to this Amendment, except to the extent that a provision of
this Amendment expressly supersedes any provision of the Agreement or First
Amendment. Sections 3 and 5 of the First Amendment, which modify Sections 4 and
2, respectively, of the Agreement, shall also apply to the Additional Class A
Shares.
3. Legends. Each certificate for Additional Class A Shares owned by
-------
Shareholder shall bear the following legends:
(a) The shares represented by this certificate were issued to the
shareholder with restrictions. Neither the shares, nor any interest in
them, may be sold, transferred, assigned, pledged, hypothecated, or
otherwise disposed of, unless that transfer is expressly permitted by
a stock rights agreement, including any amendment thereto, between the
shareholder and the Company, a copy of which is on file at the office
of the Company in Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be transferred in the absence of such registration unless the Company
receives an opinion of counsel reasonably acceptable to it stating the
such sale or transfer is exempt from registration.
With respect to Additional Class A Shares that are subject to the Company's
Purchase Option, described in Section 3 of the Agreement, however, Shareholder
shall be entitled to a certificate without the legend set forth in subparagraph
(a), evidencing any Additional Class A Shares as to which the Purchase Option
has expired.
The parties' assent to the terms of this Amendment is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
------------------------------------
Title: President
2
<PAGE>
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
--------------------------------
Title: President
Address: /s/ Edward J. Butler, Jr.
-----------------------------------
Edward J. Butler, Jr.
12 Kingsview Court
Williamsville, New York 14221
Address: /s/ Arunas A. Chesonis
-----------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
3
<PAGE>
Exhibit 10.10.4
THIRD AMENDMENT TO STOCK RIGHTS AGREEMENT
THIS THIRD AMENDMENT TO STOCK RIGHTS AGREEMENT (this "Amendment") is
made as of this 4thday of February 2000 by and among Edward J. Butler, Jr. (the
"Stockholder"), PaeTec Corp., a Delaware corporation (the "Company"), PaeTec
Communications, Inc., a Delaware corporation and wholly-owned subsidiary of the
Company (the "Subsidiary"), and Arunas A. Chesonis ("Mr. Chesonis").
RECITALS
--------
A. The Company, the Subsidiary, the Stockholder and Mr. Chesonis are
parties to a Stock Rights Agreement dated as of July 17, 1998 (the "Stock Rights
Agreement") and amended as of August 13, 1998 ("Amendment No. 1") and September
30, 1998 ("Amendment No. 2").
B. The Board of Directors of the Company has authorized the issuance
and sale (the "Series A Preferred Stock Placement") of 134,000 shares of a new
series of preferred stock of the Company, designated the Series A Convertible
Preferred Stock, to the purchasers (the "Purchasers") listed on the Schedule of
Purchasers to, and pursuant to the terms and conditions of, an Equity Purchase
Agreement (the "Purchase Agreement").
C. As a condition to the consummation of the Series A Preferred Stock
Placement, the Purchasers have required that the Company, the Subsidiary, the
Stockholder and Mr. Chesonis further amend the Stock Rights Agreement (i) to
provide that all Class B Shares (as defined in the Stock Rights Agreement) shall
automatically convert into shares of Class A common stock, par value $0.01 per
share ("Class A Common Stock"), of the Company in specified circumstances and
(ii) to clarify that to the extent that any securities are required to be
excluded from a registration pursuant to the "cut-back" provisions of the
piggyback registration rights granted to the Stockholder pursuant to the Stock
Rights Agreement, the securities to be included in such registration shall be
determined on a pro rata basis among the holders of shares participating in the
--- ----
offering pursuant to registration rights granted by the Company, based on the
number of shares of common stock requested to be included by each such holder in
such registration.
D. The parties to the Stock Rights Agreement desire to amend the
Stock Rights Agreement to induce the Purchasers to consummate of the Series A
Preferred Stock Placement.
<PAGE>
AGREEMENT
---------
1. Defined Terms. All capitalized terms used in this Amendment
-------------
without definition shall have the meanings given to such terms in the Stock
Rights Agreement, as amended.
2. Automatic Conversion of Class B Shares. Notwithstanding
--------------------------------------
anything in the Stock Rights Agreement, Amendment No. 1 or Amendment No. 2 to
the contrary, the parties agree that, as provided in the Company's certificate
of incorporation as amended in connection with the Series A Preferred Stock
Placement (the "Restated Certificate of Incorporation"), each Class B Share
subject to the Stock Rights Agreement (as amended) shall automatically convert
into one share of Class A Common Stock upon the date (the "Termination Date")
that the Stockholder ceases to be employed by the Company or any subsidiary
thereof unless, at the Termination Date, Mr. Chesonis shall (i) be the Chairman
of the Board or Chief Executive Officer of the Company, (ii) be the beneficial
owner of shares of Class B common stock of the Company and (iii) have the power
pursuant to an irrevocable proxy to vote the Class B Shares on all matters on
which such Class B Shares are entitled to vote, provided Mr. Chesonis personally
exercises such power and does not delegate the exercise thereof to any other
person. If subsequent to the Termination Date, any condition specified in
clause (i), (ii) or (iii) in the preceding sentence shall cease to be in effect,
each Class B Share shall immediately be converted into one share of Class A
Common Stock. All other terms and conditions of the Stock Rights Agreement, as
amended, shall continue to apply to such shares of Class A Common Stock upon
such conversion. In the event of any conflict between the provisions of this
Section 2 and the provisions of Article V of the Restated Certificate of
Incorporation with respect to such mandatory conversion, which shall include,
without limitation, any additional mandatory conversion events specified in such
Article V, the provisions of Article V of the Restated Certificate of
Incorporation shall control.
3. Amendment of Section 6(b). The fourth and fifth sentences of
-------------------------
Section 6(b) of the Stock Rights Agreement are hereby deleted and replaced and
superseded in their entirety with the following sentence:
"Notwithstanding any other provision of this Section 6, if the managing
underwriter advises in writing the Company and the Stockholder that
marketing factors require a limitation of the number of shares of common
stock to be underwritten and sold in such offering, the managing
underwriter may exclude some or all of the shares of common stock to be
sold in such offering from such registration, and the shares to be included
in such registration shall be allocated pro rata among the holders of
--- ----
shares participating in the offering pursuant to registration rights
granted by the Company (including demand and
2
<PAGE>
piggyback registration rights), based on the number of shares of common
stock requested to be included by each holder in such registration."
4. Binding Effect. This Amendment shall be binding upon and inure to
--------------
the benefit of the parties hereto and their heirs, executors, administrators,
successors and assigns.
5. Governing Law. This Amendment shall be governed by, and construed
-------------
and enforced in accordance with, the laws of the State of New York, except that
if any provision of this Amendment or any part of any such provision would be
illegal, invalid or enforceable under such laws in connection with a suit or
proceeding validly instituted in another jurisdiction, then the laws of such
other jurisdiction shall govern insofar as is necessary to sustain the legality,
validity or enforceability of such provision or any part of such provision.
6. Captions. Captions to the Sections in this Amendment are for the
--------
convenience of the parties only and shall not affect the meaning or
interpretation of this Amendment.
7. Enforceability and Interpretation. It is the intention of the
---------------------------------
parties to this Amendment that the terms and provisions contained in this
Amendment shall be enforceable to the fullest extent permitted by law. If any
term or provision of this Amendment or the application thereof to any Person or
circumstance is construed to be illegal, invalid or unenforceable, in whole or
in part, then such term or provision shall be construed in such a manner as to
permit its enforceability under applicable law to the fullest extent permitted
by such law. In any case, the remaining terms and provisions of this Amendment
or the application thereof to any Person or circumstance, except those terms and
provisions which have been held illegal, invalid or unenforceable, shall remain
in full force and effect.
8. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9. Additional Documents. Each party hereto agrees to execute any and
--------------------
all documents, instruments, certificates and communications deemed to be
necessary or advisable by the Company to effectuate the purposes of this
Amendment.
[signature page follows]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment with full force and effect as of the day and year first written
above.
PAETEC CORP.
By: /s/ Aruna A. Chesonis
--------------------------------
Its: CEO, Chairman and President
--------------------------------
PAETEC COMMUNICATIONS, INC.
By: /s/ Aruna A. Chesonis
--------------------------------
Its: CEO, Chairman and President
--------------------------------
/s/ Aruna A. Chesonis
-------------------------------------
Arunas A. Chesonis
/s/ Edward J. Butler, Jr.
-------------------------------------
Edward J. Butler, Jr.
4
<PAGE>
Exhibit 10.11.1
STOCK RIGHTS AGREEMENT
This is a Stock Rights Agreement (the "Agreement"), dated July 17,
1998, between RICHARD E. OTTALAGANA ("Shareholder"), PAETEC CORP., a Delaware
corporation with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 (the "Company"), PAETEC COMMUNICATIONS, INC., a
Delaware corporation and wholly-owned subsidiary of the Company with its
principal place of business at 290 Woodcliff Drive, Fairport, New York 14450
("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. The Company is a Delaware corporation having 110,000,000 shares of
authorized capital stock, 10,000,000 of which are designated preferred stock,
75,000,000 of which are designated Class A common and 25,000,000 of which are
designated Class B common. Founder is one of the founding shareholders of the
Company.
B. Shareholder is also one of the founding Shareholders of the
Company and is an employee of the Subsidiary. In order to induce Shareholder to
leave his former employer and join the Subsidiary as an employee, the Company
previously offered to issue to Shareholder 250,000 shares of Class A common
stock at a purchase price of $.40 per share, subject to certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Agreement for the purpose of confirming Shareholder's equity interest in the
Company and outlining the rights of and restrictions imposed by the Company with
respect to the shares of stock held by the Shareholder.
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares.
------------------
(a) The Company confirms its previous offer to issue 250,000 shares of
Class A common stock (the "Shares") to Shareholder at a price of $.40 per share
payable in full upon issuance of the Shares. A stock certificate evidencing the
Shares shall be issued in the name of Shareholder upon receipt of this executed
Agreement and payment in full of the purchase price.
(b) In order to induce the Company to issue the Shares, Shareholder
represents and warrants to the Company as follows:
<PAGE>
(i) Shareholder (A) understands that an investment in the
Shares is speculative due to factors including (but not limited to) the start-up
nature of the Company and the risk of economic loss from the operations of the
Company, but believes that such an investment is suitable for Shareholder based
upon Shareholder's financial needs, (B) can withstand a complete loss of the
investment in the Shares, and (C) has the net worth to undertake these risks.
(ii) Shareholder is acquiring the Shares for the personal
account of Shareholder, with no present intention of reselling, distributing or
otherwise transferring the Shares or any portion of the Shares to anyone else.
(iii) Shareholder understands and acknowledges that the Shares
are being offered and sold under one or more exemptions provided in the
Securities Act of 1933, as amended (the "Securities Act"), Regulation D
promulgated thereunder and applicable New York State securities laws, and that
this transaction has not been reviewed or passed upon by the United States
Securities and Exchange Commission, the New York State Attorney General, or any
other federal or state agency.
(iv) Shareholder realizes that Shareholder must bear the
economic risk of investment for an indefinite period of time because (A) the
Shares have not been registered under the Securities Act and cannot be resold by
Shareholder unless they are subsequently registered under the Securities Act or
an exemption from registration is available, (B) the transferability of the
Shares is restricted by the terms of this Agreement, and (C) there currently is
no public market for the Shares, and Shareholder may not be able to liquidate
the investment in the Shares in the event of an emergency. Shareholder has
adequate means of providing for Shareholder's current financial needs and
personal contingencies, and has no need for liquidity of investment with respect
to the Shares.
(v) Shareholder believes that Shareholder, either alone or
together with the assistance of professional advisor(s), has knowledge and
experience in business and financial matters sufficient to make Shareholder
capable of evaluating the merits and risks of an investment in the Shares.
(vi) Shareholder is fully familiar with the business of the
Company and its present and proposed operations. Shareholder has been given
reasonable opportunity to ask representatives of the Company questions
concerning the Company and making an investment in the Shares. Shareholder has
obtained sufficient information to evaluate the merits and risks of an
investment in the Shares.
(vii) Shareholder confirms that Shareholder has been advised to
rely on professional accounting, tax, legal and financial advisers with respect
to an investment in the Shares and has obtained, to the extent Shareholder deems
it necessary, professional advice
2
<PAGE>
with respect to the risks inherent in an investment in the Shares and the
suitability of an investment in the Shares in light of Shareholder's financial
condition and investment needs.
2. Restriction on Transfer of Shares. Shareholder may not sell,
---------------------------------
transfer, pledge, assign, transfer, or otherwise encumber or dispose of, in any
manner or by any means, any Shares that are subject to the Company's Purchase
Option described in Section 3 of this Agreement. This restriction on transfer
does not apply to any Shares that, pursuant to Section 3, no longer are subject
to the Company's Purchase Option or to any additional shares of capital stock of
the Company that Shareholder might acquire in the future. Notwithstanding the
foregoing, Shareholder may pledge the Shares to Founder as collateral security
for a promissory note dated the date hereof, provided that the Shares so pledged
shall continue to be subject to the Company's Purchase Option described in
Section 3 below.
3. Repurchase of Shares upon Termination of Employment with
--------------------------------------------------------
Subsidiary. Upon termination of Shareholder's employment with the Subsidiary,
- ----------
the Company shall have an option, but shall not be obligated, to repurchase (the
"Purchase Option") from Shareholder or Shareholder's personal representative all
or a portion of Shareholder's Shares, as set forth in the following
subparagraphs.
(a) If Shareholder's employment with the Subsidiary terminates due to
voluntary separation or dismissal for Cause (as defined below), the number of
Shares that are subject to the Company's Purchase Option shall be determined as
follows:
(i) The Company shall have the option to repurchase up to 100%
of the Shares should Shareholder's employment terminate at any time prior to the
first anniversary of Shareholder's employment with the Subsidiary.
(ii) The Company shall have the option to repurchase up to 60%
of the Shares should Shareholder's employment terminate on the first anniversary
date, or at any time between the first and second anniversary dates, of
Shareholder's employment with the Subsidiary.
(iii) The Company shall have the option to repurchase up to 40%
of the Shares should Shareholder's employment terminate on the second
anniversary date, or at any time between the second and third anniversary dates,
of Shareholder's employment with the Subsidiary.
(iv) The Company shall have the option to repurchase up to 20%
of the Shares should Shareholder's employment terminate on the third anniversary
date, or at any time between the third and fourth anniversary dates, of
Shareholder's employment with the Subsidiary.
3
<PAGE>
(b) If Shareholder's employment with the Subsidiary terminates because
of Shareholder's death or disability, Shareholder or Shareholder's personal
representative may negotiate a transfer of all or a portion of Shareholder's
Shares back to the Company at any time. With respect to Shares that were
subject to the Company's Purchase Option and that are not transferred back to
the Company, the transfer restrictions set forth in Section 2 above shall apply
to the same extent that they would have applied if Shareholder's employment had
continued. This restriction on transfer does not apply to any Shares that would
no longer have been subject to the Company's Purchase Option, or to any
additional shares of capital stock of the Company that Shareholder might acquire
in the future.
(c) In the event that Shareholder's employment with the Subsidiary
terminates for any reason not addressed in subparagraphs (a) and (b) above, the
Company's Purchase Option, together with all transfer restrictions set forth in
Section 2, shall fully expire effective as of the date of termination.
(d) The Company's Purchase Option shall fully expire on the fourth
anniversary of Shareholder's employment with the Subsidiary. Shares as to
which the Company's Purchase Option has expired are no longer subject to the
transfer restrictions set forth in Section 2.
(e) To exercise its Purchase Option, the Company must notify
Shareholder or Shareholder's personal representative of its intention to
exercise its Purchase Option within 60 days after the date of termination of
Shareholder's employment with the Subsidiary. Should the Company fail to
exercise the Purchase Option within such 60-day period, the Shares shall no
longer be subject to the transfer restrictions set forth in Section 2.
(f) In the event of a consolidation or merger of the Company with or
into any other person or entity, a sale of all or substantially all of the
assets of the Company to another person or entity, or an acquisition of more
than 50% of the capital stock of the Company by another person or entity, the
Company's Purchase Option shall be terminated as of the effective date of the
transfer. Notwithstanding the foregoing, the Company's Purchase Option shall
not be terminated or in any other way affected by an initial public offering of
stock by the Company.
4. Repurchase Price and Payment Terms. The price for all Shares
----------------------------------
purchased by the Company pursuant to the Purchase Option shall be $.40 per
Share. Payment shall be made in full for all repurchased Shares within 30 days
after the date on which the Company delivers notice of its intention to exercise
the Purchase Option. Upon payment, Shareholder or Shareholder's personal
representative shall deliver all stock certificates for repurchased Shares,
properly endorsed in blank, to the Company or its designee.
4
<PAGE>
5. Non-Competition.
---------------
(a) For a period of one year after termination of Shareholder's
employment with the Subsidiary (regardless of the reason for termination),
Shareholder shall not, directly or indirectly:
(i) solicit or serve clients or customers of the Company or any
affiliate of the Company (including the Subsidiary), whether for Shareholder's
own account or as an employee, shareholder, partner, officer, member, manager,
director, consultant, or other representative of any third party;
(ii) direct any business from, or enter into competition with,
the Company or any affiliate of the Company (including the Subsidiary) in any
line of business in which the Company or such affiliate was conducting
operations during Shareholder's employment; or
(iii) serve as an employee, shareholder, partner, officer,
member, manager, director, consultant or other representative of any third party
which engages in any line of business competitive with the Company or any
affiliate of the Company (including the Subsidiary) anywhere in the world.
Shareholder acknowledges that the foregoing limitations are reasonable in time
and scope and agrees not to raise any objection to the reasonableness of the
foregoing in any action or proceeding to enforce the terms of this Section.
(b) As consideration for the non-competition covenant set forth in
subparagraph (a) above, the Subsidiary agrees that, if Shareholder's employment
is terminated by the Subsidiary without Cause, Subsidiary shall pay Shareholder
or Shareholder's personal representative during the one-year period in which the
covenant is in effect an amount equal to the annualized base salary paid to
Shareholder immediately prior to termination of Shareholder's employment.
Payment shall be made in accordance with the Subsidiary's customary payroll
practices. Continued payment of Shareholder's base salary under this
subparagraph (b) shall not be made if termination of Shareholder's employment is
due to Shareholder's death, disability, voluntary resignation or withdrawal or
termination for "Cause" (as defined below).
(c) As additional consideration for the non-competition covenant set
forth in subparagraph (a) above, the Company agrees that (i) in the event
Shareholder's employment terminates due to the death or disability of
Shareholder or is terminated by Subsidiary without Cause, the one-year period
during which the non-competition covenant is to be in effect shall be counted as
a year of employment with Subsidiary for purposes of determining the percentage
of Shares that is subject to the Company's Purchase Option, and (ii) in the
event Shareholder's employment is terminated by the Subsidiary for Cause or
terminates due to the
5
<PAGE>
voluntary resignation or withdrawal of Shareholder, the Company shall have the
option of (A) waiving the non-competition covenant set forth in subparagraph (a)
above or (B) counting the one-year period during which the non-competition
covenant is to be in effect as a year of employment for purposes of determining
the percentage of Shares that is subject to the Company's Purchase Option.
(d) (i) Should Shareholder violate the terms of the non-competition
covenant set forth in subparagraph (a), the Company, the Company shall notify
Shareholder in writing of the alleged violation that constitutes a breach of
this Agreement, and Shareholder shall have 10 business days to cure the breach.
If the breach is not cured to the satisfaction of the Company, then in addition
to any other remedies available under law, the Company may (1) discontinue any
payments being made to Shareholder pursuant to subparagraph (b) hereof, and (2)
exercise its Purchase Option with respect to any additional Shares that would
have been subject to the Purchase Option had the one-year period of the non-
competition covenant not been counted as an additional year of employment
pursuant to the terms of subparagraph (c) hereof. Exercise of the Purchase
Option with respect to such additional Shares shall be made in accordance with
the terms of Sections 3 and 4 hereof, except that the Company may exercise the
Purchase Option at any time within 60 days after the Company first becomes aware
of Shareholder's violation of subparagraph (a).
(ii) In the event that the Company fails to make any payment due
to Shareholder pursuant to Section 5(b) above, Shareholder shall notify the
Company in writing of the alleged failure to make payment that constitutes a
breach of this Agreement, and the Company shall have 5 business days to cure the
breach. If the breach is not cured to the satisfaction of Shareholder, then the
non-competition covenant set forth in subparagraph (a) shall be null and void
and of no further force and effect.
(e) For purposes of this Section 5, termination for "Cause" shall
mean termination of Shareholder's employment with the Subsidiary due to: (i)
material failure or refusal to perform the duties assigned to Shareholder, (ii)
refusal of Shareholder to follow the reasonable directives of the Board of
Directors or Chief Executive Officer of the Subsidiary, (iii) conviction of a
felony, (iv) misappropriation of any funds or property of the Company or any
affiliate of the Company (including the Subsidiary), or (v) commission of any
act which could materially injure the business or reputation of, or materially
adversely affect the interests of Company or any affiliate of the Company
(including the Subsidiary).
(f) Shareholder acknowledges that his/her services are unique and
extraordinary and are not readily replaceable, and hereby expressly agrees that,
in the event of a violation of the non-competition covenant set forth in
subparagraph (a), the Company and its affiliates (including Subsidiary) will be
irreparably harmed and the remedy of damages or other remedy at law will be
inadequate. Therefore, Shareholder agrees that, in the event of a threatened or
actual violation of the non-competition covenant, the Company shall be entitled
to obtain from any court of competent jurisdiction, an injunction restraining
Shareholder from
6
<PAGE>
committing the violation, without the necessity of proving actual damage and in
addition to any other relief available under this Agreement or at law.
6. Piggy-Back Registration Rights.
------------------------------
(a) If at any time or from time to time the Company shall determine to
register any of its equity securities, either for its own account or the account
of a security holder or holders (other than a registration of securities
relating solely to employee benefit plans or to effect a merger or other
reorganization), the Company will promptly give to Shareholder written notice
thereof and, upon the written request of Shareholder, include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Shares specified
in the written request made within 10 business days after receipt of such
written notice from the Company.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise Shareholder as a part of the written notice given to Shareholder. In
such event the right of any Shareholder to registration pursuant to this Section
6 shall be conditioned upon Shareholder's participation in such underwriting,
and the inclusion of Shares in the underwriting shall be limited to the extent
provided herein. Shareholder (together with the Company and the other holders
distributing their securities through such underwriting) shall enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 6, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may exclude some or all of the Shares or securities of other holders
of similar registration rights from such registration. The Company shall so
advise Shareholder and other stockholders distributing their securities through
such underwriting, and the number of Shares or securities of other holders of
similar registration rights that may be included in the registration and
underwriting, as determined by the managing underwriter, shall be allocated on a
pro rata basis. If Shareholder disapproves of the terms of any such
underwriting, Shareholder may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. Any securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration, and shall
continue to be subject to the terms of this Section.
(c) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 6 prior to the effectiveness of
such registration whether or not Shareholder has elected to include securities
in such registration.
(d) All expenses associated with the registration (including, without
limitation, registration, qualification and filing fees, printing expenses, blue
sky fees, and fees and disbursements of counsel and accountants for the Company)
shall be borne by the
7
<PAGE>
Company. Selling expenses, including underwriters' discounts, shall be borne by
Shareholder pro rata in proportion to the number of securities being registered.
(e) In the case of each registration under this Section, the Company
will:
(i) prepare and file a registration statement with respect to
such securities and use its best efforts to cause such registration statement to
become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
(ii) furnish to Shareholder such reasonable number of copies of
the registration statement, preliminary prospectus, final prospectus and such
other documents as Shareholder may reasonably request in order to facilitate the
public offering of the Shares; and
(iii) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by Shareholder,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify as a foreign corporation or as a dealer in
securities or to file a general consent to service of process in any such states
or jurisdictions in which it has not already done so and except as may be
required by the Securities Act.
(f) The Company will indemnify Shareholder against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof), arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, or any violation by the Company of the Securities Act of 1933, the
Securities Exchange Act of 1934, state securities law or any rule or regulation
promulgated under such laws applicable to the Company in connection with any
such registration, qualification or compliance, and the Company will reimburse
Shareholder for any legal and any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, provided that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission, or alleged untrue statement or omission, made in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by Shareholder.
(g) Shareholder will, if Shares held by such Shareholder are included
in the securities as to which such registration is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a
8
<PAGE>
registration statement against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, such Shareholders, such directors, officers, persons, underwriters
or control persons for any legal or any other expenses reasonably incurred, as
such expenses are incurred, in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by Shareholder and stated to be specifically for use therein.
(h) Shareholder shall furnish to the Company such information
regarding Shareholder, the Shares held by Shareholder, and the distribution
proposed by Shareholder as the Company may request in writing and as shall be
required in connection with any registration referred to in this Agreement.
(i) The registration rights granted to Shareholder in this Section
shall expire at such time (if ever) as Shareholder is free to sell the Shares
under Rule 144 promulgated under the Securities Act (or any successor thereto)
without limitation as to volume or manner of sale restrictions.
7. Co-Sale Rights.
--------------
(a) In the event that Founder receives a bona fide offer from any
person to purchase any of Founder's Common Stock (the "Founder's Shares") in a
private transaction exempt from registration under the Securities Act, Founder
shall give Shareholder notice of his intention to sell Founder's Shares,
describing the amount of Founder's Shares proposed to be transferred, the
identity of the proposed transferee, and the price and terms upon which he
proposes to make such transfer (the "Transfer Notice").
(b) Within fifteen (15) days after delivery of the Transfer Notice,
Shareholder may elect to sell up to Shareholder's pro rata share of the total
number of shares to be purchased by the transferee described in the Transfer
Notice by giving written notice thereof to Founder and tendering to Founder a
certificate representing the shares to be sold, properly endorsed for transfer,
with written instructions to transfer the shares to the transferee described in
the Transfer Notice upon receipt of payment for such shares from such transferee
for the benefit of Shareholder. Founder shall thereupon notify the transferee
of the co-sale arrangements hereunder, and instruct the transferee to deliver
payment for the shares to be purchased from Shareholder to Shareholder. For the
purpose of the co-sale right set forth in this Section, the pro rata share of
Shareholder shall be determined based on the number of
9
<PAGE>
Shares held by Shareholder that are subject to co-sale rights, divided by the
sum of (A) the total number of shares of common stock held by all stockholders
of the Company (including Shareholder) holding similar co-sale rights plus (B)
the number of shares of common stock held by Founder at the date of the Transfer
Notice (assuming conversion of all convertible securities and exercise of all
options and warrants). The resulting percentage shall then be multiplied by the
number of Shares proposed to be purchased by the transferee to determine the
actual number of Shares eligible for sale by Shareholder.
(c) In the event Shareholder declines to exercise the co-sale right as
allowed by this Section, Founder may, within 90 days after the date on which
Shareholder's co-sale rights lapsed, transfer some or all of Founder's Shares
which were the subject of the Transfer Notice at a price and on terms no less
favorable to the transferee(s) than specified in the Transfer Notice. Founder's
Shares transferred in accordance with the provisions of this Section shall no
longer be subject to the restrictions on Founder's Shares forth in this Section.
After the expiration of said 90-day period, Founder shall not transfer any of
Founder's Shares without again complying with this Section.
(d) Any transfer of Founder's Shares without consideration to a family
member of Founder or a trust or custodian for the benefit of Founder or a family
member of Founder, and transfers pursuant to a pledge to secure indebtedness,
shall not be subject to the provisions of this Section, provided that the
transferee agrees in writing to be bound by the provisions of this Section with
respect to any subsequent transfer of such shares.
8. Legend. Each certificate for Shares owned by Shareholder shall
------
bear the following legends:
(a) The shares represented by this certificate were issued
to the shareholder with restrictions. Neither the shares,
nor any interest in them, may be sold, transferred,
assigned, pledged, hypothecated, or otherwise disposed of,
if restricted pursuant to a stock rights agreement between
the shareholder and the Company, a copy of which is on file
at the office of the Company in Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be transferred in the absence of such registration
unless the Company receives an opinion of counsel reasonably
acceptable to it stating the such sale or transfer is exempt
from registration.
With respect to Shares that are subject to the Purchase Option described in
Section 3 of this Agreement, however, Shareholder shall be entitled to a
certificate without the legend set forth
10
<PAGE>
in subparagraph (a), evidencing any Shares as to which the Company's Purchase
Option has expired.
9. Notices. All notices and communications under this Agreement
-------
shall be in writing and shall be given by personal delivery or by registered or
certified mail, return receipt requested, addressed to the respective residences
of Shareholder and Founder set forth below or to such other address as may be
designated by Shareholder or Founder, and to the principal office of the
Company. Notice shall be deemed given upon personal delivery or upon receipt.
10. Miscellaneous.
-------------
(a) Neither this Agreement, nor any action taken under it, shall be
construed as creating any limitation or restriction upon any right that
Subsidiary would otherwise have to terminate the employment of Shareholder at
any time for any reason.
(b) This Agreement may be modified or amended only upon the written
consent of all parties to the Agreement.
(c) This Agreement shall be interpreted, construed, and enforced in
accordance with the laws of the State of New York.
(d) Neither this Agreement, nor any rights or obligations under it,
may be assigned by any party without the prior written consent of the other
parties.
(e) This Agreement shall benefit and be binding upon the parties and
their successors, heirs, executors, personal representatives, and assigns.
(f) This Agreement sets forth the entire understanding and agreement
of the parties with respect to its subject matter and supersedes all prior
letters, agreements, covenants, communications, understandings, representations,
or warranties, whether oral or written, by any officer, employee, or
representative of either party.
(g) The waiver of any provision of this Agreement, or of any breach of
this Agreement, shall not constitute a subsequent waiver of any provision or
breach.
(h) In the event that Shareholder is a prevailing party in any
litigation arising under or in connection with this Agreement, the Company shall
pay the reasonable attorneys fees and expenses incurred by Shareholder in
connection with the litigation.
(i) If, at any time, any of the provisions of this Agreement shall be
deemed by a court or other body having jurisdiction over this Agreement to be
illegal, invalid, or unenforceable, those provisions shall be deemed severed
from this Agreement. The remaining
11
<PAGE>
provisions of this Agreement shall be valid and binding as if this Agreement had
never contained any illegal, invalid, or otherwise unenforceable provisions,
without the requirement that the amendment be recorded in a writing signed by
the parties.
The parties' assent to the terms of this Agreement is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
________________________________
Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
________________________________
Title: President
Address: /s/ Richard E. Ottalagana
____________________________________
Richard E. Ottalagana
965 Strong Road
Victor, New York 14564
Address: /s/ Arunas A. Chesonis
____________________________________
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
12
<PAGE>
Exhibit 10.11.2
FIRST AMENDMENT TO STOCK RIGHTS AGREEMENT
This is the First Amendment to Stock Rights Agreement (the
"Amendment"), dated August 13, 1998, between RICHARD E. OTTALAGANA
("Shareholder"), PAETEC CORP., a Delaware corporation with its principal place
of business at 290 Woodcliff Drive, Fairport, New York 14450 (the "Company"),
PAETEC COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary
of the Company with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 ("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. Shareholder holds 250,000 shares of Class A common stock of the
Company, subject to certain restrictions contained in a Stock Rights Agreement,
dated July 17, 1998, among the parties (the "Agreement").
B. The Company has now offered to issue to Shareholder 30,000 shares
of Class B common stock at a purchase price of $.833 per share, subject to
certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Amendment for the purpose of confirming Shareholder's equity interest in the
Class B common stock of the Company and outlining the rights of Shareholder and
the restrictions imposed by the Company with respect to the Class B common stock
to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares. The Company confirms its offer to issue
------------------
30,000 shares of Class B common stock (the "Class B Shares") to Shareholder at a
price of $.833 per share, payable in full upon issuance of the Class B Shares.
A stock certificate evidencing the Class B Shares shall be issued in the name of
Shareholder upon receipt of this executed Amendment and payment in full of the
purchase price.
2. Incorporation of Agreement by Reference. All of the provisions of
---------------------------------------
the Agreement shall apply to the Class B Shares issued to Shareholder pursuant
to this Amendment, except to the extent that a provision of this Amendment
expressly supersedes any provision of the Agreement. Additionally, to the
extent that any provision of this Amendment contradicts any provision contained
in the Agreement with respect to the Shares (as defined in the Agreement), the
provision of this Amendment shall control.
<PAGE>
3. Repurchase Price. The Purchase Option of the Company, described
----------------
in Section 3 of the Agreement, shall apply to the Class B Shares. In the event
that the Company exercises its Purchase Option with respect to all or a portion
of the Class B Shares, however, the price for all Class B Shares repurchased by
the Company pursuant to the Purchase Option, described in Section 4 of the
Agreement, shall be the fair market value of the Class B Shares as of the date
of the exercise of the Purchase Option by the Company. "Fair market value"
shall be determined by the accounting firm then retained by the Company, which
shall promptly perform an appraisal. The determination shall be made in
accordance with generally accepted accounting principles and shall be binding on
all parties.
4. Stockholders' Agreement and Proxy. Concurrently with the
---------------------------------
execution of this Amendment and the issuance of the Class B Shares, Shareholder
is executing and delivering a Stockholders' Agreement and proxy appointing
Arunas A. Chesonis Shareholder's attorney-in-fact and proxy to vote all Class B
Shares now or hereafter owned by Shareholder at any meeting of shareholders,
regular or special, whenever called, and for whatever purpose. Copies of the
Stockholders' Agreement and proxy shall be filed with the Secretary of the
Company, and the proxy shall be registered in the stock books of the Company.
Any transfer of the Class B Shares is subject to the terms of the Stockholders'
Agreement and proxy.
5. Permitted Transfer of Shares and Class B Shares. The restrictions
-----------------------------------------------
on transfer of Shareholder's Shares (as defined in the Agreement), set forth in
Section 2 of the Agreement, shall apply equally to the Class B Shares; provided,
however, that those restrictions are modified, with respect to both the Shares
and Class B Shares, to permit Shareholder to sell, assign, or transfer any or
all of the Shares or Class B Shares held by Shareholder to the following:
(a) Shareholder's spouse, parent(s), siblings, or natural or
adopted lineal descendants, or the spouses of Shareholder's parent(s), siblings,
or lineal descendants (collectively, together with the Shareholder, referred to
as "Shareholder's Family Members");
(b) the trustee of a trust (including a voting trust) principally
for the benefit of Shareholder and/or one or more of Shareholder's Family
Members; provided that the trust may also grant a general or special power of
appointment to one or more of Shareholder's Family Members and may permit trust
assets to be used to pay taxes, legacies, and other obligations of the trust or
of the estates of one or more of Shareholder's Family Members payable by reason
of the death of any of Shareholder's Family Members; and
(c) a corporation, partnership, or limited liability company, a
majority of the voting equity interest in which is owned by Shareholder or by
one or more of Shareholder's transferees under subparagraphs (a) or (b) of this
Section.
2
<PAGE>
6. Legends. Each certificate for Class B Shares owned by Shareholder
-------
shall bear the following legends:
(a) The shares represented by this certificate were issued to the
shareholder with restrictions. Neither the shares, nor any interest
in them, may be sold, transferred, assigned, pledged, hypothecated, or
otherwise disposed of, unless that transfer is expressly permitted by
a stock rights agreement, including any amendment thereto, between the
shareholder and the Company, a copy of which is on file at the office
of the Company in Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be transferred in the absence of such registration unless the Company
receives an opinion of counsel reasonably acceptable to it stating the
such sale or transfer is exempt from registration.
(c) The shares represented by this certificate are subject to a
Stockholders' Agreement and to a proxy in favor of Arunas A. Chesonis,
a copy of which is on file with the Company. Any transferee of the
shares represented by this certificate shall take the shares subject
to the terms of the Stockholders' Agreement and proxy.
With respect to Class B Shares that are subject to the Company's Purchase
Option, described in Section 3 of the Agreement, however, Shareholder shall be
entitled to a certificate without the legend set forth in subparagraph (a),
evidencing any Class B Shares as to which the Purchase Option has expired.
7. Non-competition. The non-competition covenant of Shareholder set
---------------
forth in subparagraph 5(a)(iii) of the Agreement is modified to read as
follows:
(iii) hold five percent (5%) or more of the shares of a
corporation, or serve as a partner, officer, member, manager,
director, consultant or other representative of any third party, which
engages in any line of business competitive with the Company or any
affiliate of the Company (including the Subsidiary) anywhere in the
world.
3
<PAGE>
The parties' assent to the terms of this Amendment is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
________________________________
Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
________________________________
Title: President
Address: /s/ Richard E. Ottalagana
____________________________________
Richard E. Ottalagana
965 Strong Road
Victor, New York 14564
Address: /s/ Arunas A. Chesonis
____________________________________
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
4
<PAGE>
Exhibit 10.11.3
SECOND AMENDMENT TO STOCK RIGHTS AGREEMENT
This is the Second Amendment to Stock Rights Agreement (the
"Amendment"), dated September 30, 1998, between RICHARD E. OTTALAGANA
("Shareholder"), PAETEC CORP., a Delaware corporation with its principal place
of business at 290 Woodcliff Drive, Fairport, New York 14450 (the "Company"),
PAETEC COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary
of the Company with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 ("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. Shareholder holds 250,000 shares of Class A common stock of the
Company, subject to certain restrictions contained in a Stock Rights Agreement,
dated July 17, 1998, among the parties (the "Agreement"). Shareholder also
holds 30,000 shares of Class B common stock of the Company, subject to certain
restrictions contained in the Agreement and in the First Amendment to Stock
Rights Agreement dated August 13, 1998 (the "First Amendment").
B. The Company has now offered to issue to Shareholder 30,000
additional shares of Class A common stock at a purchase price of $2.50 per
share, subject to certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Amendment for the purpose of confirming Shareholder's additional equity interest
in the Class A common stock of the Company and outlining the rights of
Shareholder and the restrictions imposed by the Company with respect to the
additional Class A common stock to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares. The Company confirms its offer to issue
------------------
30,000 shares of Class A common stock (the "Additional Class A Shares") to
Shareholder at a price of $2.50 per share, payable in full upon issuance of the
Additional Class A Shares. A stock certificate evidencing the Additional Class
A Shares shall be issued in the name of Shareholder upon receipt of this
executed Amendment and payment in full of the purchase price.
2. Incorporation of Agreement and First Amendment by Reference. All
-----------------------------------------------------------
of the provisions of the Agreement shall apply to the Additional Class A Shares
issued to
<PAGE>
Shareholder pursuant to this Amendment, except to the extent that a
provision of this Amendment expressly supersedes any provision of the Agreement
or First Amendment. Sections 3 and 5 of the First Amendment, which modify
Sections 4 and 2, respectively, of the Agreement, shall also apply to the
Additional Class A Shares.
3. Legends. Each certificate for Additional Class A Shares owned by
-------
Shareholder shall bear the following legends:
(a) The shares represented by this certificate were issued to
the shareholder with restrictions. Neither the shares, nor any
interest in them, may be sold, transferred, assigned, pledged,
hypothecated, or otherwise disposed of, unless that transfer is
expressly permitted by a stock rights agreement, including any
amendment thereto, between the shareholder and the Company, a
copy of which is on file at the office of the Company in
Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may
not be transferred in the absence of such registration unless the
Company receives an opinion of counsel reasonably acceptable to
it stating the such sale or transfer is exempt from registration.
With respect to Additional Class A Shares that are subject to the Company's
Purchase Option, described in Section 3 of the Agreement, however, Shareholder
shall be entitled to a certificate without the legend set forth in subparagraph
(a), evidencing any Additional Class A Shares as to which the Purchase Option
has expired.
The parties' assent to the terms of this Amendment is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
--------------------------------
Title: President
2
<PAGE>
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
--------------------------------
Title: President
Address: /s/ Richard E. Ottalagana
------------------------------------
Richard E. Ottalagana
965 Strong Road
Victor, New York 14564
Address: /s/ Arunas A. Chesonis
------------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
3
<PAGE>
Exhibit 10.11.4
October 15, 1998
Richard E. Ottalagana
965 Strong Rd.
Victor, NY 14564
Re: Stock Rights Agreement
----------------------
Dear Dick:
The purpose of this letter is to formalize our understanding concerning certain
restrictions on your ownership and/or transfer of PaeTec Corp. stock pursuant to
your Stock Rights Agreement dated July 17, 1998. In particular, this letter
confirms that those restrictions will be relaxed as described below, effective
upon the third anniversary of your employment with PaeTec Communications, Inc.
As we have previously discussed, your decision to join PaeTec was based, in
part, on a mutual understanding concerning the nature and length of your
employment. Specifically, it was understood that following your third full year
of employment with PaeTec you would be entitled to reduce your status at PaeTec
to part-time employment (i.e., no more than twenty hours per week) or to assist
PaeTec on a consulting basis for no more than twenty hours per week, without
adversely affecting any "vesting" rights in your PaeTec stock. This letter
formalizes our understanding that a reduction of your employment status in the
manner indicated above will not be deemed to be a voluntary separation from the
company pursuant to Section 3(a) of the Stock Rights Agreement and therefore
will not trigger the "Purchase Option" described in Section 3. Instead, your
Stock Rights Agreement will continue in full force and effect just as if you
were continuing on as a full-time employee, and the Purchase Option will not
take effect until such time as it is triggered by some other event described in
the Stock Rights Agreement. If no such triggering event occurs, the Purchase
Option will still fully expire, as indicated in the Agreement, on the fourth
anniversary of your employment with PaeTec Communications, Inc.
I trust that this letter accurately summarizes our understanding with regard to
your Stock Rights Agreement and our mutual expectations of your employment with
PaeTec. If so, please indicate your agreement with the terms of this letter by
countersigning below and returning this letter to me at your earliest
convenience.
Very truly yours,
PaeTec Corp. and PaeTec Communications, Inc.
/s/ Arunas A. Chesonis
- ----------------------------
Arunas A. Chesonis
President
Agreed as of this 12th day of January, 1999
/s/ Richard E. Ottalagana
- ----------------------------
Richard E. Ottalagana
<PAGE>
Exhibit 10.11.5
THIRD AMENDMENT TO STOCK RIGHTS AGREEMENT
THIS THIRD AMENDMENT TO STOCK RIGHTS AGREEMENT (this "Amendment") is
made as of this 4th day of February 2000 by and among Richard E. Ottalagana (the
"Stockholder"), PaeTec Corp., a Delaware corporation (the "Company"), PaeTec
Communications, Inc., a Delaware corporation and wholly-owned subsidiary of the
Company (the "Subsidiary"), and Arunas A. Chesonis ("Mr. Chesonis").
RECITALS
--------
A. The Company, the Subsidiary, the Stockholder and Mr. Chesonis are
parties to a Stock Rights Agreement dated as of July 17, 1998 (the "Stock Rights
Agreement"), as amended as of August 13, 1998 ("Amendment No. 1") and September
30, 1998 ("Amendment No. 2"), and as supplemented by letter dated October 15,
1998.
B. The Board of Directors of the Company has authorized the issuance
and sale (the "Series A Preferred Stock Placement") of 134,000 shares of a new
series of preferred stock of the Company, designated the Series A Convertible
Preferred Stock, to the purchasers (the "Purchasers") listed on the Schedule of
Purchasers to, and pursuant to the terms and conditions of, an Equity Purchase
Agreement (the "Purchase Agreement").
C. As a condition to the consummation of the Series A Preferred
Stock Placement, the Purchasers have required that the Company, the Subsidiary,
the Stockholder and Mr. Chesonis further amend the Stock Rights Agreement to
provide that (i) all Class B Shares (as defined in the Stock Rights Agreement)
shall automatically convert into shares of Class A common stock, par value $0.01
per share ("Class A Common Stock"), of the Company in specified circumstances
and (ii) any securities excluded from a registration pursuant to the "cut-back"
provisions of the piggyback registration rights granted to the Stockholder
pursuant to the Stock Rights Agreement shall be excluded from such registration
on a pro rata basis among the holders of shares participating in the offering
--- ----
pursuant to registration rights granted by the Company, based on the number of
shares of common stock owned by each holder.
D. The parties to the Stock Rights Agreement desire to amend the
Stock Rights Agreement to induce the Purchasers to consummate of the Series A
Preferred Stock Placement.
<PAGE>
AGREEMENT
---------
1. Defined Terms. All capitalized terms used in this Amendment
-------------
without definition shall have the meanings given to such terms in the Stock
Rights Agreement, as amended.
2. Automatic Conversion of Class B Shares. Notwithstanding anything
--------------------------------------
anything in the Stock Rights Agreement, Amendment No. 1, Amendment No. 2 or the
Letter to the contrary, the parties agree that, as provided in the Company's
certificate of incorporation as amended in connection with the Series A
Preferred Stock Placement (the "Restated Certificate of Incorporation"), each
Class B Share subject to the Stock Rights Agreement (as amended) shall
automatically convert into one share of Class A Common Stock upon the date (the
"Termination Date") that the Stockholder ceases to be employed by the Company or
any subsidiary thereof unless, at the Termination Date, Mr. Chesonis shall (i)
be the Chairman of the Board or Chief Executive Officer of the Company, (ii) be
the beneficial owner of shares of Class B common stock of the Company and (iii)
have the power pursuant to an irrevocable proxy to vote the Class B Shares on
all matters on which such Class B Shares are entitled to vote, provided Mr.
Chesonis personally exercises such power and does not delegate the exercise
thereof to any other person. If subsequent to the Termination Date, any
condition specified in clause (i), (ii) or (iii) in the preceding sentence shall
cease to be in effect, each Class B Share shall immediately be converted into
one share of Class A Common Stock. All other terms and conditions of the Stock
Rights Agreement, as amended, shall continue to apply to such shares of Class A
Common Stock upon such conversion. In the event of any conflict between the
provisions of this Section 2 and the provisions of Article V of the Restated
Certificate of Incorporation with respect to such mandatory conversion, which
shall include, without limitation, any additional mandatory conversion events
specified in such Article V, the provisions of Article V of the Restated
Certificate of Incorporation shall control.
3. Amendment of Section 6(b). The fourth and fifth sentences of
-------------------------
Section 6(b) of the Stock Rights Agreement are hereby deleted and replaced and
superseded in their entirety with the following sentence:
"Notwithstanding any other provision of this Section 6, if the
managing underwriter advises in writing the Company and the
Stockholder that marketing factors require a limitation of the
number of shares of common stock to be underwritten and sold in
such offering, the managing underwriter may exclude some or all
of the shares of common stock to be sold in such offering from
such registration, and the shares to be included in such
registration shall be allocated pro rata among the holders of
--- ----
shares participating in the offering pursuant to registration
rights granted by the Company (including demand and
2
<PAGE>
piggyback registration rights), based on the number of shares of
common stock requested to be included by each holder in such
registration."
4. Binding Effect. This Amendment shall be binding upon and inure to
--------------
the benefit of the parties hereto and their heirs, executors, administrators,
successors and assigns.
5. Governing Law. This Amendment shall be governed by, and construed
-------------
and enforced in accordance with, the laws of the State of New York, except that
if any provision of this Amendment or any part of any such provision would be
illegal, invalid or enforceable under such laws in connection with a suit or
proceeding validly instituted in another jurisdiction, then the laws of such
other jurisdiction shall govern insofar as is necessary to sustain the legality,
validity or enforceability of such provision or any part of such provision.
6. Captions. Captions to the Sections in this Amendment are for the
--------
convenience of the parties only and shall not affect the meaning or
interpretation of this Amendment.
7. Enforceability and Interpretation. It is the intention of the
---------------------------------
parties to this Amendment that the terms and provisions contained in this
Amendment shall be enforceable to the fullest extent permitted by law. If any
term or provision of this Amendment or the application thereof to any Person or
circumstance is construed to be illegal, invalid or unenforceable, in whole or
in part, then such term or provision shall be construed in such a manner as to
permit its enforceability under applicable law to the fullest extent permitted
by such law. In any case, the remaining terms and provisions of this Amendment
or the application thereof to any Person or circumstance, except those terms and
provisions which have been held illegal, invalid or unenforceable, shall remain
in full force and effect.
8. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9. Additional Documents. Each party hereto agrees to execute any and
--------------------
all documents, instruments, certificates and communications deemed to be
necessary or advisable by the Company to effectuate the purposes of this
Amendment.
[signature page follows]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment with full force and effect as of the day and year first written
above.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
----------------------------------------
Its: CEO, Chairman and President
----------------------------------------
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
----------------------------------------
Its: CEO, Chairman and President
----------------------------------------
/s/ Arunas A. Chesonis
--------------------------------------------
Arunas A. Chesonis
/s/ Richard E. Ottalagana
--------------------------------------------
Richard E. Ottalagana
4
<PAGE>
Exhibit 10.12.1
STOCK RIGHTS AGREEMENT
This is a Stock Rights Agreement (the "Agreement"), dated July 17,
1998, between RICHARD J. PADULO ("Shareholder"), PAETEC CORP., a Delaware
corporation with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 (the "Company"), PAETEC COMMUNICATIONS, INC., a
Delaware corporation and wholly-owned subsidiary of the Company with its
principal place of business at 290 Woodcliff Drive, Fairport, New York 14450
("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. The Company is a Delaware corporation having 110,000,000 shares of
authorized capital stock, 10,000,000 of which are designated preferred stock,
75,000,000 of which are designated Class A common and 25,000,000 of which are
designated Class B common. Founder is one of the founding shareholders of the
Company.
B. Shareholder is also one of the founding Shareholders of the
Company and is an employee of the Subsidiary. In order to induce Shareholder to
leave his former employer and join the Subsidiary as an employee, the Company
previously offered to issue to Shareholder 250,000 shares of Class A common
stock at a purchase price of $.40 per share, subject to certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Agreement for the purpose of confirming Shareholder's equity interest in the
Company and outlining the rights of and restrictions imposed by the Company with
respect to the shares of stock held by the Shareholder.
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares.
------------------
(a) The Company confirms its previous offer to issue 250,000 shares of
Class A common stock (the "Shares") to Shareholder at a price of $.40 per share
payable in full upon issuance of the Shares. A stock certificate evidencing the
Shares shall be issued in the name of Shareholder upon receipt of this executed
Agreement and payment in full of the purchase price.
(b) In order to induce the Company to issue the Shares, Shareholder
represents and warrants to the Company as follows:
<PAGE>
(i) Shareholder (A) understands that an investment in the Shares is
speculative due to factors including (but not limited to) the start-up nature of
the Company and the risk of economic loss from the operations of the Company,
but believes that such an investment is suitable for Shareholder based upon
Shareholder's financial needs, (B) can withstand a complete loss of the
investment in the Shares, and (C) has the net worth to undertake these risks.
(ii) Shareholder is acquiring the Shares for the personal account of
Shareholder, with no present intention of reselling, distributing or otherwise
transferring the Shares or any portion of the Shares to anyone else.
(iii) Shareholder understands and acknowledges that the Shares are
being offered and sold under one or more exemptions provided in the Securities
Act of 1933, as amended (the "Securities Act"), Regulation D promulgated
thereunder and applicable New York State securities laws, and that this
transaction has not been reviewed or passed upon by the United States Securities
and Exchange Commission, the New York State Attorney General, or any other
federal or state agency.
(iv) Shareholder realizes that Shareholder must bear the economic
risk of investment for an indefinite period of time because (A) the Shares have
not been registered under the Securities Act and cannot be resold by Shareholder
unless they are subsequently registered under the Securities Act or an exemption
from registration is available, (B) the transferability of the Shares is
restricted by the terms of this Agreement, and (C) there currently is no public
market for the Shares, and Shareholder may not be able to liquidate the
investment in the Shares in the event of an emergency. Shareholder has adequate
means of providing for Shareholder's current financial needs and personal
contingencies, and has no need for liquidity of investment with respect to the
Shares.
(v) Shareholder believes that Shareholder, either alone or together
with the assistance of professional advisor(s), has knowledge and experience in
business and financial matters sufficient to make Shareholder capable of
evaluating the merits and risks of an investment in the Shares.
(vi) Shareholder is fully familiar with the business of the Company
and its present and proposed operations. Shareholder has been given reasonable
opportunity to ask representatives of the Company questions concerning the
Company and making an investment in the Shares. Shareholder has obtained
sufficient information to evaluate the merits and risks of an investment in the
Shares.
(vii) Shareholder confirms that Shareholder has been advised to rely
on professional accounting, tax, legal and financial advisers with respect to an
investment in the Shares and has obtained, to the extent Shareholder deems it
necessary, professional advice
2
<PAGE>
with respect to the risks inherent in an investment in the Shares and the
suitability of an investment in the Shares in light of Shareholder's financial
condition and investment needs.
2. Restriction on Transfer of Shares. Shareholder may not sell,
---------------------------------
transfer, pledge, assign, transfer, or otherwise encumber or dispose of, in any
manner or by any means, any Shares that are subject to the Company's Purchase
Option described in Section 3 of this Agreement. This restriction on transfer
does not apply to any Shares that, pursuant to Section 3, no longer are subject
to the Company's Purchase Option or to any additional shares of capital stock of
the Company that Shareholder might acquire in the future. Notwithstanding the
foregoing, Shareholder may pledge the Shares to Founder as collateral security
for a promissory note dated the date hereof, provided that the Shares so pledged
shall continue to be subject to the Company's Purchase Option described in
Section 3 below.
3. Repurchase of Shares upon Termination of Employment with
--------------------------------------------------------
Subsidiary. Upon termination of Shareholder's employment with the Subsidiary,
- ----------
the Company shall have an option, but shall not be obligated, to repurchase (the
"Purchase Option") from Shareholder or Shareholder's personal representative all
or a portion of Shareholder's Shares, as set forth in the following
subparagraphs.
(a) If Shareholder's employment with the Subsidiary terminates due to
voluntary separation or dismissal for Cause (as defined below), the number of
Shares that are subject to the Company's Purchase Option shall be determined as
follows:
(i) The Company shall have the option to repurchase up to 100%
of the Shares should Shareholder's employment terminate at any time prior to the
first anniversary of Shareholder's employment with the Subsidiary.
(ii) The Company shall have the option to repurchase up to 60%
of the Shares should Shareholder's employment terminate on the first anniversary
date, or at any time between the first and second anniversary dates, of
Shareholder's employment with the Subsidiary.
(iii) The Company shall have the option to repurchase up to 40%
of the Shares should Shareholder's employment terminate on the second
anniversary date, or at any time between the second and third anniversary dates,
of Shareholder's employment with the Subsidiary.
(iv) The Company shall have the option to repurchase up to 20%
of the Shares should Shareholder's employment terminate on the third anniversary
date, or at any time between the third and fourth anniversary dates, of
Shareholder's employment with the Subsidiary.
3
<PAGE>
(b) If Shareholder's employment with the Subsidiary terminates
because of Shareholder's death or disability, Shareholder or Shareholder's
personal representative may negotiate a transfer of all or a portion of
Shareholder's Shares back to the Company at any time. With respect to Shares
that were subject to the Company's Purchase Option and that are not transferred
back to the Company, the transfer restrictions set forth in Section 2 above
shall apply to the same extent that they would have applied if Shareholder's
employment had continued. This restriction on transfer does not apply to any
Shares that would no longer have been subject to the Company's Purchase Option,
or to any additional shares of capital stock of the Company that Shareholder
might acquire in the future.
(c) In the event that Shareholder's employment with the Subsidiary
terminates for any reason not addressed in subparagraphs (a) and (b) above, the
Company's Purchase Option, together with all transfer restrictions set forth in
Section 2, shall fully expire effective as of the date of termination.
(d) The Company's Purchase Option shall fully expire on the fourth
anniversary of Shareholder's employment with the Subsidiary. Shares as to
which the Company's Purchase Option has expired are no longer subject to the
transfer restrictions set forth in Section 2.
(e) To exercise its Purchase Option, the Company must notify
Shareholder or Shareholder's personal representative of its intention to
exercise its Purchase Option within 60 days after the date of termination of
Shareholder's employment with the Subsidiary. Should the Company fail to
exercise the Purchase Option within such 60-day period, the Shares shall no
longer be subject to the transfer restrictions set forth in Section 2.
(f) In the event of a consolidation or merger of the Company with or
into any other person or entity, a sale of all or substantially all of the
assets of the Company to another person or entity, or an acquisition of more
than 50% of the capital stock of the Company by another person or entity, the
Company's Purchase Option shall be terminated as of the effective date of the
transfer. Notwithstanding the foregoing, the Company's Purchase Option shall
not be terminated or in any other way affected by an initial public offering of
stock by the Company.
4. Repurchase Price and Payment Terms. The price for all Shares
----------------------------------
purchased by the Company pursuant to the Purchase Option shall be $.40 per
Share. Payment shall be made in full for all repurchased Shares within 30 days
after the date on which the Company delivers notice of its intention to exercise
the Purchase Option. Upon payment, Shareholder or Shareholder's personal
representative shall deliver all stock certificates for repurchased Shares,
properly endorsed in blank, to the Company or its designee.
4
<PAGE>
5. Non-Competition.
---------------
(a) For a period of one year after termination of Shareholder's
employment with the Subsidiary (regardless of the reason for termination),
Shareholder shall not, directly or indirectly:
(i) solicit or serve clients or customers of the Company or any
affiliate of the Company (including the Subsidiary), whether for Shareholder's
own account or as an employee, shareholder, partner, officer, member, manager,
director, consultant, or other representative of any third party;
(ii) direct any business from, or enter into competition with,
the Company or any affiliate of the Company (including the Subsidiary) in any
line of business in which the Company or such affiliate was conducting
operations during Shareholder's employment; or
(iii) serve as an employee, shareholder, partner, officer,
member, manager, director, consultant or other representative of any third party
which engages in any line of business competitive with the Company or any
affiliate of the Company (including the Subsidiary) anywhere in the world.
Shareholder acknowledges that the foregoing limitations are reasonable in time
and scope and agrees not to raise any objection to the reasonableness of the
foregoing in any action or proceeding to enforce the terms of this Section.
(b) As consideration for the non-competition covenant set forth in
subparagraph (a) above, the Subsidiary agrees that, if Shareholder's employment
is terminated by the Subsidiary without Cause, Subsidiary shall pay Shareholder
or Shareholder's personal representative during the one-year period in which the
covenant is in effect an amount equal to the annualized base salary paid to
Shareholder immediately prior to termination of Shareholder's employment.
Payment shall be made in accordance with the Subsidiary's customary payroll
practices. Continued payment of Shareholder's base salary under this
subparagraph (b) shall not be made if termination of Shareholder's employment is
due to Shareholder's death, disability, voluntary resignation or withdrawal or
termination for "Cause" (as defined below).
(c) As additional consideration for the non-competition covenant set
forth in subparagraph (a) above, the Company agrees that (i) in the event
Shareholder's employment terminates due to the death or disability of
Shareholder or is terminated by Subsidiary without Cause, the one-year period
during which the non-competition covenant is to be in effect shall be counted as
a year of employment with Subsidiary for purposes of determining the percentage
of Shares that is subject to the Company's Purchase Option, and (ii) in the
event Shareholder's employment is terminated by the Subsidiary for Cause or
terminates due to the
5
<PAGE>
voluntary resignation or withdrawal of Shareholder, the Company shall have the
option of (A) waiving the non-competition covenant set forth in subparagraph (a)
above or (B) counting the one-year period during which the non-competition
covenant is to be in effect as a year of employment for purposes of determining
the percentage of Shares that is subject to the Company's Purchase Option.
(d) (i) Should Shareholder violate the terms of the non-competition
covenant set forth in subparagraph (a), the Company, the Company shall notify
Shareholder in writing of the alleged violation that constitutes a breach of
this Agreement, and Shareholder shall have 10 business days to cure the breach.
If the breach is not cured to the satisfaction of the Company, then in addition
to any other remedies available under law, the Company may (1) discontinue any
payments being made to Shareholder pursuant to subparagraph (b) hereof, and (2)
exercise its Purchase Option with respect to any additional Shares that would
have been subject to the Purchase Option had the one-year period of the non-
competition covenant not been counted as an additional year of employment
pursuant to the terms of subparagraph (c) hereof. Exercise of the Purchase
Option with respect to such additional Shares shall be made in accordance with
the terms of Sections 3 and 4 hereof, except that the Company may exercise the
Purchase Option at any time within 60 days after the Company first becomes aware
of Shareholder's violation of subparagraph (a).
(ii) In the event that the Company fails to make any payment due
to Shareholder pursuant to Section 5(b) above, Shareholder shall notify the
Company in writing of the alleged failure to make payment that constitutes a
breach of this Agreement, and the Company shall have 5 business days to cure the
breach. If the breach is not cured to the satisfaction of Shareholder, then the
non-competition covenant set forth in subparagraph (a) shall be null and void
and of no further force and effect.
(e) For purposes of this Section 5, termination for "Cause" shall
mean termination of Shareholder's employment with the Subsidiary due to: (i)
material failure or refusal to perform the duties assigned to Shareholder, (ii)
refusal of Shareholder to follow the reasonable directives of the Board of
Directors or Chief Executive Officer of the Subsidiary, (iii) conviction of a
felony, (iv) misappropriation of any funds or property of the Company or any
affiliate of the Company (including the Subsidiary), or (v) commission of any
act which could materially injure the business or reputation of, or materially
adversely affect the interests of Company or any affiliate of the Company
(including the Subsidiary).
(f) Shareholder acknowledges that his/her services are unique and
extraordinary and are not readily replaceable, and hereby expressly agrees that,
in the event of a violation of the non-competition covenant set forth in
subparagraph (a), the Company and its affiliates (including Subsidiary) will be
irreparably harmed and the remedy of damages or other remedy at law will be
inadequate. Therefore, Shareholder agrees that, in the event of a threatened or
actual violation of the non-competition covenant, the Company shall be entitled
to obtain from any court of competent jurisdiction, an injunction restraining
Shareholder from
6
<PAGE>
committing the violation, without the necessity of proving actual damage and in
addition to any other relief available under this Agreement or at law.
6. Piggy-Back Registration Rights.
------------------------------
(a) If at any time or from time to time the Company shall determine
to register any of its equity securities, either for its own account or the
account of a security holder or holders (other than a registration of securities
relating solely to employee benefit plans or to effect a merger or other
reorganization), the Company will promptly give to Shareholder written notice
thereof and, upon the written request of Shareholder, include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Shares specified
in the written request made within 10 business days after receipt of such
written notice from the Company.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise Shareholder as a part of the written notice given to Shareholder. In
such event the right of any Shareholder to registration pursuant to this Section
6 shall be conditioned upon Shareholder's participation in such underwriting,
and the inclusion of Shares in the underwriting shall be limited to the extent
provided herein. Shareholder (together with the Company and the other holders
distributing their securities through such underwriting) shall enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 6, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may exclude some or all of the Shares or securities of other holders
of similar registration rights from such registration. The Company shall so
advise Shareholder and other stockholders distributing their securities through
such underwriting, and the number of Shares or securities of other holders of
similar registration rights that may be included in the registration and
underwriting, as determined by the managing underwriter, shall be allocated on a
pro rata basis. If Shareholder disapproves of the terms of any such
underwriting, Shareholder may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. Any securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration, and shall
continue to be subject to the terms of this Section.
(c) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 6 prior to the effectiveness of
such registration whether or not Shareholder has elected to include securities
in such registration.
(d) All expenses associated with the registration (including, without
limitation, registration, qualification and filing fees, printing expenses, blue
sky fees, and fees and disbursements of counsel and accountants for the Company)
shall be borne by the
7
<PAGE>
Company. Selling expenses, including underwriters' discounts, shall be borne by
Shareholder pro rata in proportion to the number of securities being registered.
(e) In the case of each registration under this Section, the Company
will:
(i) prepare and file a registration statement with respect to
such securities and use its best efforts to cause such registration statement to
become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
(ii) furnish to Shareholder such reasonable number of copies of
the registration statement, preliminary prospectus, final prospectus and such
other documents as Shareholder may reasonably request in order to facilitate the
public offering of the Shares; and
(iii) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by Shareholder,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify as a foreign corporation or as a dealer in
securities or to file a general consent to service of process in any such states
or jurisdictions in which it has not already done so and except as may be
required by the Securities Act.
(f) The Company will indemnify Shareholder against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof), arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, or any violation by the Company of the Securities Act of 1933, the
Securities Exchange Act of 1934, state securities law or any rule or regulation
promulgated under such laws applicable to the Company in connection with any
such registration, qualification or compliance, and the Company will reimburse
Shareholder for any legal and any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, provided that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission, or alleged untrue statement or omission, made in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by Shareholder.
(g) Shareholder will, if Shares held by such Shareholder are included
in the securities as to which such registration is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a
8
<PAGE>
registration statement against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, such Shareholders, such directors, officers, persons, underwriters
or control persons for any legal or any other expenses reasonably incurred, as
such expenses are incurred, in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by Shareholder and stated to be specifically for use therein.
(h) Shareholder shall furnish to the Company such information
regarding Shareholder, the Shares held by Shareholder, and the distribution
proposed by Shareholder as the Company may request in writing and as shall be
required in connection with any registration referred to in this Agreement.
(i) The registration rights granted to Shareholder in this Section
shall expire at such time (if ever) as Shareholder is free to sell the Shares
under Rule 144 promulgated under the Securities Act (or any successor thereto)
without limitation as to volume or manner of sale restrictions.
7. Co-Sale Rights.
--------------
(a) In the event that Founder receives a bona fide offer from any
person to purchase any of Founder's Common Stock (the "Founder's Shares") in a
private transaction exempt from registration under the Securities Act, Founder
shall give Shareholder notice of his intention to sell Founder's Shares,
describing the amount of Founder's Shares proposed to be transferred, the
identity of the proposed transferee, and the price and terms upon which he
proposes to make such transfer (the "Transfer Notice").
(b) Within fifteen (15) days after delivery of the Transfer Notice,
Shareholder may elect to sell up to Shareholder's pro rata share of the total
number of shares to be purchased by the transferee described in the Transfer
Notice by giving written notice thereof to Founder and tendering to Founder a
certificate representing the shares to be sold, properly endorsed for transfer,
with written instructions to transfer the shares to the transferee described in
the Transfer Notice upon receipt of payment for such shares from such transferee
for the benefit of Shareholder. Founder shall thereupon notify the transferee
of the co-sale arrangements hereunder, and instruct the transferee to deliver
payment for the shares to be purchased from Shareholder to Shareholder. For the
purpose of the co-sale right set forth in this Section, the pro rata share of
Shareholder shall be determined based on the number of
9
<PAGE>
Shares held by Shareholder that are subject to co-sale rights, divided by the
sum of (A) the total number of shares of common stock held by all stockholders
of the Company (including Shareholder) holding similar co-sale rights plus (B)
the number of shares of common stock held by Founder at the date of the Transfer
Notice (assuming conversion of all convertible securities and exercise of all
options and warrants). The resulting percentage shall then be multiplied by the
number of Shares proposed to be purchased by the transferee to determine the
actual number of Shares eligible for sale by Shareholder.
(c) In the event Shareholder declines to exercise the co-sale right
as allowed by this Section, Founder may, within 90 days after the date on which
Shareholder's co-sale rights lapsed, transfer some or all of Founder's Shares
which were the subject of the Transfer Notice at a price and on terms no less
favorable to the transferee(s) than specified in the Transfer Notice. Founder's
Shares transferred in accordance with the provisions of this Section shall no
longer be subject to the restrictions on Founder's Shares forth in this Section.
After the expiration of said 90-day period, Founder shall not transfer any of
Founder's Shares without again complying with this Section.
(d) Any transfer of Founder's Shares without consideration to a
family member of Founder or a trust or custodian for the benefit of Founder or a
family member of Founder, and transfers pursuant to a pledge to secure
indebtedness, shall not be subject to the provisions of this Section, provided
that the transferee agrees in writing to be bound by the provisions of this
Section with respect to any subsequent transfer of such shares.
8. Legend. Each certificate for Shares owned by Shareholder shall
------
bear the following legends:
(a) The shares represented by this certificate were issued
to the shareholder with restrictions. Neither the shares,
nor any interest in them, may be sold, transferred,
assigned, pledged, hypothecated, or otherwise disposed of,
if restricted pursuant to a stock rights agreement between
the shareholder and the Company, a copy of which is on file
at the office of the Company in Fairport, New York.
(b) The shares represented by this certificate have not
been registered under the Securities Act of 1933, as
amended, and may not be transferred in the absence of such
registration unless the Company receives an opinion of
counsel reasonably acceptable to it stating the such sale or
transfer is exempt from registration.
With respect to Shares that are subject to the Purchase Option described in
Section 3 of this Agreement, however, Shareholder shall be entitled to a
certificate without the legend set forth
10
<PAGE>
in subparagraph (a), evidencing any Shares as to which the Company's Purchase
Option has expired.
9. Notices. All notices and communications under this Agreement
-------
shall be in writing and shall be given by personal delivery or by registered or
certified mail, return receipt requested, addressed to the respective residences
of Shareholder and Founder set forth below or to such other address as may be
designated by Shareholder or Founder, and to the principal office of the
Company. Notice shall be deemed given upon personal delivery or upon receipt.
10. Miscellaneous.
-------------
(a) Neither this Agreement, nor any action taken under it, shall be
construed as creating any limitation or restriction upon any right that
Subsidiary would otherwise have to terminate the employment of Shareholder at
any time for any reason.
(b) This Agreement may be modified or amended only upon the written
consent of all parties to the Agreement.
(c) This Agreement shall be interpreted, construed, and enforced in
accordance with the laws of the State of New York.
(d) Neither this Agreement, nor any rights or obligations under it,
may be assigned by any party without the prior written consent of the other
parties.
(e) This Agreement shall benefit and be binding upon the parties and
their successors, heirs, executors, personal representatives, and assigns.
(f) This Agreement sets forth the entire understanding and agreement
of the parties with respect to its subject matter and supersedes all prior
letters, agreements, covenants, communications, understandings, representations,
or warranties, whether oral or written, by any officer, employee, or
representative of either party.
(g) The waiver of any provision of this Agreement, or of any breach
of this Agreement, shall not constitute a subsequent waiver of any provision or
breach.
(h) In the event that Shareholder is a prevailing party in any
litigation arising under or in connection with this Agreement, the Company shall
pay the reasonable attorneys fees and expenses incurred by Shareholder in
connection with the litigation.
(i) If, at any time, any of the provisions of this Agreement shall be
deemed by a court or other body having jurisdiction over this Agreement to be
illegal, invalid, or unenforceable, those provisions shall be deemed severed
from this Agreement. The remaining
11
<PAGE>
provisions of this Agreement shall be valid and binding as if this Agreement had
never contained any illegal, invalid, or otherwise unenforceable provisions,
without the requirement that the amendment be recorded in a writing signed by
the parties.
The parties' assent to the terms of this Agreement is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
--------------------------------
Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
--------------------------------
Title: President
Address: /s/ Richard J. Padulo
-------------------------------------
Richard J. Padulo
1650 Brooks Avenue
Rochester, New York 14624
Address: /s/ Arunas A. Chesonis
------------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
12
<PAGE>
Exhibit 10.12.2
FIRST AMENDMENT TO STOCK RIGHTS AGREEMENT
This is the First Amendment to Stock Rights Agreement (the
"Amendment"), dated August 13, 1998, between RICHARD J. PADULO ("Shareholder"),
PAETEC CORP., a Delaware corporation with its principal place of business at 290
Woodcliff Drive, Fairport, New York 14450 (the "Company"), PAETEC
COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary of the
Company with its principal place of business at 290 Woodcliff Drive, Fairport,
New York 14450 ("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. Shareholder holds 250,000 shares of Class A common stock of the
Company, subject to certain restrictions contained in a Stock Rights Agreement,
dated July 17, 1998, among the parties (the "Agreement").
B. The Company has now offered to issue to Shareholder 15,000 shares
of Class B common stock at a purchase price of $.833 per share, subject to
certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Amendment for the purpose of confirming Shareholder's equity interest in the
Class B common stock of the Company and outlining the rights of Shareholder and
the restrictions imposed by the Company with respect to the Class B common stock
to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares. The Company confirms its offer to issue
------------------
15,000 shares of Class B common stock (the "Class B Shares") to Shareholder at a
price of $.833 per share, payable in full upon issuance of the Class B Shares.
A stock certificate evidencing the Class B Shares shall be issued in the name of
Shareholder upon receipt of this executed Amendment and payment in full of the
purchase price.
2. Incorporation of Agreement by Reference. All of the provisions of
---------------------------------------
the Agreement shall apply to the Class B Shares issued to Shareholder pursuant
to this Amendment, except to the extent that a provision of this Amendment
expressly supersedes any provision of the Agreement. Additionally, to the
extent that any provision of this Amendment contradicts any provision contained
in the Agreement with respect to the Shares (as defined in the Agreement), the
provision of this Amendment shall control.
<PAGE>
3. Repurchase Price. The Purchase Option of the Company, described
----------------
in Section 3 of the Agreement, shall apply to the Class B Shares. In the event
that the Company exercises its Purchase Option with respect to all or a portion
of the Class B Shares, however, the price for all Class B Shares repurchased by
the Company pursuant to the Purchase Option, described in Section 4 of the
Agreement, shall be the fair market value of the Class B Shares as of the date
of the exercise of the Purchase Option by the Company. "Fair market value"
shall be determined by the accounting firm then retained by the Company, which
shall promptly perform an appraisal. The determination shall be made in
accordance with generally accepted accounting principles and shall be binding on
all parties.
4. Stockholders' Agreement and Proxy. Concurrently with the
---------------------------------
execution of this Amendment and the issuance of the Class B Shares, Shareholder
is executing and delivering a Stockholders' Agreement and proxy appointing
Arunas A. Chesonis Shareholder's attorney-in-fact and proxy to vote all Class B
Shares now or hereafter owned by Shareholder at any meeting of shareholders,
regular or special, whenever called, and for whatever purpose. Copies of the
Stockholders' Agreement and proxy shall be filed with the Secretary of the
Company, and the proxy shall be registered in the stock books of the Company.
Any transfer of the Class B Shares is subject to the terms of the Stockholders'
Agreement and proxy.
5. Permitted Transfer of Shares and Class B Shares. The restrictions
-----------------------------------------------
on transfer of Shareholder's Shares (as defined in the Agreement), set forth in
Section 2 of the Agreement, shall apply equally to the Class B Shares; provided,
however, that those restrictions are modified, with respect to both the Shares
and Class B Shares, to permit Shareholder to sell, assign, or transfer any or
all of the Shares or Class B Shares held by Shareholder to the following:
(a) Shareholder's spouse, parent(s), siblings, or natural or
adopted lineal descendants, or the spouses of Shareholder's parent(s), siblings,
or lineal descendants (collectively, together with the Shareholder, referred to
as "Shareholder's Family Members");
(b) the trustee of a trust (including a voting trust) principally
for the benefit of Shareholder and/or one or more of Shareholder's Family
Members; provided that the trust may also grant a general or special power of
appointment to one or more of Shareholder's Family Members and may permit trust
assets to be used to pay taxes, legacies, and other obligations of the trust or
of the estates of one or more of Shareholder's Family Members payable by reason
of the death of any of Shareholder's Family Members; and
(c) a corporation, partnership, or limited liability company, a
majority of the voting equity interest in which is owned by Shareholder or by
one or more of Shareholder's transferees under subparagraphs (a) or (b) of this
Section.
2
<PAGE>
6. Legends. Each certificate for Class B Shares owned by
-------
Shareholder shall bear the following legends:
(a) The shares represented by this certificate were issued
to the shareholder with restrictions. Neither the shares, nor any
interest in them, may be sold, transferred, assigned, pledged,
hypothecated, or otherwise disposed of, unless that transfer is
expressly permitted by a stock rights agreement, including any
amendment thereto, between the shareholder and the Company, a
copy of which is on file at the office of the Company in
Fairport, New York.
(b) The shares represented by this certificate have not
been registered under the Securities Act of 1933, as amended, and
may not be transferred in the absence of such registration unless
the Company receives an opinion of counsel reasonably acceptable
to it stating the such sale or transfer is exempt from
registration.
(c) The shares represented by this certificate are subject
to a Stockholders' Agreement and to a proxy in favor of Arunas A.
Chesonis, a copy of which is on file with the Company. Any
transferee of the shares represented by this certificate shall
take the shares subject to the terms of the Stockholders'
Agreement and proxy.
With respect to Class B Shares that are subject to the Company's Purchase
Option, described in Section 3 of the Agreement, however, Shareholder shall be
entitled to a certificate without the legend set forth in subparagraph (a),
evidencing any Class B Shares as to which the Purchase Option has expired.
7. Non-competition. The non-competition covenant of Shareholder set
---------------
forth in subparagraph 5(a)(iii) of the Agreement is modified to read as
follows:
(iii) hold five percent (5%) or more of the shares of a
corporation, or serve as a partner, officer, member, manager,
director, consultant or other representative of any third party, which
engages in any line of business competitive with the Company or any
affiliate of the Company (including the Subsidiary) anywhere in the
world.
3
<PAGE>
The parties' assent to the terms of this Amendment is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
--------------------------------
Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
________________________________
Title: President
Address: /s/ Richard J. Padulo
------------------------------------
Richard J. Padulo
1650 Brooks Avenue
Rochester, New York 14624
Address: /s/ Arunas A. Chesonis
-----------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
4
<PAGE>
Exhibit 10.12.3
SECOND AMENDMENT TO STOCK RIGHTS AGREEMENT
This is the Second Amendment to Stock Rights Agreement (the
"Amendment"), dated September 30, 1998, between RICHARD J. PADULO
("Shareholder"), PAETEC CORP., a Delaware corporation with its principal place
of business at 290 Woodcliff Drive, Fairport, New York 14450 (the "Company"),
PAETEC COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary
of the Company with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 ("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. Shareholder holds 250,000 shares of Class A common stock of the
Company, subject to certain restrictions contained in a Stock Rights Agreement,
dated July 17, 1998, among the parties (the "Agreement"). Shareholder also
holds 15,000 shares of Class B common stock of the Company, subject to certain
restrictions contained in the Agreement and in the First Amendment to Stock
Rights Agreement dated August 13, 1998 (the "First Amendment").
B. The Company has now offered to issue to Shareholder 15,000
additional shares of Class A common stock at a purchase price of $2.50 per
share, subject to certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Amendment for the purpose of confirming Shareholder's additional equity interest
in the Class A common stock of the Company and outlining the rights of
Shareholder and the restrictions imposed by the Company with respect to the
additional Class A common stock to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares. The Company confirms its offer to issue
------------------
15,000 shares of Class A common stock (the "Additional Class A Shares") to
Shareholder at a price of $2.50 per share, payable in full upon issuance of the
Additional Class A Shares. A stock certificate evidencing the Additional Class
A Shares shall be issued in the name of Shareholder upon receipt of this
executed Amendment and payment in full of the purchase price.
2. Incorporation of Agreement and First Amendment by Reference. All
-----------------------------------------------------------
of the provisions of the Agreement shall apply to the Additional Class A Shares
issued to
<PAGE>
Shareholder pursuant to this Amendment, except to the extent that a provision of
this Amendment expressly supersedes any provision of the Agreement or First
Amendment. Sections 3 and 5 of the First Amendment, which modify Sections 4 and
2, respectively, of the Agreement, shall also apply to the Additional Class A
Shares.
3. Legends. Each certificate for Additional Class A Shares owned by
-------
Shareholder shall bear the following legends:
(a) The shares represented by this certificate were issued
to the shareholder with restrictions. Neither the shares, nor any
interest in them, may be sold, transferred, assigned, pledged,
hypothecated, or otherwise disposed of, unless that transfer is
expressly permitted by a stock rights agreement, including any
amendment thereto, between the shareholder and the Company, a
copy of which is on file at the office of the Company in
Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may
not be transferred in the absence of such registration unless the
Company receives an opinion of counsel reasonably acceptable to
it stating the such sale or transfer is exempt from registration.
With respect to Additional Class A Shares that are subject to the Company's
Purchase Option, described in Section 3 of the Agreement, however, Shareholder
shall be entitled to a certificate without the legend set forth in subparagraph
(a), evidencing any Additional Class A Shares as to which the Purchase Option
has expired.
The parties' assent to the terms of this Amendment is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
________________________________
Title: President
2
<PAGE>
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
________________________________
Title: President
Address: /s/ Richard J. Padulo
____________________________________
Richard J. Padulo
1650 Brooks Avenue
Rochester, New York 14624
Address: /s/ Arunas A. Chesonis
____________________________________
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
3
<PAGE>
Exhibit 10.12.4
October 15, 1998
Richard J. Padulo
1650 Brooks Avenue
Rochester, NY 14624
Re: Stock Rights Agreement
----------------------
Dear Dick:
The purpose of this letter is to formalize our understanding concerning certain
restrictions on your ownership and/or transfer of PaeTec Corp. stock pursuant to
your Stock Rights Agreement dated July 17, 1998. In particular, this letter
confirms that those restrictions will be relaxed as described below, effective
upon the third anniversary of your employment with PaeTec Communications, Inc.
As we have previously discussed, your decision to join PaeTec was based, in
part, on a mutual understanding concerning the nature and length of your
employment. Specifically, it was understood that following your third full year
of employment with PaeTec you would be entitled to reduce your status at PaeTec
to part-time employment (i.e., no more than twenty hours per week) or to assist
PaeTec on a consulting basis for no more than twenty hours per week, without
adversely affecting any "vesting" rights in your PaeTec stock. This letter
formalizes our understanding that a reduction of your employment status in the
manner indicated above will not be deemed to be a voluntary separation from the
company pursuant to Section 3(a) of the Stock Rights Agreement and therefore
will not trigger the "Purchase Option" described in Section 3. Instead, your
Stock Rights Agreement will continue in full force and effect just as if you
were continuing on as a full-time employee, and the Purchase Option will not
take effect until such time as it is triggered by some other event described in
the Stock Rights Agreement. If no such triggering event occurs, the Purchase
Option will still fully expire, as indicated in the Agreement, on the fourth
anniversary of your employment with PaeTec Communications, Inc.
I trust that this letter accurately summarizes our understanding with regard to
your Stock Rights Agreement and our mutual expectations of your employment with
PaeTec. If so, please indicate your agreement with the terms of this letter by
countersigning below and returning this letter to me at your earliest
convenience.
Very truly yours,
PaeTec Corp. and PaeTec Communications, Inc.
/s/ Arunas A. Chesonis
- ----------------------------
Arunas A. Chesonis
President
Agreed as of this ____ day of 1/12, 1999
/s/ Richard J. Padulo
- ----------------------------
Richard J. Padulo
<PAGE>
Exhibit 10.12.5
THIRD AMENDMENT TO STOCK RIGHTS AGREEMENT
THIS THIRD AMENDMENT TO STOCK RIGHTS AGREEMENT (this "Amendment") is
made as of this 4th day of February 2000 by and among Richard J. Padulo (the
"Stockholder"), PaeTec Corp., a Delaware corporation (the "Company"), PaeTec
Communications, Inc., a Delaware corporation and wholly-owned subsidiary of the
Company (the "Subsidiary"), and Arunas A. Chesonis ("Mr. Chesonis").
RECITALS
--------
A. The Company, the Subsidiary, the Stockholder and Mr. Chesonis are
parties to a Stock Rights Agreement dated as of July 17, 1998 (the "Stock Rights
Agreement"), as amended as of August 13, 1998 ("Amendment No. 1") and September
30, 1998 ("Amendment No. 2"), and as supplemented by letter dated October 15,
1998 (the "Letter").
B. The Board of Directors of the Company has authorized the issuance
and sale (the "Series A Preferred Stock Placement") of 134,000 shares of a new
series of preferred stock of the Company, designated the Series A Convertible
Preferred Stock, to the purchasers (the "Purchasers") listed on the Schedule of
Purchasers to, and pursuant to the terms and conditions of, an Equity Purchase
Agreement (the "Purchase Agreement").
C. As a condition to the consummation of the Series A Preferred
Stock Placement, the Purchasers have required that the Company, the Subsidiary,
the Stockholder and Mr. Chesonis further amend the Stock Rights Agreement (i) to
provide that all Class B Shares (as defined in the Stock Rights Agreement) shall
automatically convert into shares of Class A common stock, par value $0.01 per
share ("Class A Common Stock"), of the Company in specified circumstances and
(ii) to clarify that to the extent that any securities are required to be
excluded from a registration pursuant to the "cut-back" provisions of the
piggyback registration rights granted to the Stockholder pursuant to the Stock
Rights Agreement, the securities to be included in such registration shall be
determined on a pro rata basis among the holders of shares participating in the
--- ----
offering pursuant to registration rights granted by the Company, based on the
number of shares of common stock requested to be included by each such holder in
such registration.
D. The parties to the Stock Rights Agreement desire to amend the
Stock Rights Agreement to induce the Purchasers to consummate of the Series A
Preferred Stock Placement.
<PAGE>
AGREEMENT
---------
1. Defined Terms. All capitalized terms used in this Amendment
-------------
without definition shall have the meanings given to such terms in the Stock
Rights Agreement, as amended.
2. Automatic Conversion of Class B Shares. Notwithstanding anything
--------------------------------------
in the Stock Rights Agreement, Amendment No. 1, Amendment No. 2 or the Letter to
the contrary, the parties agree that, as provided in the Company's certificate
of incorporation as amended in connection with the Series A Preferred Stock
Placement (the "Restated Certificate of Incorporation"), each Class B Share
subject to the Stock Rights Agreement (as amended) shall automatically convert
into one share of Class A Common Stock upon the date (the "Termination Date")
that the Stockholder ceases to be employed by the Company or any subsidiary
thereof unless, at the Termination Date, Mr. Chesonis shall (i) be the Chairman
of the Board or Chief Executive Officer of the Company, (ii) be the beneficial
owner of shares of Class B common stock of the Company and (iii) have the power
pursuant to an irrevocable proxy to vote the Class B Shares on all matters on
which such Class B Shares are entitled to vote, provided Mr. Chesonis personally
exercises such power and does not delegate the exercise thereof to any other
person. If subsequent to the Termination Date, any condition specified in clause
(i), (ii) or (iii) in the preceding sentence shall cease to be in effect, each
Class B Share shall immediately be converted into one share of Class A Common
Stock. All other terms and conditions of the Stock Rights Agreement, as amended,
shall continue to apply to such shares of Class A Common Stock upon such
conversion. In the event of any conflict between the provisions of this Section
2 and the provisions of Article V of the Restated Certificate of Incorporation
with respect to such mandatory conversion, which shall include, without
limitation, any additional mandatory conversion events specified in such Article
V, the provisions of Article V of the Restated Certificate of Incorporation
shall control.
3. Amendment of Section 6(b). The fourth and fifth sentences of
-------------------------
Section 6(b) of the Stock Rights Agreement are hereby deleted and replaced and
superseded in their entirety with the following sentence:
"Notwithstanding any other provision of this Section 6, if the
managing underwriter advises in writing the Company and the
Stockholder that marketing factors require a limitation of the
number of shares of common stock to be underwritten and sold in
such offering, the managing underwriter may exclude some or all
of the shares of common stock to be sold in such offering from
such registration, and the shares to be included in such
registration shall be allocated pro rata among the holders of
--- ----
shares participating in the offering pursuant to registration
rights granted by the Company (including demand and
2
<PAGE>
piggyback registration rights), based on the number of shares of
common stock requested to be included by each holder in such
registration."
4. Binding Effect. This Amendment shall be binding upon and inure to
--------------
the benefit of the parties hereto and their heirs, executors, administrators,
successors and assigns.
5. Governing Law. This Amendment shall be governed by, and construed
-------------
and enforced in accordance with, the laws of the State of New York, except that
if any provision of this Amendment or any part of any such provision would be
illegal, invalid or enforceable under such laws in connection with a suit or
proceeding validly instituted in another jurisdiction, then the laws of such
other jurisdiction shall govern insofar as is necessary to sustain the legality,
validity or enforceability of such provision or any part of such provision.
6. Captions. Captions to the Sections in this Amendment are for the
--------
convenience of the parties only and shall not affect the meaning or
interpretation of this Amendment.
7. Enforceability and Interpretation. It is the intention of the
---------------------------------
parties to this Amendment that the terms and provisions contained in this
Amendment shall be enforceable to the fullest extent permitted by law. If any
term or provision of this Amendment or the application thereof to any Person or
circumstance is construed to be illegal, invalid or unenforceable, in whole or
in part, then such term or provision shall be construed in such a manner as to
permit its enforceability under applicable law to the fullest extent permitted
by such law. In any case, the remaining terms and provisions of this Amendment
or the application thereof to any Person or circumstance, except those terms and
provisions which have been held illegal, invalid or unenforceable, shall remain
in full force and effect.
8. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9. Additional Documents. Each party hereto agrees to execute any and
--------------------
all documents, instruments, certificates and communications deemed to be
necessary or advisable by the Company to effectuate the purposes of this
Amendment.
[signature page follows]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment with full force and effect as of the day and year first written
above.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
-----------------------------------------
Its: CEO, Chairman and President
---------------------------------------
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
-----------------------------------------
Its: CEO, Chairman and President
---------------------------------------
/s/ Arunas A. Chesonis
--------------------------------------------
Arunas A. Chesonis
/s/ Richard J. Padula
--------------------------------------------
Richard J. Padulo
4
<PAGE>
Exhibit 10.13.1
STOCK RIGHTS AGREEMENT
This is a Stock Rights Agreement (the "Agreement"), dated July 17,
1998, between DANIEL J. VENUTI ("Shareholder"), PAETEC CORP., a Delaware
corporation with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 (the "Company"), PAETEC COMMUNICATIONS, INC., a
Delaware corporation and wholly-owned subsidiary of the Company with its
principal place of business at 290 Woodcliff Drive, Fairport, New York 14450
("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. The Company is a Delaware corporation having 110,000,000 shares
of authorized capital stock, 10,000,000 of which are designated preferred stock,
75,000,000 of which are designated Class A common and 25,000,000 of which are
designated Class B common. Founder is one of the founding shareholders of the
Company.
B. Shareholder is also one of the founding Shareholders of the
Company and is an employee of the Subsidiary. In order to induce Shareholder to
leave his former employer and join the Subsidiary as an employee, the Company
previously offered to issue to Shareholder 250,000 shares of Class A common
stock at a purchase price of $.40 per share, subject to certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Agreement for the purpose of confirming Shareholder's equity interest in the
Company and outlining the rights of and restrictions imposed by the Company with
respect to the shares of stock held by the Shareholder.
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares.
------------------
(a) The Company confirms its previous offer to issue 250,000 shares of
Class A common stock (the "Shares") to Shareholder at a price of $.40 per share
payable in full upon issuance of the Shares. A stock certificate evidencing the
Shares shall be issued in the name of Shareholder upon receipt of this executed
Agreement and payment in full of the purchase price.
(b) In order to induce the Company to issue the Shares, Shareholder
represents and warrants to the Company as follows:
<PAGE>
(i) Shareholder (A) understands that an investment in the Shares is
speculative due to factors including (but not limited to) the start-up nature of
the Company and the risk of economic loss from the operations of the Company,
but believes that such an investment is suitable for Shareholder based upon
Shareholder's financial needs, (B) can withstand a complete loss of the
investment in the Shares, and (C) has the net worth to undertake these risks.
(ii) Shareholder is acquiring the Shares for the personal account of
Shareholder, with no present intention of reselling, distributing or otherwise
transferring the Shares or any portion of the Shares to anyone else.
(iii) Shareholder understands and acknowledges that the Shares are
being offered and sold under one or more exemptions provided in the
Securities Act of 1933, as amended (the "Securities Act"), Regulation D
promulgated thereunder and applicable New York State securities laws, and that
this transaction has not been reviewed or passed upon by the United States
Securities and Exchange Commission, the New York State Attorney General, or any
other federal or state agency.
(iv) Shareholder realizes that Shareholder must bear the economic risk
of investment for an indefinite period of time because (A) the Shares have not
been registered under the Securities Act and cannot be resold by Shareholder
unless they are subsequently registered under the Securities Act or an exemption
from registration is available, (B) the transferability of the Shares is
restricted by the terms of this Agreement, and (C) there currently is no public
market for the Shares, and Shareholder may not be able to liquidate the
investment in the Shares in the event of an emergency. Shareholder has adequate
means of providing for Shareholder's current financial needs and personal
contingencies, and has no need for liquidity of investment with respect to the
Shares.
(v) Shareholder believes that Shareholder, either alone or together
with the assistance of professional advisor(s), has knowledge and experience in
business and financial matters sufficient to make Shareholder capable of
evaluating the merits and risks of an investment in the Shares.
(vi) Shareholder is fully familiar with the business of the Company
and its present and proposed operations. Shareholder has been given reasonable
opportunity to ask representatives of the Company questions concerning the
Company and making an investment in the Shares. Shareholder has obtained
sufficient information to evaluate the merits and risks of an investment in the
Shares.
(vii) Shareholder confirms that Shareholder has been advised
to rely on professional accounting, tax, legal and financial advisers with
respect to an investment in the Shares and has obtained, to the extent
Shareholder deems it necessary, professional advice
2
<PAGE>
with respect to the risks inherent in an investment in the Shares and the
suitability of an investment in the Shares in light of Shareholder's financial
condition and investment needs.
2. Restriction on Transfer of Shares. Shareholder may not sell,
---------------------------------
transfer, pledge, assign, transfer, or otherwise encumber or dispose of, in any
manner or by any means, any Shares that are subject to the Company's Purchase
Option described in Section 3 of this Agreement. This restriction on transfer
does not apply to any Shares that, pursuant to Section 3, no longer are subject
to the Company's Purchase Option or to any additional shares of capital stock of
the Company that Shareholder might acquire in the future. Notwithstanding the
foregoing, Shareholder may pledge the Shares to Founder as collateral security
for a promissory note dated the date hereof, provided that the Shares so pledged
shall continue to be subject to the Company's Purchase Option described in
Section 3 below.
3. Repurchase of Shares upon Termination of Employment with
--------------------------------------------------------
Subsidiary. Upon termination of Shareholder's employment with the Subsidiary,
- ----------
the Company shall have an option, but shall not be obligated, to repurchase (the
"Purchase Option") from Shareholder or Shareholder's personal representative all
or a portion of Shareholder's Shares, as set forth in the following
subparagraphs.
(a) If Shareholder's employment with the Subsidiary terminates due to
voluntary separation or dismissal for Cause (as defined below), the number of
Shares that are subject to the Company's Purchase Option shall be determined as
follows:
(i) The Company shall have the option to repurchase up to 100% of
the Shares should Shareholder's employment terminate at any time prior to the
first anniversary of Shareholder's employment with the Subsidiary.
(ii) The Company shall have the option to repurchase up to 60% of
the Shares should Shareholder's employment terminate on the first anniversary
date, or at any time between the first and second anniversary dates, of
Shareholder's employment with the Subsidiary.
(iii) The Company shall have the option to repurchase up to 40%
of the Shares should Shareholder's employment terminate on the second
anniversary date, or at any time between the second and third anniversary dates,
of Shareholder's employment with the Subsidiary.
(iv) The Company shall have the option to repurchase up to 20% of
the Shares should Shareholder's employment terminate on the third anniversary
date, or at any time between the third and fourth anniversary dates, of
Shareholder's employment with the Subsidiary.
3
<PAGE>
(b) If Shareholder's employment with the Subsidiary terminates because
of Shareholder's death or disability, Shareholder or Shareholder's personal
representative may negotiate a transfer of all or a portion of Shareholder's
Shares back to the Company at any time. With respect to Shares that were
subject to the Company's Purchase Option and that are not transferred back to
the Company, the transfer restrictions set forth in Section 2 above shall apply
to the same extent that they would have applied if Shareholder's employment had
continued. This restriction on transfer does not apply to any Shares that would
no longer have been subject to the Company's Purchase Option, or to any
additional shares of capital stock of the Company that Shareholder might acquire
in the future.
(c) In the event that Shareholder's employment with the Subsidiary
terminates for any reason not addressed in subparagraphs (a) and (b) above, the
Company's Purchase Option, together with all transfer restrictions set forth in
Section 2, shall fully expire effective as of the date of termination.
(d) The Company's Purchase Option shall fully expire on the fourth
anniversary of Shareholder's employment with the Subsidiary. Shares as to
which the Company's Purchase Option has expired are no longer subject to the
transfer restrictions set forth in Section 2.
(e) To exercise its Purchase Option, the Company must notify
Shareholder or Shareholder's personal representative of its intention to
exercise its Purchase Option within 60 days after the date of termination of
Shareholder's employment with the Subsidiary. Should the Company fail to
exercise the Purchase Option within such 60-day period, the Shares shall no
longer be subject to the transfer restrictions set forth in Section 2.
(f) In the event of a consolidation or merger of the Company with or
into any other person or entity, a sale of all or substantially all of the
assets of the Company to another person or entity, or an acquisition of more
than 50% of the capital stock of the Company by another person or entity, the
Company's Purchase Option shall be terminated as of the effective date of the
transfer. Notwithstanding the foregoing, the Company's Purchase Option shall
not be terminated or in any other way affected by an initial public offering of
stock by the Company.
4. Repurchase Price and Payment Terms. The price for all Shares
----------------------------------
purchased by the Company pursuant to the Purchase Option shall be $.40 per
Share. Payment shall be made in full for all repurchased Shares within 30 days
after the date on which the Company delivers notice of its intention to exercise
the Purchase Option. Upon payment, Shareholder or Shareholder's personal
representative shall deliver all stock certificates for repurchased Shares,
properly endorsed in blank, to the Company or its designee.
4
<PAGE>
5. Non-Competition.
---------------
(a) For a period of one year after termination of Shareholder's
employment with the Subsidiary (regardless of the reason for termination),
Shareholder shall not, directly or indirectly:
(i) solicit or serve clients or customers of the Company or any
affiliate of the Company (including the Subsidiary), whether for Shareholder's
own account or as an employee, shareholder, partner, officer, member, manager,
director, consultant, or other representative of any third party;
(ii) direct any business from, or enter into competition with, the
Company or any affiliate of the Company (including the Subsidiary) in any line
of business in which the Company or such affiliate was conducting operations
during Shareholder's employment; or
(iii) serve as an employee, shareholder, partner, officer,
member, manager, director, consultant or other representative of any third party
which engages in any line of business competitive with the Company or any
affiliate of the Company (including the Subsidiary) anywhere in the world.
Shareholder acknowledges that the foregoing limitations are reasonable in time
and scope and agrees not to raise any objection to the reasonableness of the
foregoing in any action or proceeding to enforce the terms of this Section.
(b) As consideration for the non-competition covenant set forth in
subparagraph (a) above, the Subsidiary agrees that, if Shareholder's employment
is terminated by the Subsidiary without Cause, Subsidiary shall pay Shareholder
or Shareholder's personal representative during the one-year period in which the
covenant is in effect an amount equal to the annualized base salary paid to
Shareholder immediately prior to termination of Shareholder's employment.
Payment shall be made in accordance with the Subsidiary's customary payroll
practices. Continued payment of Shareholder's base salary under this
subparagraph (b) shall not be made if termination of Shareholder's employment is
due to Shareholder's death, disability, voluntary resignation or withdrawal or
termination for "Cause" (as defined below).
(c) As additional consideration for the non-competition covenant set
forth in subparagraph (a) above, the Company agrees that (i) in the event
Shareholder's employment terminates due to the death or disability of
Shareholder or is terminated by Subsidiary without Cause, the one-year period
during which the non-competition covenant is to be in effect shall be counted as
a year of employment with Subsidiary for purposes of determining the percentage
of Shares that is subject to the Company's Purchase Option, and (ii) in the
event Shareholder's employment is terminated by the Subsidiary for Cause or
terminates due to the
5
<PAGE>
voluntary resignation or withdrawal of Shareholder, the Company shall have the
option of (A) waiving the non-competition covenant set forth in subparagraph (a)
above or (B) counting the one-year period during which the non-competition
covenant is to be in effect as a year of employment for purposes of determining
the percentage of Shares that is subject to the Company's Purchase Option.
(d) (i) Should Shareholder violate the terms of the non-competition
covenant set forth in subparagraph (a), the Company, the Company shall notify
Shareholder in writing of the alleged violation that constitutes a breach of
this Agreement, and Shareholder shall have 10 business days to cure the breach.
If the breach is not cured to the satisfaction of the Company, then in addition
to any other remedies available under law, the Company may (1) discontinue any
payments being made to Shareholder pursuant to subparagraph (b) hereof, and (2)
exercise its Purchase Option with respect to any additional Shares that would
have been subject to the Purchase Option had the one-year period of the non-
competition covenant not been counted as an additional year of employment
pursuant to the terms of subparagraph (c) hereof. Exercise of the Purchase
Option with respect to such additional Shares shall be made in accordance with
the terms of Sections 3 and 4 hereof, except that the Company may exercise the
Purchase Option at any time within 60 days after the Company first becomes aware
of Shareholder's violation of subparagraph (a).
(ii) In the event that the Company fails to make any payment due
to Shareholder pursuant to Section 5(b) above, Shareholder shall notify the
Company in writing of the alleged failure to make payment that constitutes a
breach of this Agreement, and the Company shall have 5 business days to cure the
breach. If the breach is not cured to the satisfaction of Shareholder, then the
non-competition covenant set forth in subparagraph (a) shall be null and void
and of no further force and effect.
(e) For purposes of this Section 5, termination for "Cause" shall mean
termination of Shareholder's employment with the Subsidiary due to: (i)
material failure or refusal to perform the duties assigned to Shareholder, (ii)
refusal of Shareholder to follow the reasonable directives of the Board of
Directors or Chief Executive Officer of the Subsidiary, (iii) conviction of a
felony, (iv) misappropriation of any funds or property of the Company or any
affiliate of the Company (including the Subsidiary), or (v) commission of any
act which could materially injure the business or reputation of, or materially
adversely affect the interests of Company or any affiliate of the Company
(including the Subsidiary).
(f) Shareholder acknowledges that his/her services are unique and
extraordinary and are not readily replaceable, and hereby expressly agrees that,
in the event of a violation of the non-competition covenant set forth in
subparagraph (a), the Company and its affiliates (including Subsidiary) will be
irreparably harmed and the remedy of damages or other remedy at law will be
inadequate. Therefore, Shareholder agrees that, in the event of a threatened or
actual violation of the non-competition covenant, the Company shall be entitled
to obtain from any court of competent jurisdiction, an injunction restraining
Shareholder from
6
<PAGE>
committing the violation, without the necessity of proving actual damage and in
addition to any other relief available under this Agreement or at law.
6. Piggy-Back Registration Rights.
------------------------------
(a) If at any time or from time to time the Company shall determine to
register any of its equity securities, either for its own account or the account
of a security holder or holders (other than a registration of securities
relating solely to employee benefit plans or to effect a merger or other
reorganization), the Company will promptly give to Shareholder written notice
thereof and, upon the written request of Shareholder, include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Shares specified
in the written request made within 10 business days after receipt of such
written notice from the Company.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise Shareholder as a part of the written notice given to Shareholder. In
such event the right of any Shareholder to registration pursuant to this Section
6 shall be conditioned upon Shareholder's participation in such underwriting,
and the inclusion of Shares in the underwriting shall be limited to the extent
provided herein. Shareholder (together with the Company and the other holders
distributing their securities through such underwriting) shall enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 6, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may exclude some or all of the Shares or securities of other holders
of similar registration rights from such registration. The Company shall so
advise Shareholder and other stockholders distributing their securities through
such underwriting, and the number of Shares or securities of other holders of
similar registration rights that may be included in the registration and
underwriting, as determined by the managing underwriter, shall be allocated on a
pro rata basis. If Shareholder disapproves of the terms of any such
underwriting, Shareholder may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. Any securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration, and shall
continue to be subject to the terms of this Section.
(c) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 6 prior to the effectiveness of
such registration whether or not Shareholder has elected to include securities
in such registration.
(d) All expenses associated with the registration (including, without
limitation, registration, qualification and filing fees, printing expenses, blue
sky fees, and fees and disbursements of counsel and accountants for the Company)
shall be borne by the
7
<PAGE>
Company. Selling expenses, including underwriters' discounts, shall be borne by
Shareholder pro rata in proportion to the number of securities being registered.
(e) In the case of each registration under this Section, the Company
will:
(i) prepare and file a registration statement with respect to such
securities and use its best efforts to cause such registration statement to
become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
(ii) furnish to Shareholder such reasonable number of copies of
the registration statement, preliminary prospectus, final prospectus and such
other documents as Shareholder may reasonably request in order to facilitate the
public offering of the Shares; and
(iii) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by Shareholder,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify as a foreign corporation or as a dealer in
securities or to file a general consent to service of process in any such states
or jurisdictions in which it has not already done so and except as may be
required by the Securities Act.
(f) The Company will indemnify Shareholder against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof), arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, or any violation by the Company of the Securities Act of 1933, the
Securities Exchange Act of 1934, state securities law or any rule or regulation
promulgated under such laws applicable to the Company in connection with any
such registration, qualification or compliance, and the Company will reimburse
Shareholder for any legal and any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, provided that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission, or alleged untrue statement or omission, made in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by Shareholder.
(g) Shareholder will, if Shares held by such Shareholder are included
in the securities as to which such registration is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a
8
<PAGE>
registration statement against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, such Shareholders, such directors, officers, persons, underwriters
or control persons for any legal or any other expenses reasonably incurred, as
such expenses are incurred, in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by Shareholder and stated to be specifically for use therein.
(h) Shareholder shall furnish to the Company such information
regarding Shareholder, the Shares held by Shareholder, and the distribution
proposed by Shareholder as the Company may request in writing and as shall be
required in connection with any registration referred to in this Agreement.
(i) The registration rights granted to Shareholder in this Section
shall expire at such time (if ever) as Shareholder is free to sell the Shares
under Rule 144 promulgated under the Securities Act (or any successor thereto)
without limitation as to volume or manner of sale restrictions.
7. Co-Sale Rights.
--------------
(a) In the event that Founder receives a bona fide offer from any
person to purchase any of Founder's Common Stock (the "Founder's Shares") in a
private transaction exempt from registration under the Securities Act, Founder
shall give Shareholder notice of his intention to sell Founder's Shares,
describing the amount of Founder's Shares proposed to be transferred, the
identity of the proposed transferee, and the price and terms upon which he
proposes to make such transfer (the "Transfer Notice").
(b) Within fifteen (15) days after delivery of the Transfer Notice,
Shareholder may elect to sell up to Shareholder's pro rata share of the total
number of shares to be purchased by the transferee described in the Transfer
Notice by giving written notice thereof to Founder and tendering to Founder a
certificate representing the shares to be sold, properly endorsed for transfer,
with written instructions to transfer the shares to the transferee described in
the Transfer Notice upon receipt of payment for such shares from such transferee
for the benefit of Shareholder. Founder shall thereupon notify the transferee
of the co-sale arrangements hereunder, and instruct the transferee to deliver
payment for the shares to be purchased from Shareholder to Shareholder. For the
purpose of the co-sale right set forth in this Section, the pro rata share of
Shareholder shall be determined based on the number of
9
<PAGE>
Shares held by Shareholder that are subject to co-sale rights, divided by the
sum of (A) the total number of shares of common stock held by all stockholders
of the Company (including Shareholder) holding similar co-sale rights plus (B)
the number of shares of common stock held by Founder at the date of the Transfer
Notice (assuming conversion of all convertible securities and exercise of all
options and warrants). The resulting percentage shall then be multiplied by the
number of Shares proposed to be purchased by the transferee to determine the
actual number of Shares eligible for sale by Shareholder.
(c) In the event Shareholder declines to exercise the co-sale right as
allowed by this Section, Founder may, within 90 days after the date on which
Shareholder's co-sale rights lapsed, transfer some or all of Founder's Shares
which were the subject of the Transfer Notice at a price and on terms no less
favorable to the transferee(s) than specified in the Transfer Notice. Founder's
Shares transferred in accordance with the provisions of this Section shall no
longer be subject to the restrictions on Founder's Shares forth in this Section.
After the expiration of said 90-day period, Founder shall not transfer any of
Founder's Shares without again complying with this Section.
(d) Any transfer of Founder's Shares without consideration to a family
member of Founder or a trust or custodian for the benefit of Founder or a family
member of Founder, and transfers pursuant to a pledge to secure indebtedness,
shall not be subject to the provisions of this Section, provided that the
transferee agrees in writing to be bound by the provisions of this Section with
respect to any subsequent transfer of such shares.
8. Legend. Each certificate for Shares owned by Shareholder shall
------
bear the following legends:
(a) The shares represented by this certificate were issued to the
shareholder with restrictions. Neither the shares, nor any interest
in them, may be sold, transferred, assigned, pledged, hypothecated, or
otherwise disposed of, if restricted pursuant to a stock rights
agreement between the shareholder and the Company, a copy of which is
on file at the office of the Company in Fairport, New York.
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be transferred in the absence of such registration unless the Company
receives an opinion of counsel reasonably acceptable to it stating the
such sale or transfer is exempt from registration.
With respect to Shares that are subject to the Purchase Option described in
Section 3 of this Agreement, however, Shareholder shall be entitled to a
certificate without the legend set forth
10
<PAGE>
in subparagraph (a), evidencing any Shares as to which the Company's Purchase
Option has expired.
9. Notices. All notices and communications under this Agreement
-------
shall be in writing and shall be given by personal delivery or by registered or
certified mail, return receipt requested, addressed to the respective residences
of Shareholder and Founder set forth below or to such other address as may be
designated by Shareholder or Founder, and to the principal office of the
Company. Notice shall be deemed given upon personal delivery or upon receipt.
10. Miscellaneous.
-------------
(a) Neither this Agreement, nor any action taken under it, shall be
construed as creating any limitation or restriction upon any right that
Subsidiary would otherwise have to terminate the employment of Shareholder at
any time for any reason.
(b) This Agreement may be modified or amended only upon the written
consent of all parties to the Agreement.
(c) This Agreement shall be interpreted, construed, and enforced in
accordance with the laws of the State of New York.
(d) Neither this Agreement, nor any rights or obligations under it,
may be assigned by any party without the prior written consent of the other
parties.
(e) This Agreement shall benefit and be binding upon the parties and
their successors, heirs, executors, personal representatives, and assigns.
(f) This Agreement sets forth the entire understanding and agreement
of the parties with respect to its subject matter and supersedes all prior
letters, agreements, covenants, communications, understandings, representations,
or warranties, whether oral or written, by any officer, employee, or
representative of either party.
(g) The waiver of any provision of this Agreement, or of any breach of
this Agreement, shall not constitute a subsequent waiver of any provision or
breach.
(h) In the event that Shareholder is a prevailing party in any
litigation arising under or in connection with this Agreement, the Company shall
pay the reasonable attorneys fees and expenses incurred by Shareholder in
connection with the litigation.
(i) If, at any time, any of the provisions of this Agreement shall be
deemed by a court or other body having jurisdiction over this Agreement to be
illegal, invalid, or unenforceable, those provisions shall be deemed severed
from this Agreement. The remaining
11
<PAGE>
provisions of this Agreement shall be valid and binding as if this Agreement had
never contained any illegal, invalid, or otherwise unenforceable provisions,
without the requirement that the amendment be recorded in a writing signed by
the parties.
The parties' assent to the terms of this Agreement is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
--------------------------------
Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
--------------------------------
Title: President
Address: /s/ Daniel J. Venuti
------------------------------------
Daniel J. Venuti
106 Huntshill Road
Solvay, New York 13209
Address: /s/ Arunas A. Chesonis
------------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
12
<PAGE>
Exhibit 10.13.2
FIRST AMENDMENT TO STOCK RIGHTS AGREEMENT
This is the First Amendment to Stock Rights Agreement (the
"Amendment"), dated August 13, 1998, between DANIEL J. VENUTI ("Shareholder"),
PAETEC CORP., a Delaware corporation with its principal place of business at 290
Woodcliff Drive, Fairport, New York 14450 (the "Company"), PAETEC
COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary of the
Company with its principal place of business at 290 Woodcliff Drive, Fairport,
New York 14450 ("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. Shareholder holds 250,000 shares of Class A common stock of the
Company, subject to certain restrictions contained in a Stock Rights Agreement,
dated July 17, 1998, among the parties (the "Agreement").
B. The Company has now offered to issue to Shareholder 30,000 shares
of Class B common stock at a purchase price of $.833 per share, subject to
certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Amendment for the purpose of confirming Shareholder's equity interest in the
Class B common stock of the Company and outlining the rights of Shareholder and
the restrictions imposed by the Company with respect to the Class B common stock
to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares. The Company confirms its offer to issue
------------------
30,000 shares of Class B common stock (the "Class B Shares") to Shareholder at a
price of $.833 per share, payable in full upon issuance of the Class B Shares.
A stock certificate evidencing the Class B Shares shall be issued in the name of
Shareholder upon receipt of this executed Amendment and payment in full of the
purchase price.
2. Incorporation of Agreement by Reference. All of the provisions
---------------------------------------
of the Agreement shall apply to the Class B Shares issued to Shareholder
pursuant to this Amendment, except to the extent that a provision of this
Amendment expressly supersedes any provision of the Agreement. Additionally, to
the extent that any provision of this Amendment contradicts any provision
contained in the Agreement with respect to the Shares (as defined in the
Agreement), the provision of this Amendment shall control.
<PAGE>
3. Repurchase Price. The Purchase Option of the Company, described
----------------
in Section 3 of the Agreement, shall apply to the Class B Shares. In the event
that the Company exercises its Purchase Option with respect to all or a portion
of the Class B Shares, however, the price for all Class B Shares repurchased by
the Company pursuant to the Purchase Option, described in Section 4 of the
Agreement, shall be the fair market value of the Class B Shares as of the date
of the exercise of the Purchase Option by the Company. "Fair market value"
shall be determined by the accounting firm then retained by the Company, which
shall promptly perform an appraisal. The determination shall be made in
accordance with generally accepted accounting principles and shall be binding on
all parties.
4. Stockholders' Agreement and Proxy. Concurrently with the
---------------------------------
execution of this Amendment and the issuance of the Class B Shares, Shareholder
is executing and delivering a Stockholders' Agreement and proxy appointing
Arunas A. Chesonis Shareholder's attorney-in-fact and proxy to vote all Class B
Shares now or hereafter owned by Shareholder at any meeting of shareholders,
regular or special, whenever called, and for whatever purpose. Copies of the
Stockholders' Agreement and proxy shall be filed with the Secretary of the
Company, and the proxy shall be registered in the stock books of the Company.
Any transfer of the Class B Shares is subject to the terms of the Stockholders'
Agreement and proxy.
5. Permitted Transfer of Shares and Class B Shares. The
-----------------------------------------------
restrictions on transfer of Shareholder's Shares (as defined in the Agreement),
set forth in Section 2 of the Agreement, shall apply equally to the Class B
Shares; provided, however, that those restrictions are modified, with respect to
both the Shares and Class B Shares, to permit Shareholder to sell, assign, or
transfer any or all of the Shares or Class B Shares held by Shareholder to the
following:
(a) Shareholder's spouse, parent(s), siblings, or natural or
adopted lineal descendants, or the spouses of Shareholder's parent(s), siblings,
or lineal descendants (collectively, together with the Shareholder, referred to
as "Shareholder's Family Members");
(b) the trustee of a trust (including a voting trust)
principally for the benefit of Shareholder and/or one or more of Shareholder's
Family Members; provided that the trust may also grant a general or special
power of appointment to one or more of Shareholder's Family Members and may
permit trust assets to be used to pay taxes, legacies, and other obligations of
the trust or of the estates of one or more of Shareholder's Family Members
payable by reason of the death of any of Shareholder's Family Members; and
(c) a corporation, partnership, or limited liability company, a
majority of the voting equity interest in which is owned by Shareholder or by
one or more of Shareholder's transferees under subparagraphs (a) or (b) of this
Section.
2
<PAGE>
6. Legends. Each certificate for Class B Shares owned by
-------
Shareholder shall bear the following legends:
(a) The shares represented by this certificate were issued
to the shareholder with restrictions. Neither the shares, nor any
interest in them, may be sold, transferred, assigned, pledged,
hypothecated, or otherwise disposed of, unless that transfer is
expressly permitted by a stock rights agreement, including any
amendment thereto, between the shareholder and the Company, a
copy of which is on file at the office of the Company in
Fairport, New York.
(b) The shares represented by this certificate have not
been registered under the Securities Act of 1933, as amended, and
may not be transferred in the absence of such registration unless
the Company receives an opinion of counsel reasonably acceptable
to it stating the such sale or transfer is exempt from
registration.
(c) The shares represented by this certificate are subject to a
Stockholders' Agreement and to a proxy in favor of Arunas A. Chesonis,
a copy of which is on file with the Company. Any transferee of the
shares represented by this certificate shall take the shares subject
to the terms of the Stockholders' Agreement and proxy.
With respect to Class B Shares that are subject to the Company's Purchase
Option, described in Section 3 of the Agreement, however, Shareholder shall be
entitled to a certificate without the legend set forth in subparagraph (a),
evidencing any Class B Shares as to which the Purchase Option has expired.
7. Non-competition. The non-competition covenant of Shareholder set
---------------
forth in subparagraph 5(a)(iii) of the Agreement is modified to read as
follows:
(iii) hold five percent (5%) or more of the shares of a
corporation, or serve as a partner, officer, member, manager,
director, consultant or other representative of any third party, which
engages in any line of business competitive with the Company or any
affiliate of the Company (including the Subsidiary) anywhere in the
world.
3
<PAGE>
The parties' assent to the terms of this Amendment is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
--------------------------------
Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
--------------------------------
Title: President
Address: /s/ Daniel J. Venuti
-----------------------------------
Daniel J. Venuti
106 Huntshill Road
Solvay, New York 13209
Address: /s/ Arunas A. Chesonis
------------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
4
<PAGE>
Exhibit 10.13.3
SECOND AMENDMENT TO STOCK RIGHTS AGREEMENT
This is the Second Amendment to Stock Rights Agreement (the
"Amendment"), dated September 30, 1998, between DANIEL J. VENUTI
("Shareholder"), PAETEC CORP., a Delaware corporation with its principal place
of business at 290 Woodcliff Drive, Fairport, New York 14450 (the "Company"),
PAETEC COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary
of the Company with its principal place of business at 290 Woodcliff Drive,
Fairport, New York 14450 ("Subsidiary"), and ARUNAS A. CHESONIS ("Founder").
RECITALS
A. Shareholder holds 250,000 shares of Class A common stock of the
Company, subject to certain restrictions contained in a Stock Rights Agreement,
dated July 17, 1998, among the parties (the "Agreement"). Shareholder also
holds 30,000 shares of Class B common stock of the Company, subject to certain
restrictions contained in the Agreement and in the First Amendment to Stock
Rights Agreement dated August 13, 1998 (the "First Amendment").
B. The Company has now offered to issue to Shareholder 30,000
additional shares of Class A common stock at a purchase price of $2.50 per
share, subject to certain restrictions.
C. The Company, Subsidiary, Shareholder, and Founder enter into this
Amendment for the purpose of confirming Shareholder's additional equity interest
in the Class A common stock of the Company and outlining the rights of
Shareholder and the restrictions imposed by the Company with respect to the
additional Class A common stock to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Issuance of Shares. The Company confirms its offer to issue
------------------
30,000 shares of Class A common stock (the "Additional Class A Shares") to
Shareholder at a price of $2.50 per share, payable in full upon issuance of the
Additional Class A Shares. A stock certificate evidencing the Additional Class
A Shares shall be issued in the name of Shareholder upon receipt of this
executed Amendment and payment in full of the purchase price.
2. Incorporation of Agreement and First Amendment by Reference. All
-----------------------------------------------------------
of the provisions of the Agreement shall apply to the Additional Class A Shares
issued to
<PAGE>
Shareholder pursuant to this Amendment, except to the extent that a provision of
this Amendment expressly supersedes any provision of the Agreement or First
Amendment. Sections 3 and 5 of the First Amendment, which modify Sections 4 and
2, respectively, of the Agreement, shall also apply to the Additional Class A
Shares.
3. Legends. Each certificate for Additional Class A Shares owned by
-------
Shareholder shall bear the following legends:
(a) The shares represented by this certificate were issued
to the shareholder with restrictions. Neither the shares, nor any
interest in them, may be sold, transferred, assigned, pledged,
hypothecated, or otherwise disposed of, unless that transfer is
expressly permitted by a stock rights agreement, including any
amendment thereto, between the shareholder and the Company, a
copy of which is on file at the office of the Company in
Fairport, New York.
(b) The shares represented by this certificate have not
been registered under the Securities Act of 1933, as amended, and
may not be transferred in the absence of such registration unless
the Company receives an opinion of counsel reasonably acceptable
to it stating the such sale or transfer is exempt from
registration.
With respect to Additional Class A Shares that are subject to the Company's
Purchase Option, described in Section 3 of the Agreement, however, Shareholder
shall be entitled to a certificate without the legend set forth in subparagraph
(a), evidencing any Additional Class A Shares as to which the Purchase Option
has expired.
The parties' assent to the terms of this Amendment is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
________________________________
Title: President
2
<PAGE>
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
________________________________
Title: President
Address: /s/ Daniel J. Venuti
____________________________________
Daniel J. Venuti
106 Huntshill Road
Solvay, New York 13209
Address: /s/ Arunas A. Chesonis
____________________________________
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
3
<PAGE>
Exhibit 10.13.4
THIRD AMENDMENT TO STOCK RIGHTS AGREEMENT
THIS THIRD AMENDMENT TO STOCK RIGHTS AGREEMENT (this "Amendment") is
made as of this 4th day of February 2000 by and among Daniel J. Venuti (the
"Stockholder"), PaeTec Corp., a Delaware corporation (the "Company"), PaeTec
Communications, Inc., a Delaware corporation and wholly-owned subsidiary of the
Company (the "Subsidiary"), and Arunas A. Chesonis ("Mr. Chesonis").
RECITALS
--------
A. The Company, the Subsidiary, the Stockholder and Mr. Chesonis are
parties to a Stock Rights Agreement dated as of July 17, 1998 (the "Stock Rights
Agreement") and amended as of August 13, 1998 ("Amendment No. 1") and September
30, 1998 ("Amendment No. 2").
B. The Board of Directors of the Company has authorized the issuance and
sale (the "Series A Preferred Stock Placement") of 134,000 shares of a new
series of preferred stock of the Company, designated the Series A Convertible
Preferred Stock, to the purchasers (the "Purchasers") listed on the Schedule of
Purchasers to, and pursuant to the terms and conditions of, an Equity Purchase
Agreement (the "Purchase Agreement").
C. As a condition to the consummation of the Series A Preferred Stock
Placement, the Purchasers have required that the Company, the Subsidiary, the
Stockholder and Mr. Chesonis further amend the Stock Rights Agreement (i) to
provide that all Class B Shares (as defined in the Stock Rights Agreement) shall
automatically convert into shares of Class A common stock, par value $0.01 per
share ("Class A Common Stock"), of the Company in specified circumstances and
(ii) to clarify that to the extent any securities are required to be excluded
from a registration pursuant to the "cut-back" provisions of the piggyback
registration rights granted to the Stockholder pursuant to the Stock Rights
Agreement, the securities to be included in such registration shall be
determined on a pro rata basis among the holders of shares participating in the
--- ----
offering pursuant to registration rights granted by the Company, based on the
number of shares of common stock requested to be included by each such holder in
such registration.
D. The parties to the Stock Rights Agreement desire to amend the Stock
Rights Agreement to induce the Purchasers to consummate of the Series A
Preferred Stock Placement.
<PAGE>
AGREEMENT
---------
1. Defined Terms. All capitalized terms used in this Amendment
-------------
without definition shall have the meanings given to such terms in the Stock
Rights Agreement, as amended.
2. Automatic Conversion of Class B Shares. Notwithstanding anything
--------------------------------------
in the Stock Rights Agreement, Amendment No. 1 or Amendment No. 2 to the
contrary, the parties agree that, as provided in the Company's certificate of
incorporation as amended in connection with the Series A Preferred Stock
Placement (the "Restated Certificate of Incorporation), each Class B Share
subject to the Stock Rights Agreement (as amended) shall automatically convert
into one share of Class A Common Stock upon the date (the "Termination Date")
that the Stockholder ceases to be employed by the Company or any subsidiary
thereof unless, at the Termination Date, Mr. Chesonis shall (i) be the Chairman
of the Board or Chief Executive Officer of the Company, (ii) be the beneficial
owner of shares of Class B common stock of the Company and (iii) have the power
pursuant to a proxy to vote the Class B Shares on all matters on which such
Class B Shares are entitled to vote, provided Mr. Chesonis personally exercises
such power and does not delegate the exercise thereof to any other person. If
subsequent to the Termination Date, any condition specified in clause (i), (ii)
or (iii) in the preceding sentence shall cease to be in effect, each Class B
Share shall immediately be converted into one share of Class A Common Stock.
All other terms and conditions of the Stock Rights Agreement, as amended, shall
continue to apply to such shares of Class A Common Stock upon such conversion.
In the event of any conflict between the provisions of this Section 2 and the
provisions of Article V of the Restated Certificate of Incorporation with
respect to such mandatory conversion, which shall include, without limitation,
any additional mandatory conversion events specified in such Article V, the
provisions of Article V of the Restated Certificate of Incorporation shall
control.
3. Amendment of Section 6(b). The fourth and fifth sentences of
-------------------------
Section 6(b) of the Stock Rights Agreement are hereby deleted and replaced and
superseded in their entirety with the following sentence:
"Notwithstanding any other provision of this Section 6, if the
managing underwriter advises in writing the Company and the
Stockholder that marketing factors require a limitation of the number
of shares of common stock to be underwritten and sold in such
offering, the managing underwriter may exclude some or all of the
shares of common stock to be sold in such offering from such
registration, and the shares to be included in such registration shall
be allocated pro rata among the holders of shares participating in the
--- ----
offering pursuant to registration rights granted by the Company
(including demand and
2
<PAGE>
piggyback registration rights), based on the number of shares of
common stock requested to be included by each holder in such
registration."
4. Binding Effect. This Amendment shall be binding upon and inure
--------------
to the benefit of the parties hereto and their heirs, executors, administrators,
successors and assigns.
5. Governing Law. This Amendment shall be governed by, and
-------------
construed and enforced in accordance with, the laws of the State of New York,
except that if any provision of this Amendment or any part of any such provision
would be illegal, invalid or enforceable under such laws in connection with a
suit or proceeding validly instituted in another jurisdiction, then the laws of
such other jurisdiction shall govern insofar as is necessary to sustain the
legality, validity or enforceability of such provision or any part of such
provision.
6. Captions. Captions to the Sections in this Amendment are for the
--------
convenience of the parties only and shall not affect the meaning or
interpretation of this Amendment.
7. Enforceability and Interpretation. It is the intention of the
---------------------------------
parties to this Amendment that the terms and provisions contained in this
Amendment shall be enforceable to the fullest extent permitted by law. If any
term or provision of this Amendment or the application thereof to any Person or
circumstance is construed to be illegal, invalid or unenforceable, in whole or
in part, then such term or provision shall be construed in such a manner as to
permit its enforceability under applicable law to the fullest extent permitted
by such law. In any case, the remaining terms and provisions of this Amendment
or the application thereof to any Person or circumstance, except those terms and
provisions which have been held illegal, invalid or unenforceable, shall remain
in full force and effect.
8. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9. Additional Documents. Each party hereto agrees to execute any
--------------------
and all documents, instruments, certificates and communications deemed to be
necessary or advisable by the Company to effectuate the purposes of this
Amendment.
[signature page follows]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment with full force and effect as of the day and year first written
above.
PAETEC CORP.
By: /s/ Aruna A. Chesonis
---------------------------------
Its: CEO, Chairman and President
--------------------------------
PAETEC COMMUNICATIONS, INC.
By: /s/ Aruna A. Chesonis
---------------------------------
Its: CEO, Chairman and President
--------------------------------
/s/ Aruna A. Chesonis
-----------------------------------
Arunas A. Chesonis
/s/ Daniel J. Venuti
-----------------------------------
Daniel J. Venuti
4
<PAGE>
Exhibit 10.14.1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
PAETEC CORP.,
PAETEC MERGER CORP.,
AND
CAMPUSLINK COMMUNICATIONS SYSTEMS, INC.
JUNE 4, 1999
<PAGE>
<TABLE>
<CAPTION>
INDEX
------
<S> <C>
RECITALS.......................................................................... 1
1. DEFINITIONS............................................................. 1
2. PLAN OF REORGANIZATION.................................................. 8
(i) Right of Appraisal............................................ 10
------------------
(ii) Employee/Director CCS Warrants................................ 10
------------------------------
2.2 Warranties......................................................... 33
----------
2.3 Y2K Compliance..................................................... 33
--------------
2.4 Customer Relations................................................. 49
------------------
2.5 Newcourt Facility.................................................. 59
-----------------
2.6 Release of Security Interests...................................... 61
-----------------------------
2.7 Stockholder Indebtedness........................................... 61
------------------------
2.8 Total Indebtedness................................................. 61
------------------
2.9 Voting Agreement................................................... 61
----------------
2.10 Bridge Financing................................................... 62
----------------
2.11 Notice of Termination.............................................. 62
---------------------
2.12 Effect of Termination.............................................. 62
---------------------
11. INDEMNITY AND POST-CLOSING ADJUSTMENT................................... 63
2.13 Survival; Indemnity................................................ 63
-------------------
2.14 Indemnification by CCS............................................. 63
----------------------
2.15 Indemnification by PaeTec.......................................... 64
-------------------------
2.16 Valuation of PaeTec Stock.......................................... 64
-------------------------
2.17 Miscellaneous Indemnity Provisions................................. 65
----------------------------------
2.18 Notification of Claims............................................. 66
----------------------
2.19 Third-Party Claims................................................. 66
------------------
2.20 Post-Closing Adjustment............................................ 68
-----------------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
12. MISCELLANEOUS....................................................... 69
2.21 Governing Law; Venue; Jurisdiction; Waiver of Trial by Jury... 69
-----------------------------------------------------------
2.22 Assignment; Binding Upon Successors and Assigns............... 69
-----------------------------------------------
2.23 Severability.................................................. 70
------------
2.24 Counterparts.................................................. 70
------------
2.25 Other Remedies................................................ 70
-------------
2.26 Amendment and Waivers......................................... 70
---------------------
2.27 Expenses...................................................... 70
--------
2.28 Notices....................................................... 70
-------
2.29 Construction of Agreement..................................... 72
-------------------------
2.30 No Joint Venture.............................................. 72
----------------
2.31 Further Assurances............................................ 72
------------------
2.32 Absence of Third Party Beneficiary Rights..................... 72
-----------------------------------------
2.33 Public Announcement........................................... 73
-------------------
2.34 Entire Agreement.............................................. 73
----------------
</TABLE>
ii
<PAGE>
Schedules and Exhibits
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Schedule 2.1(d) -- Schedule of Employee/Director CCS Warrant Conversion
Exhibit A -- Form of Stockholders' Agreement
Exhibit B -- Form of Registration Rights Agreement
Exhibit C -- Form of Voting Agreement
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is
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entered into as of this 4th day of June, 1999, by and among PaeTec Corp., a
Delaware corporation ("PaeTec"), PaeTec Merger Corp., a Delaware corporation and
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a wholly-owned subsidiary of PaeTec ("Merger Sub"), and Campuslink
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Communications Systems, Inc., a Delaware corporation ("CCS").
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RECITALS
A. The parties intend that, subject to the terms and conditions of this
Agreement, Merger Sub will merge (the "Merger") with and into CCS, with CCS to
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be the surviving corporation of the Merger, all pursuant to the terms and
conditions of this Agreement and the Certificate of Merger, in a form and
substance reasonably acceptable to CCS and PaeTec (the "Certificate of Merger"),
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and the applicable provisions of the Delaware General Corporation Law ("DGCL").
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Upon the effectiveness of the Merger, all the issued and outstanding capital
stock of Merger Sub will be converted into ten shares of common stock, $.001 par
value per share, of CCS ("CCS Common Stock") and all the outstanding capital
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stock of CCS will be converted into Class A Common Stock of PaeTec, $0.01 par
value per share ("PaeTec Class A Common Stock"), as provided in this Agreement
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and the Certificate of Merger.
B. The Merger is intended to be treated as a reorganization pursuant
to the provisions of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and the regulations promulgated thereunder. This
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Agreement is intended to be a "plan of reorganization" within the meaning of
Section 368(a) of the Code.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. DEFINITIONS
"Adjustment Event" shall have the meaning ascribed to it in Section
2.1.
"Affiliate" shall have the meaning ascribed to it in Section 3.23.
"Agreement" shall have the meaning ascribed to it in the first
sentence of this Agreement.
"Alliance" shall have the meaning ascribed to it in the definition of
CCS Registration Rights Agreement.
"Associate" shall have the meaning ascribed to it in Section 3.23.
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"CCS" shall have the meaning ascribed to it in the first sentence of this
Agreement, provided that, except where the context requires otherwise, all
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references herein to "CCS" shall mean CCS and each of its subsidiaries.
"CCS Acquisition Proposal" shall have the meaning ascribed to it in
Section 5.8.
"CCS Balance Sheet" shall have the meaning ascribed to it in Section 3.9.
"CCS Balance Sheet Date" shall have the meaning ascribed to it in Section
3.11.
"CCS Basket" shall have the meaning ascribed to it in Section 11.2.
"CCS Common Stock" shall have the meaning ascribed to it in the Recitals.
"CCS Disclosure Schedule" shall have the meaning ascribed to it in Article
3.
"CCS Equipment" shall have the meaning ascribed to it in Section 3.28.
"CCS ERISA Affiliates" shall have the meaning ascribed to it in Section
3.9.
"CCS Financial Statements" shall have the meaning ascribed to it in Section
3.4.
"CCS Indemnification Escrow Stock" shall have the meaning ascribed to it in
Section 2.4.
"CCS Interim Audited Financials" shall have the meaning ascribed to it in
Section 3.4.
"CCS IP Rights" shall have the meaning ascribed to it in the Section 3.17.
"CCS IP Rights Agreements" shall have the meaning ascribed to it in Section
3.17.
"CCS Note" shall have the meaning ascribed to it in Section 5.3(a).
"CCS Post-Closing Adjustment Escrow Stock" shall have the meaning ascribed
to it in Section 2.4.
"CCS Preferred Stock" shall have the meaning ascribed to it in Section 3.2.
"CCS Registration Rights Agreement" shall mean the Registration Rights
Agreement, dated November 19, 1996, by and among CCS, Kline Hawkes California
SBIC, L.P. ("Kline Hawkes"), The Union Labor Life Insurance Company Separate
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Account P ("ULLICO") and Alliance Cabletel Holdings, L.P. ("Alliance").
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"CCS Series B Preferred Stock" shall have the meaning ascribed to it in
Section 2.1(b).
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"CCS Series C Preferred Stock" shall have the meaning ascribed to it in
Section 2.1(b).
"CCS Series D Preferred Stock" shall have the meaning ascribed to it in
Section 2.1(b).
"CCS Stock" shall have the meaning ascribed to it in Section 3.2.
"CCS Stockholders' Agreement" shall mean the Stockholders' Agreement, dated
November 19, 1996, by and among CCS, Kline Hawkes, ULLICO, Alliance and certain
other stockholders of CCS.
"CCS Warrants" shall have the meaning ascribed to it in Section 3.2.
"CERCLA" shall have the meaning ascribed to it in Section 3.22.
"Certificate of Merger" shall have the meaning ascribed to it in the
Recitals.
"Closing" shall have the meaning ascribed to it in Section 7.1.
"Closing Balance Sheet" shall have the meaning ascribed to it in Section
11.8.
"Closing Date" shall have the meaning ascribed to it in Section 7.1.
"COBRA" shall have the meaning ascribed to it in Section 3.9.
"Code" shall have the meaning ascribed to it in the Recitals.
"Commission" shall have the meaning ascribed to it in Section 4.6.
"Common Exchange Ratio" shall have the meaning ascribed to it in Section
2.1(b).
"Confidentiality Agreement" shall have the meaning ascribed to it in
Section 5.6.
"Consenting corporation" shall have the meaning ascribed to it in Section
3.15.
"Contaminant" shall have the meaning ascribed to it in Section 3.22.
"Contractual Obligations" shall have the meaning ascribed to it in Section
3.12.
"Damages" shall have the meaning ascribed to it in Section 11.2.
"DGCL" shall have the meaning ascribed to it in the Recitals.
"Disposal" shall have the meaning ascribed to it in Section 3.22.
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"Dissenting Shares" shall have the meaning ascribed to it in Section
2.1(c).
"DOL" shall have the meaning ascribed to it in Section 3.9.
"Effective Time" shall have the meaning ascribed to it in Section 2.1.
"Employee Benefit Plan" shall have the meaning ascribed to it in Section
3.9 or 4.9, as appropriate.
"Employee/Director CCS Warrants" shall have the meaning ascribed to it in
Section 2.1(d).
"Environmental Costs and Liabilities" shall have the meaning ascribed to it
in Section 3.22.
"Environmental Law" shall the meaning ascribed to it in Section 3.22.
"ERISA" shall have the meaning ascribed to it in Section 3.9.
"Escrow Agent" shall have the meaning ascribed to it in Section 2.5.
"Escrow Agreement" shall have the meaning ascribed to it in Section 3.1.
"Excess parachute payments" shall have the meaning ascribed to it in
Section 3.15.
"Final Date" shall have the meaning ascribed to it in Section 10.1.
"Full Share Amount" shall have the meaning ascribed to it in Section 2.5.
"GAAP" means the generally accepted accounting principles.
"Governmental Consents" shall have the meaning ascribed to it in Section
4.3(c).
"Governmental Entity" shall have the meaning ascribed to it in Section 3.3.
"Hazardous chemical" shall have the meaning ascribed to it in Section 3.22.
"Hazardous Materials" shall have the meaning ascribed to it in Section
3.22.
"Hazardous substance" shall have the meaning ascribed to it in Section
3.22.
"Incentive stock option" shall have the meaning ascribed to it in Section
3.2.
"Indemnified Party" shall have the meaning ascribed to it in Section 11.6.
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"Indemnifying Party" shall have the meaning ascribed to it in Section 11.6.
"Independent Accountants" shall have the meaning ascribed to it in Section
11.8.
"Intellectual Property Rights" shall have the meaning ascribed to it in
Section 3.17.
"IRS" shall have the meaning ascribed to it in Section 3.9.
"Kline Hawkes" shall have the meaning ascribed to it in the definition of
CCS Registration Rights Agreement.
"knowledge of CCS" shall mean the actual knowledge of any of Joseph Golden,
Robert Schwartz, James Kofalt, Wendy Foliano and Clint Walker.
"knowledge of PaeTec" shall mean the actual knowledge of any of Arunas
Chesonis, Timothy Bancroft, Daniel Venuti, Algimantas Chesonis and Richard
Ottalagana.
"Leased employee" shall have the meaning ascribed to it in Section 3.9.
"Material" shall have the meaning ascribed to it in Section 3.1.
"Material Adverse Effect" shall have the meaning ascribed to it in Section
3.1.
"Merger" shall have the meaning ascribed to it in the Recitals.
"Merger Consideration" shall have the meaning ascribed to it in Section
2.1.
"Merger Sub" shall have the meaning ascribed to it in the first sentence of
this Agreement.
"Merger Sub Common Stock" shall have the meaning ascribed to it in Section
2.1.
"Negative Working Capital" shall have the meaning ascribed to it in
Section 11.8.
"New Certificate" shall have the meaning ascribed to it in Section 2.5.
"Newcourt Facility" shall mean the $49 million secured credit facility
agreement between PaeTec and Newcourt Commercial Finance Corporation.
"Non-Escrow Percentage" shall have the meaning ascribed to it in Section
2.4.
"Non-Escrow Share Amount" shall have the meaning ascribed to it in Section
2.5.
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"Old Certificate" shall have the meaning ascribed to it in Section 2.5.
"PaeTec" shall have the meaning ascribed to it in the first sentence of
this Agreement, provided that, except where the context requires otherwise, all
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references herein to "PaeTec" shall mean PaeTec and each of its subsidiaries.
"PaeTec Acquisition Proposal" shall have the meaning ascribed to it in
Section 6.8.
"PaeTec Balance Sheet" shall have the meaning ascribed to it in Section
4.9.
"PaeTec Balance Sheet Date" shall have the meaning ascribed to it in
Section 4.11.
"PaeTec Basket" shall have the meaning ascribed to it in Section 11.3.
"PaeTec Class A Common Stock" shall have the meaning ascribed to it in the
Recitals.
"PaeTec Class B Common Stock" shall have the meaning ascribed to it in
Section 4.2.
"PaeTec Disclosure Schedule" shall have the meaning ascribed to it in
Article 4.
"PaeTec Equipment" shall have the meaning ascribed to it in Section 4.27.
"PaeTec ERISA Affiliates" shall have the meaning ascribed to it in Section
4.9.
"PaeTec Financial Statements" shall have the meaning ascribed to it in
Section 4.4.
"PaeTec IP Rights" shall have the meaning ascribed to it in Section 4.16.
"PaeTec IP Rights Agreements" shall have the meaning ascribed to it in
Section 4.16.
"PaeTec Option" shall have the meaning ascribed to it in Section 2.1(d).
"PaeTec Notes" shall have the meaning ascribed to it in Section 8.11.
"PaeTec Parties" shall have the meaning ascribed to it in Section 11.2.
"PaeTec Stock" shall have the meaning ascribed to it in Section 4.2.
"Pension Plan" shall have the meaning ascribed to it in Section 3.9.
"Permits" shall have the meaning ascribed to it in Section 3.5.
"Permitted Liens" shall mean (i) liens for Taxes not yet payable or being
contested in good faith and by appropriate proceedings and adequate reserves
have been maintained in accordance with GAAP, (ii) statutory liens of landlords,
carriers and other statutory liens
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incurred in the ordinary course of business, or (iii) zoning restrictions,
easements, rights of way, licenses, encroachments, covenants, conditions,
tenancies, minor defects in title, and other restrictions, charges or
encumbrances affecting real property.
"Person" shall mean any individual, firm, corporation, partnership, limited
liability company, trust, incorporated or unincorporated association or
enterprise, joint venture, joint stock company, Governmental Entity or other
entity of any kind, and shall include any successor (by merger or otherwise) of
such entity.
"Pollutant" shall have the meaning ascribed to it in Section 3.22.
"Pre-Closing Period" shall have the meaning ascribed to it in Section 3.15.
"Registration Rights Agreement" shall have the meaning ascribed to it in
Section 3.1.
"Release" shall have the meaning ascribed to it in Section 3.22.
"Returns" shall have the meaning ascribed to it in Section 3.15.
"Securities Act" shall have the meaning ascribed to it in Section 3.23.
"Series B Exchange Ratio" shall have the meaning ascribed to it in Section
2.1(b).
"Series C Exchange Ratio" shall have the meaning ascribed to it in Section
2.1(b).
"Series D Exchange Ratio" shall have the meaning ascribed to it in Section
2.1(b).
"Shares" shall have the meaning ascribed to it in Section 2.1(b).
"Shortfall Amount" shall have the meaning ascribed to it in Section
11.8(c).
"Stockholders" shall mean the stockholders of CCS.
"Stockholders' Agreement" shall have the meaning ascribed to it in Section
3.1.
"Stockholder Representative" shall have the meaning ascribed to it in
Section 2.7.
"Survival Period" shall have the meaning ascribed to it in Section 11.1.
"Surviving Corporation" shall have the meaning ascribed to it in Section
2.2.
"Taxes" shall have the meaning ascribed to it in Section 3.15.
"Threatened Release" shall have the meaning ascribed to it in Section 3.22.
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"Toxic chemical" shall have the meaning ascribed to it in Section 3.22.
"Toxic substance" shall have the meaning ascribed to it in Section 3.22.
"Transaction Documents" shall have the meaning ascribed to it in Section
3.1.
"ULLICO" shall have the meaning ascribed to it in the definition of CCS
Registration Rights Agreement.
"Voting Agreement" shall have the meaning ascribed to it in Section 3.1.
"Warrant Exchange Exercise Adjustment Amount" shall have the meaning
ascribed to it in Section 2.1(d).
2. PLAN OF REORGANIZATION
1.1 The Merger. Subject to the terms and conditions of this Agreement, on
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the Closing Date, the parties will cause the Merger to be consummated by filing
the Certificate of Merger (which shall provide that the effective date of the
Merger is the date of the filing of such Certificate of Merger) as contemplated
by the DGCL (the time of such filing being the "Effective Time"). At the
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Effective Time, Merger Sub will be merged with and into CCS pursuant to this
Agreement and the Certificate of Merger and in accordance with applicable
provisions of the DGCL and, by virtue of the Merger and without any further
action on the part of PaeTec, Merger Sub, CCS or any of the Stockholders:
(a) Capital Stock of Merger Sub. The shares of common stock of Merger
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Sub, $.01 par value per share (the "Merger Sub Common Stock"), that are issued
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and outstanding immediately prior to the Effective Time shall be converted into
ten shares of validly issued, fully paid and non-assessable shares of CCS Common
Stock.
(b) Conversion of Shares.
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Each share of Series B Redeemable Preferred Stock of CCS (the "CCS
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Series B Preferred Stock") issued and outstanding immediately prior to the
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Effective Time shall be converted into such number of validly issued, fully paid
and nonassessable shares of PaeTec Class A Common Stock equal to the product of
one (1) share and the Series B Exchange Ratio. As used in this Agreement, the
"Series B Exchange Ratio" shall mean the quotient of (i) $2,000 plus the amount,
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determined as of the Effective Time, of all accrued but unpaid dividends per
share of the CCS Series B Preferred Stock issued and outstanding, divided by
(ii) $5.
Each share of Series C Redeemable Preferred Stock of CCS (the "CCS Series C
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Preferred Stock") issued and outstanding immediately prior to the Effective Time
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shall be converted into such number of validly issued, fully paid and
nonassessable shares of PaeTec Class A Common
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Stock equal to the product of one (1) share and the Series C Exchange Ratio. As
used in this Agreement, the "Series C Exchange Ratio" shall mean the quotient of
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(i) $2,000 plus the amount, determined as of the Effective Time, of all accrued
but unpaid dividends per share of the CCS Series C Preferred Stock issued and
outstanding, divided by (ii) $5.
Each share of Series D-1 Redeemable Preferred Stock of CCS and Series D-2
Redeemable Preferred Stock of CCS (collectively, the "CCS Series D Preferred
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Stock") issued and outstanding immediately prior to the Effective Time shall be
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converted into such number of validly issued, fully paid and nonassessable
shares of PaeTec Class A Common Stock equal to the product of one (1) share and
the Series D Exchange Ratio. As used in this Agreement, the "Series D Exchange
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Ratio," with respect to each share of CCS Series D Preferred Stock issued and
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outstanding, shall mean the quotient of (i) $2,000 plus the amount, determined
as of the Effective Time, of all accrued but unpaid dividends per such share of
the CCS Series D Preferred Stock, divided by (ii) $5.
Each share of CCS Common Stock issued and outstanding immediately prior to
the Effective Time shall be converted into such number of validly issued, fully
paid and nonassessable shares of PaeTec Class A Common Stock equal to the
product of one (1) share and the Common Exchange Ratio. As used in this
Agreement, "Common Exchange Ratio" shall mean the quotient of (i) 6,000,000
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minus (A) the number of shares of PaeTec Class A Common Stock issued in exchange
for the CCS Series B Preferred Stock, the CCS Series C Preferred Stock and the
CCS Series D Preferred Stock and (B) the Warrant Exchange Exercise Adjustment
Amount, divided by (ii) the number of shares of CCS Common Stock issued and
outstanding immediately prior to the Effective Time.
Shares of capital stock of CCS held by it in its treasury will not be
deemed outstanding for purposes of this Agreement and will not be converted into
shares of PaeTec Class A Common Stock, cash or any other property. The shares
of PaeTec Class A Common Stock to be issued in the Merger pursuant to this
Section 2.1(b) are hereinafter collectively referred to as the "Shares."
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No fraction of a share of PaeTec Class A Common Stock will be issued in the
Merger, but in lieu thereof, each Stockholder who would otherwise be entitled to
a fractional share of PaeTec Class A Common Stock (after aggregating all
fractional shares of PaeTec Class A Common Stock to be received by such
Stockholder into as many whole shares as possible) shall receive an amount of
cash determined (rounded to the nearest whole cent) by multiplying such fraction
by $5.00. The Shares and the cash payable in lieu of fractional shares are
hereinafter referred collectively as the "Merger Consideration."
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If from the date hereof until immediately prior to the Effective Time,
the outstanding shares of PaeTec Class A Common Stock shall have been changed
into a different number of shares or a different class by reason of any
reclassification, recapitalization, stock split, combination or readjustment, or
a stock dividend thereon shall be declared with a record date within such period
(each, an "Adjustment Event"), the number or kind of shares of PaeTec
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Class A Common Stock to be issued and delivered as provided in this Agreement
shall be appropriately adjusted for each Adjustment Event.
(i) Right of Appraisal. Notwithstanding any provisions of this
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Agreement to the contrary, any shares of CCS Stock outstanding immediately prior
to the Effective Time held by a holder who has demanded and perfected the right,
if any, for appraisal of those shares in accordance with the provisions of
Section 262 of the DGCL and as of the Effective Time has not withdrawn or lost
such right to such appraisal ("Dissenting Shares") shall not be converted into
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or represent a right to receive the Merger Consideration pursuant to Section
2.1(b), but the holder shall only be entitled to such rights as are granted by
the DGCL. If a holder of shares of CCS Stock who demands appraisal of those
shares under the DGCL shall effectively withdraw or lose (through failure to
perfect or otherwise) the right to appraisal, then, as of the Effective Time or
the occurrence of such event, whichever last occurs, those shares of CCS Stock
shall be converted into and represent only the right to receive the Merger
Consideration as provided in Section 2.1(b), without interest, upon compliance
with the provisions, and subject to the limitations, of this Article 2. CCS
shall give PaeTec (a) prompt notice of any written demands for appraisal of any
shares of CCS Stock, attempted withdrawals of such demands, and any other
instruments served pursuant to the DGCL and received by CCS relating to
stockholders' rights of appraisal, and (b) the opportunity to direct all
negotiations and proceedings with respect to any demands for appraisal under the
DGCL. CCS shall not, except with the prior written consent of PaeTec,
voluntarily make any payment with respect to any demands for appraisal of CCS
Stock, or offer to settle or settle any such demands or approve any withdrawals
of any such demands.
(ii) Employee/Director CCS Warrants. Each of the CCS Warrants held by
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the individuals listed on Schedule 2.1(d) (collectively, the "Employee/Director
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CCS Warrants") shall be canceled and, in lieu thereof, an option ("PaeTec
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Option") shall be issued by PaeTec to each such individual pursuant to PaeTec's
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1998 Incentive Compensation Plan to acquire such number of shares of PaeTec
Class A Common Stock listed after the applicable individual's name in Schedule
2.1(d) at an exercise price of $2.50 per share of PaeTec Class A Common Stock.
Upon issuance, each such option shall be fully vested and exercisable and shall
have a term of ten years. As used in this Agreement, the "Warrant Exchange
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Exercise Adjustment Amount" shall mean 76,168 (which equals the quotient of (i)
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the Aggregate In-the-Money Value of the CCS Warrants listed in Schedule 2.1(d),
divided by (ii) $5).
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1.2 Effects of the Merger. At the Effective Time: (a) the separate
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existence of Merger Sub will cease and Merger Sub will be merged with and into
CCS, and CCS will be the surviving corporation of the Merger (the "Surviving
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Corporation"), all pursuant to the terms of this Agreement and the Certificate
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of Merger; (b) the name of the Surviving Corporation shall be "Campuslink
Communications Systems, Inc."; (c) the Certificate of Incorporation of Merger
Sub immediately prior to the Effective Time will be the Certificate of
Incorporation of the Surviving Corporation, provided, that Article I thereof
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shall be amended to change the name of the Surviving Corporation in accordance
with clause (b) of this Section 2.2; (d) the Bylaws of Merger Sub immediately
prior to the Effective Time will be the Bylaws of the Surviving Corporation; (e)
the directors of Merger Sub immediately prior to the Effective Time will be the
directors of the Surviving Corporation until their respective successors are
duly elected and qualified; (f) the officers of Merger Sub immediately prior to
the Effective Time will be the officers of the Surviving Corporation until their
respective successors are duly elected and qualified; (g) each share of Merger
Sub Common Stock outstanding immediately prior to the Effective Time will be
converted as provided in Section 2.1(a); (h) each share of CCS Stock outstanding
immediately prior to the Effective Time will be converted as provided in Section
2.1(b); (i) each Employee/Director CCS Warrant will be exchanged for a PaeTec
Option as provided in Section 2.1(d); and (j) the Merger will, from and after
the Effective Time, have all of the effects provided by applicable law,
including, without limitation, the DGCL.
1.3 Reorganization. The parties intend to adopt this Agreement and the
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Certificate of Merger as a plan of reorganization under Section 368(a) of the
Code. PaeTec represents, as of the date of this Agreement and as of the Closing
Date, that it presently intends to cause the Surviving Corporation to continue
CCS's historic business or use a significant portion of CCS's business assets in
a trade or business within the meaning of Treasury Regulation Section 1.368-
1(d). CCS represents that (i) it operates at least one historic business and/or
owns a significant portion of its historic business assets within the meaning of
Treasury Regulation Section 1.368-1(d), (ii) at the Effective Time, the
Surviving Corporation will hold substantially all of its properties, within the
meaning of Section 368(a)(2)(E)(i) of the Code, and (iii) it is not an
"investment company" within the meaning of Section 368(a)(2)(F) of the Code.
PaeTec further represents that it has no present plan or intention to (i)
liquidate the Surviving Corporation, (ii) merge the Surviving Corporation with
or into another corporation, (iii) sell or otherwise dispose of the stock of the
Surviving Corporation except for transfers or successive transfers to one or
more corporations controlled (within the meaning of Section 368(c) of the Code)
in each case by the transferor corporation, (iv) cause the Surviving Corporation
to issue additional shares of its capital stock that would result in PaeTec's
losing control (within the meaning of Section 368(c) of the Code) of the
Surviving Corporation, (v) cause or permit the Surviving Corporation to sell or
otherwise dispose of any of its assets or of any of the assets acquired from
Merger Sub except for dispositions made in the ordinary course of business or
transfers or successive transfers to one or more corporations controlled (within
the meaning of Section 368(c) of the Code), in each case by the transferor
corporation, or (vi) reacquire or cause any person related to PaeTec (as defined
in Treas. Reg. 1.368-1(a)(3)) to acquire any of the PaeTec Class A Common Stock
issued to the holders of CCS Stock pursuant to the Merger.
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Moreover, PaeTec hereby agrees to use its commercially reasonable
efforts to cause the Merger to qualify, and shall not take (and shall use
commercially reasonable efforts to prevent any of its affiliates from taking)
any actions that could reasonably be expected to present the Merger from
qualifying, as a reorganization under the provisions of Section 368(a) of the
Code.
1.4 Escrow Agreement. In accordance with the Escrow Agreement, (i) an
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aggregate of 876,000 shares of PaeTec Class A Common Stock issuable to the
Stockholders under this Agreement (collectively, the "CCS Indemnification Escrow
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Stock") shall be held in escrow pursuant thereto to secure the indemnification
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obligations of CCS and the Stockholders as provided in Section 11.2 hereof, and
(ii) the Post-Closing Adjustment Escrow Stock shall be held in escrow pursuant
to the Escrow Agreement to secure the post-closing adjustment obligations set
forth in Section 11.8 hereof.
As used in this Agreement, the term "Post-Closing Adjustment Escrow
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Stock" shall mean an aggregate of 1,780,000 shares of PaeTec Class A Common
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Stock issuable in the Merger; provided, however, that such number of shares
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shall be reduced by 380,000 shares, 1,000,000 shares and 300,000 shares,
respectively, in the event that CCS shall obtain a valid and binding written
consent (which is enforceable against the party giving such consent) prior to
the Closing from the U.S. Military Academy at West Point, GMH Associates or
Tufts University, respectively, in form and substance reasonably acceptable to
PaeTec, with respect to the purported assignment of, or a change of control
under, the applicable exclusive service agreement resulting from the Merger, as
the case may be.
As used in this Agreement, the term "Non-Escrow Percentage" shall mean
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a fraction, (a) the numerator of which is the aggregate number of shares of
PaeTec Class A Common Stock, excluding shares of the CCS Indemnification Escrow
Stock and the CCS Post-Closing Adjustment Escrow Stock, issuable in the Merger,
and (b) the denominator of which is the aggregate number of shares of PaeTec
Class A Common Stock issuable in the Merger.
1.5 Exchange of Certificates; Deposit in Escrow.
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(a) Exchange and Deposit. At or as soon as practicable after the
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Effective Time, PaeTec shall issue and deliver, upon surrender by each
Stockholder of one or more stock certificates representing his CCS Stock (each,
an "Old Certificate" and collectively, the "Old Certificates") for cancellation,
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together with duly executed stock powers, such amount of Merger Consideration
that such Stockholder shall be entitled to receive pursuant to Section 2.1(b);
provided, however, that PaeTec shall, in lieu of delivering to such Stockholder
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a stock certificate representing the full number of shares of PaeTec Class A
Common Stock that he would have been entitled to receive pursuant to Section
2.1(b) (the "Full Share Amount"), deliver to (A) such Stockholder a stock
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certificate (each, a "New Certificate" and collectively, the "New
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Certificates"), registered in his name and representing a number of shares (the
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"Non-Escrow Share Amount") of PaeTec Class A Common Stock equal to the Non-
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Escrow Percentage of the Full Share Amount (rounded to the nearest whole number
of shares, and (B) an independent third
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party mutually selected by PaeTec and CCS, as escrow agent (the "Escrow Agent"),
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for deposit into the escrow to be established pursuant to Section 2.4, a stock
certificate, registered in the name of the Escrow Agent or its nominee,
representing a number of shares of PaeTec Class A Common Stock equal to the
difference between the Full Share Amount and the Non-Escrow Share Amount, all of
which will be held as part of such escrow and disbursed by the Escrow Agent in
accordance with the provisions of the Escrow Agreement.
Notwithstanding the foregoing, the aggregate number of shares of
PaeTec Class A Common Stock to be delivered to and held by the Escrow Agent on
behalf of all of the Stockholders pursuant to clause (B) of the immediately
preceding sentence may be represented by a single stock certificate.
(b) No Further Ownership Rights in CCS Stock. After the Effective
----------------------------------------
Time, there shall be no further registration of transfers on the stock transfer
books of the Surviving Corporation of the shares of CCS Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, certificates representing shares of CCS Stock are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged for
the Merger Consideration pursuant to this Agreement.
No dividends or other distributions declared or set aside on shares of
PaeTec Class A Common Stock that are to be represented by New Certificates shall
be paid to any Person otherwise entitled to receive the same until Old
Certificates have been surrendered in exchange for such New Certificates in the
manner herein provided, and upon such surrender such dividends or other
distributions shall be paid to such Persons in accordance with their terms. In
no event shall the Persons entitled to receive such dividends or other
distributions be entitled to receive interest on such dividends or other
distributions.
1.6 Lost, Stolen, Destroyed or Mutilated Certificates. In the event any
-------------------------------------------------
certificates representing shares of CCS Stock shall have been lost, stolen,
destroyed or mutilated, PaeTec shall issue in exchange for such lost, stolen,
destroyed or mutilated certificates, upon the making of an affidavit of that
fact by the holder thereof, such amount of the Merger Consideration as may be
required pursuant to Section 2.5; provided, however, that PaeTec may, in its
-------- -------
discretion and as a condition precedent to the issuance of such Merger
Consideration, require the holder of such lost, stolen, destroyed or mutilated
certificates to deliver to PaeTec such mutilated certificate (if applicable) and
a lost certificate affidavit and indemnity agreement in a form and substance
reasonably satisfactory to PaeTec.
1.7 The Stockholder Representative.
(a) Appointment. In the event that the Merger and this Agreement is
-----------
approved by the Stockholders of CCS, effective upon such vote, and without
further act of any Stockholder of CCS, James A. Kofalt (the "Stockholder
----------
Representative") shall be appointed as agent and attorney-in-fact for each
- --------------
Stockholder, to serve as the Stockholder Representative under the Escrow
Agreement and take all actions relating to the escrow to be established pursuant
to
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<PAGE>
the Escrow Agreement, including, without limitation, to enter into the Escrow
Agreement on behalf of the Stockholders, to give and receive notices and
communications under the Escrow Agreement, to authorize delivery to PaeTec of
shares of PaeTec Class A Common Stock from such escrow in satisfaction of claims
made by PaeTec, to object to such deliveries, to negotiate, enter into
settlements and compromises of and to institute a suit or demand arbitration and
comply with orders of courts and awards of arbitrators with respect to such
claims, and to take all actions necessary or appropriate in the judgment of the
Stockholder Representative for the accomplishment of the foregoing. All
decisions of the Stockholder Representative relating to such escrow, the Escrow
Agreement and the related indemnification and post-closing adjustment
obligations arising hereunder shall be binding upon the Stockholders. Notices to
or from the Stockholder Representative shall constitute notice to or from each
of the Stockholders under the Escrow Agreement.
(b) Replacement of the Stockholder Representative. In the event the
---------------------------------------------
Stockholder Representative shall die, become incapacitated, resign or otherwise
terminate his status as such, his successor shall be any Stockholder appointed
by holders of a majority of the shares of PaeTec Class A Common Stock issued in
the Merger or, in the case of any vacancy where the holders of a majority of the
shares of PaeTec Class A Common Stock issued in the Merger fail to appoint a
successor within five (5) days of the creation of such vacancy, Gregory Ritchie
shall serve as the Stockholder Representative until a new Stockholder
Representative is so appointed.
1.8 Grant of PaeTec Options. From time to time after the Effective Time,
-----------------------
PaeTec shall grant stock options under its 1998 Incentive Compensation Plan to
employees of PaeTec or any of its subsidiaries who were employees of CCS or any
of its subsidiaries immediately prior to the Effective Time, on a basis
consistent with other employees of PaeTec and its subsidiaries with comparable
titles and responsibilities.
1. REPRESENTATIONS AND WARRANTIES OF CCS
CCS hereby represents and warrants to Merger Sub and PaeTec that, subject
to the disclosure contained under the applicable Sections of the disclosure
letter of even date herewith of CCS (the "CCS Disclosure Schedule") and subject
-----------------------
to the last paragraph of this Article 3:
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<PAGE>
1.1 Organization; Good Standing; Qualification and Power. CCS is a
----------------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, has all requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as it is
presently being conducted, and is duly qualified to do business and is in good
standing in each other jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification necessary, other
than in such jurisdictions where the failure to so qualify would not have a
Material Adverse Effect on CCS. Section 3.1 of the CCS Disclosure Schedule sets
forth a correct and complete list of each jurisdiction in which CCS is duly
qualified and in good standing to do business. CCS has delivered to PaeTec or
its counsel complete and correct copies of the Certificate of Incorporation and
Bylaws of CCS, in each case as amended to the date of this Agreement.
In this Agreement, any reference to any event, change or effect being
"material" with respect to any party hereto means any material event, change or
--------
effect related to the condition (financial or otherwise), properties, assets,
liabilities, businesses, operations or results of operations of such party and
its subsidiaries, if any, on a consolidated basis. In this Agreement, the term
"Material Adverse Effect" used in connection with a party means any event,
-----------------------
change or effect that is or is reasonably likely to become materially adverse to
the condition (financial or otherwise), properties, assets, liabilities,
businesses, operations or results of operations of such party and its
subsidiaries, if any, on a consolidated basis or to such party's ability to
perform its obligations, if any, as contemplated in this Agreement or the other
Transaction Documents. For purposes of this Agreement, the "Transaction
-----------
Documents" shall consist of this Agreement, the Certificate of Merger, the
- ---------
Stockholders' Agreement among PaeTec, the Stockholders, Arunas Chesonis,
Christopher Edgecomb and Jeffrey Sudikoff (the "Stockholders' Agreement"), in
-----------------------
the form attached hereto as Exhibit A; the Registration Rights Agreement among
the Stockholders and PaeTec (the "Registration Rights Agreement"), in the form
-----------------------------
attached hereto as Exhibit B; the Voting Agreement among PaeTec and each of the
Stockholders (the "Voting Agreement"), in the form attached hereto as Exhibit C;
----------------
and the Escrow Agreement among PaeTec, the Stockholder Representative and the
Escrow Agent (the "Escrow Agreement"), or any of the other documents or
----------------
agreements contemplated hereby or thereby.
1.2 Capital Structure.
-----------------
(a) Stock and Warrants. The authorized capital stock of CCS consists
------------------
of 7,250,000 shares of CCS Common Stock and 50,000 shares of preferred stock,
par value $0.001 per share, of CCS ("CCS Preferred Stock," and together with CCS
-------------------
Common Stock, the "CCS Stock"). As of the date hereof, 8,050 shares and 638,100
---------
shares of CCS Preferred Stock and CCS Common Stock, respectively, are issued and
outstanding, all of which are owned by the Stockholders of CCS in such amounts
as set forth on Section 3.2(a)(1) of the CCS Disclosure Schedule. 800, 1,750 and
5,500 shares of CCS Preferred Stock issued and outstanding as of the date hereof
have been designated as Series B, C and D Redeemable Preferred Stock,
respectively. All declared (or accrued) but unpaid dividends with respect to CCS
Preferred Stock as of March 31 are as set forth on Section 3.2(a)(2) of the CCS
Disclosure Schedule. As of the date hereof, no shares of CCS Stock are held by
CCS in its treasury. All outstanding
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<PAGE>
shares of CCS Stock are validly issued, fully paid and nonassessable and, except
as provided in the CCS Stockholders' Agreement, not subject to preemptive
rights. As of the date hereof, an aggregate of 4,879,100 shares of CCS Common
Stock are reserved for issuance upon exercise of outstanding warrants of CCS
(the "CCS Warrants"). Section 3.2(a)(3) of the CCS Disclosure Schedule sets
------------
forth a correct and complete list of each CCS Warrant outstanding as of the date
hereof, the number of shares and class and series of CCS Stock subject to such
CCS Warrant, the per share exercise price of such CCS Warrant, the vesting or
exercise schedule and expiration date applicable to such CCS Warrant. No CCS
Warrant is an "incentive stock option," as such term is used in Section 422 of
the Code.
(b) No Other Commitments. Other than the CCS Warrants described in
--------------------
Sections 3.2(a)(3) of the CCS Disclosure Schedule and except as provided in the
CCS Stockholders' Agreement and in the CCS Registration Rights Agreement, there
are no options, warrants, calls, rights, commitments, conversion rights or
agreements of any character to which CCS is a party, or by which CCS is bound,
obligating CCS to issue, deliver or sell or offer to sell, or cause to be
issued, delivered or sold, any shares of capital stock of CCS or securities
convertible into or exchangeable for or carrying a right or option to purchase
shares of capital stock of CCS, or obligating CCS to grant, extend or enter into
any such option, warrant, call, right, commitment, conversion right or
agreement. Other than the CCS Stockholders' Agreement, there are no voting
trusts or other agreements or understandings to which CCS is a party with
respect to the voting of the capital stock of CCS.
(c) Corporate Action. All corporate actions on the part of CCS
----------------
(other than the stockholder vote to approve this Agreement and the Merger),
including, but not limited to, those required under the DGCL and CCS's
Certificate of Incorporation and Bylaws, to authorize and approve the Merger and
each of the Transaction Documents to which it is a party and the transactions
contemplated thereby, have been duly and effectively taken.
1.3 Authority.
---------
(a) Corporate Authority. CCS has all requisite corporate power and
-------------------
authority to enter into each of the Transaction Documents to which it is a party
and, subject to approval of this Agreement and the Merger by the stockholders of
CCS, to perform its obligations hereunder and to consummate the Merger and the
other transactions contemplated by such Transaction Document. The execution and
delivery of this Agreement and the Certificate of Merger by CCS and the
consummation by CCS of the Merger and the other transactions contemplated by the
Transaction Documents have been duly authorized by all necessary corporate
action on the part of CCS, subject to any requisite approval by the stockholders
of CCS. This Agreement has been, and the other Transaction Documents to which
CCS is a party will be before or at the Closing, duly executed and delivered by
CCS and are (or, with respect to such other Transaction Documents, will be at
the Closing) the valid and binding obligations of CCS, enforceable against it in
accordance with their respective terms, except that such enforceability may be
subject to (i) bankruptcy, insolvency, reorganization or other similar laws
affecting or relating to enforcement of creditors' rights generally and (ii)
general principles of equity relating to enforceability.
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<PAGE>
(b) No Conflict. Subject to the receipt of required Governmental
-----------
Consents, except as set forth in Section 3.3(b) of the CCS Disclosure Schedule,
neither the execution, delivery and performance of the Transaction Documents,
nor the consummation of the transactions contemplated thereby, nor compliance
with the provisions thereof by CCS will conflict with, or result in any
violations of, or cause a default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, amendment, cancellation or
acceleration of any obligation contained in, or the loss of any material benefit
under, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of CCS under any term,
condition or provision of (w) the Certificate of Incorporation or Bylaws of CCS,
(x) any loan or credit agreement, note, bond, mortgage, indenture, lease or
other material agreement to which CCS is a party or by which it or any of its
properties or assets may be bound, (y) any material Permit or any judgment,
order or decree, or (z) any statute, law, ordinance, rule or regulation
applicable to CCS or any of its properties or assets, except where any such
conflict, violation, loss or creation with respect to any such statute, law,
ordinance, rule or regulation would not, individually or in the aggregate, have
a Material Adverse Effect on CCS. Section 3.3(b) of the CCS Disclosure Schedule
sets forth each document described in clause (x) of the immediately preceding
sentence which shall be affected in a manner described in such sentence as a
result of the execution, delivery and performance of the Transactions Documents,
or the consummation of the transactions contemplated thereby, or compliance with
the provisions thereof by CCS.
(c) Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, declaration or filing with, any court,
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign (each, a "Governmental Entity") (other than
-------------------
those required by any public service commission, public utility commission or
other Governmental Entity which regulates telecommunications services), is
required to be obtained by CCS in connection with the execution and delivery of
the Transaction Documents or the consummation by it of the transactions
contemplated thereby, except for: (i) such filings, authorizations, orders and
approvals set forth on Section 3.3(c)(1) of the CCS Disclosure Schedule; (ii)
the filing of the Certificate of Merger and this Agreement with the Secretary of
State of the State of Delaware and the filing of appropriate documents with the
relevant authorities of other states in which CCS is qualified to do business;
(iii) such filings, authorizations, orders and approvals as may be required
under foreign laws and federal and state securities laws; and (iv) where the
failure to obtain or make such consents, approvals, orders, authorizations,
registration, declaration or filing, would not prevent or delay the consummation
of the Merger or otherwise prevent CCS from performing its obligations under the
Transaction Documents to which it is a party and would not have a Material
Adverse Effect on CCS.
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<PAGE>
1.4 Financial Statements. The audited consolidated financial statements
--------------------
of CCS for the fiscal years ended June 30, 1996, 1997 and 1998 and the unaudited
financial statements of CCS for the nine months ended March 31, 1999, provided
to PaeTec by CCS, comply as to form in all material respects with the applicable
accounting requirements (except that the unaudited financial statements do not
contain any footnotes required under GAAP or statements of cash flows) and the
published rules and regulations with respect thereto, were prepared in
accordance with GAAP applied on a consistent basis during the periods involved
and fairly present, in all material respects, the consolidated financial
position of CCS as of the respective dates thereof and the results of its
operations and cash flows for the respective periods then ended. CCS shall
provide to PaeTec prior to the Closing audited consolidated financial statements
of CCS for the six months ended December 31, 1998 (the "CCS Interim Audited
-------------------
Financials"). The CCS Interim Audited Financials will comply as to form in all
- ----------
material respects with the applicable accounting requirements and the published
rules and regulations with respect thereto, will be prepared in accordance GAAP
applied on a consistent basis during the period involved and will fairly
present, in all material respects, the consolidated financial position of CCS as
of the date thereof and the results of its operations and cash flows for the
periods then ended. The audited and unaudited financial statements of CCS
described in this Section 3.4 are collectively referred to as the "CCS Financial
-------------
Statements."
- ----------
1.5 Compliance with Applicable Laws. Except as disclosed in Section 3.5 of
the CCS Disclosure Schedule or with respect to labor and employee benefit
matters (which are specifically addressed in Section 3.9) or environmental
matters (which are specifically addressed in Section 3.22), the business of CCS
has not been conducted in violation of any statute, law, ordinance, rule,
regulation or order of any Governmental Entity, except where such violation
would not have a Material Adverse Effect on CCS. Except as disclosed in Section
3.5 of the CCS Disclosure Schedule, there is currently no investigation or
review by a Governmental Entity with respect to CCS pending or, to the knowledge
of CCS, threatened , nor has any Governmental Entity notified CCS in writing of
its intention to conduct the same. CCS has all permits, licenses, approvals,
orders and franchises from Governmental Entities ("Permits") required to conduct
-------
its businesses as now being conducted, other than Permits the failure of which
to obtain would not have a Material Adverse Effect on CCS. All of CCS's material
Permits are in full force and effect and no violations thereunder (which have
not heretofore been remedied) have been recorded.
1.6 Litigation. Except as disclosed in Section 3.6 of the CCS Disclosure
----------
Schedule, there is no suit, action, arbitration, demand, claim, dispute,
investigation or proceeding pending or, to the knowledge of CCS, threatened,
against CCS; nor is there any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against CCS. No injunction, writ,
temporary restraining order, decree or order of any nature has been issued by
any court or other Governmental Entity against CCS purporting to enjoin or
restrain the consummation of the Merger or the execution, delivery or
performance of any of the Transaction Documents or any documents contemplated
thereby, and no proceedings are pending therefor.
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<PAGE>
1.7 Title to Real Properties. Section 3.7 of the CCS Disclosure Schedule
------------------------
sets forth a correct and complete list of real property owned or leased by CCS.
CCS has good record and marketable title in fee simple to, or holds a valid
interest as lessee under leases in full force and effect in, all real property
used in connection with its business or otherwise owned or leased by CCS, except
for (i) such defects in title or such lien, security interests or other
encumbrances on such property as would not, individually or in the aggregate,
have a Material Adverse Effect on CCS, (ii) Permitted Liens, and (iii) any
liens, security interests or other encumbrances relating to any indebtedness
disclosed on Section 3.16 of the CCS Disclosure Schedule and being assumed by
PaeTec at the Effective Time.
1.8 Subsidiaries. Except as disclosed in Section 3.8 of the CCS
------------
Disclosure Schedule, CCS does not directly or indirectly own nor has it made any
investment in any of the capital stock of, or any other proprietary interest in,
any other Person.
1.9 Employee Benefit Plans and Employment Matters.
---------------------------------------------
(a) Except as listed in Section 3.9 of the CCS Disclosure Schedule,
neither CCS nor any CCS ERISA Affiliate maintains any Employee Benefit Plan. As
used in this Article 3, "Employee Benefit Plan" means any "employee benefit
---------------------
plan" as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") and any other plan, policy, program, practice,
-----
agreement, understanding or arrangement (whether written or unwritten) providing
compensation or other benefits to any current or former director, officer,
employee or consultant (or to any dependent or beneficiary thereof), of CCS or
any CCS ERISA Affiliate, which are now, or were within the past six years,
maintained by CCS or any CCS ERISA Affiliate, or under which CCS or any CCS
ERISA Affiliate has or could have any obligation or liability, whether actual or
contingent (and including, without limitation, any liability arising out of an
indemnification, guarantee, hold harmless or similar agreement), including,
without limitation, all incentive, bonus, deferred compensation, vacation,
holiday, cafeteria, medical, disability, stock purchase, stock option, stock
appreciation, phantom stock, restricted stock or other stock-based compensation
plans, policies, programs, practices or arrangements. "CCS ERISA Affiliate"
-------------------
means any entity that, together with CCS, is or was treated as a single employer
under Section 414(b), (c) or (m) of the Code.
(b) CCS has delivered or made available to PaeTec or its counsel prior
to the date hereof complete and correct copies of (i) any employment agreements
and any procedures and policies relating to the employment of employees of CCS
and the use of temporary employees and independent contractors by CCS (including
summaries of any procedures and policies that are unwritten), (ii) plan
instruments and amendments thereto for all Employee Benefit Plans and related
trust agreements, insurance and other contracts, summary plan descriptions,
summaries of material modifications and material communications distributed to
the participants of each Employee Benefit Plan (and written summaries of any
unwritten Employee Benefit Plans, modifications to Employee Benefit Plans and
employee communications), (iii) to the extent annual reports on Form 5500 are
required with respect to any Employee Benefit Plan, the three most recent annual
reports and attached schedules for each Employee Benefit Plan as to which such
report is required to be filed, (iv) where applicable, the
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<PAGE>
most recent (A) opinion, notification and determination letters, (B) actuarial
valuation reports, and (C) nondiscrimination tests performed under the Code
(including 401(k) and 401(m) tests) for each Employee Benefit Plan, (v) all
material communications received from or sent to the Internal Revenue Service
("IRS") or the Department of Labor ("DOL") (including a written description of
--- ---
any oral communication), and (vi) any Forms 5330 required to be filed by CCS or
any affiliate, whether related to an Employee Benefit Plan or otherwise.
(c) Neither CCS nor any CCS ERISA Affiliate maintains or has ever
maintained, contributed to or had an obligation to contribute to or could have
any obligation in respect of an Employee Benefit Plan subject to Title IV of
ERISA or to Section 412 of the Code. Neither CCS nor any CCS ERISA Affiliate has
ever contributed to, or withdrawn in a partial or complete withdrawal from, any
"multiemployer plan" (as defined in Section 3(37) of ERISA) or has any fixed or
contingent liability under Section 4204 of ERISA. No Employee Benefit Plan is a
"multiple employer plan" as described in Section 3(40) of ERISA or Section
413(c) of the Code.
(d) With respect to each Employee Benefit Plan, to the knowledge of
CCS, (i) no party in interest or disqualified person (as defined in Section
3(14) of ERISA and Section 4975 of the Code, respectively) has at any time
engaged in a transaction which could subject PaeTec or CCS, directly or
indirectly, to a material tax, penalty or liability for prohibited transactions
imposed by ERISA or the Code and (ii) no fiduciary (as defined in Section 3(21)
of ERISA) with respect to any Employee Benefit Plan, or for whose conduct CCS
could have any liability (by reason of indemnities or otherwise), has breached
any of the responsibilities or obligations imposed upon the fiduciary under
Title I of ERISA which is reasonably likely to result in a material liability to
CCS.
(e) Each Employee Benefit Plan which is an "employee pension benefit
plan" within the meaning of Section 3(2) of ERISA (a "Pension Plan") and which
------------
is subject to Sections 201, 301 or 401 of ERISA has received a favorable
opinion, modification or determination letter from the IRS covering all
amendments required by the Tax Reform Act of 1986 and prior legislation and, to
the knowledge of CCS, there are no circumstances that are reasonably likely to
result in revocation of any such favorable determination letter. Each Employee
Benefit Plan is and has been operated in all material respects in compliance
with its terms and all applicable laws. As of and including the Closing Date,
CCS shall have made all contributions required to be made by it up to and
including the Closing Date with respect to each Employee Benefit Plan, or
adequate accruals therefor will have been provided for and will be reflected on
the unaudited balance sheet of CCS as at March 31, 1999 provided to PaeTec by
CCS (the "CCS Balance Sheet"). All notices, filings and disclosures required by
-----------------
ERISA or the Code (including notices under Section 4980B of the Code) have been
timely made, except where the failure to timely give or make such notices,
filings or disclosures would not result in liability to CCS.
(f) CCS has neither received notice of nor is aware of any actions,
claims (other than routine claims for benefits), lawsuits or arbitrations
pending or, to the knowledge of CCS, threatened with respect to any Employee
Benefit Plan or against any fiduciary of any
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<PAGE>
Employee Benefit Plan, and neither CCS nor any Stockholder has knowledge of any
facts that could give rise to any such actions, claims, lawsuits or
arbitrations. No Employee Benefit Plan is under audit or is the subject of an
audit or investigation by the IRS, the DOL or any other federal or state
governmental agency, nor, to the knowledge of CCS, is any such audit or
investigation pending or threatened.
(g) No Employee Benefit Plan provides for medical or health benefits,
or life insurance or other death benefits (through insurance or otherwise), or
provides for the continuation of such benefits or coverage, for any employee or
any dependent or beneficiary of any employee after such employee's retirement or
other termination of employment except as may be required by Part 6 of Subtitle
B of Title I of ERISA and Section 4980B of the Code ("COBRA") or applicable
-----
state law, and there has been no communication authorized by CCS or a CCS ERISA
Affiliate to any employee that could reasonably be expected to promise or
guarantee any such benefits.
(h) No Employee Benefit Plan which is not a Pension Plan is funded
through a trust intended to be exempt from tax pursuant to Section 501 of the
Code.
(i) Except as required by law or by the terms of an Employee Benefit
Plan, neither CCS nor any Stockholder has proposed or has agreed to any changes
to any Employee Benefit Plan that would cause an increase in benefits under any
such Employee Benefit Plan (or the creation of new benefits or plans) nor to
change any employee coverage which would cause an increase in the expense of
maintaining any such Employee Benefit Plan.
(j) Section 3.9(j)(1) of the CCS Disclosure Schedule lists all
employees of CCS as of the date of this Agreement who are paid $50,000 or more
per year in compensation, their salaries as of the date of this Agreement and
the date and amount of their most recent salary increases. Except as disclosed
on Section 3.9(j)(2) of the CCS Disclosure Schedule, no person or entity has an
employment, severance, consulting or independent contractor agreement with CCS.
No "leased employee" (within the meaning of Section 414(n) or (o) of the Code)
or independent contractor performs any material services for CCS.
(k) No Employee Benefit Plan provides benefits or payments based on
or measured by the value of an equity security of or interest in CCS or any CCS
ERISA Affiliate.
(1) Except as disclosed on Section 3.9(l) of the CCS Disclosure
Schedule, no Employee Benefit Plan is a plan, agreement or arrangement providing
for benefits, in the nature of severance benefits, and CCS does not have
outstanding any liabilities with respect to any severance benefits available
under any Employee Benefit Plan.
(m) Except as set forth in Section 3.9(m) of the CCS Disclosure
Schedule, the consummation of the transactions contemplated by the Transaction
Documents, either alone or in combination with another event, will not result in
(i) any payment (including, without limitation, severance, unemployment
compensation, golden parachute or bonus payments or otherwise)
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<PAGE>
becoming due to any director, officer, employee or consultant of CCS, (ii) any
increase in the amount of compensation or benefits payable in respect of any
director, officer, employee or consultant of CCS, or (iii) acceleration of the
vesting or timing of payment of any benefits or compensation payable in respect
of any director, officer, employee or consultant of CCS. No Employee Benefit
Plan provides benefits or payments contingent upon, triggered by or increased as
a result of a change in the ownership or effective control of CCS.
(n) Except as set forth in Section 3.9(n) of the CCS Disclosure
Schedule, CCS is not a contractor or subcontractor with obligations under any
federal, state or local government contracts.
(o) Except for matters arising in the ordinary course of business
which are not material, CCS is in compliance with all applicable laws (including
any legal obligation to engage in affirmative action), agreements and contracts
relating to the employment of former, current and prospective employees,
independent contractors and "leased employees" (within the meaning of Section
414(n) of the Code) of CCS, including all such laws, agreements and contracts
relating to wages, hours, collective bargaining, employment discrimination,
immigration, disability, civil rights, fair labor standards, occupational safety
and health, workers' compensation, pay equity, wrongful discharge and violation
of the potential rights of such former, current and prospective employees,
independent contractors and leased employees, and has timely prepared and filed
all appropriate forms (including Immigration and Naturalization Service Form I-
9) required by any relevant governmental authority.
(p) CCS has good labor relations in general.
(q) No collective bargaining agreement with respect to the business
of CCS is currently in effect or being negotiated. CCS has no current obligation
to negotiate any such collective bargaining agreement and, to the knowledge of
CCS, there is no active campaign by its employees to be covered by a collective
bargaining agreement.
(r) There are no strikes, slowdowns or work stoppages pending or, to
the knowledge of CCS, threatened with respect to the employees of CCS, nor has
any such strike, slowdown or work stoppage occurred or, to the knowledge of CCS,
been threatened. There is no representation claim or petition pending before
the National Labor Relations Board or any state or local labor agency and, to
the knowledge of CCS, no question concerning representation has been raised or
threatened respecting the employees of CCS.
(s) There are no complaints or charges against CCS pending before the
National Labor Relations Board or any state or local labor agency and, to the
knowledge of CCS, no person has threatened to file any complaint or charge
against CCS with any such board or agency.
(t) To the knowledge of CCS, no charges with respect to or relating
to the business of CCS or any affiliate thereof are pending before the Equal
Employment Opportunity
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<PAGE>
Commission, or any state or local agency responsible for the prevention of
unlawful employment practices.
(u) CCS has not received any written notice of the intent of any
federal, state, local or foreign agency responsible for the enforcement of labor
or employment laws to conduct an investigation of CCS and, to the knowledge of
CCS, no such investigation is in progress.
(v) Except as set forth in Section 3.9(v) of the CCS Disclosure
Schedule, there is no unpaid severance which, as of the date of this Agreement,
is due or claimed in writing to be due from CCS to any Person whose employment
with CCS was terminated.
(w) Except as set forth in Section 3.9(w) of the CCS Disclosure
Schedule or for any dissemination by CCS of written material provided by PaeTec
to employees of CCS in the course of its due diligence investigation in
connection with this Agreement and the transactions contemplated hereby, CCS has
not made any statements or representations or distributed any written material
to any of its employees regarding future operating plans of PaeTec or the
Surviving Corporation after the Effective Time or PaeTec's or the Surviving
Corporation's continued employment of CCS's employees subsequent to the
Effective Time.
(x) Section 3.9(x) of the CCS Disclosure Schedule contains (i) a
complete and correct list of all employment, management, consulting or other
agreements with any persons employed or retained by CCS (including independent
consultants and commission agents), complete and correct copies of which have
been delivered to PaeTec, (ii) the names of all employees or former employees of
CCS who are receiving or are entitled to receive at any time continuing payments
of any kind after termination of employment, other than pursuant to a plan or
program described in this Section 3.9, together with the annual amounts payable
to each of such employees and the duration of such payments.
(y) No condition exists as a result of which CCS would have a
material liability, whether absolute or contingent, including any obligations
under the Employee Benefit Plans, with respect to any misclassification of a
Person performing services for CCS as an independent contractor rather than as
an employee.
1.10 [Reserved.]
1.11 Absence of Certain Changes or Events. Except as disclosed in Section
3.11 of the CCS Disclosure Schedule, since March 31, 1999 (the "CCS Balance
-----------
Sheet Date") there has not occurred:
- ----------
(a) any change in the condition (financial or otherwise), properties,
assets, liabilities, business, operations or results of operations that has had
or will have a Material Adverse Effect on CCS;
(b) any amendments or changes in the Certificate of Incorporation or
Bylaws;
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(c) any material damage, destruction or loss of CCS's assets or
properties, whether covered by insurance or not;
(d) any redemption, repurchase or other acquisition of shares of
capital stock by CCS, or any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with respect
to its capital stock;
(e) any payment of (or any making of oral or written commitments or
representations to pay) any bonus (other than as properly accrued for on the CCS
Financial Statements), increased salary or special remuneration to any director,
officer, employee or consultant or any entry into or alterations of the terms of
any employment, consulting or severance agreement with any such person; any
payment of any severance or termination pay (other than payments made in
accordance with existing plans or agreements); any grant of stock option or
issuance of any restricted stock; any entry into or modification of any
agreement or Employee Benefit Plan (except as required by law) or any similar
agreement; or any increase in benefits of the type described in Section 3.9
outside of the ordinary course of business;
(f) any modification of any term of benefits payable under any
Employee Benefit Plan outside of the ordinary course of business;
(g) any acquisition or sale of a material amount of property or
assets of CCS, other than in the ordinary course of business consistent with
past practice, or any acquisition by CCS of any property or assets from any of
the Stockholders;
(h) any (A) incurrence, assumption or guarantee by CCS of any debt
for borrowed money; (B) issuance or sale of any securities convertible into or
exchangeable for debt securities of CCS; or (C) issuance or sale of options or
other rights to acquire from CCS, directly or indirectly, debt securities of CCS
or any securities convertible into or exchangeable for any such debt securities;
(i) any creation or assumption by CCS of any mortgage, pledge,
security interest or lien or other encumbrance on any material asset, except
those granted in favor of PaeTec;
(j) any making of any loan, advance or capital contribution to or
investment in any Person other than travel loans or advances made to employees
in the ordinary course of business consistent with past practice;
(k) any entering into, amendment of or relinquishment, termination or
non-renewal by CCS of any contract, lease transaction, commitment or other right
or obligation, other than as disclosed in Section 3.11(k) of the CCS Disclosure
Schedule and except for commitments entered into in the ordinary course of
business consistent with past practice;
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<PAGE>
(l) any transfer or grant of a right under the CCS IP Rights (as such
term is hereinafter defined);
(m) any labor dispute or charge of unfair labor practice (other than
routine individual grievances), any activity or proceeding by a labor union or
representative thereof to organize any employees of CCS or any campaign being
conducted to solicit authorization from employees to be represented by such
labor union;
(n) any institution or settlement of any litigation, action or
proceeding before any Governmental Entity relating to CCS or its properties or
assets;
(o) any change in the accounting practices or principles utilized in
the preparation of the CCS Financial Statements;
(p) any liabilities and obligations of any nature of CCS except those
(i) incurred in the ordinary course of business consistent with past practice,
or (ii) which, individually or in the aggregate, have not had and could not
reasonably be expected to have a Material Adverse Effect on CCS;
(q) any waiver or release of any right or claim, except for the
waiver or release of non-material claims in the ordinary course of business
consistent with past practice; or
(r) to the knowledge of CCS, any agreement or arrangement made by CCS
to take any action which, if taken prior to the date hereof, would have made any
representation or warranty set forth in this Section 3.11 untrue or incorrect as
of the date when made unless otherwise disclosed.
1.12 Agreements. Section 3.12 of the CCS Disclosure Schedule sets forth a
----------
list of any of the following written contracts, agreements and other instruments
("Contractual Obligations") entered into by CCS, true, correct and complete
-----------------------
copies of each of which have been delivered to PaeTec or its counsel:
(a)a contract with or commitment to any labor union;
(b) continuing contract for the future purchase, sale or manufacture
of products, material, supplies, equipment or services requiring payment to or
from CCS in an amount in excess of $25,000 per annum, which is not terminable on
30 days' or less notice without cost or other liability at (or at any time
after) the Effective Time or in which CCS has granted or received manufacturing
rights, most favored nation pricing provisions or exclusive marketing or
distribution rights relating to any product, service or territory;
(c) contract providing for the development of software for, or
license of software by or to, CCS, which software is used or incorporated in the
business of CCS, or
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<PAGE>
contract relating to any other Intellectual Property Rights, including but not
limited to rights of publicity, used or incorporated in the business of CCS;
(d) joint venture contract or agreement with any other party;
(e) contract or commitment for the employment of any officer,
employee or consultant, severance agreement, non-competition agreement, non-
disclosure agreement, agreement requiring a change of control or parachute
payments, or any other type of contract or understanding with any officer,
employee or consultant which is not immediately terminable by CCS without cost
or other liability to CCS;
(f) indenture, mortgage, promissory note, loan agreement, guarantee
or other agreement or commitment for the borrowing of money, for a line of
credit or for a leasing transaction of a type required to be capitalized in
accordance with Statement of Financial Accounting Standards No. 13 of the
Financial Accounting Standards Board;
(g) lease or other agreement under which CCS is lessee of or holds or
operates any items of tangible personal property or real property owned by any
third party and which requires CCS to make payments in excess of $25,000 per
annum;
(h) agreement or arrangement for the sale of any assets, properties
or rights involving payment of $25,000 or more;
(i) agreement which restricts CCS or, to the knowledge of CCS, any of
its employees from engaging in any aspect of its business or competing in any
line of business in any geographic area;
(j) exclusive service agreement for the provision of
telecommunication, Internet or cable television services;
(k) CCS IP Rights Agreement; or
(l) agreement between CCS and any of the Stockholders or their
respective Affiliates.
1.13 Customer Relations. The CCS Disclosure Schedule lists the customers
------------------
of CCS for the last completed fiscal year and the nine month period ended March
31, 1999 (in decreasing order of gross sales). Except as disclosed in Section
3.13 of the CCS Disclosure Schedule, CCS has not received any written notice or,
to the knowledge of CCS, any verbal notice of (or any written threats or, to the
actual knowledge of Joseph Golden or Robert Schwartz, any verbal threats with
respect to) termination, cancellation or limitation of, or any adverse
modification or change in, the business relationship of CCS or CCS's business
with any customer or any group of customers whose purchases are individually or
in the aggregate material to the business of CCS.
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<PAGE>
1.14 No Defaults. Except as disclosed in Section 3.14 of the CCS
-----------
Disclosure Schedule, CCS is not in material default under, and there exists no
event, condition or occurrence which, after notice or lapse of time, or both,
would constitute a material default by CCS under, any material contract or
agreement to which CCS is a party.
1.15 Taxes. (a) Except as set forth on Section 3.15 of the CCS Disclosure
-----
Schedule, CCS has timely filed with the appropriate taxing authorities all
returns and reports in respect of Taxes ("Returns") required to be filed by it
-------
(taking into account any extension of time to file granted to or on the account
of CCS). The information on such Returns is complete and accurate in all
material respects. Except as set forth on Section 3.15 of the CCS Disclosure
Schedule, CCS has paid on a timely basis all Taxes (whether or not shown on any
Return) due and payable. Except as set forth on Section 3.15 of the CCS
Disclosure Schedule, there are no liens for Taxes (other than for current Taxes
not yet due and payable) upon the assets of CCS.
(a) Except as set forth on Section 3.15 of the CCS Disclosure
Schedule, no unpaid (or unreserved in accordance with GAAP applied on a
consistent basis) deficiencies for Taxes have been claimed, proposed or assessed
by any taxing or other governmental authority with respect to CCS for any Pre-
Closing Period and, to the knowledge of CCS, there are no pending audits,
investigations or claims for or relating to any liability in respect of Taxes of
CCS, nor has CCS been notified of any request for such an audit, investigation
or claim. Except as set forth on Section 3.15 of the CCS Disclosure Schedule,
CCS has not requested any extension of time within which to file any currently
unfiled returns in respect of any Taxes and no extension of a statute of
limitations relating to any Taxes is in effect with respect to CCS.
(b) (i) CCS has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third party; (ii) true,
complete and correct copies of the federal income tax returns of CCS with
respect to all periods ending on or after December 31, 1995 have been furnished
or made available to PaeTec; (iii) CCS is not a "consenting corporation" under
Section 341(f) of the Code or any corresponding provision of state, local or
foreign law; (iv) there are no private letter rulings in respect of any Tax
pending between CCS and any taxing authority; (v) CCS owns no interest in real
property in the State of New York; (vi) CCS has never been a member of an
affiliated group within the meaning of Section 1504 of the Code, or filed or
been included in a combined, consolidated or unitary return of any Person other
than CCS; (vii) to the knowledge of CCS, CCS is not liable for Taxes of any
other Person, or is currently under any contractual obligation to indemnify any
Person with respect to Taxes, or is a party to any tax sharing agreement or any
other agreement providing for payments by CCS with respect to Taxes; (viii) CCS
is not, and has not been, a real property holding corporation (as defined in
Section 897(c)(2) of the Code) during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code; (ix) CCS is not a person other than a United
States person within the meaning of the Code; (x) CCS is not a party to any
joint venture, partnership, or other arrangement or contract which could be
treated as a partnership for federal income tax purposes; (xi) CCS has not
entered into any sale leaseback or any leveraged lease transaction that fails to
satisfy the requirements of Revenue Procedure 75-21 (or similar provisions of
foreign law); (xii)
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CCS has not agreed and is not required, as a result of a change in method of
accounting or otherwise, to include any adjustment under Section 481 of the Code
(or any corresponding provision of state, local or foreign law) in taxable
income; (xiii) CCS is not a party to any agreement, contract, arrangement or
plan that would result (taking into account the transactions contemplated by
this Agreement), separately or in the aggregate, in the payment of any "excess
parachute payments" within the meaning of Section 280G of the Code; (xiv) CCS
has never been a Subchapter S corporation (as defined in Section 1361(a)(1) of
the Code); (xv) Section 3.15(c)(xv) of the CCS Disclosure Schedule contains a
list of all jurisdictions to which any Tax is properly payable by CCS; (xvi) CCS
is not a personal holding company within the meaning of Section 542 of the Code;
and (xvii) CCS has not made an election and is not required to treat any of the
assets shown on the CCS Financial Statements as owned by another Person for
federal income tax purposes or as tax-exempt bond financed property or tax-
exempt use property within the meaning of Section 168 of the Code (or any
corresponding provision of state, local or foreign law).
As used in this Agreement, "Taxes" shall mean taxes, fees, levies,
-----
duties, tariffs, imposts, and governmental impositions or charges of any kind in
the nature of (or similar to) taxes, payable to any federal, state, local or
foreign taxing authority, including (without limitation) (i) income, franchise,
profits, gross receipts, ad valorem, net worth, value added, sales, use,
----------
service, real or personal property, special assessments, capital stock, license,
payroll, withholding, employment, social security, workers' compensation,
unemployment compensation, utility, severance, production, excise, stamp,
occupation, premiums, windfall profits, transfer and gains taxes, and (ii)
interest, penalties, additional taxes and additions to tax imposed with respect
thereto. As used herein, "Pre-Closing Period" means all taxable periods ending
------------------
on or before the Closing Date and the portion ending on or before the Closing
Date of any taxable period that includes (but does not end on) the Closing Date.
As used in this Section 3.15, CCS shall mean, individually and collectively, (i)
CCS and (ii) any individual, trust, corporation, partnership or other entity as
to which CCS may be liable for Taxes incurred by such individual or entity as a
transferee or pursuant to any provision of federal, state, local or foreign law
or regulation.
1.16 Outstanding Borrowings. Section 3.16 of the CCS Disclosure Schedule
----------------------
sets forth (a) the amount of all outstanding borrowings of CCS as of the date of
this Agreement, (b) any liens that relate to such outstanding borrowings and
that encumber the assets or properties of CCS, and (c) the name of each lender
thereof.
1.17 Intellectual Property. Except in each case as disclosed in Section
---------------------
3.17 of the CCS Disclosure Schedule:
(a)a CCS owns, or has the right to use, sell or license all
Intellectual Property Rights and customer lists used in its business as
presently conducted (such Intellectual Property Rights being hereinafter
collectively referred to as the "CCS IP Rights") and such rights to use, sell or
-------------
license are sufficient for such conduct of its business, and are valid and
subsisting and in full force and effect;
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(b) the execution, delivery and performance of any of the Transaction
Documents and the consummation of the transactions contemplated thereby will not
constitute a breach of any instrument or agreement governing any CCS IP Right
(the "CCS IP Rights Agreements") or customer lists of CCS, will not cause the
------------------------
forfeiture or termination or give rise to a right of forfeiture or termination
of any CCS IP Right or impair the right of CCS or the Surviving Corporation to
use, sell or license any CCS IP Right or customer lists of CCS or portion
thereof;
(c) there are no royalties, honoraria, or other similar payments
payable by CCS to any Person other than as set forth in the CCS Financial
Statements or the CCS IP Rights Agreements listed in Section 3.17(c) of the CCS
Disclosure Schedule;
(d) the conduct of CCS's business, as presently conducted, does not
violate any license, franchise or other agreement covering Intellectual Property
Rights between CCS and any third party or, to the knowledge of CCS, infringe any
Intellectual Property Right of any other party, and there is no pending or, to
the knowledge of CCS, threatened claim or litigation contesting the validity,
ownership or right to use, sell, license or dispose of any CCS IP Right or right
to conduct CCS's business, nor has CCS received any written notice asserting
that any CCS IP Right or any of CCS's customer lists or franchises, or the
proposed use, sale, license or disposition thereof or right to conduct CCS's
business conflicts or will conflict with the rights of any other party; and
(e) CCS has taken reasonable and practicable steps designed to
safeguard and maintain the secrecy and confidentiality of, and its proprietary
rights in, all CCS IP Rights which constitute trade secrets or confidential
business information of CCS or CCS's customer lists. No current or prior
officers, employees or consultants of CCS claims or has a right to claim
pursuant to any written agreement with CCS an ownership interest in any CCS IP
Rights as a result of having been involved in the development or licensing of
such property while employed by or consulting to CCS, or otherwise.
Section 3.17(e) of the CCS Disclosure Schedule sets forth a list of
all applications, registrations, filings and other formal actions made or taken
pursuant to federal, state and foreign laws by CCS to perfect or protect its
interest in CCS IP Rights, including, without limitation, all patents, patent
applications, trademarks and service marks, trademark and service mark
applications, registered copyrights and copyright applications, none of which
have lapsed, expired or been abandoned or cancelled, or subject to any
objection, opposition, cancellation or other such proceeding.
As used herein, the term "Intellectual Property Rights" shall mean all
----------------------------
industrial and intellectual property rights worldwide, including, without
limitation, patents, patent applications, patent rights, trademarks, trademark
applications, trade names, service marks, service mark applications, copyright,
copyright applications, know-how, trade secrets, proprietary processes and
formulae, software, all source and object code, algorithm, architecture,
structure, display screens, layouts, inventions, development tools and all
documentation and
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media constituting, describing or relating to the above, including, without
limitation, manuals, memoranda and records.
(f) Section 3.17(f) of the CCS Disclosure Schedule lists all of the
Intellectual Property licenses and franchises of CCS in which CCS is either a
licensor, franchisor, licensee or franchisee; all such licenses and franchises
are valid, enforceable and in full force and effect, and will continue to be so
in all material respects on identical terms immediately following the Effective
Time, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance or transfer, moratorium or
similar laws affecting the enforcement of creditors' rights generally and by
general principles of equity relating to enforceability.
(g) To the knowledge of CCS, there is no unauthorized use,
infringement, violation or misappropriation of any of CCS IP Rights or CCS's
customer lists or franchise rights by any third party, including any employee or
former employee of CCS.
1.18 Receivables and Payables. The accounts and notes receivable reflected
------------------------
on the CCS Balance Sheet provided to PaeTec by CCS, and the accounts and notes
receivable arising subsequent to the CCS Balance Sheet Date, have arisen only
from bona fide transactions in the ordinary course of CCS's business consistent
with past practice, and represent valid obligations to CCS, net of any allowance
for uncollectibles recorded on the CCS Balance Sheet in accordance with GAAP
applied on a consistent basis. There has been no material adverse change since
the CCS Balance Sheet Date in the amounts of accounts and notes receivable or
the allowances with respect thereto, or accounts payable of CCS, from that
reflected in the CCS Balance Sheet at such date.
1.19 Fees and Expenses. CCS has not paid or become obligated to pay any
-----------------
fee or commission to any broker, finder, intermediary or financial adviser
(including any Stockholder) in connection with the transactions contemplated by
any of the Transaction Documents.
1.20 Insurance. CCS has in effect fire and casualty insurance policies
---------
listed in Section 3.20 of the CCS Disclosure Schedule with the effective date
and coverage amounts accurately indicated thereon. Such insurance coverage and
coverage amounts are customary for the business engaged in by CCS. Except as
disclosed in Section 3.20 of the CCS Disclosure Schedule, such policies and
binders are valid and enforceable in accordance with their terms and are in full
force and effect.
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1.21 Ownership of Property. Except (a) as disclosed in Section 3.21 of the
---------------------
CCS Disclosure Schedule, (b) any Permitted Lien or (c) any liens, security
interest and other encumbrances relating to (i) any indebtedness set forth on
Section 3.16 of the CCS Disclosure Schedule and being assumed by PaeTec at the
Effective Time, or (ii) any leases disclosed on Section 3.12 of the CCS
Disclosure Schedule, CCS has good and marketable title to all of its tangible
personal property and assets used in its business, including those reflected as
owned on the CCS Financial Statements or so described in the CCS Disclosure
Schedule, in each case free and clear of all security interests, mortgages,
liens, charges, claims, options and encumbrances, and none of such property or
assets are owned by any Person other than CCS. All real and personal property
owned or leased by CCS is generally in good repair and is operational and usable
in the operations of CCS, subject to ordinary wear and tear. CCS is not in
violation of any zoning, building or safety ordinance, regulation or requirement
or other law or regulation applicable to the operation of its owned or leased
properties, which violation would result in a Material Adverse Effect on CCS,
nor has it received any notice of violation with which it has not complied.
1.22 Environmental Matters. Notwithstanding any other provisions of this
---------------------
Agreement to the contrary, this Section 3.22 sets forth the sole and exclusive
representations and warranties of CCS in this Agreement or otherwise with
respect to Environmental Laws or any other environmental matter of any kind or
nature.
(a)a During the period that CCS has owned, leased or operated any
properties or facilities, CCS has not disposed, released, or participated in or
authorized the release or threatened release of Hazardous Materials on, from or
under such properties or facilities in violation of any Environmental Law. For
the purposes of this Section 3.22 and Section 4.21, the terms "disposal,"
--------
"release," and "threatened release" shall have the definitions assigned thereto
------- ------------------
by the Comprehensive Environmental Response, Compensation and Liability Act of
1980, 42 U.S.C. (S) 9601 et seq., as amended ("CERCLA"). For the purposes of
------
this Agreement "Hazardous Materials" shall mean any petroleum or petroleum
-------------------
products, radioactive materials, asbestos-containing materials, radon gas and
any other hazardous or toxic substance, material or waste which is or becomes
prior to the Closing regulated under, or defined as a "hazardous substance,"
-------------------
"pollutant," "contaminant," "toxic chemical," "hazardous materials," "toxic
- ---------- ----------- -------------- ------------------- -----
substance" or "hazardous chemical" under any Environmental Law. As used herein,
- --------- ------------------
"Environmental Law" means any federal, state or local law (including any common
-----------------
law), statute, code, ordinance, rule, regulation or other requirement relating
to the environment, natural resources or public or employee health and safety,
and includes, but not limited to, CERCLA, the Hazardous Materials Transportation
Act, 49 U.S.C. (S) 1801 et seq., as amended, the Resource Conservation and
Recovery Act, 42 U.S.C. (S) 6901 et seq., as amended, the Clean Water Act, 33
U.S.C. (S) 2601 et seq., as amended, the Toxic Substances Control Act, 15 U.S.C.
(S) 6901 et seq., as amended, the Federal Insecticide, Fungicide, and
Rodenticide Act, 7 U.S.C. (S) 136 et seq., as amended, the Oil Pollution Act of
1990, 33 U.S.C. (S) 2701 et seq., as amended, and the Occupational Safety and
Health Act, 29 U.S.C. (S) 6901 et seq., as amended.
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(b) The operations, properties and facilities of CCS are in compliance
in all material respects with Environmental Law. During the time that CCS has
owned or leased its properties and facilities, CCS has not used, generated,
manufactured or stored on, under or about such properties or facilities or
transported or arranged for disposal to or from such properties or facilities,
any Hazardous Materials in violation of any Environmental Law.
(c) During the time that CCS has owned or leased its properties and
facilities, there has been no litigation brought or, to the knowledge of CCS,
threatened against CCS by, or any settlement reached by CCS with, any party or
parties alleging the presence, disposal, release or threatened release of any
Hazardous Materials, on from or under any of such properties or facilities.
(d) To the knowledge of CCS, there are no facts, circumstances or
conditions relating to the properties and facilities owned or leased by CCS
reasonably likely to give rise to a claim against CCS under any Environmental
Law or to any material Environmental Costs and Liabilities on CCS. As used
herein, "Environmental Costs and Liabilities" means any and all losses,
-----------------------------------
liabilities, obligations, damages, fines, penalties, judgments, actions, claims,
costs and expenses (including, without limitation, fees, disbursements and
expenses of legal counsel, experts, engineers and consultants and the costs of
investigation and feasibility studies and remedial activities) arising from or
under any Environmental Law or order or contract with any Governmental Entity or
any other Person.
1.23 Interested Party Transactions. Except as disclosed in Section 3.23 of
-----------------------------
the CCS Disclosure Schedule, no Stockholder, officer or director of CCS or any
"affiliate" or "associate" (as those terms are defined in Rule 405 promulgated
--------- ---------
under the Securities Act of 1933, as amended (the "Securities Act")), of any
--------------
such Person has had, either directly or indirectly, any interest in: (i) any
Person or entity which purchases from or sells, licenses or furnishes to CCS any
goods, property, technology or intellectual or other property rights or
services; or (ii) any contract or agreement to which CCS is a party or by which
it or any of its properties or assets may be bound or affected.
1.24 Disclosure. To the knowledge of CCS, no representation or warranty
----------
made by CCS or any of the Stockholders in this Agreement, nor any information or
statement contained in the CCS Disclosure Schedule or any exhibit or schedule
hereto or any certificate to be delivered by CCS pursuant hereto, when taken
together as a whole, contains or will contain any untrue statement of a material
fact, or omits or will omit to state a material fact necessary to make the
statements or facts contained herein or therein not misleading in light of the
circumstances under which they were made, except where any such untrue statement
or the omission of any such fact would not have a Material Adverse Effect on
CCS.
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1.25 Restrictions on Business Activities. Except as set forth on Section
-----------------------------------
3.25 of the CCS Disclosure Schedule, there is no agreement, judgment,
injunction, order or decree binding upon CCS that has or could be expected to
have the effect of prohibiting or materially impairing any business practice of
CCS, any acquisition of property by CCS or the conduct of business by CCS as
currently conducted or as currently expected to be conducted following the
Effective Time.
1.26 Books and Records. All accounts, books, ledgers and official records
-----------------
prepared and kept by CCS have been truthfully and properly kept and completed in
all material respects, and there are no material inaccuracies or discrepancies
of any kind contained or reflected therein.
2.2 Warranties. Except as set forth on Section 3.27 of the CCS Disclosure
----------
Schedule or as set forth in any exclusive service agreement entered into by CCS,
CCS has not made any written warranty or representation in respect of any of its
services, products or devices other than those customarily made by companies in
the telecommunications industry.
2.3 Y2K Compliance. Except as set forth in Section 3.28 of the CCS
--------------
Disclosure Schedule, to the knowledge of CCS, the computer systems and software
used by CCS or used in its business and any other equipment or products used by
CCS or used in its business that use any software or embedded chips (together,
"CCS Equipment") will accurately accept, create, manipulate, sort, store, output
-------------
and otherwise process calendar-related data from, into and between the twentieth
and twenty-first centuries and will operate before, during and after the year
2000 without error relating to calendar-related or "date" data (including data
received from or passed to the other computer systems or programs), including
without limitation error that relates to, or is the result of, calendar-related
data that represents or refers to different centuries or to more than one
century or that reflects the existence of a leap year. Without limiting the
generality of the foregoing, except as set forth in Section 3.28 of the CCS
Disclosure Schedule, to the knowledge of CCS, CCS Equipment will not, because of
calendar-related or "date" data (including without limitation data that
represents or refers to different centuries or to more than one century or that
reflects the existence of a leap year), cease prematurely or abnormally to
function before completing its intended operation or generate invalid or
incorrect results. Except as set forth in Section 3.28 of the CCS Disclosure
Schedule, to the knowledge of CCS, CCS Equipment is capable of storing explicit
values with respect to century data and uses a four-digit year in all date data
elements, whether internal to the software logic, external at interfaces with
other programs or stored on-line or off-line, and recognizes and correctly
processes dates for leap year.
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<PAGE>
Notwithstanding any to the contrary, CCS shall not be deemed to make
to PaeTec or the Merger Sub any representation or warranty other than as
expressly made by CCS in this Agreement. Notwithstanding anything to the
contrary, CCS makes no representation or warranty to PaeTec or Merger Sub with
respect to (a) any projections, estimates or budgets heretofore delivered to or
made available to PaeTec, Merger Sub or their respective counsel, accountants or
advisors of future revenues, expenses or expenditures or future results of
operations notwithstanding any otherwise express representation or warranty
contained in this Article 3, or (b) except as otherwise expressly covered by a
representation or warranty contained in this Article 3, any other information or
documents (financial or otherwise) made available to PaeTec, Merger Sub or their
respective counsel, accountants or advisors with respect to CCS or its
subsidiaries.
2. REPRESENTATIONS AND WARRANTIES OF PAETEC
PaeTec hereby represents and warrants to CCS and the Stockholders that,
subject to the disclosure contained under the applicable Sections of the
disclosure letter of even date herewith of PaeTec (the "PaeTec Disclosure
-----------------
Schedule") and subject to the last paragraph of this Article 4:
- --------
2.1 Organization; Good Standing; Qualification and Power. PaeTec is a
----------------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the state of organization, has all requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as it is
presently being conducted, and is duly qualified to do business and is in good
standing in each other jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification necessary, other
than in such jurisdictions where the failure to so qualify would not have a
Material Adverse Effect on PaeTec. PaeTec has delivered to CCS or its counsel
complete and correct copies of the Certificate of Incorporation and Bylaws of
PaeTec, in each case as amended to the date of this Agreement.
2.2 Capital Structure.
-----------------
(a) Stock, Options and Warrants. The authorized capital stock of
---------------------------
PaeTec consists of 27,500,000 shares of PaeTec Class A Common Stock and
7,500,000 shares of Class B Common Stock, par value $0.01 per share ("PaeTec
------
Class B Common Stock" and together with PaeTec Class A Common Stock, the "PaeTec
- -------------------- ------
Stock"). As of the date hereof, 8,999,952 shares and 6,285,048 shares of PaeTec
- -----
Class A Common Stock and PaeTec Class B Common Stock, respectively, are issued
and outstanding. It is anticipated that an additional 5,600,000 shares of PaeTec
Class A Common Stock will be issued pursuant to a private offering that will be
completed on or about May 31, 1999. As of the date hereof, no shares of PaeTec
Stock are held by PaeTec in its treasury. All outstanding shares of PaeTec Stock
are validly issued, fully paid and nonassessable and not subject to preemptive
rights. As of the date hereof, an aggregate of 2,195,160 shares of PaeTec Class
A Common Stock are reserved for issuance upon exercise of outstanding stock
options of PaeTec under its 1998 Incentive Compensation Plan. Section 4.2(a) of
the PaeTec Disclosure Schedule sets forth a correct and complete list of each
stock option
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<PAGE>
outstanding as of the date hereof, including the name of the holder of such
stock option, the number of shares covered by such stock option and the per
share exercise price of such stock option. Each such stock option expires on the
tenth anniversary of its grant date. Stock options granted on an annual basis
vest over a four-year term, and stock options granted upon hire vest over a
four-year term for 60% of the shares of PaeTec Class A Common Stock covered by
such options, while the remaining 40% vest over a four-year term, commencing the
time PaeTec achieves certain revenue targets.
(b) No Other Commitments. Other than the PaeTec Class A Common
--------------------
Stock, and stock options and warrants to purchase up to an aggregate of
4,300,000 shares of PaeTec Class A Common Stock heretofore granted or to be
granted pursuant to Section 6.3(h), and except as set forth on Section 4.2(b) of
the PaeTec Disclosure Schedule, there are no options, warrants, calls, rights,
commitments, conversion rights or agreements of any character to which PaeTec is
a party, or by which PaeTec is bound, obligating PaeTec to issue, deliver or
sell or offer to sell, or cause to be issued, delivered or sold, any shares of
capital stock of PaeTec or securities convertible into or exchangeable for or
carrying a right or option to purchase shares of capital stock of PaeTec, or
obligating PaeTec to grant, extend or enter into any such option, warrant, call,
right, commitment, conversion right or agreement. Except as provided in Section
4.2(b) of the PaeTec Disclosure Schedule, there are no voting trusts or other
agreements or understandings to which PaeTec is a party with respect to the
voting of the capital stock of PaeTec.
(c) Corporate Action. All corporate actions on the part of PaeTec,
----------------
including, but not limited to, those required under the DGCL and PaeTec's
Certificate of Incorporation and Bylaws, to authorize and approve the Merger and
each of the Transaction Documents to which it is a party and the transactions
contemplated thereby, have been (with respect to this Agreement), or will be
prior to the Closing (with respect to the other Transaction Documents), duly and
effectively taken.
2.3 Authority.
---------
(a) Corporate Authority. PaeTec has all requisite corporate power
-------------------
and authority to enter into each of the Transaction Documents to which it is a
party and, subject to approval of this Agreement and the Merger by PaeTec in its
capacity as the sole stockholder of Merger Sub, to perform its obligations
hereunder and to consummate the Merger and the other transactions contemplated
by such Transaction Document. The execution and delivery of this Agreement and
the Certificate of Merger by PaeTec and the consummation by PaeTec of the Merger
and the other transactions contemplated by the Transaction Documents have been
duly authorized by all necessary corporate action on the part of PaeTec, subject
to any requisite approval by PaeTec in its capacity as the sole stockholder of
Merger Sub. This Agreement has been, and the other Transaction Documents to
which PaeTec is a party will be before the Closing, duly executed and delivered
by PaeTec and are (or, with respect to such other Transaction Documents, will be
before or at the Closing) the valid and binding obligations of PaeTec,
enforceable against it in accordance with their respective terms, except that
such enforceability may be subject to (i) bankruptcy, insolvency, reorganization
or other similar laws affecting or relating to
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<PAGE>
enforcement of creditors' rights generally and (ii) general principles of equity
relating to enforceability.
(b) No Conflict. Subject to the receipt of required Governmental
-----------
Consents and the receipt of consent from Newcourt Commercial Finance
Corporation, neither the execution, delivery and performance of the Transaction
Documents, nor the consummation of the transactions contemplated thereby, nor
compliance with the provisions thereof by PaeTec will conflict with, or result
in any violations of, or cause a default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination, amendment,
cancellation or acceleration of any obligation contained in, or the loss of any
material benefit under, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties or assets of PaeTec
under any term, condition or provision of (w) the Certificate of Incorporation
or Bylaws of PaeTec, (x) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other material agreement to which PaeTec is a party or by
which it or any of its properties or assets may be bound, (y) any material
Permit or any judgment, order or decree, or (z) any statute, law, ordinance,
rule or regulation applicable to PaeTec or any of its properties or assets,
except where any such conflict, violation, loss or creation with respect to any
such statute, law, ordinance, rule or regulation would not, individually or in
the aggregate, have a Material Adverse Effect on PaeTec.
(c) Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, declaration or filing with, any Governmental
Entity ("Governmental Consents") is required to be obtained by PaeTec in
---------------------
connection with the execution and delivery of this Agreement and the other
Transaction Documents or the consummation by it of the transactions contemplated
hereby and thereby, except for: (i) the filing of the Certificate of Merger and
this Agreement with the Secretary of State of the State of Delaware and the
filing of appropriate documents with the relevant authorities of other states in
which PaeTec is qualified to do business; (ii) Governmental Consents as may be
required under foreign laws and federal and state securities laws; and (iii)
Governmental Consents required by any public service commission, public utility
Commission or other Governmental Entity regulating telecommunications services,
or (iv) Governmental Consents where the failure to obtain such Consents would
not prevent or delay the consummation of the Merger or otherwise prevent PaeTec
from performing its obligations under the Transaction Documents to which it is a
party and would not have a Material Adverse Effect on PaeTec.
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<PAGE>
2.4 Financial Statements. The audited consolidated financial statements
--------------------
of PaeTec for fiscal year ended December 31, 1998 and the unaudited financial
statements of PaeTec for the three month ended March 31, 1999 (the "PaeTec
------
Financial Statements"), provided to CCS by PaeTec, comply as to form in all
- --------------------
material respects with the applicable accounting requirements (except that the
unaudited financial statements do not contain any footnotes required under GAAP
or statements of cash flows) and the published rules and regulations with
respect thereto, were prepared in accordance with GAAP applied on a consistent
basis during the periods involved and fairly present, in all material respects,
the consolidated financial position of PaeTec as of the respective dates thereof
and the results of its operations and cash flows for the respective periods then
ended.
2.5 Compliance with Applicable Laws. The business of PaeTec has not been
-------------------------------
conducted in violation of any statute, law, ordinance, rule, regulation or order
of any Governmental Entity, except where such violation would not have a
Material Adverse Effect on PaeTec. Except in connection with PaeTec's
application for Governmental Consents relating to the Transaction Documents,
there is currently no investigation or review by a Governmental Entity with
respect to PaeTec pending or, to the knowledge of PaeTec, threatened, nor has
any Governmental Entity notified PaeTec in writing of its intention to conduct
the same. PaeTec has all Permits required to conduct its businesses as now being
conducted, other than Permits the failure of which to obtain would not have a
Material Adverse Effect on PaeTec. All of PaeTec's material Permits are in full
force and effect and no violations thereunder (which have not heretofore been
remedied) have been recorded.
2.6 Litigation. Except as disclosed in Section 4.6 of the PaeTec
----------
Disclosure Schedule, there is no suit, action, arbitration, demand, claim,
dispute, investigation or proceeding pending or, to the knowledge of PaeTec,
threatened, against PaeTec; nor is there any judgment, decree, injunction, rule
or order of any Governmental Entity or arbitrator outstanding against PaeTec. No
injunction, writ, temporary restraining order, decree or order of any nature has
been issued by any court or other Governmental Entity against PaeTec purporting
to enjoin or restrain the consummation of the Merger or the execution, delivery
or performance of any of the Transaction Documents or any documents contemplated
thereby, and no proceedings are pending therefor.
2.7 Title to Real Properties. Except as disclosed in Section 4.7 of the
------------------------
PaeTec Disclosure Schedule, PaeTec has good record and marketable title in fee
simple to, or holds a valid interest as lessee under leases in full force and
effect in, all real property used in connection with its business or otherwise
owned or leased by PaeTec, except for (i) such defects in title or such liens,
security interests or other encumbrances on such property as would not,
individually or in the aggregate, have a Material Adverse Effect on PaeTec, or
(ii) Permitted Liens.
2.8 Subsidiaries. Except as disclosed in Section 4.8 of the PaeTec
------------
Disclosure Schedule, PaeTec does not directly or indirectly own nor has it made
any investment in any of the capital stock of, or any other proprietary interest
in, any other Person.
2.9 Employee Benefit Plans and Employment Matters.
---------------------------------------------
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<PAGE>
(a)a Except as listed in Section 4.9 of the PaeTec Disclosure
Schedule, neither PaeTec nor any PaeTec ERISA Affiliate maintains any Employee
Benefit Plan. As used in this Article 4, "Employee Benefit Plan" means any
---------------------
"employee benefit plan" as defined in Section 3(3) of ERISA and any other plan,
policy, program, practice, agreement, understanding or arrangement (whether
written or unwritten) providing compensation or other benefits to any current or
former director, officer, employee or consultant (or to any dependent or
beneficiary thereof), of PaeTec or any PaeTec ERISA Affiliate, which are now, or
were within the past six years, maintained by PaeTec or any PaeTec ERISA
Affiliate, or under which PaeTec or any PaeTec ERISA Affiliate has or could have
any obligation or liability, whether actual or contingent (and including,
without limitation, any liability arising out of an indemnification, guarantee,
hold harmless or similar agreement), including, without limitation, all
incentive, bonus, deferred compensation, vacation, holiday, cafeteria, medical,
disability, stock purchase, stock option, stock appreciation, phantom stock,
restricted stock or other stock-based compensation plans, policies, programs,
practices or arrangements. "PaeTec ERISA Affiliate" means any entity that,
----------------------
together with PaeTec, is or was treated as a single employer under Section
414(b), (c) or (m) of the Code.
(b) PaeTec has delivered to CCS or its counsel prior to the date
hereof complete and correct copies of (i) any employment agreements and any
procedures and policies relating to the employment of employees of PaeTec and
the use of temporary employees and independent contractors by PaeTec (including
summaries of any procedures and policies that are unwritten), (ii) plan
instruments and amendments thereto for all Employee Benefit Plans and related
trust agreements, insurance and other contracts, summary plan descriptions,
summaries of material modifications and material communications distributed to
the participants of each Employee Benefit Plan (and written summaries of any
unwritten Employee Benefit Plans, modifications to Employee Benefit Plans and
employee communications), (iii) to the extent annual reports on Form 5500 are
required with respect to any Employee Benefit Plan, the three most recent annual
reports and attached schedules for each Employee Benefit Plan as to which such
report is required to be filed, (iv) where applicable, the most recent (A)
opinion, notification and determination letters, (B) actuarial valuation
reports, and (C) nondiscrimination tests performed under the Code (including
401(k) and 401(m) tests) for each Employee Benefit Plan, (v) all material
communications received from or sent to the IRS or DOL (including a written
description of any oral communication), and (vi) any Forms 5330 required to be
filed by PaeTec or any affiliate, whether related to an Employee Benefit Plan or
otherwise.
(c) Neither PaeTec nor any PaeTec ERISA Affiliate maintains or has
ever maintained, contributed to or had an obligation to contribute to or could
have any obligation in respect of an Employee Benefit Plan subject to Title IV
of ERISA or to Section 412 of the Code. Neither PaeTec nor any PaeTec ERISA
Affiliate has ever contributed to, or withdrawn in a partial or complete
withdrawal from, any "multiemployer plan" (as defined in Section 3(37) of ERISA)
or has any fixed or contingent liability under Section 4204 of ERISA. No
Employee Benefit Plan is a "multiple employer plan" as described in Section
3(40) of ERISA or Section 413(c) of the Code.
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<PAGE>
(d) With respect to each Employee Benefit Plan, to the knowledge of
PaeTec, (i) no party in interest or disqualified person (as defined in Section
3(14) of ERISA and Section 4975 of the Code, respectively) has at any time
engaged in a transaction which could subject the Surviving Corporation or
PaeTec, directly or indirectly, to a material tax, penalty or liability for
prohibited transactions imposed by ERISA or the Code and (ii) no fiduciary (as
defined in Section 3(21) of ERISA) with respect to any Employee Benefit Plan, or
for whose conduct PaeTec could have any liability (by reason of indemnities or
otherwise), has breached any of the responsibilities or obligations imposed upon
the fiduciary under Title I of ERISA which is reasonably likely to result in a
material liability to PaeTec.
(e) Each Employee Benefit Plan which is a Pension Plan and which is
subject to Sections 201, 301 or 401 of ERISA has received a favorable, opinion,
modification or determination letter from the IRS covering all amendments
required by the Tax Reform Act of 1986 and prior legislation and, to the
knowledge of PaeTec, there are no circumstances that are reasonably likely to
result in revocation of any such favorable determination letter. Each Employee
Benefit Plan is and has been operated in all material respects in compliance
with its terms and all applicable laws. As of and including the Closing Date,
PaeTec shall have made all contributions required to be made by it up to and
including the Closing Date with respect to each Employee Benefit Plan, or
adequate accruals therefor will have been provided for and will be reflected on
the unaudited balance sheet of PaeTec as at March 31, 1999 provided to CCS by
PaeTec (the "PaeTec Balance Sheet"). All notices, filings and disclosures
--------------------
required by ERISA or the Code (including notices under Section 4980B of the
Code) have been timely made, except where the failure to timely give or make
such notices, filings or disclosures would not result in liability to PaeTec.
(f) PaeTec has neither received notice of nor is aware of any
actions, claims (other than routine claims for benefits), lawsuits or
arbitrations pending or, to the knowledge of PaeTec, threatened with respect to
any Employee Benefit Plan or against any fiduciary of any Employee Benefit Plan,
and PaeTec has no knowledge of any facts that could give rise to any such
actions, claims, lawsuits or arbitrations. No Employee Benefit Plan is under
audit or is the subject of an audit or investigation by the IRS, the DOL or any
other federal or state governmental agency, nor, to the knowledge of PaeTec, is
any such audit or investigation pending or threatened.
(g) No Employee Benefit Plan provides for medical or health benefits,
or life insurance or other death benefits (through insurance or otherwise), or
provides for the continuation of such benefits or coverage, for any employee or
any dependent or beneficiary of any employee after such employee's retirement or
other termination of employment except as may be required by COBRA or applicable
state law, and there has been no communication authorized by PaeTec or a PaeTec
ERISA Affiliate to any employee that could reasonably be expected to promise or
guarantee any such benefits.
(h) No Employee Benefit Plan which is not a Pension Plan is funded
through a trust intended to be exempt from tax pursuant to Section 501 of the
Code.
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<PAGE>
(i) Except as required by law or by the terms of an Employee Benefit
Plan, PaeTec has neither proposed nor agreed to any changes to any Employee
Benefit Plan that would cause an increase in benefits under any such Employee
Benefit Plan (or the creation of new benefits or plans) nor to change any
employee coverage which would cause an increase in the expense of maintaining
any such Employee Benefit Plan.
(j) Section 4.9(j)(1) of the PaeTec Disclosure Schedule lists all
employees of PaeTec who are paid $100,000 or more in base salary per annum as of
the date of this Agreement, their salaries as of the date of this Agreement and
the date and amount of their most recent salary increases. Except as disclosed
on Section 4.9(j)(2) of the PaeTec Disclosure Schedule, no person or entity has
an employment, severance, consulting or independent contractor agreement with
PaeTec. No "leased employee" (within the meaning of Section 414(n) or (o) of
the Code) or independent contractor performs any material services for PaeTec.
(k) No Employee Benefit Plan provides benefits or payments based on
or measured by the value of an equity security of or interest in PaeTec or any
PaeTec ERISA Affiliate.
(1) Except as disclosed on Section 4.9(l) of the PaeTec Disclosure
Schedule, no Employee Benefit Plan is a plan, agreement or arrangement providing
for benefits, in the nature of severance benefits, and PaeTec does not have
outstanding any liabilities with respect to any severance benefits available
under any Employee Benefit Plan.
(m) The consummation of the transactions contemplated by the
Transaction Documents, either alone or in combination with another event, will
not result in (i) any payment (including, without limitation, severance,
unemployment compensation, golden parachute or bonus payments or otherwise)
becoming due to any director, officer, employee or consultant of PaeTec, (ii)
any increase in the amount of compensation or benefits payable in respect of any
director, officer, employee or consultant of PaeTec, or (iii) acceleration of
the vesting or timing of payment of any benefits or compensation payable in
respect of any director, officer, employee or consultant of PaeTec. No Employee
Benefit Plan provides benefits or payments contingent upon, triggered by or
increased as a result of a change in the ownership or effective control of
PaeTec.
(n) PaeTec is not a contractor or subcontractor with obligations
under any federal, state or local government contracts, except where the failure
to perform its obligations thereunder would not reasonably be expected to have a
Material Adverse Effect on PaeTec.
(o) Except for matters arising in the ordinary course of business
which are not material, PaeTec is in compliance with all applicable laws
(including any legal obligation to engage in affirmative action), agreements and
contracts relating to the employment of former, current and prospective
employees, independent contractors and "leased employees" (within the meaning of
Section 414(n) of the Code) of PaeTec, including all such laws, agreements and
contracts relating to wages, hours, collective bargaining, employment
discrimination,
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<PAGE>
immigration, disability, civil rights, fair labor standards, occupational safety
and health, workers' compensation, pay equity, wrongful discharge and violation
of the potential rights of such former, current and prospective employees,
independent contractors and leased employees, and has timely prepared and filed
all appropriate forms (including Immigration and Naturalization Service Form I-
9) required by any relevant governmental authority.
(p) PaeTec has good labor relations in general.
(q) No collective bargaining agreement with respect to the business
of PaeTec is currently in effect or being negotiated. PaeTec has no current
obligation to negotiate any such collective bargaining agreement and, to the
knowledge of PaeTec, there is no active campaign by its employees to be covered
by a collective bargaining agreement.
(r) There are no strikes, slowdowns or work stoppages pending or, to
the knowledge of PaeTec, threatened with respect to the employees of PaeTec, nor
has any such strike, slowdown or work stoppage occurred or, to the knowledge of
PaeTec, been threatened. There is no representation claim or petition pending
before the National Labor Relations Board or any state or local labor agency
and, to the knowledge of PaeTec, no question concerning representation has been
raised or threatened respecting the employees of PaeTec.
(s) There are no complaints or charges against PaeTec pending before
the National Labor Relations Board or any state or local labor agency and, to
the knowledge of PaeTec, no person has threatened to file any complaint or
charge against PaeTec with any such board or agency.
(t) To the knowledge of PaeTec, no charges with respect to or
relating to the business of PaeTec or any affiliate thereof are pending before
the Equal Employment Opportunity Commission, or any state or local agency
responsible for the prevention of unlawful employment practices.
(u) PaeTec has not received any written notice of the intent of any
federal, state, local or foreign agency responsible for the enforcement of labor
or employment laws to conduct an investigation of PaeTec and, to the knowledge
of PaeTec, no such investigation is in progress.
(v) There is no unpaid severance which, as of the date of this
Agreement, is due or claimed in writing to be due from PaeTec to any Person
whose employment with PaeTec was terminated.
(w) Section 4.9(v) of the PaeTec Disclosure Schedule contains (i) a
complete and correct list of all employment, management, consulting or other
agreements with any persons employed or retained by PaeTec, (ii) the names of
all employees or former employees of PaeTec who are receiving or are entitled to
receive at any time continuing payments of any kind after termination of
employment, other than pursuant to a plan or program described in this Section
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<PAGE>
4.9, together with the annual amounts payable to each of such employees and the
duration of such payments.
(x) No condition exists as a result of which PaeTec would have a
material liability, whether absolute or contingent, including any obligations
under the Employee Benefit Plans, with respect to any misclassification of a
Person performing services for PaeTec as an independent contractor rather than
as an employee.
2.10 [Reserved.]
2.11 Absence of Certain Changes or Events. Since March 31, 1999 (the
------------------------------------
"PaeTec Balance Sheet Date"), there has not occurred:
-------------------------
(a) any change in the condition (financial or otherwise), properties,
assets, liabilities, business, operations or results of operations that has had
or will have a Material Adverse Effect on PaeTec;
(b) any amendments or changes in the Certificate of Incorporation or
Bylaws;
(c) any material damage, destruction or loss of PaeTec's assets or
properties, whether covered by insurance or not;
(d) any redemption, repurchase or other acquisition of shares of
capital stock by PaeTec, or any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with respect
to its capital stock;
(e) any payment of (or any making of oral or written commitments or
representations to pay) any bonus (other than as properly accrued for on the
PaeTec Financial Statements), increased salary or special remuneration to any
director or key employee (i.e., Vice President or higher) or any entry into or
----
alterations of the terms of any employment, consulting or severance agreement
with any such person; any payment of any severance or termination pay (other
than payments made in accordance with existing plans or agreements) to any such
person; any grant of stock option or issuance of any restricted stock to any
such person; any entry into or modification of any agreement or Employee Benefit
Plan (except as required by law) or any similar agreement with respect to any
such person; or any increase in benefits of this type described in Section 4.9
outside of the ordinary course of business with respect to any such person;
(f) any acquisition or sale of a material amount of property or
assets of PaeTec, other than in the ordinary course of business consistent with
past practice, or any acquisition by PaeTec of any property or assets from any
of its stockholders;
(g) any (A) incurrence, assumption or guarantee by PaeTec of any debt
for borrowed money, except pursuant to the Newcourt Facility; (B) issuance or
sale of any securities convertible into or exchangeable for debt securities of
PaeTec; or (C) issuance or sale of options
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<PAGE>
or other rights to acquire from PaeTec, directly or indirectly, debt securities
of PaeTec or any securities convertible into or exchangeable for any such debt
securities;
(h) any creation or assumption by PaeTec of any mortgage, pledge,
security interest or lien or other encumbrance on any material asset, except
pursuant to the Newcourt Facility;
(i) any making of any loan, advance or capital contribution to or
investment in any Person other than (i) travel loans or advances made to
employees in the ordinary course of business consistent with past practice, and
(ii) any investment in majority- or wholly-owned subsidiaries of PaeTec;
(j) any transfer or grant of a right under the PaeTec IP Rights;
(k) any labor dispute or charge of unfair labor practice (other than
routine individual grievances), any activity or proceeding by a labor union or
representative thereof to organize any employees of PaeTec or any campaign being
conducted to solicit authorization from employees to be represented by such
labor union;
(l) any institution or settlement of any litigation, action or
proceeding before any Governmental Entity relating to PaeTec or its properties
or assets;
(m) any change in the accounting practices or principles utilized in
the preparation of the PaeTec Financial Statements;
(n) any liabilities and obligations of any nature of PaeTec except
those (i) incurred in the ordinary course of business consistent with past
practice, or (ii) which, individually or in the aggregate, have not had and
could not reasonably be expected to have a Material Adverse Effect on PaeTec;
(o) any waiver or release of any right or claim, except for the
waiver or release of non-material claims in the ordinary course of business
consistent with past practice; or
(p) to the knowledge of PaeTec, any agreement or arrangement made by
PaeTec to take any action which, if taken prior to the date hereof, would have
made any representation or warranty set forth in this Section 4.11 untrue or
incorrect as of the date when made unless otherwise disclosed.
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<PAGE>
2.12 Material Agreements. Section 4.12 of the PaeTec Disclosure Schedule
-------------------
lists all material agreements to which PaeTec is a party including, without
limitation, all purchase agreements, construction contracts, right of way or
occupancy agreements and lease agreements listed in other Sections of PaeTec's
Disclosure Schedule. All of the foregoing agreements are valid, subsisting and
in full force and effect, and neither PaeTec nor, to the knowledge of PaeTec,
any other parties thereto, are in material default thereunder. True, complete
and correct copies of all such agreements have been furnished or made available
to CCS.
2.13 No Defaults. PaeTec is not in material default under, and there exists
-----------
no event, condition or occurrence which, after notice or lapse of time, or both,
would constitute a material default by PaeTec under, any material contract or
agreement to which PaeTec is a party.
2.14 Taxes. (a) PaeTec has timely filed with the appropriate taxing
-----
authorities all Returns required to be filed by it (taking into account any
extension of time to file granted to or on the account of PaeTec). The
information on such Returns is complete and accurate in all material respects.
PaeTec has paid on a timely basis all Taxes (whether or not shown on any Return)
due and payable. There are no liens for Taxes (other than for current Taxes not
yet due and payable) upon the assets of PaeTec.
(a) No unpaid (or unreserved in accordance with GAAP applied on a
consistent basis) deficiencies for Taxes have been claimed, proposed or assessed
by any taxing or other governmental authority with respect to PaeTec for any
Pre-Closing Period and, to the knowledge of PaeTec, there are no pending audits,
investigations or claims for or relating to any liability in respect of Taxes of
PaeTec, nor has PaeTec been notified of any request for such an audit,
investigation or claim. PaeTec has not requested any extension of time within
which to file any currently unfiled returns in respect of any Taxes and no
extension of a statute of limitations relating to any Taxes is in effect with
respect to PaeTec.
(b) (i) PaeTec has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third party; (ii) on the
date hereof, PaeTec has not made any elections with respect to Taxes; (iii)
PaeTec is not a "consenting corporation" under Section 341(f) of the Code or any
corresponding provision of state, local or foreign law; (iv) there are no
private letter rulings in respect of any Tax pending between PaeTec and any
taxing authority; (v) PaeTec owns no interest in real property in the State of
New York; (vi) PaeTec has never been a member of an affiliated group within the
meaning of Section 1504 of the Code, or filed or been included in a combined,
consolidated or unitary return of any Person other than PaeTec; (vii) to the
knowledge of PaeTec, PaeTec is not liable for Taxes of any other Person, or is
currently under any contractual obligation to indemnify any Person with respect
to Taxes, or is a party to any tax sharing agreement or any other agreement
providing for payments by PaeTec with respect to Taxes; (viii) PaeTec is not,
and has not been, a real property holding corporation (as defined in Section
897(c)(2) of the Code) during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code; (ix) PaeTec is not a person other than a United
States person within the meaning of the Code; (x) PaeTec is not a party to any
joint venture, partnership, or other arrangement or
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contract which could be treated as a partnership for federal income tax
purposes; (xi) PaeTec has not entered into any sale leaseback or any leveraged
lease transaction that fails to satisfy the requirements of Revenue Procedure
75-21 (or similar provisions of foreign law); (xii) PaeTec has not agreed and is
not required, as a result of a change in method of accounting or otherwise, to
include any adjustment under Section 481 of the Code (or any corresponding
provision of state, local or foreign law) in taxable income; (xiii) PaeTec is
not a party to any agreement, contract, arrangement or plan that would result
(taking into account the transactions contemplated by this Agreement),
separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code; (xiv) PaeTec has never
been a Subchapter S corporation (as defined in Section 1361(a)(1) of the Code);
(xv) PaeTec is not a personal holding company within the meaning of Section 542
of the Code; (xvi) PaeTec has not made an election and is not required to treat
any of the assets shown on the PaeTec Financial Statements as owned by another
Person for federal income tax purposes or as tax-exempt bond financed property
or tax-exempt use property within the meaning of Section 168 of the Code (or any
corresponding provision of state, local or foreign law).
As used in this Section 4.14, PaeTec shall mean, individually and
collectively, (i) PaeTec and (ii) any individual, trust, corporation,
partnership or other entity as to which PaeTec may be liable for Taxes incurred
by such individual or entity as a transferee or pursuant to any provision of
federal, state, local or foreign law or regulation.
2.15 Outstanding Borrowings. Section 4.15 of the PaeTec Disclosure Schedule
----------------------
sets forth (a) the amount of all outstanding borrowings of PaeTec as of the date
of this Agreement, (b) any liens that relate to such outstanding borrowings and
that encumber the assets or properties of PaeTec, and (c) the name of each
lender thereof.
2.16 Intellectual Property. Except in each case as disclosed in Section
---------------------
4.16 of the PaeTec Disclosure Schedule:
(a) PaeTec owns, or has the right to use, sell or license all
Intellectual Property Rights and customer lists used in its business as
presently conducted (such Intellectual Property Rights being hereinafter
collectively referred to as the "PaeTec IP Rights") and such rights to use, sell
----------------
or license are sufficient for such conduct of its business, and are valid and
subsisting and in full force and effect;
(b) the execution, delivery and performance of any of the Transaction
Documents and the consummation of the transactions contemplated thereby will not
constitute a breach of any instrument or agreement governing any PaeTec IP Right
(the "PaeTec IP Rights Agreements") or customer lists of PaeTec, will not cause
---------------------------
the forfeiture or termination or give rise to a right of forfeiture or
termination of any PaeTec IP Right or impair the right of PaeTec or the
Surviving Corporation to use, sell or license any PaeTec IP Right or customer
lists of PaeTec or portion thereof;
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(c) there are no royalties, honoraria or other similar payments
payable by PaeTec to any Person other than as set forth in the PaeTec Financial
Statements.
(d) the conduct of PaeTec's business, as presently conducted, does not
violate any license, franchise or other agreement between PaeTec and any third
party or, to the knowledge of PaeTec, infringe any Intellectual Property Right
of any other party, and there is no pending or, to the knowledge of PaeTec,
threatened claim or litigation contesting the validity, ownership or right to
use, sell, license or dispose of any PaeTec IP Right or right to conduct
PaeTec's business nor has PaeTec received any written notice asserting that any
PaeTec IP Right or any of PaeTec's customer lists or franchises, or the proposed
use, sale, license or disposition thereof or right to conduct PaeTec's business
conflicts or will conflict with the rights of any other party; and
(e) PaeTec has taken reasonable and practicable steps designed to
safeguard and maintain the secrecy and confidentiality of, and its proprietary
rights in, all PaeTec IP Rights which constitute trade secrets or confidential
business information of PaeTec or PaeTec's customer lists. No current or prior
officers, employees or consultants of PaeTec claims or has a right to claim
pursuant to any written agreement with PaeTec an ownership interest in any
PaeTec IP Rights as a result of having been involved in the development or
licensing of such property while employed by or consulting to PaeTec, or
otherwise.
Section 4.16(e) of the PaeTec Disclosure Schedule sets forth a list of
all applications, registrations, filings and other formal actions made or taken
pursuant to federal, state and foreign laws by PaeTec to perfect or protect its
interest in PaeTec IP Rights, including, without limitation, all patents, patent
applications, trademarks and service marks, trademark and service mark
applications, registered copyrights and copyright applications, none of which
have lapsed, expired or been abandoned or cancelled, or subject to any
objection, opposition, cancellation or other such proceeding.
(f) Section 4.16(f) of the PaeTec Disclosure Schedule lists all of the
Intellectual Property licenses and franchises of PaeTec in which PaeTec is
either a licensor, franchisor, licensee or franchisee; all such licenses and
franchises are valid, enforceable and in full force and effect, and will
continue to be so in all material respects on identical terms immediately
following the Effective Time, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or
transfer, moratorium or similar laws affecting the enforcement of creditors'
rights generally and by general principles of equity relating to enforceability.
(g) To the knowledge of PaeTec, there is no unauthorized use,
infringement, violation or misappropriation of any of PaeTec IP Rights or
PaeTec's customer lists or franchise rights by any third party, including any
employee or former employee of PaeTec.
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2.17 Receivables and Payables. The accounts and notes receivable reflected
------------------------
on the PaeTec Balance Sheet provided to CCS by PaeTec, and the accounts and
notes receivable arising subsequent to the PaeTec Balance Sheet Date, have
arisen only from bona fide transactions in the ordinary course of PaeTec's
business consistent with past practice, and represent valid obligations to
PaeTec, net of any allowance for uncollectibles recorded on the PaeTec Balance
Sheet in accordance with GAAP applied on a consistent basis. There has been no
material adverse change since the PaeTec Balance Sheet Date in the amounts of
accounts and notes receivable or the allowances with respect thereto, or
accounts payable of PaeTec, from that reflected in the PaeTec Balance Sheet at
such date.
2.18 Fees and Expenses. PaeTec has not paid or become obligated to pay any
-----------------
fee or commission to any broker, finder, intermediary or financial adviser in
connection with the transactions contemplated by any of the Transaction
Documents.
2.19 Insurance. PaeTec has in effect fire and casualty insurance policies
---------
listed in Section 4.19 of the PaeTec Disclosure Schedule with the effective date
and coverage amounts accurately indicated thereon. Such insurance coverage and
coverage amounts are customary for the business engaged in by PaeTec. To the
knowledge of PaeTec, such policies and binders are valid and enforceable in
accordance with their terms and are in full force and effect.
2.20 Ownership of Property. Except (a) as disclosed in Section 4.20 of the
---------------------
PaeTec Disclosure Schedule, or (b) any Permitted Liens, PaeTec has good and
marketable title to all of its tangible personal property and assets used in its
business, including those reflected as owned on the PaeTec Financial Statements
or so described in the PaeTec Disclosure Schedule, in each case free and clear
of all security interests, mortgages, liens, charges, claims, options and
encumbrances, and none of such property or assets are owned by any Person other
than PaeTec. All real and personal property owned or leased by PaeTec is
generally in good repair and is operational and usable in the operations of
PaeTec, subject to ordinary wear and tear. PaeTec is not in violation of any
zoning, building or safety ordinance, regulation or requirement or other law or
regulation applicable to the operation of its owned or leased properties, which
violation would result in a Material Adverse Effect on PaeTec, nor has it
received any notice of violation with which it has not complied.
2.21 Environmental Matters. Notwithstanding any other provisions of this
---------------------
Agreement to the contrary, this Section 4.21 sets forth the sole and exclusive
representations and warranties of PaeTec in this Agreement or otherwise with
respect to Environmental Laws or any other environmental matters of any kind or
nature.
(a) During the period that PaeTec has owned, leased or operated any
properties or facilities, PaeTec has not disposed, released, or participated in
or authorized the release or threatened release of Hazardous Materials on, from
or under such properties or facilities in violation of any Environmental Law.
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(b) The operations, properties and facilities of PaeTec are in
compliance in all material respects with Environmental Law. During the time that
PaeTec has owned or leased its properties and facilities, PaeTec has not used,
generated, manufactured or stored on, under or about such properties or
facilities or transported or arranged for disposal to or from such properties or
facilities, any Hazardous Materials in violation of any Environmental Law.
(c) During the time that PaeTec has owned or leased its properties
and facilities, there has been no litigation brought or, to the knowledge of
PaeTec, threatened against PaeTec by, or any settlement reached by PaeTec with,
any party or parties alleging the presence, disposal, release or threatened
release of any Hazardous Materials, on from or under any of such properties or
facilities.
(d) To the knowledge of PaeTec, there are no facts, circumstances or
conditions relating to the properties and facilities owned or leased by PaeTec
reasonably likely to give rise to a claim against PaeTec under any Environmental
Law or to any material Environmental Costs and Liabilities on PaeTec.
2.22 Interested Party Transactions. Except as disclosed in Section 4.22 of
-----------------------------
the PaeTec Disclosure Schedule, no stockholder, officer or director of PaeTec or
any "affiliate" or "associate" (as those terms are defined in Rule 405
promulgated under the Securities Act), of any such Person has had, either
directly or indirectly, any interest in: (i) any Person or entity which
purchases from or sells, licenses or furnishes to PaeTec any goods, property,
technology or intellectual or other property rights or services; or (ii) any
contract or agreement to which PaeTec is a party or by which it or any of its
properties or assets may be bound or affected.
2.23 Disclosure. To the knowledge of PaeTec, no representation or warranty
----------
made by PaeTec in this Agreement, nor any information or statement contained in
the PaeTec Disclosure Schedule or any exhibit or schedule hereto or any
certificate to be delivered by PaeTec pursuant hereto, when taken together as a
whole, contains or will contain any untrue statement of a material fact, or
omits or will omit to state a material fact necessary to make the statements or
facts contained herein or therein not misleading in light of the circumstances
under which they were made, except where any such untrue statement or the
omission of any such fact would not have a Material Adverse Effect on PaeTec.
2.24 Restrictions on Business Activities. There is no agreement, judgment,
-----------------------------------
injunction, order or decree binding upon PaeTec that has or could be expected to
have the effect of prohibiting or materially impairing any business practice of
PaeTec, any acquisition of property by PaeTec or the conduct of business by
PaeTec as currently conducted or as currently expected to be conducted following
the Effective Time.
2.25 Books and Records. All accounts, books, ledgers and official records
-----------------
prepared and kept by PaeTec have been truthfully and properly kept and completed
in all material respects, and there are no material inaccuracies or
discrepancies of any kind contained or reflected therein.
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2.26 [Reserved].
2.27 Y2K Compliance. To the knowledge of PaeTec, the computer systems and
--------------
software used by PaeTec or used in its business and any other equipment or
products used by PaeTec or in its business that use any software or embedded
chips (together, "PaeTec Equipment") will accurately accept, create, manipulate,
----------------
sort, store, output and otherwise process calendar-related data from, into and
between the twentieth and twenty-first centuries and will operate before, during
and after the year 2000 without error relating to calendar-related or "date"
data (including data received from or passed to the other computer systems or
programs), including without limitation error that relates to, or is the result
of, calendar-related data that represents or refers to different centuries or to
more than one century or that reflects the existence of a leap year. Without
limiting the generality of the foregoing, to the knowledge of PaeTec, PaeTec
Equipment will not, because of calendar-related or "date" data (including
without limitation data that represents or refers to different centuries or to
more than one century or that reflects the existence of a leap year), cease
prematurely or abnormally to function before completing its intended operation
or generate invalid or incorrect results. To the knowledge of PaeTec, PaeTec
Equipment is capable of storing explicit values with respect to century data and
uses a four-digit year in all date data elements, whether internal to the
software logic, external at interfaces with other programs or stored on-line or
off-line, and recognizes and correctly processes dates for leap year.
2.4 Customer Relations. Section 4.28 of the PaeTec Disclosure Schedule
------------------
lists the top 10 customers of PaeTec (in gross revenues for the 12 month period
ending on the date of this Agreement). Except as disclosed in Section 4.28 of
the PaeTec Disclosure Schedule, PaeTec has not received any written notice or,
to the knowledge of PaeTec, any verbal notice of (or any written threats or, to
the actual knowledge of Arunas Chesonis or Tim Bancroft, any verbal threats with
respect to) termination, cancellation or limitation of, or any adverse
modification or change in, the business relationship of PaeTec, or PaeTec's
business, with any such customers.
Notwithstanding anything to the contrary, PaeTec shall not be deemed to
make to CCS any representation or warranty other than as expressly made by
PaeTec in this Agreement. Notwithstanding anything to the contrary, PaeTec makes
no representation or warranty to CCS with respect to (a) any projections,
estimates or budgets heretofore delivered to or made available to CCS or its
counsel, accountants or advisors of future revenues, expenses or expenditures or
future results of operations notwithstanding any otherwise express
representation or warranty contained in this Article 4 or (b) except as
otherwise expressly covered by a representation or warranty contained in this
Article 4, any other information or documents (financial or otherwise) made
available to CCS, or its counsel, accountants or advisors with respect to PaeTec
or its subsidiaries.
3. CCS's COVENANTS
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3.1 Advice of Changes. During the period from the date of this Agreement
-----------------
until the earlier of the Effective Time or the termination of this Agreement in
accordance with its terms, CCS will promptly advise PaeTec in writing (a) of any
event occurring subsequent to the date of this Agreement that would render any
representation or warranty of CCS and the Stockholders contained in this
Agreement, if made on or as of the date of such event or the Closing Date,
untrue or inaccurate, (b) of any Material Adverse Effect on CCS and (c) of any
breach by CCS of any covenant or agreement contained in any of the Transaction
Documents. To ensure compliance with this Section 5.1, CCS shall deliver to
PaeTec as soon as practicable but in any event within thirty (30) days after the
end of each monthly accounting period ending after the date of this Agreement
and before the earlier of the Closing Date or the termination of this Agreement
in accordance with its terms, an unaudited consolidated balance sheet and
statement of operations for CCS, which financial statements shall be prepared in
the ordinary course of business in accordance with CCS's books and records and
GAAP consistently applied and shall fairly present in all material respects the
consolidated financial position of CCS as of their respective dates and the
results of CCS's operations for the periods then ended.
Notwithstanding anything to the contrary contained in this Agreement,
any event occurring subsequent to the date of this Agreement which is disclosed
to PaeTec in writing pursuant to clause (a) of the first sentence of this
Section 5.1 shall, to the extent of such written disclosure, be deemed to modify
the applicable representations and warranties of CCS as though such event was
disclosed on the CCS Disclosure Schedule.
3.2 Maintenance of Business. During the period from the date of this
-----------------------
Agreement until the earlier of the Effective Time or the termination of this
Agreement in accordance with its terms, CCS will use its commercially reasonable
efforts to carry on and preserve its business and its relationships with
customers, suppliers, employees and others in substantially the same manner as
it has prior to the date hereof. If CCS becomes aware of any material
deterioration in the relationship with any customer, supplier or key employee,
it will promptly bring such information to the attention of PaeTec in writing
and will exert its best efforts to restore the relationship.
3.3 Conduct of Business. During the period from the date of this Agreement
-------------------
until the earlier of the Effective Time or the termination of this Agreement in
accordance with its terms, CCS will continue to conduct the business of CCS and
maintain its business relationships in the ordinary and usual course consistent
with past practice and will not, without the prior written consent of PaeTec:
(a) (i) incur, assume or guarantee any debt for borrowed money, other
than borrowings (A) under that certain commitment letter by and between CCS and
PaeTec and the related $4,000,000 promissory note (the "CCS Note"), (B) under
--------
the existing credit facility for the West Point project, up to an amount equal
to the unborrowed portion of such facility remaining on the date hereof, or (C)
with respect to the amounts described in clause (iii) of the definition of the
term "Negative Working Capital"; (ii) issue or sell any securities convertible
into or exchangeable for debt securities of CCS; or (iii) issue or sell options
or other rights to acquire, directly or
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indirectly, debt securities of CCS or any securities convertible into or
exchangeable for any such debt securities;
(b) enter into any material transaction not in the ordinary course of
its business consistent with past practice;
(c) create or assume any mortgage, pledge, material security interest
or lien or other encumbrance on any asset;
(d) dispose of any of its assets except in the ordinary course of
business consistent with past practice;
(e) enter into any material lease or contract for the purchase or
sale or license of any property, real or personal, except in the ordinary course
of business consistent with past practice;
(f) fail to maintain its equipment and other assets in good working
condition and repair in all material respects according to the standards it has
maintained to the date of this Agreement, subject only to ordinary wear and
tear;
(g) except as set forth in Section 5.3(g) of the CCS Disclosure
Schedule or as described in Section 3.11 of the CCS Disclosure Schedule, pay (or
make any oral or written commitments or representations to pay) any bonus,
increased salary or special remuneration to any director, officer, employee or
consultant or enter into or vary the terms of any employment, consulting or
severance agreement with any such person, pay any severance or termination pay
(other than payments made in accordance with plans or agreements existing on the
date hereof), grant any stock option or warrant or issue any restricted stock,
or enter into or modify any agreement or Employee Benefit Plan (except as
required by law) or any similar agreement or increase benefits of the type
described in Section 3.9;
(h) change accounting practice or principle utilized in the
preparation of the CCS Financial Statements;
(i) make any loan, advance or capital contribution to or investment
in any Person other than travel loans or advances made in the ordinary course of
business consistent with past practice;
(j) enter into, amend, relinquish, terminate or permit expiration of
any contract, lease transaction, commitment or other right or obligation, except
for commitments entered into in the ordinary course of business consistent with
past practice;
(k) waive or release any right or claim except for the waiver or
release of non-material claims in the ordinary course of business consistent
with past practice;
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(l) except as contemplated by Section 5.11, issue or sell any shares
of its capital stock of any class or any other of its securities, or issue or
create any warrants, obligations, subscriptions, options, convertible securities
or other commitments to issue shares of capital stock, or accelerate the vesting
of any outstanding security;
(m) split or combine the outstanding shares of its capital stock of
any class or enter into any recapitalization or agreement affecting the number
or rights of outstanding shares of its capital stock of any class affecting any
other of its securities;
(n) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business and
consistent with past practice of liabilities reflected or reserved against in
the CCS Financial Statements or incurred since the CCS Balance Sheet Date in the
ordinary course of business and consistent with past practice;
(o) merge, consolidate or reorganize with, or acquire any entity;
(p) amend its Certificate of Incorporation or Bylaws;
(q) license any CCS IP Rights except in the ordinary course of
business consistent with past practice;
(r) agree to any audit assessment by any Tax authority;
(s) change any insurance coverage or issue any certificates of
insurance;
(t) redeem, repurchase or otherwise acquire shares of its capital
stock, or declare, set aside or pay any dividend or other distribution (whether
in cash, stock or property) with respect to its capital stock; or
(u) agree to do, or enter into negotiations with respect to, any of
the things described in the preceding clauses in this Section 5.3.
3.4 Regulatory Approvals. CCS will promptly execute and file (and, to the
--------------------
extent required, the Stockholders will promptly join in the execution and filing
of) any application or other document that may be necessary or desirable in
order to obtain the authorization, approval or consent of any governmental body,
federal, state, local or foreign, which may be reasonably required, or which
PaeTec may reasonably request, in connection with the consummation of the
transactions contemplated by the Transaction Documents. CCS will use its
commercially reasonable efforts to promptly obtain all such authorizations,
approvals and consents.
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3.5 Necessary Consents. During the period from the date of this Agreement
------------------
until the earlier of the Effective Time or the termination of this Agreement in
accordance with its terms, CCS will use its commercially reasonable efforts to
obtain such written consents and take such other actions as may be necessary or
appropriate (in addition to those set forth in Section 5.4) to facilitate the
consummation of the transactions contemplated by the Transaction Documents and
to allow the Surviving Corporation to carry on CCS's business after the
Effective Time.
3.6 Access to Information. During the period from the date of this
---------------------
Agreement until the earlier of the Effective Time or the termination of this
Agreement, CCS will allow PaeTec and its agents reasonable access to the files,
books, records, offices and personnel of CCS, including, without limitation, any
and all information relating to CCS's Taxes, commitments, contracts, leases,
licenses and real, personal and intangible property and financial condition. CCS
will cause its accountants to cooperate with PaeTec and its agents in making
available to them all financial information reasonably requested, including,
without limitation, the right to examine all working papers pertaining to all
Tax returns and financial statements prepared, reviewed or audited by such
accountants. PaeTec shall keep such information confidential in accordance with
the terms of the confidentiality agreement dated April 21, 1999 between CCS and
PaeTec (the "Confidentiality Agreement").
--------------------------
3.7 Satisfaction of Conditions Precedent. During the period from the date
------------------------------------
of this Agreement until the earlier of the Effective Time or the termination of
this Agreement in accordance with its terms, CCS will use its commercially
reasonable efforts to satisfy or cause to be satisfied all the conditions
precedent within its control that are set forth in Article 9, and CCS will use
its commercially reasonable efforts to cause the Merger and the other
transactions contemplated by the Transaction Documents to be consummated.
3.8 No Other Negotiations. From and after the date of this Agreement until
---------------------
the earlier of the Effective Time or the termination of this Agreement in
accordance with its terms, neither CCS or any of the Stockholders nor any Person
acting on behalf of CCS or any of the Stockholders shall, directly or
indirectly, (a) solicit, initiate or respond to discussions or engage in
negotiations with any Person (whether such negotiations are initiated by CCS or
any of the Stockholders or otherwise) or take any other action intended or
designed to facilitate the efforts of any Person, other than PaeTec, relating to
the possible acquisition, recapitalization or other business combination
involving CCS (whether by way of merger, purchase of capital stock, purchase of
assets or otherwise) or any material portion of its capital stock or assets
(with any such efforts by any such Person, including a firm proposal to make
such an acquisition, to be referred to as "CCS Acquisition Proposal"), (b)
------------------------
provide non-public information with respect to CCS to any Person, other than
CCS's professional advisors, PaeTec or PaeTec's professional advisors, or (c)
enter into an agreement with any Person, other than PaeTec, providing for a
possible CCS Acquisition Proposal. If CCS or any of the Stockholders receives
any unsolicited offer or proposal relating to a CCS Acquisition Proposal, CCS
shall immediately notify PaeTec thereof, including information as to the
identity of the party making any such offer or proposal and the specific terms
of such offer or proposal, as the case may be.
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3.9 Termination of Certain CCS Warrants. CCS shall use its best efforts to
-----------------------------------
terminate on or prior to the Closing Date all outstanding CCS Warrants (other
than the Employee/Director CCS Warrants) by way of exercise thereof in
accordance with the terms of such Warrants as of the date hereof.
3.10 CCS Stockholders Meeting. CCS shall call a special meeting of its
------------------------
stockholders for the purposes of voting upon the approval of this Agreement and
the transactions contemplated hereby as soon as practicable, but in no event
later than July 15, 1999, provided, that CCS may, in lieu of holding such a
meeting, obtain such approval by written consent of stockholders in accordance
with the requirements of the DGCL. CCS shall take all reasonable actions
necessary or advisable to secure the vote in favor of such approval.
4. PAETEC AND MERGER SUB COVENANTS
4.1 Advice of Changes. During the period from the date of this Agreement
-----------------
until the earlier of the Effective Time or the termination of this Agreement in
accordance with its terms, PaeTec will promptly advise CCS in writing (a) of any
event occurring subsequent to the date of this Agreement that would render any
representation or warranty of PaeTec or Merger Sub contained in this Agreement,
if made on or as of the date of such event or the Closing Date, untrue or
inaccurate in any material respect, (b) of any Material Adverse Effect on
PaeTec, and (c) of any breach by PaeTec or Merger Sub of any covenant or
agreement contained in the Transaction Documents. To ensure compliance with this
Section 6.1, PaeTec shall deliver to CCS as soon as practicable but in any event
within thirty (30) days after the end of each monthly accounting period ending
after the date of this Agreement and before the earlier of the Closing Date or
the termination of this Agreement in accordance with its terms, an unaudited
consolidated balance sheet and statement of operations for PaeTec, which
financial statements shall be prepared in the ordinary course of business in
accordance with PaeTec's books and records and GAAP consistently applied and
shall fairly present in all material respects the consolidated financial
position of PaeTec as of their respective dates and the results of PaeTec's
operations for the periods then ended.
Notwithstanding anything to the contrary contained in this Agreement,
any event occurring subsequent to the date of this Agreement which is disclosed
to CCS in writing pursuant to clause (a) of the first sentence of this Section
6.1 shall, to the extent of such written disclosure, be deemed to modify the
applicable representations and warranties of PaeTec as though such event was
disclosed on the PaeTec Disclosure Schedule.
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4.2 Maintenance of Business. During the period from the date of this
-----------------------
Agreement until the earlier of the Effective Time or the termination of this
Agreement in accordance with its terms, PaeTec will use its commercially
reasonable efforts to carry on and preserve its business and its relationships
with customers, suppliers, employees and others in substantially the same manner
as it has prior to the date hereof. If PaeTec becomes aware of any material
deterioration in the relationship with any customer, supplier or key employee,
it will promptly bring such information to the attention of CCS in writing and
will exert its best efforts to restore the relationship.
4.3 Conduct of Business. During the period from the date of this Agreement
-------------------
until the earlier of the Effective Time or the termination of this Agreement in
accordance with its terms, PaeTec will continue to conduct the business of
PaeTec and maintain its business relationships in the ordinary and usual course
consistent with past practice and will not, without the prior written consent of
CCS:
(a) any acquisitions of assets for consideration in excess of (i) $10
million in any single transaction or series of related transactions, or (ii) $25
million in the aggregate;
(b) any leases providing for payment obligations in excess of (i) $5
million in any single transaction or series of related transactions, or (ii) $25
million in aggregate leases;
(c) any disposition, lease, conveyance or transfer of assets with a value
in excess of $1 million in any single transaction or series of related
transactions;
(d) any encumbrance of PaeTec's (or any subsidiary's) assets (other than
purchase money security interests not in excess of $1 million in the aggregate,
any Permitted Liens or any encumbrance existing on the date hereof);
(e) any borrowings by PaeTec (or any subsidiary) of $25 million or
greater, in the aggregate;
(f) any acquisition or sale of securities of another Person with a
purchase price of $25 million or greater;
(g) any merger or consolidation of PaeTec or any of its subsidiaries with
or into any other Person or any reclassification or other exchange of any stock;
provided, that any subsidiary may merge or consolidate with any Person in
- --------
connection with any acquisition permitted by paragraph (f) of this Section 6.3;
(h) any issuance, or any agreement to issue, by PaeTec of any its
securities (other than (A) the grant or issuance of options and warrants to
acquire no more than 4,825,000 shares of PaeTec Class A Common Stock in the
aggregate to PaeTec's directors, employees and agents, (B) the issuance of
shares of PaeTec Class A Common Stock upon exercise of such options or warrants,
and (C) the issuance of PaeTec's securities in connection with any acquisition
permitted by paragraph (a) or (f) of this Section 6.3);
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(i) any purchase, redemption or other acquisition for value (or any
payment into or setting aside as a sinking fund for such purpose) and any
securities of PaeTec;
(j) the entering into of any contract, agreement or arrangement which is
outside the ordinary course of PaeTec's business (it being understood that any
agreement relating to the resale of energy is outside the ordinary course of
PaeTec's business, and agreements for telecommunications services, including
content over digital subscriber lines, Internet services or other related
services are generally within the ordinary course of business) or which is with
any officer, director or stockholder of PaeTec or any affiliate of such officer,
directors or stockholder;
(k) any amendment to the charter documents or bylaws of PaeTec; or
(l) any transaction which would change the nature of PaeTec's business in
any material respects.
4.4 Regulatory Approvals. PaeTec will promptly execute and file any
--------------------
application or other document that may be necessary or desirable in order to
obtain the authorization, approval or consent of any governmental body, federal,
state, local or foreign which may be reasonably required, or which CCS may
reasonably request, in connection with the consummation of the transactions
contemplated by the Transaction Documents. PaeTec will use its commercially
reasonable efforts to promptly obtain all such authorizations, approvals and
consents.
4.5 Necessary Consents. During the period from the date of this Agreement
------------------
until the earlier of the Effective Time or the termination of this Agreement in
accordance with its terms, PaeTec will use its commercially reasonable efforts
to obtain such written consents and take such other actions as may be necessary
or appropriate in addition to those set forth in Section 6.4 to facilitate the
consummation of the transactions contemplated by the Transaction Documents.
4.6 Access to Information. During the period from the date of this
---------------------
Agreement until the earlier of the Effective Time or the termination of this
Agreement, PaeTec will allow CCS and its agents reasonable access to the files,
books, records, offices and senior personnel of PaeTec. CCS shall keep such
information confidential in accordance with the terms of the Confidentiality
Agreement.
4.7 Satisfaction of Conditions Precedent. During the period from the date
------------------------------------
of this Agreement until the earlier of the Effective Time or the termination of
this Agreement in accordance with its terms, PaeTec will use its commercially
reasonable efforts to satisfy or cause to be satisfied all the conditions
precedent within its control that are set forth in Article 8, and PaeTec will
use its commercially reasonable efforts to cause the Merger and the other
transactions contemplated by the Transaction Documents to be consummated.
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4.8 No Other Negotiations. From and after the date of this Agreement until
---------------------
the earlier of the Effective Time or the termination of this Agreement in
accordance with its terms, neither PaeTec nor any Person acting on behalf of
PaeTec shall, directly or indirectly, (a) solicit, initiate or respond to
discussions or engage in negotiations with any Person (whether such negotiations
are initiated by PaeTec or otherwise) or take any other action intended or
designed to facilitate the efforts of any Person, other than CCS, relating to
the possible acquisition, recapitalization or other business combination
involving PaeTec (whether by way of merger, purchase of capital stock, purchase
of assets or otherwise) or any material portion of its capital stock or assets
(with any such efforts by any such Person, including a firm proposal to make
such an acquisition, to be referred to as "PaeTec Acquisition Proposal"), (b)
---------------------------
provide non-public information with respect to PaeTec to any Person, other than
PaeTec's professional advisors, CCS or CCS's professional advisors, or (c) enter
into an agreement with any Person, other than CCS, providing for a possible
PaeTec Acquisition Proposal; provided, however, nothing contained in this
-------- -------
Section 6.8 shall prevent or restrict the ability of PaeTec to effect any
transaction which may be consummated without the approval of CCS under Section
6.3 and actions related thereto. If PaeTec receives any unsolicited offer or
proposal relating to a PaeTec Acquisition Proposal (other than any transaction
which may be consummated without the approval of CCS under Section 6.3), PaeTec
shall immediately notify CCS thereof, including information as to the identity
of the party making any such offer or proposal and the specific terms of such
offer or proposal, as the case may be.
4.9 Transaction Documents. PaeTec shall use its commercially reasonable
---------------------
efforts to negotiate and enter into each of the Transaction Documents with the
relevant Stockholders.
4.10 Compliance With Securities Laws. PaeTec shall prepare and furnish to
-------------------------------
each Stockholder who is not an "accredited investor," as such term is defined in
Regulation D promulgated under the Securities Act, an information statement
regarding PaeTec prepared in accordance with Regulation D and shall take all
other actions such that the issuance of the Merger Consideration complies in all
material respects with all applicable federal and state securities laws, rules,
regulations and other requirements, including blue sky laws.
5. CLOSING AND CLOSING DELIVERIES
5.1 The Closing. Subject to the termination of this Agreement as provided
-----------
in Article 10, the consummation of the transactions contemplated by this
Agreement (the "Closing") will take place at the offices of Bond, Schoeneck &
-------
King, LLP, One Lincoln Center, Syracuse, New York 13202, on or before July 31,
1999, at a time to be mutually agreed upon by the parties, unless another place,
time and date is mutually selected by CCS and PaeTec (the "Closing Date").
------------
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF CCS
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The obligations of CCS hereunder are subject to the fulfillment or
satisfaction on or before the Closing Date of each of the following conditions
(any one or more of which may be waived by CCS, but only in a writing signed by
CCS):
6.1 Covenants. Each of PaeTec and Merger Sub shall have performed and
---------
complied in all material respects with all of its covenants required to be
performed by it under this Agreement on or before the Closing Date.
6.2 Accuracy of Representations and Warranties. The representations and
------------------------------------------
warranties of PaeTec and Merger Sub set forth in this Agreement, the PaeTec
Disclosure Schedule or in any certificate executed and delivered by PaeTec or
Merger Sub pursuant to this Agreement shall be true and accurate in all material
respects on and as of the Closing Date with the same force and effect as if they
had been made at the Closing.
6.3 Absence of Material Adverse Change. There shall not have been any
----------------------------------
material adverse change since the PaeTec Balance Sheet Date in the condition
(financial or otherwise), properties, assets, liabilities, business, operations,
results of operations of PaeTec.
6.4 Officer's Certificate. CCS shall have received a certificate as to the
---------------------
matters covered by Sections 8.1, 8.2 and 8.3 executed by PaeTec's Chief
Executive Officer and Chief Financial Officer.
6.5 Compliance with Law. There shall be no order, decree or ruling by any
-------------------
Governmental Entity or threat thereof, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the Merger, which would
prohibit or render illegal the transactions contemplated by the Transaction
Documents.
6.6 Government Consents. There shall have been obtained on or before the
-------------------
Closing Date such material permits or authorizations, and there shall have been
taken such other action, as may be required to consummate the Merger by any
Governmental Entity having jurisdiction over the parties and the actions herein
proposed to be taken, including but not limited to requirements under applicable
federal and state securities laws.
6.7 Opinion of PaeTec's Counsel. CCS shall have received from Bond,
---------------------------
Schoeneck & King, LLP, counsel to PaeTec, an opinion in a form and substance
reasonably acceptable to CCS.
6.8 Board of Director and Stockholder Approvals. The principal terms of
-------------------------------------------
this Agreement and the Merger and the transactions contemplated hereby shall
have been approved and adopted by the Board of Directors of PaeTec in accordance
with applicable law and PaeTec's Certificate of Incorporation and Bylaws. The
principal terms of this Agreement and the Merger and the transactions
contemplated hereby shall have been approved by the Board of Directors of Merger
Sub and its stockholder, PaeTec, in accordance with applicable law and Merger
Sub's Certificate of Incorporation and Bylaws.
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6.9 No Legal Action. No temporary restraining order, preliminary
---------------
injunction or permanent injunction or other order preventing the consummation of
the Merger shall have been issued by any Federal or state court and remain in
effect, nor shall any proceeding seeking any of the foregoing be pending.
6.10 Entry into Transaction Documents. PaeTec and Merger Sub (and, in case
--------------------------------
of the Stockholders' Agreement, Messrs. Chesonis, Edgecomb and Sudikoff) shall
have entered into each of the other Transaction Documents set forth in Section
9.10 to which each is a party.
6.11 CCS Stockholder Debt. PaeTec shall have executed and delivered
--------------------
promissory notes ("PaeTec Notes") in favor of (a) those Persons designated by
------------
CCS to evidence the assumption by PaeTec of indebtedness of CCS owed to such
Persons, and (b) other applicable stockholders of CCS for the amounts specified
in clause (iii) of the definition of the term "Negative Working Capital." The
PaeTec Notes shall (i) be in the principal face amount of the outstanding
balance of the applicable assumed indebtedness on the Closing Date, which amount
shall in no event exceed $7.5 million in the aggregate, (ii) bear interest at 8%
per annum (subject to adjustment from time to time to reflect changes in the
prime rate of interest charged by City National Bank), and such interest shall
be payable quarterly, (iii) provide that they may be repaid in full or in part
from time to time, at the option of PaeTec, without premium or penalty, and (iv)
be payable, together with all accrued but unpaid interest to the date of
repayment, upon the earlier of (A) the consummation by PaeTec of an initial
public offering of its common stock, or (B) December 31, 2000.
6.12 Bridge Financing. PaeTec shall have obtained a commitment to lend,
----------------
with respect to a bridge loan facility in an amount between $30 million and $40
million, upon the terms and subject to the conditions reasonably acceptable to
PaeTec.
2.5 Newcourt Facility. PaeTec shall be in compliance with all of the terms
-----------------
and conditions of the Newcourt Facility in all material respects, and there
shall exist no event, condition or occurrence which, after notice or lapse of
time, or both, would constitute a material default by PaeTec under the Newcourt
Facility, unless in each case compliance with such terms or conditions or such
default shall have been waived in writing by Newcourt.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF PAETEC AND MERGER SUB
The obligations of PaeTec and Merger Sub hereunder are subject to the
fulfillment or satisfaction on or before the Closing Date of each of the
following conditions (any one or more of which may be waived by PaeTec, but only
in a writing signed by PaeTec):
7.1 Covenants. CCS shall have performed and complied in all material
---------
respects with all of its and his covenants contained in this Agreement on or
before the Closing Date.
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7.2 Accuracy of Representations and Warranties. The representations and
------------------------------------------
warranties of CCS in this Agreement, the CCS Disclosure Schedule or in any
certificate executed and delivered by CCS pursuant to this Agreement shall be
true and accurate in all material respects on and as of the Closing Date with
the same force and effect as if they had been made at the Closing.
7.3 Absence of Material Adverse Change. There shall not have been any
----------------------------------
material adverse change since the CCS Balance Sheet Date in the condition
(financial or otherwise), properties, assets, liabilities, business, operations
or results of operations of CCS.
7.4 Officer's Certificates. PaeTec and Merger Sub shall have received a
----------------------
certificate as to the matters covered by Sections 9.1, 9.2, 9.3, 9.13, 9.16 and
9.17 executed by CCS's Chief Executive Officer and Chief Operating Officer.
7.5 Compliance with Law. There shall be no order, decree or ruling by any
-------------------
Governmental Entity or threat thereof, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the Merger, which would
prohibit or render illegal the transactions contemplated by the Transaction
Documents.
7.6 Government Consents. There shall have been obtained on or before the
-------------------
Closing Date such material permits or authorizations, and there shall have been
taken such other action, as may be required to consummate the Merger by any
Governmental Entity having jurisdiction over the parties and the actions herein
proposed to be taken, including but not limited to requirements under applicable
federal and state securities laws.
7.7 Opinion of CCS's Counsel. PaeTec and Merger Sub shall have received
------------------------
from Honigman, Miller, Schwartz and Cohn, counsel to CCS and the Stockholders,
an opinion in a form and substance reasonably acceptable to PaeTec.
7.8 Documents. PaeTec or CCS, as applicable, shall have received all
---------
written consents, assignments, waivers, authorizations or certificates
reasonably deemed necessary by PaeTec's legal counsel to provide for the
continuation in full force and effect of any and all material contracts and
leases of CCS (which, for the purposes hereof, shall include the exclusive
service agreements described in Section 11.8) and for PaeTec or CCS to
consummate the transactions contemplated by the Transaction Documents, including
without limitation, under the Newcourt Facility.
7.9 No Legal Action. No temporary restraining order, preliminary or
---------------
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any Federal or state court and remain in effect, nor
shall any proceeding seeking any of the foregoing be pending.
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7.10 Registration Rights Agreement, Stockholders' Agreement and Escrow
-----------------------------------------------------------------
Agreement. Each of the Stockholders shall have entered into a Registration
- ---------
Rights Agreement and Stockholders' Agreement, substantially in forms attached
hereto as Exhibits A and B, respectively; and the Stockholder Representative,
PaeTec and the Escrow Agent shall have entered into an Escrow Agreement, in a
form and substance reasonably acceptable to the parties thereto.
7.11 CCS Warrants. All outstanding CCS Warrants (other than the
------------
Employee/Director CCS Warrants) shall have been terminated in accordance with
Section 5.9. CCS shall have received written consents of the holders of
Employee/Director CCS Warrants with respect to the exchange thereof contemplated
by Section 2.1(d).
7.12 CCS 401(k) Plan. If applicable, CCS shall have taken all such actions
---------------
as are necessary to effect an amendment, to be effective as of the Effective
Time, to the CCS's 401(k) Plan to provide that only employees of the Surviving
Corporation are eligible to participate in such plan.
7.13 Playa Vista Agreement. CCS shall have entered into a definitive
---------------------
agreement with Playa Capital Corp., pursuant to which CCS shall become the
exclusive provider of local telephone, Internet connection and cable television
services for the Playa Vista development, upon the terms and subject to the
conditions reasonably acceptable to PaeTec, or CCS shall then be engaged in good
faith, on-going negotiations with Playa Capital Corp. with respect to such
definitive agreement.
7.14 Termination of CCS Agreements. Each of the CCS Stockholders' Agreement
-----------------------------
and the CCS Registration Rights Agreement shall have been terminated in all
respects.
2.6 Release of Security Interests. All liens, security interests and other
-----------------------------
encumbrances on any of the assets of CCS in favor of Alliance or City National
Bank shall have been released or removed in all respects and shall be of no
further effect.
2.7 Stockholder Indebtedness. On the Closing Date, the aggregate principal
------------------------
balance (and accrued interest thereon) of all indebtedness owed to stockholders
of CCS, together with the amounts for which a PaeTec Note will be issued
pursuant to clause (b) of the first sentence of Section 8.11, shall not exceed
$7.5 million in the aggregate.
2.8 Total Indebtedness. On the Closing Date, the total indebtedness of CCS
------------------
on a consolidated basis (including all indebtedness to its stockholders) shall
not exceed in the aggregate the sum of (i) $13.8 million, (ii) the outstanding
principal balance (and any accrued but unpaid interest thereon) under the CCS
Note, and (iii) the outstanding principal balance (and any accrued but unpaid
interest thereon) of any additional borrowings approved in writing by PaeTec.
2.9 Voting Agreement. All stockholders of CCS to whom shares of PaeTec
----------------
Class A Common Stock are issuable under the terms of this Agreement shall have
entered into the Voting Agreement, substantially in the form attached hereto as
Exhibit C.
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2.10 Bridge Financing. PaeTec shall have obtained a commitment to lend,
----------------
with respect to a bridge loan facility in an amount between $30 million and $40
million, upon the terms and subject to the conditions reasonably acceptable to
PaeTec.
8. TERMINATION OF AGREEMENT
8.1 Termination. This Agreement may be terminated at any time prior to the
-----------
Effective Time, whether before or after approval of the Merger by the
stockholders of CCS:
(a) by mutual agreement of CCS and PaeTec;
(b) by PaeTec if the stockholders of CCS fail to approve this
Agreement and the transactions contemplated hereby at a special meeting of
stockholders called for the purpose of securing such approval or pursuant to a
written consent in lieu of such meeting;
(c) by either party, if all the conditions precedent for the Merger
shall not have been satisfied or waived on or before the Final Date (as such
term is hereinafter defined), other than as a result of a breach of this
Agreement by the terminating party;
(d) by either party, if in such party's good faith, reasonable
determination one or more events occurring subsequent to the date hereof with
respect to the other party and disclosed pursuant to Section 5.1 or 6.1, as the
case may be, could be expected to result in Damages to such party of $500,000 or
more in the aggregate; or
(e) by either party, if a permanent injunction or other order by any
Federal or state court which would make illegal or otherwise restrain or
prohibit the consummation of the Merger shall have been issued and shall have
become final and nonappealable.
As used herein, the Final Date shall be September 30, 1999, except
----------
that if a temporary, preliminary or permanent injunction or other order by any
Federal or state court which would prohibit or otherwise restrain consummation
of the Merger shall have been issued and shall remain in effect on such date,
and such injunction shall not have become final and nonappealable, either party,
by giving the other written notice thereof on or prior to such date, may extend
the time for consummation of the Merger up to and including the earlier of the
date such injunction shall become final and non-appealable or 45 days after the
Final Date, so long as such party shall, at its own expense, use its best
efforts to have such injunction dissolved.
2.11 Notice of Termination. Any termination of this Agreement under
---------------------
Section 10.1 will be effective by the delivery of written notice of the
terminating party to the other parties hereto.
2.12 Effect of Termination. In the case of any termination of this
---------------------
Agreement as provided in this Article 10, this Agreement shall be of no further
force and effect (except as
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provided in Article 12) and nothing herein shall relieve any party from
liability for any breach of this Agreement; provided, however, that in the
-------- -------
event that this Agreement is terminated pursuant to Section 10.1(d), none of the
parties hereto shall have any further liability or obligations under this
Agreement.
11. INDEMNITY AND POST-CLOSING ADJUSTMENT
2.13 Survival; Indemnity. The representations, warranties, covenants and
agreements of the parties shall survive the date of the Closing; provided,
--------
however, that representations and warranties of the parties shall only so
- -------
survive until December 31, 2000, except with respect to PaeTec's representations
and warranties contained in Section 2.3 which shall survive until the expiration
of the applicable statute of limitations under the Code (as applicable, the
"Survival Date"). Nothing contained in the foregoing sentence shall prevent
- --------------
recovery under this Article 11 after the applicable Survival Date so long as the
party making a claim or seeking recovery complies with the provisions of clause
(x) and (y) of the following sentence. No party shall have any claim or right
of recovery for any breach of a representation, warranty, covenant or agreement
unless (x) written notice is given in good faith by that party to the other
party of the representation, warranty, covenant or agreement pursuant to which
the claim is made or right of recovery is sought, setting forth in reasonable
detail the breach of the representation, warranty, covenant or agreement, the
amount or nature of the claim being made, if then ascertainable, and the general
basis therefor and (y) such notice is given prior to the Survival Date.
Indemnities contained in this Article 11 shall survive the Closing until the
Survival Date. The representations and warranties contained in this Agreement,
in the CCS Disclosure Schedule, the PaeTec Disclosure Schedule, any exhibit or
schedule to this Agreement or any certificate delivered pursuant to Section 9.4
of this Agreement shall survive any audit or investigation by any party hereto
and shall not be affected or deemed waived by reason of the fact that any such
party or his or its representatives knew or should have known that any such
representation or warranty is or might be inaccurate in any respect.
2.14 Indemnification by CCS. Subject to the other provisions of this
----------------------
Article 11, CCS agrees to indemnify PaeTec and Merger Sub and their respective
officers, directors, stockholders, employees, affiliates (including without
limitation the Surviving Corporation), attorneys, accountants and agents (the
"PaeTec Parties"), and hold them harmless from and against, any and all damages,
--------------
losses, liabilities, costs and expenses (including, without limitation,
reasonable expenses of investigation and reasonable attorneys' fees and expenses
in connection with any action, suit or proceeding) (collectively, "Damages")
-------
incurred or suffered by the PaeTec Parties arising out of (i) any breach of any
representation, warranty, covenant or agreement of CCS contained in this
Agreement, the CCS Disclosure Schedule or any exhibit or schedule to this
Agreement or any certificate delivered by CCS pursuant to this Agreement, and
(ii) any breach of any representation, warranty, covenant or agreement of any of
the Stockholders contained in the Voting Agreement between PaeTec and such
Stockholder. From and after the Effective Time, CCS's indemnification
obligations under this Section 11.2 shall be satisfied solely through the
procedures established under the Escrow Agreement to release shares of the CCS
Indemnification Escrow Stock to PaeTec in accordance therewith. Notwithstanding
anything to the contrary in
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this Agreement, from and after the Effective Time, (a) all indemnification
claims for Damages arising under this Section 11.2 (including claims for any
breach of the Voting Agreements) shall in no event exceed in the aggregate
$4,380,000 and all such claims shall only be satisfied (if at all) from the CCS
Indemnification Escrow Stock under the Escrow Agreement (each share of PaeTec
Class A Common Stock to be valued in accordance with Section 11.4); (b) all
indemnification claims for Damages arising under this Section 11.2 as a result
of one or more breaches by any of the Stockholders of the Voting Agreement
between PaeTec and such Stockholder shall be limited in the aggregate to the
value of the CCS Indemnification Escrow Stock (each share of PaeTec Class A
Common Stock to be valued in accordance with Section 11.4) allocated to such
Stockholder and held in escrow on such Stockholder's behalf under the Escrow
Agreement, and all such claims shall only be satisfied (if at all) therefrom;
and (c) neither CCS nor any Stockholder shall have any liability to the PaeTec
Parties for Damages under this Section 11.2 unless and until the aggregate
amount of all such Damages exceed $150,000 in the aggregate (the "CCS Basket"),
----------
in which case CCS or such Stockholder, as the case may be, shall be liable for
all amounts in excess of the CCS Basket, subject to clause (a) of this sentence;
provided, however, that the CCS Basket shall not apply to any claims for
- -------- -------
indemnification which is attributable to any breach of a representation or
warranty which constitutes fraud by CCS.
2.15 Indemnification by PaeTec. Subject to the other provisions of this
-------------------------
Article 11, PaeTec agrees to indemnify the Stockholders, and to hold the
Stockholders harmless from and against, any and all Damages incurred or suffered
by the Stockholders arising out of any breach of any representation, warranty,
covenant or agreement of PaeTec. Notwithstanding the foregoing, from and after
the Effective Time, (a) all indemnification claims for Damages arising under
this Section 11.3 shall in no event exceed $4,380,000 in the aggregate; and (b)
PaeTec shall have no liability to the CCS Parties for Damages under this Section
11.3 unless and until the aggregate amount of all such Damages exceed $150,000
in the aggregate (the "PaeTec Basket"), in which case PaeTec shall be liable for
-------------
all amounts in excess of the PaeTec Basket, subject to clause (a) of this
sentence; provided, however, that the PaeTec Basket shall not apply to any
-------- -------
claims for indemnification which is attributable to any breach of a
representation or warranty which constitutes fraud by PaeTec.
2.16 Valuation of PaeTec Stock. For purposes of Sections 11.2 and 11.8(d),
-------------------------
each share of PaeTec Class A Common Stock shall be deemed to worth:
(i) in the event that, at the time of the valuation, the PaeTec Class
A Common Stock is then listed or traded on a national securities
exchange or automated quotation system or is publicly held, then
an amount equal to the greater of (x) $5 or (y)(A) if the PaeTec
Class A Common Stock is listed or traded on any national
securities exchange or listed for quotation on the Nasdaq
National Market or SmallCap Market, an amount equal to the last
or closing sale price, regular way, of the PaeTec Class A Common
Stock on the applicable date, as reported in the principal
consolidated transaction reporting system (in case of a national
securities exchange) or in the Wall Street Journal (in case of
the Nasdaq National Market or SmallCap
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Market); and (B) in all other cases, an amount equal to the
average of the high bid and low asked prices in the over-the-
counter market, such as the Nasdaq OTC Bulletin Board, as
reported in the Wall Street Journal or, if PaeTec Class A Common
Stock is not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional
market maker making a market in the PaeTec Class A Common Stock
selected by the Board of Directors of PaeTec.
(ii) in all other instances, an amount equal to the greater of $5 or
the purchase price per share of PaeTec Class A Common Stock sold
in the latest private placement offering of PaeTec Class A Common
Stock; provided, however, that in the event that either PaeTec or
-------- -------
CCS shall notify the other party of its intention to seek an
appraisal of the PaeTec Class A Common Stock, each share of
PaeTec Class A Common Stock shall be deemed to have the value
determined by such appraisal or $5, whichever is greater.
(a) any appraisal pursuant to this Section 11.4(ii) shall be
conducted by an independent and nationally recognized
accounting or investment banking firm mutually acceptable to
the parties hereto and such third party appraiser shall base
its conclusion on the analysis and parameters to be
reasonably agreed upon by the parties hereto, provided, that
--------
any such appraisal shall be based upon the total enterprise
value of PaeTec and its subsidiaries as a going concern,
allocated equally to each outstanding share of PaeTec Common
Stock (without any minority or liquidity discount).
(b) the party requesting an appraisal pursuant to this Section
11.4(ii) shall pay all fees and expenses incurred in
connection with such appraisal.
2.17 Miscellaneous Indemnity Provisions.
----------------------------------
Notwithstanding anything to the contrary contained in this Agreement,
from and after the Effective Time:
(i) To the extent that any of the PaeTec Parties has any claim for
Damages arising out of this Agreement or any Voting Agreement,
the sole and exclusive remedy for such PaeTec Party shall be to
make a claim against the CCS Indemnification Escrow Stock under
the Escrow Agreement; provided, however, that nothing contained
-------- -------
in this Section 11.5(i) shall in any way limit or reduce the
scope of the post-closing adjustments expressly contemplated by
Section 11.8.
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<PAGE>
(ii) To the extent that any of the Stockholders has any claim against
PaeTec for Damages arising out of this Agreement, the sole and
exclusive remedy for such Stockholder shall be to make a claim
for indemnification pursuant to this Article 11.
(iii) For purposes of determining the amount of any Damages under
Section 11.2 or 11.3, (A) such amount shall be reduced by the
amount of any insurance proceeds received by the Indemnified
Party in respect of the Damages; and (B) such amount shall
exclude all consequential or special damages suffered by the
Indemnified Party and all punitive damages awarded against the
Indemnifying Party.
(iv) Any information disclosed pursuant to any Section of a party's
Disclosure Schedule shall be deemed disclosed for purposes of
all other Sections of such Disclosure Schedule so long as the
relevance of such disclosure to such other Sections is
reasonably apparent.
(v) Notwithstanding anything in this Agreement or any statute or the
common law to the contrary, the parties acknowledge and agree
that the indemnification and post-closing adjustment rights set
forth in this Article 11 shall be the sole and exclusive remedy
of the Indemnified Parties for Damages of any kind or nature
arising under this Agreement or any statute or the common law.
(vi) CCS shall not be liable for any Damages of the PaeTec Parties
under Section 11.2 to the extent such PaeTec Parties have
otherwise been made whole for such Damages pursuant to Section
11.8.
2.18 Notification of Claims. Upon any party (the "Indemnified Party")
---------------------- -----------------
becoming aware of a fact, condition or event that constitutes a basis for a
claim for Damages in respect thereof against any other party (the "Indemnifying
------------
Party") under Section 11.2 or 11.3, if such a claim is to be made, the
- -----
Indemnified Party will with reasonable promptness notify the Indemnifying Party
or Parties in writing of such fact, condition or event, but in any event within
sufficient time to permit the Indemnifying Party or Parties to respond timely to
any complaint or other process served on the Indemnified Party. The failure to
notify the Indemnifying Party or Parties under this Section 11.6 shall not
relieve any Indemnifying Party of any liability that it may have to the
Indemnified Party except to the extent that such failure to notify shall have
resulted in a waiver of any lawful and valid affirmative defense to any third-
party claim or otherwise materially prejudices the Indemnifying Party or Parties
in connection with the administration or defense of such third-party claim.
2.19 Third-Party Claims.
------------------
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<PAGE>
(a) Upon receipt by the Indemnifying Party or Parties of any notice of
claim for indemnification hereunder arising from a third-party claim, the
Indemnifying Party or Parties shall assume the administration and defense of
such third-party claim with counsel that is reasonably satisfactory to the
Indemnified Party and shall proceed with the administration and defense of such
third-party claim diligently and in good faith; provided, however, that any
-------- -------
Indemnifying Party shall be entitled to assume the administration and defense of
such third-party claim only if it agrees in writing with the Indemnified Party
that it is obligated to indemnify the Indemnified Party pursuant to this Article
11 with respect to such third-party claim; and provided, further that no
-------- -------
Indemnifying Party shall be entitled to assume the administration and defense of
any third-party claim that (i) seeks an injunction or other equitable relief
that might materially and adversely affect any PaeTec Party, or (ii) involves
any criminal action or any claim that could reasonably be expected to result in
a criminal action against any PaeTec Party. The Indemnified Party shall be
fully consulted by the Indemnifying Party or Parties and shall have the right to
participate, at its own expense, in the investigation, administration and
defense of such third-party claim. Any party hereto receiving notice of any
proposed settlement of any such third-party claim shall promptly provide a copy
of such notice to the other parties hereto. The Indemnifying Party or Parties
shall not have the right to settle or compromise any third-party claim for which
indemnification is being sought hereunder without the consent of the Indemnified
Party unless as a result of such settlement or compromise the Indemnified Party
is fully discharged and released from any and all liability with respect to such
third-party claim. The Indemnified Party shall make available to the
Indemnifying Party or Parties and its counsel all books, records, documents and
other information relating to any third-party claim for which indemnification is
sought hereunder, and the parties to this Agreement shall render to each other
reasonable assistance in the defense of any such third-party claim.
(b) In the event more than one party is an Indemnifying Party, a majority
in interest of such Indemnifying Parties shall assume the administration and
defense of such third-party claim and appoint counsel reasonably satisfactory to
the Indemnified Party and proceed with the administration and defense of such
third-party claim diligently and in good faith. All decisions and other actions
that are taken by such majority in interest of the Indemnifying Parties in
connection with the appointment of such counsel and the administration and
defense of such third-party claim shall be final, binding and conclusive on all
other Indemnifying Parties, and none of such other Indemnifying Parties
obligations under this Article 11 shall be diminished as a result of such
administration and defense of such third-party claim.
(c) Notwithstanding any other provision of this Agreement, the Indemnified
Party shall have the absolute right, at its election (to be exercised in its
sole discretion by written notice to the Indemnifying Party or Parties) to
assume from the Indemnifying Party or Parties the administration and defense of
any third-party claim against the Indemnified Party. In such event, the
Indemnifying Party or Parties shall be responsible for the costs and expenses of
the administration and defense of such claim incurred prior to the Indemnified
Party or Parties' assumption of the administration and defense of such claim and
shall not be responsible for costs and expenses incurred after such assumption.
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<PAGE>
2.20 Post-Closing Adjustment.
-----------------------
(a) Within 60 days after the Closing Date, CCS shall deliver to PaeTec
consolidated financial statements of CCS audited by its independent auditors for
the period from January 1, 1999 to the close of business on the day immediately
preceding the Closing Date (such audited financial statements referred to as the
"Closing Balance Sheet"), together with all related work papers of such
---------------------
auditors. The Closing Balance Sheet shall be prepared in accordance with GAAP.
(b) PaeTec and its accountants, agents, and representatives shall have 30
days after the receipt of the Closing Balance Sheet to review the same, and to
object to any amounts thereon. If an objection to the Closing Balance Sheet is
raised, PaeTec shall notify CCS in writing on or before the 30th day following
receipt of the Closing Balance Sheet, which notice shall set forth the grounds
for the objection in reasonable detail. The parties shall endeavor to resolve
any such objection within 15 days after receipt of a notice of objection by CCS.
If the parties are unable to resolve all such objections, the dispute shall be
submitted for determination to nationally recognized independent accountants to
be mutually selected by the parties (the "Independent Accountants"). The
-----------------------
Independent Accountants shall review the objections of PaeTec and make a
determination whether any adjustments to the Closing Balance Sheet need to be
made in order to make the Closing Balance Sheet conform to the requirements of
this Section 11.8. The parties shall instruct the Independent Accountants to
render their determination no later than 45 days after the objections are
referred to the Independent Accountants. The determination of the Independent
Accountants shall be conclusive and binding upon the parties. PaeTec and Merger
Sub, on one hand, and the Stockholders, on the other hand, shall each pay one-
half (1/2) of the fees and expenses of the Independent Accountants; provided,
--------
that if the Stockholders shall fail to pay their portion of such fees and
expenses within 15 days of PaeTec's request, PaeTec may pay such portion to the
Independent Accountants on behalf of the Stockholders and, in such case, PaeTec
shall be reimbursed therefor through the release from the escrow established
under the Escrow Agreement of such number of shares of PaeTec Class A Common
Stock having a value equal to such payment (each share of PaeTec Class A Common
Stock shall be valued at $5.00).
(c) If, following the examination and adjustment (if any) of the Closing
Balance Sheet pursuant to Section 11.8(b), the Negative Working Capital as
reflected on the Closing Balance Sheet exceeds $2 million, or the total
indebtedness of CCS (including all indebtedness owed to stockholders of CCS) as
reflected on the Closing Balance Sheet exceeds $13.8 million, then such number
of shares of Post-Closing Adjustment Escrow Stock held under the Escrow
Agreement having a value equal to the Shortfall Amount shall be released to
PaeTec from such escrow without the consent of CCS. For purposes of this
Section 11.8(c), each share of PaeTec Class A Common Stock shall be valued at
$5.00.
As used herein, the term "Negative Working Capital" shall mean the
------------------------
amount by which CCS's total current liabilities (excluding any current portion
of indebtedness) exceed its total current assets; provided, however, that the
-------- -------
determination of Negative Working Capital shall be adjusted to eliminate the
effects of the following items from CCS's total current assets and total
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<PAGE>
current liabilities: (i) any capital expenditures, and other expenditures
approved by PaeTec, for the Playa Vista development and other new projects, (ii)
any other adjustments and one-time charges approved by PaeTec, and (iii) to the
extent that the aggregate indebtedness owed to the stockholders of CCS is less
than $7.5 million, any other amounts due to any stockholder of CCS for
consulting or other fees (up to an aggregate amount equal to the difference
between $7.5 million and such aggregate indebtedness).
As used herein, the term "Shortfall Amount" shall mean the sum of (x)
----------------
the amount, if any, by which the Negative Working Capital as reflected on the
Closing Balance Sheet exceeds $2 million, and (y) the amount, if any, by which
the total indebtedness (including all indebtedness owed to stockholders of CCS)
as reflected on the Closing Balance Sheet exceeds the sum of (i) $13.8 million,
(ii) the outstanding principal balance (and any accrued but unpaid interest
thereon) of the borrowings, if any, approved by PaeTec, and (iii) the
outstanding principal balance (and any accrued but unpaid interest thereon), if
any, under the CCS Note.
(d) In the event that (i) CCS shall fail to obtain prior to Closing the
valid and binding written consent of the U.S. Military Academy at West Point,
GMH Associates or Tufts University with respect to the assignment of, or a
change of control under, the respective exclusive service agreement in
connection with the Merger, as the case may be, (ii) any of the West Point, GMH
Associates or Tufts University shall repudiate, terminate or otherwise fail to
perform its payment obligations in any material respects under, the applicable
exclusive service agreements at any time during the period from the Effective
Time until the first anniversary thereof, and (iii) the Surviving Corporation
---
shall not be able to enforce such agreement against West Point, GMH or Tufts, as
the case may be, solely as a result of CCS's failure to obtain prior consent of
such party described in clause (i) of this sentence, then such number of shares
of Post-Closing Escrow Stock held under the Escrow Agreement having a value
equal to $1.9 million (in case of West Point), $5 million (in case of GMH) and
$1.5 million (in case of Tufts) shall be released to PaeTec. For purposes of
this Section 11.8(d), each share of PaeTec Class A Common Stock shall be valued
in accordance with Section 11.4.
12. MISCELLANEOUS
2.21 Governing Law; Venue; Jurisdiction; Waiver of Trial by Jury. The laws
-----------------------------------------------------------
of the State of New York (irrespective of its choice of law principles) will
govern the validity of this Agreement, the construction of its terms and the
interpretation and enforcement of the rights and duties of the parties hereto.
This Agreement shall be enforceable in any court of competent jurisdiction.
EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY
JURY WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT.
2.22 Assignment; Binding Upon Successors and Assigns. None of the parties
-----------------------------------------------
hereto may assign any of its rights or obligations hereunder without the prior
written consent of the other
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<PAGE>
parties hereto. This Agreement will be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns.
2.23 Severability. If any provision of this Agreement, or the application
------------
thereof, will for any reason and to any extent be invalid or unenforceable, the
remainder of this Agreement and application of such provision to other persons
or circumstances will be interpreted so as reasonably to effect the intent of
the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the greatest extent possible, the economic, business and
other purposes of the void or unenforceable provision.
2.24 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which will be an original as regards any party whose
signature appears thereon and all of which, when taken together, will constitute
one and the same instrument. This Agreement will become binding when one or more
counterparts hereof, individually or taken together, bears the signatures of all
the parties reflected hereon as signatories.
2.25 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party will be deemed cumulative with,
and not exclusive of, any other remedy conferred hereby or by law on such party,
and the exercise of any one remedy will not preclude the exercise of any other.
2.26 Amendment and Waivers. Any term or provision of this Agreement may be
---------------------
amended, and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or prospectively)
only by a writing signed by the party to be bound thereby. The waiver by a party
of any breach hereof or default in the performance hereof will not be deemed to
constitute a waiver of any other default or any succeeding breach or default.
This Agreement may be amended by the parties hereto at any time before or after
its approval by the stockholders of CCS or by PaeTec (as the stockholder of
Merger Sub) but, after such approval, no amendment will be made which by
applicable law requires the further approval of the stockholders without
obtaining such further approval.
2.27 Expenses. Each of CCS and PaeTec will bear its respective expenses
--------
and fees incurred with respect to this Agreement, and the transactions
contemplated hereby.
2.28 Notices. All notices and other communications pursuant to this
-------
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following address (or at such other address, person's attention
or telecopier number for a party as shall be specified by like notice):
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<PAGE>
If to CCS to:
Campuslink Communications Systems, Inc.
1530 Eisenhower Place
Ann Arbor, Michigan 48108
Attention: Chief Executive Officer
Telecopier: (734) 975-8001
With a copy to:
Honigman, Miller, Schwartz & Cohn
2290 First National Building
660 Woodard Avenue
Detroit, Michigan 48226-3583
Attention: David A. Breach, Esq.
Telecopier: (313) 465-7375
With a copy to:
James A. Kofalt
50209 Manly
Chapel Hill, NC 27514
Telecopier: (919) 968-1904
And if to PaeTec or Merger Sub, to:
PaeTec Corp.
290 Woodcliff Drive
Fairport, New York 14450
Attention: President and Chief Executive Officer
Telecopier: (716) 340-2547
With a copy to:
PaeTec Corp.
290 Woodcliff Drive
Fairport, NY 14450
Attention: General Counsel
Telecopier: (716) 340-2563
With a copy to:
Bond, Schoeneck & King, LLP
One Lincoln Center
-71-
<PAGE>
Syracuse, New York 13202
Attention: Wallace J. McDonald, Esq.
Telecopier: (315) 422-3598
All such notices and other communications shall be deemed to have been
received (a) in the case of personal delivery, on the date of such delivery, (b)
in the case of a telecopy, when the telecopier of the party receiving such copy
shall have confirmed receipt of the telecopies of the communication, (c) in the
case of delivery by nationally recognized overnight courier, on the business day
following dispatch, and (d) in the case of mailing, on the third business day
following such mailing.
2.29 Construction of Agreement. This Agreement has been negotiated by the
-------------------------
parties hereto and their respective attorneys and the language hereof will not
be construed for or against either party. In this Agreement, (i) a reference to
a Section or Article or an exhibit or schedule will mean a Section or Article
in, or exhibit or schedule to, this Agreement unless otherwise explicitly set
forth; (ii) words denoting the singular include the plural and vice versa, (iii)
"it" or "its" or words denoting any gender include all genders, and (iv) the
word "including" shall mean "including without limitation", whether or not
expressed. The titles and headings herein are for reference purposes only and
will not in any manner limit the construction of this Agreement, which will be
considered as a whole.
2.30 No Joint Venture. Nothing contained in this Agreement will be deemed
----------------
or construed as creating a joint venture or partnership between any of the
parties hereto. No party is by virtue of this Agreement authorized as an agent,
employee or legal representative of any other party. No party will have the
power to control the activities and operations of any other and their status is,
and at all times will continue to be, that of independent contractors with
respect to each other. No party hereto will have any power or authority to bind
or commit any other. No party hereto will hold itself out as having any
authority or relationship in contravention of this Section.
2.31 Further Assurances. Each party agrees to cooperate fully with the
------------------
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances, and to take such further action, as
may be reasonably requested by any other party to evidence and reflect the
transactions described herein and contemplated hereby, to carry into effect the
intents and purposes of this Agreement and to place PaeTec in operating control
of the business, properties and assets of CCS.
2.32 Absence of Third Party Beneficiary Rights. Except for the provisions
-----------------------------------------
herein which confer rights or benefits to the Stockholders, no provisions of
this Agreement are intended, nor will be interpreted, to provide or create any
third party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder or partner of any party hereto or any other
Person unless specifically provided otherwise herein, and, except as so
provided, all provisions hereof will be personal solely among the parties to
this Agreement.
-72-
<PAGE>
2.33 Public Announcement. The parties shall cooperate with respect to any
-------------------
public announcement relating to the transactions contemplated hereby; and none
of the parties hereto will issue any public statement announcing such
transaction without the prior consent of the others, except as any such party in
good faith (based upon advice of counsel) believes to be required by law and
following notice to the other parties.
2.34 Entire Agreement. This Agreement, the exhibits and schedules hereto
----------------
and the documents referred to herein and therein (including the other
Transaction Documents) constitute the entire understanding and agreement of the
parties hereto with respect to the subject matter hereof and supersede all prior
and contemporaneous agreements or understandings, inducements or conditions,
express or implied, written or oral, between the parties with respect hereto,
other than the Confidentiality Agreement, which shall remain in full force and
effect. The express terms hereof control and supersede any course of performance
or usage of the trade inconsistent with any of the terms hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
Plan of Reorganization as of the date first above written.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
---------------------------------
Name: Arunas A. Chesonis
Title: President and Chief Executive
Officer
PAETEC MERGER CORP.
By: /s/ Arunas A. Chesonis
---------------------------------
Name: Arunas A. Chesonis
Title: President and Chief Executive
Officer
CAMPUSLINK COMMUNICATIONS
SYSTEMS, INC.
By: /s/ Joseph J. Golden
---------------------------------
Name: Joseph J. Golden
Title: Chief Executive Officer
<PAGE>
SCHEDULE 2.1(D)
<PAGE>
EXHIBIT A
[Form of Stockholders' Agreement]
<PAGE>
EXHIBIT B
[Form of Registration Rights Agreement]
<PAGE>
EXHIBIT C
[Form of Voting Agreement]
<PAGE>
Exhibit 10.14.2
AGREEMENT AND PLAN OF REORGANIZATION
AMENDMENT NO. 1
DATED AS OF: JULY 15, 1999
This Amendment No. 1 to that certain Agreement and Plan of
Reorganization by and among PaeTec Corp., a Delaware corporation ("PaeTec"),
PaeTec Merger Corp., a Delaware corporation ("Merger Sub"), and Campuslink
Communications Systems, Inc., a Delaware corporation ("CCS"), dated June 4,
1999, is agreed to by the parties as of July 15, 1999. All capitalized terms
used but not defined herein shall have the meanings given to them in the
Agreement (as defined below).
RECITALS
A. PaeTec, Merger Sub and CCS which are the sole parties to that
certain Agreement and Plan of Reorganization dated June 4, 1999 (the
"Agreement"), wish to amend the Agreement as set forth in this Amendment No. 1.
TERMS
NOW, THEREFORE the parties agree as follows:
1. Section 2.2(c) of the Agreement is hereby amended in its entirety
to read as follows:
"(c) the Certificate of Incorporation of CCS immediately prior
to the Effective Time will be the Certificate of Incorporation of
the Surviving Corporation, provided that Article Fourth thereof
--------
shall be amended to provide that the total number of shares of
all classes of capital stock which the Surviving Corporation
shall have the authority to issue is one hundred (100) shares of
Common Stock, par value .001 per share."
2. Section 5.10 of the Agreement is hereby amended in its entirety to
read as follows:
"5.10 CCS Stockholders Meeting. CCS shall call a special
------------------------
meeting of its stockholders for the purposes of voting upon the
approval of this Agreement and the transactions contemplated
hereby as soon as practicable, but in no event later than
<PAGE>
September 15, 1999, provided, that CCS may, in lieu of holding
such a meeting, obtain such approval by written consent of
stockholders in accordance with the requirements of the DGCL.
CCS shall take all reasonable actions necessary or advisable to
secure the vote in favor of such approval."
3. Section 8.11 of the Agreement is hereby amended in its entirety to
read as follows:
"8.11 CCS Stockholder Debt. Concurrently with the Closing,
--------------------
PaeTec shall have (a) paid in cash (by wire transfer of
immediately available funds to accounts designated by the
applicable payees) $5,250,000 of the indebtedness owing to
certain stockholders of CCS (as designated by CCS prior to the
Closing) and (b) executed and delivered promissory notes ("PaeTec
Notes") in favor of (i) those Persons designated by CCS to
evidence the assumption by PaeTec of indebtedness of CCS owed to
such Persons, and (ii) other applicable stockholders of CCS for
the amounts specified in clause (iii) of the definition of the
term "Net Working Capital" less amounts paid by PaeTec pursuant
to the preceding clause (a). The PaeTec Notes shall (A) be
subordinate (on terms reasonably satisfactory to the parties) to
an expected $70 million senior credit facility of PaeTec and be
in the principal face amount of the outstanding balance of the
applicable assumed indebtedness on the Closing Date, which amount
shall in no event exceed in the aggregate $7,500,000 less the
amount paid pursuant to clause (a) of this Section 8.11, (B) bear
interest at 8% per annum (subject to adjustment from time to time
to reflect changes in the prime rate of interest charged by City
National Bank), and such interest shall be paid quarterly (unless
PaeTec shall be in default with respect to any senior
indebtedness, in which case interest shall be accrued but unpaid
for the duration of the default or until maturity), (C) provide
that they may be repaid in full or in part from time to time, at
the option of PaeTec, without premium or penalty, and (D) be
payable, together with all accrued but unpaid interest to date of
repayment, upon the earlier of (1) the consummation by PaeTec of
one or more financing transactions with aggregate gross proceed
of $5,000,000 or greater (whether debt or equity transactions),
or (2) June 30, 2002."
4. Section 9.16 shall be amended by adding the words "PaeTec made a
cash payment pursuant to clause (a) of Section 8.11 plus the amounts for
2
<PAGE>
which" in the third line of such Section 9.16 after the word "which" and before
the word "a".
5. Section 11.8(c) shall be amended by adding "(a)" before "$13.8
million," at the end of the fourth line of such Section and adding the following
language after "$13.8 million," in the fourth line of such Section: "plus (b)
the outstanding principal balance (and any accrued but unpaid interest thereon)
of the borrowings, if any, approved by PaeTec, plus (c) the outstanding
principal balance (any accrued but unpaid interest thereon), if any, under the
CCS Note."
6. All references in the Agreement to a Voting Agreement, when used
with respect to or in connection with any Stockholder other than Alliance, Kline
Hawkes or ULLICO, shall mean a Representation Letter, in the form attached
hereto as Exhibit A, to be executed and delivered by such Stockholder.
7. Except as hereby amended, the Agreement shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
and Plan of Reorganization as of the date first above written.
PAETEC CORP.
By: /s/ Timothy Bancroft
-------------------------
Name: Timothy Bancroft
Title: Vice President - Finance
PAETEC MERGER CORP.
By: /s/ Timothy Bancroft
-------------------------
Name: Timothy Bancroft
Title: Vice President
CAMPUSLINK COMMUNICATIONS
SYSTEMS, INC.
By: /s/ Joseph J. Golden
-------------------------
Name: Joseph J. Golden
Title: Chief Executive Officer
3
<PAGE>
Exhibit 10.15
STOCKHOLDERS' AGREEMENT
-----------------------
THIS STOCKHOLDERS' AGREEMENT (this "Agreement"), made as of this 9/th/ day
of September, 1999, by and among PaeTec Corp., a Delaware corporation (the
"Corporation"), Alliance Cabletel Holdings, L.P., a Delaware limited partnership
("Alliance"), Kline Hawkes California SBIC, L.P. ("Kline Hawkes"), The Union
Labor Life Insurance Company Separate Account P ("ULLICO"), the individuals
and/or entities listed on Schedule A hereto (together with Alliance, Kline
----------
Hawkes and ULLICO, the "CCS Group Stockholders"), Arunas A. Chesonis ("Mr.
Chesonis"), Christopher Edgecomb, Trustee of the Christopher E. Edgecomb Living
Trust dated April 25, 1998 ("Mr. Edgecomb") and Jeffrey Sudikoff ("Mr.
Sudikoff"; and together with Mr. Chesonis and Mr. Edgecomb, the "Majority
Stockholders"). The CCS Group Stockholders and the Majority Stockholders are
hereinafter sometimes collectively referred to as the "Stockholders" and
individually as a "Stockholder".
RECITALS
--------
WHEREAS, the Corporation is party to an Agreement and Plan of
Reorganization (the "Merger Agreement") dated as of June 4, 1999, as amended,
with PaeTec Merger Corp., a Delaware corporation and a wholly-owned subsidiary
of the Corporation (the "Merger Sub"), and Campuslink Communications Systems,
Inc., a Delaware corporation ("Campuslink"), pursuant to which the Merger Sub
will be merged with and into Campuslink, with Campuslink being the surviving
entity (the "Merger").
WHEREAS, pursuant to subscription agreements, certain of the CCS Group
Stockholders purchased from the Corporation in a private placement an aggregate
of 1,200,000 shares of Class A Common Stock of the Corporation, $0.01 per value
per share ("Class A Common Stock").
WHEREAS, pursuant to a proposed Common Stock Purchase Agreement (the "PCG
Purchase Agreement") to be entered into between Star Telecommunications, Inc.
("Star") and Pacific Capital Group, Inc. ("PCG"), PCG, who is an Affiliate of
Alliance, may purchase (either on its own behalf or with other purchasers
designated by it, one or more of whom may be CCS Group Stockholders) 2,900,000
shares of Class A Common Stock owned by Star (such shares (upon acquisition by
PCG or its designees) being referred to in this Agreement as the "PCG Shares"),
which PCG shares will not be covered by this Agreement but will (assuming such
contemplated purchase is consummated) be subject to a Stockholders' Agreement
with the Corporation and the Majority Stockholders which is similar to this
Agreement (the "PCG Stockholders' Agreement").
WHEREAS, upon consummation of the Merger, Campuslink will become a wholly-
owned subsidiary of the Corporation, and each of the CCS Group Stockholders, who
constitute all of the holders of capital stock and warrants to purchase capital
stock of Campuslink, will own that number of shares of Class A Common Stock
and/or that number of options to purchase Class A Common Stock (the "Options")
as set forth opposite each individual's or entity's name on
<PAGE>
Schedule B attached to this Agreement (which numbers include the shares of Class
- ----------
A Common Stock referred to in the above recital).
WHEREAS, the Majority Stockholders currently own that number of shares of
Class A Common Stock, and that number of shares of Class B Common Stock of the
Corporation ("Class B Common Stock"), $0.01 par value per share, as set forth
opposite each Majority Stockholder's name on Schedule C attached to this
----------
Agreement.
WHEREAS, pursuant to Sections 8.10 and 9.10 of the Merger Agreement, it is
a condition precedent to the obligations of the parties thereunder to consummate
the Merger that the parties enter into this Agreement.
WHEREAS, the Stockholders believe that it is in the best interests of the
parties hereto (a) to formalize their agreements relating to preemptive and tag-
along rights upon certain transfers of Securities (as defined below); (b) to
formalize their agreements regarding certain voting matters; and (c) to define
certain rights, duties and obligations among the parties hereto.
NOW, THEREFORE, the Stockholders and the Corporation agree as follows:
1. Definitions.
-----------
1.1 "Affiliate" shall mean any Person that directly, or indirectly
---------
through one or more intermediaries, controls or is controlled by, or is under
common control with, any other Person.
1.2 "Common Stock" shall mean, collectively, the Class A Common
------------
Stock and the Class B Common Stock of the Corporation.
1.3 "Majority Stockholders' Agreement" shall mean that certain
--------------------------------
Stockholders' Agreement dated August 13, 1998 between Mr. Chesonis, Mr.
Edgecomb, as Trustee of the Christopher E. Edgecomb Living Trust dated April 25,
1998, and Mr. Sudikoff, as such Stockholders' Agreement is in effect as of the
date hereof.
1.4 "Permitted Transferee" shall mean the transferee of any
--------------------
Securities of any Stockholder who is an Affiliate of such Stockholder or the
spouse, lineal descendents (natural or adopted) or parents of such Stockholder
or Affiliate, or (with the prior consent of the Corporation, which consent shall
not be unreasonably withheld or delayed) the respective constituent partners or
participants of such Stockholder or such partners' or participants' direct and
indirect constituent partners, stockholders and Affiliates, or an inter vivos
----- -----
trust for the benefit of any such person.
1.5 "Person" shall mean any individual, corporation, partnership
------
(general or limited), limited liability company, limited liability partnership,
firm, trust, association or other entity.
2
<PAGE>
1.6 "Securities" shall mean, collectively, all capital stock of the
----------
Corporation, all rights to acquire any shares of any capital stock of the
Corporation and all securities convertible into capital stock of the Corporation
(including indebtedness convertible into or exchangeable for shares of capital
stock of the Corporation), together with any and all securities received as
stock splits, dividends on or in substitution for any capital stock of the
Corporation, or in connection with any increase, reduction or reclassification
of the capital stock of the Corporation, or upon any reorganization,
recapitalization, share exchange, exchange offer, merger or consolidation of the
Corporation with any one or more entities in which an entity other than the
Corporation is the surviving entity, or upon the exercise of any option or
warrant to purchase capital stock of the Corporation.
1.7 "Stock Rights Agreements" shall mean, collectively, (i) the Stock
-----------------------
Rights Agreements, dated as of July 17, 1998 and as amended as of August 13,
1998 and September 30, 1998, by and among the Corporation, PaeTec
Communications, Inc., Arunas A. Chesonis and each of Joseph D. Ambersley,
John Baron, Bradford M. Bono, Edward J. Butler, Richard E. Ottalagana,
Richard J. Padulo and Daniel J. Venuti; (ii) the Stock Rights Agreement, dated
as of August 13, 1998 and as amended as of September 30, 1998, by and among the
Corporation, PaeTec Communications, Inc., Arunas A. Chesonis and
Timothy J. Bancroft; and (iii) the Stock Rights Agreement, dated as of October
30, 1998, by and among the Corporation, PaeTec Communications, Inc.,
Arunas A. Chesonis and Katherine A. Chapman, each as in effect as of the date of
this Agreement.
1.8 "Transfer" shall mean any sale, pledge, assignment, encumbrance,
--------
transfer, hypothecation, gift or other alienation, by operation of law or
otherwise, of any Securities.
2. Tag-Along Rights.
----------------
2.1 Right to Transfer. If, at any time, one or more Majority
-----------------
Stockholders (which term, for purposes of this Section 2 shall refer to such
Majority Stockholders and/or each of the Permitted Transferees of such Majority
Stockholders) propose to Transfer any Securities to any Person (other than (a) a
Transfer to a Permitted Transferee and (b) the Transfer by Mr. Chesonis of not
more than 25,000 shares of Common Stock pursuant to an option agreement with
James Daleen), such Majority Stockholder (a "Transferring Stockholder") shall
give written notice to each of the CCS Group Stockholders (which term, for
purposes of this Section 2 shall refer to such CCS Group Stockholder and/or each
of the Permitted Transferees of such CCS Group Stockholders) ("Non-Transferring
Stockholders") and the Corporation at least 25 business days prior to the
consummation of the proposed Transfer (the "Tag-Along Notice"). Each Non-
Transferring Stockholder may, upon giving written notice to the Transferring
Stockholder and the Corporation within 15 business days after its receipt of the
Tag-Along Notice (a "Tag-Along Election Notice"), participate in such Transfer
on a pro rata basis, at the same price and upon the same terms and conditions as
--- ----
are applicable to the Transferring Stockholder in such transaction. For
purposes of the preceding sentence, each Non-Transferring Stockholder's pro rata
--- ----
share shall
3
<PAGE>
be a percentage of the total number of Securities that the purchaser agrees to
purchase, such percentage to be determined by dividing (a) the number of
Securities that such Non-Transferring Stockholder submits for sale pursuant to
Section 2.2, by (b) the number of Securities proposed to be sold by the
Transferring Stockholder plus the total number of Securities that all Non-
Transferring Stockholders submit for sale pursuant to Section 2.2, plus, with
respect to a proposed Transfer by Mr. Chesonis, the total number of Securities
that Mr. Edgecomb and Mr. Sudikoff have the right to Transfer in such
transaction pursuant to Section 3 of the Majority Stockholders' Agreement, plus
the total number of Securities that certain Officers of the Corporation have the
right to Transfer in such transaction pursuant to the Stock Right Agreements.
2.2 Percentage Participation. Each Non-Transferring Stockholder may
------------------------
submit for sale the same percentage of the holdings of each class of Securities
of the Corporation held by the Non-Transferring Stockholder as the quantity of
the corresponding class of Securities being sold by the Transferring Stockholder
represents of the Transferring Stockholder's total holdings of that class. For
this purpose, (a) the Class A Common Stock of the Corporation and the Class B
Common Stock of the Corporation shall be deemed one and the same class of
securities and (b) subject to Section 2.3 below, holdings of Common Stock and
holdings of warrants, options (including the Options held by one or more of the
CCS Group Stockholders) or other rights to purchase Common Stock shall be
treated as being identical.
2.3 Common Stock Equivalents. If the Transferring Stockholder
------------------------
proposes to Transfer Common Stock or warrants, options or other rights to
purchase Common Stock (which Common Stock, warrants, options and rights are
individual and collectively sometimes referred to herein as "Common Stock
Equivalents"), the Non-Transferring Stockholder may sell Common Stock
Equivalents. The per share purchase price paid for Common Stock Equivalents held
by the Non-Transferring Stockholder shall be the per share price paid for the
Common Stock Equivalents being sold by the Transferring Stockholder. In such
case, the per share price paid for Common Stock Equivalents shall be the same
but with an adjustment to take into account the cost, or any difference in cost,
of purchasing Common Stock upon exercise of the warrants, options and
subscription rights.
2.4 Requirement to Purchase. If any Non-Transferring Stockholder
-----------------------
gives a timely Tag-Along Election Notice, the Transferring Stockholder shall
require the purchaser, as a condition precedent to consummating the purchase of
Securities from the Transferring Stockholder, purchase the Securities that the
Non-Transferring Stockholder is entitled to Transfer under this Section 2.
Subject to Section 2.3, such purchase shall be at the same price and upon the
same terms and conditions as are applicable to the sale by the Transferring
Stockholder. The Transferring Stockholder shall not complete its sale to the
purchaser if the purchaser fails to satisfy the condition precedent referred to
in the second preceding sentence.
2.5 Termination of Tag-Along Rights. The rights granted to the CCS
-------------------------------
Group Stockholders pursuant to this Section 2 shall terminate upon the
completion by the Corporation of an initial public offering of its Common Stock
with gross proceeds from such offering of $25
4
<PAGE>
million or greater.
2.6 No Other Tag-Along Rights. Except for (i) the rights granted
-------------------------
to the CCS Group Stockholders under Section 2 of this Agreement, (ii) the co-
sale rights granted to Mr. Edgecomb and Mr. Sudikoff under the Majority
Stockholders' Agreement, (iii) the co-sale rights granted under the Stock Rights
Agreements, and (iv) the tag-along rights to be granted to PCG and its designees
under the PCG Stockholders' Agreement, no Majority Stockholder shall grant tag-
along, co-sale or other rights similar to the rights granted to the CCS Group
Stockholders under this Section 2 (i.e., the right to participate in the
---
Transfer of Securities in connection with a Transfer of Securities by a Majority
Stockholder) without the prior written consent of CCS Group Stockholders holding
a majority of the shares of Common Stock held by all CCS Group Stockholders on
the applicable date that such Majority Stockholder desires to grant such rights.
3. Rights Upon Issuance of Stock by the Corporation.
------------------------------------------------
3.1 Right to Purchase. Subject to Section 3.3 below, each CCS Group
-----------------
Stockholder (which term, for purposes of this Section 3 shall refer to (i) each
CCS Group Stockholder, (ii) each of the Permitted Transferees of each CCS Group
Stockholder, and (iii) each third party transferee of Securities from a CCS
Group Stockholder who is entitled to enjoy the rights of such CCS Group
Stockholder hereunder pursuant to Section 8.5 of this Agreement) shall have a
preemptive right (that is, a right to purchase such CCS Group Stockholder's pro
---
rata share of all capital stock of the Corporation on a fully diluted basis
- ----
assuming the exercise of all outstanding options and warrants to purchase
capital stock of the Corporation, based on such CCS Group Stockholder's actual
and assumed holdings at that date, at the same price and on the same terms and
conditions as those upon which such capital stock is proposed to be sold) to
acquire any shares of any class of capital stock of the Corporation, including
unissued shares, treasury shares or any rights or options to purchase such
capital stock, or any securities convertible into or exchangeable for such
capital stock or any options to purchase such convertible or exchangeable
securities (collectively, "Capital Stock"), authorized by the Board of Directors
of the Corporation for issuance after the date hereof; provided, however, that
-------- -------
the foregoing provision shall not apply to any such Capital Stock of the
Corporation: (a) issued upon the exercise of the warrants and options listed on
Schedule 3.1 to this Agreement or warrants or options granted or Common Stock
- ------------
issued by the Company after the date of this Agreement pursuant to the
Corporation's 1998 Incentive Compensation Plan or Agent Bonus Plan each as in
effect on the date hereof; (b) issued in connection with a stock split or
dividend; (c) issued in connection with a merger or consolidation approved
pursuant to Section 5.1(g) of this Agreement; (d) issued upon the exchange,
conversion or exercise of any Securities that are exchangeable for, convertible
into or exercisable for shares of the Corporation's capital stock, the original
issuance of which was authorized in compliance with Section 5.1 of this
Agreement; or (e) issued in connection with an initial public offering of the
Corporation's Common Stock with gross proceeds in excess of $25 million.
3.2 Procedure. Prior to any issuance or sale by the Corporation of
---------
any shares of Capital Stock subject to the rights described in subsection 3.1
above, the Corporation shall
5
<PAGE>
notify each CCS Group Stockholder, in writing, of its intention to sell or issue
such shares, setting forth in reasonable detail the consideration and other
terms under which it proposes to make such sale or issuance (the "Corporation
Notice"). Within 20 business days after the Corporation Notice, each CCS Group
Stockholder shall notify the Corporation whether such CCS Group Stockholder
elects to purchase such CCS Group Stockholder's pro rata share (or any part
--- ----
thereof) of the shares so offered upon the consideration and other terms set
forth in the Corporation Notice. If, within such 20 business days, a CCS Group
Stockholder shall have notified the Corporation of his or its election to
exercise the right granted pursuant to Section 3.1 above, such CCS Group
Stockholder shall purchase his or its pro rata share (or any part thereof) of
--- ----
the shares, on the consideration and other terms set forth in the Corporation
Notice by the later of (a) the 10/th/ day after delivery of his or its notice to
the Corporation electing to exercise the foregoing right and (b) the closing of
the transaction referred to in the Corporation Notice. If, however, such CCS
Group Stockholder shall not, within 20 business days after the Corporation
Notice, have notified the Corporation that such CCS Group Stockholder elects to
exercise the right granted pursuant to Section 3.1 above with regard to any or
all of the shares subject to the transaction described in the Corporation
Notice, such CCS Group Stockholder shall be deemed to have waived his or its
rights under this Section 3 with respect to any portion of the shares that he or
it shall not have elected to purchase; provided, however, that failure by a CCS
-------- -------
Group Stockholder to exercise or to consummate his or its option to purchase
with respect to one sale or issuance shall not affect the option to purchase
shares under this Section 3 in any subsequent sale or issuance.
3.3 Termination of Right. The right to purchase granted to each CCS
-----------------
Group Stockholder pursuant to this Section 3 shall terminate upon the completion
by the Corporation of an initial public offering of its Common Stock, with gross
proceeds from such offering of $25 million or greater.
4. Matters Concerning the Board of Directors.
-----------------------------------------
4.1 Director Voting. So long as Mr. Chesonis owns (whether
---------------
beneficially or of record) or otherwise has the right to vote any shares of
Class B Common Stock of the Corporation, Mr. Chesonis shall vote all of his
shares of Common Stock (including the shares of Common Stock owned by others
which he has the right to vote) for the election of (i) that number of nominees
to serve as directors of the Corporation nominated by the CCS Group Stockholders
(which term, for purposes of this Section 4 shall refer to each CCS Group
Stockholder and/or each of the Permitted Transferees of each CCS Group
Stockholder and/or each of the Permitted Transferees of each CCS Group
Stockholder) (the "CCS Group Directors") which shall equal the greater of (a) a
number of members of the Board of Directors of the Corporation by the CCS Board
Percentage and (b) one nominee and (ii) any nominee designated by the CCS Group
Stockholders to fill any vacancy created by the resignation or removal of any
then current CCS Group Director. For
6
<PAGE>
purposes of this Section 4.1, the "CCS Board Percentage" shall be equal to the
total number of shares of Common Stock owned by the CCS Group Stockholders
(excluding any PCG Shares owned by the CCS Group Stockholders) divided by the
total number of issued and outstanding shares of Common Stock of the
Corporation. For purposes of this Section 4.1, nominees to serve as CCS Group
Directors shall be determined by the vote of CCS Group Stockholders holding a
majority of the shares of Common Stock held by all the CCS Group Stockholders on
the applicable date that a nominee is required to be nominated. Other than any
votes cast for the CCS Group Directors (or any directors which PCG becomes
entitled to nominate under the PCG Stockholders' Agreement), the CCS Group
Stockholders shall vote all of their shares of Common Stock for the election of
any director nominees by Mr. Chesonis.
4.2 Termination. The provisions set forth in this Section 4 shall
-----------
terminate on the first to occur of (a) the date that Mr. Chesonis ceases to own,
or otherwise have the right to vote, any shares of Class B Common Stock of the
Corporation and (b) the date that the CCS Group Stockholders (including their
Permitted Transferees) cease to own, on an aggregate basis, at least 5% of the
issued and outstanding shares of Common Stock of the Corporation.
5. Approval of Certain Transactions.
--------------------------------
5.1 Approval of Major Transactions. The Corporation shall not, on or
------------------------------
after the date hereof, directly or indirectly, authorize or engage in any Major
Transaction (as defined below) without the approval of a majority of the CCS
Group Directors, or, if there are only two CCS Group Directors, then without the
approval of both CCS Group Directors. The term "Major Transaction" shall
consist of:
(a) any acquisitions of assets for consideration in excess of (i) $10
million in any single transaction or series of relation transactions, or
(ii) $25 million in the aggregate (which amount shall be increased to $50
million upon completion by the Corporation of a high yield debt offering
with gross proceeds of at least $100 million);
(b) any leases providing for payment obligations in excess of (i) $5
million in any single transaction or series of related transactions, or
(ii) $25 million in aggregate leases at any one time;
(c) any disposition, lease, conveyance or transfer of assets with a
value in excess of $1 million in any single transaction or series of
related transactions;
(d) any encumbrance of the Corporation's (or any subsidiary's) assets
(other than statutory liens for monies not yet due and purchase money
security interests not in excess of $1 million in the aggregate in force at
any one time);
(e) any borrowings by the Corporation (or any subsidiary) of $25
million or greater, in the aggregate, at any one time;
(f) any acquisition or sale of securities of another Person with a
purchase price of $25 million or greater;
7
<PAGE>
(g) any merger or consolidation of the Corporation or any of its
subsidiaries with or into any other Person or any reclassification or other
exchange of any stock, provided that this paragraph shall not involve any
transaction in which the Corporation or its subsidiary is the surviving
entity and which involves aggregate consideration to the equity owners of
the other party (or parties) of not more than $10 million.
(h) any issuance, or any agreement to issue, by the Corporation of
any Securities of the Corporation other than pursuant to the Corporation's
1998 Incentive Compensation Plan or Agent Bonus Plan, as each such Plan is
in effect on the date hereof or pursuant to the options issued to Clinton
Walker, Lodwrick Cook and Stephen Mayo on the date hereof in connection
with the Merger;
(i) any purchase, redemption or other acquisition for value (or any
payment into or setting aside as a sinking fund for such purpose) and any
Securities of the Corporation;
(j) the entering into of any contract, agreement or arrangement which
is outside the ordinary course of the Corporation's business (it being
understood that any agreement relating to the resale of energy is outside
the ordinary course of the Corporation's business, and agreements for
telecommunications services, including content over digital subscriber
lines, Internet services or other related services are generally within the
ordinary course of business) or which is with any officer, director or
stockholder of the Corporation or any affiliate of such officer, directors
or stockholder;
(k) any amendment to the charter documents or bylaws of the
Corporation; and
(l) any transaction which would materially change the nature of the
Corporation's business.
5.2 Termination. The provisions of this Section 5 shall terminate on
-----------
the first to occur of (a) the date of the completion of the Corporation of an
initial public offering of its Common Stock, with gross proceeds from such
offering of $25 million or greater and (b) the date that the CCS Group
Stockholders (including their Permitted Transferees) cease to own, on an
aggregate basis, at least 5% of the issued and outstanding shares of Common
Stock of the Corporation.
6. Legend on Securities; Additional Securities.
-------------------------------------------
6.1 Legend. Each certificate or instrument representing, and any
------
future certificate or instrument evidencing ownership of, the Securities that
are subject to this Agreement will be conspicuously imprinted with the
following legends:
8
<PAGE>
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SAID ACT AND APPLICABLE STATE LAWS."
"IN ADDITION, SUCH SECURITIES ARE SUBJECT TO THE TERMS AND
CONDITIONS OF A STOCKHOLDERS' AGREEMENT DATED AS OF SEPTEMBER 9,
1999 BETWEEN PAETEC CORP., AND CERTAIN STOCKHOLDERS OF PAETEC
CORP. THE VOTING AND SALE, TRANSFER OR OTHER DISPOSITION OF THESE
SECURITIES IS SUBJECT TO THE TERMS OF SUCH STOCKHOLDERS'
AGREEMENT AND SUCH SECURITIES WILL BE TRANSFERRED ONLY UPON PROOF
OF COMPLIANCE THEREWITH."
The legend in respect of this Agreement shall not be removed from the Securities
so long as this Agreement remains in effect. The legend in respect of the
compliance with applicable federal or state securities laws shall be removed if
an opinion of counsel reasonably satisfactory to the Corporation and the
Corporations' counsel is provided to the Corporation that such legend is not
required in order to establish compliance with any provisions of the Securities
Act or applicable state securities laws.
6.2 Additional Securities. If the Corporation distributes any of its
---------------------
shares of Common Stock or other Securities to any of the Stockholders as a
dividend upon any of the Securities then outstanding or issues any of its
Securities to any of the Stockholders in lieu of, or in exchange for, or in
addition to Securities then outstanding, or any Stockholder acquires or obtains
any additional Securities, then, and in any of such events, any such Securities
distributed or issued or acquired or obtained by any Stockholder will be deemed
to be "Securities" under this Agreement and will be subject to the terms of this
Agreement.
7. Injunctive Relief. Each Stockholder and the Corporation acknowledges
-----------------
and agrees that the terms, covenants and obligations of this Agreement relate to
special, unique and extraordinary matters and that a violation of any of the
terms, covenants or obligations of this Agreement will cause the Corporation and
each Stockholder irreparable injury in an amount which would be impossible to
estimate or determine and for which adequate compensation could not be
fashioned. Therefore, each Stockholder and the Corporation agrees that the
Corporation and/or the other Stockholders (as applicable) will be entitled to an
injunction, restraining order or other equitable relief as a matter of course,
and without the necessity of proving irreparable harm or the inadequacy of a
legal remedy or posting a bond, from any court of competent jurisdiction,
restraining the applicable Stockholders or the corporation and any other
person(s) as the court may order from committing any violation or threatened
violation of the terms, covenants or obligations in this Agreement. The
Corporation's and each Stockholder's rights and remedies under this Section 7
are cumulative and are in addition to any other rights and remedies that the
9
<PAGE>
Corporation or any Stockholder may have under this Agreement or any other
agreement or at law or in equity.
8. Miscellaneous.
-------------
8.1 Continuing Force; Remedies Cumulative. The provisions contained
-------------------------------------
in this Agreement will survive and remain in full force and effect after
execution of this Agreement. The remedies contained in this Agreement will
survive and remain in full force and effect after the termination of this
Agreement. The rights and remedies provided for in this Agreement are
cumulative and will be in addition to rights and remedies otherwise available to
the parties under any other agreement or applicable law.
8.2 Amendment. This Agreement may only be amended by a written
---------
agreement signed by each of the Majority Stockholders and by the CCS Group
Stockholders holding at least 75% of the Common Stock owned by all of the CCS
Group Stockholders covered by this Agreement on a fully diluted basis (assuming
the exercise of all warrants or options to purchase Common Stock and the
conversion of all Securities convertible into shares of Common Stock held by
such CCS Group Stockholder) at the time of the proposed amendment; provided,
--------
however, that no amendment may adversely affect the rights of the CCS Group
- -------
Stockholders under Sections 2 and 3 of this Agreement without the consent of
each CCS Group Stockholder.
8.3 Waiver. No waiver of any Section of provision of this Agreement
------
will be valid unless in a writing signed by the party to be charged and only to
the extent set forth in that writing. Unless such a writing expressly provides
otherwise, any waiving by any party of any Section or provision of this
Agreement will not operate or be construed as a waiver of any subsequent breach
of this Agreement or constitute a course of conduct which may be relied upon to
justify any subsequent breach of this Agreement.
8.4 Notices. All notices, demands and other communications called
-------
for or required by this Agreement shall be in writing and shall be addressed to
the parties at their respective addresses stated below or to such other address
as a party may subsequently designate by written notice to the other parties.
Communications hereunder shall be deemed to have been received (i) upon delivery
in person, (ii) five days after mailing it by U.S. certified mail, return
receipt requested and postage prepaid, (iii) the first business day after
depositing it with a commercial overnight carrier which provides written
verification of delivery, or (iv) the day of transmission if sent before 2:00
p.m. recipient's time by facsimile transmission (with confirmation of receipt)
provided that a copy of such notice is sent on the same day by U.S. certified
mail, return receipt requested and postage prepaid, with an indication that the
original was sent by facsimile and the date of its transmittal.
If to the Corporation to:
PaeTec Corp.
10
<PAGE>
290 Woodcliff Drive
Fairport, New York
Attention: President and Chief Executive Officer
Telecopier: (716) 340-2547
with a copy to:
Bond, Schoeneck & King, LLP
One Lincoln Center
Syracuse, New York 13202
Attention: Wallace J. McDonald, Esq.
Facsimile: (315) 422-3598
or at such other address and to the attention of such other person as the
Corporation may designate by written notice to the CCS Group Stockholders.
Notices to any CCS Group Stockholder shall be addressed to such stockholder at
the most current address set forth in the Corporation's books and records with a
copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, IL 60601
Attention: David A. Breach, Esq.
Facsimile Number: (312) 861-2200
or at such other address and to the attention of such other person as the
applicable CCS Group Stockholder may designate by written notice to the
Corporation. Notices to the Majority Stockholders shall be addressed to:
Arunas A. Chesonis
c/o PaeTec Corp.
290 Woodcliff Drive
Fairport, New York 14450
Facsimile: (716) 340-2547
Christopher Edgecomb, Trustee
of the Christopher E. Edgecomb Living Trust
dated April 25, 1998
c/o STAR Telecommunications, Inc.
223 East De La Guerra
Santa Barbara, California 93101
Facsimile: (805) 884-1137
Jeffrey Sudikoff
P.O. Box 491669
11
<PAGE>
Los Angeles, California 90049
Facsimile: (310) 382-3376
or at such other address and to the attention of such other person as the
Majority Stockholders may designate by written notice to the Corporation.
8.5 Binding Effect and Assignment. This Agreement, and the rights
-----------------------------
and duties under it, will be binding upon and inure to the benefit of (a) the
Corporation, its successors and assigns, and (b) each Stockholder, its
successors and assigns. No Stockholder may assign its rights under this
Agreement or delegate its duties hereunder unless such Stockholder both assigns
its rights and delegates its duties hereunder and such assignment and delegation
is made in connection with a Transfer of Securities by a CCS Group Stockholder
to a third party who is not a Permitted Transferee, such transferee shall only
enjoy the rights of a CCS Group Stockholder pursuant to Section 3 of this
Agreement and not the rights of a CCS Group Stockholder pursuant to Sections 2,
4 and 5 of this Agreement. In connection with any Transfer to any Permitted
Transferee, or to any third party as contemplated by the preceding sentence of
this Section 8.5, the transferring Stockholder shall obtain from such transferee
an agreement in writing, in a form reasonably satisfactory to the applicable
parties, to be bound by this Agreement and that Securities transferred shall
remain subject to the terms of this Agreement.
8.6 Governing Law. This Agreement will be governed by, and construed
-------------
and enforced in accordance with, the laws of the State of New York, except that
if any provision of this Agreement or any part of any such provision would be
illegal, invalid or enforceable under such laws in connection with a suit or
proceeding validity instituted in another jurisdiction, then the laws of such
other jurisdiction will govern insofar as is necessary to sustain the legality,
validity or Enforceability of such provision or any part of such provision.
8.7 Captions. Captions to the various Sections in this Agreement are
--------
for the convenience of the parties only and will not affect the meaning or
interpretation of this Agreement.
8.8 Enforceability and Interpretation. It is the desire and intent
---------------------------------
of the parties to this Agreement that the terms, provisions, conditions,
covenants, representations, warranties, and remedies contained in this Agreement
will be enforceable to the fullest extent permitted by law. If any term,
provision, condition, covenant, representation, warranty, or remedy of this
Agreement or the application thereof to any person or circumstances will, to any
extent, be construed to be illegal, invalid, or unenforceable, in whole or in
part, then such terms, provisions, condition, covenant, representation,
warranty, or remedy will be construed in a manner so as to permit its
enforceability under the applicable law to the fullest extent permitted by such
law. In any case, the remaining terms, provisions, conditions, covenants,
representations, warranties, and remedies of this Agreement or the application
thereof to any person or circumstance, except those which have been held
illegal, invalid, or unenforceable, will remain in full force and effect.
8.9 Counterparts. This Agreement may be executed in one or more
------------
12
<PAGE>
counterparts, each of which will be deemed an original, but together they will
constitute one and the same instrument.
8.10 Additional Documents. Each Stockholder agrees to execute any and
--------------------
all documents, instruments, certificates and communications deeded to be
necessary or desirable by the Corporation to effectuate or reconfirm the
applicability of this Agreement to any and all future transaction affecting the
Corporation, the Securities, or any Stockholder.
8.11 Cost of Enforcement. Any party of this Agreement shall pay to
-------------------
any other party all fees and expenses (including reasonable fees and expenses of
attorneys) incurred by such other party in enforcing its rights under this
Agreement against such party.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement with full force and effect as of the day and year first written above.
THE CORPORATION:
PAETEC CORP.
By: Arunas A. Chesonis
-----------------------------------------
Its: President
-------------------------------------
MAJORITY STOCKHOLDERS:
/s/ Arunas A. Chesonis
--------------------------------------------
Arunas A. Chesonis
CHRISTOPHER E. EDGECOMB
LIVING TRUST, dated April 25, 1998
/s/ Christopher Edgecomb
--------------------------------------------
Christopher Edgecomb, Trustee
/s/ Jeffrey Sudikoff
--------------------------------------------
Jeffrey Sudikoff
CCS GROUP STOCKHOLDERS:
ALLIANCE CABLETEL HOLDINGS, L.P., a Delaware
limited partnership
By: KOCOM COMMUNICATIONS, INC., a
Delaware limited partnership
By: /s/ James A. Kofalt
-----------------------------------------
James A. Kofalt, President
14
<PAGE>
KLINE HAWKES CALIFORNIA SBIC, L.P.
By: [SIGNATURE ILLEGIBLE]
----------------------------------------
Its: Chairman
------------------------------------
THE UNION LABOR LIFE INSURANCE COMPANY
SEPARATE ACCOUNT P
By: [SIGNATURE ILLEGIBLE]
----------------------------------------
Its: VP Investments
------------------------------------
/s/ Robert I. Schwartz
-------------------------------------------
Robert I. Schwartz
/s/ Kenneth M. Kiraly
-------------------------------------------
Kenneth M. Kiraly
/s/ Susan F. Kiraly
-------------------------------------------
Susan F. Kiraly
/s/ Richard P. Rizzutti
-------------------------------------------
Richard P. Rizzutti
/s/ Bryant Hopper
-------------------------------------------
Bryant Hopper
/s/ Ronald S. Johnson
-------------------------------------------
Ronald S. Johnson
/s/ Lodwrick Cook
-------------------------------------------
15
<PAGE>
Lodwrick Cook
/s/ Peter Cracovaner
-------------------------------------------
Peter Cracovaner
/s/ Richard Cunningham
-------------------------------------------
Richard Cunningham
/s/ Thomas O. FitzGerald
-------------------------------------------
Thomas O. FitzGerald
/s/ Wendy Foliano
-------------------------------------------
Wendy Foliano
/s/ Joseph Golden
-------------------------------------------
Joseph Golden
/s/ Stephen Mayo
-------------------------------------------
Stephen Mayo
/s/ Karen Sancimino
-------------------------------------------
Karen Sancimino
/s/ Clinton Walker
-------------------------------------------
Clinton Walker
16
<PAGE>
SCHEDULE A
Robert I. Schwartz
Kenneth M. and Susan F. Kiraly
Richard P. Rizzuti
Bryant Hopper
Ronald S. Johnson
Lodwrick Cook
Peter Cracovaner
Richard Cunningham
Thomas O. FitzGerald
Wendy Foliano
Joseph Golden
Stephen Mayo
Karen Sancimino
Clinton Walker
17
<PAGE>
SCHEDULE B
Common Stock Options
Holder (Number of Shares) (Number of Shares)
------ ------------------ -----------------
Alliance Cabletel Holdings, L.P. 2,465,478 --
Kline Hawkes California SBIC, L.P. 1,703,652 --
The Union Labor Life Insurance 1,702,042 --
Company - Separate Account P
Robert I. Schwartz 26,700 27,798
Kenneth M. & Susan F. Kiraly 12,855 --
Richard P. Ruzzuti 3,245 --
Bryant Hopper 1,217 --
Ronald S. Johnson 1,560 --
Lodwrick Cook -- 14,174
Peter Cracovaner 2,434 --
Richard Cunningham -- 7,411
Thomas O. FitzGerald -- 4,833
Wendy Foliano -- 3,222
Joseph Golden -- 44,418
Stephen Mayo -- 18,830
Karen Sancimino -- 4,833
Clinton Walker -- 36,109
18
<PAGE>
SCHEDULE C
Name Class Shares
---- ----- ------
Arunas A. Chesonis Class A Common Stock 43,620
Class B Common Stock 2,450,000
Jeffrey Sudikoff Class B Common Stock 1,200,048
Christopher Edgecomb Living Class A Common Stock 145,000
Trust, dated April 25, 1998 Class B Common Stock 2,400,000
19
<PAGE>
SCHEDULE 3.1
As of the date hereof, there were outstanding options to acquire an
aggregate of 1,967,437 shares of Class A Common Stock of the Corporation
pursuant to the PaeTec Corp. 1998 Incentive Compensation Plan. In addition, on
the date hereof, there were outstanding warrants to purchase an aggregate of
40,000 shares of Class A Common Stock of the Corporation.
20
<PAGE>
Exhibit 10.15.1
AMENDMENT NO. 1
TO
STOCKHOLDERS' AGREEMENT
This Amendment No. 1 (this "Amendment") is made as of October 13, 1999 to
the Stockholders' Agreement, dated as of September 9, 1999 (the "Stockholders'
Agreement"), by and among the undersigned parties thereto. All capitalized terms
used herein but not defined herein shall have the meanings given to them in the
Stockholders' Agreement.
PRELIMINARY STATEMENTS
A. Certain subsidiaries of the Corporation expect to establish a $10
million unsecured loan facility pursuant to a Loan Agreement (the "Loan
Agreement") with financial institutions named as "Lenders" therein (the
"Lenders") and Newcourt Commercial Finance Corporation, as administrative agent;
B. The Loan Agreement provides that, in connection with the transactions
contemplated thereby, the Corporation shall issue to the Lenders certain
warrants to purchase shares of its Class A Common Stock (the "Warrants"); and
C. The parties hereto desire to amend the Stockholders' Agreement to
exclude the Warrants, and the shares of Class A Common Stock issuable upon
exercise thereof, from the application of the preemptive rights contained in
Section 3 of the Stockholders' Agreement, and to amend certain other provisions
of the Stockholders' Agreement;
NOW, THEREFORE, the undersigned parties agree as follows:
1. Section 2.1 of the Stockholders' Agreement is hereby amended to
insert the following at the end of the last sentence of such Section:
"plus the total number of Securities that holders thereof have the
right to Transfer in such transaction as a result of any other tag-
along, co-sale or similar rights granted in accordance with Section 2.6
hereof."
2. Section 3.1 of the Stockholders' Agreement is hereby amended to
insert a sentence at the end of such Section, to read in its entirety as
follows:
"Furthermore, the provisions of this Section 3.1 shall not apply to the
issuance of any warrants (or any Securities issuable upon exercise of
such
<PAGE>
warrants) in connection with the $10 million unsecured loan facility
established under a Loan Agreement, by and among certain wholly-owned
subsidiaries of the Corporation, financial institutions named as
"Lenders" therein and Newcourt Commercial Finance Corporation, as
administrative agent.
3. Schedule 3.1 of the Stockholders' Agreement is hereby amended to
replace the number "1,967,437" appearing thereon with "2,401,258".
IN WITNESS WHEREOF, the parties have executed and delivered this Amendment
as of the date first written above.
THE CORPORATION:
PAETEC CORP.
By:/s/ Arunas A. Chesonis
-----------------------------
Name: Arunas A. Chesonis
Title: President and Chief Executive Officer
MAJORITY STOCKHOLDERS:
/s/ Arunas A. Chesonis
-----------------------------
Arunas A. Chesonis
CHRISTOPHER E. EDGECOMB
LIVING TRUST, dated April 25, 1998
/s/ Christopher Edgecomb
-----------------------------
Christopher Edgecomb, Trustee
/s/ Jeffrey Sudikoff
-----------------------------
Jeffrey Sudikoff
<PAGE>
CCS GROUP STOCKHOLDERS:
ALLIANCE CABLETEL HOLDINGS, L.P., a
Delaware limited partnership
By: KOCOM COMMUNICATIONS, INC., a
Delaware limited partnership
By: /s/ James A. Kofalt
-------------------------------
James A. Kofalt, President
KLINE HAWKES CALIFORNIA SBIC, L.P.
By: [Signature Illegible]
-------------------------------
Its: Chairman
THE UNION LABOR LIFE INSURANCE
COMPANY SEPARATE ACCOUNT P
By: [Signature Illegible]
-------------------------------
Its: VP Investments
/s/ Robert I. Schwartz
-----------------------------
Robert I. Schwartz
/s/ Kenneth M. Kiraly
-----------------------------
Kenneth M. Kiraly
/s/ Susan F. Kiraly
-----------------------------
Susan F. Kiraly
3
<PAGE>
/s/ Richard P. Rizzutti
------------------------------------
Richard P. Rizzutti
/s/ Bryant Hopper
-------------------------------------
Bryant Hopper
/s/ Ronald S. Johnson
-------------------------------------
Ronald S. Johnson
/s/ Lodwrick Cook
-------------------------------------
Lodwrick Cook
/s/ Peter Cracovaner
-------------------------------------
Peter Cracovaner
/s/ Richard Cunningham
-------------------------------------
Richard Cunningham
/s/ Thomas O. FitzGerald
-------------------------------------
Thomas O. FitzGerald
/s/ Wendy Foliano
-------------------------------------
Wendy Foliano
/s/ Joseph Golden
-------------------------------------
Joseph Golden
/s/ Stephen Mayo
-------------------------------------
Stephen Mayo
4
<PAGE>
/s/ Karen Sancimino
--------------------------------
Karen Sancimino
/s/ Clinton Walker
--------------------------------
Clinton Walker
5
<PAGE>
Exhibit 10.15.2
FIRST AMENDMENT TO STOCKHOLDERS' AGREEMENT
THIS FIRST AMENDMENT TO STOCKHOLDERS' AGREEMENT (this "Amendment") is
made as of this 4th day of February 2000 by and among PaeTec Corp., a Delaware
corporation (the "Corporation"), Alliance Cabletel Holdings, L.P., a Delaware
limited partnership ("Alliance"), Kline Hawkes California SBIC, L.P. ("Kline
Hawkes"), The Union Labor Life Insurance Company Separate Account P ("ULLICO"),
the individuals listed on the signature pages hereto (together with Alliance,
Kline Hawkes and ULLICO, the "CCS Group Stockholders"), Arunas A. Chesonis ("Mr.
Chesonis"), Christopher E. Edgecomb, ("Mr. Edgecomb"), Trustee of the
Christopher E. Edgecomb Living Trust dated April 25, 1998 (the "Trust"), and
Jeffrey Sudikoff ("Mr. Sudikoff," and together with Mr. Chesonis and Mr.
Edgecomb, the "Majority Stockholders"). The CCS Group Stockholders and the
Majority Stockholders are hereinafter sometimes collectively referred to as the
"Stockholders" and individually as a "Stockholder."
RECITALS
--------
A. The Corporation and the Stockholders are parties to a Stockholders'
Agreement dated as of September 9, 1999 (the "Stockholders' Agreement").
B. Section 2 of the Stockholders' Agreement grants to each of the CCS
Group Stockholders tag-along rights in the event that one or more of the
Majority Stockholders proposes to transfer any Securities (as defined in the
Stockholders' Agreement) and according to the terms and conditions of the
Stockholders' Agreement.
C. Section 3 of the Stockholders' Agreement provides that each CCS Group
Stockholder shall have a preemptive right to acquire capital stock of the
Corporation in certain circumstances specified therein.
D. The Board of Directors of the Corporation has authorized the issuance
and sale (the "Series A Preferred Stock Placement") of up to 134,000 shares of a
new series of preferred stock of the Corporation, designated the Series A
Convertible Preferred Stock (the "Series A Preferred Stock"), to the purchasers
(the "Purchasers") listed on the Schedule of Purchasers to, and pursuant to the
terms and conditions of, an Equity Purchase Agreement (the "Purchase
Agreement").
E. As a condition to the consummation of the Series A Preferred Stock
Placement, the Purchasers have required that the Corporation, the Majority
Stockholders and the Purchasers enter into a Stockholders' Agreement (the
"Stockholders' Agreement of the Purchasers"), dated the date of the Purchase
<PAGE>
Agreement, pursuant to which the Purchasers will be entitled to certain tag-
along rights (the "Purchasers' Tag-Along Rights") in the event that one or more
of the Majority Stockholders proposes to transfer certain securities of the
Corporation.
F. As a condition to the consummation of the Series A Preferred Stock
Placement, the Purchasers have required that the parties hereto enter into a
Voting Agreement (the "Voting Agreement"), with the Purchasers which, among
other things, will replace and supersede Section 4 of the Stockholders'
Agreement to the extent the terms of such Section 4 conflict with or are
inconsistent with the terms of the Voting Agreement.
G. The parties hereto desire to amend the Stockholders' Agreement to
induce the Purchasers to consummate the Series A Preferred Stock Placement.
AGREEMENT
---------
1. Defined Terms. All capitalized terms used in this Amendment
-------------
without definition shall have the meanings given to such terms in the
Stockholders' Agreement. All capitalized terms defined in this Amendment,
including the recitals hereof, and not defined in the Stockholders' Agreement
are hereby incorporated into and made a part of the Stockholders' Agreement, as
amended by this Amendment.
2. Amendment of Section 2.1. Section 2.1 of the Stockholders'
------------------------
Agreement is hereby amended, replaced and superseded to read in its entirety as
follows:
"2.1 Right to Transfer. If, at any time, one or more of the
-----------------
Majority Stockholders (which term, for purposes of this Section 2 shall
refer to such Majority Stockholders and/or each of the Permitted
Transferees of such Majority Stockholders) propose to Transfer any class or
type of Securities to any Person (other than a Transfer to a Permitted
Transferee), such Majority Stockholder (a "Transferring Stockholder") shall
give written notice to each of the CCS Group Stockholders (which term, for
the purposes of this Section 2 shall refer to such CCS Group Stockholder
and/or each of the Permitted Transferees of such CCS Group
Stockholders)("Non-Transferring Stockholders") and the Corporation at least
25 business days prior to the consummation of the proposed Transfer (the
"Tag-Along Notice"). Each Non-Transferring Stockholder holding such class
or type of Securities may, upon giving written notice to the Transferring
Stockholder and the Corporation within 15 business days after its receipt
of the Tag-Along Notice (a "Tag-Along Election Notice"), participate in
such Transfer on a pro rata basis, at the same price and
--- ----
-2-
<PAGE>
upon the same terms and conditions as are applicable to the Transferring
Stockholder in such transaction. For purposes of the preceding sentence,
each Non-Transferring Stockholder's pro rata share shall be a percentage of
--------
the total number of such type or class of Securities that the purchaser
agrees to purchase, such percentage to be determined by dividing (a) the
number of Securities of such type or class that such Non-Transferring
Stockholder submits for sale pursuant to Section 2.2, by (b) the number of
Securities of such type or class proposed to be sold by the Transferring
Stockholder plus the total number of Securities of such type or class that
----
all Non-Transferring Stockholders submit for sale pursuant Section 2.2 plus
----
the total number of Securities of such type or class that the Purchasers
have the right to Transfer in such transaction pursuant to Section 2.2 of
the Stockholders' Agreement of the Purchasers, plus, with respect to a
----
proposed Transfer by Mr. Chesonis, the total number of Securities of such
type or class that (i) Mr. Edgecomb and Mr. Sudikoff have the right to
Transfer in such transaction pursuant to Section 3 of the Majority
Stockholders' Agreement and (ii) certain officers of the Corporation have
the right to Transfer in such transaction pursuant to the Stock Right
Agreements."
3. Amendment of Section 2.6. Section 2.6 of the Stockholders'
------------------------
Agreement is hereby amended, replaced and superseded to read in its entirety as
follows:
"2.6 No Other Tag-Along Rights. Except for (i) the rights
-------------------------
granted to the Purchasers under Section 2 of the Stockholders' Agreement of
the Purchasers, (ii) the co-sale rights granted to Mr. Edgecomb and Mr.
Sudikoff under the Majority Stockholders' Agreement, (iii) the co-sale
rights granted under the Stock Rights Agreements, and (iv) the rights
granted to the CCS Group Stockholders under Section 2 of this Agreement, no
Majority Stockholder shall grant tag-along, co-sale or other rights similar
to the rights granted to the CCS Group Stockholders under this Section 2
(i.e., the right to participate in the Transfer of Securities in connection
----
with a Transfer of Securities by a Principal Stockholder) without the prior
written consent of CCS Group Stockholders holding a majority of the shares
of Common Stock held by all CCS Group Stockholders on the applicable date
that such Majority Stockholder desires to grant such rights."
4. Amendment of Section 3.1. Section 3.1 of the Stockholders'
------------------------
Agreement is hereby amended, replaced and superseded to read in its entirety as
follows:
-3-
<PAGE>
"3.1 Right to Purchase. Subject to Section 3.3, each CCS Group
-----------------
Stockholder (which term, for purposes of this Section 3 shall refer to (i)
each CCS Group Stockholder, (ii) each of the Permitted Transferees of each
CCS Group Stockholder, and (iii) each third party transferee of Securities
from a CCS Group Stockholder who is entitled to enjoy the rights of such
CCS Group Stockholder hereunder pursuant to Section 8.5 of this Agreement)
shall have a preemptive right to acquire any shares of any class of capital
stock of the Corporation, including unissued shares, treasury shares or any
rights or options to purchase such capital stock, or any securities
convertible into or exchangeable for such capital stock or any options to
purchase such convertible or exchangeable securities (collectively,
"Capital Stock"), authorized by the Board of Directors of the Corporation
for issuance after the date hereof. Such preemptive right shall entitle
each CCS Group Stockholder to purchase up to such CCS Group Stockholder's
pro rata share of all Capital Stock on a fully diluted basis assuming the
--- ----
exercise of all outstanding options, warrants and conversion rights to
purchase or acquire Capital Stock, based on such CCS Group Stockholder's
actual and assumed holdings at that date, at the same price and on the same
terms and conditions as those upon which such Capital Stock is proposed to
be sold. Notwithstanding the foregoing, such preemptive right shall not
apply to any such Capital Stock (each an "Excluded Issuance"): (a) issued
in the Series A Preferred Stock Placement pursuant to the Purchase
Agreement; (b) issued upon conversion of the Series A Preferred Stock in
accordance with the terms of the Corporation's certificate of
incorporation; (c) issued upon the exercise of the warrants and options
outstanding as of February 4, 2000 (as set forth on the Capitalization
Schedule attached to the Purchase Agreement) or warrants or options granted
or Common Stock issued by the Corporation pursuant to the Corporation's
1998 Incentive Compensation Plan or PaeTec Communications, Inc. Agent
Incentive Plan without any increase in the number of shares of Capital
Stock issuable under such plans (other than increases caused by stock
splits and similar recapitalizations) from the number of shares of Capital
Stock set forth in Section 5 of the Purchase Agreement; (d) issued as a
dividend or other distribution on Capital Stock; (e) issued in connection
with a merger or consolidation permitted under or approved pursuant to
Section 5.1(g) of this Agreement; (f) issued upon the exchange, conversion
or exercise of any Securities that are exchangeable for, convertible into
or exercisable for shares of Capital Stock, the original issuance of which
was authorized in compliance with Section 5.1 of this Agreement; or (g)
issued to the public in connection with an initial
-4-
<PAGE>
public offering of the Corporation's Common Stock with gross proceeds in
excess of $25 million."
5. Application of Section 4.
------------------------
(a) The provisions of Section 4 of the Stockholders' Agreement, as
modified by Section 5(b) of this Amendment, shall continue in full force and
effect to the extent, but only to the extent, that the provisions of such
Section 4 do not conflict with and are not inconsistent with the provisions of
the Voting Agreement. To the extent that the provisions of such Section 4
conflict with or are inconsistent with any provisions of the Voting Agreement,
the provisions of the Voting Agreement shall control.
(b) Section 4.2 of the Stockholders' Agreement is hereby amended,
replaced and superseded to read in its entirety as follows:
"4.2 Termination. The provisions set forth in this Section 4
-----------
shall terminate on the date that the CCS Group Stockholders (including
their Permitted Transferees) cease to own, on an aggregate basis, at
least 5% of the issued and outstanding shares of Common Stock of the
Corporation."
6. Amendment of Section 5.1(a). Section 5.1(a) of the Stockholders'
---------------------------
Agreement is hereby amended, replaced and superseded to read in its entirety as
follows:
"(a) any acquisitions of assets for consideration in excess of (i)
$10 million in any single transaction or series of related transactions or
(ii) $50 million in the aggregate;"
7. Waiver of Rights; Consent. The CCS Group Stockholders hereby
-------------------------
waive any rights they may have under the Stockholders' Agreement (whether
pursuant to Section 3 thereunder or otherwise) and under any other agreement to
participate in the purchase and sale of the Series A Preferred Stock under the
Purchase Agreement (including with respect to any shares of Common Stock or
other securities issued upon conversion of such Series A Preferred Stock) and
any other rights they have with respect to such purchase and sale, and hereby
consent to the consummation of the purchase and sale of the Series A Preferred
Stock and the other transactions contemplated by the Purchase Agreement.
8. Binding Effect. This Amendment shall be binding upon and inure to
--------------
the benefit of the parties hereto and their heirs, executors, administrators,
successors and assigns.
-5-
<PAGE>
9. Governing Law. This Amendment shall be governed by, and construed
-------------
and enforced in accordance with, the laws of the State of New York, except that
if any provision of this Amendment or any part of any such provision would be
illegal, invalid or enforceable under such laws in connection with a suit or
proceeding validly instituted in another jurisdiction, then the laws of such
other jurisdiction shall govern insofar as is necessary to sustain the legality,
validity or enforceability of such provision or any part of such provision.
10. Captions. Captions to the Sections in this Amendment are for the
--------
convenience of the parties only and shall not affect the meaning or
interpretation of this Amendment.
11. Enforceability and Interpretation. It is the intention of the
---------------------------------
parties to this Amendment that the terms and provisions contained in this
Amendment shall be enforceable to the fullest extent permitted by law. If any
term or provision of this Amendment or the application thereof to any Person or
circumstance is construed to be illegal, invalid or unenforceable, in whole or
in part, then such term or provision shall be construed in such a manner as to
permit its enforceability under applicable law to the fullest extent permitted
by such law. In any case, the remaining terms and provisions of this Amendment
or the application thereof to any Person or circumstance, except those terms and
provisions which have been held illegal, invalid or unenforceable, shall remain
in full force and effect.
12. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13. Additional Documents. Each party hereto agrees to execute any
--------------------
and all documents, instruments, certificates and communications deemed to be
necessary or advisable by the Corporation to effectuate the purposes of this
Amendment.
[signature pages follow]
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment with full force and effect as of the day and year first written
above.
THE CORPORATION:
PAETEC CORP.
By: /s/ Arunas A. Chesonis
------------------------------
Its: CEO, Chairman and President
MAJORITY STOCKHOLDERS PARTY
HERETO:
/s/ Arunas A. Chesonis
---------------------------------
Arunas A. Chesonis
/s/ Jeffrey Sudikoff
---------------------------------
Jeffrey Sudikoff
/s/ Christopher E. Edgecomb
---------------------------------
Christopher Edgecomb, Trustee of the
Christopher E. Edgecomb Living Trust dated
April 25, 1998
CCS GROUP STOCKHOLDERS:
ALLIANCE CABLETEL HOLDINGS, L.P., a
Delaware limited partnership
By: KOCOM COMMUNICATIONS, INC., a
Delaware limited partnership
By: /s/ James A. Kofalt
-----------------------------
James A. Kofalt, President
-7-
<PAGE>
KLINE HAWKES CALIFORNIA SBIC, L.P.
By: /s/ Frank Kline
----------------------------
Its: Chairman
THE UNION LABOR LIFE INSURANCE
COMPANY SEPARATE ACCOUNT P
By: /s/ Joseph Linehan
----------------------------
Its: VP - Securities
/s/ Robert I. Schwartz
----------------------------
Robert I. Schwartz
/s/ Kenneth M. Kiraly
----------------------------
Kenneth M. Kiraly
/s/ Susan F. Kiraly
----------------------------
Susan F. Kiraly
/s/ Richard P. Rizzutti
----------------------------
Richard P. Rizzutti
/s/ Bryant Hopper
----------------------------
Bryant Hopper
/s/ Ronald S. Johnson
----------------------------
Ronald S. Johnson
-8-
<PAGE>
/s/ Lodwrick Cook
------------------------------
Lodwrick Cook
/s/ Peter Cracovaner
------------------------------
Peter Cracovaner
/s/ Richard Cunningham
------------------------------
Richard Cunningham
/s/ Thomas O. Fitzgerald
------------------------------
Thomas O. Fitzgerald
/s/ Wendy Foliano
------------------------------
Wendy Foliano
/s/ Joseph Golden
------------------------------
Joseph Golden
/s/ Stephen Mayo
------------------------------
Stephen Mayo
/s/ Karen Sancimino
------------------------------
Karen Sancimino
/s/ Clint Walker
------------------------------
Clint Walker
-9-
<PAGE>
Exhibit 10.16
_____________________________________________________________________________
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
Dated as of October 29, 1999
Among
PAETEC COMMUNICATIONS, INC.,
PAETEC INTERNATIONAL, INC.,
PAETEC ONLINE, INC.,
PAETEC COMMUNICATIONS OF VIRGINIA, INC.,
PAETEC CAPITAL CORP.,
CAMPUSLINK COMMUNICATIONS SYSTEMS, INC.,
SELECT SWITCH ACQUISITION CO.,
PARKLINK COMMUNICATIONS, INC.,
and
EAST FLORIDA COMMUNICATIONS, INC.
as Borrowers,
THE FINANCIAL INSTITUTIONS FROM TIME TO
TIME PARTIES HERETO,
as Lenders,
and
CANADIAN IMPERIAL BANK OF COMMERCE
as Administrative Agent for the Lenders,
and
NEWCOURT COMMERCIAL FINANCE CORPORATION,
as Collateral Agent for the Lenders
_____________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I AMENDMENT AND RESTATEMENT; DEFINITIONS......................................... 1
SECTION 1.01. Amendment and Restatement............................................... 1
SECTION 1.02. Definitions............................................................. 2
SECTION 1.03. Accounting Terms........................................................ 18
SECTION 1.04. Others Defined in New York Uniform Commercial Code...................... 19
SECTION 1.05. Supplemental Disclosure................................................. 19
ARTICLE II LOANS......................................................................... 19
SECTION 2.01. Agreement to Lend....................................................... 19
SECTION 2.02. Loans................................................................... 19
SECTION 2.03. Procedure for Loan Request and Borrowing Commitment..................... 20
SECTION 2.04. The Notes............................................................... 22
SECTION 2.05. Interest on Loans....................................................... 22
SECTION 2.06. Conversion or Continuation.............................................. 23
SECTION 2.07. Special Provisions Governing LIBOR Loans................................ 23
SECTION 2.08. Scheduled Payments...................................................... 25
SECTION 2.09. Optional and Mandatory Prepayment of Loans; Optional and Mandatory
Reduction of Commitment Amount..................................................... 26
SECTION 2.10. Application of Prepayments.............................................. 27
SECTION 2.11. Fees.................................................................... 27
SECTION 2.12. Borrower Payments, etc.................................................. 27
SECTION 2.13. Maximum Lawful Interest Rate............................................ 28
SECTION 2.14. Funding Issues.......................................................... 28
SECTION 2.15. Joint and Several Liability; Contribution............................... 29
ARTICLE III REPRESENTATIONS AND WARRANTIES............................................... 30
SECTION 3.01. Organization; Powers.................................................... 30
SECTION 3.02. Corporate Authorization................................................. 30
SECTION 3.03. Financial Statements.................................................... 31
SECTION 3.04. No Material Adverse Change.............................................. 31
SECTION 3.05. Litigation.............................................................. 31
SECTION 3.06. Tax Returns............................................................. 31
SECTION 3.07. No Defaults............................................................. 31
SECTION 3.08. Properties.............................................................. 31
SECTION 3.09. Licenses, Material Agreements, Intellectual Property.................... 32
SECTION 3.10. Compliance With Laws.................................................... 32
SECTION 3.11. ERISA................................................................... 32
SECTION 3.12. Investment Company Act; Public Utility Holding Company Act.............. 33
SECTION 3.13. Federal Reserve Regulations............................................. 33
SECTION 3.14. Collateral.............................................................. 33
SECTION 3.15. Chief Place of Business................................................. 34
SECTION 3.16. Other Corporate Names................................................... 34
SECTION 3.17. Insurance. Schedule 3.17............................................... 34
SECTION 3.18. Milestone Plan.......................................................... 34
SECTION 3.19. Capitalization and Subsidiaries......................................... 34
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
SECTION 3.20. Real Property, Leases and Easements........................................ 34
SECTION 3.21. Solvency................................................................... 35
SECTION 3.22. Brokers, etc............................................................... 35
SECTION 3.23. No Material Misstatements.................................................. 35
SECTION 3.24. Year 2000 Issues........................................................... 35
SECTION 3.25. Switching Equipment........................................................ 35
SECTION 3.26. Campuslink Property........................................................ 35
ARTICLE IV CONDITIONS FOR LOANS............................................................. 36
SECTION 4.01. Conditions Precedent to Initial Loan on or after the Closing Date.......... 36
SECTION 4.02. Conditions Precedent to All Loans.......................................... 39
ARTICLE V AFFIRMATIVE COVENANTS............................................................. 40
SECTION 5.01. Corporate and Franchise Existence.......................................... 41
SECTION 5.02. Compliance with Laws, Etc.................................................. 41
SECTION 5.03. Maintenance of Properties.................................................. 41
SECTION 5.04. Insurance.................................................................. 41
SECTION 5.05. Obligations and Taxes...................................................... 43
SECTION 5.06. Financial Statements, Reports, etc......................................... 44
SECTION 5.07. Litigation and Other Notices............................................... 46
SECTION 5.08. Mortgages; Landlord Consents; Licenses and Other Agreements................ 46
SECTION 5.09. ERISA...................................................................... 46
SECTION 5.10. Access to Premises and Records............................................. 47
SECTION 5.11. Design and Construction.................................................... 47
SECTION 5.12. Environmental Notices...................................................... 47
SECTION 5.13. Amendment of Organizational Documents...................................... 47
SECTION 5.14. Pledge Agreements.......................................................... 47
SECTION 5.15. Accounts Payable........................................................... 48
SECTION 5.16. Collateral Assignments..................................................... 48
SECTION 5.17. Fiscal Year................................................................ 48
SECTION 5.18. Completed Systems.......................................................... 48
SECTION 5.19. Year 2000 Issues........................................................... 48
SECTION 5.20. Subsidiary Guarantees and Pledges.......................................... 48
SECTION 5.21. Accounting................................................................. 48
SECTION 5.22. Landlord Letters of Credit................................................. 48
SECTION 5.23. Pledge of East Florida Common Stock........................................ 49
SECTION 5.24. Interest Rate Agreement.................................................... 49
SECTION 5.25. Marcap Debt................................................................ 49
SECTION 5.26. Further Assurances......................................................... 50
ARTICLE VI NEGATIVE COVENANTS............................................................... 50
SECTION 6.01. Liens, etc................................................................. 50
SECTION 6.02. Use of Proceeds............................................................ 51
SECTION 6.03. Sale of Assets, Consolidation, Merger, etc................................. 51
SECTION 6.04. Dividends and Distributions; Sale of Equity Interests...................... 51
SECTION 6.05. Management Fees and Permitted Corporate Overhead........................... 52
SECTION 6.06. Guarantees; Third Party Sales and Leases................................... 52
SECTION 6.07. Investments................................................................ 52
SECTION 6.08. Subsidiaries; Permitted Acquisitions....................................... 52
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
SECTION 6.09. Permitted Activities.................................................................. 53
SECTION 6.10. Disposition of Licenses, etc.......................................................... 54
SECTION 6.11. Transactions with Affiliates.......................................................... 54
SECTION 6.12. ERISA................................................................................. 54
SECTION 6.13. Indebtedness.......................................................................... 54
SECTION 6.14. Sale and Leaseback Transactions....................................................... 55
SECTION 6.15. Margin Regulation..................................................................... 56
SECTION 6.16. Unsecured Loan Documents.............................................................. 56
ARTICLE VII FINANCIAL COVENANTS........................................................................ 56
SECTION 7.01. Financial Covenants Prior to Commitment Termination Date.............................. 56
SECTION 7.02. Financial Covenants After the Commitment Termination Date............................ 57
ARTICLE VIII COLLATERAL SECURITY....................................................................... 58
SECTION 8.01. Collateral Security................................................................... 58
SECTION 8.02. Preservation of Collateral and Perfection of Security Interests Therein............... 59
SECTION 8.03. Appointment of the Collateral Agent as the Borrowers' Attorney-in-Fact................ 59
SECTION 8.04. Collection of Accounts and Restricted Account Arrangements............................ 60
SECTION 8.05. Cure Rights........................................................................... 60
ARTICLE IX EVENTS OF DEFAULT; REMEDIES................................................................. 61
SECTION 9.01. Events of Default..................................................................... 61
SECTION 9.02. Termination of Commitment; Acceleration............................................... 63
SECTION 9.03. Waivers............................................................................... 64
SECTION 9.04. Rights and Remedies Generally......................................................... 64
SECTION 9.05. Entry Upon Premises and Access to Information......................................... 64
SECTION 9.06. Sale or Other Disposition of Collateral by the Administrative Agent or the Collateral
Agent........................................................................................ 65
SECTION 9.07. Governmental Approvals................................................................ 65
SECTION 9.08. Appointment of Receiver or Trustee.................................................... 66
SECTION 9.09. Right of Setoff....................................................................... 66
ARTICLE X THE ADMINISTRATIVE AGENT AND THE COLLATERAL AGENT............................................ 67
SECTION 10.01. Appointment of Administrative Agent................................................... 67
SECTION 10.02. Administrative Agent's Reliance, Etc.................................................. 68
SECTION 10.03. CIBC and Affiliates................................................................... 68
SECTION 10.04. Lender Credit Decision................................................................ 69
SECTION 10.05. Indemnification....................................................................... 69
SECTION 10.06. Successor Agent....................................................................... 69
SECTION 10.07. Payments; Non-Funding Lenders; Information; Actions in Concert........................ 70
SECTION 10.08. Collateral Matters.................................................................... 72
SECTION 10.09. Agency for Perfection................................................................. 73
SECTION 10.10. Concerning the Collateral and the Related Loan Documents and the Collateral Agent..... 73
ARTICLE XI MISCELLANEOUS............................................................................... 73
SECTION 11.01. Notices; Action on Notices, etc....................................................... 73
SECTION 11.02. No Waivers; Amendments................................................................ 74
SECTION 11.03. Governing Law And Jurisdiction........................................................ 75
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
SECTION 11.04. Expenses; Documentary Taxes.......................................................... 75
SECTION 11.05. Equitable Relief..................................................................... 76
SECTION 11.06. Indemnification; Limitation of Liability............................................. 76
SECTION 11.07. Survival of Representations and Warranties, etc...................................... 77
SECTION 11.08. Successors and Assigns; Assignments; Participations.................................. 77
SECTION 11.09. Severability......................................................................... 79
SECTION 11.10. Cover Page, Table of Contents and Section Headings................................... 80
SECTION 11.11. Counterparts......................................................................... 80
SECTION 11.12. Application of Payments.............................................................. 80
SECTION 11.13. Marshalling; Payments Set Aside...................................................... 80
SECTION 11.14. Service Of Process................................................................... 80
SECTION 11.15. Waiver Of Jury Trial, Etc............................................................ 80
SECTION 11.16. Confidentiality...................................................................... 81
SECTION 11.17. Entire Agreement, etc................................................................ 81
SECTION 11.18. No Strict Construction............................................................... 82
</TABLE>
-iv-
<PAGE>
EXHIBITS
EXHIBIT A Milestone Plan
EXHIBIT B Form of General Reaffirmation and Modification Agreement
EXHIBIT C Form of Accession Agreement
EXHIBIT D Form of Landlord Waiver
EXHIBIT E Form of Note
EXHIBIT F Form of Periodic Reporting Certificate
EXHIBIT G Form of Amended and Restated Guaranty
EXHIBIT H-1 Form of Notice of Borrowing
EXHIBIT H-2 Form of Notice of Continuation/Conversion
EXHIBIT I Financials
EXHIBIT J-1 Form of Secretary's Certificate of Borrower
EXHIBIT J-2 Form of Secretary's Certificate of Guarantor
EXHIBIT K-1 Form of Opinion of Borrowers' Special Counsel
EXHIBIT K-2 Form of Opinion of Borrowers' Regulatory Counsel
EXHIBIT L Form of Pledge Agreement
EXHIBIT M Form of Loss Payable Endorsement
EXHIBIT N Form of Restricted Account Agreement
EXHIBIT O Form of Assignment Agreement
EXHIBIT P Collateral Assignment of Leases
EXHIBIT Q Collateral Assignment of Licenses
-v-
<PAGE>
SCHEDULES
SCHEDULE 3.02 Consents
SCHEDULE 3.05 Litigation
SCHEDULE 3.06 Taxes
SCHEDULE 3.08 Properties
SCHEDULE 3.09(a) Governmental Authorizations and Approvals
SCHEDULE 3.09(b) Material Agreements
SCHEDULE 3.09(c) Intellectual Property
SCHEDULE 3.10 Environmental Matters
SCHEDULE 3.11 Plans
SCHEDULE 3.14 Filing Offices
SCHEDULE 3.15 Chief Executive Office and Principal Place of Busine
SCHEDULE 3.16 Corporate and Fictitious Names
SCHEDULE 3.17 Insurance
SCHEDULE 3.19 Capitalization and Subsidiaries
SCHEDULE 3.20 Real Property, Leased Real Property and Easements
SCHEDULE 3.25 Switching Equipment
SCHEDULE 3.26 Campuslink Property
SCHEDULE 5.16 Consents to Collateral Assignment
SCHEDULE 6.11 Transactions With Affiliates
SCHEDULE 8.04 Collection Accounts
-vi-
<PAGE>
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ("Agreement") dated as of
October 29, 1999 among PAETEC COMMUNICATIONS, INC., a Delaware corporation
("PaeTec"), PAETEC INTERNATIONAL, INC., a Delaware corporation
("International"), PAETEC ONLINE, INC., a Delaware corporation ("PaeTec
Online"), PAETEC COMMUNICATIONS OF VIRGINIA, INC., a Virginia corporation
("PaeTec Virginia"), PAETEC CAPITAL CORP., a Delaware corporation ("PaeTec
Capital"), CAMPUSLINK COMMUNICATIONS SYSTEMS, INC., a Delaware corporation
("Campuslink"), SELECT SWITCH ACQUISITION CO., a Delaware corporation
("Select"), PARKLINK COMMUNICATIONS, INC., a Delaware corporation ("Parklink"),
EAST FLORIDA COMMUNICATIONS, INC., a Florida corporation ("Florida"; PaeTec,
PaeTec International, PaeTec Online, PaeTec Virginia, PaeTec Capital,
Campuslink, Select, Parklink, and Florida being hereinafter collectively
referred to hereinafter as the "Borrowers" ), the financial institutions from
---------
time to time parties thereto (the "Lenders"), CANADIAN IMPERIAL BANK OF COMMERCE
-------
as contractual representative for the Lenders, ( in such capacity, the
"Administrative Agent") and NEWCOURT COMMERCIAL FINANCE CORPORATION (f/k/a AT&T
- ---------------------
COMMERCIAL FINANCE CORPORATION), as collateral agent for the Lenders (in such
capacity, the "Collateral Agent").
----------------
RECITALS
A. The Borrowers, the Lenders and Newcourt Commercial Finance Corporation,
as agent, are parties to a certain Loan and Security Agreement dated as of
November 16, 1998, as amended pursuant to that certain Amendment No. 1 thereto
dated as of May 12, 1999 and that certain Amendment No. 2 thereto dated as of
September 8, 1999 (such Loan and Security Agreement, as so amended being
hereinafter referred to as the "Existing Agreement"), pursuant to which the
Lenders have provided loans to the Borrowers (the "Existing Loans").
--------------
B. The Borrowers, the Lenders, the Administrative Agent and the Collateral
Administrative Agent have agreed to amend the Existing Agreement in certain
respects, to, among other things, increase the Commitment Amount to $70,000,000,
and have agreed to execute this Agreement as a restatement of the Existing
Agreement, in order to incorporate such amendments and the Existing Agreement
into a single document.
C. It is the intent of the parties hereto that the execution and delivery
of this Agreement, made for the purpose described in the immediately preceding
Recital, not effectuate a refinancing or novation of the Existing Loans, but
rather a modification to the terms governing the repayment of the Existing
Loans, which Existing Loans remain outstanding as of the date hereof and remain
secured by the "Collateral" referred to and defined in the Existing Agreement.
ARTICLE I
AMENDMENT AND RESTATEMENT; DEFINITIONS
SECTION 1.01. Amendment and Restatement. The Borrowers, the
-------------------------
Administrative Agent, the Collateral Agent and the Lenders hereby agree that,
effective upon the execution and delivery of this Agreement by each such party:
(a) the terms and provisions of the
-1-
<PAGE>
Existing Agreement shall be and hereby are amended, superseded and restated in
their entirety by the terms and provisions of this Agreement, except that any
grant of security by any Borrower pursuant to Section 8.01 of the Existing
Agreement shall remain effective as of the date any such grant first became
effective, and (b) the Existing Loans shall constitute the initial outstanding
Loans under this Agreement and shall be payable solely in accordance with the
terms of this Agreement and any Loan Documents delivered pursuant hereto. No
party hereto shall have any obligations under the Existing Agreement, except to
the extent that any obligations thereunder may be restated in this Agreement or
the other Loan Documents. The Borrowers, the Administrative Agent, the
Collateral Agent and the Lenders agree that the execution and delivery of this
Agreement shall not effectuate a novation or refinancing of the Existing Loans,
but rather a substitution of certain of the terms governing the payment and
performance of the Existing Loans.
SECTION 1.02. Definitions. As used in this Agreement, the following
-----------
words and terms shall have the meanings specified below:
"Accession Agreement" shall mean an agreement substantially in the
-------------------
form of Exhibit C hereto.
---------
"Accounts" shall mean all present and future rights of any Borrower to
--------
payment for goods sold or leased or for services rendered which are not
evidenced by instruments or chattel paper, and whether or not they have been
earned by performance.
"Affiliate" shall mean any Person other than any Lender or Borrower
---------
directly or indirectly controlling, controlled by or under common control with
any Borrower and any officer or shareholder of such Person or any Borrower,
which shareholder beneficially owns at least ten percent (10%) of the Equity
Interests of such Person or any Borrower. For the purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by", and "under common control with"), as used with respect to any
Person, means the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise; provided,
--------
however, that beneficial ownership of at least 10% of the Equity Interests of a
- -------
Person shall be deemed to constitute control.
"Agents" shall mean collectively, the Administrative Agent and the
------
Collateral Agent.
"Aggregate Principal Amount" shall mean the amount equal to the total
--------------------------
outstanding principal amount of the Loans determined on the Commitment
Termination Date.
"Aggregate Utilization" shall mean at any given time, the sum of the
---------------------
principal amounts of the Existing Loans made under the Existing Agreement prior
to the Closing Date, without giving effect to any repayments thereof.
"Applicable Margin" shall mean, with respect to the LIBO Rate or the
-----------------
Base Rate (a) at any time prior to the date upon which the Borrower has eight
(8) Completed Systems and the date upon which the Administrative Agent has first
received financial statements of the Borrowers demonstrating compliance with the
applicable Total Revenue Threshhold for the
-2-
<PAGE>
fiscal quarter to which such financial statements relate, 3.25% for Base Rate
Loans and 4.25% for LIBOR Loans, and (b) at any time thereafter, the percentage
per annum set forth below which corresponds to the Consolidated Leverage Ratio
on such date:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Level I Level II Level III Level IV Level V
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EBITDA ** 0
Consolidated or CLR * 12.0 to CLR * 10.0 CLR * 8.0 CLR * 6.0
Leverage CLR ** 12.0 1.0 but ** 10.0 to 1.0 but ** to 1.0 but ** 1.0
Ratio ("CLR") to 1.0 to 1.0 8.0 to 1.0 6.0 to 1.0
- --------------------------------------------------------------------------------------------------------
Applicable Margin 3.00% 2.75% 2.50% 2.25% 2.00%
for Base Rate
- --------------------------------------------------------------------------------------------------------
Applicable Margin 4.00% 3.75% 3.50% 3.25% 3.00%
for LIBO Rate
- --------------------------------------------------------------------------------------------------------
</TABLE>
* more
** less than or equal to
Upon receipt of the financial statements delivered pursuant to Section 5.06(b),
---------------
the Applicable Margin in connection with any Loan shall be adjusted, such
adjustment being effective five (5) Business Days following the Administrative
Agent's receipt of such financial statements; provided, that if the Borrower
--------
shall not have timely delivered its financial statements in accordance with
Section 5.06(b), then commencing on the date on which such financial statements
- ---------------
should have been delivered and continuing until the date on which such financial
statements are actually delivered, it shall be assumed for purposes of
determining the Applicable Margin that the Consolidated Leverage Ratio was
greater than 12.0 to 1.0 and the Level I pricing above shall be applicable.
"Assignment Agreement" shall mean an assignment agreement entered into
--------------------
in connection with an assignment pursuant to Section 11.08 hereof substantially
-------------
in the form of Exhibit O hereof.
---------
"Bankruptcy Code" shall have the meaning given to such term in Section
--------------- -------
2.15(b).
- -------
"Base Rate" shall mean, with respect to any calendar quarter, the per
---------
annum rate equal to the sum of (a) the Applicable Margin for Base Rate Loans
plus (b) the higher of (i) the Reference Bank Base Rate on the first Business
- ----
Day of such calendar quarter and (ii) the sum of the Federal Funds Effective
Rate plus one-half percent (0.50%) per annum.
"Base Rate Loan" shall mean a Loan, or portion thereof, during any
--------------
period in which it bears interest at a rate based upon the Base Rate.
"Benefit Plan" shall mean a defined benefit plan as defined in Section
------------
3(35) of ERISA (other than a Multiemployer Plan) in respect of which any
Borrower or any ERISA Affiliate is, or within the immediately preceding six (6)
years was, an "employer" as defined in Section 3(5) of ERISA.
-3-
<PAGE>
"Borrower" shall mean any of PaeTec, International, PaeTec Online,
--------
PaeTec Virginia, PaeTec Capital, Campuslink, Select, Parklink, Florida and any
Subsidiary of any of the foregoing or of the Guarantor that enters into an
Accession Agreement, is acceptable to the Requisite Lenders, and the outstanding
Equity Interests of which are pledged to the Collateral Agent pursuant to a
pledge agreement substantially in the form of Exhibit L attached hereto.
---------
"Business" shall mean, with respect to any Borrower, the business of
--------
constructing, operating and maintaining the Systems owned by such Borrower and
all operations related thereto or in support thereof.
"Business Day" shall mean (a) any day not a Saturday, Sunday or legal
------------
holiday in the State of New York or New Jersey, on which banks are open for
business in New York and New Jersey and (b) with respect to all notices,
determinations, fundings and payments in connection with the LIBO Rate or LIBOR
Loans, any day that is a Business Day pursuant to clause (a) above and that is
also a day on which trading is carried on by and between banks in the London
interbank market.
"Capitalization" shall mean the amount at any time of the sum of
--------------
Consolidated Debt plus Funded Equity of the Guarantor without taking into
account operating losses.
"Capitalized Lease Obligations" shall mean Debt represented by
-----------------------------
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such Debt shall be
the capitalized amount of such obligations determined in accordance with GAAP.
"Change of Control" shall mean (A) Arunas A. Chesonis ceases to have
-----------------
senior management responsibilities with respect to the Borrowers or the
Guarantor, (B) the Guarantor no longer beneficially owns (i) all of the
outstanding Equity Interests of each Borrower other than PaeTec Online, or (ii)
at least ninety-five (95%) of the outstanding Equity Interests of PaeTec Online,
(C) the Existing Stockholders cease to have 51% of the Voting Power of the
Voting Stock of the Guarantor on a fully diluted basis or a "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) other
than the Existing Stockholders becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of a percentage of the total
voting power of the Voting Stock of the Guarantor on a fully diluted basis which
represents a greater percentage of the total Voting Power of the Voting Stock of
the Guarantor, on a fully diluted basis, than is held by the Existing
Stockholders on such date, or (D) individuals who on the Closing Date constitute
the Board of Directors of the Guarantor (together with any new directors whose
election by the Board of Directors or whose nomination by the Board of Directors
for election by the Guarantor's stockholders was approved by a vote of at least
a majority of the members of the Board of Directors then in office who either
were members of the Board of Directors on the Closing Date or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the members of the Board of Directors of the Guarantor
then in office.
"CIBC" shall mean Canadian Imperial Bank of Commerce in its individual
----
capacity, and its successors and assigns.
-4-
<PAGE>
"Closing Date" shall mean the date on which this Agreement is executed
------------
and delivered by the parties hereto.
"Collateral" shall mean, all property and interests in property now
----------
owned or hereafter acquired by any Borrower in or upon which a security
interest, lien or mortgage is granted to the Collateral Agent by any Borrower,
whether under this Agreement or the other Loan Documents.
"Collateral Assignments of Leases" shall mean (i) that certain
--------------------------------
Collateral Assignment of Leases dated as of November 16, 1998 among PaeTec,
International and the Collateral Agent, as amended, modified, supplemented and
restated from time to time and (ii) that certain Collateral Assignment of Leases
dated as of September 8, 1999 among the other Borrowers and the Collateral
Agent, as amended modified supplemented and restated from time to time, copies
of which are attached as Exhibit P hereto.
---------
"Collateral Assignment of Licenses" shall mean (i) that certain
---------------------------------
Collateral Assignment of Licenses dated as of November 16, 1998 among PaeTec,
International and the Collateral Agent, as amended, modified, supplemented and
restated from time to time and (ii) that certain Collateral Assignment of
Licenses among PaeTec Online, PaeTec Virginia, PaeTec Capital, Campuslink,
Select, Parklink, Florida and the Collateral Agent, as amended, modified,
supplemented and restated from time to time, copies of which are attached as
Exhibit Q hereto.
- ---------
"Collection Accounts" and "Collection Agent" shall have the meanings
------------------------------------------
given to such terms in Section 8.04 hereof.
------------
"Commitment" shall mean Lenders' commitment to lend as set forth in
----------
Section 2.01 hereof.
- ------------
"Commitment Amount" shall mean, (a) as to any Lender, the amount set
-----------------
forth opposite such Lender's name on Annex A to this Agreement or in the most
-------
recent Assignment Agreement executed by such Lender and (b) as to all Lenders,
the total amount of the Commitments of all Lenders as set forth on Annex A to
-------
this Agreement, which aggregate commitment shall be Seventy Million Dollars
($70,000,000) on the Closing Date, as such amount may be adjusted from time to
time in accordance with this Agreement.
"Commitment Termination Date" shall mean December 31, 2000.
---------------------------
"Common Stock" shall mean with respect to any Person, all Equity
------------
Interests of such Person that are generally entitled to (i) vote in the election
of directors of such Person or (ii) if such Person is not a corporation, vote or
otherwise participate in the selection of the governing body, partners, managers
or others that will control the management and policies of such Person.
"Completed System" shall mean any System which is fully operational,
----------------
shall have a Lucent 5-ESS Switch or other comparable Switch deployed, shall be
switching paid traffic on its owned Telecommunications Equipment, shall have
sales, customer service and billing systems operational to the satisfaction of
the Collateral Agent with switching capabilities, shall have generated at least
$25,000 of revenue and with respect to which all Governmental
-5-
<PAGE>
Approvals have been obtained and connectivity to at least one major
interexchange carrier point-of-presence or a local exchange tandem has been
achieved.
"Consolidated" or "consolidated" refers, with respect to any Person,
------------ ------------
to the consolidation of the accounts of such Person and its Subsidiaries, if
any, in accordance with GAAP.
"Consolidated Debt" shall mean, at any date, all Debt of the Guarantor
-----------------
and its Subsidiaries calculated on a consolidated basis in accordance with GAAP
on such date.
"Consolidated Leverage Ratio" shall mean, for any fiscal quarter, the
---------------------------
ratio of (i) Consolidated Debt as of the last day of such fiscal quarter, to
(ii) EBITDA of the Borrowers on a combined basis, for the two fiscal quarter
period ending on such day, multiplied by two.
"Contaminant" shall mean any pollutant, hazardous substance, toxic
-----------
substance, hazardous waste, special waste, petroleum or petroleum derived
substance or waste, or any constituent of any such substance or waste.
"Contributed Capital" shall mean, with respect to the Borrowers, at
-------------------
any date of determination, all contributed capital to such Borrowers.
"Debt" shall mean, with respect to any Person, (i) indebtedness for
----
borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other
similar instruments, (iii) obligations which have been incurred in connection
with the acquisition of property or services (including, without limitation,
obligations to pay the deferred purchase price of property or services),
excluding trade payables and accrued expenses incurred in the ordinary course of
business, (iv) obligations as lessee under leases which shall have been or
should be, in accordance with GAAP, recorded as capital or operating leases, (v)
all Guarantees of such Person, including, without limitation, Debt of any other
Person secured by a Lien on any property of such Person, (vi) all reimbursement
obligations, contingent or otherwise, with respect to letters of credit and
banker's acceptances issued for the account of any Borrower, and (vii) all
indebtedness, obligations or other liabilities in respect of any Interest Rate
Agreement, provided that the amount outstanding at any time of any Debt issued
--------
with original issue discount is the principal amount of such Debt less the
remaining unamortized portion of the original issue discount of such Debt at
such time as determined in conformity with GAAP, and that Debt shall not include
any liability for Federal, state, local or other taxes. Notwithstanding any
other provision of the foregoing definition, any trade payable arising from the
purchase of goods or materials or for services obtained in the ordinary course
of business shall not be deemed to be "Debt" of any Borrower for purposes of
this definition. Furthermore, guarantees of (or obligations with respect to
letters of credit supporting) Debt otherwise included in the determination of
such amount shall not also be included.
"Debt Service" shall mean the amount determined as of the last day of
------------
any fiscal quarter equal to the sum of (i) combined cash interest expense of the
Borrowers for the two (2) fiscal quarters then ending, multiplied by two plus
----
(ii) scheduled principal payments of the Borrower for the two (2) fiscal
quarters then ending, multiplied by two.
-6-
<PAGE>
"Default" shall mean any event which but for the passage of time or
-------
giving of notice would constitute an Event of Default.
"Dollars" or "$" shall mean lawful money of the United States of
------- -
America.
"Easements" shall have the meaning given to such term in Section 3.20
--------- ------------
hereof.
"EBITDA" shall mean, with respect to any Person, for any period, an
------
amount equal to (i) Net Income plus (ii) the sum of the following, to the extent
----
deducted in determining Net Income: (A) income and franchise taxes, (B)
interest expense, (C) amortization, depreciation and other non-cash charges,
minus (iii) the sum of interest income plus extraordinary gains, as determined
- -----
in accordance with GAAP as calculated at the end of such period.
"Environmental Laws" shall mean all federal, state and local laws,
------------------
rules, regulations, ordinances, programs, permits, guidance, orders and consent
decrees or other binding determination of any Public Authority relating to
health, safety, hazardous substances, and environmental matters applicable to a
Borrower and/or its business and facilities (whether or not owned by it). Such
laws and regulations include but are not limited to the Resource Conservation
and Recovery Act, 42 U.S.C. (S) 6901 et seq., as amended; the Comprehensive
-- ----
Environmental Response, Compensation and Liability Act, 42 U.S.C. (S) 9601 et
--
seq., as amended; the Toxic Substances Control Act, 15 U.S.C. (S) 2601 et seq.,
- ---- -- ----
as amended; the Clean Water Act, 42 U.S.C. (S) 466 et seq., as amended; the
-- ----
Clean Air Act, 46 U.S.C. (S) 7401 et seq., as amended; state and federal lien
-- ----
and environmental cleanup programs; the Occupational Safety and Health Act, 29
U.S.C. (S) 651 et seq.; and U.S. Department of Transportation regulations, each
-- ---
as from time to time hereafter in effect.
"Equity Affiliate" shall mean, as applied to any Person, any other
----------------
Person directly or indirectly controlling, controlled by, or under direct or
indirect common control with, such Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling",
"controlled by" and "under common control with"), as applied to any Person,
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Equity Interest" shall mean, with respect to any Person, any and all
---------------
shares or other equivalents (however designated) of capital stock, membership
units, partnership interests or any other participation right or other interest
in the nature of an equity interest in such Person or any option, warrant or
other security convertible into any of the foregoing.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended from time to time.
"ERISA Affiliate" shall mean (i) any corporation which is a member of
---------------
the same controlled group of corporations (within the meaning of Section 414(b)
of the IRC) as any Borrower, (ii) any partnership or other trade or business
(whether or not incorporated) under common control (within the meaning of
Section 414(c) of the IRC) with any Borrower and (iii) any member of the same
affiliated service group (within the meaning of Section 414(m) of the
-7-
<PAGE>
IRC) as any Borrower, any corporation described in clause (i) above or any
partnership or trade or business described in clause (ii) above.
"Eurocurrency Liabilities" shall have the meaning assigned to that
------------------------
term in Regulation D of the Federal Reserve Board, as in effect from time to
time.
"Event of Default" shall have the meaning given to such term in
----------------
Article IX hereof.
- ----------
"Event of Loss" shall mean, with respect to any item of Collateral,
-------------
the actual or constructive loss of such item of Collateral or the use thereof,
due to theft, destruction, damage beyond repair or damage from any reason
whatsoever, to an extent which makes repair uneconomical, or rendition thereof
unfit for normal use, or the condemnation, confiscation or seizure of, or
requisition of title to or use of, such item of Collateral by any Governmental
Authority or any other Person, acting under or deemed to be acting under color
of any Governmental Authority.
"Excess Cash Flow" shall mean for any fiscal year, Net Income of the
----------------
Borrowers plus non-cash interest expense, depreciation and amortization and any
other non-cash items of the Borrowers, minus scheduled principal payments of the
Borrowers to Lenders, lease payments and capital expenditures of the Borrowers.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended from time to time.
"Existing Agreement" shall have the meaning given to such term in the
------------------
introductory paragraphs of this Agreement.
"Existing Loans" shall have the meaning given to such term in the
--------------
introductory paragraphs of this Agreement.
"Existing Stockholders" shall mean Arunas A. Chesonis and shall
----------------------
include his Equity Affiliates and any lineal descendant and/or any member of
each of the foregoing Person's immediate family and/or any trusts established
for the benefit of such Person.
"FCC" shall mean the Federal Communications Commission or any
---
successor commission or agency of the United States of America having
jurisdiction over any Borrower or any System.
"Federal Funds Effective Rate" shall mean, for any period, a
----------------------------
fluctuating interest rate per annum equal for each day during such period to (a)
the weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by federal funds brokers, as
published for such day (or if such day is not a Business Day, for the preceding
Business Day) by the Federal Reserve Bank of New York in the Composite Closing
Quotations for U.S. Government Securities; or (b) if such rate is not so
published for any day which is a Business Day, the average of the quotations at
approximately 10:30 a.m. (New York time) for such day on such transactions
received by the Reference Bank from three federal funds brokers of recognized
standing selected by it.
-8-
<PAGE>
"Federal Reserve Board" shall mean the Board of Governors of the
---------------------
Federal Reserve System or any successor thereto.
"Fee Letter"shall have the meaning given to such term in Section
---------- -------
2.11(b).
- -------
"Financials" shall have the meaning given to such term in Section
---------- -------
3.03.
"Fixed Charges" shall mean, with respect to any period, the sum of the
-------------
following amounts calculated at the end of such period without duplication with
respect the Borrowers, and determined on a combined, consolidated basis and in
accordance with GAAP: (i) scheduled principal and interest payments with respect
to Debt for borrowed money; (ii) scheduled principal and interest payments with
respect to capital leases; (iii) capital expenditures; and (iv) tax expenses
paid in cash.
` "Funded Equity" shall mean with respect to the Guarantor at any date of
-------------
determination, all proceeds of the sale of Equity Interests received by the
Guarantor directly or as a result of capital contributions.
"Funding Date" shall mean the date upon which, subject to the
------------
satisfaction of all conditions precedent contained in Sections 4.01 and 4.02,
------------- ----
the initial Loans made on or after the Closing Date, shall be funded.
"Governmental Approval" shall mean, with respect to any Borrower, any
---------------------
license, permit or certificate of public convenience and necessity issued to any
Borrower by the FCC, any PUC or any other Governmental Authority in connection
with any System.
"Governmental Authority" shall mean any federal, state, local or other
----------------------
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
"Guarantee" shall mean any obligation, contingent or otherwise, of any
---------
Person guaranteeing any indebtedness of any other Person (the "Primary Obligor")
in any manner, whether directly or indirectly, and including any obligation of
such Person, direct or indirect, (i) to purchase or pay (or advance or supply
funds for the purchase or payment of) such indebtedness or to purchase (or to
advance or supply funds for the purchase of) any security for the payment of
such indebtedness; (ii) to purchase property, securities or services for the
purpose of assuring the owner of such indebtedness of the payment of such
indebtedness; or (iii) to maintain working capital, equity capital or other
financial statement condition of the Primary Obligor so as to enable the Primary
Obligor to pay such indebtedness.
"Guarantor" shall mean PaeTec Corp., a Delaware corporation.
---------
"Guaranty" shall mean that certain Amended and Restated Guaranty of
--------
even date herewith executed by the Guarantor in favor of the Collateral Agent,
substantially in the form of Exhibit G hereto.
---------
"Interest Expense" shall mean for any period, the total interest
----------------
expense (including, without limitation, interest expense attributable to capital
leases) determined on a combined basis, without duplication for the Borrowers in
accordance with GAAP.
-9-
<PAGE>
"Interest Period" shall mean, with respect to each LIBOR Loan, the
---------------
interest period applicable to such LIBOR Loan as set forth in the applicable
Notice of Borrowing or Notice of Conversion/Continuation.
"Interest Rate Agreement" shall mean for any Person, any interest rate
-----------------------
swap agreement, interest rate cap agreement, interest rate collar agreement or
other similar agreement designed to protect the party indicated therein against
fluctuations in interest rates.
"Investment" shall mean, as applied to any Person, any direct or
----------
indirect purchase or other acquisition by that Person of securities, or of a
beneficial interest in securities, of any other Person, and any direct or
indirect loan, advance (other than deposits with financial institutions
available for withdrawal on demand, prepaid expenses, advances to employees,
officers and directors and similar items, each made or incurred in the ordinary
course of business), or capital contribution by that Person to any other Person,
including all Debt of such other Person to that Person, but excluding accounts
owed by that other Person in the ordinary course of business. Investments shall
exclude (i) extensions of trade credit on commercially reasonable terms in
accordance with normal trade practices and (ii) the repurchase of securities of
any Person by such Person. The amount of any Investment shall be determined in
conformity with GAAP.
"IRC" shall mean the Internal Revenue Code of 1986, as amended from
---
time to time, and the rules and regulations promulgated thereunder, and any
successor statutes or rules and regulations.
"IRS" shall mean the Internal Revenue Service or any successor agency.
---
"Landlord L/C" shall have the meaning give to such term in Section
------------ -------
5.22 hereof.
- ----
"Leased Real Property" shall have the meaning given to such term in
--------------------
Section 3.20 hereof.
- ------------
"LIBOR" shall mean, a rate of interest equal to the per annum rate
-----
equal to the one, three or six-month "London Interbank Offered Rate", as
applicable based on the tenor of the applicable Interest Period for such Loan,
displayed on the Telerate Screen Page 3750 or any successor service on the
applicable LIBOR Interest Rate Determination Date. In the event that such rate
is not displayed or published, the Administrative Agent shall determine the
applicable one, three or six-month "London Interbank Offered Rate" using such
means as it deems appropriate to reasonably approximate the interest rate at
which deposits in U.S. dollars having a maturity of one, three or six-months, as
applicable, are offered in London, England to prime banks in the London
interbank market.
"LIBOR Interest Payment Date" shall mean, with respect to a LIBOR
---------------------------
Loan, the last day of each Interest Period applicable to such Loan, and, if such
Interest Period has a duration of more than three months, on each day which
occurs during such Interest Period every three months from the first day of such
Interest Period.
"LIBOR Interest Rate Determination Date" shall mean each date of
--------------------------------------
calculating the LIBO Rate for purposes of determining the interest rate with
respect to an Interest Period.
-10-
<PAGE>
The LIBOR Interest Rate Determination Date for any LIBOR Loan shall be the
second Business Day prior to the first day of the related Interest Period for
such LIBOR Loan.
"LIBOR Loan" shall mean a Loan, or portion thereof, during any period
----------
in which it bears interest at a rate based upon the LIBO Rate.
"LIBO Rate" shall mean, for any Interest Period, a rate per annum
---------
determined in accordance with the following formula (rounded upward to the
nearest 1/100th of 1%, if necessary):
The Applicable Margin + LIBOR
-----------------------------
1.00- LIBOR Reserve Percentage
"LIBOR Reserve Percentage" shall mean, for any day for any Interest
------------------------
Period, the maximum reserve percentage (expressed as a decimal, rounded upward
to the next 1/100th of 1.0%) in effect on such day (whether or not applicable to
any Lender) for United States domestic banks under regulations issued from time
to time by the Federal Reserve Board for determining the maximum reserve
requirement (including any emergency, supplemental or other marginal reserve
requirement) with respect to Eurocurrency Liabilities having a term comparable
to such Interest Period.
"Lien" shall mean any mortgage, pledge, deed of trust, assignment,
----
lien, charge, encumbrance or security interest of any kind, or the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement, but excluding easements, rights of way or similar
encumbrances on real property which are in the ordinary course and which do not
materially affect the value, use and insurability of title of such real
property.
"Loan" shall mean any loan made to the Borrower pursuant to the
----
provisions of Section 2.01 below and each Existing Loan.
------------
"Loan Documents" shall mean this Agreement, the Existing Agreement,
--------------
each "Loan Document" under and as defined in the Existing Agreement, the
Collateral Assignments of Leases, the Collateral Assignments of Licenses, the
Mortgages, the Notes, the Pledge Agreements, the Guaranty, the Fee Letter, all
other agreements, instruments and documents, including, without limitation,
security agreements, loan agreements, notes, guarantees, mortgages, deeds of
trust, subordination agreements, pledges, trademark security agreements, powers
of attorney, consents, assignments, contracts, notices, leases, financing
statements, Interest Rate Agreements between the Borrower and the Administrative
Agent, the Collateral Agent or any Lender or any affiliate of any of the
foregoing, reaffirmations by any Borrower or the Guarantor, and all other
written matter whether heretofore, now, or hereafter executed by or on behalf of
any Borrower or any other Person in connection with the transactions
contemplated hereby and delivered to the Administrative Agent, the Collateral
Agent or the Lenders, including, without limitation, all amendments,
restatements, waivers, consents, reaffirmations and other modifications to any
of the foregoing, together with all agreements and documents referred to therein
or contemplated thereby; provided, however, that none of the Unsecured Loan
Documents or any documents executed in connection with the purchase by any
Lender of equity interests in the Guarantor shall constitute Loan Documents.
-11-
<PAGE>
"Lucent" shall mean Lucent Technologies Inc.
------
"Lucent Purchase Agreement" shall mean an agreement between any
-------------------------
Borrower and Lucent for the purchase of Telecommunications Equipment, on terms
and conditions satisfactory to the Requisite Lenders.
"Marcap Agreement" shall mean that certain Master Lease Agreement
----------------
dated as of July 29, 1998 between Campuslink and Marcap Corporation.
"Material Adverse Effect" shall mean, with respect to any Person, a
-----------------------
material adverse effect upon the condition (financial or otherwise), operations,
properties or prospects of such Person, or upon the ability of such Person to
perform under the Loan Documents.
"Maximum Amount" shall mean $65,000,000 prior to the earlier of the
--------------
date on which (i) the Debt of the Borrower to Marcap Corporation has been
discharged in full, or (ii) in the event that the Borrowers receive cash capital
contributions from the Guarantor in an aggregate amount of at least $50,000,000
on or prior to June 30, 1999, the date of receipt of such cash capital
contributions, and on and after such date, $70,000,000.
"Maximum Rate" shall have the meaning given to such term in Section
------------ -------
2.13 hereof.
- ----
"Milestone Plan" shall mean that certain PaeTec-Campuslink-Final B
--------------
Plan of the Borrowers, a copy of which has been furnished to the Administrative
Agent pursuant to the Non Disclosure Agreement and is attached hereto as Exhibit
-------
A. Such Milestone Plan may be amended from time to time with the prior written
- -
consent of all the Lenders.
"Mortgages" shall mean mortgages or deeds of trust in favor of the
---------
Collateral Agent, with respect to any Borrower's (i) owned real property and
(ii) other interests in those items of real property and Easements, as specified
by the Collateral Agent, which mortgages and deeds of trust shall be in form and
substance satisfactory to the Collateral Agent.
"Multiemployer Plan" shall mean a "multiemployer plan" as defined in
------------------
Section 4001(a)(3) of ERISA which is, or within the immediately preceding six
(6) years was, contributed to by any Borrower or an ERISA Affiliate.
"Net Income" shall mean, with respect to any Person for any period,
----------
the net income (loss) of such Person determined in accordance with GAAP.
"Newcourt CFC" shall mean Newcourt Commercial Finance Corporation, in
------------
its individual capacity, and its successors and assigns.
"Non Disclosure Agreement" shall have the meaning given such term in
------------------------
Section 11.17.
- -------------
"Note" shall mean a promissory note of the Borrower substantially in
----
the form of Exhibit E attached hereto.
---------
-12-
<PAGE>
"Notice of Borrowing" shall mean a notice substantially in the form of
-------------------
Exhibit H-1 attached hereto.
- -----------
"Notice of Conversion/Continuation" shall have the meaning given to
---------------------------------
such term in Section 2.06(b).
---------------
"Obligations" shall mean all the payment, performance and
-----------
indemnification obligations, covenants and duties of any Borrower now or
hereafter existing under this Agreement or any other Loan Document to which any
Borrower is a party, whether for principal, interest, fees, expenses,
reimbursement, indemnification, performance or otherwise. Obligations shall
include all interest which accrues after the commencement of any case or
proceeding in bankruptcy after the insolvency of, or for the reorganization of
any Borrower, whether or not allowed in such proceeding.
"Operating Leverage Ratio" shall mean, as of the last day of each
------------------------
fiscal quarter, the ratio of (i) Senior Debt of the Borrowers as of such day to
(ii) combined EBITDA of the Borrowers for the two fiscal quarter period ending
on such day, multiplied by two.
"Payment Account" shall mean the Administrative Agent's Account No.
---------------
890-0331-046 at Bank of New York, New York, New York, ABA# 021-000-018, for
further credit to Agented Loans Account. No. 07-09611, Attention: Agency
Services, reference PaeTec.
"Payment Date" shall mean the last day of March, June, September and
------------
December in each calendar year, but if any such date is not a Business Day, the
next preceding Business Day, commencing December 31, 1999.
"PBGC" shall mean the Pension Benefit Guaranty Corporation referred to
----
and defined in ERISA.
"Periodic Reporting Certificate" shall mean a periodic reporting
------------------------------
certificate in the form of Exhibit F attached hereto.
---------
"Permitted Assignee" shall mean any bank or other financial
------------------
institution engaged in the business of lending (or making other financial
accommodations) to entities similar to the Borrowers and which has a tangible
net worth of not less than $50,000,000.
"Permitted Acquisition" shall have the meaning set forth in Section
--------------------- -------
6.08 hereof.
- ----
"Permitted Liens" shall have the meaning set forth in Section 6.01
--------------- ------------
hereof.
"Person" shall mean any natural person, corporation, division of a
------
corporation, business trust, joint venture, association, company, partnership,
unincorporated organization or other legal entity, or a government or any agency
or political subdivision thereof.
"Plan" shall mean any employee benefit plan as defined in Section 3(3)
----
of ERISA (other than a Multiemployer Plan) in respect of which any Borrower or
any ERISA Affiliate is, or within the immediately preceding six (6) years was,
an "employer" as defined in Section 3(5) of ERISA.
-13-
<PAGE>
"Pledge Agreement" shall mean a pledge agreement substantially in the
----------------
form of the pledge agreements executed and delivered pursuant to the Existing
Agreement, copies of which are attached as Exhibit L hereto.
---------
"Prepayment Premium" shall mean the amount determined by multiplying
------------------
(A) the principal amount of the relevant Loans being prepaid times (B) the
-----
applicable Prepayment Percentage determined as of the date of such prepayment.
"Prepayment Percentage" shall mean, with respect to each period set
---------------------
forth below, the percentage set forth opposite such period:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Period Prepayment Percentage
------ ---------------------
- ----------------------------------------------------------------------------------------
<S> <C>
Closing Date 1.50%
through and including
the 1st anniversary thereof
- ----------------------------------------------------------------------------------------
Any date thereafter 1.00%
until
the 2nd anniversary
of the Closing Date
- ----------------------------------------------------------------------------------------
Any date thereafter 0.75%
until
the 3rd anniversary
of the Closing Date
- ----------------------------------------------------------------------------------------
at any date thereafter 0.00%
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
"Principal Payments" shall mean, for any period, total required
------------------
amortization (including, without limitation, the principal payments attributable
to capital leases) determined on a combined basis, without duplication, for the
Borrowers in accordance with GAAP.
"Pro Rata Share" shall mean with respect to all matters relating to
--------------
any Lender, the percentage obtained by dividing (1) at any time prior to the
Commitment Termination Date, the Commitment Amount of such Lender by the
aggregate Commitment Amount of all Lenders, and (2) at any time after the
Commitment Termination Date, the aggregate outstanding principal balance of the
Loans held by that Lender by the aggregate outstanding principal balance of the
Loans held by all Lenders.
"PUC" shall mean any state Governmental Authority having utility or
---
telecommunications regulatory authority over any Borrower or any System.
"Purchase Debt" shall have the meaning given to such term in Section
------------- -------
6.13(iv).
- --------
"Reference Bank" shall mean Canadian Imperial Bank of Commerce.
--------------
"Reference Bank Base Rate" shall mean a rate per annum equal to the
------------------------
corporate base rate, prime rate or base rate of interest, as applicable,
announced by the Reference Bank from time to time, changing when and as such
rate changes, it being understood that such rate of interest is not necessarily
the lowest or best rate charged by the Reference Bank to its customers.
-14-
<PAGE>
"Register" shall have the meaning given to such term in Section
-------- -------
11.08(c)(iii).
- -------------
"Release" shall mean any release, spill, emission, leaking, pumping,
-------
injection, deposit, disposal, discharge, dispersal, leaching or migration into
the environment or into or out of any property, including the movement of
Contaminants through or in the air, soil, surface water, groundwater or
property.
"Remedial Action" shall mean actions required to (1) clean up, remove,
---------------
treat or in any other way address Contaminants in the environment; (2) prevent
the Release or threat of Release or prevent or minimize the further Release of
Contaminants so they do not migrate or endanger or threaten to endanger public
health or welfare or the environment; or (3) perform preremedial studies and
investigations and postremedial monitoring and care.
"Reportable Event" shall mean any reportable event as defined in
----------------
Section 4043 of ERISA unless the reporting requirement with respect to such
reportable event has been waived by the PBGC or other appropriate Governmental
Authority.
"Requisite Lenders" shall mean (a) prior to the date on which the
-----------------
Commitment has been terminated, Lenders holding at least sixty-six and two-
thirds percent (66 2/3%) of the aggregate Commitment Amount of all the Lenders,
and (b) on and after the date on which the Commitment has been terminated,
Lenders holding at least sixty-six and two-thirds percent (66 2/3%) of the
aggregate outstanding amount of the sum of all Loans.
"Senior Debt" shall mean, with respect to the Borrowers, at any date,
-----------
the sum of the Debt described in the following clauses of Section 6.13: (i),
------------
(ii), (iii), (iv), (viii) and (ix).
"Solvent" shall mean, at any time of determination, with respect to
-------
any Person:
(i) the assets of such Person, at a fair valuation, are in excess of
the total amount of its debts (including, without limitation, contingent
liabilities); and
(ii) the present fair saleable value of its assets is greater than
its probable liability on its existing debts as such debts become absolute
and matured; and
(iii) it is then able and expects to be able to pay its debts
(including, without limitation, contingent debts and other commitments) as
they mature; and
(iv) it has capital sufficient to carry on its business as conducted.
For purposes of determining whether a Person is Solvent, the amount of any
contingent liability shall be computed as the amount that, in light of all the
facts and circumstances existing at such time, represents the amount that can
reasonably be expected to become an actual or mature liability.
"Subsidiary" shall mean, with respect to any Person, any corporation,
----------
partnership, joint venture, association or other business entity, whether now
existing or hereafter organized or acquired, (i) in the case of a corporation,
of which more than 50% of the total voting power of the Equity Interests
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, officers or trustees thereof is held by such Person or
any of its Subsidiaries;
-15-
<PAGE>
or (ii) in the case of a partnership, joint venture, association or other
business entity, with respect to which such Person or any of its Subsidiaries
has the power to direct or cause the direction of the management and policies of
such entity by contract or otherwise or if in accordance with GAAP such entity
is consolidated with the such Person for financial statement purposes.
"Switching Equipment" shall mean telecommunications switches and
-------------------
associated electronics.
"System" shall mean each telecommunications system to be constructed,
------
developed, owned and operated by any Borrower in the United States of America as
a competitive local exchange carrier in a designated metropolitan area, in
accordance with the Milestone Plan, and all replacements, enhancements or
additions thereto.
"Taxes" shall mean any and all license, documentation, recording and
-----
registration fees, and all taxes (including, without limitation, income (other
than those on the income of the Lenders or the Agents), gross receipts, sales,
value-added, use, excise, personal property (tangible and intangible), real
estate and stamp, documentary, transfer or recording taxes, levies, imposts,
deductions, duties, assessments, fees, charges, and withholdings of any nature
whatsoever, whether or not presently in existence, together with any penalties,
fines, additions to tax, or interest thereon, imposed by any taxing authority or
other Governmental Authority.
"Telecommunications Equipment" shall mean fiber optic cable, Lucent 5-
----------------------------
ESS switches or other comparable switches, transmission equipment and other
ancillary equipment necessary for the installation and operation of a switch
room or central office and co-location with other telecommunications providers
that will enable a Borrower to offer telephony services, as well as all software
and hardware associated with the network operating center and back office
systems (including operations systems and support, billing systems and data
services).
"Temporary Cash Investments" shall mean (i) Investments in marketable,
--------------------------
direct obligations issued or guaranteed by the United States of America, or of
any governmental agency or political subdivision thereof, maturing within 365
days of the date of purchase; (ii) Investments in certificates of deposit issued
by a bank organized under the laws of the United States of America or any state
thereof or the District of Columbia, in each case having capital, surplus and
undivided profits totaling more than $500,000,000 and rated at least A by
Standard & Poor's Ratings Service and A-2 by Moody's Investors Service, Inc.
maturing within 365 days of purchase; or (iii) Investments not exceeding 365
days in duration in money market funds that invest substantially all of such
funds' assets in the Investments described in the preceding clauses (i) and
(ii).
"Termination Event" shall mean (i) a Reportable Event with respect to
-----------------
a Benefit Plan; (ii) the withdrawal of any Borrower or any ERISA Affiliate from
a Benefit Plan during a plan year in which any Borrower or such ERISA Affiliate
was a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (iii)
the imposition of an obligation on any Borrower or any ERISA Affiliate under
Section 4041 of ERISA to provide affected parties written notice of intent to
terminate a Benefit Plan in a distress termination described in Section 4041(c)
of ERISA; (iv) the institution by the PBGC of proceedings to terminate a Benefit
Plan; (v) any event or condition which might constitute grounds under Section
4042 of ERISA for the
-16-
<PAGE>
termination of, or the appointment of a trustee to administer, any Benefit Plan;
or (vi) the partial or complete withdrawal of any Borrower or any ERISA
Affiliate from a Multiemployer Plan.
"Third Party Interactives" shall mean all Persons with whom any
------------------------
Borrower exchanges data electronically in the ordinary course of business,
including without limitation, customers, suppliers, third-party vendors,
subcontractors, processors-converters, shippers and warehousemen.
"Total Revenue Threshhold" shall mean that the Borrowers on a combined
------------------------
basis have total revenues of at least an amount equal to ninety-five percent
(95%) of the amount set forth below for the fiscal quarter ending on the date
opposite such amount:
Fiscal Quarter Total Revenues
- -------------- --------------
March 31, 2000 $24,431,268
June 30, 2000 $30,470,697
September 30, 2000 $39,648,347
December 31, 2000 $55,684,612
"UFCA" shall have the meaning given to such term in Section 2.15(b).
"UFTA" shall have the meaning given to such term in Section 2.15(b).
---- ---------------
"Unsecured Loan Agreement" shall mean that certain Loan Agreement
------------------------
dated as of October 13, 1999 among the Borrowers, the financial institutions
from time to time parties thereto as Lenders, and Newcourt Commercial Finance
Corporation, as Administrative Agent for said Lenders, evidencing a $10,000,000
unsecured credit facility.
"Unsecured Loan Documents" shall mean the Unsecured Loan Agreement and
------------------------
all promissory notes, guaranties, warrants and other documents and instruments
contemplated by the Unsecured Loan Agreement.
"Variable Rate" shall mean the Base Rate or the LIBO Rate.
-------------
"Voting Power" shall mean, with respect to Voting Stock, the ability
------------
to exercise the voting rights of such Voting Stock either by direct ownership or
control of such Voting Stock or through the granting of proxy rights by any
owner of such Voting Stock .
"Voting Stock" shall mean securities of any class or classes of a
------------
corporation, the holders of which are ordinarily, in the absence of
contingencies, entitled to elect a majority of the corporate directors (or
Persons performing similar functions).
"West Point Contract" shall mean that certain Contract No. DAAG60-98-
-------------------
C-O dated as of April 22, 1998 between Campuslink and the Department of the
Army, as amended from time to time.
"Year 2000 Corrective Actions" shall mean, as to each Borrower, all
----------------------------
actions necessary to eliminate such Person's Year 2000 Problems, including,
without limitation,
-17-
<PAGE>
computer code enhancements and revisions, upgrades and replacements of Year 2000
Date-Sensitive Systems/Components, and coordination of such enhancements,
revisions, upgrades and replacements with Third Party Interactives.
"Year 2000 Corrective Plan" shall mean, with respect to each Borrower,
-------------------------
a comprehensive plan to eliminate all of its Year 2000 Problems including
without limitations (i) computer code enhancements or revisions, (ii) upgrades
or replacements of Year 2000 Date-Sensitive Systems/Components, (iii) test and
validation procedures, (iv) an implementation time line and budget and (v)
designation of specific employees who will be responsible for planning,
coordinating and implementing each phase or subpart of the Year 2000 Corrective
Plan.
"Year 2000 Date-Sensitive System/Component" shall mean, as to any
-----------------------------------------
Person, any system software, network software, applications software, database,
computer file, embedded microchip, firmware or hardware that accepts, creates,
manipulates, sorts, sequences, calculates, compares or outputs calendar-related
data accurately; such systems and components shall include, without limitation,
mainframe computers, file server/client system, computer workstations, routers,
hubs, other network-related hardware, and other computer-related software,
firmware or hardware and information processing and delivery systems of any kind
and telecommunications systems and other communications processors, security
systems, alarms, elevators and HVAC systems.
"Year 2000 Implementation Testing" shall mean, as to each Borrower,
--------------------------------
(i) the performance of test and validation procedures regarding Year 2000
Corrective Actions on a unit basis and a systemwide basis, (ii) the performance
of test and validation procedures regarding data exchanges among the Borrowers'
Year 2000 Date-Sensitive Systems/Components and data exchanges with Third Party
Interactives, and (iii) the design and implementation of additional Corrective
Actions, the need for which has been demonstrated by test and validation
procedures.
"Year 2000 Problems" shall mean, with respect to each Borrower,
------------------
limitations on the capacity or readiness of any such Borrower's Year 2000 Date-
Sensitive Systems/Components to accurately accept, create, manipulate, sort,
sequence, calculate, compare or output calendar date information with respect to
calendar year 1999 or any subsequent calendar year beginning on or after January
1, 2000 (including leap year computations), including, without limitation,
exchanges of information among Year 2000 Date-Sensitive Systems/Components of
the Borrowers and exchanges of information among the Borrowers and Year 2000
Date-Sensitive Systems/Components of Third Party Interactives and functionality
of peripheral interfaces, firmware and embedded microchips.
SECTION 1.03. Accounting Terms. Except as otherwise herein
----------------
specifically provided, each accounting term used herein shall have the meaning
given to it under generally accepted accounting principles applied on a
consistent basis ("GAAP").
----
SECTION 1.04. Others Defined in New York Uniform Commercial Code.
--------------------------------------------------
All other terms contained in this Agreement (and which are not otherwise
specifically defined herein) shall have the meanings provided by the Uniform
Commercial Code of the State of New York (the "Code") to the extent the same are
----
used or defined therein.
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<PAGE>
SECTION 1.05. Supplemental Disclosure. At any time or times as the
-----------------------
Borrowers determine necessary, the Borrowers shall supplement any schedule
hereto with respect to any matter hereafter arising which, if existing or
occurring prior to the date hereof, would have been required to be set forth or
described in such schedule or which is necessary to correct any information in
such schedule which has been rendered inaccurate thereby. If any such supplement
to such schedule discloses the existence or occurrence of events, facts or
circumstances which are restricted or prohibited by the terms of this Agreement,
or would reasonably be likely to result in a Material Adverse Effect, such
supplement to such schedule shall not be deemed an amendment thereof unless
expressly consented to in writing by the Administrative Agent and the Requisite
Lenders, and no such amendments, except as the same may be consented to in
writing which expressly includes a waiver, shall be or be deemed a waiver by the
Administrative Agent or any Lender of an Event of Default or Default hereunder.
ARTICLE II
LOANS
SECTION 2.01. Agreement to Lend. (a) Each Lender severally agrees, on
-----------------
the terms and conditions hereinafter set forth, to make one or more Loans to the
Borrowers on the Funding Date or any date thereafter until the Commitment
Termination Date in an amount not to exceed an amount equal to (i) the
Commitment Amount of such Lender minus (ii) such Lender's Pro Rata Share of the
-----
Aggregate Utilization in effect as of the Funding Date. Amounts repaid or
prepaid under the Loan Documents may not be reborrowed except those Loans that
are prepaid in accordance with clause (ii) of the proviso to Section 2.09(a) and
---------------
those Loans that are prepaid in accordance with the provisions of Section
-------
2.09(e). In no event shall the aggregate principal amount of Loans made to
- -------
Florida exceed $1,000,000.
(b) The Lenders shall not be obligated to make any Loan which, when
added together with all Loans outstanding at such time, would cause the
aggregate outstanding principal balance of all Loans made hereunder to exceed
the Maximum Amount determined at such time.
SECTION 2.02. Loans. (a) The proceeds of the Loans shall be used by
-----
the Borrowers to purchase Telecommunications Equipment, to pay transaction costs
incurred in connection with the execution, delivery and performance of the Loan
Documents, to finance Permitted Acquisitions and for working capital and other
general corporate purposes (including, without limitation, payment of interest
on the Loans), and refinancing of Debt of Campuslink existing on the Closing
Date, all as specified in the Notice of Borrowing and in accordance with the
Milestone Plan; provided, however, that (i) not more than $6,000,000 of the
proceeds of the Loans may be used by the Borrowers for the purpose of making
Permitted Acquisitions or for working capital or other general corporate
purposes, and not more than $2,500,000 of such $6,000,000 amount may be applied
to a single Permitted Acquisition and (ii) proceeds of any of the Loans shall
not be used by Campuslink for any purpose in the State of New York until and
unless Campuslink receives regulatory approval from the New York Public Service
Commission to participate in the Loans. Loans bearing interest at the LIBOR Rate
shall be in a minimum principal amount of $2,500,000 and in $500,000 increments
in excess thereof and Loans bearing
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<PAGE>
interest at the Base Rate shall be in a minimum principal amount of $1,000,000
and in $250,000 increments in excess thereof. No more than four (4) Loans per
calendar month shall be made.
SECTION 2.03. Procedure for Loan Request and Borrowing Commitment.
---------------------------------------------------
(a) A Borrower requesting a Loan shall deliver to each of the Administrative
Agent and the Collateral Agent a Notice of Borrowing substantially in the form
of Exhibit H-1 attached hereto by 11:00 a.m. on the date at least five (5)
-----------
Business Days prior to the date on which such Loan is requested to be made if
such Loan is requested to be a LIBOR Loan and at least two (2) Business Days
prior to the date on which such Loan is requested to be made if such Loan is
requested to be a Base Rate Loan, which notice, once given, shall be
irrevocable; provided, however, that only the Collateral Agent shall receive the
attachments to the Notice of Borrowing, as outlined below. In the case of a Loan
the proceeds of which will be used to purchase Telecommunications Equipment, the
Notice of Borrowing delivered to the Collateral Agent will include a certificate
of delivery and acceptance in the form included in Exhibit H-1 and a copy of the
-----------
invoice from the seller of the Telecommunications Equipment described in such
invoice. In the case of a Loan the proceeds of which will be used to pay
transaction and construction costs, the Notice of Borrowing delivered to the
Collateral Agent will include a copy of the invoice from the provider of the
service or other appropriate supporting documentation. In the case of a Loan,
the proceeds of which will be used for the financing of working capital or other
general corporate purposes, the
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<PAGE>
Notice of Borrowing delivered to the Collateral Agent will contain a certified
schedule of the Borrowers' current outstanding accounts payable in detail
satisfactory to the Collateral Agent together with a description of the intended
use of proceeds of such Loan. The Notice of Borrowing shall, with respect to any
Loans requested, specify whether such requested Loans are to be Base Rate Loans
or LIBOR Loans, and if such requested Loans are to be LIBOR Loans, the requested
Interest Period for such Loans.
(b) The Administrative Agent agrees, promptly upon (i) receipt of a
Notice of Borrowing and (ii) acknowledgment by the Collateral Agent that the
Borrowers have delivered and the Collateral Agent has reviewed to its
satisfaction (x) each of the invoices or certificates required to be provided to
the Collateral Agent pursuant to Section 2.03(a) above and (y) each of the
---------------
collateral documents, including, without limitation, all third party agreements
and the related consents to collateral assignments required pursuant to Section
-------
5.08 of the Loan Agreement, as requested by the Collateral Agent, which
- ----
acknowledgment shall be delivered by the Collateral Agent at least three (3)
Business Days prior to the date on which any LIBOR Loan is requested to be made
and one (1) Business Day prior to the date on which any Base Rate Loan is
requested to be made, to notify each Lender of the date and amount of the Loan
proposed thereunder and the amount of such Lender's Pro Rata Share therein.
So long as no Event of Default has occurred and is continuing and upon
fulfillment of the applicable conditions set forth in Article IV, each such
----------
Lender severally agrees, on or before 12:00 P.M. (New York time) on the date of
each proposed Loan, to pay into the Payment Account, an amount equal to such
Lender's Pro Rata Share of such Loan in dollars and in same day funds. After
the Administrative Agent's receipt of such Lender's Loan proceeds, the
Administrative Agent shall make available such proceeds to the Borrower
requesting the Loan or the Person entitled to payment thereof at the bank
account(s) specified in the Notice of Borrowing on the date specified in such
Notice of Borrowing in Dollars in immediately available funds; provided,
however, that if any Loan proceeds are to be applied to pay invoices from
Lucent, such invoices shall be paid directly by the Administrative Agent to
Lucent.
(c) Unless the Administrative Agent has received written notice from
a Lender prior to the date of any proposed Loan that such Lender will not make
available to the Administrative Agent such Lender's Pro Rata Share of such Loan,
the Administrative Agent may, but is not obligated to, assume that such Lender
has made its Pro Rata Share of such Loan available to the Administrative Agent
on the date of such Loan in accordance with paragraph (b) above, and the Lenders
-------------
may, in reliance upon such assumption, make available to the Borrower on such
date a corresponding amount. If such Pro Rata Share is not, in fact, paid to
Administrative Agent by such Lender when due, the Administrative Agent will be
entitled to recover such amount on demand from such Lender or the Borrower which
received the proceeds of such Loan without set-off, counterclaim or deduction of
any kind, together with interest thereon, for each day from the date such amount
is made available to such Borrower until the date such amount is repaid to the
Administrative Agent either by such Borrower or such Lender, at, (1) in the case
of such Borrower, the interest rate applicable to such Loan, and (2) in the case
of such Lender, the Federal Funds Effective Rate plus any applicable fees
charged by the Administrative Agent. Nothing in this Section 2.03(c) or
---------------
elsewhere in this Agreement or the other Loan Documents shall be deemed to
require the Administrative Agent to advance funds on behalf of any Lender or to
relieve any Lender from its obligation to fulfill its Commitment hereunder or to
prejudice any rights that the Borrower may have against any Lender as a result
of
-21-
<PAGE>
any default by such Lender hereunder. Without limiting the foregoing, with
respect to any Lender which for any reason fails to make timely payment to the
Administrative Agent of its Pro Rata Share of any Loan, the Administrative
Agent, in addition to other rights and remedies which it may have, shall be
entitled to withhold or set off from any payments due to such Lender hereunder,
an amount equal to the Pro Rata Share required to have been paid by such Lender
plus interest as described above, and to withhold from such Lender any right of
consent provided to such Lender by Article 5 or 6 of this Agreement and to bring
--------- -
an action or suit against such Lender in a court of competent jurisdiction to
recover such Pro Rata Share thereof and any related interest thereon. If such
Lender shall repay to the Administrative Agent such corresponding amount, such
amount so repaid shall constitute such Lender's applicable Pro Rata Share of
such Loan for purposes of this Agreement. If both such Lender and such Borrower
shall have repaid the corresponding amount, the Administrative Agent shall
promptly return to such Borrower its corresponding amount.
SECTION 2.04. The Notes. Each Borrower shall execute and deliver to
---------
each Lender a Note to evidence the Commitment of that Lender. Each Note shall be
in the principal amount of the Commitment Amount of the applicable Lender, dated
the Funding Date, stated to mature on December 31, 2006, and substantially in
the form of Exhibit E. The Note payable to each Lender shall represent the
---------
obligation of such Borrower to pay the amount of each Lender's Commitment Amount
or, if less, the applicable Lender's Pro Rata Share of the aggregate unpaid
principal amount of all Loans to such Borrower together with interest thereon as
prescribed in Section 2.05. The Administrative Agent is hereby authorized by
------------
each Borrower to record in the Register the date and amount of each Loan made to
such Borrower, as applicable, and to record therein the date and amount of each
payment on each Loan made to such Borrower, and such recordations shall be
conclusive evidence against such Borrower of the amounts owing to the Lenders
with respect to the Loans in the absence of manifest error; provided, however,
-------- -------
that the failure of the Administrative Agent to register any such information on
such schedule shall not in any manner affect the obligation of such Borrower to
repay the Loans made to such Borrower in accordance with the terms of this
Agreement.
SECTION 2.05. Interest on Loans. (a) General. Each Loan shall bear
----------------- -------
interest at a rate per annum equal to the Base Rate or the LIBO Rate, as
selected in the applicable Notice of Borrowing delivered by the Borrower or as
converted pursuant to Section 2.06, computed on the basis of (i) a 360 day year
------------
composed of twelve 30-day months for LIBOR Loans and (ii) a 365/366 day year, as
applicable, for Base Rate Loans, and with respect to both clauses (i) and (ii),
the actual number of days elapsed. Interest on Base Rate Loans shall be
compounded quarterly.
(b) Default Interest. Notwithstanding any provision in this
----------------
Agreement to contrary, if the Borrower shall default in the payment of the
principal of or interest on any Loan or any other amount becoming due hereunder
on its due date, then the Borrower shall, on demand from the Administrative
Agent, thereafter pay interest on all Loans at a rate that is four percent
(4.00%) per annum above the rates of interest otherwise payable on all the Loans
from the date such payment is due to the date such payment default is either
cured or waived in writing by the Requisite Lenders. If any other Event of
Default shall occur and be continuing, then the Borrower shall, on demand,
thereafter pay interest on all the Loans at a rate that is two percent (2.00%)
per annum above the rates of interest otherwise payable on such Loans from the
-22-
<PAGE>
date of the occurrence of such Event of Default until the date such Event of
Default has been cured or waived in writing by the Requisite Lenders; provided,
--------
that in the event that an Event of Default described in the first sentence of
this clause (b) shall occur at any time that a Default described in this
sentence has occurred and is continuing, then the rate of interest described in
the first sentence of this clause (b) shall apply.
SECTION 2.06. Conversion or Continuation. (a) Subject to the
--------------------------
provisions of Section 2.07, on any Payment Date or Interest Payment Date, as
------------
applicable, each Borrower shall have the option (i) to convert any of its
outstanding Loans, from Base Rate Loans to LIBOR Loans; (ii) to convert any of
its outstanding Loans from LIBOR Loans to Base Rate Loans; and (iii) to continue
any portion of such LIBOR Loans as LIBOR Loans; provided, however, that no
-------- -------
outstanding Loans may be converted into, or continued as, LIBOR Loans when any
Default or Event of Default has occurred and is continuing.
(b) Whenever a Borrower elects to convert or continue Loans under
this Section 2.06, such Borrower shall deliver to the Administrative Agent a
------------
written notice substantially in the form of that attached hereto as Exhibit H-2
-----------
(a "Notice of Conversion/ Continuation"), signed by an authorized officer of
such Borrower (i) no later than 10:00 a.m. (New York time) three (3) Business
Days in advance of the requested conversion date, in the case of a conversion
into Base Rate Loans, and (ii) no later than 10:00 a.m (New York time) three (3)
Business Days in advance of the requested conversion or continuation date, in
the case of a conversion into, or continuation of, LIBOR Loans. The Notice of
Conversion/Continuation shall specify (1) the conversion or continuation date
(which shall be a Business Day), (2) the amount and type of the Loans to be
converted or continued, (3) the nature of the requested conversion or
continuation, and (4) in the case of a conversion into, or continuation of,
LIBOR Loans, the requested Interest Period. Promptly after receipt of a Notice
of Conversion/Continuation pursuant to this Section 2.06(b), the Administrative
---------------
Agent shall notify the Lenders by telecopy, telephone or other similar form of
transmission, of the requested conversion or continuation. In the event that a
Borrower should fail to provide a Notice of Conversion/Continuation with respect
to any LIBOR Loans as provided above, such Loans shall, on the last day of the
Interest Period with respect to such Loans, convert to Base Rate Loans.
(c) Any Notice of Conversion/Continuation for conversion to, or
continuation of, Loans made pursuant to this Section 2.06 shall be irrevocable
------------
and the applicable Borrower shall be bound to convert or continue in accordance
therewith.
SECTION 2.07. Special Provisions Governing LIBOR Loans.
----------------------------------------
Notwithstanding any other provisions to the contrary contained in this
Agreement, the following provisions shall govern with respect to LIBOR Loans as
to the matters covered:
(a) Determination of Interest Period. By giving notice as set forth
--------------------------------
in Section 2.06(b), a Borrower shall have the option, subject to the other
---------------
provisions of this Section 2.07, to specify whether the Interest Period for such
------------
LIBOR Loan shall be a one, three or six month period. The determination of
Interest Periods shall be subject to the following provisions:
-23-
<PAGE>
(i) In the case of immediately successive Interest Periods, each
successive Interest Period shall commence on the day on which the next
preceding Interest Period expires.
(ii) If any Interest Period would otherwise expire on a day which is
not a Business Day, the Interest Period shall be extended to expire on the
next succeeding Business Day; provided, however, that if the next
-------- -------
succeeding Business Day occurs in the following calendar month, then such
Interest Period shall expire on the immediately preceding Business Day.
(iii) A Borrower may not select an Interest Period for any LIBOR
Loan, which Interest Period expires later than December 31, 2006.
(iv) A Borrower may not select an Interest Period with respect to any
portion of such Borrower's Loans which extends beyond any date on which the
outstanding principal amount of the Loans are scheduled to be reduced
pursuant to Section 2.08(b) unless, after giving effect to such selection,
---------------
the portion of the Loans not subject to Interest Periods ending after any
such date is equal to or greater than any amount of such scheduled
principal payments of Loans.
(v) There shall be no more than six (6) Interest Periods in effect
at any one time.
(b) Determination of Interest Rate. As soon as practicable after
------------------------------
10:00 a.m. (New York time) on the LIBOR Interest Rate Determination Date, the
Administrative Agent shall determine (which determination shall, absent manifest
error, be presumptively correct) the interest rate for the LIBOR Loans for which
an interest rate is then being determined and shall promptly give notice thereof
(in writing or by telephone confirmed in writing) to the applicable Borrower. In
the event that on any LIBOR Interest Rate Determination Date the Administrative
Agent shall have determined (which determination shall, absent manifest error,
be presumptively correct and binding upon all parties) that:
(i) adequate and fair means do not exist for ascertaining the
applicable interest rates by reference to which the LIBO Rate then being
determined is to be fixed; or
(ii) the LIBO Rate for any Interest Period for such Loans will not
adequately reflect the cost to any Lender of making, funding or maintaining
its LIBOR Loan for such Interest Period, the Administrative Agent shall
forthwith so notify the applicable Borrower and the Lender, whereupon:
(A) each LIBOR Loan will automatically, on the last day of the then
existing Interest Period therefor, convert into a Base Rate
Loan; and
(B) the obligation of the Lenders to make, or to convert Loans into,
LIBOR Loans shall be suspended until the Administrative Agent
shall notify the applicable Borrower and the Lenders that the
circumstances causing such suspension no longer exist.
-24-
<PAGE>
(c) Illegality. Notwithstanding any other provision of this
----------
Agreement, if any Lender shall notify the Administrative Agent that the
introduction of or any change in or in the interpretation of any law or
regulation makes it unlawful, or any central bank or other Governmental
Authority asserts that it is unlawful, for any Lender to perform its obligations
hereunder to make LIBOR Loans or to fund or maintain LIBOR Loans hereunder, (i)
the obligation of the Lenders to make, or to convert Loans into or to continue
Loans as, LIBOR Loans shall be suspended until the Administrative Agent shall
notify the Borrowers and the Lenders that the circumstances causing such
suspension no longer exist and (ii) the Borrowers shall on the termination of
the Interest Period then applicable thereto, or on such earlier date required by
law, prepay in full all LIBOR Loans then outstanding together with accrued
interest thereon, or convert all such LIBOR Loans into Base Rate Loans in
accordance with Section 2.06.
------------
(d) Compensation. In addition to such amounts as are required to be
------------
paid by the Borrowers pursuant to the other Sections of this Article II, the
----------
Borrowers agree to compensate any Lender for all losses, expenses and
liabilities, including, without limitation, any loss or expense incurred by
reason of the liquidation or reemployment of deposits or other funds acquired by
such Lender to fund or maintain such Lender's LIBOR Loans to the Borrowers,
which such Lender may sustain (i) if for any reason a funding of any LIBOR Loans
does not occur on a date specified therefor in a Notice of Borrowing or Notice
of Conversion/Continuation, or a successive Interest Period does not commence
after notice therefor is given pursuant to Section 2.06, (ii) if any voluntary
------------
or mandatory prepayment of any LIBOR Loans occurs for any reason on a date which
is not the last scheduled day of an Interest Period, (iii) as a consequence of
any required conversion of LIBOR Loans to Base Rate Loans as a result of any of
the events indicated in Section 2.07(d), or (iv) as a consequence of any other
---------------
failure by a Borrower to repay LIBOR Loans when required by the terms of this
Agreement.
(e) Booking of LIBOR Loans. The Lenders may make, carry or transfer
----------------------
LIBOR Loans at, to, or for the account of, any of their respective branch
offices or the office of any of their respective affiliates.
(f) LIBOR Loans After Event of Default. Unless the Requisite Lenders
----------------------------------
shall otherwise agree, after the occurrence of and during the continuance of any
Event of Default, the Borrowers may not borrow Loans as LIBOR Loans or elect to
have any Loans continued as, or converted to, LIBOR Loans after the expiration
of any Interest Period then in effect for such Loans.
SECTION 2.08. Scheduled Payments. (a) Interest on each LIBOR Loan
------------------
shall be payable in arrears on the last day of each LIBOR Interest Payment Date
for such LIBOR Loan and upon payment in full thereof. Interest on each Base Rate
Loan shall be payable quarterly in arrears on each Payment Date and upon payment
in full thereof. After the occurrence and during the continuance of any Event of
Default, interest shall be payable on demand.
(b) Subject to the provisions of Sections 2.09 and 9.02, the
------------- ----
outstanding principal balance of the Loans shall be payable in twenty-four (24)
quarterly installments commencing on March 31, 2001, and continuing on the last
day of each June, September, December and March thereafter through and including
December 31, 2006 with (i) the first four of such quarterly principal payments
due hereunder to be in an amount equal to 2.50% of the Aggregate Principal
Amount, (ii) the fifth through the twelfth principal payments due hereunder to
be in an amount
-25-
<PAGE>
equal to 3.75% of the Aggregate Principal Amount, and (iii) the remaining
principal payments due hereunder to be in an amount equal to 5.00% of the
Aggregate Principal Amount.
(c) Payments made with respect to the Loans by each Borrower shall be
applied by the Administrative Agent first to unpaid and accrued fees and
interest and then to the outstanding unpaid principal balance of the Loans of
such Borrower; provided, however, that on and after the occurrence and during
-------- -------
the continuance of an Event of Default, any payments received by the
Administrative Agent shall be applied to the Obligations in any manner the
Requisite Lenders shall determine.
SECTION 2.09. Optional and Mandatory Prepayment of Loans; Optional
----------------------------------------------------
and Mandatory Reduction of Commitment Amount. (a) Provided that no Event of
- --------------------------------------------
Default has occurred and is continuing, the Borrowers shall have the right upon
the provision of (1) twenty-five days' prior written notice on or prior to the
six month anniversary of the Closing Date to the Administrative Agent, and (2)
forty-five days' prior written notice to the Administrative Agent at any time
thereafter, which notice, once given, shall be irrevocable, on any Payment Date
with respect to any Base Rate Loans and on the last day of the applicable
Interest Period with respect to any LIBOR Loans, to prepay the outstanding
principal thereof in a minimum principal amount of $500,000, together in each
case with accrued interest thereon and the aggregate Prepayment Premium
applicable thereto as determined on the date of such prepayment; provided that
--------
no Prepayment Premium shall be applicable to any voluntary prepayments hereunder
which are made (i) in connection with a refinancing of the Loans by a group of
lenders led by the Administrative Agent or the Collateral Agent, (ii) within six
month after the Closing Date, solely to the extent that such prepayments were
made with the proceeds of the issuance of high-yield Debt or Equity Interests of
the Guarantor and do not reduce the outstanding principal balance of the
Obligations below $25,000,000, or (iii) pursuant to Section 2.09(e).
---------------
(b) Upon the occurrence of any Event of Loss with respect to any item
of Collateral that is not repaired or replaced (other than an item of Collateral
no longer used or useful in the Business), the Borrowers shall make a principal
prepayment in an amount equal to the replacement value of the item of Collateral
which suffered the Event of Loss, together with accrued interest thereon (but
without the Prepayment Premium).
(c) Simultaneously with the delivery of the financial statements
required to be delivered under Section 5.06(a) for the fiscal years ending
---------------
December 31, 2000 and thereafter, the Borrowers shall immediately prepay the
Loans by an amount equal to fifty percent (50%) of Excess Cash Flow, if any, as
determined for such fiscal year, without Prepayment Premium; provided, however,
that such prepayment shall not be required with respect to any fiscal year in
which the Borrowers maintained throughout such fiscal year an Operating Leverage
Ratio of less than 5.0 to 1.0.
(d) The Borrowers shall prepay the Loans in a principal amount equal
to (i) all of the net proceeds of any sales of assets of any Borrower other than
sales to another Borrower or otherwise made in the ordinary course of business,
which proceeds are not reinvested within 180 days after receipt thereof in
replacement assets, plus accrued interest thereon and the applicable Prepayment
Premium, and (ii) the proceeds of insurance policies and condemnation awards
paid to any Borrower if the proceeds thereof are not applied within 180 days
after such payment to the
-26-
<PAGE>
replacement, reconstruction or restoration of equipment which was the subject of
the insurance loss or award, plus accrued interest thereon without any
Prepayment Premium.
(e) The Borrowers shall prepay the Loans in a principal amount equal
to one-half of the net cash proceeds received by the Guarantor from the issuance
of high-yield Debt or Equity Interests, when such proceeds first equal or exceed
an aggregate amount as measured from the Closing Date of at least $25,000,000
but not in excess of an amount that would reduce the outstanding principal
balance of the Loans below $25,000,000, plus accrued interest thereon without
any Prepayment Penalty. Such prepayment shall be required only once.
SECTION 2.10. Application of Prepayments. Each prepayment of the
--------------------------
Loans made by the Borrowers under this Agreement, whether voluntary or
mandatory, shall be applied to unpaid principal installments of the Loans in the
inverse order of their respective maturities.
SECTION 2.11. Fees. (a) The Borrowers shall be jointly and
----
severally liable to pay the Administrative Agent for the account of the Lenders
a nonutilization fee payable on each Payment Date occurring during the period
commencing on the Funding Date through and including the Payment Date
immediately after the Commitment Termination Date based upon the applicable per
annum rate set forth below (calculated based on a 365-day year and payable
quarterly) on the undrawn portion of the Commitment Amount during the quarterly
period ending on such Payment Date:
Drawn Portion of Commitment Amount Per Annum Fee
---------------------------------- -------------
Less than $23,100,000 1.50%
Greater than or equal to $23,100,000 1.25%
and less than or equal to $46,200,000
Greater than $46,200,000 0.75%
(b) The Borrowers shall be jointly and severally liable to pay the
Administrative Agent each of the fees set forth in a fee letter (the "Fee
---
Letter") from the Administrative Agent dated September 8, 1999 addressed to the
- ------
Borrowers at the times and in the amounts so specified in such letter.
(c) All fees once paid shall be nonrefundable.
SECTION 2.12. Borrower Payments, etc. All payments by the Borrowers
-----------------------
hereunder and under the Notes shall be made to the Administrative Agent by wire
transfer or other electronic payment method to the Payment Account, or to such
bank account as the Administrative Agent may designate, for the account of the
Lenders in Dollars in immediately available funds by 12:00 p.m., New York time,
on the date on which such payment shall be due. The Administrative Agent will
promptly thereafter cause to be distributed like funds relating to the payment
of principal or interest or other fees ratably (other than amounts payable
pursuant to Section 2.14) to each Lender in accordance with Section 10.07
------------ -------------
hereof. Interest in respect of any Loan hereunder shall accrue from the day
such Loan is made up to and including the day prior to the date on which such
Loan is paid in full. Payments received after 12:00 p.m. shall not be
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<PAGE>
given credit until the next Business Day, and the Borrowers shall be liable for
interest, if any, accruing on such payment until the next Business Day.
SECTION 2.13. Maximum Lawful Interest Rate. Notwithstanding any
----------------------------
provision contained herein, the total liability of the Borrowers for payment of
interest pursuant hereto and the Notes, including any other charges or other
amounts, to the extent such charges and other amounts are deemed to be interest,
shall not exceed the maximum amount of such interest permitted by law to be
charged, collected, or received from the Borrowers (the "Maximum Rate"). If any
------------
payments by any Borrower for the account of any Lender include interest in
excess of the Maximum Rate, such Lender shall apply such excess to the reduction
of the unpaid principal amount owing by such Borrower, or if none is due, such
excess shall be returned to such Borrower.
SECTION 2.14. Funding Issues. (a) Increased Costs. If, due to
-------------- ---------------
either (i) the introduction after the date hereof of, or any change after the
date hereof in or in the interpretation of, any applicable law, rule or
regulation by any Governmental Authority, central bank or comparable agency
charged with the interpretation or administration thereof or (ii) compliance by
any Lender after the date hereof with any final request or final directive
issued after the date hereof (whether or not having the force of law) by any
such Governmental Authority, central bank or comparable agency, and, as a result
of any of the events set forth in the above clauses (i) and (ii), (x) there
shall be any increase in the cost to such Lender in maintaining its Commitment
under this Agreement or funding or maintaining its Pro Rata Share of the Loans
under this Agreement, or (y) any Lender is subjected to any charge or
withholding on its obligations hereunder, or changes in the basis of taxation of
payments to any Lender in connection with any of the foregoing (except for
changes in the rate of tax on overall net income of any Lender) (collectively,
"Increased Costs"), then the Borrowers shall, from time to time, pay, to the
---------------
Administrative Agent for the benefit of such Lender within 15 days after such
Lender shall have provided notice to the Administrative Agent (and the
Administrative Agent shall have provided notice to the Borrowers) of such
Increased Cost, an amount sufficient to compensate such Lender for such
Increased Cost, as provided herein. A certificate setting forth in reasonable
detail the computation of the amount of such Increased Cost (which increase in
cost shall be determined by such Lender's reasonable allocation of the aggregate
of such cost increases resulting from such event), submitted to the Borrowers by
such Lender, shall be conclusive and binding for all purposes, absent manifest
error.
(b) Increased Capital. If any Lender which is subject to minimum
-----------------
capital requirements determines that compliance by such Lender, with any
guideline or request from any central bank or other Governmental Authority
(whether or not having the force of law) affects or would affect the amount of
capital required or expected to be maintained by such Lender, or any corporation
controlling such Lender, and such Lender reasonably determines that the amount
of such capital is increased by or based upon any commitment to lend hereunder
or making or maintaining Loans, or other commitments of this type, then, upon
demand by such Person, the Borrowers agree to, within five (5) days of such
demand, pay to such Person, from time to time as specified by such Person,
additional amounts sufficient to compensate such Person in the light of such
circumstances, to the extent that such Person reasonably determines such
increase in capital to be allocable to such Person's commitment or maintenance
of Loans hereunder. A
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<PAGE>
certificate as to the amount of such increased cost, submitted to the Borrowers
by the applicable Person shall, absent manifest error, be conclusive and binding
on the Borrowers for all purposes.
SECTION 2.15. Joint and Several Liability; Contribution. (a)
-----------------------------------------
Notwithstanding anything to the contrary in this Agreement or the other Loan
Documents, all payment and performance Obligations arising under this Agreement
and the other Loan Documents shall be joint and several obligations of each
Borrower secured by all the Borrowers' Collateral. The Administrative Agent and
the Collateral Agent may apply any portion of any Borrower's Collateral to
satisfy any of the Obligations of any other Borrower.
(b) Contribution and Indemnification between the Borrowers. To the
------------------------------------------------------
extent that any Borrower shall, as a result of the operation of Section 2.15,
------------
pay (whether directly or by the application of proceeds of Collateral owned by
such Borrower) any Obligation of any other Borrower under the Loan Documents
(such payment being referred to as an "Accommodation Payment"), then such
Borrower shall be entitled to contribution and indemnification from, and be
reimbursed by each other Borrower, in an amount equal to a fraction of such
Accommodation Payment, the numerator of which fraction is such other Borrower's
"Allocable Amount" (as defined below) and the denominator of which is the sum of
the Allocable Amounts of all the Borrowers. As of any date of determination, the
"Allocable Amount" of each Borrower shall be equal to the maximum amount of
liability for Accommodation Payments which could be asserted against such
Borrower hereunder without (a) rendering such Borrower "insolvent" within the
meaning of Section 101(32) of the United States Bankruptcy Code (11 U.S.C.
(S)101 et. seq) (the "Bankruptcy Code"), Section 2 of the Uniform Fraudulent
---------------
Transfer Act (the "UFTA") or Section 2 of the Uniform Fraudulent Conveyance Act
----
(the "UFCA"), (ii) leaving such Borrower with unreasonably small capital or
----
assets, within the meaning of Section 548 of the Bankruptcy Code, Section 4 of
the UFTA, or Section 5 of the UFCA, or (iii) leaving such Borrower unable to pay
its debts as they become due within the meaning of Section 548 of the Bankruptcy
Code or Section 4 of the UFTA, or Section 5 of the UFCA. All rights and claims
of subrogation, contribution, indemnification and reimbursement under this
section shall be subordinate in right of payment to the prior payment in full of
the Obligations. Each Borrower agrees that any extension, forbearance or
amendment, or any acceptance, release or substitution of security, or any
impairment or suspension of the Administrative Agent's, the Collateral Agent's
or the Lenders' remedies or rights against any other Borrower or the cessation
of the liability of any other Borrower for any reason other than full and
indefeasible satisfaction of all Obligations shall not in any way affect the
liability of such Borrower. Each Borrower has provided itself of the means of
remaining informed of the financial condition of each other Borrower, and waives
any right to require any Lender or the Administrative Agent to keep it informed
of the financial condition of any other Borrower. The provisions of this section
shall, to the extent expressly inconsistent with any provision in any Loan
Document, supersede such inconsistent provision.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Each Borrower represents and warrants to the Administrative Agent, the
Collateral Agent and the Lenders that:
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<PAGE>
SECTION 3.01. Organization; Powers. (a) Such Borrower (i) is a
--------------------
corporation or limited liability company duly organized, validly existing and in
good standing under the laws of its jurisdiction of organization and (ii) is
qualified to do business in the jurisdiction in which its principal place of
business is located and in every other jurisdiction where such qualification is
necessary unless the failure to be so qualified would not reasonably be expected
to have a Material Adverse Effect on such Borrower;
(b) such Borrower has the power and authority to own its properties,
to carry on its business as now conducted; and
(c) such Borrower has the power and authority to execute and deliver
and perform this Agreement and the other Loan Documents to which it is a party,
to borrow hereunder, and will have the power to execute and deliver any
Mortgages and Collateral Assignments of Leases or other instruments to be
delivered by it subsequent to the date hereof.
SECTION 3.02. Corporate Authorization. The execution, delivery and
-----------------------
performance of this Agreement and the other Loan Documents to which such
Borrower is a party, and the Loans hereunder:
(a) have been duly authorized by such Borrower's Board of Directors
or managers and, if necessary, such Borrower's stockholders or members;
(b) (1) do not violate (i) any existing provision of law applicable
to such Borrower and not immaterial to its business, (ii) such Borrower's
Certificate or Articles of Incorporation or other organizational documents, as
the case may be, or (iii) any applicable order of any court or other
governmental agency, and (2) do not conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under any
indenture, agreement for borrowed money, bond, note or other similar instrument
or any other material agreement to which such Borrower is a party or by which
such Borrower or any of such Borrower's property is bound;
(c) do not result in the creation or imposition of any Lien of any
nature whatsoever upon any property or assets of such Borrower other than the
Liens granted pursuant to this Loan Agreement or the other Loan Documents;
(d) constitute legal, valid and binding obligations of such Borrower,
enforceable against such Borrower in accordance with their respective terms; and
(e) do not, as of the date of execution hereof, require any
governmental consent, filing, registration or approval except as set forth on
Schedule 3.02.
- -------------
SECTION 3.03. Financial Statements. The Borrowers have furnished to
--------------------
the Administrative Agent and the Lenders the management prepared consolidated
financial statements of the Guarantor dated as of June 30, 1999 which statements
are attached hereto as Exhibit I (collectively, the "Financials"). The
--------- ----------
Financials have been prepared in accordance with GAAP applied on a basis
consistent with that of preceding periods and are complete and correct in all
material respects. As of the date of the Financials, (a) the Financials fairly
represent the Guarantor's financial position and results of operations; and (b)
there are no omissions from the
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<PAGE>
Financials or any other facts or circumstances not reflected in the Financials
which are or may be material according to GAAP.
SECTION 3.04. No Material Adverse Change. There has been no material
--------------------------
adverse change in the condition (financial or otherwise operations or properties
of such Borrower since the date of the Financials.
SECTION 3.05. Litigation. Except as set forth on Schedule 3.05
---------- -------------
hereto, there are no actions, suits or proceedings at law or in equity or by or
before any Governmental Authority now pending or, to the knowledge of such
Borrower against or affecting such Borrower or any property or rights of such
Borrower as to which there is a reasonable possibility of an adverse
determination and which, if adversely determined, would individually or in the
aggregate materially impair the right of any Borrower to carry on business
substantially as now being conducted or as presently contemplated or would
result in any Material Adverse Effect.
SECTION 3.06. Tax Returns. Except as set forth on Schedule 3.06
----------- -------------
hereto, such Borrower has filed or caused to be filed all Federal, state and
local tax returns which are required to be filed and has paid or caused to be
paid all taxes as shown on such returns or on any assessment received by it to
the extent that such taxes have become due, except such taxes the amount,
applicability or validity of which are being contested in good faith by
appropriate proceedings and with respect to which such Borrower shall have set
aside on its books adequate reserves with respect to such taxes as are required
by GAAP.
SECTION 3.07. No Defaults. Such Borrower is not in default (i) with
-----------
respect to any judgment, writ, injunction, decree, rule or regulation of any
Governmental Authority which is likely to have a Material Adverse Effect, or
(ii) in the performance, observance or fulfillment of any of the obligations,
covenants or conditions contained in any material agreement or instrument to
which such Borrower is a party or by which any of its assets are bound, which is
likely to have a Material Adverse Effect.
SECTION 3.08. Properties. Except as set forth on Schedule 3.08
---------- -------------
hereto, such Borrower has good and marketable title to all its material
properties and assets and all Collateral of such Borrower is free and clear of
all Liens of any nature whatsoever, except Permitted Liens.
SECTION 3.09. Licenses, Material Agreements, Intellectual Property.
----------------------------------------------------
(a) Such Borrower has obtained all Governmental Approvals and approvals of any
Governmental Authority having jurisdiction over such Borrower, which
Governmental Approvals and approvals are necessary or appropriate for the
construction and operation of the Systems as are presently operating. Such
Governmental Approvals and approvals are correctly listed on Schedule 3.09(a)
----------------
and constitute the only material licenses, permits or franchises or other
Governmental Approvals of any Governmental Authority required in connection with
the Systems as are presently operating. All Governmental Approvals of such
Borrower are in full force and effect, are duly issued in the name of, or
validly assigned to, such Borrower and such Borrower has the power and authority
to operate thereunder.
(b) Schedule 3.09(b) accurately and completely lists all material
----------------
agreements to which such Borrower is a party, including, without limitation, all
purchase agreements, construction contracts, right of way or right of occupancy
agreements, lease agreements,
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<PAGE>
consulting, employment, management and related agreements. All of the foregoing
agreements are valid, subsisting and in full force and effect and none of such
Borrower, or, to the best of such Borrower's knowledge and belief, any other
parties, are in material default thereunder. Such Borrower has given true and
complete copies of all such agreements to the Administrative Agent and the
Lenders.
(c) Such Borrower possesses or is applying for all the patents,
trademarks, service marks, trade names, copyrights and licenses, and all rights
with respect to the foregoing, necessary for the conduct of its business as
presently conducted without any known conflict with the rights of others.
Schedule 3.09(c) accurately and completely lists all such rights.
- ----------------
SECTION 3.10. Compliance With Laws. Except as disclosed on Schedule
-------------------- --------
3.10, the operations of such Borrower comply in all material respects with all
- ----
applicable federal, state or local laws and regulations, including
environmental, health and safety statutes and regulations. None of the
operations of such Borrower is subject to any judicial or administrative
proceeding alleging the violation of any federal, state or local environmental,
health or safety statute or regulation. None of the operations of such Borrower
is the subject of federal or state investigation evaluating whether any Remedial
Action is needed to respond to a Release. Except as disclosed on Schedule 3.10,
-------------
such Borrower has not filed any notice under any federal or state law indicating
past or present treatment, storage or disposal of a hazardous waste or reporting
a Release. Except as disclosed on Schedule 3.10, such Borrower has no
-------------
contingent liability of which such Borrower has knowledge or reasonably should
have knowledge in connection with any Release.
SECTION 3.11. ERISA. None of such Borrower or any ERISA Affiliate of
-----
such Borrower maintains or contributes to any Plan other than a Plan listed on
Schedule 3.11 hereto. Each Plan which is intended to be qualified under Section
- -------------
401(a) of the IRC has been determined by the IRS to be so qualified, and each
trust related to any such Plan has been determined to be exempt from federal
income tax under Section 501(a) of the IRC. Except as disclosed on Schedule
--------
3.11, none of such Borrower or any ERISA Affiliate maintains or contributes to
- ----
any employee welfare benefit plan within the meaning of Section 3(1) of ERISA
which provides benefits to employees after termination of employment other than
as required by Section 601 of ERISA. None of such Borrower or any ERISA
Affiliate has breached any of the responsibilities, obligations or duties
imposed on it by ERISA or regulations promulgated thereunder with respect to any
Plan. No Plan has incurred any accumulated funding deficiency (as defined in
Section 302(a)(2) of ERISA and Section 412(a) of the IRC), whether waived or not
waived. None of such Borrower or any ERISA Affiliate nor any fiduciary of any
Plan which is not a Multiemployer Plan (i) has engaged in a nonexempt
"prohibited transaction" described in Section 406 of ERISA or Section 4975 of
the IRC or (ii) has taken or failed to take any action which would constitute or
result in a Termination Event. None of such Borrower or any ERISA Affiliate has
incurred any liability to the PBGC which remains outstanding other than the
payment of premiums, and there are no premium payments which have become due
which are unpaid. Schedule B to the most recent annual report filed with the
IRS with respect to each Plan with respect to which a Schedule B is required to
be filed is complete and accurate. Since the date of each such Schedule B,
there has been no adverse change in the funding status or financial condition of
the Plan relating to such Schedule B. None of such Borrower or any ERISA
Affiliate has (i) failed to make a required contribution or payment to a
Multiemployer Plan or (ii)
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<PAGE>
made a complete or partial withdrawal under Sections 4203 or 4205 of ERISA from
a Multiemployer Plan. None of such Borrower or any ERISA Affiliate has failed to
make a required installment or any other required payment under Section 412 of
the IRC on or before the due date for such installment or other payment. None of
such Borrower or any ERISA Affiliate is required to provide security to a Plan
under Section 401(a)(29) of the IRC due to a Plan amendment that results in an
increase in current liability for the plan year.
SECTION 3.12. Investment Company Act; Public Utility Holding Company
------------------------------------------------------
Act. Such Borrower is not an "investment company" as that term is defined in,
- ---
and is not otherwise subject to regulation under, the Investment Company Act of
1940. Such Borrower is not a "holding company" as that term is defined in, and
is not otherwise subject to regulation under, the Public Utility Holding Company
Act of 1935.
SECTION 3.13. Federal Reserve Regulations. Such Borrower is not
---------------------------
engaged principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying any margin stock
(within the meaning of Regulation G of the Board of Governors of the Federal
Reserve System of the United States), and no part of the proceeds of the Loans
made to such Borrower will be used to purchase or carry any such margin stock or
to extend credit to others for the purpose of purchasing or carrying any such
margin stock or for any purpose that violates, or is inconsistent with, the
provisions of Regulation T, U or X of said Board of Governors.
SECTION 3.14. Collateral. The security interests granted by Article
---------- -------
VIII hereof, together with those granted pursuant to the Existing Agreement and
- ----
accompanying financing statements, when duly filed in the offices and
jurisdictions set forth on Schedule 3.14 hereof, create valid and perfected
-------------
first priority Liens in and to the Collateral of such Borrower, enforceable
against other Persons in all jurisdictions securing the payment, as applicable,
of the Obligations hereunder. Upon filing such financing statements, to the
extent that the filing of a financing statement is sufficient to perfect a
security interest, no further action is required to perfect the Liens of the
Collateral Agent in favor of the Lenders in the Collateral of such Borrower
described in Section 8.01.
------------
SECTION 3.15. Chief Place of Business. As of the Closing Date, the
-----------------------
chief executive office and principal place of business of such Borrower is as
set forth on Schedule 3.15. If any change in any such location occurs, such
-------------
Borrower shall notify the Administrative Agent and the Collateral Agent thereof
not later than ten days after the occurrence thereof. As of the date of
execution hereof, the books and records of such Borrower and all chattel paper
and all records of account are located at the principal place of business or
chief executive office of such Borrower and if any change in such location
occurs, such Borrower shall notify the Administrative Agent and the Collateral
Agent thereof not later than ten days after the occurrence thereof.
SECTION 3.16. Other Corporate Names. Except as set forth on Schedule
--------------------- --------
3.16, such Borrower has not used and does not now use and will not use any
- ----
corporate or fictitious name.
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<PAGE>
SECTION 3.17. Insurance. Schedule 3.17 contains a description of all
--------- -------------
insurance which such Borrower maintains or has maintained on its behalf. All of
such insurance is in full force and effect.
SECTION 3.18. Milestone Plan. The Milestone Plan represents good faith
--------------
projections of future financial performance of the Borrowers for the periods set
forth therein. Such document has been prepared on the basis of the assumptions
set forth therein, which the Borrowers believe are reasonable in light of
current and reasonably foreseeable business conditions.
SECTION 3.19. Capitalization and Subsidiaries. The classes of Equity
-------------------------------
Interests, number of authorized shares, number of outstanding shares and par
values or other designations of the Equity Interests or other equity securities
or beneficial interests of such Borrower and the Guarantor are correctly set
forth on Schedule 3.19. All the outstanding shares of Equity Interests or other
-------------
equity securities or beneficial interests of such Borrower and the Guarantor are
duly and validly issued, fully paid and nonassessable, and none of such issued
and outstanding shares, equity securities or beneficial interests has been
issued in violation of, or is subject to, any preemptive or subscription rights.
Except as set forth on Schedule 3.19, there are no: (A) outstanding shares of
-------------
Equity Interests or other equity securities or beneficial interests or other
securities convertible into or exchangeable for shares of Equity Interests or
other equity securities or other beneficial interests of such Borrower or the
Guarantor, (B) outstanding rights of subscription, warrants, calls, options,
contracts or other agreements of any kind, issued, made or granted to or with
any Person under which such Borrower or the Guarantor may be obligated to issue,
sell, purchase, retire or redeem or otherwise acquire or dispose of any shares
of Equity Interests or other equity securities or beneficial interests of such
Borrower or the Guarantor, or (C) Subsidiaries of such Borrower or the
Guarantor. Except as set forth on Schedule 3.19, the Guarantor beneficially
-------------
owns all of the equity interests of such Borrower.
SECTION 3.20. Real Property, Leases and Easements. Such Borrower
-----------------------------------
owns the real property described on Schedule 3.20. Set forth on Schedule 3.20
------------- -------------
is a list of (i) all real property leased by such Borrower (the "Leased Real
-----------
Property") and (ii) all easements, rights of way, rights of occupancy, licenses
- --------
and similar rights with respect to real property granted to such Borrower not
otherwise disclosed to the Collateral Agent and the Lenders on a title report
delivered to the Collateral Agent and the Lenders pursuant to the terms hereof
(together with all easements, rights of way, rights of occupancy, licenses and
similar rights with respect to real property granted to such Borrower which are
so disclosed, collectively, the "Easements"). Also set forth on Schedule 3.20 is
--------- -------------
a street address of the real property and Leased Real Property locations
described above, including a description of such properties' current use.
Except as set forth in Schedule 3.20, such Borrower's interests in the owned
-------------
real property, the Leased Real Property and the Easements are sufficient in
order for such Borrower to conduct its business and operations as presently
conducted.
SECTION 3.21. Solvency. After giving effect to any Loans made to
--------
such Borrower hereunder, the disbursement of the proceeds of such Loans pursuant
to such Borrower's instructions and the execution, delivery and performance of
each of the Loan Documents and transactions contemplated thereby, such Borrower
is Solvent and is not contemplating either the filing of a petition by it under
any state or federal bankruptcy or
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<PAGE>
insolvency laws or the liquidation of all or a substantial portion of its
property, and has no knowledge of any Person contemplating the filing of any
such petition against such Borrower.
SECTION 3.22. Brokers, etc. Such Borrower has not dealt with any
-------------
broker, finder, commission agent or other similar Person in connection with the
Loans or the transactions being effected contemporaneously with this Agreement
and such Borrower covenants and agrees to indemnify and hold harmless the
Administrative Agent, the Collateral Agent and the Lenders from and against, any
broker's fee, finder's fee or commission in connection with such transactions.
SECTION 3.23. No Material Misstatements. Neither any report, financial
-------------------------
statement, notice, certificate, exhibit or schedule furnished by or on behalf of
such Borrower to the Administrative Agent, the Collateral Agent or any Lender in
connection with the negotiation of this Agreement and the other Loan Documents
or included herein or therein, nor any other information required to be
furnished pursuant to the provisions of Article V hereof, contains any material
---------
misstatement of fact or omits to state any material fact necessary to make the
statements therein not materially misleading.
SECTION 3.24. Year 2000 Issues. Each Borrower has made a full and
----------------
complete assessment of the Year 2000 Issues and has a realistic and achievable
program for remediating the Year 2000 Issues on a timely basis. Based on such
assessment and program, such Borrower does not reasonably anticipate that Year
2000 Issues will have a Material Adverse Effect.
SECTION 3.25. Switching Equipment. The ownership of the Borrowers'
-------------------
Switching Equipment with respect to each market of the Borrowers is correctly
set forth on Schedule 3.25 hereto.
-------------
SECTION 3.26. Campuslink Property. With respect to its customer
-------------------
contracts, Campuslink owns or possesses a security interest in equipment related
to such contracts in the locations set forth on Schedule 3.26 hereto.
-------------
ARTICLE IV
CONDITIONS FOR LOANS
The obligations of each Lender to make Loans hereunder are subject to
the accuracy, as of the Funding Date and as of the date of making of each of the
Loans after the Funding Date, of the representations and warranties contained in
Article III and the other Loan Documents, to the performance by each Borrower of
- -----------
its obligations to be performed hereunder on or before the date of such Loan and
to the satisfaction of the following further conditions:
SECTION 4.01. Conditions Precedent to Initial Loan on or after the
----------------------------------------------------
Closing Date. In the case of the Loans to be made on the Funding Date:
- ------------
(a) All the applicable legal matters incident to this Agreement and
the other Loan Documents shall be reasonably satisfactory to counsel for the
Administrative Agent.
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<PAGE>
(b) The Administrative Agent shall have received payment in full of
the fees set forth in the Fee Letter then due and payable and all the other
documented out-of-pocket costs and expenses of the Administrative Agent and the
Lenders incurred on or prior to the Funding Date, including, without limitation,
reasonable attorneys' and paralegal' fees and expenses and the fees and expenses
incurred in connection with preparation of any environmental audits.
(c) (1) The Administrative Agent and the Collateral Agent shall have
received the following items, in each case in form and substance satisfactory to
the Administrative Agent and the Collateral Agent:
(i) the Financials;
(ii) the Milestone Plan showing in reasonable detail and
specifying any material underlying assumptions, the
Borrowers' anticipated revenues and expenses and projected
statements of cash flow and information with respect to
projected capital expenditures and changes in working
capital over such period;
(iii) certificates substantially in the form of Exhibits J-1
------------
and J-2 hereto, dated the Funding Date or dated the Closing
---
Date and a reaffirmation of such certificate dated the
Funding Date, of the secretaries or assistant secretaries
of each of the Borrowers and the Guarantor, certifying (1)
the names and true signatures of the officers authorized to
sign each Loan Document being signed as of the Closing Date
to which such Borrower or the Guarantor, as applicable, is
a party, (2) the resolutions of the Board of Directors of
such Borrower the Guarantor, as applicable, approving the
transactions contemplated by the Loan Documents to which
each is a party, and (3) such Borrower's or the
Guarantor's, as applicable, bylaws;
(iv) the written opinion of special and regulatory counsel for
the Borrowers and the Guarantor, dated the Funding Date,
addressed to the Administrative Agent , the Collateral
Agent and the Lenders satisfactory to (and containing only
such qualifications and limitations as are satisfactory to)
counsel for the Administrative Agent and the Collateral
Agent, which opinions shall be substantially in the forms
set forth in Exhibits K-1 and K-2 attached hereto;
------------ ---
(v) certificates of appropriate public officials dated not more
than 30 days prior to the Funding Date, as to the legal
existence or qualification, and good standing of each
Borrower and the Guarantor from such Person's jurisdiction
of organization and from the jurisdiction in which such
Person has its principal place of business;
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<PAGE>
(vi) each Borrower's and the Guarantor's Certificate or
Articles of Incorporation, as amended, modified or
supplemented on or prior to the Funding Date, each
certified to be true, correct and complete by the
Secretary of State of the state in which such Person is
organized;
(vii) updated Year 2000 questionnaires executed by each
Borrower;
(viii) the Notes duly executed and delivered by the Borrowers;
(ix) General Reaffirmation and Modification Agreement among the
Guarantor, the Borrowers, the Administrative Agent and the
Collateral Agent;
(x) the Amended and Restated Guaranty, duly executed by the
Guarantor;
(xi) loss payable endorsements substantially in the form of
Exhibit M attached hereto with respect to each Borrower's
---------
insurance policies relating to the Collateral, and
insurance certificates required by Section 5.04(g) from
---------------
nationally recognized insurance brokers with respect to
each Borrower's insurance policies;
(xii) with respect to each Borrower's then existing Collection
Accounts, Restricted Account Agreements substantially in
the form of such agreements executed and delivered
pursuant to the Existing Agreement, copies of which are
attached as Exhibit N hereto, duly executed by the
---------
applicable Borrower and the financial institutions
maintaining the Collection Accounts (except to the extent
previously delivered pursuant to the Existing Agreement);
(xiii) a duly executed Collateral Assignment of Licenses by each
Borrower, together with consents to assignment of licenses
and rights from Persons designated by the Collateral Agent
duly executed by such Persons, including agreements as to
default notices, cure rights, waiver of lien rights,
conveyance of nondisturbance rights and other terms
satisfactory to the Collateral Agent (except to the extent
previously delivered pursuant to the Existing Agreement,
in which case such document shall be supplemented if
necessary);
(xiv) a duly executed Collateral Assignment of Leases by each
Borrower (except to the extent previously delivered
pursuant to the Existing Agreement, in which case such
document shall be supplemented if necessary), together
with consents to assignment (or such other documentation
described in Section 5.22), duly executed by the
------------
appropriate Persons, including agreements as to default
notices, cure rights, waiver of lien rights, conveyance of
nondisturbance
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rights and other terms satisfactory to the Collateral Agent
with respect to those leased properties specified by the
Collateral Agent, together with landlord waivers in the
form of Exhibit D hereto executed by the appropriate
---------
landlord;
(xv) environmental questionnaires or updates of previously
------------
submitted environmental questionnaires executed by each Borrower with respect to
each of its premises described in Section 3.10; and
(xvi) the note payable by Campuslink to the Guarantor in the
original principal amount of $4,000,000, duly pledged by the Guarantor to the
Collateral Agent.
(d) The Collateral Agent shall have satisfactorily completed its
review of any Lucent Purchase Agreement, construction and maintenance contracts,
right of way agreements and interconnection agreements related to the Systems
being financed with the initial Loan made on the Funding Date.
(e) The Collateral Agent shall have received evidence satisfactory to
the Collateral Agent that the Collateral Agent's security interests in the
Collateral have been properly perfected and constitute first and prior security
interests subject only to Permitted Liens, including by means of the filing of
Mortgages, the Collateral Assignment of Licenses, the Collateral Assignment of
Leases, obtaining consents thereto, leasehold mortgages and UCC-1 financing
statements in certain filing and recording offices, and the taking of possession
of stock certificates and other instruments.
(f) The Collateral Agent shall have received evidence satisfactory to
the Collateral Agent, including the results of searches conducted in the
mortgage recording, UCC, tax Lien and judgment filing records in each
appropriate filing office or jurisdiction, that there are no Liens against the
Collateral except Permitted Liens.
(g) The Administrative Agent shall have received evidence
satisfactory to the Administrative Agent that no Borrower has any Debt other
than as described in Section 6.13 and that the holders of any such Debt shall
------------
have executed subordination and standstill agreements satisfactory to the
Administrative Agent.
(h) The Collateral Agent shall have obtained or waived in writing
with respect to each real estate and material equipment lease and each mortgage
of any Borrower relating to the Systems being financed with the initial Loan
made after the Closing Date (i) the right from the applicable lessors and
mortgagees to cure all payment defaults under such leases and mortgages by
making payment directly to the applicable lessors and mortgagees and (ii)
landlord waivers and consents, as the Collateral Agent may require, with respect
to each leased facility.
(i) The Administrative Agent and the Collateral Agent shall have
satisfactorily completed their due diligence investigation of the Borrowers and
the Systems and the Borrowers' other assets, and their respective officers and
directors including, without limitation, environmental reviews, engineering
reviews, review of material agreements of the Borrowers and review of easement
matters.
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(j) All right of way agreements with respect to each System under
construction shall be sufficient to allow full operation of such System and
shall be assignable to the Collateral Agent or its designee.
(k) The Guarantor shall have raised and contributed $60,000,000 in
equity capital to the Borrowers.
SECTION 4.02. Conditions Precedent to All Loans. In the case of each
---------------------------------
Loan hereunder:
(a) The representations and warranties of each Borrower set forth in
Article III or in any other Loan Document shall be true and correct in all
- -----------
material respects on and as of the date of such Loan with the same effect as
though such representations and warranties had been made on and as of such date.
(b) At the time of each such Loan, and after giving effect to such
Loan, each Borrower shall be in compliance with all the terms and provisions set
forth herein on its part to be observed or performed, and no Event of Default or
Default shall have occurred and be continuing.
(c) At the time of each such Loan and after giving effect to each such
Loan, there shall have been no material adverse change in the condition
(financial or otherwise), operations, properties or prospects of any Borrower
since the date of the Financials.
(d) Such Loan, when combined with Loans previously made to the
Borrowers, shall not exceed the Commitment Amount.
(e) All legal matters incident to such Loan and the Loan Documents
shall be satisfactory to counsel for the Administrative Agent and the Collateral
Agent.
(f) The Agent shall have received a Notice of Borrowing for the Loan
and acceptance certificate and invoices required by Section 2.03.
------------
(g) The Collateral Agent shall have first priority Liens on all
personal and real property assets that comprise or relate to each System to be
funded by such Loan, shall have received collateral assignments of all material
third party agreements relating to such Systems, consented to by the applicable
third parties, as requested by the Collateral Agent, and shall have received
evidence that all necessary Governmental Approvals for such System have been
obtained.
(h) The Collateral Agent shall have received copies of such lien
waivers and other acknowledgments from Persons constructing the Systems, any
subcontractors or vendors (including Lucent) with respect to the construction of
the Systems as the Collateral Agent may reasonably request.
(i) All fees and expenses which are due and payable to the
Administrative Agent on or prior to the date of the advance of such Loan shall
have been paid.
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(j) The Lenders shall have satisfactorily completed their review of
any construction and maintenance contracts related to the Systems being financed
with such Loan and the interconnection agreements for each System being financed
with such Loan.
(k) The Collateral Agent shall have obtained or waived in writing with
respect to each real estate and material equipment lease, each mortgage, and
each material third party agreement relating to the Systems being financed with
such Loan (i) the right from the applicable lessors and mortgagees to cure all
payment defaults under such leases and mortgages by making payments directly to
the applicable lessors and mortgagees, (ii) landlord waivers and consents (or
such other documentation described in Section 5.22), as the Collateral Agent may
------------
require, with respect to each leased facility, and (iii) consents to collateral
assignment, as the Collateral Agent may require, with respect to each such
material third party agreement.
(l) If the use of the Loan proceeds are for purposes of financing a
particular System for the first time, the Collateral Agent shall have received
copies of all interconnection agreements, right of way agreements, easement
agreements, real property leases, construction agreements, equipment purchase
agreements, fiber leases, telephone line leases, state and local franchise
agreements and other agreements with municipalities, that in each case relate to
such System.
ARTICLE V
AFFIRMATIVE COVENANTS
Each Borrower covenants and agrees that so long as this Agreement
shall remain in effect, any Commitment hereunder shall be outstanding or any
Obligations hereunder or under any of the other Loan Documents are unpaid,
unless the Requisite Lenders shall have otherwise given prior written consent:
SECTION 5.01. Corporate and Franchise Existence. Such Borrower shall
---------------------------------
preserve and maintain its corporate or limited liability company existence,
rights, franchises, licenses and privileges in its jurisdiction of its
organization, and in all other jurisdictions in which such qualification is
necessary in view of its business and operations and property and preserve,
protect and keep in full force and effect its material rights and its
Governmental Approvals.
SECTION 5.02. Compliance with Laws, Etc. Such Borrower shall comply in
--------------------------
all material respects with all laws and regulations applicable to it, including,
without limitation, Environmental Laws, regulations promulgated by the FCC and
any PUC, and other telecommunications laws and regulations, and all material
contractual obligations applicable to it.
SECTION 5.03. Maintenance of Properties. Such Borrower shall at all
-------------------------
times maintain in good repair, working order and condition, excepting ordinary
wear and tear, all of its properties material to its operations and make all
appropriate repairs, replacements and renewals thereof, in each case consistent
with prudent industry practices and sound business judgment and
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<PAGE>
with respect to the maintenance of machinery and equipment, in compliance with
applicable government regulations, manufacturers' warranty requests and any
licensing requirements.
SECTION 5.04. Insurance. Such Borrower shall at its own expense, with
---------
insurers and with maximum deductibles satisfactory to the Collateral Agent:
(a) keep its insurable properties, including its Telecommunications
Equipment, real property and other tangible Collateral, adequately insured on an
all risk basis for the full replacement value thereof at all times;
(b) maintain in full force and effect, pay all premiums when due in
respect of, and comply with all terms and conditions of the following insurance
coverages for each System:
(i) All Risk Property Insurance. Such Borrower shall maintain
---------------------------
all risk property insurance covering each of its Systems against physical
loss or damage, including but not limited to fire and extended coverage,
collapse, flood, earth movement and comprehensive boiler and machinery
coverage (including electrical and mechanical breakdown). Such insurance
shall cover each and every component of such System and shall not contain
any exclusion for resultant damage caused by faulty workmanship, design or
materials. Coverage shall be written on a replacement cost basis in an
amount acceptable to the Collateral Agent. Such insurance policy shall
contain an agreed amount endorsement waiving any coinsurance penalty; and
(ii) Business Interruption. As an extension of the coverage
---------------------
required under Section 5.04(b)(i), such Borrower shall maintain business
------------------
interruption insurance in an agreed amount equal to twelve (12) months
projected loss of net profits, continuing expenses and debt service
payments of such System and shall contain an agreed amount endorsement
waiving any coinsurance penalty. Contingent business interruption
insurance shall also be included to cover the major suppliers and customers
of the Borrower. Coverage shall be included for expediting expenses in an
amount not less than $15,000,000. Such insurance shall also cover service
interruption. Deductibles shall not exceed thirty (30) days; and
(iii) Comprehensive or Commercial General Liability Insurance.
-------------------------------------------------------
Such Borrower shall maintain comprehensive general liability insurance
written on an occurrence basis with a limit of not less than $1,000,000.
Such coverage shall include, but not be limited to, premises/operations,
explosion, collapse, underground hazards, contractual liability,
independent contractors, products, completed operations, property damage
and personal injury liability. Such insurance shall not exclude coverage
for punitive or exemplary damages where insurable by law; and
(iv) Workers' Compensation/Employer's Liability. Such Borrower
------------------------------------------
shall maintain workers' compensation insurance in accordance with statutory
provisions covering accidental injury, illness or death of an employee of
such Borrower while at work or in the scope of his or her employment with
such Borrower and employer's liability insurance in an amount not less than
$500,000. Such coverage shall not contain any occupational disease
exclusions; and
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(v) Automobile Liability. Such Borrower shall maintain
--------------------
automobile liability insurance covering owned, non-owned, leased, hired or
borrowed vehicles against bodily injury or property damage. Such coverage
shall have a limit of not less than $1,000,000; and
(vi) Excess/Umbrella Liability. Such Borrower shall maintain
-------------------------
excess or umbrella liability insurance in an amount not less than
$10,000,000, written on an occurrence basis providing coverage limits in
excess of the insurance limits required under Sections 5.04(b)(iii),
---------------------
(b)(iv) (employer's liability only), and (b)(v). Such insurance shall
------- ------
follow from the primary insurances and drop down in case of exhaustion of
underlying limits and/or aggregates. Such insurance shall not exclude
coverage for punitive or exemplary damages where insurable by law; and
(vii) Directors and Officers Insurance. Such Borrower shall
--------------------------------
maintain directors and officers liability insurance including entity
employment practices liability and fiduciary liability insurance of at
least $5,000,000 at all times, including defense costs, with a retention
amount of $50,000 or less for directors and officers liability claims and a
retention amount of $75,000 or less for employment practices liability
claims.
(c) maintain such other insurance to such extent and against such
risks, as are reasonably satisfactory to Collateral Agent (the insurance
policies described on Schedule 3.17 hereto being acceptable to the Collateral
-------------
Agent as of the date hereof);
(d) cause each insurance policy (other than any policy referred to in
clause (b)(iv) above related to workmen's compensation) pertaining to the
Collateral to (i) name the Collateral Agent and its affiliates (all of the
foregoing are hereinafter referred to as the "Additional Insureds") as an
-------------------
"additional insured" if such policy is a liability policy, (ii) name each of the
Additional Insureds as a "mortgagee" and "loss payee" as to claims in excess of
$500,000 and include a standard agent's loss payable endorsement in favor of
each of the Additional Insureds substantially in the form of Exhibit M if such
---------
policy is a property insurance policy, (iii) provide that, the Collateral Agent
shall be notified in writing of any proposed cancellation or modification of
such policy initiated by the Borrower's insurer at least thirty (30) days in
advance prior to any proposed cancellation or modification and will have
sufficient time to correct any deficiencies justifying such proposed
cancellation or modification, (iv) provide that all insurance proceeds for
losses shall be payable to each of the Additional Insureds as their interests
may appear in the event of any omission or breach by the Borrower, (v) waive any
right of subrogation of the insurers against the Additional Insureds and waive
any right of the insurers to any setoff or counterclaim or any other deduction,
whether by attachment or otherwise, in respect of any liability of the Borrower,
and (vi) provide that such insurance shall be primary insurance, that the
insurers under such insurance policies shall be liable under such policies
without right of contribution from any other insurance coverage and expressly
provide that all provisions thereof, except the limits of liability (which shall
be applicable to all insureds as a group), shall operate in the same manner as
if there were a separate policy covering each insured, and liability for
premiums shall be solely a liability of the Borrower;
(e) direct all insurers under policies of insurance described in
clause (d) above and payors of any condemnation claim or award relating to the
property to pay all proceeds payable under such policies or with respect to such
claim or award for any loss with respect to
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<PAGE>
the Collateral directly to the Collateral Agent, which amounts shall be applied
by the Agent, upon request by such Borrower and provision to the Collateral
Agent of detailed information, including a construction schedule and cost
estimates, which establish to the reasonable satisfaction of the Collateral
Agent that the amounts available and the proposed schedule are adequate to
restore, replace or rebuild the property subject to any insurance or
condemnation award in a timely manner, to such restoration, replacement or
rebuilding unless an Event of Default or Default shall have occurred and be
continuing or such Borrower shall have failed to make such request within thirty
days after receipt of such amounts by Agent, in which case such amounts shall be
applied in the Required Lenders' sole discretion to the prepayment of the
Obligations or such restoration, replacement or rebuilding;
(f) on or prior to the renewal date of each policy deliver to the
Collateral Agent copies of all policies or broker's certificates and loss
payable endorsements issued by such Borrower's insurers in respect of all
policies and endorsements, as renewed. Each such policy, certificate and
endorsement shall be accompanied by a statement from the Borrowers' insurance
broker or insurance agent stating whether, in the opinion of such broker or
agent, such policies comply with the requirements of this Section 5.04 that all
------------
premiums due thereon have been paid and that upon the renewal date, such policy
shall be in full force and effect; and
(g) immediately upon receiving notice from the broker or insurance
carrier of cancellation or material modification of any policy required
hereunder, provide the Collateral Agent with notice thereof.
SECTION 5.05. Obligations and Taxes. Such Borrower shall pay all of
---------------------
its indebtedness and obligations promptly and in accordance with their terms and
pay and discharge promptly all taxes, assessments and governmental charges or
levies imposed upon it or upon its income or profits or in respect of its
property, before the same shall become in default, as well as all lawful claims
for labor, materials and supplies or otherwise which, if unpaid, might become a
Lien upon such properties or any part thereof; provided, however, that such
-------- -------
Borrower shall not be required to pay and discharge or to cause to be paid and
discharged any such tax, assessment, charge, levy or claim so long as the
validity or amount thereof shall be contested in good faith by appropriate
proceedings diligently pursued, and such Borrower shall set aside on its books
such reserves as are required by GAAP with respect to any such tax, assessment,
charge, levy or claim so contested.
SECTION 5.06. Financial Statements, Reports, etc. Such Borrower
-----------------------------------
shall furnish to the Administrative Agent, the Collateral Agent and the Lenders:
(a) within 120 days after the end of the 1999 fiscal year of such
Borrower and within ninety (90) days after the end of each subsequent fiscal
year of such Borrower, an annual audited consolidated financial statement of the
Guarantor, including consolidating statements showing the separate results of
the Borrowers, consisting of the balance sheets and statements of operations,
income, stockholders' equity and cash flows, for such fiscal year, prepared in
accordance with GAAP, which consolidated financial statements and other above
described financial information shall have been audited by a nationally
recognized independent certified public accounting firm satisfactory to the
Administrative Agent, and accompanied by such independent certified public
accounting firm's unqualified opinion;
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<PAGE>
(b) within forty-five (45) days after the end of each month and each
fiscal quarter during each fiscal year of the Guarantor, consolidated unaudited
balance sheets and statements of operations for the Guarantor, and consolidating
statements showing the separate results of the Borrowers as of the end of each
such month or fiscal quarter, as applicable, and for the then elapsed portion of
the fiscal year;
(c) concurrently with (a) and (b) above, a certificate of the
Guarantor's independent certified public accountant or the Guarantor's chief
financial officer, as applicable, to the effect that the financial statements
referred to in clause (a) or (b) above, present fairly the financial position
and results of operations of the Guarantor and the Borrowers and as having been
prepared in accordance with GAAP consistently applied, in each case subject to
normal year end audit adjustments except for the statements referred to in
clause (a) above;
(d) concurrently with (a) above, and any statements delivered pursuant
to (b) above in respect of the month of March and the period ending March 31,
the month of June and the period ending June 30 or the month of September and
the period ending September 30, a Periodic Reporting Certificate of the chief
financial officer of the Guarantor setting forth the calculations contemplated
in Article VII hereof, the number of Completed Systems and certifying as to the
-----------
fact that such Person has examined the provisions of this Agreement and that no
Event of Default or any Default, shall have occurred and be continuing or if
such an event has occurred, a statement explaining its nature and extent and
setting forth the steps the Borrowers propose to take to cure or prevent any
Event of Default;
(e) prior to February 15 of each year for such year, an operating
budget of the Guarantors and the Borrowers, showing projected consolidated and
consolidating revenues, expenses and a projected balance sheet on a month-by-
month basis in reasonable detail, prepared by the Guarantor and the Borrowers
and in form and substance reasonably satisfactory to the Administrative Agent
and the Lenders, a draft of such operating budget to be delivered to the
Administrative Agent and the Lenders as soon as available, and in any event
December 1, of the preceding year for approval by the Administrative Agent and
the Lenders, which approval shall be automatically deemed to have occurred with
respect to such draft operating budget if the Administrative Agent and the
Lenders fail to comment on such draft operating budget within 31 days of receipt
thereof;
(f) all material agreements or licenses affecting the Governmental
Approvals of any Borrower or any System promptly after any execution, or
material amendment thereto;
(g) promptly upon their becoming available, copies of any periodic or
special documents, statements or other information filed by any Borrower with
the FCC, PUC or other Governmental Authority in connection with the construction
and/or operation of any System or with respect to the transactions contemplated
by any of the Loan Documents, and copies of any material notices and other
material communications from the FCC, PUC or from any other Governmental
Authority;
(h) immediately upon any officer of any Borrower obtaining knowledge
of any condition or event (i) which either constitutes an Event of Default or a
Default, (ii) which renders any representation, covenant or warranty contained
herein materially false or misleading, or (iii) which would result in any
financial results for any fiscal year to materially deviate from the
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<PAGE>
financial results projected for such fiscal year in the Milestone Plan or the
financial projections described in clause (e) above, a certificate signed by an
authorized officer of such Borrower specifying in reasonable detail the nature
and period of existence thereof and what corrective action such Borrower has
taken or proposes to take with respect thereto;
(i) within forty-five (45) days after the end of each fiscal year of
such Borrower, a certificate signed by an authorized officer of such Borrower
(x) setting forth all the Leased Real Property, Easements, licenses, rights of
way and other similar interests in real property acquired by such Borrower in
the preceding year and (y) confirming that no Default or Event of Default has
occurred and is continuing;
(j) evidence of insurance complying with Section 5.04;
------------
(k) following the written request of the Administrative Agent, not
later than forty-five (45) days after the end of each fiscal month, reports on
accounts receivable and accounts payable of such Borrower in such detail and
format as may be reasonably requested by the Administrative Agent;
(l) promptly upon the filing thereof, copies of all registration
statements and annual, quarterly, monthly or other regular reports which such
Borrower or the Guarantor files, if at all, with the Securities and Exchange
Commission; and
(m) promptly from time to time such other information regarding the
operations (including, without limitation, construction budgeting and System
completion), business affairs and condition (financial or otherwise) of such
Borrower or the Guarantor as the Administrative Agent or the Collateral Agent
may reasonably request.
SECTION 5.07. Litigation and Other Notices. Such Borrower shall give
----------------------------
the Administrative Agent prompt written notice upon obtaining knowledge of the
following: (a) all events of default or defaults and all events of default or
any event that would become an event of default upon notice or lapse of time or
both under any of the terms or provisions of any note, or of any other evidence
of indebtedness or agreement or contract governing the borrowing of money in
excess of $25,000 in the aggregate, of such Borrower; (b) any levy, attachment,
execution or other process against any of the property or assets, real or
personal, of such Borrower in an amount in excess of $100,000; (c) the filing or
commencement of any action, suit or proceeding by or before any court or any
Governmental Authority which, if adversely determined against such Borrower,
would result in a Material Adverse Effect; (d) any material notice, letter or
other correspondence of any kind from the FCC or the PUC relating to the
Governmental Approvals or any System; (e) any default under any other material
license, agreement or contract to which such Borrower is or may become a party;
and (f) any matter which has resulted in, or which such Borrower reasonably
believes will result in, a Material Adverse Effect on such Borrower.
SECTION 5.08. Mortgages; Landlord Consents; Licenses and Other
------------------------------------------------
Agreements. As security for the Obligations, such Borrower shall with respect
- ----------
to each Completed System, and each System which is not a Completed System but
which is requested to be financed with the proceeds of Loans (i) promptly
execute and deliver to the Collateral Agent (1) Mortgages in favor of the
Collateral Agent with respect to any real property purchased by such Borrower,
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together with lender's title policies for such real property satisfactory to the
Collateral Agent, (2) leasehold mortgages or collateral assignments of leases
with respect to any real property leased by such Borrower, satisfactory to the
Collateral Agent, (3) Mortgages or collateral assignments with respect to such
Borrower's Easements and rights of way, as specified by the Collateral Agent,
satisfactory to the Collateral Agent, (4) in the case of any leased facilities,
Easements or rights of way, landlord waivers or consents satisfactory to the
Collateral Agent, and (ii) (1) update Schedule 1 to the Collateral Assignment of
Licenses to cover all Governmental Approvals obtained by such Borrower after the
Closing Date and agreements entered into by such Borrower after the Closing Date
with third Persons, (2) obtain consents to collateral assignments from the
licensors granting the Governmental Approvals referred to in clause (ii) (1)
above and from those third Persons referred to in clause (ii) (1) above that are
specified by the Collateral Agent, such consents to collateral assignment to be
in form and substance satisfactory to the Collateral Agent.
SECTION 5.09. ERISA. Such Borrower shall comply in all material
-----
respects with the applicable provisions of ERISA and furnish to the
Administrative Agent, (i) as soon as possible, and in any event within thirty
(30) days after such Borrower or any officer of such Borrower knows or has
reason to know that any Reportable Event with respect to any Plan has occurred
or any Termination Event has occurred, a statement of an officer of such
Borrower setting forth details as to such Reportable Event or Termination Event
and the corrective action that such Borrower proposes to take with respect
thereto, together with a copy of the notice of any such Reportable Event given
to the PBGC, and (ii) promptly after receipt thereof, a copy of any notice such
Borrower may receive from the PBGC relating to the intention of the PBGC to
terminate any Plan or to appoint a trustee to administer any such Plan.
SECTION 5.10. Access to Premises and Records. Such Borrower shall
------------------------------
permit representatives of the Administrative Agent, the Collateral Agent and the
Lenders to have access to such Borrower's books and records and to the
Collateral and the premises of such Borrower at reasonable times upon reasonable
notice and to make such excerpts from such records as such representatives deem
necessary and to inspect the Collateral.
SECTION 5.11. Design and Construction. Such Borrower shall design,
-----------------------
construct, equip and operate its Systems substantially as previously disclosed
to Lenders in the Milestone Plan and in accordance with prudent industry
standards.
SECTION 5.12. Environmental Notices. If such Borrower shall (a)
---------------------
receive notice that any violation of any federal, state or local environmental
law or regulation may have been committed or is about to be committed by such
Borrower, (b) receive notice that any administrative or judicial complaint or
order has been filed or is about to be filed against such Borrower alleging
violations of any federal, state or local environmental law or regulation or
requiring such Borrower to take any action in connection with any Release of any
Contaminant into the environment, or (c) receive any notice from a Governmental
Authority or private party alleging that such Borrower may be liable or
responsible for costs associated with a response to or cleanup of a Release or
any damages caused thereby, such Borrower shall provide the Administrative Agent
with a copy of such notice within twenty (20) Business Days of such Borrower's
receipt thereof.
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SECTION 5.13. Amendment of Organizational Documents. Such Borrower
-------------------------------------
shall notify the Administrative Agent and the Collateral Agent of any amendment
to its Certificate or Articles of Incorporation or other organizational
documents within ten (10) days of the occurrence of any such event, and provide
the Administrative Agent and the Collateral Agent with copies of any amendments
certified by the secretary of such Borrower and of all other relevant
documentation. Such Borrower shall promptly deliver to the Collateral Agent such
financing statements executed by such Borrower which the Collateral Agent may
request as a result of any such event.
SECTION 5.14. Pledge Agreements. In the event that any Person other
-----------------
the Guarantor becomes a shareholder of any Borrower, the applicable Borrower
shall cause each such Person to execute and deliver to the Collateral Agent a
Pledge Agreement substantially in the form of Exhibit L attached hereto and a
limited nonrecourse guaranty (if such Person is not a Borrower), which guaranty
shall contain substantially the same provisions as the guaranty attached as
Exhibit G hereto except that the liability of such Person shall be nonrecourse
to such Person and shall be limited to the value of the "Pledged Collateral" (as
defined in the Pledge Agreement) and the payment of certain expenses. This
provision shall not constitute a waiver of the Event of Default specified in
ection 9.01(q).
- ---------------
SECTION 5.15. Accounts Payable. Such Borrower shall pay each of its
----------------
accounts payable in accordance with its practices as of the Closing Date but in
any event no later than sixty (60) days after the due date, provided, however,
-------- -------
that such Borrower shall not be required to pay any account payable as long as
the validity thereof shall be contested in good faith by appropriate proceedings
and such Borrower shall have set aside adequate reserves with respect thereto in
accordance with GAAP.
SECTION 5.16. Collateral Assignments. Such Borrower shall furnish to
----------------------
the Collateral Agent collateral assignments of, and if requested by the
Collateral Agent, consents to such assignments from the applicable counter
parties, for each material license, lease, contract or other agreement or
instrument entered into by such Borrower after the date hereof. Campuslink has
contacted the customers listed on Schedule 5.16 to obtain consents to collateral
-------------
assignments to the Collateral Agent of the contracts or agreements to which
Campuslink and such customers are parties. Campuslink shall exercise its
reasonable best efforts to obtain such consents within ninety days after the
Closing Date.
SECTION 5.17. Fiscal Year. Such Borrower shall maintain a fiscal
-----------
year ending on December 31.
SECTION 5.18. Completed Systems. Such Borrower, together with all
-----------------
other Borrowers, shall have (in the aggregate) five (5) Completed Systems on or
prior to October 31, 1999, six (6) Completed Systems on or prior to February 28,
2000, seven (7) Completed Systems on or prior to March 31, 2000, and eight (8)
Completed Systems on or prior to April 30, 2000.
SECTION 5.19. Year 2000 Issues. Within three months of any Borrower
----------------
discovering a Year 2000 Problem, such Borrower shall implement Year 2000
Corrective Actions with respect to such Year 2000 Problem. Within two months of
implementing a Year 2000 Corrective Action, each Borrower shall eliminate all
Year 2000 Problems, except where the
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failure to correct the same could not reasonably be expected to have a Material
Adverse Effect, individually or in the aggregate.
SECTION 5.20. Subsidiary Guarantees and Pledges. Such Borrower shall
---------------------------------
(i) cause each Person which becomes a Subsidiary of such Borrower and does not
become a Borrower under this Agreement to execute a guaranty of the Obligations
substantially in the form of Exhibit G hereto, but exclusive of any financial
covenants, and (ii) execute a Pledge Agreement, pursuant to which all of the
Equity Interests in such Person will be pledged to the Collateral Agent.
SECTION 5.21. Accounting. Such Borrower shall maintain a system of
----------
accounting established and administered in accordance with GAAP.
SECTION 5.22. Landlord Letters of Credit. In the event that any
--------------------------
consent to a collateral assignment of a real property lease from any landlord as
required by Sections 4.01(c)(1)(xiv), 4.02(k) or 5.16 is not obtained by a
--------------------------------- ----
Borrower, then in lieu of meeting the requirements under such Sections, such
Borrower may cause such landlord to accept a letter of credit ("Landlord L/C")
------------
naming such landlord as beneficiary, as security for no less than six months of
lease payments due at any time under such lease; provided that such letter of
--------
credit is in form and substance satisfactory to the Collateral Agent, the
Borrower shall cause such letter of credit to be renewed or replaced so that it
remains outstanding as long as any of the Obligations remain unpaid, and the
landlord waiver from such landlord has addressed the application of any draws
from such letter of credit in a manner satisfactory to the Collateral Agent.
SECTION 5.23. Pledge of East Florida Common Stock. Campuslink shall
-----------------------------------
immediately upon the earlier of (i) payment in full of the Debt referred to in
Section 6.13(viii) below, or (ii) the release of the Common Stock of Florida
- ------------------
from the pledge described in Section 6.01(ix) below, pledge all of the Common
----------------
Stock and other Equity Interests in Florida to the Collateral Agent pursuant to
a Pledge Agreement.
SECTION 5.24. Interest Rate Agreement. At all times on and after
-----------------------
December 1, 1999 and on or prior to the Commitment Termination Date, the
Borrowers shall maintain one or more Interest Rate Agreements on terms and
conditions and with counterparties reasonably satisfactory to the Administrative
Agent with respect to at least $25,000,000 of the outstanding principal balance
of the Loans. At all times after the Commitment Termination Date, in the event
that less than fifty percent (50%) of the Debt of the Guarantor and the
Borrowers on a consolidated basis bears interest at a fixed rate, the Borrowers
shall maintain one or more Interest Rate Agreements on terms and conditions and
with counterparties reasonably satisfactory to the Administrative Agent with
respect to such amount of the outstanding principal balance of the Loans that
would result in at least fifty percent (50%) of the Debt of the Guarantor and
the Borrowers on a consolidated basis bearing interest at a fixed rate.
SECTION 5.25. Marcap Debt. In the event that Campuslink is in default
-----------
under the Marcap Agreement, upon written request from the Administrative Agent
delivered at least five (5) Business Days before any date specified in Section
13 of the Marcap Agreement that permits prepayment in full of the obligations of
Campuslink to Marcap Corporation under the Marcap Agreement and provided that
Loans are made available to Campuslink for such purpose, Campuslink shall on
such date prepay in full all of its obligations to Marcap Corporation. As
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<PAGE>
soon as possible after the obligations of Campuslink to Marcap Corporation have
been discharged in full, whether as a result of prepayment or otherwise,
Campuslink shall terminate all security interests granted in any of its assets
to Marcap Corporation, collaterally assign the West Point Contract to the
Collateral Agent, use its reasonable best efforts to obtain a consent to
collateral assignment of the West Point Contract in a form satisfactory to the
Collateral Agent from the Department of the Army, and cause the Collection Agent
which receives the payments due under the West Point Contract to enter into a
Restricted Account Agreement with the Collateral Agent with respect to such
payments in a form satisfactory to the Collateral Agent. Campuslink shall notify
the Administrative Agent and the Collateral Agent of any default by Campuslink
under the Marcap Agreement immediately upon any officer of Campuslink obtaining
knowledge thereof, and in the event that the Lenders are willing to make Loans
to Campuslink in an amount necessary to cure any such default, Campuslink shall
apply the proceeds of such Loans to cure such default.
SECTION 5.26. Further Assurances. Such Borrower agrees to do such
------------------
further acts and things and to execute and deliver to the Administrative Agent
or the Collateral Agent such additional assignments, agreements, powers and
instruments, at such Borrower's expense, as the Administrative Agent or the
Collateral Agent may reasonably require or deem advisable to carry into effect
the purposes of this Agreement and the other Loan Documents or to better assure
and confirm unto the Administrative Agent or the Collateral Agent its rights,
powers and remedies hereunder and thereunder.
ARTICLE VI
NEGATIVE COVENANTS
Each Borrower covenants and agrees with the Administrative Agent, the
Collateral Agent and the Lenders that as long as this Agreement shall remain in
effect, any Commitment hereunder shall be outstanding or any Obligations
hereunder or under any of the Loan Documents shall be unpaid, unless the
Requisite Lenders shall have otherwise given prior written consent:
SECTION 6.01. Liens, etc. Such Borrower shall not create, incur,
-----------
assume or suffer to exist, directly or indirectly, any Lien upon or with respect
to any of its properties or the Collateral, now owned or hereafter acquired, or
upon any proceeds, products, issues, income or profits therefrom except for the
following "Permitted Liens":
---------------
(i) Liens granted pursuant to the Loan Documents;
(ii) Liens securing any Purchase Debt to the extent that the Liens
cover only the subject assets purchased with such Purchase Debt;
(iii) Liens for taxes, assessments or governmental charges or levies
on such Borrower's property if the same shall not at the time be delinquent
or thereafter can be paid without penalty, or are being diligently
contested in good faith and by appropriate proceedings and for which such
Borrower shall have set aside reserves on its books as required by GAAP;
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<PAGE>
(iv) Liens imposed by law, such as landlord's, carrier's,
warehousemen's and mechanic's liens, which liens shall be waived in writing
to the extent waivable, and with respect to obligations not yet due or
being contested in good faith by appropriate proceedings and in either case
for which such Borrower shall have set aside reserves on its books as
required by GAAP;
(v) Liens arising out of pledges or deposits under workmen's
compensation laws, unemployment insurance, old age pensions, or other
social security benefits other than any Lien imposed by ERISA;
(vi) Liens incurred or deposits made in the ordinary course of
business to secure surety bonds provided that such Liens shall extend only
to cash collateral for such surety bonds;
(vii) an assignment, if any, of leasehold interests of PaeTec, as
lessee, under a lease (the "Manhattan Lease") between PaeTec and 111 8th
---------------
Avenue LLC, in connection with the premises located at 111 8th Avenue, New
York, New York, in favor of Star Telecommunications, Inc. so long as such
assignment of the Manhattan Lease shall only be effective in the event that
the Collateral Agent shall have notified PaeTec in writing of its decision
not to enforce its rights under the Collateral Assignment of Leases
executed by PaeTec, with respect to the Manhattan Lease;
(viii) Liens on cash collateral securing reimbursement obligations
arising out of (1) any Landlord L/C or (2) any other letter of credit
issued for the benefit of a landlord of a Borrower as a security deposit
for rent due to such landlord, the aggregate amount of such cash collateral
not to exceed the aggregate face amount of all such letters of credit;
(ix) Liens on the capital stock of Florida granted to J. Gordon
Whitley and Cathleen J. Whitley solely to secure the Debt referred to in
Section 6.13(viii) below ;
------------------
(x) Liens of Marcap Corporation on the West Point Contract and the
equipment subject to the West Point Contract prior to any date on which the
Lenders require Campuslink to repay its obligations to Marcap Corporation in
full in accordance with the provisions of Section 5.25.
------------
(x) Liens listed on Schedule 3.08 hereto.
-------------
SECTION 6.02. Use of Proceeds. Such Borrower shall not use the
---------------
proceeds of any Loan for any purpose other than as provided in Section 2.02
------------
hereof.
SECTION 6.03. Sale of Assets, Consolidation, Merger, etc. Such
-------------------------------------------
Borrower shall not consolidate with or merge into any other Person (except as
permitted under Section 6.08, and only if the Borrower is the surviving entity),
------------
or without the prior written consent of the Requisite Lenders, sell, lease,
transfer or otherwise dispose of any Collateral, except for (a) sales of
inventory in the ordinary course of business (b) sales of Telecommunications
Equipment from one Borrower to another so long as the Collateral Agent maintains
a first priority perfected security interest in such Telecommunications
Equipment, for the benefit of the Lenders, and (c)
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<PAGE>
any sale, lease, transfer or other disposition of assets no longer used or
useful in the conduct of the Business for the fair market value thereof not to
exceed $50,000 in the aggregate.
SECTION 6.04. Dividends and Distributions; Sale of Equity Interests.
-----------------------------------------------------
(a) Such Borrower shall not purchase, redeem or otherwise acquire any interest
of such Borrower, declare or make or pay any dividends in any fiscal year of
such Borrower on any class or classes of stock, return capital of such Borrower
to its shareholders, make any other distribution on or in respect of any shares
of any class of capital stock of such Borrower or make other payments to any
shareholder of such Borrower (including in the form of non-salary compensation,
loan, expense reimbursement or management fee); provided, however, that provided
-------- -------
no Event of Default or Default has occurred and is continuing or would result
therefrom, such Borrower may make payments of fees or compensation for services
which are in the nature of management, corporate overhead or administrative
services to the extent permitted by Section 6.05 hereof.
------------
(b) Such Borrower shall not sell or issue any additional Equity
Interests except to the Guarantor for the purpose of permitting the Guarantor to
make cash capital contributions to the Borrowers in an amount equal to the
consideration paid for such Equity Interests and except pursuant to the PaeTec
Online, Inc. 1999 Incentive Compensation Plan.
SECTION 6.05. Management Fees and Permitted Corporate Overhead. Such
------------------------------------------------
Borrower shall not pay or enter into any arrangement to pay any fee or
compensation, or reimburse expenses of, an Affiliate or any other Person for
services which are in the nature of management, corporate overhead or
administrative services except to the extent provided for in the Milestone Plan
or as described on Schedule 6.11 attached hereto.
-------------
SECTION 6.06. Guarantees; Third Party Sales and Leases. Such
----------------------------------------
Borrower shall not directly or indirectly, (i) assume any obligation or
indebtedness of another Person, (ii) make or assume any Guarantee, or (iii)
finance any third party sales or leases, other than its obligations under
Section 2.15 or obligations of other Borrowers
- ------------
SECTION 6.07. Investments. Such Borrower shall not, directly or
-----------
indirectly, make any Investments except:
(i) Temporary Cash Investments;
(ii) Investments in certificates of deposit, repurchase agreements,
money market or other cash management accounts, bankers acceptances and
short term Eurodollar time deposits with financial institutions having a
long term deposit rating of at least A+ from Moody's Investors Service,
Inc. or Standard & Poor's Ratings Group, respectively;
(iii) Investments in commercial paper rated P1 or A1 by Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group respectively;
and
(iv) the Investment by Campuslink in 10.1% of the outstanding Equity
Interests in Campuslink, Inc.
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<PAGE>
SECTION 6.08. Subsidiaries; Permitted Acquisitions. Such Borrower
------------------------------------
shall not create or acquire any Subsidiary or acquire all or any significant
portion of the assets or Equity Interests of another Person; provided, however,
-------- -------
that each Borrower may acquire the Equity Interests of or all or any significant
portion of the assets of another Person if such acquisition meets the following
requirements (each such acquisition constituting a "Permitted Acquisition"):
---------------------
(1) no Default or Event of Default shall have occurred and be
continuing or would result from such transaction or transactions or the
incurrence of any Debt by any Borrower or the Guarantor in connection
therewith;
(2) if such acquisition is being effectuated by means of the
acquisition of Equity Interests any Person (or the formation of a new
Subsidiary in order to acquire assets of another Person), such acquired
Person shall become a Borrower hereunder pursuant to an Accession Agreement
and shall deliver such documentation as is reasonably required by the
Administrative Agent to evidence the enforceability of such Accession
Agreement;
(3) the Collateral Agent shall, immediately upon the consummation of
such acquisition, obtain a first priority Lien, for the benefit of the
Lenders and as collateral for the payment of the Obligations, in the assets
being purchased or acquired by virtue of an acquisition of Equity Interests
and the Borrowers shall have complied in all respects with the provisions
of Section 8.02 with respect to such assets;
------------
(4) the business being acquired shall be substantially similar,
related or incidental to the Businesses;
(5) after giving effect to such acquisition, the representations and
warranties set forth in Article III hereof shall be true and correct in all
-----------
material respects on and as of the date of such acquisition with the same
effect as though made on and as of such date and including with respect to
any new Borrower pursuant to paragraph (2) above;
(6) prior to each such acquisition, the Borrowers shall cause to be
delivered to the Administrative Agent and the Lenders a certificate from
the Guarantor's Chief Financial Officer demonstrating to the satisfaction
of the Administrative Agent and the Requisite Lenders that after giving
effect to such transaction or transactions and the incurrence of any Debt
permitted by Section 6.13 in connection therewith on a pro forma basis as
------------
if such acquisition and such incurrence of Debt had occurred on the first
day of the twelve-month period ending on the last day of the Guarantor's
and the Borrowers' most recently completed fiscal quarter, the Borrowers
would have been in compliance with all of the covenants contained in this
Agreement at all times during such twelve-month period;
(7) the purchase is consummated pursuant to a negotiated acquisition
agreement on a non-hostile basis; and
(8) the cash portion of the purchase price (including assumed Debt)
in connection with any and all such transactions shall not exceed:
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(A) for any single transaction or series of related
transactions, $2,500,000; and
(B) for all such transactions, $10,000,000.
SECTION 6.09. Permitted Activities. Such Borrower shall not engage
--------------------
in any business or activity other than the operation of its Business in
accordance with the Milestone Plan without the prior written consent of the
Requisite Lenders.
SECTION 6.10. Disposition of Licenses, etc. Such Borrower shall not
-----------------------------
sell, assign, transfer or otherwise dispose or attempt to dispose of in any way
any Governmental Approval or any other licenses, permits or approvals necessary
or appropriate for the operation of any System or of the Business in accordance
with the Milestone Plan.
SECTION 6.11. Transactions with Affiliates. Except as set forth on
----------------------------
Schedule 6.11, such Borrower shall not directly or indirectly, enter into any
- -------------
transaction, including, without limitation, leases or other agreements for the
purchase or use of any goods or services, with any Affiliate, except in the
ordinary course of and pursuant to reasonable requirements of such Borrower's
business upon fair and reasonable terms no less favorable to such Borrower than
it would obtain in a comparable arm's length transaction with an unaffiliated
Person.
SECTION 6.12. ERISA. Such Borrower shall not:
-----
(A) engage, or permit any ERISA Affiliate to engage, in any
prohibited transaction described in Section 406 of ERISA or 4975 of the IRC for
which a statutory or class exemption is not available or a private exemption has
not been previously obtained from the United States Department of Labor;
(B) permit to exist any accumulated funding deficiency (as defined in
Section 302 of ERISA and Section 412 of the IRC), whether or not waived;
(C) fail, or permit any ERISA Affiliate to fail, to pay timely
required contributions or annual installments due with respect to any waived
funding deficiency to any Benefit Plan;
(D) terminate, or permit any ERISA Affiliate to terminate, any
Benefit Plan which would result in any material liability of such Borrower under
Title IV of ERISA;
(E) fail to make any contribution or payment to any Multiemployer
Plan which such Borrower or any ERISA Affiliate may be required to make under
any agreement relating to such Multiemployer Plan, or any law pertaining
thereto;
(F) amend, or permit any ERISA Affiliate to amend, a Plan resulting
in an increase in current liability for the plan year such that such Borrower is
required to provide security to such Plan under Section 401(a)(29) of the IRC;
or
(G) fail, or permit any ERISA Affiliate to fail, to pay any required
installment under Section 412 of the IRC on or before the due date for such
installment or other payment.
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<PAGE>
SECTION 6.13. Indebtedness. Such Borrower shall not create or suffer
------------
to exist any Debt or any other obligations for the deferred purchase price of
property or services except:
(i) the Obligations;
(ii) the obligations arising under any Loan Document;
(iii) obligations under real property leases contemplated in the
Milestone Plan;
(iv) obligations under Capitalized Leases, financing leases or loan
agreements or similar debt documents with respect to the financing and
contemplated purchase of office equipment, vehicles and non-essential
telecommunications equipment, not to exceed an aggregate amount for the
Borrowers at any time of $1,000,000 plus the outstanding balance owing by
Select under that certain Master Lease Agreement dated as of June 17, 1997
between The CIT Group/Equipment Financing, Inc. and Select ("Purchase
--------
Debt");
----
(v) performance bonds executed solely in connection with the
construction of Systems in the ordinary course of business;
(vi) reimbursement obligations arising out of (1) any Landlord L/C
or (2) any other letter of credit issued for the benefit of a landlord of a
Borrower as a security deposit for rent due to such landlord;
(vii) Debt issued pursuant to the Unsecured Loan Documents in an
aggregate outstanding principal amount not exceeding $10,000,000; provided,
--------
however, that, in no event shall the Borrower, or any other Person on behalf of
- -------
the Borrowers, (x) pay, repay or prepay any such Debt, or any interest, fees or
other amounts with respect thereto, in violation of Article VIII of the
Unsecured Loan Agreement, or (y) voluntarily pay, repay or prepay any such Debt
or other amounts prior to the date on which such amounts are required or
permitted to be paid, repaid or prepaid pursuant to the terms and conditions of
the Unsecured Loan Documents;
(viii) Debt of PaeTec under that certain Promissory Note dated August
31, 1999 payable to J. Gordon Whitley and Cathleen J. Whitley, of a principal
amount of $1,028,157.78, together with interest accrued on the unpaid principal
balance outstanding from time to time;
(ix) Debt under Interest Rate Agreements approved by the
Administrative Agent;
(x) Debt of Campuslink payable to the Guarantor in the aggregate
principal amount of $4,000,000; and
(xi) prior to any date on which the Lenders require Campuslink to
pay its obligations to Marcap Corporation in full in accordance with the
provisions of Section 5.25, the Debt of Campuslink to Marcap Corporation under
------------
that certain Master Lease Agreement dated as of July 29, 1998 between Campuslink
and Marcap Corporation.
SECTION 6.14. Sale and Leaseback Transactions. Such Borrower shall
-------------------------------
not, directly or indirectly, enter into any arrangement with any Person other
than another Borrower
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<PAGE>
providing for such Borrower to lease or rent property that any Borrower or the
Guarantor has sold or will sell or otherwise transfer to such Person.
SECTION 6.15. Margin Regulation. Such Borrower shall not use or
-----------------
permit any other Person to use any portion of the proceeds of any credit
extended under this Agreement in any manner which might cause the extension of
credit made by any Lender or the application of such proceeds to violate the
Securities Act of 1933 or Securities Exchange Act of 1934 (each as amended from
time to time, and any successor statute) or to violate Regulation G, Regulation
U, or Regulation X, or any other regulation of the Federal Reserve Board, in
each case as in effect on the date or dates of such extension of credit and such
use of proceeds.
SECTION 6.16. Unsecured Loan Documents. Such Borrower shall not
------------------------
modify any provision of Articles II, VI, VII, VIII or IX of the Unsecured Loan
Agreement.
ARTICLE VII
FINANCIAL COVENANTS
Each Borrower covenants and agrees with the Administrative Agent and
the Lenders that as long as this Agreement shall remain in effect, any
Commitment hereunder shall be outstanding or the Obligations hereunder or under
any of the Loan Documents shall be unpaid, unless the Requisite Lenders shall
have otherwise given prior written consent:
SECTION 7.01. Financial Covenants Prior to Commitment Termination
---------------------------------------------------
Date. At all times prior to the Commitment Termination Date:
- ----
(a) Senior Debt to Capitalization. The Borrowers shall not at any
------------------------------
time permit the ratio of Senior Debt to Capitalization to exceed 0.55 to 1.00.
(b) Consolidated Debt to Capitalization. The Borrowers shall not at
-----------------------------------
any time permit the ratio of Consolidated Debt to Capitalization to exceed 0.70
to 1.00
(c) Minimum Revenues. As of the last day of each fiscal quarter set
----------------
forth below, the Borrowers shall on a combined basis have revenues at least
equal to the amount set forth opposite each such date:
Fiscal Quarter Minimum Revenues
-------------- ----------------
December 31, 1999 $15,000,750
March 31, 2000 $20,750,000
June 30, 2000 $25,900,000
September 30, 2000 $33,700,000
December 31, 2000 $47,300,000
(d) EBITDA. As of the last day of each fiscal quarter set forth below
------
until the fiscal quarter ending June 30, 2000, the Borrowers shall not permit
the EBITDA losses for all the Borrowers on a combined basis to exceed the
amount set forth opposite each such date. As of
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<PAGE>
the last day of each fiscal quarter set forth below and ending thereafter, the
EBITDA for all the Borrowers on a combined basis shall at least equal the amount
set forth opposite each such date:
Fiscal Quarter EBITDA
-------------- ------
December 31, 1999 ($3,900,000)
March 31, 2000 ($2,300,000)
June 30, 2000 ($1,400,000)
September 30, 2000 $ 500,000
December 31, 2000 $6,000,000
(e) Minimum Cash on Hand. At all times, the amount of the Borrowers'
--------------------
consolidated cash, as determined in accordance with GAAP, shall be greater than
or equal to $200,000.
SECTION 7.02. Financial Covenants After the Commitment Termination
Date. On and after March 31, 2001:
(a) Senior Debt to Capitalization. The Borrowers shall not at any
-----------------------------
time permit the ratio of Senior Debt to Capitalization to exceed ) 0.55 to 1.00.
(b) Consolidated Debt to Capitalization. The Borrowers shall not at
-----------------------------------
any time permit the ratio of Consolidated Debt to Capitalization to exceed 0.70
to 1.00
(c) Maximum Operating Leverage Ratio. At the end of each fiscal
--------------------------------
quarter set forth below, the Operating Leverage Ratio as measured at such time
shall not exceed the ratio set forth below opposite such quarter:
Fiscal Quarter Ratio
-------------- ------
March 31, 2001 4.00 to 1.00
June 30, 2001 3.50 to 1.00
September 30, 2001 3.00 to 1.00
December 31, 2001 2.50 to 1.00
March 31, 2002 2.50 to 1.00
June 30, 2002 2.00 to 1.00
and each quarter thereafter
(d) Minimum Debt Service Coverage Ratio. At the end of each fiscal
-----------------------------------
quarter set forth below, the ratio of (i) the sum of the combined EBITDA of the
Borrowers for the two fiscal quarters then ending, multiplied by two, minus the
-----
combined capital expenditures of the Borrowers for the same two fiscal quarters,
multiplied by two, to (ii) Debt Service, as measured at such time, shall equal
at least the ratio set forth below opposite such quarter:
Fiscal Quarter Ratio
-------------- -----
March 31, 2001 2.00 to 1.00
June 30, 2001 1.75 to 1.00
September 30, 2001 1.75 to 1.00
December 31, 2001 2.00 to 1.00
and each quarter thereafter
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<PAGE>
(e) Minimum Fixed Charge Coverage Ratio. As of the last day of any
-----------------------------------
fiscal quarter ending on and after March 31, 2001, the Borrowers shall not
permit the ratio of (1) EBITDA for the Borrowers and the Guarantor on a combined
basis for the two fiscal quarters then ended, multiplied by two, to (2) Fixed
Charges for the Borrowers and the Guarantor on a combined basis for the same two
quarters, multiplied by two, to be less than 1.00 to 1.00, for the fiscal
quarters ending on March 31, 2001 and June 30, 2001 and 1.10 to 1.00 for any
fiscal quarter thereafter.
(f) Maximum Consolidated Leverage Ratio. As of the last day of any
-----------------------------------
fiscal quarter set forth below, the Borrowers shall not permit the ratio of (1)
Consolidated Debt as of such day to (2) EBITDA for the Guarantor and the
Borrowers on a consolidated basis for the two fiscal quarters then ended,
multiplied by two, to be greater than the ratio set forth below opposite such
quarter:
Fiscal Quarter Ratio
-------------- -----
March 31, 2001 5.50 to 1.00
June 30, 2001 5.50 to 1.00
September 30, 2001 4.75 to 1.00
December 31, 2001 4.00 to 1.00
and each quarter thereafter
ARTICLE VIII
COLLATERAL SECURITY
SECTION 8.01. Collateral Security. (a) To secure payment and
-------------------
performance of all of the Obligations, each of the Borrowers hereby reaffirms
its grant to the Collateral Agent of, and hereby regrants to the Collateral
Agent for the benefit of the Collateral Agent, the Administrative Agent and the
Lenders, to the extent permitted by law, a right of setoff against and a
continuing security interest in and to all of such Borrower's tangible and
intangible personal property, fixtures and real property leasehold and easement
interests, whether now owned or existing, or hereafter acquired or arising,
wheresoever located, including, without limitation, all of the following
property, or interests in property: (a) all machinery, equipment,
Telecommunications Equipment and fixtures, including without limitation, fiber
optic and other cables, transmission and switching equipment, transmission
facilities, connection equipment, conduit, carrier pipes, junctions,
regenerators, power sources, alarm systems, electronics, structures and shelters
and cable laying equipment; (b) all Accounts, accounts receivable, other
receivables, contract rights, leases, chattel paper, investment property, and
general intangibles of such Borrower (including, without limitation, goodwill,
going concern value, patents, trademarks, trade names, service marks,
blueprints, designs, product lines and research and development), including,
without limitation, all of such Borrower's rights under all present and future
Governmental Approvals, permits, licenses and franchises heretofore or hereafter
granted to such Borrower for the operation and ownership of its Systems
(excluding licenses and permits issued by the FCC, any PUC or any other
Governmental Authority to the extent, and only to the extent, it is unlawful to
grant a security interest in such licenses and permits, but including, to the
maximum extent permitted by law, all rights incident or appurtenant to such
licenses and permits, including, without limitation, the right to receive all
proceeds derived from or in
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<PAGE>
connection with the sale, assignment or transfer of such licenses and permits),
whether now owned or hereafter acquired by such Borrower, or in which such
Borrower may now have or hereafter acquire an interest; (c) all instruments,
letters of credit, documents of title, policies and certificates of insurance,
securities, bank deposits, deposit accounts (including such Borrower's
Collection Accounts), checking accounts and cash now or hereafter owned by such
Borrower, or in which such Borrower may now have or hereafter acquire an
interest; (d) all inventory, including all merchandise, raw materials, work in
process, finished goods and supplies, now or hereafter owned by such Borrower or
in which such Borrower may now have or hereafter acquire an interest; (e) all of
such Borrower's leasehold interest in any real property, all of such Borrower's
licenses, easements and rights of way with respect to real property; (f) all
accessions, additions or improvements to, substitutions for and all proceeds and
products of, all of the foregoing, including proceeds of insurance; and (g) all
books, records, documents, computer tapes and discs relating to all of the
foregoing.
SECTION 8.02. Preservation of Collateral and Perfection of Security
-----------------------------------------------------
Interests Therein. Such Borrower shall execute and deliver to the Collateral
- -----------------
Agent for the benefit of the Collateral Agent, the Administrative Agent and the
Lenders, prior to the Funding Date, and at any time or times thereafter at the
request of the Collateral Agent, all financing statements or other documents
(and pay the cost of filing or recording the same in all public offices deemed
necessary by the Collateral Agent), as the Collateral Agent may request, in a
form satisfactory to the Collateral Agent, to perfect and keep perfected the
security interest in the Collateral granted by such Borrower to the Collateral
Agent or to otherwise protect and preserve the Collateral and the Collateral
Agent's security interest therein or to enforce the Collateral Agent's security
interest in the Collateral. Should such Borrower fail to do so, the Collateral
Agent is authorized to sign any such financing statements as such Borrower's
agent. Such Borrower further agrees that a carbon, photographic or other
reproduction of this Agreement or of a financing statement is sufficient as a
financing statement.
SECTION 8.03. Appointment of the Collateral Agent as the Borrowers'
-----------------------------------------------------
Attorney-in-Fact. Such Borrower hereby irrevocably designates, makes,
- ----------------
constitutes and appoints the Collateral Agent (and all persons designated by the
Collateral Agent) as such Borrower's true and lawful attorney-in-fact, and
authorizes the Collateral Agent, in such Borrower's or the Collateral Agent's
name, to, following the occurrence and during the continuance of an Event of
Default: (i) demand payment of such Borrower's Accounts; (ii) enforce payment of
such Borrower's Accounts by legal proceedings or otherwise; (iii) exercise all
of such Borrower's rights and remedies with respect to proceedings brought to
collect an Account; (iv) sell or assign any Account upon such terms, for such
amount and at such time or times as the Collateral Agent deems advisable; (v)
settle, adjust, compromise, extend or renew an Account; (vi) discharge and
release any Account; (vii) prepare, file and sign such Borrower's name on any
proof of claim in bankruptcy or other similar document against an account debtor
of such Borrower; (viii) notify the post office authorities to change the
address for delivery of such Borrower's mail to an address designated by the
Collateral Agent, and open and deal with all mail addressed to such Borrower;
(ix) do all acts and things which are necessary, in the Collateral Agent's sole
discretion, to fulfill such Borrower's obligations under this Agreement; (x)
take control in any manner of any item of payment or proceeds thereof; (xi) have
access to any lockbox or postal box into which such Borrower's mail is
deposited; (xii) endorse such Borrower's name upon any items of payment or
proceeds thereof and deposit the same in the
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Collateral Agent's account on account of the Obligations; (xiii) endorse such
Borrower's name upon any chattel paper, document, instrument, invoice, or
similar document or agreement relating to any Account or any goods pertaining
thereto; and (xiv) sign such Borrower's name on any verification of Accounts and
notices thereof to account debtors.
SECTION 8.04. Collection of Accounts and Restricted Account
---------------------------------------------
Arrangements. Such Borrower hereby represents and warrants that each depository
- ------------
account ("Collection Account") now maintained by such Borrower at any bank
------------------
("Collection Agent") for the collection of checks and cash constituting proceeds
----------------
of Accounts and sales of other personal property which are part of the
Collateral is identified on Schedule 8.04 attached hereto and made a part
-------------
hereof. With respect to each Collection Account, such Borrower shall, no later
than the Funding Date, deliver (to the extent not previously delivered pursuant
to the Existing Agreement) to the Collateral Agent, a "Restricted Account
------------------
Agreement" substantially in the form of Exhibit N attached hereto and made a
- --------- ---------
part hereof, duly executed and delivered by such Borrower and the applicable
Collection Agent, authorizing and directing such Collection Agent, upon receipt
of written notice from the Collateral Agent that an Event of Default has
occurred and is continuing, to deposit all checks and cash received into a
restricted account (a "Restricted Account") and remit all amounts deposited in
------------------
such Restricted Account to the Collateral Agent's account specified in such
Restricted Account Agreement until such time as the Collection Agent receives
written notice from the Collateral Agent rescinding such instruction. Such
Borrower shall, following the occurrence and during the continuance of an Event
of Default and any subsequent request by the Collateral Agent therefor, take
such further action as the Collateral Agent may reasonably deem desirable to
effect the transfer of exclusive ownership and control of the Restricted
Accounts and all Collection Accounts to the Collateral Agent. Until all of the
Obligations have been indefeasibly paid in full, such Borrower agrees not to
enter into any agreement or execute and deliver any direction which would
modify, impair or adversely affect the rights and benefits of the Collateral
Agent under any Restricted Account Agreement. Such Borrower shall not open,
establish or maintain any Collection Account (other than those identified on
Schedule 8.04 hereto) without first having delivered to the Collateral Agent a
- -------------
duly executed and delivered Restricted Account Agreement with respect to such
Collection Account. Such Borrower shall notify the Collateral Agent in writing
not less than five (5) days prior to the date it shall open or establish any
Collection Account other than an account described on Schedule 8.04 hereto.
-------------
SECTION 8.05. Cure Rights. Such Borrower expressly authorizes the
-----------
Collateral Agent, and the Collateral Agent may, but shall not be required to, at
any time and from time to time, to take any and all action that it reasonably
determines to be necessary or desirable to cure any default or violation
(including a payment default) of such Borrower in connection with any real
estate lease, license agreement, Governmental Approval or any other material
lease, agreement or contract entered into with respect to the Systems. Any and
all amounts expended by the Collateral Agent in connection with such actions
shall constitute Obligations secured by the Collateral.
ARTICLE IX
EVENTS OF DEFAULT; REMEDIES
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SECTION 9.01. Events of Default. The following events shall each
-----------------
constitute an "Event of Default":
----------------
(a) Any Borrower shall fail to pay the principal of or interest on
its Notes or any other amounts payable hereunder or under any of the other Loan
Documents when due, whether as scheduled, at a date fixed for prepayment, by
acceleration or otherwise, and such failure remains uncured for five (5)
Business Days; or
(b) Any Borrower or the Guarantor shall fail to observe or perform
any other covenant, condition or agreement to be observed or performed by any
Borrower or the Guarantor in any of the Loan Documents, in any material
agreement of any Borrower and any Borrower or the Guarantor fails to cure such
breach within fifteen (15) Business Days after written notice thereof unless the
breach relates to a covenant contained in Sections 5.04, or Article VI (other
------------- ------- --
than Section 6.05 or Section 6.07) or VII, in which case no notice or grace
------- ---- ------- ---- ---
period shall apply, or unless the breach relates to Section 5.06, in which case
------- ----
an Event of Default shall occur on the thirtieth day following the breach
without any notice requirement, unless the breach shall have been cured before
such date; or
(c) Any representation or warranty made by any Borrower or the
Guarantor in connection with this Agreement or any other Loan Document, or the
Loans or any statement or representation made in any report, certificate,
financial statement or other instrument furnished by or on behalf of such
Borrower or the Guarantor pursuant to this Agreement or any other Loan Document,
shall prove to have been false or misleading in any material respect when made
or delivered or when deemed made in accordance with the terms hereof or thereof;
or
(d) Any Borrower or the Guarantor shall fail to make any payment due
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) on any other obligation for borrowed money in excess of $250,000, and
such failure shall continue after the applicable grace period, if any, specified
in the agreement or instrument relating to such indebtedness; or any other
default or event under any agreement or instrument relating to any indebtedness
for borrowed money in excess of $250,000 or any other event, shall occur and
shall continue after the applicable grace period, if any, specified in such
agreement or instrument if the effect of such default or event is to accelerate,
or to permit the acceleration of, the maturity of such indebtedness in excess of
$250,000, or any such indebtedness in excess of $250,000 shall be declared to be
due and payable or required to be prepaid (other than by a regularly scheduled
required prepayment) prior to the stated maturity thereof; or
(e) Any Borrower or the Guarantor shall (i) apply for or consent to
the appointment of a receiver, trustee, custodian, sequestrator or similar
official for such Borrower or the Guarantor or for a substantial part of its
property, (ii) make a general assignment for the benefit of creditors, (iii)
become unable, or admit in writing its inability, to pay its debts as they
become due, (iv) voluntarily or involuntarily dissolve, liquidate or wind up its
affairs, or (v) take action for the purpose of effecting any of the foregoing;
or
(f) a proceeding under any bankruptcy, reorganization, arrangement of
debts, insolvency or receivership law is filed by or against any Borrower or the
Guarantor, or any Borrower or the Guarantor takes any action to authorize any of
the foregoing matters, and in the case of any such proceeding instituted against
any Borrower or the Guarantor (but not instituted
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by any Borrower or the Guarantor), either such proceeding shall remain
undismissed or unstayed for a period of 60 days or any of the actions sought in
such proceeding (including, without limitation, the entry of an order for relief
against, or the appointment of a receiver, trustee or other similar official for
any Borrower or the Guarantor or any substantial part of its property) shall be
granted or shall occur; or
(g) a Termination Event occurs which the Requisite Lenders in good
faith believe would subject any Borrower to a material liability; or
(h) the plan administrator of any Plan applies under Section 412(d)
of the IRC for a waiver of the minimum funding standards of Section 412(a) of
the IRC and the Requisite Lenders in good faith believe that the approval of
such waiver could subject any Borrower or any ERISA Affiliate to material
liability; or
(i) any of the Governmental Approvals or any other license,
Governmental Approval or other governmental consent or approval necessary for
the continuing operation of any Borrower any System or any other material
Governmental Approval or approval of or material filing with the FCC, any PUC or
any other Governmental Authority with respect to the conduct by any Borrower of
its business and operations, including its Business, shall not be obtained or
shall cease to be in full force and effect, which in respect of any of the
Governmental Approvals shall, in the case of an order of the FCC, any PUC or
other Governmental Authority having jurisdiction with respect thereto, revoking,
or deciding not to renew, any such Governmental Approval, occur upon the
issuance of such order, and, in the case of any other order revoking or
terminating any of the Governmental Approvals or deciding not to renew such
Governmental Approvals prior to the termination thereof, occur when such order
becomes final; or
(j) the FCC, any PUC or any other Governmental Authority, by final
order, determines that the existence or performance of this Agreement or any
other Loan Document will result in a revocation, suspension or material adverse
modification of any of the Governmental Approvals for any System; or
(k) for any reason any Loan Document shall not be in full force and
effect or shall not be enforceable in accordance with its terms, or any security
interest or lien granted pursuant thereto shall fail to be perfected or to have
its intended priority, or any party thereto other than the Administrative Agent
or any Lender shall contest the validity of any Lien granted under, or shall
disaffirm its obligations under any Loan Document; or
(l) any Borrower shall have wrongfully failed to accept
Telecommunications Equipment in accordance with any Lucent Purchase Agreement
within the period specified in such Lucent Purchase Agreement or shall otherwise
default under any Lucent Purchase Agreement, which default shall not have been
cured or waived within the applicable grace period thereunder; or
(m) for any reason, any Borrower ceases to operate its Business or
ceases to own any of its Governmental Approvals necessary for the continuing
conduct of its Business; or
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(n) a judgment or judgments for the payment of money in excess of
$250,000 individually or $500,000 in the aggregate at any one time shall have
been rendered against any Borrower and the same shall have remained unsatisfied
and in effect for any period of sixty (60) days during which no stay of
execution shall have been obtained; or
(o) any Borrower is enjoined, restrained or in any way prevented by
the order of any court or administrative or regulatory agency from conducting
its business in any material respect with respect to any one or more of its
Systems; or
(p) any Borrower becomes subject to any liabilities, costs, expenses,
damages, fines or penalties which could reasonably be expected to have a
Material Adverse Effect arising out of or related to (i) any Remedial Action in
response to a Release or threatened Release at any location of any Contaminant
into the indoor or outdoor environment or (ii) any material violation of any
environmental, health or safety requirement of law; or
(q) the Guarantor shall fail to pay any amounts due on the Guaranty,
or shall fail to observe or perform any covenant, condition or agreement to be
observed or performed by the Guarantor in the Guaranty; or
(r) the Guarantor shall have failed to contribute an aggregate amount
of at least $60,000,000 in equity capital into the Borrowers prior to the
Funding Date;
(s) a Change of Control shall occur; or
(t) a "Default" or "Event of Default" (as defined in the Unsecured
Loan Agreement) shall exist or occur.
SECTION 9.02. Termination of Commitment; Acceleration. Upon the
---------------------------------------
occurrence and at any time during the continuance of any Event of Default, the
Administrative Agent may upon direction from the Requisite Lenders:
(a) by notice to the Borrowers, terminate Lenders' Commitment to
make Loans hereunder; or
(b) by notice to the Borrowers, declare the Obligations to be
immediately due and payable, whereupon all the Obligations shall be immediately
due and payable without further notice of any kind, provided, however, that if
-------- -------
an Event of Default described in Section 9.01(f) shall exist or occur, all of
---------------
the Obligations shall automatically, without declaration or notice of any kind,
be immediately due and payable and the Commitment shall be automatically
terminated.
SECTION 9.03. Waivers. Demand, presentment, protest and notices of
-------
nonpayment, protest, dishonor and acceptance are hereby waived by each Borrower.
Each Borrower also waives the benefit of all valuation, appraisal and exemption
laws and the posting of any bond required of the Administrative Agent, the
Collateral Agent or any Lender in connection with any judicial process to
realize on the Collateral, to enforce any judgment or other court order entered
in favor of the Administrative Agent, the Collateral Agent or any Lender or to
enforce by specific performance, temporary restraining order, or preliminary or
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permanent injunction, this Agreement or any other Loan Documents. Each Borrower
waives the right, if any, to the benefit of, or to direct the application of,
any Collateral. Each Borrower hereby acknowledges that none of the
Administrative Agent, the Collateral Agent or any Lender has any obligation to
resort to any Collateral or make claim against any other Person before seeking
payment or performance from any Borrower.
SECTION 9.04. Rights and Remedies Generally. If an Event of Default
-----------------------------
occurs and is continuing, the Administrative Agent and the Collateral Agent
shall have, in addition to any other rights and remedies contained in this
Agreement or in any of the other Loan Documents, all of the rights and remedies
of a secured party under the Code or other applicable laws, all of which rights
and remedies shall be cumulative, and none exclusive, to the extent permitted by
law. In addition to all such rights and remedies, the sale, lease or other
disposition of the Collateral, or any part thereof, by the Administrative Agent
or the Collateral Agent after the occurrence of an Event of Default may be for
cash, credit or any combination thereof, and the Administrative Agent or the
Collateral Agent may purchase all or any part of the Collateral at public or, if
permitted by law, private sale, and in lieu of actual payment of such purchase
price, may set off the amount of such purchase price against the Obligations
then owing. Any sales of the Collateral may be adjourned from time to time with
or without notice. The Administrative Agent or the Collateral Agent may, in its
sole discretion, cause the Collateral to remain on the premises of any Borrower,
at the expense of the Borrowers, pending sale or other disposition of the
Collateral. The Administrative Agent or the Collateral Agent shall have the
right to conduct such sales on the premises of any Borrower, at the expense of
the Borrowers, or elsewhere, on such occasion or occasions as it may see fit.
SECTION 9.05. Entry Upon Premises and Access to Information. If an
---------------------------------------------
Event of Default occurs and is continuing, the Administrative Agent and the
Collateral Agent shall have the right to enter upon the premises of any Borrower
where any Collateral is located (or is believed to be located) without any
obligation to pay rent to such Borrower, or any other place or places where the
Collateral is believed to be located and kept, and render the Collateral
unusable or remove the Collateral therefrom to the premises of the
Administrative Agent or the Collateral Agent or any agent thereof, for such time
as the Administrative Agent or the Collateral Agent may desire, in order
effectively to collect or liquidate the Collateral, and/or the Administrative
Agent or the Collateral Agent may require any Borrower to assemble the
Collateral and make it available to the Administrative Agent or the Collateral
Agent at a place or places to be designated by the Administrative Agent or the
Collateral Agent. If an Event of Default occurs and is continuing, the
Administrative Agent or the Collateral Agent shall have the right to obtain
access to any Borrower's data processing equipment, computer hardware and
software relating to the Collateral and to use all of the foregoing and the
information contained therein in any manner the Administrative Agent or the
Collateral Agent deems appropriate.
SECTION 9.06. Sale or Other Disposition of Collateral by the
----------------------------------------------
Administrative Agent or the Collateral Agent. Any notice required to be
- --------------------------------------------
given by the Administrative Agent or the Collateral Agent of a sale, lease or
other disposition or other intended action by the Administrative Agent or the
Collateral Agent with respect to any of the Collateral which is deposited in the
United States mails, registered or certified, postage prepaid and duly addressed
to the Borrowers at the address specified in Section 11.01 below, at least ten
-------------
days prior to such proposed action shall constitute fair and reasonable notice
to the Borrowers of any such action.
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The net proceeds realized by the Administrative Agent or the Collateral Agent
upon any such sale or other disposition, after deduction for the expense of
retaking, holding, preparing for sale, selling or the like and the reasonable
attorneys' fees and legal expenses incurred by the Administrative Agent or the
Collateral Agent in connection therewith, shall be applied as provided herein
toward satisfaction of the Obligations. The Administrative Agent or the
Collateral Agent, as applicable, shall account for and pay to the Borrowers any
surplus realized upon such sale or other disposition, and the Borrowers shall
remain liable for any deficiency. The commencement of any action, legal or
equitable, or the rendering of any judgment or decree for any deficiency shall
not affect the Administrative Agent's or the Collateral Agent's security
interest in the Collateral. The Borrowers agree that the Collateral Agent has no
obligation to preserve rights to the Collateral against any other parties. The
Administrative Agent and the Collateral Agent are hereby granted a license or
other right to use, without charge, the Borrowers' labels, patents, copyrights,
rights of use of any name, trade secrets, trade names, trademarks, service marks
and advertising matter, or any property of a similar nature, as it pertains to
the Collateral, and the Borrowers' rights under all licenses and all franchise
agreements shall inure to the Administrative Agent's and the Collateral Agent's
benefit until the Obligations are paid in full.
SECTION 9.07. Governmental Approvals. In connection with the
----------------------
enforcement by the Administrative Agent or the Collateral Agent of any remedies
available to it as a result of any Event of Default, each Borrower agrees that
it shall join and cooperate fully with, at the request of the Administrative
Agent or the Collateral Agent, any receiver referred to below and/or the
successful bidder or bidders at any foreclosure sale in a filing of an
application (and furnishing any additional information that may be required in
connection with such application or which the Administrative Agent or the
Collateral Agent may believe relevant to such application) with the FCC, any PUC
and all other applicable Governmental Authorities, requesting their prior
approval of (i) the operation or abandonment of all or the portion of any System
and/or (ii) the transfer of control of such Borrower or assignment of all
licenses, certificates, Governmental Approvals, approvals and permits, issued to
such Borrower by the FCC, any PUC or any such Governmental Authorities with
respect to any System and the operation thereof, to the Administrative Agent or
the Collateral Agent, the receiver or to the successful bidder or bidders. In
connection with the foregoing, each Borrower shall take such further actions,
and execute all such instruments, as the Administrative Agent or the Collateral
Agent reasonably deems necessary or desirable. Each Borrower agrees that the
Administrative Agent or the Collateral Agent may enforce any obligation of such
Borrower as set forth in this section by an action for specific performance. In
addition, each Borrower hereby irrevocably constitutes and appoints the
Administrative Agent and the Collateral Agent and any agent or officer thereof
(which appointment is coupled with an interest) as its true and lawful attorney-
in-fact with full irrevocable power and authority and in the place and stead of
such Borrower and in the name of such Borrower or in its own name, from time to
time in its discretion after the occurrence and during the continuance of an
Event of Default and in connection with the foregoing, for the purpose of
executing on behalf and in the name of such Borrower any and all of the above-
referenced instruments and to take any and all appropriate action in furtherance
of the foregoing. The exercise of any rights or remedies hereunder or under any
other Loan Document by any Lender, the Administrative Agent or the Collateral
Agent that may require FCC, any PUC or any other Governmental Authority approval
shall be subject to obtaining such approval. Pending the receipt of any FCC, any
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PUC or any other Governmental Authority approval, no Borrower shall do anything
to delay, hinder, interfere or obstruct the exercise of the Administrative
Agent's or the Collateral Agent's rights or remedies hereunder in obtaining such
approvals.
SECTION 9.08. Appointment of Receiver or Trustee. In connection with
----------------------------------
the exercise of its remedies under this Agreement, the Administrative Agent or
the Collateral Agent may, upon the occurrence of an Event of Default, obtain the
appointment of a receiver or trustee to assume, upon receipt of all necessary
judicial, FCC, any PUC or other Governmental Authority consents or approvals,
control of or ownership of any of the Governmental Approvals. Such receiver or
trustee shall have all rights and powers provided to it by law or by court order
or provided to the Administrative Agent or the Collateral Agent under this
Agreement. Upon the appointment of such trustee or receiver, the Borrowers agree
to cooperate, to the extent necessary or appropriate, in the expeditious
preparation, execution and filing of an application to the FCC, any PUC or any
other Governmental Authority or for consent to the transfer of control or
assignment of any Borrower's Governmental Approvals to the receiver or trustee.
SECTION 9.09. Right of Setoff. In addition to any rights now or
---------------
hereafter granted under applicable law and not by way of limitation of any such
rights, upon the occurrence and during the continuance of any Event of Default,
each Lender and each holder of any Note is hereby authorized at any time or from
time to time, without notice to any Borrower or to any other Person, any such
notice being hereby expressly waived, to set off and to appropriate and to apply
any and all balances held by it at any of its offices for the account of any
Borrower (regardless of whether such balances are then due to such Borrower) and
any other properties or assets any time held or owing by that Lender or that
holder to or for the credit or for the account of any Borrower against and on
account of any of the Obligations which are not paid when due. Any Lender or
holder of any Note exercising a right to set off or otherwise receiving any
payment on account of the Obligations in excess of its Pro Rata Share thereof
shall purchase for cash (and the other Lenders or holders shall sell) such
participation in each such other Lender's or holder's Pro Rata Share of the
Obligations as would be necessary to cause such Lender to share the amount so
set off or otherwise received with each other Lender or holder in accordance
with their respective Pro Rata Shares. Each Borrower agrees, to the fullest
extent permitted by law, that (a) any Lender or holder may exercise its right to
set off with respect to amounts in excess of its Pro Rata Share of the
Obligations and may sell participations in such amount so set off to other
Lenders and holders and (b) any Lender or holder so purchasing a participation
in the Loans made or other Obligations held by other Lenders or holders may
exercise all rights of set-off, bankers' lien, counterclaim or similar rights
with respect to such participation as fully as if such Lender or holder were a
direct holder of the Loans and the other Obligations in the amount of such
participation. Notwithstanding the foregoing, if all or any portion of the set-
off amount or payment otherwise received is thereafter recovered from the Lender
that has exercised the right of set-off, the purchase of participations by that
Lender shall be rescinded and the purchase price restored without interest. Each
Borrower hereby agrees that the foregoing provisions are intended to be
construed so as to satisfy the requirements of Section 553 of the Federal
Bankruptcy Code or amendments thereto (including any requirement of mutuality of
obligations therein).
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ARTICLE X
THE ADMINISTRATIVE AGENT AND THE COLLATERAL AGENT
SECTION 10.01. Appointment of Administrative Agent. (a) CIBC is
-----------------------------------
hereby appointed to act as contractual representative on behalf of all Lenders
under this Agreement and the other Loan Documents. The Administrative Agent
agrees to act as such contractual representative upon the express conditions
contained in this Article X. The provisions of this Section 10.01 are solely for
--------- -------------
the benefit of the Administrative Agent and the Lenders and no Borrower or any
other Person shall have any rights as a third party beneficiary of any of the
provisions hereof. In performing its functions and duties under this Agreement
and the other Loan Documents, the Administrative Agent shall act solely as an
agent of the Lenders and does not assume and shall not be deemed to have assumed
any obligation toward or relationship of agency or trust with or for any
Borrower or any other Person. The Administrative Agent shall have no duties or
responsibilities except for those expressly set forth in this Agreement and the
other Loan Documents. Notwithstanding the use of the defined term
"Administrative Agent", it is expressly understood and agreed that the
Administrative Agent shall not have any fiduciary responsibilities to any Lender
by reason of this Agreement and that the Administrative Agent is merely acting
as the representative of the Lenders with only those duties as are expressly set
forth in this Agreement and the other Loan Documents. In its capacity as the
Lenders' contractual representative, the Administrative Agent (i) does not
assume any fiduciary duties to any of the Lenders, (ii) is a "representative" of
the Lenders within the meaning of Section 9-105 of the UCC and (iii) is acting
as an independent contractor, the rights and duties of which are limited to
those expressly set forth in this Agreement and the other Loan Documents. Each
of the Lenders agrees to assert no claim against the Administrative Agent on any
agency theory or any other theory of liability for breach of fiduciary duty, all
of which claims each Lender waives. Neither the Administrative Agent nor any of
its Affiliates nor any of their respective officers, directors, employees,
agents or representatives shall be liable to any Lender for any action taken or
omitted to be taken by it hereunder or under any other Loan Document, or in
connection herewith or therewith, except for damages caused by its or their own
gross negligence or willful misconduct.
(b) If the Administrative Agent shall request instructions from all
Lenders, Requisite Lenders or all affected Lenders with respect to any act or
action (including failure to act) in connection with this Agreement or any other
Loan Document, then the Administrative Agent shall be entitled to refrain from
such act or taking such action unless and until the Administrative Agent shall
have received instructions from all Lenders, Requisite Lenders or all affected
Lenders, as the case may be, and the Administrative Agent shall not incur
liability to any Person by reason of so refraining. The Administrative Agent
shall be fully justified in failing or refusing to take any action hereunder or
under any other Loan Document (a) if such action would, in the opinion of the
Administrative Agent, be contrary to law or the terms of this Agreement or any
other Loan Document, (b) if such action would, in the opinion of the
Administrative Agent, expose the Administrative Agent to liabilities beyond the
limits of this Agreement or (c) if the Administrative Agent shall not first be
indemnified to its satisfaction against any and all liability and expense which
may be incurred by it by reason of taking or continuing to take any such action.
Without limiting the foregoing, no Lender shall have any right of action
whatsoever against the Administrative Agent as a result of the Administrative
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Agent acting or refraining from acting hereunder or under any other Loan
Document in accordance with the instructions of all Lenders, Requisite Lenders
or all affected Lenders, as applicable.
SECTION 10.02. Administrative Agent's Reliance, Etc. Neither the
-------------------------------------
Administrative Agent nor any of its Affiliates nor any of their respective
directors, officers, agents or employees shall be liable for any action taken or
omitted to be taken by it or them under or in connection with this Agreement or
the other Loan Documents, except for damages caused by its or their own gross
negligence or willful misconduct. Without limitation of the generality of the
foregoing, the Administrative Agent: (a) may treat the payee of any Note as the
holder thereof until the Administrative Agent receives written notice of the
assignment or transfer thereof signed by such payee and in form satisfactory to
the Administrative Agent; (b) may consult with legal counsel, independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken in good faith by it in accordance with the
advice of such counsel, accountants or experts; (c) makes no warranty or
representation to any Lender and shall not be responsible to any Lender for any
statements, warranties or representations made in or in connection with this
Agreement or the other Loan Documents; (d) shall not have any duty to ascertain
or to inquire as to the performance or observance of any of the terms, covenants
or conditions of this Agreement or the other Loan Documents on the part of any
Borrower or to inspect the Collateral (including the books and records); (e)
shall not be responsible to any Lender for the due execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement or
the other Loan Documents or any other instrument or document furnished pursuant
hereto or thereto; and (f) shall incur no liability under or in respect of this
Agreement or the other Loan Documents by acting upon any notice, consent,
certificate or other instrument or writing (which may be by telecopy, telegram,
cable or telex) believed by it to be genuine and signed or sent by the proper
party or parties.
SECTION 10.03. CIBC and Affiliates. With respect to its Commitments
-------------------
hereunder, CIBC shall have the same rights and powers under this Agreement and
the other Loan Documents as any other Lender and may exercise the same as though
it were not the Administrative Agent; and the term "Lender" or "Lenders" shall,
unless otherwise expressly indicated, include CIBC in its individual capacity.
CIBC and its Affiliates may lend money to, invest in, and generally engage in
any kind of business with, any Borrower, any of its Affiliates and any Person
who may do business with or own securities of any Borrower or any such
Affiliate, all as if CIBC were not the Administrative Agent and without any duty
to account therefor to Lenders. CIBC and its Affiliates may accept fees and
other consideration from any Borrower for services in connection with this
Agreement or otherwise without having to account for the same to Lenders. CIBC
may also purchase or hold Equity Interests or warrants in the Guarantor or any
Borrower and make subordinated loans to any Borrower. Each Lender acknowledges
the potential conflict of interest between CIBC as a Lender holding
disproportionate interests in the Loans, CIBC as a subordinated lender to any
Borrower, CIBC as a shareholder of the Guarantor, and CIBC, as Administrative
Agent.
SECTION 10.04. Lender Credit Decision. Each Lender acknowledges that
----------------------
it has, independently and without reliance upon the Administrative Agent or any
other Lender and based on the financial information given it by the Borrowers
and such other documents and information as it has deemed appropriate, made its
own credit and financial analysis of the
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Borrowers and its own decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the
Administrative Agent or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement. Each
Lender acknowledges the potential conflict of interest of each other Lender as a
result of Lenders holding disproportionate interests in the Loans, and expressly
consents to, and waives any claim based upon, such conflict of interest.
SECTION 10.05. Indemnification. Each of the Lenders agrees to
---------------
indemnify the Administrative Agent (to the extent not reimbursed by the
Borrowers and without limiting the obligations of Borrowers hereunder), ratably
according to their respective Pro Rata Shares, from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever which may be
imposed on, incurred by, or asserted against the Administrative Agent in any way
relating to or arising out of this Agreement or any other Loan Document or any
action taken or omitted by the Administrative Agent in connection therewith;
provided, however, that no Lender shall be liable for any portion of such
- -------- -------
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from the Administrative Agent's gross
negligence or willful misconduct. Without limiting the foregoing, each Lender
agrees to reimburse the Administrative Agent promptly upon demand for its
ratable share of any out-of-pocket expenses (including counsel fees) incurred by
the Administrative Agent in connection with the preparation, execution,
delivery, administration, modification, amendment or enforcement (whether
through negotiations, legal proceedings or otherwise) of, or legal advice in
respect of rights or responsibilities under, this Agreement and each other Loan
Document, to the extent that the Administrative Agent is not reimbursed for such
expenses by the Borrowers.
SECTION 10.06. Successor Agent. The Administrative Agent may resign
---------------
at any time by giving not less than thirty (30) days' prior written notice
thereof to Lenders and the Borrowers. Upon any such resignation, the Requisite
Lenders shall have the right to appoint a successor Administrative Agent. If no
successor Administrative Agent shall have been so appointed by the Requisite
Lenders and shall have accepted such appointment within 30 days after the
resigning Administrative Agent's giving notice of resignation, then the
resigning Administrative Agent may, on behalf of Lenders, appoint a successor
Administrative Agent, which shall be a Lender, if a Lender is willing to accept
such appointment, or otherwise shall be a commercial bank or financial
institution or a subsidiary of a commercial bank or financial institution if
such commercial bank or financial institution is organized under the laws of the
United States of America or of any State thereof and has a combined capital and
surplus of at least $300,000,000. If no successor Administrative Agent has been
appointed pursuant to the foregoing, by the 30th day after the date such notice
of resignation was given by the resigning Administrative Agent, such resignation
shall become effective and the Requisite Lenders shall thereafter perform all
the duties of Administrative Agent hereunder until such time, if any, as the
Requisite Lenders appoint a successor Administrative Agent as provided above.
Any successor Administrative Agent appointed by the Requisite Lenders hereunder
shall be subject to the approval of Borrowers, such approval not to be
unreasonably withheld or delayed; provided that such approval shall not be
--------
required if a Default or an Event of Default shall have occurred and be
continuing. Upon the acceptance of any appointment as Administrative Agent
hereunder by a successor Administrative Agent, such successor Administrative
Agent shall succeed to and
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become vested with all the rights, powers, privileges and duties of the
resigning Administrative Agent. Upon the earlier of the acceptance of any
appointment as Administrative Agent hereunder by a successor Administrative
Agent or the effective date of the resigning Administrative Agent's resignation,
the resigning Administrative Agent shall be discharged from its duties and
obligations under this Agreement and the other Loan Documents, except that any
indemnity rights or other rights in favor of such resigning Administrative Agent
shall continue. After any resigning Administrative Agent's resignation
hereunder, the provisions of this Section 10.06 shall inure to its benefit as to
-------------
any actions taken or omitted to be taken by it while it was Administrative Agent
under this Agreement and the other Loan Documents.
SECTION 10.07. Payments; Non-Funding Lenders; Information; Actions
in Concert.
(a) Loans; Payments. Whenever the Administrative Agent receives a
---------------
payment of principal, interest, fee or premium (if any) or other payment, or
whenever the Administrative Agent makes an application of funds, in connection
with the Loans or the Notes (including, without limitation, any payment or
application from any Collateral), the Administrative Agent will on the date such
payment is received or applied, if on or prior to 11:00 a.m. (Eastern time) on
such date, or otherwise on the next Business Day, pay over to each Lender as
instructed by such Lender in writing, an amount equal to such Lender's Pro Rata
Share of such payment provided that such Lender has funded all Loans required to
be made by it and has purchased all participation required to be purchased by it
under this Agreement and the other Loan Documents as of such date. To the extent
that any Lender (a "Non-Funding Lender") has failed to fund all such payments
-------------------
and Loans or failed to fund the purchase of all such participation, the
Administrative Agent shall be entitled to set off the funding short-fall against
that Non-Funding Lender's Pro Rata Share of all payments received from the
Borrowers. All payments by Administrative Agent shall be made by wire transfer
to such Lender's account (as specified by such Lender) not later than 2:00 p.m.
(Eastern time) on the applicable Business Day.
(b) Return of Payments. (i) If Administrative Agent pays an amount to
------------------
a Lender under this Agreement in the belief or expectation that a related
payment has been or will be received by the Administrative Agent from the
Borrowers and such related payment is not received by Administrative Agent, then
the Administrative Agent will be entitled to recover such amount from such
Lender on demand without set-off, counterclaim or deduction of any kind.
(ii) If the Administrative Agent determines at any time that any
amount received by the Administrative Agent under this Agreement must be
returned to any Borrower or paid to any other Person pursuant to any
insolvency law or otherwise, then, notwithstanding any other term or
condition of this Agreement or any other Loan Document, the Administrative
Agent will not be required to distribute any portion thereof to any Lender.
In addition, each Lender will repay to Administrative Agent on demand any
portion of such amount that the Administrative Agent has distributed to
such Lender, together with interest at such rate, if any, as the
Administrative Agent is required to pay to any Borrower or such other
Person, without set-off, counterclaim or deduction of any kind.
(c) Non-Funding Lenders. The failure of any Non-Funding Lender to
-------------------
make any portion of its Loans or any payment required by it hereunder on the
date specified therefor
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shall not relieve any other Lender (each such other Lender, an "Other Lender")
------------
of its obligations to make any such Loan on such date, but neither any Other
Lender nor the Administrative Agent shall be responsible for the failure of any
Non-Funding Lender to make any Loan. Notwithstanding anything set forth herein
to the contrary, a Non-Funding Lender shall not have any voting or consent
rights under or with respect to any Loan Document or constitute a "Lender" (or
be included in the calculation of "Requisite Lenders" hereunder) for any voting
or consent rights under or with respect to any Loan Document.
(d) Dissemination of Information. The Administrative Agent will use
----------------------------
reasonable efforts to provide Lenders with any notice of Default or Event of
Default received by the Administrative Agent from, or delivered by the
Administrative Agent to, the Borrowers, with notice of any Event of Default of
which the Administrative Agent has actually become aware and with notice of any
action taken by the Administrative Agent following any Event of Default;
provided, however, that the Administrative Agent shall not be liable to any
- --------
Lender for any failure to do so, except to the extent that such failure is
attributable to the Administrative Agent's gross negligence or willful
misconduct. Lenders acknowledge that the Borrowers are required to provide
financial statements and other documents to Lenders pursuant to this Agreement
and agree that the Administrative Agent shall have no duty to provide the same
to Lenders.
(e) Actions in Concert. Anything in this Agreement to the contrary
------------------
notwithstanding, each Lender hereby agrees with each other Lender that no Lender
shall take any action to protect or enforce its rights arising out of this
Agreement or the Notes (including exercising any rights of set-off) without
first obtaining the prior written consent of the Administrative Agent and
Requisite Lenders, it being the intent of Lenders that any such action to
protect or enforce rights under this Agreement and the Notes shall be taken in
concert and at the direction or with the consent of Administrative Agent.
SECTION 10.08. Collateral Matters.
------------------
(a) The Lenders hereby irrevocably authorize the Collateral Agent, at
its option and in its reasonable business judgment, to release any Lien upon any
Collateral (i) upon the termination of the Commitments and payment and
satisfaction of all Loans and all other Obligations and which the Collateral
Agent has been notified in writing are then due and payable; (ii) constituting
property being sold or disposed of if the applicable Borrower certifies to the
Collateral Agent that the sale or disposition is made in compliance with Section
-------
6.03 (and the Collateral Agent may rely conclusively on any such certificate,
- ----
without further inquiry); or (iii) constituting property leased to the
applicable Borrower under a lease which has expired or been terminated in a
transaction permitted under this Agreement or which will expire imminently and
which has not been, and is not intended by such Borrower to be, renewed or
extended and with respect to which such Borrower has not exercised any purchase
option. Except as provided above, the Collateral Agent will not release or
subordinate any of the Liens without the prior written authorization of the
Requisite Lenders; provided that the Collateral Agent may not release or
--------
subordinate the Liens on Collateral valued in the aggregate in excess of
$500,000 without the prior written authorization of the Requisite Lenders and
may not release all or substantially all of the Collateral or subordinate the
Liens thereon without the consent of the Lenders. Upon request by the
Collateral Agent or the Borrowers at any time, the Lenders will confirm in
writing the Collateral Agent's authority to release any Liens upon particular
types or items of Collateral pursuant to this Section 10.08(a).
----------------
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(b) Upon receipt by the Collateral Agent of any authorization
required pursuant to Section 10.08(a) from the Requisite Lenders or Lenders, as
----------------
applicable, of the Collateral Agent's authority to release any Liens upon
particular types or items of Collateral, and upon at least five (5) Business
Days' prior written request by the applicable Borrower, and provided that no
Event of Default has occurred and is then continuing, the Collateral Agent shall
(and is hereby irrevocably authorized by the Lenders to) execute such documents
as may be necessary to evidence the release of the Liens upon such Collateral;
provided, however, that (i) the Collateral Agent shall not be required to
- -------- -------
execute any such document on terms which, in the Collateral Agent's opinion,
would expose the Collateral Agent to liability or create any obligation or
entail any consequence other than the release of such Liens without recourse or
warranty, and (ii) such release shall not in any manner discharge, affect or
impair the Obligations or any Liens (other than those expressly being released)
upon (or obligations of the applicable Borrower in respect of) all interests
retained by the applicable Borrower, including (without limitation) the proceeds
of any sale, all of which shall continue to constitute part of the Collateral.
(c) The Collateral Agent shall have no obligation whatsoever to any
of the Lenders to assure that the Collateral exists or is owned by any Borrower
or is cared for, protected or insured or has been encumbered, or, other than a
duty to act without recklessness, willful misconduct or gross (but not mere)
negligence, that the Liens have been properly or sufficiently or lawfully
created, perfected, protected or enforced or are entitled to any particular
priority, or to exercise at all or in any particular manner or under any duty of
care, disclosure or fidelity, or to continue exercising, any of the rights,
authorities and powers granted or available to the pursuant to this Section
-------
10.08 or pursuant to any of the Loan Documents, it being understood and agreed
- -----
that in respect of the Collateral, or any act, omission or event related
thereto, the Collateral Agent may act in any manner it may deem appropriate, in
its reasonable business judgment, given the Collateral Agent's own interest in
the Collateral in its capacity as one of the Lenders and that the Collateral
Agent shall have no other duty or liability whatsoever to any Lender as to any
of the foregoing.
SECTION 10.09. Agency for Perfection. Each Lender hereby appoints
---------------------
each other Lender as agent for the purpose of perfecting the Lenders' security
interest in assets which, in accordance with Article 9 of the UCC can be
perfected only by possession. Should any Lender (other than the Collateral
Agent) obtain possession of any such Collateral, such Lender shall notify the
Collateral Agent thereof, and, promptly upon the Collateral Agent's request
therefor shall deliver such Collateral to the Collateral Agent.
SECTION 10.10. Concerning the Collateral and the Related Loan
----------------------------------------------
Documents and the Collateral Agent. (a) Each Lender authorizes and directs the
- ----------------------------------
Collateral Agent to enter into this Agreement and the other Loan Documents
relating to the Collateral, for the ratable benefit of the Lenders. Each Lender
agrees that any action taken by the Collateral Agent or Requisite Lenders in
accordance with the terms of this Agreement or the other Loan Documents relating
to the Collateral, and the exercise by the Collateral Agent or the Requisite
Lenders of their respective powers set forth therein or herein, together with
such other powers that are reasonably incidental thereto, shall be binding upon
all of the Lenders.
(b) The Collateral Agent with respect to the administration of the
Collateral shall have the same rights, obligations and status as the
Administrative Agent as are set forth in Section 10.01, 10.02, 10.03, 10.04,
------------- ----- ----- -----
10.05, and 10.06 above.
- ----- -----
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ARTICLE XI
MISCELLANEOUS
SECTION 11.01. Notices; Action on Notices, etc. (a) Notices and
-------------------------------
other communications provided for herein shall be in writing and shall be
delivered by a courier service of recognized standing (specifying one (1) day
delivery), or by registered or certified mail, postage prepaid, return receipt
requested (or, if by telecopy communications equipment of the sending party,
delivered by such equipment) addressed, if to the Borrowers, at PaeTec
Communications, Inc., 290 Woodcliff Drive, Fairport, New York 14450 ; Attention:
Vice President, Finance (telecopy no. (716) 340-2563 confirmation no. (716) 340-
2512) with a copy to General Counsel; (telecopy no. (716) 340-2563 confirmation
no. (716) 340-2630), , if to the Administrative Agent (or CIBC as a Lender), at
Canadian Imperial Bank of Commerce, 425 Lexington Avenue, New York, New York
10017, Attention: Executive Director, Media Telecom Group (telecopy no. (212)
856-3550, confirmation no. (212) 856-3985), with copies to Canadian Imperial
Bank of Commerce, 425 Lexington Avenue, New York, New York 10017, Attention:
Agency Services (telecopy no. (212) 856-3763, confirmation no. (212) 856-4062),
if to the Collateral Agent (or Newcourt CFC, as a Lender), at Two Gatehall
Drive, Parsippany, NJ 07054, Attention: Media and Communications , Vice
President-Operations Manager (telecopy no. (973) 355-7641, confirmation no.
(973) 355-7632), with copies to Newcourt Commercial Finance Corporation, Two
Gatehall Drive, Parsippany, NJ 07054, Attention: Vice President - Credit
(telecopy no. (973) 355-7641, confirmation no. (973) 355-7630) and Attention:
Vice President - Legal (telecopy no. (973) 355-7645, confirmation no. (973) 355-
7609), if to any Lender (other than CIBC or Newcourt CFC), at its address set
forth below its signature line on Annex A hereto or as otherwise specified by
-------
any Lender in an Assignment Agreement or otherwise in writing. All notices and
other communications given to any party hereto in accordance with the provisions
of this Agreement shall be deemed to have been given (a) five Business Days
after mailing when sent by registered or certified mail, postage prepaid, return
receipt requested, or (b) upon receipt, if by courier service or any telecopy
communications equipment of the sender, in each case addressed to such party as
provided in this Section or in accordance with the latest unrevoked direction
from such party.
(b) Each Borrower agrees that the Administrative Agent and the
Collateral Agent may act upon any notice, consent, certificate, cable, telex or
other instrument or writing believed by the Administrative Agent or the
Collateral Agent or to be genuine, that the Administrative Agent or the
Collateral Agent may consult with legal counsel, selected by the Administrative
Agent or the Collateral Agent and shall not be liable to any Borrower for any
action taken or omitted to be taken in good faith by Lender in accordance with
the advice of such counsel.
SECTION 11.02. No Waivers; Amendments. (a) No failure or delay of
----------------------
the Administrative Agent, the Collateral Agent or any Lender to exercise any
right hereunder or under any other Loan Document shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, preclude
any other or further exercise thereof or the exercise of any other right. No
waiver of any provision of this Agreement or any other Loan Document (exclusive
of any Interest Rate Agreement) nor consent to any departure by any Borrower
therefrom shall in any event be effective unless the same shall be in writing
and signed by the Administrative Agent and the Requisite Lenders, and then such
waiver or consent shall be
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effective only in the specific instance and for the purpose for which given. No
notice or demand on any Borrower in any case shall entitle any Borrower to any
other or further notice or demand in similar or other circumstances.
(b) Subject to the provisions of this Section 11.02(b), the Requisite
----------------
Lenders (or the Administrative Agent with the consent in writing of the
Requisite Lenders) and the Borrowers may enter into agreements supplemental
hereto for the purpose of adding or modifying any provisions to the Loan
Documents or changing in any manner the rights of the Lenders or the Borrowers
hereunder or waiving any Event of Default or Default hereunder; provided, that
--------
any Interest Rate Agreement which constitutes a Loan Document may be amended or
modified solely with the consent of the parties thereto; provided, further,
-------- -------
however, that no such supplemental agreement shall, without the consent of each
- -------
Lender affected thereby:
(i) Postpone or extend the Commitment Termination Date, the
maturity date for the loans or any other date fixed for any payment of
principal of, or interest on, the Loans or any fees or other amounts
payable to such Lender except with respect to (A) any modifications of the
provisions relating to prepayments of Loans and other Obligations and (B) a
waiver of the application of the default rate of interest pursuant to
Section 2.05(b) hereof.
---------------
(ii) Reduce the principal amount of any Loans, or reduce the rate or
extend the time of payment of interest or fees thereon.
(iii) Reduce the percentage specified in the definition of Requisite
Lenders or any other percentage of Lenders specified to be the applicable
percentage in this Agreement to act on specified matters or amend the
definition of "Pro Rata Share".
(iv) Increase the amount of any Commitment of any Lender hereunder
or increase any Lender's Pro Rata Share.
(v) Permit any Borrower to assign its rights under this Agreement.
(vi) Release all or substantially all of the Collateral.
(vii) Amend this Section 11.02(b).
----------------
No amendment of any provision of this Agreement relating to the Administrative
Agent or the Collateral Agent shall be effective without the written consent of
the Administrative Agent or the Collateral Agent, as applicable.
SECTION 11.03. GOVERNING LAW AND JURISDICTION. THIS AGREEMENT AND
------------------------------
THE OTHER LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY
CONFLICTS OF LAWS PRINCIPLES. THE BORROWERS, THE ADMINISTRATIVE AGENT, THE
COLLATERAL AGENT AND THE LENDERS CONSENT TO THE JURISDICTION OF ANY LOCAL, STATE
OR FEDERAL COURT LOCATED IN THE STATE OF NEW YORK AND WAIVE ANY
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OBJECTION RELATING TO IMPROPER VENUE OR FORUM NON CONVENIENCE TO THE CONDUCT OF
ANY PROCEEDING BY SUCH COURT.
SECTION 11.04. Expenses; Documentary Taxes. The Borrowers will pay,
---------------------------
and have joint and several liability for, all documented out-of-pocket third-
party expenses (i) incurred by the Administrative Agent and the Collateral Agent
in connection with the negotiation, preparation and execution of the Loan
Documents (whether or not the transactions contemplated hereby shall be
consummated), and (ii) by the Administrative Agent, the Collateral Agent or the
Lenders in connection with the administration of the Loan Documents, the
creation, perfection, priority and protection of the Liens in the Collateral,
and the enforcement of the rights of the Administrative Agent, the Collateral
Agent or the Lenders in connection with this Agreement, any other Loan Documents
or the Collateral, including all reasonable attorneys' and paralegals' fees and
related expenses and costs. The Borrowers agree that they shall jointly and
severally indemnify the Administrative Agent, the Collateral Agent and the
Lenders from and hold them harmless against any documentary taxes, assessments
or charges made by any Governmental Authority by reason of the execution and
delivery of this Agreement or any other Loan Document unless prohibited by law.
SECTION 11.05. Equitable Relief. Each Borrower recognizes that, in
----------------
the event such Borrower fails to perform, observe or discharge any of its
obligations or liabilities under this Agreement, or any other Loan Document, any
remedy at law may prove to be inadequate relief to the Administrative Agent, the
Collateral Agent and the Lenders; therefore, such Borrower agrees that the
Administrative Agent or the Collateral Agent, if it so requests, shall be
entitled to temporary and permanent injunctive relief in any such case without
the necessity of proving actual damages.
SECTION 11.06. Indemnification; Limitation of Liability. (a) The
----------------------------------------
Borrowers jointly and severally agree to protect, indemnify and hold harmless
the Administrative Agent, the Collateral Agent, each Lender and each of their
respective officers, affiliates, directors, employees, attorneys, accountants,
consultants, representatives and agents (collectively called the "Indemnitees")
-----------
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, expenses and disbursements
(including, without limitation, payment by the Administrative Agent, the
Collateral Agent or any Lender of any obligations due or past due under any
contract or agreement to which any Borrower is or becomes a party) of any kind
or nature whatsoever (including, without limitation, the fees and disbursements
of counsel for and consultants of such Indemnitees in connection with any
investigative, administrative or judicial proceeding, whether or not such
Indemnitees shall be designated a party thereto), which may be imposed on,
incurred by, or asserted against such Indemnitees (whether direct, indirect, or
consequential and whether based on any federal or state laws or other statutory
regulations, including, without limitation, securities, environmental and
commercial laws and regulations, under common law or at equitable cause or on
contract or otherwise) in any manner relating to or arising out of this
Agreement or any of the other Loan Documents (other than claims arising solely
from a dispute between the Administrative Agent, the Collateral Agent and any
number of Lenders or between any two or more Lenders), or any act, event or
transaction related or attendant thereto, the agreements of the Administrative
Agent, the Collateral Agent or the Lenders contained herein, the making of
Loans, the management of such Loans or the Collateral (including any liability
under federal, state or local environmental
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laws or regulations) or the use or intended use of the proceeds of such Loans
hereunder (collectively, the "Indemnified Matters"); provided that the Borrowers
------------------- --------
shall not have any obligation to any Indemnitee hereunder with respect to
Indemnified Matters caused by or resulting from the willful misconduct or gross
negligence of such Indemnitee; provided, further that no Borrower shall have any
-------- -------
obligation to any Indemnitee hereunder with respect to taxes that are imposed on
the net income of any Indemnitee or any franchise or doing business taxes
imposed on any Indemnitee. To the extent that the undertaking to indemnify, pay
and hold harmless set forth in the preceding sentence may be unenforceable
because it is violative of any law or public policy, the Borrowers shall
contribute the maximum portion which they are permitted to pay and satisfy under
applicable law, to the payment and satisfaction of all Indemnified Matters
incurred by the Indemnitees.
(b) To the extent permitted by applicable law, no claim may be made
by the Borrowers or any other Person against the Administrative Agent, the
Collateral Agent, any Lender or any of their respective affiliates, directors,
officers, employees, agents, attorneys, accountants, representatives or
consultants for any special, indirect, consequential or punitive damages in
respect of any claim for breach of contract or any other theory of liability
arising out of or related to the transactions contemplated by any of the Loan
Documents or any act, omission or event occurring in connection therewith; and
the Borrowers hereby waive, release and agree not to sue upon any claim for any
such damages, whether or not accrued and whether or not known or suspected to
exist in its favor.
SECTION 11.07. Survival of Representations and Warranties, etc. All
------------------------------------------------
warranties and representations made by any Borrower in any Loan Document shall
survive the execution and delivery of this Agreement and the other Loan
Documents and the making and repayment of the Obligations. The confidentiality
obligations of each Borrower in Section 11.16, the indemnification obligations
-------------
of each Borrower in Section 11.06, and to the extent the second sentence of
-------------
Section 11.13 is applicable, all covenants of each Borrower, survive the
- -------------
repayment of the Obligations.
SECTION 11.08. Successors and Assigns; Assignments; Participations
---------------------------------------------------
(a) General. The terms and provisions of the Loan Documents shall be
-------
binding upon and inure to the benefit of the Borrowers, the Administrative
Agent, the Collateral Agent and the Lenders and their respective successors and
assigns, except that (i) no Borrower shall have any right to assign its rights
or obligations under the Loan Documents and (ii) any assignment by any Lender
must be made in compliance with subsection (c) below. Notwithstanding the
foregoing, any Lender may at any time, without the consent of the Borrowers or
the Administrative Agent, assign all or any portion of its rights under this
Agreement and its Notes to a Federal Reserve Bank or to an affiliate of such
Lender; provided, however, that no such assignment shall release the transferor
-------- -------
Lender from its obligations hereunder. The Administrative Agent shall be
entitled to utilize its Register to determine the payee of any Note for all
purposes hereof. Any request, authority or consent of any Person, who at the
time of making such request or giving such authority or consent is the holder of
any Note, shall be conclusive and binding on any subsequent holder, transferee
or assignee of such Note or of any Note or Notes issued in exchange therefor.
(b) Participations.
--------------
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<PAGE>
(i) Subject to the terms set forth in this Section 11.08(b), any
----------------
Lender may, in the ordinary course of its business and in accordance with
applicable law, at any time sell to one or more banks or other entities
("Participants") participating interests in any Loan owing to such Lender,
any Note held by such Lender, any Commitment of such Lender or any other
interest of such Lender under the Loan Documents on a pro rata or non-pro
rata basis in an aggregate principal amount of at least $2,500,000. In the
event of any such sale by a Lender of participating interests to a
Participant, such Lender's obligations under the Loan Documents shall
remain unchanged, such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, such Lender shall
remain the holder of any such Note for all purposes under the Loan
Documents, such Lender shall be solely responsible for any withholding
taxes or any filing or reporting requirements in connection therewith
relating to such Participant, all amounts payable by the Borrowers under
this Agreement shall be determined as if such Lender had not sold such
participating interests, and the Borrowers and the Administrative Agent
shall continue to deal solely and directly with such Lender in connection
with such Lender's rights and obligations under the Loan Documents except
that, for purposes of Section 2.13 hereof, the Participants shall be
------------
entitled to the same rights as if they were Lenders, provided that no
--------
Participant shall be entitled to receive any greater amount pursuant to
Section 2.13 than such Lender would have been entitled to receive in
------------
respect of the amount of the participation transferred to such Participant
had no transfer occurred.
(ii) Each Lender shall retain the sole right to approve, without the
consent of any Participant, any amendment, modification or waiver of any
provision of the Loan Documents other than any amendment, modification or
waiver with respect to any Loan or Commitment in which such Participant has
an interest which forgives principal, interest or fees or reduces the
interest rate or fees payable pursuant to the terms of this Agreement with
respect to any such Loan or Commitment, postpones any date fixed for any
regularly-scheduled payment of principal of, or interest or fees on, any
such Loan or Commitment, or releases all or substantially all of the
Collateral, if any, securing any such Loan.
(iii) The Borrowers agree that each Participant shall be deemed to
have the right of setoff provided in Section 9.09 hereof in respect to its
------------
participating interest in amounts owing under the Loan Documents to the
same extent as if the amount of its participating interest were owing
directly to it as a Lender under the Loan Documents, provided that each
--------
Lender shall retain the right of setoff provided in Section 9.09 hereof
------------
with respect to the amount of participating interests sold to each
Participant except to the extent such Participant exercises its right of
setoff. The Lenders agree to share with each Participant, and each
Participant, by exercising the right of setoff provided in Section 9.09
------------
hereof, agrees to share with each Lender, any amount received pursuant to
the exercise of its right of setoff, such amounts to be shared in
accordance with Section 9.09 as if each Participant were a Lender.
------------
(c) Assignments.
-----------
(i) Any Lender may, in the ordinary course of its business and in
accordance with applicable law, at any time assign to one or more Permitted
Assignees ("Purchasers") all
----------
-76-
<PAGE>
or a portion of its rights and obligations under this Agreement (including,
without limitation, its Commitment and the Loans owing to it hereunder) in
accordance with the provisions of this Section 11.08(c). Each assignment
----------------
shall be of a constant, and not a varying, ratable percentage of all of the
assigning Lender's rights and obligations under this Agreement. Such
assignment shall be evidenced by an Assignment Agreement in form and
substance reasonably satisfactory to the Administrative Agent and shall not
be permitted hereunder unless such assignment (A) is either for all of such
Lender's rights and obligations under the Loan Documents or for Loans and
Commitments in an aggregate principal amount equal to the lesser of
$5,000,000 (which minimum amount may be waived by the Administrative Agent
and the Borrower at any time that an Event of Default has not occurred and
is not continuing and solely by the Administrative Agent upon the
occurrence and during the continuance of an Event of Default) and such
Lender's Commitment Amount, and (B) is consented to by the Administrative
Agent (such consent not to be unreasonably withheld) at any time that an
Event of Default has not occurred and is not continuing.
(ii) Upon (i) delivery to the Administrative Agent of a notice of
assignment (a "Notice of Assignment"), together with any consent required
--------------------
hereunder, and (ii) payment of a $3,500 processing fee to the
Administrative Agent for processing such assignment (unless such assignment
is made by one of the Agents to one of its affiliates, in which case no
processing fee shall be assessed), such assignment shall become effective
on the effective date specified in such Notice of Assignment. The assigning
Lender shall be obligated to reimburse the Administrative Agent for all
other costs and expenses associated with the preparation and execution of
such assignment (including reasonable attorneys' fees arising out of such
preparation and execution of such assignment). The Notice of Assignment
shall contain a representation by the Purchaser to the effect that none of
the consideration used to make the purchase of the Commitment and Loans
under the applicable assignment agreement are "plan assets" as defined
under ERISA and that the rights and interests of the Purchaser in and under
the Loan Documents will not be "plan assets" under ERISA. On and after the
effective date of such assignment, such Purchaser, if not already a Lender,
shall for all purposes be a Lender party to this Agreement and any other
Loan Documents executed by the Lenders and shall have all the rights and
obligations of a Lender under the Loan Documents, to the same extent as if
it were an original party hereto, and no further consent or action by the
Borrowers, the Lenders or the Administrative Agent shall be required to
release the transferor Lender with respect to the percentage of the
aggregate Commitment and Loans assigned to such Purchaser. Upon the
consummation of any assignment to a Purchaser pursuant to this Section
-------
11.08(c)(ii), the transferor Lender, the Administrative Agent and the
------------
Borrowers shall make appropriate arrangements so that replacement Notes are
issued to such transferor Lender and new Notes or, as appropriate,
replacement Notes, are issued to such Purchaser, in each case in principal
amounts reflecting their Commitment and their Loans, as adjusted pursuant
to such assignment.
(iii) The Administrative Agent shall maintain at its address referred
to in Section 11.01 a copy of each assignment delivered to and accepted by
-------------
it pursuant to this Section 11.08 and a register (the "Register") for the
------------- --------
recordation of the names and addresses of the Lenders and the Commitment of
and principal amount of the Loans owing to, each
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<PAGE>
Lender from time to time and whether such Lender is an original Lender or
the assignee of another Lender pursuant to an assignment under this Section
-------
11.08. The entries in the Register shall be conclusive and binding for all
-----
purposes, absent manifest error, and the Borrowers, the Administrative
Agent and the Lenders may treat each Person whose name is recorded in the
Register as a Lender hereunder for all purposes of this Agreement. The
Register shall be available for inspection by the Borrowers or any Lender
at any reasonable time and from time to time upon reasonable prior notice.
SECTION 11.09. Severability. In case any one or more of the
------------
provisions contained in this Agreement or any other Loan Document shall be
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein and therein shall
not in any way be affected or impaired thereby.
SECTION 11.10. Cover Page, Table of Contents and Section Headings.
--------------------------------------------------
The cover page, Table of Contents and section headings used herein are for
convenience of reference only, are not part of this Agreement and are not to
affect the construction of or be taken into consideration in interpreting this
Agreement.
SECTION 11.11. Counterparts. This Agreement may be signed in
------------
counterparts with the same effect as if the signatures thereof and hereto were
upon the same instrument.
SECTION 11.12. Application of Payments. Notwithstanding any
-----------------------
contrary provision contained in this Agreement or in any of the other Loan
Documents, upon the occurrence and during the continuance of any Event of
Default, each Borrower irrevocably waives the right to direct the application of
any and all payments at any time or times hereafter received by the
Administrative Agent or any Lender from such Borrower or with respect to any of
the Collateral, and such Borrower does hereby irrevocably agree that the
Administrative Agent or any Lender shall have the continuing exclusive right to
apply and reapply any and all payments received at any time or times hereafter,
whether with respect to the Collateral or otherwise, against the Obligations in
such manner as the Administrative Agent or any Lender may deem advisable,
notwithstanding any entry by the Administrative Agent or any Lender upon any of
its books and records.
SECTION 11.13. Marshalling; Payments Set Aside. Neither the
-------------------------------
Administrative Agent nor the Collateral Agent shall be under any obligation to
marshall any assets in favor of any Borrower or any other party or against or in
payment of any or all of the Obligations. To the extent that any Borrower makes
a payment or payments to the Administrative Agent, the Collateral Agent or any
Lender or the Administrative Agent, the Collateral Agent or any Lender enforces
its security interests or exercises its rights of setoff, and such payment or
payments or the proceeds of such enforcement or setoff or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
and/or required to be repaid to a trustee, receiver or any other party under any
bankruptcy law, state or federal law, common law or equitable cause, then to the
extent of such recovery, the obligation or part thereof originally intended to
be satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or setoff had not occurred.
SECTION 11.14. SERVICE OF PROCESS. EACH BORROWER WAIVES PERSONAL
------------------
SERVICE OF ANY PROCESS UPON IT AND, CONSENTS THAT ALL
-78-
<PAGE>
SERVICE OF PROCESS SHALL BE MADE BY REGISTERED MAIL, RETURN RECEIPT REQUESTED,
DIRECTED TO SUCH BORROWER AT THE ADDRESS INDICATED IN SECTION 11.01 AND SERVICE
-------------
SO MADE SHALL BE DEEMED TO BE COMPLETED FIVE (5) BUSINESS DAYS AFTER SAME SHALL
HAVE BEEN POSTED AS AFORESAID.
SECTION 11.15. WAIVER OF JURY TRIAL, ETC. EACH OF THE BORROWERS, THE
-------------------------
ADMINISTRATIVE AGENT, THE COLLATERAL AGENT AND THE LENDERS WAIVES ANY RIGHT TO
HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT,
TORT, OR OTHERWISE, BETWEEN THE ADMINISTRATIVE AGENT, THE COLLATERAL AGENT OR
ANY LENDER AND ANY BORROWER ARISING OUT OF, CONNECTED WITH, RELATED TO OR
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR
AGREEMENT EXECUTED OR DELIVERED IN CONNECTION THEREWITH OR THE TRANSACTIONS
RELATED THERETO. EACH OF THE BORROWERS, THE ADMINISTRATIVE AGENT, THE
COLLATERAL AGENT AND THE LENDERS HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY
AND THAT ANY OF THEM MAY FILE AS AN ORIGINAL COUNTERPART OR A COPY OF THIS
AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES
HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
SECTION 11.16. Confidentiality. No Borrower shall at any time before
---------------
or after payment in full and satisfaction of all of the Obligations, reveal,
divulge or make known, or knowingly permit to be so revealed, divulged or made
known, to any Person (including Persons within its own organization who do not
have a definite need to know for the purpose of performance of this Agreement),
the terms or conditions of this Agreement or any document or agreement now or
hereafter executed in connection herewith except (i) the Borrower's may reveal
such terms and conditions to their respective legal counsel and accountants who
agree to keep such terms and conditions confidential, (ii) the Borrowers may
disclose the aggregate amount and maturity of the credit facility evidenced by
this Agreement and the identity of the Administrative Agent to its investors,
(iii) with the prior consent of the Administrative Agent as to timing and
content, the Borrowers may issue a press release relating to this Agreement and
the facilities evidenced hereby, (iv) information required to be disclosed by
order of a court of competent jurisdiction or in connection with any
governmental investigation (in each case to the extent disclosure is required,
but no further) may be disclosed so long as such Borrower notifies the
Administrative Agent in writing of any circumstances of which such Borrower is
aware that may lead to such a requirement or order, so as to allow the
Administrative Agent to take steps to contest such order or investigation, (v)
information which is required to be disclosed by such Borrower or information
which in the reasonable determination of such Borrower is desirable for such
Borrower to disclose, pursuant to federal or state securities laws, pursuant to
the rules or regulations of the FCC, any PUC or other applicable Governmental
Authority may be so disclosed and (vi) information may be disclosed to Persons
who may potentially provide debt financing (other than a lender providing
secured financing to such Borrower or any debt financing in replacement of the
Loans) or equity financing to such Borrower or any Affiliate
-79-
<PAGE>
with respect to its Business and any consultants or advisors of such Person, or
to Persons who are consultants, advisors (including but not limited to attorneys
and auditors), officers, directors or employees of such Borrower, provided that
each such Person is required by such Borrower to keep such information
confidential.
SECTION 11.17. Entire Agreement, etc. This Agreement (including all
----------------------
schedules and exhibits referred to herein), the Notes, the Fee Letter and all
other Loan Documents constitute the entire contract between the parties hereto
with respect to the subject matter hereof and thereof and shall supersede and
take the place of any other instrument purporting to be an agreement of the
parties hereto relating to such subject matter. Notwithstanding the foregoing,
the terms of that certain Non Disclosure Agreement dated July 16, 1998 and the
Addendum thereto date July 27, 1998 (collectively, the "Non Disclosure
--------------
Agreement") among the Collateral Agent, PaeTec and International, shall survive
the execution and effectiveness of this Agreement.
SECTION 11.18. No Strict Construction. The parties hereto have
-----------------------
participated, jointly in the negotiation and drafting of this Agreement. In the
event of any ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of authorship of any provisions of this Agreement.
-80-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their duly authorized officers as of the day and year first
above written.
PAETEC COMMUNICATIONS, INC., as a Borrower
By: /s/ Timothy J. Bancroft
-------------------------------------------
Name: Timothy J. Bancroft
Title: Vice President, Finance
PAETEC INTERNATIONAL, INC., as a Borrower
By: /s/ Timothy J. Bancroft
-------------------------------------------
Name: Timothy J. Bancroft
Title: Vice President, Finance
PAETEC ONLINE, INC., as a Borrower
By: /s/ Timothy J. Bancroft
-------------------------------------------
Name: Timothy J. Bancroft
Title: Vice President, Finance
PAETEC COMMUNICATIONS OF VIRGINIA, INC.,
as a Borrower
By: /s/ Timothy J. Bancroft
-------------------------------------------
Name: Timothy J. Bancroft
Title: Vice President, Finance
PAETEC CAPITAL CORP., as a Borrower
By: /s/ Timothy J. Bancroft
-------------------------------------------
Name: Timothy J. Bancroft
Title: Vice President, Finance
<PAGE>
CAMPUSLINK COMMUNICATIONS SYSTEMS, INC.,
as a Borrower
By: /s/ Timothy J. Bancroft
-------------------------------------------
Name: Timothy J. Bancroft
Title: Vice President, Finance
SELECT SWITCH ACQUISITION CO., as a Borrower
By: /s/ Timothy J. Bancroft
-------------------------------------------
Name: Timothy J. Bancroft
Title: Vice President, Finance
PARKLINK COMMUNICATIONS, INC., as a Borrower
By: /s/ Timothy J. Bancroft
-------------------------------------------
Name: Timothy J. Bancroft
Title: Vice President, Finance
EAST FLORIDA COMMUNICATIONS, INC., as a
Borrower
By: /s/ Timothy J. Bancroft
-------------------------------------------
Name: Timothy J. Bancroft
Title: Vice President, Finance
<PAGE>
CANADIAN IMPERIAL BANK OF COMMERCE, as
Administrative Agent and as a Lender
By: /s/ Ellen Marshall
---------------------------------------------
Name: Ellen Marshall
Title: Managing Director
NEWCOURT COMMERCIAL FINANCE CORPORATION, as Collateral
Agent and a Lender
By: /s/ Mike Monahan
---------------------------------------------
Name: Mike Monahan
Title: Vice President
MERRILL LYNCH CAPITAL CORP., as a Lender
By: /s/ Jack Lucid
---------------------------------------------
Name: Jack Lucid
Title: Vice President
<PAGE>
Annex A
Lender Commitment Amount
------ -----------------
Canadian Imperial Bank of Commerce $ 32,500,000
Newcourt Commercial Finance Corporation $ 32,500,000
Merrill Lynch Capital Corp. $ 5,000,000
250 Vesey Street
New York, NY 10281
Telecopier No.: 212-738-1719
Confirmation No.: 212-449-6996
Attention: Mark Campbell
<PAGE>
EXHIBIT 10.16.2
AMENDMENT NO. 1
Dated as of March 28, 2000
to
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
Dated as of October 29, 1999
THIS AMENDMENT NO. 1 (this "Amendment") dated as of March 28,
2000 is entered into by and among:
(i) PAETEC COMMUNICATIONS, INC., PAETEC INTERNATIONAL, INC.,
PAETEC ONLINE, INC., PAETEC COMMUNICATIONS OF VIRGINIA, INC.,
PAETEC CAPITAL CORP., CAMPUSLINK COMMUNICATIONS SYSTEMS, INC.,
SELECT SWITCH ACQUISITION CO.,, PARKLINK COMMUNICATIONS, INC.,
and EAST FLORIDA COMMUNICATIONS, INC. (the "Borrowers");
--------- ---------
(ii) CANADIAN IMPERIAL BANK OF COMMERCE ("CIBC"), NEWCOURT
----
COMMERCIAL FINANCE CORPORATION, an affiliate of The CIT Group,
Inc. ("Newcourt CFC"), and MERRILL LYNCH CAPITAL CORP.
------------
("Merrill"), each in its capacity as an assignor hereunder,
-------
and collectively, the "Assigning Lenders");
-----------------
(iii) UNION BANK OF CALIFORNIA, N.A. ("UBOC");
----
(iv) GENERAL ELECTRIC CAPITAL CORPORATION (the "Accepting Lender,"
and together with the Assigning Lenders and UBOC, the
"Lenders"); and
-------
(v) CANADIAN IMPERIAL BANK OF COMMERCE, in its capacity as
administrative agent (in such latter capacity, the "Agent").
-----
PRELIMINARY STATEMENTS
(A) The Borrowers, the Assigning Lenders, UBOC and the Agent
are parties to that certain Amended and Restated Loan and Security Agreement,
dated as of October 29, 1999 (the "Loan Agreement", the terms defined therein
--------------
being used herein as therein defined unless otherwise defined herein).
(B) The Borrowers, the Assigning Lenders, UBOC, the Agent and
the Accepting Lender wish to enter into this Amendment to evidence assignments
and assumptions from the Assigning Lenders to the Accepting Lender, such that
(i) GECC becomes a Lender under the Loan Agreement and (ii) the Commitments of
the Lenders shall be as set forth on Exhibit A hereto.
---------
(C) The Borrowers, the Assigning Lenders, UBOC, the Agent and
the Accepting Lender are, on the terms and conditions stated below, agreeable to
amending the Loan
<PAGE>
Agreement as set forth below.
SECTION 1. Amendments to the Loan Agreement. The Loan Agreement is
--------------------------------
hereby amended as follows, such amendment to be effective as of the date hereof
subject to the satisfaction of the conditions precedent set forth in Section 2
---------
hereof:
(a) The Assigning Lenders and the Accepting Lenders hereby agree
among themselves (and the Borrowers and Agent hereby consent to such
agreement) that, on the "Effective Date" (as defined in Section 2
---------
below), there shall be deemed to have occurred certain assignments from
the Assigning Lenders and related assumptions by the Accepting Lender
with respect to certain rights and obligations of the Assigning Lenders
under the Loan Documents, such that, after giving effect to such
assignments and assumptions, each Lender"s Commitment Amount is as
stated on Exhibit A hereto. The Assigning Lenders make such assignments
---------
without recourse, representation, or warranty, except as expressly set
forth in Section 3 hereof, and the Accepting Lender accepts and assumes
---------
such assignments and assumptions on such terms. The Lenders shall make
all appropriate payments and adjustments among themselves to effectuate
the payment and receipt of the appropriate purchase prices for the
assignments and assumptions contemplated by this Section 1.
---------
Notwithstanding the provisions of Section 11.08 of the Loan Agreement,
the assignments among the Assigning Lenders and the Accepting Lender
contemplated and effected in accordance with this Section 1 and
---------
reflected on Exhibit A hereto (the "Subject Assignments") (1) shall be
--------- -------------------
evidenced by this Amendment and not by separate Assignment and
Acceptance Agreements and (2) shall not require the payment of the
processing fee provided for in Section 11.08(c)(ii) of the Loan
Agreement. On and after the Effective Date, each reference in the Loan
Agreement and the other Loan Documents to "Lender" or "Lenders" shall
include GECC and shall no longer include Merrill.
(b) Annex A ("Commitment Amounts") to the Loan Agreement is hereby
amended to delete such Annex in its entirety and to substitute therefor
the Annex attached hereto as Exhibit A.
---------
SECTION 2. Conditions Precedent. This Amendment shall become
--------------------
effective and be deemed effective as of the date hereof (the "Effective Date")
--------------
upon (i) receipt by the Agent of counterparts of this Amendment executed by the
Borrowers, the Agent, UBOC, all of the Assigning Lenders and the Accepting
Lender, and (ii) receipt of a Note by GECC, if GECC shall have requested such.
SECTION 3. Representations, Warranties and Covenants.
3.1. The Accepting Lender hereby represents, warrants, and
covenants the following to each of the Assigning Lenders and the
Agent:
(a) This Amendment is the legal, valid and binding
agreement of the Accepting Lender, enforceable in accordance
with its terms;
2
<PAGE>
(b) The execution and performance by the Accepting
Lender of its duties and obligations under this Amendment and
the Loan Documents will not require any registration with,
notice to, or consent or approval by any Governmental
Authority;
(c) The Accepting Lender is familiar with
transactions of the kind and scope reflected in the Loan
Documents and in this Amendment;
(d) The Accepting Lender has made its own
independent investigation and appraisal of the financial
condition and affairs of the Borrowers, has conducted its own
evaluation of the Loans, the Loan Documents and the
Borrowers" creditworthiness, has made its decision to become
a Lender to the Borrowers under the Loan Agreement
independently and without reliance upon any Assigning Lender
or the Agent, and will continue to do so;
(e) The Accepting Lender is entering into this
Amendment in the ordinary course of its business, and is
acquiring its interest in the Loans for its own account and
not with a view to or for sale in connection with any
subsequent distribution; provided, however, that at all times
the distribution of the Accepting Lender"s property shall,
subject to the terms of the Loan Agreement, be and remain
within its control;
(f) No future assignment or participation by the
Accepting Lender pursuant to Section 11.08 of the Loan
Agreement will require any Assigning Lender, the Agent or the
Borrowers to file any registration statement with the
Securities and Exchange Commission or to apply to qualify
under the blue sky laws of any state;
(g) The Accepting Lender has no loans to, written or
oral agreements with, or equity or other ownership interest
in any of the Borrowers;
(h) As of the Effective Date, the Accepting Lender
is entitled to receive payments of principal and interest in
respect of the Obligations without deduction for or on
account of any taxes imposed by the United States of America
or any political subdivision thereof;
(i) The Accepting Lender is a Permitted Assignee;
(j) The Accepting Lender appoints and authorizes the
Agent to take such actions as administrative agent on its
behalf and to exercise such powers and discretion under the
Loan Agreement as are delegated to the Agent by the terms
thereof, together with such powers and discretion as are
reasonable incidental thereto; and
3
<PAGE>
(k) The Accepting Lender will perform in accordance
with their terms all of the obligations that by the terms of
the Loan Agreement are required to be performed by it as a
Lender.
3.2. Each of the Assigning Lenders hereby represents,
warrants, and covenants the following to the Accepting Lender and the
Agent:
(a) This Amendment is the legal, valid and binding
agreement of the Assigning Lender, enforceable in accordance
with its terms;
(b) The execution and performance by the Assigning
Lender of its duties and obligations under this Amendment and
the Loan Documents will not require any registration with,
notice to, or consent or approval by any Governmental
Authority;
(c) The Assigning Lender has full power and
authority, and has taken all action necessary to execute and
deliver this Amendment and to fulfill the obligations
hereunder and to consummate the transactions contemplated
hereby;
(d) The Assigning Lender has not previously
assigned, transferred or otherwise disposed of any of the
interests being assigned hereby, and the interests being
assigned hereby are free and clear of any adverse claim,
lien, encumbrance, security interest, restriction on
transfer, purchase option, call or similar right of a third
party, in each case, created by, through or under the
Assigning Lender; and
(e) This Assignment by the Assigning Lender to the
Accepting Lender complies, in all material respects, with the
terms of the Loan Documents.
3.3. Each of the Borrowers hereby represents, warrants, and
covenants the following to each of the Lenders and the Agent:
(a) This Amendment is the legal, valid and binding
agreement of such Borrower, enforceable in accordance with
its terms; and
(b) As of the Effective Date, no Default or Event of
Default has occurred and is continuing.
3.4. Neither the Assigning Lenders (except as provided in
Section 3.2), UBOC nor the Agent make any representations or
-----------
warranties of any kind, nor assume any responsibility or liability
whatsoever, with regard to (a) the Loan Documents or any other
document or instrument furnished pursuant thereto or the Loans or
other Obligations, (b) the creation, validity, genuineness,
enforceability, sufficiency, value or collectibility of any of them,
(c) the amount, value or existence of the Collateral, (d) the
perfection or priority of any Lien upon the
4
<PAGE>
Collateral, or (e) the financial condition of the Borrowers or any
other obligor or the performance or observance by the Borrowers of
their obligations under any of the Loan Documents. Neither the
Assigning Lenders, UBOC nor the Agent has or will have any duty,
either initially or on a continuing basis, to make any investigation,
evaluation, appraisal of, or any responsibility or liability with
respect to the accuracy or completeness of, any information provided
to the Accepting Lender which has been provided by the Assigning
Lenders or the Agent by the Borrowers. Nothing in this Amendment or
in the Loan Documents shall impose upon the Assigning Lenders, UBOC
or the Agent any fiduciary relationship in respect of the Accepting
Lender.
SECTION 4. Reference to and Effect on the Loan Agreement.
4.1. Upon the effectiveness of this Amendment, each reference in
the Loan Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import shall mean and be a reference to the
Loan Agreement, as amended hereby, and each reference to the Loan
Agreement in any other document, instrument or agreement executed
and/or delivered in connection with the Loan Agreement shall mean and
be a reference to the Loan Agreement as amended hereby.
4.2. The Loan Agreement, as amended hereby, and each of the
other Loan Documents shall remain in full force and effect and are
hereby ratified and confirmed.
4.3. The execution, delivery and effectiveness of this Amendment
shall not operate as a waiver of any right, power or remedy of any
Lender or the Agent under the Loan Agreement or any of the other Loan
Documents, nor constitute a waiver of any provision contained
therein, except as specifically set forth herein.
SECTION 5. Execution in Counterparts. This Amendment may be executed
-------------------------
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same instrument.
SECTION 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT
GIVING EFFECT TO ANY CONFLICTS OF LAWS PRINCIPLES THAT REQUIRE OR PERMIT THE
APPLICATION OF THE LAWS OF ANY OTHER STATE OR JURISDICTION.
SECTION 7. Headings. Section headings in this Amendment are included
--------
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized as of the
date first above written.
Signature Page to the Amendment
<PAGE>
PAETEC COMMUNICATIONS, INC., as a Borrower
PAETEC INTERNATIONAL, INC., as a Borrower
PAETEC ONLINE, INC., as a Borrower
PAETEC COMMUNICATIONS OF VIRGINIA, INC., as a Borrower
PAETEC CAPITAL CORP., as a Borrower
CAMPUSLINK COMMUNICATIONS SYSTEMS, INC., as a Borrower
SELECT SWITCH ACQUISITION CO., as a Borrower
PARKLINK COMMUNICATIONS, INC., as a Borrower
EAST FLORIDA COMMUNICATIONS, INC., as a Borrower
/s/ Timothy Bancroft
By: ___________________________________
Name: Timothy Bancroft
Title: Vice President, Finance
CANADIAN IMPERIAL BANK OF COMMERCE, as Administrative
Agent and as an Assigning Lender
/s/ Laura Horn
By: ___________________________________
Name: Laura Horn
Title: Executive Director, CIBC WorldMarkets
Corp. As Appointed
NEWCOURT COMMERCIAL FINANCE CORPORATION,
an affiliate of The CIT Group, Inc., as an Assigning Lender
/s/ John P. Sicico, II
By: ___________________________________
Name: John P. Sicico, II
Title: Vice President
MERRILL LYNCH CAPITAL CORP., as an Assigning Lender
/s/ Jodi Lund
By: ___________________________________
Name: Jodi Lund
Title: Managing Director
UNION BANK OF CALIFORNIA, N.A. as a Lender
/s/ James C. Opdyke
By: ___________________________________
Name: James C. Opdyke
Title: Assistant Vice President
GENERAL ELECTRIC CAPITAL CORPORATION as an Accepting
Lender
/s/ Molly S. Fergusson
By: -----------------------------------
Name: Molly S. Fergusson
Title: Manager, Operations
Address: c/o GE Capital Services
Service Finance Group, Inc.
120 Long Ridge Road
Stamford, CT 06927
Attn: Portfolio Operations (Telecom)
Facsimile No.: (203) 961-2017
Confirmation No.: (203) 357-3735
<PAGE>
Exhibit A
Annex A to the Loan Agreement
Commitment Amounts
------------------
Lender Commitment Amount
------ -----------------
Canadian Imperial Bank of Commerce $20,000,000.00
Newcourt Commercial Finance Corporation $20,000,000.00
General Electric Capital Corporation $20,000,000.00
Union Bank of California, N.A. $10,000,000.00
8
<PAGE>
Exhibit 10.17
EXECUTION COPY
AMENDED AND RESTATED GUARANTY
This AMENDED AND RESTATED GUARANTY ("Guaranty") is made as of the 29th
--------
day of October, 1999, by PaeTec Corp., a Delaware corporation (the "Guarantor"),
---------
in favor of Newcourt Commercial Finance Corporation, as "Collateral Agent" for
the ratable benefit of the "Lenders" (each as defined below) (in such capacity,
the "Collateral Agent"). Capitalized terms used herein and not otherwise
----------------
defined herein shall have the respective meanings given to such terms in the
"Loan Agreement" (as defined below).
WITNESSETH:
WHEREAS, PaeTec Communications, Inc. ("PaeTec"), PaeTec International,
Inc. ("International"), PaeTec Online, Inc. ("PaeTec Online"), PaeTec
Communications of Virginia, Inc. ("PaeTec Virginia"), PaeTec Capital Corp.
("PaeTec Capital"), Campuslink Communications Systems, Inc. ("Campuslink"),
Select Switch Acquisition Co. ("Select"), Parklink Communications, Inc.
("Parklink"), East Florida Communications, Inc. ("Florida"), and such other
borrowers which become "Borrowers" from time to time (PaeTec, International,
PaeTec Online, PaeTec Virginia, PaeTec Capital, Campuslink, Select, Parklink,
Florida and such other borrowers collectively, the "Borrowers"), the financial
institutions named as "Lenders" therein (the "Lenders"), Canadian Imperial Bank
of Commerce, as administrative agent for the Lenders (in such capacity, the
"Administrative Agent"), and the Collateral Agent are entering into that certain
Amended and Restated Loan and Security Agreement dated as of even date herewith
(as amended, restated, supplemented or otherwise modified from time to time, the
"Loan Agreement");
--------------
WHEREAS, the Borrowers are direct or indirect subsidiaries of the
Guarantor and the Guarantor will derive direct and indirect economic benefit
from the loans made to the Borrowers under the Loan Agreement; and
WHEREAS, the Administrative Agent, the Collateral Agent and the
Lenders have required, as a condition to their entering into the Loan Agreement,
that the Guarantor execute and deliver the Guaranty;
NOW THEREFORE, Guarantor hereby agrees as follows:
1. Guaranty. (i) For value received and in consideration of any
--------
loan, advance or financial accommodation of any kind whatsoever heretofore, now
or hereafter made, given or granted to any Borrower by the Lenders, the
Guarantor unconditionally guarantees to the Collateral Agent, for the ratable
benefit of the Lenders, the full and prompt payment and performance when due,
whether at maturity or earlier, by reason of acceleration or otherwise, and at
all times thereafter, of all of the Obligations of each Borrower, and all
interest, charges and fees, including, without limitation, interest accruing
following the filing of a bankruptcy petition by or against any Borrower, at the
applicable rate specified in the Loan Agreement, whether or not such interest is
allowed as a claim in bankruptcy.
<PAGE>
(ii) At any time after the occurrence and during the continuation of
an Event of Default under the Loan Agreement, the Guarantor shall pay to the
Collateral Agent, for the ratable benefit of the Lenders, on demand and in
immediately available funds, the full amount of the Obligations outstanding
under the Loan Agreement (including any portion thereof which is not yet due and
payable) plus the "Expenses" (as defined below). The Guarantor further agrees
to pay to the Collateral Agent and reimburse the Collateral Agent, for the
ratable benefit of the Lenders, for, on demand and in immediately available
funds, (a) all losses, fees, costs and expenses (including, without limitation,
all court costs and reasonable attorneys' and paralegals' fees, costs and
expenses) paid or incurred by the Collateral Agent, the Administrative Agent or
any Lender in: (1) prosecuting any action against the Guarantor relating to this
Guaranty; and (2) preserving, protecting or defending the enforceability of, or
enforcing, this Guaranty or its rights hereunder (all such costs and expenses
are hereinafter referred to as the "Expenses") and (b) interest on (1) the
--------
Obligations which do not constitute interest, (2) to the extent permitted by
applicable law, the Obligations which constitute interest, and (3) the Expenses,
from the date of demand under this Guaranty until paid in full at the rate of
interest applicable to Loans with respect to which a payment default has
occurred. The Guarantor hereby agrees that this Guaranty is an absolute
guaranty of payment and is not a guaranty of collection.
2. Collateral Security. To secure payment and performance of all of
-------------------
its obligations hereunder, the Guarantor has (i) pursuant to that certain Pledge
Agreement dated as of November 16, 1998 in favor of the Collateral Agent and
that certain Pledge Agreement dated as of September 9, 1999 in favor of the
Collateral Agent, granted to the Collateral Agent for the ratable benefit of the
Lenders, a right of set off against and a continuity security interest in the
"Pledged Collateral" (as defined in each of the Pledge Agreements) and (ii)
pledged to the Collateral Agent that certain promissory noted dated June 4, 1999
payable to it by Campuslink Communications Systems, Inc. in the original
principal amount of $4,000,000 (the "Campuslink Note").
3. Obligations Unconditional. The Guarantor hereby agrees that its
-------------------------
obligations under this Guaranty shall be unconditional, irrespective of:
(i) the validity, enforceability, avoidance or subordination of any
of the Obligations or any of the Loan Documents;
(ii) the absence of any attempt by, or on behalf of, the Collateral
Agent, the Administrative Agent or the Lenders to collect, or to take any
other action to enforce, all or any part of the Obligations whether from or
against any Borrower, any other guarantor of the Obligations or any other
Person;
(iii) the election of any remedy by, or on behalf of, the Collateral
Agent, the Administrative Agent or the Lenders with respect to all or any
part of the Obligations;
(iv) the waiver, consent, extension, forbearance or granting of any
indulgence by, or on behalf of, the Collateral Agent, the Administrative
Agent or the Lenders with respect to any provision of any of the Loan
Documents;
2
<PAGE>
(v) the failure of the Collateral Agent, the Administrative Agent
or any Lender to take any steps to perfect and maintain its security
interest in, or to preserve its rights to, any security or collateral for
the Obligations;
(vi) the election by, or on behalf of, the Collateral Agent, the
Administrative Agent or the Lenders, in any proceeding instituted with
respect to any Borrower under Chapter 11 of Title 11 of the United States
Code (11 U.S.C. 101 et seq.) (the "Bankruptcy Code"), of the application of
---------------
Section 1111(b)(2) of the Bankruptcy Code;
(vii) any borrowing or grant of a security interest by any Borrower,
as debtor-in-possession, under Section 364 of the Bankruptcy Code;
(viii) the disallowance, under Section 502 of the Bankruptcy Code, of
all or any portion of the claims of the Collateral Agent, the
Administrative Agent or the Lenders for repayment of all or any part of the
Obligations or any Expenses; or
(ix) to the extent permitted by law, any other circumstance which
might otherwise constitute a legal or equitable discharge or defense of any
Borrower or the Guarantor other than indefeasible payment in full (in cash)
of the Obligations.
4. Enforcement; Application of Payments. Upon the occurrence and
------------------------------------
during the continuation of an Event of Default under the Loan Agreement, the
Collateral Agent or the Administrative Agent may proceed directly and at once,
without notice, against the Guarantor to obtain performance of and to collect
and recover the full amount, or any portion, of the Obligations, without first
proceeding against any Borrower, any other guarantor of the Obligations or any
other Person, or against any security or collateral for the Obligations.
Subject to the terms of the Loan Agreement, the Administrative Agent shall have
the exclusive right to determine the application of payments and credits, if
any, from the Guarantor, the Borrower or from any other Person or from the
Pledged Collateral on account of the Obligations or any other liability of the
Guarantor to the Administrative Agent, the Collateral Agent or the Lenders.
5. Waivers. (i) The Guarantor hereby waives diligence, presentment,
-------
demand of payment, filing of claims with a court in the event of receivership or
bankruptcy of any Borrower, protest or notice with respect to the Obligations,
all setoffs and counterclaims and all presentments, demands for performance,
notices of nonperformance, protests, notices of protest, notices of dishonor and
notices of acceptance of this Guaranty, the benefits of all statutes of
limitation, and all other demands whatsoever (and shall not require that the
same be made on any Borrower as a condition precedent to the Guarantor's
obligations hereunder), and covenants that this Guaranty will not be discharged,
except by complete payment (in cash) and performance of the Obligations and any
other obligations contained herein. The Guarantor further waives all notices of
the existence, creation or incurring of new or additional indebtedness, arising
either from additional loans extended to any Borrower or otherwise, and also
waives all notices that the principal amount, or any portion thereof, and/or any
interest on any instrument or document evidencing all or any part of the
Obligations is due, notices of any and all proceedings to collect from the
maker, any endorser or any other guarantor of all or any part of the
Obligations, or from any other Person, and, to the extent permitted by law,
notices of exchange, sale, surrender or
3
<PAGE>
other handling of any security or collateral given to the Collateral Agent, the
Administrative Agent or the Lenders to secure payment of all or any part of the
Obligations.
(ii) The Collateral Agent, the Administrative Agent and each Lender
is hereby authorized, without notice or demand and without affecting the
liability of the Guarantor hereunder, from time to time, (a) to renew, extend,
accelerate or otherwise change the time for payment of, or other terms relating
to, all or any part of the Obligations, or to otherwise modify, amend or change
the terms of any of the Loan Documents; (b) to accept partial payments on all or
any part of the Obligations; (c) to take and hold security or collateral for the
payment of all or any part of the Obligations (in addition to the Pledged
Collateral and the Campuslink Note), this Guaranty, or any other guaranties of
all or any part of the Obligations or other liabilities of any Borrower, (d) to
exchange, enforce, waive and release any security or collateral; (e) to apply
security or collateral and direct the order or manner of sale thereof as in its
discretion it may determine; (f) to settle, release, exchange, enforce, waive,
compromise or collect or otherwise liquidate all or any part of the Obligations
this Guaranty, any other guaranty of all or any part of the Obligations, and any
security or collateral for the Obligations or for any such guaranty. Any of the
foregoing may be done in any manner, without affecting or impairing the
obligations of the Guarantor hereunder.
6. Financial Information. The Guarantor hereby assumes
---------------------
responsibility for keeping itself informed of the financial condition of any
Borrower and any and all endorsers and/or other guarantors of all or any part of
the Obligations, and of all other circumstances bearing upon the risk of
nonpayment of the Obligations, or any part thereof, that diligent inquiry would
reveal, and the Guarantor hereby agrees that neither the Collateral Agent nor
the Administrative Agent shall have any duty to advise the Guarantor of
information known to it regarding such condition or any such circumstances. In
the event the Collateral Agent or the Administrative Agent in its sole
discretion, undertakes at any time or from time to time to provide any such
information to the Guarantor, neither the Collateral Agent nor the
Administrative Agent shall be under any obligation (i) to undertake any
investigation not a part of its regular business routine, (ii) to disclose any
information which the Collateral Agent or the Administrative Agent, pursuant to
accepted or reasonable commercial finance or banking practices, wishes to
maintain confidential or (iii) to make any other or future disclosures of such
information or any other information to the Guarantor.
7. Representations, Warranties and Covenants. (i) The Guarantor
-----------------------------------------
represents and warrants (which representations and warranties shall be deemed to
have been renewed at the time of the making of any Loan) that:
(a) It is a corporation duly incorporated or formed, validly existing
and in good standing under the laws of its jurisdiction of incorporation or
formation and has all requisite authority to conduct its business as a
foreign Person in each jurisdiction in which its business is conducted,
except where the failure to have such requisite authority would not have a
Material Adverse Effect.
(b) It has the power and authority and legal right to execute and
deliver this Guaranty and to perform its obligations hereunder. The
execution and delivery by it of
4
<PAGE>
this Guaranty and the performance by it of its obligations hereunder have
been duly authorized by proper proceedings, and this Guaranty constitutes a
legal, valid and binding obligation of the Guarantor enforceable against
the Guarantor in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency or similar laws affecting the enforcement
of creditors' rights generally.
(c) Neither the execution and delivery by it of this Guaranty, nor the
consummation by it of the transactions herein contemplated, nor compliance
by it with the terms and provisions hereof, will violate any law, rule,
regulation, order, writ, judgment, injunction, decree or award binding on
it or its certificate or articles of incorporation or by-laws, limited
liability company or partnership agreement or the provisions of any
indenture, instrument or material agreement to which it is a party or is
subject, or by which it, or its property, is bound, or conflict with or
constitute a default thereunder, or result in the creation or imposition of
any Lien in, of or on its property pursuant to the terms of any such
indenture, instrument or material agreement. No order, consent, approval,
license, authorization, or validation of, or filing, recording or
registration with, or exemption by, any Governmental Authority, is required
to authorize, or is required in connection with the execution, delivery and
performance by it of, or the legality, validity, binding effect or
enforceability against the it of, this Guaranty.
(ii) The Guarantor covenants that:
(a) it shall not create, incur, assume or suffer to exist, directly
or indirectly, any Lien upon or with respect to any of its properties, now
owned or hereafter acquired, or upon any proceeds, products, issues, income
or profits therefrom except for the Permitted Liens (as such Permitted
Liens apply to the Guarantor) described in clauses (i) through (x) of
Section 6.01(i) of the Loan Agreement.
---------------
(b) it shall not create or suffer to exist any Debt or any other
obligations for the deferred purchase price of property or services except:
(1) the Debt evidenced by this Guaranty;
(2) the obligations arising under any Loan Document;
(3) unsecured Debt of the Guarantor which has subordination terms
(as to the payment of the Obligations), covenants, pricing and other
terms which have been approved in writing by the Collateral Agent, and
the amount of which, unless such amount is less than or equal to
$100,000,000, shall also have been approved in writing by the
Collateral Agent; provided however, that the Guarantor shall not amend
-------- -------
or otherwise modify, or waive any rights under, any indentures, notes,
agreements, documents or other instruments evidencing such Debt if, in
any case, such amendment, modification or waiver could be adverse to
the interests of the Lenders; and
(4) performance bonds executed solely in connection with the
construction of Systems in the ordinary course of business.
5
<PAGE>
(c) it shall not create or acquire any Subsidiary or acquire all or
any significant portion of the assets or Equity Interests of another Person
without the consent of the Requisite Lenders; provided, however, that the
-------- -------
Guarantor may acquire the Equity Interests of or all or any significant
portion of the assets of another Person if such acquisition meets the
following requirements (each such acquisition constituting a "Permitted
---------
Acquisition"):
-----------
(1) no Default or Event of Default under the Loan Agreement
shall have occurred and be continuing or would result from such
transaction or transactions or the incurrence of any Debt by the
Guarantor in connection therewith;
(2) if such acquisition is being effectuated by means of the
acquisition of Equity Interests any Person (or the formation of a new
Subsidiary in order to acquire assets of another Person), such
acquired Person shall become a Borrower under the Loan Agreement
pursuant to an Accession Agreement and shall deliver such
documentation as is reasonably required by the Collateral Agent or the
Administrative Agent to evidence the enforceability of such Accession
Agreement;
(3) the business being acquired shall be substantially similar,
related or incidental to the Businesses;
(4) after giving effect to such acquisition, the representations
and warranties set forth in Article III of the Loan Agreement shall be
-----------
true and correct in all material respects on and as of the date of
such acquisition with the same effect as though made on and as of such
date and including with respect to any new Borrower pursuant to
paragraph (2) above;
(5) prior to each such acquisition, the Guarantor shall cause to
be delivered to the Collateral Agent, the Administrative Agent and the
Lenders a certificate from the Guarantor's Chief Financial Officer
demonstrating to the satisfaction of the Collateral Agent, the
Administrative Agent and the Requisite Lenders that after giving
effect to such transaction or transactions and the incurrence of any
Debt in connection therewith on a pro forma basis as if such
acquisition and such incurrence of Debt had occurred on the first day
of the twelve-month period ending on the last day of the Guarantor's
and the Borrowers' most recently completed fiscal quarter, the
Borrowers would have been in compliance with all of the covenants
contained in the Loan Agreement at all times during such twelve-month
period;
(6) the purchase is consummated pursuant to a negotiated
acquisition agreement on a non-hostile basis; and
(7) the cash portion of the purchase price (including assumed
Debt) in connection with any and all such transactions shall not
exceed:
(A) for any single transaction or series of related
transactions, $2,500,000; and
6
<PAGE>
(B) for all such transactions, $10,000,000.
(d) it shall not engage in any business other than that of being a
holding company for its Subsidiaries.
8. Reinstatement. The Guarantor agrees that, to the extent that any
-------------
Borrower, the Guarantor or any other guarantor of all or any part of the
Obligations makes a payment or payments to the Administrative Agent or the
Collateral Agent, which payment or payments or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside and/or
required to be repaid to such Borrower, the Guarantor, such other guarantor or
any other Person, or their respective estates, trustees, receivers or any other
party, including, without limitation, the Guarantor, under any bankruptcy law,
state or federal law, common law or equitable cause, then, to the extent of such
payment or repayment, the part of the Obligations which has been paid, reduced
or satisfied by such amount shall be reinstated and continued in full force and
effect as of the time immediately preceding such initial payment, reduction or
satisfaction.
9. WAIVER OF SUBROGATION. THE GUARANTOR HEREBY IRREVOCABLY WAIVES
---------------------
ALL RIGHTS OF SUBROGATION (WHETHER CONTRACTUAL, UNDER SECTION 509 OF THE
BANKRUPTCY CODE, UNDER COMMON LAW, OR OTHERWISE) TO THE CLAIMS OF THE
ADMINISTRATIVE AGENT, THE COLLATERAL AGENT OR THE LENDERS AGAINST ANY BORROWER
AND ALL CONTRACTUAL, STATUTORY OR COMMON LAW RIGHTS OF CONTRIBUTION,
REIMBURSEMENT, INDEMNIFICATION AND SIMILAR RIGHTS AND "CLAIMS" (AS SUCH TERM IS
DEFINED IN THE BANKRUPTCY CODE) AGAINST ANY BORROWER WHICH ARISE IN CONNECTION
WITH, OR AS A RESULT OF, THIS GUARANTY.
10. Subordination. The Guarantor agrees that any and all claims of
-------------
the Guarantor against any Borrower, any endorser or any other guarantor of all
or any part of the Obligations, or against any of their respective properties,
shall be subordinate and subject in right of payment to the prior payment, in
full and in cash, of all Obligations. Notwithstanding any right of the
Guarantor to ask, demand, sue for, take or receive any payment from any
Borrower, all rights, liens and security interests of the Guarantor, whether now
or hereafter arising and howsoever existing, in any assets of any Borrower shall
be and hereby are subordinated to the rights of the Collateral Agent and the
Administrative Agent in those assets. The Guarantor shall have no right to
possession of any such asset or to foreclose upon any such asset, whether by
judicial action or otherwise, unless and until all of the Obligations shall have
been fully paid and satisfied and all financing arrangements among the
Borrowers, the Administrative Agent, the Collateral Agent and the Lenders have
been terminated. The Guarantor agrees that until the Obligations have been paid
in full (in cash) and satisfied and all financing arrangements among the
Borrowers, the Administrative Agent, the Collateral Agent and the Lenders have
been terminated, the Guarantor will not assign or transfer to any Person any
claim the Guarantor has or may have against any Borrower.
11. Enforcement; Amendments; Waivers. No delay on the part of the
--------------------------------
Collateral Agent, the Administrative Agent or any Lender in the exercise of any
right or remedy arising
7
<PAGE>
under this Guaranty, any of the Loan Documents or otherwise with respect to all
or any part of the Obligations or any other guaranty of or security for all or
any part of the Obligations shall operate as a waiver thereof, and no single or
partial exercise by the Collateral Agent, the Administrative Agent or any Lender
of any such right or remedy shall preclude any further exercise thereof. No
modification or waiver of any of the provisions of this Guaranty shall be
binding upon the Collateral Agent, the Administrative Agent or the Lenders,
except as expressly set forth in a writing duly signed and delivered by the
Collateral Agent. Failure by the Collateral Agent or the Administrative Agent at
any time or times hereafter to require strict performance by any Borrower, the
Guarantor, any other guarantor of all or any part of the Obligations or any
other Person of any of the provisions, warranties, terms and conditions
contained in any of the Loan Documents now or at any time or times hereafter
executed by such Persons and delivered to the Collateral Agent or the
Administrative Agent shall not waive, affect or diminish any right of the
Collateral Agent or the Administrative Agent at any time or times hereafter to
demand strict performance thereof and such right shall not be deemed to have
been waived by any act or knowledge of the Collateral Agent or the
Administrative Agent, or its agents, officers or employees, unless such waiver
is contained in an instrument in writing, directed and delivered to such
Borrower, the Guarantor or other relevant Person, as applicable, specifying such
waiver, and is signed by the Collateral Agent or the Administrative Agent. No
waiver of any Event of Default by the Administrative Agent, the Collateral Agent
or any Lender shall operate as a waiver of any other Event of Default or the
same Event of Default on a future occasion, and no action by the Collateral
Agent permitted hereunder shall in any way affect or impair the Collateral
Agent's rights and remedies or the obligations of the Guarantor under this
Guaranty. Any determination by a court of competent jurisdiction of the amount
of any principal and/or interest owing by any Borrower to the Administrative
Agent, the Collateral Agent or any Lender shall be conclusive and binding on the
Guarantor irrespective of whether the Guarantor was a party to the suit or
action in which such determination was made.
12. Effectiveness; Termination. This Guaranty shall become effective
--------------------------
upon its execution by the Guarantor and shall continue in full force and effect
and may not be terminated or otherwise revoked until the Obligations shall have
been fully paid (in cash) and discharged and the Loan Agreement and financing
arrangements among the Borrowers, the Administrative Agent, the Collateral Agent
and the Lenders shall have been terminated. If, notwithstanding the foregoing,
the Guarantor shall have any right under applicable law to terminate or revoke
this Guaranty, the Guarantor agrees that such termination or revocation shall
not be effective until a written notice of such revocation or termination,
specifically referring hereto, signed by the Guarantor, is actually received by
the Collateral Agent. Such notice shall not affect the right and power of the
Collateral Agent to enforce rights arising prior to receipt thereof by the
Collateral Agent. If the Collateral Agent, the Administrative Agent or any
Lender grants loans or takes other action after the Guarantor terminates or
revokes this Guaranty but before the Collateral Agent receives such written
notice, the rights of the Collateral Agent, the Administrative Agent and the
Lenders with respect thereto shall be the same as if such termination or
revocation had not occurred.
13. Successors and Assigns. This Guaranty shall be binding upon the
----------------------
Guarantor and upon the successors and assigns of the Guarantor and shall inure
to the benefit of the Collateral Agent, the Administrative Agent the Lenders and
each of their respective successors and assigns; all references herein to the
Borrowers and to the Guarantor shall be
8
<PAGE>
deemed to include their respective successors and assigns. The successors and
assigns of the Guarantor and the Borrowers shall include, without limitation,
their respective receivers, trustees or debtors-in-possession. All references to
the singular shall be deemed to include the plural where the context so
requires.
14. Governing Law; Jurisdiction. Any dispute between the Collateral
---------------------------
Agent, the Administrative Agent, the Lenders and the Guarantor arising out of or
related to the relationship established between them in connection with this
Guaranty, and whether arising in contract, tort, equity, or otherwise, shall be
resolved in accordance with the internal laws (as opposed to conflicts of law
provisions) and decisions of the State of New York. The Guarantor consents to
the jurisdiction of any local, state or Federal court located in the State of
New York and waive any objection relating to improper venue or forum non
conveniens to the conduct of any proceeding by such court.
15. Service of Process. The Guarantor waives personal service of any
------------------
process upon it, and irrevocably consents to the service of process in any
action or proceeding by mailing of copies thereof by registered or certified
mail, postage prepaid, to the Guarantor at its address set forth below, such
service to become effective five (5) Business Days after same shall have been
posted as aforesaid.
16. WAIVER OF JURY TRIAL. EACH OF THE GUARANTOR AND THE COLLATERAL
--------------------
AGENT WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY DISPUTE, WHETHER SOUNDING IN
CONTRACT, TORT, OR OTHERWISE, BETWEEN THE COLLATERAL AGENT AND THE GUARANTOR
ARISING OUT OF OR RELATED TO THE TRANSACTIONS CONTEMPLATED BY THIS GUARANTY OR
ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION
HEREWITH. EITHER THE GUARANTOR OR THE COLLATERAL AGENT MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS GUARANTY WITH ANY COURT AS WRITTEN EVIDENCE OF THE
CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
17. Waiver of Bond. The Guarantor waives the posting of any bond
--------------
otherwise required of the Collateral Agent in connection with any judicial
process or proceeding to realize on the Pledged Collateral or any other security
for its obligations hereunder enforce any judgment or other court order entered
in favor of the Collateral Agent, or to enforce by specific performance,
temporary restraining order, or preliminary or permanent injunction, this
Guaranty or any other agreement or document between the Collateral Agent and the
Guarantor.
18. Advice of Counsel. The Guarantor represents and warrants to the
-----------------
Collateral Agent that it has discussed this Guaranty and, specifically, the
provisions of Sections 14 through 17 hereof, with the Guarantor's lawyers.
----------- --
19. Amendment and Restatement. The Guarantor has executed that
-------------------------
certain Guaranty in favor of the Collateral Agent dated as of November 16, 1998
(the "Existing Guaranty") to guarantee the obligations of the Borrowers under
that certain Loan and Security Agreement among the Borrowers, the financial
institutions from time to time parties thereto as
9
<PAGE>
Lenders, and Newcourt Commercial Finance Corporation as Agent for the Lenders.
Effective upon execution of this Guaranty, the terms and provisions of the
Existing Guaranty shall be and heretofore amended, superseded and restated in
their entirety by the terms and conditions of this Guaranty and the Guarantor
shall have no further obligation thereunder. The execution and delivery of this
Guaranty shall not effectuate a novation of the Guarantor's obligations under
the Existing Guaranty, but rather a substitution of certain of the terms
governing the Guarantors' guaranty obligations.
20. Notices. All notices and other communications required or desired
-------
to be served, given or delivered hereunder shall be made in the manner
prescribed by the Loan Agreement and to the following addresses, facsimile and
telephone numbers:
if to the Collateral Agent, to
Newcourt Commercial Finance Corporation
Two Gatehall Drive
Parsippany, New Jersey 07054
Attention: Communications and Media Division
Vice President-Operations Manager
Facsimile: (973) 355-7641
Confirmation: (973) 355-7632
if to Guarantor to:
290 Woodcliff Road
Fairport, NY 14450
Attention: Vice President, Finance
Facsimile: 716-340-2563
Confirmation: 716-340-2512
with a copy to:
290 Woodcliff Road
Fairport, NY 14450
Attention: General Counsel
Facsimile: 716-340-2563
Confirmation: 716-340-2630
21. Severability. Wherever possible, each provision of this Guaranty
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Guaranty shall be prohibited by or
invalid under such law, such provision shall be ineffective to the extent of
such prohibition or invalidity without invalidating the remainder of such
provision or the remaining provisions of this Guaranty.
22. Merger. This Guaranty represents the final agreement of the
------
Guarantor with respect to the matters contained herein and may not be
contradicted by evidence of prior or contemporaneous agreements, or subsequent
oral agreements, between the Guarantor and the Collateral Agent.
10
<PAGE>
23. No Strict Construction. The Guarantor and the Collateral Agent
----------------------
have participated, jointly in the negotiation and drafting of this Guaranty. In
the event of any ambiguity or question of intent or interpretation arises, this
Guaranty shall be construed as if drafted jointly by the Guarantor and the
Collateral Agent and no presumption or burden of proof shall arise favoring or
disfavoring either the Guarantor or the Collateral Agent by virtue of authorship
of any provisions of this Guaranty.
24. Section Headings. The section headings herein are for
----------------
convenience of reference only, and shall not affect in any way the
interpretation of any of the provisions hereof.
25. Execution in Counterparts. This Guaranty may be executed in any
-------------------------
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
11
<PAGE>
IN WITNESS WHEREOF, this Guaranty has been duly executed by the
Guarantor as of the day and year first set forth above.
PAETEC CORP.
as the Guarantor
By: /s/ Timothy J. Bancroft
-------------------------------------
Name: Timothy J. Bancroft
Title: Vice President/Finance
12
<PAGE>
Acknowledged and agreed to
as of the 29th day of October, 1999
NEWCOURT COMMERCIAL FINANCE CORPORATION,
as the Collateral Agent
By: /s/ Jack Lucid
---------------------------------
Name: Jack Lucid
Title: Vice President
13
<PAGE>
Exhibit 10.19
[EXECUTION COPY]
VOTING AGREEMENT
----------------
THIS VOTING AGREEMENT (this "Agreement"), made as of this 4th day of
---------
February 2000, by and among PaeTec Corp., a Delaware corporation (the
"Corporation"); Alliance Cabletel Holdings, L.P., a Delaware limited partnership
-----------
("Alliance"), Kline Hawkes California SBIC, L.P. ("Kline Hawkes"), The Union
-------- ------------
Labor Life Insurance Company Separate Account P ("ULLICO"), and the individuals
------
and/or entities listed on Schedule A hereto (together with Alliance, Kline
----------
Hawkes and ULLICO, the "CCS Group Stockholders"); Arunas A. Chesonis ("Mr.
---------------------- ---
Chesonis"), Christopher Edgecomb, Trustee of the Christopher E. Edgecomb Living
- --------
Trust dated April 25, 1998 ("Mr. Edgecomb"), and Jeffrey Sudikoff ("Mr.
------------ ---
Sudikoff" and, together with Mr. Chesonis and Mr. Edgecomb, the "Principal
- -------- ---------
Stockholders"); Madison Dearborn Capital Partners III L.P., a Delaware limited
- ------------
partnership, Madison Dearborn Special Equity III, a Delaware limited
partnership, and Special Advisors Fund I LLC, a Delaware limited partnership
(collectively, "MDCP Group Stockholders"); Blackstone CCC Capital Partners,
-----------------------
L.P., a Delaware limited partnership, Blackstone CCC Offshore Capital Partners,
L.P., a Cayman Islands limited partnership, and Blackstone Family Investment
Partnership III, L.P., a Delaware limited partnership (collectively the
"Blackstone Group Stockholders"); and Ares Leveraged Investment Fund L.P., a
- ------------------------------
Delaware limited partnership, Ares Leveraged Investment Fund L.P. II, a Delaware
limited partnership, Newcourt Commercial Finance Corporation, a Delaware
corporation, and UnionBanCal Equities, Inc., a California corporation
(collectively, the "Other Investor Stockholders"). The MDCP Group Stockholders,
---------------------------
the Blackstone Group Stockholders and the Other Investor Stockholders are
hereinafter sometimes collectively referred to as the "Investor Stockholders"
---------------------
and individually as an "Investor Stockholder." The Principal Stockholders, the
--------------------
CCS Group Stockholders and the Investor Stockholders are hereinafter sometimes
collectively referred to as the "Stockholders" and individually as a
------------
"Stockholder."
-----------
RECITALS
--------
WHEREAS, the Corporation is party to an Equity Purchase Agreement with the
Investor Stockholders, dated as of the date hereof (the "Purchase Agreement"),
------------------
pursuant to which the Investor Stockholders will purchase shares of the
Corporation's Series A Convertible Preferred Stock, par value $0.01 per share
(the "Preferred Stock").
---------------
WHEREAS, pursuant to Section 2 of the Purchase Agreement, it is a condition
precedent to the obligations of the parties thereunder to consummate the
transactions contemplated by the Purchase Agreement that the parties enter into
this Agreement.
WHEREAS, pursuant to the terms of the Preferred Stock, as set forth in the
Corporation's Restated Certificate of Incorporation as of the date hereof, the
Investor Stockholders are entitled to nominate a certain number of persons for
election to the Corporation's board of directors (the "Board").
-----
WHEREAS, pursuant to the Campuslink Stockholders Agreement (as defined
below), the CCS Group Stockholders are entitled to nominate a certain number of
persons for election to the Board.
<PAGE>
WHEREAS, the Stockholders believe that it is in the best interests of the
parties hereto to formalize their agreements regarding certain voting matters
and to define certain rights, duties and obligations among the parties hereto.
NOW, THEREFORE, the Stockholders and the Corporation agree as follows:
1. Definitions.
-----------
1.1 "Affiliate" shall mean any Person that directly, or indirectly through
---------
one or more intermediaries, controls or is controlled by, or is under common
control with, any other Person, including, without limitation, any Affiliated
Fund.
1.2 "Affiliated Fund" shall mean each corporation, trust, general or
---------------
limited partnership or other entity under common control with any Stockholder
which is managed by an Affiliate of Madison Dearborn Capital Partners III, L.P.
or Blackstone CCC Capital Partners, L.P.
1.3 "Beneficially own" has the meaning set forth in Rule 13d-3 under the
----------------
Securities Exchange Act of 1934, as amended, as in effect on the date hereof.
1.4 "Campuslink Stockholders Agreement" shall mean that certain
---------------------------------
Stockholders' Agreement, dated as of September 9, 1999, as amended as of the
date hereof, by and among the Corporation, the Principal Stockholders and the
other stockholders a party thereto.
1.5 "Common Stock" shall mean, collectively, the Class A common stock, par
------------
value $0.01 per share, of the Corporation, and the Class B common stock, par
value $.01 per share, of the Corporation (the "Class B Common Stock").
--------------------
1.6 "Permitted Transferee" shall mean the transferee of any Securities of
--------------------
any Stockholder who is an Affiliate of such Stockholder or the spouse, lineal
descendants (natural or adopted) or parents of such Stockholder or Affiliate, or
(with the prior consent of the Corporation, which consent shall not be
unreasonably withheld or delayed) the respective constituent partners or
participants of such Stockholder or such partners' or participants' direct and
indirect constituent partners, stockholders and Affiliates, or an inter vivos
----- -----
trust for the benefit of any such Person or, in the case of the MDCP Group
Stockholders, any other transferee of no more than two percent of the Securities
in the aggregate held by the MDCP Group Stockholders as of February 4, 2000, so
long as such transferee is designated by the MDCP Group Stockholders in writing
to the Corporation as a "Permitted Transferee" promptly following the time of
such transfer.
1.7 "Person" shall mean any individual, corporation, partnership (general
------
or limited), limited liability company, limited liability partnership, firm,
trust, association or other entity.
1.8 "Principal Stockholders' Agreement" shall mean that certain
---------------------------------
Stockholders' Agreement, dated August 13, 1998, among Mr. Chesonis, Mr.
Edgecomb, as Trustee of the Christopher E. Edgecomb Living Trust dated April 25,
1998, and Mr. Sudikoff, as such Stockholders' Agreement is in effect as of the
date hereof.
2
<PAGE>
1.9 "Public Offering" means any bona fide underwritten sale of the Common
---------------
Stock to the public pursuant to an effective registration statement under the
Securities Act of 1933, as amended, filed with the Securities and Exchange
Commission on Form S-1 (or a successor form adopted by the Securities and
Exchange Commission); provided that the following shall not be considered a
Public Offering: (i) any issuance of Common Stock as consideration for a merger
or acquisition; and (ii) any issuance of Common Stock or rights to acquire
Common Stock to existing securityholders or to employees of the Corporation or
its subsidiaries on Form S-4 or Form S-8 (or any successor forms adopted by the
Securities and Exchange Commission) or otherwise.
1.10 "Securities" shall mean, collectively, all capital stock of the
----------
Corporation, all rights to acquire any shares of any capital stock of the
Corporation and all securities convertible into capital stock of the Corporation
(including indebtedness convertible into or exchangeable for shares of capital
stock of the Corporation), together with any and all securities received as
stock splits, dividends on or in substitution for any capital stock of the
Corporation, or in connection with any increase, reduction or reclassification
of the capital stock of the Corporation, or upon any reorganization,
recapitalization, share exchange, exchange offer, merger or consolidation of the
Corporation with any one or more entities in which an entity other than the
Corporation is the surviving entity, or upon the exercise of any option or
warrant to purchase capital stock of the Corporation.
2. Matters Concerning the Board of Directors.
-----------------------------------------
2.1 Composition of the Board. From and after the effectiveness of this
------------------------
Agreement and until the provisions of this Section 2 cease to be effective, each
Stockholder shall vote all of such Stockholder's Securities and any other voting
securities of the Corporation over which such Stockholder has voting control and
shall take all other necessary or desirable actions within such Stockholder's
control (whether in the capacity as a stockholder, director, member of a Board
committee or officer of the Corporation or otherwise, and including, without
limitation, attendance at meetings in person or by proxy for purposes of
obtaining a quorum and execution of written consents in lieu of meetings), and
the Corporation shall take all necessary and desirable actions within its
control (including, without limitation, calling special Board and stockholder
meetings and nominating individuals to the Board in accordance with, and not
inconsistent with, the terms and conditions contained herein and in the
Corporation's certificate of incorporation), so that the following persons shall
be elected to the Board:
(i) CCS Group Directors. Until such date as the CCS Group Stockholders
-------------------
(including their Permitted Transferees) cease to beneficially own, on
an aggregate basis, at least 5% of the Common Stock issued and
outstanding in the aggregate, the nominees to serve as directors of
the Corporation nominated by the CCS Group Stockholders (which term,
for purposes of this Section 2, shall refer to each CCS Group
Stockholder and each Permitted Transferee of each CCS Group
Stockholder) (the "CCS Group Directors"), the number of which shall
-------------------
equal the greater of (x) the number of members of the Board multiplied
------- -- ----------
by the CCS Board Percentage, rounded down to the nearest whole number
--
and (y) one nominee. For purposes of this Section 2.1(i), the "CCS
---
Board Percentage" shall, with respect to any nomination of a CCS Group
----------------
Director, be equal to the total number of shares
3
<PAGE>
of Common Stock beneficially owned by the CCS Group Stockholders
(including their Permitted Transferees) at the time of any such
nomination of a CCS Group Director divided by the total number of
------- --
issued and outstanding shares of Common Stock. For purposes of this
Section 2.1(i), nominees to serve as CCS Group Directors shall be
determined by the vote of CCS Group Stockholders beneficially owning a
majority of the shares of Common Stock held by all the CCS Group
Stockholders at the time of any such nomination of a CCS Group
Director.
(ii) MDCP Group Directors:
--------------------
(A) Prior to a Public Offering. Prior to the consummation
--------------------------
of a Public Offering, until such date as the holders of the
Series A Preferred on the date of its initial issuance and the
Permitted Transferees of such holders beneficially own in the
aggregate (x) Series A Preferred and (y) shares of Common Stock
received upon a conversion of the Series A Preferred in
accordance with the conversion rights set forth in the
Corporation's certificate of incorporation, which together, on an
as-converted basis, represent less than one-third of the
aggregate number of shares of Common Stock issuable upon
conversion of all of the Series A Preferred acquired by the
holders of the Series A Preferred on the date of its initial
issuance, (1) one person nominated by the MDCP Group Stockholders
if the Board has eight or fewer members, (2) two persons
nominated by the MDCP Group Stockholders if the Board has
between nine and fourteen members, and (3) and three persons
nominated by the MDCP Group Stockholders if the Corporation has
fifteen or more members. Each person elected to the Board
pursuant to a nomination made in accordance with this clause (A)
or clause (B) below is referred to herein individually as an
"MDCP Director" and collectively as the "MDCP Directors".
------------- --------------
(B) After a Public Offering.
-----------------------
1. After a Public Offering, and until such date as the
MDCP Group Stockholders and their Permitted Transferees
collectively own beneficially in the aggregate (x)
Series A Preferred and (y) shares of Common Stock
received upon a conversion of the Series A Preferred in
accordance with the Corporation's certificate of
incorporation, which together, on an as-converted basis,
represent less than either (1) one-third of the
---- ----
aggregate number of shares of Common Stock issuable upon
conversion of all of the Series A Preferred acquired by
the MDCP Group Stockholders on the date of its initial
issuance or (2) five percent of the Common Stock issued
and outstanding in the aggregate, one person nominated
by the MDCP Group Stockholders and their Permitted
Transferees; and
4
<PAGE>
2. After a Public Offering, at any time in which the
number of members of the Board is established at nine
or greater and until the date on which the MDCP Group
Stockholders and their Permitted Transferees
collectively own beneficially in the aggregate (x)
Series A Preferred and (y) shares of Common Stock
received upon a conversion of the Series A Preferred in
accordance with the Company's certificate of
incorporation, which together, on an as-converted
basis, represent less than either (1) fifty percent of
---- ----
the aggregate number of shares of Common Stock issuable
upon conversion of all of the Series A Preferred
acquired by the MDCP Group Stockholders on the date of
its initial issuance or (2) five percent of the Common
Stock issued and outstanding in the aggregate, a second
person nominated by the MDCP Group Stockholders and
their Permitted Transferees;
(C) Determinations Made by the MDCP Group Stockholders and
------------------------------------------------------
Their Permitted Transferees. Nominations and other actions and
---------------------------
determinations made by the MDCP Stockholders and their Permitted
Transferees under this Agreement shall be made by the MDCP
Stockholders and their Permitted Transferees holding a majority
of the shares of Common Stock (calculated on an as-converted
basis with respect to any Preferred Stock held by such
Stockholders) beneficially owned collectively by all of the MDCP
Stockholders and their Permitted Transferees.
(iii) Blackstone Group Directors:
--------------------------
(A) Prior to a Public Offering. Prior to the consummation
--------------------------
of a Public Offering, until such date as the holders of the
Series A Preferred on the date of its initial issuance and the
Permitted Transferees of such holders beneficially own in the
aggregate (x) Series A Preferred and (y) shares of Common Stock
received upon a conversion of the Series A Preferred in
accordance with the conversion rights set forth in the
Corporation's certificate of incorporation, which together, on an
as-converted basis, represent less than one-third of the
aggregate number of shares of Common Stock issuable upon
conversion of all of the Series A Preferred acquired by the
holders of the Series A Preferred on the date of its initial
issuance, (1) one person nominated by the Blackstone Group
Stockholders if the Board has twelve or fewer than twelve
members, (2) two persons nominated by the Blackstone Group
Stockholders if the Board has between twelve and seventeen
members, and (3) three persons nominated by the Blackstone Group
Stockholders if the Board has eighteen or more members. Each
person elected to the Board pursuant to a nomination made in
accordance with this clause (A) or clause (B) below is
5
<PAGE>
referred to herein individually as a "Blackstone Director" and
-------------------
collectively as the "Blackstone Directors".
--------------------
(B) After a Public Offering. After a Public Offering, and
-----------------------
until such date as the Blackstone Group Stockholders and their
Permitted Transferees collectively own beneficially in the
aggregate (x) Series A Preferred and (y) shares of Common Stock
received upon a conversion of the Series A Preferred in
accordance with the Corporation's certificate of incorporation,
which together, on an as-converted basis, represent less than
---- ----
either (1) one-third of the aggregate number of shares of Common
Stock issuable upon conversion of all of the Series A Preferred
acquired by the Blackstone Group Stockholders on the date of its
initial issuance or (2) five percent of the Common Stock issued
and outstanding in the aggregate, one person nominated by the
Blackstone Group Stockholders and their Permitted Transferees
(C) Determinations Made by the Blackstone Group Stockholders
--------------------------------------------------------
and Their Permitted Transferees. Nominations and other actions
-------------------------------
and determinations made by the Blackstone Group Stockholders and
their Permitted Transferees under this Agreement shall be made by
the Blackstone Group Stockholders and their Permitted Transferees
holding a majority of the shares of Common Stock (calculated on
an as-converted basis with respect to any Preferred Stock held by
such Stockholders) beneficially owned collectively by all of the
Blackstone Group Stockholders and their Permitted Transferees.
(iv) Chesonis Directors: Until such date as Mr. Chesonis ceases to be
------------------
at least one of the Chairman of the Board or the Chief Executive
Officer of the Corporation or Mr. Chesonis ceases to beneficially own,
or otherwise ceases to have the right to vote, any shares of Class B
Common Stock, other than with respect to any votes required to be
voted for the CCS Group Directors, the MDCP Directors and the
Blackstone Directors pursuant to this Section 2, the Stockholders
shall vote all of their shares of capital stock for the election of
any other directors nominated by Mr. Chesonis (each, a "Chesonis
--------
Director").
--------
Notwithstanding Section 2.1(ii)(A) and 2.1(iii)(A), the maximum number of MDCP
Directors and Blackstone Directors in the aggregate at any time prior to the
consummation of a Public Offering shall not exceed the maximum number provided
for in paragraph 5A of the Corporation's Restated Certificate of Incorporation
as of the date hereof (except as provided for in Section 8 of such Restated
Certificate of Incorporation).
(a) The removal from the Board of any person nominated to the Board
pursuant to this Section 2 without cause shall be only upon the written
request of (1) in the case of any CCS Group Director, the CCS Group
Stockholders and their Permitted Transferees holding a majority of the
shares of Common Stock held by all of the CCS Group Stockholders; (2) in
the case of any MDCP Director, the MDCP Group Stockholders and their
Permitted Transferees; (3) in the case of any Blackstone Director,
6
<PAGE>
the Blackstone Group Stockholders and their Permitted Transferees; and (4)
in the case of a Chesonis Director, by Mr. Chesonis; provided that upon the
-------- ----
request of the Investor Stockholders holding a majority of the shares of
Common Stock (calculated on an as-converted basis with respect to any
Preferred Stock held by such Stockholders) held by all of the Investor
Stockholders, Mr. Chesonis shall take such action as is necessary to remove
the Chesonis Directors at such time, if any, that Mr. Chesonis is no longer
at least one of the Chairman of the Board or the Chief Executive Officer of
the Corporation.
(b) The removal from the Board of any person nominated to the Board
pursuant to this Section 2 for cause shall be only upon the written request
of a majority of the shares of Common Stock beneficially owned collectively
by all of the Stockholders (calculated on an as-nominated basis with
respect to any Preferred Stock held by such Stockholders).
(c) In the event that any person designated as a director hereunder
for any reason ceases to serve as a member of the Board during such
person's term of office, the resulting vacancy on the Board shall be filled
by a representative designated by the person or persons entitled to remove
such director pursuant to Section 2.1(a).
(d) If, and so long as, any of the MDCP Group Stockholders, the
Blackstone Group Stockholders or the CCS Group Stockholders fails to
designate a representative to fill a directorship pursuant to the terms of
this Section 2, the election of a person to such directorship shall be
accomplished in accordance with the Corporation's certificate of
incorporation, bylaws and applicable law.
(e) The Company shall reimburse each CSC Group Director, each MDCP
Director and each Blackstone Director for all reasonable out-of-pocket
expenses borne by such directors in connection with the performance of
their duties as directors of the Corporation and in connection with their
attendance at any meeting of the Board.
Each Stockholder shall be obligated to vote such Stockholder's Securities and
take all other actions set forth in Section 2.1 with respect to the election of
any person to the Board only if (i) such Stockholder is entitled under the
Corporation's certificate of incorporation to vote on the election of such
person to the Board and (ii) following such time, if ever, as the Corporation
has a class of equity securities registered under Section 12 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), only if compliance with
------------
Section 2.1 would not, by itself, obligate such Stockholder or its Affiliates to
comply with the requirements of Section 16 of the Exchange Act.
2.2 Committees of the Board. So long as any MDCP Director or Blackstone
-----------------------
Director is a member of the Board, one of such directors shall be entitled
hereunder to serve as a member of any committee of the Board which is
established.
3. Injunctive Relief. Each Stockholder and the Corporation acknowledges and
agrees that the terms, covenants and obligations of this Agreement relate to
special, unique and extraordinary matters and that a violation of any of the
terms, covenants or obligations of this Agreement will cause the Corporation and
each Stockholder irreparable injury in an amount
7
<PAGE>
which would be impossible to estimate or determine and for which adequate
compensation could not be fashioned. Therefore, each Stockholder and the
Corporation agrees that the Corporation and/or the other Stockholders (as
applicable) will be entitled to an injunction, restraining order or other
equitable relief as a matter of course, and without the necessity of proving
irreparable harm or the inadequacy of a legal remedy or posting a bond, from any
court of competent jurisdiction, restraining the applicable Stockholders or the
Corporation and any other Persons as the court may order from committing any
violation or threatened violation of the terms, covenants or obligations in this
Agreement. The rights and remedies of the Corporation and each Stockholder under
this Section 3 are cumulative and are in addition to any other rights and
remedies that the Corporation or any Stockholder may have under this Agreement
or any other agreement or at law or in equity.
4. Miscellaneous.
-------------
4.1 Continuing Force; Remedies Cumulative. The provisions contained in
-------------------------------------
this Agreement will survive and remain in full force and effect after execution
of this Agreement. The remedies contained in this Agreement will survive and
remain in full force and effect after the termination of this Agreement. The
rights and remedies provided for in this Agreement are cumulative and will be in
addition to rights and remedies otherwise available to the parties under any
other agreement or applicable law.
4.2 Amendment. This Agreement may only be amended by a written agreement
---------
signed by (i) the Corporation, (ii) the Principal Stockholders holding a
majority of the Common Stock held collectively by all of the Principal
Stockholders at the time of the proposed amendment, (iii) CCS Group
Stockholders, holding a majority of the Common Stock held collectively by all of
the CCS Group Stockholders at the time of the proposed amendment, (iv) MDCP
Group Stockholders holding a majority of the Common Stock (calculated on an as-
converted basis with respect to any Preferred Stock held by such Stockholders)
held collectively by all of the MDCP Group Stockholders at the time of the
proposed amendment, and (v) the Blackstone Group Stockholders holding a majority
of the Common Stock (calculated on an as-converted basis with respect to any
Preferred Stock held by such Stockholders) held collectively by all of the
Blackstone Group Stockholders at the time of the proposed amendment.
4.3 Waiver. No waiver of any Section or provision of this Agreement will
------
be enforceable against any party to this Agreement unless set forth in a writing
signed by such party. Unless such a writing expressly provides otherwise, any
waiving by any party of any Section or provision of this Agreement will not
operate or be construed as a waiver of any subsequent breach of this Agreement
or constitute a course of conduct which may be relied upon to justify any
subsequent breach of this Agreement.
4.4 Notices. All notices, demands and other communications called for or
-------
required by this Agreement shall be in writing and shall be addressed to the
parties at their respective addresses stated below or to such other address as a
party may subsequently designate by written notice to the other parties.
Communications hereunder shall be deemed to have been received (i) upon delivery
in person, (ii) five days after such communication is mailed by U.S. certified
mail, return receipt requested and postage prepaid, (iii) the first business day
after such communication is deposited with a commercial overnight carrier which
provides written verification of delivery,
8
<PAGE>
or (iv) the day of transmission of such communication if sent before 2:00 p.m.
recipient's time by facsimile transmission (with confirmation of receipt)
provided that a copy of such communication is sent on the same day by U.S.
certified mail, return receipt requested and postage prepaid, with an indication
that the original was sent by facsimile and the date of its transmittal.
If to the Corporation to:
PaeTec Corp.
290 Woodcliff Drive
Fairport, New York 14450
Attention: President and Chief Executive Officer
Telecopier: (716) 340-2547
with a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
8300 Greensboro Drive
McLean, Virginia 22102
Attention: Richard J. Parrino, Esq.
Telecopier: (703) 610-6200
or at such other address and to the attention of such other person as the
Corporation may designate by written notice to the Stockholders. Notices to the
Principal Stockholders shall be addressed to:
Arunas A. Chesonis
c/o PaeTec Corp.
290 Woodcliff Drive
Fairport, New York 14450
Telecopier: (716) 340-2547
Christopher Edgecomb, Trustee
of the Christopher E. Edgecomb Living Trust
dated April 25, 1998
c/o STAR Telecommunications, Inc.
223 East De La Guerra
Santa Barbara, California 93101
Telecopier: (805) 884-1137
Jeffrey Sudikoff
P.O. Box 491669
Los Angeles, California 90049
Telecopier: (310) 382-3376
9
<PAGE>
or at such other address and to the attention of such other person as the
Principal Stockholders may designate by written notice to the Corporation.
Notices to any MDCP Group Stockholder shall be addressed to:
c/o Madison Dearborn Capital Partners
Three First National Plaza, Suite 3800
Chicago, Illinois 60670
Attention: James N. Perry, Jr.
James H. Kirby
Greg Share
Telecopier: (312) 895-1001
with a copy (which shall not constitute notice) to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, IL 60601
Attention: Edward T. Swan, Esq.
Jeffrey Seifman, Esq.
Michael L. Newquist, Esq.
Telecopier: (312) 861-2200
or at such other address and to the attention of such other person as the MDCP
Group Stockholders may designate by written notice to the Corporation and the
other Stockholders. Notices to any Blackstone Group Stockholder shall be
addressed to:
c/o The Blackstone Group
345 Park Avenue
New York, New York 10154
Attention: Lawrence H. Guffey
Michael S. Chae
Telecopier: (212) 583-5722
with a copy (which shall not constitute notice) to:
Simpson Thacher & Bartlett
425 Lexington Ave.
New York, New York 10017-3954
Attention: Wilson Neely, Esq.
Telecopier: (212) 455-2502
or at such other address and to the attention of such other person as the
Blackstone Group Stockholders may designate by written notice to the Corporation
and the other Stockholders. Notices to any CCS Group Stockholder shall be
addressed to such Stockholder at the address maintained for such Stockholder in
the Corporation's books and records with a copy (which shall not constitute
notice) to:
10
<PAGE>
Kirkland & Ellis
200 East Randolph Drive
Chicago, IL 60601
Attention: David A. Breach, Esq.
Telecopier: (312) 861-2200
or at such other address and to the attention of such other person as the CCS
Group Stockholders may designate by written notice to the Corporation and the
other Stockholders. Notices to any other Investor Stockholder or any other
Stockholder made from time to time a party to this Agreement shall be addressed
to such Stockholder at the address maintained for such Stockholder in the
Corporation's books and records.
4.5 Binding Effect and Assignment. This Agreement, and the rights and
-----------------------------
duties under it, will be binding upon and inure to the benefit of (i) the
Corporation, its successors and assigns, and (ii) each Stockholder, its
successors and assigns. No Stockholder may assign its rights under this
Agreement or delegate its duties hereunder unless such Stockholder both assigns
its rights and delegates its duties hereunder, and the transferring Stockholder
obtains from such transferee an agreement in writing, in a form reasonably
satisfactory to the applicable parties, that such transferee will be bound by
this Agreement and that such Securities shall remain subject to the terms of
this Agreement. Without the prior written consent of the Corporation, no
Stockholder may assign its rights and duties hereunder other than to Permitted
Transferees of such Stockholder.
4.6 Governing Law. The corporate law of Delaware will govern all issues
-------------
concerning the relative rights of the Corporation and its Stockholders. All
other issues concerning this Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to any
choice of law or conflict of law provision or rule (whether of the State of New
York or any other jurisdiction) that would cause the application of the law of
any jurisdiction other than the State of New York.
4.7 Captions. Captions to the various Sections in this Agreement are for
--------
the convenience of the parties only and will not affect the meaning or
interpretation of this Agreement.
4.8 Enforceability and Interpretation. It is the desire and intent of the
---------------------------------
parties to this Agreement that the terms, provisions, conditions, covenants,
representations, warranties, and remedies contained in this Agreement will be
enforceable to the fullest extent permitted by law. If any term, provision,
condition, covenant, representation, warranty, or remedy of this Agreement or
the application thereof to any person or circumstances will, to any extent, be
construed to be illegal, invalid, or unenforceable, in whole or in part, then
such terms, provisions, condition, covenant, representation, warranty, or remedy
will be construed in a manner so as to permit its enforceability under the
applicable law to the fullest extent permitted by such law. In any case, the
remaining terms, provisions, conditions, covenants, representations, warranties,
and remedies of this Agreement or the application thereof to any person or
circumstance, except those which have been held illegal, invalid, or
unenforceable, will remain in full force and effect.
11
<PAGE>
4.9 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which will be deemed an original, but together they will
constitute one and the same instrument.
4.10 Additional Documents. Each Stockholder agrees to execute any and all
--------------------
documents, instruments, certificates and communications deeded to be necessary
or desirable by the Corporation to effectuate or reconfirm the applicability of
this Agreement to any and all future transaction affecting the Corporation, the
Securities, or any Stockholder.
4.11 Cost of Enforcement. Any party of this Agreement shall pay to any
-------------------
other party all fees and expenses (including reasonable fees and expenses of
attorneys) incurred by such other party in enforcing its rights under this
Agreement against such party.
4.12 Entire Agreement. Except as otherwise expressly set forth herein, this
----------------
Agreement and the documents referenced herein embody the complete agreement and
understanding among the parties hereto with respect to the subject matter hereof
and supersede and preempt (to the extent that such agreements are inconsistent
with this Agreement) any prior understandings, agreements or representations by
or among the parties, written or oral, which may have related to the subject
matter hereof in any way. All such understandings, agreements or
representations will no longer be of any further force or effect (except in the
case of any Stockholder who is a party to or otherwise bound by any other
understanding, agreement or representation not to transfer such Stockholder's
Securities, but only with respect to such understandings, agreements or
representations relating only to the transfer of Securities), and, as of the
date hereof, each Stockholder expressly waives all of such Stockholder's rights
under such understandings, agreements or representations.
[signature pages follow]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Voting Agreement with full force and effect as of the day and year first written
above.
THE CORPORATION:
---------------
PAETEC CORP.
By: /s/ Arunas A. Chesonis
----------------------------------------------
Its: CEO, Chairman & President
---------------------------------------------
MDCP GROUP STOCKHOLDERS:
-----------------------
MADISON DEARBORN CAPITAL PARTNERS III, L.P.
By: Madison Dearborn Partners III, L.P.
Its: General Partner
By: Madison Dearborn Partners, LLC
Its: General Partner
By: /s/ James N. Perry
----------------------------------------------
Its: Managing Director
MADISON DEARBORN SPECIAL EQUITY III, L.P.
By: Madison Dearborn Partners III, L.P.
Its: General Partner
By: Madison Dearborn Partners, LLC
Its: General Partner
By: /s/ James N. Perry
----------------------------------------------
Its: Managing Director
SPECIAL ADVISORS FUND I, LLC
By: Madison Dearborn Partners III, L.P.
Its: Manager
By: Madison Dearborn Partners, LLC
Its: General Partner
By: /s/ James N. Perry
----------------------------------------------
Its: Managing Director
[Signature Page to Voting Agreement Continues]
<PAGE>
BLACKSTONE GROUP STOCKHOLDERS:
-----------------------------
BLACKSTONE CCC CAPITAL PARTNERS L.P.
By: Blackstone Management Associates III L.L.C.
By: /s/ Lawrence H. Guffy
----------------------------------------
Name: Lawrence H. Guffy
--------------------------------------
Title: Senior Managing Director
-------------------------------------
BLACKSTONE CCC OFFSHORE CAPITAL PARTNERS L.P.
By: Blackstone Management Associates III L.L.C.
By: /s/ Lawrence H. Guffy
----------------------------------------
Name: Lawrence H. Guffy
--------------------------------------
Title: Senior Managing Director
-------------------------------------
Executed as a Deed
Witnessed by:
/s/ Barbara Frive
-------------------------------------------
BLACKSTONE FAMILY INVESTMENT PARTNERSHIP III L.P.
By: Blackstone Management Associates III L.L.C.
By: /s/ Lawrence H. Guffy
----------------------------------------
Name: Lawrence H. Guffy
--------------------------------------
Title: Senior Managing Director
-------------------------------------
[Signature Page to Voting Agreement Continues]
<PAGE>
PRINCIPAL STOCKHOLDERS:
----------------------
/s/ Arunas A. Chesonis
---------------------------------------
Arunas A. Chesonis
CHRISTOPHER E. EDGECOMB LIVING TRUST, dated April
25, 1998
By: /s/ Christopher Edgecomb
------------------------------------
Christopher Edgecomb, Trustee
/s/ Jeffrey Sudikoff
---------------------------------------
Jeffrey Sudikoff
CCS GROUP STOCKHOLDERS:
----------------------
ALLIANCE CABLETEL HOLDINGS, L.P.
By: KOCOM Communications, Inc.
By: /s/ James A. Kofalt
------------------------------------
James A. Kofalt, President
KLINE HAWKES CALIFORNIA SBIC, L.P.
By: /s/ Frank Kline
------------------------------------
Its: Chairman
-----------------------------------
THE UNION LABOR LIFE INSURANCE CORPORATION
SEPARATE ACCOUNT P
By: /s/ Joseph Linehan
------------------------------------
Its: VP-Securities
-----------------------------------
/s/ Robert I. Schwartz
---------------------------------------
Robert I. Schwartz
/s/ Kenneth M. Kiraly
---------------------------------------
Kenneth M. Kiraly
[Signature Page to Voting Agreement Continues]
<PAGE>
/s/ Susan F. Kiraly
------------------------------------------
Susan F. Kiraly
/s/ Richard P. Rizzutti
------------------------------------------
Richard P. Rizzutti
/s/ Bryant Hopper
------------------------------------------
Bryant Hopper
/s/ Ronald S. Johnson
------------------------------------------
Ronald S. Johnson
/s/ Lodwrick Cook
------------------------------------------
Lodwrick Cook
/s/ Peter Cracovaner
------------------------------------------
Peter Cracovaner
/s/ Richard Cunningham
------------------------------------------
Richard Cunningham
/s/ Thomas O. FitzGerald
------------------------------------------
Thomas O. FitzGerald
/s/ Wendy Foliano
------------------------------------------
Wendy Foliano
/s/ Joseph Golden
------------------------------------------
Joseph Golden
/s/ Stephen Mayo
------------------------------------------
Stephen Mayo
/s/ Karen Sancimino
------------------------------------------
Karen Sancimino
/s/ Clinton Walker
------------------------------------------
Clinton Walker
[Signature Page to Voting Agreement Continues]
<PAGE>
OTHER INVESTOR STOCKHOLDERS:
---------------------------
NEWCOURT COMMERCIAL FINANCE CORP.
By: /s/ Charles Brown
----------------------------------------
Its: V.P.
---------------------------------------
CARAVELLE INVESTMENT FUND, L.L.C.
By: Caravelle Advisors, L.L.C.
Its: Investment Manager and Attorney-in-Fact
By: [Signature Illegible]
----------------------------------------
Its: Executive Director
UNIONBANCAL EQUITIES, INC.
By: /s/ David Bonruhi
----------------------------------------
Its: Vice President VP
----------------------------------------
ARES LEVERAGED INVESTMENT FUND, L.P.
By: ARES Management, L.P.
Its: General Partner
By: /s/ J. Serot
----------------------------------------
Its: Vice President
----------------------------------------
ARES LEVERAGED INVESTMENT FUND II, L.P.
By: ARES Management, L.P.
Its: General Partner
By: /s/ J. Serot
----------------------------------------
Its: Vice President
----------------------------------------
[Final Signature Page to Voting Agreement]
<PAGE>
Exhibit 10.20
[EXECUTION COPY]
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
--------------------------------------------------
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this "Agreement"),
---------
dated as of February 4, 2000, by and among PaeTec Corp., a Delaware corporation
(the "Corporation"); Alliance Cabletel Holdings, L.P., a Delaware limited
-----------
partnership ("Alliance"), Kline Hawkes California SBIC, L.P., a California
--------
limited partnership ("Kline Hawkes"), The Union Labor Life Insurance Corporation
------------
Separate Account P ("ULLICO"), and the other individuals and/or entities listed
------
on Schedule A hereto (together with Alliance, Kline Hawkes and ULLICO, the "CCS
---------- ---
Group Stockholders"); Madison Dearborn Capital Partners III, L.P., a Delaware
- ------------------
limited partnership ("Madison Dearborn Capital"), Madison Dearborn Special
------------------------
Equity II, L.P., a Delaware limited partnership ("Special Equity"), and Special
--------------
Advisors Fund I, LLC, a Delaware limited liability company ("Special Advisors,"
----------------
and together with Madison Dearborn Capital and Special Equity the "MDCP Group
----------
Stockholders"); Blackstone CCC Capital Partners L.P., a Delaware limited
- ------------
partnership, Blackstone CCC Offshore Capital Partners L.P., a Cayman Islands
limited partnership, and Blackstone Family Investment Partnership III L.P., a
Delaware limited partnership (collectively the "Blackstone Group Stockholders");
-----------------------------
Ares Leveraged Investment Fund L.P., a Delaware limited partnership, Ares
Leveraged Investment Fund L.P. II, a Delaware limited partnership, Newcourt
Commercial Finance Corporation, a Delaware corporation, and UnionBanCal
Equities, Inc., a California corporation (collectively, the "Other Investor
--------------
Stockholders"). The Other Investor Stockholders, the MDCP Group Stockholders
- ------------
and the Blackstone Group Stockholders are referred to in this Agreement as the
"Investor Stockholders." The Other Investor Stockholders, the MDCP Group
Stockholders, the Blackstone Group Stockholders and the CCS Group Stockholders
are sometimes collectively referred to herein as the "Stockholders" and
------------
individually as a "Stockholder."
-----------
RECITALS
--------
WHEREAS, the Corporation is party to an Equity Purchase Agreement (the
"Purchase Agreement") dated as of February 4, 2000 with the Investor
- -------------------
Stockholders, pursuant to which the Investor Stockholders will purchase shares
of the Corporation's Series A Convertible Preferred Stock, par value $0.01 per
share (the "Preferred Stock").
---------------
WHEREAS, the Corporation and the CCS Group Stockholders are parties to a
Registration Agreement, dated as of September 9, 1999 (the "Prior Agreement"),
---------------
pursuant to which the Corporation granted the CCS Stockholders the registration
rights set forth in the Prior Agreement.
WHEREAS, in order to induce the Investor Stockholders to enter into the
Purchase Agreement, and as a condition precedent to the obligations of the
parties under the Purchase Agreement, the Corporation and the CCS Group
Stockholders have agreed to amend and restate the Prior Agreement and the
Corporation has agreed to grant the Investor Stockholders the registration
rights set forth herein.
<PAGE>
WHEREAS, this Agreement is the "Registration Agreement" as defined in the
Purchase Agreement.
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound hereby, the parties hereto hereby agree as follows:
ARTICLE 1
Shelf Registration for the Benefit of the Investor Stockholders
and the CCS Group Stockholders
Section 1.1 Obligation to File and Maintain. Upon completion of a public
-------------------------------
offering of any shares of common stock of the Corporation (whether pursuant to
an initial public offering by the Corporation or as a result of the MDCP Group
Stockholders, the Blackstone Group Stockholders or the CCS Group Stockholders
exercising their demand registration rights pursuant to Article 2), at any time
after the first anniversary and prior to the third anniversary of the completion
of such public offering (which date of completion shall be deemed to be the
third business day after the date on which the registration statement with
respect to such public offering is declared effective), promptly upon the
written request of the MDCP Group Stockholders Representative, the Blackstone
Group Stockholders Representative or the CCS Group Stockholders Representative,
the Corporation will use its best efforts to file, as promptly as reasonably
possible, with the Securities and Exchange Commission (the "Commission") a
----------
registration statement under the Securities Act of 1933, as amended and any
successor thereof, and the rules and regulations thereunder (the "Securities
----------
Act"), for the offering on a continuous or delayed basis in the future (the
- ---
"Shelf Registration") of all of the Registrable Securities then owned by the
- -------------------
Investor Stockholders and the CCS Group Stockholders (including, in the case of
the CCS Group Stockholders, shares of Common Stock acquired by any CCS Group
Stockholder in addition to shares of Common Stock acquired in the Merger and, in
the case of the Investor Stockholders, any shares of Common Stock acquired by
any Investor Stockholder upon conversion of the Preferred Stock and any other
shares of Common Stock acquired by an Investor Stockholder). The Shelf
Registration shall be on an appropriate form that the Corporation is then
eligible to use and the Shelf Registration and any form of prospectus included
therein or prospectus supplement relating thereto shall reflect such plan of
distribution or method of sale as the MDCP Group Stockholders Representative,
the Blackstone Group Stockholders Representative and the CCS Group Stockholders
Representative may from time to time jointly specify in a written notice to the
Corporation, including the sale of some or all of the Registrable Securities in
a public offering or, if requested by the MDCP Group Stockholders
Representative, the Blackstone Group Representative or the CCS Group
Stockholders Representative, subject to receipt by the Corporation of such
information (including information relating to purchasers) as the Corporation
reasonably may require, the sale of some or all of the Registrable Securities
(i) in a transaction constituting an offering outside the United States which is
exempt from the registration requirements of the Securities Act in which the
Corporation undertakes to effect registration of such Registrable Securities as
soon as possible after the completion of such offering in order to permit such
Registrable Securities to be freely tradeable in the United States, (ii) in a
transaction constituting a private placement under Section 4(2) of
2
<PAGE>
the Securities Act in connection with which the Corporation undertakes to
register such Registrable Securities after the conclusion of such placement to
permit such Registrable Securities to be freely tradeable by the purchasers
thereof, or (iii) in a transaction under Rule 144A of the Securities Act in
connection with which the Corporation undertakes to register such Registrable
Securities after the conclusion of such transaction to permit such Registrable
Securities to be freely tradeable by the purchasers thereof. The Corporation
shall use its best efforts to keep the Shelf Registration continuously effective
for the period beginning on the date on which the Shelf Registration is declared
effective and ending on the first date that there are no Registrable Securities.
During the period during which the Shelf Registration is effective, the
Corporation shall supplement or make amendments to the Shelf Registration, if
required by the Securities Act or if reasonably requested jointly by the MDCP
Group Stockholders Representative, the Blackstone Group Stockholders
Representative and the CCS Group Stockholders Representative or an underwriter
of Registrable Securities, including to reflect any specific plan of
distribution or method of sale, and shall use its reasonable best efforts to
have such supplements and amendments declared effective, if required, as soon as
practicable after filing.
Section 1.2 Black-Out Periods of the MDCP Group Stockholders, the
-----------------------------------------------------
Blackstone Group Stockholders and the CCS Group Stockholders. Subject to the
- ------------------------------------------------------------
conditions of this Section 1.2, the Corporation shall have the right,
exercisable on not more than two occasions in the aggregate in any period of 24
months, from time to time (i) to require the Investor Stockholders and the CCS
Group Stockholders not to sell under the Shelf Registration or to suspend the
effectiveness thereof during the period starting with the date 30 days prior to
the Corporation's good faith estimate, as certified in writing by an executive
officer of the Corporation to the MDCP Group Stockholders Representative, the
Blackstone Group Stockholders Representative and the CCS Group Stockholders
Representative, of the proposed date of filing of a registration statement or a
preliminary prospectus supplement relating to an existing shelf registration
statement, in either case, pertaining to an underwritten public offering of
equity securities of the Corporation or debt securities of the Corporation which
are convertible into equity securities of the Corporation for the account of the
Corporation, and ending on the date 90 days following the effective date of such
registration statement or the date of filing of such prospectus supplement, or
(ii) to postpone or suspend (but not for a period exceeding 120 days) the filing
or effectiveness of a registration statement otherwise required to be prepared
and filed by it pursuant to this Article 1, if the Corporation determines, in
its good faith judgment as certified in writing by an executive officer of the
Corporation to the MDCP Group Stockholders Representative, the Blackstone Group
Stockholders Representative and the CCS Group Stockholders Representative, that
such registration and offering or continued effectiveness would interfere with
any material financing, acquisition, disposition, corporate reorganization or
other material transaction involving the Corporation or any of its subsidiaries
or public disclosure thereof would be required prior to the time such disclosure
might otherwise be required, or when the Corporation is in possession of
material information that it deems advisable not to disclose in a registration
statement.
Section 1.3 Black-Out Periods of the Corporation. Subject to the
------------------------------------
conditions of this Section 1.3, each of the MDCP Group Stockholders and the CCS
Group Stockholders shall have the right, exercisable on not more than two
occasions in any period of 24 months, and the Blackstone Group Stockholders
shall have the right, exercisable on not more than one occasion
3
<PAGE>
in any period of 24 months, to require the Corporation, by written request
provided by the MDCP Group Stockholders Representative, the Blackstone Group
Stockholders Representative or the CCS Group Stockholders Representative (as the
case may be), not to sell any common equity securities of the Corporation, or
any securities convertible into common equity securities of the Corporation
under any registration statement (other than a registration statement on Form S-
8 or other successor form) or prospectus supplement relating to an existing
shelf registration statement, or to suspend the effectiveness thereof, during
the period starting with the date 20 days prior to the good faith estimate of
the MDCP Group Stockholders Representative, the Blackstone Group Stockholders
Representative or the CCS Group Stockholders Representative (as the case may
be), as certified in writing to the Corporation, of a proposed date of filing of
a preliminary prospectus supplement relating to a Shelf Registration filed
pursuant to Section 1.1, pertaining to an underwritten public offering of
Registrable Securities, and ending on the date 45 days following the date of
filing the final prospectus supplement.
Section 1.4 Additional Black-Out Periods with Respect to Demand
---------------------------------------------------
Registrations. In addition to the black-out limitations set forth in Sections
- -------------
1.2 and 1.3, (i) the MDCP Group Stockholders holding at least 50% of the
Registrable Securities held by all MDCP Group Stockholders shall have the right,
exercisable on not more than two occasions in connection with any permitted
Demand Registration commenced by the MDCP Group Stockholders pursuant to Article
2 to require the CCS Group Stockholders and the other Investor Stockholders not
to sell any common equity securities of the Corporation under the Shelf
Registration during the period starting with the date 20 days prior to the MDCP
Group Stockholders Representative's good faith estimate, as certified in writing
by the MDCP Group Stockholders Representative to the CCS Group Stockholders and
the other Investor Stockholders, of a proposed initial date of distribution of
Registrable Securities under any such permitted Demand Registration commenced by
the MDCP Group Stockholders and ending on the date 180 days following the date
of such initial distribution (or such earlier date permitted by the
underwriters, if such Demand Registration is underwritten); (ii) the Blackstone
Group Stockholders holding at least 50% of the Registrable Securities held by
all Blackstone Group Stockholders shall have the right, exercisable on not more
than one occasion in connection with any permitted Demand Registration commenced
by the Blackstone Group Stockholders pursuant to Article 2 to require the CCS
Group Stockholders and the other Investor Stockholders not to sell any common
equity securities of the Corporation under the Shelf Registration during the
period starting with the date 20 days prior to the Blackstone Group Stockholders
Representative's good faith estimate, as certified in writing by the Blackstone
Group Stockholders Representative to the CCS Group Stockholders and the other
Investor Stockholders, of a proposed initial date of distribution of Registrable
Securities under any such permitted Demand Registration commenced by the
Blackstone Group Stockholders and ending on the date 180 days following the date
of such initial distribution (or such earlier date permitted by the
underwriters, if such Demand Registration is underwritten); and (iii) the CCS
Group Stockholders shall have the right, exercisable on not more than two
occasions in connection with any permitted Demand Registration commenced by the
CCS Group Stockholders pursuant to Article 2, to require the Investor
Stockholders not to sell any common equity securities of the Corporation under
the Shelf Registration during the period starting with the date 20 days prior to
the CCS Group Stockholders Representative's good faith estimate, as certified in
writing by the CCS Group Stockholders Representative to the Investor
Stockholders, of a proposed initial date of distribution of Registrable
Securities under any such permitted Demand Registration commenced
4
<PAGE>
by the CCS Group Stockholders and ending on the date 180 days following the date
of such initial distribution (or such earlier date permitted by the
underwriters, if such Demand Registration is underwritten).
Section 1.5 Number of Shelf Registrations. A Shelf Registration shall be
-----------------------------
deemed to have been effected if such registration becomes effective pursuant to
the Securities Act and is kept continuously effective of a period of at least
two years; provided, however, that no Shelf Registration shall be deemed to have
-------- -------
been effected (or to have been kept continuously effective) if such registration
cannot be used by the Investor Stockholders and the CCS Group Stockholders for
more than 90 days as a result of any stop order, injunction or other order of
the Commission or other government authority or for any other reason other than
an act or omission of either the Investor Stockholders or the CCS Group
Stockholders.
Section 1.6 Expenses. Any and all Registration Expenses incurred in
--------
connection with any Shelf Registration which may be requested under this Article
1 shall be borne by the Corporation.
Section 1.7 Selection of Underwriters. Any and all underwriters or other
-------------------------
agents involved in any sale of Registrable Securities pursuant to a registration
statement contemplated by this Article 1 shall include such underwriters or
other agents as shall be selected by the Investor Stockholders and the CCS Group
Stockholders holding at least 50% of the Registrable Securities held
collectively by all Investor Stockholders and CCS Group Stockholders
participating in such sale and approved of by the Corporation, which approval
shall not be unreasonably withheld. The Corporation shall (together with the
Investor Stockholders and/or the CCS Group Stockholders if legally required)
enter into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting, as well as all other documents
customary in similar offerings, which documents shall be in customary form and
reasonably acceptable to the Corporation, including, without limitation,
underwriting agreements, custody agreements, powers of attorney, and
indemnification agreements.
Section 1.8 Expiration. Notwithstanding anything in this Section 1 to the
----------
contrary, none of the MDCP Group Stockholders, the Blackstone Group Stockholders
or the CCS Group Stockholders may exercise the shelf registration rights granted
under this Section 1 in connection with a proposed offering of Registrable
Securities by any such group of Stockholders having a reasonably anticipated
aggregate gross offering price of less than $20,000,000 if at such time (if
ever) such MDCP Group Stockholders, such Blackstone Group Stockholders or such
CCS Group Stockholders, as the case may be, are free to sell their shares of
Common Stock under Rule 144 of the Securities Act, without limitation as to
volume or manner of sale restrictions.
ARTICLE 2
Demand Registration
Section 2.1 Obligation to File and Notify. The CCS Group Stockholders
-----------------------------
shall be entitled to Demand Registrations (as defined below) (A) if the
Corporation does not complete an initial public offering of its Common Stock on
or before September 9, 2000 with gross proceeds from the offering of at least
$25 million and (B) as specified below after the Corporation has
5
<PAGE>
completed an initial public offering of its Common Stock. The Investor
Stockholders shall be entitled to Demand Registrations as specified below at any
time after the completion by the Corporation of an initial public offering of
its Common Stock. Subject to the limitations set forth in the foregoing two
sentences and the other limitations set forth in this Section 2.1, if the
Corporation shall receive from (i) the CCS Group Stockholders holding at least
50% of the Registrable Securities held by all CCS Group Stockholders, (ii) the
MDCP Group Stockholders holding at least 50% of the Registrable Securities held
by all MDCP Group Stockholders, or (iii) the Blackstone Group Stockholders
holding at least 50% of the Registrable Securities held by all Blackstone Group
Stockholders, a written request for the Corporation to effect any registration,
qualification or compliance under the Securities Act with respect to Registrable
Securities held by any such group of Stockholders pursuant to this Section 2
(each, a "Demand Registration"), then, at a time specified in such request,
-------------------
the Corporation will use best efforts to effect such Demand Registration when
so specified in such request, provided that (x) the CCS Group Stockholders
-------- ----
shall only be entitled to request one (1) Demand Registration on Form S-1 or any
similar long-form registration statement (each, a "Long-Form Registration") in
----------------------
addition to one (1) Demand Registration that the CCS Group Stockholders may
exercise under clause (A) of the first sentence of this Section 2.1, the MDCP
Group Stockholders shall only be entitled to request two (2) Long-Form
Registrations, and the Blackstone Group Stockholders shall only be entitled to
request one (1) Long-Form Registration and (y) each of the MDCP Group
Stockholders holding at least 50% of the Registrable Securities held by all MDCP
Group Stockholders, the Blackstone Group Stockholders holding at least 50% of
the Registrable Securities held by all Blackstone Group Stockholders and the CCS
Group Stockholders holding at least 50% of the Registrable Securities held by
all CCS Group Stockholders shall be entitled to request an unlimited number of
Demand Registrations on Form S-2 or S-3 or any similar short-form registration
statement (each, a "Short-Form Registration") if available; and provided further
----------------------- -------- -------
that the Corporation shall have at least 150 days after such request with
- ----
respect to a Demand Registration (including, without limitation, the execution
of an undertaking to file post-effective amendments, appropriate qualification
under the applicable blue sky or other state securities laws and appropriate
compliance with regulations issued under the Securities Act and any other
governmental requirements or regulations) to effect such Demand Registration in
such manner as would permit or facilitate the sale and distribution of the
Registrable Securities specified in such request. A registration shall not count
as one of the permitted Long-Form Registrations until it has become effective
(unless such Long-Form Registration has not become effective due solely to the
fault of the holders requesting such registration), and a Long-Form Registration
shall not count as one of the permitted Long-Form Registrations unless the
holders of Registrable Securities requesting such Demand Registration are able
to register and sell at least 90% of the Registrable Securities requested to be
included in such registration.
Section 2.2 Underwriting. If a MDCP Group Stockholder, a Blackstone Group
------------
Stockholder or a CCS Group Stockholder intends to distribute the Registrable
Securities covered by its request by means of an underwritten public offering,
such Stockholder shall so advise the Corporation. Any and all underwriters or
other agents involved in any sale of Registrable Securities pursuant to a Demand
Registration shall include such underwriters or other agents as shall be
selected by the MDCP Group Stockholders, the Blackstone Group Stockholders or
the CCS Group Stockholders, as the case may be, requesting such a registration
and approved by the Corporation, which approval shall not be unreasonably
withheld or delayed. The Corporation shall (together with the MDCP Group
Stockholders, the Blackstone Group Stockholders or the
6
<PAGE>
CCS Group Stockholders, as the case may be, if legally required) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting, as well as all other documents customary in
similar offerings, which documents shall be in customary form and reasonably
acceptable to the Corporation, including, without limitation, underwriting
agreements, custody agreements, powers of attorney, and indemnification
agreements.
The Corporation may include in any Demand Registration involving an
underwritten public offering and commenced pursuant to this Article 2 securities
for its own account but only to the extent that, in the reasonable belief of the
managing underwriter of such offering, the inclusion of such securities will not
adversely affect the per share sales price for the Registrable Securities
included pursuant to the request for such Demand Registration (including
Registrable Securities included pursuant to the exercise of piggyback rights
granted to the Investor Stockholders and the CCS Group Stockholders under
Section 3.1), and only if the managing underwriter did not exclude any
Registrable Securities held by any Investor Stockholder or CCS Group Stockholder
and requested to be included in such Demand Registration. If the managing
underwriter in an underwritten public offering commenced in connection with a
Demand Registration advises in writing the Corporation, the Investor
Stockholders and the CCS Group Stockholders that marketing factors require a
limitation of the number of shares of Common Stock to be underwritten and sold
in such offering, the managing underwriter may exclude some or all of shares of
Common Stock to be sold in such offering from such registration, in which event
the shares to be included in such registration shall be allocated pro rata among
--- ----
the holders of shares participating in the offering pursuant to registration
rights granted by the Corporation (including any demand registration rights and
piggyback rights), based on the number of shares of Common Stock requested to be
included by each holder in such registration. If any Investor Stockholder or
CCS Group Stockholder disapproves of the terms of any such underwriting, such
Stockholder may elect to withdraw therefrom by written notice to the Corporation
and the managing underwriter.
Section 2.3 Black-Out Periods of the Investor Stockholders or the CCS
---------------------------------------------------------
Group Stockholders. Subject to the conditions of this Section 2.3, the
- ------------------
Corporation shall have the right, exercisable on not more than one occasion in
any period of 12 consecutive months, to postpone or suspend (but not for a
period exceeding 90 days) the filing or effectiveness of a Demand Registration
otherwise required to be prepared and filed by it pursuant to this Article 2, if
the Corporation determines, in its good faith judgment as certified by CEO, that
such registration and offering or continued effectiveness would interfere with
any material financing, acquisition, disposition, corporate reorganization or
other material transaction involving the Corporation or any of its subsidiaries
or public disclosure thereof would be required prior to the time such disclosure
might otherwise be required, or when the Corporation is in possession of
material information that it deems advisable not to disclose in a registration
statement.
Section 2.4 Expenses. Any and all Registration Expenses incurred in
--------
connection with any Demand Registration which may be requested under this
Article 2 shall be borne by the Corporation.
Section 2.5 Non-Subordination. The Demand Registration rights of the
-----------------
Investor Stockholders and the CCS Group Stockholders pursuant to this Article 2
shall not be subordinate
7
<PAGE>
to the registration rights of any other Person, and the Corporation shall not
grant any registration rights to any other Person which are superior to the
registration rights granted to the Investor Stockholders and the CCS Group
Stockholders pursuant to this Article 2.
Section 2.6 Expiration. Notwithstanding anything in Section 2.1 to the
----------
contrary, none of the MDCP Group Stockholders, the Blackstone Group Stockholders
or the CCS Group Stockholders may exercise the Demand Registration rights
granted under this Article 2 in connection with a proposed offering of
Registrable Securities by any such group of Stockholders having a reasonably
anticipated aggregate gross offering price of less than $20,000,000 if at such
time (if ever) such MDCP Group Stockholders, such Blackstone Group Stockholders
or such CCS Group Stockholders, as the case may be, are free to sell their
shares of Common Stock under Rule 144 of the Securities Act, without limitation
as to volume or manner of sale restrictions.
ARTICLE 3
Piggyback Registration Rights
Section 3.1 Notification and Inclusion.
--------------------------
(a) If, at any time from time to time after the earlier to occur of
(i) the date on which the Corporation completes an initial public offering
of shares of its common stock and (ii) September 9, 2000, the Corporation
proposes to register any of its equity securities, either for its own
account or for the account of a security holder or holders and whether
pursuant to its own initiative, the initiative or request of another Person
or pursuant to a Demand Registration (other than a registration of
securities relating solely to employee benefit plans or to effect a merger
or other reorganization), the Corporation shall promptly give written
notice of such registration to the Investor Stockholders and the CCS Group
Stockholders.
(b) Upon the written request of any Investor Stockholder or CCS Group
Stockholder given within 10 business days after receipt of a notice
delivered pursuant to Section 3.1(a), the Corporation shall seek to include
in such proposed registration such Registrable Securities of such
Stockholder as such Stockholder shall request be so included and shall use
its best efforts to cause a registration statement covering all of the
Registrable Securities of such Stockholder that such Stockholder has
requested to be registered to become effective under the Securities Act.
The Corporation shall be under no obligation to complete any registration
of securities it proposes to make under this Article 3, other than its
obligation to complete any Demand Registration, subject to the terms and
conditions set forth in Article 2. If, at any time after giving written
notice of its intention to register any securities and prior to the
effective date of the registration statement filed in connection with such
registration, the Corporation shall determine for any reason not to
register or to delay registration of such securities, the Corporation shall
give written notice of such determination to the Investor Stockholders and
the CCS Group Stockholders and, thereupon, (i) in the case of a
determination not to register, the Corporation shall be relieved of its
obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration
8
<PAGE>
Expenses incurred in connection therewith) and (ii) in the case of a
determination to delay registering, the Corporation shall be permitted to
delay registering any Registrable Securities for the same period as the
delay in registering such other securities.
Section 3.2 Cut-back Provision. If the registration of which the
------------------
Corporation gives notice pursuant to this Article 3 is for a registered public
offering involving an underwriting, the Corporation shall so advise the
Stockholders as part of the written notice given to the Stockholders pursuant to
this Article 3. If the managing underwriter in an underwritten public offering
pursuant to which Stockholders are participating pursuant to this Article 3
advises in writing the Corporation and the Stockholders that marketing factors
require a limitation of the number of shares of Common Stock to be underwritten
and sold in such offering, the managing underwriter may exclude some or all of
shares of Common Stock held by the Stockholders to be sold in such offering from
such registration, in which event the shares held by the Stockholders to be
included in such registration shall be allocated pro rata among the holders of
shares held by the Stockholders participating in the offering pursuant to
registration rights granted by the Corporation (including any demand
registration rights and piggyback registration rights), based on the number of
shares of Common Stock requested to be included by each holder in such
registration. If any Stockholder disapproves of the terms of any such
underwriting, such Stockholder may elect to withdraw therefrom by written notice
to the Corporation and the managing underwriter.
Section 3.3 Expenses. The Corporation shall bear and pay all Registration
--------
Expenses incurred in connection with any registration of Registrable Securities
pursuant to this Article 3.
Section 3.4 Duration of Registration Rights. Each Stockholder shall have
-------------------------------
unlimited piggyback registration rights set forth in Section 3.1(a) with respect
to the Registrable Securities held by such Stockholder.
Section 3.5 Non-Subordination. The piggyback registration rights of the
-----------------
Stockholders pursuant to this Article 3 shall not be subordinate to the
registration rights of any other Person, and the Corporation shall not grant any
registration rights to any other Person which are superior to the registration
rights granted to the Stockholders pursuant to this Article 3.
ARTICLE 4
Registration Procedures
Section 4.1 In connection with the filing of any registration statement as
provided in Article 1, 2 or 3, the Corporation shall, as expeditiously as
reasonably practicable:
(a) prepare and file with the Commission the requisite registration
statement (including a prospectus therein) to effect such registration and
use its best efforts to cause such registration statement to become
effective, provided that before filing such registration statement or any
-------- ----
amendments or supplements thereto, the Corporation will furnish to the MDCP
Group Stockholders Representative, the Blackstone Group Stockholders
Representative and the CCS Group Stockholders Representative, if
Registrable Securities held by the MDCP Group Stockholders, the Blackstone
Group Stockholders or the CCS Group Stockholders, as the case may be, are
included in such
9
<PAGE>
registration, copies of all such documents proposed to be filed, which
documents will be subject to the review of counsel to the MDCP Group
Stockholders, counsel to the Blackstone Group Stockholders and counsel to
the CCS Group Stockholders before any such filing is made within ten days
after receipt of such documents, and the Corporation will comply with any
reasonable request made by any such counsel to make changes in any
information contained in such documents relating to the Stockholders;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to maintain the effectiveness of
such registration and to comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such
registration statement until, in the case of Article 1, the termination of
the period during which the Shelf Registration is required to be kept
effective, or, in the case of Articles 2 and 3, the earlier of such time as
all of such securities have been disposed of and the date which is 120 days
or 90 days, in the case of Article 2 and Article 3, respectively, after the
date of initial effectiveness of such registration statement;
(c) furnish to the Stockholders whose Registrable Securities are
included in such registration such number of conformed copies of such
registration statement and of each such amendment and supplement thereto
(in each case including all exhibits), such number of copies of the
prospectus contained in such registration statements (including each
complete prospectus and any summary prospectus) and any other prospectus
filed under Rule 424 under the Securities Act, in conformity with the
requirements of the Securities Act, and such other documents, including
documents incorporated by reference, as such Stockholders may reasonably
request, but only while the Corporation is required under the provisions
hereof to cause a registration statement to remain in effect;
(d) use its best efforts to register and qualify all Registrable
Securities under such other securities or blue sky laws of such
jurisdictions as any Stockholder whose Registrable Securities are included
in such registration shall reasonably request, to take all actions which
may be reasonably necessary to keep such registration or qualification in
effect for so long as such registration statement remains in effect, and
take any other action which may be reasonably necessary or advisable to
enable such Stockholders to consummate the disposition in such
jurisdictions of the securities owned by such Stockholders, except that the
------ ----
Corporation shall not for any such purpose be required to qualify generally
to do business as a foreign corporation in any jurisdiction wherein it
would not but for the requirements of this paragraph be obligated to be so
qualified, or to consent to general service of process in any such
jurisdiction, or change the composition of its assets to conform with the
securities laws of any such jurisdiction, or to subject the Corporation to
any material tax in any such jurisdiction where it is not then so subject;
(e) cause all Registrable Securities covered by such registration
statement to be registered with or approved by such other government
authority as may be reasonably necessary to enable the Stockholders to
consummate the disposition of such Registrable Securities;
10
<PAGE>
(f) furnish to any managing underwriter of an underwritten public
offering, to the extent requested by such managing underwriter, a signed
counterpart, addressed to the managing underwriter (and the underwriters,
if any), of
(i) an opinion of counsel for the Corporation, dated the
effective date of such registration statement (and, if such
registration includes an underwritten public offering, dated the date
of the closing under the underwriting agreement), reasonably
satisfactory in form and substance to the managing underwriter, and
(ii) to the extent permitted by then applicable rules of
professional conduct, a "comfort" letter, dated the effective date of
such registration statement (and, if such registration includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement), signed by the independent public accountants
who have certified the Corporation's financial statements included in
such registration statement, covering substantially the same matters
with respect to such registration statement (and the prospectus
included therein) and, in the case of the accountants' letter, with
respect to events subsequent to the date of such financial statements,
all as are customarily covered in opinions of issuer's counsel and in
accountants' letters delivered to the underwriters in underwritten
public offerings of securities;
(g) immediately notify the Stockholders whose Registrable Securities
are included in such registration at any time when the Corporation becomes
aware that a prospectus relating thereto is required to be delivered under
the Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under
which they were made, and at the request of any such Stockholder promptly
prepare and furnish to such Stockholder a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such securities, such
prospectus shall not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances
under which they were made;
(h) comply or continue to comply in all material respects with the
Securities Act and the Securities Exchange Act of 1934, as amended, and any
successor thereto, and the rules and regulations thereunder (the "Exchange
--------
Act"), and with all applicable rules and regulations of the Commission, and
---
make available to its security holders, as soon as reasonably practicable,
an earnings statement covering the period of at least twelve (12) months,
but not more than eighteen (18) months, beginning with the first full
calendar month of the first full fiscal quarter after the effective date of
such registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act, and not file any
amendment or supplement to such registration statement or prospectus upon
which the Stockholders have not been afforded at least five days to review
and comment;
11
<PAGE>
(i) provide a transfer agent and registrar for all Registrable
Securities covered by such registration statement not later than the
effective date of such registration statement; and
(j) list all common stock of the Corporation covered by such
registration statement on any securities exchange on which any of the
common stock of the Corporation is then listed.
Section 4.2 Stockholder Information. Each Stockholder whose Registrable
-----------------------
Securities are included in such registration shall furnish in writing to the
Corporation such information regarding such Stockholder the Registrable
Securities to be sold, the intended method of distribution of such Registrable
Securities, and such other information requested by the Corporation as is
necessary for inclusion in the registration statement relating to such offering
pursuant to the Securities Act. Such writing shall expressly state that it is
being furnished to the Corporation for use in the preparation of a registration
statement, preliminary prospectus, supplementary prospectus, final prospectus or
amendment or supplement thereto, as the case may be.
ARTICLE 5
Preparation
Section 5.1. Stockholder Participation in Preparation. In connection with
----------------------------------------
the preparation and filing of any registration statement under the Securities
Act in which Registrable Securities held by the MDCP Group Stockholders, the
Blackstone Group Stockholders or the CCS Group Stockholders are included, the
Corporation will give the MDCP Group Stockholders, the Blackstone Group
Stockholders, or the CCS Group Stockholders, as the case may be, the
underwriters of each, if any, and their respective counsel, the opportunity to
participate in the preparation of such registration statement, each prospectus
included therein or filed with the Commission, and each amendment thereof or
supplement thereto, and will give each of them such access to its books and
records and such opportunities to discuss the business of the Corporation with
its officers, its counsel and the independent public accountants who have
certified its financial statements as shall be necessary, in the reasonable
opinion of counsel to the MDCP Group Stockholders, counsel to the Blackstone
Group Stockholders and counsel to the CCS Group Stockholders, to conduct a
reasonable investigation within the meaning of the Securities Act.
ARTICLE 6
Indemnification
Section 6.1. Indemnification by Corporation. In the event of any
------------------------------
registration of any Registrable Securities of the Corporation under the
Securities Act, the Corporation will, and hereby does, indemnify and hold
harmless the Stockholders, each Person, if any, who controls any Stockholder
within the meaning of the Securities Act, each other Person who participates as
an underwriter in the offering or sale of such securities and each other Person
who controls any such underwriter within the meaning of the Securities Act,
against any expenses, losses, claims, damages or liabilities (or actions in
respect thereof), joint or several, to which the Stockholders
12
<PAGE>
or their respective controlling Persons, or any such underwriter or its
controlling Persons may become subject under the Securities Act or otherwise,
insofar as such expenses, losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the registration statement under which such
Registrable Securities were registered under the Securities Act, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or any
amendment or supplement thereto, or any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or any violation by the Corporation of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation promulgated
under such laws applicable to the Corporation in connection with any such
registration, and the Corporation will reimburse the Stockholders and their
respective controlling Persons and each such underwriter and its controlling
Persons for any legal or any other expenses reasonably incurred by them, as such
expenses are incurred, in connection with investigating or defending any such
expense, loss, claim, liability, action or proceedings; provided, however, that
-------- -------
the Corporation shall not be liable in any such case to the extent that any such
expense, loss, claim, damage or liability (or action or proceeding in respect
thereof) arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
any such preliminary prospectus, final prospectus, summary prospectus, amendment
or supplement in reliance upon and in conformity with written information
furnished to the Corporation by any Stockholder, specifically stating that it is
for use in the preparation thereof. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of the
Stockholders or their respective controlling Persons, or any such underwriter or
its controlling Persons, and shall survive the transfer of such securities by
the Stockholders.
Section 6.2. Indemnification by the Stockholders. In the event of any
-----------------------------------
registration of any Registrable Securities of the Corporation under the
Securities Act, the Corporation will require, as a condition to including any
Registrable Securities in any registration statement pursuant to Article 1,
Article 2 or Article 3, that the Corporation shall have received an undertaking
satisfactory to it from the applicable Stockholder to indemnify and hold
harmless (in the same manner and to the same extent as set forth in Section 6.1)
the Corporation, each director of the Corporation, each officer of the
Corporation and each other Person, if any, who controls the Corporation within
the meaning of the Securities Act, and each other Person who participates as an
underwriter in the offering or sale of such securities with respect to any
untrue statement or alleged untrue statement of a material fact in or omission
or alleged omission to state a material fact from such registration statement,
any preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, if such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Corporation by
such Stockholder, specifically stating that it is for use in the preparation of
such registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement; provided that in no event shall any
-------- ----
indemnity provided pursuant hereto by a Stockholder exceed the net proceeds from
the offering received by such Stockholder. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of the
Corporation or any such director, officer, or controlling Person and shall
survive the transfer of such securities by any Stockholder.
13
<PAGE>
Section 6.3. Procedures. Promptly after receipt by an indemnified party
----------
of notice of the commencement of any action or proceeding involving a claim
referred to in the preceding Sections of this Article 6, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party,
give written notice to the latter of the commencement of such action; provided,
--------
however, that the failure of any indemnified party to give notice as provided
- -------
herein shall not relieve the indemnifying party of its obligations under the
preceding Sections of this Article 6, except to the extent that the indemnifying
party is actually prejudiced by such failure to give notice. In case any such
action is brought against an indemnified party, unless in such indemnified
party's reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, the indemnifying party
shall be entitled to participate in and to assume the defense thereof, jointly
with any other indemnifying party similarly notified to the extent that it may
wish, with counsel reasonably satisfactory to such indemnified party, and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party shall not be liable to the
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof other than reasonable costs of
investigation.
Section 6.4. Other Indemnification. Indemnification similar to that
---------------------
specified in the preceding Sections of this Article 6 (with appropriate
modifications) shall be given by the Corporation and the Stockholders with
respect to any required registration or other qualification of securities under
any federal or state law or regulation of governmental authority other than the
Securities Act.
Section 6.5. Payment. The indemnification required by this Article 6
-------
shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as and when bills are received or any expense,
loss, claim, damage or liability is incurred.
Section 6.6. Contribution. If, for any reason, the foregoing indemnity is
------------
unavailable, or is insufficient to hold harmless an indemnified party, then the
indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of the expense, loss, claim, damage or liability,
(i) in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and the indemnified party on the other
(determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or omission relates to information supplied
by the indemnifying party or the indemnified party and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission), or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law or provides a lesser sum to the
indemnified party than the amount hereinafter calculated, in the proportion as
is appropriate to reflect not only the relative fault of the indemnifying party
and the indemnified party, but also the relative benefits received by the
indemnifying party on the one hand and the indemnified party on the other, as
well as any other relevant equitable considerations. No indemnified party
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any indemnifying
party who was not guilty of such fraudulent misrepresentation.
14
<PAGE>
ARTICLE 7
Covenants
Section 7.1. Filings and Certifications. The Corporation will file in a
--------------------------
timely manner, information, documents and reports in compliance with the
Exchange Act and will, at its expense, forthwith upon the request of any
Stockholder, deliver to such Stockholder a certificate, signed by the
Corporation's principal financial officer, stating (i) the Corporation's name,
address and telephone number (including area code), (ii) the Corporation's
Internal Revenue Service identification number, (iii) the Corporation's
Commission file number, (iv) the number of shares of common stock of the
Corporation outstanding as shown by the most recent report or statement
published by the Corporation, and (v) whether the Corporation has filed the
reports required to be filed under the Exchange Act for a period of at least 90
days prior to the date of such certificate and in addition has filed the most
recent annual report required to be filed thereunder. If at any time, following
an initial public offering of the Corporation's Common Stock, the Corporation is
not required to file reports in compliance with either Section 13 or Section
15(d) of the Exchange Act, the Corporation will, at its expense, forthwith upon
the written request of the MDCP Group Stockholders Representative, the
Blackstone Group Stockholders Representative or the CCS Group Stockholders
Representative, make available adequate current public information with respect
to the Corporation within the meaning of paragraph (c)(2) of Rule 144 of the
General Rules and Regulations promulgated under the Securities Act.
ARTICLE 8
Miscellaneous
Section 8.1. Registration Matters.
--------------------
(a) If Registrable Securities of any Stockholder are included in any
registration statement, such Stockholder shall execute and deliver all
documents reasonably requested by the underwriters of an offering covered
by such registration statement and any other documents customary in similar
offerings, which documents shall be in customary form, including, without
limitation, underwriting agreements, custody agreements, powers of
attorney, and indemnification agreements, provided that no such documents
-------- ----
shall have terms more onerous than those sought of any other Person in
connection with the same transaction.
(b) Each Stockholder whose Registrable Securities are included in any
registration statement shall cooperate with the Corporation in connection
with the preparation of such registration statement, and for so long as the
Corporation is obligated to file and keep effective the registration
statement, shall provide to the Corporation, in writing, for use in the
registration statement, all such information regarding such Stockholder as
the Corporation may from time to time reasonably request in writing and
which is required in accordance with the Securities Act.
(c) During such time as the Corporation may be engaged in a
distribution, the Corporation shall comply with Regulation M promulgated
under the Exchange Act.
15
<PAGE>
Section 8.2. Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party. Copies of executed counterparts
transmitted by telecopy, telefax or other electronic transmission service shall
be considered original executed counterparts for purposes of this Article 8,
provided receipt of copies of such counterparts is confirmed.
Section 8.3. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE
TO THE CHOICE OF LAW PRINCIPLES THEREOF.
Section 8.4. Entire Agreement. This Agreement (including agreements
----------------
incorporated herein) contains the entire agreement between the parties with
respect to the subject matter hereof and there are no agreements or
understandings between the parties other than those set forth or referred to
herein. This Agreement is not intended to confer upon any person not a party
hereto, or a successor and assign of such party, any rights or remedies
hereunder.
Section 8.5. Notices. All notices and other communications hereunder
-------
shall be sufficiently given for all purposes hereunder if in writing and
delivered personally, sent by documented overnight delivery service or, to the
extent receipt is confirmed, telecopy, telefax or other electronic transmission
service to the appropriate address or number as set forth below. Notices to the
Corporation shall be addressed to:
PaeTec Corp.
290 Woodcliff Drive
Fairport, New York 14450
Attention: President and Chief Executive Officer
Telecopier: (716) 340-2547
with a copy (which shall not constitute notice)
to:
Hogan & Hartson L.L.P.
8300 Greensboro Drive
McLean, Virginia 22102
Attention: Richard J. Parrino, Esq.
Telecopier: (703) 610-6200
or at such other address and to the attention of such other person as the
Corporation may designate by written notice to the Stockholders. Notices to any
Stockholder shall be addressed to such Stockholder at the address maintained for
such Stockholder in the Corporation's books and records with a copy (which shall
not constitute notice) to:
16
<PAGE>
In the case of any CCS Group Stockholder:
Kirkland & Ellis
200 East Randolph Drive
Chicago, IL 60601
Attention: David A. Breach, Esq.
Telecopier: (312) 861-2200
In the case of any MDCP Group Stockholder:
Kirkland & Ellis
200 East Randolph Drive
Chicago, IL 60601
Attention: Edward T. Swan, Esq.
Jeffrey Seifman, Esq.
Michael L. Newquist, Esq.
Telecopier: (312) 861-2200
In the case of any Blackstone Group Stockholder:
Simpson Thacher & Bartlett
425 Lexington Ave.
New York, New York 10017-3954
Attention: Wilson Neely, Esq.
Telecopier: (212) 455-2502
or at such other address and to the attention of such other person as any
Stockholder may designate by written notice to the Corporation.
Section 8.6. Assignment. This Agreement shall be binding upon and inure
----------
to the benefit of the parties hereto and their respective successors. No party
shall be permitted to assign any of its rights hereunder to any third party,
except that if (i) a Stockholder transfers or pledges any or all of the
- ------ ----
Registrable Securities held by such Stockholder to a bona fide financial
institution as security for any bona fide indebtedness of any such Stockholder,
the pledgee of such Registrable Securities shall be considered an intended
beneficiary hereof and may exercise all rights of such Stockholder hereunder,
and (ii) each Stockholder shall be permitted to assign such Stockholder's rights
hereunder to any other Person to whom such Stockholder may transfer any capital
stock of the Corporation.
Section 8.7. Headings. The Section headings and other headings contained
--------
in this Agreement are inserted for convenience of reference only and will not
affect the meaning or interpretation of this Agreement.
Section 8.8. Consent to Amendments. Except as otherwise expressly
---------------------
provided herein, the provisions of this Agreement may be amended and the
Corporation may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if the Corporation has obtained the
written consent of each of (x) the holders of a majority of the Registrable
Securities held by all MDCP Group Stockholders at the time such consent is
17
<PAGE>
requested, (y) the holders of a majority of the Registrable Securities held by
all Blackstone Group Stockholders at the time such consent is requested, and (z)
the holders of a majority of the Registrable Securities held by all CCS Group
Stockholders at the time such consent is requested; provided, that if any such
amendment, modification or waiver would adversely and disproportionately affect
any holder of Registrable Securities relative to any holder or holders of
Registrable Securities voting in favor of such amendment, modification, or
waiver, such amendment, modification or waiver shall also require the written
consent of such holder or holders, as the case may be, of a majority of the
outstanding Registrable Securities held by all holders so adversely affected;
and provided, further, that if any such amendment, modification or waiver is to
a provision in this Agreement that requires a specific vote to take an action
thereunder or to take an action with respect to the matters described therein,
such amendment, modification or waiver shall not be effective unless such vote
is obtained with respect to such amendment, modification or waiver. No other
course of dealing between the Corporation and the holder of any Registrable
Securities or any delay in exercising any rights hereunder shall operate as a
waiver of any rights of any such holders. This Agreement may not be amended
without the written consent of the Corporation.
Section 8.9. Construction. For the purposes hereof, (i) words in the
------------
singular shall be held to include the plural and vice versa and words of one
gender shall be held to include the other gender as the context requires, (ii)
the terms "hereof," "herein," and "herewith" and words of similar import shall,
unless otherwise stated, be construed to refer to this Agreement as a whole and
not to any particular provision of this Agreement, and Section, paragraph or
other references are to the Sections, paragraphs, or other references to this
Agreement unless otherwise specified, (iii) the word "including" and words of
similar import when used in this Agreement shall mean "including, without
limitation," unless the context otherwise requires or unless otherwise
specified, (iv) the word "or" shall not be exclusive, and (v) provisions shall
apply, when appropriate, to successive events and transactions.
This Agreement shall be construed without regard to any presumption or rule
requiring construction or interpretation against the party drafting or causing
any instrument to be drafted.
Section 8.10. Severability. Any provision hereof which is invalid or
------------
unenforceable shall be ineffective to the extent of such invalidity or
unenforceability, without affecting in any way the remaining provisions hereof.
ARTICLE 9
Certain Definitions
As used herein, the following terms shall have the following meanings:
"Blackstone Group Stockholders Representative" shall mean Blackstone CCC
--------------------------------------------
Capital Partners L.P. or such Person designated thereby.
"CCS Group Stockholders Representative" shall mean the Person designated as
-------------------------------------
such under that certain Agreement dated as of September 9, 1999, among the
Corporation and the CCS Group Stockholders.
18
<PAGE>
"Common Stock" shall mean the common stock, $0.01 par value per share, of
------------
the Corporation, including the Class A Common Stock and the Class B Common Stock
of the Corporation.
"Corporation Registration Expenses" shall mean the fees and disbursements
---------------------------------
of counsel and independent public accountants for the Corporation incurred in
connection with the Corporation's performance of or in compliance with this
Agreement, including the expenses of any special audits or "cold comfort"
------------
letters required by or incident to such performance and compliance and any
premiums and other costs of policies of insurance obtained by the Corporation
against liabilities arising out of the sale of any securities.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
------------
and any successor thereof, and the rules and regulations thereunder.
"MDCP Group Stockholders Representative" shall mean Madison Dearborn
--------------------------------------
Capital Partners III L.P.
"Merger" shall have the meaning set forth in the Prior Agreement.
------
"Person" shall mean any individual, corporation, partnership (general or
------
limited), limited liability company, limited liability partnership, firm, trust,
association or other entity.
"Registrable Securities" shall mean (i) with respect to a CCS Group
----------------------
Stockholder, any shares of Common Stock acquired by such CCS Group Stockholder,
including any such shares acquired in addition to the shares of Common Stock
acquired in the Merger, and (ii) with respect to an Investor Stockholder, any
shares of Common Stock acquired or acquirable by such Investor Stockholder,
including any such shares acquired or acquirable by converting shares of
Preferred Stock into shares of Common Stock. As to any particular Registrable
Securities, once issued such securities shall cease to be Registrable Securities
when (A) a registration statement with respect to the sale of such securities
shall have become effective under the Securities Act and such securities shall
have been disposed of in accordance with such registration statement, (B) such
securities shall have been sold in accordance with Rule 144 (or any successor
provision) under the Securities Act , (C) such securities have been distributed
without consideration by a holder that is a limited liability company to its
members or investment advisor, or by a holder that is a limited partnership to
its limited partners, and in connection with such distribution, such holder has
notified the Corporation in writing of its election to terminate the status of
such securities as Registrable Securities, or (D) subject to Sections 1.8 and
2.6, the Corporation shall have issued certificates representing such securities
without any legend restricting the transfer thereof under the Securities Act or
applicable state securities laws.
"Registration Expenses" shall mean the Corporation's Registration Expenses,
---------------------
all registration, filing and stock exchange or National Association of
Securities Dealers, Inc. fees, all fees and expenses of complying with
securities or blue sky laws (including the reasonable fees and expenses of
counsel to the Stockholders participating in any transaction involving the
registration of Registrable Securities, as follows: (i) with respect to any
Demand Registration, the fees and expenses of a single counsel selected by the
group of Stockholders initiating such Demand Registration in connection with
such transaction, (ii) with respect to the filing of a Shelf
19
<PAGE>
Registration, the fees and expenses of no more than two counsel, one selected by
Stockholders holding at least a majority of the Registrable Securities
participating in such registration, and one selected by Stockholders holding at
least 66.67% of the Registrable Securities participating in such transaction,
and (iii) with respect to any other transactions not otherwise described under
clause (i) or (ii), the fees and expenses of a single counsel selected by a
majority of the Stockholders participating in such transaction), all printing
expenses, messenger and delivery expenses, and any fees and disbursements of
underwriters customarily paid by sellers of securities who are not the issuers
of such securities and all underwriting discounts and commissions and transfer
taxes, if any, other than the discounts, commissions, fees and disbursements of
underwriters or selling agents with respect to the Registrable Securities.
"Securities Act" shall mean the Securities Act of 1933, as amended, and any
--------------
successor thereof, and the rules and regulations thereunder.
* * * * *
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amended and Restated Registration Rights Agreement with full force and effect as
of the day and year first written above.
THE CORPORATION:
---------------
PAETEC CORP.
By: /s/ Arunas A. Chesonis
---------------------------------------
Its: CEO, Chairman & President
--------------------------------------
MDCP GROUP STOCKHOLDERS:
-----------------------
MADISON DEARBORN CAPITAL PARTNERS III, L.P.
By: Madison Dearborn Partners III, L.P.
Its: General Partner
By: Madison Dearborn Partners, LLC
Its: General Partner
By: /s/ James N. Perry
---------------------------------------
Its: Managing Director
MADISON DEARBORN SPECIAL EQUITY III, L.P.
By: Madison Dearborn Partners III, L.P.
Its: General Partner
By: Madison Dearborn Partners, LLC
Its: General Partner
By: /s/ James N. Perry
---------------------------------------
Its: Managing Director
SPECIAL ADVISORS FUND I, LLC
By: Madison Dearborn Partners III, L.P.
Its: Manager
By: Madison Dearborn Partners, LLC
Its: General Partner
By: /s/ James N. Perry
---------------------------------------
Its: Managing Director
[Signature Page to Amended and Restated Registration Rights Agreement Continues]
<PAGE>
BLACKSTONE GROUP STOCKHOLDERS:
-----------------------------
BLACKSTONE CCC CAPITAL PARTNERS L.P.
By: Blackstone Management Associates III L.L.C.
By: /s/ Lawrence H. Guffy
-----------------------------------------
Name: Lawrence H. Guffy
---------------------------------------
Title: Senior Managing Director
--------------------------------------
BLACKSTONE CCC OFFSHORE CAPITAL PARTNERS L.P.
By: Blackstone Management Associates III L.L.C.
By: /s/ Lawrence H. Guffy
-----------------------------------------
Name: Lawrence H. Guffy
---------------------------------------
Title: Senior Managing Director
--------------------------------------
Executed as a Deed
Witnessed by:
/s/ Barbara Frive
--------------------------------------------
BLACKSTONE FAMILY INVESTMENT PARTNERSHIP III L.P.
By: Blackstone Management Associates III L.L.C.
By: /s/ Lawrence H. Guffy
-----------------------------------------
Name: Lawrence H. Guffy
---------------------------------------
Title: Senior Managing Director
--------------------------------------
[Signature Page to Amended and Restated Registration Rights Agreement Continues]
<PAGE>
CCS GROUP STOCKHOLDERS:
----------------------
ALLIANCE CABLETEL HOLDINGS, L.P.
By: KOCOM Communications, Inc.
By: /s/ James A. Kofalt
-------------------------------------
James A. Kofalt, President
KLINE HAWKES CALIFORNIA SBIC, L.P.
By: /s/ Frank Kline
-------------------------------------
Its: Chairman
------------------------------------
THE UNION LABOR LIFE INSURANCE CORPORATION
SEPARATE ACCOUNT P
By: /s/ Joseph Linehan
-------------------------------------
Its: VP - Securities
------------------------------------
/s/ Robert I. Schwartz
----------------------------------------
Robert I. Schwartz
/s/ Kenneth M. Kiraly
----------------------------------------
Kenneth M. Kiraly
/s/ Susan F. Kiraly
----------------------------------------
Susan F. Kiraly
/s/ Richard P. Rizzutti
----------------------------------------
Richard P. Rizzutti
/s/ Bryant Hopper
----------------------------------------
Bryant Hopper
/s/ Ronald S. Johnson
----------------------------------------
Ronald S. Johnson
/s/ Lodwrick Cook
----------------------------------------
Lodwrick Cook
[Signature Page to Amended and Restated Registration Rights Agreement Continues]
<PAGE>
/s/ Peter Cracovaner
----------------------------------------
Peter Cracovaner
/s/ Richard Cunningham
----------------------------------------
Richard Cunningham
/s/ Thomas O. FitzGerald
----------------------------------------
Thomas O. FitzGerald
/s/ Wendy Foliano
----------------------------------------
Wendy Foliano
/s/ Joseph Golden
----------------------------------------
Joseph Golden
/s/ Stephen Mayo
----------------------------------------
Stephen Mayo
/s/ Karen Sancimino
----------------------------------------
Karen Sancimino
/s/ Clinton Walker
----------------------------------------
Clinton Walker
OTHER INVESTOR STOCKHOLDERS:
---------------------------
NEWCOURT COMMERCIAL FINANCE CORP.
By: /s/ Charles Brown
-------------------------------------
Its: V.P.
------------------------------------
CARAVELLE INVESTMENT FUND, L.L.C.
By: Caravelle Advisors, L.L.C.
Its: Investment Manager and Attorney-in-Fact
By: /s/ Jason Block
-------------------------------------
Its: Executive Director
[Signature Page to Amended and Restated Registration Rights Agreement Continues]
<PAGE>
UNIONBANCAL EQUITIES, INC.
By: /s/ David Bonruhi
----------------------------------------
Its: Vice President V.P.
---------------------------------------
ARES LEVERAGED INVESTMENT FUND, L.P.
By: ARES Management, L.P.
Its: General Partner
By: /s/ J. Serot
----------------------------------------
Its: Vice President
---------------------------------------
ARES LEVERAGED INVESTMENT FUND II, L.P.
By: ARES Management II, L.P.
Its: General Partner
By: /s/ J. Serot
----------------------------------------
Its: Vice President
---------------------------------------
[Signature Page to Amended and Restated Registration Rights Agreement Continues]
<PAGE>
Exhibit 10.21
PAETEC CORP.
1998 INCENTIVE COMPENSATION PLAN
--------------------------------
1. Preamble. This document sets forth the terms of the PaeTec Corp.
--------
1998 Incentive Compensation Plan ("Plan"), which shall become effective as of
July 1, 1998, contingent upon the approval of the Plan by the shareholders of
PaeTec Corp.
2. Purpose. The purpose of the Plan is to promote the interests of
-------
the Company by providing current and future employees of the Company and its
Subsidiaries with an equity or equity-based interest in the Company, so that the
interests of such individuals will be closely associated with the interests of
shareholders by reinforcing the relationship between shareholder gains and
individual compensation. Pursuant to this Plan, eligible individuals may
receive (a) Incentive Stock Options, (b) Non-Qualified Stock Options, and/or (c)
Stock Appreciation Rights.
3. Eligibility. Employees of the Company or its Subsidiaries shall
-----------
be eligible to participate in the Plan. Participants shall be selected by the
Committee based upon such factors as the eligible individual's past and
potential contributions to the success, profitability, and growth of the
Company.
4. Definitions. As used in this Plan,
-----------
(a) "Board of Directors" shall mean the Board of Directors of the
Company.
(b) "Committee" shall mean the committee appointed by the Board
of Directors to administer the Plan in accordance with Paragraph 13.
(c) "Common Stock" shall mean the Class A Common Stock, par value
$0.01 per share, of the Company.
(d) "Company" shall mean PaeTec Corp.
(e) "Disinterested Director" shall mean a member of the Board of
Directors who has not, at any time within one year prior to the member's
participating in the administration of the Plan, received stock, stock options,
stock appreciation rights or any other equity security of the Company pursuant
to the Plan or any other plan of the Company or its affiliates.
(f) "Eligible Individuals" shall mean persons described in
Paragraph 3; provided that only employees of the Company shall be eligible for
grants of Incentive Stock Options.
<PAGE>
(g) "Incentive Stock Option" shall mean the right granted to an
Eligible Individual to purchase Common Stock under this Plan, the grant,
exercise and disposition of which are intended to comply with, and to be
governed by, Internal Revenue Code Section 422.
(h) "Market Value per Share" shall mean, at any date, the fair
market value per share of the shares of Common Stock, as determined in good
faith by the Committee.
(i) "Non-Qualified Stock Option" shall mean the right granted to
an Eligible Individual to purchase Common Stock under this Plan, the grant,
exercise and disposition of which are not intended to be subject to the
requirements and limitations of Internal Revenue Code Section 422.
(j) "Optionee" shall mean the Eligible Individual to whom an
Option Right is granted pursuant to an agreement evidencing an outstanding
Incentive Stock Option or Non-Qualified Stock Option.
(k) "Option Right" shall mean the right to purchase a share of
Common Stock upon exercise of an outstanding Incentive Stock Option or Non-
Qualified Stock Option.
(l) "Stock Appreciation Right" or "SAR" shall mean an Eligible
Individual's right to receive a payment described in Paragraph 9.
(m) "Subsidiary" shall mean any corporation in which (at the time
of determination) the Company owns or controls, directly or indirectly, 50
percent or more of the total combined voting power of all classes of stock
issued by the corporation.
5. Shares Available Under the Plan.
-------------------------------
(a) The shares of Common Stock which may be made the subject of
rights or awards granted pursuant to this Plan may be treasury shares or shares
of original issue or a combination of the foregoing.
(b) Subject to adjustments in accordance with Paragraph 11 of
this Plan, the maximum number of shares of Common Stock that may be the subject
of Option Rights or Stock Appreciation Rights granted pursuant to this Plan
shall be 4,300,000 shares of Common Stock which are made available by virtue of
this Plan.
6. Grants of Option Rights Generally. The Committee may, from time
---------------------------------
to time and upon such terms and conditions as it may determine, authorize the
grant of Option Rights to Eligible Individuals. Each such grant may utilize any
or all of the shares of Common Stock authorized under this Plan and shall be
subject to all of the limitations, contained in the following provisions:
(a) Each grant shall specify whether it is intended as a grant of
Incentive Stock Options or Non-Qualified Stock Options.
-2-
<PAGE>
(b) Each grant shall specify the number of shares of Common Stock
to which it pertains.
(c) Successive grants may be made to the same Eligible Individual
whether or not any Option Rights previously granted to such Eligible Individual
remain unexercised.
(d) Upon exercise of an Option Right and subject to approval by
the Committee, the entire option price shall be payable (i) in cash, (ii) by the
transfer to the Company by the Optionee of shares of Common Stock with a value
(Market Value per Share times the number of shares) equal to the total option
price, or (iii) by a combination of such methods of payment. Payment may not be
made with Common Stock issued to the Optionee by the Company upon his or her
prior exercise of an option under this Plan or any other option plan unless the
Common Stock received upon that prior exercise shall have been held by the
Optionee for at least one year.
(e) Each grant of Option Rights shall be evidenced by an
agreement executed on behalf of the Company by any officer designated by the
Committee for this purpose and delivered to and accepted by the Eligible
Individual and shall contain such terms and provisions, consistent with this
Plan, as the Committee may approve.
7. Special Rules for Grants of Incentive Stock Options.
---------------------------------------------------
(a) Each grant of Incentive Stock Options shall specify an option
price per share not less than the Market Value per Share on the date the Option
Right is granted; provided that, if an Incentive Stock Option is granted to any
Eligible Individual who, immediately after such option is granted, is considered
to own stock possessing more than ten percent of the combined voting power of
all classes of stock of the Company, or any of its subsidiaries, then the option
price per share shall be not less than 110 percent of the Market Value per Share
on the date of the grant of the option, and such option may be exercised only
within five years of the date of the grant.
(b) The duration of each Incentive Stock Option by its terms
shall be not more than ten years from the date the option is granted as
specified by the Committee.
(c) The Committee shall establish the time or times within the
option period when the Incentive Stock Option may be exercised in whole or in
such parts as may be specified from time to time by the Committee, except that
Incentive Stock Options shall not be exercisable earlier than six months after
the Optionee commences employment with the Company or one of its subsidiaries,
nor later than ten years following the date the option is granted. The date of
grant of each Option Right shall be the date of its authorization by the
Committee.
(d) Except as may be provided by the Committee at the time of
grant, (i) in the event of the Optionee's termination of employment due to any
cause, including death or
-3-
<PAGE>
retirement, rights to exercise Incentive Stock Options shall cease, except for
those which are exercisable as of the date of termination, and (ii) rights that
are exercisable as of the date of termination shall remain exercisable for a
period of 30 days following a termination of employment for any cause other than
death or disability, and for a period of one year following a termination due to
death or disability. However, no Incentive Stock Option shall, in any event, be
exercised after the expiration of ten years from the date such option is
granted, or such earlier date as may specified in the option.
(e) No Incentive Stock Options shall be granted hereunder to any
Optionee that would allow the aggregate fair market (determined at the time the
option is granted) of the stock subject of all post-1986 incentive stock
options, including the Incentive Stock Option in question, which such Optionee
may exercise for the first time during any calendar year, to exceed $100,000.
The term "post-1986 incentive stock options" shall mean all rights, which are
intended to be "incentive stock options" under the Internal Revenue Code,
granted on or after January 1, 1987 under any stock option plan of the Company
or its Subsidiaries. If the Company shall ever be deemed to have a "parent," as
such term is used for purposes of Section 422 of the Internal Revenue Code, then
rights intended to be "incentive stock options" under the Internal Revenue Code,
granted after January 1, 1987 under such parent's stock option plans, shall be
included with the terms of the definition of "post-1986 incentive stock
options".
8. Special Rules for Grants of Non-Qualified Stock Options.
-------------------------------------------------------
(a) Except as may be provided by the Committee at the time of
grant, (i) in the event of the Optionee's termination of employment due to death
or disability, rights to exercise Non-Qualified Stock Options that are
exercisable as of the date of termination shall remain exercisable for one year
following termination, (ii) in the event of the Optionee's termination of
employment due to any other reason, the rights to exercise Non-Qualified Stock
Options that are exercisable as of the date of termination shall remain
exercisable for 30 days following termination, and (iii) the right to exercise
Non-Qualified Stock Options that are not exercisable as of the date of
termination shall be forfeited. Notwithstanding the foregoing, the Committee
may, at any time, extend the time within which a Non-Qualified Stock Option may
be exercised.
(b) The Company shall not issue stock certificates to an Optionee
who exercises a Non-Qualified Stock Option, unless payment of the required
lawful withholding taxes has been made to the Company by check, payroll
deduction or other arrangements satisfactory to the Committee.
-4-
<PAGE>
9. Stock Appreciation Rights.
-------------------------
(a) The Committee may, from time to time, authorize the grant of
Stock Appreciation Rights (SARs) to Eligible Individuals. The Committee may
grant SARs in "tandem" with Option Rights, independent of Option Rights, or in
any combination of these forms of SARs. The Committee shall have complete
discretion in determining the number of SARs granted and in determining the
terms and conditions pertaining to such SARs; provided, however, that in no
event shall any SAR become exercisable within six months of its grant nor shall
any SAR be granted for a term of more than ten years.
(b) SARs granted in "tandem" with Option Rights may be exercised
for all or part of the shares of Common Stock subject to the related Option
Right upon the surrender of the right to exercise the equivalent portion of the
related Option Right. A "tandem" SAR may be exercised only with respect to the
Shares for which its related Option Right is then exercisable. Notwithstanding
any other provision of this Plan to the contrary, with respect to an SAR granted
in "tandem" with an Incentive Stock Option:
(i) the SAR will expire no later than the expiration of the
underlying Incentive Stock Option;
(ii) the value of the payout with respect to the SAR may be
for no more than 100 percent of the difference between
the option price of the underlying Incentive Stock
Option and the fair market value of the shares subject
to the underlying Incentive Stock Option at the time
the SAR is exercised; and
(iii) the SAR may be exercised only when the fair market
value of the shares subject to the Incentive Stock
Option exceeds the option price of the Incentive Stock
Option.
(c) Each SAR grant shall be evidenced by a written agreement that
shall contain such terms and conditions as the Committee shall determine.
(d) Upon exercise of an SAR, a Participant shall be entitled to
receive payment from the Company in an amount determined by multiplying:
(i) The excess (if any) of the Market Value per Share on
the date of exercise over the Market Value per Share on
the date the SAR was granted; by
(ii) The number of shares of Common Stock with respect to
which the SAR is exercised.
At the discretion of the Committee, the payment upon exercise of an SAR may be
in cash, in shares of Common Stock of equivalent value, or in some combination
thereof.
-5-
<PAGE>
(e) Each SAR award agreement shall set forth the rights of the
Participant following termination of the Participant's employment with the
Company and its Subsidiaries. Such provisions shall be determined in the sole
discretion of the Committee and shall be included in the award agreement entered
into with Participants, and need not be uniform among all SARs issued pursuant
to this Plan, and may reflect distinctions based on the reasons for termination
of employment.
10. Transferability. No Option Right shall be transferable by an
---------------
Optionee other than by will or the laws of descent and distribution. Option
Rights shall be exercisable during the Optionee's lifetime only by the Optionee.
Other rights granted pursuant to this Plan shall not be subject to assignment,
alienation, lien, transfer, sale or exchange.
11. Adjustments. The Committee may make or provide for such
-----------
adjustments in the maximum numbers of shares of Common Stock specified in
Paragraph 5 of this Plan, in the numbers of shares of Common Stock covered by
other rights granted hereunder, and in the prices per share applicable under all
such rights, as the Committee in its sole discretion, exercised in good faith,
may determine is equitably required to prevent dilution or enlargement of the
rights of Eligible Individuals that otherwise would result from any stock
dividend, stock split, combination of shares, recapitalization or other change
in the capital structure of the Company, merger, consolidation, spin-off,
reorganization, partial or complete liquidation, issuance of rights or warrants
to purchase securities, or any other transaction or event having an effect
similar to any of the foregoing.
12. Fractional Shares. The Company shall not be required to issue any
-----------------
fractional share of Common Stock pursuant to this Plan. The Committee may
provide for the elimination of fractions or for the settlement of fractions in
cash.
13. Administration of the Plan.
--------------------------
(a) This Plan shall be administered by the Committee, which shall
consist of not less than three Disinterested Directors. No right shall be
granted under this Plan to any member of the Committee so long as membership
continues.
(b) The Committee shall have the power to interpret and construe
any provision of this Plan. The interpretation and construction by the Committee
of any provision of this Plan or of any agreement evidencing the grant of rights
hereunder, and any determination by the Committee pursuant to any provision of
this Plan or of any such agreement, shall be final and binding. No member of the
Committee shall be liable for any such action or determination made in good
faith.
(c) Notwithstanding any other provision of this Plan, the
Committee may impose such conditions on the exercise of any right granted
hereunder (including, without limitation, the right of the Committee to limit
the time of exercise to specified periods) as may be
-6-
<PAGE>
required to satisfy the requirements of Section 16 (or any successor rule) of
the Securities Exchange Act of 1934, as may be amended from time to time, or any
successor statute.
14. Amendments, Termination, Etc.
-----------------------------
(a) This Plan may be amended from time to time by resolutions of
the Board of Directors, provided that no such amendment shall (i) increase the
maximum number of shares of Common Stock specified in Paragraph 5 of this Plan
(except that adjustments authorized by Paragraph 11 of this Plan shall not be
limited by this provision), or (ii) change the definition of "Eligible
Individuals", without further approval by the shareholders of the Company.
(b) The Committee may, with the concurrence of the affected
Optionee, cancel any agreement evidencing Option Rights granted under this Plan.
In the event of such cancellation, the Committee may authorize the granting of
new Option Rights (which may or may not cover the same number of shares which
had been the subject of the prior agreement) in such manner, at such option
price and subject to the same terms and conditions as, under this Plan, would
have been applicable had the canceled Option Rights not been granted.
(c) In the case of any Option Right not immediately exercisable
in full, the Committee in its discretion may accelerate the time at which the
Option Right may be exercised, subject to the limitation described in Paragraph
7(c).
(d) Notwithstanding any other provision of the Plan to the
contrary, (i) the Plan may be terminated at any time by resolutions of the Board
of Directors, and (ii) no rights shall be granted pursuant to this Plan after
June 30, 2008.
-7-
<PAGE>
Exhibit 10.21
(Continued)
AMENDMENT #1
PAETEC CORP.
1998 INCENTIVE COMPENSATION PLAN
--------------------------------
This sets forth Amendment #1 to the Paetec Corp. 1998 Incentive
Compensation Plan, effective as of July 1, 1998 ("Plan"). Effective as of July
1, 1999, the Plan shall be amended as follows:
1. Section 4 of the Plan shall be amended by deleting current
subsection 4(e) and by redesignating subsequent subsections of Section 4.
2. Subsection 4(e) (formerly subsection 4(f)) shall be clarified to
provide in its entirety as follows:
"Eligible Individuals" shall mean persons described in
Paragraph 3; provided that only individuals who are
employees of the Company or its Subsidiaries shall be
eligible for grants of Incentive Stock Options.
3. Subsection 5(b) of the Plan shall be amended to increase the
number of shares of Common Stock available by virtue of the Plan from 4,300,000
shares to 4,500,000 shares.
4. The first sentence of subsection 7(c) of the Plan shall be
amended and restated to provide in its entirety as follows:
The Committee shall establish the time or times within the option
period when the Incentive Stock Option may be exercised in whole
or in such parts as may be specified from time to time by the
Committee, except that Incentive Stock Options shall not be
exercisable earlier than six months, nor later than ten years,
following the date the option is granted.
5. Section 8 of the Plan shall be amended by adding a new subsection
8(c) to the Plan. New subsection 8(c) shall provide in its entirety as follows:
(c) The Committee shall establish the time or times
within the option period when the Non-Qualified Stock Option
may be exercised in whole or in such parts as may be
specified from time to time by the Committee, except that
Non-Qualified Stock Options shall not be exercisable earlier
than six months, nor later than ten years, following the
<PAGE>
date the option is granted. The date of grant of each Option
Right shall be the date of its authorization by the
Committee.
6. Subsection 13(a) of the Plan shall be amended and restated to
provide in its entirety as follows:
This Plan shall be administered by the Committee, which shall consist
of such number of persons as the Board of Directors shall determine.
Executed this 20th day of August 1999.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
-----------------------------
<PAGE>
Exhibit 10.21
(Continued)
AMENDMENT #2
PAETEC CORP.
1998 INCENTIVE COMPENSATION PLAN
--------------------------------
This sets forth Amendment #2 to the PaeTec Corp. 1998 Incentive
Compensation Plan, established effective as of July 1, 1998 ("Plan"). Effective
as of February 28, 2000, the Plan shall be amended as follows:
1. Paragraph 2 of the Plan shall be amended by adding two new
sentences at the end of Paragraph 2 to provide as follows:
In addition, pursuant to this Plan, eligible individuals who receive
and exercise options to acquire shares of common stock of a Subsidiary
pursuant to any stock-based incentive compensation plan maintained by
the Subsidiary, and who exchange shares so acquired for shares of
Common Stock pursuant to a grant or exchange agreement to which the
Company is a party, shall be issued shares of Common Stock pursuant to
this Plan to the extent provided in such grant or exchange agreement
and ratified by the Committee. Shares of Common Stock acquired in the
manner described in the preceding sentence shall be referred to in
this Plan as "Exchange Shares."
2. Paragraph 5(b) of the Plan shall be amended and restated to
provide in its entirety as follows:
(b) Subject to adjustment in accordance with Paragraph 5(c) and
Paragraph 11 of this Plan, the maximum number of shares of Common
Stock that may be the subject of Option Rights or Stock Appreciation
Rights granted pursuant to this Plan shall be 5,300,000 shares of
Common Stock, in the aggregate, which are made available by virtue of
this Plan.
<PAGE>
3. A new Paragraph 5(c) shall be added to the Plan and shall provide
in its entirety as follows:
(c) Notwithstanding the number of shares of Common Stock made
available by virtue of this Plan in accordance with Paragraph 5(b),
until such time as shares of Common Stock are actively traded on an
established securities market, the number of shares of Common Stock
available under this Plan shall be reduced to reflect the number of
stock options and warrants granted under any stock-based incentive
compensation plan adopted by any Subsidiary ("Subsidiary Option
Plan"). The reduction in the number of shares that may be granted
under this Plan will be determined as follows:
(i) At any time that options are to be granted under a Subsidiary
Option Plan, the fully diluted fair market value of a share of
Common Stock (taking into account the consideration to be received
by the Company from the exercise of options and warrants
outstanding at the time of such valuation), and the portion of
such fair market value that is attributable to the Subsidiary that
is proposing to issue options under a Subsidiary Option Plan
(expressed as a fully diluted fair market value per share of the
Subsidiary, taking into account the consideration to be received
by the Subsidiary from the exercise of outstanding options and
warrants issued by the Subsidiary), shall be established based
upon the latest determination made by the Subsidiary Committee (as
defined below) as to the relative enterprise values of the Company
and of the Subsidiary (which determination in no event shall be
earlier than three months preceding the applicable option grant
date). The Subsidiary Committee shall make such determination in
its good faith, reasonable judgment (it being understood that,
until Common Stock becomes publicly-traded, the Subsidiary
Committee may consider the per share purchase price in the latest
private placement by the Company of its capital stock in
determining the enterprise values of the Company and its
Subsidiaries) and, to the extent the Subsidiary Committee deems
appropriate or desirable, upon consultation with the Company's
independent financial advisors. The determination of the
Subsidiary Committee shall be ratified by the members of the
Committee. In the event that the "CCS Group Director" (as such
term is defined in the Stockholders Agreement dated September 9,
1999, by and among the Company, Arunas A. Chesonis, Jeffrey
Sudikoff, the Christopher E. Edgecomb Living Trust and former
stockholders of Campuslink Communications Systems, Inc.defined in
the June 4 Agreement and Plan of Reorganization by and among the
Company, PaeTec Merger Corp. and Campuslink Communications
Systems, Inc., as amended) does not objects to the Subsidiary
Committee's determination concerning the respective enterprise
values of the Company and/or the Subsidiary within sixty (60) days
of his receipt of information regarding the exercise price for the
option in question and the conversion rate between Subsidiary
shares and shares of Common Stock then in effect, the Subsidiary
Committee's, the Committee and the CCS Group Director shall
discuss and resolve in good faith the objections raised by the CCS
Group Director. determination in respect of such option shall
conclusively be deemed reasonable for purposes of this paragraph.
As used herein, the term "Subsidiary Committee" refers to a
committee designated by the Board of Directors of the Subsidiary
to establish the exercise prices of options granted under the
Subsidiary Option Plan, and the conversion rate
-2-
<PAGE>
between shares of such Subsidiary issued under its
Subsidiary Option Plan and shares of Common Stock issuable
upon conversion thereof.
(ii) Based on the valuations determined in accordance with the
preceding subparagraph (i), a number of shares will be
subtracted from the 5,300,000 shares of Common Stock available
under the Plan upon the grant of options under a Subsidiary
Option Plan, calculated as follows:
Reduction Amount = (SOG x SSFMV) / PTFMV
where,
SOG = number of shares with respect to which
options are being granted by the Subsidiary
under the Subsidiary Option Plan
SSFMV = fully diluted fair market value per share of
the Subsidiary at the time of the option
grant
PTFMV = fully diluted fair market value per share of
Common Stock at the time of the option grant
(iii) In the event an individual acquires shares of common stock of a
Subsidiary under the Subsidiary Option Plan, which shares were
previously included in a calculation described in subparagraphs
5(c)(i) and (ii), and then exchanges some or all of the acquired
shares for shares of Common Stock pursuant to a stock option
grant or exchange agreement among the Company, the Subsidiary
and the individual ("Grant Agreement"), the actual number of
shares of Common Stock received in the exchange (which number
shall be determined pursuant to the Grant Agreement and ratified
by the Committee) shall be compared to the product of (A) the
total "Reduction Amount" determined for all shares of common
stock of the Subsidiary included in the applicable calculation
described in subparagraphs 5(c)(i) and (ii), times (B) a
fraction, the numerator of which is the number of shares of
common stock of the Subsidiary surrendered in the exchange, and
the denominator of which is the total number of shares of common
stock of the Subsidiary included in the applicable calculation
described in subparagraphs 5(c)(i) and (ii). If the actual
number of shares of Common Stock received in the exchange is
greater than the product described in the foregoing sentence,
the number of shares of Common Stock available under this
Paragraph 5 shall be further decreased by the difference. If the
actual number of shares of Common Stock received in the exchange
is less than such product, the number of shares of Common Stock
available under this Paragraph 5 shall be increased by the
difference.
-3-
<PAGE>
(iv) In the event that any options under a Subsidiary Option Plan
expire or terminate for any reason without being exercised, the
number of shares issuable under the Plan shall be adjusted as if
such unexercised options had never been granted.
(v) At such time as shares of Common Stock are actively traded on an
established securities market, (A) no adjustments shall be
required pursuant to subparagraphs 5(c)(i) and (ii) with respect
to any subsequent option or other grant pursuant to any
Subsidiary Option Plan, (B) no adjustment shall be required
pursuant to subparagraph 5(c)(iii) with respect to any
subsequent exchange of shares of the applicable Subsidiary for
shares of Common Stock, and (C) Exchange Shares subsequently
issued by the Company, but not previously the subject of any
adjustment under this Paragraph 5(c), shall reduce the number of
shares of Common Stock available pursuant to Paragraph 5(b) on
an one-for-one basis.
4. A new Paragraph 9A shall be added to the Plan and shall provide
in its entirety as follows:
9A Exchange Shares. The Committee shall be cause the Company
---------------
to issue (pursuant to this Plan) such number of Exchange Shares
necessary to satisfy the Company's obligations under individual stock
option grant or exchange agreements entered into by and among the
Company, a Subsidiary and an employee of a Subsidiary (pursuant to a
Subsidiary Option Plan, as defined in Paragraph 5(c)), pursuant to
which grant or exchange agreement an optionee acquires shares of
common stock of a Subsidiary and seeks to dispose of the acquired
shares through an exchange of the acquired shares with the Company for
shares of Common Stock.
Executed this 28th day of February 2000.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
---------------------------
-4-
<PAGE>
Exhibit 10.22
PAETEC COMMUNICATIONS, INC.
AGENT INCENTIVE PLAN
Introduction
Employee participation in ownership through stock options is a key
element of PaeTec's business plan. Our independent sales agents are also an
important part of PaeTec's marketing strategy, and we want to offer means by
which agents who help us succeed can share in the success along with our
employees and shareholders. Accordingly, we have created this Agent Incentive
Plan (the "Plan").
Under the Plan, agents who achieve specified sales goals will be
granted Warrants entitling them to purchase shares of the Class A Common Stock
of our parent company, PaeTec Corp. ("Warrant Shares")./1/ The Exercise Price
will be set at the time the Warrants are granted by the Company based on the
then current fair market value of PaeTec's stock. Agents who receive Warrants
will then have the benefit of subsequent increases in the price of the shares as
if they were investors holding stock. In this way, agents who consistently
generate significant monthly revenues are rewarded with the option to in effect
"buy-in" to the Company and to share in future increases in value of the
Company.
PaeTec is currently a private company and there is no public trading
market for its stock. Recognizing that agents will not therefore realize cash
"value" from the Plan until PaeTec becomes a public company, the Warrants will
not be exercisable until after PaeTec successfully completes an initial public
offering (an "IPO") of its common stock. Further, the Warrants will only be
exercisable in compliance with federal and state securities laws.
The ability to exercise the Warrants (also referred to as "vesting")
will also be dependent on maintenance of sales volumes. The right to purchase
the Warrant Shares will vest over a period four years, depending on retention of
the sales revenues generated by the agent.
The Company has set aside a total of 500,000 shares to cover Warrants
under the Plan. Once the Warrants have been granted with respect to all 500,000
shares, the Plan will automatically end unless the Company decides, in its sole
discretion, to continue the Plan by increasing the number of shares available
under the Plan.
______________________
/1/ For purposes of the Plan, PaeTec Communications, Inc. and PaeTec Corp.
are referred to collectively as "PaeTec" or the "Company." A warrant is similar
to an option; it is a legal right to purchase stock at a specified price which
is referred to as the "Exercise Price."
<PAGE>
Qualification and Exercise Price
To qualify, agents must first achieve specified monthly revenue
targets. The Company will issue Warrants to agents when their monthly sales
reach one of the following levels:
<TABLE>
<CAPTION>
Monthly Revenue Level Warrants
--------------------- --------
<S> <C>
At least $50,000 but less than $100,000 in monthly revenue 2,500 Warrant Shares
At least $100,000 but less than $250,000 in monthly revenue 5,000 Warrant Shares
At least $250,000 but less than $500,000 in monthly revenue 12,000 Warrant Shares
At least $500,000 in monthly revenue 20,000 Warrant Shares
</TABLE>
A Warrant Certificate for the number of Warrants earned by an agent
based on the revenue level achieved will be granted to the agent automatically
within 60 days after the end of the month in which the agent hits its sales
target.
The price for purchasing the Warrant Shares (in other words, the
Exercise Price) will be the fair market value of PaeTec's Class A Common Stock
at the time the Warrants are granted. Since PaeTec is currently not a public
company and there is no trading market for its shares, the Exercise Price will
be set by the Board of Directors of the Company and its determination will be
final. Generally, the Board will base its determination on the most recent
selling price for shares in a private offering by PaeTec, but the Board reserves
the right to consider other factors affecting value as well. For Warrants issued
after PaeTec goes public, the Exercise Price will generally equal the closing
price per share of PaeTec's Class A Common Stock on the last trading date of the
month the agent qualifies for the Warrants.
A form of the Warrant Certificate is attached as Exhibit A.
Payment for the Warrant Shares
Agents will pay nothing at the time the Warrants are issued to them.
The Warrants will be issued to successful agents who meet their monthly revenue
targets as a reward for their sales achievements for PaeTec, and no payment is
required until the agent decides to exercise its rights under the Warrant. At
that point the agent will have to pay the Exercise Price in cash for the Warrant
Shares it elects to buy. Alternatively, a "cashless exercise" will be permitted.
The "cashless exercise" alternative in essence enables the agent to
use the appreciation, if any, in the value of PaeTec stock over the Exercise
Price, rather than its own funds, to pay for the Warrant Shares. For example,
assume the agent is eligible (i.e., PaeTec has gone public and the agent's
Warrants have "vested") to purchase 1,000 Warrant Shares at an Exercise Price of
$5.00 per share. Further assume that the market price of the shares at the time
of exercise has increased to $10.00 per share, reflecting appreciation of $5.00
per share. The agent could either purchase 1,000 shares by paying $5,000 in
cash, or it could acquire 500 shares through a "cashless exercise" by
authorizing the Company to cancel 500 Warrants in addition to the 500 Warrants
being exercised. In effect, the appreciation in the 500 Warrants to be cancelled
-2-
<PAGE>
is used to purchase 500 Warrant Shares. By using the cashless exercise
alternative, the agent foregoes the opportunity to purchase a larger number of
shares for the privilege of not having to invest its own funds./2/
Securities Law Matters
In order that agents holding Warrants will have sufficient information
about the Company to make an informed decision about investing in Warrant
Shares, and will be able to sell in a public market any Warrant Shares they
elect to purchase through the exercise of the Warrants, the Warrants will not be
exercisable until after PaeTec has become a public company and "registered" the
Warrant Shares on a Registration Statement filed with the Securities and
Exchange Commission. While PaeTec anticipates that it will go public in the
future, there can be no assurance that it will do so within any specified period
of time or at all. If PaeTec fails to go public, the Warrants would never become
exercisable.
Vesting
Assuming PaeTec has become a public company, an agent can purchase up
to 20% of the Warrant Shares at any time after the grant of the Warrants. In
other words, 20% of the Warrants automatically become exercisable as soon as the
Warrant is granted to the agent, regardless of the agent's subsequent monthly
revenue level. On the other hand, an agent's ability to purchase the rest of the
shares under the Warrant (in other words, the remaining 80%) will depend on the
maintenance of sales revenues over the next four years. After the IPO, an agent
may exercise its Warrants with respect to all or any portion of the vested
Warrant Shares.
______________________
/2/ See the attached Warrant Certificate for the mechanism for a cashless
exercise.
-3-
<PAGE>
Each year after Warrants are issued, the Company will determine
whether the agent is still meeting the monthly sales target that resulted in the
grant of the Warrant. In order to do this, the Company will review the agent's
revenue level as of the end of the month for which the grant was made
("Anniversary Month") in each of the succeeding four years. For example, if a
Warrant was granted with respect to June 2000, the relevant Anniversary Months
for the purpose of vesting are June 2001, June 2002, June 2003 and June 2004. If
the agent's average monthly sales during June of the applicable year and the
previous eleven months remained at or above the applicable target level, an
additional 20% of the shares covered by the Warrant will "vest" and become
exercisable as of June 30th of that year. Thus, for example, an agent who is
granted Warrants for 2,500 shares in June 2000 as a result of generating $50,000
in monthly revenue could purchase 500 shares (20% of 2,500 shares) at any time
after the grant/3/, and 500 additional shares after the end of each June
thereafter until all 2,500 shares are vested, provided that it maintains the
required average monthly revenue level of $50,000. The "penalty" for falling
below the average monthly revenue target is simply the loss of the vested
Warrant Shares for that year (i.e., loss of 20% vesting for that year). The
----
agents, however, are eligible to make up for any shortfall in the monthly
revenue target in subsequent years through and including the fifth Anniversary
Month following issuance of the Warrant Certificate. Example #1 shows how an
agent would vest upon issuance of the Warrants, and over a four year period by
maintaining its revenue level:
Example #1 $50,000 monthly revenue level for June C 2,500 Warrants
-------------------------------------------------------
Vesting on Issuance (2,500 x 20%) = 500 Warrants
June 30 (1st Anniversary) (2,500 x 20%) = 500 Warrants
June 30 (2nd Anniversary) (2,500 x 20%) = 500 Warrants
June 30 (3rd Anniversary) (2,500 x 20%) = 500 Warrants
June 30 (4th Anniversary) (2,500 x 20%) = 500 Warrants
-----------------------------------------------------------
Total Vested Warrants After 4 Years = 2,500
=====
An agent who increases sales to the next revenue level will not only
vest an additional 20% of the shares covered by his original Warrant as
described above, but also be entitled to new Warrants to reflect the newly
achieved sales level. For example, assume that an agent achieves the $50,000 per
month sales plateau in June of year one and receives Warrants for 2,500 shares.
In June of the second year the agent increases revenues to the $100,000 per
month level. The agent would then be vested for a total of 40% of the shares
covered by its first Warrant (in other words, 1,000 shares), and would also be
granted new Warrants for an additional 5,000 shares. The agent would
automatically vest for 20% of the new Warrant (or 1,000 shares), and thus would
be eligible to purchase a combined 2,000 shares under both Warrants. Of course,
if an agent initially generates the applicable revenue level in any subsequent
month (say, August in our example), it will also receive a new Warrant for that
month. Simply put, the more revenue an agent generates for PaeTec, the more
shares it can buy under the Plan.
______________________
/3/ Subject to the pre-IPO restrictions previously described.
-4-
<PAGE>
On the other hand, an agent who fails to maintain average monthly
sales revenues will forfeit the right to buy shares that would otherwise vest
under its Warrant. Assume that an agent hits the $50,000 monthly revenue target
for June 2000 and receives a Warrant for 2,500 shares. The agent immediately
vests for 500 shares, but the agent's average monthly revenue during the
succeeding twelve months falls below the $50,000 monthly revenue threshold to
$40,000. In that case, the agent would forfeit the right to purchase the 500
shares that would otherwise have vested as of June 30, 2001.
If an agent fails to meet its monthly revenue target and therefore a
20% installment fails to vest, the Plan offers the agent an opportunity to "earn
back" the forfeited Warrant Shares in subsequent years up to and including the
last day of the fifth Anniversary Month following issuance of the Warrant
Certificate by bringing monthly sales levels back above the threshold target by
a sufficient amount to exceed the prior year's shortfall. Thus, returning to the
example in the preceding paragraph, if it is subsequently determined that the
agent's average monthly sales during the twelve months ending June 30, 2002
exceed the $60,000 threshold (in other words, $50,000 for June 2002 and $10,000
to make up for the June 2001 shortfall), the 500 shares previously forfeited at
the end of year one would be restored, and an additional 500 shares would vest
for the current year as well. See example #2 below.
Example #2:
Monthly revenue target level: $100,000
June, Year 1 (revenues for the month = $100,000):
-------------------------------------------------
Warrants for 5,000 shares granted, 20% vest immediately (1,000 shares
vested)
June, Year 2 (average monthly revenues during preceding 12 months =
-------------------------------------------------------------------
$90,000):
---------
Since the average monthly revenues were less than $100,000, 20% of the
Warrants (1000 shares) are forfeited.
June 30, Year 3 (average monthly revenues during preceding 12 months =
----------------------------------------------------------------------
$85,000):
---------
Again, the revenues are less than $100,000 and, as a result, the 20%
of the Warrants which would otherwise have vested are forfeited (Agent
remains vested for 1,000 shares from original issuance).
June 30, Year 4 (average monthly revenues during preceding 12 months =
----------------------------------------------------------------------
$130,000):
----------
Since the average monthly revenues during the preceding 12 months
exceeded the $100,000 target level by $30,000 (which would make up for
the Year 2 shortfall of $10,000 and the Year 3 shortfall of $15,000),
the agent will earn back the shares forfeited in Year 2 and Year 3.
Accordingly, 20% of 5,000 Warrants will vest for the current Year 4,
an additional 20% will vest for Year 3, and additional 20% vest for
Year 2 for a total of 4,000 Warrants vested, including the Warrants
vested in Year 1. However, there will be no credit given with respect
to the $5,000 in extra
-5-
<PAGE>
revenues (difference between the excess $30,000 and the $25,000 total
shortfall amount) for any future periods.
June 30, Year 5 (average monthly revenues = $80,000):
-----------------------------------------------------
Since the average monthly revenues for twelve months ended June 30
once again fell below the $100,000 threshold, the last 20% will not
vest. However, the agent will have one last chance to earn back these
forfeited shares if it has or exceeds $120,000 in average monthly
revenues during Year 6, measured as of the last day of the Anniversary
Month of that year.
Regardless of whether any Warrant has "vested" as herein described,
unless and until PaeTec becomes a public company, the agent holding the Warrants
may not purchase Warrant Shares under any circumstances. Further, an agent can
"earn back" Warrants that did not vest because average monthly sales fell below
target only until the last day of the fifth Anniversary Month following the
issuance of the Warrant Certificate.
Expiration Date
All unexercised Warrants will expire on the last day of the tenth
Anniversary Month occurring after issuance of the Warrant Certificate.
Sub-Agents
PaeTec Communications recognizes that many agents work with sub-agents and
that they may wish to assign some of their Warrants to sub-agents who help them
achieve and maintain their PaeTec revenue goals. Accordingly, while Warrants
generally are not transferable, limited transfers to sub-agents will be
permitted on the following conditions: (i) the proposed transferee must be a
genuine sub-agent and proof of its sales of PaeTec products and services will be
required, (ii) only vested Warrants may be assigned, (iii) the minimum
assignment must be for at least 50 Warrant Shares and must be in increments of
50 Warrant Shares, and (iv) the sub-agent transferee will be subject to the same
restrictions as the agent, e.g., Warrants are not exercisable pre-IPO and
----
Warrant Shares may only be transferred in compliance with the securities laws.
Transferability - Warrants and Warrant Shares
Except for transfers to sub-agents as previously discussed, Warrants may
not be assigned, transferred, pledged or otherwise disposed of and any attempted
transfer will be void. It is PaeTec's intention to "register" the Warrant Shares
issuable upon exercise of the Warrants once it becomes a public company so that
the Warrant Shares will generally be freely tradable in the public market.
However, it is possible that, for some reason that we cannot presently foresee,
this registration would be precluded or delayed. In that event, the Warrant
Shares could not be sold unless an exemption from the application of the
securities laws is available. Agents are urged to contact the Company prior to
purchasing Warrant Shares pursuant to the exercise of a Warrant to confirm that
the shares will in fact be freely tradable.
-6-
<PAGE>
Plan Summary
. 500,000 shares of Class A Common Stock of PaeTec Corp. have been set aside
for the Plan.
. Warrants are not exercisable in any event until after PaeTec has gone
public.
. Warrants are issued and the Exercise Price is set when a specified monthly
revenue level is reached. Agent has a potential to receive Warrants with
respect to each calendar month.
. Warrants vest over a 4 year period (20% immediately upon grant and then 20%
as of the end of the Anniversary Month for four years).
. For continued vesting, Agent must maintain the applicable revenue level on
average during each succeeding 12 months.
. Penalty for missing the target revenue level is loss of vesting for that
year (20%).
. To make up for any lost vesting, the agent must exceed his target revenue
level plus the shortfall amount on average during any succeeding twelve
month period, measured as of the end of any succeeding Anniversary Month,
up to and including the fifth Anniversary Month after issuance of the
Warrant Certificate.
. Unexercised Warrants will expire after ten years.
-7-
<PAGE>
Exhibit A to Agent Incentive Plan
NEITHER THE WARRANTS REPRESENTED BY THIS WARRANT CERTIFICATE NOR ANY SHARES
ACQUIRED UPON THE EXERCISE OF THE WARRANTS HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, NOR MAY
WARRANTS OR SHARES BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE
STATE SECURITIES LAWS, OR PURSUANT TO AN EXEMPTION FROM THESE REGISTRATION
REQUIREMENTS. THE WARRANTS AND SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH
THE CONDITIONS SPECIFIED IN THIS WARRANT CERTIFICATE.
WARRANTS
To Purchase ________ Shares of Class A Common Stock of
PAETEC CORP.
Dated: ________________
THIS WARRANT CERTIFICATE CERTIFIES THAT ___________________ (the "Holder")
is entitled, at any time after the Warrants represented by this Warrant
Certificate become exercisable as provided in Section 2.1, but prior to the
Expiration Date (as hereafter defined), to purchase from PaeTec Corp., a
Delaware corporation (the "Company"), _________ shares of the Company's Class A
Common Stock at a purchase price of $_______ per share (the "Exercise Price"),
all on the terms and conditions set forth in this Warrant Certificate.
1. DEFINITIONS
As used in this Warrant Certificate, the following terms have the meanings
set forth below:
"Agent" shall mean the independent sales agent of the Company named on
Schedule A hereto.
"Anniversary Month" shall mean the calendar month indicated under the
caption "Anniversary Month" on Schedule A hereto.
"Board of Directors" shall mean the Board of Directors of the Company.
"Business Day" shall mean any day that is not a Saturday or Sunday or a day
on which banks are required or permitted to be closed in the State of New York.
<PAGE>
"Class A Common Stock" shall mean the Class A Common Stock, $.01 par value
per share, of the Company, and any other securities of the Company into which
such Class A Common Stock is recapitalized or reclassified.
"Commission" shall mean the Securities and Exchange Commission or any
successor federal agency then administering the Securities Act and successor
federal securities laws.
"Exercise Price" shall mean the price indicated above at which a share of
Class A Common Stock may be purchased pursuant to this Warrant. The Exercise
Price may from time to time be adjusted in accordance with Section 4 hereof.
"Expiration Date" shall mean the tenth (10th) anniversary of the date of
this Warrant Certificate.
"Fair Market Value" shall mean the fair value of a share of Class A Common
Stock as determined in good faith by the Board of Directors, whose determination
shall be conclusive; provided, however, that if the Class A Common Stock is then
-------- -------
listed or traded on a national securities exchange or automated quotation system
or is publicly held, then such term shall mean (a) if the Class A Common Stock
is listed or traded on any national securities exchange or listed for quotation
on the Nasdaq National Market or SmallCap Market, the last or closing sale
price, regular way, of the Class A Common Stock on the applicable date, as
reported in the principal consolidated transaction reporting system (in case of
a national securities exchange) or in the Wall Street Journal (in case of the
Nasdaq National Market or SmallCap Market); and (b) in all other cases, the
average of the high bid and low asked prices in the over-the-counter market,
such as the Nasdaq OTC Bulletin Board, as reported in The Wall Street Journal
or, if Class A Common Stock is not quoted by any such organization, the average
of the closing bid and asked prices as furnished by a professional market maker
making a market in the Class A Common Stock selected by the Board of Directors.
"Holder" shall mean the Person in whose name this Warrant is registered on
the books of the Company maintained for such purpose.
"Initial Public Offering" shall mean the closing of an initial public
offering underwritten by an investment banking firm on a firm commitment basis
pursuant to an effective registration statement under the Securities Act
covering the offer and sale by the Company of its common stock.
"Person" shall mean any individual, firm, corporation, partnership, limited
liability company, joint venture, trust or unincorporated organization,
government (or agency or political subdivision thereof) or any other entity.
"Revenues" shall mean gross revenues derived by the Company from sales of
its products and services to customers generated by Agent.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
2
<PAGE>
"Shortfall Amount" shall have the meaning given to it in Section 2.1
hereof.
"Target Revenue Level" shall mean the monthly target revenue level
indicated under the caption "Target Revenue Level" on Schedule A hereto.
"Vesting Installment" shall have the meaning given to it in Section 2.1
hereof.
"Warrants" shall mean the rights represented by this Warrant Certificate to
purchase Warrant Stock.
"Warrant Stock" shall mean the shares of Class A Common Stock that may be
purchased by the holders of the Warrants upon the exercise thereof.
2. EXERCISE OF WARRANTS
2.1. Time of Exercise. The Warrants may be exercised if and only if the
----------------
condition set forth in subsection (a) of this Section 2.1 is satisfied, but then
only with respect to shares of Warrant Stock vested in accordance with
subsection (b) of this Section 2.1:
(a) the Initial Public Offering shall have been consummated at least one
year prior to the date of exercise and a registration statement on an applicable
form under the Securities Act, covering the issuance by the Company of all the
shares of Warrant Stock, shall have been declared effective by the Commission.
(b) the Warrants are exercisable only with respect to shares of Warrant
Stock which shall have vested in accordance with the following:
(1) twenty percent (20%) of the Warrant Stock shall vest immediately
upon the grant of the Warrants; and
(2) the remaining eighty percent (80%) of the Warrant Stock shall
vest in four (4) equal annual installments (each, a "Vesting
Installment") of twenty percent (20%) on the last day of the
Anniversary Month in each of the four years immediately
succeeding the year in which the Warrants are granted (the "Grant
Year"), if and only if the Agent's average monthly Revenues
during the twelve month period ending on the last day of the
Anniversary Month of that year shall equal or exceed the Target
Revenue Level; provided, however, that in the event that any
-------- -------
Vesting Installment shall fail to vest as a result of the Agent's
average monthly Revenues not meeting the Target Revenue Level
(the difference between the Target Revenue Level and the Agent's
average monthly Revenues is hereinafter referred to as the
"Shortfall Amount"), then such Vesting Installment may vest in
any subsequent year on or prior to the fifth anniversary of the
last day of the Anniversary Month of the Grant Year if the
Agent's average monthly Revenues during the twelve month period
ending on the last day of the Anniversary Month of such
subsequent year equal or exceed the sum of
3
<PAGE>
the Target Revenue Level and the Shortfall Amount. If the average
monthly Revenues for any such twelve month period exceed the
Target Revenue Level, however, no credit will be given for any
future periods with respect to such excess Revenues.
2.2. Manner of Exercise. At any time after the Warrants become exercisable
------------------
as provided in Section 2.1 hereof until 5:00 p.m., New York time, on the
Expiration Date, Holder may exercise the Warrants on any Business Day for all or
any part of the number of shares of Warrant Stock purchasable hereunder,
provided that the Warrants may be exercisable in a maximum of two installments.
In order to exercise the Warrants, in whole or in part, Holder shall
deliver to the Company at its principal office at 290 Woodcliff Drive, Fairport,
New York 14450 (i) a written notice of Holder's election to exercise the
Warrants, substantially in the form appearing at the end of this Warrant as
Exhibit A ("Exercise Notice"), (ii) unless Holder indicates on the Exercise
Notice of its intention to effect a cashless exercise (in which case no cash
payment of the Exercise Price shall be made by Holder), payment of the Exercise
Price for each share of Warrant Stock as to which the Warrant is exercised by a
certified or bank check, payable to the order of the Company, and (iii) this
Warrant Certificate. Upon receipt of all of these items the Company shall
deliver or cause to be delivered to Holder a certificate or certificates
representing the aggregate number of full shares of Warrant Stock issuable upon
such exercise, together with cash in lieu of any fraction of a share, as
hereinafter provided; provided, however, that in the event that Holder elects to
-------- -------
effect a cashless exercise, the Holder shall be entitled to receive upon
exercise a number of shares of Warrant Stock, computed as of the date on which
the Company received the Exercise Notice together with this Warrant Certificate,
determined by the following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Warrant Stock to be issued to
Holder;
Y = the aggregate number of shares of Warrant Stock with
respect to which Holder elected to effect a cashless
exercise;
A = the Fair Market Value per share of the Company's Class A
Common Stock (on the date of such calculation); and
B = the Exercise Price.
In lieu of payment of the Exercise Price, the Company shall
cancel such number of shares of Warrant Stock equal to the
difference (rounded up to the nearest whole number of shares)
between Y and X.
The stock certificate or certificates so delivered shall be registered in
the name of Holder. The Warrants shall be deemed to have been exercised and such
certificate or certificates shall be
4
<PAGE>
deemed to have been issued, and Holder shall be deemed to have become a holder
of record of such shares for all purposes, as of the date the notice, together
with the Exercise Price (if applicable) and this Warrant Certificate, are
received by the Company as described above. If the Warrants shall have been
exercised in part, the Company shall, at the time of delivery of the certificate
or certificates representing Warrant Stock, deliver to Holder a new Warrant
Certificate evidencing the right of Holder to purchase the remaining shares of
Warrant Stock, which new Warrant Certificate shall in all other respects be
identical to this Warrant Certificate or, in the sole discretion of the Company,
appropriate notation may be made on this Warrant Certificate and the same
returned to Holder.
2.3. Fractional Shares. The Company shall not be required to issue a
-----------------
fractional share of Class A Common Stock upon exercise of the Warrants. In lieu
of any fraction of a share which Holder would otherwise be entitled to purchase
upon exercise, the Company shall pay cash in an amount equal to the same
fraction of the Fair Market Value per share of Class A Common Stock on the date
of exercise.
3. RESERVATION AND AUTHORIZATION OF CLASS A COMMON STOCK
From and after the date hereof, the Company shall at all times reserve and
keep available for issuance upon the exercise of the Warrants such number of its
authorized but unissued shares of Class A Common Stock (or its authorized and
issued shares of Class A Common Stock held in treasury) as will be sufficient to
permit the exercise in full of the Warrants. All shares of Class A Common Stock
which shall be so issuable, when issued upon exercise of the Warrants and
payment therefor in accordance with the terms of the Warrants, shall be duly and
validly issued and fully paid and nonassessable, and not subject to preemptive
rights.
4. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES.
The Exercise Price and the number of shares of Class A Common Stock covered
by the Warrants are subject to adjustment from time to time as provided in this
Section 4.
(a) In case the Company shall at any time after the date of this
Warrant Certificate (i) effect a distribution payable in shares of Class A
Common Stock to all holders of the outstanding Class A Common Stock, (ii)
subdivide the outstanding shares of its Class A Common Stock, (iii) combine the
outstanding Class A Common Stock into a smaller number of shares of Class A
Common Stock or (iv) issue any securities of the Company in a reclassification
or recapitalization of the Class A Common Stock, then the number and kind of
securities issuable upon exercise of the Warrants (commencing on the record date
for such distribution or the effective date of such subdivision, combination,
reclassification or recapitalization) shall be proportionately adjusted so that
the holder of the Warrants exercised after such time shall be entitled to
receive the aggregate number and kind of securities which, if such Warrants had
been exercised in full immediately prior to such date, he would have owned upon
such exercise and been entitled to receive by virtue of such distribution,
subdivision, combination, reclassification
5
<PAGE>
or recapitalization. Such adjustment shall be made successively whenever any
event listed above shall occur.
(b) Upon each adjustment of the number of shares of Class A Common
Stock for which the Warrants are exercisable as provided in Section 4(a) hereof,
the per share Exercise Price payable upon exercise of the Warrants shall be
adjusted by multiplying the Exercise Price immediately prior to such adjustment
by a fraction (i) the numerator of which shall be the number of shares of Class
A Common Stock covered by the Warrants prior to such adjustment, and (ii) the
denominator of which shall be the number of shares of Class A Common Stock
covered by the Warrants immediately after such adjustment.
5. RESTRICTIONS ON TRANSFER
Except as otherwise provided in Section 8.2 hereof, the Warrants may not be
transferred, hypothecated or assigned without the prior written consent of the
Company, which consent may be given or withheld in the Company's sole
discretion. Holder, by acceptance of this Warrant Certificate, agrees to be
bound by the provisions of this Section 5.
Each certificate representing shares of Warrant Stock issued upon the
exercise of a Warrant shall be stamped or otherwise imprinted with the following
legend, unless in the opinion of counsel for the Company, such legend is not
required under applicable laws:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
EXCEPT IN COMPLIANCE WITH SUCH ACT OR SUCH LAWS."
6. LOSS, THEFT, DESTRUCTION OR MUTILATION
Upon receipt by the Company from any Holder of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of this Warrant Certificate and indemnity or security reasonably
satisfactory to the Company and reimbursement to the Company of all reasonable
expenses incidental thereto, and in case of mutilation upon surrender and
cancellation of the mutilated Warrant Certificate, the Company will execute and
deliver in lieu hereof a new Warrant Certificate of like tenor to such Holder;
provided that, in the case of mutilation, no indemnity or security shall be
required if this Warrant Certificate in identifiable form is surrendered to the
Company for cancellation.
6
<PAGE>
7. LIMITATION OF LIABILITY AND RIGHTS AS STOCKHOLDER
No provision hereof, in the absence of affirmative action by Holder to
purchase shares of Class A Common Stock, and no enumeration herein of the rights
or privileges of Holder hereof, shall give rise to any liability of such Holder
for the Exercise Price of any Warrant Stock or as a stockholder of the Company,
whether such liability is asserted by the Company or by creditors of the
Company.
Prior to the exercise of the Warrants and the date of the stock certificate
representing the shares of Warrant Stock issuable upon exercise, the Holder of
this Warrant Certificate, as such, shall not be entitled to any rights of a
stockholder of the Company with respect to, or be deemed for any purpose the
holder of, shares for which the Warrants shall be exercisable, including without
limitation, the right to vote or to receive dividends or other distributions,
and shall not be entitled to receive any notice of any proceedings of the
Company, except as provided herein.
8. MISCELLANEOUS
8.1 Notice. Any notice, demand, request, consent, approval, declaration,
------
delivery or other communication hereunder to be made pursuant to the provisions
of this Warrant Certificate shall be sufficiently given or made if in writing
and either delivered in person with receipt acknowledged or sent by registered
or certified mail, return receipt requested, postage prepaid, or by a nationally
recognized overnight courier or by telecopy and confirmed by telecopy answer
back, addressed as follows:
(a) If to any Holder, at its last known address appearing on the
books of the Company maintained for such purpose.
(b) If to the Company at:
PaeTec Corp.
Attn: Vice President - Finance
290 Woodcliff Drive
Fairport, New York 14450
Telecopy Number: (716) 340-2511
with a copy to:
PaeTec Corp.
Attn: General Counsel
290 Woodcliff Drive
Fairport, New York 14450
Telecopy Number: (716) 340-2563
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such
7
<PAGE>
notice. Every notice, demand, request, consent, approval, declaration, delivery
or other communication hereunder shall be deemed to have been duly given or
served on the date on which personally delivered, with receipt acknowledged, or
telecopied and confirmed by telecopy answer back, one (1) Business Day after the
same shall have been deposited with a nationally recognized overnight courier or
three (3) Business Days after the same shall have been deposited in the United
States mail.
8.2 Successors and Permitted Assigns. This Warrant Certificate and the
--------------------------------
rights evidenced hereby shall inure to the benefit of and be binding upon the
successors of the Company and the successors and permitted assigns of Holder.
Neither this Warrant Certificate nor the rights evidenced hereby may be
assigned, transferred, pledged or otherwise disposed of by Holder to any other
Person without the prior written consent of the Company, except where such
assignment (i) is made by Agent to a sub-agent thereof who has performed bona
fide services on behalf of Holder to sell products and services of the Company,
and Agent has submitted documentation or proof satisfactory to the Company
concerning such fact, (ii) relates only to vested shares of Warrant Stock, and
---
(iii) is for at least fifty (50) or more vested shares of Warrant Stock
represented hereby and is in increments of fifty (50) shares.
8.3 Amendment. This Warrant Certificate or the Warrant represented hereby
---------
may be modified or amended, or the provisions hereof or thereof waived, only
with the written consent of the Company and the Holder.
8.4. Severability. Wherever possible, each provision of this Warrant
------------
Certificate shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Warrant Certificate shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Warrant Certificate.
8.5. Headings. The headings used in this Warrant Certificate are for the
--------
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
8.6. Governing Law. This Warrant Certificate and the Warrant represented
-------------
hereby shall be governed by the laws of the State of Delaware, without regard to
the provisions thereof relating to conflict of laws.
8
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed and its corporate seal to be impressed hereon as of the date set
forth below.
PAETEC CORP.
SEAL
By:____________________________
Name:
Title:
ATTEST:
________________________________
Secretary or Assistant Secretary
9
<PAGE>
SCHEDULE A
Name of Agent:_________________________
Number of Shares:_________________
Anniversary Month:________________
Target Revenue Level: $____________
10
<PAGE>
Exhibit 10.22
(Continued)
AMENDMENT #1
PAETEC COMMUNICATIONS, INC. AGENT INCENTIVE PLAN
This sets forth Amendment #1 to the PaeTec Communications, Inc. Agent
Incentive Plan ("Plan"). Effective as of March 20, 2000, the Plan shall be
amended as follows:
1. The third paragraph of the "Introduction" section of the Plan
shall be amended and restated to provide in its entirety as follows (with the
amended portion underscored):
PaeTec is currently a private company and there is no public trading
market for its stock. Recognizing that agents will not therefore
realize cash "value" from the Plan until PaeTec becomes a public
company, the Warrants will not be exercisable before the first
----------------
anniversary of the date PaeTec successfully completes an initial
-----------------------
public offering (an "IPO") of its common stock. Further, the Warrants
will only be exercisable in compliance with federal and state
securities laws.
2. The "Securities Law Matters" section of the Plan shall be amended
and restated to provide in its entirety as follows (with the amended portion
underscored):
In order that agents holding Warrants will have sufficient information
about the Company to make an informed decision about investing in
Warrant Shares, and will be able to sell in a public market any
Warrant Shares they elect to purchase through the exercise of the
Warrants, the Warrants will not be exercisable before the first
----------------
anniversary of the date PaeTec has become a public company and not
----------------------- ---
before PaeTec has "registered" the Warrant Shares on a Registration
-----------------
Statement filed with the Securities and Exchange Commission. While
PaeTec anticipates that it will go public in the future, there can be
no assurance that it will do so within any specified period of time or
at all. If PaeTec fails to go public, the Warrants would never become
exercisable.
<PAGE>
3. The first paragraph of the "Vesting" section of the Plan shall be
amended and restated to provide in its entirety as follows (with the amended
portion underscored):
Assuming that the public offering and registration requirements
---------------------------------------------------------------
described in the "Securities Law Matters" section above have been
-----------------------------------------------------------------
satisfied, an agent can purchase up to 20% of the Warrant Shares at
---------
any time after the grant of the Warrants. In other words, 20% of the
Warrants automatically become exercisable as soon as the Warrant is
granted to the agent, regardless of the agent's subsequent monthly
revenue level. On the other hand, an agent's ability to purchase the
rest of the shares under the Warrant (in other words, the remaining
80%) will depend on the maintenance of sales revenues over the next
four years. After the public offering and registration requirements
---------------------------------------------
described in the "Securities Law Matters" section above have been
-----------------------------------------------------------------
satisfied, an agent may exercise its Warrants with respect to all or
---------
any portion of the vested Warrant Shares.
4. The last paragraph of the "Vesting" section of the Plan shall be
amended and restated to provide in its entirety as follows (with the amended
portion underscored):
Regardless of whether any Warrant has "vested" as herein described,
unless and until the public offering and registration requirements
-------------------------------------------------
described in the "Securities Law Matters" section above have been
-----------------------------------------------------------------
satisfied, the agent holding the Warrants may not purchase Warrant
---------
Shares under any circumstances. Further, an agent can "earn back"
Warrants that did not vest because average monthly sales fell below
target only until the last day of the fifth Anniversary Month
following the issuance of the Warrant Certificate.
5. The last sentence of the "Sub-Agents" section of the Plan shall be
amended and restated to provide in its entirety as follows (with the amended
portion underscored):
Warrants are not exercisable until the public offering and
-----------------------------
registration requirements described in the "Securities Law Matters"
-------------------------------------------------------------------
section above have been satisfied and Warrant Shares may only be
---------------------------------
transferred in compliance with the securities laws.
<PAGE>
6. The second bullet in the "Plan Summary" section of the Plan shall
be amended and restated to provide in its entirety as follows (with the amended
portion underscored):
Warrants are not exercisable in any event until after the public
----------
offering and registration requirements described in the "Securities
-------------------------------------------------------------------
Law Matters" section above have been satisfied.
----------------------------------------------
This Amendment #1 has been adopted by the Board of Directors of PaeTec
Communications, Inc., and the Board of Directors of PaeTec Corp., to be
effective as of March 20, 2000.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
-------------------------
Title: President
----------------------
Date: March 20, 2000
-----------------------
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
-------------------------
Title: President
----------------------
Date: March 20, 2000
-----------------------
<PAGE>
Exhibit 10.23.1
STOCK RIGHTS AGREEMENT
This is a Stock Rights Agreement (the "Agreement"), dated October 30, 1998,
among KATHERINE A. CHAPMAN ("Shareholder"), PAETEC CORP., a Delaware corporation
with its principal place of business at 290 Woodcliff Drive, Fairport, New York
14450 (the "Company"), PAETEC COMMUNICATIONS, INC., a Delaware corporation and
wholly-owned subsidiary of the Company with its principal place of business at
290 Woodcliff Drive, Fairport, New York 14450 ("Subsidiary"), and ARUNAS A.
CHESONIS ("Founder").
RECITALS
A. The Company is a Delaware corporation having 35,000,000 shares of
authorized capital stock, 27,500,000 of which are designated Class A common and
7,500,000 of which are designated Class B common. Founder is one of the founding
shareholders of the Company.
B. Shareholder is an employee of the Subsidiary and is subject to the terms
of a non-competition covenant set forth in an Incentive Stock Option Agreement,
effective as of July 27, 1998, between Shareholder and the Company (the "ISO
Agreement").
C. The Company has offered to issue to Shareholder, and Shareholder has
agreed to purchase, 20,000 shares of Class A common stock of the Company at a
purchase price of $2.50 per share, subject to certain restrictions.
D. The Company, Subsidiary, Shareholder, and Founder enter into this
Agreement for the purpose of confirming Shareholder's equity interest in the
Class A common stock of the Company and outlining the rights of Shareholder and
the restrictions imposed by the Company with respect to the Class A common stock
to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Modification of ISO Agreement Provisions. To the extent that any
----------------------------------------
provision of this Agreement modifies or contradicts any provision contained in
the ISO Agreement, this Agreement shall control.
2. Issuance of Shares.
------------------
(a) The Company confirms its offer to issue 20,000 shares of Class A
common stock (the "Class A Shares") to Shareholder at a price of $2.50 per
share, payable
<PAGE>
in full upon issuance of the Class A Shares. A stock certificate evidencing the
Class A Shares shall be issued in the name of Shareholder upon receipt of this
executed Amendment and payment in full of the purchase price.
(b) In order to induce the Company to issue the Class A Shares,
Shareholder represents and warrants to the Company as follows:
(i) Shareholder (A) understands that an investment in the Class A
Shares is speculative due to factors including (but not limited to) the start-up
nature of the Company and the risk of economic loss from the operations of the
Company, but believes that such an investment is suitable for Shareholder based
upon Shareholder's financial needs, (B) can withstand a complete loss of the
investment in the Class A Shares, and (C) has the net worth to undertake these
risks.
(ii) Shareholder is acquiring the Class A Shares for the personal
account of Shareholder, with no present intention of reselling, distributing or
otherwise transferring the Class A Shares or any portion of the Class A Shares
to anyone else.
(iii) Shareholder understands and acknowledges that the Class A
Shares are being offered and sold under one or more exemptions provided in the
Securities Act of 1933, as amended (the "Securities Act"), Regulation D
promulgated thereunder and applicable New York State securities laws, and that
this transaction has not been reviewed or passed upon by the United States
Securities and Exchange Commission, the New York State Attorney General, or any
other federal or state agency.
(iv) Shareholder realizes that Shareholder must bear the economic
risk of investment for an indefinite period of time because (A) the Class A
Shares have not been registered under the Securities Act and cannot be resold by
Shareholder unless they are subsequently registered under the Securities Act or
an exemption from registration is available, (B) the transferability of the
Class A Shares is restricted by the terms of this Agreement, and (C) there
currently is no public market for the Class A Shares, and Shareholder may not be
able to liquidate the investment in the Class A Shares in the event of an
emergency. Shareholder has adequate means of providing for Shareholder's current
financial needs and personal contingencies, and has no need for liquidity of
investment with respect to the Class A Shares.
(v) Shareholder believes that Shareholder, either alone or together
with the assistance of professional advisor(s), has knowledge and experience in
business and financial matters sufficient to make Shareholder capable of
evaluating the merits and risks of an investment in the Class A Shares.
(vi) Shareholder is fully familiar with the business of the Company
and its present and proposed operations. Shareholder has been given reasonable
2
<PAGE>
opportunity to ask representatives of the Company questions concerning the
Company and making an investment in the Class A Shares. Shareholder has obtained
sufficient information to evaluate the merits and risks of an investment in the
Class A Shares.
(vii) Shareholder confirms that Shareholder has been advised to rely
on professional accounting, tax, legal and financial advisers with respect to an
investment in the Class A Shares and has obtained, to the extent Shareholder
deems it necessary, professional advice with respect to the risks inherent in an
investment in the Class A Shares and the suitability of an investment in the
Class A Shares in light of Shareholder's financial condition and investment
needs.
3. Restriction on Transfer of Class A Shares.
-----------------------------------------
(a) Shareholder may not sell, transfer, pledge, assign, or otherwise
encumber or dispose of, in any manner or by any means, any Class A Shares that
are subject to the Company's Purchase Option described in Section 4 of this
Agreement, except as set forth in subparagraph (b) below. This restriction on
transfer does not apply to any Class A Shares that, pursuant to Section 4, no
longer are subject to the Company's Purchase Option or to any additional shares
of capital stock of the Company that Shareholder might acquire in the future.
(b) The restrictions on transfer of Shareholder's Class A Shares, set
forth in subparagraph (a) above, shall not operate to prohibit Shareholder from
selling, assigning, or transferring any or all of the Class A Shares held by
Shareholder to the following:
(i) Shareholder's spouse, parent(s), siblings, or natural or adopted
lineal descendants, or the spouses of Shareholder's parent(s), siblings, or
lineal descendants (collectively, together with the Shareholder, referred to as
"Shareholder's Family Members");
(ii) the trustee of a trust (including a voting trust) principally
for the benefit of Shareholder and/or one or more of Shareholder's Family
Members; provided that the trust may also grant a general or special power of
appointment to one or more of Shareholder's Family Members and may permit trust
assets to be used to pay taxes, legacies, and other obligations of the trust or
of the estates of one or more of Shareholder's Family Members payable by reason
of the death of any of Shareholder's Family Members; and
(iii) a corporation, partnership, or limited liability company, a
majority of the voting equity interest in which is owned by Shareholder or by
one or more of Shareholder's transferees under subparagraphs (i) or (ii) of this
subparagraph.
4. Repurchase of Class A Shares upon Termination of Employment with
----------------------------------------------------------------
Subsidiary. Upon termination of Shareholder's employment with the Subsidiary,
- ----------
the Company
3
<PAGE>
shall have an option, but shall not be obligated, to repurchase (the
"Purchase Option") from Shareholder or Shareholder's personal representative all
or a portion of Shareholder's Class A Shares, as set forth in the following
subparagraphs.
(a) If Shareholder's employment with the Subsidiary terminates due to
voluntary separation or dismissal for Cause (as defined below), the number of
Class A Shares that are subject to the Company's Purchase Option shall be
determined as follows:
(i) The Company shall have the option to repurchase up to 100% of
the Class A Shares should Shareholder's employment terminate at any time prior
to the first anniversary of Shareholder's employment with the Subsidiary.
(ii) The Company shall have the option to repurchase up to 60% of
the Class A Shares should Shareholder's employment terminate on the first
anniversary date, or at any time between the first and second anniversary dates,
of Shareholder's employment with the Subsidiary.
(iii) The Company shall have the option to repurchase up to 40% of
the Class A Shares should Shareholder's employment terminate on the second
anniversary date, or at any time between the second and third anniversary dates,
of Shareholder's employment with the Subsidiary.
(iv) The Company shall have the option to repurchase up to 20% of
the Class A Shares should Shareholder's employment terminate on the third
anniversary date, or at any time between the third and fourth anniversary dates,
of Shareholder's employment with the Subsidiary.
(b) If Shareholder's employment with the Subsidiary terminates because
of Shareholder's death or disability, Shareholder or Shareholder's personal
representative may negotiate a transfer of all or a portion of Shareholder's
Class A Shares back to the Company at any time. With respect to Class A Shares
that were subject to the Company's Purchase Option and that are not transferred
back to the Company, the transfer restrictions set forth in Section 3 above
shall apply to the same extent that they would have applied if Shareholder's
employment had continued. This restriction on transfer does not apply to any
Class A Shares that would no longer have been subject to the Company's Purchase
Option, or to any additional shares of capital stock of the Company that
Shareholder might acquire in the future.
(c) In the event that Shareholder's employment with the Subsidiary
terminates for any reason not addressed in subparagraphs (a) and (b) above, the
Company's Purchase Option, together with all transfer restrictions set forth in
Section 3, shall fully expire effective as of the date of termination.
4
<PAGE>
(d) The Company's Purchase Option shall fully expire on the fourth
anniversary of Shareholder's employment with the Subsidiary. Class A Shares as
to which the Company's Purchase Option has expired are no longer subject to the
transfer restrictions set forth in Section 3.
(e) To exercise its Purchase Option, the Company must notify Shareholder
or Shareholder's personal representative of its intention to exercise its
Purchase Option within 60 days after the date of termination of Shareholder's
employment with the Subsidiary. Should the Company fail to exercise the Purchase
Option within such 60-day period, the Class A Shares shall no longer be subject
to the transfer restrictions set forth in Section 3.
(f) In the event of a consolidation or merger of the Company with or
into any other person or entity, a sale of all or substantially all of the
assets of the Company to another person or entity, or an acquisition of more
than 50% of the capital stock of the Company by another person or entity, the
Company's Purchase Option shall be terminated as of the effective date of the
transfer. Notwithstanding the foregoing, the Company's Purchase Option shall not
be terminated or in any other way affected by an initial public offering of
stock by the Company.
5. Repurchase Price and Payment Terms. The price for all Class A Shares
----------------------------------
repurchased by the Company pursuant to the Purchase Option shall be the fair
market value of the Class A Shares as of the date of the exercise of the
Purchase Option by the Company. "Fair market value" shall be determined by the
accounting firm then retained by the Company, which shall promptly perform an
appraisal. The determination shall be made in accordance with generally accepted
accounting principles and shall be binding on all parties.
Payment shall be made in full for all repurchased Class A Shares within 30
days after the date on which the Company delivers notice of its intention to
exercise the Purchase Option. Upon payment, Shareholder or Shareholder's
personal representative shall deliver all stock certificates for repurchased
Class A Shares, properly endorsed in blank, to the Company or its designee.
6. Legends. Each certificate for Class A Shares owned by Shareholder shall
-------
bear the following legends:
(a) The shares represented by this certificate were issued to
the shareholder with restrictions. Neither the shares, nor any interest
in them, may be sold, transferred, assigned, pledged, hypothecated, or
otherwise disposed of, unless that transfer is expressly permitted by a
stock rights agreement, including any amendment thereto, between the
shareholder and the Company, a copy of which is on file at the office of
the Company in Fairport, New York.
5
<PAGE>
(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not be
transferred in the absence of such registration unless the Company
receives an opinion of counsel reasonably acceptable to it stating the
such sale or transfer is exempt from registration.
With respect to Class A Shares that are subject to the Company's Purchase
Option, described in Section 4 of the Agreement, however, Shareholder shall be
entitled to a certificate without the legend set forth in subparagraph (a),
evidencing any Class A Shares as to which the Purchase Option has expired.
7. Non-competition. The portion of the non-competition covenant between
---------------
Shareholder and the Company that is set forth in subparagraph 8(a)(iii) of the
ISO Agreement is modified to read as follows:
(iii) hold five percent (5%) or more of the shares of a corporation,
or serve as a partner, officer, member, manager, director, consultant or other
representative of any third party, which engages in any line of business
competitive with the Company or any affiliate of the Company (including any
subsidiary) anywhere in the world.
8. Co-Sale Rights.
--------------
(a) In the event that Founder receives a bona fide offer from any person
to purchase any of Founder's Common Stock (the "Founder's Shares") in a private
transaction exempt from registration under the Securities Act, Founder shall
give Shareholder notice of his intention to sell Founder's Shares, describing
the amount of Founder's Shares proposed to be transferred, the identity of the
proposed transferee, and the price and terms upon which he proposes to make such
transfer (the "Transfer Notice").
(b) Within 15 days after delivery of the Transfer Notice, Shareholder
may elect to sell up to Shareholder's pro rata share of the total number of
shares to be purchased by the transferee described in the Transfer Notice by
giving written notice thereof to Founder and tendering to Founder a certificate
representing the shares to be sold, properly endorsed for transfer, with written
instructions to transfer the shares to the transferee described in the Transfer
Notice upon receipt of payment for such shares from such transferee for the
benefit of Shareholder. Founder shall thereupon notify the transferee of the
co-sale arrangements hereunder, and instruct the transferee to deliver payment
for the shares to be purchased from Shareholder to Shareholder. For the purpose
of the co-sale right set forth in this Section, the pro rata share of
Shareholder shall be determined based on the number of Shares held by
Shareholder that are subject to co-sale rights, divided by the sum of (A) the
total number of shares of common stock held by all stockholders of the Company
(including
6
<PAGE>
Shareholder) holding similar co-sale rights plus (B) the number of shares of
common stock held by Founder at the date of the Transfer Notice (assuming
conversion of all convertible securities and exercise of all options and
warrants). The resulting percentage shall then be multiplied by the number of
Shares proposed to be purchased by the transferee to determine the actual number
of Shares eligible for sale by Shareholder.
(c) In the event Shareholder declines to exercise the co-sale right as
allowed by this Section, Founder may, within 90 days after the date on which
Shareholder's co-sale rights lapsed, transfer some or all of Founder's Shares
which were the subject of the Transfer Notice at a price and on terms no less
favorable to the transferee(s) than specified in the Transfer Notice. Founder's
Shares transferred in accordance with the provisions of this Section shall no
longer be subject to the restrictions on Founder's Shares forth in this Section.
After the expiration of said 90-day period, Founder shall not transfer any of
Founder's Shares without again complying with this Section.
(d) Any transfer of Founder's Shares without consideration to a family
member of Founder or a trust or custodian for the benefit of Founder or a family
member of Founder, and transfers pursuant to a pledge to secure indebtedness,
shall not be subject to the provisions of this Section, provided that the
transferee agrees in writing to be bound by the provisions of this Section with
respect to any subsequent transfer of such shares.
9. Piggy-Back Registration Rights.
------------------------------
(a) If at any time or from time to time the Company shall determine to
register any of its equity securities, either for its own account or the account
of a security holder or holders (other than a registration of securities
relating solely to employee benefit plans or to effect a merger or other
reorganization), the Company will promptly give to Shareholder written notice
thereof and, upon the written request of Shareholder, include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Class A Shares
specified in the written request made within 10 business days after receipt of
such written notice from the Company.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise Shareholder as a part of the written notice given to Shareholder. In such
event the right of any Shareholder to registration pursuant to this Section
shall be conditioned upon Shareholder's participation in such underwriting, and
the inclusion of Class A Shares in the underwriting shall be limited to the
extent provided herein. Shareholder (together with the Company and the other
holders distributing their securities through such underwriting) shall enter
into an underwriting agreement in customary form with the managing underwriter
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section, if the managing underwriter determines that marketing
factors require a limitation of the number of shares to be underwritten, the
managing underwriter may exclude some or all of the Class A Shares or
7
<PAGE>
securities of other holders of similar registration rights from such
registration. The Company shall so advise Shareholder and other stockholders
distributing their securities through such underwriting, and the number of Class
A Shares or securities of other holders of similar registration rights that may
be included in the registration and underwriting, as determined by the managing
underwriter, shall be allocated on a pro rata basis. If Shareholder disapproves
of the terms of any such underwriting, Shareholder may elect to withdraw
therefrom by written notice to the Company and the managing underwriter. Any
securities excluded or withdrawn from such underwriting shall be withdrawn from
such registration, and shall continue to be subject to the terms of this
Section.
(c) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section prior to the effectiveness of
such registration whether or not Shareholder has elected to include securities
in such registration.
(d) All expenses associated with the registration (including, without
limitation, registration, qualification and filing fees, printing expenses, blue
sky fees, and fees and disbursements of counsel and accountants for the Company)
shall be borne by the Company. Selling expenses, including underwriters'
discounts, shall be borne by Shareholder pro rata in proportion to the number of
securities being registered.
(e) In the case of each registration under this Section, the Company
will:
(i) prepare and file a registration statement with respect to such
securities and use its best efforts to cause such registration statement to
become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
(ii) furnish to Shareholder such reasonable number of copies of the
registration statement, preliminary prospectus, final prospectus and such other
documents as Shareholder may reasonably request in order to facilitate the
public offering of the Class A Shares; and
(iii) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by Shareholder,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify as a foreign corporation or as a dealer in
securities or to file a general consent to service of process in any such states
or jurisdictions in which it has not already done so and except as may be
required by the Securities Act.
(f) The Company will indemnify Shareholder against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any
8
<PAGE>
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration, or based on
any omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or any violation by the
Company of the Securities Act of 1933, the Securities Exchange Act of 1934,
state securities law or any rule or regulation promulgated under such laws
applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse Shareholder for any
legal and any other expenses reasonably incurred, as such expenses are incurred,
in connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission, or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by
Shareholder.
(g) Shareholder will, if Class A Shares held by such Shareholder are
included in the securities as to which such registration is being effected,
indemnify the Company, each of its directors and officers, each underwriter, if
any, of the Company's securities covered by such a registration statement
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Shareholders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by Shareholder and stated to be specifically for use therein.
(h) Shareholder shall furnish to the Company such information regarding
Shareholder, the Class A Shares held by Shareholder, and the distribution
proposed by Shareholder as the Company may request in writing and as shall be
required in connection with any registration referred to in this Agreement.
(i) The registration rights granted to Shareholder in this Section shall
expire at such time (if ever) as Shareholder is free to sell the Class A Shares
under Rule 144 promulgated under the Securities Act (or any successor thereto)
without limitation as to volume or manner of sale restrictions.
9
<PAGE>
10. Notices. All notices and communications under this Agreement shall be
-------
in writing and shall be given by personal delivery or by registered or certified
mail, return receipt requested, addressed to the respective residences of
Shareholder and Founder set forth below or to such other address as may be
designated by Shareholder or Founder, and to the principal office of the
Company. Notice shall be deemed given upon personal delivery or upon receipt.
11. Miscellaneous.
--------------
(a) Neither this Agreement, nor any action taken under it, shall be
construed as creating any limitation or restriction upon any right that
Subsidiary would otherwise have to terminate the employment of Shareholder at
any time for any reason.
(b) This Agreement may be modified or amended only upon the written
consent of all parties to the Agreement.
(c) This Agreement shall be interpreted, construed, and enforced in
accordance with the laws of the State of New York.
(d) Neither this Agreement, nor any rights or obligations under it, may
be assigned by any party without the prior written consent of the other parties.
(e) This Agreement shall benefit and be binding upon the parties and
their successors, heirs, executors, personal representatives, and assigns.
(f) This Agreement sets forth the entire understanding and agreement of
the parties with respect to its subject matter and supersedes all prior letters,
agreements, covenants, communications, understandings, representations, or
warranties, whether oral or written, by any officer, employee, or representative
of either party.
(g) The waiver of any provision of this Agreement, or of any breach of
this Agreement, shall not constitute a subsequent waiver of any provision or
breach.
(h) In the event that Shareholder is a prevailing party in any
litigation arising under or in connection with this Agreement, the Company shall
pay the reasonable attorneys fees and expenses incurred by Shareholder in
connection with the litigation.
(i) If, at any time, any of the provisions of this Agreement shall be
deemed by a court or other body having jurisdiction over this Agreement to be
illegal, invalid, or unenforceable, those provisions shall be deemed severed
from this Agreement. The remaining provisions of this Agreement shall be valid
and binding as if this Agreement had never contained any illegal, invalid, or
otherwise unenforceable provisions, without the requirement that the amendment
be recorded in a writing signed by the parties.
10
<PAGE>
The parties' assent to the terms of this Agreement is confirmed by their
signatures below.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
------------------------------------
Arunas A. Chesonis, President
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
------------------------------------
Arunas A. Chesonis, President
Address: /s/ Katherine A. Chapman
------------------------------------
Katherine A. Chapman
130 Clara Vista Court
Santa Barbara, California 93110
Address: /s/ Arunas A. Chesonis
------------------------------------
Arunas A. Chesonis
18 Buckthorn Run
Victor, New York 14564
11
<PAGE>
Exhibit 10.23.2
FIRST AMENDMENT TO STOCK RIGHTS AGREEMENT
THIS FIRST AMENDMENT TO STOCK RIGHTS AGREEMENT (this "Amendment") is
made as of this 4th day of February 2000 by and among Katherine A. Chapman (the
"Stockholder"), PaeTec Corp., a Delaware corporation (the "Company"), PaeTec
Communications, Inc., a Delaware corporation and wholly-owned subsidiary of the
Company (the "Subsidiary"), and Arunas A. Chesonis ("Mr. Chesonis").
RECITALS
--------
A. The Company, the Subsidiary, the Stockholder and Mr. Chesonis are
parties to a Stock Rights Agreement dated as of October 30, 1998 (the "Stock
Rights Agreement").
B. The Board of Directors of the Company has authorized the issuance and
sale (the "Series A Preferred Stock Placement") of 134,000 shares of a new
series of preferred stock of the Company, designated the Series A Convertible
Preferred Stock, to the purchasers (the "Purchasers") listed on the Schedule of
Purchasers to, and pursuant to the terms and conditions of, an Equity Purchase
Agreement (the "Purchase Agreement").
C. As a condition to the consummation of the Series A Preferred Stock
Placement, the Purchasers have required that the Company, the Subsidiary, the
Stockholder and Mr. Chesonis further amend the Stock Rights Agreement (i) to
provide that all Class B Shares (as defined in the Stock Rights Agreement) shall
automatically convert into shares of Class A common stock, par value $0.01 per
share ("Class A Common Stock"), of the Company in specified circumstances and
(ii) to clarify that to the extent that any securities are required to be
excluded from a registration pursuant to the "cut-back" provisions of the
piggyback registration rights granted to the Stockholder pursuant to the Stock
Rights Agreement, the securities to be included in such registration shall be
determined on a pro rata basis among the holders of shares participating in the
--- ----
offering pursuant to registration rights granted by the Company, based on the
number of shares of common stock requested to be included by each such holder in
such registration.
D. The parties to the Stock Rights Agreement desire to amend the Stock
Rights Agreement to induce the Purchasers to consummate of the Series A
Preferred Stock Placement.
<PAGE>
AGREEMENT
---------
1. Defined Terms. All capitalized terms used in this Amendment
-------------
without definition shall have the meanings given to such terms in the Stock
Rights Agreement.
2. Amendment of Section 6(b). The fourth and fifth sentences of
-------------------------
Section 9(b) of the Stock Rights Agreement are hereby deleted and replaced and
superseded in their entirety with the following sentence:
"Notwithstanding any other provision of this Section 6, if the managing
underwriter advises in writing the Company and the Stockholder that
marketing factors require a limitation of the number of shares of common
stock to be underwritten and sold in such offering, the managing
underwriter may exclude some or all of the shares of common stock to be
sold in such offering from such registration, and the shares to be included
in such registration shall be allocated pro rata among the holders of
--- ----
shares participating in the offering pursuant to registration rights
granted by the Company (including demand and piggyback registration
rights), based on the number of shares of common stock requested to be
included by each holder in such registration."
3. Binding Effect. This Amendment shall be binding upon and inure to
--------------
the benefit of the parties hereto and their heirs, executors, administrators,
successors and assigns.
4. Governing Law. This Amendment shall be governed by, and construed
-------------
and enforced in accordance with, the laws of the State of New York, except that
if any provision of this Amendment or any part of any such provision would be
illegal, invalid or enforceable under such laws in connection with a suit or
proceeding validly instituted in another jurisdiction, then the laws of such
other jurisdiction shall govern insofar as is necessary to sustain the legality,
validity or enforceability of such provision or any part of such provision.
5. Captions. Captions to the Sections in this Amendment are for the
--------
convenience of the parties only and shall not affect the meaning or
interpretation of this Amendment.
6. Enforceability and Interpretation. It is the intention of the
---------------------------------
parties to this Amendment that the terms and provisions contained in this
Amendment shall be enforceable to the fullest extent permitted by law. If any
term or provision of this Amendment or the application thereof to any Person or
circumstance is construed to be illegal, invalid or unenforceable, in whole or
in part,
2
<PAGE>
then such term or provision shall be construed in such a manner as to
permit its enforceability under applicable law to the fullest extent permitted
by such law. In any case, the remaining terms and provisions of this Amendment
or the application thereof to any Person or circumstance, except those terms and
provisions which have been held illegal, invalid or unenforceable, shall remain
in full force and effect.
7. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8. Additional Documents. Each party hereto agrees to execute any and
--------------------
all documents, instruments, certificates and communications deemed to be
necessary or advisable by the Company to effectuate the purposes of this
Amendment.
[signature page follows]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment with full force and effect as of the day and year first written
above.
PAETEC CORP.
By: /s/ Arunas A. Chesonis
------------------------------
Its: CEO, Chairman and President
------------------------------
PAETEC COMMUNICATIONS, INC.
By: /s/ Arunas A. Chesonis
------------------------------
Its: CEO, Chairman and President
------------------------------
/s/ Arunas A. Chesonis
-----------------------------------
Arunas A. Chesonis
/s/ Katherine A. Chapman
-----------------------------------
Katherine A. Chapman
4
<PAGE>
Exhibit 10.24.1
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS AGREEMENT is made and entered into as of December 8, 1999, among
PaeTec Corp., a Delaware corporation (the "Company"), and the persons and
entities listed on the attached Schedule I (the "Purchasers").
----------
RECITALS
--------
WHEREAS, Star Telecommunications, Inc., a Delaware corporation (the
"Seller"), owns 850,000 shares of Class A Common Stock, par value $0.01 per
share (the "Class A Common Stock"), of the Company;
WHEREAS, the Seller is selling to the Purchasers and the Purchasers
are purchasing from the Seller all of such 850,000 shares (the "Purchased
Shares"), in the amounts set forth on Schedule I hereto, concurrently with the
----------
execution and delivery of this Agreement and pursuant to the terms and
conditions of a Common Stock Purchase Agreement, dated as of December 6, 1999,
between the Purchasers and the Seller (the "Stock Purchase Agreement");
WHEREAS, the Company granted to the Seller certain piggy-back
registration rights with respect to the Purchased Shares in connection with the
original issuance thereof to the Seller; and
WHEREAS, the Company desires to grant to each Purchaser certain piggy-
back registration rights with respect to (i) the Purchased Shares held by such
Purchaser and (ii) any shares of common stock of the Company paid, issued or
distributed in respect of such Purchased Shares by way of stock dividend or
distribution or stock split or in connection with a combination of shares,
recapitalization or otherwise (the shares referred to in clauses (i) and (ii)
collectively, the "Registrable Shares") according to the terms and provisions of
this Agreement;
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Piggy-Back Registration Rights.
- -- ------------------------------
(a) If at any time or from time to time after the completion of the
initial public offering of shares of the Class A Common Stock, the Company shall
determine to register any of its equity securities, either for its own account
or the account of a security holder or holders (other than a registration of
securities on Form S-8 relating solely to employee benefit or stock plans or a
registration
<PAGE>
on Form S-4 to effect a merger or other reorganization), the Company shall
promptly give to the Purchasers written notice thereof and, upon the written
request of a Purchaser made within 10 business days after receipt of such
written notice from the Company, and subject to paragraph (b) below, shall
include in such registration (and any related qualification under blue sky laws
or other compliance), and in any underwriting involved therein, all the
Registrable Shares held by such Purchaser specified in such written request.
(b) If the registration of which the Company gives notice is for a
registered public offering for the account of the Company or a security holder
(such security holder, an "Initiating Holder") involving an underwriting, the
Company shall so advise the Purchasers as a part of the written notice given to
the Purchasers pursuant to Section 1(a). In such event the right of any
Purchaser to registration pursuant to this Section 1 shall be conditioned upon
such Purchaser's participation in such underwriting, and the inclusion of
Registrable Shares held by such Purchaser in the underwriting shall be limited
to the extent provided herein. Each Purchaser desiring to participate in such
an offering (together with the Company and the other security holders
distributing their securities through such underwriting) shall enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 1, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may exclude some or all of the Registrable Shares or securities of
other holders of registration rights granted by the Company from such
registration in accordance with the succeeding sentence. In such event and
provided the managing underwriter has so notified the Company in writing, the
securities to be included in such offering shall consist of (i) first, any
securities the Company or the Initiating Holder, as the case may be, proposes to
sell, and (ii) second, the number of Registrable Shares the Purchasers requested
to be included in such registration that, in the opinion of the managing
underwriter, can be sold without jeopardizing the success of the offering of all
the securities that the Company or the Initiating Holder, as the case may be,
desires to sell for its own account, such amount to be allocated on a pro rata
basis among the Purchasers who have requested their securities be so included
based on the number of Registrable Shares that each Purchaser has requested to
be so included; provided that, in the event another person has duly requested
pursuant to an agreement with the Company that the Company register other
securities of the Company and such request has not been withdrawn, the
Purchasers and such other person shall be included in such registration pro rata
based on the number of securities the Purchasers and such other person have
requested to be so included. If any Purchaser disapproves of the terms of any
such underwriting, such Purchaser may elect to withdraw therefrom by written
notice to the Company and the managing underwriter. Any securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration, and
shall continue to be subject to the terms of this Agreement.
2
<PAGE>
(c) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 1 prior to the effectiveness of
such registration whether or not any Purchaser has elected to include securities
in such registration; provided, however, that any such termination or withdrawal
shall not relieve the Company from its obligation to pay expenses of the
Purchasers pursuant to Section 1(d).
(d) All expenses associated with any registration hereunder
(including, without limitation, registration, qualification and filing fees,
printing expenses, blue sky fees, and fees and disbursements of counsel and
accountants for the Company) shall be borne by the Company. Notwithstanding the
foregoing, the Company shall not be obligated to pay any fees or disbursements
of counsel to any Purchaser, and underwriters' discounts and commissions shall
be borne by the participating Purchasers pro rata in proportion to the number of
securities being registered.
(e) In the case of each registration under this Section 1, the
Company shall:
(i) prepare and file with the Securities and Exchange
Commission a registration statement with respect to such securities and use its
best efforts to cause such registration statement to become and remain effective
for at least 45 days or until the distribution described in the registration
statement has been completed, whichever first occurs (provided that before
filing a registration statement or prospectus or any amendments or supplements
thereto, the Company shall furnish to a single counsel to the Purchasers copies
of all such documents proposed to be filed, which documents shall be subject to
the review and, as to any information relating to the Purchasers or the proposed
plan of distribution of the Registrable Shares, comment of such counsel);
(ii) furnish to participating Purchasers such reasonable
number of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such Purchasers may reasonably request in
order to facilitate the public offering of the Registrable Shares included in
such registration;
(iii) use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by
participating Purchasers, to take all actions which may be reasonably necessary
to keep such registration or qualification in effect for so long as such
registration statement remains in effect, and take any other action which may be
reasonably necessary or advisable to enable the Purchasers to consummate the
disposition in such jurisdictions of the Registrable Shares included in such
registration, provided that the Company shall not be required in connection
therewith or as a condition thereto
3
<PAGE>
to qualify as a foreign corporation or as a dealer in securities or to file a
general consent to service of process in any such states or jurisdictions in
which it has not already done so and except as may be required by the Securities
Act of 1933, as amended (the "Securities Act");
(iv) immediately notify the Purchasers at any time when the
Company becomes aware that a prospectus relating thereto is required to be
delivered under the Securities Act, of the happening of any event as a result of
which the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances under which they were made, and
at the request of the Purchasers promptly prepare and furnish to the Purchasers
a reasonable number of copies of a supplement or an amendment of such prospectus
as may be necessary so that, as thereafter delivered to the purchasers of such
securities, such prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading in the light of the circumstances
under which they were made;
(v) provide a transfer agent and registrar for all
Registrable Shares covered by such registration statement no later than the
effective date of such registration statement; and
(vi) list all Registrable Shares covered by such registration
statement on any securities exchange on which any of the same class of common
stock of the Company is then listed.
(f) The Company shall indemnify participating Purchasers and each
person, if any, who controls such Purchasers within the meaning of the
Securities Act against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any registration
statement or prospectus, or any amendment or supplement thereto, incident to any
such registration, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances in which they were made,
not misleading, and the Company shall reimburse such Purchasers for any legal
and any other expenses reasonably incurred, as such expenses are incurred, in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that the Company shall not be liable in
any such case to the extent that any such claim, loss, damage, liability or
expense arises out of or is based on any untrue statement or omission, or
alleged untrue statement or omission, made in reliance upon and in conformity
with written information relating to a Purchaser
4
<PAGE>
furnished to the Company or any underwriter by such Purchaser for inclusion in
any registration statement or prospectus, or any amendment or supplement
thereto.
(g) Each Purchaser shall, if Registrable Shares held by such Purchaser
are included in the securities as to which such registration is being effected,
indemnify the Company, each of its directors and officers, each underwriter, if
any, of the Company's securities covered by such a registration statement and
each person, if any, who controls the Company or such underwriter against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement or prospectus, or any
amendment or supplement thereto, incident to any such registration, or based on
any omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances in which they were made, not misleading, and shall reimburse
the Company, such directors, officers, underwriters and control persons for any
legal or any other expenses reasonably incurred, as such expenses are incurred,
in connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement or prospectus, or in such
amendment or supplement thereto, in reliance upon and in conformity with written
information relating to such Purchaser furnished to the Company or any
underwriter by such Purchaser for inclusion therein; provided that the
obligations to indemnify shall be individual, not joint and several, for each
Purchaser and shall be limited to the net amount of proceeds received by such
Purchaser from the sale of Registrable Shares pursuant to such registration
statement.
(h) If for any reason the indemnity set forth in paragraphs (f) or (g)
above is unavailable or insufficient to hold harmless an indemnified party in
respect of any losses, claims, damages, liabilities or expenses (or actions in
respect thereof), then the indemnifying party shall contribute to the amount
paid or payable by the indemnified party as a result of such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and the indemnified party on the other hand in connection
with statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses (or actions in respect thereof), as well as any other
relevant equitable considerations, subject to the liability limitations set
forth in the proviso in the last sentence of paragraph (g) above. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
indemnifying party or the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. Notwithstanding the foregoing, a
5
<PAGE>
Purchaser shall not be required to contribute any amount in excess of the amount
it would have been required to pay to an indemnified party if the indemnity
under paragraph (g) hereof were available. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(i) The provisions on indemnification and contribution contained in
any underwriting agreement entered into in connection with any underwritten
registration referred to in this Agreement shall supersede the provisions of
paragraphs (f), (g) and (h) above with respect to the parties to such
underwriting agreement.
(j) Each Purchaser shall furnish to the Company such information
regarding such Purchaser, the Registrable Shares held by such Purchaser, the
distribution proposed by such Purchaser and such other information as shall be
required by the Securities Act or the rules promulgated thereunder as the
Company may reasonably request in writing and as shall be reasonably required in
connection with any registration referred to in this Agreement.
(k) The registration rights granted to each Purchaser in this Section
1 shall expire as to such Purchaser at such time (if ever) as such Purchaser may
sell the Registrable Shares held by such Purchaser under Rule 144 promulgated
under the Securities Act (or any successor thereto) without limitation as to
volume. The foregoing notwithstanding, a Purchaser's registration rights under
this Section 1 shall expire after the Company has offered such Purchaser the
cumulative opportunity to register all of such Purchaser's Registrable Shares in
two registered offerings, irrespective of whether such Purchaser elects to
participate in such registered offerings.
2. Lock-Up. Each Purchaser hereby agrees, if so requested in writing
-------
by any managing underwriter of an underwritten registration by the Company of
its securities (either for its own account, or for the benefit of the holders of
any securities of the Company), not to effect any sale or distribution of
Registrable Shares, except as part of such underwritten registration, during the
seven days prior to and the 90 days (or 180 days, in the case of the Company's
initial public offering) after the time such underwritten registration has
become effective or such period of time shorter than 90 days (or 180 days, as
applicable) that is sufficient and appropriate, in the opinion of the managing
underwriter, in order to complete the sale and distribution of securities
included in such underwritten registration; provided, however, that if any
director or executive officer of the Company or any owner of 5% or more of the
outstanding common stock of the Company subject to such a lock-up restriction is
subject to a lock-up restriction of shorter duration, such shorter lock-up
period shall apply to such Purchaser. If requested, each Purchaser shall enter
into a lock-up agreement with
6
<PAGE>
the applicable underwriters that is consistent with the agreement in the
preceding sentence. The provisions of this Section 2 with respect to any
underwritten registration shall not limit the exercise by the Purchasers of
their rights under Section 1 with respect to such underwritten registration.
3. Miscellaneous.
-------------
(a) This Agreement may be modified or amended only upon the written consent of
the Company and the Purchasers holding a majority of the then-outstanding
Registrable Shares; provided, however, that no modification or amendment of
this Agreement that adversely affects the rights hereunder of any Purchaser
in any material respect shall be effective against such Purchaser unless
such Purchaser shall have consented in writing to such modification or
amendment.
(b) This Agreement shall be interpreted under and governed by the laws
of the State of New York applicable to agreements made and to be performed
entirely within the State of New York, without giving effect to the principles
of conflicts of law thereunder.
(c) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and permitted assigns. No
Purchaser shall be permitted to assign any of its registration rights or other
rights under this Agreement to any other person without the prior written
consent of the Company, which may be granted or withheld by the Company in its
sole discretion. Any permitted assignee of registration rights hereunder shall
execute and agree to be bound by, and shall be deemed a "Purchaser" under, this
Agreement.
(d) This Agreement may be executed in counterparts, each of which
shall be an original but all of which shall constitute one and the same
instrument.
(e) Any notice, demand or other communication required, permitted or
desired to be given hereunder shall be in writing and shall be deemed
effectively given upon personal delivery, facsimile transmission (with
confirmation of receipt), delivery by reputable overnight service or five (5)
days following deposit in the United States mail (if sent by certified or
registered mail, postage prepaid, return receipt requested), in each case duly
addressed to the Company at its headquarters or to the Purchasers at the
respective addresses of the Purchasers listed on Schedule I hereto (unless the
----------
Company receives notice pursuant to this Section 3(e) of a change to any such
address).
7
<PAGE>
(f) This agreement sets forth the entire understanding and agreement
of the parties with respect to its subject matter.
[remainder of page intentionally left blank;
signature pages follow]
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first above written.
PURCHASERS:
GKW UNIFIED HOLDINGS LLC
By: /s/ Gregg Ritchey
------------------------------------------
Its: CFO Manager
-----------------------------------------
CAROLWOOD COMPANY LLC
By: /s/ Lodwrick M. Cook
------------------------------------------
Its: Manager
-----------------------------------------
KEPACA LLC
By: /s/ Thomas J. Casey
------------------------------------------
Its: President
-----------------------------------------
FIDUCIA INTERNATIONAL
By: /s/ Gregg Ritchey
------------------------------------------
Its: General Partner
-----------------------------------------
SAN PASQUAL CORP.
By: /s/ David Lee
------------------------------------------
Its: General Partner
-----------------------------------------
BARRY PORTER
By: /s/ Barry Porter
------------------------------------------
Its:
-----------------------------------------
THE WALKER LIVING TRUST
By: /s/ Clint W. Walker
------------------------------------------
Its: Trustee
-----------------------------------------
9
<PAGE>
ROSALIE ZALIS
By: /s/Rosalie Zalis
------------------------------------------
Its:
-----------------------------------------
PETE WILSON
By: /s/ Pete Wilson
------------------------------------------
Its:
-----------------------------------------
THE COMPANY:
PAETEC CORP.
By: /s/ Timothy Bancroft
------------------------------------------
Its: Vice President - Finance
-----------------------------------------
10
<PAGE>
SCHEDULE I
----------
<TABLE>
<CAPTION>
Buyer Shares
----- -------
<S> <C>
GKW Unified Holdings LLC 360,000
360 N. Crescent
Beverly Hills, CA 90210
Kepaca LLC 200,000
1476 Via Cresta
Pacific Palisades, CA 90272
Attention: Tom Casey
Carolwood Company LLC 100,000
13849 Weddington Street
Sherman Oaks, CA 91401
Attention: Lodwrick Cook
Fiducia International 50,000
16875 Callie De Sarah
Pacific Palisades, CA 90272
Attn: Gregg Ritchie
San Pasqual 50,000
c/o The Management Group
9100 Wilshire Blvd., Suite 725E
Beverly Hills, CA 90212
Barry Porter 50,000
c/o The Management Group
9100 Wilshire Blvd., Suite 725E
Beverly Hills, CA 90212
The Walker Living Trust 30,000
2600 Via Segunda
Palos Verdes Estates, CA 90274
Attention: Clint Walker
Rosalie Zalis 5,000
360 N. Crescent Drive
Beverly Hills, CA 90274
Pete Wilson 5,000
360 N. Crescent Drive
Beverly Hills, CA 90274
</TABLE>
<PAGE>
Exhibit 10.24.2
FIRST AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
THIS FIRST AMENDMENT TO REGISTRATION RIGHTS AGREEMENT (this
"Amendment") is made as of this 4th day of February 2000 by and among PaeTec
Corp., a Delaware corporation (the "Company"), and the persons and other
entities listed on the signature pages hereto (the "Purchasers").
RECITALS
--------
A. The Company and the Purchasers are parties to a Registration Rights
Agreement dated as of December 8, 1999 (the "Registration Rights Agreement").
B. The Board of Directors of the Company has authorized the issuance
and sale (the "Series A Preferred Stock Placement") of 134,000 shares of a new
series of preferred stock of the Company, designated the Series A Convertible
Preferred Stock, to the purchasers (the "Purchasers") listed on the Schedule of
Purchasers to, and pursuant to the terms and conditions of, an Equity Purchase
Agreement (the "Purchase Agreement").
C. As a condition to the consummation of the Series A Preferred Stock
Placement, the Purchasers have required that the Company and the Purchasers
amend the Registration Rights Agreement to clarify that to the extent that any
securities are required to be excluded from a registration pursuant to the "cut-
back" provisions of the piggyback registration rights granted to the Purchasers
pursuant to the Registration Rights Agreement, the securities to be included in
such registration shall be determined on a pro rata basis among the holders of
--- ----
shares participating in the offering pursuant to registration rights granted by
the Company, based on the number of shares of common stock requested to be
included by each such holder in such registration.
D. The parties hereto desire to amend the Registration Rights
Agreement to induce the Purchasers to consummate the Series A Preferred Stock
Placement.
AGREEMENT
---------
1. Defined Terms. All capitalized terms used in this Amendment
-------------
without definition shall have the meanings given to such terms in the
Registration Rights Agreement.
<PAGE>
2. Amendment of Section 6(b). The fifth sentence of Section 1(b) of
-------------------------
the Registration Rights Agreement is hereby deleted and replaced and superseded
in its entirety with the following sentence:
"In such event and provided the managing underwriter has so notified the
Company in writing, the managing underwriter may exclude some or all of the
shares of common stock to be sold in such offering from such registration,
and the shares to be included in such registration shall be allocated pro
---
rata among the holders of shares participating in the offering pursuant to
----
registration rights granted by the Company (including demand and piggyback
registration rights), based on the number of shares of common stock
requested to be included by each holder in such registration."
All other terms and conditions of the Registration Rights Agreement
remain in full force and effect.
3. Binding Effect. This Amendment shall be binding upon and inure to
--------------
the benefit of the parties hereto and their heirs, executors, administrators,
successors and assigns.
4. Governing Law. This Amendment shall be governed by, and construed
-------------
and enforced in accordance with, the laws of the State of New York, except that
if any provision of this Amendment or any part of any such provision would be
illegal, invalid or enforceable under such laws in connection with a suit or
proceeding validly instituted in another jurisdiction, then the laws of such
other jurisdiction shall govern insofar as is necessary to sustain the legality,
validity or enforceability of such provision or any part of such provision.
5. Captions. Captions to the Sections in this Amendment are for the
--------
convenience of the parties only and shall not affect the meaning or
interpretation of this Amendment.
6. Enforceability and Interpretation. It is the intention of the
---------------------------------
parties to this Amendment that the terms and provisions contained in this
Amendment shall be enforceable to the fullest extent permitted by law. If any
term or provision of this Amendment or the application thereof to any Person or
circumstance is construed to be illegal, invalid or unenforceable, in whole or
in part, then such term or provision shall be construed in such a manner as to
permit its enforceability under applicable law to the fullest extent permitted
by such law. In any case, the remaining terms and provisions of this Amendment
or the application thereof to any Person or circumstance, except those terms and
provisions which have been held illegal, invalid or unenforceable, shall remain
in full force and effect.
<PAGE>
7. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9. Additional Documents. Each party hereto agrees to execute any and
--------------------
all documents, instruments, certificates and communications deemed to be
necessary or advisable by the Company to effectuate the purposes of this
Amendment.
[signature pages follow]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment with full force and effect as of the day and year first written
above.
PURCHASERS:
GKW UNIFIED HOLDINGS LLC
By: /s/ Gregg Ritchey
---------------------
Its: CFO, Manager
------------
CAROLWOOD COMPANY LLC
By: /s/ Lodwrick M. Cook
---------------------
Its: Manager
-------
KEPACA LLC
By: /s/ Thomas J. Casey
---------------------
Its: President
---------
FIDUCIA INTERNATIONAL
By: /s/ Gregg Ritchey
---------------------
Its: General Partner
---------------
SAN PASQUAL CORP.
By: /s/ David Lee
---------------------
Its: General Partner
---------------------------
BARRY PORTER
By: /s/ Barry Porter
------------------
Its:
----------------------------
THE WALKER LIVING TRUST
By: /s/ Clint W. Walker
---------------------
Its: Trustee
---------
<PAGE>
ROSALIE ZALIS
By: /s/Rosalie Zalis
------------------
Its:
PETE WILSON
By: /s/ Pete Wilson
-----------------
Its:
THE COMPANY:
PAETEC CORP.
By: /s/ Timothy J. Bancroft
------------------------------
Timothy J. Bancroft
Its: Vice President - Finance
<PAGE>
Exhibit 10.25
PAETEC CORP.
290 Woodcliff Drive
Fairport, New York 14450
September 30, 1998
To: The Investors in the
PaeTec $10,000,000 Offering
I am pleased to tell you that our $10,000,000 private offering has
been successfully completed and in fact was over-subscribed. Your subscription
has been accepted on behalf of the Company and certificates representing your
shares will be forwarded to you shortly. All of us at PaeTec appreciate your
confidence.
Certain investors have inquired about registration rights and after
considering the matter, we have decided to give each of the investors in this
offering "Piggy-back Registration Rights" equivalent to those currently enjoyed
by the officers and other existing shareholders of the Company. A statement of
the rights that are being granted to you is attached. Essentially, if the
Company decides to register an offering for the sale of its stock with the
Securities and Exchange Commission, it will offer you and the other shareholders
holding these rights a chance to participate in the registration so that you
would be able to sell some or all of your shares in the public offering.
This right is subject to certain limitations as described in the
attached statement. In particular, if an IPO or other underwritten offering is
involved, the managing underwriter has the ability to exclude some or all of the
shareholders' stock on a pro rata basis if it determines that market factors
require a limitation on the number of shares to be sold. This limitation is
necessary to protect the Company's ability to raise needed capital in the equity
markets, and it would apply to corporate officers and current shareholders as
well.
Very truly yours,
PAETEC CORP.
By: /s/ Arunas A. Chesonis
Arunas A. Chesonis
Chairman and Chief Executive Officer
<PAGE>
STATEMENT OF
REGISTRATION RIGHTS
PaeTec Corp. (the "Company") hereby grants the following "piggy-back"
registration rights to each purchaser of its Class A common shares pursuant to
its private offering of 4,000,000 shares as set forth in its Confidential
Private Offering Memorandum dated September 15, 1998. Hereafter, each such
purchaser is referred to as "Purchaser" and each Purchaser's Class A shares are
referred to as the "Shares":
(1) If at any time or from time to time the Company shall determine to
register any of its equity securities, either for its own account or the account
of a security holder or holders (other than a registration of securities
relating solely to employee benefit plans or to effect a merger or other
reorganization), the Company will promptly give to Purchaser written notice
thereof and, upon the written request of Purchaser, include in such registration
(and any related qualification under blue sky laws or other compliance), and in
any underwriting involved therein, all of the Shares specified in the written
request made within 10 days after receipt of such written notice from the
Company.
(2) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise Purchaser as a part of the written notice given to Purchaser. In such
event, the right of any Purchaser to registration shall be conditioned upon
Purchaser's participation in such underwriting, and the inclusion of Purchaser's
Shares in the underwriting shall be limited to the extent provided herein.
Purchaser (together with the Company and the other holders distributing their
securities through such underwriting) shall enter into an underwriting agreement
in customary form with the managing underwriter selected for such underwriting
by the Company. Notwithstanding any other provision of this Statement of
Registration Rights, if the managing underwriter determines that marketing
factors require a limitation of the number of shares to be underwritten, the
managing underwriter may exclude some or all of Purchaser's Shares or securities
of other holders of similar registration rights from such registration. The
Company shall so advise Purchaser and other stockholders distributing their
securities through such underwriting, and the number of shares or securities of
other holders of similar registration rights that may be included in the
registration and underwriting, as determined by the managing underwriter, shall
be allocated on a pro rata basis. If Purchaser disapproves of the terms of any
such underwriting, Purchaser may elect to withdraw therefrom by written notice
to the Company and the managing underwriter. Any securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration, and
shall continue to be subject to the registration rights set forth herein.
<PAGE>
(3) The Company shall have the right to terminate or withdraw any
registration initiated by it prior to the effectiveness of such registration
whether or not Purchaser has elected to include securities in such registration.
(4) All expenses associated with the registration (including, without
limitation, registration, qualification and filing fees, printing expenses, blue
sky fees, and fees and disbursements of counsel and accountants for the Company)
shall be borne by the Company. Underwriters' discounts and related charges,
shall be borne by Purchaser pro rata in proportion to the number of securities
being registered.
(5) In the case of each registration under this Section, the Company
will:
(i) prepare and file a registration statement with respect to such
securities and use its best efforts to cause such registration statement to
become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
(ii) furnish to Purchaser such reasonable number of copies of the
registration statement, preliminary prospectus, final prospectus and such other
documents as Purchaser may reasonably request in order to facilitate the public
offering of the Purchaser's Shares; and
(iii) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by Purchaser,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify as a foreign corporation or as a dealer in
securities or to file a general consent to service of process in any such states
or jurisdictions in which it has not already done so and except as may be
required by the Securities Act.
(6) The Company will indemnify Purchaser and each person, if any, who
controls Purchaser within the meaning of the Securities Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any registration statement,
prospectus, offering circular or other document, or any amendment or supplement
thereto, incident to any such registration, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, or any violation by the Company of the
Securities Act of 1933, the Securities Exchange Act of 1934, state securities
law or any rule or regulation promulgated under such laws applicable to the
Company in connection with any such registration, qualification or compliance,
and the Company will reimburse Purchaser for any legal and any other expenses
reasonably incurred, as such expenses are incurred, in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission, or alleged untrue statement or
omission, made in reliance upon and in conformity with written information
relating to Purchaser furnished to the Company by an instrument duly executed by
Purchaser.
- 2 -
<PAGE>
(7) Purchaser will, if Shares held by Purchaser are included in the
securities as to which such registration is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a registration statement against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company, such
Purchasers, such directors, officers, persons, underwriters or control persons
for any legal or any other expenses reasonably incurred, as such expenses are
incurred, in connection with investigating or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
relating to Purchaser furnished to the Company by an instrument duly executed by
Purchaser and stated to be specifically for use therein, provided that in no
event shall any indemnity under this paragraph 7 exceed the net proceeds from
the offering received by Purchaser.
(8) If for any reason the indemnity set forth in paragraphs (6) or (7)
above is unavailable or insufficient to hold harmless an indemnified party in
respect of any losses, claims, damages, liabilities or expenses (or actions in
respect thereof), then the indemnifying party shall contribute to the amount
paid or payable by the indemnified party as a result of such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and the indemnified party on the other hand in connection
with statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the indemnifying party or the indemnified
party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
Notwithstanding the foregoing, Purchaser shall not be required to contribute any
amount in excess of the amount it would have been required to pay to an
indemnified party if the indemnity under paragraph 7 hereof was available. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
- 3 -
<PAGE>
(9) Purchaser shall furnish to the Company such information regarding
Purchaser, the Shares held by Purchaser, and the distribution proposed by
Purchaser as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration referred to in this
Agreement.
(10) The registration rights hereby granted to Purchaser shall expire
at such time (if ever) as Purchaser is free to sell its Shares under Rule 144
promulgated under the Securities Act (or any successor thereto) without
limitation as to volume or manner of sale restrictions. The foregoing
notwithstanding, Purchaser's registration rights under this Statement shall
expire after the Company has offered Purchaser the cumulative opportunity to
register all of the Shares in two registered offerings, irrespective of whether
Purchaser elects to participate in these registrations.
- 4 -
<PAGE>
Exhibit 10.26.1
LEASE AGREEMENT
This Lease made as of the 7th day of July, 1999 between WillowBrook II L.L.C., a
New York limited liability company having an office for the transaction of
business at 250 WillowBrook Office Park, Fairport, New York, 14450, hereinafter
called "Landlord", and PAETEC CORP., a Delaware corporation with an office for
the transaction of business at 290 Woodcliff Drive, Fairport, New York 14450,
hereinafter called "Tenant".
W I T N E S S E T H:
ARTICLE 1
PREMISES AND TERM
-----------------
Section 1.01 Landlord will construct a development on certain land which
-------------
will contain parking areas, common areas and a building, known as Building 700*
(the "Building") WillowBrook Office Park (the "Park") containing approximately
75,000 rentable square feet on floors one through three and Tenant renting
approximately 13,000 rentable square feet in the lower level (the lower level
consisting, in its entirety, of 25,000 r.s.f.)**. Landlord shall construct the
Building and associated roadways, access road, parking lot (which shall contain
362 parking spaces. Tenant, subject to any required governmental or quasi-
governmental approvals, not later than the first day of the 15th year of the
demised term, by written notice to Landlord, may require Landlord, at Landlord's
sole cost and expense, subject to the approvals of any governmental or quasi-
governmental board, bureau, or agency having jurisdiction thereof, to build an
additional 38 contiguous parking spaces) common areas, and landscaped areas in a
good and workmanlike manner in accordance with the drawings of David Hanlon,
Architect, and Charles J. Costich, P.E.; which drawings are attached hereto,
labeled in the aggregate Exhibit A, and shall become a part hereof.
Section 1.02 Landlord hereby leases to Tenant, and Tenant hereby hires and
------------
takes from the Landlord the following described premises in the Building (the
"Demised Premises") together with the right to use parking areas contiguous to
or a part of the Building of which the Demised Premises form a part to be
constructed as set forth above and to be used and occupied by the Tenant for
offices*** and for no other purposes. Tenant shall have the exclusive right,
within the Demised Premises, to the use of the hallways, stairs, elevators, and
other areas exclusively provided for access to and the use of the Building.
-----------
Notwithstanding the foregoing, Landlord, its agents, contractors, and employees
shall be permitted reasonable access to the Building and the Demised Premises
for the maintenance and operation of the
* Or such other name for the Building as Tenant choses. ** See Rider 1,
Paragraph 63.
*** And for the co-location uses described in Rider 1, Paragraph 60.
-1-
<PAGE>
Building. Further, nothing herein shall be interpreted to grant Tenant access
to or to restrict Landlord from access to the portion of the lower level of the
Building retained by Landlord which is labeled "Retained Space" on Exhibit B.
Section 1.03
------------
A. The Demised Premises shall include:
(1) For floors one, two, and three of the Building, the area bounded by the
line established by the exterior face of the exterior wall of the Building
(but not the surface thereof), the concrete floor surface, and the lower
surface of the next higher floor (or roof); all as depicted on Exhibit B
attached hereto and made a part hereof;
(2) For the lower level, the area bounded by the line established by the
exterior face of the exterior wall of the Building, the concrete floor
surface, and the lower surface of the first floor, which consists of 13,000
rentable square feet; all as depicted on Exhibit B.
B. Landlord reserves unto itself, its successors and assigns, the right to
install, maintain, use, repair and replace pipes, ducts, conduits, wires and
structural elements leading through the Demised Premises in locations which will
not materially interfere with Tenant's use of the Demised Premises. No right to
use any part of the exterior of the Building and no easement for light or air
are included in the lease of the Demised Premises hereby made.
Section 1.04 (A) subject to delays caused (1) by the action or inaction
------------
of Tenant's employees, agents, or contractors, and/or (2) by the granting or
failure to grant of all approvals required for the construction of the Building
of any bureau, agency or board having jurisdiction thereof, in which case the
date October 1, 1999 below shall be extended one (1) day for each day Landlord
is so delayed, and subject to the approval of any governmental or quasi-
governmental board, bureau or agency having jurisdiction thereof, Landlord
agrees, at Landlord's sole cost and expense to commence construction of the
Building and its attendant roadways and parking areas, etc. on or before October
1, 1999 and to thereafter, continuously and diligently, construct and build the
Building and its attendant roadways, parking areas, etc., to completion as soon
as reasonably practicable; and, (B) to construct the Demised Premises for
Tenant's use and occupancy in accordance with the terms and provisions of
Paragraph A of Exhibit C attached hereto and made a part hereof. Any work in
addition to any of the items specifically enumerated in said Exhibit C,
Paragraph A shall be performed by Tenant at its own cost and expense, and if
Landlord installs or constructs any of such additional work in the Demised
Premises at Tenant's request, it shall be paid for by Tenant within thirty (30)
days after receipt of a bill therefore at Landlord's cost plus five percent
(5%).
-2-
<PAGE>
Section 1.05 To have and to hold the Demised Premises for a term of twenty
------------
(20) lease years, or until such term shall sooner cease and terminate, as
hereinafter provided, said term to commence on the 1st day of July, 2000 (the
"Rent Commencement Date") and to end on the 30th day of June, 2020. In the
event the Lease term commences on a date other than July 1, 2000, then the Lease
term will expire twenty (20) years from the last day of the first full month
after the term commences. See Rider 1, Paragraphs 50 and 53.
ARTICLE 2
RENT
----
Section 2.01 Tenant covenants to pay an annual rent as follows:
------------
A. For the first lease year of the demised term, the sum of $1,223,824.08
($101,985.34 per month);
B. For the second lease year of the demised term, the sum of $1,434,640.23
payable in monthly installments as follows:
Month of 2nd Lease Year Monthly Installment
----------------------- -------------------
1st Month: 104,688.11
2nd Month: 107,390.88
3rd Month: 110,093.65
4th Month: 112,796.42
5th Month: 115,499.19
6th Month: 118,201.96
7th Month: 120,904.73
8th Month: 123,607.50
9th Month: 126,310.27
10th Month: 129.013.04
11th Month: 131,715.81
12th Month: 134,418.67
C. For the 3rd lease year through the 10th lease year of the demised
term, the sum of $1,613,024.00, payable in monthly installments of
$134,418.68.
D. For the remainder of the demised term, the annual rental of
$1,773,574.20 ($147,797.85 per month). See Rider 1, Paragraph 57.
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<PAGE>
Said rent shall be payable in advance on the first day of each and every
calendar month during the term hereof. Rent for any period of less than
one (1) month shall equal 1/30th of the monthly rental for each day of such
period.
ARTICLE 3
CARE AND SURRENDER OF PREMISES
------------------------------
Section 3.01 The Tenant will take good care of the Demised Premises,
------------
fixtures and appurtenances, and all alterations, additions and improvements to
either; will repair all damage to the same resulting from the negligence or
willful acts of the Tenant, its employees, agents or visitors; will suffer no
waste, or injury; will execute and comply with all laws, rules, orders,
ordinances and regulations at any time issued or enforced by any lawful
authority, applicable to the Tenant's use or occupancy of the Demised Premises;
will repair, at or before the end of the term, all injury done by the
installation or, if permitted hereunder, removal of furniture and property,
wiring, conduit, electrical circuits, telephone lines, etc. and at the end of
the term will quit and surrender the Demised Premises in good order and
condition, subject to normal wear and tear. Tenant, at Landlord's request, at
the end of the demised term, will remove all wiring, telephone and data lines,
etc. installed by Tenant in the Building. See Rider 1. Paragraph 51.
ARTICLE 4
ASSIGNMENT, SUBLETTING AND RECAPTURE
------------------------------------
Section 4.01 The Tenant will not sell, assign, mortgage or transfer this
------------
Lease, or sublet or rent the premises or any part thereof, or permit the same or
any part thereof to be used or occupied by anybody other than the Tenant or the
Tenant's employees, without the prior written consent of the Landlord, which
Landlord agrees not to unreasonably withhold or delay. Landlord shall not be
required to consent to a sublet of all or a portion of the Demised Premises or
to an assignment of this Lease to any person, firm, corporation, or other entity
which, in the one (1) year preceding said requested sublet/assignment, said
person, firm corporation, or other entity, or any investor, owner, shareholder
or partner thereof has been or is a Tenant in the Park. Any sale, assignment,
mortgage, transfer or subletting of this Lease which is not in compliance with
the provisions of this paragraph and the following paragraphs shall be of no
effect and void.
If Tenant shall desire to sublet the Demised Premises, Tenant shall give
written notice thereof to Landlord requesting Landlord's consent thereto which
notice shall set forth a proposed commencement date ("Proposed Effective Date")
of the sublease term, which is not less than 45 nor more than 90 days after the
sending of said notice and attached to said notice shall be a copy of the
proposed sublease
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<PAGE>
agreement and of all agreements collateral thereto. The form of said sublease
agreement shall be subject to Landlord's approval and, among other things, the
subtenant shall agree to be bound by all of the terms and provisions contained
in this Lease Agreement. Landlord, within 10 business days after receipt of said
notice shall give Tenant written notice of Landlord's consent or lack of consent
to Tenant's said request. In the event Landlord does not so notify Tenant within
the said ten business day period, Landlord shall be deemed to have consented to
Tenant's said request for consent.
In the event of any sublease of all or any portion of the Demised Premises
where the rental reserved in the sublease exceeds the rental or pro rata portion
of the rental, as the case may be, for such space reserved in the Lease, Tenant
shall pay the Landlord monthly, as additional rent, at the same time as the
monthly installments of rent hereunder, 10%* of the excess of the rental
reserved in the sublease over the rental reserved in this Lease applicable to
the sublease space.**
If this Lease be assigned, sublet or transferred in any manner whatsoever,
such assignment or transfer shall be upon and subject to all of the covenants,
provisions and conditions contained in this Lease and, notwithstanding any
consent by the Landlord to any such assignment or transfer or any subletting by
the Tenant, the Tenant shall continue to be and remain the primary obligor
hereunder. Any consent by the Landlord to any such assignment, transfer,
subletting or other matter or thing contained in this paragraph shall not in any
way be construed to relieve the Tenant from obtaining the prior consent of the
Landlord to any other or further such assignment, transfer, subletting, matter
or thing. Tenant agrees to pay Landlord, on demand, the reasonable costs
incurred to Landlord's attorney in connection with any request by Tenant for
Landlord to consent to any assignment or subletting by Tenant, including
reasonable attorney's fees. See Rider 1, Paragraph 54.
ARTICLE 5
ALTERATIONS, ADDITIONS, ETC.
----------------------------
Section 5.01 *** The Tenant will not make or permit anyone to make any
------------
alterations, improvements or additions or installations of wiring, conduit,
electrical circuits, telephone lines, etc.
* 50% if the "excess rental" is derived from space contained in the lower
level of the Building. **See Rider 1, Paragraph 60 *** See Rider 1, Paragraph
51.
(herein sometimes referred to, in the aggregate, as "alterations, additions, and
improvements") in or to the Demised Premises, or install any equipment of any
kind that will require any alteration or addition to, or use of, the water,
heating, air conditioning or electrical or other building systems or equipment,
without prior written consent of the Landlord which approval Landlord
agrees not to unreasonably withhold or delay; and then only by contractors
approved by Landlord. Further, a condition precedent to
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<PAGE>
any contractor performing work, labor or services on or about the Building or
the Demised Premises shall be the receipt by Landlord of a Certificate of
Insurance evidencing that the contractor is appropriately insured in accordance
with the regulations of the Landlord and that the Landlord and such other
parties as Landlord has designated as having an insurable interest have been
named as additional insureds.
Section 5.02 If Landlord shall grant its consent, prior to the
------------
commencement of any said
alterations, additions or improvements, Tenant shall provide Landlord
Certificates evidencing the insurance coverage and limits required by Exhibit C
for all contractor and/or subcontractors working in or about the Building or the
Demised Premises.
Section 5.03 For any said alterations, additions or improvements which
------------
exceed $25,000 in cost, Landlord, as a condition of granting its said consent,
may require that Tenant deliver to Landlord a payment bond which will be in
sufficient amount and issued by a reputable bonding company to guarantee payment
of the cost of said alterations, additions or improvements.
If any such alterations or improvements are made without such consent, the
Landlord may correct or remove them, and the Tenant shall be liable for any and
all expense incurred by the Landlord in the performance of this work. Any such
alterations, additions or improvements to the Demised Premises which are made
with the Landlord's prior written consent shall immediately become the property*
of the Landlord and shall remain upon and be surrendered with the premises as a
part thereof at the end of the term. The Landlord may however, at or prior to
the end of the term by written notice to such effect, require the Tenant to
remove all or any part of such alterations, additions, or improvements, as well
as any electrical lines, telephone, lines, or data lines (and associated
equipment), and in such event the Tenant shall promptly remove the same at its
expense and shall, at or prior to the end of the term, repair all damage to the
premises caused by such removal and return the Demised Premises, at Landlord's
option, to the same condition they were in prior to said alterations, additions,
or improvements. Tenant, at the time requesting Landlord's said consent to any
said alteration or repair may, in said consent, require Landlord to then elect
whether or not Tenant shall be responsible for so removing said alterations,
additions, or * See Rider 1, Paragraph 51
improvements.
ARTICLE 6
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<PAGE>
SIGNS
-----
Section 6.01 The Tenant will not permit or suffer any signs,
------------
advertisements or notices to be displayed, inscribed upon or affixed on any part
of the outside of the Demised Premises or the exterior of the Building. See
Rider 1, Paragraph 47.
ARTICLE 7
SERVICES
--------
Section 7.01 The Demised Premises shall be furnished with the electrical
------------
and heating, ventilating, and air conditioning services referred to in Exhibit
C, Paragraphs A6 and A7 and subject to any laws, regulations, or statutes
applicable thereto, said services shall be supplied to the Demised Premises
twenty-four hours a day, seven days a week, fifty-two weeks a year, and domestic
water for a drinking fountain on each of floors one through three and the lower
level of the Building, appropriate men's and ladies room on each of the first,
second, and third floors, and the lower level of the Building and separate mens'
and ladies' shower/changing area attached to and a part of each respective mens'
room and ladies' room on the lower level. Landlord shall not be liable for
failure to furnish any of the foregoing when such failure is caused by the
accidents or conditions beyond the control of Landlord, or by repairs, labor
disputes or labor disturbances, of any character, whether resulting from or
caused by acts of Landlord or otherwise; nor shall Landlord be liable under any
circumstances for loss of or injury to property, however occurring, through or
in connection with or incidental to the furnishing of any of the foregoing, nor
shall any such failure relieve Tenant from the duty to pay the full amount of
rent herein reserved, or constitute or be construed as a constructive or other
eviction of Tenant.
ARTICLE 8
LANDLORD'S REPAIR
-----------------
Section 8.01 Subject to any other provision or term herein to contrary,
------------
Landlord shall maintain in good repair the (a) structural parts of the Building;
(b) electrical, plumbing and sewerage systems serving the Building (except to
the extent there is or will exist within the Demised Premises, supplied and
installed by Landlord, disposal(s), refrigerators, freezer(s), dishwashers,
microwave ovens, or "instant hot" water dispensers, Tenant agrees to maintain
and keep in repair the same at its sole cost and expense but, if said equipment
was supplied by Landlord, Landlord agrees to make available to Tenant all
manufacturer(s) warranties applicable to said items); (c) subject to the
provisions of Article 7 above, the heating, ventilating and air conditioning
supplied by Landlord serving the Demised Premises (Tenant, at its sole cost and
expense, shall service and repair any supplemental air conditioning, heating and
ventilation equipment required by Tenant); (d) ceiling and Landlord supplied
lighting in the Demised
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<PAGE>
Premises except Landlord shall be responsible for supplying and installing bulbs
within the Demised Premises only for the 2' x 4' recessed florescent light
fixtures referred to herein. Landlord, however, at Tenant's expense and request
shall replace any other bulbs in the Demised Premises; (e) the Building, its
common areas, landscaping and snowplowing its parking facilities and exterior,
and all of the Building systems in a manner commensurate with a "Class A" office
building; except Tenant shall be responsible for and pay for any repairs
required due to the negligence, misuse, or willful misconduct of Tenant,
Tenant's employees, agents, representatives, contractors, visitors or invitees.
Landlord shall not be responsible for the repair or maintenance of any Tenant
supplied or Tenant paid for item or equipment.
ARTICLE 9
NOTICES
-------
Section 9.01 In every case, when under the provisions of this Lease, it
------------
shall be necessary or desirable for the Landlord to serve any notice or demand
on the Tenant, such notice or demand shall be in writing and shall be served
personally or by Certified Mail, Return Receipt Requested, addressed to the
Tenant at the Demised Premises, to the attention of (1) the "President" and, (2)
the "General Counsel" and any such notice or demand to be given to the Landlord
shall be in writing and shall be served personally and by Certified Mail, Return
Receipt Requested addressed to the Landlord at 250 WillowBrook Office Park,
Fairport, New York, 14450; or such other address as either may designate in
writing.
ARTICLE 10
INSPECTION AND SHOWING OF PREMISES
----------------------------------
Section 10.01 The Landlord shall have the right at all reasonable times
-------------
during the term of this Lease to enter the Demised Premises for the purpose of
examining or inspecting the same, providing services or maintenance, or making
such repairs or alterations therein and the Landlord, during the last six (6)
months of the demised term, may exhibit the Demised Premises to prospective new
tenants. In exercising its rights under this paragraph, Landlord agrees, as
much as reasonably possible, to cause Tenant as little inconvenience as possible
and if reasonable, and unless otherwise directed by Tenant, to conduct such
examination, showing or inspection, during Tenant's normal business hours.
ARTICLE 11
INSURANCE
---------
Section 11.01 The Tenant agrees to maintain in full force throughout the
-------------
demised term, at its own cost and expense, one or more policies of public
liability and property damage insurance having a
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<PAGE>
combined single limit of Five Million Dollars ($5,000,000.00) which, up to the
maximum liability amounts thereof, insure the Tenant and the Landlord (and such
other person(s) designated by the Landlord having an insurable interest) against
liability for injury (or death) to persons and/or damage to property of any
person or persons in or about the Demised Premises. The insurance required by
this Section shall be primary insurance and the insurer shall be liable for the
full amount of the loss up to and including the total limit of liability as set
forth in the declarations without the right of contribution from any other
insurance coverage held by Tenant.
Section 11.02 During the lease term, Tenant shall maintain in full force
-------------
on all its fixtures and equipment in the Demised Premises a policy or policies
of fire insurance insuring Landlord and Tenant with standard extended coverage
endorsements to the extent of at least eighty percent (80%) of their insurable
value containing the proper co-insurance provisions to prevent Tenant from being
a co-insurer.
Section 11.03 All insurance required to be secured by the Tenant in
-------------
accordance with this Article 11 shall be obtained from insurance companies
licensed to do business in the state of New York and certificates of said
insurance shall be furnished by the Tenant to the Landlord each of which
policies shall be endorsed to provide that thirty (30) days notice of
cancellation or amendment will be given to the Landlord. Upon Tenant's failure
to procure such insurance or to cause Tenant's vendors/contractors to procure
said insurance as required in Section 11.07 below, as the case may be, and
deliver the policy or policies or certificates therefore to the Landlord prior
to the commencement of the term hereunder or, in the case of any said
vendors/contractors, prior to the commencement of any said work, labor or
services, or thirty (30) days before the expiration of any policy delivered to
the Landlord, the Landlord may, at its option, obtain such insurance or any of
the same and the premium therefor shall be deemed to be and be paid as
additional rent at the next rent payment day.
Section 11.04 Landlord shall keep the Building containing the Demised
-------------
Premises insured against loss or damage by fire with extended coverage
endorsement in an amount not less than eighty percent (80%) of the full
insurable value thereof.
Section 11.05 Tenant shall not do or permit to be done any act or thing in
-------------
or upon the Demised Premises which will invalidate or be in conflict with the
certificate of occupancy or the terms of the New York State standard form of
fire, boiler, sprinkler, water damage or other insurance policies covering the
Building and/or the fixtures, equipment and property therein. Tenant shall, at
its own expense, comply with all rules, orders, regulations, or requirements of
the New York Board of Fire Underwriters or any other similar body having
jurisdiction provided same relate to its use or occupancy of the Demised
Premises and shall not knowingly do or permit anything to be done in or upon the
Demised Premises or
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<PAGE>
bring or keep anything therein or use the Demised Premises in a manner which
increases the rate of insurance upon the Building or any property or equipment
located therein over the rate in effect at the commencement of the term of this
Lease.
Section 11.06 If because of anything done, caused or permitted to be done
-------------
permitted or omitted by Tenant, the rate of liability, fire, boiler, sprinkler,
water damage or other insurance with all extended coverage on the Building or on
the property and equipment of Landlord shall be higher than it otherwise would
be, Tenant shall reimburse Landlord and the other tenants and subtenants in the
Building for the additional insurance premiums thereafter paid by Landlord or by
other tenants and subtenants in the Building which shall have been charged
because of the aforesaid reasons and Tenant shall make the reimbursement on the
first day of the month following such payment by Landlord or such other tenants
or subtenants.
Section 11.07 Tenant agrees to cause any vendors/contractors doing work,
-------------
labor or services, on behalf of Tenant, in or about the Demised Premises to
maintain while performing said work, labor or services, at their own cost and
expense, one or more policies of public liability and property damage insurance
having a combined single limit of One Million Dollars ($1,000,000.00) which, up
to the maximum liability amounts thereof, insure the said vendor/contractor,
Tenant and the Landlord (and such other person(s) designated by the Landlord
having an insurable interest) against liability for injury (or death) to persons
and/or damage to property of any person or persons in or about the Demised
Premises. The insurance required by this Section shall be primary insurance and
the insurer shall be liable for the full amount of the loss up to and including
the total limit of liability as set forth in the declarations without the right
of contribution from any other insurance coverage held by Tenant.
ARTICLE 12
RULES AND REGULATIONS
---------------------
Section 12.01 The Tenant shall observe faithfully and comply strictly
-------------
with, the rules and regulations promulgated from time to time by written notice
to Tenant from Landlord or attached to this Lease, as in the Landlord's
reasonable judgment are necessary for the safety, care and cleanliness of the
Building or for the preservation of good order therein but such rules and
regulations shall not affect the substance of this agreement (as distinguished
from procedural and administrative considerations of the operation of the
Demised Premises, the Building and of the Park). The Landlord shall not be
liable to the Tenant for violation of such rules and regulations by any other
Tenant, its servants, employees, agents, visitors or licensees. The current
Rules and Regulations are attached hereto and made a part hereof. Landlord
shall not be responsible for the non-observance by any other tenant of any said
Rules and
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<PAGE>
Regulations, or the covenants or agreements contained in any other lease, by any
other Tenant of the Building, or its agents or employees.
ARTICLE 13
SUBORDINATION
-------------
Section 13.01 This Lease shall be subordinate and subject at all times to
-------------
all ground or underlying leases and to any mortgage covering the Building or
which at any time hereafter shall be made, and to all advances made, or
hereafter to be made, upon the security of any such mortgagee.*
ARTICLE 14
DEFAULT
-------
Section 14.01 If the Tenant shall at any time be in default continuing
-------------
after ten (10) days written notice thereof in the payment of any rent or any
additional rent or any other payments required of Tenant hereunder, or any part
thereof, without demand therefor, or if Tenant, after thirty (30) days written
notice by Landlord to Tenant, shall be in default in any of the other covenants
and conditions of this Lease to be kept, observed and performed by Tenant, or if
Tenant shall vacate or abandon the premises during the term hereof, or if this
leasehold interest shall be levied on or taken or attempted to be taken by
execution, attachment, or other process of law, or if any execution or
attachment shall be issued against Tenant, or any of Tenant's property in the
Demised Premises**, whereby the Demised Premises shall be taken or occupied or
attempted to be taken or occupied by someone other than Tenant, or if a
receiver, assignee or trustee shall be appointed for Tenant or Tenant's
property, or if this Lease shall by operation of law devolve upon or pass to any
person or persons other than the Tenant, then in any of said cases, and subject
to the provisions in Section 14.02 below, the Landlord may:
A. at its option, without terminating this Lease, change the locks on
the doors to the Demised Premises and exclude the Tenant therefrom until all of
such defaults shall have been completely cured;
* See Rider 1, Paragraph 49.
** Unless removed or dismissed by a court of competent jurisdiction within
thirty (30) days.
B. enter into the Demised Premises, remove Tenant's property and
effects as elsewhere in the Lease provided, take and hold possession thereof,
without such entry and possession terminating this Lease or releasing Tenant in
whole or in part from Tenant's obligation to pay rent and all its other
obligations hereunder for the full term. Relet the Demised Premises or any part
or parts thereof, either in the name
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of or for the account of Landlord or Tenant, for such rent and for such term and
terms as Landlord may see fit, which term may, at Landlord's option, extend
beyond the balance of the term of this Lease. Landlord shall not be required to
accept any tenant offered by Tenant or to observe any instructions given by
Tenant about such reletting. In any such case Landlord may make such repairs,
alterations and additions in or to the Demised Premises and redecorate the same
as it sees fit. Tenant shall pay Landlord the deficiency between the rent hereby
reserved and covenanted to be paid and the net amount of the rents collected on
such reletting, for the balance of the term of this Lease, as well as any
expenses incurred by Landlord in such reletting, including, but not limited to
reasonable attorneys' fees ("reasonableness" shall be based upon the amount of
time and effort expended by the attorneys without regard to the amount in
controversy), brokers' fees, the expense of repairing, altering and adding to
and redecorating the premises, and otherwise preparing the same for re-rental.
All such costs, other than the rental, shall be paid by Tenant upon demand by
Landlord. Any deficiency in rental shall be paid in monthly installments, upon
statements rendered by Landlord to Tenant, unless Landlord has declared the
entire rental for the balance of the term due, as elsewhere in the Lease
provided. Any suit brought to collect the amount of the deficiency for any one
or more months shall not preclude any subsequent suit or suits to collect the
deficiency for any subsequent months;
C. require that upon any termination of this Lease, whether by lapse of
time, the exercise of any option by Landlord to terminate the same, or in any
other manner whatsoever, or upon any termination of Tenant's right to possession
without termination of the Lease, the Tenant shall at once surrender possession
of the Demised Premises to the Landlord and immediately vacate the same, and
remove all effects therefrom, except such as may not be removed under other
provisions of this Lease. If Tenant fails to do so, Landlord may forthwith
re-enter the said Demised Premises, with or without process of law, and
repossess itself thereof as in its former estate and expel and remove Tenant and
any other persons and property therefrom, using such force as may be necessary,
without being deemed guilty of trespass, eviction or forcible entry, without
thereby waiving Landlord's rights to rent or any other rights given Landlord
under this Lease or at law or in equity;
D. if the Tenant shall not remove all effects from the Demised Premises
as in this Lease provided, at Landlord's option, Landlord may remove any or all
of said effects in any manner that Landlord shall choose and store the same
without liability for loss thereof and Tenant will pay the Landlord, on demand,
any and all expenses incurred in such removal and also storage of said effects
for any length of time during which the same shall be in Landlord's possession
or in storage; or Landlord may, at its option, without notice, sell* any or all
of said effects in such manner and for such price as the
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Landlord may deem best and apply the proceeds of such sale upon any amounts due
under this Lease from the Tenant to the Landlord, including the expenses of
removal and sale;
E. collect from Tenant any other loss or damage Landlord may sustain by
reason of any breach and diminished value of the Demised Premises resulting from
said breach;
F. in the event of a breach, or threatened breach, by Tenant of any of
the covenants or provisions of this Lease, have the right to enjoin any such
breach or threatened breach; and,
G. declare the entire rental for the balance of the term or the entire
term immediately due and payable at once.
Section 14.02 Except for the nonpayment of rent, additional rent or any
-------------
other charges or payment the responsibility of Tenant to make hereunder, Tenant
shall not be in default upon the occurrence of any of the events referred to in
Section 14.01 above (except for the nonpayment of rent, additional rent or any
other charge or payment the responsibility of Tenant to make hereunder) if,
during the said thirty (30) day notice period, Tenant cures said default. If,
however, the said default shall be of such a nature that the same cannot be
completely cured or remedied within said thirty (30) day period, then Tenant
shall not be in default if, during the said thirty (30) day period Tenant shall
have commenced to cure said default and thereafter continuously and diligently
takes such action and actions as are necessary to cure said default at the
earliest possible time but in no event, however, shall the time within which
Tenant shall have to cure said default be extended beyond sixty (60) days from
the giving of the said thirty (30) day notice.
Section 14.03 Except for the ten (10) days notice referred to in
-------------
Section 14.01 above, Tenant expressly waives the service of any demand for
payment of rent. Tenant hereby expressly waives any and all rights of redemption
granted by or under any present or future laws, in the event of eviction or
dispossession of Tenant by Landlord under any provisions of this Lease. No
receipt of monies by the Landlord from or for the account of Tenant or from
anyone in possession or occupancy of the Demised Premises after the termination
in any way of this Lease or after the giving of any notice, shall reinstate,
* Only after 30 days written notice to Tenant.
Continue or extend the term of this Lease or affect any notice given to
the Tenant prior to the receipt of such money, it being agreed that after final
judgment for possession of the Demised Premises, the Landlord may receive and
collect any rent or other amounts due Landlord and such payment shall not waive
or affect said notice, said suit or said judgment.
Section 14.04 The Tenant waives a trial by jury of any or all issues
-------------
arising in any action or proceeding between the parties hereto, or their
successors, arising out of or in any way connected with
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<PAGE>
this Lease, or any of its provisions, the Tenant's use or occupancy of the
Demised Premises and/or any claim of injury or damage.
Section 14.05 Any and all rights and remedies which Landlord may have
-------------
under this Lease and at law or in equity, shall be cumulative and shall not be
deemed inconsistent with each other, and any two or more or all of said rights
and remedies may be exercised at the same time or at different times and from
time to time.
Section 14.06 The Tenant covenants and agrees to pay on demand
-------------
Landlord's expenses, including reasonable attorneys' fees ("reasonableness"
shall be based upon the amount of time and effort expended by the attorneys
without regard to the amount in controversy), incurred in enforcing any
obligation of the Tenant under the Lease or in curing any default by Tenant
under this Lease.*
Section 14.07 If any of the aforesaid provisions or any other provision
-------------
of this Lease shall be unenforceable or void, said provision(s) shall be deemed
eliminated and of no force and effect and the balance of this Lease shall
continue in full force and effect. If any notice is required by law to be given,
such notice shall be given.
Section 14.08 The Landlord shall have the first lien on Tenant's
-------------
interest in this Lease to secure the payment and performance of Tenant's
obligation hereunder, prior and preferable to all other liens.
Section 14.09 The Tenant shall not permit any mechanics' or
-------------
materialmen's liens to be filed against the fee of the real property of which
the Demised Premises form a part nor against the Tenant's leasehold interest in
the Demised Premises. The Landlord shall have the right at all reasonable times
to post and keep posted on the Demised Premises any notice which it deems
necessary for protection from such liens. If any such liens are so filed, the
Landlord, at its election, may pay and satisfy the same and in such event the
sums so paid by the Landlord with maximum permissible interest from the date of
payment, but not to exceed 12% per annum, shall be deemed to be additional rent
due and payable by the Tenant at once without notice or demand.
* Only if Landlord is the prevailing party and said fees are awarded by a court
of competent jurisdiction.
ARTICLE 15
OCCUPANCY AFTER TERM EXPIRATION
-------------------------------
Section 15.01 If the Tenant shall continue to occupy the Demised
-------------
Premises after the expiration of.
the said term, with the consent of the Landlord, such tenancy shall be from
month to month, and in no event from year to year, upon the same terms and
conditions, except the monthly rental shall be increased to 125% of the monthly
rental for the last month of the demised term.
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ARTICLE 16
EMINENT DOMAIN
--------------
Section 16.01 If the whole or any part of the Demised Premises or the
-------------
Building shall be taken or condemned by any competent authority under power or
eminent domain for a public or quasi public use or purpose, then, at the option
of either party, to be exercised by written notice to the other, the term hereby
granted shall cease from the time when possession of the part so taken shall be
required for such public or quasi public use or purpose, and without an
apportionment of the award, the Tenant hereby assigning to the Landlord all
right and claim to the award. The current rent, however, in such case shall be
apportioned. Landlord's said notice, to be effective, must be given to Tenant no
later than thirty (30) days after Landlord's receipt of the "Notice of Taking".
Tenant's said notice, to be effective, must be given to Landlord no later than
thirty (30) days after Landlord gives Tenant notice of Landlord's receipt of the
"Notice of Taking".
ARTICLE 17
FIRE, CASUALTY, ETC.
--------------------
Section 17.01 In the event that the Building be damaged or destroyed by
-------------
fire, the elements or casualty, this Lease shall continue in full force and
effect, but the Landlord, subject to there being adequate insurance proceeds
available to Landlord for the full loss thereof, shall forthwith repair such
damage or destruction, provided such repairs can be made under the laws and
regulations of State, County, Federal or Municipal authorities; except that if
said building is so damaged or destroyed to the extent of not less than
one-third (1/3) of the replacement cost thereof, or if said insurance proceeds
to Landlord are not so adequate, as determined by the Landlord, the Landlord, at
its option (to be exercised by written notice to the other within ninety (90)
days from the date of such damage or destruction), may terminate this Lease. The
Tenant shall be entitled to a proportionate reduction of rent while such repairs
are being made only if the Demised Premises are untenantable, such proportionate
reduction to be based upon the extent that the Demised Premises, or part
thereof, may be untenantable and for the period that said premises, or part
thereof, may be untenantable and no such rent reduction shall be allowed by
reason of inconvenience, annoyance or injury to the Tenant's business because of
such damage or destruction, or the necessity of repairing any portion of the
Building, or the making of such repairs, and the Landlord shall not be liable to
the Tenant because of such inconvenience, annoyance or injury. Tenant hereby
expressly waives the provisions of Section 227 of the Real Property Law and
agrees that the foregoing provisions shall govern and control in lieu thereof.
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Section 17.02 Landlord shall not be responsible to Tenant for any loss
-------------
or theft of property in or from the Demised Premises, or for any loss or theft
or damage of or to any property left with any employee of Landlord, however
occurring. Landlord shall not be liable for any damage caused by water, rain,
snow or ice, or by breakage, stoppage or leakage of water, gas, heating, air
conditioning, sewer, or other pipes or conduits, in, upon, about or adjacent to
the Demised Premises, or the Building.
ARTICLE 18
ESCALATIONS
-----------
Section 18.01 The Tenant hereby agrees to pay, as additional rent, the
-------------
amount by which any of each of the yearly "building operating costs" incurred by
the Landlord during each year occurring during the term of this Lease,
commencing July 1, 2001, exceed the cost of each said respective building
operating cost incurred by the Landlord during the period July 1, 2000 through
June 30, 2001, (the "Operating Year"). Notwithstanding the foregoing, the
Operating Year shall be the later of (1) July 1, 2000 through June 30, 2001, or
(2) the first full twelve (12) calendar months after the day on which the
certificate of occupancy is issued indicating completion of Landlord's Work as
defined in Exhibit C, Subparagraph A, in which case all the remaining dates in
Section 18.01 shall be deemed appropriately changed to reflect the actual
Operating Year. Allocation of costs that benefit the Building and other
buildings in the Park shall be fair and equitable, in accordance with and in
proportion to the gross square footage of the Building so that each building in
the Park bears, in proportion to its respective size, its proportionate share of
said costs. A "building operating cost" shall be defined to include the cost to
the Landlord of operating and maintaining the Building, the Building Common
Areas, lawns, and shrubs, the roadways leading to the Building including the
roadway leading from New York Route 96, and the Exterior Common Areas, including
but without limiting the generality of the foregoing, the cost of: gardening and
landscaping; parking lot and roadway repairs; maintenance and line restriping;
insurance premiums; repairs to the Building and roof; painting and caulking;
refinishing; glass repair; the maintenance and repair of lighting, sanitary
control facilities and heating, ventilating and air conditioning systems and
equipment; utilities; removal of snow, ice, trash, waste, refuse and recycling
costs, including compliance with any and all recycling laws, rules and
regulations imposed by the municipality in which the Building is located and
specifically excluding any hazardous or toxic wastes (including but not limited
to petroleum products, medical wastes, etc.) which shall be disposed of by
Tenant at Tenant's own cost and expense; traffic control and policing; fire and
security protection; maintenance, replacement and rental of signs and equipment;
repair and/or replacement of on-site water lines, sanitary and storm sewer
lines; rental and other charges paid to third parties; maintenance and service
(including
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but not limited to service contracts) of security/safety equipment and
automatic/electronic and/or magnetic exterior entrance door locking devices; and
real estate taxes* and other municipal services rendered by the appropriate
municipal authorities or quasi-governmental authorities payable by the Landlord
and allocable to the Building and the land on which the Building stands and
adjacent land owned by the Landlord which is part of the Park. Notwithstanding
the foregoing, and by way of expansion and not limitation, Tenant shall be
responsible for the cost in excess of a total of $1.50 per rentable square foot
per year of electricity and gas (heat, air conditioning, light, and power): (1)
supplied to the Demised Premises, and (2) for the cost of same for the roadway
and parking lot lighting serving the Building. The Landlord, in good faith,
shall reasonably determine the amount of each such yearly building operating
cost(s) and once each year during the term, commencing in July 2002 notify the
Tenant, in writing, of additional rent payable on account of any such increase
of each said building operating cost(s) from the preceding Operating Year,
together with an itemized statement thereof. Thus, in July 2002, the Landlord
shall notify the Tenant of additional rent payable on account of the increase,
if any, of any such costs for the preceding Operating Year over the year July 1,
2000 through June 30, 2001. Landlord agrees that in the event Tenant is not so
notified by Landlord of said increase in the said building operating costs
within one (1) year of the date provided herein for Tenant to be so notified,
then Landlord shall be deemed to have waived reimbursement for said increase for
the applicable period. For a period of one (1) year after notification, Tenant
shall have the right to inspect the Landlord's cost records which cost records
shall include only those books and records which are necessary to the
determination of the appropriateness of the applicable charges forwarded to
Tenant. No such books and records may be copied or removed from Landlord's
office. Tenant acknowledges that the information acquired as a result of said
inspection is confidential to Landlord and Tenant will not give or release any
said information to a third party except as may be reasonably necessary to
protect and enforce Tenant's rights pursuant to this Lease. See Rider 1,
Paragraph 42. * See Rider 1, Paragraph 62.
Section 18.02 For purposes of the Lease, real estate taxes shall be
-------------
defined as follows: (i) all real estate taxes, including but not limited to
town, county and school taxes payable (adjusted after protest or litigation, if
any) for any part of the term of this Lease, including any extension period
hereof, but exclusive of penalties or discounts, on the Building or the Park to
the extent reasonably allocable to the Building; (ii) any taxes which shall be
levied in lieu of the taxes described in (i) above; (iii) Pure Waters charges,
sewer district charges and any assessments (special or otherwise) made against
the Building and/or the Park which shall be required to be paid during the
calendar year or fiscal year in
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respect to which they are being determined; (iv) any water pollution charges*;
(v) any other governmental real estate taxes, levies, impositions or charges of
a similar or dissimilar nature, whether general, special, ordinary,
extraordinary, foreseen or unforeseen which may be assessed, levied or imposed
upon all or any part of the Building and/or the Park; and (vi) the reasonable
expense of contesting the amount or validity of any such taxes, charges or
assessments, such expense (including reasonable attorney's fees) to be
applicable to the period of the item contested. Tenant, at its sole cost and
expense, shall be permitted, upon prior written notice to Landlord, to contest
the amount or validity of any said taxes, charges or assessments. Landlord
agrees to cooperate with Tenant in any said contest.
Section 18.03 Tenant shall pay prior to delinquency all taxes assessed
-------------
against or levied upon its occupancy of the Demised Premises, or upon the
fixtures, furnishings, equipment and all other personal property of Tenant
located in the Demised Premises other than those furnished and paid for by
Landlord, if nonpayment thereof shall give rise to a lien on the real estate,
and when possible Tenant shall cause said fixtures, furnishings, equipment and
other personal property to be assessed and billed separately from the property
of Landlord. In the event any or all of Tenant's fixtures, furnishings,
equipment and other personal property, or upon Tenant's occupancy of the Demised
Premises, shall be assessed and taxed with the property of Landlord, Tenant
shall pay to Landlord its share of such taxes within thirty (30) days after
delivery to Tenant by Landlord of a statement in writing setting forth the
furnishings, equipment or personal property.
Section 18.04 Should any governmental taxing authority acting under any
-------------
present or future law, ordinance or regulation, levy, assess or impose a tax,
excise, surcharge and/or assessment (other than a tax on net rental income or
franchise tax) upon or against the rents payable by Tenant to Landlord, or upon
or against the Building, the Building Common Areas, either by way of
substitution for or in addition to any *Not to include fines and sanctions for
pollution caused by Landlord or other tenants of the Building (except for
subtenants of Tenant) or their respective agents, employees or contractors.
existing tax on land or buildings or otherwise, Tenant shall be responsible for
and shall pay Tenant's pro rata share of such tax, excise, surcharge and/or
assessment.
Section 18.05 Should any alteration or improvement performed by Tenant,
-------------
during the term of this Lease, cause an increase in assessment, Tenant shall pay
to Landlord the cost of all taxes resulting from such increase in assessment.
Any amount paid separately hereunder by Tenant to Landlord shall be in addition
to any amounts paid by Tenant pursuant to Section 18.02 above.
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Section 18.06 Tenant shall pay as additional rent all sales, use and/or
-------------
occupancy taxes or fees of any kind and nature whatsoever whether imposed on or
payable by either Landlord or Tenant under any present or future statute, law,
ordinance, rule or regulation or the like, which at any time prior to or during
the term of this Lease may be assessed, levied, confirmed, imposed upon, or grow
or become due and payable out of or in respect of calculated on or become a lien
on, (i) the Demised Premises or any part thereof or any appurtenances thereof,
(ii) the rent, income or other payments received, due or to become due under
this Lease, (iii) any use or occupation of the Demised Premises, and (iv) such
franchises as may be appurtenant to the use of the Demised Premises.
ARTICLE 19
PURE WATERS, POLLUTION AND SEWERAGE
-----------------------------------
Section 19.01 Tenant shall be responsible for and pay upon being billed
-------------
therefor by Landlord, with Landlord, upon Tenant's written request, exhibiting
receipted bills for the charges, of all water, Pure Waters District charges,
pollution charges and sewerage charges assessed against the Building for water
and sewerage consumed in, about or for the benefit of the Building including the
land immediately surrounding the Building.
ARTICLE 20
SURVIVAL OF TENANT'S OBLIGATIONS
--------------------------------
Section 20.01 The obligation of Tenant to pay the charges referred to
-------------
in Article 18 and 19 of this Lease that accrue during the term of this Lease
shall survive the expiration or early termination of this Lease.
ARTICLE 21
ENTIRE AGREEMENT, TIME OF THE
-----------------------------
ESSENCE AND NONWAIVER
---------------------
Section 21.01 This Lease contains all the agreements of the parties.
-------------
There have been no representations made by the Landlord or understandings made
between parties other than those set forth in this Lease. This Lease may not be
modified except by written instrument duly executed by the parties hereto.
Receipt of rent with knowledge of a default by the Tenant will not condone,
forgive or waive such default. Failure by Landlord to enforce any of the
provisions hereof for any length of time shall not be deemed a waiver of its
rights set forth in this Lease, and such waiver may only be made by instrument
in writing and signed by the Landlord. Time is of the essence with respect to
all payments and performances required of the Tenant by the provisions of this
Lease.
ARTICLE 22
INDEMNIFICATION OF LANDLORD
---------------------------
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Section 22.01 Tenant shall indemnify, defend and save Landlord harmless
-------------
from and against any and all loss, liability, damage or expense including
reasonable attorneys' fees ("reasonableness" shall be based upon the amount of
time and effort expended by the attorneys without regard to the amount in
controversy) suffered or incurred by Landlord because of (i) the negligence of
Tenant, or Tenants' agents, contractors and employees, (ii) any act or
occurrence in the Demised Premises, unless caused by the negligence of Landlord,
its agents, contractors, or employees, or the intentional wrongful act of
Landlord its agents, contractors, or employees (iii) judgments, citations, fines
or other penalties rendered or assessed against Landlord, its agents,
contractors, or employees (with the exception of any claims under any worker's
compensation laws) as a result of Tenant's failure to abide by and to undertake
the duty of compliance on behalf of Landlord with all federal, state and local
laws, safety and health regulations relating to the interior and other portions
of the Demised Premises which Tenant has assumed the duty to maintain pursuant
to this Lease, provided that Landlord agrees to give Tenant prompt notice of any
such violation asserted by any government agency, and (iv) any and all claims
and liabilities which may arise out of or be connected with any improvements,
alterations and additions undertaken by Tenant with regard to the Demised
Premises including any liens for labor and material arising from such work.
Section 22.02 (a) Except as provided in Section 22.02 (b) hereof,
-------------
Landlord shall indemnify Tenant against loss, liability or damages to third
parties as a result of any personal injury, death, or property damage that
occurs in the Common area or the Demised Premises solely as a result of the
negligence or the tortious acts of the Landlord, its agents, servants or
employees.
(b) The indemnity shall not apply to loss, liability or damages with
respect to vehicles except for vehicles owned or operated by Landlord,
Landlord's employees, or Landlord's agents; to loss, liability or damages with
respect to products; claims under Workers' Compensation laws; or loss, liability
or damages caused by the negligence of Tenant or its agents, servants or
employees.
(c) Landlord shall have the sole right to and shall defend any lawsuits
with respect to claims for loss, liability or damage against which the indemnity
provided in Section 22.02 (a) applies and pay any judgments which result from
the lawsuits. "Lawsuits" include arbitration proceedings and administrative
proceedings and all other governmental and quasi-governmental proceedings.
"Liabilities" include the fees and disbursements of attorneys and witnesses.
ARTICLE 23
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NONDELIVERY OF PREMISES
-----------------------
Section 23.01 In the event of the failure of the Landlord to deliver
-------------
possession of the Demised Premises at the time of the commencement of the term
of this Lease, neither the Landlord nor its agents shall be liable for any
damage caused thereby, nor shall this Lease thereby become void or voidable, but
in such event the Tenant shall not be liable for any rent until such time as the
Landlord can deliver possession. See Rider 1, Paragraph 55.
ARTICLE 24
SECURITY DEPOSIT
----------------
Section 24.01 A. Simultaneously with the execution of this Lease by
-------------
Tenant, Tenant shall deposit with Landlord the sum of $100,000.00 as security
for the faithful performance and observance by Tenant of the terms, provisions
and conditions of this Lease, it is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this Lease; including
but not limited to payment of rent, Landlord may, at its option, use, apply or
retain the whole or any part of the security so deposited to the extent required
for the payment of any rent or any sum as to which Tenant is in default or for
any sum which Landlord may expend by reason of Tenant's default in respect of
any of the terms, covenants and conditions of this Lease, including but not
limited to, any damages or deficiency in the reletting of the Demised Premises,
whether such damages or deficiency accrued before or after summary proceedings
or other re-entry by Landlord. In the event that Tenant shall fully and
faithfully comply with all of the terms, provisions, covenants and conditions of
this Lease, the security shall be returned, without interest to Tenant after the
date fixed as the end of the Lease and within a reasonable time after delivery
of entire possession of the Demised Premises to Landlord. In the event of a sale
of the Land and/or Building or leasing of the Building, of which the Demised
Premises form a part, Landlord shall have the right to transfer the security to
the vendee or lessee, and Landlord shall thereupon be released* by Tenant from
all liability for the * Provided the new owner agrees in writing which writing
to be effective must be delivered to Tenant, to be bound by the terms herein
relating to the return to Tenant of the said security deposit.
return of such security; and Tenant agrees to look to the new Landlord solely
for the return of said security; and it is agreed that the provisions hereof
shall apply to every transfer or assignment made of the security to a new
Landlord. Tenant further covenants that it will not assign or encumber or
attempt to assign or encumber the monies deposited herein as security and that
neither Landlord nor its successors or assigns shall be bound by any such
assignment, encumbrance, attempted assignment or attempted encumbrance.
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B. Notwithstanding the terms and provisions of subparagraph A above,
Tenant shall not be required to deposit the said security deposit referred to
therein unless 51% or more of the Demised Premises have been sublet or this
Lease has been assigned. Notwithstanding anything herein to the contrary, no
such sublet or assignment shall be effective until and unless Landlord has
received the said security deposit. Further, no such security deposit shall be
required if the said assignment or sublet is to any successor corporation as the
result of a merger or consolidation, or to a subsidiary of Tenant, or to an
affiliated or related company to Tenant. See Rider 1, Paragraph 61.*
ARTICLE 25
WAIVER OF SUBROGATION
---------------------
Section 25.01 Notwithstanding anything in this Lease contained to the
-------------
contrary: Landlord shall insure the Building and Tenant shall insure the Demised
Premises and its fixtures and contents, against fire and other causes included
in standard extended coverage by policies which shall include a waiver by the
insurer of all right of subrogation against Landlord or Tenant, their officers,
directors, employees, invitees, and in case of Tenant, its subtenants, in
connection with any loss or damage thereby insured against. Neither party, nor
its officers, directors, employees, agents or invitees, nor, in case of Tenant,
its subtenants (if Tenant shall have sublet in accordance with the terms
herein), shall be liable to the other for loss or damage caused by any risk
covered by such insurance. If the release of either Landlord or Tenant, as set
forth in this paragraph, shall contravene any law with respect to exculpatory
agreements, the liability of the party in question shall be deemed not released
but shall be secondary to the other's insurer.
* Further, Landlord agrees, not later than 30 days after the expiration of the
demised term, to return to Tenant the said security deposit less any sum or sums
that Landlord, in accordance with the terms herein, is then entitled to retain.
ARTICLE 26
BROKERAGE
---------
Section 26.01 Tenant and Landlord represent and warrant that they have
-------------
dealt with no broker, agent or other real estate sales person in connection with
this lease other than MOORE AND ASSOCIATES, INC., ROBERT MOORE, BROKER, the
commission which shall be paid by Landlord, and that, other than as herein
expressly set forth, no broker, agent or such other person brought about this
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transaction. Tenant and Landlord agree to indemnify and hold each other harmless
from and against any claims by any broker, agent or other real estate sales
person claiming a commission or other form of compensation by virtue of this
Lease or of having dealt with Tenant or Landlord with regard to this leasing
transaction and should a claim for such commission or other compensation be made
it shall be promptly paid or bonded by the party who has dealt with the person
or entity making such claim. The provisions of this Article shall survive the
termination of this Lease.
ARTICLE 27
FORCE MAJEURE
-------------
Section 27.01 Except as otherwise provided in this Lease and except as
-------------
to the payment of rent or other monies due under this Lease neither party shall
be responsible for delays or inability to perform its obligations hereunder for
causes beyond the control of such party including acts of other tenants,
governmental restriction, regulation or control, labor dispute, accident,
mechanical breakdown, shortages or inability to obtain labor, fuel, steam,
water, electricity or materials, acts of God, enemy action, civil commotion, or
fire or other casualty.
ARTICLE 28
MISCELLANEOUS PROVISIONS
------------------------
Section 28.01 No receipt of money by Landlord from Tenant after the
-------------
termination of this Lease or after the service of any notice or after the
commencement of any suit or after final judgment for possession of the Demised
Premises shall reinstate, continue or extend the term of this Lease or affect
any such notice, demand or suit or imply consent for any action for which
Landlord's consent is required.
Section 28.02 No waiver of any default of Tenant or of Landlord
-------------
hereunder shall be implied from any omission by Landlord or Tenant, as the case
may be, to take any action on account of such default if such default persists
or be repeated, and no express waiver shall affect any default other than the
default specified in the express waiver and that only for the time and to the
extent therein stated.
Section 28.03 The term "Landlord" as used in this Lease, so far as
-------------
covenants or agreements on the part of Landlord are concerned, shall be limited
to mean and include only the owner or owners of Landlord's interest in this
Lease at the time in question, and in the event of any transfer or transfers of
such interest, Landlord herein named (and in case of any subsequent transfer,
the then transferor) shall be automatically freed and relieved from and after
the date of such transfer of all personal liability from events which occur
after the date of transfer. Any such release of Landlord under this paragraph
shall become effective only at such time Landlord's transferee is deemed to be
bound to the terms and provisions of this Lease. It is agreed, however, that
Landlord shall reimburse Tenant for any
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overpayments of rent made by Tenant prior to the assignment and any prepayment
of rent for months subsequent to the assignment.
ARTICLE 29
ESTOPPEL CERTIFICATES
---------------------
Section 29.01 Landlord and Tenant agree that from time to time upon not
-------------
less than ten (10) days prior request of the other, to deliver to the party
making the request a statement in writing (the "Certificate") certifying (a)
that this Lease is unmodified and in full force and effect (or if the have been
modifications that the same is in full force and effect as modified and
identifying the modifications), (b) the dates to which the rent and other
charges have been paid, and (c) that, so far as the person making the
certificate knows, the other party is not in default under any provision of this
Lease, or if such were not to be the fact, then certifying such default of which
person making the certificate may have knowledge. It is agreed that the
certificate may be relied upon by the party requesting it or by any other person
to which it may be exhibited or delivered. The contents of the certificate shall
be binding on the party on behalf of which it shall have been executed.
ARTICLE 30
QUIET ENJOYMENT
---------------
Section 30.01 The Landlord covenants and agrees that the Tenant on
-------------
paying said rent and performing the covenants aforesaid shall and may peaceably
and quietly hold and enjoy the said Demised Premises for the term aforesaid.
ARTICLE 31
EXECUTION
---------
Section 31.01 This Lease shall not be binding and in effect until a
-------------
counterpart hereof has been executed and delivered by the parties each to the
other.
ARTICLE 32
INVALID PROVISIONS SEVERABLE
----------------------------
Section 32.01 If any term or provision of this Lease or the application
-------------
thereof to any person or circumstances shall, to any extent, be invalid or
unenforceable, the remainder of this Lease, or the application of such term or
provision to persons or circumstances other than those as to which it is held
invalid or unenforceable shall not be affected thereby and each term and
provision of this Lease shall be valid and be enforced to the fullest extent
permitted by law.
ARTICLE 33
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PRONOUNS INTERCHANGEABLE
------------------------
Section 33.01 Feminine, neuter and masculine pronouns, the plural and
-------------
the singular, shall be construed to be and shall be interchangeable, in any
place or places herein in which the context may require such interchange.
ARTICLE 34
RIDER
-----
Section 34.01 In the event there are Riders and/or Exhibits attached
-------------
hereto they shall be deemed a part hereof and in any case where the provisions
of any said Rider and/or Exhibits shall conflict with or be contrary to the
provisions contained in this, the main portion of this Lease Agreement, the
provision of said Rider(s) and/or Exhibits shall control.
ARTICLE 35
LATE PAYMENT: ADDITIONAL RENT
-----------------------------
Section 35.01 All rental payments, any additional rent herein and any
-------------
and all payments due under the provisions of this Lease Agreement from Tenant,
unless herein otherwise specifically referred to, shall be received by Landlord
no later than 4:00 p.m. on the 1st day of each month (in the case of rent and
additional rent) or within fifteen (15) days of being invoiced therefor,
whichever is applicable, after which there shall be a 5% charge calculated on
the amount then due to compensate Landlord for the additional time and
inconvenience incurred by Landlord as a result of the payment not being made as
aforesaid. In the event, however, that said charge were to exceed that permitted
by law, the said charge due hereunder shall immediately and automatically be
reduced to the maximum then permitted by law. Any charges or payments due to
Landlord from Tenant arising out of the terms and provisions of this Lease or as
the result of Tenant's occupation of the Demised Premises, including but not
limited to services, labor or materials furnished or performed at Tenant's
request, shall be deemed additional rent hereunder and shall be deemed due and
payable within fifteen (15) days after a statement is rendered therefor.
ARTICLE 36
ARTICLE TITLES
--------------
Section 36.01 The Article titles are inserted as a matter of convenience
-------------
and for reference and in no way define, limit or describe the scope or intent of
this Lease nor in any way affect this Lease.
ARTICLE 37
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INTERIOR CLEANING
-----------------
Section 37.01 Landlord agrees to provide cleaning services ("interior
-------------
cleaning") for the cleaning of the interior for the Demised Premises in
accordance with Exhibit D which is attached hereto and made a part hereof.
ARTICLE 38
MISCELLANEOUS
Section 38.01 This Lease Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the State of New York and without
the aid of any canon, custom or rule of law requiring construction against the
draftsman. Landlord and Tenant hereby submit to personal jurisdiction in the
courts of the State of New York for the enforcement of their respective
obligations hereunder, and Landlord and Tenant each waives any and all personal
rights under the law of any other state or country to object to jurisdiction
within the State of New York for the purposes of an action to enforce such
obligations and the venue for any such actions shall be in Monroe County, New
York.
ARTICLE 39
PROVISIONS, BINDING, ETC.
-------------------------
Section 39.01 The conditions, covenants and agreements in this Lease
-------------
contained to be kept and performed by the parties hereto shall be binding upon
and inure to the benefit of said respective parties, their legal
representatives, successors and assigns. This Section shall not be construed to
permit any assignment or subletting, unless otherwise permitted in this Lease,
without Landlord's consent. The term "Landlord" as used in this Lease means only
the owner for the time being of the Land and Building (or the owner of a lease
of the Building) of which the Demised Premises form a part, so that in the event
of any sale or sales of said Land and Building or of said lease, or in the event
of a lease of said Building, the said Landlord shall be and hereby is entirely
freed and relieved of all covenants and obligations for Landlord hereunder and
it shall be deemed and construed without further agreement between the parties
or their successors in interest, or between the parties and the purchaser, at
any such sale, or the said tenant of the building, provided that the purchaser
or tenant of the Building as of the date of such purchase or lease has assumed
and agreed to carry out any and all covenants and obligations of Landlord
hereunder.
ARTICLE 40
CORPORATE TENANT
----------------
Section 40.01 If Tenant is a corporation, the persons executing this
-------------
Lease on behalf of Tenant hereby covenant, represent and warrant that Tenant is
duly incorporated or duly qualified (if foreign)
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corporation and is authorized to do business in the State of New York (a copy of
evidence thereof to be supplied to Landlord upon request); and that the person
or persons executing this Lease on behalf of Tenant is an officer or are
officers of such Tenant, and that he or they as such officers are duly
authorized to execute, acknowledge and deliver this Lease to Landlord (a copy of
a resolution to that effect to be supplied to Landlord upon request).
ARTICLE 41
LANDLORD'S CONSENT
------------------
Section 41.01 If at any time during the term of this Lease or any
-------------
renewal thereof, Landlord is requested to give its consent and Landlord delays
in granting its consent or determines to withhold such consent, the sole remedy
of Tenant shall be equitable action to compel Landlord to give its consent.
Landlord shall not be liable for any loss, liability, damage or expense,
including attorney's fees that Tenant may suffer or incur as a result of
Landlord's delay in granting such consent or in the event a court subsequently
determines that such consent was unreasonably withheld, or as a result of or in
connection with Tenant's action to compel Landlord to give its consent as herein
provided.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals as of the date first above written.
WILLOWBROOK II L.L.C.
By: /s/ Charles N. Mills
-----------------------------------
CHARLES N. MILLS
PAETEC CORP.
Date: 7/15/99 By: /s/ Arunas A. Chesonis
--------------------------- -----------------------------------
(Name and Title)
-27-
<PAGE>
STATE OF NEW YORK )
)SS:
COUNTY OF MONROE )
On the 19th day of July, 1999, before me personally came CHARLES N. MILLS, to me
known, who, being by me duly sworn, did depose and say that he resides at
Rochester, New York; that he is a Partner in WILLOWBROOK II L.L.C., the New York
partnership described in, and which executed the foregoing instrument.
/s/ Debra Ann Marabito
--------------------------------
Notary Public
DEBRA ANN MARABITO
Notary Public, State of New York
Monroe County
Commission expires Jan. 31, 2000
STATE OF NEW YORK)
)SS:
COUNTY OF MONROE )
On the 15th day of July, 1999, before me personally came
Arunas A. Chesonis, to me known, who, being by me duly sworn, did
depose and say that he/she/they reside(s) at
Victor, NY; that he/she/they is/are the
Chairman & CEO of PAETEC CORPORATION the Delaware corporation described
in, and which executed the foregoing instrument; that he/she/they know(s) the
seal of said corporation; that the seal affixed to said instrument is such
corporate seal; that it was so affixed by order of the board of directors of
said corporation; and that he/she/they signed his/her/their name(s) thereto by
like order.
/s/ Karen F. Ferrini
--------------------------------
Notary Public
KAREN F. FERRINI
Notary Public, State of New York
No. 4765553
Qualified in Monroe County
Commission expires Nov. 30, 2000
Notary Public
STATE OF )
)SS:
COUNTY OF )
On the ___ day of ___________, 19__, before me personally came
__________________________________, to me known and known to me to be the
individual described in and who executed the foregoing instrument and duly
acknowledged to me that he/she/they executed the same.
--------------------------------
Notary Public
-28-
<PAGE>
RIDER 1
TO LEASE AGREEMENT
BETWEEN
WILLOWBROOK II L.L.C.
AND
PAETEC CORP.
Paragraph 42 Except for building operating costs that are not Landlord
------------
controllable (which shall not be subject to the 4% limitation referred to
following) notwithstanding any other provision herein contained to the contrary,
Tenant's obligation for the payment of increases in building operating costs
referred to in Section 18.01 above shall not, in any one year, exceed an amount
equal to 104% of the amount required to be paid for the prior year. For
example, if Tenant were obligated for the payment in any one year for $10,000 in
increases in Landlord controllable building operating costs, Tenant's obligation
for the payment of increases in Landlord controllable building operating costs
for the next year would not exceed $10,400 ($10,000 x 1.04=$10,400). "Landlord
controllable" building operating costs shall be defined as those building
operating costs the amounts of which are within the control of Landlord. By way
of expansion and not of limitation, taxes of any governmental or quasi-
governmental authority of any kind, nature, and description, utilities,
insurance, third party services contracts (such as elevator maintenance
agreements, electronic door maintenance agreements, security monitoring
agreements), shall not be deemed "Landlord controllable" costs. Further,
"building operating costs" shall be defined to exclude capital expenditures, as
the definition is accepted in accordance with generally accepted accounting
standards, except for fan motors, compressors, pumps, condensing units, dryers,
and accumulators, all of which shall be deemed included in the definition of
"building operating costs".
Paragraph 43 Upon commencement of the demised term, Landlord agrees to pay
------------
Tenant incurred fees up to and not exceeding $15,000 for space planning/design
services incurred by Tenant for the design/planning of the Demised Premises.
Tenant shall not have to account to Landlord for the said $15,000. Landlord, at
its sole cost and expense, will provide Tenant with partition plans, Building
HVAC drawings, Building fire protection drawings, and such Building plumbing
drawings as are required by the Town of Perinton for the Building system
plumbing.
Paragraph 44 Subject to required approvals of and governmental or quasi-
------------
governmental bureau, board, or agency having jurisdiction thereof and subject to
the execution by Tenant of the "Rooftop Agreement" (attached hereto as Exhibit
E) and compliance by Tenant with the terms therein contained Tenant, shall be
permitted to install condensers, antennas, and equipment on the roof of the
Building with no additional installation, rental, maintenance or miscellaneous
charges therefore.
Paragraph 45 Prior to commencement of construction of the Building,
------------
Landlord agrees, at its sole cost and expense:
A. To provide Tenant with a complete set of base Building drawings on
a CAD disk; and,
B. Upon completion of the construction of the Building, shall provide
Tenant with final "as built" drawings of Landlord's Work.
Paragraph 46 INTENTIONALLY OMITTED
------------
Paragraph 47
------------
A. Subject to any governmental or quasi-governmental approvals
of any board, bureau, or agency having jurisdiction thereof,
Tenant, at its sole cost and expense, shall be permitted to have
the following exterior signage/identification:
(1) A building-mounted, exterior, internally
illuminated individual-letter sign; and,
(2) A "monument" sign on the New York Route 96
frontage.
B. Tenant, at Landlord's request, agrees, at its sole cost and
expense (1) to remove said sign(s) simultaneously with the
expiration of the demised term, and (2) to repair any damage
done by said removal in a good and workmanlike matter and return
the Building to the same condition it was in prior to the
installation of said signs.
Paragraph 48 Upon commencement of the demised term, Tenant shall
------------
receive allowance from Landlord equal to $111,000. Tenant may use said allowance
as it chooses and said allowance, at Tenant's written directions to Landlord
shall be in cash paid by Landlord to Tenant or used by Tenant as a credit on
amounts of sums due hereunder from Tenant to Landlord, or a combination of both.
Paragraph 49 Notwithstanding the terms of Article 13 above, Landlord
------------
agrees to provide Tenant with a Non-disturbance Agreement (based on the New York
State Bar Association format) from the holder of any mortgage lien on the
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<PAGE>
Building which agreement Tenant agrees to execute. In the event the said
Mortgagee charges a fee for the said agreement, Tenant agrees to be responsible
for the payment thereof.
Paragraph 50 Notwithstanding anything herein contained to the
------------
contrary, Tenant shall have the continued right to inspect the Demised Premises
to determine if Landlord's Work has been completed in accordance with this
Lease. Not later than thirty (30) days after the Rent Commencement Date, Tenant
shall provide Landlord with a written itemization of those items that have not
been completed as required by the terms and provisions of this Lease or that
require corrective action (the "Punch List"). Landlord shall complete or correct
each item on the Punch List within such time as is reasonable under the
circumstances, but in all events, within forty-five (45) days after Landlord's
receipt of the Punch List. Landlord shall use reasonable efforts to complete or
correct each item on the Punch List in such a time and in such a manner so as
not to unreasonably interfere with or disrupt Tenant's business from and in the
Demised Premises.
Paragraph 51 Notwithstanding anything herein contained to the
------------
contrary, Tenant may remove from the Demised Premises its trade fixtures and
equipment provided:
A. Tenant shall, in a good and workmanlike manner, repair any damage to
the Demised Premises caused by said removal and return the Demised
Premises to the same condition they were in prior to the installation of
said fixtures/equipment;
B. That the said removal and repair is completed at or before the
expiration of the demised term.
Paragraph 52 INTENTIONALLY OMITTED
------------
Paragraph 53 Notwithstanding anything in the Lease to the contrary,
------------
including but not limited to the terms and provisions of Sections 1.05 and 2.01
above, the demised term will commence (the "Rent Commencement Date") the later
of July 1, 2000 or, (2) the first day of the first full calendar month the
Demised Premises are "ready for occupancy". For purposes of this Paragraph 53,
the term "ready for Occupancy" means that the Building and the Demised Premises
have received a valid Certificate of Occupancy; that the Demised Premises have
been professionally cleaned and are free of trash or debris; and that the
Demised Premises have been finished in accordance with Landlord's Work as
referred to in Paragraph A of Exhibit C; subject only to minor "punch list"
items which do not separately or in the aggregate materially, adversely affect
Tenant's use and occupancy of the Demised Premises. Notwithstanding the
foregoing, the term "ready for occupancy" shall refer only to Landlord's Work
and if no Certificate of Occupancy has been issued as the result of the action
or inaction of Tenant, its representatives, agents, employees, or contractors
than the requirement of the issuance of a Certificate of Occupancy as herein
referred to shall be deemed waived. Further, Landlord shall be required to give
Tenant not less than thirty (30) days prior written notice of the day when
Landlord's Work will be complete and the Demised Premises will be ready for
occupancy. In the event that the Certificate of Occupancy is not issued as the
result of the said action or inaction of Tenant, Landlord agrees, upon the
curing by Tenant of the condition preventing the issuance of said Certificate of
Occupancy by the said inaction or action, to thereafter, continuously and
diligently make every reasonable effort and to take every reasonable action to
effectuate the issuance of the said Certificate of Occupancy.
Paragraph 54 Notwithstanding anything in the Lease to the contrary,
------------
including but not limited to the terms and provisions of Article 4, but subject
to the provisions of Article 4, provided Tenant shall have given not less than
ten (10) business days notice thereof, Tenant, without Landlord's consent, may
sublet all or any part of the Demised Premises or assign this Lease to any
successor corporation as the result of a merger or consolidation or to a
subsidiary of Tenant, or to an affiliated or related company to Tenant.
Paragraph 55
------------
A. In the event that the Demised Premises are not "ready for occupancy"
(as that term is defined below) for Tenant by nine (9) months from the
expiration of the ninth (9th) full calendar month after Landlord has
received all the governmental or quasi-governmental approvals required
to construct the Building, etc., (the "Completion Date") unless caused
by the action or inaction of Tenant, Tenant's employees, agents,
contractors or representatives, in which case the Completion Date shall
be extended one (1) day for each day of delay so caused, the rental
reserved herein shall abate at the rate of two days rent for each day of
delay past the Completion Date.
B. For purposes of this Paragraph 55, the term "ready for occupancy"
means that the Building and the Demised Premises have received valid
Certificate of Occupancy; that the Demised Premises have been
professionally cleaned and are free of trash or debris; and that the
Demised Premises have been finished in accordance with the provisions of
the Lease, subject only to minor "punch list" items which do not
separately or in the aggregate materially, adversely affect Tenant's use
and occupancy of the Demised Premises. Notwithstanding the foregoing,
the term "ready for occupancy" shall refer only to Landlord's Work and
if no Certificate of Occupancy has been issued as the result of the
action or inaction of Tenant, its representatives, agents, employees or
contractors than the requirement of the issuance of a Certificate of
Occupancy as herein referred to shall be deemed waived.
Paragraph 56 Subject to the approvals of any governmental or quasi-
------------
governmental board, bureau, or agency having jurisdiction thereof, Tenant shall
be permitted to have such ground-mounted antennas, equipment, and generators as
it desires and shall be in locations as are reasonably approved by Landlord
which approval Landlord agrees not to unreasonably refuse or delay. Further,
upon prior written notice to Landlord, Tenant, without Landlord imposed fees or
-30-
<PAGE>
charges therefore, but subject to the terms and provisions of the "Rooftop
Agreement" attached as Exhibit E., shall be permitted, at its sole cost and
expense, to install and maintain such equipment, auxiliary cabling, generators,
and antennas as it desires. Such equipment, antennas, etc. shall be in
locations as Landlord shall reasonably approve, which approvals Landlord agrees
not to unreasonably withhold or delay.
Paragraph 57 Notwithstanding anything herein to the contrary, the annual
-------------
rental herein referred to in Section 2.01 above for the 11th through the 20th
lease years will be deemed increased, for each said year, (and, correspondingly,
1/12th for each month of each said year thereof) by an amount calculated as
follows:
At the commencement of the 11th lease year:
A. The total principal and interest payments for one (1) year on
a 25 year term, $7,500,000 self-amortizing loan, with
interest at 8% per year shall be calculated. The resulting
calculation shall be refereed to herein as the "Original
Annual Payment";
B. Simultaneously with the calculation referred to in
subparagraph A above, there shall be calculated the principle
and interest payments for one (1) year on a 25 year term,
$7,500,000 self-amortizing loan with interest calculated at
the interest rate calculated by adding 200 basis points to
the then "ten (10) year" U.S. Government Treasury
Bonds"("asked" price). The resulting calculation existing
shall be referred to herein as the "Revised Annual Payment";
C. The Original Annual Payment shall be subtracted from the
Revised Annual Payment from which shall be subtracted the sum
of $25,000. The said sum shall be deemed the "Increased
Annual Rental Component";
D. The annual rental for each of the 11th through the 20th lease
years shall be deemed increased (with corresponding increases
in the monthly rental) equal to the Increased Annual Rental
Component, provided the said sum is $1.00 more .
Paragraph 58 INTENTIONALLY OMITTED.
------------
Paragraph 59 Subject to the approvals of any governmental or quasi-
------------
governmental bureau, board, or agency having jurisdiction thereof, Tenant, at
its sole cost and expense, may install and operate a ground-mounted power
generator. The location of the said generator shall be subject to Landlord's
reasonable approval which Landlord agrees not to unreasonably withhold or delay.
Paragraph 60 Notwithstanding the provisions of Article 4 above, upon prior
------------
written notice to Landlord, Tenant shall be permitted to "co-locate" Tenant's
customers'/vendors'/suppliers' equipment in the Demised Premises. Tenant may
charge such licensing fees to the said customers as it chooses for said
equipment co-location and Landlord shall not be entitled to share in said fees.
Prior to any said equipment being so co-located in the Demised Premises there
shall be provided to Landlord a certificate of insurance evidencing insurance by
an insurance company licensed to do business in the State of New York, insuring
the said equipment and the operation thereof, which insurance shall have a
single combined limit for property damage and liability of the greater of (1) $1
million, or (2) the value of the equipment; which insurance certificate shall
name Landlord and such additional parties as have an insurable interest as shall
be designated by Landlord, as additional insureds.
Paragraph 61 In the event Tenant shall sublet 51% (aggregating all
------------
existing sublets excluding any co-location referred to in Paragraph 60 above) or
more of the Demised Premises, Tenant shall deposit with Landlord a security
deposit in an amount calculated as follows:
$100,000 shall be multiplied by a fraction the numerator of which
shall be the rentable square feet of the total amount of space
sublet and the denominator of which shall be the rentable square
footage of the Demised Premises.
Paragraph 62 In reference to the terms and provisions of Article 18 above,
------------
computations relating to the increases in real estate taxes shall be computed on
and as if the Building is fully assessed as a completed building prior to or at
the commencement of the Operating Year and in such event it is agreed that
during any such lease year when the Building is less than fully assessed as a
completed building, for the purpose of calculating real estate tax escalation
charges, the tax rate(s) existing during the Operating Year shall be applied to
-------
the final assessment as if the Building had been fully assessed during the
-----
Operating Year. The resulting amount(s) shall be used for calculating real
estate tax escalations pursuant to this Article.
Paragraph 63 After the 2nd lease year and on/or before the expiration of
------------
the 15th lease year of the demised term, provided Tenant is in compliance with
all of the material terms herein, is not in default in any of the terms herein,
and has made all of the payments required of Tenant hereunder to make, Tenant,
upon not less than 90 days prior written notice to Landlord shall have an option
to lease all or part of the 12,000 r.s.f. (the "Additional Demised Premises") on
the lower level of the Building not now already leased to Tenant upon the
following terms and conditions:
A. The annual rental rates shall be as follows:
(1) For the 3rd lease year, through the 10th lease year, $19.46
per r.s.f. per year.
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<PAGE>
(2) For the eleventh through the twentieth lease year $21.41 per
r.s.f. per year;
B. Landlord shall, at its sole cost and expense, complete the
Additional Demised Premises as follows:
(1) Interior finish of walls shall be gypsum wallboard
taped and finished with two (2) coats flat latex
paint with single color throughout ("non-decorator"
color to be selected by Tenant);
(2) All floors shall be carpeted with 26oz. commercial
carpet over felt pad. Color to be chosen by Tenant
from Landlord available colors. Except as referred
to below, matching 4" vinyl base;
(3) Ceiling shall be premium 2' x 2' tegular tile, lay-
in panels in exposed metal tee grid. Ceiling
heights to be 9' - 0''.
(4) Interior drywall partitioning as requested by
written notice of Tenant to Landlord.
Partitions shall be 2" x 3 []" studs 24 o.c. with
1/2" gypsum wallboard, both sides, taped and
finished. Partitions shall be complete with flush
wood, solid core cherry veneer full-height doors
(one per room), hollow metal frames (painted to
match adjoining walls), trim and Yale or equal
polished brass lever-style passage sets. Lock-set
at entrances.
Full-height 1'-6" glass sidelites on "interior"
offices.
(5) Heating and air conditioning--Subject to Article 7
in the main body of this Lease Agreement, Landlord
shall provide the following air conditioning and
heating of the Tenant space:
(a) The Building will be heated and cooled with
ceiling-concealed water-source heat pump
terminal units.
(b) Ventilation air will be introduced through a
heat exchanger and ducted to the return air
opening of each heat pump unit. Ceiling plenum
exhaust will be ducted to the other side of
the Heat Exchanger which will preheat or pre-
cool the ventilation air depending on the
season.
(c) System Design Conditions:
(1) Air Conditioning Capacity:
Approximately 400 sq. ft. per ton.
(2) Heating Capacity: 72 degrees
Fahrenheit with outside conditions
at 1 degrees Fahrenheit, 15 MPH
wind velocity.
(3) Ventilation: 15 CFM/Person.
(4) Air Diffusion: Constant Volume,
average air velocity of between 25
and 50 FPM, measured within the
occupied space.
(5) Thermostatically controlled zones
to provide reasonable comfort
conditions, not less than 800 sq.
ft. per zone.
(6) Hours of Operation: 24 hours per
day, 7 days per week, 52 weeks per
year.
(6) Electrical:
(a) Subject to any applicable law, statute, ordinance
or regulation, Landlord shall provide recessed
fluorescent light providing an average of 60-foot
candles. Light fixtures shall be 2' x 4', 3-tube,
"deep cell" parabolic fixtures.
(b) The Building will have a 3,000 amp 120/208 3-phase
electrical service with up to 4 subpanels per
floor.
(c) Outlets--Up to one wall-mounted 110 volt 20 amp
duplex convenience outlet (non-dedicated) per 100
rentable square feet. There shall be 12 outlets per
circuit.
(7) 1" Levelor (or equal) tilt-up horizontal metal blinds on all
exterior windows. Alabaster in color.
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<PAGE>
(8) All foregoing work shall be in accordance with local
building codes and regulations.
Paragraph 64 Subject to the approvals of any board, bureau, or agency
------------
having jurisdiction thereof, Tenant, at its sole cost and expense shall be
permitted, on the "back" of the Building (i.e. the side facing NY Route 96), to
have a loading dock/area as and where it chooses.
Paragraph 65
------------
A. Subject to the approvals of any board, bureau, or agency having
jurisdiction thereof, and subject to the provisions of subparagraph B.
below, and upon not less than 10 days prior written notice to Landlord,
Tenant shall be permitted to have on the roof, in the Building or in the
ground surrounding the Building such cabling, conduits, fiber optics or
other such equipment as needed by Tenant. If on the roof, tenant shall
comply with the provisions of Exhibit E attached hereto.
B. Notwithstanding the foregoing, the location of said cabling,
conduits, etc. shall be subject to Landlord's approval which Landlord
agrees not to delay or unreasonably withhold. In the event Landlord
fails to respond to Tenant's request within ten (10) days after
Landlord's receipt of said notice, then it shall be conclusively
presumed that Landlord has consented to Tenant's request. Further,
Tenant agrees, upon Landlord's written request, to forthwith
move/relocate said cabling, conduits, etc. at its sole cost and expense,
if reasonably necessary for the maintenance or operation of the Building
or the Park.
WILLOWBROOK II L.L.C.
By: /s/ Charles N. Mills
--------------------
CHARLES N. MILLS
PAETEC CORP.
Date: 7/15/99 By: /s/ Arunas A. Chesonis
------- ----------------------
(Name and Title)
-33-
<PAGE>
Exhibit 10.26.2
February 11, 2000
PaeTec Corp.
290 Woodcliff Drive
Fairport, New York 14450
Re: Lease Amendment/PaeTec Building, 600 WillowBrook Office Park
Gentlemen:
The purpose of this letter is to amend the Lease Agreement dated July 7,
1999, (the "Lease") between WillowBrook II L.L.C. ("Landlord") and PaeTec Corp.
("Tenant") for space at 600 WillowBrook Office Park, Fairport, New York. I have
attached a copy of the facing page of the Lease to this letter.
The Lease is hereby amended as follows:
1. Section 1.01 of the Lease is hereby deemed eliminated and is hereby
declared null and void and in its place and stead shall be substituted
the following:
Section 1.01 Landlord will construct a development on certain land
------------
which will contain parking areas, common areas and a building,
known as Building 600 (the "Building") WillowBrook Office Park (the
"Park") containing approximately 98,717 rentable square feet.
Landlord shall construct the Building and associated roadways,
access road, parking lot (which shall contain 362 parking spaces),
common areas, and landscaped areas in a good and workmanlike manner
in accordance with the drawings of David Hanlon, Architect, and
Charles J. Costich, P.E.; which drawings are attached hereto,
labeled in the aggregate Exhibit A, and shall become a part hereof.
Tenant, subject to any required governmental or quasi-governmental
approvals, not later than the first day of the 15th year of the
demised term, by written notice to Landlord, may require Landlord,
at Landlord's sole cost and expense, subject to the approvals of
any governmental or quasi-governmental board, bureau, or agency
having jurisdiction thereof, to build an additional 38 contiguous
parking spaces where said spaces are shown on Exhibit A and
identified thereon as "Possible Future Parking".
2. The reference on the bottom of Page 1 of the Lease "**See Rider 1,
Paragraph 63" shall be deemed eliminated.
<PAGE>
3. The last sentence of Section 1.02 of the Lease shall be deemed
eliminated and of no force or effect.
4. Section 1.03A of the Lease is hereby deemed eliminated and is hereby
declared null and void and in its place and stead shall be substituted
the following:
Section l.03
------------
A. The Demised Premises and the Additional Demised Premises shall,
together, include the entire Building and shall be the area
bounded by the line established by the exterior face of the
exterior wall of the Building (but not the surface thereof),
the concrete floor surface, and the lower surface of the next
higher floor (or roof); all as depicted on Exhibit A attached
hereto and made a part hereof.
5. Section 1.04 of the Lease is hereby deemed changed so that the
reference therein to October 1, 1999, as the date for the commencement
of construction shall be deemed changed to March 15, 2000. In the event
of the occurance of weather conditions that render the said
construction to commence on or before the said date of March 15, 2000,
unreasonable, then the said date of March 15, 2000, shall be deemed
extended until ten (10) days after said weather conditions change
sufficiently to render the commencement of construction reasonable.
6. Section 2.01 of the Lease is hereby deemed eliminated and is hereby
declared null and void and in its place and stead shall be substituted
the following:
Section 2.0l Tenant covenants to pay an annual rent as follows:
------------
A. Subject to the provisions of subparagraph B below, for the
first lease year of the demised term, the sum of $1,296,156.96
($108,013.08 per month);
B. For the second lease year of the demised term, the sum of
$1,506,973.11 payable in monthly installments as follows:
Month of 2nd Lease Year Monthly Installment
----------------------- -------------------
1st Month $110,715.85
2nd Month $113,418.62
3rd Month $116,121.39
<PAGE>
4th Month $118,824.16
5th Month $121,526.93
6th Month $124,229.70
7th Month $126,932.47
8th Month $129,635.24
9th Month $132,338.01
10th Month $135,040.78
11th Month $137,743.55
12th Month $140,446.41
C. Notwithstanding the foregoing, commencing the latter of (1) the
Rent Commencement date or (2) January 1, 2002, the then
existing annual rental shall be increased by the sum of
---------
$136,219.92 ($11,351.66 per month);
D. For the 3rd lease year through the 10th lease year of the
demised term, the sum of $1,821,576.96 payable in monthly
installments of $151,498.08.
E. For the remainder of the demised term, the annual rental of
$2,003,025.12 ($166,918.76 per month). See Rider l,
Paragraph 57.
Said rent shall be payable in advance on the first day of each and
every calendar month during the term hereof. Rent for any period of
less than one (l) month shall equal l/30th of the monthly rental
for each day of such period.
7. Section 7.01 of the Lease is hereby deemed eliminated and is hereby
declared null and void and in its place and stead shall be
substituted the following:
Section 7.01 The Demised Premises shall be furnished with the
------------
electrical and heating, ventilating, and air conditioning
services referred to in Exhibit C, Paragraphs A6 and A7 and
subject to any laws, regulations, or statutes applicable
thereto, said services shall be supplied to the Demised
Premises twenty-four hours a day, seven days a week, fifty-two
weeks a year, and domestic water for a drinking fountain on
each of the floors of the Building, appropriate men's and
ladies' room on each of the floors of the Building and separate
men's' and ladies'
<PAGE>
shower/changing area attached to and a part of each respective
men's' room and ladies' room on the first floor. Landlord shall
not be liable for failure to furnish any of the foregoing when
such failure is caused by the accidents or conditions beyond
the control of Landlord, or by repairs, labor disputes or labor
disturbances, of any character, whether resulting from or
caused by acts of Landlord or otherwise; nor shall Landlord be
liable under any circumstances for loss of or injury to
property, however occurring, through or in connection with or
incidental to the furnishing of any of the foregoing, nor shall
any such failure relieve Tenant from the duty to pay the full
amount of rent herein reserved, or constitute or be construed
as a constructive or other eviction of Tenant.
8. Paragraph 63 of Rider 1 to the Lease is hereby deemed
eliminated and is hereby declared null and void.
9. A. Effective January 1, 2002, the Demised Premises shall be
deemed to include the Additional Demised Premises, as shown on
Exhibit A, consisting of 7,000 rentable square feet.
B. Landlord shall, at its sole cost and expense, complete the
Additional Demised Premises as follows ("Additional
Landlord's Work"):
(1) Interior finish of walls shall be gypsum wallboard
taped and finished with two (2) coats flat latex paint
with single color throughout ("non-decorator" color to
be selected by Tenant);
(2) All Floors shall be carpeted with 26 oz. closed loop
carpet over felt pad. Color to be chosen by Tenant
from Landlord available colors. Matching 4" vinyl
base;
(3) Ceiling shall be premium 2'x2' tegular tile, lay-in
panels in exposed metal tee grid. Ceiling heights to
be 9'0".
(4) Interior drywall partitioning as requested not later
than October 1, 2001, by written notice of Tenant to
Landlord.
Partitions shall be 2"x 3 5/8" studs 24 o.c. with
l/2" gypsum wallboard, both sides, taped and
finished. Partitions shall be complete with flush
wood, solid core cherry veneer full-height doors
(one per room), hollow metal frames (painted to
match adjoining walls), trim and Yale or equal
polished brass lever-style passage sets. Lock-set
at entrances.
Full-height l'6" glass sidelites on "interior"
offices.
<PAGE>
(5) Heating and air conditioning - Subject to Article 7 in
the main body of this Lease Agreement, Landlord shall
provide the following air conditioning and heating of
the Tenant space:
(a) The Building will be heated and cooled with
ceiling-concealed water-source heat pump terminal
units.
(b) Ventilation air will be introduced through a heat
exchanger and ducted to the return air opening of
each heat pump unit. Ceiling plenum exhaust will
be ducted to the other side of the Heat Exchanger
which will preheat or pre-cool the ventilation
air depending on the season.
(c) System Design Conditions:
(i) Air Conditioning Capacity: Approximately
400 sq. ft. per ton.
(ii) Heating Capacity: 72 degrees Fahrenheit
with outside conditions at l degree
Fahrenheit, 15 MPH wind velocity.
(iii) Ventilation: 15 CFM/Person;
(iv) Air Diffusion: Constant Volume, average air
velocity of between 25 and 50 FPM, measured
within the occupied space.
(v) Thermostatically controlled zones to
provide reasonable comfort conditions, not
less than 800 sq. ft. per zone.
(vi) Hours of Operation: 24 hours per day,
7 days per week, 52 weeks per year.
(6) Electrical:
(a) Subject to any applicable law, statute, ordinance
or regulation, Landlord shall provide recessed
fluorescent light providing an average of 60 foot
candles. Light fixtures to be 2'x4', 3 tube,
"deep cell" parabolic fixtures.
(b) Outlets - Up to 70 wall-mounted 110 volt 20 amp
duplex convenience outlets (non-dedicated). There
shall be 12 outlets per circuit.
(7) l" Levelor (or equal) tilt-up horizontal metal blinds
on all exterior windows. Alabaster in color.
(8) All foregoing work shall be in accordance with local
building codes and regulations.
<PAGE>
C. Provided Tenant, not later than October 1, 2001, shall have
furnished Landlord with full and complete drawings and
specifications which are reasonable and adequate in their
substance, content and form to enable Landlord to complete
the "Additional Landlord's Work", Landlord agrees to
"substantially complete" the Additional Landlord's Work on
or before December 15, 2000 (the "Additional Demised
Premises Completion Date"). Unless caused by the action or
inaction of Tenant, Tenant's employees, agents, contractors
or representatives, in which case the Additional Demised
Premises Completion Date shall be extended one (1) day for
each day of delay so caused, the rental reserved herein
shall abate at the rate of two days rent for each day of
delay past the Additional Demised Premises Completion Date.
Except as modified above, all other terms, provisions, and conditions of
the Lease shall remain unchanged and are hereby ratified and confirmed.
If the above reflects your understanding, please sign the enclosed copy of
this letter and return it to us as soon as possible.
Cordially yours,
WILLOWBROOK II, L.L.C.
By /s/ Charles N. Mills
-------------------------------
Charles N. Mills
The above is hereby accepted and approved.
PAETEC CORP.
By /s/ Arunas A. Chesonis
-------------------------------
Arunas A. Chesonis CEO
(Name) (Title) Dated: 2/17/00
--------------------
<PAGE>
STATE OF NEW YORK )
) SS:
COUNTY OF MONROE )
On the 18th day of February, 2000, before me, the undersigned,
personally appeared CHARLES N. MILLS, personally known to me or proved to me on
the basis of satisfactory evidence to be the individual whose name is subscribed
to the within instrument and acknowledged to me that he executed the same in his
capacity and that by his signature on the instrument, the individual or the
person upon behalf of which the individual acted, executed the instrument.
/s/ Debra Ann Phegley
--------------------------
Notary Public
DEBRA ANN PHEGLEY
Notary Public, State of New York
Monroe County
Commission Expires Jan. 31, 2002
STATE OF NEW YORK )
) SS:
COUNTY OF MONROE )
On the 17th day of February, 2000, before me, the undersgined,
personally appeared Arunas A. Chesonis personally known to me or
proved to me on the basis of satisfactory evidence to be the individual(s) whose
name(s) is (are) subscribed to the within instrument and acknowleded to me that
he/she/they executed the same in his/her/their capacity(ies), and that by
his/her/their signature(s) on the instrument, the individual(s), or the person
upon behalf of which the indivudual(s) acted, executed the instrument.
/s/ Karen F. Ferrini
--------------------------
Notary Public
Karen F. Ferrini
Notary Public, State of New York
No. 4765553
Qualified in Monroe County
Commission Expires Nov. 30, 2000
<PAGE>
Exhibit 10.26.3
March 7, 2000
PaeTec Corp.
290 Woodcliff Drive
Fairport, New York 14450
Re: Lease Amendment/PaeTec Building, 600 WillowBrook Office Park
Gentlemen:
The purpose of this letter is to amend the Lease Agreement dated July 7,
1999, as amended by letter dated February 11, 2000, (the "Lease") between
WillowBrook II L.L.C. ("Landlord") and PaeTec Corp. ("Tenant") for space at 600
WillowBrook Office Park, Fairport, New York. I have attached a copy of the
facing page of the Lease to this letter.
The Lease is hereby amended as follows:
1. Paragraph 5 of the Lease Amendment dated February 11, 2000, is hereby
deemed changed so that the reference therein to March 15, 2000, as the date for
the commencement of construction shall be deemed changed to April 15, 2000. In
the event of the occurance of weather conditions that render the said
construction to commence on or before the said date of April 15, 2000,
unreasonable, then the said date of April 15, 2000, shall be deemed extended
until ten (10) days after said weather conditions change sufficiently to render
the commencement of construction reasonable.
2. Paragraph 6 of the Lease Amendment dated February 11, 2000, is hereby deemed
eliminated and is hereby deemed null and void and in its place and stead shall
be substituted the following:
Section 2.0l Tenant covenants to pay an annual rent as follows:
------------
A. For the first lease year of the demised term, the sum of $1,432,376.88
($119,364.74 per month);
B. For the second lease year of the demised term, the sum of $1,643,193.03
payable in monthly installments as follows:
<PAGE>
Month of 2nd Lease Year Monthly Installment
----------------------- -------------------
1st Month $122,067.51
2nd Month $124,770.28
3rd Month $127,473.05
4th Month $130,175.82
5th Month $132,878.59
6th Month $135,581.36
7th Month $138,284.13
8th Month $140,986.90
9th Month $143,689.67
10th Month $146,392.44
11th Month $149,095.21
12th Month $151,798.07
C. For the 3rd lease year through the 10th lease year of the demised term, the
sum of $1,821,576.96 payable in monthly installments of $151,498.08.
D. For the remainder of the demised term, the annual rental of $2,003,025.12
($166,918.76 per month). See Rider l, Paragraph 57.
Said rent shall be payable in advance on the first day of each and
every calendar month during the term hereof. Rent for any period of
less than one (l) month shall equal l/30th of the monthly rental for
each day of such period.
3. Paragraph 9 of the Lease Amendment dated February 11, 2000, is hereby deemed
null and void and of no force or effect.
4. The reference "Additional Demised Premises 7,000 Rentable S.F." on page 4 of
Exhibit "A" attached to and a part of the Lease Amendment dated February 11,
2000, is hereby deemed null and void.
<PAGE>
Except as modified above, all other terms, provisions, and conditions of
the Lease shall remain unchanged and are hereby ratified and confirmed.
If the above reflects your understanding, please sign the enclosed copy
of this letter and return it to us as soon as possible.
Cordially yours,
WILLOWBROOK II, L.L.C.
By /s/ Charles N. Mills
-----------------------------
Charles N. Mills
The above is hereby accepted and approved.
PAETEC CORP.
By /s/ Richard Ottalagana
------------------------------------
Richard Ottalagana
(Name) (Title)
Dated: 3/22/00
---------------------
<PAGE>
STATE OF NEW YORK )
) SS:
COUNTY OF MONROE )
On the 24th day of March, 2000, before me, the undersigned, personally
appeared CHARLES N. MILLS, personally known to me or proved to me on the basis
of satisfactory evidence to be the individual whose name is subscribed to the
within instrument and acknowledged to me that he executed the same in his
capacity and that by his signature on the instrument, the individual or the
person upon behalf of which the individual acted, executed the instrument.
/s/ Debra Ann Phegley
__________________________
Notary Public
DEBRA ANN PHEGLEY
Notary Public, State of New York
Monroe County
Commission Expires Jan. 31, 2002
STATE OF NEW YORK )
) SS:
COUNTY OF MONROE )
On the 22nd day of March, 2000, before me, the undersgined,
personally appeared Richard Ottalagana personally known to me or
proved to me on the basis of satisfactory evidence to be the individual(s) whose
name(s) is (are) subscribed to the within instrument and acknowleded to me that
he/she/they executed the same in his/her/their capacity(ies), and that by
his/her/their signature(s) on the instrument, the individual(s), or the person
upon behalf of which the indivudual(s) acted, executed the instrument.
/s/ Karen F. Ferrini
--------------------------
Notary Public
KAREN F. FERRINI
Notary Public, State of New York
No. 4765553
Qualified in Monroe County
Commission Expires Nov. 30, 2000
<PAGE>
Exhibit 10.27.1
STANDARD
OFFICE SPACE LEASE
Name of Office Building: WOODCLIFF III
Location of Office Building: 290 WOODCLIFF DRIVE
FAIRPORT, NEW YORK 14450
Landlord: 290 WOODCLIFF DRIVE COMPANY
Tenant: PAETEC COMMUNICATIONS, INC.
<PAGE>
TABLE OF CONTENTS
ARTICLE 1............................................................... 2
Premises............................................................. 2
ARTICLE 2............................................................... 2
Term of Lease........................................................ 2
ARTICLE 3............................................................... 3
Rent, Taxes and Lease Year........................................... 3
ARTICLE 4............................................................... 5
Construction, Financing and Alterations.............................. 5
ARTICLE 5............................................................... 6
Use of Premises...................................................... 6
ARTICLE 6............................................................... 6
Operating Costs...................................................... 6
ARTICLE 7............................................................... 7
Energy Costs and Water............................................... 7
ARTICLE 8............................................................... 8
Repairs and Compliance............................................... 8
ARTICLE 9............................................................... 9
Indemnity............................................................ 9
ARTICLE 10.............................................................. 10
Insurance............................................................ 10
ARTICLE 11.............................................................. 11
Fire and Other Casualties............................................ 11
ARTICLE 12.............................................................. 11
Eminent Domain....................................................... 11
ARTICLE 13.............................................................. 12
Bankruptcy and Default Provisions.................................... 12
ARTICLE 14.............................................................. 14
Mechanic's Liens..................................................... 14
ARTICLE 15.............................................................. 14
Mortgages, Assignments, Subleases and Transfers of Tenant's Interest. 14
ARTICLE 16.............................................................. 15
Subordination of Lease............................................... 15
ARTICLE 17.............................................................. 16
Entry to Premises.................................................... 16
ARTICLE 18.............................................................. 16
Notices and Certificates............................................. 16
ARTICLE 19.............................................................. 16
Covenant of Quiet Enjoyment.......................................... 16
ARTICLE 20.............................................................. 17
Services............................................................. 17
ARTICLE 21.............................................................. 17
Certain Rights Reserved to Landlord.................................. 17
ARTICLE 22.............................................................. 17
Miscellaneous Provisions............................................. 17
<PAGE>
STANDARD
OFFICE SPACE LEASE
This Lease made effective as of the 10TH DAY OF JULY, 1998, is by and between
the following parties:
Landlord: 290 WOODCLIFF DRIVE COMPANY
---------------------------
a partnership organized and existing under the laws of the State of New York
with its mailing address for notices and a principal office at:
c/o THE WIDEWATERS GROUP, INC.
5786 WIDEWATERS PARKWAY
P.O. BOX 3
DEWITT, NEW YORK 13214-0003
Attention: (Lease Administration)
hereinafter referred to as the "Landlord", and
Tenant: PAETEC COMMUNICATIONS, INC.
------------------------------
(Correct Legal Name of Tenant)
a corporation organized and existing under the laws of the State of New York
with its principal office at:
290 WOODCLIFF DRIVE
-------------------
FAIRPORT, NEW YORK 14450
-------------------------
ATTN: Mr. Arunas A. Chesonis, President
----- ---------------------------------
(Person or Office to Receive Notices)
Fed. Tax ID # 16 - 1551095
------------
hereinafter referred to as the "Tenant."
Landlord has appointed The Widewaters Group, Inc. the Managing Agent, and
Landlord has granted to The Widewaters Group, Inc. the authority to rent,
operate and manage the Building on behalf of and in the name of Landlord.
1
<PAGE>
WITNESSETH:
ARTICLE 1
Premises
1.01 - Premises
Landlord hereby leases to Tenant and Tenant hereby leases and hires
from Landlord those certain premises in the WOODCLIFF III Office Building
(hereinafter called the "Building") which is located in the County of Monroe and
State of New York, which premises are located on the first (1st) and second
(2nd) floor(s) of the Building and are outlined on the floor plan(s) attached
hereto and made a part hereof as Exhibit "A" (said premises being hereinafter
called the "Premises"), together with the right to use, in common with others,
the Building Common Areas and Outside Common Areas as hereinafter defined. For
purposes of this Section 1.01, the sum of the square feet in the Premises and
Tenant's share of Building Common Areas (as defined in Section 1.02 hereof)
shall be 8,397 leasable square feet from the Term Commencement Date through the
day prior to the "Delivery Date" of the "Expansion Premises" (as such terms are
defined in Section 22.27, below, and 16,452 leaseable square feet from and after
the Delivery Date. The Premises shall include the area bounded by: the center
line of any walls common to adjacent tenants, the Building Common Area side of
any wall adjoining Building Common Areas (but not the surface thereof), the line
established by the exterior face of the exterior walls of the Building, the
concrete floor surface and the lower surface of the next higher floor (or roof).
Landlord reserves unto itself, its successors and assigns, the right to install,
maintain, use, repair and replace pipes, ducts, conduits, wires and structural
elements leading through the Premises in locations which will not materially
interfere with Tenant's use of the Premises. No right to use any part of the
exterior of the Building and no easement for light or air are included in the
lease of the Premises hereby made.
1.02 - Definition of Building Common Areas
"Building Common Areas" shall be defined to mean all areas, space,
equipment, signs and special services provided by Landlord specifically for the
Building or for the common or joint use and benefit of all the tenants in the
Building, their employees, agents, customers, visitors and other invitees,
including without limitation, hallways, corridors, trash rooms, mechanical and
electrical rooms, storage rooms, stairways, entrances, elevators, rest rooms,
lobbies, stairs, loading docks, pedestrian walks, roofs and basements, janitor's
and storage closets within the Building and all other common rooms and common
facilities within the Building.
1.03 - Definition of Outside Common Areas
The term "Outside Common Areas" is defined to mean the land described on
Exhibit "B" attached hereto and made a part hereof, or such portion thereof as
is from time to time devoted to uses associated with the Building, and any
adjacent, contiguous or other land which may from time to time be devoted to
uses associated with the Building, together with such improvements as may from
time to time be erected upon or under any of such lands, including, but not
limited to, parking areas, lighting facilities, utility lines, sidewalks,
covered walkways, underground walkways, driveways, plazas, courts, retaining
walls, access roads, truck serviceways and landscaped areas, signs and
equipment.
ARTICLE 2
Term of Lease
2.01 - Term
The initial term of this Lease shall commence as of July 10, 1998
("Term Commencement Date"), and shall expire on December 31, 1999 ("Expiration
Date"), unless earlier termination pursuant to the terms hereof."
The word "term" shall, unless otherwise expressly provided to the contrary,
be deemed to include the initial and any renewal term.
2.02 - INTENTIONALLY DELETED.
2.03 - INTENTIONALLY DELETED.
2.04 - Condition of Premises
Tenant's taking possession shall be conclusive evidence as against
Tenant that the Premises was in good order and satisfactory condition when
Tenant took possession. At the termination of this Lease, Tenant shall return
the Premises broom clean and in as good condition as when Tenant took
possession, ordinary wear and loss by fire or other casualty excepted, failing
which the Landlord may restore the Premises to such condition and Tenant shall
pay the cost thereof.
2.05 - Tenant's Trade Fixtures and Personal Property
Upon the expiration or sooner termination of this Lease, Tenant shall
remove all of its trade fixtures and other property from the Premises and shall
promptly repair any damage caused to the Premises or to the Building by such
removal. If the Tenant fails to so remove any trade fixtures or other property
of Tenant prior to vacating the Premises, such fixtures and/or other property
shall be deemed abandoned by Tenant and shall become the property of Landlord
or, at Landlord's option, Landlord may cause the fixtures or property to be
removed at Tenant's expense.
2
<PAGE>
ARTICLE 3
Rent, Taxes and Lease Year
3.01 - Fixed Monthly Rent
Tenant agrees to pay to Landlord at the offices of Landlord, or at such other
place designated by Landlord, without any prior demand therefor and without any
deduction or set-off whatsoever, fixed monthly rent in accordance with the
following schedule:
MONTH OF INITIAL TERM: FIXED MONTHLY RENT:
- ---------------------- -------------------
Term Commencement Date through
the day prior to the Delivery
Date of the Expansion Premises: $12,788.96
Delivery Date through the end of
the initial term of this
Lease, inclusive: $25,878.34
(sometimes referred to herein as "Fixed Monthly Rent"), payable in advance upon
the first day of each calendar month during the term hereof. The monthly
installment shall be deemed to have been paid upon such first day only if
actually received by such first day.
If the term or payment of rent shall commence or terminate upon a day other
than the first (or in the case of termination the last) day of a calendar month,
Tenant shall pay, upon the Term Commencement Date or the date payment of rent
shall commence, and on the first day of the last calendar month, a pro rata
portion of the Fixed Monthly Rent for the first and last fractional calendar
month, respectively, prorated on a per diem basis with respect to such
fractional calendar month(s).
3.02 - Taxes
(a) Landlord shall, in the first instance, pay during the term of this Lease,
to the public officers charged with the collection thereof, all Building
Taxes as hereinafter defined.
The term "Building Taxes" shall be deemed to include (i) all real property
taxes (which shall be deemed to include all property taxes and assessments,
water and sewer rents, rates and charges, parking and environmental surcharges
and any other governmental charges, general and special, ordinary and
extraordinary), which may be levied or assessed by any lawful authority against
the Building, the Building Common Areas and the Outside Common Areas, plus (ii)
twelve percent (12%) of such real property taxes for overhead expenses. The
amounts required to be paid by Landlord or any tenant or occupant of the
Building pursuant to any Payment in Lieu of Tax Agreement entered into with a
taxing authority having jurisdiction over the Building shall be considered for
the purposes of this Lease to be included within the definition of Building
Taxes.
(b) During the term of this Lease, Tenant agrees to pay to Landlord as
Additional Rent, Tenant's Allocable Share (computed pursuant to Section
22.10(b) hereof) of the amount by which Building Taxes payable by Landlord
under Section 3.02(a) above for each lease year exceeds said Building Taxes
payable during the Tax Base Year as hereinafter defined. The term "Tax
Base Year" for purposes of this Lease shall mean the 1997-1998 school tax
year for School Taxes and the 1998 calendar year for State, Town and County
Taxes. At the beginning of each lease year, Landlord will submit to Tenant
Landlord's estimate of the increases in Building Taxes for the following
lease year. Within ten (10) days after receipt of such estimate, (and
thereafter on the first day of each month without invoice) Tenant shall pay
to Landlord an amount equal to one twelfth (1/12) of Tenant's Allocable
Share of such estimated increase. At the end of each lease year or partial
lease year, Landlord will furnish to Tenant a statement setting forth the
actual Building Taxes payable during such lease year, comparing such actual
Building Taxes with the Building Taxes for the Tax Base Year and also
comparing Tenant's Allocable Share of the increase as estimated by Landlord
and paid by Tenant with Tenant's Allocable share of the actual increase in
Building Taxes for such lease year. Any overpayment or underpayment by
Tenant shall be promptly adjusted by payment within fifteen (15) days of
the balance of any underpayment for such year by Tenant to Landlord, or by
Landlord to Tenant of the balance of any overpayment for such year, or at
Landlord's election by applying such overpayment by Tenant as a credit to
the next succeeding monthly installments of increases in Building Taxes, or
to offset any then existing monetary default by Tenant under this Lease. A
copy of a tax bill or assessment bill submitted by Landlord to Tenant shall
at all times be sufficient evidence of the amount of Building Taxes levied
or assessed against the property to which such bill relates.
(c) Tenant shall at all times be responsible for and pay, before delinquency,
all municipal, county, state or federal taxes assessed against its
leasehold interest or any fixtures, furnishings, equipment, stock-in-trade
or other personal property of any kind owned, installed or used in or on
the Premises.
(d) Should any governmental taxing authority acting under any present or future
law, ordinance or regulation, levy, assess or impose a tax, excise,
surcharge and/or assessment (other than a tax on net rental income or
franchise tax) upon or against the rents payable by Tenant to Landlord, or
upon or against the Building, the Building Common Areas or the Outside
Common Areas, either by way of substitution for or in addition to any
existing tax on land or buildings or otherwise, Tenant shall be responsible
for and shall pay Tenant's Allocable Share of such tax, excise, surcharge
and/or assessment in the manner provided in Subsection (b) above.
3
<PAGE>
(e) Landlord may seek a reduction in the assessed valuation (for real estate
tax purposes) of the Building in which the Premises is situate by
administrative or legal proceeding. Tenant shall pay to Landlord Tenant's
Allocable Share of Landlord's costs for said proceedings including but not
limited to, special counsel, counsel's reimbursable expenses, and special
appraisers if required, Tenant's Allocable Share of Landlord's costs being
computed under Section 22.1(b). In the event that the assessed valuation
of the Building is reduced as aforementioned or in any other manner, all
future computations of Tenant's Allocable Share of Building Taxes shall be
made with respect to the new assessed valuation. Upon receipt of any
refund resulting from any proceeding for which Tenant has paid Tenant's
Allocable Share of Landlord's costs and has paid Tenant's Allocable Share
of excess Building Taxes under Section 3.02(b) above, Landlord shall
recompute the amount that would have been due from Tenant and pay to Tenant
the amount by which Building Taxes originally paid by Tenant exceed such
recomputed amount.
(f) Should any alteration or improvement performed by Tenant during the term of
this Lease cause an increase in assessment, Tenant shall pay to Landlord
the cost of all taxes resulting from such increase in assessment. Any
amount paid separately hereunder by Tenant to Landlord shall be in addition
to any amounts paid by Tenant pursuant to Section 3.02(b) above.
3.03 - Past Due Rent
If, during the term of this Lease, Tenant shall fail to pay any installment of
Fixed Monthly Rent or Additional Rent or any other charge hereunder when the
same is due and payable, Tenant shall pay to Landlord, in addition to such
installment of Fixed Monthly Rent or Additional Rents or any other charge,
without notice or demand by Landlord, a sum equal to one-tenth (1/10) of the
payment due, said additional sum payable as herein required being the agreed
liquidated damages for Tenant's late payment of any installment not paid when
due; provided, however, that Tenant shall not be obligated to pay the foregoing
liquidated damages with respect to the first two (2) late payments hereunder
during any twelve (12) month period: provided that Landlord receives said
payment within five (5) of Landlord's notice that the same is past due. If
Tenant's failure to pay any such installment continues for more than thirty (30)
days from the original date such installment was due, Landlord shall have the
right to impose as additional liquidated damages a sum equal to one-tenth (1/10)
of the amount then due. Nothing contained in this Section 3.03 shall be
construed to be a limitation of or in substitution of Landlord's rights and
remedies under Article 13. Any payments by Tenant to Landlord shall first be
applied to satisfy any past due rent charges under this Section before being
applied for any other purpose. Tenant shall pay to Landlord an administrative
fee of $100.00 for each and every check submitted by Tenant which is dishonored.
If Landlord receives from Tenant two or more checks which have been dishonored,
all checks from Tenant thereafter shall, at Landlord's option, be either
certified or cashier's checks.
3.04 - Definition of Lease Year and Partial Lease Year
The term "lease year" is defined to mean a period of twelve (12) consecutive
calendar months, the first full lease year commencing on the first day of
January following the Term Commencement Date, and each succeeding lease year
commencing on the anniversary of the commencement of the first full lease year.
Any portion of the term which is less than a lease year shall be deemed a
"partial lease year" and computations requiring proration shall be pro rated on
a per diem basis using a 365 day year.
Landlord reserves the right to designate and change the beginning and ending
day of the lease year, notice of which shall be given to Tenant.
3.05 - Security Deposit
Tenant agrees to deposit with Landlord, upon Tenant's execution and return of
this Lease, the sum of $12,788.96 as security for the faithful performance and
observance by Tenant of the terms, provisions and conditions of this Lease.
Landlord acknowledges receipt of an installment of the deposit equal to
$5,297.50. The balance, being $7,491.46 shall be paid by Tenant pursuant to the
first sentence of this Section 3.05. It is agreed that in the event Tenant
defaults in respect of any of the terms, provisions and conditions of this
Lease, including, but not limited to, the payment of Fixed Monthly Rent and
Additional Rent, Landlord may use, apply or retain the whole or any part of the
security so deposited, to the extent required, for the payment of any Fixed
Monthly Rent and Additional Rent or any other sum as to which Tenant is in
default, or for any sum which Landlord may expend or may be required to expend
by reason of Tenant's default in respect of any of the terms, covenants and
conditions of this Lease, including but not limited to, any damages or
deficiency in the re-letting of the Premises, whether such damages or deficiency
occurred before or after summary proceedings or other re-entry by Landlord. If
Landlord uses, applies or retains any part of the security so deposited, Tenant
shall promptly replenish the security deposit to its full original amount upon
demand by Landlord. In the event that Tenant shall fully and faithfully comply
with all of the terms, provisions, covenants and conditions of this Lease, the
security shall be returned to Tenant after the date fixed as the end of the term
of the Lease, after surrender of the Premises to Landlord in accordance with
Sections 2.04 and 2.05, and within sixty (60) days of Tenant's request. In the
event of a sale of the land and Building or leasing of the entire Building,
Landlord shall have the right to transfer the security to the vendee or lessee
and Landlord shall thereupon be released by Tenant from all liability for the
return of such security; and Tenant agrees to look to the new Landlord solely
for the return of said security; and it is agreed that the provisions hereof
shall apply to every transfer or assignment made of the security to a new
Landlord. Tenant further covenants that it will not assign or encumber or
attempt to assign or encumber the monies deposited herein as security, and that
neither Landlord not its successors or assigns shall be bound by any such
assignment, encumbrance, attempted assignment or attempted encumbrance.
4
<PAGE>
3.06 - Place for Payments
(a) Tenant shall deliver to Landlord all payments of Fixed Monthly Rent,
Additional Rent, and other sums at the office of Landlord shown on page 1 of
this Lease or such other place as may be designated by Landlord. Checks should
be made payable to The Widewaters Group, Inc.
(b) At the request of Landlord and at Landlord's sole option, Tenant shall,
during the term of this Lease:
(i) open and maintain an account in a financial institution ("Tenant's
financial institution") which is authorized to transmit entries to
an Automated Clearing House of a member of the National Automated
Clearing House Association;
(ii) execute promptly any and all agreements and authorizations and
supply any and all information, necessary to provide for
automatic payment of Fixed Monthly Rent, Additional Rent, and
other sums by electronic funds transfer from Tenant's financial
institution to a financial institution designated by Landlord;
and
(iii) take all actions necessary to insure that any and all such
payments will be received by Landlord's financial institution from
Tenant`s financial institution by the dates due as specified in
this Lease.
Tenant agrees to maintain an account containing sufficient funds at all times
during the term of this Lease. In the event such account fails to contain
sufficient funds necessary to pay amounts then due, such that said amounts
become delinquent, the outstanding amounts shall be subject to liquidated
damages as set forth in Section 3.03 of this Lease. Nothing contained in this
Section 3.06(b) shall relieve Tenant of the obligation to pay by the dates due,
any and all such payments payable by Tenant under this Lease.
ARTICLE 4
Construction, Financing and Alterations
4.01 - Landlord's Obligation
Landlord shall, at its cost and expense (except as otherwise specified),
construct the Premises for Tenant's use and occupancy in accordance with plans
and specifications prepared by Landlord or Landlord's architect, incorporating
in such construction all items of work described in Exhibit "C" attached hereto
and made a part hereof. Any work in addition to any of the items specifically
enumerated in said Exhibit "C" shall be performed by Tenant at its own cost and
expense, or if Landlord installs or constructs any of such additional work in
the Premises at Tenant's request it shall be paid for by Tenant within fifteen
(15) days after receipt of a bill therefor.
4.02 - Financing
If Landlord can obtain mortgage financing or refinancing only upon the basis
of modifications of the terms and provisions of this Lease, Landlord shall have
the right to cancel this Lease if Tenant refuses to approve in writing any such
modifications within thirty (30) days after Landlord's request therefor. The
lease modifications referred to herein shall not relate to those provisions
pertaining to length of the term of the Lease, amount of rent, Additional Rent,
and other charges. If such right to cancel is exercised, this Lease shall
thereafter be null and void, any money or prepaid rent deposited hereunder shall
be returned to Tenant, and neither party shall have any liability to the other
by reason of such cancellation.
In the event of a refinancing or a bona fide sale of the Building by
Landlord, Tenant shall, immediately upon request therefor, provide to Landlord a
balance sheet and a statement of income and expenses for Tenant's last fiscal
year.
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4.03 - Tenant's Obligation
In the event Tenant shall perform any alterations, additions or improvements
to the Premises pursuant to Section 4.04, below, Tenant shall perform such work
at its cost and expense and in full compliance with all provisions as described
in Exhibit "D" attached hereto and made a part hereof (herein referred to as
"Tenant's Work"). Tenant acknowledges its ability to perform such work and no
delay in its performance shall cause or be deemed to cause any delay or
postponement of the Term Commencement Date.
Tenant agrees, at Tenant's expense, to obtain and maintain for so long as
Tenant's Work continues, insurances of the types and in the amounts set forth in
Exhibit "D" to fully protect Landlord as well as Tenant from and against any and
all liability for death or personal injury or damage to property caused in or
about the Premises by reason of the performance of Tenant's Work. Tenant shall
furnish to Landlord certificates evidencing said coverage prior to the
commencement of Tenant's Work.
4.04 - Alterations, Additions and Improvements
Tenant shall not make any alterations, additions or improvements in or to the
Premises without the prior written consent of Landlord, and then only by
contractors approved by Landlord. If Landlord shall grant its consent, Tenant
shall provide Landlord with certificates evidencing the insurance coverages and
limits required by Exhibit "D" prior to the commencement of any such work.
Tenant shall not make nor permit any defacement, injury or waste in, to or about
the Premises or any part of the Building. Tenant agrees that any improvements
as may be installed within the Premises by Tenant pursuant to this Section 4.04
shall, at the option of Landlord, remain as part of the Premises at the
expiration of the Lease or any extension or renewal thereof. Landlord, however,
shall have the right to require Tenant to remove any alterations, additions or
improvements so made. Tenant shall, at its expense, repair or cause to be
repaired any damage to the Premises caused by such removal.
ARTICLE 5
Use of Premises
5.01 - Use of Premises
Tenant agrees to use the Premises for general office purposes and for no
other purpose whatsoever. Tenant further agrees to comply with the rules and
regulations set forth in Exhibit "E" attached hereto and made a part hereof, and
with such reasonable modifications thereof and additions thereto as Landlord may
hereafter from time to time make for the Building, the Building Common Areas or
the Outside Common Areas. Landlord shall not be responsible for the non-
observance by any other tenant of any of said rules and regulations and shall
not be responsible to Tenant for any violation of the rules and regulations, or
the covenants or agreements contained in any other lease, by any other tenant of
the Building, or its agents or employees.
ARTICLE 6
Operating Costs
6.01 - Definitions
The term "Operating Costs" shall be deemed to include (i) the costs of
operating, managing, and maintaining the Building, the Building Common Areas and
the Outside Common Areas, including, but without limiting the generality of the
foregoing, the cost of: gardening and landscaping; parking lot repair,
maintenance and line restriping; janitorial and cleaning services (which shall
be deemed to include labor, materials and supplies for cleaning any office space
in the Building, whether or not leased to tenants, including the Premises);
insurance premiums; repairs to the Building and roof; painting and caulking;
refinishing; glass repair; the maintenance and repair of lighting, utilities,
sanitary control facilities, and heating, ventilating and air-conditioning
systems and equipment; removal of snow, ice, trash, waste and refuse in
compliance with any and all recycling laws, rules and regulations imposed by the
municipality in which the Building is located and specifically excluding any
hazardous or toxic wastes (including but not limited to petroleum products,
medical waste, etc.) which shall be disposed of by Tenant at Tenant's own cost
and expense; traffic control and policing; fire and security protection; the
cost, as reasonably amortized by Landlord, with annual interest at the prime
rate in existence at the time of completion of the improvement, of any capital
improvement made after calendar year 1998 in compliance with the requirements of
any federal, state or local law or governmental regulation; the cost, as
reasonably amortized by Landlord, with interest at the rate of ten percent (10
%) per annum, of any other capital improvement made after calendar year 1998;
maintenance, replacement and rental of signs and equipment; depreciation of the
capital cost of any machinery, equipment and vehicles used in connection with
the operation and maintenance of the Outside Common Areas and Building Common
Areas; repair and/or replacement of on-site water lines, sanitary and storm
sewer lines; rental and other charges paid to third parties; personnel costs;
holiday and other decorations; and related costs to implement such services,
plus (ii) twelve percent (12%) of the foregoing for overhead expenses.
Operating Costs shall not include franchise or income taxes imposed on
Landlord, except to the extent hereinbefore provided, or the cost to Landlord
for any work or service performed in any instance for any tenant (including
Tenant) at the cost of such tenant, or the cost of improvements performed for
tenants as Landlord's work.
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6.02 - Tenant to Share Increases in Operating Costs
(a) Tenant agrees to pay to Landlord, as Additional Rent, monthly (or less
frequently as Landlord shall determine) within ten (10) days after receipt of
Landlord's estimate therefor (and thereafter on the first day of each month
without invoice) an amount equal to one twelfth (1/12) of Tenant's Allocable
Share (computed pursuant to Section 22.10(a) hereof) of the estimated amount by
which Operating Costs for each lease year exceed the Operating Costs for the
Base Period as hereinafter defined. The "Base Period" for purposes of this
Lease shall mean that period consisting of twelve (12) consecutive calendar
months, the first of which shall be May of 1998 In determining the amount of
Operating Costs for any lease year or partial lease year (including the Base
Period), (1) if less than 100% of the square feet leasable in the Building shall
have been occupied by tenants at any time during a lease year or partial lease
year, Operating Costs shall be deemed, for purposes of this Article 6, to be
increased to an amount equal to like operating costs which would normally be
expected to be incurred, had such occupancy been 100% during the entire period,
or (2) if Landlord is not furnishing any particular work or service (the cost of
which if performed by Landlord would constitute Operating Costs) to a tenant who
has undertaken to perform such work or service in lieu of the performance
thereof by Landlord, Operating Costs shall be deemed for the purposes of this
Article to be increased by an amount equal to the additional Operating Costs
which would reasonably have been incurred during such period by Landlord if it
had at its own expense furnished such work or service to such tenant.
(b) Following the end of each lease year (or partial lease year), Landlord
shall furnish to Tenant a comparative statement showing Tenant's Allocable Share
of the Operating Costs during such year and the amounts paid by Tenant (based on
Landlord's estimate of increases in Operating Costs) attributable to such year.
Any overpayment or underpayment by Tenant shall be promptly adjusted by payment,
within fifteen (15) days, of the balance of any underpayment for such year by
Tenant to Landlord, or by Landlord to Tenant of the balance of any overpayment
for such year, or at Landlord's election by applying such overpayment by Tenant
as a credit to succeeding monthly installments of increases in Operating Costs,
or to offset any then existing monetary default by Tenant under this Lease.
Landlord and Tenant shall use commercially reasonable efforts to minimize such
costs of operation, management and maintenance in a manner consistent with
generally accepted office building practices.
(c) Tenant covenants and agrees to promptly pay Landlord as Additional Rent,
upon demand, the amount of any increase in costs for trash removal from the
Premises or any other part of the Building that results by reason of Tenant's
extraordinary trash removal requirements, including but not limited to the
removal of Tenant's purged files, the disposal of boxes, and any governmental
fines resulting from Tenant's non-compliance with local recycling laws, rules or
regulations.
ARTICLE 7
Energy Costs and Water
7.01 - Definitions
As used in this Lease, "Building Utilities" shall mean the cost of all
energy of any kind and water which is consumed for the purposes of operating the
Building, Building Common Areas, and Outside Common Areas, during the Normal
Operating Hours for the Building as set forth in Section 20.01 of this Lease,
except for the cost of electric energy paid by tenants of the Building. "Tenant
Electric Energy" shall mean the cost of all electric energy which is consumed by
all electrically operated equipment within the Premises, including but not
limited to heating, ventilating and air conditioning equipment, lighting
fixtures, and electrical convenience plugs and outlets etc., during all hours of
each day. "Tenant Extra Energy" shall mean the cost of all energy, other than
Tenant Electric Energy, consumed in the operation of the Building, Building
Common Areas and Outside Common Areas, during hours which are in addition to the
Normal Operating Hours for the Building. Building Utilities, Tenant Electric
Energy and Tenant Extra Energy shall include an additional twelve percent (12%)
of such costs for overhead expenses.
7.02 - Tenant to Share Increases in Building Utilities
(a) Tenant agrees to pay Landlord as Additional Rent, monthly, within ten
(10) days after receipt of Landlord's estimate therefore (and thereafter on the
first day of each month, without invoice) an amount equal to one-twelfth (1/12)
of Tenant's Allocable Share (computed under Section 22.10(a) hereof) of the
estimated amount by which Building Utilities for each lease year exceed the Base
Amount as hereinafter defined. The term "Base Amount" for purposes of this
Lease shall be (i) the amount computed by applying the electrical rate in effect
during the month following the month in which the Tenant first takes occupancy
of the Building or any part thereof to the total kilowatt hours of usage
(computed monthly) during the twelve (12) consecutive month period commencing
with May of 1998, plus (ii) twelve percent (12%) of such costs for overhead
expenses. In determining the amount of Building Utilities for the purpose of
this Article 7 for any lease year or partial lease year, (1) if less than 100%
of the square feet leasable in the Building shall have been occupied by tenants
at any time during a lease year or partial lease year (including the period used
in determining the Base Amount), Building Utilities shall be deemed for the
purposes of this Article to be increased to an amount equal to the like Building
Utilities which would normally be expected to be incurred, had such occupancy
been 100% during the entire period, or (2) if Landlord is not furnishing any
particular work or service (the cost of which if performed by Landlord would
constitute Building Utilities) to a tenant who has undertaken to perform such
work or service in lieu of the performance thereof by Landlord, Building
Utilities shall be deemed for the purposes of this Article to be increased by an
amount equal to the additional Building Utilities which would reasonably have
been incurred during such period by Landlord if it had at its own expense
furnished such work or service to such tenant.
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(b) Following the end of each lease year (or partial lease year), Landlord
shall furnish to Tenant a comparative statement showing Tenant's Allocable Share
of the Building Utilities during such year and the amounts paid by Tenant (based
on Landlord's estimates of increases in the Building Utilities) attributable to
such year. Any overpayment or underpayment by Tenant shall be promptly adjusted
by payment, within thirty (30) days, of the balance of any underpayment for such
year by Tenant to Landlord, or by Landlord to Tenant of the balance of any
overpayment for such year, or at Landlord's election by applying such
overpayment for such year as a credit to succeeding monthly installments of
increases in Building Utilities, or to offset any then existing monetary default
by Tenant under this Lease. Landlord and Tenant shall use their commercially
reasonable efforts to minimize Building Utilities.
7.03 - Charge for Tenant Electric Energy
Tenant agrees to pay to Landlord, as Additional Rent, an annual charge for
Tenant Electric Energy equal to thirty-five cents ($0.35) per leaseable square
foot of Premises, payable in twelve (12) equal consecutive monthly installments,
each payable in advance on the first day of each calendar month during the term
hereof. The monthly charge for Tenant Electric Energy as herein set forth was
estimated by Landlord based upon an estimate of Tenant's metered usage and
current utility rates, plus twelve percent (12%) of such costs for overhead
expenses. Following the end of each lease year (or partial lease year),
Landlord shall furnish to Tenant a comparative statement showing Tenant's actual
consumption of electric energy and the amounts paid by Tenant for the same under
this Section 7.03 attributable to such year. Based on Tenant's actual usage,
any overpayment or underpayment by Tenant shall be promptly adjusted by payment,
within thirty (30) days, of the balance of any underpayment for such year by
Tenant to Landlord, or by Landlord to Tenant of the balance of any overpayment
for such year, or at Landlord's election by applying such overpayment by Tenant
as a credit to succeeding monthly installments of amounts due pursuant to this
Section 7.03, or to offset any then existing monetary default by Tenant under
this Lease.
7.04 - Charge for Tenant Extra Energy
In the event Tenant shall occupy and/or use the Premises during hours which
are in addition to the Normal Operating Hours for the Building, Tenant agrees to
pay to Landlord, as Additional Rent, the Tenant Extra Energy consumed during
such period of time, as estimated by Landlord based upon energy requirements
considering Tenant's use of the Premises, and its location, size, and equipment
contained therein, plus twelve percent (12%) of such costs for overhead
expenses, within ten (10) days following Tenant's receipt of Landlord's invoice
therefor.
ARTICLE 8
Repairs and Compliance
8.01 - Repairs
Tenant shall give to Landlord prompt notice of any damage to, or defective
condition in any part of or appurtenance to the Building's plumbing, electrical,
heating, air-conditioning or other systems serving, located in, or passing
through the Premises. Subject to the provisions of Article 11, Tenant shall, at
Tenant's own expense, keep the Premises, including everything therein (except
the heating and air-conditioning systems), in good order, condition and repair
during the term. Landlord shall, as part of the Operating Costs set forth in
Article 6, maintain the heating and air-conditioning systems throughout the
Building (including the Premises) and the outside walls, outside windows, roof
and foundation of the Building containing the Premises in good order and repair.
Repairs made by Landlord required due to negligence or fault of Tenant, its
contractors, agents or employees shall be made at Tenant's expense, plus
nineteen percent (19%) administrative charge.
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Tenant, at Tenant's expense, shall comply with all laws or ordinances, and
all rules and regulations of all governmental authorities and of all insurance
bodies at any time in force, applicable to the Premises or to Tenant's use
thereof, except that Tenant shall not hereby be under any obligation to comply
with any law, ordinance, rule or regulation requiring any structural alteration
of or in connection with the Premises, unless such alteration is required by
reason of a condition which has been created by, or at the instance of, Tenant,
or is required by reason of a breach of any of Tenant's covenants and agreements
hereunder. All repairs made by Tenant shall be made using contractors approved
by Landlord, which approval shall not be unreasonably withheld. If Tenant fails
or neglects to comply with any laws or ordinances, rules and regulations of any
governmental authority or insurance body as herein required of Tenant, then
Landlord or its agents may enter the Premises and make said repairs and comply
with any laws or ordinances, or the rules and regulations of any governmental
authority or insurance body at the cost and expense of the Tenant, plus a
nineteen percent (19%) administrative charge, and in case Tenant fails to pay
therefor upon notice within five (5) days thereafter, the said cost and expenses
shall be added to the next month's installment of Fixed Monthly Rent and be due
and payable as such or Landlord may deduct the same from any balance remaining
in Landlord's hands. This provision is in addition to the right of Landlord to
terminate this Lease by reason of default on the part of Tenant.
8.02 - Hazardous Materials
Tenant shall, at all times, comply with all local and federal laws, rules
and regulations governing the use, handling and disposal of Hazardous Materials
in the Premises including, but not limited to Section 1004 of the Federal
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et. seq. (42
U.S.C. Section 6903) and any additions, amendments, or modifications thereto.
As used herein, the term "Hazardous Materials" shall mean any hazardous or toxic
substance, material or waste including but not limited to petroleum products,
which is, or becomes, regulated by any local or state government authority in
which the Premises is located or the United States Government. Landlord and its
agents shall have the right, but not the duty, to inspect the Premises at any
time to determine whether Tenant is complying with the terms of this Section.
If Tenant is not in compliance with this Section, Landlord shall have the right
to immediately enter upon the Premises and take whatever actions reasonably
necessary to comply including, but not limited to, the removal from the Premises
of any Hazardous Materials and the restoration of the Premises to a clean, neat,
attractive, healthy and sanitary condition. Tenant shall pay all such costs
incurred by Landlord within ten (10) days of receipt of a bill therefor, plus
nineteen percent (19%) administrative charge.
ARTICLE 9
Indemnity
9.01 - Indemnification
(a) Tenant does hereby agree to indemnify Landlord, Landlord's managing
agent, and such other persons as are in privity of estate with Landlord, defend
and save it harmless from and against any and all claims, actions, damages,
liability and expense in connection with loss of life, personal injury and/or
damage to property arising from or out of any occurrence in, upon or at the
Premises, from or out of the occupancy or use by Tenant of the Premises, the
Building Common Areas and/or Outside Common Areas or any part thereof, or
occasioned wholly or in part by any act or omission of Tenant, its agents,
contractors, employees, lessees or concessionaires. However, nothing herein
shall be deemed to relieve Landlord of liability for its acts, omissions or
negligence or the acts, omissions or negligence of Landlord's agents, employees
or contractors and Landlord hereby indemnifies and agrees to hold Tenant
harmless from and against any and all claims, actions, damages, liability and
expense in connection with the loss of life, personal injury and/or damage to
property arising from or out of such acts, omissions or negligence.
(b) In case Landlord (and such other persons as are in privity of estate
with Landlord) shall, without fault on its part, be made a party to any
litigation commenced by or against Tenant, then Tenant agrees to protect and
hold Landlord harmless and to pay all costs, expenses and reasonable attorney's
fees incurred or paid by Landlord in connection with such litigation. If either
party seeks the enforcement of the covenants, obligations and/or agreements of
the other under this Lease and shall prevail, said prevailing party shall be
entitled to recover all costs, expenses and reasonable attorneys' fees that may
be thereby incurred or paid, regardless of whether the action proceeding is
prosecuted to judgment.
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ARTICLE 10
Insurance
10.01 - Liability Insurance
At all times during the term of this Lease, Tenant shall, at its sole cost
and expense, maintain personal injury and property damage liability insurance,
naming the Landlord and its managing agent as additionally insured parties,
against claims for personal injury, death or property damage occurring on, in or
about the Premises during the term of this Lease of not less than Two Million
Dollars ($2,000,000.00) with respect to personal injury, death or property
damage, and including contractual liability coverage. In the event that Tenant
shall not have delivered to Landlord a policy or certificate evidencing such
insurance fifteen (15) days prior to the Term Commencement Date and fifteen (15)
days prior to the expiration dates of each expiring policy, Landlord may obtain
such insurance as it may reasonably require to protect its interest, and the
cost for such policies shall be paid by Tenant to Landlord as Additional Rent
upon demand, plus nineteen percent (19%) administrative charge.
10.02 - All Risks and Difference in Conditions Insurance
At all times during the term of this Lease, Landlord shall keep the Building
insured for the benefit of Landlord against loss or damage by risks now or
hereafter embraced by "All Risks", "Difference in Conditions", and loss of rent
coverages, and against such other risks as Landlord from time to time reasonably
may designate in amounts sufficient to prevent Landlord from becoming a
coinsurer.
In any event, the amount applicable to "All Risks" shall be ninety percent
(90%) of the then full replacement cost (being the cost of replacing the
Building, exclusive of the costs of excavations and footings below the lowest
grade level). Such full replacement cost shall be determined from time to time
(but not more frequently than once in any twelve (12) calendar months) by an
appraiser, architect or other person or firm designated by Landlord.
10.03 - Insurance on Common Areas
At all times during the term of this Lease, Landlord shall keep the Common
Areas insured for personal injury and property damage liability, "All Risk"
property coverage, "Difference in Conditions", workers' compensation,
employer's liability and any other casualty or risk insurance which Landlord or
Landlord's insurance carrier deems necessary or appropriate.
10.04 - Increase in Fire Insurance Premium
Tenant covenants and agrees to promptly pay to Landlord as Additional Rent,
upon demand, the amount of any increase in the rate of insurance on the Premises
or on any part of the Building that (but for Tenant's act(s) or Tenant's
permitting certain activities to take place which result in an increase in said
rate of insurance) would otherwise have been in effect.
10.05 - Waiver of Subrogation
Each party hereto hereby waives on behalf of the insurers of such party's
property, any and all claims or rights of subrogation of any such insurer
against the other party hereto for loss of or damage to the property so insured
other than loss or damage resulting from the willful act of such other party,
and each party hereby agrees to maintain insurance upon its property, it being
understood, however, (a) that such waiver shall be ineffective as to any insurer
whose policy of insurance does not authorize such waiver, (b) that it shall be
the obligation of each party seeking the benefit of the foregoing waiver to
request the other party (i) to submit copies of its insurance, and (ii) in case
such waiver results in an additional charge from the insurer thereunder, the
additional charge for such waiver shall be paid by the party requesting the
benefit of said waiver; and (c) that no party shall be liable to the other under
clause (b) hereof except for willful failure to comply with any request pursuant
to said clause (b).
10.06 - Tenant's Property
At all times during the term of this Lease, Tenant shall, at Tenant's sole
cost and expense, carry "all-risk" insurance coverage for Tenant's trade
fixtures, furnishings, equipment and other personal property of Tenant.
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ARTICLE 11
Fire and Other Casualties
11.01 - Untenantability
If the Premises is made untenantable in whole or in part by fire or other
casualty, the Fixed Monthly Rent, Additional Rent and other charges, until
repairs shall be made or the Lease terminated as hereinafter provided, shall be
apportioned on a per diem basis according to the part of the Premises which is
usable by Tenant, if, but only if, such fire or other casualty not be caused by
Tenant's fixtures or equipment or by fault or negligence of Tenant, its
contractors, agents or employees. If such damage shall be so extensive that the
Premises cannot be restored by Landlord within a period of nine (9) months,
either party shall have the right to cancel this Lease by notice to the other
given at any time within thirty (30) days after the date of such damage, except
that if such fire or casualty be due to Tenant's fixtures or equipment or due to
Tenant's fault or negligence Tenant shall have no right to cancel. If a portion
of the Building other than the Premises shall be so damaged that in the opinion
of Landlord the Building should be restored in such a way as to alter the
Premises materially, Landlord may cancel this Lease by notice to Tenant given at
any time within thirty (30) days after the date of such damage. In the event of
giving effective notice pursuant to this Section, this Lease and the term and
the estate hereby granted shall expire on the date fifteen (15) days after the
giving of such notice as fully and completely as if such date were the date
hereinbefore set for the expiration of the term of this Lease. If this Lease is
not so terminated, Landlord will promptly (taking into account the time
necessary to obtain required permits and approvals and the time necessary to
effectuate a satisfactory settlement with Landlord's insurance company) restore
the damage insured by Landlord pursuant to Section 10.02. Tenant hereby
expressly waives the provisions of Section 227 of the New York Real Property Law
and agrees that the foregoing provisions of this Section 11.01 shall govern and
control in lieu thereof.
11.02 - Loss of Property and Water Damage
Landlord shall not be responsible to Tenant for any loss or theft of
property in or from the Premises, or for any loss or theft or damage of or to
any property left with any employee of Landlord, however occurring. Landlord
shall not be liable for any damage caused by water, rain, snow or ice, or by
breakage, stoppage or leakage of water, gas, heating, air-conditioning, sewer
or other pipes or conduits, or arising from any other cause, in, upon, about or
adjacent to the Premises or the Building, except to the extent the same are
shown to have resulted from Landlord's negligence or willful misconduct, or the
negligence or willful misconduct of Landlord's agents, employees or
contractors.
ARTICLE 12
Eminent Domain
12.01 - Eminent Domain
(a) In the event that title to the whole or any part of the Premises shall
be lawfully condemned or taken in any manner for any public or quasi-public use,
this Lease and the term and estate hereby granted shall forthwith cease and
terminate as of the date of vesting of title, and Landlord shall be entitled to
receive the entire award, Tenant hereby assigning to Landlord Tenant's interest
therein, if any.
(b) In the event that title to a part of the Building other than the
Premises shall be so condemned or taken, and if in the opinion of Landlord, the
Building should be restored in such a way as to alter the Premises materially,
or in the event that title to all or a material part of the Outside Common Areas
shall be so condemned or taken, Landlord may terminate this Lease and the term
and estate hereby granted by notifying Tenant of such termination within sixty
(60) days following the date of vesting of title, and this Lease and the term
and estate hereby granted shall expire on the date specified in the notice of
termination, which date shall be not less than sixty (60) days after the giving
of such notice, as fully and completely as if such date were the date
hereinbefore set for the expiration of the term of this Lease, and the Fixed
Monthly Rent, Additional Rent, and other charges hereunder shall be apportioned
as of such date. In such event, Tenant shall not be entitled to any portion of
Landlord's award hereunder, if any, nor shall Tenant have any claim against
Landlord for the value of the unexpired portion of the term.
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ARTICLE 13
Bankruptcy and Default Provisions
13.01 - Conditional Limitations
(a) This Lease and the demised term are subject to the limitation that if,
at any time prior to or during the term, any one or more of the following events
(herein called an "event of default") shall occur, that is to say:
(i) If Tenant shall make an assignment for the benefit of its
creditors; or
(ii) If the leasehold estate hereby created shall be taken on
execution or by other process of law; or
(iii) If any petition shall be filed against Tenant in any court,
whether or not pursuant to any statute of the United States or
of any State, in any bankruptcy, reorganization, composition,
extension, arrangement, or insolvency proceedings, and Tenant
shall thereafter be adjudicated bankrupt, or such petition shall
be approved by the court, or the court shall assume jurisdiction
of the subject matter and if such proceedings shall not be
dismissed within ninety (90) days after the institution of the
same, or if any such petition shall be so filed by the Tenant;
or
(iv) If in any proceedings a receiver or trustee be appointed for
Tenant's property, and such receivership or trusteeship shall
not be vacated or set aside within ninety (90) days after the
appointment of such receiver or trustee; or
(v) If Tenant shall vacate or abandon the Premises and permit the
same to remain unoccupied or closed for business for more than
thirty (30) days; or
(vi) If Tenant shall be in default of any other lease of premises in
the Building or office park in which the Building is located; or
(vii) If Tenant shall fail to pay any installment of the Fixed
Monthly Rent or any part thereof when the same shall become due
and payable, and such failure shall continue for five (5) days
following Tenant's receipt of notice from Landlord; or
(viii) If Tenant shall fail to pay any other charge required to be
paid by Tenant hereunder, and such failure shall continue for
five (5) days after Tenant's receipt of notice from Landlord; or
(ix) If Tenant shall fail to timely deliver to Landlord any
Subordination Agreement or any Estoppel Certificate, as required
hereunder; or
(x) Tenant fails to perform or observe any other requirement of this
Lease (not hereinbefore specifically referred to) on the part of
Tenant to be performed or observed and such failure continues
for thirty (30) days after receipt of notice from Landlord to
Tenant.
(b) This Lease and the term are expressly subject to the conditional
limitation that upon the happening of any one or more of the aforementioned
events of default, Landlord, in addition to the other rights and remedies it may
have, shall have the right to immediately declare this Lease terminated and the
term ended, in which event all of the right, title and interest of Tenant
hereunder shall wholly cease and expire upon service by Landlord of a Notice of
Termination. Tenant shall then quit and surrender the Premises to Landlord in
the manner and under the conditions as provided for under this Lease, but Tenant
shall remain liable as hereinafter provided.
(c) If the Landlord shall not be permitted to terminate this Lease as
hereinabove provided because of Title 11 of the United States Code, as amended,
relating to Bankruptcy (the "Bankruptcy Code"), then Tenant or any trustee for
Tenant agrees promptly, within no more than fifteen (15) days after the request
of Landlord to the Bankruptcy Court to assume or reject this Lease and Tenant
agrees not to seek or request any extension or adjournment of any application to
assume or reject this Lease so made by Landlord. In such event, Tenant or any
trustee for Tenant may only assume this Lease if it (1) cures or provides
adequate assurance that the trustee will promptly cure any default hereunder,
(2) compensates or provides adequate assurance that the Tenant will promptly
compensate Landlord for any actual pecuniary loss to Landlord resulting from
Tenant's default, and (3) provides adequate assurance of future performance
under this Lease by Tenant. In no event after the assumption of this Lease by
Tenant or any trustee for Tenant shall any then existing default remain uncured
for a period in excess of ten (10) days. Adequate assurance of future
performance of this Lease shall include, without limitation, adequate assurance
(a) of the source of the Fixed Monthly Rent required to be paid to Landlord
hereunder, and (b) that the assumption or any permitted assignment of this Lease
will not constitute a breach of any provision of this Lease.
13.02 - Landlord's Remedies
(a) If this Lease shall be terminated as provided in Section 13.01, Landlord or
Landlord's agents or employees may immediately or at any time thereafter
re-enter the Premises and remove therefrom Tenant, its agents, employees,
licensees, and any subtenants and other persons, firms or corporations, and
all or any of its or their property therefrom either by summary dispossess
proceedings or by any suitable action or proceeding at law or by force or
otherwise, without being liable to indictment, prosecution or damages
therefor, and repossess and enjoy the Premises, together with all
alterations, additions and improvements thereto.
(b) In case of any such termination, re-entry or dispossession by summary
proceedings or otherwise, the rents and all other charges required to be paid up
to the time of such termination, re-entry or dispossession, shall be paid by
Tenant, and Tenant shall also pay to Landlord all expenses which Landlord may
then or thereafter incur for legal expenses, attorneys' fees, brokerage
commissions and all other costs paid or incurred by Landlord for restoring the
Premises to good order and condition and for altering and otherwise preparing
the same for reletting thereof. Landlord may, at any time and from time to
time, relet the Premises, in whole or in part, for any rental then obtainable
either in its own name or as agent of Tenant, for a term or terms which, at
Landlord's option, may be for the remainder of the then current term of this
Lease or for any longer or shorter period.
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(c) If this Lease be terminated as aforesaid, Tenant nevertheless covenants
and agrees, notwithstanding any entry or re-entry by Landlord, whether by
summary proceedings, termination, or otherwise, to pay and be liable for on the
days originally fixed herein for the payment thereof, amounts equal to the
several installments of Fixed Monthly Rent, Additional Rent and other charges as
they would, under the terms of this Lease, become due if this Lease had not been
terminated or if Landlord had not entered or re-entered as aforesaid, whether
the Premises be relet or remain vacant in whole or in part for a period less
than the remainder of the term or for the whole thereof, but in the event the
Premises be relet by Landlord, Tenant shall be entitled to a credit (but not in
excess of the Fixed Monthly Rent, and Additional Rent reserved under the terms
of this Lease) in the net amount of rent received by Landlord in reletting the
Premises after deduction of all expenses and costs incurred or paid as aforesaid
in reletting the Premises and in collecting the rent in connection therewith.
As an alternative, at the election of Landlord, Tenant shall pay to Landlord as
damages, such a sum as at the time of such termination represents: (i) the
unamortized costs of Landlord's leasehold improvements (including, but not
limited to, any costs of design materials and construction) within the Premises
and any brokerage and/or other fees paid by Landlord in connection with this
Lease, as such costs shall have been amortized over the term of the Lease at an
interest rate of ten percent (10%), and (ii) the amount of the then present
value of the total Fixed Monthly Rent and Additional Rent and other benefits
which would have accrued to Landlord under this Lease for the remainder of the
term (including all renewal terms whether or not Tenant had elected to renew) if
the Lease terms had been fully complied with by Tenant.
(d) Tenant hereby expressly waives, so far as permitted by law, the service
of any notice of intention to re-enter provided for in any statute, or of the
institution of legal proceedings to that end, and Tenant, for and on behalf of
itself and all persons claiming through or under Tenant also waives any and all
rights of redemption or re-entry or repossession under present or future laws,
including specifically but without limitation, Section 761 of the New York Real
Property Actions and Proceeding Law including any amendments hereafter made
thereto, and Tenant further waives any and all rights to restore the operation
of this Lease and further waives any right under Article 63 of the Civil
Practice Law and Rules. In case Tenant shall be dispossessed by a judgment or
by warrant of any court or judge, or in case of re-entry or repossession by
Landlord, or in case of any expiration or termination of this Lease, Landlord
and Tenant, so far as permitted by law, waive and will waive trial by jury in
any action, proceeding or counterclaim brought by either of the parties hereto
against the other on any matters whatsoever arising out of or in any way
connected with this Lease, the relationship of Landlord and Tenant, Tenant's use
or occupancy of said Premises, or any claim of injury or damage. The terms
"enter," "entry," or "re-entry" as used in this lease are not restricted to
their technical legal meaning.
(e) No failure by Landlord to insist upon the strict performance of any
covenant, agreement, term or condition of this Lease or to exercise any right or
remedy consequent upon a breach thereof, and no acceptance of full or partial
rent during the continuance of any such breach, shall constitute a waiver of any
such breach or of such covenant, agreement, term or condition. No waiver of any
breach shall affect or alter this Lease, but each and every covenant, agreement,
term and condition of this Lease shall continue in full force and effect with
respect to any other then existing or subsequent breach thereof. No payment by
Tenant or receipt by Landlord of a lesser amount than the monthly installments
of rent or Additional Rent stipulated in this Lease shall be deemed to be other
than on account of the earliest stipulated rent, nor shall any endorsement or
statement on any check or letter accompanying a check for payment of rent be
deemed any accord and satisfaction, and Landlord may accept such check or
payment without prejudice to Landlord's right to recover the balance of such
rent or to pursue any other remedy provided by this Lease.
(f) In the event of any breach or threatened breach by Tenant of any of the
covenants, agreements, terms or conditions contained in this Lease, Landlord
shall be entitled to enjoin such breach or threatened breach and shall have the
right to invoke any right or remedy allowed at law or in equity or by statute or
otherwise.
(g) Each right or remedy of Landlord provided for in this Lease shall be
cumulative and shall be in addition to every other right or remedy provided for
in this Lease, or now or hereafter existing at law or in equity or by statute or
otherwise.
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ARTICLE 14
Mechanic's Liens
14.01 - Mechanic's Liens
Tenant agrees to pay when due all sums of money that may become due for, or
purporting to be due for, any labor, services, materials, supplies or equipment
alleged to have been furnished or to be furnished to or for Tenant in, upon or
about the Premises and/or Landlord's interest therein.
If any mechanic's lien shall be filed against the Premises or the Building
based upon any act of Tenant or anyone claiming through Tenant, Tenant, after
notice thereof from Landlord (or any person in privity of estate with Landlord),
shall forthwith take whatever action by bonding, deposit, payment or otherwise,
as will remove or satisfy such lien within five (5) days. In the event Tenant
does not remove or satisfy said lien within said five (5) day period, Landlord
shall have the right to do so by posting a bond or undertaking, and Tenant
agrees to reimburse Landlord for any and all expenses incurred by Landlord in
connection therewith within five (5) days after receipt by Tenant of Landlord's
invoice therefor. These expenses shall include, but not be limited to, filing
fees, legal fees and bond premiums.
However, nothing in this Article 14 shall be deemed or construed as (a)
Landlord's consent to any person, firm or corporation for the performance of any
work or services, or the supply of any materials to the Premises, or (b) giving
Tenant or any other person, firm or corporation any right to contract for or to
perform or supply any work, services or materials that would permit or give rise
to a lien against the Premises or the Building.
ARTICLE 15
Mortgages, Assignments, Subleases and Transfers of Tenant's Interest
15.01 - Limitation on Tenant's Rights
Except as hereinafter otherwise provided, during the term of this Lease,
neither this Lease nor the interest of Tenant in this Lease or in the Premises,
or in any sublease, or in any rentals under any sublease shall be sold,
assigned, transferred, mortgaged, pledged, hypothecated or otherwise disposed
of, whether by operation of law or otherwise, unless Landlord's prior written
consent is obtained in each case, nor shall the Premises be sublet in any case
unless such prior written consent is obtained.
It is understood and agreed between the parties that, should Tenant request
Landlord's consent to a proposed assignment of this Lease or a subletting of all
or any portion of the Premises, Landlord will, in addition to any other
requirements which may be imposed as conditions to Landlord's consent, require
that Tenant execute and deliver to Landlord an agreement whereby Tenant
obligates itself, as Additional Rent, to pay over to Landlord the amount, if
any, of all rent, Additional Rent and any other consideration paid by such
assignee or sublessee to Tenant pursuant to such assignment or sublease which is
in excess of the rent and Additional Rent due and payable from time to time from
Tenant to Landlord pursuant to this Lease.
Should Tenant request Landlord's consent to a proposed assignment of this
Lease or a subletting of all or part of the Premises, Landlord shall have the
right at Landlord's option to recapture the Premises by written notice given to
Tenant within thirty (30) days after Landlord's receipt of Tenant's request for
Landlord's consent. If Landlord exercises its right to recapture the Premises,
or any part thereof, this Lease shall be cancelled and terminated as of the date
that is proposed by Tenant for the requested assignment or subletting as fully
and effectively as if such date were the date originally specified herein for
the expiration of this Lease. If this Lease shall be cancelled with respect to
less than the entire Premises, the Fixed Monthly Rent reserved herein shall be
prorated on the basis of the number of leaseable square feet retained by Tenant
in proportion to the number of leaseable square feet contained in the Premises,
and this Lease shall continue thereafter in full force and effect with respect
to the portion of the Premises retained by Tenant, and the parties shall execute
an amendment of this Lease to provide for the reduction in square footage and
rental.
No consent by Landlord to an assignment of this Lease and no assignment made
as hereinafter permitted, shall be effective until there shall have been
delivered to Landlord (a) an agreement, in recordable form, executed by Tenant
and the proposed assignee, wherein and whereby such assignee assumes due
performance of the obligations on Tenant's part to be performed under this Lease
to the end of the term hereof, and (b) the written consent to such assignment by
the holder of any fee or leasehold mortgage to which this Lease is then subject
shall have been obtained and delivered to Landlord if so required by the terms
of such fee or leasehold mortgage.
Notwithstanding the assumption by such assignee of due performance, Tenant
shall continue to be fully responsible for the due performance of Tenant's
obligations hereunder in the same manner and to the same extent as if no such
assignment had been made.
Any assignment, mortgage, pledge, sublease or hypothecation of this Lease, or
of the interest of Tenant hereunder, without full compliance with any and all
requirements set forth in this Lease shall be a breach of this Lease and a
default hereunder, shall be null and void, and shall confer no rights upon any
third party.
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15.02 - Effect of Landlord's Consent
Any consent by Landlord to a sale, assignment, sublease, mortgage, pledging,
hypothecation, or transfer of this Lease, shall apply only to the specific
transaction thereby authorized and shall not relieve Tenant from the requirement
of obtaining the prior written consent of Landlord to any further sale,
assignment, sublease, mortgage, pledge, hypothecation, or transfer of this
Lease. In instances where the consent of Landlord is required hereunder to any
proposed assignment or sublease of this Lease, or to the mortgaging, pledging or
hypothecation of this Lease, contemporaneously with the request of Tenant
therefor, Tenant shall submit in writing information reasonably sufficient to
enable Landlord to decide with respect thereto including, but not limited to,
(i) the name and address of the proposed transferee, (ii) a current financial
statement of the proposed transferee, (iii) the consideration to be paid by the
proposed transferee to Tenant, and (iv) the use intended to be made of the
Premises by the proposed transferee. Landlord shall reply to Tenant within ten
(10) days after receipt of the request and information as aforementioned.
With respect to any of the consents requested by Tenant under the provisions
of this Article 15, whether or not the Landlord shall have consented thereto,
Tenant shall pay to Landlord all reasonable counsel fees and other out-of-pocket
expenses incurred by the Landlord in connection therewith.
15.03 - Sale of Stock or Partnership Interest
Tenant agrees that if (i) Tenant or any Guarantor of Tenant's obligations
under this Lease is a corporation and there shall be a sale of stock
constituting a controlling interest in Tenant or any Guarantor of Tenant's
obligations under this Lease (whether such sale occurs at one time or at
intervals so that, in the aggregate, over the term of this Lease, such a sale
shall have occurred), or (ii) Tenant or any Guarantor of Tenant's obligations
under this Lease is a partnership or other legal business entity and there shall
be a sale of a partnership or ownership interest constituting a controlling
interest in Tenant or any Guarantor of Tenant's obligations under this Lease
(whether such sale occurs at one time or at intervals so that, in the aggregate,
over the term of this Lease, such a sale shall have occurred), then and in any
of such events, Landlord shall have the right, at its sole election, to deem
such sale a default pursuant to Article 13 of this Lease and to cancel and
terminate this Lease at any time thereafter by giving notice of Landlord's
intention to do so and this Lease shall terminate upon the expiration of thirty
(30) days after such notice of intention from Landlord to Tenant, but Tenant
shall remain liable for its obligations under this Lease as provided in Article
13 hereof.
The term "sale" shall include any transfer of the stock, partnership and/or
ownership interest in Tenant or its Guarantor, as the case may be, other than a
transfer by operation of law occurring upon the death of a stockholder or
partner and the devolution of the stock or interest held by such stockholder or
partner or member or other owner to his legal representative, heirs or legatees,
but shall not include a stock offering whereby an aggregate of greater than
fifty percent (50%) of Tenant's stock shall be offered publicly, to parties who
are non-stockholders as of the date of this Lease, through a recognized security
exchange.
ARTICLE 16
Subordination of Lease
16.01 - Subordination to Mortgages and Ground Leases
This Lease and all the rights of Tenant hereunder are and shall be subject
and subordinate to the lien of any ground or underlying leases and to any
mortgage or mortgages, whether fee or leasehold mortgages, which may now or
hereafter affect the Premises or the Building or the land under the Building,
and to all renewals, modifications, consolidations, replacements and extensions
thereof, and advances thereunder. However, Tenant agrees to execute and deliver
to Landlord, within fifteen (15) days after request therefor, such instrument(s)
as may be requested by any such ground lessor, mortgagee, or trustee for such
purposes (any such instrument(s) are hereinafter referred to as "Subordination
Agreement"). In the event Tenant fails to execute and deliver any such
Subordination Agreement within the fifteen (15) day period Tenant does hereby
make, constitute and irrevocably appoint Landlord as its attorney-in-fact for
the purpose of executing any such Subordination Agreement in Tenant's name,
place and stead.
Tenant will not do, suffer or permit any act, happening or occurrence or any
condition to occur or remain which may be prohibited under the terms or
provisions of any ground or underlying lease or mortgage to which this Lease is
subject or which will create a default thereunder except that Tenant shall not
be obligated to pay the principal indebtedness or any installment thereof or
interest thereon.
So long as any such mortgage or lease shall remain a lien on the Premises,
Tenant agrees simultaneously with the giving of any notice to Landlord which is
required to be given by this Lease, to give a duplicate copy thereof to any
mortgagee or ground lessor, notice of whose name and address have been given to
Tenant. Further, Tenant agrees that if Landlord defaults in the performing of
any of its covenants under this Lease and if such default allows Tenant to
cancel or surrender said Lease, the mortgagee or ground lessor may cure said
default with the same effect as if cured by Landlord, and if necessary, enter
upon the Premises for the purpose of curing any such default, provided that the
mortgagee or ground lessor must cure the default within the time in which
Landlord is obligated to cure such default under this Lease. The giving of any
such notice to Landlord shall not be properly given under the terms of this
Lease and shall be of no force and effect until a duplicate copy thereof shall
also have been given to the mortgagee or ground lessor pursuant to this Section.
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ARTICLE 17
Entry to Premises
17.01 - Entry to Premises by Landlord
Landlord shall have the right to enter the Premises at all reasonable times
for the purposes of:
(a) inspecting the same, and/or
(b) making any repairs to the Premises and performing any work
therein that may be necessary by reason of Tenant's default under
the terms of this Lease continuing beyond any applicable period
of grace, and/or
(c) exhibiting the Premises for the purpose of sale, ground lease or
mortgage.
ARTICLE 18
Notices and Certificates
18.01 - Notices and Certificates
Any notice, statement, certificate, request or demand required or permitted
to be given under this Lease shall be in writing sent either by an overnight
express mail service (such as Federal Express) or by registered or certified
mail, postage prepaid, return receipt requested, addressed, as the case may be,
to Landlord in care of the Managing Agent (see Page 1) at the address shown at
the beginning of this Lease, and to Tenant at the address shown at the beginning
of this Lease or to such other addresses as Landlord or Tenant shall designate
in the manner herein provided. Such notice, statement, certificate, request or
demand shall be deemed to have been given on the date mailed as aforesaid by
such express mail service or on the date deposited in any post office or branch
post office regularly maintained by the United States Government, except for
notice of change of address or revocation of a prior notice, which shall only be
effective upon receipt or refusal to accept receipt of such notice. Anything
contained in the foregoing to the contrary notwithstanding, any notice of change
of address, in order to be effective, must be express and clearly state that the
correspondence is intended to be a notice of change of address.
At any time or times when Tenant's interest herein shall be vested in more
than one person, firm or corporation, jointly, in common or in severalty, a
notice given by Landlord to any one such person, firm or corporation shall be
conclusively deemed to have been given to all such persons, firms or
corporations. Any notice by Tenant pursuant to the provisions hereof shall be
void and ineffective unless signed by all such persons, firms and corporations,
unless all such persons, firms and corporations shall have previously given
notice to Landlord, signed by each of them designating and authorizing one or
more of them to give the notice referred to, and such notice shall then be
unrevoked by any notice to Landlord.
18.02 - Certificate by Tenant
Within fifteen (15) days after request by Landlord, Tenant, from time to time
and without charge, shall deliver to Landlord or to a person, firm or
corporation, specified by Landlord, a duly executed and acknowledged instrument
certifying:
(a) that this Lease is unmodified and in full force and effect, or if
there has been any modification, that the Lease is in full force
and effect, as modified, and identifying the date of any such
modification; and
(b) whether Tenant knows or does not know, as the case may be, of any
default by Landlord in the performance by Landlord of the terms,
covenants, and conditions of this Lease, and specifying the
nature of such defaults, if any; and
(c) whether or not there are any then existing set-offs or defenses
by Tenant to the enforcement by Landlord of the terms, covenants,
and conditions of this Lease and any modification thereof, and if
so. specifying them; and
(d) the date to which the Fixed Monthly Rent has been paid.
Any such instrument(s) is sometimes referred to herein as "Estoppel
Certificate".
ARTICLE 19
Covenant of Quiet Enjoyment
19.01 - Covenant of Quiet Enjoyment
Tenant, subject to the terms and provisions of this Lease, on payment of the
rent and observing, keeping and performing all the terms and provisions of this
Lease on its part to be observed, kept and performed, shall lawfully, peaceably
and quietly have, hold and enjoy the Premises during the term hereof on and
after the Term Commencement Date without hindrance or ejection by Landlord and
any persons lawfully claiming under Landlord, subject nevertheless to the terms
and conditions of this Lease and to any ground or underlying lease and/or
mortgage(s); but it is understood and agreed that this covenant, and any and all
other covenants of Landlord contained in this Lease shall be binding upon
Landlord and its successors only with respect to breaches occurring during its
and their respective ownership of Landlord's interest hereunder.
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ARTICLE 20
Services
20.01 - Services
During the term of this Lease, while Tenant is not in default hereunder,
Landlord shall furnish to the Premises electricity, lighting, heating,
ventilating, air conditioning, elevator service and water to the plumbing
fixtures (collectively, "Services"), if any, on Monday through Friday from 8
a.m. to 6 p.m., principal legal holidays excepted (herein referred to as the
"Normal Operating Hours"). Landlord agrees that the Services shall be available
to Tenant during hours other than Normal Operating Hours upon Tenant's
reasonable prior request. The cost of any such additional Services shall be
paid for by Tenant in accordance with the provisions of Section 7.04, above.
Landlord shall also furnish janitorial services consisting of cleaning floors,
removing waste paper each business day and window cleaning.
20.02 - Interruption of Service
No diminution or abatement of rent or other compensation shall be claimed or
allowed for inconvenience or discomfort arising from the making of repairs or
improvements to the Premises, the Building or its appurtenances. There shall be
no diminution or abatement of rent or any other compensation for interruption or
curtailment of any service or utility herein expressly or impliedly agreed to be
furnished by Landlord when such interruption or curtailment shall be due to
accident, alterations, repairs (desirable or necessary), or to inability or
difficulty in securing supplies or labor, or to some other cause not resulting
from gross negligence on the part of Landlord. No such interruption or
curtailment shall be deemed a constructive eviction. Tenant agrees that
Landlord shall not be responsible for interruption of utility service caused by
any utility company or governmental regulatory agency.
ARTICLE 21
Certain Rights Reserved to Landlord
21.01 - Certain Rights Reserved to Landlord
Landlord reserves the following rights:
(a) To name the Building and to change the name or street address of
the Building;
(b) To install and maintain a sign or signs on the exterior or
interior of the Building;
(c) To designate all sources furnishing sign painting and lettering,
ice, drinking water, towels, toilet supplies, shoe shining,
vending machines, mobile vending service, catering, and like
services used on the Premises;
(d) During the last ninety (90) days of the term, if during or prior
to that time Tenant vacates the Premises, to decorate, remodel,
repair, alter or otherwise prepare the Premises for reoccupancy,
including the placing of a notice of reasonable size on or in the
Premises offering the Premises "For Rent" or "For Lease", all
without affecting Tenant's obligation to pay rental for the
Premises;
(e) To constantly have pass keys to the Premises;
(f) At any time in the event of an emergency, or otherwise at
reasonable times, to take any and all measures, including
inspections, repairs, alterations, additions and improvements to
the Premises or to the Building, as may be necessary or desirable
for the safety, protection or preservation of the Premises or the
Building or the Landlord's interests, or as may be necessary or
desirable in the operation or improvement of the Building or in
order to comply with all laws, orders and requirements of
governmental or other authority;
(g) At any reasonable time and from time to time throughout the term
of the Lease to show the Premises to persons wishing to rent same
or to purchase the Building.
ARTICLE 22
Miscellaneous Provisions
22.01 - Occupancy After Expiration of Term
(a) Should Tenant continue to occupy the Premises after the expiration or
earlier termination of the term, such tenancy shall be from month-to-month, and
such month-to-month tenancy shall be under the same terms, covenants and
conditions as set forth in this Lease, except that the Tenant shall pay double
the Fixed Monthly Rent reserved herein.
(b) The aforementioned month-to-month tenancy may be terminated by either
party notifying the other of its intention to terminate the month-to-month
tenancy at least one calendar month prior to the last day of the term. Tenant's
continued occupancy of the Premises after the expiration of the time period
specified in said notice to terminate shall confer no rights whatsoever upon
Tenant, who shall then be deemed a holdover tenant. Tenant hereby consents in
advance to the immediate entry of an order and warrant of eviction, together
with judgment for unpaid rent or Additional Rent due and owing under the terms
of this Lease, or for compensation due and owing to the Landlord for Tenant's
use and occupation of the Premises during the time of occupancy as a holdover
Tenant, by any court of competent jurisdiction. Tenant shall indemnify and save
harmless Landlord from any claim, damage, expense, attorney fee, or loss which
Landlord may incur by reason of such holding over, including without limitation,
any claim of a succeeding tenant, or any loss by Landlord with respect to a lost
opportunity to re-let Premises.
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22.02 - Limitation on Personal Liability
(a) It is understood and agreed that Tenant shall look solely to the estate
and property of Landlord in the Building for the satisfaction of Tenant's
remedies for the collection of a judgment (or other judicial process) requiring
the payment of money by Landlord in the event of any default or breach by
Landlord with respect to any of the terms, covenants and conditions of this
Lease to be observed and/or performed by Landlord and any other obligation of
Landlord created by or under this Lease, and no other property or assets of
Landlord or of its partners, members, beneficiaries, co-tenants, shareholders,
or principals (as the case may be) shall be subject to levy, execution or other
enforcement procedures.
(b) The term "Landlord," as used in Subsection 22.02(a) above and throughout
this Lease, so far as covenants and agreements on the part of Landlord are
concerned, shall be limited to mean and include only the owner or owners at the
time in question of the Building and Lease. Further, in the event of any
transfer or transfers of the title to the Lease and/or the Building, Landlord
herein named (and in case of any subsequent transfers or conveyances, the then
grantor), including each of its members, partners, beneficiaries, co-tenants,
shareholders, or principals (as the case may be), shall be automatically freed
and relieved from and after the date of such transfer and conveyance of all
liability as respects the performance of any covenants and agreements on the
part of Landlord. Landlord or the grantor shall turn over to the grantee all
monies and security, if any, then held by Landlord or such grantor on behalf of
Tenant, Landlord thereby being relieved of and from all responsibility for such
monies and security, and shall assign to such grantee all right, title and
interest of Landlord or such grantor thereto, it being intended that the
covenants and agreements contained in this Lease on the part of Landlord to be
performed shall, subject as aforesaid, be binding on Landlord, its successors
and assigns.
22.03 - No Representations by Landlord
Landlord and Landlord's agents have made no representations or promises with
respect to the Building, the land upon which the Building is erected or the
Premises except as herein expressly set forth, and no rights, easements, or
licenses are acquired by Tenant by implication or otherwise except as expressly
set forth in the provisions of this Lease.
22.04 - Lease Binding
All covenants in this Lease which are binding upon Tenant shall be construed
to be equally applicable to and binding upon Tenant's agents, employees and
others claiming the right to be in the Premises or in the Building through or
under Tenant. If more than one individual, firm or corporation shall join as
Tenant, the singular context shall be construed to be plural wherever necessary,
and the covenants of Tenant shall be the joint and several obligations of each
party signing as Tenant; and, when the parties signing as Tenant are partners,
it shall be the joint and several obligations of the firm and of the individual
members thereof.
22.05 - Failure to Give Possession
Notwithstanding anything to the contrary contained in this Lease, Landlord
shall not in any manner be liable to Tenant for damages or any other claim
resulting from failure to construct the Building as shown on Exhibit "A" or to
deliver the Premises or for any delay in commencing or completing any work
Landlord is to perform or is authorized by Tenant to perform under Exhibit C,
and Tenant hereby waives any such liability whatsoever and any right it may have
to terminate this Lease. Provided that in the event Landlord fails to construct
the Building as shown on Exhibit "A" within one (1) year after the date hereof,
then Landlord shall have the option to terminate this Lease upon notice to
Tenant.
(a) If Landlord shall be unable to give possession of the Premises on the
Term Commencement Date by reason of the fact that the Premises is located in a
building being constructed which has not been sufficiently completed to make the
Premises ready for occupancy or by reason of the fact that a certificate of
occupancy has not been procured or for any other reason, then Landlord shall not
be subject to any liability for the failure to give possession on said date.
Under such circumstances the rent reserved and covenanted to be paid herein
shall not commence until possession of the Premises is given or the Premises is
available for occupancy by Tenant. Notwithstanding the forgoing, if the Term
Commencement Date shall not have occurred within two (2) years after the date
hereof, then this Lease shall automatically become null and void. In either
case, Landlord shall reimburse Tenant for any advance rent paid or security
deposit posted, and except for items which have been theretofore accrued and not
yet paid and both parties hereto shall be relieved of all obligations hereunder,
in which event each party will, at the other's request, execute an instrument in
recordable form containing a release and surrender of all right, title and
interest in and to this Lease.
(b) If the Building is not in the course of construction, and Landlord is
unable to give possession of the Premises on the Term Commencement Date by
reason of the holding over or retention of possession by any tenant, tenants, or
occupants, or for any other reason, or if repairs, improvements or decoration of
the Premises or of the Building are not completed, such inability by Landlord
shall not constitute a default under this Lease but the Term Commencement Date
shall be postponed until such date as such holdover tenant or occupant shall
give up possession of the Premises, and/or the repairs, improvements or
decorations have been completed, and the term of this Lease shall be deemed to
commence on such Term Commencement Date as postponed (and the expiration date of
the term of the Lease shall be extended by the same period as the Term
Commencement Date is postponed).
18
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22.06 - Relocation of Tenant
Landlord shall have the right to relocate Tenant to other premises
substantially similar in size as the Premises (but not to premises containing
less leaseable square feet than the Premises without Tenant's consent) and
located within any building in the office park ("Office Park") in which the
Building is located upon sixty (60) days' written notice to Tenant. Such
relocation shall be at Landlord's cost and expense and shall in no way affect
the obligations or duties of either party hereunder. If Landlord relocates the
Premises to another building in the Office Park, Landlord covenants and agrees
that the entire Premises shall be so located, it being the intention of the
parties that the Premises not be located in more than one (1) building at any
given time.
22.07 - Force Majeure
The period of time during which either party is prevented or delayed in the
performance or the making of any improvements or repairs or fulfilling any
obligation other than the payment of Fixed Monthly Rent or Additional Rent
required under this Lease due to unavoidable delays caused by fire, catastrophe,
strikes or labor trouble, civil commotion, Acts of God or the public enemy,
governmental prohibitions or regulation or inability to obtain materials or
labor, or other causes beyond such party's reasonable control, shall be added to
such party's time for performance thereof, and such party shall have no
liability by reason thereof.
22.08 - Attornment by Tenant
If at any time during the term of this Lease the Building is sold through a
mortgage foreclosure proceeding, or if Landlord hereunder shall be the holder of
a leasehold estate covering premises which include the Premises and if such
leasehold estate shall be cancelled or otherwise terminated prior to the
expiration date thereof and prior to the expiration of the term of this Lease,
or in the event of the surrender thereof whether voluntary, involuntary or by
operation of law, Tenant shall make full and complete attornment to the
purchaser at the foreclosure sale or to the lessor of such leasehold estate for
the balance of the term of this Lease upon the same covenants and conditions as
are contained herein so as to establish direct privity between such purchaser or
lessor and Tenant and with the same force and effect as though this Lease was
made directly from such purchaser or lessor to Tenant. Tenant shall make all
rent payments thereafter directly to such purchaser or lessor.
22.09 - Landlord May Pay Tenant's Obligations
All costs and expenses which Tenant assumes or agrees to pay under the
provisions of this Lease shall at Landlord's election be treated as Additional
Rent, and in the event of non-payment, Landlord shall have all the rights and
remedies herein provided for in case of non-payment of rent or of a breach of
covenant. If Tenant shall default in making any payment required to be made by
Tenant (other than the payment of rent as provided by Article 3 above) or shall
default in performing any term, covenant or condition of this Lease on the part
of Tenant to be performed which shall involve the expenditure of money by
Tenant, Landlord at Landlord's option may, but shall not be obligated to, make
such payment or, on behalf of Tenant, expend such sums as may be necessary to
perform and fulfill such term, covenant or condition, and any and all sums so
expended by Landlord, with interest thereon at the rate of one and one-half
percent (1 1/2%) per month from the date of such expenditure, shall be and be
deemed to be Additional Rent, in addition to the rent provided in Article 3 and
shall be repaid by Tenant to Landlord on demand, but no such payment or
expenditures by Landlord shall be deemed a waiver of Tenant's default nor shall
it affect any other remedy of Landlord by reason of such default.
22.10 - Definition of "Tenant's Allocable Share"
(a) For purposes of determining Tenant's Allocable Share herein, except as
provided in Subsection (b) below, such share shall be the percentage resulting
from dividing the number of square feet set forth in Section 1.01 above, by the
total number of square feet leased in the Building as of the beginning of each
lease year or partial lease year.
(b) For purposes of determining Tenant's Allocable Share for Section 3.02,
such share shall be the percentage resulting from dividing the number of square
feet set forth in Section 1.01 above, by the total number of square feet
leasable in the Building as of the beginning of each lease year or partial lease
year.
22.11 - Division of Costs
Landlord may construct and operate other office buildings located within the
office park in which the Building is located. Tenant agrees that Landlord may
treat the Building and the adjacent office buildings as one unit for the purpose
of purchasing and providing energy and water, insurance and the common services
included within Operating Costs. Landlord shall equitably divide such costs
between the Building and the adjacent office buildings for each lease year (or
partial lease year) and the allocation of such costs shall be subject to
verification by Tenant at Landlord's offices.
22.12 - Effect of Captions
The captions or legends on this Lease are inserted only for convenient
reference or identification of the particular Sections. They are in no way
intended to describe, interpret, define or limit the scope, or extent or intent
of this Lease, or any Section or provision thereof.
19
<PAGE>
22.13 - Tenant Authorized to Do Business
Tenant represents and covenants that it is and throughout the term of this
Lease shall be authorized to do business in the state in which the Building is
located. In the event Tenant hereunder is a corporation, the persons executing
this Lease on behalf of the Tenant hereby covenant and warrant that: the Tenant
is a duly constituted corporation qualified to do business in the state in which
the Building is located, all Tenant's franchise and corporate taxes have been
paid to date; all future forms, reports, fees and other documents necessary for
Tenant to comply with applicable laws will be filed by Tenant when due; and such
persons are duly authorized by the governing body of such corporation to execute
and deliver this Lease on behalf of the corporation.
22.14 - Execution in Counterparts
This Lease may be executed in one or more counterparts, any one or all of
which shall constitute but one agreement.
22.15 - Memorandum of Lease
Upon request by either party, Landlord and Tenant agree to execute a
Memorandum or Notice of Lease in recordable form pursuant to applicable state
law. Upon the expiration or earlier termination or this Lease, the party who
shall have recorded such Memorandum or Notice of Lease shall promptly execute
any necessary instrument and remove the Memorandum or Notice of Lease from the
public records, and upon failure to do so, the other party, upon ten (10) days
prior notice to the party who recorded the aforesaid instrument, is hereby
appointed attorney-in-fact to execute any such instrument in the recording
party's name, place and stead. The requesting party shall pay for all recording
fees and attorney's fees in connection with the preparation and recording of the
Memorandum or Notice of Lease.
22.16 - Law Governing, Effect and Gender
This Lease shall be construed in accordance with the laws of the state in
which the Building is located and shall be binding upon the parties hereto and
their respective legal representatives, successors and assigns except as
expressly provided otherwise. Should any provisions of this Lease require
judicial interpretation, it is agreed that the court interpreting or construing
the same shall not apply a presumption that the terms of any such provisions
shall be more strictly construed against one party or the other by reason of the
rule of construction that a document is to be construed most strictly against
the party who itself or its agent prepared the same, it being agreed that the
agents of all parties have participated in the preparation of this Lease. Use
of the neuter gender shall be deemed to include the masculine or feminine, as
the sense requires. Any reference to successors and assigns of Tenant is not
intended to constitute a consent to any assignment by Tenant but has reference
only to those instances in which Landlord may later give consent to a particular
assignment as required by the provisions of Article 15 hereof.
20
<PAGE>
22.17 - Security Agreement
Tenant hereby grants to Landlord a security interest in all appliances,
equipment, fixtures, improvements, now or hereafter located in the Premises, and
all proceeds and accounts receivable therefrom, to secure the payment of the
Tenant's obligation set forth in this Lease. Such security interest will be
deemed to apply to all of the foregoing, notwithstanding that Tenant may have
reimbursed Landlord for all or any portion of the costs of the same in Exhibit
"C" of this Lease. Tenant authorizes Landlord to sign a Financing Statement as
may be required under the Uniform Commercial Code to perfect such security
interest. Upon the occurrence of any event of default pursuant to Section
15.01, Landlord shall be entitled to exercise all of the rights and remedies of
a secured party under the Uniform Commercial Code. Reasonable attorney's fees
of the Landlord in enforcing any right or exercising any remedy under this
Security Agreement shall be deemed a part of the obligation secured hereby.
22.18 - Amendments
Except as may be specifically provided otherwise in any mortgage on the
Building, the parties hereto mutually agree that so long as a mortgage or any
extension thereof shall be a lien upon the Premises, they will not reduce the
rents from that provided for in this Lease, provided for payments of rents prior
to time set forth herein, not terminate said Lease prior to the end of the term,
except as otherwise provided in this Lease, without first obtaining the consent
of the mortgagee in writing, and that any such proposed modification or
termination without said mortgagee's consent shall be void as against said
mortgagee.
22.19 - Brokerage
Tenant warrants that it has had no dealings with any broker or agent in
connection with this Lease and covenants and agrees to pay any commission,
compensation or charge claimed by any real estate broker, salesman or agent with
respect to this Lease or the negotiation thereof, and Tenant further covenants
to hold harmless and indemnify Landlord from and against any and all costs,
expense or liability in connection therewith.
22.20 - Complete Agreement
This Lease contains and embraces the entire Agreement between the parties
hereto and it or any part of it may not be changed, altered, modified, limited,
terminated, or extended orally or by any agreement between the parties unless
such agreement be expressed in writing, signed and acknowledged by the parties
hereto, their legal representative, successors or assigns, except as may be
expressly otherwise provided herein.
22.21 - Arbitration
Any controversy or claims arising or relative to any matter in connection
with this Lease, with reference to which this Lease shall expressly provide that
this section governs, shall be settled by arbitration in the City of Syracuse,
New York, in accordance with the rules of the American Arbitration Association
or its successor organization, and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction hereof.
22.22 - Joint and Several Liability
If Tenant or Tenant's Guarantor (if any) is a partnership or other business
organization, the members of which are subject to personal liability, the
liability of each such member, or Guarantor, where there is more than one
Guarantor, shall be deemed to be joint and several. Any present or future
partner of Tenant or Tenant's Guarantor(s) who is no longer a partner of Tenant
or its Guarantor(s) at the time of any default under this Lease shall,
nevertheless, remain liable for the obligations of Tenant under this Lease, as
if any such partner had been a partner on the date of such default.
22.23 - Invalidity of Particular Provisions
If any term or provision of this Lease or the application thereof to any
person or circumstances shall to any extent be invalid or unenforceable, the
remainder of this Lease, or the application of such term or provision to persons
or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby and each term and provision of this
Lease shall be valid and be enforced to the fullest extent permitted by law.
22.24 - Execution of Lease by Landlord
The submission of this document for examination and negotiation does not
constitute an offer to lease, or a reservation of, or option for, the Premises,
and this document shall be effective and binding only upon such date that this
lease shall have been executed and delivered by both Landlord and Tenant ("Lease
Date"). All negotiations, considerations, representations and understandings
between Landlord and Tenant are incorporated herein and may be modified or
altered only by an agreement in writing between Landlord and Tenant, and no act
or omission of any employee or other agent of Landlord shall later, change or
modify any of the provisions hereof. Notwithstanding the fact that the term of
this Lease shall commence on the Term Commencement Date, this lease and all of
the obligations of Landlord and Tenant are binding and are and shall be in full
force and effect from and after the Lease Date.
21
<PAGE>
22.25 - Relationship of the Parties
Nothing contained herein shall be deemed or construed by the parties hereto
nor by any third party as creating the relationship of principal and agent or of
partnership or of joint venture between the parties hereto, it being understood
and agreed that neither the method of computation of rent nor any other
provision herein contained, nor any acts of the parties hereto, shall be deemed
to create any relationship between the parties hereto other than Landlord and
Tenant.
22.26 - Other Provisions
There are attached hereto and incorporated herein the following additional
provisions (insert below the Section number and heading of any additional
provisions; if there are none, write "NONE"):
Section 22.27 - Expansion Premises
22.27 - Expansion Premises
Landlord hereby agrees to deliver to Tenant, and Tenant shall accept,
possession of additional premises shown on Exhibit "A" as the "Expansion
Premises" consisting of approximately 8,055 leaseable square feet ("Expansion
-----
Premises") upon such date that Landlord delivers written notice to Tenant that
the Expansion Premises are available for Tenant's occupancy. The date of said
notice is herein referred to as "Delivery Date", and the delivery of said notice
shall constitute delivery of the Expansion Premises by Landlord without need for
further act or writing by either Landlord or Tenant. Tenant shall accept
possession of the Expansion Premises in their AS IS condition. Notwithstanding
-- --
the foregoing, Landlord agrees to deliver the Expansion Premises to Tenant in
reasonably good and tenantable condition, broom clean, normal wear and tear due
to occupancy of its prior tenant accepted.
As of the Delivery Date, the term "Premises" as defined in Section 1.01,
above, and as used throughout this Lease, shall for all purposes automatically
be deemed to mean and include the Expansion Premises.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
22
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease and made the
same effective as of the date first above written.
Landlord: TENANT:
290 Woodcliff Drive Company PAETEC COMMUNICATIONS, INC.
By:/s/ Joseph R. Scuderi By: /s/ Arunas A. Chesonis
--------------------------------- ------------------------------
Joseph R. Scuderi Printed name: Arunas A. Chesonis
Member of the Executive Committee --------------------
Title: President / CEO
---------------
(Acknowledgment of Landlord)
STATE OF NEW YORK ]
SS.:
COUNTY OF ONONDAGA ]
On this 7 day of Aug., 1998, before me personally came Joseph R.
Scuderi, to me personally known, who, being by me duly sworn, did depose and say
that he resides at Onondaga County, New York, that he is a Member of the
Executive Committee of the entity described in and which executed the within
Lease as Landlord; and who acknowledged to me that he executed the same on
behalf of and in the name of such entity.
/s/ Michelle L. Smith
------------------------------
NOTARY PUBLIC
MICHELLE L. SMITH
Notary Public, State of New York
Qualified in Onondaga County
No. 5014751
My Commission Expires July 6, 1999
(Acknowledgment of Tenant)
STATE OF NEW YORK, ]
SS.:
COUNTY OF MONROE ]
On this 3rd day of August, 1998, before me personally came ARUNAS
A. CHESONIS, to me personally known, who, being by me duly sworn, did depose and
say that he resides at Victor, New York, that he is the Chief Executive Officer
of PaeTec Communications, Inc., the corporation described in and which executed
the within Lease as Tenant; and who further acknowledged to me that he executed
said Lease for, on behalf and in the name of said corporation by order of the
Board of Directors thereof.
/s/ Marcia A. Benwitz
-------------------------------
NOTARY PUBLIC
MARCIA A. BENWITZ
Notary Public, State of New York
Monroe County
My Commissioin Expires Sept. 30, 1998
23
<PAGE>
TABLE OF EXHIBITS
Exhibit A............................................................Floor Plan
Exhibit B........................................Legal Description or Site Plan
of Outside Common Areas
Exhibit C.......................................................Landlord's Work
Exhibit D.........................................................Tenant's Work
Exhibit E.................................................Rules and Regulations
Exhibit F.................................................INTENTIONALLY DELETED
Exhibit G.................................................INTENTIONALLY DELETED
24
<PAGE>
Exhibit 10.27.2
LEASE MODIFICATION AGREEMENT # 1
This Lease Modification Agreement # 1 ("Agreement") dated this 30th day of
September, 1998, is by and between 290 Woodcliff Drive Company, a general
partnership organized and existing pursuant to the laws of the State of New York
with a principal office at c/o The Widewaters Group, Inc., P.O. Box 3, 5786
Widewaters Parkway, Dewitt, New York 13214-0003 ("Landlord"), and PaeTec
Communications, Inc., a corporation with a principal office at 290 Woodcliff
Drive, Fairport, New York 14450 ("Tenant").
WITNESSETH THAT:
WHEREAS, Landlord and Tenant entered into a Standard Office Space Lease
dated as of July 10, 1998 ("Lease") relating to office space in the Woodcliff
III Office Building, located at 290 Woodcliff Drive, Fairport, New York;
WHEREAS, the Lease shall expire on December 31, 1999;
WHEREAS, pursuant to the provisions of Section 22.27 of the Lease, Tenant
has agreed to expand the Premises by accepting an additional 8,055 leasable
square feet from Landlord, as shown on Exhibit A-1, attached hereto and made a
part hereof;
WHEREAS, as of the date of this Agreement, Landlord has not delivered the
8,055 leasable square feet of premises to Tenant;
WHEREAS, Tenant desires to further expand the Premises to include an
additional 2,678 leasable square feet shown on Exhibit A-1 attached hereto and
made a part hereof;
WHEREAS, Landlord has agreed to deliver, and Tenant has agreed to accept the
additional 2,678 leasable square feet upon the terms and conditions of this
Agreement;
WHEREAS, as part of such expansion of the Premises, Landlord and Tenant
agree to modify and amend the Lease in order to reflect the same and to reflect
certain other modifications as set forth herein.
NOW THEREFORE, in consideration of the foregoing and other good and valuable
consideration, the receipt and legal sufficiency of which is hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1. Capitalized terms not defined in this Agreement shall have the meaning
ascribed to them in the Lease.
2. The Lease is hereby modified as follows:
a. Section 1.01 is hereby modified by deleting the sentence beginning with
"For purposes of this Section 1.01..." and ending with "...from and after
the Delivery Date." and inserting the following in its place and stead:
"For purposes of this Section 1.01, the sum of the square feet in the
Premises and Tenant's share of Building Common Areas (as defined in
Section 1.02 hereof) shall be 8,397 leasable square feet as of the
Term Commencement Date. Upon the Delivery Date of the Expansion
Premises (as both terms are defined in Section 22.27 below) the number
of leasable square feet contained in the Premises shall automatically
be increased by 8,055 leasable square feet. And upon the Turn Over
Date of the Additional Premises (as both terms are defined in Section
22.28 below) the number of leasable square feet contained in the
Premises shall automatically be increased by 2,678 leasable square
feet. Upon the later of (i) the Delivery Date, or (ii) the Turn Over
Date, Tenant's Premises shall consist of a total of 19,130 leasable
square feet."
b. Section 3.01 is hereby modified by replacing the first paragraph of the
Section with the following:
"Tenant agrees to pay to Landlord at the offices of Landlord, or at
such other place designated by Landlord, without any prior demand
therefor and without any deduction or set-off whatsoever, and as fixed
monthly rent, the sum of Twelve Thousand Seven Hundred Eighty-eight
and 96/100 Dollars ($12.788.96) (sometimes referred to herein as
"Fixed Monthly Rent"), payable in advance upon the first day of each
calendar month during the term hereof. The monthly installment shall
be deemed to have been paid upon such first day only if actually
received by such first day. Anything contained in the foregoing to the
contrary notwithstanding, the amount of Fixed Monthly Rent payable to
Landlord is subject to automatic increases in accordance with Sections
22.27 and 22.28 of this Lease."
c. Section 22.27 of the Lease is hereby modified by the addition of the
following to the end of the first paragraph of said Section:
"Upon the Delivery Date, Tenant's Fixed Monthly Rent then in effect
shall automatically increase by Thirteen Thousand Eighty-nine and
38/100 Dollars ($13,089.38) and shall be due in accordance with and be
subject to the provisions of Section 3.01."
1
<PAGE>
d. Section 22.28 is hereby added to the Lease and shall state as follows:
"22.28 Additional Premises
Landlord agrees to deliver approximately 2,678 leasable square
feet of additional premises located on the first floor of the Building
("Additional Premises") to Tenant and Tenant agrees to accept
possession of the Additional Premises in its "as is" condition. The
date that Landlord notifies Tenant that possession of the Additional
Premises is available to Tenant is hereinafter referred to as the
"Turn Over Date". As of the Turn Over Date, the term "Premises", as
defined in Section 1.01 above, and as use throughout this Lease, shall
automatically be deemed to mean and include the Additional Premises
and Tenant's Fixed Monthly Rent then in effect shall automatically
increase by Four Thousand Three Hundred Fifty-one and 75/100 Dollars
($4,351.75) and shall be due in accordance with and be subject to the
provisions of Section 3.01."
e. Exhibit "A" to the Lease is hereby replaced by Exhibit "A-1", attached
hereto and made a part hereof, and all references to Exhibit "A" in the
Lease shall be deemed to refer to Exhibit "A-1.
3. Tenant agrees to pay to Landlord additional security in the amount of
Four Thousand Three Hundred Fifty-one and 75/100 Dollars ($4,351.75) upon its
execution and delivery of this Agreement. Such amount shall be held by Landlord
in accordance with and shall be subject to the provisions of Section 3.05 of the
Lease.
4. This Agreement may be executed in one or more counterparts, any one or
all of which constitute one document.
5. Tenant hereby certifies to Landlord that as of the date hereof: (i) the
Lease is in full force and effect; (ii) there currently exist no default by
Landlord under the Lease, nor any condition which with the giving of notice or
the passage of time, or both, would constitute a default under the Lease on the
part of Landlord; (iii) Tenant has no existing set-offs, counterclaims or
defenses against Landlord under the Lease; and (iv) the Lease as modified hereby
contains the entire agreement between the parties hereto with respect to the
Premises, the Lease and the Building.
6. Tenant represents and warrants that it has taken all necessary
corporate, partnership or other action necessary to execute and deliver this
Agreement, and that this Agreement constitutes the legally binding obligation of
Tenant enforceable in accordance with its terms. Tenant further represents and
warrants that it has full and complete authority to enter into and execute this
Agreement and acknowledges that Landlord is relying upon Tenant's representation
of its authority to execute this Agreement and Tenant shall save and hold
Landlord harmless from any claims, or damages including reasonable attorneys'
fees arising from Tenant's misrepresentation of its authority to enter into and
execute this Agreement.
7. The effective date of this Agreement for all purposes shall be upon its
full execution and it shall not be binding unless and until executed on behalf
of both parties hereof.
8. As of the effective date, this Agreement shall be attached to and
automatically be deemed a part of the Lease. Except as herein modified and
amended, all other terms and conditions of the Lease are hereby ratified and
shall continue in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease Modification
Agreement # 1.
LANDLORD:
290 Woodcliff Drive Company
By: /s/ Joseph R. Scuderi
----------------------------------
Joseph R. Scuderi
Member of the Executive Committee
TENANT:
PaeTec Communications, Inc.
By: /s/ Arunas A. Chesonis
----------------------------------
Arunas A. Chesonis, President and CEO
2
<PAGE>
STATE OF NEW YORK )
SS.:
COUNTY OF ONONDAGA )
On this 30th day of September, 1998, before me personally came Joseph R.
Scuderi, to me personally known, who, being by me duly sworn, did depose and say
that he resides in Manluis, N.Y.; that he is a Member of the Executive Committee
of 290 Woodcliff Drive Company; that he is known to me to be one of the Members
of the Executive Committee of the partnership that executed the within
instrument; and he acknowledged to me that he executed the same on behalf of and
in the name of such partnership.
/s/ Margo M. McCaffery
-------------------------------
NOTARY PUBLIC
MARGO M. McCAFFERY
Notary Public, State of New York
No. 01MC5056553
Qualified in Madison County
Commission Expires March 4, 2000
STATE OF NEW YORK )
SS.:
COUNTY OF MONROE )
On this 28th day of September, 1998, before me personally came Arunas A.
Chesonis, to me personally known, who, being by me duly sworn, did depose and
say that he resides in Rochester, NY, that he is the President and CEO of
PaeTec Communications, Inc. the corporation described in and which executed the
within instrument; and that he signed his name thereto by order of the Board of
Directors of said corporation.
/s/ Marcia A. Benwitz
-------------------------------
NOTARY PUBLIC
MARCIA A. BENWITZ
Notary Public, State of New York
Monroe County
My Commissioin Expires Sept. 30, 1998
3
<PAGE>
Exhibit 10.27.3
LEASE MODIFICATION AGREEMENT # 2
This Lease Modification Agreement # 2 ("Agreement") dated this 11th day of
October, 1999, is by and between 290 Woodcliff Drive Company, a general
partnership organized and existing pursuant to the laws of the State of New York
with a principal office at c/o The Widewaters Group, Inc., P.O. Box 3, 5786
Widewaters Parkway, Dewitt, New York 13214-0003 ("Landlord"), and PaeTec
Communications, Inc., a corporation with a principal office at 290 Woodcliff
Drive, Fairport, New York 14450 ("Tenant").
WITNESSETH THAT:
WHEREAS, Landlord and Tenant entered into a Standard Office Space Lease
dated as of July 10, 1998, modified by Lease Modification Agreement #1 dated
September 30, 1998 (collectively, the "Lease") relating to 19,130 leasable
square feet of office space in the Woodcliff III Office Building, located at 290
Woodcliff Drive, Fairport, New York;
WHEREAS, the Lease shall expire on December 31, 1999;
WHEREAS, Landlord and Tenant have agreed to extend the term of the Lease
for an additional twelve (12) months; and
WHEREAS, as part of such extension of the term, Landlord and Tenant agree
to modify and amend the Lease in order to reflect the same and to reflect
certain other modifications as set forth herein.
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and legal sufficiency of which is hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1. Capitalized terms not defined in this Agreement shall have the meaning
ascribed to them in the Lease.
2. The term of the Lease is hereby extended for a period of twelve (12) months
commencing January 1, 2000, and expiring December 31, 2000 (said twelve-
month period is hereinafter referred to as the "Extension Term"). The
Extension Term shall be upon all the same terms and conditions as are
contained in the Lease, except that the Fixed Monthly Rent shall be Twenty-
two and 50/100 Dollars ($22.50) per leasable square foot of premises [i.e.
Thirty-five Thousand Eight Hundred Sixty-eight and 75/000 Dollars
($35,868.75)], payable in advance and in accordance with Section 3.01 of
the Lease.
3. Landlord shall have the right to recapture all, or a portion, of the
Premises (the "Recaptured Premises") by giving Tenant thirty (30) days
prior written notice at any time after September 1, 2000 ("Right To
Recapture"). If Landlord exercises its Right To Recapture, Tenant's rights
to the Recaptured Premises under the Lease shall be cancelled and
terminated effective as of the later of (i) the date set forth in
Landlord's notice as the termination date, or (ii) thirty days after
Tenant's receipt of the notice. If Landlord recaptures less than the entire
Premises (a) the Fixed Monthly Rent shall be prorated on the basis of the
number of leaseable square feet retained by Tenant in proportion to the
number of leaseable square feet contained in the Premises before Landlord's
exercise of its Right To Recapture, and (b) the Lease shall continue
thereafter in full force and effect with respect to the portion of the
Premises retained by Tenant, and (c) the parties shall execute an amendment
of the Lease to provide for the reduction in square footage and Fixed
Monthly Rent.
4. This Agreement may be executed in one or more counterparts, any one or
all of which constitute one document.
5. Tenant hereby certifies to Landlord that as of the date hereof: (i) the
Lease is in full force and effect; (ii) there currently exist no default by
Landlord under the Lease, nor any condition which with the giving of notice
or the passage of time, or both, would constitute a default under the Lease
on the part of Landlord; (iii) Tenant has no existing set-offs,
counterclaims or defenses against Landlord under the Lease; and (iv) the
Lease as modified hereby contains the entire agreement between the parties
hereto with respect to the Premises, the Lease and the Building.
6. Tenant represents and warrants that it has taken all necessary corporate,
partnership or other action necessary to execute and deliver this
Agreement, and that this Agreement constitutes the legally binding
obligation of Tenant enforceable in accordance with its terms. Tenant
further represents and warrants that it has full and complete authority to
enter into and execute this
1
<PAGE>
Agreement and acknowledges that Landlord is relying upon Tenant's
representation of its authority to execute this Agreement and Tenant shall
save and hold Landlord harmless from any claims, or damages including
reasonable attorneys' fees arising from Tenant's misrepresentation of its
authority to enter into and execute this Agreement.
7. The effective date of this Agreement for all purposes shall be upon its
full execution and it shall not be binding unless and until executed on
behalf of both parties hereof.
8. As of the effective date, this Agreement shall be attached to and
automatically be deemed a part of the Lease. Except as herein modified and
amended, all other terms and conditions of the Lease are hereby ratified
and shall continue in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease Modification
Agreement #2.
LANDLORD:
290 Woodcliff Drive Company
By: /S/ Joseph R. Scuderi
---------------------------------
Joseph R. Scuderi
Member of the Executive Committee
TENANT:
PaeTec Communications, Inc.
By: /s/ Arunas A. Chesonis
------------------------------
Arunas A. Chesonis
President and CEO
STATE OF NEW YORK )
) SS.:
COUNTY OF ONONDAGA )
On the 11th day of October in the year 1999, before me, the undersigned, a
Notary Public in and for said State, personally appeared Joseph R. Scuderi,
personally known to me or proved to me on the basis of satisfactory evidence to
be the individual whose name is subscribed to the within instrument and
acknowledged to me that he executed the same in his capacities, and that by his
signature(s) on the instrument, the individuals, or the person upon behalf of
which the individual acted, executed the instrument.
/s/ Kelly Lynn Crabtree
------------------------------
Notary Public
KELLY LYNN CRABTREE
Notary Public, State of New York
Qualified in Onondaga Co.
No. 01CA4861404
My Commission Expires June 9, 2000
STATE OF NEW YORK )
) SS.:
COUNTY OF MONROE )
On the 5th day of October in the year 1999, before me, the undersigned, a Notary
Public in and for said State, personally appeared Arunas A. Chesonis, personally
known to me or proved to me on the basis of satisfactory evidence to be the
individual(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
capacity(ies), and that by his/her/their signature(s) on the instrument, the
individual(s), or the person upon behalf of which the individual(s) acted,
executed the instrument.
/s/ Marcia A. Benwitz
-------------------------------
NOTARY PUBLIC
MARCIA A. BENWITZ
Notary Public, State of New York
Monroe County
My Commissioin Expires Sept. 30, 1998
2
<PAGE>
Exhibit 21.1
------------
SUBSIDIARIES OF PAETEC CORP.
<TABLE>
<CAPTION>
Other names under which such
Name Jurisdiction of Organization subsidiary does business
---- ---------------------------- ----------------------------
<S> <C> <C>
PaeTec Communications of Virginia,
Inc................................ Virginia --
PaeTec Capital Corp................. Delaware --
PaeTec Communications, Inc.......... Delaware AutoCom; AutoCom Long Distance
PaeTec International, Inc........... Delaware --
PaeTec Online, Inc./1/.............. Delaware OnNet Mall
East Florida Communications, Inc.... Florida --
WANLink Communications, L.L.C./2/... Delaware --
</TABLE>
/1/ Ownership is slightly less than 100% due to employee ownership of shares.
/2/ The Company and Subsidiaries own 50.1% of the membership interests in this
Delaware limited liability company.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of PaeTec Corp. on Form S-1
of our reports dated March 22, 2000 and May 29, 1998, appearing in the
Prospectus, which is part of this Registration Statement, and to the references
to us under the headings "Summary Consolidated Financial and Operating Data",
"Selected Financial and Operating Data", and "Experts" in such Prospectus.
Our audits of the consolidated financial statements referred to in our
aforementioned report dated March 22, 2000 also included the consolidated
financial statement schedule of PaeTec Corp., listed in Item 16. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement 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.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Rochester, New York
April 14, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of Registration
Statement of PaeTec Corp. on Form S-1.
/s/ Arthur Andersen LLP
Detroit, Michigan
April 13, 2000.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 8-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> MAY-19-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 2,434 7,435
<SECURITIES> 0 0
<RECEIVABLES> 160 13,199
<ALLOWANCES> (2) (2,360)
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,785 19,080
<PP&E> 12,027 66,344
<DEPRECIATION> (243) (3,960)
<TOTAL-ASSETS> 15,716 121,986
<CURRENT-LIABILITIES> 3,081 22,759
<BONDS> 0 0
0 0
0 0
<COMMON> 153 270
<OTHER-SE> 12,482 29,791
<TOTAL-LIABILITY-AND-EQUITY> 15,716 121,986
<SALES> 150 23,347
<TOTAL-REVENUES> 150 23,347
<CGS> 0 0
<TOTAL-COSTS> 96 16,809
<OTHER-EXPENSES> 6,013 44,802
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 2,434
<INCOME-PRETAX> (5,852) (40,343)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,852) (40,343)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,852) (40,343)
<EPS-BASIC> (0.67) (1.93)
<EPS-DILUTED> (0.67) (1.93)
</TABLE>
