<PAGE>
As filed with the Securities and Exchange Commission on November 19, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CHOICE ONE COMMUNICATIONS INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
Delaware 4813 16-1550742
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
100 Chestnut Street
Rochester, New York 14604-2417
(716)-246-4231
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Ajay Sabherwal
Senior Vice President and Chief Financial Officer
Choice One Communications Inc.
100 Chestnut Street
Rochester, New York 14604-2417
(716) 246-4231
Facsimile (716) 530-2733
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
James A. Locke III, Esq. Richard D. Truesdell, Jr., Esq.
Richard F. Langan, Jr., Esq. Davis Polk & Wardwell
John C. Partigan, Esq. 450 Lexington Avenue
Nixon Peabody LLP New York, New York 10017
1300 Clinton Square (212) 450-4000
Rochester, New York 14604 Facsimile (212) 450-4800
(716) 263-1000
Facsimile (716) 263-1600
</TABLE>
---------------
Approximate date of commencement of proposed sale to 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
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 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 registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of each class of Proposed Maximum Aggregate Amount of
securities to be registered Offering Price (1)(2) Registration Fee
- ------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value per
share........................... $100,000,000 $27,800
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) In accordance with Rule 457(o) under the Securities Act of 1933, as
amended, the number of shares being registered and the proposed maximum
offering price per share are not included in this table.
(2) Estimated solely for purposes of calculating the registration fee.
---------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This registration statement contains two separate prospectuses. The first
prospectus relates to a public offering in the United States and Canada of an
aggregate of shares of common stock. The second prospectus relates to a
concurrent offering outside the United States and Canada of an aggregate of
shares of common stock. The prospectuses for each of the offerings will be
identical with the exception of an alternate front cover page for the offering
outside the United States and Canada. Such alternate cover page appears in
this registration statement immediately following the cover page for the
offering in the United States and Canada.
2
<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 we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued November 19, 1999
Shares
[Choice One Communications Inc. Logo]
COMMON STOCK
-----------
Choice One Communications Inc. is offering shares of its common stock. This is
our initial public offering and no public market currently exists for our
shares. We anticipate that the initial public offering price will be between
$ and $ per share.
-----------
We expect the common stock to be approved for quotation on the Nasdaq National
Market under the symbol "CWON."
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 8.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Choice One
-------- ------------- -----------
<S> <C> <C> <C>
Per Share........................ $ $ $
Total............................ $ $ $
</TABLE>
Choice One Communications Inc. has granted the underwriters the right to
purchase up to an additional shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 2000.
-----------
MORGAN STANLEY DEAN WITTER
LEHMAN BROTHERS
WARBURG DILLON READ LLC
FIRST UNION SECURITIES, INC.
CIBC WORLD MARKETS
, 2000
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued November 19, 1999
Shares
[Choice One Communications Inc. Logo]
COMMON STOCK
-----------
Choice One Communications Inc. is offering shares of its common stock. This is
our initial public offering and no public market currently exists for our
shares. We anticipate that the initial public offering price will be between
$ and $ per share.
-----------
We expect the common stock to be approved for quotation on the Nasdaq National
Market under the symbol "CWON."
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 8.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Choice One
-------- ------------- -----------
<S> <C> <C> <C>
Per Share........................ $ $ $
Total............................ $ $ $
</TABLE>
Choice One Communications Inc. has granted the underwriters the right to
purchase up to an additional shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 2000.
-----------
MORGAN STANLEY DEAN WITTER
LEHMAN BROTHERS
WARBURG DILLON READ
FIRST UNION SECURITIES, INC.
CIBC WORLD MARKETS
, 2000
<PAGE>
[Map of northeastern United States, showing current and proposed facilities]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................. 2
Risk Factors....................... 8
Use of Proceeds.................... 21
Dividend Policy.................... 21
Capitalization..................... 22
Dilution........................... 23
Selected Consolidated Financial and
Operating Data.................... 24
Unaudited Pro Forma Condensed
Combined Financial Information.... 26
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 33
Business........................... 42
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management.......................... 66
Certain Relationships and Related
Transactions....................... 76
Security Ownership of Certain
Beneficial Owners and Management... 78
Description of Capital Stock........ 80
United States Federal Tax
Considerations for Non-U.S. Holders
of Common Stock.................... 84
Shares Eligible for Future Sale..... 88
Underwriters........................ 90
Legal Matters....................... 93
Experts............................. 93
Where You Can Find More
Information........................ 93
Index to Financial Statements....... F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock
and seeking offers to buy shares of common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or any sale of the common stock. In this
prospectus, "Choice One," the "Company," "we," "us" and "our" refer to Choice
One Communications Inc.
Unless otherwise specifically stated, the information throughout this
prospectus gives effect to the -for-1 split of our common stock which
will occur prior to the closing of this offering and does not take into
account the possible issuance of additional shares of common stock to the U.S.
underwriters pursuant to their rights to purchase additional shares to cover
over-allotments.
Our logo and certain titles and logos of our services mentioned in this
prospectus are our trademarks. Each trademark, trade name or service mark of
any other company appearing in this prospectus belongs to its holder.
We have not taken any action to permit a public offering of the shares of
common stock outside the United States or to permit the possession or
distribution of this prospectus outside the United States. Persons outside the
United States who come into possession of this prospectus must inform
themselves about and observe any restrictions relating to the offering of the
shares of common stock and the distribution of this prospectus outside the
United States.
Until , 2000, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This delivery requirement is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company, the common stock being sold in this offering
and the financial statements and notes thereto appearing elsewhere in this
prospectus.
Choice One Communications
We are an integrated communications provider offering broadband data and
voice telecommunications services primarily to small and medium-sized
businesses in second and third tier markets in the northeastern United States.
Our offerings include high speed data and Internet service, principally
utilizing digital subscriber line, or DSL, technology, local exchange service
and long distance service. We seek to become the leading integrated
communications provider, or ICP, in each of our target markets by offering a
single source for competitively priced, high quality, customized
telecommunications services. A key element of our strategy is to be one of the
first ICPs to provide comprehensive coverage in each of the markets we serve.
We are achieving this market coverage by installing both data and voice network
equipment in multiple incumbent local exchange carrier central offices, a
process known as collocation. We also intend to maximize utilization of our
market network coverage by offering data and voice services on a wholesale
basis to Internet service and other telecommunications providers. Through our
strategy of connecting substantially all of our clients directly to our own
switches, we are able to more efficiently route traffic, ensure quality service
and control costs. As of November 15, 1999, we had service agreements with
3,150 clients for 21,733 access lines, including 254 DSL lines, of which we had
initiated service with 2,459 clients for 14,999 access lines, including 117 DSL
lines.
We currently offer data and voice services in nine markets and intend to
expand into approximately 11 additional markets by the end of the second
quarter 2001. Following completion of our planned expansion to these
approximately 20 markets, we believe our networks will be able to reach
approximately 3.7 million business lines, which constitute more than 75% of the
estimated business lines in these markets, and 5.3 million households.
We divide our target markets into four stages of development:
. Operational. We began providing services and generating client revenues
in the Albany, NY; Buffalo, NY; Manchester, NH; Pittsburgh, PA;
Providence, RI; Rochester, NY; Springfield, MA; Syracuse, NY; and
Worcester, MA markets during the past nine months. Our switching
facilities servicing each of these markets consist of both packet and
circuit-switched networks.
. Under Construction. We are currently constructing switching facilities
by installing packet-switched networks to offer DSL services in
Allentown, PA; Harrisburg, PA; and Scranton, PA. We expect to be
operational in these markets by the end of the first quarter 2000 and to
add voice capabilities to these networks by means of either "voice over
DSL" or access nodes, which will work in concert with the packet-based
architecture at our collocation sites.
. In Development. We plan to construct switching facilities consisting of
both packet and circuit-switched networks in the Hartford, CT and New
Haven, CT markets, which we expect to be operational during the second
quarter 2000.
. Planned. We are in the process of evaluating other second and third tier
cities and intend to expand into approximately six additional markets in
the northeastern United States by the end of the second quarter 2001.
2
<PAGE>
As of November 15, 1999, we had applications accepted to collocate our
network equipment in 223 incumbent local exchange carrier central offices;
completed 94 of these collocations; and had 129 additional collocations in
progress in our operational and under construction markets. We have also
installed equipment to provide DSL services in 85 of our current collocations
and expect to have DSL services available in all 115 collocations targeted for
completion by the end of 1999.
We have developed a flexible network buildout strategy allowing us to
leverage rapidly evolving telecommunications technology. In each of our first
nine markets, we have deployed or intend to deploy both packet and circuit-
switched platforms. In our Allentown, Harrisburg and Scranton markets, we will
employ a "DSL First" method of market entry by installing a circuit or packet-
switched network and initially offering only data services. We will then add
packet-switched voice services within 12 months after entering such markets. We
believe this DSL First strategy provides for faster time to market and lower
initial capital costs, while preserving flexibility for our future development.
We intend to continue entering new markets using methods tailored to meet the
needs of clients in our target markets and the technology available in those
markets. We expect that our market entry strategy and network architecture will
continue to evolve in order to capitalize on advances in telecommunications
technology and to satisfy the changing needs of our clients.
We have designed and are developing integrated operations support systems,
or OSS, and other back office systems that we believe will provide significant
competitive advantages by enhancing our efficiency and allowing us to support
rapid and sustained growth and provide exceptional client care. We have
automated most of our back office systems and are in the process of integrating
them into a seamless end-to-end system that will synchronize multiple tasks,
including installation, billing and client care. We also strive to minimize the
time between a client order and service installation. To achieve this goal, we
have established an on-line and real-time connection, known as electronic
bonding, of our operations support systems with Bell Atlantic Corporation. We
anticipate establishing similar connections with other incumbent local exchange
carriers, or ILECs.
In each of our markets, we have a locally based, dedicated and experienced
sales force that provides high quality, personalized client care. In addition
to our direct sales force, we use third party agencies to sell our services. As
of November 15, 1999, we had 129 persons in our sales and sales support staff
and had sales arrangements with several third party agencies.
We intend to acquire telecommunications companies in our target market
region to accelerate market penetration and growth. Once acquired, we plan to
expand the range of services offered by the acquired entities to correspond to
the full range of Choice One services. In November 1999, we acquired Atlantic
Connections, L.L.C., a local and long distance service provider with operations
in Portsmouth, NH and Worcester, MA, for an initial cash purchase price of
approximately $8.3 million plus up to an additional $2.1 million that would be
payable in cash, or at our option, in common stock, if specified performance
criteria are met in the 12 months following the acquisition. Our strategy is to
migrate the approximately 3,100 small and medium-sized business clients of
Atlantic Connections to our switch-based network and to offer a full suite of
Choice One data and voice services to these clients.
We were founded in June 1998 by a group of telecommunications executives led
by Steve Dubnik, the former chief operating officer of North American
Operations of ACC Corp. In addition to Mr. Dubnik, members of our group of
founding executives include Kevin Dickens, Senior Vice President, Operations
and Engineering; Mae Squier-Dow, Senior Vice President, Sales, Marketing and
Service; and Philip Yawman, Senior Vice President, Corporate Development, all
of whom were formerly executives at ACC Corp. Mr. Dubnik and this group of
founding executives have hired a management team with extensive experience and
success in the telecommunications industry. Members of our management team have
significant experience in the northeastern markets, having previously served at
such companies as Frontier Corporation, Teleport Communications Group, Inc.,
and MFS Communications Company. Our 20 top executives and managers have an
average of 15 years of experience in the telecommunications industry.
3
<PAGE>
Our approximately $62.1 million of funded equity has been provided by
experienced investors in the telecommunications industry, including Morgan
Stanley Capital Partners III, L.P., Fleet Equity Partners VI, L.P. and Waller-
Sutton Media Partners, L.P., and our management team. Our credit facility
permits us to borrow up to $150.0 million for the next eight years with maximum
borrowing limits to be reduced during the eight year period, subject to the
covenants, restrictions and significant borrowing conditions described in the
credit facility.
Business Strategy
The key elements of our business strategy are to:
. capitalize on early to market advantage;
. offer broad coverage to small and medium-sized businesses in our target
markets;
. lead competition in providing DSL services;
. use our flexible network buildout strategy to rapidly and cost
effectively enter new markets;
. target underserved clients in second and third tier markets;
. offer customized bundled services with a single point of contact and a
single bill;
. utilize efficient automated and integrated back office systems that can
support rapid and sustained growth;
. increase market share by establishing service-driven client
relationships and creating a local presence;
. accelerate growth through acquisitions of telecommunications and related
businesses; and
. leverage management's experience by drawing upon its expertise and
success in the telecommunications industry.
----------------
We are a Delaware corporation with our principal executive offices located
at 100 Chestnut Street, Suite 700, Rochester, New York 14604. Our telephone
number is 716-CHOICE1.
4
<PAGE>
THE OFFERING
Common stock offered:
<TABLE>
<C> <S>
U.S. offering................................... shares
International offering.......................... shares
Total....................................... shares
Common stock to be outstanding after the offering.. shares,
excluding up to an
additional shares
issuable upon exercise
of the underwriters'
over-allotment option
and an aggregate of
shares issuable upon
exercise of stock
options granted as of
, 2000 (of which
are currently
exercisable).
Over-allotment option.............................. shares
Use of proceeds.................................... We estimate that our net
proceeds from the
offering will be
approximately $
million, based on an
assumed initial public
offering price of
$ per share. We
plan to use net proceeds
from the offering for
capital expenditures,
repayment of
indebtedness and general
corporate purposes. See
"Use of Proceeds."
Dividend policy.................................... We do not intend to pay
dividends on our common
stock. We plan to retain
any earnings for use in
the operation of our
business and to fund
future growth.
Proposed Nasdaq National Market symbol............. CWON
</TABLE>
5
<PAGE>
SUMMARY CONSOLIDATED AND COMBINED FINANCIAL AND OPERATING DATA
The following table sets forth our selected consolidated financial data for
the periods indicated. The consolidated statement of operations data and
consolidated balance sheet data as of and for the period from inception through
December 31, 1998 and as of and for the nine months ended September 30, 1999
have been derived from our consolidated financial statements included elsewhere
in this prospectus, which have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report included elsewhere in this
prospectus. The unaudited pro forma combined statement of operations data and
other financial and operating data give effect to the acquisition of Atlantic
Connections, L.L.C. as if it had occurred on January 1, 1998. The unaudited pro
forma combined balance sheet data give effect to that acquisition as if it had
occurred on September 30, 1999. The pro forma as adjusted combined balance
sheet data set forth below are unaudited and give effect to the offering and
the application of the net proceeds of the offering, assuming an initial
offering price of $ per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us, as if
they had occurred on September 30, 1999. The unaudited pro forma statements do
not give effect to the up to $2.1 million additional purchase price payable in
cash or, at our option, our common stock, in connection with the acquisition of
Atlantic Connections if specified performance criteria are met in the 12 months
following the acquisition. The results of our operations for the periods
indicated are not necessarily indicative of the results of operations in the
future.
We have defined EBITDA as earnings before interest, taxes, depreciation,
amortization and noncash deferred compensation. EBITDA is not a measure of
performance under generally accepted accounting principles and should not be
used as a substitute for net income, net cash provided by operating activities
or other operating or cash flow statement data prepared in accordance with
generally accepted accounting principles. Nevertheless, we have presented data
related to EBITDA because we believe that EBITDA may be used by investors as
supplemental information to evaluate a company's financial performance,
including its ability to incur and/or service debt. Our definition of EBITDA
may not be comparable to similarly titled measures used by other companies.
6
<PAGE>
You should read the financial data set forth below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our audited financial statements with related notes and our
unaudited pro forma financial data with related notes contained elsewhere in
this prospectus.
<TABLE>
<CAPTION>
Period Ended Nine Months Ended
December 31, 1998 September 30, 1999
--------------------- ---------------------
Actual Pro forma Actual Pro forma
-------- ----------- -------- -----------
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues.......................... $ - $ 6,472 $ 947 $ 7,186
Operating expenses:
Network costs................... - 5,287 2,577 7,371
Selling, general and
administrative................. 4,684 6,495 12,826 14,310
Noncash deferred compensation... 87 87 996 996
Depreciation and amortization... 36 1,333 3,373 4,044
-------- ------- -------- --------
Total operating expenses...... 4,807 13,202 19,772 26,721
-------- ------- -------- --------
Loss from operations.......... (4,807) (6,730) (18,825) (19,535)
Interest income (expense), net.... 22 (866) (832) (1,498)
-------- ------- -------- --------
Net loss.......................... $ (4,785) $(7,596) $(19,657) $(21,033)
======== ======= ======== ========
Net loss per share................ $ $ $ $
======== ======= ======== ========
Other Financial Data:
Net cash provided by (used in)
operating activities............. $ 6,587 $(16,740)
Net cash used in investing
activities....................... (21,146) (33,043)
Net cash provided by financing
activities....................... 16,050 48,295
Capital expenditures.............. 21,146 33,043
EBITDA............................ (4,684) $(5,310) (14,456) $(14,495)
Operating Data:
Lines sold........................ - 1,854 12,303 16,151
UNE's installed................... - - 6,060 6,060
T-1 channels installed............ - - 869 869
DSL lines installed............... - - 57 57
Resold lines installed............ - 1,854 - 3,848
-------- ------- -------- --------
Total lines installed............. - 1,854 6,986 10,834
Collocations installed............ - - 68 68
Markets in operation.............. - 2 5 7
Number of switches deployed....... - - 5 5
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1999
---------------------------------
Pro forma,
Actual Pro forma as adjusted
-------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................... $ 3 $ 230 $
Working capital (deficit).................... (9,582) (10,089)
Property, plant and equipment, net........... 50,780 50,863
Total assets................................. 54,180 64,135
Long-term debt............................... 5,000 13,266
Stockholder's equity......................... 38,420 38,420
</TABLE>
7
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occur, our business, financial
condition or results of operations could be materially adversely affected. In
such case, the trading price of our common stock could decline, and you may
lose all or part of your investment.
History of Operations--We only have a limited history upon which you can base
your investment decision
We were formed in June 1998 and we have recently entered nine markets and
are starting the process of entering additional markets. As a result of our
limited operating history, prospective investors have limited operating and
financial data about us upon which to base an evaluation of our performance
and an investment in our common stock. Our ability to provide an integrated
package of bundled telecommunications services on a widespread basis and to
generate operating profits and positive operating cash flow will depend upon
our ability, among other things, to:
. develop our operational support and other back office systems;
. obtain state authorizations to operate as a competitive local exchange
carrier and any other required governmental authorizations;
. attract and retain an adequate client base;
. raise additional capital;
. attract and retain qualified personnel; and
. enter into and implement interconnection agreements with ILECs on
satisfactory terms.
We cannot assure you that we will be able to achieve any of these
objectives, generate sufficient revenues to achieve or sustain profitability,
meet our working capital and debt service requirements or compete successfully
in the telecommunications industry.
Future Revenues--We anticipate having future negative EBITDA and operating
losses before we realize any significant revenues
The development of our business and the deployment of our services and
systems will require significant capital expenditures, a substantial portion
of which will need to be incurred before the realization of sufficient
revenues. We expect that our earnings before interest, taxes, depreciation and
amortization, or EBITDA, will be negative while we emphasize development,
construction and expansion of our telecommunications services business and
until we establish a sufficient revenue-generating client base. For the nine
months ended September 30, 1999 and for the period from inception (June 2,
1998) through December 31, 1998, after giving pro forma effect to the
acquisition of Atlantic Connections and the incurrence of debt in connection
therewith, we would have had operating losses of $19.5 million and $6.7
million, net losses of $21.0 million and $7.6 million and negative EBITDA of
$14.5 million and $5.3 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." We expect that each of our
markets will generally produce negative EBITDA for at least 18 to 30 months
after operations commence in such market, and we expect to experience
increasing operating losses, net losses and negative EBITDA as we expand our
operations. We cannot assure you that we will achieve or sustain profitability
or generate sufficient EBITDA to meet our working capital and debt service
requirements, which could have a material adverse effect on our business,
financial condition and results of operations.
8
<PAGE>
Significant Capital Requirements--To expand and develop our business we will
need a significant amount of cash; our ability to obtain additional financing
is uncertain
The expansion and development of our business and the deployment of our
networks, services and systems will require significant capital expenditures,
working capital, debt service and cash flow deficits. Our principal capital
expenditure requirements involve the purchase and installation of collocation
equipment, network switches and switch electronics, software for billing,
client service and information systems, and network operations expenditures.
The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of, among other things, the demand
for our services and regulatory, technological and competitive developments,
including additional market developments and new opportunities, in our
industry. Our revenues and costs may also be dependent upon factors that are
not within our control, including regulatory changes, changes in technology,
and increased competition. Due to the uncertainty of these factors, actual
revenues and costs may vary from expected amounts, possibly to a material
degree, and such variations are likely to affect our future capital
requirements. If our actual capital requirements exceed our estimates, we may
not be able to enter all of our targeted markets. We also expect that we may
require additional financing or require financing sooner than anticipated if
our development plans change or prove to be inaccurate or if we alter the
schedule of our roll-out plan. We may also require additional financing in
order to take advantage of unanticipated opportunities, to effect acquisitions
of businesses, to develop new services or to otherwise respond to changing
business conditions or unanticipated competitive pressures. Sources of
additional financing may include commercial bank borrowings, vendor financing,
or the private or public sale of equity or debt securities. We cannot assure
you that we will be successful in raising sufficient additional capital on
favorable terms or at all or that the terms of any indebtedness we may incur
will not impair our ability to develop our business. Failure to raise
sufficient funds may require us to modify, delay or abandon some of our
planned future expansion or expenditures, which could have a material adverse
effect on our business, financial condition and results of operations. In
addition, availability under our credit facility is subject to significant
conditions. Accordingly, we cannot assure you that those funds will be
available to meet our capital needs. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Business Development and Expansion Risks--We expect to grow and cannot
guarantee that we will be able to effectively manage our future growth
We have recently begun operations in the first nine markets of our
development plan. Our success will depend upon, among other things, our
ability to access potential markets, obtain required governmental
authorizations, franchises and permits, secure financing, market to, sell and
provision new clients, implement interconnection and collocation with ILEC
facilities, lease adequate trunking capacity from ILECs or CLECs, purchase and
install switches in additional markets, implement efficient OSS and other back
office systems, and develop a sufficient client base. The successful
implementation of our business plan will result in rapid expansion of our
operations and the provision of bundled telecommunications services on a
widespread basis, which could place a significant strain on our management,
operational, financial and other resources and increase demands on our systems
and controls.
Our ability to manage future growth, should it occur, will depend upon our
ability to develop efficient OSS and other back office systems, monitor
operations, control costs, maintain regulatory compliance, maintain effective
quality controls and significantly expand our internal management, technical,
information and accounting systems and to attract, assimilate and retain
additional qualified personnel. See "--Dependence on Key Personnel." Failure
to manage our future growth effectively could adversely affect the expansion
of our client base and service offerings. We cannot assure you that we will
successfully implement and maintain efficient operational and financial
systems, procedures and controls or successfully obtain, integrate and utilize
the employees and management, operational, financial and other resources
necessary to manage a developing and expanding business in our evolving,
highly regulated and increasingly competitive industry. Any failure to
9
<PAGE>
expand these areas and to implement and improve such systems, procedures and
controls in an efficient manner at a pace consistent with the growth of our
business could have a material adverse effect on our business, financial
condition and results of operations.
If we were unable to hire sufficient qualified personnel or develop,
acquire and integrate successfully our operational and financial systems,
procedures and controls, our clients could experience delays in connection of
service and/or lower levels of client service, our resources may be strained
and we may be subjected to additional expenses. Our failure to meet client
demands and to manage the expansion of our business and operations could have
a material adverse effect on our business, financial condition and results of
operations.
Information and Processing Systems--We are dependent on our systems for
effective billing and client service
Sophisticated back office information and processing systems are vital to
our growth and our ability to monitor costs, bill clients, provision client
orders and achieve operating efficiencies. Our plans for the development and
implementation of these systems rely, for the most part, on choosing products
and services offered by third party vendors and integrating such products and
services in-house to produce efficient operational solutions. We cannot assure
you that these systems will be successfully implemented on a timely basis or
that they will be implemented at all or that, once implemented, they will
perform as expected. Failure by these vendors to deliver such products and
services in a timely and effective manner and at acceptable costs, failure by
us to adequately identify all of our information and processing needs, failure
of our related processing or information systems or failure by us to
effectively integrate such products or services could have a material adverse
effect on us. Furthermore, we cannot assure that, as our suppliers revise and
upgrade their hardware, software and equipment technology, we will not
encounter difficulties in integrating the new technology into our business or
that the new systems will be appropriate for our business. Furthermore, our
right to use these systems is dependent upon license agreements with third
party vendors. Some of these agreements may be cancelled by the vendor and the
cancellation or nonrenewal of these agreements may have an adverse effect on
us. See "--Risks Associated with Year 2000."
Difficulties in Implementation of Local and Enhanced Services--We may need to
rely on the established local telephone companies to implement successfully
our switched and enhanced services
We are a recent entrant into the newly created competitive local
telecommunications services industry. The local exchange services market in
most states was only recently opened to competition due to the February 1996
passage of the Telecommunications Act and related regulatory rulings. There
are numerous operating complexities associated with providing these services.
We will be required to develop new products, services and systems and will
need to develop new marketing initiatives to sell these services. We cannot
assure you that we will be able to develop such products and services.
We are deploying high capacity digital and packet switches in the cities in
which we will operate networks. We initially intend to rely on the networks of
ILECs or those of new market entrants (known as competitive local exchange
carriers or CLECs) for some aspects of transmission. Subject to agreements to
lease portions of other carriers' networks, including space in their equipment
buildings, this will enable us to offer a variety of switched access services,
high bandwidth data services, enhanced services and local dial tone services.
The Telecommunications Act requires most of the traditional monopoly carriers
to lease or "unbundle" elements of their networks and permit us to purchase
the call origination and call termination services we need, thereby decreasing
our operating expenses. Given that the unbundling rules of the Federal
Communications Commission, known as the FCC, have recently been modified (as
discussed below), we cannot assure you that such unbundling will continue to
occur in a timely manner or that the prices for such elements will be
favorable to us. In addition, our ability to implement successfully our
switched and enhanced services will require the negotiation of interconnection
and collocation agreements with ILECs and CLECs, which can take considerable
time, effort and expense and are subject to federal, state and local
regulation.
10
<PAGE>
In August 1996, the FCC released a decision implementing the
interconnection portions of the Telecommunications Act, known as the Local
Competition Order. The Local Competition Order establishes rules for
negotiating interconnection agreements and guidelines for review of such
agreements by state public utilities commissions. In 1997, the United States
Court of Appeals for the Eighth Circuit issued decisions that vacated some
portions of the Local Competition Order. On January 25, 1999, the United
States Supreme Court issued an opinion confirming the FCC's authority to issue
regulations implementing the pricing and other provisions of the
Telecommunications Act and reinstating most of the FCC rules previously
vacated by the Eighth Circuit. Among other things, the Supreme Court held that
the FCC has general authority under the Telecommunications Act to promulgate
regulations governing local interconnection pricing, to adopt a "pick and
choose rule," and to enact rules governing access to unbundled network
elements.
However, the Supreme Court instructed the FCC to reconsider an earlier
determination regarding the extent to which ILECs are required to unbundle
elements of their networks and lease those unbundled elements to CLECs.
Certain ILECs have indicated in papers filed with the U.S. Court of Appeals
for the Eighth Circuit that they plan additional appeals of the FCC's pricing
rules on the grounds that the FCC, while possessing the authority to create
these rules, has done so incorrectly. On November 5, 1999, the FCC, in
response to the Supreme Court's remand, issued an order revisiting its rules
on the network elements that incumbents must make available, including those
used in the provision of advanced services. While we do not believe that these
revisions will have significant impact on our business, other parties may
request reconsideration or an appeal of this order. Such continued delays in
establishing final interconnection rules could delay implementation of our
business plan.
Many new carriers have experienced difficulties in working with the ILECs
with respect to ordering, interconnecting, leasing premises, and implementing
the systems used by these new carriers to order and receive unbundled network
elements and wholesale services from the ILECs. Coordination with ILECs is
necessary for new carriers such as us to provide local service to clients on a
timely and competitive basis. The Telecommunications Act created an incentive
for Regional Bell Operating Companies, also known as RBOCs, to cooperate with
new carriers and permit access to their networks by denying RBOCs the ability
to provide long distance services within the same region that they provide
local service until they have satisfied statutory conditions designed to open
their local markets to competition. The RBOCs in our proposed markets are not
yet permitted by the FCC to offer long distance services, although some have
made significant progress toward gaining this permission. We cannot assure you
that these RBOCs will be accommodating to us once they are permitted to offer
long distance service. If we are unable to obtain the cooperation of an RBOC
in a region, whether or not such RBOC has been authorized to offer long
distance service, our ability to offer local services in such region on a
timely and cost-effective basis would be adversely affected. In addition, both
proposed and recently completed mergers involving RBOCs, including Bell
Atlantic's proposed merger with GTE, SBC's merger with Ameritech and the
proposed acquisition by Qwest of US West as well as MCI WorldCom's proposed
acquisition of Sprint, could facilitate such a combined entity's ability to
provide many of the services offered by us, thereby making it more difficult
to compete against them.
The Telecommunications Act requires a local telephone company to compensate
another telephone company when it delivers a local call to a client on the
other telephone company's network. A number of ILECs around the country have
been contesting whether the obligation to pay this "reciprocal compensation"
to CLECs should apply to local telephone calls from a client on the ILEC
network to an Internet service provider, often referred to as an ISP, on the
CLEC network. The ILECs claim that this traffic is not local, but instead is
interstate in nature and therefore should be exempt from compensation
arrangements applicable to local, intrastate calls. Most states have required
ILECs to pay reciprocal compensation for ISP-bound traffic. However, on
February 25, 1999, the FCC adopted an order in which it determined that calls
to ISPs are interstate in nature and proposed rules to govern compensation to
carriers for transmitting these calls. It stated, however, that its action was
not intended to dislodge previous state decisions interpreting interconnection
agreements between ILECs and CLECs to require reciprocal compensation between
two local carriers jointly delivering dial-up traffic to ISPs. Since that
11
<PAGE>
time, some states have decided that this traffic is still local, while at
least one has reconsidered previous decisions and found this traffic to be
interstate in nature.
Currently, the FCC does not require ISPs to pay access charges to ILECs for
connecting to the local telephone network or to contribute to universal
service funds. However, the FCC's order concerning reciprocal compensation
could affect the costs incurred by ISPs and the demand for their offerings.
Because of the uncertainty surrounding the payment of reciprocal compensation
by ILECs to CLECs for calls delivered to ISPs, we have not relied upon such
reciprocal compensation in the calculation of our potential future revenues;
thus, an unfavorable outcome should not materially affect such potential
future revenues.
Our data and voice services may not be profitable due to, among other
factors, lack of client demand, inability to secure access to ILEC facilities
on acceptable terms, and competition and pricing pressure from the ILECs and
CLECs. We cannot assure you that we will be able to successfully implement our
switched and enhanced services strategy. Implementation of our data and voice
services is also dependent upon equipment manufacturers' ability to meet our
switch deployment schedule. We cannot assure you that switches will be
deployed on the schedule contemplated by us or that, if deployed, such
switches will be utilized to the degree contemplated by us. Any of the
foregoing factors could have a material adverse effect on our business,
financial condition and results of operations.
We Depend on Portions of the ILECs' Networks for DSL Technology--DSL
technology may not operate as expected on incumbent local carrier networks and
may interfere with or be affected by other transport technologies
We depend significantly on the quality of the copper telephone lines we
obtain from Bell Atlantic, or other ILECs providing services in our target
markets, and their maintenance of these lines to provide DSL services. We
cannot assure you that we will be able to obtain the copper telephone lines
and the services we require from these ILECs on a timely basis or at quality
levels, prices, terms and conditions satisfactory to us or that such ILECs
will maintain the lines in a satisfactory manner.
All transport technologies using copper telephone lines have the potential
to interfere with, or to be interfered with by, other traffic on adjacent
copper telephone lines. This interference could degrade the performance of our
services or make us unable to provide service on selected lines. In addition,
incumbent carriers may claim that the potential for interference by DSL
technology permits them to restrict or delay our deployment of DSL services.
The telecommunications industry and regulatory agencies are still developing
procedures to resolve interference issues between competitive carriers and
incumbent carriers, and these procedures may not be effective. We may be
unable to successfully negotiate interference resolution procedures with
incumbent carriers. Interference, or claims of interference, if widespread,
would adversely affect our speed of deployment, reputation, brand image,
service quality and client retention and satisfaction and may have a material
adverse effect on our business, financial condition and results of operations.
Dependence on Leased Trunking Capacity--Failure to obtain permits or rights-
of-way may affect our ability to develop our networks
Under our network buildout strategy, we will initially seek to lease from
ILECs and CLECs local fiber trunking capacity connecting our switch to
particular ILEC central offices. In the future, we may seek to replace this
leased trunk capacity with our own fiber if warranted by traffic volume
growth. We cannot assure you that all required trunking capacity will be
available to us on a timely basis or on favorable terms. The failure to obtain
such leased fiber could delay our ability to penetrate some of our markets or
require us to make additional unexpected up-front capital expenditures to
install our own fiber and could have a material adverse effect on our
business, financial condition and results of operations. If and when we seek
to install our own fiber, we must obtain local franchises and other permits,
as well as rights-of-way to utilize underground conduit and aerial pole space
and other rights-of-way from entities such as ILECs and other utilities,
railroads, long distance companies, state highway authorities, local
governments and transit authorities. We cannot assure you that we will be able
to
12
<PAGE>
obtain and maintain the franchises, permits and rights needed to implement our
network buildout on favorable terms. The failure to enter into and maintain
any such required arrangements for a particular network may affect our ability
to develop that network and may have a material adverse effect on our
business, financial condition and results of operations. See "Business--
Service Introduction."
Competition--We face a high level of competition in the telecommunications
industry
The telecommunications industry is highly competitive, and one of the
primary purposes of the Telecommunications Act is to foster additional
competition. In each of our markets, we compete principally with the ILEC
serving such market, which is generally one of the RBOCs. The ILECs have long-
standing relationships with their clients, financial, technical and marketing
resources substantially greater than ours and the potential to fund
competitive services with cash flows from a variety of businesses, and
currently benefit from existing regulations that favor the ILECs over ICPs and
CLECs in some respects. Furthermore, RBOCs recently have been granted, under
particular conditions, pricing flexibility from federal regulators with regard
to special access services with which we compete.
It is likely that we will also face competition from ICPs and facilities-
based CLECs in some of our markets. After the investment and expense of
establishing a network and support services in a given market, the marginal
cost of carrying an additional call is negligible. Accordingly, in those
markets where there are other ICPs and facilities-based CLECs, we expect
substantial price competition. We believe that second and third tier markets
will support only a limited number of competitors and that operations in such
markets with multiple competitive providers are likely to be unprofitable for
one or more of such providers. The primary competitors in our targeted markets
are ILECs, such as Bell Atlantic, Frontier, SNET and Ameritech and CLECs, such
as Adelphia Business Solutions, Inc. Although there is currently only limited
penetration by ICPs and CLECs in our target markets, we cannot assure you that
additional competitors will not enter our target markets in the future,
including the additional markets in our plans.
Other potential competitors in our markets include resellers, microwave,
satellite and other wireless telecommunications providers, cable television
companies, electric utilities and RBOCs seeking to operate outside their
current local service areas. In particular, electric utilities and cable
companies are likely competitors given their existing rights of way. The
development of networks utilizing new technologies such as Internet telephony,
cable modem service and terrestrial wireless networks and satellite
transmission, which can be used to provide high capacity wireless local loop,
LAN, Internet access and interactive services might also create significant
new competitors that may have a lower cost basis than we have. We believe that
there may also be an increasing level of agent and distributor resale
initiatives in third tier markets.
Prices in both the long distance business and the data transmission
business have declined significantly in recent years and are expected to
continue to decline. We will face competition from large carriers such as AT&T
Corp., MCI WorldCom Corporation and Sprint Corporation as well as from other
resellers and companies offering Internet telephony services. In addition,
long distance carriers, including AT&T, MCI WorldCom and Sprint, as well as
smaller carriers, have begun to offer integrated local and long distance
telecommunications services. The RBOCs are also making concerted efforts to
gain regulatory permission under the Telecommunications Act to offer their own
bundled local and long distance services. For instance, Bell Atlantic-New York
has filed a request to provide interstate long distance to New York consumers
before the FCC and the New York Public Service Commission has filed comments
supporting that request. If the FCC approves the application, Bell Atlantic-
New York could be permitted to provide long distance service to New York
consumers as soon as the end of 1999.
While recent regulatory initiatives allow competitive telecommunications
providers such as us to interconnect with an ILEC's facilities and to obtain
unbundled network elements from the ILECs, some initiatives also provide
increased pricing flexibility for, and relaxation of regulatory oversight of,
ILECs. This may present ILECs with an opportunity to subsidize services that
compete with our services with revenues generated from non-competitive
services. This would allow ILECs to offer competitive services at lower
prices.
13
<PAGE>
We cannot assure you that we will be able to obtain the interconnections and
unbundled network elements we require on terms and conditions that will permit
us to offer switched and advanced, high speed digital services at rates that
are both competitive and profitable. Various states, including New York, are
conducting or will conduct proceedings to determine the prices for
interconnection and unbundled network elements in the future. We cannot
predict the outcome of these proceedings. See "--We Depend on Portions of the
ILECs' Networks for DSL Technology" and "--Difficulties in Implementing Local
and Enhanced Services." If the ILECs engage in increased volume and discount
pricing practices or charge competitive telecommunications providers increased
fees for interconnection or the provision of unbundled network elements, it
may have a material adverse effect on our business, financial condition and
results of our operations.
We expect to experience declining prices and increasing price competition.
We cannot assure you that we will be able to achieve or maintain adequate
market share or margins, or compete effectively, in any of our markets.
Moreover, substantially all of our current and potential competitors have
financial, technical, marketing, personnel and other resources, including
brand name recognition, substantially greater than ours as well as other
competitive advantages over our business, financial condition and results of
operations. Any of the foregoing factors could have a material adverse effect
on us. See "Business--Competition."
Dependence on Key Personnel--We depend on certain key personnel and could be
affected by the loss of their services
We are managed by a small number of key executive officers, most notably
Steve M. Dubnik, our Chairman, President and Chief Executive Officer. We
believe that our success will depend in large part on our ability to attract
and retain qualified management, technical, marketing and sales personnel and
the continued contributions of such management and personnel. Competition for
qualified employees and personnel in the telecommunications industry is
intense and there is a limited number of persons with knowledge of and
expertise in the industry. We do not maintain key person life insurance for
any of our executive officers, other than Mr. Dubnik. Although we have been
successful in attracting and retaining qualified personnel, we cannot assure
you that we will be able to hire or retain necessary personnel in the future.
The loss of services of one or more of these key individuals, particularly Mr.
Dubnik, or the inability to attract and retain additional qualified personnel,
could materially and adversely affect us. In addition, if Mr. Dubnik ceases to
be our Chief Executive Officer and a replacement satisfactory to the lenders
under our credit facility is not hired within 180 days, there will be an event
of default under our credit facility and the lenders may declare all amounts
outstanding under the credit facility immediately due and payable.
Government Regulation--FCC and state regulations may limit the services we can
offer
Our networks and the provision of telecommunications services are subject
to significant regulation at the federal, state and local levels. Delays in
receiving required regulatory approvals or the enactment of new adverse
regulation or regulatory requirements may have a material adverse effect upon
our business, financial condition and results of our operations.
We cannot assure you that the FCC or state commissions will grant required
authority or refrain from taking action against us if we are found to have
provided services without obtaining the necessary authorizations. If authority
is not obtained or if our schedules of prices, terms, and conditions, also
referred to as tariffs, are not filed, or are not updated, or otherwise do not
fully comply with the rules of the FCC or state regulatory agencies, third
parties or regulators could challenge these actions. Such challenges could
cause us to incur substantial legal and administrative expenses.
Our Internet operations are not currently subject to direct regulation by
the FCC or any other governmental agency, other than regulations applicable to
businesses generally. However, the FCC has recently indicated that some
services offered over the Internet, such as phone-to-phone Internet protocol
telephony, may be functionally indistinguishable from traditional
telecommunications service offerings and their non-regulated status may have
to be re-examined. We are unable to predict what regulations may be adopted in
the future, or to what extent
14
<PAGE>
existing laws and regulations may be found applicable, or the impact such new
or existing laws may have on our business. New laws or regulations relating to
Internet services, or existing laws found to apply to them, may have a
material adverse effect on our business, financial condition or results of
operations. Although the FCC has recently decided not to allow local telephone
companies to impose per-minute access charges on Internet service providers,
and that decision has been upheld by the reviewing court, further regulatory
and legislative consideration of this issue is likely. In addition, some
telephone companies are seeking relief through state regulatory agencies. Such
rules, if adopted, would affect our costs of serving dial-up clients and could
have a material adverse effect on our business, financial condition or results
of operations.
The Telecommunications Act remains subject to judicial review and
additional FCC rulemaking, and thus it is difficult to predict what effect the
legislation will have on us and our operations. There are currently many
regulatory actions underway and being contemplated by federal and state
authorities regarding interconnection pricing and other issues that could
result in significant changes to the business conditions in the
telecommunications industry. We cannot assure you that these changes will not
have a material adverse effect on our business, financial condition or results
of operations.
In May 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy regime. For example, the FCC
established new subsidies for telecommunications and information services
provided to qualifying schools and libraries with an annual cap of $2.25
billion and for services provided to rural health care providers with an
annual cap of $400.0 million. The FCC also expanded the federal subsidies for
local exchange telephone service provided to low-income consumers. Providers
of interstate telecommunications services, such as we are, as well as other
entities, must pay for these programs. Our share of the payments into these
federal subsidy funds will be based on our share of specified defined
telecommunications end-user revenues. Currently, the FCC is assessing such
payments on the basis of a provider's revenue for the previous year. Since we
had no significant revenues in 1998, we will not be liable for subsidy
payments in any material amount during 1999. With respect to subsequent years,
however, we are currently unable to quantify the amount of subsidy payments
that we will be required to make and the effect that these required payments
will have on our financial condition. In the May 1997 order, the FCC also
announced that it will soon revise its rules for subsidizing service provided
to consumers in high cost areas, which may result in further substantial
increases in the overall cost of the subsidy program. Several parties appealed
the May 1997 order. The appeals were consolidated and transferred to the
United States Court of Appeals for the Fifth Circuit which issued a decision
on July 30, 1999. Specifically, the Fifth Circuit: (1) reversed the FCC's
decision to assess contributions based on the intrastate revenues of universal
service contributors; (2) reversed and remanded for further consideration the
FCC's decision to assess contributions based on the international revenues of
contributors having interstate revenues; and (3) reversed the FCC's decision
to "require" incumbent local exchange carriers to recover universal service
contributions through their interstate access charges. In October 1999, the
FCC issued revised rules consistent with the Court's mandate. In October 1999,
the FCC also adopted an order revising its rules for subsidizing service by
large telephone companies to consumers in high cost areas, which has not yet
been released. Based on the FCC's press release regarding the order, the
revised rules are likely to increase the overall cost of the subsidy program.
Various states are also in the process of implementing their own universal
service programs.
To the extent we provide interexchange telecommunications service, we are
required to pay access charges to ILECs when we use the networks of those
companies to originate or terminate interexchange calls. Also, as a
competitive telecommunications provider, we provide access services to other
interexchange service providers. The interstate access charges of ILECs are
subject to extensive regulation by the FCC, while those of competitive
telecommunications providers are subject to a lesser degree of FCC regulation
but remain subject to the requirement that all charges be just, reasonable,
and not unreasonably discriminatory. In two orders released in December 1996
and May 1997, the FCC made major changes in the interstate access charge
structure. In the December 1996 order, the FCC removed restrictions on ILECs'
ability to lower access prices and relaxed the regulation of new switched
access services in those markets where there are other providers of access
services. If this increased pricing flexibility is not effectively monitored
by federal regulators, it could have a material adverse effect on our ability
to compete in providing interstate access services. The May 1997 order
substantially increased the costs that ILECs, subject to the FCC's price cap
rules, also known as price cap LECs, recover
15
<PAGE>
through monthly, non-traffic-sensitive access charges and substantially
decreased the costs that price cap LECs recover through traffic-sensitive
access charges. In an Order issued in August 1999, the FCC furthered its plan
to bring interstate access rate levels more in line with cost by granting some
large, established LECs increased pricing flexibility upon demonstration of
increased competition (or potential competition) in relevant markets and
sought comment on further changes in the rules to increase ILEC flexibility.
In addition, the FCC is seeking comments on a joint proposal of several ILECs
and IXCs to further reduce access charges and create a new universal service
fund to which all telecommunications carriers would be required to contribute.
The manner in which the FCC has implemented and continues to implement its
efforts to lower access charge levels could have a material effect on our
ability to compete in providing interstate access services. We also assess
access charges to companies that use our facilities to originate or terminate
long distance calls. Some of these companies, including AT&T and Sprint, have
announced plans to resist paying access charges that exceed the access charges
of the ILEC in any given geographic area. In addition, the FCC's August 1999
access charge order requested comment on whether the FCC should take steps to
limit CLEC access charges. While we have not experienced any challenges to our
rights to collect access charges, we could experience them in the future. If
so, the effect upon our business, financial condition and results of
operations could be material and adverse.
Technological Changes in the Telecommunications Industry--Our inability to
adapt to such technological change could affect our business
The telecommunications industry is subject to rapid and significant changes
in technology, and we must rely, to an extent, on third parties for the
development of and access to new technology. The effect of technological
changes on our business cannot be predicted. We believe that our future
success will depend, in part, on our ability to anticipate or adapt to such
changes and to offer, on a timely basis, services that meet client demands. We
cannot assure you that we will obtain access to new technology on a timely
basis or on satisfactory terms. Any failure by us to obtain new technology
could have a material adverse effect on our business, financial condition or
results of operations.
Possible Future Acquisitions, Investments and Strategic Alliances--We may not
have the ability to develop strategic alliances or investments needed to
complement our existing business
We may seek, as part of our business strategy, to develop strategic
alliances and to make investments or acquire assets or other businesses that
will relate to our existing business. Recently, we acquired Atlantic
Connections, L.L.C., a local and long distance service provider. We are unable
to predict whether or when any planned or prospective acquisitions or
strategic alliances will occur or the likelihood of a material transaction
being completed on favorable terms and conditions. Our ability to finance
acquisitions and strategic alliances may be constrained by our degree of
leverage at the time of such acquisition. In addition, our credit facility may
significantly limit our ability to make acquisitions or enter into strategic
alliances and to incur indebtedness in connection with acquisitions and
strategic alliances. Such transactions commonly involve risks, including,
among others:
. the difficulty of assimilating the acquired operations and personnel;
. the potential disruption of our ongoing business and diversion of
resources and management time;
. the inability of management to maximize our financial and strategic
position by the successful incorporation of licensed or acquired
technology and rights into our service offerings;
. the possible inability of management to maintain uniform standards,
controls, procedures and policies;
. the risks of entering markets in which we have little or no direct prior
experience; and
. the potential impairment of relationships with employees or clients as a
result of changes in management or otherwise arising out of such
transactions.
We cannot assure you that any acquisition will be made, that we will be
able to obtain financing needed to fund such acquisitions and, if any
acquisitions are so made, that the acquired business will be successfully
16
<PAGE>
integrated into our operations or that the acquired business will perform as
expected. We currently have no definitive agreements with respect to any
acquisition, although from time to time we may have discussions with other
companies and assess opportunities on an ongoing basis.
In addition, if we were to proceed with one or more significant strategic
alliances, acquisitions or investments in which the consideration consists of
cash, a substantial portion of our available cash (including proceeds of this
offering) could be used to consummate the strategic alliances, acquisitions or
investments. The financial impact of acquisitions, investments and strategic
alliances could have a material adverse effect on our business, financial
condition and results of operations and could cause substantial fluctuations
in our quarterly and yearly operating results. Furthermore, the use of our
common stock as consideration for acquisitions will result in dilution to our
shareholders.
Long Distance Business--We may fail to achieve acceptable profits on our long
distance business due to high levels of competition, declining prices and low
customer retention rate
The long distance business is extremely competitive, and prices have
declined substantially in recent years and are expected to continue to
decline. In addition, the long distance industry has a low customer retention
rate, as clients frequently change long distance providers in response to the
offering of lower rates or promotional incentives by competitors. We will rely
on other carriers to provide us with a major portion of our long distance
transmission network. Such agreements typically provide for the resale of long
distance services on a per-minute basis and may contain minimum volume
commitments. The negotiation of these agreements involves estimates of future
supply and demand for transmission capacity as well as estimates of the
calling patterns and traffic levels of our future clients. In the event that
we fail to meet such minimum volume commitments, we may be obligated to pay
underutilization charges, and, in the event we underestimate our need for
transmission capacity, we may be required to obtain capacity through more
expensive means. Our failure to achieve acceptable profits on our long
distance business could have a material adverse effect on our business,
financial condition and results of operation.
Risks Related to Data Transmission Business--As a new entrant in the market,
we may initially generate low or negative gross margins
As a new entrant in the data transmission business, we expect to generate
low or negative gross margins and substantial start-up expenses as we begin to
offer data transmission services. The success of our data transmission
business will be dependent upon, among other things, the effectiveness of our
sales personnel in the promotion and sale of our data transmission services,
the acceptance of such services by potential clients, and our ability to hire
and train qualified personnel and further enhance our services in response to
future technological changes. We cannot assure you that we will be successful
with respect to these matters. If we are not successful with respect to these
matters, it could have a material adverse effect on our business, financial
condition and results of operations.
Risks Associated With Year 2000--Our financial condition may be adversely
affected if our systems and those of our suppliers fail because of Year 2000
problems
The commonly referred to Year 2000, or Y2K, problem results from the fact
that many existing computer programs and systems use only two digits to
identify the year in the date field. These programs were designed and
developed without considering the impact of a change in the century
designation. If not corrected, computer applications that use a two-digit
format could fail or create erroneous results in any computer calculation or
other processing involving the year 2000 or a later date. We have identified
two main areas of Y2K risk:
. Computer systems could be disrupted, provide erroneous results, or fail,
causing an interruption or decrease in productivity in our operations;
and
17
<PAGE>
. Computer systems of third parties including equipment suppliers and
other vendors, ILECs, financial institutions, landlords and others could
be disrupted, provide erroneous results, or fail, causing an
interruption or decrease in our ability to continue our operations.
As a new ICP, we have engaged reputable suppliers of equipment and
telecommunications software and other services to launch our company. For
example, we use Compaq(R) and Dell(R) PCs, Sun(R) Unix-based servers,
Lucent(R) switches, Oracle(R) RDBMS, and Microsoft(R) office products.
Software companies we have used to develop sophisticated systems primarily use
known software development tools and have multiple clients using similar
software. In our corporate headquarters we have off-the-shelf HVAC, security,
and other systems installed pursuant to our specifications. We believe that
all of our actual and expected vendor and supplier companies are well aware of
Year 2000 issues. However, we are in the final testing stages of our key
computer systems and equipment to ensure that they are Y2K compliant.
Control by Large Stockholders--After the offering, private equity funds
managed by Morgan Stanley Dean Witter Capital Partners will continue to
control a significant portion of our common stock and conflicts of interest
may arise
When this offering is completed, funds managed by Morgan Stanley Dean
Witter Capital Partners, or MSDWCP, will beneficially own approximately %
of our outstanding common stock (or approximately % if the U.S. underwriters
exercise their over allotment option in full). As a result, MSDWCP will
control all matters requiring shareholder approval, including any
determination with respect to mergers or other business combinations involving
us.
We have entered into an agreement with MSDWCP and certain other investors
relating to the election of directors. See "Management--Election of Directors;
Voting Agreement." By controlling the Board, MSDWCP will have overall control
over management of the Company, including:
. any determination with respect to our directions and policies (including
the appointment and removal of officers);
. the acquisition or disposition of our assets;
. future issuances of our common stock or other securities; and
. our incurrence of debt.
This control by MSDWCP could delay or prevent our acquisition by other
investors. Conflicts might arise in transactions between us and MSDWCP,
including the negotiation or enforcement of the terms of any such
transactions. In addition, there are no restrictions on other investments that
may be pursued by MSDWCP and conflicts might arise with respect to future
business opportunities.
Lack of Trading Market--A failure of an active trading market to develop for
our common stock could materially adversely affect your investment in our
common stock
Our common stock has not been traded in the public market before this
offering. We have applied to the Nasdaq National Market for quotation of our
common stock, but we do not know whether active trading in our common stock
will develop or continue after this offering. We will determine the price you
will pay for our common stock through negotiations with the underwriters. You
may not be able to resell your shares at or above the price you will pay for
our common stock. Among the factors to be considered in determining the
initial public offering price will be our future prospects and the prospects
of our industry in general, our sales, results of operations and other
financial and operating information in recent periods, and the price-earnings
ratios, price-sales ratios, market prices of securities and financial and
operating information of companies engaged in activities similar to ours. The
estimated initial public offering price range set forth on the cover page of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
18
<PAGE>
Dilution of Your Stock--You will incur immediate and substantial dilution of
the book value of your investment
The initial public offering price will be substantially higher than the net
tangible book value per share of our outstanding common stock, which is
negative. As a result, you will incur immediate, substantial dilution. In
addition, we have issued options to acquire our common stock at prices
significantly below the initial public offering price. You may incur
additional dilution if holders of stock options, whether currently outstanding
or subsequently granted, exercise their options. For more information, see
"Dilution."
Impact of Future Sales on Stock Price--Sales of substantial amounts of our
common stock in the public market could depress our stock price
Sales of substantial amounts of our common stock in the public market
following this offering, or the appearance that a large number of our shares
are available for sale, could adversely affect the market price for our common
stock. The number of shares of our common stock available for sale in the
public market will be limited by lock-up agreements under which our executive
officers, directors and principal stockholders, who will collectively hold
% of our common stock after this offering, or % if the underwriters
exercise their over-allotment option in full, have agreed not to sell or
otherwise dispose of any of their shares for a period of 180 days after the
date of this prospectus without the prior written consent of Morgan Stanley &
Co. Incorporated on behalf of the underwriters. In addition to the adverse
effect a price decline could have on holders of common stock, that decline
would likely impede our ability to raise capital through the issuance of
additional shares of common stock or other equity securities.
After this offering, the holders of shares of common stock will
have the right to require us to register the sale of their shares, subject to
limitations specified in the registration rights agreement and to the lock-up
agreements described above. The holders of these shares also have the right to
require us to include their shares in any future public offerings of our
equity securities. Following this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register shares of
common stock subject to outstanding stock options or reserved for issuance
under our stock incentive plans. The sale of these additional shares into the
public market may further adversely affect the market price of our common
stock.
Certain Limitations on Changes in Control of Our Company
Our certificate of incorporation and by-laws and applicable provisions of
the Delaware General Corporation Law contain several provisions, including
those described below, that, once effective, may make the acquisition of a
controlling interest in us more difficult without the approval of our Board of
Directors.
Except for the classified board, which will be in effect immediately, the
provisions listed below will only be in effect upon the earlier of the date
MSDWCP owns less than 17.5% of our outstanding stock or has given its consent,
which we refer to as the Trigger Date:
. our Board of Directors is classified into three classes, each of which
(after an initial transition period) will serve for staggered three-year
terms;
. a director may be removed by our stockholders only for cause;
. our stockholders may take action by written consent instead of by a
meeting only if all stockholders sign the written consent;
. our stockholders must comply with advance notice and other procedures
specified in our bylaws in order to nominate candidates for election to
our Board of Directors or to place stockholders' proposals on the agenda
for consideration at meetings of the stockholders; and
. business combinations involving one or more persons that own or intend
to own at least 10% of our voting stock (other than MSDWCP) must be
approved by the affirmative vote of at least 66 2/3% of our voting stock
(excluding that held by such person or persons) or by a majority of
"continuing directors"
19
<PAGE>
(as that term is defined in our certificate of incorporation) and in
accordance with the "fair price" provisions specified in the certificate
of incorporation.
For more information about these provisions, see "Description of Capital
Stock."
In addition, our certificate of incorporation provides that we may issue
preferred stock without shareholder approval. Following the Trigger Date,
preferred stock could be issued by us in connection with a shareholder rights
plan without the consent of MSDWCP. The issuance of preferred stock in
connection with a shareholder rights plan would cause substantial dilution to
any person or group that attempts to acquire Choice One on terms not approved
in advance by our Board of Directors. In addition, Section 203 of the Delaware
General Corporation Law imposes certain restrictions on mergers and other
business combinations between us and any holder of 15% or more of our common
stock. Choice One has expressly elected at this time not to be governed by
Section 203. Any change in that election must be approved by a majority vote
of our stockholders.
Risks Regarding Forward-Looking Statements
We have made some statements in this prospectus, including some under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere,
which constitute forward-looking statements. These statements involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any results, levels of activity, performance or achievements
expressed or implied by any forward-looking statements. These factors include,
among other things, those listed under "Risk Factors" and elsewhere in this
prospectus. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "expects," "intends,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential" or
"continue" or the negative of these terms or other comparable terminology.
Although we believe that the expectations reflected in forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of
the forward-looking statements after the date of this prospectus.
20
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of
common stock will be approximately $ million ($ if the underwriters
exercise their over-allotment option in full) assuming an initial public
offering price of $ per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses of $ payable by
us.
We will use a portion of the net proceeds to repay any outstanding amounts
under our credit facility. Indebtedness under this credit facility as of
November 15, 1999 was approximately $36.7 million, which was incurred to
finance the Atlantic Connections acquisition and for general corporate
purposes. This facility matures on November 3, 2007 and, on November 15, 1999,
bore interest at a weighted average rate of approximately 10.5%. We expect to
use the remainder of the net proceeds for capital expenditures relating to our
planned expansion and working capital and other general corporate purposes.
Pending such uses, we plan to invest the net proceeds in investment grade,
interest-bearing securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock and
do not anticipate paying cash dividends in the foreseeable future. We
currently intend to retain all future earnings, if any, for use in the
operation of our business and to fund future growth.
21
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999
on (i) an actual basis, (ii) a pro forma basis to give effect to the
acquisition of Atlantic Connections as of such date and (iii) a pro forma, as
adjusted basis which further adjusts the pro forma amounts to give effect to
the offering as of such date and the application of the estimated net proceeds
therefrom, assuming an initial public offering price of $ per share and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us, as if they had occurred on September 30,
1999. This table should be read in conjunction with the Consolidated Financial
Statements and notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Use of Proceeds" included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of September 30, 1999
-------------------------------
Pro Pro forma,
Actual forma as adjusted
-------- -------- -----------
(unaudited)
(in thousands, except per
share data)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 3 $ 230
======== ========
Long-term debt:
Credit facility.............................. $ 5,000 $ 16,278
Stockholder's equity:
Common Stock, $ 0.01 par value; 134,604
shares authorized, actual, 62,105 shares
issued and outstanding, actual; shares
authorized, pro forma, shares issued and
outstanding, pro forma; shares
authorized, pro forma, as adjusted,
shares issued and outstanding, pro forma,
as adjusted................................. 1 1
Additional paid-in capital................... 68,886 68,886
Deferred compensation........................ (6,025) (6,025)
Accumulated deficit.......................... (24,442) (24,442)
-------- -------- ---
Total stockholder's equity................. 38,420 38,420
-------- -------- ---
Total capitalization..................... $ 43,420 $ 54,698
======== ======== ===
</TABLE>
22
<PAGE>
DILUTION
Our pro forma net tangible book value (deficit) as of September 30, 1999
was approximately $ million, or $ per share. Pro forma net tangible
book value (deficit) per share is equal to our total tangible assets less
total liabilities, divided by the number of shares of our common stock
outstanding. After giving effect to the acquisition of Atlantic Connections
and the proceeds of this offering, assuming an initial public offering price
of $ per share and after deducting estimated underwriting discounts and
commissions and estimated expenses payable by us, our pro forma net tangible
book value as of September 30, 1999 would have been approximately $ , 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. The following table
illustrates this dilution, as of September 30, 1999:
<TABLE>
<S> <C>
Assumed initial public offering price............................. $
Pro forma net tangible book value (deficit) per share before this
offering......................................................... $
Increase in pro forma net tangible book value per share
attributable to new investors....................................
Pro forma net tangible book value per share after this offering...
Dilution per share to new investors...............................
</TABLE>
The following table summarizes on a pro forma basis as described above, the
difference, as of September 30, 1999, between existing stockholders and new
investors with respect to the number of shares of common stock to be
purchased, the total consideration paid to Choice One and the average price
per share paid:
<TABLE>
<CAPTION>
Shares Total
purchased consideration Average
-------------- -------------- price
Number Percent Amount Percent per share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... % $ % $
New investors...........................
----- ----- ----- -----
Total................................. % $ %
===== ===== ===== =====
</TABLE>
The table above assumes no exercise of stock options outstanding at
September 30, 1999. As of September 30, 1999, there were options
outstanding to purchase a total of shares of common stock at a weighted
average exercise price of $ per share. To the extent any of these options
are exercised, there will be further dilution to new investors.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth our selected consolidated financial data for
the periods indicated. The consolidated statement of operations data and
consolidated balance sheet data as of and for the period from inception
through December 31, 1998 and as of and for the nine months ended September
30, 1999 have been derived from our consolidated financial statements included
elsewhere in this prospectus which have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report included
elsewhere in this prospectus. The results of our operations for the periods
indicated are not necessarily indicative of the results of operations in the
future.
You should read the selected consolidated financial data set forth below in
conjunction with the Consolidated Financial Statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
24
<PAGE>
<TABLE>
<CAPTION>
Period ended Nine months ended
December 31, 1998 September 30, 1999
----------------- ------------------
(in thousands, except per share
data)
<S> <C> <C>
Statement of Operations Data:
Revenues................................. $ - $ 947
Operating expenses:
Network costs........................... - 2,577
Selling, general and administrative..... 4,684 12,826
Noncash deferred compensation........... 87 996
Depreciation and amortization........... 36 3,373
-------- --------
Total operating expenses............... 4,807 19,772
-------- --------
Loss from operations................... (4,807) (18,825)
Interest and other income (expense)...... 22 (832)
======== ========
Net loss................................. $ (4,785) $(19,657)
======== ========
Net loss per share....................... $ $
======== ========
Other Financial Data:
Net cash provided by (used in) operating
activities.............................. $ 6,587 $(16,740)
Net cash used in investing activities.... (21,146) (33,043)
Net cash provided by financing
activities.............................. 16,050 48,295
Capital expenditures..................... 21,146 33,043
EBITDA................................... (4,684) (14,456)
Operating Data:
Lines sold............................... - 12,303
UNE's installed.......................... - 6,060
T-1 channels installed................... - 869
DSL lines installed...................... - 57
Resold lines installed................... - -
-------- --------
Total lines installed.................... - 6,986
Collocations installed................... - 68
Markets in operation..................... - 5
Number of switches deployed.............. - 5
</TABLE>
<TABLE>
<CAPTION>
As of
September 30, 1999
------------------
<S> <C>
Balance Sheet Data:
Cash and cash equivalents.................................... $ 3
Working capital (deficit).................................... (9,582)
Property, plant and equipment, net........................... 50,780
Total assets................................................. 54,180
Long-term debt............................................... 5,000
Stockholder's equity......................................... 38,420
</TABLE>
25
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited 1998 pro forma condensed combined statement of operations
reflects the combination of the statement of operations of Choice One for the
period from inception (June 2, 1998) through December 31, 1998 and the
statements of operations of Atlantic Connections L.L.C. and its predecessors
(Atlantic Connections, Inc. and Atlantic Connections, Ltd.), or Atlantic
Connections, for the year ended December 31, 1998, as adjusted for the
acquisition, as if the acquisition was consummated on January 1, 1998. The
unaudited 1999 nine month pro forma statement of operations reflects the
combination of the statement of operations of Choice One for the nine months
ended September 30, 1999 and the statement of operations of Atlantic
Connections for the nine months ended September 30, 1999, as adjusted for the
acquisition as if the acquisition was consummated on January 1, 1998. The
unaudited pro forma condensed combined balance sheet is presented as if the
acquisition was consummated on September 30, 1999. The unaudited pro forma
statements do not give effect to the up to $2.1 million additional purchase
price payable in cash or, at our option, our common stock in connection with
the acquisition of Atlantic Connections if specified performance criteria are
met in the 12 months following the acquisition. The unaudited pro forma
statements should be read in conjunction with the separate historical
financial statements of Choice One and Atlantic Connections and its
predecessors and the notes thereto, and with the accompanying notes to the pro
forma statements.
The unaudited pro forma statements are based upon currently available
information and upon certain assumptions that Choice One believes are
reasonable under the circumstances. The unaudited pro forma statements do not
purport to represent what Choice One's financial position or results of
operations would actually have been if the transaction in fact had occurred on
such date or at the beginning of the period indicated or to project the
Company's financial position or the results of operations at any future date
or for any future period.
26
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Atlantic
Choice One Connections
historical and predecessors
from inception pro forma
(June 2, 1998) for the
through year ended
December 31, December 31, Pro forma Pro forma
1998 1998(3) adjustments combined
-------------- ---------------- ----------- ---------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C>
Revenues................ $ - $ 6,472 $ - $ 6,472
Operating expenses:
Network costs......... - 5,287 - 5,287
Selling, general and
administrative....... 4,684 1,811 - 6,495
Noncash deferred
compensation......... 87 - - 87
Depreciation and
amortization......... 36 610 687 (1) 1,333
------- ------- ------- -------
Total operating
expenses........... 4,807 7,708 687 13,202
------- ------- ------- -------
Loss from operations.... (4,807) (1,236) (687) (6,730)
Interest income
(expense), net......... 22 (332) (556)(2) (866)
------- ------- ------- -------
Net loss................ $(4,785) $(1,568) $(1,243) $(7,596)
======= ======= ======= =======
Net loss per share,
basic and diluted...... $ $
======= =======
Weighted average number
of shares outstanding..
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Notes to the Unaudited Pro Forma Condensed Combined Statement of Operations
(1) Reflects an adjustment to depreciation expense related to the decrease in
net tangible assets of Atlantic Connections on the assumption that the
acquisition had taken place on January 1, 1998. These assets have been
restated at their estimated fair market values and depreciated using our
depreciation methods over the remaining useful lives of the assets. The
decrease in depreciation expense of $66,000, as compared to that recorded
by Atlantic Connections, was included in operating expenses as indicated.
Reflects an increase in amortization expense of $753,000 related to the
amortization of the acquired goodwill and customer base, less the
amortization expense of intangible assets recorded in Atlantic
Connection's pro forma statement of operations. The values of the acquired
goodwill and customer base are based on estimated appraised values and are
amortized using the straight-line method and estimated useful lives of 10
years and 5 years, respectively.
(2) Reflects the additional interest expense of $727,000 incurred on the debt
to finance the acquisition. The overall effective interest rate was 10.75%
per annum.
(3) The Atlantic Connections and predecessors pro forma statement of
operations for the year ended December 31, 1998 consists of the following,
assuming the acquisitions of its predecessors were consummated on January
1, 1998:
<TABLE>
<CAPTION>
Historical Atlantic
---------------------------------------------------- Connections
Atlantic Atlantic Atlantic and
Connections, LLC Connections, Inc. Connections, Ltd. predecessors
for the period for the period for the period pro forma
from July 24, from January 1, from January 1, for the year
1998 through 1998 through 1998 through ended
December 31, August 31, August 31, Pro forma December 31,
1998 1998 1998 adjustments 1998
---------------- ----------------- ----------------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues................ $2,180 $2,029 $2,263 $ - $ 6,472
Operating expenses:
Network costs......... 1,858 1,781 1,648 - 5,287
Selling, general and
administrative....... 600 450 761 - 1,811
Depreciation and
amortization......... 215 27 33 335 (a) 610
------ ------ ------ ----- -------
Total operating
expenses........... 2,673 2,258 2,442 335 7,708
------ ------ ------ ----- -------
Loss from operations.... (493) (229) (179) (335) (1,236)
Interest expense........ (111) (30) (20) (171)(b) (332)
------ ------ ------ ----- -------
Loss from operations
before provision for
(benefit of) income
taxes.................. (604) (259) (199) (506) (1,568)
Income tax provision
(benefit).............. - - (70) 70 (c) -
------ ------ ------ ----- -------
Net loss................ $ (604) $ (259) $ (129) $(576) $(1,568)
====== ====== ====== ===== =======
</TABLE>
- --------
(a) Adjustment to include goodwill amortization for the period from January
1, 1998 to August 31, 1998 related to Atlantic Connections, LLC's
acquisitions of its predecessors, Atlantic Connections, Inc. and Atlantic
Connections, Ltd.
(b) Adjustment to reflect pro forma interest expense for the period from
January 1, 1998 to August 31, 1998 for additional borrowing associated
with the acquisitions.
(c) Adjustment to exclude income tax benefit, which, on a pro forma basis,
would flow through to Atlantic Connections, LLC Unitholders.
28
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Atlantic
Choice One Connections Pro forma Pro forma
historical historical adjustments combined
---------- ----------- ----------- ---------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Revenues................... $ 947 $6,239 $ - $ 7,186
Operating expenses:
Network costs............ 2,577 4,794 - 7,371
Selling, general and
administrative.......... 12,826 1,484 - 14,310
Noncash deferred
compensation............ 996 - - 996
Depreciation and
amortization............ 3,373 466 205 (1) 4,044
-------- ------ ----- --------
Total operating
expenses.............. 19,772 6,744 205 26,721
-------- ------ ----- --------
Loss from operations....... (18,825) (505) (205) (19,535)
Interest income (expense),
net....................... (832) (258) (408)(2) (1,498)
-------- ------ ----- --------
Net loss................... $(19,657) $ (763) $(613) $(21,033)
======== ====== ===== ========
Net loss per share, basic
and diluted............... $ $
======== ========
Weighted average number of
shares outstanding........
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Notes to the Unaudited Pro Forma Condensed Combined Statement of Operations
(1) Reflects an adjustment to depreciation expense related to the decrease in
net tangible assets of Atlantic Connections, based on the assumption that
the acquisition had taken place on January 1, 1998. These assets have been
restated at their estimated fair market values and depreciated using our
depreciation methods over the remaining useful lives of the assets. The
decrease in depreciation expense of $396,000 as compared to that recorded
by Atlantic Connections, was included in operating expenses as indicated.
Reflects an increase in amortization expense of $601,000 related to the
amortization of the acquired goodwill and customer base, less the
amortization expense of intangible assets recorded in Atlantic
Connection's historical statement of operations. The values of the
acquired goodwill and customer base are based on estimated appraised
values and are amortized using the straight-line method and estimated
useful lives of 10 years and 5 years, respectively.
(2) Reflects the additional interest expense of $408,000 incurred on the debt
to finance the acquisition. The overall effective interest rate was 10.75%
per annum.
30
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of September 30, 1999
<TABLE>
<CAPTION>
Atlantic
Choice One Connections Pro forma Pro forma Pro forma,
historical historical adjustments combined as adjusted
---------- ----------- ----------- --------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents.......... $ 3 $ 227 $ - $ 230
Accounts receivable,
net.................. 685 952 - 1,637
Prepaid expenses and
other current
assets............... 490 3 - 493
-------- ------- ------- --------
Total current
assets............. 1,178 1,182 - 2,360
Property, plant and
equipment, net......... 50,780 543 (460)(2) 50,863
Other assets............ 2,222 2,560 (6,130)(1) 10,912
-------- ------- ------- --------
Total assets........ $ 54,180 $ 4,285 $ 5,670 $ 64,135
======== ======= ======= ========
Liabilities and
Stockholder's Equity
Current liabilities:
Bank overdraft........ $ 1,344 $ - $ - $ 1,344
Current portion of
long-term debt....... - 318 (318)(4) -
Accounts payable...... 2,023 1,400 - 3,423
Accrued expenses...... 7,393 39 250 (3) 7,682
-------- ------- ------- --------
Total current
liabilities........ 10,760 1,757 (68) 12,449
-------- ------- ------- --------
Long-term liabilities... 5,000 3,012 5,254 (4) 13,266
-------- ------- ------- --------
Stockholder's equity:
Common stock and
additional paid-in
capital.............. 68,887 883 (883)(5) 68,887
Deferred
compensation......... (6,025) - - (6,025)
Accumulated deficit... (24,442) (1,367) 1,367 (5) (24,442)
-------- ------- ------- --------
Total stockholder's
equity............. 38,420 (484) 484 38,420
-------- ------- ------- --------
Total liabilities
and stockholder's
equity............. $ 54,180 $ 4,285 $ 5,670 $ 64,135
======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Notes to the Unaudited Pro Forma Condensed Combined Balance Sheet
(1) Reflects the estimated purchase accounting adjustments for the
acquisition based upon a preliminary appraisal of the assets and
liabilities assumed. For purchase accounting, Atlantic Connections'
assets have been recorded at their estimated fair market value subject to
adjustments based upon the results of an independent appraisal. The
estimated amounts recorded for assets and liabilities acquired from
Atlantic Connections are not expected to differ materially from the final
assigned values. Purchase accounting adjustments were recorded to reduce
property, plant and equipment by $460,000, to reflect the estimated fair
value of the acquired customer base of $4.3 million, to decrease the
recorded value of intangible assets acquired by $2.6 million, to increase
the recorded excess of purchase cost over fair value of net assets
acquired by $4.3 million and to decrease the long-term debt not assumed
by $3.3 million. These adjustments are required to record these assets at
their estimated fair market values. The purchase price is subject to
adjustment based on Atlantic Connections' October 1999 billed revenue and
working capital at October 31, 1999 under the terms of the Purchase
Agreement. In addition, the Purchase Agreement includes an earn-out
provision that will require the Company to pay up to an additional 25
percent of the initial purchase price in cash or our stock if certain
objectives are met. Those objectives include sales, access line
provisioning and customer retention targets as well as the retention of
certain key employees. The additional purchase price will be paid
approximately one year after the purchase date. The calculation of excess
purchase cost over fair value of net assets acquired is as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
<S> <C>
Cash paid............................................................. $8,266
Direct acquisition costs.............................................. 250
------
Total purchase cost................................................... 8,516
Less: Net book value of Atlantic Connections.......................... (2,846)
Less: Adjustment in net assets to fair value.......................... (1,325)
------
Excess of purchase cost over fair value of assets acquired and
liabilities assumed (goodwill)....................................... $4,345
======
</TABLE>
Reflects the estimated fair value of the acquired customer base of $4.3
million.
Represents the decrease of $2.6 million for the remaining net book value
of the goodwill existing on Atlantic Connections' balance sheet.
(2) Reflects the fair value adjustment to reduce property, plant and
equipment by $460,000.
(3) Reflects the liability for direct acquisition costs of $250,000.
(4) Reflects borrowings of $8.3 million in connection with the acquisition of
Atlantic Connections and the repayment of $3.3 million of debt of
Atlantic Connections.
(5) Reflects the elimination of Atlantic Connections' unitholders' equity.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Choice One Overview
We are an integrated communications provider offering broadband data and
voice telecommunications services primarily to small and medium-sized
businesses in second and third tier markets in the northeastern United States.
Our offerings include high speed data and Internet service, principally
utilizing DSL technology, local exchange service and long distance service. We
seek to become the leading ICP in each of our target markets by offering a
single source for competitively priced, high quality, customized
telecommunications services. A key element of our strategy is to be one of the
first ICPs to provide comprehensive coverage in each of the markets we serve.
We are achieving this market coverage by installing both data and voice
network equipment in multiple incumbent local exchange carrier central
offices, a process known as collocation. We also intend to maximize
utilization of our market network coverage by offering data and voice services
on a wholesale basis to Internet service and other telecommunications
providers. Through our strategy of connecting substantially all of our clients
directly to our own switches, we are able to more efficiently route traffic,
ensure quality service and control costs.
Since our inception on June 2, 1998, our principal activities have
consisted of the hiring of management and other key personnel, the raising of
capital, the procurement of governmental authorizations and space in central
offices, the acquisition of equipment and facilities, the development,
acquisition and integration of OSS and other back office systems, the
negotiation of interconnection agreements and the commencement of operations
in the Albany, Buffalo, Manchester, Pittsburgh, Providence, Rochester,
Springfield, Syracuse and Worcester markets. Therefore, our revenues during
this period are not indicative of revenues that may be attained in the future.
As a result of our development activities, we have experienced significant
operating losses and negative EBITDA to date. We do not expect to achieve
positive EBITDA in any market while we emphasize development, construction and
expansion of our telecommunications services business in such market and until
we establish a sufficient revenue-generating client base. We expect to
continue to experience increasing operating losses and negative EBITDA as we
expand our operations. We only have a limited history upon which you can base
your investment decision. As a result of our limited operating history,
prospective investors have limited operating and financial data about us upon
which to base an evaluation of our performance. See "Risk Factors-- History of
Operations."
Institutional investors, referred to by us as the Investor Members, and 25
members of our management, referred to by us as the Management Members,
currently own approximately 95.0% and 5.0%, respectively, of the ownership
interests of Choice One Communications L.L.C., the entity that owns all of our
outstanding capital stock. Upon completion of this offering, Choice One
Communications L.L.C. will dissolve and its assets (which consist almost
entirely of such capital stock) will be distributed to the Investor Members
and the Management Members in accordance with the terms of the limited
liability company agreement governing that entity, referred to by us as the
LLC Agreement. The LLC Agreement provides that the equity allocation of our
common stock held by the LLC between the Investor Members and the Management
Members will range between 95.0%/5.0% and approximately 68.1%/31.9%. The
Management Members will receive the full 31.9% allocation if the value of the
common stock distributable to the Investor Members based on the initial public
offering price exceeds certain hurdle rate thresholds specified in the LLC
Agreement for the return on the equity invested by the Investor Members.
However, the maximum amount allocable to the Management Members would be
reduced to not less than %, based on the amount of committed Investor Member
equity undrawn and the length of time of such equity commitment. Assuming an
initial public offering price of $ per share, the midpoint of the price
range on the cover of this prospectus, and assuming no drawdowns on the
additional equity commitments, if the initial public offering occurs before
March 1, 2000, the equity allocation will be approximately % to the Investor
Members and % to the Management Members. Under generally accepted accounting
principles, upon consummation of this offering, we will be required to record
the $ million (assuming an initial public offering price of $ per
share, the midpoint of the price range on the cover of this prospectus)
increase in the assets of Choice One Communications L.L.C. allocated to the
Management Members as an increase in
33
<PAGE>
additional paid-in capital (with a corresponding increase in retained
deficit), of which we will be required to record $ million as a
noncash, non-recurring charge to operating expense and $ million will be
recorded as deferred management ownership allocation charge. The deferred
charge will be amortized at $ , $ , $ and
$ during 2000, 2001, 2002 and 2003, respectively, which is based
upon the period over which we have the right to repurchase the securities (50%
of the vested securities at fair market value and the remaining 50% of vested
securities and all unvested securities at the lesser of the original cost of
the securities or fair market value) in the event a Management Member's
employment with us is terminated. The right to repurchase the securities
expires over a 24 to 36-month period after the completion of this offering
depending on the particular Management Member's vesting schedule. See "Certain
Relationships and Related Transactions."
Choice One Factors Affecting Results of Operations
Revenues
Revenues are generated from the following categories:
. Revenues from DSL and other data services, which will consist primarily
of monthly recurring charges for connections from the end-user to our
facilities.
. Local calling services, which will consist of monthly recurring charges
for basic service, usage charges for local calls, service charges for
features such as call waiting and call forwarding and, to a lesser
extent, non-recurring charges for items such as installing additional
lines to existing clients.
. Long distance services, which include a full range of retail long
distance services, including traditional switched and dedicated long
distance, 800/888 calling, international, calling card and operator
services.
. Access charges, which we earn by connecting our clients to their
selected long distance carrier for outbound calls or by delivering
inbound long distance traffic to our local service clients.
. Reciprocal compensation, which entitles us to bill ILECs for calls in
the same local calling area, placed by their clients to our clients.
There is uncertainty surrounding the payment of reciprocal compensation by
ILECs for calls delivered to ISPs. However, the amount of reciprocal
compensation revenue that we receive related to ISPs is not material. See
"Risk Factors--Difficulties in Implementation of Local and Enhanced Services."
We expect to generate most of our revenues from sales to end user clients
in the small and medium-sized business market segments, but may augment this
core revenue source by selectively supplying wholesale services, including
equipment collocation and facilities management services, to information
providers, such as audio-text service providers, and ISPs.
We price our services competitively in relation to those of the ILECs and
offer combined service discounts designed to give clients incentives to buy a
portfolio of services. During the past several years, market prices for many
telecommunications services have been declining, which is a trend that we
believe will likely continue. This decline will have a negative effect on our
revenue that may not be offset completely by savings from decreases in our
cost of services. See "Risk Factors--Competition--We face a high level of
competition in the telecommunications industry."
Network Costs
Under our network buildout strategy, we are deploying digital and packet
switching platforms with local and long distance capability and leasing fiber
trunking capacity from the ILECs and other CLECs to connect our switch with
our transmission equipment collocated in ILEC central offices. We will lease
high capacity digital lines and unbundled copper loop lines from the ILECs to
connect our clients and other carriers' networks to our
34
<PAGE>
network. We plan to lease capacity or overbuild specific network segments in
certain markets as economically justified by traffic volume growth. In
addition, we expect to increase the capacity of our switches, and may install
additional switches, in a market as demand warrants. We have acquired the
rights to two strands of dark fiber between Springfield and Worcester, and
have an option to purchase the rights to an additional two strands.
We expect switch site lease costs will be a significant part of our ongoing
cost of services. For use of their central offices for collocation, ILECs
typically charge both a start-up fee as well as a monthly recurring fee. The
costs to lease high capacity digital lines and unbundled copper loop lines
from the ILECs will vary by ILEC and are regulated by state authorities.
Collocation costs are also expected to be a significant part of our network
development and ongoing cost of services. We will be required to invest a
significant amount of funds to develop the central office collocation sites
and to deploy the transmission and distribution electronics. We believe that
in most of the markets we plan to enter there are multiple carriers in
addition to the ILEC from which we could lease trunking capacity. We expect
that the costs associated with these leases will increase with client volume
and will be a significant part of our ongoing cost of services. However, we
believe that offering integrated data and voice services by means of DSL
technology will provide us with a cost advantage over competitors as we will
be able to reduce the number of access lines we will need to lease from the
ILEC to provide the same amount of service.
In order to enter a market, we must enter into an interconnection agreement
with the ILEC to make comprehensive calling available to our clients.
Typically these agreements set the cost per minute to be charged by each party
for the calls which have traversed between each carrier's network. These costs
will grow in proportion to our clients' outbound call volume and are expected
to be a major portion of our cost of services. However, we do expect to
generate increased revenue from the ILECs as our clients' inbound calling
volume increases. To the extent our clients' outbound call volume is
equivalent to their inbound call volume, we expect that our interconnection
costs paid to the ILECs will be substantially offset by the interconnection
revenues received from the ILECs.
We have entered into a resale agreement with a long distance carrier to
provide us with transmission services. This agreement provides for the resale
of long distance services on a per-minute basis and contains minimum volume
commitments. In the event we fail to meet our minimum volume commitments, we
may be obligated to pay under-utilization charges and in the event we
underestimate our need for transmission capacity, we may be required to obtain
capacity through more expensive means. Transmission capacity costs will
increase as our clients' long distance calling volume increases, and we expect
that these costs will be a significant portion of our cost of long distance
services. As traffic on specific routes increases, however, we may lease or
otherwise acquire fiber optic trunk capacity which would have the effect of
reducing our per unit network costs and increasing our depreciation and
amortization expense.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses include selling and
marketing costs, client care, billing, corporate administration, personnel and
network maintenance.
We employ a large direct sales force in each market we enter. To attract
and retain a highly qualified sales force, we are offering our sales and
client care personnel a compensation package emphasizing commissions and stock
options. In addition to our direct sales force, we may use independent sales
agents in each of our markets to sell our products through indirect channels.
We expect to incur significant selling and marketing costs as we continue to
expand our operations. We also plan to offer sales promotions to win clients,
especially in the first few years as we establish our market presence.
We have developed a customized information system and procedures for OSS
and other back office systems that are required to enter, schedule, provision
and track a client order from point of sale to the installation and testing of
service and that will include or interface with trouble management, inventory,
billing, collection and client care service systems. Along with the
development cost of the systems, we will also incur ongoing expenses
35
<PAGE>
for client care and billing. As our strategy stresses the importance of
personalized client care, we expect that our client care department will
become a larger part of our ongoing administrative expenses. We also expect
billing costs to increase as our number of clients and call volume increase.
Billing is expected to be a significant part of our ongoing administrative
expenses.
We will incur other costs and expenses, including the costs associated with
the maintenance of our network, administrative overhead, office leases and bad
debt. We expect that these costs will grow significantly as we expand our
operations and that administrative overhead will be a large portion of these
expenses during the start-up phase of our business. However, we expect these
expenses to become smaller as a percentage of our revenue as we build our
client base.
Deferred Compensation
As the estimated fair market value of our stock exceeded the exercise price
of certain options granted, we recognized deferred compensation which is
amortized over the vesting period of the options.
As our estimated fair market value has exceeded the price at which units of
Choice One LLC have been sold to management employees since the formation of
Choice One, we have recognized a deferred compensation charge of $3.6 million
which is being amortized over a four year period from the date the units were
issued. In addition, we have similarly recognized a deferred compensation
expense of $3.5 million in connection with the issuance of options to
management employees, which is being amortized over a four year period from
the date the options were issued.
Depreciation and Amortization
Our depreciation and amortization expense includes depreciation of switch
related equipment, non-recurring charges and equipment collocated in ILEC
central offices, network infrastructure equipment, information systems and
furniture and fixtures. It also includes amortization of deferred financing
costs related to our credit facility. Our acquisition of Atlantic Connections
will be accounted for using the purchase method of accounting. The amount of
the purchase price in excess of the fair value of the net assets acquired,
$4.3 million, will be amortized over a 10 year period. The value of the
customer base acquired from Atlantic Connections, which management estimates
to be approximately $4.3 million, will be amortized over a five year period.
We expect that our depreciation and amortization expense will increase as we
continue to make capital expenditures, acquire long-term rights in
telecommunications facilities and acquire other businesses.
Income Taxes
We have not generated any taxable income to date and do not expect to
generate taxable income in the next few years. Use of our net operating loss
carryforwards, which begin to expire in 2013, may be subject to limitations
under Section 382 of the Internal Revenue Code of 1986, as amended. We have
recorded a full valuation allowance on the deferred tax asset, consisting
primarily of net operating loss carryforwards, due to the uncertainty of its
realizability.
Choice One Results of Operations
During the period from our inception on June 2, 1998 through December 31,
1998, we were in the development stage of operations and did not generate any
revenue. Our principal activities during 1998 consisted of the hiring of
management and other key personnel, the raising of capital, the procurement of
governmental authorizations, the acquisition of equipment and facilities, the
development, acquisition and integration of OSS and other back office systems
and the negotiation of interconnection agreements. During the period from our
inception on June 2, 1998 through December 31, 1998, we incurred a net loss of
$4.8 million, which was attributable to selling, general and administrative,
or SG&A, expenses of $4.7 million, noncash deferred compensation of $.1
million and minimal depreciation and amortization expense.
36
<PAGE>
We became operational in Albany and Buffalo in February 1999, in Pittsburgh
and Syracuse in April 1999, and in Providence in August 1999. We generated $.9
million in revenue for the nine months ended September 30, 1999. For the nine
months ended September 30, 1999, after giving pro forma effect to the
acquisition of Atlantic Connections and the incurrence of debt in connection
therewith, we would have had a net loss of $21.4 million. Our historical
network operating costs, SG&A expenses, noncash deferred compensation and
depreciation and amortization expense during this period were $2.6 million,
$12.8 million, $1.0 million and $3.4 million, respectively. We expect these
costs and expenses to increase significantly in future periods as we expand
our operations.
Atlantic Connections and Predecessors Overview
In November 1999, we acquired Atlantic Connections, a local and long
distance service provider with operations in Portsmouth, New Hampshire and the
Worcester, Massachusetts metropolitan area.
Atlantic Connections Results of Operations
Revenues
Total revenues of Atlantic Connections were $6.5 million for 1998 compared
to $5.5 million for 1997, an increase of $1.0 million, or 18.2%. This increase
was the result of growth in sales to existing customers as well as the
addition of new customers. The increase in 1998 was also due in part to the
addition of two new services.
Total revenues were $5.5 million for 1997 compared to $5.3 million for
1996, an increase of $196,000, or 3.8%. During this period, minutes of use
increased over 14.0%, but were offset by competitive pressure on rates.
Cost of Service
Cost of service was $5.2 million for 1998 compared to $3.7 million for
1997, an increase of $1.5 million, or 40.5%. This increase was primarily due
to the higher cost of local exchange resale and, to a lesser extent, from
inefficiencies resulting from having two network systems while Atlantic
Connections converted traffic in phases from its old to its new network. The
upfront cost of implementing a new service also contributed to the increase in
cost of service for 1998.
Cost of service was $3.7 million for 1997 compared to $3.8 million for
1996, a decrease of approximately $.1 million or 2.6%. The decrease was
primarily attributable to significant reductions in "wholesale" access costs.
This decrease was also in part due to the accounting treatment for various new
network costs related to the installation of new switches, which were
accounted for under general and administrative expenses rather than cost of
service, until placed into service.
Selling, General and Administrative
Selling, general and administrative expenses were $2.0 million for 1998
compared to $1.5 million for 1997, an increase of $543,000, or 35.2%. This
increase was primarily due to expenses associated with sales growth and
additional personnel.
Selling, general and administrative expenses were $1.5 million for 1997
compared to $1.2 million for 1996, an increase of $350,000, or 29.1%. This
increase was primarily attributable to increases in salary expenses associated
with management, inside sales and other personnel, consulting, accounting and
legal fees and expenses directly related to upgrades in Atlantic Connections'
office equipment and switch installation. Additionally, certain expenses
relating to the installation of new switches that would normally have been
applied under cost of service were expensed under general and administrative
for 1997 because the switches were not in service.
37
<PAGE>
Liquidity and Capital Resources
Our initial equity financing consisted of approximately $62.1 million
contributed by the Investor Members and the Management Members of our parent,
Choice One Communications L.L.C. On June 30, 1999, the aggregate amount of
capital committed by certain of these members and new members was increased by
approximately $71.3 million to a total capital commitment of approximately
$133.4 million. These additional equity commitments will expire upon
consummation of this offering. We currently do not anticipate drawing on these
additional commitments prior to the consummation of this offering. If the
additional commitments terminate, the total equity capital committed to the
LLC would reduce back to an aggregate of approximately $62.1 million. See
"Certain Relationships and Related Transactions."
Our credit facility permits us to borrow up to $150.0 million, subject to
various conditions, covenants and restrictions (including those described
below), for the next eight years with maximum borrowing limits to be reduced
starting in 2002 by 5.0% with increasing reductions thereafter for each year.
The $50.0 million term loan portion of the credit facility will not be
available for borrowing by us after November 3, 2000 if these funds have not
been borrowed before that date. As of September 30, 1999, $5.0 million was
outstanding under the revolving portion of the credit facility. The credit
facility, which is secured by liens on substantially all of our and our
subsidiaries' assets and a pledge of our subsidiaries' common stock, contains
covenants and provisions that restrict our ability and our subsidiaries'
ability to:
. incur additional indebtedness and contingent obligations;
. incur liens and enter into lease transactions;
. make loans, advances and investments;
. effect mergers, liquidations, acquisitions and asset sales;
. make dividends and distributions on, and redemptions and repurchases of
capital stock and other similar payments;
. make exchanges and issuances of capital stock;
. engage in transactions with affiliates;
. make certain accounting changes;
. make amendments, specified payments and prepayments of subordinated
debt;
. amend charter documents; and
. enter into restrictive agreements.
The credit facility also requires the satisfaction of particular financial
covenants. During the Stage 1 Covenant Period (as defined in the credit
facility), these covenants include:
. a continuing test of debt to contributed capital ratio;
. a quarterly test of minimum revenue;
. a quarterly test of the maximum EBITDA losses permitted and minimum
EBITDA required;
. an annual limit on capital expenditures; and
. a quarterly test of the ratio of property, plant and equipment to total
debt.
During the Stage 2 Covenant Period (as defined in the credit facility),
these covenants include:
. a quarterly test of the Borrower Leverage Ratio;
. a quarterly test of the ratio of EBITDA to Fixed Charges (as defined in
the credit facility);
. a quarterly test of the ratio of EBITDA to Interest Expense (as defined
in the credit facility);
38
<PAGE>
. an annual limit on capital expenditures; and
. a quarterly test of the Company Leverage Ratio (as defined in the credit
facility).
Events of default under the credit facility include various events of
default customary for such type of agreement, such as failure to pay scheduled
payments when due, cross-defaults with and cross-acceleration to other
indebtedness, the occurrence of a change in control (as defined in the credit
facility), loss of material communications licenses, and events of bankruptcy,
insolvency and reorganization. In addition, if Mr. Dubnik ceases to be our
Chief Executive Officer and a replacement satisfactory to the lenders is not
hired within 180 days, there will be an event of default under our credit
facility.
We have incurred significant operating and net losses since our inception.
We expect to continue to experience increasing operating losses and negative
EBITDA as we expand our operations and build our client base. As of September
30, 1999, we had an accumulated deficit of $24.4 million. Net cash provided by
operating activities was approximately $6.6 million for the period of
inception through December 31, 1998 and net cash used in our operating
activities was approximately $16.7 million for the nine months ended September
30, 1999. The net cash used for operating activities during 1999 was primarily
due to net losses and a decrease in current liabilities.
Capital expenditures were $21.1 million and $33.0 million from the period
of inception through December 31, 1998 and during the nine months ended
September 30, 1999, respectively. We expect that our capital expenditures will
be substantially higher in future periods in connection with the purchase of
infrastructure equipment necessary for the development and expansion of our
network and the development of new regions. Net cash used in our investing
activities was $21.1 million for the period of inception through December 31,
1998 and $33.0 million for the nine months ended September 30, 1999. The net
cash used for investing activities was due to capital expenditures.
Net cash provided by financing activities was $16.0 million for the period
from inception through December 31, 1998 and $48.3 million for the nine months
ended September 30, 1999. Net cash provided by financing activities for the
period from inception through December 31, 1998 was related to equity
contributions. Net cash provided by financing activities for the nine months
ended September 30, 1999 was related to $5.0 million of borrowings under the
credit facility, $44.0 million of equity contributions and $.7 million of
payments of financing costs.
The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of the demand for our services and
regulatory, technological and competitive developments (including additional
market developments and new opportunities) in the industry and other factors.
We also expect that we will require additional financing (or require financing
sooner than anticipated) if our development plans or projections change or
prove to be inaccurate or if we alter the schedule or targets of our roll-out
plan. We may also require additional financing in order to take advantage of
unanticipated opportunities, to effect acquisitions of businesses, to develop
new services or to otherwise respond to changing business conditions or
unanticipated competitive pressures. Sources of additional financing may
include commercial bank borrowings, vendor financing or the private or public
sale of equity or debt securities. We cannot assure you that we will be
successful in raising sufficient additional capital at all or on favorable
terms, that the terms of additional indebtedness will be within the
limitations contained in our financing agreements, including the indenture, or
that the terms of such indebtedness will not impair our ability to develop our
business. To expand and develop our business, we will need a significant
amount of cash. Our ability to obtain additional financing is uncertain. "See
Risk Factors--Significant Capital Requirements."
Quantitative and Qualitative Disclosures about Market Risk
At September 30, 1999, the carrying value of our debt obligations excluding
capital lease obligations was $5.0 million and the fair value of those
obligations was $5.0 million. The weighted average interest rate of our debt
obligations at September 30, 1999 was 10.75%.
39
<PAGE>
We have not, in the past, used in any material respect financial
instruments as hedges against financial and currency risks or for trading.
However, as we expand our operations, we may begin to use various financial
instruments, including derivative financial instruments, in the ordinary
course of business, for purposes other than trading. These instruments could
include letters of credit, guarantees of debt and interest rate swap
agreements. We do not intend to use derivative financial instruments for
speculative purposes. Interest rate swap agreements would be used to reduce
our exposure to risks associated with interest rate fluctuations and, subject
to limitations and conditions, are required by our credit facility. By their
nature, these instruments would involve risk, including the risk of
nonperformance by counterparties, and our maximum potential loss may exceed
the amount recognized in our balance sheet. We would attempt to control our
exposure to counterparty credit risk through monitoring procedures and by
entering into multiple contracts.
Year 2000
The Year 2000, or Y2K, problem results from the fact that many existing
computer programs are written to handle two digits, rather than four, to
define the applicable year. Accordingly, date-sensitive software or hardware
may not be able to distinguish between the year 1900 and the year 2000, and
programs that perform arithmetic operations, comparisons or sorting of date
fields may begin yielding incorrect results. This could potentially cause a
system failure or miscalculations that could disrupt operations. These Y2K
issues affect virtually all companies and organizations.
State of Readiness
We have developed plans to address the potential risks we face as a result
of the Y2K issue. Generally, we have identified two areas for Y2K review:
internal systems and operations, and external systems and services. As a new
enterprise, we are not burdened internally with legacy systems that are not
Y2K ready. As we develop our network and support systems, we intend to ensure
that all systems will be Y2K ready. We are purchasing our operations support
systems with express specifications and warranties that all systems be Y2K
ready and with remedies if they are not. In addition, we are requiring that
all vendors supplying third party software and hardware to us warrant their
Y2K readiness. However, we cannot assure you that all systems will function
adequately when we reach the year 2000. We are selling our telecommunications
services to companies that will rely upon computerized systems to make
payments for such services, and to interconnect portions of our network and
systems with other companies' networks and systems. These transactions and
interactions potentially will expose us to Y2K problems. We have instituted a
program to contact our external suppliers, vendors and providers to obtain
information about their Y2K readiness and, based on that information, to
assess the extent to which these external information technology and non-
information technology systems (including embedded technology) could cause a
material adverse effect to our operations. Our assessment of our Y2K readiness
will be ongoing as we receive applicable information from suppliers, vendor
and others and as we continue to develop our own operations support system and
become reliant on the systems of additional third parties as a result of the
geographic expansion of our business into additional markets. We may in the
future identify a significant internal or external Y2K issue which, if not
remedied in a timely manner, could have a material adverse effect on our
business, financial condition and results of operations.
Costs to Address Year 2000 Issues
Other than time spent by our internal information technology and other
personnel, we have not yet incurred any significant costs in identifying Y2K
issues. Because no material Y2K issues have yet been identified in connection
with external sources, we cannot reasonably estimate costs that may be
required for remediation or for implementation of contingency plans, but they
will be funded through cash flows generated through investments and
operations. We will expense the assessment and remediation costs. As we gather
information relating to external sources of Y2K issues, we will reevaluate our
ability to estimate costs associated with Y2K issues. We cannot assure you
that as additional Y2K issues are addressed, our costs to remediate such
issues will be consistent with our historical costs.
40
<PAGE>
Risks of Year 2000 Issues
Since all of our information technology and non-information technology
systems and products relating to our external issues are manufactured or
supplied by third parties outside of our control, we cannot assure you that
each of those third party systems will be Y2K ready. In particular, we will be
dependent upon other ILECs, long distance carriers and others on whose
services we depend for interconnection and completion of off-network calls.
These interconnection arrangements are material to our ability to conduct our
business and failure by any of these providers to be Y2K ready may have a
material adverse effect on our business in the affected market. Moreover,
although we believe we have taken reasonable precautions to purchase Y2K ready
internal systems, we cannot assure you that every vendor will fully comply
with its contractual requirements to us. If some or all of our internal and
external systems fail or are not Y2K ready in a timely manner, there could be
a material adverse effect on our results of operations, financial position or
cash flow.
Because we have not yet identified any material Y2K issues, we cannot
reasonably ascertain the extent of the risks involved if any one system fails
to process date-sensitive calculations accurately. Potential risks may include
the following: the inability to process client billing accurately or in a
timely manner; the inability to provide accurate financial reporting to
management, auditors, investors and others; an interruption in delivery of
voice and data services to clients; a loss of power to our facilities;
litigation costs associated with potential suits from clients and investors;
delays in implementing other information technology projects as a result of
work by internal personnel on Y2K issues; delays in receiving payment or
equipment from clients or suppliers as a result of their systems' failure; and
the inability to occupy and operate in a facility. Although we are unable to
determine the probability that any such risk will occur, any one of these
risks could have a material adverse effect on our results of operations,
financial position or cash flow.
Contingency Plans
Although we have not made any specific contingency plan, we believe that
our most reasonably likely worst case Y2K scenario would be a loss of power
and/or a failure of our external systems. Our operations facilities and
systems are backed up with auxiliary power generators capable of operating a
significant portion of our equipment and systems for a limited period of time
should power supplies fail. However, due to our reliance on other ILECs for
interconnection services, we cannot eliminate, even for a limited time, the
negative impact that disruptions in ILEC service or the service of other
carriers would create.
Recent Accounting Pronouncements
In June 1998, the financial accounting standards board, or FASB, issued
statement of financial accounting standards, SFAS, No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which was amended by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133, an amendment of FASB
Statement No. 133," and is effective on a prospective basis for interim
periods and fiscal years beginning January 1, 2001. This Statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging
securities. To the extent we begin to enter into such transactions in the
future, we will adopt the Statement's disclosure requirements in the financial
statements for the year ending December 31, 2001.
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position 98-1, "Accounting For the Costs of
Computer Software Developed For or Obtained For Internal-Use," which requires
the capitalization of particular costs incurred in connection with developing
or obtaining software for internal-use. We adopted the provisions of SOP 98-1
in our financial statements as of January 1, 1999.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting the
Costs of Start-Up Activities," which requires that costs related to start-up
activities be expensed as incurred. We adopted the provisions of SOP 98-5 in
our financial statements as of January 1, 1999.
41
<PAGE>
BUSINESS
Choice One Communications
We are an integrated communications provider offering broadband data and
voice telecommunications services primarily to small and medium-sized
businesses in second and third tier markets in the northeastern United States.
Our offerings include high speed data and Internet service, principally
utilizing DSL technology, local exchange service and long distance service. We
seek to become the leading ICP in each of our target markets by offering a
single source for competitively priced, high quality, customized
telecommunications services. A key element of our strategy is to be one of the
first ICPs to provide comprehensive coverage in each of the markets we serve.
We are achieving this market coverage by installing both data and voice
network equipment in multiple incumbent local exchange carrier central
offices. We also intend to maximize utilization of our market network coverage
by offering data and voice services on a wholesale basis to Internet service
and other telecommunications providers. Through our strategy of connecting
substantially all of our clients directly to our own switches, we are able to
more efficiently route traffic, ensure quality service and control costs. As
of November 15, 1999, we had service agreements with 3,150 clients for 21,733
access lines, including 254 DSL lines, of which we had initiated service with
2,459 clients and for 14,999 access lines, including 117 DSL lines.
We currently offer data and voice services in nine markets and intend to
expand into approximately 11 additional markets by the end of the second
quarter 2001. Following completion of our planned expansion to these
approximately 20 markets, we believe our networks will be able to reach
approximately 3.7 million business lines, which constitute more than 75% of
the estimated business lines in these markets, and 5.3 million households.
We divide our target markets into four stages of development:
. Operational. We began providing services and generating client revenues
in the Albany, NY; Buffalo, NY; Manchester, NH; Pittsburgh, PA;
Providence, RI; Rochester, NY; Springfield, MA; Syracuse, NY; and
Worcester, MA markets during the past nine months. Our switching
facilities servicing each of these markets consist of both packet and
circuit-switched networks.
. Under Construction. We are currently constructing switching facilities
by installing packet-switched networks to offer DSL services in
Allentown, PA; Harrisburg, PA; and Scranton, PA. We expect to be
operational in these markets by the end of the first quarter 2000 and to
add voice capabilities to these networks by means of either "voice over
DSL" or access nodes, which will work in concert with the packet-based
architecture at our collocation sites.
. In Development. We plan to construct switching facilities consisting of
both packet and circuit-switched networks in the Hartford, CT and New
Haven, CT markets, which we expect to be operational during the second
quarter 2000.
. Planned. We are in the process of evaluating other second and third tier
cities and intend to expand into approximately six additional markets in
the northeastern United States by the end of the second quarter 2001.
As of November 15, 1999, we had applications accepted to collocate our
network equipment in 223 incumbent local exchange carrier central offices;
completed 94 of these collocations; and had 129 additional collocations in
progress in our operational and under construction markets. We have also
installed equipment to provide DSL services in 85 of our current collocations
and expect to have DSL services available in all 115 collocations targeted for
completion by the end of 1999.
We have developed a flexible network buildout strategy allowing us to
leverage rapidly evolving telecommunications technology. In each of our first
nine markets, we have deployed or intend to deploy both packet and circuit-
switched platforms. In our Allentown, Harrisburg and Scranton markets, we will
employ a "DSL First" method of market entry by installing a circuit or packet-
switched network and initially offering
42
<PAGE>
only data services. We will then add packet-switched voice services within 12
months after entering such markets. We believe this DSL First strategy
provides for faster time to market and lower initial capital costs, while
preserving flexibility for our future development. We intend to continue
entering new markets using methods tailored to meet the needs of clients in
our target markets and the technology available in those markets. We expect
that our market entry strategy and network architecture will continue to
evolve in order to capitalize on advances in telecommunications technology and
to satisfy the changing needs of our clients.
We have designed and are developing integrated operations support systems,
or OSS, and other back office systems that we believe will provide significant
competitive advantages by enhancing our efficiency and allowing us to support
rapid and sustained growth and provide exceptional client care. We have
automated most of our back office systems and are in the process of
integrating them into a seamless end-to-end system that will synchronize
multiple tasks, including installation, billing and client care. We also
strive to minimize the time between a client order and service installation.
To achieve this goal, we have established an on-line and real-time connection,
known as electronic bonding, of our operations support systems with Bell
Atlantic Corporation. We anticipate establishing similar connections with
other incumbent local exchange carriers, or ILECs.
In each of our markets, we have a locally based, dedicated and experienced
sales force that provides high quality, personalized client care. In addition
to our direct sales force, we use third party agencies to sell our services.
As of November 15, 1999, we had 129 persons in our sales and sales support
staff and had sales arrangements with several third party agencies.
We intend to acquire telecommunications companies in our target market
region to accelerate market penetration and growth. Once acquired, we plan to
expand the range of services offered by the acquired entities to correspond to
the full range of Choice One services. In November 1999, we acquired Atlantic
Connections, L.L.C., a local and long distance service provider with
operations in Portsmouth, NH and Worcester, MA, for an initial cash purchase
price of approximately $8.3 million plus up to an additional $2.1 million that
would be payable in cash, or at our option, in common stock, if specified
performance criteria are met in the 12 months following the acquisition. Our
strategy is to migrate the approximately 3,100 small and medium-sized business
clients of Atlantic Connections to our switch-based network and to offer a
full suite of Choice One data and voice services to these clients.
We were founded in June 1998 by a group of telecommunications executives
led by Steve Dubnik, the former chief operating officer of North American
Operations of ACC Corp. In addition to Mr. Dubnik, members of our group of
founding executives include Kevin Dickens, Senior Vice President, Operations
and Engineering; Mae Squier-Dow, Senior Vice President, Sales, Marketing and
Service; and Philip Yawman, Senior Vice President, Corporate Development, all
of whom were formerly executives at ACC Corp. Mr. Dubnik and this group of
founding executives have hired a management team with extensive experience and
success in the telecommunications industry. Members of our management team
have significant experience in the northeastern markets, having previously
served at such companies as Frontier Corporation, Teleport Communications
Group, Inc., and MFS Communications Company. Our 20 top executives and
managers have an average of 15 years of experience in the telecommunications
industry.
Our approximately $62.1 million of funded equity has been provided by
experienced investors in the telecommunications industry, including Morgan
Stanley Capital Partners III, L.P., Fleet Equity Partners VI, L.P. and Waller-
Sutton Media Partners, L.P., and our management team. Our credit facility
permits us to borrow up to $150.0 million for the next eight years with
maximum borrowing limits to be reduced during the eight year period, subject
to the covenants, restrictions and significant borrowing conditions described
in the credit facility.
43
<PAGE>
Business Strategy
The key elements of our business strategy are to:
Capitalize on Early to Market Advantage
Our goal is to continue to be among the first ICPs in an area to actively
market and provide a bundled package of integrated services to small and
medium-sized businesses. We believe this strategy provides us with a
significant advantage over competitors who enter our markets after us.
Offer Broad Coverage
Once we enter a market, we plan to provide broad coverage by collocating in
multiple locations in order to reach both central business districts and
outlying areas. While other companies often limit their network buildout to
highly concentrated downtown areas, our collocation strategy is to reach 75%
to 80% of the business lines within each market. As a result, we are often the
only competitor to the ILEC to offer integrated services to small and medium-
sized businesses at many of our collocation sites.
Lead Competition in Providing DSL Services
We believe we will be one of the first ICPs in each of our markets to
provide dedicated, high speed digital communications services using DSL
technology. DSL technology permits broadband transmissions over existing
copper telephone lines, allowing us to provide high speed services
economically. High speed connectivity is becoming increasingly important to
small and medium-sized businesses due to the dramatic growth in Internet and
electronic business applications.
Use Our Flexible Network Buildout Strategy to Rapidly and Cost Effectively
Enter New Markets
We have developed a flexible network buildout strategy allowing us to enter
each of our target markets using methods specifically tailored to the client
demand and the technology available in each such market. For instance, in each
of our first nine markets, we have or intend to have both packet and circuit-
switched platforms. In other "DSL First" markets, we are initially installing
DSL equipment only, significantly reducing the time and expense necessary to
complete collocations. We intend to offer packet-switched voice services in
these DSL First markets within 12 months of entry. By employing this DSL First
strategy, we expect to benefit through faster time to market and lower initial
capital costs, while preserving flexibility for future development.
Target Underserved Clients
We are targeting small and medium-sized businesses primarily in second and
third tier markets in the northeastern United States that we believe are
currently being underserved by the ILECs and other competitors. We are
focusing on markets where there is a high concentration of potential business
clients and a demand for the types of services we offer. We believe we can
attract and satisfy clients in these areas by offering a simplified,
comprehensive package of services and a high level of client care.
Offer Bundled Services with a Single Point of Contact
We strive to attract new clients and maximize client retention by offering
bundled services with a single point of contact for sales and service and
convenient, integrated billing. Our clients may bundle DSL, Internet, e-mail,
Web page design, Web server hosting, voice mail and other enhanced services
not generally available from the ILECs (or available only at higher prices)
along with their traditional local and long distance services. Our convenient
billing system will provide our clients with a single, easy to understand
statement covering all of their services.
44
<PAGE>
Utilize Efficient Automated and Integrated Back Office Systems
Our management team is committed to having efficient OSS and other back
office systems that can support rapid and sustained growth. To realize this
objective, we hired a team of engineering and information technology
professionals experienced in the telecommunications industry. Our systems team
is working with key third party vendors, including Saville Systems, MetaSolv
Software Inc. and DSET Corporation, to develop a seamless end-to-end system
that will synchronize multiple tasks, including installation, billing and
client care. Unlike the legacy systems currently employed by many ILECs and
CLECs, which require multiple entries of client information to synchronize
multiple tasks, our system will require only a single entry to transfer client
information from sales to service to billing. Our customized system will also
integrate our back office systems to minimize the time between client order
and service installation and to reduce our costs. We have implemented an
electronic interface, referred to as electronic bonding, linking our OSS
directly to Bell Atlantic so that we can switch Bell Atlantic customers to our
network on an automated basis. We anticipate developing similar bonds with
ILECs.
Increase Our Market Share by Providing Service-Driven Client Relationships
and a Local Presence
We seek to attract and retain clients by establishing local sales offices
in each of our markets and providing a highly experienced, locally based
account management team which will provide face-to-face sales and personalized
client care. We are dedicated to building long-term relationships with our
clients, which we believe have not typically received a satisfying level of
local support from the ILEC. We guarantee to respond to client problems and
needs within two hours of notification and to resolve their problems upon
their first request. Our Service Guarantee provides that if a client is not
satisfied with the quality of our service and we cannot remedy the problem
within 30 days, we will incur all of the costs to switch the client back to
its previous provider. In addition, we are committed to supporting and further
developing the communities in which our clients live and work. Choice One
employees live in these communities and create a community presence through
participation in local charities, organizations and chambers of commerce. We
believe that this local presence builds strong, positive Choice One name
recognition within these communities and demonstrates to our clients our
commitment to providing quality services in their communities on a long-term
basis.
Accelerate Growth Through Acquisitions
We intend to accelerate our growth and expand our presence in our target
market region by acquiring telecommunications companies and related businesses
and assets. We seek acquisition targets that offer similar services to ours
which can be integrated into our existing operations and networks. We also
seek acquisition targets which may allow us to offer additional value-added or
other related services. Once we have acquired a company, we intend to
integrate the company by expanding its offered services to the full range of
Choice One services; by centralizing administrative, billing and client care
functions; and by reducing redundant overhead. We currently have no definitive
agreements or commitments relating to any acquisitions.
Leverage Management Experience
Our management team has extensive experience and success in the
telecommunications industry, especially in our target markets. We believe that
our ability to draw upon the collective talent and expertise of our senior
management gives us a competitive advantage in the execution of network
deployment, sales and marketing, service installation, billing and collection,
back office and OSS systems, finance, regulatory affairs and client care.
Market Opportunity
We operate in both the high speed data and voice markets. We believe that
each of these markets is undergoing dramatic growth.
45
<PAGE>
Overall Market Size and Growth
According to International Data Corporation, or IDC, the overall market of
regulated, switched and unswitched data and voice traffic 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. The number of switched network access lines is
expected to grow from 187.5 million lines in 1998 to 232.6 million lines by
2002 and CLEC market share by revenue is expected to grow from 2.6% in 1998 to
5.6% by 2002.
Growing Market Demand for High-Speed Digital Communications Bandwidth
High-speed connectivity has become important to small and medium-sized
businesses due to the dramatic increase in Internet usage and electronic
business. According to IDC, the number of Internet users worldwide is
estimated to have reached approximately 86.6 million in 1997 and is forecasted
to grow to approximately 398.6 million by 2002. The popularity of the Internet
with consumers has driven the rapid proliferation of the Internet as a
commercial medium, as businesses establish Web sites and corporate intranets
and extranets to expand their client reach and improve their communications
efficiency. It is also estimated by IDC that the value of goods and services
sold worldwide through the Internet will increase from $15.4 billion in 1997
to over $733.6 billion in 2002. Accordingly, to remain competitive, small and
medium-sized businesses increasingly need high-speed Internet connections to
maintain complex Web sites, access critical business information and
communicate with employees, clients and business partners more efficiently.
High-speed digital connections are also becoming increasingly important to
businesses and consumers as more high bandwidth information and applications
become available on the Internet. As businesses continue to increase their use
of the Internet, intranets and extranets, we expect the market for both small
and medium-sized business Internet access to continue to grow rapidly causing
the demand for high-speed digital communications services to also grow
rapidly.
DSL Market Demand
According to IDC, total DSL line revenue is expected to increase in the
U.S. from $14.5 million in 1998 to $5.7 billion in 2003, for a 229% compounded
annual growth rate. By 2003, IDC estimates there will be 12.6 million DSL
lines, up from approximately 100,000 DSL lines in 1998.
Expansion of Competitive Local Telecommunications Industry
Until recently, the competitive local telecommunications industry has
generally been limited to providing interstate dedicated access, interstate
switched access and private line services, accounting for only approximately
one-fourth of the total local services market. The Telecommunications Act
opened local services markets to full competition by preempting state and
local laws to the extent that they prevent competitive entry with respect to
the provision of any telecommunications service and imposed a variety of new
duties on ILECs in order to promote competition in local exchange and access
services. See "-- Government Regulation."
46
<PAGE>
According to the FCC's 1998 Preliminary Statistics of Communications Common
Carriers, ILECs in the United States generated approximately $108 billion in
total revenue in 1998. Local exchange services consist of a number of service
components and are defined by specific regulatory classifications. For 1998,
total revenue by service was:
ILEC Market Revenue 1998 = $108 Billion
[Pie chart showing components of 1998 ILEC market revenue consisting of local
service revenue, network access service revenue, network service revenue and
miscellaneous revenue.]
Source: FCC's 1998 Preliminary Statistics of Communications Common Carriers
Our Targeted Markets
We are targeting second and third tier cities in the northeastern United
States. The U.S. Census Bureau defines second and third tier cities as having
a population between 500,000 and 1.5 million people. Our target markets had an
average of approximately 200,000 business access lines per city based on the
1998 FCC statistics.
Choice One's Telecommunications Services
Our service offerings are tailored to meet the specific needs of small and
medium-sized businesses in our target markets. We offer both bundled and
individual services.
Bundled Services
Bundled services can be purchased through the following three
ChoiceSelect SM plans:
. Platinum Choice--bundles high speed Internet, local and long distance
services.
. Gold Choice--bundles local and long distance services.
. Silver Choice--bundles high speed Internet and local services.
Our ChoiceSelect SM plans permit customization of services to meet clients'
needs and to save them up to 20% off the price of the same services on an
unbundled basis. In addition, we believe that our prices are less than those
of the ILEC for the same services.
Individual Services
As an alternative to choosing a ChoiceSelect SM plan, clients can select
one or more individual services. Our clients can choose from the following
services:
Internet Access and DSL High Speed Data Services. With our ChoiceAccess SM
suite of Internet services, we offer a comprehensive solution to our clients'
requirements including Internet access, e-mail, domain name
47
<PAGE>
hosting and other value-added services. We offer Internet access via DSL
technology, dedicated T-1 connections and dial-up. Utilizing DSL technology,
we can provide high-speed data communications and Internet access to our
targeted small and medium-sized business at rates that we believe are very
attractive when compared to the cost and performance of other available data
service offerings.
Our Choice NetJet service, powered by DSL technology, is highlighted by the
following key elements:
. Customizable Bandwidth. We offer our clients speeds ranging from 128kps
to 1.544 mbs. Our clients choose the speed and bandwidth capacity that
meets their needs.
. Always On. Through Choice NetJet, our clients are connected 24 hours a
day, 7 days a week.
. Symmetric Connections. Our service allows for data transmission at the
same speed in both directions.
. Security. Our server is designed to prevent unauthorized access to our
clients' information and enable the safe and secure transmission of
sensitive information and applications.
. No Usage Fees. Clients may use their Choice NetJet connection for any
period of time without per minute usage charges.
Dedicated T-1 Services. We offer ChoicePath SM dedicated T-1 services, as
an integrated low cost solution for dedicated access for bundling
Internet/data, local and long distance services over a single connection.
ChoicePath permits digital connections to be purchased in blocks of 24
circuits or on an individual basis.
Local Calling Services. Our local exchange services are offered through our
ChoiceXchange SM service plan. This service includes dialing parity,
simplified local rates and local number portability to provide our clients
with a seamless transition, listing in white and yellow page directories,
access to 911 and directory assistance. Also available through the service are
enhanced features, such as three-way conference calling, line rollover, call
forwarding, call waiting, caller ID and voice mail. Our voice mail service,
known as ChoiceMail, includes free call forwarding, remote access, paging
notification, personalized greetings and password protection. We also
originate and terminate interexchange calls placed or received by our clients.
Long Distance Services. Through our ChoiceOnePlus SM service, we offer a
full range of domestic and international long distance services, including
"1+" outbound calling, six second incremental billing, inbound toll free
service, and such complementary services as calling cards with operator
assistance and conference calling. To provide easy to understand billing to
our clients, we will also offer one rate on any calls within the U.S. Some
companies, such as Bell Atlantic, currently do not offer this service in our
target markets. We will permit our clients to choose only local service, but
we do not intend to market long distance as a stand-alone service.
Other Planned Services
Wholesale Services to ISPs and VARs. We believe that by rapidly deploying
DSL technology throughout our target markets, we will capitalize on additional
product and revenue opportunities that will enhance usage on our network.
These opportunities include offering DSL enabled services on a wholesale basis
to other telecommunications companies such as ISPs and value-added resellers,
or VARs, that desire to offer consumer Internet access services but do not
have the resources or network facilities to provide these services. This
allows these companies to market and resell our services under their own brand
name while allowing us to leverage our network capacities.
RLAN Services. We believe that businesses desire to have their employees
access and send e-mail and conduct business electronically from outside of
their offices, creating a demand for high speed digital communications for
remote local area network access, or RLANs. We will pursue opportunities to
provide DSL services to equip employees of targeted businesses with the
ability to work at home and in other remote locations through RLAN access.
48
<PAGE>
VPN Services. Our virtual private network, or VPN, services will combine
our DSL and dedicated T-1 access services with our VPN equipment to provide
clients with high-speed and secure connections to their corporate local area
network and the Internet. This flexible and cost-effective solution will
support both telecommuters and site-to-site connections. Our VPN services will
provide our clients with the convenience of an always-on connection and the
high speed and performance of DSL technology.
Web Hosting. We will offer a variety of Web hosting services to enable our
clients to maintain a high quality, highly reliable Internet presence without
investing capital in data center space, multiple high speed connections or
other capital intensive infrastructure. These services will include dedicated
Web hosting, shared Web hosting, and equipment collocation.
Web and E-Commerce Site Development. Our Web and e-commerce services will
provide our clients with Web-enabled functions such as shopping baskets,
payment processing, inventory management, on-line ordering and customer
service.
Enhanced Internet Applications Services. Our enhanced Internet application
services will include Web-based and Web-managed e-mail services and hosted
collaborative applications such as on-line calendars, on-line meetings,
virtual bulletin boards and document sharing.
Extranets & Electronic Villages. As a compliment to our VPN offerings, we
will develop public and private electronic communities where our clients can
share information and transact business with their colleagues and clients in a
secure, reliable and cost effective manner.
Managed Network Services. Our end to end product solutions will include
design, installation and management of our clients' voice and data networks.
These services will include de-marc extension, channel bank configurations and
deployment, router configuration and deployment, network monitoring and
managed firewalls.
Unified Messaging. Our unified messaging service will allow our clients to
manage all of their voice, fax and e-mail messages over a common platform and
user interface.
Sales and Client Care
In each market that we enter we have a locally based, dedicated and
experienced sales force that uses a consultative selling approach to offer
clients a full range of sophisticated and cost-effective telecommunications
solutions. We have designed an integrated team of professionals enabling us to
provide a results-oriented, responsive and personalized level of service to
our clients. Each of our sales teams is led by a General Manager, who is
responsible for the acquisition and retention of all revenues in that market.
Each team includes Account Executives, Service Order Coordinators, Client
Development Representatives and Technical Consultants who work together to
ensure a trouble-free transition for the client. Our sales teams use a variety
of methods to qualify leads and set up initial appointments, including
telemarketing and building canvassing. As of November 15, 1999, our sales and
sales support staff consisted of 129 persons.
Each member of our sales and sales support team is required to participate
in a comprehensive training program designed to enhance knowledge of
telecommunications, sales processes and activity management. This program also
promotes our quality client care and personalized local service principles and
ensures a consistent market message in all our territories. Our incentive
program is designed to motivate our sales team personnel to meet our high
activity standards (i.e., number of sales appointments and proposals per week)
with the goal of eventually calling on every qualified prospective business
client in each of our markets. In addition to our direct sales force, we use
several third party agencies to sell our services.
We assign a Client Development Representative to manage the relationship
with each client and to respond to and support the client's ongoing needs. The
Client Development Representatives focus on identifying the
49
<PAGE>
evolving telecommunications requirements of clients and assisting in
"upselling" a broader array of more comprehensive telecommunications services.
We have designed commission plans and incentive programs to reward and retain
our top performers and to encourage strong client relationships. Our sales
force utilizes the Choice One Contact Automated Sales Helper, which we refer
to as CASH, to manage opportunities and sales activity, share account
information with the account team and generate customized letters and
proposals. We plan to integrate CASH with our other back office systems.
We focus on providing exceptional client care, starting with our guaranteed
two-hour response time to any problems or concerns a client may have with our
service. Our Service Guarantee provides that if a client is not satisfied with
the quality of our service and we cannot remedy the problem within 30 days, we
will incur all of the costs to switch the client back to its previous
provider. Our state of the art automatic call distribution system enables us
to efficiently manage our client contacts. In addition to basic call
distribution features this system allows for:
. computer telephony integration, allowing instant on screen access to
client information at the time of a call;
. task queing, enabling automatic distribution to the next available agent
of a phone call, fax or e-mail; and
. geographic routing, allowing client services representatives to receive
incoming contacts from an assigned geographic area.
We are also developing a Web-enabled system to allow clients to access
their account information and interact with our client care representatives on
a real-time basis over the Internet.
Our Markets
In selecting prospective markets, we estimate market demand for our
services using data gathered from interexchange carriers, the FCC, local
sources, site visits and specific market studies. In addition to market
demand, we also consider the ILEC's level of service as well as the level of
penetration within the market by other ICPs.
We currently offer telecommunications services in nine markets and intend
to expand into approximately 11 additional markets in the northeastern United
States by the end of the second quarter 2001.
Our target markets are in four stages of development:
Operational Markets
We are currently providing data and voice services to our clients in the
following nine markets:
<TABLE>
<CAPTION>
Initial
Estimated Estimated total Estimated total service date
Market population(1) business access lines(2) households (3)
- ------ ------------- ------------------------ --------------- -------------
<S> <C> <C> <C> <C>
Albany, NY.............. 1,028,000 219,000 396,000 February 1999
Buffalo, NY............. 1,231,000 242,000 472,000 February 1999
Pittsburgh, PA.......... 2,507,000 512,000 985,000 April 1999
Syracuse, NY............ 791,000 166,000 293,000 April 1999
Providence, RI.......... 1,509,000 285,000 545,000 August 1999
Manchester, NH.......... 567,000 131,000 354,000 November 1999
Rochester, NY........... 1,132,000 220,000 420,000 November 1999
Springfield, MA......... 655,000 119,000 242,000 November 1999
Worcester, MA........... 725,000 134,000 269,000 November 1999
---------- --------- ---------
Total................. 10,150,000 2,028,000 3,981,000
</TABLE>
50
<PAGE>
Markets Under Construction
We are constructing switching facilities in the following three markets:
<TABLE>
<CAPTION>
Estimated Estimated total Estimated total Initial
Market population(1) business access lines(2) households service date(4)
- ------ ------------- ------------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Allentown, PA........... 709,000 152,000 264,000 1Q, 2000
Harrisburg, PA.......... 1,112,000(5) 217,000 397,000 1Q, 2000
Scranton, PA............ 671,000 160,000 258,000 1Q, 2000
--------- ------- -------
Total................. 2,494,000 529,000 920,000
Markets in Development
We are developing plans to construct switching facilities consisting of
both packet-switched and circuit-switched networks in the following markets.
The business plans for these markets have been approved by our Board of
Directors and our anticipated buildout schedule is set forth below.
<CAPTION>
Estimated Estimated total Estimated total Initial
Market population(1) business access lines(2) households service date(4)
- ------ ------------- ------------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Hartford, CT............ 1,086,000 216,000 409,000 2Q, 2000
New Haven, CT........... 985,000(6) 255,000 435,000 2Q, 2000
--------- ------- -------
Total................... 2,071,000 472,000 845,000
</TABLE>
- --------
(1) Source: U.S. Census Bureau Report as of December 31, 1997 based on basic
trading area.
(2) Source: Federal Communications Commission, Statistics of Common Carriers
as of December 31, 1997.
(3) Refers to the first month during which we commenced facilities-based
services in such market.
(4) Refers to the first quarter during which we expect to commence facilities-
based services in such market, based on our current business plan.
(5) Includes basic trading areas for both Harrisburg, PA and Lancaster, PA.
(6) Includes basic trading areas for both Bridgeport, CT and Stamford, CT.
Planned Markets
We intend to expand into approximately six markets in other second and
third tier cities in the northeastern United States by the end of the second
quarter 2001.
Network Infrastructure
We are a switch-based ICP and have developed a flexible network strategy
allowing us to leverage rapidly evolving telecommunications technology to our
competitive advantage. In each of our operational markets (other than
Worcester), we have installed a dedicated Lucent 5ESS(R) switch and related
equipment at a central location. The switches are connected to ILEC tandem
switches and IXC and ISP points-of-presence, often referred to as POPs. In the
Worcester market, we have provided for our collocations, which are connected
to our Springfield switch by backhauling traffic, which has enabled us to
avoid the expense of deploying a switch in the Worcester market. We expect to
utilize dark fiber recently acquired by us for backhauling this traffic. In
our current under construction markets, we are installing packet switches that
will enable us to offer DSL services in Allentown, PA; Harrisburg, PA and
Scranton, PA.
We are also collocating integrated digital loop carriers and related
equipment in multiple ILEC central offices within each of these markets in
order to reach 75% to 80% of the business lines in these markets. In addition,
we are collocating Digital Subscriber Line Access Modules, often referred to
as DSLAMs, in the same ILEC central offices so that we can provide high speed
data access using the existing copper loops. We will
51
<PAGE>
initially lease local network trunking facilities from the ILEC and/or one or
more competitive access providers, or CAPs, in order to connect our switch to
major ILEC central offices. We provide service to each client by leasing
unbundled loops from the ILEC or T-1 facilities from the ILECs or CAPs to
connect our access equipment (located in the serving central office) to the
client premise equipment.
We have ongoing market tests of VODSL with customers and anticipate
deployment of this technology following its validation as a commercially
viable solution. Our network architecture, comprised of both DSL/data packet
and voice switching technologies will enable us to integrate this traffic over
DSL from the client location to our collocated access equipment, and then over
a packet-based network to our Regional Switching Center. At the Regional
Center, this traffic then will be split into its data and voice components.
Data traffic will be switched via the packet switch to its appropriate
destination. The voice components will be switched through the Lucent 5ESS(R),
which will be interconnected to the public switched telephone network.
We are principally leasing our local network transmission facilities. We
may choose to replace leased trunk capacity with our own fiber optic
facilities as and when we experience sufficient traffic volume growth between
our switch and specific ILEC central offices. We have acquired the rights to
two strands of dark fiber and an option to purchase the rights to an
additional two strands to backhaul our traffic from Worcester (where we will
have approximately 20 collocations connected to a data center), into
Springfield (where we will have a switch). This will allow us to reduce our
costs of network buildout in the Worcester area and to reduce our cost of
leasing transmission facilities during the term of our rights to use the
fiber.
We have an agreement with Lucent to provide 24-hour monitoring of our
network equipment and switches during our non-business hours. We are also
exploring the possibility of developing our own network operations center,
which we may pursue if we believe it will provide operational efficiencies and
cost savings.
In markets that we enter using our DSL First strategy, the network will be
built on a packet-based infrastructure that includes DSLAMs collocated in ILEC
central offices. Additionally, each collocation will have packet-based
transmission equipment to support the future introduction of voice services.
These collocated offices will be interconnected with a regional Network Access
Point which aggregates the asynchronous transfer mode, or ATM, backbone and
provides interconnection with various vendor networks as well as our own wide-
area network.
We believe that this network design positions us to rapidly implement our
future voice switching infrastructure. Using various combinations of packet-
based access and switching solutions, our network is designed to use a
distributed architecture that creates network efficiencies, closely correlates
capital costs with traffic volumes, and distributes access/routing elements
closer to our clients. Signaling, control, and feature elements are
centralized to serve multiple markets. This design encourages capital
efficiencies while enabling enhanced feature and service functionality.
Information Systems
We have developed an integration strategy for OSS and other back-office
systems that we believe will provide significant competitive advantages in
terms of efficiency, capacity to process large order volumes and the ability
to deliver exceptional client care. We are developing a seamless end-to-end
system that will synchronize multiple activities. This integrated system will
allow information to be entered once and at the appropriate time within our
sales, client care, trouble management and billing process. Information will
then be shared between the various components of our systems.
We believe that our single entry system is superior to legacy systems,
which generally require multiple entries of client information. Duplicate
information entered into multiple systems can result in billing problems,
service interruptions, and delays in installation. Our single entry process is
less labor intensive and reduces the margin for error. In addition, the sales
to billing interval will be significantly shortened. We expect that our
customized, integrated system will also enable us to support rapid and
sustained growth.
52
<PAGE>
The individual components of our system are as follows:
Order Entry, Workflow, Circuit Inventory, Billing and Administration
We have entered into an agreement with MetaSolv Software Inc. to license
its Telecom Business Solution, or TBS, software to manage our back office
operational support system. MetaSolv's TBS software manages our order entry,
service installation, network design, network element inventory, gateway
interconnects and work flow business functions. This software also allows our
sales team to monitor the status of the order from initiation through service
implementation.
We have entered into an agreement with Saville Systems to utilize its
Convergent Billing Platform, or CBP, AS/400 software. Saville's CBP product
enables us to bundle and rate current and future service offerings and present
the information on a single bill for our clients. This system supports client
care functions, including billing inquiries and collection processes. Call
detail records, such as the billing records generated by the Lucent 5ESS(R)
switches and/or other network switching devices, will be automatically
processed by the billing services provider in order to calculate and produce
bills in a variety of formats. Clients will be able to choose specific
management reports and access their account information over the Internet.
We anticipate that during the first quarter of 2000, our MetaSolv TBS
system will be fully integrated with our Saville Systems CBP billing and
administration system to ensure data integrity and eliminate redundant data
entry. We anticipate that this integrated software solution will allow us to
efficiently provide a bundled product offering and will provide infrastructure
for a central point of contact for handling orders and activities.
Electronic Bonding
Through software that we have licensed from DSET Corporation and have
integrated with our MetaSolv TBS software, we believe that we are one of the
first competitive providers to electronically interface with Bell Atlantic for
the electronic bonding of orders. While most of our competitors initiate
service for a client by sending the ILEC a fax or e-mail or by remote data
entry, we have implemented an electronic interface linking our OSS directly to
the ILEC system so that we can process orders on an automated basis for our
clients which are switching service from the ILEC. Additionally, we can
confirm receipt and installation of service on-line and in real-time. Some
ILECs are just beginning to develop automated interfaces on a limited basis.
We intend to continue to take a lead role with selected ILECs to create
standards for automation of these interfaces. We anticipate establishing
similar connections with other incumbent local exchange carriers.
Trouble Ticketing
We have created a system that logs information related to and monitors the
resolution of network problems. This system will act as a central repository
for logging client trouble calls, allocating responsibility for addressing the
problem to the appropriate party, and monitoring the status of the response to
the calls, including automatically escalating the response process, as
appropriate.
Sales Force Automation and Contact Management
Our sales force utilizes sales force automation software called Contact
Automated Sales Helper, or CASH. CASH assists us in the management of contacts
with prospects, the distribution of lists of potential clients, the
preparation of client forecast materials, the management of sales activities
with particular client prospects and the preparation of proposals,
correspondence and order forms.
Service Introduction
Prior to offering services in a market, we must secure certification from
state regulatory commissions. Typically, we must file tariffs, or price lists,
for the services that we will offer. The certification process varies
53
<PAGE>
from state to state; however, the fundamental requirements are largely the
same. State regulators require new entrants to demonstrate that they have
secured adequate financial resources to establish and maintain good client
service. New entrants are also required to show that they have the requisite
technical and managerial ability required to establish and operate a
telecommunications network. Our operating subsidiaries have already received
certificates of authority to provide local exchange and interexchange
telecommunications services in Connecticut, Massachusetts, New Hampshire, New
York, Ohio, Pennsylvania and Rhode Island. Applications for such authority
have been filed in Maine and Vermont. In addition, we have received authority
under Section 214 of the Communications Act of 1934 to provide international
switched services.
Before providing local service, we must also negotiate and execute an
interconnection agreement with the ILEC. While such agreements can be
voluminous and may take months to negotiate, most of the key interconnection
issues have now been thoroughly addressed and regulatory commissions in most
states have ruled on arbitrations between the ILECs and new entrants. New
entrants may adopt an interconnection agreement already entered into by the
ILEC and another carrier. We will selectively adopt such an approach so that
we can enter markets quickly. At the same time, we will preserve our right to
replace the adopted agreement with a customized interconnection agreement that
can be negotiated once service has already been established. We have adopted
interconnection agreements in Connecticut, Massachusetts, New Hampshire, New
York, Pennsylvania and Rhode Island. Some ILECs, such as Bell Atlantic, have
sought to limit the rights of competitive telecommunications providers to
adopt existing interconnection agreements. We cannot predict whether we will
be able to adopt such interconnection agreements in the future.
While interconnection agreements include key terms and prices for
interconnection circuits, a significant joint implementation effort must be
made with the ILEC in order to establish operationally efficient and reliable
traffic interchange arrangements. Interchange arrangements must include those
between the new entrant's network and the facilities of other service
providers as well as public service agencies. Examples of traffic interchange
and interconnection arrangements utilizing the ILEC's network include
connectivity to its out-of-band signaling facilities, interconnectivity to the
ILEC's operator services and directory assistance personnel, and access
through the ILEC to the networks of wireless companies and interexchange
carriers.
Regulation
The following summary of regulatory development and legislation does not
describe all present and proposed federal, state, and local regulation and
legislation affecting the Internet service and telecommunications industries.
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 industries operate. We
cannot predict the outcome of these proceedings or their impact upon the
Internet service and telecommunications industries or upon us.
Overview
Our telecommunications services are subject to federal, state and local
regulation. The FCC exercises jurisdiction over all facilities and services of
telecommunications common carriers to the extent those facilities are used to
provide, originate, or terminate interstate or international communications.
State regulatory commissions exercise jurisdiction over facilities and
services to the extent those facilities are used to provide, originate or
terminate intrastate communications. In addition, as a result of the passage
of the Telecommunications Act, state and federal regulators share
responsibility for implementing and enforcing the domestic pro-competitive
policies of the Telecommunications Act. In particular, state regulatory
commissions have substantial oversight over the provision of interconnection
and non-discriminatory network access by ILECs. Local governments often
regulate public rights-of-way necessary to install and operate networks.
54
<PAGE>
Federal Regulation
Internet. In recent years there have been a number of U.S. and foreign
legislative and other initiatives seeking to control or affect the content of
information provided over the Internet. Some of these initiatives would impose
criminal liability upon persons sending or displaying, in a manner available
to minors, obscene or indecent material or material harmful to minors.
Liability would also be imposed on an entity knowingly permitting facilities
under its control to be used for such activities. These initiatives may
decrease demand for Internet access, chill the development of Internet
content, or have other adverse effects on Internet access providers, including
us.
Both the provision of Internet access service and the provision of
underlying telecommunications services are affected by federal, state, local
and foreign regulation. As a result of the passage of the Telecommunications
Act of 1966, state and federal regulators share responsibility for
implementing and enforcing the domestic pro-competitive policies of this Act.
In particular, state regulatory commissions have substantial oversight over
the provision of interconnection and non-discriminatory network access by
ILECs. Municipal authorities generally have some jurisdiction over access to
rights of way, franchises, zoning and other matters of local concern.
Our Internet operations are not currently subject to direct regulation by
the FCC or any other U.S. governmental agency, other than regulations
applicable to businesses generally. However, the FCC continues to review its
regulatory position on the usage of the basic network and communications
facilities by ISPs. In an April 1998 Report, the FCC determined that ISPs
should not be treated as telecommunications carriers and therefore should not
be regulated. However, the future ISP regulatory status continues to be
uncertain. In the April 1998 report, the FCC concluded that some services
offered over the Internet, such as phone-to-phone IP telephony, may be
functionally indistinguishable from traditional telecommunications service
offerings, and that their non-regulated status may have to be re-examined.
Congress has recently adopted legislation that regulates certain aspects of
the Internet, including online content, user privacy and taxation. In
addition, Congress and other federal entities are considering other
legislative and regulatory proposals that would further regulate the Internet.
Various states have adopted and are considering Internet-related legislation.
Increased U.S. regulation of the Internet may slow its growth, particularly if
other governments follow suit, which may negatively impact the cost of doing
business over the Internet and materially adversely affect our business,
financial condition, results of operations and future prospects.
Changes in the regulatory structure and environment affecting the Internet
access market, including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood of competition from RBOCs
or other telecommunications companies, could have an adverse effect on our
business. Although the FCC has decided not to allow local telephone companies
to impose per-minute access charges on ISPs, and that decision has been upheld
by the reviewing court, further regulatory and legislative consideration of
this issue is likely. In addition, some telephone companies are seeking relief
through state regulatory agencies. The imposition of access charges would
affect our costs of serving dial-up clients and could have a material adverse
effect on our business, financial condition and results of operations.
An important issue for competitive telecommunications providers is the
right to receive reciprocal compensation for the transport and termination of
Internet traffic. We believe that, under the 1996 Act, competitive
telecommunications providers are entitled to receive reciprocal compensation
from ILECs. However, some ILECs have disputed payment of reciprocal
compensation for dial access Internet traffic, arguing that ISP traffic is not
local traffic subject to reciprocal compensation obligations. Most states have
required ILECs to pay competitive telecommunications providers reciprocal
compensation. In October 1998, the FCC determined that dedicated DSL service
is an interstate service and properly tariffed at the interstate level. In
February 1999, the FCC concluded that at least a substantial portion of dial-
up ISP traffic is jurisdictionally interstate. The FCC also concluded that its
jurisdictional decision does not alter the exemption from access charges
currently enjoyed by ISPs. The FCC established a proceeding to consider an
appropriate compensation mechanism for interstate Internet traffic. Pending
the adoption of that mechanism, the FCC saw no reason to interfere with
existing intercommunication agreements and reciprocal compensation
arrangements. The FCC order has been appealed.
55
<PAGE>
In addition, there is a risk that state public utility commissions that have
previously considered this issue and ordered the payment of reciprocal
compensation by the ILECs to the competitive telecommunications providers may
be asked by the ILECs to revisit their determinations, or may revisit their
determinations on their own motion. To date, at least one ILEC has filed suit
seeking a refund from a carrier of reciprocal compensation that the ILEC had
paid to that carrier. There can be no assurance that any future court, state
regulatory or FCC decision on this matter will favor our position. An
unfavorable result may have an adverse impact on our potential future revenues
as a competitive telecommunications provider, as well as increasing our costs
generally.
Other Telecommunications Services. We are regulated at the federal level as
a nondominant common carrier subject to minimal regulation under Title II of
the Communications Act of 1934. The Communications Act of 1934 was
substantially amended by the Telecommunications Act of 1996, 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 ILECs to provide interconnection to their facilities,
. facilitating the end user's choice to switch service providers from
ILECs to competitive providers such as us and
. requiring access to rights-of-way.
Under the Telecommunications Act, RBOCs have the opportunity to provide in-
region, long distance services if they comply with market-opening conditions.
ILECs are no longer prohibited from providing specified cable TV services. In
addition, the Telecommunications Act eliminates particular restrictions on
utility holding companies, thus clearing the way for them to diversify into
telecommunications services.
The Telecommunications Act specifically requires all local exchange
carriers (including ILECs and competitive telecommunications providers such as
us):
. not to prohibit or unduly restrict resale of their services,
. to provide, to the extent technically feasible, number portability,
. to provide dialing parity and nondiscriminatory access to telephone
numbers, operator services, directory assistance and directory listings,
. to afford access to poles, ducts, conduits and rights-of-way, and
. to establish reciprocal compensation arrangements for the transport and
termination of telecommunications.
It also requires every ILEC to negotiate in good faith interconnection
agreements for the transmission and routing of local exchange traffic:
. at any technically feasible point within the ILEC's network,
. on a level that is at least at parity to that provided by the ILEC to
itself, its affiliates or any other party to which the ILEC provides
interconnection, and
. at rates, terms and conditions that are just, reasonable and
nondiscriminatory.
ILECs also are required to provide nondiscriminatory access to network
elements on an unbundled basis at any technically feasible point, to offer for
resale at wholesale rates their telecommunications services offered at retail
to subscribers who are not telecommunications carriers, and to facilitate the
collocation of equipment necessary for competitors to interconnect with or
access the ILEC's unbundled network elements at rates, terms and conditions
that are just, reasonable and nondiscriminatory, including local loops capable
of providing such
56
<PAGE>
high speed digital services as ISDN, ADSL and DS-3 level signals. However,
some aspects of FCC regulations designed to implement these provisions are
subject to litigation as discussed below.
Some smaller ILECs may be exempt from some or all of these requirements.
Rural telephone companies are exempt from the ILEC-specific requirements until
they receive a bona fide request for interconnection or unbundled network
elements and the state commission determines that the interconnection request
is technically feasible, consistent with universal service, and not
economically burdensome. In addition, any local exchange carrier with less
than two percent of the nation's subscriber lines may petition the state for
suspension or modification of both the ILEC-specific requirements and the
requirements that apply to all local exchange carriers. The state must grant
the petition if it is consistent with the public interest and it is either
necessary to avoid a significant adverse impact on users, or to avoid an
economically burdensome requirement, or to avoid a technically infeasible
requirement.
The Telecommunications Act also removed on a prospective basis most
restrictions on the RBOCs resulting from the consent decree which provided for
divestiture of the RBOCs from AT&T in 1984. It establishes procedures under
which an RBOC can enter the market for inter-LATA (i.e., long distance)
services within the area where it provides local exchange service (the
Telecommunications Act permitted the RBOCs to enter the out-of region long
distance market immediately upon enactment). Before an RBOC can provide in-
region inter-LATA services, it must obtain FCC approval upon showing that it
has entered into interconnection agreements in the states where it seeks
authority, that the interconnection agreements satisfy a 14-point "checklist"
of competitive requirements and that such entry is in the public interest. To
date, such authority has not been granted to any RBOC, although at least one
RBOC, Bell Atlantic, may qualify soon in one or more states in its region. The
provision of in-region inter-LATA services by RBOCs could permit them to offer
"one-stop shopping" of bundled local and long distance services, thereby
eliminating our current marketing advantage.
On February 22, 1999, the United States Supreme Court issued a decision
confirming the FCC's authority to adopt requirements for compliance with the
checklist. This order reversed an earlier decision by the U.S. Court of
Appeals for the Eighth Circuit that required the FCC to defer to state
determinations as to particular elements of the checklist.
FCC Rules Implementing the Local Competition Provisions of the
Telecommunications Act
On August 8, 1996, the FCC issued an order which established a framework of
national rules enabling the implementation of many of the local competition
provisions of the Telecommunications Act. The order, and subsequent
iterations, also known as the Local Competition Orders, promulgated rules to
implement Congress' statutory directive concerning the interconnection
obligations of the ILECs. A summary of the Local Competition Orders follows:
Interconnection. ILECs are required to provide interconnection for
telephone exchange or exchange access service, or both, to any requesting
telecommunications carrier at any technically feasible point. The
interconnection must be at least equal in quality to that provided by the ILEC
to itself or subsidiaries, affiliates or any other party to which it provides
interconnection, and must be provided on rates, terms and conditions that are
just, reasonable and nondiscriminatory.
Access to Unbundled Elements. ILECs are required to provide requesting
telecommunications carriers with nondiscriminatory access to network elements
on an unbundled basis at any technically feasible point, on rates, terms, and
conditions that are just, reasonable, and nondiscriminatory. At a minimum,
ILECs must unbundle and provide access to network interface devices, local
loops, local and tandem switches (including all software features provided by
such switches), interoffice transmission facilities, signaling and call-
related database facilities, operations support systems, and information and
operator and directory assistance facilities. Due to a recent decision by the
U.S. Supreme Court, this FCC rule was remanded to the FCC for reconsideration,
see "Regulation--Recent Decisions." On November 5, 1999, the FCC, in response
to the Supreme Court's remand, issued an Order revising its rules on the
network elements that incumbents must make available, particularly those used
in the provision of advanced services such as DSL. The order adopts stricter
requirements
57
<PAGE>
for when a network element must be made available to CLECs by an ILEC and,
using these standards, concludes that operator services and directory
assistance need not be unbundled. The order also determines that switching
need not be unbundled in certain urban markets for service to larger
customers.
Collocation. ILECs are required to provide physical collocation of
equipment necessary for interconnection or access to unbundled network
elements at the ILEC's premises, except that the ILEC may provide virtual
collocation, if it demonstrates to the state regulatory commission that
physical collocation is not practical for technical reasons, or because of
space limitations. On March 18, 1999, the FCC adopted measures designed to
facilitate a competitor's ability to access ILEC collocation space, including
a requirement that ILECs make new collocation arrangements (e.g., shared
collocation and cageless collocation) available to competing carriers and a
requirement that competitors be able to locate all equipment necessary for
interconnection, among other things.
Transport and Termination Charges. State regulatory commissions, during
arbitrations, should set symmetrical prices based on forward-looking economic
costs, using the Total Element Long Run Incremental Cost, known as TELRIC
methodology.
Pricing Methodologies. State commissions are required to set arbitrated
rates for interconnection and unbundled elements based on the ILEC's TELRIC,
plus a reasonable share of forward-looking joint and common costs.
Resale. State commissions are required to identify which marketing,
billing, collection, and other costs will be avoided, or that are avoidable,
by ILECs when they provide services on a wholesale basis and to calculate the
portion of the retail rates for those services that is attributable to the
avoided and avoidable costs.
Access to Rights-of-Way. The FCC established procedures designed to
facilitate the negotiation and mutual provision of nondiscriminatory access by
telecommunications carriers and utilities to their poles, ducts, conduits, and
rights-of-way.
Interconnection Agreements. State commissions are required to follow these
national rules when arbitrating interconnection agreements negotiated between
ILECs and telecommunications carriers (typically competitive
telecommunications providers like us) that have not been able to reach a
voluntary agreement. These rules do not apply to voluntary agreements. The
Telecommunications Act provides procedures and timetables for negotiation,
arbitration and approval of interconnection agreements.
Recent Decisions
In 1997, the U.S. Court of Appeals for the Eighth Circuit vacated portions
of the FCC rules implemented by the Interconnection Orders. In particular, in
Iowa Utilities Board v. FCC, the Court vacated the FCC's pricing rules because
the FCC had exceeded its jurisdiction in setting national rules. On January
25, 1999, the United States Supreme Court issued an opinion confirming the
FCC's authority to issue regulations implementing the pricing and other
provisions of the 1996 Act and reinstating most of the FCC rules previously
vacated by the Eighth Circuit. Among other things, the Supreme Court held that
the FCC has general authority under the Telecommunications Act to promulgate
regulations governing local interconnection pricing, to adopt a "pick and
choose rule," and to enact rules governing access to unbundled network
elements. However, the Supreme Court vacated a key FCC rule identifying the
network elements that ILECs are required to unbundle, and remanded this issue
to the FCC for further consideration. On November 5, 1999, the FCC, in
response to the Supreme Court's remand, issued an Order revising its rules on
the network elements that incumbents must make available, including those used
in the provision of advance services such as DSL. The order adopts stricter
requirements for when a network element must be made available to CLECs by an
ILEC and, using these standards, concludes that operator services and
directory assistance need not be unbundled. The order also determines that
switching need not be unbundled in certain urban markets for service to larger
customers. While we do not believe that these revisions will have significant
impact on our business, other parties may request an appeal of this Order. In
58
<PAGE>
addition, the Eighth Circuit is now considering certain issues left undecided
by the Supreme Court's decision, including the validity of the TELRIC pricing
methodology.
In the spring of 1998, four of the RBOCs petitioned the FCC to be relieved
of specified regulatory requirements in connection with their provision of
high-speed data services, including obligations to unbundle high- speed data
loops and to resell such services. In October of 1998, the FCC ruled that
high-speed data services are telecommunications services subject to the
unbundling and resale obligations of the Act. However, the FCC has initiated a
proceeding to determine whether RBOCs can create separate affiliates for their
high-speed data services that would be free from these obligations. An adverse
decision in that proceeding may have an adverse effect on us. On July 30,
1999, the United States Court of Appeals for the Fifth Circuit issued a
decision in an appeal of the FCC's universal service rules. Specifically, the
Fifth Circuit: (1) reversed the FCC's decision to assess certain contributions
based in part on the intrastate revenues of universal service contributors;
(2) reversed and remanded for further consideration the FCC's decision to
assess contributions based on the international revenues of certain
contributors having interstate revenues; and (3) reversed the FCC's decision
to "require" ILECs to recover universal service contributions through their
interstate access charges. In October, 1999, the FCC issued revised rules
consistent with the Court's mandate.
Other Regulations
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 (i.e., ILECs) and nondominant carriers (i.e., ICPs and
CLECs).
Tariffs. As a nondominant carrier, we may install and operate facilities
for the transmission of domestic interstate communications without prior FCC
authorization. Services of nondominant carriers have been subject to
relatively limited regulation by the FCC, primarily filing tariffs and making
periodic reports. However, nondominant carriers like us must offer interstate
services on a nondiscriminatory basis, at just and reasonable rates, and
remain subject to FCC complaint procedures.
In October 1996, the FCC adopted the Detariffing Order, which eliminated
the requirement that nondominant interstate carriers maintain tariffs on file
with the FCC for domestic interstate services, and provided that, after a
nine-month transition period, relationships between interstate carriers and
their clients would be set by contract. Several parties requested
reconsideration and/or filed appeals of the Detariffing Order. On February 13,
1997, the District of Columbia Circuit stayed implementation of the
Detariffing Order pending its decision on appeal. In the meantime, however, on
August 20, 1997, the FCC issued a Reconsideration Order, which reversed some
aspects of the FCC's previous regulations. The Reconsideration Order would
still significantly limit the ability of carriers to tariff long distance
service. If the FCC's Orders become effective, nondominant interstate services
providers will no longer be able to rely on the filing of tariffs with the FCC
as a means of providing notice to clients of prices, terms and conditions
under which they offer their interstate services. If we cancel our FCC tariffs
as a result of the FCC's Orders, we will need to implement replacement
contracts, which could result in substantial administrative expenses. On March
18, 1999, the FCC adopted rules requiring long distance carriers to make
specific public disclosures of their rates, terms and conditions for domestic
interstate services, with the effective date for these rules delayed until a
court decision on the appeal of the FCC's Detariffing Order.
International Services. Nondominant carriers such as us also are required
to obtain FCC authorization pursuant to Section 214 of the Communications Act
and file tariffs before providing international communications services. We
have obtained such authority. The FCC has adopted rules for a multi-year
transition to lower international settlements payments by U.S. common
carriers. We believe that these rules are likely to lead to lower rates for
some international services and increased demand for these services, including
capacity on the U.S. facilities that provide these services.
59
<PAGE>
ILEC Price Cap Regulation Reform. In 1991, the FCC replaced traditional
rate of return regulation for large ILECs with price cap regulation. Under
price caps, ILECs can change prices for some specified services, including
interconnection services provided to CLECs, only within given parameters. On
September 14, 1995, the FCC proposed a three-stage plan which would
substantially reduce ILEC price regulation as local markets become
increasingly competitive and ultimately would result in granting ILECs
nondominant status. Adoption of the FCC's proposal to significantly reduce its
regulation of ILEC pricing would greatly enhance the ability of ILECs to
compete against us, particularly by targeting price cuts to particular
clients, and could have a material adverse effect on us. The FCC released an
order on December 24, 1996 which adopted some of these proposals, including
the elimination of the limits on price reductions within the access service
category. The FCC's December 1996 order also eased the requirements necessary
for the introduction of new services. On May 21, 1997, the FCC took further
action updating and reforming its price cap plan for ILECs. The changes
require ILECs subject to the price cap regulations to reduce their price cap
indices, which limit maximum prices, by 6.5% annually, less an adjustment for
inflation. The FCC also eliminated rules that require ILECs earning more than
specified rates of return to "share" portions of the excess with their access
clients during the next year in the form of lower access rates. These actions
could have a significant impact on the interstate access prices charged by the
ILECs with which we compete. Review of these FCC decisions is currently
pending before the District of Columbia Circuit.
Access Charges. The FCC has granted the ILECs significant flexibility in
pricing their interstate special and switched access services on a specific
central office by central office basis. Under this pricing scheme, ILECs may
establish pricing zones based on access traffic density and charge different
prices for each zone. We anticipate that the FCC will grant ILECs increasing
pricing flexibility as the number of interconnections and competitors
increases. In two orders released on December 24, 1996 and May 16, 1997, the
FCC took action to reform the current interstate access charge system. The FCC
adopted an order that makes various reforms to the existing rate structure for
interstate access that are designed to move access charges, over time, to more
cost-based rate levels and structures. These changes will reduce access
charges and will shift charges currently based on minutes of use to flat-rate,
monthly per line end-user charges. As a result, the aggregate amount of access
charges paid by long distance carriers to access providers in the United
States may decrease. However, the FCC, noting the proliferation of fixed
monthly charges on the bills of long distance customers, has recently
initiated a public inquiry on the impact of these charges on consumers who
make few interstate long distance calls. It is possible that this may result
in some sort of regulation of long distance rates. In an Order issued on
August 1999, the FCC furthered its plan to bring interstate access rate levels
more in line with cost by granting some large, established LECs increased
pricing flexibility upon demonstration of increased competition (or potential
competition) in relevant markets and sought comments on further changes in the
rules to increase ILEC flexibility. That process will give ILECs progressively
greater flexibility in setting rates as competition develops, gradually
replacing regulation with competition as the primary means of setting prices.
The FCC has also adopted a "prescriptive safeguard" to bring access rates to
competitive levels in the absence of competition. The access charge reform
decision is likely to have a significant impact on our operations, expenses,
pricing and revenue. In addition, the FCC is seeking comments on a joint
proposal of several ILECs and IXCs to further reduce access charges and create
a new universal service fund to which all telecommunications carriers would
contribute.
In October 1998, AT&T initiated a proceeding in which it sought a
declaration from the FCC that AT&T need not purchase competitive
telecommunications provider switched access services. In addition, AT&T and
Sprint have sent letters to virtually every competitive telecommunications
provider stating that the competitive telecommunications provider's
terminating access rates are unreasonable, and demanding a reduction in rates
to a "competitive" level. If competitive telecommunications providers are
unwilling to comply, the IXCs threaten to no longer purchase their switched
access services. In many instances, the IXCs have refused to pay competitive
telecommunications providers their tariffed rate for switched access services,
and in some cases have refused payment to competitive telecommunications
providers entirely. On July 16, 1999, the FCC issued a decision holding that a
competitive telecommunications provider was entitled to be paid its tariffed
rate for originating switched access services provided to AT&T, only
originating access charges were at issue, since AT&T did not give sufficiently
unambiguous notice of its intent to terminate access arrangements with the
60
<PAGE>
competitive telecommunications provider. If IXCs may in fact refuse to
purchase competitive telecommunications providers switched assess services,
competitive telecommunications provider may be adversely affected. The FCC
August access order requests comment on this question and on whether the FCC
should take steps to limit CLEC access charges.
Reciprocal Compensation. A critical issue for competitive
telecommunications providers is the right to receive reciprocal compensation
for the transport and termination of Internet traffic. We believe that, under
the Telecommunications Act and current FCC rules, competitive
telecommunications providers are entitled to receive reciprocal compensation
from ILECs for the transport and termination of Internet traffic. However,
some ILECs have disputed payment of reciprocal compensation for Internet
traffic, arguing the ISP traffic is not local traffic. Most states have
required ILECs to pay ISPs reciprocal compensation. On February 25, 1999, the
FCC adopted a Declaratory Ruling on reciprocal compensation for local exchange
traffic to Internet service providers. The FCC determined that traffic to
Internet service providers is "largely interstate," which would relieve the
carrier originating such traffic of the obligation to pay reciprocal
compensation. While the FCC has began a proceeding to determine an alternative
compensation scheme for Internet traffic, we have not included any sums for
reciprocal compensation from Internet traffic in the calculation of our
potential future revenues.
Universal Service Reform. On May 8, 1997, the FCC issued an order to
implement the provisions of the Telecommunications Act relating to the
preservation of advancement of universal telephone service, including quality
of service, affordable rates, access to advanced services, access in rural and
high-cost areas, equitable and nondiscriminatory contributions, specific and
predictable support mechanisms and access to advanced telecommunications
services for schools, health care providers and libraries. The order added
competitive neutrality to the FCC's universal service principles by providing
that universal service support mechanisms and rules should not unfairly
advantage or disadvantage one provider or technology over another. All
telecommunications carriers providing interstate telecommunications services,
including us, must contribute to the universal service support fund. These
contributions became due beginning in 1998 for all providers of interstate
telecommunications services. Until the July 30, 1999, Fifth Circuit decision
became effective, contributions were assessed based on end-user
telecommunications revenues, and actual contributions also depend on the
proportion of intrastate, interstate and international revenues. Beginning
November 1, 1999, contributions are based solely on interstate and
international revenues. Contribution factors vary quarterly and carriers,
including us, are billed monthly. We, like other telecommunications carriers
that provide interstate telecommunications services, will be required to
contribute a portion of our end-user telecommunications revenues to fund
Universal Service programs. However, we are also eligible as a recipient of
Universal Service support if we elect to provide specific services supported
by the federal universal service support mechanisms.
State Regulation. We believe that most, if not all, states in which we
propose to operate will require a registration, certification or other
authorization to offer intrastate services. Many of the states in which we
operate or intend to operate are in the process of addressing issues relating
to the regulation of CLECs. We will also be subject to tariff filing
requirements. In most states, we are required to file tariffs setting forth
the terms, conditions and prices for services that are classified as
intrastate.
We have received, through our operating subsidiaries, certificates of
authority to provide local exchange and interexchange telecommunications
services in Connecticut, Massachusetts, New Hampshire, New York, Ohio,
Pennsylvania and Rhode Island. Applications for such authority are pending in
Maine and Vermont.
In addition to tariff filing requirements, some states also impose
reporting, client service and quality requirements, as well as unbundling and
universal service requirements. In addition, we will be subject to the outcome
of generic proceedings held by state utility commissions to determine new
state regulatory policies. Some states, including some of our target states,
have adopted or have pending proceedings to adopt specific universal service
funding obligations. These state proceedings may result in obligations that
are equal to or more burdensome than the federal universal service
obligations.
61
<PAGE>
We believe that, as the degree of intrastate competition increases, the
states will offer the ILECs increasing pricing flexibility. This flexibility
may present the ILECs with an opportunity to subsidize services that compete
with our services with revenues generated from non-competitive services,
thereby allowing ILECs to offer competitive services at lower prices. We
cannot predict the extent to which this may occur, but it could have a
material adverse effect on us and our ability to meet our obligations.
We are also subject to requirements in some states to obtain prior approval
for, or notify the state commission of, specified events such as transfers of
control, sales of assets, corporate reorganizations, issuances of stock or
debt instruments and related transactions.
Local Authorizations. When constructing a network, such as fiber optic
cables, we generally must obtain municipal franchises and other permits. These
rights are typically the subject of non-exclusive agreements of finite
duration and provide for the payment of fees or the provision of services to
the municipality. In addition, we must secure rights-of-way, pole attachments
and other access rights, which are typically provided under non-exclusive
multi-year agreements that generally contain renewal options. In some
municipalities we will be required to pay license or franchise fees based on a
percentage of gross revenues or on a per linear foot basis, as well as post-
performance bonds or letters of credit.
Slamming. When an end user decides to choose a local or long distance
telecommunications company for services, that choice is encoded in the client
record. This encoded information is used to route the user's calls so that
billing comes from the desired company. A user may change service providers at
any time, but the FCC regulates the process. Specific client instituted
procedures must be followed, and when they are not, particularly if the change
is unauthorized or fraudulent, the process is known as "slamming." Slamming is
such a significant problem that it was addressed in detail in the
Telecommunications Act and by the FCC in recent orders. The FCC has levied
significant fines for slamming. The risk of financial damage and harm to
business reputation from slamming is significant. Even one slamming complaint
could cause extensive litigation expenses for us. The FCC recently decided to
apply its slamming rules, which originally covered only long distance, to
local service.
Payphone Compensation. Section 276 of the Telecommunications Act requires
payphone owners to be compensated for each completed call originated at their
payphones. Although the FCC has issued several orders that have been remanded
and vacated on appeal, on February 4, 1999, the FCC released its Third Report
and Order that established a default rate for payphone compensation of $0.24
cents. Although as a competitive telecommunications provider, we currently are
not liable to compensate payphone owners for many calls, as we begin to
provide additional services, our compensation requirements may increase
significantly.
Competition
We operate in a highly competitive environment and currently do not have a
significant market share in any of our markets. Most of our actual and
potential competitors have substantially greater financial, technical,
marketing and other resources (including brand name recognition) than we do.
Also, the continuing trend toward business alliances in the telecommunications
industry, and the increasingly reduced regulatory and technological barriers
to entry in the data and Internet services markets, could give rise to
significant new competition. We believe that the principal competitive factors
affecting our business will be pricing levels and clear pricing policies,
client service, accurate billing and, to a lesser extent, variety of services.
Our ability to compete effectively will depend upon our ability to provide
high quality market-driven services at prices generally equal to or below
those charged by our competitors. To maintain our competitive posture, we
believe that we must be in a position to reduce our prices in order to meet
reductions in rates, if any, by others. Any such reductions could adversely
affect us.
62
<PAGE>
ILECs
In each of our target markets, we will compete principally with the ILEC
serving that area, such as Bell Atlantic, Frontier, SNET and Ameritech. ILECs
are the established providers of dedicated and local telephone services to the
majority of telephone subscribers within their respective service areas. In
addition, ILECs generally have long-standing relationships with their clients
and with federal and state regulatory authorities and have financial,
technical and marketing resources substantially greater than we do, and the
potential to subsidize competitive services from a variety of businesses.
While recent regulatory initiatives provide increased competitive
opportunities to voice, data, and Internet-service providers such as us, they
also provide the ILECs with increased pricing flexibility for their private
line, special access, and switched access services. With respect to
competitive access services (i.e., the fees to connect to an ILECs'
facilities), the FCC recently decided to increase ILEC pricing flexibility and
deregulation for such services, either automatically or after specified
criteria are met. If the ILECs are allowed additional flexibility to offer
discounts to large clients, engage in aggressive volume and term discount
pricing practices, and/or charge competitors with excessive fees for
interconnection to their local networks, the potential income of ICPs and
CLECs, including us, could be adversely affected.
Data/Internet Services Providers
The Internet services market is highly competitive, and we expect that
competition will continue to intensify. Our competitors in this market will
include ISPs, other telecommunications companies, online services providers
and Internet software providers. In addition, we may also face competition
from companies providing DSL services. Many of these competitors have greater
financial, technological and marketing resources than those available to us.
Competitive Telecommunications Providers
We also face competition from other current and potential market entrants,
including long distance carriers seeking to enter, reenter or expand entry
into the local exchange market such as AT&T and MCI WorldCom, and from
resellers of local exchange services and CAPS. We also face competition from
other CLECs with overlap in our targeted markets, such as Adelphia Business
Solutions, Inc. and Time Warner Telecom. Even the ILECs, particularly the
RBOCs, have established independent CLEC subsidiaries to compete with their
former Bell System cousins in local competition. Some of these competitors
have significantly greater financial resources than we do. For example, AT&T,
MCI WorldCom, and Sprint (historically only long distance carriers), have each
begun to offer local telecommunications services in major U.S. markets using
their own facilities or by resale of the other providers' services. In
addition, 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. For example, the merger of
WorldCom, Inc. with MCI, Global Crossing's recent purchase of Frontier Corp.,
SBC's merger with Ameritech, Qwest's agreement to buy US WEST, MCI WorldCom's
agreement to buy Sprint Corp. and AT&T's acquisition of Teleport
Communications Group, Inc. and Tele-Communications Inc. are examples of these
competitive alliances. Such combined entities may provide a "bundled package"
of telecommunications products (e.g., local, long distance, and Internet
telephony) that directly competes with the products we offer. These types of
consolidations and strategic alliances could put us at a competitive
disadvantage.
Fixed Wireless Companies
We also face competition from companies using radio and microwave spectrum
instead of physical wiring, known as fixed wireless services. These companies
utilize various wireless communications systems, and unlicensed wireless radio
services. The FCC has issued, or is in the process of issuing, licenses for
these services to provide broadband integrated telecommunications services on
a point-to-point and/or point-to-multi-point basis. Some of these service
providers, such as WinStar, Advanced Radio Telecom and Teligent, have already
63
<PAGE>
raised substantial capital and have commenced building their wide-area
networks in many top-50 urban areas. Upon entering into appropriate
interconnection agreements with ILECs, these service providers are expected to
provide integrated voice and data services to small and medium-sized
businesses. Several equipment manufacturers have developed still other low
data-rate transmission devices (e.g., infrared) that may provide non-regulated
competition to us.
The FCC has authorized mobile cellular Personal Communications Services, or
PCS, and other Commercial Mobile Radio Services, or CMRS, providers to offer
wireless services to fixed locations. Previously, cellular providers could
provide service to fixed locations only on an ancillary or incidental basis.
This authority to provide fixed as well as mobile services will enable CMRS
providers to offer "wireless" local loop service and other services to high
density fixed locations (e.g., office and apartment buildings) in direct
competition with us and other providers of traditional telephone service.
Other Competitors
Other companies that currently offer, or are capable of offering, local
switched services include: cable television companies, electric utilities,
microwave carriers, and large business clients (who build private networks).
These entities, upon entering into appropriate interconnection agreements or
resale agreements with ILECs, could offer single source local and long
distance services like those that we offer. We also expect to increasingly
face competition from companies offering long distance data and voice services
over the Internet. Such companies could enjoy a significant cost advantage
because they do not currently pay carrier access charges or universal service
fees.
In addition, RBOCs may soon begin offering single source local and long
distance services. Currently, RBOCs cannot provide long-distance service that
originates (or in some cases terminates) in one of its in-region states until
the RBOC has satisfied statutory conditions in that state, and has received
the approval of the FCC. To date, none of the RBOCs have satisfied these
statutory conditions and, as a result, the FCC has denied all of the RBOC
applications to provide long distance service. However, we expect that RBOCs
will soon begin to satisfy these statutory conditions and obtain FCC approval
to provide such services. In particular, we believe that Bell Atlantic may
obtain long distance authority in one or more of the states in its region in
the near future. Once the RBOCs are allowed to offer in-region long distance
services, they will undoubtedly offer single-source local and long distance
service, which will give rise to increased competition to us. In the spring of
1998, four of the RBOCs petitioned the FCC to be relieved of some particular
regulatory requirements in connection with their provision of high-speed data
services, including obligations to unbundle high-speed data loops and to
resell such services. In October 1998, the FCC ruled that high-speed services
are telecommunications services subject to the unbundling and resale
obligations of the Act. However, the FCC has initiated a proceeding to
determine whether RBOCs can create separate affiliates for their high-speed
data services that would be free from these obligations.
Employees
As of November 15, 1999, we had approximately 368 employees. We believe
that our future success will depend on our continued ability to attract and
retain highly skilled and qualified employees. None of our employees are
currently represented by collective bargaining agreements. We believe that we
enjoy good relationships with our employees.
Legal Proceedings
We are not party to any pending legal proceedings that we believe would,
individually or in the aggregate, have a material adverse effect on our
financial condition or results of operations.
64
<PAGE>
Facilities
We are headquartered in Rochester, New York and lease offices and space in a
number of locations, primarily for sales offices and network equipment
installations. The table below lists our leased facilities as of November 15,
1999:
<TABLE>
<CAPTION>
Approximate
Location Lease Expiration Square Footage
-------- ----------------- --------------
<S> <C> <C>
Albany, NY.................................. October 2008(1) 4,500
Albany, NY.................................. October 2003(2) 3,725
Buffalo, NY................................. October 2008(3) 7,000
Manchester, NH.............................. October 2009(3) 11,413
Pittsburgh, PA.............................. February 2009(3) 12,200
Portsmouth, NH.............................. April 2000(5) 1,078
Portsmouth, NH.............................. April 2004(5) 2,520
Providence, RI.............................. March 2009(3) 9,335
Rochester, NY............................... January 2009(4) 32,000
Rochester, NY............................... December 2009(3) 11,390
Springfield, MA............................. September 2009(3) 7,450
Syracuse, NY................................ December 2008(3) 9,850
Worcester, MA............................... September 2009(3) 4,446
Worcester, MA............................... September 2001(5) 1,000
</TABLE>
- --------
(1) Lease of network equipment facilities only.
(2) Lease of office space only.
(3) Lease of both office space and network equipment facilities.
(4) Lease of our principal executive offices.
(5) Atlantic Connections lease of office space.
We believe that our leased facilities are adequate to meet our current needs
and that additional facilities are available to meet our development and
expansion needs in existing and projected target markets.
65
<PAGE>
MANAGEMENT
The following sets forth information concerning the directors, executive
officers and other key personnel of the Company including their ages as of
November 15, 1999.
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<C> <C> <S>
Steve M. Dubnik(1)...... 36 Chairman of the Board, President and Chief
Executive Officer, Director
Kevin S. Dickens........ 36 Senior Vice President, Operations and
Engineering
Ajay Sabherwal.......... 33 Senior Vice President, Finance and Chief
Financial Officer
Mae H. Squier-Dow....... 38 Senior Vice President, Sales, Marketing and
Service
Philip H. Yawman........ 34 Senior Vice President, Corporate Development
Robert Bailey........... 53 Vice President, Convergent Network Systems
Joseph A. Calzone....... 36 Vice President, Engineering and Network
Operations
Linda S. Chapman........ 36 Vice President, Human Resources
James C. Currie......... 52 Vice President, Operations
Elizabeth A. Ellis...... 41 Vice President, Information Technology
David A. Fitts.......... 34 Vice President, Product Marketing
Robert J. Merrill....... 43 Vice President, Business Development
Michelle C. Paroda...... 36 Vice President, Client Services
Joseph M. Schaal........ 33 Vice President, Application Services and
Strategy
Kim Robert Scovill...... 46 Vice President, Regulatory Affairs and General
Counsel
John J. Zimmer.......... 41 Vice President, Finance and Controller
Paul Cissel............. 42 Vice President, Sales, New England
Michael A. D'Angelo..... 34 Vice President, Sales, Western Region
Daniel K. Iles.......... 38 Regional Vice President of Sales, Western
Region
Eric Peterson........... 36 Regional Vice President of Sales, New England
John B. Ehrenkranz(1)... 34 Director
Bruce M. Hernandez(1)... 39 Director
Michael M. Janson....... 51 Director
Robert M. Van Degna(1).. 55 Director
</TABLE>
- --------
(1) Member of the Board's Executive Committee
Steve M. Dubnik, our Chairman of the Board, President, Chief Executive
Officer and Founder, has worked in the telecommunications industry for 15
years. Prior to founding Choice One in June 1998, Mr. Dubnik served in various
capacities with ACC Corp., including as the President and Chief Operating
Officer of North American Operations of ACC from November 1996 to April 1998
and as Chairman of the Board of Directors of ACC TelEnterprises Ltd. from July
1994 to April 1998. From December 1997 to April 1998, he also jointly
performed the functions of Chief Executive Officer of ACC. Prior to joining
ACC, Mr. Dubnik served as President, Mid-Atlantic Region, of RCI Long Distance
(now Frontier Corporation) from 1992 through June 1994. For more than five
years prior thereto, he held various senior positions with Rochester Telephone
Corporation (now Frontier Corporation) in engineering, operations, information
technology and sales.
Kevin S. Dickens, our Senior Vice President, Operations and Engineering
since July 1998, has worked in the telecommunications industry for 11 years.
Prior to joining us, Mr. Dickens was President and Chief Executive Officer of
ACC Corp.'s Canadian subsidiary, ACC TelEnterprises Ltd., from May 1997 to
June 1998. Prior thereto, Mr. Dickens was Vice President of Network Planning
and Optimization at Frontier Corporation, from September 1996 to May 1997,
with responsibility for Frontier's long distance network. Prior thereto, Mr.
Dickens was a Senior Director of Advanced Technology and a Senior Director of
Engineering at Frontier Corporation since September 1994. Mr. Dickens has also
worked in various positions in engineering and technology development,
business unit management, marketing and sales.
66
<PAGE>
Ajay Sabherwal, our Senior Vice President, Finance and Chief Financial
Officer since September 1999, has worked both directly in the
telecommunications industry and as an equity analyst covering the
telecommunications industry for over 10 years. Mr. Sabherwal was most recently
executive director of institutional equity research for Toronto-based CIBC
World Markets from June 1996 to September 1999. Prior to joining CIBC World
Markets as a senior research analyst in June of 1996, Mr. Sabherwal was the
telecommunications analyst for BZW (Barclays de Zoete Wedd) Canada and its
successor company from November 1993 until June 1996. Mr. Sabherwal has also
held management positions at Unitel Communications (now AT&T Canada), Deloitte
and Touche Management Consultants, and CNCP Telecommunications in the areas of
new product development and launch, planning, managing vendor relationships
and budgeting.
Mae H. Squier-Dow, our Senior Vice President, Sales, Marketing and Service
since June 1998, has worked in the telecommunications industry for 15 years.
Ms. Squier-Dow served as President of ACC Telecom, a U.S. subsidiary of ACC
Corp., from June 1996 to May 1998, and in several positions at ACC Long
Distance U.K. Ltd., including as Commercial Director from April 1995 to June
1996, and as Director of Client Relations and Marketing, Vice President of
International Planning and Operations Director from October 1993 to April
1995. Ms. Squier-Dow also served as Vice President of Client Relations at ACC
Corp. from March 1992 to October 1993 and as its Director of Client Relations
from January 1991 to March 1992.
Philip H. Yawman, our Senior Vice President, Corporate Development since
July 1998, has worked in the telecommunications industry for 11 years. Prior
to joining us, Mr. Yawman was Vice President of Investor Relations and
Corporate Communications at ACC Corp. from April 1997 to January 1998. Mr.
Yawman also served in various positions at Frontier Corporation from July 1989
to April 1997, including as head of investor relations activities and in
several product management positions.
Robert Bailey, our Vice President of Convergent Network Systems since
September 1999, is responsible for evaluating and selecting the technology to
be deployed by Choice One in the next generation of switching systems
architecture, including the evolution from circuit switching systems to packet
and ATM-based infrastructure. Most recently, he was Vice President and Chief
Technology Officer for the Upstate Cellular Network (Frontier Cellular), a
joint venture of Bell Atlantic Mobile and Frontier Corporation, from January
1985 until April 1999, where he was responsible for engineering and operations
of a cellular network that covered 5.5 million population units in upstate New
York. Previously, Mr. Bailey held a number of key positions at Frontier
Corporation, including Vice President of Strategic Technologies, and President
of Frontier Cellular, Frontier Network Systems and Frontier's long distance
network. Prior to entering the deregulated business units in 1985, he held a
number of senior positions in operations and engineering at Frontier's
predecessor regulated company, Rochester Telephone.
Joseph A. Calzone, our Vice President, Engineering and Network Operations
since July 1998, has worked in the telecommunications industry for 13 years.
Prior to joining us, Mr. Calzone held various key management positions at
Citizens Communications from October 1995 to May 1998, most recently as head
of the National Sales and Services organization and as Vice President of Long
Distance Engineering and Operations. Prior thereto, Mr. Calzone was employed
by Frontier Corporation for 10 years, where he held various positions such as
Director of Carrier Services and Sales, Director of Strategic Accounts and
Manager of Traffic Engineering and Switching.
Linda S. Chapman, our Vice President, Human Resources since August 1998,
was the Director of Human Resources of ACC Corp.'s U.S. subsidiary, ACC
Telecom, from June 1997 to July 1998. Prior thereto, Ms. Chapman held various
management positions with MCI from March 1994 to May 1997 and worked in the
Lodging division of Marriott International from October 1986 to February 1994.
James C. Currie, our Vice President, Operations was at Citizens
Communications from 1994 until he came to Choice One in June 1999. At Citizens
he was in a number of executive positions including Director of Long Distance
Operations, Director of Network Provisioning, Senior Director--Business Call
Centers and Sales Engineering, Vice President of Eastern Region Operations and
Vice President of Carrier Access Sales. Prior to
67
<PAGE>
joining Citizens, Mr. Currie's experience includes over 20 years of operations
and engineering experience with New York Telephone, CONTEL as well as with
GTE.
Elizabeth A. Ellis, our Vice President, Information Technology since July
1998, has worked in the information technology field for over 18 years,
including the past five years in the telecommunications industry. Prior to
joining us in July 1998, Ms. Ellis was Commercial Director for ACC Telecom's
subsidiaries in the United Kingdom and Germany from August 1994 to June 1998
where she was responsible for all aspects of network, operations, client
service, telemarketing and information technology. Prior thereto, Ms. Ellis
was employed at Wytecom, Inc. from March 1992 to August 1994.
David A. Fitts, our Vice President, Product Marketing since July 1998, has
worked in the telecommunications industry for 11 years. Prior to joining us,
Mr. Fitts was a Senior Manager responsible for Marketing Communications and
Internet Product Management at RCN Corporation from January to July 1998.
Prior thereto, Mr. Fitts was Marketing Manager at Time Warner Communications
from May 1995 to January 1998 and was Senior Product Manager at Teleport
Communications Group from November 1993 to May 1995.
Robert J. Merrill, our Vice President, Product Development since September
1998, has worked in the telecommunications industry for over 21 years. Prior
to joining us, Mr. Merrill was the Vice President of Marketing and Product
Development for Frontier Communication's Carrier Services Group, from January
to September 1998 and the Director of Product Development (Wholesale) from
June 1997 to January 1998. Prior thereto, Mr. Merrill was at Rochester
Telephone as the Director of Marketing and Product Development from April 1995
to June 1997 and as the General Manager of Visions Long Distance from June
1993 to April 1995. Prior thereto, Mr. Merrill worked in a variety of areas
including marketing and product development, regulatory affairs, engineering,
network operations, sales, finance and business development for GTE, AT&T and
NECA for over 15 years.
Michelle C. Paroda, our Vice President, Client Services since July 1998,
has worked in the telecommunications industry for 15 years. Prior to joining
us, Ms. Paroda had been employed in a variety of positions by Frontier
Corporation since 1984, most recently as Vice President of Client Service.
Joseph M. Schaal, our Vice President, Application Services and Strategy
since July 1998, has worked in the telecommunications industry for 10 years.
Prior to joining us, Mr. Schaal held various positions at Frontier Corporation
in project management, business planning, financial management, operations and
software development at Frontier Corporation from January 1995 to February
1997, most recently as its Director of Application and Product Development
from March 1997 to May 1998.
Kim Robert Scovill, our Vice President, Regulatory Affairs and General
Counsel since December 1998, has worked in the telecommunications industry for
over 26 years. Mr. Scovill began his career in 1972 as a founding faculty
member of Ohio University's Center of Telecommunications Management. Mr.
Scovill served as a senior administrator and Administrative Law Judge at the
Public Utilities Commission of Ohio from May 1982 to August 1986. Mr. Scovill
also served as the Manager of Corporate Issues at Cincinnati Bell Telephone
from May 1986 to March 1990, where he managed the introduction of such
telecommunications innovations as cellular calling party pays and Kentucky's
deaf relay service. From January 1991 to February 1998, Mr. Scovill was Vice
President of Worthington Voice Services, a telecommunications and e-commerce
company. From February 1998 to December 1998, Mr. Scovill was Vice President
and General Counsel of Omnicall, a South Carolina-based CLEC.
John J. Zimmer, our Vice President, Finance and Controller since August
1998, is a certified public accountant and has worked in the
telecommunications industry for eight years. Prior to joining us, Mr. Zimmer
was employed by ACC Corp., as Vice President and Treasurer from January 1997
to July 1998, as Vice President of Finance from September 1994 to January
1997, and as Controller from March 1991 through August 1994. Prior thereto,
Mr. Zimmer was an Audit and Accounting Manager with Arthur Andersen & Co.
68
<PAGE>
Paul Cissel, our Vice President, Sales, New England Region, since November
1999, has worked in both the telecommunications and electronics industries for
over 19 years. Mr. Cissel was President of Atlantic Connections when Choice
One acquired it in November 1999. Prior to joining Atlantic Connections in
September 1998, Mr. Cissel was the Senior Vice President of Sales and
Marketing for Phoenix Network from November 1993 to November 1996.
Michael A. D'Angelo, our Vice President of Sales, Western Region, since
September 1998, has worked in the telecommunications industry for over 12
years. Prior to joining us, Mr. D'Angelo was the Director of Sales, Southeast
Regional Manager at ICG Communications from November 1997 to September 1998.
Prior thereto, Mr. D'Angelo was Regional Sales Manager for Citizens
Communications from January 1995 to November 1997, Territory Manager for MFS
Telecom Communications from August 1994 to January 1995, and Major Account
Manager and Account Executive for Rochester Telephone from March 1987 to
February 1994.
Daniel K. Iles, our Regional Vice President of Sales, Western Region, since
July 1998, has worked in the telecommunications industry for 13 years. Prior
to joining us, Mr. Iles was the Director of Sales for Intermedia Corporation
from March 1997 to July 1998. Prior thereto, Mr. Iles was employed by Frontier
Corporation, as Director of Sales from October 1995 to March 1997 and as
Regional Manager-Upstate New York from November 1990 to October 1995.
Eric Peterson, our Regional Vice President of Sales, New England Region,
since November 1999. Prior to joining Choice One, Mr. Peterson held a similar
position with HarvardNet from December 1998 to August 1999. He served as the
Vice President of Sales and Marketing for FaxNet, a startup company, from 1996
until 1998. From 1991 to 1996, Mr. Peterson held a series of positions with
Allnet Communications, where he helped to establish the Allnet Wholesale
Division. His telecom career began at First Phone in Boston where he was
Director of Sales from 1988 to 1991.
John B. Ehrenkranz, was elected to our Board of Directors in July 1998 and
is a Principal of Morgan Stanley & Co. Incorporated where he has been employed
since 1987. Mr. Ehrenkranz is also a Principal of Morgan Stanley Capital
Partners III, Inc., the corporate general partner of certain MSDWCP funds. Mr.
Ehrenkranz also currently serves on the Board of Directors of Allegiance
Telecom, Inc., as well as other privately held companies.
Bruce M. Hernandez, was elected to our Board of Directors in July 1998 and
is a Principal and Chief Executive Officer of Waller Sutton Media Partners,
L.P., where he has been employed since 1997. Mr. Hernandez previously served
as Chief Financial Officer of Horizon Cellular from 1993 to 1997.
Michael M. Janson, was elected to our Board of Directors in July 1998 and
is a Managing Director of Morgan Stanley & Co. Incorporated where he has been
employed since 1987. Mr. Janson is also a Managing Director of Morgan Stanley
Capital Partners III, Inc., the corporate general partner of certain MSDWCP
funds. Mr. Janson also currently serves on the Board of Directors of Silgan
Holdings, Inc., as well as other privately held companies.
Robert M. Van Degna, was elected to our Board of Directors in July 1998 and
is a Managing Director of Fleet Equity Partners, an investment firm affiliated
with Fleet Boston Financial Corp. Mr. Van Degna joined Fleet Financial Group
in 1971 and held a variety of lending and management positions until he
organized Fleet Equity Partners in 1982. Mr. Van Degna served on the Board of
Directors of ACC Corp. from 1995 to 1998 and he was Chairman of the Board when
ACC merged with Teleport Communications Group. Mr. Van Degna also currently
serves on the Board of Preferred Networks, Inc., as well as other privately
held companies.
Each of our officers serves at the pleasure of the Board of Directors.
Election of Directors; Composition of Board; Voting Agreement
Pursuant to our certificate of incorporation and an agreement among our
current stockholders, known as the Transaction Agreement, the initial size of
our Board is established at seven directors. The Board size may be
69
<PAGE>
changed by action of the Board but may not be less than the total number of
directors permitted to be designated by the parties to the Transaction
Agreement.
The composition of the Board pursuant to the Transaction Agreement is as
follows. MSDWCP is entitled to designate the majority of our Board so long as
it continues to hold 75% or more of the stock initially issued to it; 1/3 of
the Board so long as it holds at least 50%; two directors so long as it holds
at least 25%; and one director if it holds at least 10%. Fleet and Waller-
Sutton are each entitled to designate one director so long as each continues
to hold, respectively, 50% and 75%, of the stock initially issued to them. Our
Chief Executive Officer is also designated as a director. Within three months
of this offering, at least one outside director will be designated to the
Board. The stockholders who are parties to the Transaction Agreement have
agreed to vote all of their shares to give effect to the Board composition
described above.
Our Board is divided into three classes serving staggered terms. After an
initial transition period following the offering, directors in each class will
be elected to serve for three-year terms and until their successors are
elected and have qualified. Each year, the directors of one class will stand
for election as their terms of office expire. Prior to the Trigger Date, our
directors may be removed without cause by our stockholders. After the Trigger
Date, our directors may only be removed by our stockholders for cause.
is a director with a term of office expiring on the date of our annual
meeting of stockholders in 2000; Messrs. Jansen and Ehrenkranz are directors
with terms of office expiring on the date of our annual meeting of
stockholders in 2001; and Messrs. Dubnik, Van Degna and Hernandez are
directors with terms of office expiring on the date of our annual meeting of
stockholders in 2002. The composition of the board of directors of each of the
subsidiaries of the Company will be the same as the Board of the Company.
The quorum for Board action requires the presence of at least four
directors with at least one director present who has been designated by MSDWCP
and one director present who has been designated by either Fleet or Waller-
Sutton. Any vacancy on the Board may be required to be filled as the first
order of business at a meeting following the event creating a vacancy.
Committees of the Board of Directors
The Board of Directors currently has five committees: an Executive
Committee; an Employee Option Plan Administration Committee; a Compensation
Committee; an Audit Committee; and a Pricing Committee.
The Executive Committee has the authority to act as a liaison between the
Board and executive management and exercise such powers as shall be delegated
to it from time to time by the Board. Pursuant to our certificate of
incorporation and the Transaction Agreement, the Executive Committee will be
comprised of our Chief Executive Officer and may be comprised of three other
representatives, since one member may be designated by each of MSDWCP, the
Fleet Entities and Waller-Sutton so long as that investor is entitled to
designate a director to the Board. The current members of the Executive
Committee are Messrs. Dubnik, Ehrenkranz, Hernandez and Van Degna.
The Employee Option Plan Administration Committee administers our 1998
Employee Stock Option Plan. The Committee consists of Messrs. Ehrenkranz,
Hernandez and Van Degna. See "--Stock Plan--1998 Employee Stock Option Plan."
The Compensation Committee reviews and recommends the compensation
arrangements for management, including salaries, bonus plans and options
granted outside of the 1998 Employee Stock Option Plan. The current members of
the Compensation Committee are Messrs. Ehrenkranz, Hernandez and Van Degna.
The Audit Committee, among other things, recommends the firm to be
appointed as independent accountants to audit our financial statements,
discusses the scope and results of the audit with the independent accountants,
reviews with management and the independent accountants our interim and year-
end operating results, assesses the adequacy of our internal accounting
controls and audit procedures and reviews the non-audit
70
<PAGE>
services to be performed by the independent accountants. The Audit Committee
is currently comprised of Messrs. Ehrenkranz, Hernandez and Janson.
The Pricing Committee has the authority to: negotiate the pricing and other
terms applicable to the engagement of an affiliate of Morgan Stanley Dean
Witter as our financial advisor or as lead manager or lead arranger for any
underwritten offering or capital markets activities; select and engage one or
more co-managers or co-arrangers for any such underwritten offering or capital
markets activities and to negotiate the terms of such engagement; and exercise
such other powers as shall be delegated to it from time to time by the Board.
MSDWCP's designee will generally abstain from voting on matters relating to
such engagement of an affiliate of Morgan Stanley, but is expected to
participate in discussions pertaining thereto. Pursuant to our certificate of
incorporation and the Transaction Agreement, the Pricing Committee will be
comprised of our Chief Executive Officer and may be comprised of three other
representatives, since one member may be designated by each of MSDWCP, Fleet
and Waller-Sutton so long as that investor is entitled to designate a director
to the Board. The current members of the Pricing Committee are Messrs. Dubnik,
Ehrenkranz, Hernandez and Van Degna.
Compensation of Directors
We will reimburse the members of our Board of Directors for their
reasonable out-of-pocket expenses incurred in connection with attending Board
or committee meetings and related activities. Additionally, we are obligated
to maintain our present level of directors' and officers' liability insurance.
Members of our Board of Directors currently receive no other compensation for
services provided as a Director or as a member of any Board committee. Non-
employee directors of Choice One and our subsidiaries are entitled to
participate in our 1999 Directors' Stock Incentive Plan.
Executive Compensation
The following table sets forth compensation paid during the period from
June 1998 to December 31, 1998 to the Chief Executive Officer of the Company
and the other three most highly paid executive officers of the Company (the
"Named Executive Officers") whose annual salary and bonus, on a prorated
basis, exceeded $100,000 for all services rendered to the Company during such
period.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation All Other
------------------ Compensation
Name and Principal Position Year Salary($) Bonus($) ($) (4)
- --------------------------- ---- --------- -------- ------------
<S> <C> <C> <C> <C>
Steve M. Dubnik (1)....................... 1998 $75,385 $14,000 $1,777
President and Chief Executive Officer
Kevin S. Dickens (2)...................... 1998 65,000 13,000 1,650
Sr. Vice President, Operations and
Engineering
Mae Squier-Dow (1)........................ 1998 70,000 13,000 1,650
Sr. Vice President, Sales, Marketing and
Service
Philip Yawman (3)......................... 1998 60,000 23,000 1,650
Sr. Vice President, Corporate Development
</TABLE>
- --------
(1) Mr. Dubnik and Ms. Squier-Dow joined the Company on June 15, 1998 and the
compensation disclosed is for the period from that date through December
31, 1998.
(2) Mr. Dickens joined the Company on July 1, 1998 and the compensation
disclosed is for the period from that date through December 31, 1998.
(3) Mr. Yawman joined the Company on July 13, 1998 and the compensation
disclosed is for the period from that date through December 31, 1998.
(4) Reflects matching contributions made by the Company under its 401(k) plan
on behalf of such Named Executive Officer.
71
<PAGE>
Stock Plans
1998 Employee Stock Option Plan
On August 12, 1998, our stockholders approved the 1998 Employee Stock
Option Plan (the "Employee Option Plan"), under which we may issue stock
options exercisable for shares of our common stock to employees of the Company
and our subsidiaries who did not own Class B Units of Choice One
Communications L.L.C. which, prior to this offering, was our sole shareholder.
The Employee Option Plan is administered by the Employee Option Plan
Administration Committee, which is a committee of our Board of Directors, and
must consist of at least two outside directors. The Committee is authorized
under the Employee Option Plan to select employees eligible for participation
in the Plan and determine the terms and conditions of the awards under the
Employee Option Plan. An aggregate of shares of common stock have been
reserved for issuance under the Employee Option Plan. As of , 2000
options to acquire an aggregate of shares of our common stock have been
granted under the Plan.
Options granted under the Employee Option Plan may be either incentive
stock options, ISOs, or such other forms of non-qualified stock options,
NQSOs, as the Committee may determine. Only ISOs have been granted under the
plan as of June 30, 1999. ISOs are intended to qualify as "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of
1986 as amended, the Code. The exercise price of (1) an ISO granted to an
individual who owns shares possessing more than 10% of the total combined
voting power of all classes of stock of the Company, a 10% Owner, will be at
least 110% of the fair market value of a share of common stock on the date of
grant and (2) an ISO granted to an individual other than a 10% Owner and an
NQSO will be at least 100% of the fair market value of a share of common stock
on the date of grant.
Options granted under the Employee Option Plan may be subject to time
vesting and other restrictions at the sole discretion of the Committee.
Subject to limitations and exceptions, the right to exercise an option
generally will terminate at the earlier of (1) the first date on which the
initial grantee of such option is not employed by us for any reason other than
termination without cause, death or permanent disability or (2) the expiration
date of the option. If the holder of an option dies or suffers a permanent
disability while still employed by us, any option may be exercised by the
participant, or in the event of the participant's death, by the participant's
personal representative, any time prior to the earlier of the expiration date
of the option or the expiration of three months after the date of termination,
but only if and to the extent that the employee was entitled to exercise the
option at the date of such termination. If the holder of an option is
terminated without cause, or resigns from the Company, we will, upon the
recommendation of the Chief Executive Officer, repurchase the vested shares of
the participant at fair market value, provided the participant executes and
delivers a covenant not to compete within 10 days of termination.
In the event of a Change of Control of Choice One, vesting will be
accelerated by one year, or an amount of options will vest immediately such
that 50% of a participant's options are vested, whichever is greater; and each
participant holding an exercisable option shall have the right, subject to
restrictions and qualifications, to exercise the option in full, or to
exercise the option for an amount of cash equal to the difference between the
fair market value on the date of surrender and the option price. A Change of
Control shall occur upon the happening of any of the following:
. the sale, lease, exchange or transfer of all or substantially all of our
assets;
. our consolidation or merger with another corporation in which we are not
the surviving corporation, or pursuant to which any shares of our common
stock are to be converted into cash, securities or other property;
. the consummation of a liquidation or dissolution of us;
. any person becomes the beneficial owner, directly or indirectly, of 30%
or more of our then outstanding common stock; or
72
<PAGE>
. the Board of Directors as of August 12, 1998, the Incumbent Board,
ceases to constitute at least a majority of the Board, except that any
person who becomes a Director thereafter by the approval of at least
three quarters of the directors comprising the Incumbent Board, shall be
considered a member of the Incumbent Board.
1999 Directors' Stock Incentive Plan
On November 18, 1999, our stockholders approved the 1999 Directors' Stock
Incentive Plan, under which we may issue non-qualified stock options to
purchase shares of our common stock to our non-employee directors. Options may
be granted under the directors' stock incentive plan with respect to an
aggregate of shares of our common stock. The directors' stock
incentive plan is administered by our Board of Directors. Under the plan, our
non-employee directors will receive options to purchase shares of
common stock as soon as practicable after the completion of this offering.
Options granted under the directors' stock incentive plan may be in such
forms of NQSOs as the Board of Directors may determine. To date, no options
have been granted under the plan.
In the event of a change in control as defined in the directors' stock
incentive plan, all options under this plan shall vest and become exercisable
unless our Board of Directors directs otherwise in a resolution adopted prior
to the change in control. Under specified circumstances following a change in
control, holders of options may surrender them in exchange for cash in an
amount equal to the difference between the exercise price of such option and
the fair market value of our common stock on the date of surrender. If a
holder does not exercise that right, such holder may exercise the option at
any time during the term of such option.
401(k) Plan
We have adopted a tax-qualified employee savings and retirement plan, the
401(k) Plan, covering all of our full-time employees. Pursuant to the 401(k)
Plan, employees may elect to reduce their current compensation up to the
statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan is intended to qualify under
Section 401 of the Code so that contributions by employees to the 401(k) Plan
and income earned on plan contributions are not taxable to employees until
withdrawn from the 401(k) Plan. The trustees under the 401(k) Plan, at the
direction of each participant, invest such participant's assets in the 401(k)
Plan in selected investment options.
Executive Agreements
Steve M. Dubnik Executive Agreement
In July 1998, in connection with Steve M. Dubnik's purchase of an equity
interest in Choice One Communications L.L.C., we entered into an Executive
Purchase Agreement with Choice One Communications L.L.C., and Mr. Dubnik,
referred to as the Dubnik Executive Agreement.
Vesting. Pursuant to the Dubnik Executive Agreement, the Choice One
Communications L.L.C. securities purchased by Mr. Dubnik as well as any of our
company securities distributed with respect to such Choice One Communications
L.L.C. securities, referred to collectively as the Dubnik Executive
Securities, are subject to vesting over a four-year period, with 20% vesting
on the date of grant and 20% vesting on each of the first four anniversaries
thereof. Vesting will be accelerated by one year upon the consummation of our
initial public offering, 100% in the event of Mr. Dubnik's death or
disability, and 100% upon a sale of the Company where at least 50% of the
consideration for such sale is cash or marketable securities. Vesting will
cease and no unvested Dubnik Executive Securities will vest after the date on
which Mr. Dubnik's employment with us and our subsidiaries terminates for any
reason, unless his employment is terminated by us without cause or by Mr.
Dubnik for good reason.
73
<PAGE>
Repurchase of Securities. If Mr. Dubnik's employment is terminated for any
reason other than a termination by us without cause or by Mr. Dubnik for good
reason, the Dubnik Executive Agreement provides that we (or our assignees) and
Choice One Communications L.L.C. will have the right to repurchase all
unvested Dubnik Executive Securities at the lesser of fair market value and
original cost.
Restrictions on Transfer, Holdback and "Drag Along" Agreement. Pursuant to
the Dubnik Executive Agreement, the Dubnik Executive Securities are subject to
various restrictions on transferability, holdback periods in the event of a
public offering of our securities and provisions requiring the holder of such
shares to approve and, if requested by us, sell its shares in any sale of the
Company that is approved by the Board.
Terms of Employment. Mr. Dubnik's employment may be terminated by us at any
time and for any reason. Mr. Dubnik is not entitled to receive any severance
payments upon any such termination, other than payments in consideration of
the noncompetition and nonsolicitation agreements discussed below.
Noncompetition and Nonsolicitation Agreements. The Dubnik Executive
Agreement provides that, during the Noncompete Period (as defined below), Mr.
Dubnik may not solicit or attempt to induce any of our employees, officers or
consultants (or any employees, officers or consultants of our subsidiaries) to
leave our employ. Mr. Dubnik may also not attempt to induce any of our
clients, suppliers, licensees or other business relations to cease doing
business with us, nor in any other way interfere with our relationships with
our employees, clients, suppliers, licensees and other business relations. In
addition, pursuant to the Dubnik Executive Agreement, during the Noncompete
Period, Mr. Dubnik may not participate in any business engaged in the
provision of telecommunications services in any Covered State. As used in the
Dubnik Executive Agreement, the "Noncompete Period" means the period
commencing on July 8, 1998 and continuing until the later of (i) July 8, 2002
and (ii) the second anniversary of the date of termination of his employment.
However, the "Noncompete Period" shall end if at any time we cease to pay Mr.
Dubnik his base salary and medical benefits in existence at the time of
termination (reduced by any salary or benefits Mr. Dubnik receives as a result
of other employment). As used in the Dubnik Executive Agreement, "Covered
State" means: (i) Connecticut, Delaware, Illinois, Indiana, Maine,
Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio,
Pennsylvania, Rhode Island and Vermont; (ii) any market for which, as of the
date of termination of employment, we have a business plan which has been
approved by the Board of Directors; and (iii) any state in which we have taken
substantial steps in preparing a business plan, to be approved by the Board of
Directors within a limited period of time, to conduct business.
Kevin S. Dickens Executive Agreement
In July 1998, in connection with Kevin S. Dickens' purchase of an ownership
interest in Choice One Communications L.L.C., we have entered into an
Executive Purchase Agreement with Mr. Dickens, referred to as the Dickens
Executive Agreement, which is substantially similar to the Dubnik Executive
Agreement except that the Choice One Communications L.L.C. securities
purchased by Mr. Dickens pursuant to the Dickens Executive Agreement as well
as any of our company securities distributed with respect to such Choice One
Communications L.L.C. securities, referred to collectively as the Dickens
Executive Securities, are subject to vesting over a four-year period, with 20%
vesting on the date of grant and 20% vesting on each of the first four
anniversaries thereof. Vesting will cease and no unvested Dickens Executive
Securities will vest after the date on which Mr. Dickens's employment with us
and our subsidiaries terminates for any reason, unless his employment is
terminated by us without cause or by Mr. Dickens for good reason, upon which
the Dickens Executive Securities will continue to vest until the next
anniversary thereof and vesting will continue such that at least 50% of the
Dickens Executive Securities become vested (so long as he commits no covenant
breach).
Ajay Sabherwal Executive Agreement
In August 1999, in connection with his purchase of an ownership interest in
Choice One Communications L.L.C., Mr. Sabherwal entered into an Executive
Purchase Agreement containing terms substantially similar to those contained
in the Dickens Executive Agreement.
74
<PAGE>
Mae Squier-Dow Executive Agreement
In July 1998, in connection with her purchase of an ownership interest in
Choice One Communications L.L.C., Ms. Squier-Dow entered into an Executive
Purchase Agreement containing terms substantially similar to those contained
in the Dickens Executive Agreement.
Philip Yawman Executive Agreement
In July 1998, in connection with his purchase of an ownership interest in
Choice One Communications L.L.C., Mr. Yawman entered into an Executive
Purchase Agreement containing terms substantially similar to those contained
in the Dickens Executive Agreement.
Executive Agreements Entered into by Other Management Investors
Each of the other Management Investors has entered into an executive
purchase agreement in a form substantially similar to the Dickens Executive
Agreement, except with respect to the following terms.
Vesting. Pursuant to these agreements, the Choice One Communications L.L.C.
securities purchased by a Management Member as well as any of our company
securities distributed with respect to such Choice One Communications L.L.C.
securities (collectively, the "Executive Securities") are subject to vesting
over a four-year period, with 25% vesting on each of the first four
anniversaries of the grant date. Vesting will be accelerated by one year upon
the consummation of our initial public offering, 100% in the event of the
Management Member's death or disability, and 100% upon a sale of the Company
where at least 50% of the consideration for such sale is cash or marketable
securities. Vesting will cease and no unvested Executive Securities will vest
after the date on which the Management Investor's employment with us and our
subsidiaries terminates for any reason.
Repurchase of Securities. If the Management Member's employment is
terminated for any reason, the agreements provide that Choice One
Communications L.L.C. and the Company (or their respective assignees) will
have the right to repurchase all unvested Executive Securities at the lesser
of fair market value and original cost, provided that the aggregate repurchase
price for the securities will not be less than the original cost of the
securities repurchased.
75
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transaction and Purchase Agreements
In July 1998, the following entities and individuals and the Management
Members entered into a Transaction Agreement and related agreements pursuant
to which they committed to purchase an aggregate of approximately $62.1
million in ownership interests of Choice One Communications L.L.C.:
. Morgan Stanley Capital Partners III, L.P., Morgan Stanley Capital
Investors, L.P., and MSCP III 982 Investors, L.P., collectively referred
to as MSDWCP,
. Fleet Venture Resources, Inc., Fleet Equity Partners VI, L.P., Chisholm
Partners III, L.P. and Kennedy Plaza Partners, collectively referred to
as the Fleet Entities,
. Waller-Sutton Media Partners, L.P.,
. First Union Capital Partners,
. General Electric Capital, and
. Royce J. Holland.
Each of these investors is referred to individually as an Investor Member
and collectively they are referred to as the Investor Members. Each of the
Investor Members has entered into the Investor Purchase Agreement and made a
capital contribution to Choice One Communications L.L.C., which then issued
Class A Units to each Investor Member in respect of such Member's capital
contribution.
In addition, the Management Members have purchased an ownership interest in
Choice One Communications L.L.C. Each of the Management Members has entered
into a purchase agreement and made a capital contribution to Choice One
Communications L.L.C., which then issued Class B Units to each Management
Member in respect of such Member's capital contribution.
On June 30, 1999, the Members of Choice One Communications L.L.C. entered
into an amendment to the Transaction Agreement. This amendment increases the
aggregate amount of capital contributions committed by certain Investor
Members, including certain new members, by approximately $71.3 million to a
total capital commitment of $133.4 million. In addition, each of the Investor
Members entered into or amended its Purchase Agreement to reflect its pro rata
portion of such $71.3 commitment to Choice One Communications L.L.C. The
additional approximately $71.3 million commitments terminate upon completion
of this offering. In consideration for this commitment, the equity allocation
to Investor Members will vary based on the length of time during which they
are committed to make or make available the additional equity commitments
through April 2000. If the commitments terminate, then the total capital
committed to the LLC would be approximately $62.1 million. Upon liquidation of
the LLC, the LLC interests will convert into our common stock.
Certain provisions of the Transaction Agreement will continue in effect
following completion of this offering, including the following:
. an agreement among the Investor Members and Management Members to vote
their shares:
(i) for the election to the Board of a specified number of designees of
MSDWCP (reducing as MSDWCP's ownership declines); one designee of each
Fleet and Waller-Sutton (until the designating party's ownership falls
below a specified threshold); the CEO; and at least one outside director
(as described under "Management--Election of Directors" above), and
(ii) to ensure the composition of the Executive Committee and Pricing
Committee are as described under "Management--Committees of the Board of
Directors" above, so long as, in the case of a designee to such Committee
of an Investor Member, the Investor Member is entitled to designate at
least one director to the Board;
76
<PAGE>
. so long as MSDWCP's ownership is above a specified level, MSDWCP will
have the right to select our lead manager for capital markets activities
and financial adviser for advisory assignments;
. business plans and budgets will continue to be subject to Board approval
pursuant to specified procedures; and
. all Members will be required to sell their shares in any sale of the
company approved by the Board.
Limited Liability Company Operating Agreement
In July 1998, the Investor Members and the Management Members, collectively
known as the LLC Members, entered into a limited liability company agreement,
or LLC Agreement, in order to govern the affairs of Choice One Communications
L.L.C.
Upon consummation of this offering, Choice One Communications L.L.C. will
dissolve and its assets (which consist almost entirely of our stock) will be
distributed to each of the LLC Members in accordance with the LLC Agreement.
The LLC Agreement provides that the equity allocation between the Investor
Members (which own all the Class A Units of Choice One Communications L.L.C.)
and the Management Members (which own all the Class B Units of Choice One
Communications L.L.C.) will range from 95.0%/5.0% to 68.1%/31.9% based upon
the initial public offering price of our common stock. The Management Members
will receive the full 31.9% allocation if the value of the common stock
distributable to the Investor Members based on the initial public offering
price exceeds certain hurdle rate thresholds specified in the LLC Agreement
for the return on the equity invested by the Investor Members. However, the
maximum amount allocable to the Management Members would be reduced to not
less than % based on the amount of committed Investor Member equity undrawn
and the length of time of such equity commitment. Based on an assumed initial
public offering price of $ (the mid point of the range set forth on
the cover page hereto) and assuming no drawdowns on the additional equity
commitments with an initial public offering occurring before February 1, 2000,
the allocation would be % to the Management Members and % to the
Investor Members.
Registration Rights Agreement
We are a party to a registration rights agreement dated as of July 8, 1998
with the Investor Members and the Management Members of Choice One
Communications L.L.C. This agreement requires us to register our securities
held by the LLC Members, subject to specified conditions and limitations, and
will continue in effect after this offering. Upon consummation of this
offering, holders of a majority of the equity held by Investor Members are
entitled to demand three registrations on Form S-1 and unlimited registrations
on Form S-3. After one registration of this kind has been effected, holders of
a majority of the equity held by Management Members may demand one
registration on Form S-3. After one registration has been effected, Investor
Members holding 20% of the outstanding registrable securities, or two out of
the three largest investor holders can demand three registrations on Form S-1
(minus any Form S-1 registration effected at the demand of a majority of
Investor Members) and unlimited registrations on Form S-3. In addition, all
LLC Members are entitled to include their shares on primary or secondary
registered public offerings of our securities. Subject to limitations, we are
required to bear all registration, legal (for no more than one independent
legal counsel for all selling holders of registrable shares) and other
expenses in connection with these registrations, other than underwriting
discounts and commissions, and must provide appropriate indemnification to the
LLC Members.
Transactions with Affiliates
On August 19, 1999, we loaned $186,000 to Ajay Sabherwal, our Senior Vice
President, Finance and Chief Financial Officer. This loan bears interest at a
rate of 5.96% and is to be repaid by Mr. Saberwal in five annual installments,
the first of which was made on August 31, 1999. The loan is secured by a
pledge from Mr. Sabherwal of 186,336 Class B Units of Choice One
Communications L.L.C. owned by Mr. Sabherwal and all after acquired Class B
Units.
77
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Prior to this offering, our outstanding equity securities consisted of
common stock held by Choice One Communications L.L.C. In addition, we have
reserved common stock for issuance under options granted under the 1998
Employee Stock Option Plan. The following table sets forth information
regarding the beneficial ownership of our outstanding common stock, after
giving effect to the LLC dissolution, allocation of equity among LLC members,
assuming an initial public offering price of $ per share and as
adjusted for this offering, by: (i) each of the directors and the executive
officers of the Company; (ii) all directors and executive officers as a group
and (iii) each owner of more than 5% of the equity securities of the Company,
referred to as the 5% Owners.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Owned
Prior to After
Offering Offering(2)
-------------- --------------
Name and Address of Beneficial Owner(1) Number Percent Number Percent
- --------------------------------------- ------ ------- ------ -------
<S> <C> <C> <C> <C>
Directors and Executive Officers................
Steve M. Dubnik (3)(4)..........................
Kevin S. Dickens (3)(5).........................
Ajay Sabherwal(3)...............................
Mae Squier-Dow (3)..............................
Philip Yawman (3)(6)............................
John B. Ehrenkranz (7)..........................
Bruce M. Hernandez (8)..........................
Michael M. Janson (9)...........................
Robert M. Van Degna (10)........................
All directors and executive officers as a group
(24 persons)...................................
5% Owners.......................................
MSDWCP Entities (11)............................
Fleet Entities (12).............................
Waller-Sutton Media Partners, L.P. (13).........
</TABLE>
- --------
* Denotes less than one percent.
(1) The persons named in the table have sole voting and dispositive power
with respect to all shares of our common stock shown as beneficially
owned by them, subject to the information contained in the notes to the
table and to community property laws, where applicable.
(2) Assumes no exercise of U.S. underwriter's over-allotment option and does
not give effect to purchases, if any, by such persons in the equity
offering.
(3) The shares of common stock owned by Mr. Dubnik, Mr. Dickens, Ms. Squier-
Dow and Mr. Yawman are subject to vesting, with 20% of such shares of
common stock vested on July 8, 1998, and an additional 20% vesting on
each of July 8, 1999, 2000, 2001 and 2002. The shares of common stock
owned by Mr. Sabherwal are subject to vesting, with 20% of such shares
vested on August 19, 1999, and an additional 20% vesting on each of
August 19, 2000, 2001, 2002 and 2003. The shares of common stock owned by
other Management Members vest 25% on each of the first four anniversaries
of that Management Member's grant date.
(4) Includes shares of common stock held by the Dubnik Family
Limited Partnership, of which Mr. Dubnik is sole general partner. Mr.
Dubnik disclaims any beneficial ownership of these shares of common
stock.
(5) Includes shares of common stock held by the Dickens Family
Limited Partnership, of which Mr. Dickens is sole general partner. Mr.
Dickens disclaims any beneficial ownership of these shares of common
stock.
78
<PAGE>
(6) Includes shares of common stock held by P.H.Y. Associates, L.P.
of which Mr. Yawman is the sole stockholder of the sole general partner.
Mr. Yawman disclaims any beneficial ownership of these shares of common
stock.
(7) Mr. Ehrenkranz is a Principal of Morgan Stanley & Co. Incorporated and of
Morgan Stanley Capital Partners III, Inc., the corporate general partner
of each of the MSDWCP Entities.
(8) Mr. Hernandez is Chief Executive Officer of Waller-Sutton Media, L.L.C.,
general partner of Waller Sutton Media Partners, L.P.
(9) Mr. Janson is a Managing Director of Morgan Stanley & Co. Incorporated
and a Director of Morgan Stanley Capital Partners III, Inc., the
corporate general partner of each of the MSDWCP Entities.
(10) Mr. Van Degna is Chairman & Chief Executive Officer of Fleet Growth
Resources II, Inc., the general partner of Fleet Equity Partners VI,
L.P., Chairman and CEO of Silverado III Inc., the general partner of
Silverado III, LP, the general partner of Chisholm Partners III LP;
Chairman and CEO of Fleet Venture Resources, Inc. and a general partner
of Kennedy Plaza Partners.
(11) These LLC Units are owned by Morgan Stanley Capital Partners III, L.P.
(and related private equity funds), and Morgan Stanley Dean Witter
Capital Partners IV, L.P. (and related a private equity fund). Their
address is c/o Morgan Stanley Dean Witter Capital Partners, 1221 Avenue
of the Americas, New York, New York 10020.
(12) These LLC Units are owned by Fleet Equity Partners VI, L.P., Fleet
Venture Resources, Inc., Chisholm Partners III, L.P. and Kennedy Plaza
Partners. Their address is c/o Fleet Equity Partners, 50 Kennedy Plaza,
12th Floor, Providence, Rhode Island, 02903.
(13) These LLC Units are owned by Waller-Sutton Media Partners L.P. Its
address is One Rockefeller Plaza, Suite 3300, New York, New York 10020.
79
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General Matters
Our total authorized capital stock consists of shares of common
stock, par value $.01 per share and shares of preferred stock par value
$.01 per share. Upon completion of this offering, shares of common
stock will be issued and outstanding and no shares of preferred stock will be
issued. The following summary of particular provisions of our capital stock
describes all material provisions of, but does not purport to be a complete
description of and is subject to, and qualified in its entirety by, our
certificate of incorporation and our by-laws and by the provisions of
applicable law.
Common Stock
The issued and outstanding shares of our common stock (and the shares of
common stock being offered by us when payment is made for them), are validly
issued, fully paid and nonassessable. The holders of outstanding shares of our
common stock are entitled to receive dividends out of assets legally available
therefor at such time and in such amounts as the Board of Directors may from
time to time determine subject to the prior rights of the holders of any
preferred stock. The shares of common stock are not convertible and the
holders have no preemptive or subscription rights to purchase any of our
securities. Upon our liquidation, dissolution or winding up, the holders of
common stock are entitled to receive, pro rata, our assets which are legally
available for distribution, after payment of all debts and other liabilities
and subject to the rights of any holders of preferred stock. Each outstanding
share of common stock is entitled to one vote on all matters submitted to a
vote of stockholders. There is no cumulative voting.
We have applied to have our common stock approved for listing on the Nasdaq
National Market under the symbol "CWON."
Preferred Stock
Our Board of Directors may, without further action by our stockholders,
from time to time, direct the issuance of shares of preferred stock in series.
In addition, the Board may, at the time of issuance, determine the rights,
preferences and limitations of each series. Satisfaction of any dividend
preferences of outstanding shares of preferred stock would reduce the amount
of funds available for the payment of dividends on shares of common stock.
Holders of shares of preferred stock may be entitled to receive a preference
payment in the event of any liquidation, dissolution or winding-up of Choice
One before any payment is made to the holders of shares of common stock. Under
some circumstances, the issuances of shares of preferred stock may make a
merger, tender offer or proxy contest or the assumption of control by a holder
of a large block of our securities or the removal of incumbent management more
difficult. Upon the vote of a majority of the directors then in office, our
Board of Directors, without stockholder approval, may issue shares of
preferred stock with voting and conversion rights which could adversely affect
the holders of shares of common stock. Prior to the Trigger Date, the Board
may not make issuances of preferred stock in connection with a shareholder
rights plan without MSDWCP's written approval. Upon completion of this
offering, there will be no shares of preferred stock outstanding, and we have
no present intention to issue any shares of preferred stock.
Certificate of Incorporation and By-laws
Our Certificate of Incorporation provides for the Board of Directors to be
divided into three classes, as nearly equal in number as possible, serving
staggered terms. Approximately one-third of the Board of Directors will be
elected each year. See "Management." After the Trigger Date, our directors may
only be removed for cause. Accordingly, the provision for a classified board
could prevent a party who acquires control of a majority of the outstanding
voting stock following the Trigger Date from obtaining control of the Board of
Directors until the second annual stockholders meeting following the date the
acquiror obtains the controlling stock interest. The classified board
provision could have the effect of discouraging a potential acquiror from
making a tender offer or otherwise attempting to obtain control of us without
obtaining the approval of our Board of Directors and could increase the
likelihood that incumbent directors will retain their positions.
80
<PAGE>
Our By-laws provide that, in accordance with our Certificate of
Incorporation, the initial number of directors will be seven. The number of
directors may be fixed from time to time pursuant to resolution adopted by a
majority of the board, but will not be less than the total number of directors
designated by parties to the Transaction Agreement. See "Management." The
majority vote of the remaining directors is required to fill vacancies on the
Board and to establish committees of the Board, fill committee memberships and
adopt, rescind or amend resolutions which establish policies with respect to
the categories of matters that must be presented to our Board (or a committee
of our Board) prior to taking action.
Our Certificate of Incorporation provides that after the Trigger Date,
stockholder action can be taken in lieu of a meeting only by unanimous written
consent and that, except as otherwise required by law, special meetings of the
stockholders can only be called pursuant to a resolution adopted by a majority
of the Board of Directors or by our Chairman of the Board.
Our By-laws following the Trigger Date establish advance notice and other
procedures for stockholder proposals to be brought before an annual meeting of
our stockholders, including proposed nominations of persons for election to
the Board of Directors. Stockholders at an annual meeting may only consider
proposals or nominations specified in the notice of meeting or brought before
the meeting by or at the direction of the Board of Directors or by a
stockholder who was a stockholder of record on the record date for the
meeting, who is entitled to vote at the meeting and who has given to our
Secretary timely written notice, in proper form, of the stockholder's
intention to bring that business before the meeting. Although our By-laws do
not give the Board of Directors the power to approve or disapprove stockholder
nominations of candidates or proposals regarding other business to be
conducted at a special or annual meeting, our By-laws may have the effect of
precluding the conduct of particular types of business at a meeting if the
proper procedures are not followed or may discourage or defer a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of Choice One.
Our Certificate of Incorporation also contains a fair price provision that
after the Trigger Date applies to certain business combination transactions
involving any person or group that is or has announced or publicly disclosed a
plan or intention to become the beneficial owner of at least 10% of our
outstanding voting stock (other than MSDWCP), which we refer to as an
Interested Stockholder. This fair price provision requires the affirmative
vote of the holders of at least 66 2/3% of the voting stock (excluding stock
owned by the Interested Stockholder) to approve such business combination
transactions between the Interested Stockholder and us or our subsidiaries, or
approve any agreement or other arrangement providing for such business
combination transactions, including:
. any merger or consolidation;
. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition or other arrangement with or for the benefit of the
Interested Stockholder involving our assets or the assets of our
subsidiaries having a fair market value of $10.0 million or more or
constituting more than 5% of the value of the entity in question;
. the adoption of any plan or proposal for our liquidation or dissolution
or any change to or exchange of our capital stock; and
. certain recapitalizations or reclassifications of our securities.
This voting requirement will not apply to certain transactions, including
any transaction involving the payment of consideration to holders of our
outstanding capital stock, in which the following conditions, among others,
are met:
. the consideration to be received by the holders of each class of our
capital stock is at least equal to the greater of:
(i) the highest per share price paid for shares of such class by the
Interested Stockholder in the two years prior to the proposed business
combination or in the transaction in which it became an Interested
Stockholder, whichever is higher; or
81
<PAGE>
(ii ) the fair market value of the shares of such class on the date of
the announcement of the proposed business combination or the date on which
it became an Interested Stockholder; and
. the consideration is in the same form and amount as that paid by the
Interested Stockholder in connection with its acquisition of such class
of capital stock, or any transaction approved by a majority of our
continuing directors (as such term is defined in our certificate of
incorporation).
The above provision could have the effect of delaying or preventing a
change in control in a transaction or series of transactions that did not
satisfy the "fair price" criteria. The "fair price" provisions of our
Certificate of Incorporation may be amended by the affirmative vote of the
holders of at least 66 2/3% of the voting stock, excluding the Interested
Stockholder, unless such amendment is unanimously recommended by the Board of
Directors, a majority of whom are continuing directors.
Our By-laws may be altered or repealed and new By-laws adopted by a
majority of the whole Board of Directors or by the holders of a majority of
the voting stock.
We have expressly elected at this time not to be governed by Section 203 of
the Delaware General Corporations Law. Section 203 prohibits a publicly held
Delaware corporation from engaging in a business combination with an
interested stockholder, meaning generally a stockholder acquiring 15% or more
of our outstanding voting stock, for a period of three years after the time
the stockholder becomes an interested stockholder unless:
. prior to such time, our Board approved the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder;
. upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting outstanding at the time the transaction
commenced; or
. at or subsequent to such time, the business combination is approved by
our Board and authorized by holders of 66 2/3% of our voting stock that
is not owned by the interested stockholder.
Any change in the above Section 203 election must be approved by a majority
vote of our stockholders.
The effect of electing not to be governed by Section 203 is that the
provisions of Delaware law, which may render it more difficult or may
discourage any attempt to acquire Choice One without approval of our Board,
are not available to Choice One.
Limitations on Liability and Indemnification of Officers and Directors
Our certificate of incorporation limits the liability of our directors to
the fullest extent permitted by the Delaware General Corporation Law. In
addition, our certificate of incorporation provides that we will indemnify our
directors and officers to the fullest extent permitted by such law. We believe
that these provisions are necessary to attract and retain qualified directors
and officers.
Certificate of Incorporation, By-laws and Statutory Provisions Affecting
Stockholders
Our certificate of incorporation divides our Board of Directors into three
classes of directors serving staggered three-year terms. Under the Delaware
General Corporation Law, directors serving on a classified board can be
removed only for cause unless otherwise provided in the certificate of
incorporation. Pursuant to our certificate of incorporation, our directors may
be removed without cause prior to the Trigger Date and only with cause
thereafter.
82
<PAGE>
Our certificate of incorporation and by-laws also provide that after the
Trigger Date:
. our board may issue preferred stock in connection with a shareholder
rights plan without the consent of our stockholders;
. stockholder action can be taken in lieu of a meeting only by unanimous
written consent;
. advance notice procedures must be complied with for stockholder
proposals; and
. some business combinations must be approved by supermajority vote.
The certificate of incorporation and by-laws also:
. provide that special meetings of the stockholders may be called only by
a resolution adopted by a majority of the Board of Directors or by our
Chairman of the Board; and
. reserve to the board the exclusive right to change the number of
directors or to fill vacancies on the board after the Trigger Date.
The provisions of the certificate of incorporation and by-laws described
above would make more difficult or discourage a proxy contest or acquisition
of control by a holder of a substantial block of our stock or the removal of
the incumbent board of directors. Such provisions could also have the effect
of discouraging an outsider from making a tender offer or otherwise attempting
to obtain control of Choice One, even though such an attempt might be
beneficial to us and our stockholders.
Registration Rights
We are a party to a registration rights agreement dated as of July 8, 1998
with the Investor Members and the Management Members of Choice One
Communications L.L.C. See "Certain Relationships and Related Transactions--
Registration Rights Agreement."
Stock Transfer Agent
The transfer agent and registrar for the common stock is
, New York, New York.
83
<PAGE>
UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a summary of the material United States federal income and
estate tax consequences of the ownership and disposition of Choice One common
stock applicable to non-U.S. holders, as defined below, of such common stock.
You are a "non-U.S. holder" for United States federal income tax purposes if
you are a beneficial owner of Choice One common stock and are any of the
following:
. A nonresident alien individual as to the United States
. A corporation (or other entity treated as a corporation under the United
States Internal Revenue Code of 1986 and the Treasury Regulations
thereunder) that is not created or organized under the laws of the
United States or of any State
. A partnership (or other entity treated as a partnership under the United
States Internal Revenue Code of 1986 and the Treasury Regulations
thereunder) that is not created or organized under the laws of the
United States or of any State
. An estate that is not subject to United States federal income tax on a
net income basis in respect of income or gain on the common stock
. A trust if either its administration is not subject to the primary
supervision of a United States court or with respect to which no United
States persons (as defined in the United States Internal Revenue Code of
1986) have authority to control all substantial decisions of the trust.
If you are an individual who is not a United States citizen, you should be
aware that the rules for determining whether you are a nonresident alien
individual as to the United States (and thus subject to United States federal
income and estate taxation as described below) or a resident alien individual
(and thus subject to United States federal income and estate taxation in the
same manner as a United States citizen) are highly complex. You may be a
resident alien individual as to the United States for United States federal
income tax purposes for any year if any of the following apply:
. You are a lawful permanent resident of the United States at any time
during the year
. You have elected to be treated as a resident alien individual under the
provisions of the United States Internal Revenue Code of 1986
. You are physically present in the United States for at least 31 days
during the year and a number of other conditions are satisfied.
You should consult your own tax advisors regarding your status as a non-
U.S. holder of Choice One common stock.
This discussion does not deal with all aspects of United States federal
income and estate taxation and does not consider the specific facts and
circumstances that may be relevant to a particular holder in light of such
holder's personal investment or tax position. In addition, it does not address
the treatment of holders of Choice One common stock under the laws of any
state, local or non-United States taxing jurisdiction.
This discussion is based on the federal tax laws of the United States,
including the Internal Revenue Code of 1986, the Treasury Regulations
promulgated thereunder, rulings and pronouncements of the United States
Internal Revenue Service and judicial decisions now in effect, all of which
are subject to change at any time. Any of these changes may be applied
retroactively in a manner that could cause the tax consequences to vary
substantially from the consequences described below, possibly having an
adverse effect on a beneficial owner of Choice One common stock.
84
<PAGE>
You are urged to consult with your own tax advisors with regard to the
application of the federal income and estate tax laws to your particular
situation, as well as the applicability and effect of any state, local or non-
United States tax laws to which you may be subject.
Dividends
If you are a non-U.S. holder of Choice One common stock, dividends paid to
you are subject to withholding of United States federal income tax at a 30%
rate or at a lower rate if so specified in an applicable income tax treaty.
If, however, the dividends you receive are effectively connected with the
conduct of a trade or business in the United States by you or by a partnership
that holds the common stock and of which you are a partner (and the dividends
are attributable to a permanent establishment that is maintained by you or the
partnership in the United States, if this further requirement must be met
under the terms of an applicable income tax treaty as a condition for
subjecting you to United States federal income taxation on a net income basis
on such dividends), then such "effectively connected" dividends generally are
not subject to withholding tax, provided that you satisfy a number of
certification requirements. Instead, such effectively connected dividends are
taxed on a net income basis at the same graduated rates applicable to United
States citizens and resident alien individuals and United States corporations.
In general, you will not be considered to be engaged in a trade or business in
the United States solely as a result of your ownership of Choice One common
stock.
Effectively connected dividends received by a non-U.S. holder that is a
corporation may, in some circumstances, be subject to an additional "branch
profits tax" at a 30% rate or at a lower rate if so specified in an applicable
income tax treaty.
Under currently effective United States Treasury Regulations, dividends
paid to an address in a foreign country are presumed to be paid to a resident
of that country, unless the payor has actual knowledge to the contrary, for
purposes of the 30% withholding tax discussed above. Under current
interpretations of these United States Treasury Regulations, this presumption
that dividends paid to an address in a foreign country are paid to a resident
of that country, unless the payor has actual knowledge to the contrary, also
applies for purposes of determining whether a lower rate of withholding tax
applies under an applicable income tax treaty.
Under newly issued United States Treasury Regulations, which will generally
apply to dividends paid after December 31, 2000 (the "final withholding
regulations"), if you claim the benefit of a lower rate of withholding tax
under an applicable income tax treaty, you must satisfy a number of
certification requirements. In addition, in the case of Choice One common
stock held by a foreign partnership, the certification requirements generally
will apply to the partners of the partnership, and the partnership itself will
have to provide some information, including a United States taxpayer
identification number. The final withholding regulations also provide look-
through rules for tiered partnerships.
If you are eligible for a reduced rate of United States withholding tax
under an applicable income tax treaty, you may obtain a refund of any excess
amounts withheld by filing a refund claim with the Internal Revenue Service.
Gain on Disposition of Common Stock
If you are a non-U.S. holder, you generally will not be subject to United
States federal income tax on any gain recognized on a sale or other
disposition of Choice One common stock unless:
. The gain is effectively connected with the conduct of a trade or
business in the United States by you or by a partnership that holds the
common stock and of which you are a partner (and the gain is
attributable to a permanent establishment maintained by you or the
partnership in the United States, if this further requirement must be
met under the terms of an applicable income tax treaty as a condition
for subjecting you to United States federal income taxation on a net
income basis on gain from the sale or other disposition of the common
stock);
85
<PAGE>
. You are an individual, you or a partnership of which you are a partner
holds the common stock as a capital asset, and you are present in the
United States for 183 or more days during the year of the sale or other
disposition and several other conditions are satisfied;
. You are an individual who is a former citizen or long-term resident
alien of the United States and are subject to tax pursuant to the
provisions of the United States federal income tax laws applicable to
United States expatriates; or
. Choice One is or has been a "United States real property holding
corporation" for United States federal income tax purposes and you held,
directly or indirectly, at any time during the five-year period ending
on the date of the sale or other disposition, more than 5% of the total
outstanding common stock of Choice One (and you are not eligible for any
exemption under an applicable income tax treaty).
Choice One has not been, is not and does not anticipate becoming a "United
States real property holding corporation" for United States federal income tax
purposes.
Effectively connected gains are taxed on a net income basis at the same
graduated rates applicable to United States citizens and resident alien
individuals and United States corporations. Effectively connected gains
recognized by a non-U.S. holder that is a corporation may, in some
circumstances, be subject to an additional "branch profits tax" at a 30% rate
or at a lower rate if so specified in an applicable income tax treaty.
Federal Estate Taxes
Choice One common stock owned by an individual non-U.S. holder at the time
of death will be included in the holder's gross estate for United States
federal estate tax purposes and thus may be subject to United States federal
estate tax, at graduated rates of up to 55%, unless an applicable estate tax
treaty provides otherwise.
Information Reporting and Backup Withholding Tax
In general, United States information reporting requirements and backup
withholding tax will not apply to dividends paid to you if you are either:
. Subject to the 30% withholding tax discussed above
or
. Not subject to the 30% withholding tax because an applicable income tax
treaty reduces or eliminates the withholding tax
although dividend payments to you will be reported to the Internal Revenue
Service for purposes of the withholding tax. See "--Dividends." If you do not
meet either of these requirements for exemption and you fail to provide
necessary information (including your United States taxpayer identification
number) or otherwise establish your status as an "exempt recipient," you may
be subject to backup withholding of United States federal income tax at a rate
of 31% on dividends paid to you with respect to your Choice One common stock.
Under current law, Choice One may generally treat dividends paid to a payee
with an address outside the United States as exempt from backup withholding
tax and information reporting requirements unless Choice One has actual
knowledge that the payee is a United States person. However, under the final
withholding regulations, dividends paid after December 31, 2000 will generally
be subject to backup withholding and information reporting unless a number of
certification requirements are met. See "--Dividends" for the rules applicable
to foreign partnerships under the final withholding regulations.
United States information reporting requirements and backup withholding tax
generally will not apply to a payment of the proceeds of a sale or other
disposition of Choice One common stock made outside the United States through
an office outside the United States of a non-U.S. broker. However, United
States information reporting requirements, but not backup withholding tax,
will apply to a payment of the proceeds of a sale or
86
<PAGE>
other disposition of common stock made outside the United States through an
office outside the United States of a broker that:
. Is a United States person
. Is a non-United States person who derives 50% or more of its gross
income for a specified period preceding the year of the sale or other
disposition from the conduct of a trade or business in the United States
. Is a "controlled foreign corporation" as to the United States for United
States federal income tax purposes
or
. With respect to payments made after December 31, 2000, is a foreign
partnership, if at any time during its tax year:
. one or more of its partners are United States persons, as defined in
applicable Treasury Regulations, who in the aggregate hold more than 50%
of the income or capital interests in the partnership
or
. the foreign partnership is engaged in the conduct of a trade or business
in the United States
unless that broker has documentary evidence in its records that the holder or
beneficial owner of the common stock disposed of is a non-U.S. holder (and the
broker has no actual knowledge to the contrary), or the payee otherwise
establishes its entitlement to an exemption.
Payment of the proceeds of a sale or other disposition of Choice One common
stock through a United States office of a broker is subject to both United
States information reporting requirements and backup withholding tax at the
rate of 31% unless the non-U.S. holder certifies as to its non-U.S. status
under penalties of perjury or otherwise establishes its entitlement to an
exemption.
Backup withholding is not an additional tax. A non-U.S. holder generally
may obtain a refund of any excess amounts withheld under the backup
withholding rules by filing a refund claim with the Internal Revenue Service.
87
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, in the public market
following this offering, the market price of our common stock could decline.
These sales also might make it more difficult for us to sell equity or equity-
related securities in the future at a time and price that we deem appropriate.
Upon completion of this offering, we will have outstanding an aggregate of
shares of our common stock, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options or
warrants. Of these shares, all of the shares sold in this offering will be
freely tradeable without restriction or further registration under the
Securities Act, unless such shares are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act. This leaves shares
eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
Number
of
Shares Date
------ ----
<S> <C>
After 180 days from the date of this
prospectus (subject, in some cases,
to volume limitations).
At various times after 180 days from
the date of this prospectus.
</TABLE>
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of our common stock then outstanding, which
will equal approximately shares immediately after this
offering; or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information
about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale,
public information, volume limitation or notice provisions of Rule 144.
Registration Rights
Upon completion of this offering, holders of shares of our common stock
will have the right to demand registration under the Securities Act of 1933 at
our expense of all or a portion of the shares of common stock they own. See
"Certain Relationships and Related Transactions--Registration Rights
Agreement."
Lock-Up Agreements
All of our officers, directors and stockholders have entered into lock-up
agreements under which they agreed not to transfer or dispose of, directly or
indirectly, any shares of our common stock or any securities convertible
88
<PAGE>
into or exercisable or exchangeable for shares of our common stock, for a
period of 180 days after the date of this prospectus without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters,
subject to limited exceptions. For more information, see "Underwriters."
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchases shares of our
common stock from us in connection with a compensatory stock or option plan or
other written agreement is eligible to resell those shares 90 days after the
effective date of this offering in reliance on Rule 144, but without
compliance with some of the restrictions, including the holding period,
contained in Rule 144.
Following this offering, we intend to file a registration statement on Form
S-8 under the Securities Act covering approximately shares of common
stock issued or issuable upon the exercise of stock options, subject to
outstanding options or reserved for issuance under the 1999 Stock Plan.
Accordingly, shares registered under such registration statement will, subject
to Rule 144 provisions applicable to affiliates, be available for sale in the
open market, except to the extent that such shares are subject to vesting
restrictions or the contractual restrictions described above. See
"Management--Stock Plans."
89
<PAGE>
UNDERWRITERS
We intend to offer our common stock in the United States through a number
of U.S. underwriters as well as elsewhere through international managers.
Under the terms and subject to the conditions of the underwriting agreement
dated the date of this prospectus, the U.S. underwriters named below, for whom
Morgan Stanley & Co. Incorporated, Lehman Brothers Inc., Warburg Dillon Read
LLC, First Union Securities, Inc. and CIBC World Markets are acting as U.S.
representatives, and the international underwriters named below, for whom
Morgan Stanley & Co. International Limited, Lehman Brothers International
(Europe), UBS AG, acting through its division Warburg Dillon Read, First Union
Securities, Inc. and CIBC World Markets are acting as international
representatives, have severally agreed to purchase, and we have severally
agreed to sell to them the respective number of shares of our common stock set
forth opposite the names of the underwriters below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
U.S. underwriters:
Morgan Stanley & Co. Incorporated................................
Lehman Brothers Inc..............................................
Warburg Dillon Read LLC..........................................
First Union Securities, Inc. ....................................
CIBC World Markets...............................................
Subtotal.......................................................
------
International underwriters:
Morgan Stanley & Co. International Limited.......................
Lehman Brothers International (Europe)...........................
UBS AG, acting through its division Warburg Dillon Read..........
First Union Securities, Inc......................................
CIBC World Markets...............................................
Subtotal.......................................................
------
Total........................................................
======
</TABLE>
The U.S. underwriters and the international underwriters, and the U.S.
representatives and the international representatives, are collectively
referred to as the underwriters and the representatives, respectively. The
underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of our common stock
offered hereby are subject to the approval of specified legal matters by their
counsel and to other conditions. The underwriters are obligated to purchase
all of the shares of our common stock except those covered by the U.S.
underwriters' over-allotment option described below if any are purchased.
The underwriters initially propose to offer part of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus. The underwriters may also offer the shares to securities dealers
at a price that represents a concession not in excess of $ a share under the
public offering price. Any underwriter may allow and dealers may allow, a
concession not in excess of $ a share to other underwriters or to securities
dealers. After the initial offering of the shares, the offering price and
other selling terms may from time to time be changed by the representatives.
We have granted to the U.S. underwriters an option, exercisable for 30 days
from the date of this prospectus to purchase up to an aggregate of
additional shares at the public offering price set forth on the cover page of
this prospectus, less underwriting discounts and commissions. The U.S.
underwriters may exercise this option solely for the purpose of covering over-
allotments, if any, made in connection with the offering of the shares offered
pursuant to this prospectus. To the extent this option is exercised, each U.S.
underwriter will become obligated, subject to specified conditions, to
purchase about the same percentage of additional shares as the number set
forth next to the U.S. underwriter's name in the preceding table bears to the
total number of
90
<PAGE>
shares set forth next to the names of all U.S. underwriters in the preceding
table. If the U.S. underwriters' option is exercised in full, the total price
to the public for this offering would be $ , the total underwriters'
discounts and commissions would be $ and total proceeds to Choice One would
be $ .
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares
offered by them.
At our request, the underwriters will reserve up to shares offered
hereby for sale at the initial public offering price to certain of our
employees and other persons, generally in the United States. The number of
shares available for sale to the general public will be reduced to the extent
these individuals purchase the reserved shares. Any reserved shares which are
not so purchased will be offered by the underwriters to the general public on
the same basis as the other shares offered in this prospectus.
We expect our common stock to be approved for listing on the Nasdaq
National Market under the symbol "CWON."
Each of Choice One and our directors, executive officers and current
stockholders has agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the underwriters, it will not, during
the period ending 180 days after the date of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock, whether any transaction described above is to be settled
by delivery of shares of common stock or other securities, in cash or
otherwise; or
. file a registration statement (in the case of Choice One) other than a
registration statement on Form S-8 covering shares of common stock
subject to outstanding options or options to be issued under our stock
option plans
The restrictions described in the previous paragraph do not apply to some
circumstances, including:
. the sale of the shares to the underwriters;
. the issuance by Choice One of shares of common stock upon the exercise
of an option or warrant or the conversion of a security outstanding on
the date of this prospectus of which the underwriters have been advised
in writing; or
. transactions by any person other than Choice One relating to shares of
common stock or other securities acquired in open market or other
transactions after the completion of the offering.
In order to facilitate the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
shares of common stock. Specifically, the underwriters may agree to sell (or
allot) more shares than the shares of our common stock we have agreed to sell
to them. This over-allotment would create a short position in our common stock
for the underwriters' account. To cover any over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering, if the syndicate repurchases
previously distributed common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. The underwriters have
reserved the right to reclaim selling concessions in order to encourage
underwriters and dealers to distribute the common stock for investment, rather
than for short-term profit taking. Increasing the proportion of the offering
held for investment may reduce the supply of common stock available for short-
term trading. Any of these activities may stabilize or maintain the market
price of the common stock
91
<PAGE>
above independent market levels. The underwriters are not required to engage
in these activities, and may end any of these activities at any time.
From time to time, some of the underwriters have provided, and may continue
to provide, investment banking and financial advisory services to us. In
addition, First Union Investors, Inc., an affiliate of First Union Securities,
Inc., one of the underwriters, is the administrative agent and a lender under
our credit facility and CIBC Inc., an affiliate of CIBC World Markets, one of
the underwriters, is the documentation agent and a lender under our credit
facility.
Because it is expected that more than 10% of the net proceeds of the
offering may be paid to affiliates of the underwriters, the offering is being
conducted in accordance with Rule 2710(c)(8) of the Conduct Rules of the
National Association of Securities Dealers, Inc. (the "NASD"). The rules of
the NASD provide that no NASD member shall participate in such an offering
unless the initial public offering price of the common stock is no higher than
that recommended by a qualified independent underwriter as defined by the
NASD. Lehman Brothers Inc. has agreed to serve in that capacity in connection
with the offering and has performed due diligence investigations and reviewed
and participated in the preparation of this prospectus. Lehman Brothers Inc.
will not receive compensation in connection with its services as qualified
independent underwriter.
Upon consummation of this offering, affiliates of Morgan Stanley & Co.
Incorporated, First Union Securities, Inc. and CIBC World Markets will be
shareholders of the Company and affiliates of Morgan Stanley & Co.
Incorporated have representatives on the Company's board of directors. See
"Management," "Certain Relationships and Related Transactions" and "Security
Ownership of Certain Beneficial Owners and Management."
We have agreed with the underwriters to indemnify each other against a
variety of liabilities, including liabilities under the Securities Act of
1933.
Pricing of the Offering
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between Choice One and the underwriters. Among the factors to be considered in
determining the initial public offering price will be the future prospects of
Choice One and its industry in general, sales, earnings and other financial
and operating information of Choice One in recent periods, and the price-
earnings ratios, price-sales ratios, market prices of securities and other
financial and operating information of companies engaged in activities similar
to those of Choice One. The estimated initial public offering price range set
forth on the cover page of this preliminary prospectus is subject to change as
a result of market conditions and other factors.
92
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by our counsel, Nixon Peabody LLP, Rochester, New York. Various
regulatory matters in connection with this offering are being passed upon for
us by Swidler Berlin Shereff Friedman, LLP, Washington, D.C. Various legal
matters in connection with this offering will be passed upon for the
underwriters by Davis Polk & Wardwell, New York, New York.
EXPERTS
The audited consolidated financial statements of Choice One Communications
Inc. included in this prospectus and elsewhere in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
The financial statements of Atlantic Connections, Inc. and Atlantic
Connections, Ltd. at December 31, 1997 and for the year then ended and at
August 31, 1998 and for the eight months then ended and the consolidated
financial statements of Atlantic Connections, L.L.C. at December 31, 1998 and
for the period from July 24, 1998 (date of inception) to December 31, 1998,
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein. The financial statements referred to above are
included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have not previously been subject to the reporting requirements of the
Securities Exchange Act of 1934. We have filed with the SEC a registration
statement on Form S-1 under the Securities Act with respect to the offer and
sale of common stock pursuant to this prospectus. This prospectus, filed as a
part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement or the exhibits and schedules thereto
as permitted by the rules and regulations of the SEC. Statements made in this
prospectus concerning the contents of any contract, agreement or other
document filed as an exhibit to the Registration Statement are summaries of
the terms of such contracts, agreements or documents and are not necessarily
complete. Reference is made to each such exhibit for a more complete
description of the matters involved and such statements shall be deemed
qualified in their entirety by such reference. The Registration Statement and
the exhibits and schedules thereto filed with the SEC may be inspected,
without charge, and copies may be obtained at prescribed rates, at the public
reference facility maintained by the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at
7 World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621-2511. The
Registration Statement and other information filed by us with the SEC are also
available at the SEC's World Wide Web site on the internet at
http://www.sec.gov.
As a result of the offering, Choice One and its stockholders will become
subject to the proxy solicitation rules, annual and periodic reporting
requirements, restrictions of stock purchases and sales by affiliates and
other requirements of the Exchange Act. We will furnish our stockholders with
annual reports containing audited financial statements certified by
independent auditors and quarterly reports containing unaudited financial
statements for the first three quarters of each fiscal year.
93
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of September 30, 1999 and December 31,
1998.................................................................... F-3
Consolidated Statements of Operations for the nine months ended September
30, 1999 and the period from inception (June 2, 1998) through December
31, 1998................................................................ F-4
Consolidated Statements of Stockholder's Equity for the nine months ended
September 30, 1999 and the period from inception (June 2, 1998) through
December 31, 1998....................................................... F-5
Consolidated Statements of Cash Flows for the nine months ended September
30, 1999 and the period from inception (June 2, 1998) through December
31, 1998................................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
ATLANTIC CONNECTIONS, LLC
Report of Independent Auditors........................................... F-18
Consolidated Balance Sheets as of December 31, 1998 and September 30,
1999 (Unaudited)........................................................ F-19
Consolidated Statements of Operations for the period from July 24, 1998
(date of inception) to December 31, 1998 and for the nine months ended
September 30, 1999 (Unaudited).......................................... F-20
Consolidated Statements of Cash Flows for the period from July 24, 1998
(date of inception) to December 31, 1998 and for the nine months ended
September 30, 1999 (Unaudited).......................................... F-22
Notes to Consolidated Financial Statements............................... F-23
ATLANTIC CONNECTIONS, INC.
Report of Independent Auditors........................................... F-29
Balance Sheets as of December 31, 1997 and August 31, 1998............... F-30
Statements of Operations for the year ended December 31, 1997 and the
eight months ended August 31, 1998...................................... F-31
Statements of Stockholders' Deficit for the year ended December 31, 1997
and the eight months ended August 31, 1998.............................. F-32
Statements of Cash Flows for the year ended December 31, 1997 and the
eight months ended August 31, 1998...................................... F-33
Notes to Financial Statements............................................ F-34
ATLANTIC CONNECTIONS, LTD.
Report of Independent Auditors........................................... F-37
Balance Sheets as of December 31, 1997 and August 31, 1998............... F-38
Statements of Operations for the year ended December 31, 1997 and the
eight months ended August 31, 1998...................................... F-39
Statements of Stockholders' Deficit for the year ended December 31, 1997
and the eight months ended August 31, 1998.............................. F-40
Statements of Cash Flows for the year ended December 31, 1997 and the
eight months ended August 31, 1998...................................... F-41
Notes to Financial Statements............................................ F-42
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Choice One Communications Inc.:
We have audited the accompanying consolidated balance sheets of Choice One
Communications Inc. (a Delaware corporation) and subsidiaries as of September
30, 1999 and December 31, 1998 and the related consolidated statements of
operations, stockholder's equity, and cash flows for the nine months ended
September 30, 1999 and the period from inception (June 2, 1998) through
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Choice One Communications
Inc. and subsidiaries as of September 30, 1999 and December 31, 1998, and the
results of their operations and their cash flows for the nine months ended
September 30, 1999 and the period from inception (June 2, 1998) through
December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Rochester, New York
November 8, 1999
F-2
<PAGE>
CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 1999 and December 31, 1998
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 3 $ 1,491
Accounts receivable, net........................ 685 -
Prepaid expenses and other current assets....... 490 144
-------- -------
Total current assets.......................... 1,178 1,635
-------- -------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant, and equipment.................. 54,189 21,146
Less--Accumulated depreciation.................. (3,409) (36)
-------- -------
Total property, plant, and equipment.......... 50,780 21,110
-------- -------
OTHER ASSETS...................................... 2,222 1,727
-------- -------
Total assets.................................. $ 54,180 $24,472
======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Bank overdraft.................................. $ 1,344 $ -
Accounts payable................................ 2,023 1,630
Accrued expenses................................ 7,393 9,712
-------- -------
Total current liabilities..................... 10,760 11,342
-------- -------
LONG-TERM DEBT.................................... 5,000 -
-------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $0.01 par value, 134,604 and
63,000 shares authorized, 62,105 and 60,000
shares issued and outstanding as of September
30, 1999 and December 31, 1998, respectively... 1 1
Additional paid-in capital...................... 68,886 18,692
Deferred compensation........................... (6,025) (778)
Accumulated deficit............................. (24,442) (4,785)
-------- -------
Total stockholder's equity.................... 38,420 13,130
-------- -------
Total liabilities and stockholder's equity.... $ 54,180 $24,472
======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-3
<PAGE>
CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 1999 and
the Period from Inception (June 2, 1998) through December 31, 1998
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Period from inception
Nine Months Ended (June 2, 1998) through
September 30, December 31,
1999 1998
----------------- ----------------------
<S> <C> <C>
Revenues.............................. $ 947 $ -
Operating Expenses:
Network costs....................... 2,577 -
Selling, general and
administrative..................... 12,826 4,684
Noncash deferred compensation....... 996 87
Depreciation and amortization....... 3,373 36
-------- -------
Total operating expenses.......... 19,772 4,807
-------- -------
Loss from operations............ (18,825) (4,807)
-------- -------
Interest Income/(Expense):
Interest income..................... 66 138
Interest expense.................... (898) (116)
-------- -------
Interest income/(expense), net.... (832) 22
-------- -------
Net Loss.............................. $(19,657) $(4,785)
======== =======
Net Loss Per Share, basic and
diluted.............................. $(316.51) $(94.17)
======== =======
Weighted Average Number of Shares
Outstanding,
basic and diluted.................... 62,105 50,812
======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
F-4
<PAGE>
CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the Nine Months Ended September 30, 1999 and
the Period from Inception (June 2, 1998) through December 31, 1998
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional
------------- Paid-In Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
------ ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 2, 1998
(date of inception).... - $- $ - $ - $ - $ -
Issuance of common
stock................ 60,000 1 17,827 - - 17,828
Deferred
compensation......... - - 865 (865) - -
Amortization of
deferred
compensation......... - - - 87 - 87
Net loss and
comprehensive loss... - - - - (4,785) (4,785)
------ --- ------- ------- -------- --------
BALANCE, December 31,
1998................... 60,000 1 18,692 (778) (4,785) 13,130
Capital contributions
and
issuance of common
stock................ 2,105 - 43,951 - - 43,951
Deferred
compensation......... - - 6,243 (6,243) - -
Amortization of
deferred
compensation......... - - - 996 - 996
Net loss and
comprehensive loss... - - - - (19,657) (19,657)
------ --- ------- ------- -------- --------
BALANCE, September 30,
1999................... 62,105 $ 1 $68,886 $(6,025) $(24,442) $ 38,420
====== === ======= ======= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
F-5
<PAGE>
CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and the Period from Inception
(June 2, 1998) through December 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
Period from
inception
(June 2, 1998)
Nine Months Ended through
September 30, December 31,
1999 1998
----------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................... $(19,657) $ (4,785)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization............. 3,373 36
Amortization of deferred financing costs.. 161 51
Deferred compensation..................... 996 87
Changes in assets and liabilities:
Accounts receivable, net................ (685) -
Prepaid expenses and other current
assets................................. (346) (144)
Bank overdraft.......................... 2,023 -
Accounts payable........................ (286) 1,630
Accrued expenses........................ (2,319) 9,712
-------- --------
Net cash (used in) provided by
operating activities................. (16,740) 6,587
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (33,043) (21,146)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt................... 33,000 -
Principal payments of long-term debt.......... (28,000) -
Proceeds from capital contributions and
issuance of common stock..................... 43,951 17,828
Payments of financing costs................... (656) (1,778)
-------- --------
Net cash provided by financing
activities........................... 48,295 16,050
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (1,488) 1,491
CASH AND CASH EQUIVALENTS, beginning of
period....................................... 1,491 -
-------- --------
CASH AND CASH EQUIVALENTS, end of period...... $ 3 $ 1,491
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid............................... $ 736 $ 65
======== ========
Income taxes paid........................... $ 10 $ -
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
F-6
<PAGE>
CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
(All amounts in thousands, except share and per share data)
1. Description of Business
Choice One Communications Inc. and subsidiaries ("Choice One" or the
"Company"), an integrated communications provider ("ICP"), was incorporated
under the laws of the State of Delaware on June 2, 1998. Choice One is a
wholly owned subsidiary of Choice One Communications L.L.C. ("Choice One
LLC").
The Company is an ICP offering broadband data and voice telecommunications
services primarily to small and medium-sized businesses in second and third
tier markets in the northeastern United States. The Company's services include
high speed data and Internet service, principally utilizing digital subscriber
line or DSL technology, local exchange service and long distance service. The
Company seeks to become the leading ICP in each target market by offering a
single source for competitively priced, high quality, customized
telecommunications services.
2. Summary of Significant Accounting Policies
Development Stage Company
Until February 1999, the Company was in the development stage, as defined
by Statement of Financial Accounting Standards ("SFAS") No. 7, Accounting and
Reporting by Development Stage Enterprises. The Company's principal activities
included developing its business plans; procuring governmental authorizations;
raising capital; hiring management and other key personnel; developing,
acquiring and integrating operations support systems ("OSS") and other back
office systems; acquiring equipment and facilities; and negotiating
interconnection agreements. Accordingly, the Company has incurred operating
losses and operating cash flow deficits.
The Company's success will be affected by the problems, expenses, and
delays encountered in connection with the formation of any new business, and
the competitive environment in which the Company intends to operate. The
Company's performance will further be affected by its ability to access
potential markets; secure financing or raise additional capital; implement
expanded interconnection and collocation with incumbent local exchange carrier
("ILEC") facilities; lease adequate trunking capacity from ILECs or
competitive local exchange carriers; purchase and install switches in
additional markets; implement its anticipated services; manage future growth;
implement efficient OSS and other back office systems; develop a sufficient
customer base; attract, retain and motivate qualified personnel; develop
strategic alliances or investments needed to complement existing business; and
achieve acceptable profits on long distance business due to high levels of
competition, declining prices and low customer retention rates. The Company's
networks and the provisions of telecommunications services are subject to
significant regulation at the federal, state and local levels. Delays in
receiving required regulatory approvals or the enactment of new adverse
regulation or regulatory requirements may have a material adverse effect upon
the Company. The telecommunications industry is subject to rapid and
significant changes in technology and is highly competitive. Although
management believes that the Company will be able to successfully mitigate
these risks, there can be no assurance that the Company will be able to do so
or that the Company will ever operate profitably.
Expenses are expected to exceed revenues in each location in which the
Company offers service until a sufficient customer base is established. It is
anticipated that obtaining a sufficient customer base will take a number of
years, and positive cash flows from operations are not expected in the near
future.
Principles of Consolidation
The consolidated financial statements include all accounts of Choice One
and all of its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
F-7
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
Cash and cash equivalents are highly liquid investments with original
maturities of three months or less. The cost of the cash equivalents
approximates fair market value.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and include office
furniture and equipment, computer equipment and software, switch equipment,
construction-in-progress of switches and leasehold improvements. For financial
reporting purposes, depreciation and amortization are computed using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Computer equipment and software................................. 3-5 years
Switch equipment................................................ 10 years
Office furniture and equipment.................................. 3-5 years
</TABLE>
Leasehold improvements are amortized using the straight-line method over
the shorter of the estimated life of the asset or the related lease term.
Betterments, renewals and extraordinary repairs that extend the life of the
asset are capitalized; other repairs and maintenance are expensed as incurred.
Other Assets
Other assets primarily consist of deferred financing costs. Deferred
financing costs are amortized on a straight-line basis, which approximates the
effective interest rate method, over the life of the related debt (eight
years).
The Company reviews its long-lived assets in accordance with SFAS No. 121,
Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be
Disposed of, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If such
events or changes in circumstances are present, a loss is recognized to the
extent the carrying value of the asset is in excess of the sum of the
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition.
Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109, Accounting
for Income Taxes. SFAS No. 109 requires an asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
tax assets and liabilities are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities. Deferred
tax assets and liabilities are measured using the tax rates and laws that are
currently in effect. In addition, the amount of any future tax benefits is
reduced by a valuation allowance until it is more likely than not that such
benefits will be realized.
Deferred Compensation
The Company recognizes deferred compensation for the difference between the
estimated fair market value of the Company's stock and the price at which
units of Choice One LLC have been sold to management employees since the
formation of the Company or the exercise price of certain options granted. The
deferred compensation charge is amortized over the period in which the
employee earns the right to sell the stock at market value or, in the case of
options, over the vesting period.
F-8
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Derivatives
The Company has limited involvement with derivative financial instruments
and does not use them for trading purposes. The Company uses derivative
instruments solely to reduce the financial impact of interest rate changes on
its Credit Agreement (See Note 6). The Company's Credit Agreement requires the
Company to enter into hedging agreements with respect to interest rate
exposure with an aggregate notional principal amount equal to 50.0 percent of
the outstanding borrowings once at least 50.0 percent of the aggregate
commitment has been utilized.
The differentials to be received or paid under these agreements will be
recognized as an adjustment to interest expense in the Consolidated Statements
of Operations. Gains and losses on termination of interest rate swaps will be
recognized when terminated in conjunction with the retirement of the
associated debt. At September 30, 1999 and December 31, 1998, the Company was
not a party to any derivative financial instrument agreements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 requires that every derivative be recorded as either an asset or liability
in the balance sheet and measured at its fair value. SFAS No. 133 also
requires that changes in the derivative's fair market value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. The Company is
required to adopt SFAS No. 133, as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133, an amendment of FASB Statement No. 133, on a
prospective basis for interim periods and fiscal years beginning January 1,
2001. The Company has not yet determined the effect of adopting SFAS No. 133.
Fair Value of Financial Instruments
The Fair Value of Financial Instruments are accounted for in accordance
with SFAS No. 107, Disclosures about Fair Value of Financial Instruments. SFAS
No. 107 requires that the Company disclose the fair value of its financial
instruments for which it is practicable to estimate fair value. The carrying
amounts of cash and cash equivalents, prepaid expenses and other current
assets, accounts payable and amounts included in accruals meeting the
definition of a financial instrument approximate fair value because of the
short-term maturity of these instruments. Based on borrowing rates currently
available to the Company for loans with similar terms and maturities, long-
term debt approximates fair value.
Recognition of the Cost of Start-up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-5, Reporting on the Costs of Start-up
Activities ("SOP 98-5"). SOP 98-5 requires start-up activities and
organization costs to be expensed as incurred and start-up costs to be
capitalized prior to the adoption of SOP 98-5 be reported as the cumulative
effect of a change in accounting principle. The Company expensed all such
costs as incurred in accordance with SOP 98-5.
F-9
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Loss per Common Share
The Company calculates net loss per share under the provisions of the SFAS
No. 128, Earnings per Share. SFAS No. 128 requires dual presentation of basic
and diluted earnings per share ("EPS") on the face of the income statement.
Basic EPS is based on the weighted average number of common shares
outstanding. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. No reconciliation of basic and diluted is needed,
as the effect of dilutive securities would be anti-dilutive. The Company had
options to purchase 1,061 and 560 shares outstanding at September 30, 1999 and
December 31, 1998, respectively, that were not included in the calculation of
diluted loss per share because the effect would be antidilutive.
Revenue Recognition
Revenue is recognized in the month in which service is provided. Deferred
revenue represents advance billings for services not yet provided. Such
revenue is deferred and recognized in the month in which service is provided.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of these assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
3. Property, Plant and Equipment
Property, plant and equipment, at cost consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Computer equipment and software................ $ 9,420 $ 6,088
Switch equipment............................... 31,280 7,080
Office furniture and equipment................. 2,290 217
Leasehold improvements......................... 839 150
Construction in progress....................... 10,360 7,611
------- -------
$54,189 $21,146
======= =======
</TABLE>
Depreciation expense for the nine months ended September 30, 1999 and for
the period from inception (June 2, 1998) through December 31, 1998 amounted to
$3,373 and $36, respectively. No depreciation expense was recorded in 1998 on
the switch equipment costs. Depreciation of the switch equipment began once
the switches were placed in service in 1999. Construction in progress costs
relate to projects to acquire, install and make operational switch equipment.
Direct labor costs incurred in connection with the installation and
construction of certain equipment is capitalized until such equipment becomes
operational. These costs are then amortized over the life of the related
asset. Capitalized labor included in property, plant and equipment was $3,275
and $617 at September 30, 1999 and December 31, 1998, respectively.
F-10
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Other Assets
Other assets consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Deferred financing costs....................... $2,284 $1,628
Other assets................................... 150 150
------ ------
2,434 1,778
Less--Accumulated amortization................. (212) (51)
------ ------
$2,222 $1,727
====== ======
</TABLE>
5. Accrued Expenses
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Accrued switch equipment costs............... $3,127 $4,611
Accrued network costs........................ 1,742 -
Accrued payroll and employee related
benefits.................................... 1,413 936
Accrued software costs....................... 755 3,760
Other expenses............................... 356 405
------ ------
$7,393 $9,712
====== ======
</TABLE>
6. Long-Term Debt
In October 1998, the Company, as a guarantor, and the Company's
subsidiaries, as borrowers, entered into an agreement for a revolving credit
facility with three financial institutions (the "Credit Agreement"). The
Credit Agreement, which terminates on September 30, 2006, provides the Company
with a maximum credit facility of $60.0 million. The Credit Agreement will be
used to finance capital expenditures and to provide working capital.
Borrowings under the Credit Agreement are secured by substantially all of the
assets of the Company and bear interest, at the Company's option, at either
the LIBOR rate or the base rate (the higher of the prime interest rate or the
federal funds rate plus 0.5 percent), with additional percentage points added
based on the Company's leverage ratio, as defined in the Credit Agreement. In
addition, the Company is also required to pay a commitment fee of 0.375
percent to 0.50 percent per annum based on the Company's leverage ratio.
As of September 30, 1999, $5.0 million principal amount of borrowings was
outstanding under the Credit Agreement, which bore interest at a weighted
average rate of 10.75 percent. The Company had no long-term debt outstanding
as of December 31, 1998.
The Credit Agreement contains certain covenants including maximum debt to
capital ratio, minimum revenue amounts, maximum EBITDA losses, maximum capital
expenditure levels, maximum leverage ratio, maximum fixed charge coverage
ratio and minimum interest coverage ratio, all as defined in the agreement.
The Company was in compliance with all of these covenants and ratios, except
for the minimum revenue covenant, as of September 30, 1999. During November
1999, the Company amended the Credit Agreement to, among other things, modify
the covenants, including the minimum revenue covenant (See Note 12).
F-11
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Credit Agreement also requires the Company to enter into hedging
agreements with respect to interest rate exposure with an aggregate notional
principal amount equal to 50 percent of the outstanding borrowings once at
least 50 percent of the aggregate commitment has been utilized.
The aggregate commitment under the Credit Agreement is reduced by 1.25
percent per quarter commencing on December 31, 2001 until September 30, 2002,
by 2.50 percent per quarter commencing on December 31, 2002 until September
30, 2003, by 6.25 percent per quarter commencing on December 31, 2003 until
September 30, 2004, and by 7.50 percent per quarter commencing on December 31,
2004 until termination of the loan on September 30, 2006.
7. Stockholder's Equity
Capitalization
In July 1998, the Investor Members and the Management Members (collectively
the "Members") entered into a Limited Liability Company agreement (the "LLC
agreement") in order to govern the affairs of Choice One LLC, which presently
holds all of the outstanding shares of the Company's Common Stock. Choice One
LLC has two outstanding classes of Units. Class A Units are held by the
Investor Members (95 percent) and Class B Units are held by the Management
Members (5 percent). The rights of the two classes of Units will differ upon,
among other events, the consummation of a Public Offering by the Company.
On June 30, 1999, the Members entered into an agreement amending the LLC
Agreement. The amendment increases the amount of capital contributions
committed by the Members as a whole by approximately $71.3 million to a total
capital commitment of approximately $133.4 million. In addition, the existing
Investor Purchase Agreements were amended such that certain Investor Members
increased their pro rata commitment to Choice One LLC on the same terms as
those included in the previous commitments. These commitments providing for
additional equity contributions expire on January 1, 2001 or upon the
completion of a successful debt or equity offering as defined in the
agreement. If the commitments terminate, the total capital committed to the
LLC would reduce back to an aggregate of approximately $62.1 million.
Choice One LLC has agreed to make contributions as necessary to fund the
Company's expansion into fourteen markets. In order to obtain funds, the
Company submitted proposals to Choice One LLC detailing the funds necessary to
build out the Company's business in these markets. Through September 30, 1999,
Choice One LLC has approved the proposals for fourteen markets. As of
September 30, 1999 and December 31, 1998, Choice One LLC has contributed a
total of approximately $62.1 million and $17.8 million, respectively, to the
Company.
Stock Option Plan
On August 12, 1998, the Company's stockholder approved the 1998 Employee
Stock Option Plan (the "Plan"). Options may be granted under the Plan only to
key employees who do not own Class B Units of Choice One LLC. The persons to
whom options are granted, the number of shares granted to each and the period
over which the options become exercisable are determined by the Employee
Option Plan Administrative Committee. The options granted have a term of ten
years and vest at equal rates over a four-year period. The total number of
shares available in the Plan is 3,000.
The Company accounts for stock based compensation issued to its employees
in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, and has elected to adopt the "disclosure-only" provisions of SFAS
No. 123, Accounting for Stock Based Compensation. Had compensation cost for
the Plan
F-12
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
been determined based on the fair value of the options at the grant dates for
awards under the plan consistent with the method prescribed in SFAS No. 123,
the Company's net loss would have increased to the pro forma amount indicated
below for the nine months ended September 30, 1999 and the period from
inception (June 2, 1998) through December 31, 1998.
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Net loss as reported................................... $(19,657) $(4,785)
Net loss pro forma..................................... $(19,856) $(4,812)
</TABLE>
Net loss per share-basic and diluted:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
As reported............................................ $(316.51) $(94.17)
Pro forma.............................................. $(319.72) $(94.71)
</TABLE>
For purposes of the pro forma disclosure above, the fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option pricing model and the minimum value method permitted by SFAS No. 123
for entities not publicly traded with the following weighted-average
assumptions used for grants in 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Dividend yield.................................. 0 percent 0 percent
Risk-free interest rate......................... 5.12 percent 4.99 percent
Expected life................................... 7 years 7 years
</TABLE>
The weighted average grant date fair value of options granted during the
nine months ended September 30, 1999 and the period from inception (June 2,
1998) through December 31, 1998 was $6,706 and $2,013, respectively.
SFAS No. 123 has only been applied to options granted beginning August 12,
1998. As a result, the pro forma compensation expense may not be
representative of that to be expected in future years.
The following is a summary of the activity in the Company's Plan during the
nine months ended September 30, 1999 and the period from inception (June 2,
1998) through December 31, 1998:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------------ -----------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Options outstanding,
beginning of period..... 560 $1,000 - $ -
Options granted.......... 732 1,220 560 1,000
Options forfeited........ (231) 1,014 - -
----- ---
Options outstanding, end
of period............... 1,061 1,149 560 1,000
===== ===
</TABLE>
The weighted-average remaining contractual life of options outstanding was
9.3 years, with exercise prices ranging from $1,000 to $1,417, as of September
30, 1999. None of the options granted were exercisable at September 30, 1999
or December 31, 1998. During October 1999, the Company granted options for 258
shares with an exercise price of $2,667 per share.
As the estimated fair market value of the Company's stock exceeded the
exercise price of certain options granted, the Company has recognized total
gross deferred compensation expense of $3,547 and $445 at
F-13
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
September 30, 1999 and December 31, 1998, respectively, of which $436 and $45
has been amortized to expense during the nine months ended September 30, 1999
and the period from inception (June 2, 1998) through December 31, 1998,
respectively. The deferred compensation is amortized to expense over the
vesting period of the options.
The Company's certificate of incorporation provides that it may issue
preferred stock without shareholder approval. Under certain circumstances, as
defined in the certificate of incorporation and by-laws, preferred stock could
be issued by the Company in connection with a shareholder rights plan. The
issuance of preferred stock in connection with a shareholder rights plan could
cause substantial dilution to any person or group that attempts to acquire the
Company on terms not approved in advance by the Company's Board of Directors.
8. Income Taxes
The Company had approximately $18,475 and $150 of net operating loss
carryforwards for federal income tax purposes at September 30, 1999 and
December 31, 1998, respectively. The net operating loss carryforwards will
expire in the years 2019 and 2018, respectively, if not previously utilized.
The Company has recorded a valuation allowance equal to the net deferred tax
assets at September 30, 1999 and December 31, 1998, 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 deferred tax asset is comprised of the following at September 30, 1999
and December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Start-up and other capitalized costs.................... $ 1,646 $ 1,538
Net operating loss carryforwards........................ 6,282 50
Less: valuation allowance............................... (7,928) (1,588)
------- -------
Net deferred tax asset.................................. $ - $ -
======= =======
</TABLE>
Under existing tax law, all operating expenses incurred prior to a company
commencing its principal operations are capitalized and amortized over a 60-
month period for tax purposes.
9. Commitments and Contingencies
Operating Lease Agreements
The Company leases office space and certain other equipment under various
operating leases that expire through 2009. At September 30, 1999, the minimum
aggregate payments under noncancelable leases are as follows for the years
ending September 30:
<TABLE>
<S> <C>
2000........................................... $ 1,655
2001........................................... 1,709
2002........................................... 1,713
2003........................................... 1,682
2004........................................... 1,635
Thereafter..................................... 7,783
-------
$16,177
=======
</TABLE>
F-14
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense for the six months ended September 30, 1999 and for the period
from inception (June 2, 1998) through December 31, 1998 was approximately $716
and $186, respectively.
401(k) Plan
The Company provides a defined contribution 401(k) plan to substantially
all of its employees meeting certain service and eligibility requirements. The
Company pays a monthly matching contribution equal to 50 percent of the
employees' contributions up to a maximum of 6 percent of their eligible
compensation. Plan expenses were approximately $121 and $32 during the nine
months ended September 30, 1999 and for the period from inception (June 2,
1998) through December 31, 1998, respectively.
Annual Incentive Plan
During 1998, the Company's Board of Directors approved the 1998/99 Bonus
Plan (the "Bonus Plan"). All full-time noncommissioned Choice One employees
are eligible to participate in the Bonus Plan. The total amount included in
operations for these incentive bonuses was approximately $343 and $538 during
the nine months ended September 30, 1999 and for the period from inception
(June 2, 1998) through December 31, 1998, respectively.
Other Agreements
In 1999, the Company entered into a sponsorship agreement with Buffalo
Bills, Inc. Under the sponsorship agreement, the Company obtained certain
marketing and signage rights related to Ralph Wilson Stadium and the Buffalo
Bills, a National Football League team, and became the exclusive
telecommunications provider of Ralph Wilson Stadium during the 1999 through
2003 seasons. The agreement requires the Company to pay a total of $2.4
million during the period from September 30, 1999 through June 30, 2004.
In 1998, the Company entered into a three-year general agreement with
Lucent Technologies, Inc. ("Lucent") establishing terms and conditions for the
purchase of Lucent products, services and licensed materials. The agreement
requires the Company to purchase a minimum of $30.0 million of Lucent
products, services and licensed materials. If the Company fails to purchase
the minimum requirements, an additional price premium is charged.
In 1998, the Company entered into a capacity agreement with Frontier
Communications of the West Inc. from which the Company will purchase dedicated
circuit capacity for the transport of its long distance traffic. The agreement
contains certain minimum circuit term and commitment charges depending on the
specific circuits selected.
In 1998, the Company entered into a service bureau agreement with Saville
Systems Inc. to process the Company's billing records. The agreement contains
minimum monthly transaction fees.
10. Related Parties
The Company is a majority owned subsidiary of Choice One LLC. As of
September 30, 1999, and December 31, 1998, Choice One LLC has made aggregate
capital contributions to the Company of approximately $62.1 million and $17.8
million, respectively. Choice One LLC may continue to make additional capital
contributions to the Company as discussed in Note 7 to these financial
statements, but no such contributions will be required after the Company
consummates an initial public offering of its stock. Certain investors in
Choice One LLC are also employees of the Company. Upon an initial public
offering by the Company, a sale of the Company or liquidation or dissolution
of the Company, Choice One LLC will dissolve and its assets (which are
F-15
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
expected to consist almost entirely of capital stock of the Company) will be
distributed to the institutional investors and employee investors of Choice
One LLC in accordance with an allocation formula calculated immediately prior
to such dissolution. The Company will account for any increase in the
allocation of assets to the employee investors in Choice One LLC in accordance
with generally accepted accounting principles and SEC regulations in effect at
the time of such increase, and this will result in a charge to the Company's
earnings (see Note 12).
As the estimated fair market value of the Company has exceeded the price at
which units of Choice One LLC have been sold to management employees since the
formation of the Company, the Company has recognized total gross deferred
compensation of $3,561 and $420 at September 30, 1999 and December 31, 1998,
respectively, of which $560 and $42 has been amortized to expense at September
30, 1999 and December 31, 1998, respectively. The deferred compensation charge
is amortized based upon the period over which the Company has the right to
repurchase the securities (at the lower of fair market value or the price paid
by the employee) in the event the management employee's employment with the
Company is terminated, which expires over a four year period from the date of
issuance.
11. Significant Customer Information
The Company has recorded revenues and expenses from reciprocal compensation
and access agreements with ILECs and inter exchange carriers. Revenues from
two customers (one ILEC and one inter exchange carrier) represented
approximately 19 percent of total revenues during the nine months ended
September 30, 1999.
12. Subsequent Events
Public Stock Offering
The Company will seek to raise approximately $100 million of gross proceeds
in an initial public offering of Common Stock (the "Equity Offering").
The Investor Members and Management Members currently own 95.0 percent and
5.0 percent, respectively, of the ownership interests of Choice One LLC, an
entity that owns substantially all of the Company's outstanding capital stock.
If the Equity Offering is consummated, Choice One LLC will dissolve and its
assets (which consist almost entirely of such capital stock) will be
distributed to the Investor Members and the Management Members in accordance
with the LLC Agreement. The LLC Agreement provides that the Equity Allocation
between the Investor Members and the Management Members will range between
95.0 percent/5.0 percent and 66.7 percent/33.3 percent based upon the
valuation of the Company's Common Stock implied by the Equity Offering. Based
upon the current valuation of the Company's Common Stock implied by the Equity
Offering, excluding the effect of options, the Equity Allocation will be 68.1
percent to the Investor Members and 31.9 percent to the Management Members.
The Management Members will receive the full 31.9% allocation if the value of
the common stock distributable to the Investor Members based on the initial
public offering price exceeds certain hurdle rate thresholds specified in the
LLC Agreement for the return on the equity invested by the Investor Members.
However, the maximum amount allocable to the Management Members could be
reduced based on the amount of committed Investor Member equity undrawn and
the length of time of such equity commitment. Under generally accepted
accounting principles, upon the consummation of the Equity Offering, the
Company will be required to record the increase (based upon the valuation of
the Common Stock implied by the Equity Offering) in the assets of Choice One
LLC allocated to the Management Members as an increase in additional paid-in
capital, a portion of which will be recorded as a noncash, nonrecurring charge
to operating expense and a portion of which will be recorded as a deferred
management ownership allocation charge. The deferred charge will be amortized
over 1999, 2000, 2001 and 2002, which is the period over which the Company has
the right to
F-16
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
repurchase the securities (at the lower of fair market value or the price paid
by the employee) in the event the management employee's employment with the
Company is terminated.
Long-Term Debt
In November 1999, the Company, as a guarantor, and the Company's
subsidiaries, as borrowers, amended and restated the Credit Agreement (the
"Amended Agreement"). The Amended Agreement, which terminates on November 3,
2007, provides the Company with a maximum revolving credit facility of $100.0
million and a delayed draw term loan of $50.0 million. The Amended Agreement
will be used to finance the purchase of Atlantic Connections L.L.C., capital
expenditures and to provide working capital. Borrowings under the Amended
Agreement are secured by substantially all of the assets of the Company and
bear interest, at the Company's option, at either the LIBOR rate or the base
rate (the higher of the prime interest rate or the federal funds rate plus 0.5
percent), with additional percentage points added based on the Company's
leverage ratio, as defined in the agreement. In addition, the Company is also
required to pay a commitment fee of 0.75 percent to 1.50 percent per annum
based on the Company's utilization of the Amended Agreement.
The Amended Agreement revised certain covenants including maximum debt to
capital ratio, minimum revenue amounts, maximum EBITDA losses, maximum capital
expenditure levels, minimum ratio of fixed assets to total debt, maximum
leverage ratio, maximum fixed charge coverage ratio, and minimum interest
coverage ratio, all as defined in the Amended Agreement.
The Amended Agreement also requires the Company to enter into hedging
agreements with respect to interest rate exposure with an aggregate notional
principal amount equal to 50 percent of the outstanding borrowings once at
least 50 percent of the aggregate commitment has been utilized.
The aggregate commitment under the Amended Agreement is reduced by 1.25
percent per quarter commencing on December 31, 2002 until September 30, 2003,
by 2.50 percent per quarter commencing on December 31, 2003 until September
30, 2004, by 6.25 percent per quarter commencing on December 31, 2004 until
September 30, 2005, and by 7.50 percent per quarter commencing on December 31,
2005 until termination of the loan on November 3, 2007.
In addition, any unused portion of the term loan commitment will expire on
November 3, 2000.
Acquisition
In November 1999, the Company purchased all of the outstanding units of
Atlantic Connections, L.L.C. ("Atlantic"). The purchase price was
approximately $8.3 million and is subject to adjustment based on Atlantic's
October billed revenue and working capital at October 31, 1999 under the terms
of the Purchase Agreement. In addition, the Purchase Agreement includes an
earn-out provision that will require the Company to pay up to an additional 25
percent of the initial purchase price if certain objectives are met. Those
objectives include sales, access line provisioning and customer retention
targets as well as the retention of certain key employees. The additional
purchase price will be paid approximately one year after the purchase date.
The transaction will be accounted for as a purchase, with the purchase price
allocated based upon the fair value of the assets acquired and liabilities
assumed with any excess reflected as goodwill.
F-17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Unitholders
Atlantic Connections, LLC
We have audited the accompanying consolidated balance sheet of Atlantic
Connections, LLC as of December 31, 1998, and the related consolidated
statements of operations, unitholders' equity, and cash flows for the period
from July 24, 1998 (date of inception) to December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Atlantic
Connections, LLC at December 31, 1998, and the results of its operations and
its cash flows for the period from July 24, 1998 (date of inception) to
December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
June 4, 1999, except for
Note 9, as to which the date
is November 3, 1999
F-18
<PAGE>
ATLANTIC CONNECTIONS, LLC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................... $ 100,585 $ 227,485
Accounts receivable, less allowance for doubtful
amounts of $120,357 at December 31, 1998 and
$159,099 at September 30, 1999 (Unaudited)....... 547,937 755,157
Unbilled receivables.............................. 150,872 197,192
Note receivable from former owners................ 186,693 -
Prepaid expenses and other assets................. 7,530 2,500
---------- ----------
Total current assets............................ 993,617 1,182,334
Property and equipment:
Switching equipment, including equipment under
capital leases................................... 549,621 568,417
Computer equipment................................ 16,965 56,770
Office equipment.................................. 38,299 38,497
Vehicles.......................................... 6,025 6,025
---------- ----------
610,910 669,709
Less accumulated depreciation and amortization.... (46,360) (127,080)
---------- ----------
564,550 542,629
Other assets........................................ - 9,775
Intangible assets, net of accumulated amortization
of $168,481 at December 31, 1998 and $545,808 at
September 30, 1999 (Unaudited)..................... 2,927,873 2,550,546
---------- ----------
Total assets.................................... $4,486,040 $4,285,284
========== ==========
Liabilities and unitholders' equity (deficit)
Current liabilities:
Line-of-credit.................................... - $ 200,000
Accounts payable.................................. $ 857,677 1,399,684
Accrued expenses.................................. 126,788 39,431
Current portion of capital lease obligations...... 82,568 66,787
Current portion of long-term borrowings........... 52,263 51,341
---------- ----------
Total current liabilities....................... 1,119,296 1,757,243
Long-term borrowings and capital lease obligations,
less current portions.......... Unitholders' equity
(deficit): 3,087,677 3,012,006
Common units, no par value: 500,000 units
authorized; 71,000 issued and outstanding........ 816,666 816,666
Other equity...................................... 66,600 66,600
Accumulated deficit............................... (604,199) (1,367,231)
---------- ----------
Total unitholders' equity (deficit)............. 279,067 (483,965)
---------- ----------
Total liabilities and unitholders' equity
(deficit)...................................... $4,486,040 $4,285,284
========== ==========
</TABLE>
See accompanying notes.
F-19
<PAGE>
ATLANTIC CONNECTIONS, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the period from
July 24, 1998
(date of inception)
to December 31, Nine Months ended
1998 September 30, 1999
------------------- ------------------
(Unaudited)
<S> <C> <C>
Net revenues............................. $2,180,277 $6,239,057
Cost of revenues......................... 1,857,775 4,794,064
---------- ----------
Gross profit............................. 322,502 1,444,993
Operating expenses:
Sales and marketing.................... 90,878 302,140
General and administrative............. 724,274 1,647,427
---------- ----------
815,152 1,949,567
---------- ----------
Loss from operations..................... (492,650) (504,574)
Interest expense......................... 111,549 258,458
---------- ----------
Net loss................................. $ (604,199) $ (763,032)
========== ==========
</TABLE>
See accompanying notes.
F-20
<PAGE>
ATLANTIC CONNECTIONS, LLC
CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY (DEFICIT)
For the period from July 24, 1998 (date of inception)
to December 31, 1998 and the Nine Months ended
September 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
Common Total
--------------- Other Accumulated Unitholders'
Units Amount Equity Deficit Equity (Deficit)
------ -------- ------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Issuance of common units
for cash................ 71,000 $816,666 - - $ 816,666
Issuance of warrants in
connection with senior
convertible notes
payable................. - - $66,600 - 66,600
Net loss................. - - - $ (604,199) (604,199)
------ -------- ------- ----------- ---------
Balance at December 31,
1998.................... 71,000 816,666 66,600 (604,199) 279,067
Net loss (Unaudited)..... - - - (763,032) (763,032)
------ -------- ------- ----------- ---------
Balance at September 30,
1999 (Unaudited)........ 71,000 $816,666 $66,600 $(1,367,231) $(483,965)
====== ======== ======= =========== =========
</TABLE>
See accompanying notes.
F-21
<PAGE>
ATLANTIC CONNECTIONS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the period from
July 24, 1998
(date of inception)
to December 31, Nine Months ended
1998 September 30, 1999
------------------- ------------------
(Unaudited)
<S> <C> <C>
Operating activities
Net loss............................... $ (604,199) $(763,032)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization........ 214,841 466,039
Provision for allowance for doubtful
amounts............................. 31,549 60,000
Changes in operating assets and
liabilities:
Accounts receivable................ 36,252 (267,220)
Unbilled receivables............... 5,295 (46,320)
Prepaid expenses and other current
assets............................ 8,525 5,030
Other assets....................... - (9,775)
Accounts payable................... (229,566) 542,007
Accrued expenses................... 61,616 (87,357)
----------- ---------
Net cash used in operating activities.. (475,687) (100,628)
Investing activities
Purchase of property and equipment..... (51,356) (58,800)
Note receivable from former owners..... (186,693) 186,693
Cash paid for acquired assets,
including acquisition costs........... (1,268,393) -
----------- ---------
Net cash (used in) provided by
investing activities.................. (1,506,442) 127,893
Financing activities
Proceeds from sale of units............ 816,666 -
Proceeds of senior notes payable and
warrants.............................. 1,500,000 -
Proceeds from line-of-credit........... - 200,000
Payments on long-term debt............. (206,550) (39,296)
Payments on capital lease obligations.. (27,402) (61,069)
----------- ---------
Net cash provided by financing
activities............................ 2,082,714 99,635
----------- ---------
Increase in cash and cash equivalents.. 100,585 126,900
Cash and cash equivalents at the
beginning of period................... - 100,585
----------- ---------
Cash and cash equivalents at the end of
period................................ $ 100,585 $ 227,485
=========== =========
Supplemental Disclosures of Cash Flow
Information
Cash paid for interest................. $ 91,643 $ 260,271
Noncash investing and financing
activities:
Long-term debt issued or assumed in
connection with acquisitions........ 1,754,958 -
Capital lease obligations assumed in
acquisitions........................ 269,986 -
</TABLE>
See accompanying notes.
F-22
<PAGE>
ATLANTIC CONNECTIONS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Organization
Atlantic Connections, LLC (the Company) is a limited liability company
incorporated in the state of Massachusetts on July 24, 1998. The term of the
Company may continue until June 1, 2048 and can be extended prior to the
expiration date. The Company is a local telecommunications carrier with
locations in Portsmouth, NH and Worcester, MA, and is an integrated
communications provider offering local, long distance, data and private line
services to small and medium-sized businesses in the Northeastern United
States.
The liability of each member of the Company is limited to such member's
respective capital contribution.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Atlantic Connections, Ltd. (See Note 3). All
intercompany amounts have been eliminated in consolidation.
Advertising Cost
The Company expenses advertising costs as incurred.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
Concentrations of Credit Risk
The financial instruments that potentially subject the Company to
concentrations of risk are cash and cash equivalents and accounts and unbilled
receivables. The risk with respect to cash and cash equivalents is minimized
by the Company's policy of investing in financial instruments with short-term
term maturities issued by highly-rated financial institutions. The risk with
respect to accounts and unbilled receivables is minimized by the large number
of the Company's customers. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require
collateral. Credit losses have been within management's expectations.
Customers are located throughout the New England area.
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed
Of." Under SFAS 121, the carrying value of long-lived assets are reviewed if
the facts and circumstances suggest they may be impaired. If this review
indicates that the affected assets may not be recoverable, as determined based
upon a projection of undiscounted operating cash flows, the carrying value of
the affected assets would be reduced to fair value.
Intangible Assets
Intangible assets result from acquisitions and principally consist of the
excess of the acquisition cost over the fair value of the identifiable
tangible and intangible assets of the businesses acquired, or goodwill, and
amounts attributable to non-compete agreements. Goodwill is amortized on a
straight-line basis over its expected life, seven years. The non-compete
agreements are amortized on a straight-line basis over the term of the
agreement, three years.
F-23
<PAGE>
ATLANTIC CONNECTIONS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies
Amortization expense was $168,481 and $377,327 for the period July 24, 1998
to December 31, 1998 and the nine months ended September 30, 1999 (Unaudited),
respectively.
Property and Equipment
Property and equipment are stated at cost and are being depreciated using
the straight-line method over the estimated useful life of three to seven
years. Leasehold improvements are being amortized over the shorter of their
useful lives or the remaining life of the lease. Equipment under capital
leases amounted to $352,525 at December 31, 1998 and $314,754 at September 30,
1999 (Unaudited).
Depreciation expense was $46,360 and $80,719 for the period July 24, 1998
to December 31, 1998 and the nine months ended September 30, 1999 (Unaudited),
respectively. Amortization of equipment under capital leases is included with
depreciation in the accompanying financial statements.
Revenue Recognition
Revenue is recognized in the month in which the service is provided.
Unbilled Receivables
Unbilled receivables represent services rendered to customers prior to the
balance sheet date but unbilled at that date based on the customer's cycle
date of billing.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Comprehensive Income
The Company has no elements of comprehensive income (loss) and,
accordingly, comprehensive income (loss) is the same as net income (loss) for
the period from July 24, 1998 to December 31, 1998 and the nine months ended
September 30, 1999.
Interim Financial Information (Unaudited)
The interim financial information at September 30, 1999 and for the nine
months ended September 30, 1999, all of which is unaudited, was prepared by
the Company on a basis consistent with the audited financial statements. In
management's opinion, such information reflects all adjustments which are of a
normal recurring nature and which are necessary to present fairly the results
of the periods presented.
3. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Salaries....................................... $ 67,080 $20,598
Professional fees.............................. 36,524 -
Interest....................................... 23,184 18,833
-------- -------
$126,788 $39,431
======== =======
</TABLE>
F-24
<PAGE>
ATLANTIC CONNECTIONS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Acquisitions
On September 8, 1998, the Company acquired substantially all of the
business assets and assumed substantially all of the liabilities of Atlantic
Connections, Inc. (ACI) and acquired the stock of Atlantic Connections, Ltd.
(ACL), effective as of September 1, 1998. ACI and ACL were related through
common stockholders and management. The acquisitions were accounted for as
purchases and the results of operations of ACI and ACL are included in the
accompanying consolidated financial statements from the effective date of the
acquisitions.
The total purchase price was approximately $4,443,000, including
acquisition costs, and was paid in cash, notes issued to the former owners and
liabilities assumed. The purchase price was allocated approximately as
follows:
<TABLE>
<S> <C>
Current assets, principally accounts receivable and
unbilled receivables...................................... $ 788,000
Fixed assets............................................... 559,000
Intangibles, including non-compete agreement and goodwill.. 3,096,000
-----------
$ 4,443,000
===========
A reconciliation to cash paid for the acquired assets is as
follows:
Total purchase price....................................... $ 4,443,000
Less current liabilities and long-term debt assumed or
issued.................................................... (3,175,000)
-----------
Cash used to acquire assets................................ $ 1,268,000
===========
</TABLE>
Subsequent to the acquisition, certain post closing adjustments were made
in accordance with the arrangements between the former owners and the Company.
The resulting adjustments resulted in a note receivable due from the former
owners at December 31, 1998 of $186,693.
The pro forma unaudited results of operations for the year ended December
31, 1998, assuming the purchase of ACI and ACL had consummated as of January
1, 1998, follows:
<TABLE>
<S> <C>
Net Revenues............................... $6,473,000
Net Loss................................... (1,568,000)
</TABLE>
F-25
<PAGE>
ATLANTIC CONNECTIONS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Borrowings
Long-Term Debt
A summary of the Company's long-term debt, including capital leases, at
December 31, 1998 and September 30, 1999 (Unaudited) is as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
(Unaudited)
<S> <C> <C>
Note payable to former owners, 8% interest;
interest only for the first twenty-four months.
Payments of principal and interest of $5,353 for
months twenty-five through eighty-five. Due in
full October 2005. Secured by substantially all
business assets.................................. $ 241,343 $ 241,343
Note payable to former owners, 8% interest;
interest only for the first twenty-four months.
Principal and interest payments of $16,201 per
month for months twenty-five through eighty-five.
Due in full October 2005. Secured by
substantially all business assets of the
Company.......................................... 713,287 713,287
Note payable to former owners, 8% interest with
monthly principal and interest payments of $8,091
through April 15, 2007. Secured by substantially
all business assets of the Company............... 591,894 552,597
Senior notes payable to venture capital firm; 12%
interest; face amount $1,400,000, due in full
March 31, 2005. Interest due quarterly; quarterly
principal payments of $75,000 begin June 30,
2000............................................. $1,333,400 $1,341,392
Senior note payable to venture capital firm; 12%
interest; convertible into units of the Company
equal to 15% of the fully diluted equity of the
Company; due March 31, 2005...................... 100,000 100,000
Various capital lease obligations; interest rates
ranging from 7% to 9%............................ 242,584 181,515
---------- ----------
3,222,508 3,130,134
Less current portions:
Capital lease obligations......................... (82,568) (66,787)
Long-term borrowings.............................. (52,263) (51,341)
---------- ----------
$3,087,677 $3,012,006
========== ==========
</TABLE>
The senior notes payable to venture capital firm above are senior in
priority to other borrowings of the Company, except those, if any, in
connection with the line-of-credit to a bank described below. The senior notes
payable require the Company to comply with various financial covenants
including maintenance of minimum working capital, minimum capital and
limitations on the ratio of senior indebtedness to capital, as defined. At
December 31, 1998, the Company was not in compliance with certain of the
covenants and the venture capital firm waived the events of noncompliance
through December 31, 1998.
At September 30, 1999, the Company was not in compliance with certain of
the covenants. Such events of non-compliance were cured by the acquisition
described in Note 9.
F-26
<PAGE>
ATLANTIC CONNECTIONS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Borrowings
In connection with the senior notes payable, the Company issued a warrant
exchangeable into 10% of the fully diluted equity of the Company. The
estimated fair value of the warrant of $66,600 at September 8, 1998 has been
credited to equity and reduced from the face of the senior notes payable. The
resulting discount will be amortized to interest expense over the term of the
senior notes payable. Amortization expense was $7,992 for the nine months
ended September 30, 1999 (Unaudited).
Line-of-Credit
On April 30, 1999, the Company obtained two credit facilities with a bank.
The line-of-credit is a $500,000 facility to support working capital. The
second facility is a $100,000 equipment line-of-credit to acquire equipment.
The unused portion of the facilities expires May 31, 2000, with the working
capital line-of-credit renewable at the Bank's discretion. Interest is at the
prime rate plus 2.0% and is paid monthly in arrears. No amounts were
outstanding under these facilities at December 31, 1998 and $200,000 was
outstanding under these facilities at September 30, 1999 (Unaudited).
Aggregate maturities of long-term debt as of December 31, 1998 for the next
five years are as follows:
<TABLE>
<S> <C>
Years ended December 31:
1999...................................... $ 52,263
2000...................................... 324,294
2001...................................... 543,958
2002...................................... 564,206
2003...................................... 586,136
Thereafter................................ 975,667
----------
$3,046,524
==========
</TABLE>
6. Leases
Future minimum lease payments under noncancelable operating and capital
leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- --------
<S> <C> <C>
1999................................................. $35,266 $106,187
2000................................................. 19,230 76,562
2001................................................. 12,205 61,822
2002................................................. - 43,276
2003................................................. - 4,153
------- --------
66,701 292,000
Less amounts representing interest................... - (49,416)
------- --------
$66,701 $242,584
======= ========
</TABLE>
Rent expense was $14,261 and $35,901 in the period from July 24, 1998 to
December 31, 1998 and the nine months ended September 30, 1999 (Unaudited).
In June 1999, the Company entered into a five year noncancelable operating
lease for a new office facility. The Company has a one time renewal option for
either a one, three or five year extension. The minimum annual lease payments
are approximately $38,000.
F-27
<PAGE>
ATLANTIC CONNECTIONS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Unitholders' Equity
Issuance of Common Units
During the period July 24, 1998 to December 31, 1998, the Company
authorized 500,000 units designated as no par value common units and issued
71,000 units in exchange for $816,666 in cash.
Warrants
In connection with the senior notes payable (see Note 5), the Company
issued a warrant to purchase an equity interest in the Company equivalent to
10% of the fully diluted equity ownership. The warrants are immediately
exercisable and expire September 8, 2008. Up to 5% of the warrants may be
earned back by the Company at the rate of up to 1% for each year the Company
meets or exceeds certain EBITDA targets and for each year the Company makes
principal payments in accordance with the warrant agreement. The warrants are
redeemable by the Company, at the option of the investor, beginning any time
after the sixth year.
At December 31, 1998, the Company has reserved 10,000 units for exercise of
the warrants and 15,000 units for conversion of the convertible senior notes
payable.
8. Income Taxes
Since the Company is a limited liability company, all taxes are paid by the
unitholders of the Company as the Company is treated as a pass-through entity
for federal and state income tax purposes. Accordingly, there is no tax
provision or benefit recorded for the period from July 24, 1998 to December
31, 1998 and the nine months ended September 30, 1999.
9. Subsequent Event
On November 3, 1999, Choice One Communications, Inc. acquired all of the
outstanding units of Atlantic Connections, LLC in an acquisition to be
accounted for as a purchase business combination. The acquisition was
effective from November 1, 1999.
10. Year 2000 Issue (Unaudited)
The Company has completed a significant portion of its assessment of Year
2000 issues with regard to its computer systems and other aspects of its
operations dependent upon automation or computerized operation. The Company
believes that the Year 2000 issue will not pose significant operational
problems for its computer systems or other critically dependent equipment and
that all required modifications or conversions to comply with Year 2000
requirements will be fully completed by the end of 1999. In the opinion of
management, the total costs of addressing the Year 2000 issue will not have a
material impact on the Company's financial position or results of operations.
Notwithstanding the foregoing, the Company is unable to assess at this time
whether unrelated entities with whom the Company conducts business may be
adversely affected by their own Year 2000 issues which could adversely affect
the Company.
F-28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Atlantic Connections, Inc.
We have audited the accompanying balance sheets of Atlantic Connections,
Inc. as of December 31, 1997 and August 31, 1998, and the related statements
of operations, stockholders' deficit, and cash flows for the year ended
December 31, 1997 and the eight months ended August 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Atlantic Connections, Inc.
at December 31, 1997 and August 31, 1998, and the results of its operations
and its cash flows for the year ended December 31, 1997 and the eight months
ended August 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
November 10, 1999
F-29
<PAGE>
ATLANTIC CONNECTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, August
1997 31, 1998
------------ ---------
<S> <C> <C>
Assets
Current assets:
Accounts receivable, less allowance for doubtful
amounts of $10,000 at December 31, 1997 and $22,802
at August 31, 1998.................................. $ 232,026 $ 265,759
Unbilled receivables................................. 34,394 43,426
Prepaid expenses and other assets.................... 11,720 -
--------- ---------
Total current assets............................... 278,140 309,185
Property and equipment:
Switching equipment, including equipment under
capital leases...................................... 186,732 187,360
Office equipment..................................... - 13,400
--------- ---------
186,732 200,760
Less accumulated depreciation and amortization....... (95,848) (122,950)
--------- ---------
90,884 77,810
--------- ---------
Total assets....................................... $ 369,024 $ 386,995
========= =========
Liabilities and Stockholders' deficit
Current liabilities:
Cash overdraft....................................... $ 143,977 $ 32,183
Accounts payable..................................... 283,165 645,929
Accrued expenses..................................... 21,221 46,926
Current portion of capital lease obligations......... 17,547 5,670
Current portion of note payable to affiliate......... 29,607 29,607
Current portion of long-term borrowings.............. 9,365 3,205
--------- ---------
Total current liabilities.......................... 504,882 763,520
Capital lease obligations.............................. 70,653 77,534
Note payable to affiliate, less current portion........ 177,460 189,460
Long-term borrowings, less current portion............. 115,284 115,284
Stockholders' deficit:
Common stock, no par value: 300 shares authorized,
issued and outstanding.............................. 166,900 166,900
Less: Treasury stock, at cost; 47 shares............. (130,490) (130,490)
Accumulated deficit.................................. (535,665) (795,213)
--------- ---------
Total stockholders' deficit........................ (499,255) (758,803)
--------- ---------
Total liabilities and stockholders' deficit........ $ 369,024 $ 386,995
========= =========
</TABLE>
See accompanying notes.
F-30
<PAGE>
ATLANTIC CONNECTIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Eight Months
Year Ended Ended
December 31, August 31,
1997 1998
------------ ------------
<S> <C> <C>
Net revenues......................................... $2,150,397 $2,028,891
Cost of revenues..................................... 1,613,424 1,781,367
---------- ----------
Gross profit......................................... 536,973 247,524
Operating expenses:
Selling, general and administrative................ 588,690 476,772
---------- ----------
Loss from operations................................. (51,717) (229,248)
Interest expense..................................... 30,160 30,300
---------- ----------
Net loss............................................. $ (81,877) $ (259,548)
========== ==========
</TABLE>
See accompanying notes.
F-31
<PAGE>
ATLANTIC CONNECTIONS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
Year ended December 31, 1997
and the eight months ended August 31, 1998
<TABLE>
<CAPTION>
Common Treasury Total
--------------- ---------------- Accumulated Stockholders'
Shares Amount Shares Amount Deficit Deficit
------ -------- ------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 300 $166,900 $(428,669) $(261,769)
Purchase of treasury
stock.................. (47) $(130,490) (130,490)
Dividends paid.......... (25,119) (25,119)
Net loss................ (81,877) (81,877)
--- -------- --- --------- --------- ---------
Balance at December 31,
1997................... 300 166,900 (47) (130,490) (535,665) (499,255)
Net loss................ (259,548) (259,548)
--- -------- --- --------- --------- ---------
Balance at August 31,
1998................... 300 $166,900 (47) $(130,490) $(795,213) $(758,803)
=== ======== === ========= ========= =========
</TABLE>
See accompanying notes.
F-32
<PAGE>
ATLANTIC CONNECTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Eight Months
Year Ended Ended
December 31, August 31,
1997 1998
------------ ------------
<S> <C> <C>
Operating activities
Net loss............................................ $(81,877) $(259,548)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization..................... 30,129 27,102
Provision for allowance for doubtful amounts...... 10,000 12,802
Changes in operating assets and liabilities:
Accounts receivable............................. (91,724) (46,535)
Unbilled receivables............................ (4,986) (9,032)
Prepaid expenses and other assets............... (11,720) 11,720
Cash overdraft.................................. 87,242 (111,794)
Accounts payable................................ 50,043 353,607
Accrued expenses................................ 21,221 34,862
-------- ---------
Net cash provided by operating activities........... 8,328 13,184
Investing activities
Purchase of property and equipment.................. - (14,028)
-------- ---------
Net cash used in investing activities............... - (14,028)
Financing activities
Proceeds of notes payable to affiliate.............. 55,506 12,000
Payments on long-term borrowings.................... (38,715) (6,160)
Dividends paid...................................... (25,119)
Payments on capital lease obligations............... - (4,996)
-------- ---------
Net cash (used in) provided by financing
activities......................................... (8,328) 844
Increase in cash and cash equivalents............... - -
Cash and cash equivalents at the beginning of
period............................................. - -
-------- ---------
Cash and cash equivalents at the end of period...... $ - $ -
======== =========
Supplemental Disclosures of Cash Flow Information
Cash paid for interest.............................. $ 20,204 $ 8,586
Noncash investing and financing activities:
Long-term debt issued to purchase treasury stock.. 130,490 -
Capital lease obligations assumed................. 101,074 -
</TABLE>
See accompanying notes.
F-33
<PAGE>
ATLANTIC CONNECTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business and Organization
Atlantic Connections, Inc. (the Company) was incorporated in the state of
Massachusetts on May 31, 1991. The Company is a local telecommunications
carrier located in Worcester, MA and is an integrated communications provider
offering local, long distance, data and private line services to small and
medium-sized businesses in the Northeastern United States.
2. Significant Accounting Policies
Concentrations of Credit Risk
The financial instruments that potentially subject the Company to
concentrations of risk are cash, accounts receivables and unbilled
receivables. The risk with respect to cash is minimized by the Company's
policy of investing in financial instruments with short-term term maturities
issued by highly-rated financial institutions. The risk with respect to
accounts receivable and unbilled receivables is minimized by the large number
of the Company's customers. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require
collateral. Credit losses have been within management's expectations.
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed
Of." Under SFAS 121, the carrying value of long-lived assets are reviewed if
the facts and circumstances suggest they may be impaired. If this review
indicates that the affected assets may not be recoverable, as determined based
upon a projection of undiscounted operating cash flows, the carrying value of
the affected assets would be reduced to fair value.
Property and Equipment
Property and equipment are stated at cost and are being depreciated using
the straight-line method over the estimated useful lives of three to seven
years. Leasehold improvements are being amortized over the shorter of their
useful lives or the remaining life of the lease. Equipment under capital
leases amounted to $80,859 at December 31, 1997 and $69,448 at August 31,
1998.
Depreciation expense was $30,129 for the year ended December 31, 1997 and
$27,102 for the eight months ended August 31, 1998. Amortization of equipment
under capital leases is included with depreciation in the accompanying
financial statements.
Income Taxes
No provision has been made for federal income taxes as each shareholder is
individually liable for federal income taxes under the provisions of
Subchapter S of the Federal Income Tax Code. The Company determined
Massachusetts state income taxes at the applicable corporate statutory rate
using the liability method as required under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Because
of the Company's net loss position for 1998 and 1997, no state tax provision
was recognized.
Revenue Recognition
Revenue is recognized in the month in which the service is provided.
F-34
<PAGE>
ATLANTIC CONNECTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Unbilled Receivables
Unbilled receivables represent services rendered to customers prior to
December 31, 1997 and August 31, 1998 but unbilled at that date based on the
customer's cycle date of billing.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. Related Party
The Company has a note payable to a related party, Atlantic Connections,
Ltd., and relates to advances for working capital and the sharing of certain
costs, such as salaries. The Company and Atlantic Connections, Ltd. are
related through common management and some common stockholders. Total amount
due as of December 31, 1997 and August 31, 1998 is $207,067 and $237,383,
respectively. No amounts have been re-paid and the remaining balance is due in
full September 1, 2000. As of August 31, 1998 amounts representing interest on
the outstanding principal is $18,316.
4. Financing Arrangements
Long-Term Debt
A summary of the Company's long-term debt, including capital leases, at
December 31, 1997 and August 31, 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Note payable to former owner, 8% interest. Payments of
principal and interest of $1,583 per month for 60 months
and due in full by April 15, 2007......................... $124,649 $118,489
Note payable to affiliate, 10.5% interest with monthly
principal and interest payments of $2,062 through
September 1, 2000......................................... 207,067 219,067
Capital lease obligation, 9% interest. Principal and
interest payments of $2,057 per month for 60 months and
due in full April 2002.................................... 88,200 83,204
-------- --------
419,916 420,760
Less current portions:..................................... (56,519) (38,482)
-------- --------
$363,397 $382,278
======== ========
</TABLE>
Aggregate maturities of note payables for the next five years are as
follows:
<TABLE>
<S> <C>
Four months ending December 31, 1998............................ $ 32,812
Year ending December 31, 1999................................... 27,436
Year ending December 31, 2000................................... 157,151
Year ending December 31, 2001................................... 11,896
Year ending December 31, 2002................................... 12,884
Year ending December 31, 2003................................... 95,377
--------
$337,556
========
</TABLE>
F-35
<PAGE>
ATLANTIC CONNECTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Financing Arrangements
Leases
Future minimum lease payments under noncancelable operating and capital
leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
<S> <C> <C>
Four months ended December 31, 1998.................... $ 4,500 $ 8,228
Year ending December 31, 1999.......................... 13,500 24,682
Year ending December 31, 2000.......................... 13,500 24,682
Year ending December 31, 2001.......................... 10,125 24,682
Year ending December 31, 2002.......................... - 8,228
------- -------
41,625 90,502
Less amounts representing interest..................... - (7,298)
------- -------
$41,625 $83,204
======= =======
</TABLE>
Rent expense was $17,912 for the year ending December 31, 1997 and $12,449
for the eight months ended August 31, 1998.
5. Subsequent Event
On September 8, 1998, substantially all of the Company's assets were
acquired by Atlantic Connections, LLC. Atlantic Connections, LLC also assumed
substantially all of the Company's liabilities. The transaction had an
effective date of September 1, 1998.
6. Year 2000 Issue (Unaudited)
The Company has completed a significant portion of its assessment of Year
2000 issues with regard to its computer systems and other aspects of its
operations dependent upon automation or computerized operation. The Company
believes that the Year 2000 issue will not pose significant operational
problems for its computer systems or other critically dependent equipment and
that all required modifications or conversions to comply with Year 2000
requirements will be fully completed by the end of 1999. In the opinion of
management, the total costs of addressing the Year 2000 issue will not have a
material impact on the Company's financial position or results of operations.
Notwithstanding the foregoing, the Company is unable to assess at this time
whether unrelated entities with whom the Company conducts business may be
adversely affected by their own Year 2000 issues which could adversely affect
the Company.
F-36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Atlantic Connections, Ltd.
We have audited the accompanying balance sheets of Atlantic Connections,
Ltd. as of December 31, 1997 and August 31, 1998, and the related statements
of operations, stockholders' deficit, and cash flows for the year ended
December 31, 1997 and the eight months ended August 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Atlantic Connections, Ltd.
at December 31, 1997 and August 31, 1998, and the results of its operations
and its cash flows for the year ended December 31, 1997 and the eight months
ended August 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
November 10, 1999
F-37
<PAGE>
ATLANTIC CONNECTIONS, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, August 31,
1997 1998
------------ ----------
<S> <C> <C>
Assets
Current assets:
Accounts receivable, less allowance for doubtful
amounts of $40,000 at December 31, 1997 and $45,390
at August 31, 1998 $ 277,980 $ 290,777
Note receivable from affiliate...................... 29,607 29,607
Unbilled receivables................................ 113,224 107,854
Prepaid expenses and other assets................... 1,482 4,875
--------- ----------
Total current assets.............................. 422,293 433,113
Property and equipment:
Switching equipment, including equipment under
capital leases..................................... 361,956 489,975
Office equipment.................................... 40,143 41,304
Vehicles............................................ 14,095 12,946
--------- ----------
416,194 544,225
Less accumulated depreciation and amortization...... (308,123) (341,695)
--------- ----------
108,071 202,530
Note receivable from affiliate........................ 177,460 207,776
Other assets.......................................... 10,000 180
--------- ----------
Total assets...................................... $ 717,824 $ 843,599
========= ==========
Liabilities and stockholders' deficit
Current liabilities:
Cash overdraft...................................... $ 273,058 $ 212,759
Line-of-credit...................................... 75,000 75,000
Accounts payable.................................... 60,390 232,342
Accrued expenses.................................... 63,251 250,381
Income tax payable.................................. 104,170 118,005
Deferred taxes...................................... 114,388 -
Current portion of capital lease obligations........ 17,547 19,909
Current portion of long term borrowings............. 166,213 123,514
--------- ----------
Total current liabilities......................... 874,017 1,031,910
Capital lease obligations............................. 70,653 166,874
Long-term borrowings, less current portion............ 481,045 481,045
Stockholders' deficit:
Class A common stock, no par value: 200 shares
authorized; 170 shares issued and outstanding...... 123,000 123,000
Class B common stock, no par value: 400 shares
authorized; 341 shares issued and outstanding...... 7,008 7,008
Less: Treasury stock, at cost; 170 shares........... (541,579) (541,579)
Accumulated deficit................................. (296,320) (424,659)
--------- ----------
Total stockholders' deficit........................... (707,891) (836,230)
--------- ----------
Total liabilities and stockholders' deficit........... $ 717,824 $ 843,599
========= ==========
</TABLE>
See accompanying notes.
F-38
<PAGE>
ATLANTIC CONNECTIONS, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Eight months
Year ended ended
December 31, August 31,
1997 1998
------------ ------------
<S> <C> <C>
Net revenues......................................... $3,385,666 $2,263,422
Cost of revenues..................................... 2,105,777 1,647,620
---------- ----------
Gross profit......................................... 1,279,889 615,802
Operating expenses:
Selling, general and administrative................ 954,803 794,874
---------- ----------
Income (loss) from operations........................ 325,086 (179,072)
Interest expense..................................... 53,263 19,597
---------- ----------
Income (loss) before income tax...................... 271,823 (198,669)
Tax provision (benefit).............................. 181,317 (70,330)
---------- ----------
Net income (loss).................................... $ 90,506 $ (128,339)
========== ==========
</TABLE>
See accompanying notes.
F-39
<PAGE>
ATLANTIC CONNECTIONS, LTD.
STATEMENTS OF STOCKHOLDERS' DEFICIT
Year ended December 31, 1997
and eight months ended August 31, 1998
<TABLE>
<CAPTION>
Class A Class B
Common Common Treasury Total
--------------- ------------- ---------------- Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Deficit Deficit
------ -------- ------ ------ ------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 170 $123,000 341 $7,008 $(286,826) $(156,818)
Purchase of treasury
stock.................. (170) $(541,579) (541,579)
Dividends paid.......... (100,000) (100,000)
Net income.............. 90,506 90,506
--- -------- --- ------ ---- --------- --------- ---------
Balance at December 31,
1997................... 170 123,000 341 7,008 (170) (541,579) (296,320) (707,891)
Net loss................ (128,339) (128,339)
--- -------- --- ------ ---- --------- --------- ---------
Balance at August 31,
1998................... 170 $123,000 341 $7,008 (170) $(541,579) $(424,659) $(836,230)
=== ======== === ====== ==== ========= ========= =========
</TABLE>
See accompanying notes.
F-40
<PAGE>
ATLANTIC CONNECTIONS, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Eight months
Year ended ended
December 31, August 31,
1997 1998
------------ ------------
<S> <C> <C>
Operating activities
Net income (loss)................................... $ 90,506 $(128,339)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation...................................... 32,065 33,474
Provision for allowance for doubtful amounts...... 40,000 5,390
Deferred taxes.................................... 100,715 (114,388)
Changes in operating assets and liabilities:
Accounts receivable............................. 2,630 (18,187)
Unbilled receivables............................ 7,515 5,370
Prepaid expenses and other assets............... 1,561 (3,393)
Other assets.................................... (10,000) 9,820
Cash overdraft.................................. 273,058 (60,299)
Accounts payable................................ (379,653) 171,952
Accrued expenses................................ (2,676) 187,130
Income taxes payable............................ 78,963 13,835
-------- ---------
Net cash provided by operating activities........... 234,684 102,365
Investing activities
Purchase of property and equipment.................. (21,424) (10,151)
-------- ---------
Net cash used in investing activities............... (21,424) (10,151)
Financing activities
Proceeds of notes payable........................... 140,000 -
Dividends paid...................................... (100,000) -
Advances to affiliate............................... (101,183) (30,316)
Payments on long-term borrowings.................... (139,065) (42,699)
Payments on capital lease obligations............... (13,300) (19,199)
-------- ---------
Net cash used by financing activities............... (213,548) (92,214)
Decrease in cash and cash equivalents............... (288) -
Cash and cash equivalents at the beginning of
period............................................. 288 -
-------- ---------
Cash and cash equivalents at the end of period...... $ - $ -
======== =========
Supplemental Disclosures of Cash Flow Information
Cash paid for interest.............................. $ 54,868 $ 41,359
Cash paid for taxes................................. 1,639 9,273
Noncash investing and financing activities:
Long-term debt issued to purchase treasury stock.. 541,579 -
Capital lease obligations assumed................. 101,500 117,782
</TABLE>
See accompanying notes.
F-41
<PAGE>
ATLANTIC CONNECTIONS, LTD.
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business and Organization
Atlantic Connections, Ltd. (the Company) was incorporated in the state of
New Hampshire on April 29, 1988. The Company is a local telecommunications
carrier located in Portsmouth, NH and is an integrated communications provider
offering local, long distance, data and private line services to small and
medium-sized businesses in the Northeastern United States.
2. Significant Accounting Policies
Concentrations of Credit Risk
The financial instruments that potentially subject the Company to
concentrations of risk are cash, accounts receivables and unbilled
receivables. The risk with respect to cash is minimized by the Company's
policy of investing in financial instruments with short-term term maturities
issued by highly-rated financial institutions. The risk with respect to
accounts and unbilled receivables is minimized by the large number of the
Company's customers. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral.
Credit losses have been within management's expectations. Customers are
located throughout the New England area.
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed
Of." Under SFAS 121, the carrying value of long-lived assets are reviewed if
the facts and circumstances suggest they may be impaired. If this review
indicates that the affected assets may not be recoverable, as determined based
upon a projection of undiscounted operating cash flows, the carrying value of
the affected assets would be reduced to fair value.
Property and Equipment
Property and equipment are stated at cost and are being depreciated using
the straight-line method over the estimated useful life of three to seven
years. Leasehold improvements are being amortized over the shorter of their
useful lives or the remaining life of the lease. Equipment under capital
leases amounted to $80,859 at December 31, 1997 and $180,787 at August 31,
1998.
Depreciation expense was $32,065 for the year ended December 31, 1997 and
$33,475 for the eight months ended August 31, 1998. Amortization of equipment
under capital leases is included with depreciation in the accompanying
financial statements.
Income Taxes
The Company provides for income taxes under the liability method prescribed
by Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the year in which
the difference is expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized.
Revenue Recognition
Revenue is recognized in the month in which the service is provided.
Unbilled Receivables
Unbilled receivables represent services rendered to customers prior to
December 31, 1997 and August 31, 1998 but unbilled at that date based on the
customer's cycle date of billing.
F-42
<PAGE>
ATLANTIC CONNECTIONS, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. Related Party
The Company has a note receivable from a related party, Atlantic
Connections, Inc., and relates to advances for working capital and the sharing
of certain costs, such as salaries. The Company and Atlantic Connections, Inc.
are related through common management and some common stockholders. Total
amount due as of December 31, 1997 and August 31, 1998 is $207,067 and
$237,383, respectively. No amounts have been re-paid and the remaining balance
is due in full September 1, 2000.
4. Financing Arrangements
Long-Term Debt
A summary of the Company's long-term debt, including capital leases, at
December 31, 1997 and August 31, 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Note payable to bank, 10% interest. Payments of
principal and interest of $2,975 per month for 60
months and due in full by April 16, 2002. Note
contains a subjective acceleration clause; amount
is classified as current.......................... $ 124,601 $ 109,270
Note payable to former owner, 8% interest. Payments
of principal and interest of $6,508 due on April
15, 2007.......................................... 517,852 492,830
Note payable to bank, 8.9% interest with 36 monthly
principal and interest payments of $321 through
April, 1999....................................... 4,805 2,459
Various capital lease obligations; interest rates
ranging from 7% to 9%............................. 88,200 186,783
--------- ---------
735,458 791,342
Less current portion............................... (183,760) (143,423)
--------- ---------
$ 551,698 $ 647,919
========= =========
</TABLE>
Aggregate maturities of long-term debt for the next five years are as
follows:
<TABLE>
<S> <C>
Four months ended December 31, 1998............................. $ 22,656
Year ending December 31, 1999................................... 69,251
Year ending December 31, 2000................................... 74,245
Year ending December 31, 2001................................... 81,051
Year ending December 31, 2002................................... 64,013
Thereafter...................................................... 293,343
--------
$604,559
========
</TABLE>
Line-of-Credit
The Company has a credit facility with a bank. The line-of-credit is a
$75,000 facility to support working capital. The unused portion of the
facility expires May 31, 1999. Interest is at the prime rate plus 1.5% and is
paid monthly in arrears. $75,000 was outstanding under this facility at
December 31, 1997 and August 31, 1998.
F-43
<PAGE>
ATLANTIC CONNECTIONS, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Leases
Future minimum lease payments under noncancelable operating and capital
leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- --------
<S> <C> <C>
Four months ended December 31, 1998.................... $ 6,199 $ 27,169
Year ending December 31, 1999.......................... 19,270 81,505
Year ending December 31, 2000.......................... 3,234 51,928
Year ending December 31, 2001.......................... - 37,140
Year ending December 31, 2002.......................... - 24,839
------- --------
28,703 222,581
Less amounts representing interest..................... - (35,798)
------- --------
$28,703 $186,783
======= ========
</TABLE>
Rent expense was $16,172 for the year ended December 31, 1997 and $10,713
for the eight months ended August 31, 1998.
6. Income Taxes
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
Eight Months
Year Ended Ended
December 31, August 31,
1997 1998
------------ ------------
<S> <C> <C>
Current:
Federal........................................ $ 68,829 $ 36,072
State.......................................... 11,773 7,986
-------- ---------
80,602 44,058
-------- ---------
Deferred:
Federal........................................ 82,876 (93,655)
State.......................................... 17,839 (20,733)
-------- ---------
100,715 (114,388)
-------- ---------
Total (benefit) expense........................ $181,317 $ (70,330)
======== =========
</TABLE>
Deferred income taxes arise principally from temporary differences related
to a change from the accrual to cash method of accounting for tax purposes. The
components of the Company's deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31, August 31,
1997 1998
------------ ----------
<S> <C> <C>
Deferred tax liabilities:
Adjustment of accrual to cash basis.............. $(113,562) $ 19,823
Fixed assets differences......................... (826) (16,022)
--------- --------
Total deferred tax liabilities................. (114,388) 3,801
Deferred tax assets:
Less valuation allowance......................... - 3,801
--------- --------
Net deferred tax liability..................... $(114,388) $ -
========= ========
</TABLE>
F-44
<PAGE>
ATLANTIC CONNECTIONS, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Income Taxes
The difference between the provision (benefit) for income taxes and the
amount computed by applying the statutory federal income tax rate is as
follows:
<TABLE>
<CAPTION>
Eight Months
Year Ended Ended
December 31, August 31,
1997 1998
------------- --------------
<S> <C> <C> <C> <C>
Federal taxes at statutory rates................. $ 92,420 34.0% $(67,547) 34.0%
Add/(deduct):
Change in valuation allowance.................. 3,801 (1.9)
State income taxes, net of federal benefit..... 12,802 4.7 (8,413) 4.2
Effect of graduated rates...................... 781 0.3 - -
Additional taxes due to IRS examination........ 71,508 26.3 - -
Other.......................................... 3,806 1.4 1,829 (.9)
-------- ---- -------- ----
$181,317 66.7% $(70,330) 35.4%
======== ==== ======== ====
</TABLE>
7. Subsequent Event
On September 8, 1998, Atlantic Connections, LLC acquired 100% of the
outstanding stock of the Company. The transaction had an effective date of
September 1, 1998.
8. Year 2000 Issue (Unaudited)
The Company has completed a significant portion of its assessment of Year
2000 issues with regard to its computer systems and other aspects of its
operations dependent upon automation or computerized operation. The Company
believes that the Year 2000 issue will not pose significant operational
problems for its computer systems or other critically dependent equipment and
that all required modifications or conversions to comply with Year 2000
requirements will be fully completed by the end of 1999. In the opinion of
management, the total costs of addressing the Year 2000 issue will not have a
material impact on the Company's financial position or results of operations.
Notwithstanding the foregoing, the Company is unable to assess at this time
whether unrelated entities with whom the Company conducts business may be
adversely affected by their own Year 2000 issues which could adversely affect
the Company.
F-45
<PAGE>
[Choice One Communications Inc. Logo]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses, other than the underwriting
discounts and commissions, paid or payable by the Registrant in connection
with the distribution of the securities being registered. All expenses of the
offering will be paid by the Registrant. All amounts are estimates except the
SEC registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $27,800
NASD Filing Fee.................................................. 10,500
Nasdaq National Market Listing Fee............................... 95,000
Printing Costs................................................... *
Legal Fees and Expenses.......................................... *
Accounting Fees and Expenses..................................... *
Blue Sky Fees and Expenses....................................... 10,000
Transfer Agent and Registrar Fees................................ *
Miscellaneous.................................................... *
-------
Total.......................................................... $ *
=======
</TABLE>
- --------
* To be provided by amendment
Item 14. Indemnification of Directors and Officers
General Corporation Law
The Company is incorporated under the laws of the State of Delaware.
Section 145 ("Section 145") of the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (the "General
Corporation Law"), inter alia, provides that a Delaware corporation may
indemnify any persons who were, are or are threatened to be made, parties 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 such corporation), by reason of the fact that such person is
or was an officer, director, employee or agent of such corporation, or is or
was serving at the request of such corporation as a director, officer employee
or agent of another corporation or enterprise. The indemnity may include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, provided such person acted in good faith and
in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was illegal. A
Delaware corporation may indemnify any persons who are, were or are threatened
to be made, a party to any threatened, pending or completed action or suit by
or in the right of the corporation by reasons of the fact that such person was
a director, officer, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit, provided
such person acted in good faith and in a manner he reasonably believed to be
in or not opposed to the corporation's best interests, provided that no
indemnification is permitted without judicial approval if the officer,
director, employee or agent is adjudged to be liable to the corporation. Where
an officer, director, employee or agent is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer or director has actually
and reasonably incurred.
Section 145 further authorizes a corporation 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
II-1
<PAGE>
corporation as a director, officer, employee or agent of another corporation
or enterprise, against any liability asserted against him and incurred by him
in any such capacity, arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
Certificate of Incorporation and By-laws
The Company's Certificate of Incorporation and by-laws provides for the
indemnification of officers and directors to the fullest extent permitted by
the General Corporation Law.
All of the Company's directors and officers are covered by insurance
policies maintained by it against certain liabilities for actions taken in
their capacities as such, including liabilities under the Securities Act of
1933, as amended.
Item 15. Recent Sales of Unregistered Securities
Since its inception, the Company has issued the following securities
without registration under the Securities Act (the number of shares set forth
below does not give effect to the proposed stock split of the Company's common
stock referred to in the prospectus).
On July 8, 1998, in connection with the Company's formation, the Company
issued 60,000 shares of common stock to Choice One Communications L.L.C. for
consideration of $6.0 million. The stock issued in this transaction was
subject to transfer restrictions which were noted on the stock certificate.
This transaction is exempt from registration under the Securities Act pursuant
to Section 4(2) of the Securities Act, along with Rule 506 of the accompanying
regulations of the Securities Act, as transactions not involving any public
offering. On June 30, 1999, the Company issued additional shares of common
stock to Choice One Communications L.L.C. to correct an underissuance of
shares in connection with the issuance on July 8, 1998 at the same price as
the original issuance. The stock issued in this transaction was subject to
transfer restrictions which were noted on the stock certificate. This
transaction is exempt from registration under the Securities Act pursuant to
Section 4(2) of the Securities Act, along with Rule 506 of the accompanying
regulations of the Securities Act, as transactions not involving any public
offering.
On August 12, 1998 the Company reserved 3,000 shares of common stock of
Choice One Communications for the Employee Stock Option Plan of the Company.
On August 12, 1998, the Company issued options to purchase 405 shares of
common stock of the Company at an exercise price of $1,000 per share. On
October 16, 1998 the Company issued options to purchase 154.5 shares of common
stock of the Company at an exercise price of $1,000 per share. On January 21,
1999 the Company issued options to purchase 346.50 shares of common stock of
the Company at an exercise price of $1,000 per share. On April 15, 1999, the
Company issued options to purchase 138.75 shares of common stock of the
Company at an exercise price of $1,416.67 per share. On July 15, 1999 the
Company issued options to purchase 241.35 shares of common stock at an
exercise price of $1,416.67 per share. On October 21, 1999, the Company issued
options to purchase 247.53 shares of common stock at an exercise price of
$2,666.64 per share. A total of 231.00 options have been forfeited and
returned to the plan. As of November 15, 1999, options to acquire an aggregate
of 1,308.33 shares were outstanding under Choice One's 1998 Employee Stock
Option Plan and none has vested and none were exerciseable. None of the
options granted under this paragraph require any registration, because they do
not involve the sale of a security and thus are exempt from registration under
the Securities Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Certificate of Incorporation of the Registrant*
3.2 Amended and Restated By-laws of the Registrant*
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
4.1 Form of Certificate for the Registrant's Common Stock*
5.1 Opinion of Nixon Peabody LLP*
10.1 1998 Management Stock Incentive Plan of the Registrant (November 1999
Restatement)*
10.2 1999 Directors' Stock Incentive Plan of the Registrant*
10.3 Transaction Agreement, dated as of July 8, 1998, among Choice One
Communications Inc. Choice One Communications L.L.C. and holders of
Investor Equity and Management Equity
10.4 Amendment No. 1 dated as of December 18, 1998 to Transaction Agreement,
dated as of July 8, 1998, among Choice One Communications Inc. Choice
One Communications L.L.C. and holders of Investor Equity and Management
Equity
10.5 Amendment No. 2 dated as of February 18, 1999 to Transaction Agreement,
dated as of July 8, 1998, among Choice One Communications Inc. Choice
One Communications L.L.C. and holders of Investor Equity and Management
Equity
10.6 Amendment No. 3 dated as of May 14, 1999 to Transaction Agreement, dated
as of July 8, 1998, among Choice One Communications Inc. Choice One
Communications L.L.C. and holders of Investor Equity and Management
Equity
10.7 Amendment No. 4 dated as of June 30, 1999 to Transaction Agreement,
dated as of July 8, 1998, among Choice One Communications Inc. Choice
One Communications L.L.C. and holders of Investor Equity and Management
Equity
10.8 Amendment No. 5 dated as of June 30, 1999 to Transaction Agreement,
dated as of July 8, 1998, among Choice One Communications Inc. Choice
One Communications L.L.C. and holders of Investor Equity and Management
Equity
10.9 Amendment No. 6 dated as of November 18, 1999 to Transaction Agreement,
dated as of July 8, 1998, among Choice One Communications Inc. Choice
One Communications L.L.C. and holders of Investor Equity and Management
Equity
10.10 Registration Rights Agreement dated as of July 8, 1998, among Choice One
Communications Inc., the Investor Holders and the Management Holders
10.11 Amendment No. 1 dated as of February 18, 1999 to Registration Rights
Agreement dated as of July 8, 1998, among Choice One Communications
Inc., the Investor Holders and the Management Holders
10.12 Amendment No. 2 dated as of June 30, 1999 to Registration Rights
Agreement dated as of July 8, 1998, among Choice One Communications
Inc., the Investor Holders and the Management Holders
10.13 Amendment No. 3 dated as of June 30, 1999 to Registration Rights
Agreement dated as of July 8, 1998, among Choice One Communications
Inc., the Investor Holders and the Management Holders
10.14 Form of Executive Purchase Agreement dated July 8, 1998 among the
Registrant, Choice One Communications L.L.C. and Certain Executives of
the Registrant
10.15 Executive Purchase Agreement dated as of July 8, 1998 among the
Registrant, Choice One Communications L.L.C. and Steve M. Dubnik
10.16 Executive Purchase Agreement dated as of July 8, 1998 among the
Registrant, Choice One Communications L.L.C. and Mae Squier-Dow
10.17 Executive Purchase Agreement dated as of July 8, 1998 among the
Registrant, Choice One Communications L.L.C. and Philip Yawman
10.18 Executive Purchase Agreement dated as of July 8, 1998 among the
Registrant, Choice One Communications L.L.C. and Kevin Dickens
10.19 Executive Purchase Agreement dated as of August 19, 1999 among the
Registrant, Choice One Communications L.L.C. and Ajay Sabherwal
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.20 Amended and Restated Credit Agreement dated as of November 3, 1999 among
the Registrant, as Guarantor, subsidiaries of the Registrant, as
Borrowers, First Union Investors, Inc., as Administrative Agent, General
Electric Capital Corporation, as Syndication Agent, and CIBC, Inc. as
Documentation Agent, and the lenders thereto
10.21 Lease between the Registrant and Bendersen-Rochester Associates, LLC
dated October 14, 1998, as amended
10.22 Unit Purchase Agreement dated as of October 21, 1999 Among the
Registrant, Atlantic Connections L.L.C., ACL Telecommunications, LTD.,
Paul Cissel, Antonio Lopez, Jr. and North Atlantic Venture Fund II, L.P.
21.1 Subsidiaries of the Registrant
23.1 Consent of Nixon Peabody LLP (included in Exhibit 5.1)*
23.2 Consent of Arthur Anderson LLP, independent auditors
23.3 Consent of Ernst & Young LLP, independent auditors
24.1 Power of Attorney (included on the signature page hereto)
27.1 Financial Data Schedule for the year ended December 31, 1998
</TABLE>
- --------
* To be filed by amendment.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
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.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements 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 Act, 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 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 Act, 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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Rochester, State of New York, on the 19th day of
November, 1999.
Choice One Communications Inc.
By: /s/ Steve M. Dubnik
----------------------------------
Steve M. Dubnik
Chairman, President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Steve M. Dubnik, Ajay Sabherwal, John J.
Zimmer and Kim Robert Scovill and each or any of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any registration statement filed under the Securities Act
of 1933 and any and all amendments (including post-effective amendments) to
this registration statement and to any registration statement filed pursuant
to Rule 462(b), and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto each said attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the foregoing, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent or either of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Steve M. Dubnik Chairman, President and November 19, 1999
___________________________________________ Chief Executive Officer
Steve M. Dubnik (Principal Executive
Officer)
/s/ Ajay Sabherwal Senior Vice President, November 19, 1999
___________________________________________ Finance and Chief
Ajay Sabherwal Financial Officer
(Principal Financial and
Accounting Officer)
/s/ John B. Ehrenkranz Director November 19, 1999
___________________________________________
John B. Ehrenkranz
/s/ Bruce M. Hernandez Director November 19, 1999
___________________________________________
Bruce M. Hernandez
/s/ Michael M. Janson Director November 19, 1999
___________________________________________
Michael M. Janson
/s/ Robert M. Van Degna Director November 19, 1999
___________________________________________
Robert M. Van Degna
</TABLE>
II-5
<PAGE>
EXHIBIT 10.3
TRANSACTION AGREEMENT
AMONG
CHOICE ONE COMMUNICATIONS INC.
CHOICE ONE COMMUNICATIONS L.L.C.
and
HOLDERS OF
INVESTOR EQUITY
and
MANAGEMENT EQUITY
July 8, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
----
<S> <C>
ARTICLE 1 subscription for LLC interests by investor members and management
members; LLC's Investment in the Corporation 2
Section 1.1. Subscription for LLC Interests by Investor Members and Management Members 2
Section 1.2. Purchase and Sale of Common Stock 2
Section 1.3. The Initial Closing 2
ARTICLE 2Conditions to the Initial Closing 2
Section 2.1. Representations and Warranties; Covenants 3
Section 2.2. Adoption of Certificate of Incorporation 3
Section 2.3. Adoption of the Corporation's Bylaws 3
Section 2.4. LLC Agreement 3
Section 2.5. Investor Purchase Agreement 3
Section 2.6. Executive Purchase Agreements 3
Section 2.7. Registration Rights Agreement 4
Section 2.8. Securities Law Compliance 4
Section 2.9. Compliance with Applicable Laws 4
Section 2.10. Initial Closing Documents 4
Section 2.11. Approval of Initial Budget 5
Section 2.12. Waiver 5
ARTICLE 3Subsequent Contributions; Conditions to Each Subsequent
Contribution
Section 3.1. Subsequent Contributions 5
Section 3.2. Approval of Business Plans by the LLC 6
Section 3.3. Effect of Substantial Negative Deviation from Approved
Business Plan or Approved Budget 8
Section 3.4. Conditions to Each Subsequent Contribution 9
Section 3.5. Certain Opt-Out Rights of Fleet and Waller-Sutton 11
ARTICLE 4Covenants
Section 4.1. Financial Statements and Other Information 14
Section 4.2. Inspection of Property 17
Section 4.3. Affirmative Covenants 18
Section 4.4. Compliance with Agreements 19
Section 4.5. Current Public Information 19
Section 4.6. Intellectual Property Rights 19
Section 4.7. Public Disclosures 20
Section 4.8. Selection of Corporation's Financial Advisor, Underwriter
etc 20
ARTICLE 5Governance
Section 5.1. Management of the Corporation Generally 20
Section 5.2. Governance Rights of the LLC 20
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 5.3. Corporate Board Composition and Vacancies 25
Section 5.4. Director Expenses; Directors' and Officers' Insurance;
Indemnity and Exculpation 28
Section 5.5. Termination 28
Section 5.6. Voting Rights 28
ARTICLE 6Restrictions on Transfers of Securities 29
Section 6.1. General Securities Laws Restrictions 29
Section 6.2. Restrictions on Transfer of Management Equity 30
Section 6.3. Transfer of Investor Equity 30
Section 6.4. Transfers in Violation of Agreement 41
Section 6.5. Right to Participate in Certain Sales 41
Section 6.6. All Holders Required to Participate in Certain Sales 44
ARTICLE 7Representations and Warranties of the Corporation 47
Section 7.1. Organization, Corporate Power and Licenses 47
Section 7.2. Capital Stock and Related Matters 48
Section 7.3. Authorization; No Breach 48
Section 7.4. Conduct of Business; Absence of Liabilities 49
Section 7.5. No Subsidiaries 49
Section 7.6. Brokerage 49
Section 7.7. Government Consent, Etc 49
Section 7.8. Compliance with Laws 50
Section 7.9. Disclosure 50
Section 7.10. Litigation 50
Section 7.11. Executive Officers 50
Section 7.12. Taxes 50
ARTICLE 8Definitions 51
Section 8.1. Definitions 51
Section 8.2. Knowledge 60
ARTICLE 9Miscellaneous Provisions 61
Section 9.1. Expenses 61
Section 9.2. Remedies 62
Section 9.3. LLC's Investment Representations 62
Section 9.4. Consent to Amendments 81
Section 9.5. Survival of Representations and Warranties 81
Section 9.6. Successors and Assigns 81
Section 9.7. Capital and Surplus; Special Reserves 82
Section 9.8. Severability 82
Section 9.9. Counterparts 82
Section 9.10. Descriptive Headings; Interpretation; No Strict Construction 82
Section 9.11. Governing Law 83
Section 9.12. Submission to Jurisdiction 83
Section 9.13. Notices 83
</TABLE>
<PAGE>
TRANSACTION AGREEMENT
THIS TRANSACTION AGREEMENT (this "Agreement") is made as of July 8, 1998,
among Choice One Communications Inc., a Delaware corporation (the
"Corporation"), and Choice One Communications L.L.C., a Delaware limited
liability company (the "LLC"), and each person who on the date hereof or
hereafter becomes a holder of Investor Equity or Management Equity and who
executes an appropriate counterpart of this Agreement. Capitalized terms used
but not otherwise defined herein have the meanings ascribed to such terms in
Article 8 below.
WHEREAS, the Investor Members and the Management Members desire to make
investments in the Corporation to be held initially through ownership of Units
in the LLC;
WHEREAS, this Agreement provides for, among other things, (i) the issuance
of the Corporation's common stock, par value $0.01 per share (the "Common
Stock"), to the LLC at the Initial Closing (as defined below) and the making of
Subsequent Contributions (as defined below) on the terms and conditions hereof,
(ii) certain matters relating to the governance of the Corporation and certain
other covenants of the Corporation in favor of the other parties hereto and
(iii) restrictions on transfer of Units and Common Stock;
WHEREAS, the Investor Members and the Management Members are parties to the
LLC Agreement governing their relationships as Persons holding interests in the
profits, losses, and distributions of the LLC;
WHEREAS, each Management Member has entered into (and each subsequent
Management Member will enter into) an Executive Purchase Agreement (as defined
below) with the LLC and the Corporation providing for certain rights and
obligations relating to the Management Member's investment in the LLC and the
Corporation and certain obligations of the Management Member as an employee of
the Corporation;
NOW, THEREFORE, in consideration of the mutual promises made herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
<PAGE>
ARTICLE 1
SUBSCRIPTION FOR LLC INTERESTS BY INVESTOR MEMBERS AND MANAGEMENT
MEMBERS; LLC'S INVESTMENT IN THE CORPORATION
Section 1.1. Subscription for LLC Interests by Investor Members and
Management Members. On the date hereof, immediately prior to the transactions
contemplated by Section 1.02, each Investor Member that has executed a
counterpart hereof on the date hereof will have subscribed for Class A Units in
the LLC pursuant to the Investor Purchase Agreement (as defined below), and each
Management Member that has executed a counterpart hereof on the date hereof will
have subscribed for Class B Units in the LLC pursuant to such Management
Member's Executive Purchase Agreement.
Section 1.2. Purchase and Sale of Common Stock. At the Initial Closing
(as defined below), subject to the terms and conditions set forth herein, the
Corporation shall sell to the LLC and the LLC shall purchase from the
Corporation 60,000 shares of Common Stock at a price per share of $100, for an
aggregate purchase price equal to $6,000,000 of which (i) $5,907,020.70 (the
"Initial Contribution") will be funded on the date hereof and (ii) $92,979.30
will be funded as soon as the authorized but unissued Class B Units are issued
pursuant to Section 3.02(a) of the LLC Agreement.
Section 1.3. The Initial Closing. The closing of the purchase and sale of
Common Stock (the "Initial Closing") shall take place at the offices of Davis
Polk & Wardwell in New York, New York, at 10:00 a.m. local time on the date
hereof (the "Initial Closing Date"). At the Initial Closing, the Corporation
shall deliver to the LLC stock certificates evidencing the Common Stock to be
purchased at the Initial Closing, registered in the name of the LLC, upon the
LLC's payment of the purchase price therefor by delivery to the Corporation of a
check, or wire transfer of immediately available funds to an account designated
by the Corporation, in an aggregate amount equal to the Initial Contribution.
ARTICLE 2
Conditions to the Initial Closing
The obligation of the LLC to purchase and pay for the Common Stock at the
Initial Closing is subject to the satisfaction as of the Initial Closing of the
following conditions:
2
<PAGE>
Section 2.1. Representations and Warranties; Covenants. The
representations and warranties contained in Article 7 hereof and in each
Executive Purchase Agreement executed on the date hereof shall be true and
correct in all material respects at and as of the Initial Closing as though then
made, and the Corporation shall have performed in all material respects all of
the covenants required to be performed by it hereunder prior to the Initial
Closing.
Section 2.2. Adoption of Certificate of Incorporation. The Corporation's
amended and restated certificate of incorporation shall be in form and substance
as set forth in Exhibit 1 hereto (the "Certificate of Incorporation"), shall be
in full force and effect under the laws of Delaware as of the Initial Closing,
and shall not have been further amended or modified.
Section 2.3. Adoption of the Corporation's Bylaws. The Corporation's
amended and restated bylaws shall have been duly authorized and adopted in form
and substance as set forth in Exhibit 2 attached hereto (as so adopted, the
"Bylaws"), shall be in full force and effect under the laws of Delaware as of
the Initial Closing, and shall not have been further amended or modified.
Section 2.4. LLC Agreement. The Unitholders shall have entered into the
Limited Liability Company Agreement dated as of the date hereof governing the
affairs of the LLC (the "LLC Agreement"), and the LLC Agreement shall be in full
force and effect as of the Initial Closing.
Section 2.5. Investor Purchase Agreement. The LLC and the Investor
Members shall have entered into the Investor Purchase Agreement dated as of the
date hereof (the "Investor Purchase Agreement"), and the Investor Purchase
Agreement shall be in full force and effect as of the Initial Closing.
Section 2.6. Executive Purchase Agreements. (a) The LLC and the
Corporation shall have entered into a separate executive purchase agreement, in
form and substance substantially similar to that set forth in Exhibit 3 attached
hereto (each such agreement and the agreement referred to in Section 2.06(b), an
"Executive Purchase Agreement"), with each of Mae Squier-Dow ("Squier-Dow"),
Kevin Dickens ("Dickens"), and Phillip Yawman ("Yawman"), and such Executive
Purchase Agreements shall be in full force and effect as of the Initial Closing.
(b) The LLC and the Corporation shall have entered into an Executive
Purchase Agreement, in form and substance substantially similar to that set
forth in Exhibit 4 attached hereto, with Steve Dubnik, and such Executive
Purchase Agreement shall be in full force and effect as of the Initial Closing.
3
<PAGE>
Section 2.7. Registration Rights Agreement. The Corporation and each of
the Unitholders shall have entered into the Registration Rights Agreement dated
as of the date hereof (the "Registration Rights Agreement"), and the
Registration Rights Agreement shall be in full force and effect as of the
Initial Closing.
Section 2.8. Securities Law Compliance. The Corporation shall have made
all filings under all applicable federal and state securities laws necessary to
consummate the issuance, in compliance with such laws, of the Common Stock to be
issued at the Initial Closing pursuant to this Agreement.
Section 2.9. Compliance with Applicable Laws. The purchase of Common
Stock by the LLC hereunder at the Initial Closing shall not be prohibited by any
applicable law or governmental rule or regulation and shall not subject the LLC
to any penalty, liability or, in the LLC's reasonable judgment, other onerous
condition under or pursuant to any applicable law or governmental rule or
regulation, and the purchase of the Common Stock by the LLC hereunder shall be
permitted by the laws, rules and regulations of the jurisdictions and
governmental authorities and agencies to which the LLC is subject.
Section 2.10. Initial Closing Documents. The Corporation shall have
delivered to the LLC all of the following documents each of which shall be
satisfactory in form and substance to the LLC and its counsel:
(a) an Officer's Certificate, dated the Initial Closing Date, stating
that the conditions specified in Sections 2.01-2.03 and 2.08-2.09, inclusive,
have been fully satisfied;
(b) certified copies of (i) the resolutions duly adopted by the Board
authorizing the execution, delivery and performance of this Agreement, the
Registration Rights Agreement and each of the other agreements contemplated
hereby, the amendment and restatement of the Corporation's Certificate of
Incorporation referred to in Section 2.02, the adoption of the Corporation's
Bylaws referred to in Section 2.03, the issuance and sale of the Common Stock at
the Initial Closing, and the consummation of all other transactions to occur as
of the Initial Closing as contemplated by this Agreement, and (ii) the written
consent executed by the Corporation's sole incorporator electing Steve Dubnik as
initial sole director;
(c) certified copies of the Certificate of Incorporation and the Bylaws,
each as in effect at the Initial Closing;
4
<PAGE>
(d) a certified copy of the Certificate of Formation as in effect at the
Initial Closing;
(e) copies of all third party and governmental consents, approvals and
filings required in connection with the consummation of the transactions to
occur as of the Initial Closing hereunder;
(f) an opinion of Nixon, Hargrave, Devans & Doyle LLP, counsel to the
Corporation in form and substance satisfactory to the LLC; and
(g) such other documents relating to the transactions contemplated by
this Agreement as the LLC or its special counsel may reasonably request.
Section 2.11. Approval of Initial Budget. The LLC shall have approved the
Corporation's initial budget (including the payment of deposits by the
Corporation for two telephone switches), attached hereto as Exhibit 6, covering
the succeeding six months, prepared on a monthly basis for the Corporation and
its Subsidiaries by market and on an aggregate basis, which includes with
respect to such six-month period (i) the information required by Sections
3.02(a)(ii) and 3.02(b) and (ii) statements of anticipated income and cash
flows, balance sheets and proposed capital expenditures (upon which approval,
such budget shall constitute an "Approved Budget" for purposes of Section
3.02(b)).
Section 2.12. Waiver. Any condition specified in this Article 2 that is
legally permissible to be waived may be waived if such waiver is consented to by
the LLC in writing.
ARTICLE 3
Subsequent Contributions; Conditions to Each Subsequent Contribution
Section 3.1. Subsequent Contributions. Subject to the terms and
conditions set forth below, the LLC shall, after the Initial Closing, be
required to make capital contributions to the Corporation ("Subsequent
Contributions") from time to time as proposed by the Corporation's chief
executive officer and set forth in a written notice from such chief executive
officer on behalf of the Corporation (the "Subsequent Contribution Notice") sent
to the LLC and to each Unitholder at least 30 days prior to the proposed date of
the applicable Subsequent Contribution (the "Drawdown Date"). Such notice shall
set forth the aggregate amount of the proposed Subsequent Contribution and shall
specify in reasonable detail the intended use of such Subsequent Contribution by
the Corporation, including a breakdown of the portion of such Subsequent
5
<PAGE>
Contribution to be expended in respect of each Approved Business Plan (including
a good faith estimate as to the timing of such expenditures and the amount
thereof to be contributed by each Unitholder). With respect to each Subsequent
Contribution, subject to the terms and conditions hereof, the LLC shall deliver
to the Corporation a check, or wire transfer of immediately available funds to
an account designated by the Corporation, in an aggregate amount equal to the
applicable Subsequent Contribution. If at any time after the date hereof the LLC
makes any contribution to the capital of the Corporation and the amount of such
capital contribution exceeds the LLC's then-outstanding unpaid obligations (if
any) to make the Initial Contribution and all Subsequent Contributions required
to be made prior to such time (the amount of any such excess, an "Excess
Contribution"), then such Excess Contribution shall be credited dollar for
dollar against the LLC's obligation to make Subsequent Contributions on Drawdown
Dates occurring after the date of such Excess Contribution.
Section 3.2. Approval of Business Plans by the LLC. (a) Approval of
Business Plan. With respect to any market in which the Corporation proposes to
commence operations, so long as the LLC may be required to make Subsequent
Contributions hereunder, the chief executive officer shall submit to the LLC for
its approval a business proposal setting forth (i) proposed business activities
of the Corporation in such specified market during the 10-year period (or such
other period as shall otherwise be agreed to by the LLC and the executive
management) commencing on the date of such business proposal (or, if longer, the
period running from the date of such business proposal until the date estimated
in such proposal as the "break even" point for the Corporation's operations in
such market) (including the identification of key managers to be hired and the
proposed compensation and terms for each such hire); projections of revenues,
expenses, income and cash flows from such business activities in such period;
projections of the amounts, timing, and proposed terms for lease financing,
vendor financing and other financing to be obtained by the Corporation to
support such business activities during such period; the best estimates of the
chief executive officer and the Executive Managers as to the amounts and timing
of periodic capital drawdowns to be made by each Unitholder to support such
business activities during such period; and a budget of proposed expenditures of
such capital in such period; and (ii) a budget prepared on a monthly basis
covering the initial 12 months for such market setting forth projections of cash
flows, revenues, expenses, income and cash flows from such business activities
in such period; projections of the amounts, timing, and proposed terms for lease
financing, vendor financing and other financing to be obtained by the
Corporation to support such business activities during such period; and a budget
of proposed expenditures of such capital in such period. Upon approval by the
LLC, such business proposal shall constitute an "Approved Business Plan." It is
6
<PAGE>
understood that, without limiting the discretion of the LLC to approve or to
decline to approve any such business plan with respect to a specified market,
the LLC will not approve any business plan submitted unless, among other things,
(i) key local managers for such market have been identified, have been approved
for hiring pursuant to Section 5.02 hereof and Section 3.02 of the LLC Agreement
and are ready, willing and able to commence employment with the Corporation,
(ii) in the case of the first such business proposal submitted to the LLC, the
Corporation shall have in place a term life insurance policy for the Founder
(which insurance policy shall be owned by the Corporation and under which the
Corporation shall have been named the sole beneficiary), in form and substance
acceptable to the LLC, providing coverage in an amount not less than $10,000,000
and (iii) in the case of a business plan proposed to the LLC (x) after business
plans for two markets have been approved or (y) after 50% of the Maximum
Commitment has been contributed by the Investor Members and the Management
Members, a binding, written commitment for $45,000,000 (or such other amount
determined by the LLC) of vendor financing, on terms approved by the LLC, has
been obtained by the Corporation.
(b) Approval of Annual Budget by the LLC. So long as the LLC may be
required to make Subsequent Contributions hereunder, at least 30 days but not
more than 90 days prior to the beginning of each fiscal year, the Corporation
shall submit to the LLC for its approval a proposed annual budget prepared on a
monthly basis for the Corporation and its Subsidiaries by market and on an
aggregate basis covering the next succeeding fiscal year (displaying anticipated
statements of income and cash flows and balance sheets and budgeted capital
expenditures) ("Proposed Budget"); provided that prior to December 1, 1998, the
Corporation shall submit to the LLC for its approval a Proposed Budget covering
the period between the date hereof and December 31, 1999 (the "Benchmark
Budget"). Each Proposed Budget shall also set forth the total amount of
Subsequent Contributions required to be made under such Proposed Budget and a
breakdown of the portion of such Subsequent Contributions to be expended in
respect of each Approved Business Plan (including a good faith estimate as to
the timing of such expenditures and the amount thereof to be contributed by each
Unitholder). The LLC shall approve or disapprove the proposed annual budget
within 20 days of the submission of such budget by the Corporation to the LLC.
Upon approval by the LLC, each such Proposed Budget shall constitute an
"Approved Budget." It is expected that the LLC will approve a Proposed Budget
that is consistent with all Approved Business Plans theretofore approved.
(c) Required Revision of Annual Budget. The Corporation shall submit
with any business proposal submitted to the LLC pursuant to Section 3.02(a) a
revised annual Proposed Budget described in Section 3.02(b) which incorporates
7
<PAGE>
such business proposal, including any budget items, for the fiscal year in which
such business proposal first requires funding (it being understood that if an
Approved Budget does not yet exist for such fiscal year, the Corporation must
deliver a Proposed Budget for such fiscal year). The LLC shall not be obligated
to make any Subsequent Contribution with respect to any items in an Approved
Business Plan or Approved Budget unless and until a revised annual Proposed
Budget for the relevant fiscal year that incorporates such business proposal and
all Approved Business Plans has been approved by the LLC.
(d) Amendment of Approved Business Plan or Approved Budget. As soon as
an Approved Business Plan or an Approved Budget ceases to be such pursuant to
Section 3.03, the Corporation shall promptly prepare a revision thereof
(consistent with the information required under Section 3.02(a) or 3.02(b), as
applicable) and deliver such proposed revision to the LLC for its approval. The
Corporation shall also promptly upon preparation of any other significant
budgets and of any other revision of an Approved Business Plan or of an annual
or other budget deliver such budgets and revisions to the LLC for its approval.
When the Corporation submits a revision of an Approved Business Plan (or one
that has ceased to be such pursuant to Section 3.03), the Corporation must also
submit a revised Proposed Budget consistent with the process described in
Section 3.02(c). If an Approved Budget ceases to be such pursuant to Section
3.03, the LLC shall not be obligated to make any Subsequent Contribution with
respect to any items in the relevant budget unless and until the proposed
revision of such budget is approved by the LLC (upon approval of which the
revision thereof will be deemed the applicable Approved Budget hereunder).
(e) Continued Effect of this Section after Maximum Commitment Has Been
Fully Drawn and After Dissolution of the LLC. After the LLC is no longer
required to make Subsequent Contributions hereunder, as well as after
dissolution of the LLC (but after dissolution of the LLC only so long as the
holders of Investor Equity hold at least 10% of the outstanding Common Stock in
the aggregate), management of the Corporation will continue to be required to
seek the prior approval of the LLC (or after dissolution of the LLC, the Board)
for proposed business plans and Proposed Budgets consistent with the
requirements as to timing, content and other procedures set forth in this
Section 3.02.
Section 3.3. Effect of Substantial Negative Deviation from Approved
Business Plan or Approved Budget. An Approved Business Plan for a particular
market shall cease to be such and shall not be considered or deemed to be an
Approved Business Plan for any purpose whatsoever (whether under this Agreement,
the LLC Agreement, or otherwise) as soon as the revenues, expenses, available
financing, capital expenditures, capital requirements, or other business
8
<PAGE>
operations of the Corporation in the market to which such plan relates reflect,
in the good faith judgment of the LLC, a substantial negative deviation from
such plan's estimates, plans, and projections of any of the foregoing. An
Approved Budget shall cease to be such and shall not be considered or deemed to
be an Approved Budget for any purpose whatsoever (whether under this Agreement,
the LLC Agreement, or otherwise) as soon as the Corporation's revenues,
expenses, available financing, capital expenditures, capital requirements,
results of operations, cash flows or other business operations of the
Corporation reflect, in the good faith judgment of the LLC, a substantial
negative deviation from such budget. It is understood that in determining the
existence or nonexistence of a "substantial negative deviation," the LLC shall
consider such plan's estimates, plans, and projections or such budget in the
aggregate and shall not consider any one factor or measure in isolation to the
extent a deviation in such factor or measure does not impact the plan or budget
as a whole.
Section 3.4. Conditions to Each Subsequent Contribution . Notwithstanding
anything else contained herein, the obligation of the LLC to make any Subsequent
Contribution to the capital of the Corporation is subject to the satisfaction as
of the applicable Drawdown Date of each of the following conditions:
(a) Authorized by Approved Budgets. The applicable Subsequent
Contribution shall be expressly contemplated and authorized under the terms of
the Corporation's applicable Approved Budget, and such Subsequent Contribution
shall not exceed the aggregate capital requirements of the Corporation during
the 6-month period (or such longer or shorter time period as agreed to by the
LLC and the Corporation's chief executive officer) commencing on the Drawdown
Date for such Subsequent Contribution as set forth in the Corporation's
applicable Approved Budget (taking into account any prior Subsequent
Contribution to the extent the time period for such prior Subsequent
Contribution overlaps with the time period for the present Subsequent
Contribution).
(b) Representations and Warranties. The representations and warranties
contained in Sections 7.01 (Organization), 7.02(b) (Capital Stock), 7.03
(Authorization), 7.06 (Brokerage), 7.07 (Governmental Consent), 7.08 (Compliance
with Laws), 7.09 (Disclosure), 7.10 (Litigation), 7.11 (Executive Officers) and
7.12 (Taxes) hereof and in each of the Executive Purchase Agreements shall be
true and correct in all respects at and as of the applicable Drawdown Date as
though then made, except to such extent as would not reasonably be expected to
have a Material Adverse Effect.
9
<PAGE>
(c) No Breach or Default. Neither the Corporation nor any of its
Subsidiaries shall (i) have breached or be in default of any of its obligations
in any material respect under any agreement to which it is a party or (ii) have
failed to comply with any of the provisions of its certificate of incorporation
or bylaws as then in effect.
(d) No Material Adverse Effect. In the good faith judgment of the LLC,
there shall not have occurred a Material Adverse Effect.
(e) Compliance with Applicable Laws; Contribution Not Prohibited. The
making of the applicable Subsequent Contribution by the LLC hereunder shall not
be prohibited by (i) any applicable law or governmental rule or regulation and
shall not subject the LLC to any penalty, liability or, in the LLC's reasonable
judgment, other onerous condition under or pursuant to any applicable law or
governmental rule or regulation, and the making of such Subsequent Contribution
by the LLC hereunder shall be permitted by the laws, rules and regulations of
the jurisdictions and governmental authorities and agencies to which the LLC is
subject or (ii) any applicable judgment, injunction or order of any court or
governmental agency or body. There shall not be pending or threatened before or
by any court, arbitrator or governmental agency or body, any litigation,
investigation or other proceeding seeking such prohibition.
(f) Documents to be Delivered on Drawdown Dates. The Corporation shall
have delivered to the LLC all of the following documents:
(i) an Officer's Certificate, dated the applicable Drawdown Date,
stating that the conditions specified in Sections 3.04(a) through 3.04(d),
inclusive, have been fully satisfied (it being understood and agreed that
such Certificate must include a certification that no Material Adverse
Change has occurred); and
(ii) such other documents relating to the transactions to occur at
such Subsequent Contribution as the LLC or its special counsel may
reasonably request.
(g) Maximum Commitment. The aggregate amount of the applicable
Subsequent Contribution, together with the Initial Contribution and all
previously made Subsequent Contributions, shall not exceed the Maximum
Commitment.
(h) Nondissolution of LLC. The LLC shall not have been dissolved or
terminated; provided, however, that any obligation to make Subsequent
10
<PAGE>
Contributions on a Drawdown Date prior to such dissolution shall remain in
existence after such dissolution or termination of the LLC.
(i) Bankruptcy. The Corporation shall (i) not have commenced a case or
other proceeding, nor shall a case or other proceeding have been commenced
against the Corporation, seeking liquidation, reorganization or other relief
with respect to itself or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of all or any
substantial part of its property, (ii) not have consented to any such relief or
to any such appointment in an involuntary case or other proceeding commenced
against it, (iii) not have made a general assignment for the benefit of
creditors, (iv) not have failed generally to pay its debts as they become due
and (v) not have taken any corporate action to authorize any of the foregoing.
(j) Management Report. The LLC shall have received a report from the
Founder and Executive Managers setting forth significant recent developments
relating to the Corporation's business operations such as new business lines
which have been added since the last Drawdown Date and the Corporation's current
market share in its markets.
(k) Waiver. Any condition specified in this Article 3 that is legally
permissible to be waived may be waived if consented to by the LLC in writing.
Section 3.5. Certain Opt-Out Rights of Fleet and Waller-Sutton. (a) If
(i) the requisite approval of the LLC is obtained for (A) any proposed business
plan pursuant to Section 3.02(a), (B) any amendment of a business plan pursuant
to Section 3.02(d) proposing a significant increase in the amount required to be
contributed by each Unitholder from the amount that was required under the
related business plan previously approved pursuant to Section 3.02(a) or (C) any
acquisition pursuant to Section 5.02(d)(i)(C)(2) of the LLC Agreement (which
acquisition is to be funded in any part by a Subsequent Contribution under an
Approved Budget that incorporates an Approved Business Plan reflecting such
acquisition), and (ii) the Representative of Fleet and/or Waller-Sutton, as the
case may be, does not vote in favor of any of the events described in clauses
(A), (B) or (C), then in any such case Waller-Sutton and/or Fleet may, within
seven business days of such approval by the LLC, by written notice (the "Opt-Out
Notice") to the LLC and the other Investor Members elect (the "Opt-Out
Election") to be treated thenceforth as an "Opt-Out Investor." Such election
shall result in such Opt-Out Investor having the rights, obligations and
consequences described below in Section 3.05(b). Upon receipt of an Opt-Out
Notice from an Opt-Out Investor, either Fleet or Waller-Sutton, as the case may
11
<PAGE>
be, may also elect to be treated as an Opt-Out Investor by providing, within
three business days of receipt of such Opt-Out Notice, its own Opt-Out Notice to
the LLC and each other Investor Member, whereupon such electing Investor Member
shall also be treated as an Opt-Out Investor.
(b) The following shall be the rights and obligations of, and the
consequences of being, an Opt-Out Investor for purposes of the Transaction
Agreement, the LLC Agreement and the other agreements contemplated hereby and
thereby:
(i) An Opt-Out Investor shall, for a period of six months after the
Opt-Out Election, in order to enable the Corporation to fulfill its
obligations to make Subsequent Contributions with respect to all Approved
Business Plans and Approved Budgets which were approved by the LLC pursuant
to this Article 3 prior to such Opt-Out Election, remain obligated to
provide additional Capital Contributions to the LLC in an amount equal to
its pro rata share (determined pursuant to Section 3.03(a) of the LLC
Agreement before giving effect to clause (iii) below) of the aggregate
amount of Capital Contributions required to be provided to the LLC by all
of its Members in order to permit the LLC to make any such Subsequent
Contributions which it has not already contributed to the Corporation.
(ii) Except as provided in Section 3.05(b)(i) or 3.05(b)(iv), an
Opt-Out Investor shall not have any right or obligation to make any other
capital contributions to or investments in the LLC or the Corporation.
(iii) The aggregate amount of Capital Contributions made by an
Opt-Out Investor to the LLC prior to the Opt-Out Election plus the amount
required to be subsequently contributed by it to the LLC pursuant to
Section 3.05(b)(i) is referred to as such Opt-Out Investor's "Opt-Out
Commitment." The number of Units held by such Opt-Out Investor immediately
prior to the Opt-Out Election (the "Initial Unit Amount") will be
automatically reduced to the number corresponding to the aggregate dollar
amount of such Opt-Out Commitment (assuming for this purpose that each Unit
were equivalent to $1 of commitment) (the "Adjusted Unit Amount"). The
number of Units by which such Opt-Out Investor's Initial Unit Amount
exceeds its Adjusted Unit Amount will be offered (the "Opt-Out Units
Offer"), by written notice, for reissuance to each other Investor Member
that is not an Opt-Out Investor based on each such Investor Member's pro
rata ownership, determined immediately prior to such reissuance, of the
aggregate amount of Units held by all the
12
<PAGE>
Investor Members offered such Units. If any such Investor Member subscribes
for less than its full pro rata share of offered Units pursuant to the Opt-
Out Units Offer, such unsubscribed portion shall be offered to the other
Investor Members (that are not Opt-Out Investors) in a similar manner. Such
Opt-Out Units Offer will be deemed rejected by an Investor Member if not
accepted by written notice to the LLC within five business days of such
Opt-Out Units Offer. The maximum commitment of each Investor Member who
subscribes for such Units shall be increased by $1 times the number of
Units so subscribed for. To the extent the Units so offered are not
accepted by any of such other Investor Members, they will be deemed
canceled and the Maximum Commitment will be reduced accordingly.
(iv) Each of the Opt-Out Investors hereby unconditionally releases
and waives, to the fullest extent permitted by applicable law, any and all
rights it may have to approve, object to or make any claim (including for
breach of fiduciary or other duty by any other Investor Member or any of
its Affiliates, designated Directors, designated Representatives or any
other Person) with respect to the amount, timing or terms of any further or
future equity or debt financing of or by the LLC or the Corporation or the
terms of any amendment to this Agreement, the LLC Agreement or the other
agreements contemplated hereby and thereby consistent with such financing
and related arrangements (regardless of whether such financing is senior or
dilutive to the equity ownership of such Opt-Out Investor); provided that
each Opt-Out Investor will be offered the opportunity to participate in any
such future equity or debt financing of or by the LLC or the Corporation,
that is dilutive to its equity ownership position, based on its pro rata
ownership, determined after giving effect to Section 3.05(b)(iii) above, of
the aggregate number of outstanding Units.
(v) An Opt-Out Investor shall immediately cease to have any rights
granted in Section 5.02(d)(i)(B) or 5.02(d)(i)(C) of the LLC Agreement.
(vi) An Opt-Out Investor will continue to hold the number of Class
A Units corresponding to the aggregate dollar amount of its Opt-Out
Commitment (which Units will not be subject to repurchase pursuant to
Section 3.04 of the LLC Agreement by virtue of the Opt-Out Election, but
will remain subject to Section 3.04 of the LLC Agreement in all other cases
including a breach by such Opt-Out Investor of Section 3.05(b)(i) above)
and, except as otherwise provided in this Section 3.05, will
13
<PAGE>
continue to have all its other rights and obligations under the Transaction
Agreement, the LLC Agreement and the other agreements contemplated hereby
and thereby, including, without limitation, its voting rights (after giving
effect to Section 3.05(b)(iii) and 3.05(b)(v)), rights under Section 9.04,
rights to distributions under Article 4 of the LLC Agreement and its
registration rights under the Registration Rights Agreement.
ARTICLE 4
Covenants
Section 4.1. Financial Statements and Other Information. The Corporation
shall deliver (i) to each holder of Management Equity (so long as such holder
does not "participate" (as such term is defined in the form executive purchase
agreement attached hereto as Exhibit 3) in any business that may be or is
competitive with any business conducted by the Corporation or any Subsidiary and
has not committed a Vesting Termination Breach (also as defined in said Exhibit
3), the information set forth in Section 4.01(c) below, and (ii) to the LLC (so
long as it holds any Common Stock), to each holder of Investor Equity or its
Affiliates, and to any subsequent holder of at least 5% of the Investor Equity
(so long as such holder or any of its Affiliates holds at least 5% of the
Investor Equity) (the LLC, each holder of Investor Equity or Affiliate, and each
other such holder, a "Qualified Holder") all the information described in this
Section 4.01:
(a as soon as available but in any event within 30 days after the end
of each monthly accounting period in each fiscal year: (i) unaudited
consolidating and consolidated statements of income and cash flows of the
Corporation and its Subsidiaries for such monthly period and for the period from
the beginning of the fiscal year to the end of such month, and unaudited
consolidating and consolidated balance sheets of the Corporation and its
Subsidiaries as of the end of such monthly period, setting forth in each case
comparisons to the Corporation's annual budget and to the corresponding period
in the preceding fiscal year, all such statements shall be prepared in
accordance with generally accepted accounting principles, consistently applied
(subject to the absence of footnote disclosures and to changes resulting from
normal year-end adjustments for recurring accruals), and shall be certified by
the Corporation's chief financial officer, and (ii) a status report prepared by
the Corporation's chief financial officer, indicating whether the Corporation
has met its budgeted financial goals (including, without limitation, those
specified in any Approved Business Plan or Approved Budget and those delivered
pursuant to Section 4.01(e) below),
14
<PAGE>
discussing in reasonable detail the reasons for any variation from such goals,
and describing what actions the Corporation and its Subsidiaries have taken and
propose to take in order to meet budgeted financial targets in the future;
(b within 45 days after the end of each quarterly accounting period in
each fiscal year, an Officer's Certificate stating that neither the Corporation
nor any of its Subsidiaries is in default in any material respect under any of
its agreements or, if any such default exists, specifying the nature and period
of existence thereof and what actions the Corporation and its Subsidiaries have
taken and propose to take with respect thereto;
(c within 90 days after the end of each fiscal year, consolidating and
consolidated statements of income and cash flows of the Corporation and its
Subsidiaries for such fiscal year, and consolidating and consolidated balance
sheets of the Corporation and its Subsidiaries as of the end of such fiscal
year, setting forth in each case comparisons to the Corporation's annual budget
and to the preceding fiscal year, all prepared in accordance with generally
accepted accounting principles, consistently applied, and accompanied by (i)
with respect to the consolidated portions of such statements, an opinion
containing no exceptions or qualifications (except for qualifications regarding
specified contingent liabilities) of one of the "Big Five" independent
accounting firms selected by the audit committee of the Corporation, (ii) a
certificate from such accounting firm, addressed to the Board, stating that in
the course of its examination nothing came to its attention that caused it to
believe that there was any default specified in Section 4.01(b) in existence or
that there was any other default by the Corporation or any Subsidiary in the
fulfillment of or compliance with any of the material terms, covenants,
provisions or conditions of any agreement to which the Corporation or any
Subsidiary is a party or, if such accountants have reason to believe any such
default by the Corporation or any Subsidiary exists, a certificate specifying
the nature and period of existence thereof, and (iii) a copy of such firm's
annual management letter to the Board;
(d promptly upon receipt thereof, any additional reports, management
letters or other detailed information concerning significant aspects of the
Corporation's operations or financial affairs given to the Corporation by its
independent accountants (and not otherwise contained in other materials provided
hereunder);
(e at least 30 days but not more than 90 days prior to the beginning
of each fiscal year, the Proposed Budget and, promptly upon preparation thereof,
any other significant budgets prepared by the Corporation and any revisions of
such
15
<PAGE>
annual or other budgets, in each case for approval by the LLC pursuant to
Section 3.02;
(f promptly (but in any event within five business days) after the
discovery or receipt of notice of (i) any material lawsuit or proceeding against
the Corporation or any of its Subsidiaries or executive officers, (ii) any
default in any material respect under any agreement to which the Corporation or
any of its Subsidiaries or executive officers is a party, (iii) any condition or
event which is reasonably likely to result in any material liability under any
federal, state or local statute or regulation relating to public health and
safety, worker health and safety or pollution or protection of the environment
or (iv) any other material adverse change, event or circumstance affecting the
Corporation or any Subsidiary or executive officer (including, without
limitation, the filing of any litigation against the Corporation or any
Subsidiary or executive officer or the existence of any dispute with any Person
which involves a reasonable likelihood of such litigation being commenced), an
Officer's Certificate specifying the nature and period of existence thereof and
what actions the Corporation and its Subsidiaries and executive officers have
taken and propose to take with respect thereto;
(g within ten days after transmission thereof, copies of all financial
statements, proxy statements, reports and any other general written
communications which the Corporation sends to its stockholders and copies of all
registration statements and all regular, special or periodic reports which it
files, or (to its knowledge) any of its officers or directors file with respect
to the Corporation, with the Securities and Exchange Commission or with any
securities exchange on which any of its securities are then listed, and copies
of all press releases and other statements made available generally by the
Corporation to the public concerning material developments in the Corporation's
and its Subsidiaries' businesses; and
(h with reasonable promptness, such other information and financial
data concerning the Corporation and its Subsidiaries as any Qualified Holder may
reasonably request.
Each of the financial statements referred to in Section 4.01(a) and
4.01(c) shall be true and correct in all material respects as of the dates and
for the periods stated therein, subject in the case of the unaudited financial
statements to changes resulting from normal year-end adjustments for recurring
accruals (none of which would, alone or in the aggregate, be materially adverse
to the financial condition, operating results, assets, operations or business
prospects of the Corporation and its Subsidiaries taken as a whole).
16
<PAGE>
Notwithstanding the foregoing, the provisions of this Section 4.01 shall
cease to be effective so long as the Corporation (a) is subject to the periodic
reporting requirements of the Securities Exchange Act and continues to comply
with such requirements and (b) promptly provides to each Qualified Holder all
reports and other materials filed by the Corporation with the Securities and
Exchange Commission pursuant to the periodic reporting requirements of the
Securities Exchange Act; provided that so long as any Common Stock remains
outstanding, the Corporation shall continue to deliver to each Qualified Holder
the information specified in Sections 4.01(b), 4.01(c)(ii) and (iii), 4.01(e),
4.01(f) and 4.01(h).
Except as otherwise required by law or judicial order or decree or
requested by any governmental agency or authority, or as specified in the
immediately following proviso, each Person entitled to receive information
regarding the Corporation and its Subsidiaries under Section 4.01 or 4.02 shall
not disclose any such information to any third party (other than such Person's
advisors or representatives who shall be instructed to abide by this
confidentiality obligation and for whose breach hereof such Person shall be
responsible); provided that such a Person may disclose such information (i) in
connection with the proposed sale or transfer of any Investor Equity if such
Person's proposed transferee agrees in writing to be bound by the
confidentiality provisions hereof, (ii) if such Person is a partnership, limited
liability company or corporation, to such Person's partners, members and
shareholders, on a need to know basis only, so long as all such parties are
apprised of the confidentiality provisions herein, or (iii) if such information
is available to the public other than by reason of such Person's breach of this
provision.
Section 4.2. Inspection of Property. To the extent not otherwise
prohibited by law or regulation, the Corporation shall permit any
representatives designated by any Qualified Holder, upon reasonable notice and
during normal business hours and at such other times as any such Qualified
Holder may reasonably request to (i) visit and inspect any of the properties of
the Corporation and its Subsidiaries, (ii) examine the corporate and financial
records of the Corporation and its Subsidiaries and make copies thereof or
extracts therefrom and (iii) discuss the affairs, finances and accounts of any
such corporations with the directors, officers, key employees and independent
accountants of the Corporation and its Subsidiaries. The presentation of an
executed copy of this Agreement (or photocopy thereof) by any Qualified Holder
or representative thereof to the Corporation's independent accountants shall
constitute the Corporation's permission to its independent accountants to
participate in discussions with such Persons notwithstanding the fact that such
Qualified Holder is not a party hereto.
17
<PAGE>
Section 4.3. Affirmative Covenants. So long as any Investor Equity
remains outstanding, the Corporation shall, and shall cause each Subsidiary (if
any) to:
(a at all times cause to be done all things necessary to maintain,
preserve and renew its corporate existence;
(b at all times take all actions and cause to be done all things
necessary to obtain, maintain, preserve, and renew all material licenses,
authorizations, orders, permits, and other governmental approvals necessary to
the conduct of its businesses as presently proposed to be conducted and as
hereafter conducted;
(c maintain and keep its material properties in good repair, working
order and condition, and from time to time make all necessary or desirable
repairs, renewals and replacements, so that its businesses may be properly and
advantageously conducted in all material respects at all times;
(d pay and discharge when payable all taxes, assessments and
governmental charges imposed upon its properties or upon the income or profits
therefrom (in each case before the same becomes delinquent and before penalties
accrue thereon) and all material claims for labor, materials or supplies which
if unpaid would by law become a Lien upon any of its property unless and except
to the extent that the same are being contested in good faith and by appropriate
proceedings and adequate reserves (as determined in accordance with generally
accepted accounting principles, consistently applied) have been established on
its books with respect thereto;
(e comply with all other material obligations which it incurs pursuant
to any contract or agreement, whether oral or written, express or implied, as
such obligations become due, unless and except to the extent that the same are
being contested in good faith and by appropriate proceedings and adequate
reserves (as determined in accordance with generally accepted accounting
principles, consistently applied) have been established on its books with
respect thereto;
(f comply in all material respects with all applicable laws, rules and
regulations of the Federal Communications Commission and all other governmental
authorities to which any of the Corporation and its Subsidiaries are subject
including, without limitation, environmental laws;
(g apply for and continue in force with nationally reputable insurance
companies adequate insurance covering risks of such types and in such amounts
18
<PAGE>
as are customary for well-insured corporations of similar size engaged in
similar lines of business; and
(h maintain proper books of record and account which present fairly in
all material respects its financial condition and results of operations and make
provisions on its financial statements for all such proper reserves as in each
case are required in accordance with generally accepted accounting principles,
consistently applied.
Section 4.4. Compliance with Agreements. The Corporation shall perform
and observe all of its obligations to each holder of Common Stock set forth in
the Certificate of Incorporation, the Bylaws, and the Registration Rights
Agreement.
Section 4.5. Current Public Information. At all times after the
Corporation has filed a registration statement with the Securities and Exchange
Commission pursuant to the requirements of either the Securities Act or the
Securities Exchange Act, the Corporation shall file all reports required to be
filed by it under the Securities Act and the Securities Exchange Act and the
rules and regulations adopted by the Securities and Exchange Commission
thereunder and shall take such further action as any holder or holders of
Restricted Securities may reasonably request, all to the extent required to
enable such holders to sell Restricted Securities pursuant to (a) Rule 144
adopted by the Securities and Exchange Commission under the Securities Act (as
such rule may be amended from time to time) or any similar rule or regulation
hereafter adopted by the Securities and Exchange Commission or (b) a
registration statement on Form S-2 or S-3 or any similar registration form
hereafter adopted by the Securities and Exchange Commission. Upon request, the
Corporation shall deliver to any holder of Restricted Securities a written
statement as to whether it has complied with such requirements.
Section 4.6. Intellectual Property Rights. The Corporation shall, and
shall cause each Subsidiary to, possess and maintain all material Intellectual
Property Rights necessary to the conduct of their respective businesses and own
all right, title and interest in and to, or have a valid license for, all such
Intellectual Property Rights. Neither the Corporation nor any Subsidiary shall
take any action, or fail to take any action, which would result in the
invalidity, abandonment, misuse or unenforceability of such Intellectual
Property Rights or which would infringe upon or misappropriate any intellectual
property rights of other Persons.
19
<PAGE>
Section 4.7. Public Disclosures. The Corporation shall not, nor shall it
permit any Subsidiary to, disclose the LLC's or any holder of Investor Equity's
name or identity as an investor in the Corporation or the LLC in any press
release or other public announcement or in any document or material filed with
any governmental entity, without the prior written consent of such Person,
unless such disclosure is required by applicable law or governmental regulations
or by order of a court of competent jurisdiction, in which case prior to making
such disclosure the Corporation shall give written notice to such Person
describing in reasonable detail the proposed content of such disclosure and
shall permit such Person to review and comment upon the form and substance of
such disclosure.
Section 4.8. Selection of Corporation's Financial Advisor, Underwriter
etc. So long as MSCP holds more than 30% of the aggregate outstanding Investor
Equity and Management Equity, MSCP will have the right to select the
Corporation's financial adviser, if any, for all financial advisory assignments
and to select the lead manager or lead arranger, if any, for all securities
offerings, capital markets activities and financings of the Corporation. The
terms of such engagement will be subject to Section 5.03(f) to the extent
provided therein.
ARTICLE 5
Governance
From and after the Initial Closing and until the provisions of this Article
5 cease to be effective:
Section 5.1. Management of the Corporation Generally. Management of the
Corporation shall vest in the Board, subject to the rights and powers of the LLC
described in the next sentence. Notwithstanding anything else contained herein,
the Corporation (i) shall take any lawful action mandated by a resolution
adopted by the LLC and (ii) shall not take any action in violation of any
resolution adopted by the LLC or in violation of Section 5.02. Subject to the
preceding sentences, the day-to-day affairs of the Corporation shall be managed
by the executive officers of the Corporation under the supervision of its chief
executive officer. It is understood that Board meetings are to be conducted in
a manner to encourage participation by all Directors.
Section 5.2. Governance Rights of the LLC. The Corporation shall not (and
shall not permit any of its Subsidiaries to), without the prior written consent
of the LLC:
20
<PAGE>
(a directly or indirectly declare or pay any dividends or make any
distributions upon any of its capital stock or other equity securities;
(b directly or indirectly redeem, purchase or otherwise acquire, or
permit any Subsidiary to redeem, purchase or otherwise acquire, any of the
Corporation's or any Subsidiary's capital stock or other equity securities,
except for repurchases of capital stock issued upon the exercise of stock
options pursuant to the terms of any Permitted Stock Option Plan (as defined
below), or repurchases of the Corporation's securities pursuant to the terms of
the Executive Purchase Agreements;
(c except for (x) issuances of Common Stock at the Initial Closing as
contemplated under this Agreement, or (y) issuances of options to acquire Common
Stock pursuant to the terms of the Permitted Stock Option Plan or of Common
Stock upon the exercise of such options, authorize, issue or enter into any
agreement providing for the issuance (contingent or otherwise) of any notes or
debt securities containing equity features (including, without limitation, any
notes or debt securities convertible into or exercisable or exchangeable for
capital stock or other equity securities, issued in connection with the issuance
of capital stock or other equity securities or containing profit participation
features), other than as may be expressly specified in any Approved Business
Plan or Approved Budget, or any capital stock or other equity securities (or
any securities convertible into or exercisable or exchangeable for any capital
stock or other equity securities);
(d make, or permit any Subsidiary to make, any loans or advances to,
guarantees for the benefit of, or Investments in, any Person, except for
reasonable advances to employees or customers in the ordinary course of
business, acquisitions permitted under Section 5.02(h), and Investments having
a stated maturity no greater than one year from the date the Corporation makes
such Investment in obligations of the United States government or any agency
thereof or obligations guaranteed by the United States government, certificates
of deposit of commercial banks having combined capital and surplus of at least
$500 million or commercial paper with a rating of at least "Prime-1" by Moody's
Investors Service, Inc.;
(e merge or consolidate with any Person or, except as permitted under
Section 5.02(h), permit any Subsidiary to merge or consolidate with any Person
(other than a merger between Wholly-Owned Subsidiaries);
(f sell, lease or otherwise dispose of, or permit any Subsidiary to
sell, lease or otherwise dispose of, assets of the Corporation and its
Subsidiaries having
21
<PAGE>
in the aggregate a value of more than $100,000 (computed on the basis of book
value, determined in accordance with generally accepted accounting principles
consistently applied, or fair market value, determined by the LLC in its
reasonable good faith judgment) in any transaction or series of related
transactions, or sell, or license or permanently dispose of any of its or any
Subsidiary's material Intellectual Property Rights;
(g liquidate, dissolve or effect a recapitalization or reorganization,
or permit any Subsidiary to liquidate, dissolve or effect a recapitalization or
reorganization, in any form of transaction (including, without limitation, any
reorganization into a limited liability company, a partnership or any other non-
corporate entity which is treated as a partnership for federal income tax
purposes);
(h acquire, or permit any Subsidiary to acquire, any interest in any
company or business (whether by a purchase of assets, purchase of stock, merger
or otherwise), or enter into any joint venture (in each case, other than as may
be expressly specified in any Approved Business Plan or Approved Budget);
(i enter into, or permit any Subsidiary to enter into, the ownership,
active management or operation of any business other than the provision of
telecommunications services or such other business activities in each case as
may be identified in any Approved Business Plan;
(j become subject to, or permit any of its Subsidiaries to become
subject to (including, without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would (under any
circumstances) restrict the right of any Subsidiary to make loans or advances or
pay dividends to, transfer property to, or repay any Indebtedness owed to, the
Corporation or another Subsidiary or restrict the Corporation's performance of
its obligations under the provisions of this Agreement, the Registration Rights
Agreement, the Certificate of Incorporation or the Bylaws (including, without
limitation, provisions relating to the declaration and payment of dividends on
any Common Stock);
(k except as expressly contemplated by this Agreement, make any
amendment to the Certificate of Incorporation or the Bylaws, or file any
resolution of the Board or the LLC with the Delaware Secretary of State;
(l enter into, amend, modify or supplement, or permit any Subsidiary
to enter into, amend, modify or supplement, any agreement, transaction, benefit
plan, commitment or arrangement with any of its or any Subsidiary's executive
officers, directors or Affiliates or with any individual related by blood,
marriage or
22
<PAGE>
adoption to any such individual or with any entity in which any such Person or
individual owns a beneficial interest, except as otherwise expressly
contemplated by this Agreement;
(m establish or acquire any Subsidiaries other than Wholly-Owned
Subsidiaries organized within the United States and its territorial possessions;
(n create, incur, assume or suffer to exist, or permit any Subsidiary
to create, incur, assume or suffer to exist, Indebtedness on a consolidated
basis in an aggregate outstanding principal amount in excess of $250,000 at any
time (other than Indebtedness expressly specified in any Approved Business Plan
or Approved Budget then applicable);
(o create, incur, assume or suffer to exist, or permit any Subsidiary
to create, incur, assume or suffer to exist, any Liens other than Permitted
Liens;
(p make any capital expenditures or permit any Subsidiary to make any
capital expenditures (including, without limitation, payments with respect to
capitalized leases, as determined in accordance with generally accepted
accounting principles consistently applied) exceeding $100,000 in the aggregate
on a consolidated basis during any 12-month period (other than capital
expenditures expressly specified in any Approved Business Plan or Approved
Budget then applicable);
(q enter into, or permit any Subsidiary to enter into, any leases or
other rental agreements (excluding capitalized leases, as determined in
accordance with generally accepted accounting principles consistently applied)
under which the amount of the aggregate lease payments for all such agreements
exceeds $100,000 on a consolidated basis for any 12-month period;
(r change its fiscal year or permit any Subsidiary to change its
fiscal year;
(s change the authorized size or composition of the Board or the board
of directors of any Subsidiary from that set forth in Article 5 hereof;
(t adopt any stock option plan or employee stock ownership plan, stock
purchase or restricted stock or stock appreciation rights plan or issue any
shares of Common Stock to its or its Subsidiaries' employees other than
pursuant to an option plan, the terms of which shall be approved by the LLC,
under which employees of the Corporation and its Subsidiaries may be granted
options to acquire up to 5% of the Corporation's Common Stock, determined
immediately
23
<PAGE>
after giving effect to the transactions contemplated hereby on a fully diluted
and as-if-converted basis (the "Permitted Stock Option Plan") or the issuance of
options in certain circumstances upon a Public Offering pursuant to the terms of
any Executive Purchase Agreement;
(u issue or sell any shares of the capital stock or other equity
securities (including, without limitation, any warrants, options, and other
rights to acquire such capital stock or other equity securities) of any
Subsidiary to any Person other than the Corporation or a Wholly-Owned
Subsidiary;
(v terminate the employment of, hire, or enter into, amend or modify
any employment agreement or arrangement with, any key employee of the
Corporation or any of its Subsidiaries who would serve as, or would report
directly to, the Corporation's chief executive officer;
(w enter into any voting trust, voting or stockholder agreement with
respect to any of its or its Subsidiaries' securities or register any securities
pursuant to the Securities Act or the Securities Exchange Act, or grant, or
permit any of its Subsidiaries to grant, any registration rights (including,
without limitation, any demand or piggyback registration rights) with respect to
any of its capital stock, in each case other than pursuant to this Agreement and
the Registration Rights Agreement as in effect on the date hereof;
(x amend, waive, or otherwise modify any Approved Business Plan or
Approved Budget;
(y use the proceeds from the sale of the Common Stock hereunder other
than for working capital and budgeted general corporate purposes reflected in
any Approved Business Plan or Approved Budget or for such other purposes as are
contemplated by any Approved Business Plan or Approved Budget;
(z select or retain (except in compliance with Section 4.08), or
enter into, amend, terminate, or modify any retention arrangement with any
underwriter, manager, or financial advisor to advise the Corporation and its
Subsidiaries with respect to any proposed Sale of the Corporation or to
underwrite, or advise the Corporation with respect to, a Public Offering or any
acquisitions or financing transactions;
(aa change any of the accounting principles or practices utilized by
the Corporation or its Subsidiaries, or select, retain, or amend, terminate, or
modify any retention arrangement with any accounting firm engaged to audit the
Corporation's or its Subsidiaries' financial statements;
24
<PAGE>
(bb amend, waive, or otherwise modify any agreement entered into by
the Corporation on the date hereof;
(cc make or change any tax election, change any annual tax accounting
periods, adopt or change any method of tax accounting or make any change in the
Corporation's independent accounting firm; or
(dd agree or commit to any of the foregoing.
Section 5.3. Corporate Board Composition and Vacancies. The LLC shall
vote all shares of Common Stock owned by it and the LLC and each Unitholder
shall take all other necessary or desirable action within such holder's control
(whether in such holder's capacity as a stockholder, director, member of a Board
committee or officer of the Corporation, Unitholder or member of the LLC or
otherwise, and including, without limitation, attendance at meetings in person
or by proxy for purposes of establishing a quorum and execution of written
consents in lieu of meetings), and the Corporation shall take all necessary or
desirable actions within its control (including, without limitation, if
necessary, calling special Board and stockholder meetings), so that:
(a The authorized number of directors on the Board shall initially be
established and remain at seven directors. The size of the Board may be changed
at any time by approval of the LLC's Board of Representatives as constituted
immediately prior to such time.
(b The Investor Members and the Management Members shall have the
right to designate the following individuals to be elected to the Board (and the
Board shall be comprised of such designees):
(i the holders of a majority of the MSCP Equity held by MSCP and
its Affiliates may designate (x) a majority of the representatives so long
as MSCP and its Affiliates hold at least a majority of the aggregate
outstanding Class A Units and Class B Units (the "Outstanding Voting
Units"); (y) a number of representatives equal to the total number of
representatives not then designated by MSCP and its Affiliates so long as
MSCP and its Affiliates hold less than a majority but at least 20% of the
Outstanding Voting Units; and (z) one representative so long as MSCP and
its Affiliates hold less than 20% but at least 5% of the Outstanding Voting
Units;
25
<PAGE>
(ii the holders of a majority of the Fleet Equity held by Fleet
and its Affiliates may designate one representative so long as Fleet and
its Affiliates hold at least 5% of the Outstanding Voting Units;
(iii the holders of a majority of the Waller-Sutton Equity held
by Waller-Sutton and its Affiliates may designate one representative so
long as Waller-Sutton and its Affiliates hold at least 5% of the
Outstanding Voting Units; and
(iv the holders of a majority of the Management Equity may
designate one member of the Corporation's management, who shall be the
Corporation's chief executive officer (such member when elected, the
"Management Director").
(c The required quorum for Board action shall be the presence at a
Board meeting of at least five directors, at least one of whom is a Director
designated by Fleet or Waller-Sutton.
(d) The composition of the board of directors of each of the
Corporation's Subsidiaries (a "Sub Board") shall be the same as that of the
Board.
(e) The Board shall create and maintain an executive committee (the
"Executive Committee") consisting of the following members: (i) one Director
designated by the holders of a majority of MSCP Equity held by MSCP and its
Affiliates, (ii) the Corporation's chief executive officer, (iii) the Director
designated by Fleet pursuant to 5.03(b)(ii), and (iv) the Director designated by
Waller-Sutton pursuant to 5.03(b)(iii); provided that an Investor Member will
lose its right to have its designee on the Executive Committee as soon as it is
not entitled to any designee on the Board. The Executive Committee shall (x)
act as a liaison between the Board, on the one hand, and executive management,
on the other hand, and (y) exercise such powers as shall be delegated to it from
time to time by the Board. Each member of the Executive Committee shall have
one vote.
(f) The Board shall create and maintain a committee (the "Pricing
Committee") consisting of the following members: (i) one Director designated by
the holders of a majority of MSCP Equity held by MSCP and its Affiliates, (ii)
the Corporation's chief executive officer, (iii) the Director designated by
Fleet pursuant to 5.03(b)(ii), and (iv) the Director designated by Waller-Sutton
pursuant to 5.03(b)(iii); provided that an Investor Member will lose its right
to have its designee on the Pricing Committee as soon as it is not entitled to
any designee on
26
<PAGE>
the Board. The Pricing Committee (A) shall negotiate the pricing and other terms
applicable to the engagement of an Affiliate of MSCP as a financial advisor to
the Corporation or the LLC or as lead manager or lead arranger for any
underwritten offering or capital markets activities (x) for the account of the
Corporation or (y) in which MSCP does not participate, which terms will be
customary for a transaction of that nature, (B) will have the authority in all
such cases to select and engage one or more co-managers or co-arrangers for any
such underwritten offering or capital markets activities and may negotiate the
terms of such engagement and (C) shall exercise such others powers as shall be
delegated to it from time to time by the Board. Notwithstanding the foregoing,
MSCP's designee shall abstain from voting on matters referred to in clause (A)
of the previous sentence (but will be entitled to participate in discussions and
deliberations, and will be consulted in good faith, thereon). Each member of the
Pricing Committee shall have one vote.
(g) Committees of the Board or a Sub Board (other than the Executive
Committee and the Pricing Committee) shall be created only upon the approval of
a majority of the members of the entire Board or the applicable entire Sub
Board, in each case assuming there were no vacancies and provided that action is
taken at a meeting at which a quorum exists, and the composition of each such
committee (if any) shall be proportionately equivalent to that of the Board to
the extent practicable. It is understood and agreed, however, that no Director
who is an officer of the Corporation may serve on the audit committee or any
compensation committee or other similar committee established by the Board.
(h) Any director will be removed from the Board or a Sub Board, (i) with
or without cause, at the written request of the holder or holders entitled to
designate such person to be a director or (ii) with cause, at the written
request of any Investor Member, and, subject to Section 141(k) of the Delaware
General Corporation Law, under no other circumstances; provided that if any
Director who is an officer of the Corporation ceases to be an employee of the
Corporation and its Subsidiaries for any reason, he shall be removed as a member
of the Board and each Sub Board promptly after his employment ceases.
(i) In the event any director ceases to serve as a member of the Board
or a Sub Board during his or her term of office, whether pursuant to paragraph
5.03(h) above or otherwise, or for any other reason there are at any time fewer
representatives serving on the Board than are entitled to be designated by an
Investor Member or the Management Members, as the case may be, the resulting
vacancy on the Board or the Sub Board may be filled at any time (i) by a
representative (or in the case of a vacant Management Directorship, a member of
the Corporation's management) designated by the holder or holders entitled to
designate such vacant Board seats or (ii) if no holder is entitled to designate
a
27
<PAGE>
representative to fill such vacancy at such time, then by the LLC's Board of
Representatives as constituted immediately prior to such time.
(j) If any of MSCP, Fleet, or Waller-Sutton become ineligible, by virtue
of the terms of Section 5.03(b)(i), 5.03(b)(ii) or 5.03(b)(iii), respectively
(including by operation of Section 5.03(k)), to designate a representative to
fill a directorship pursuant to such Section, all rights and entitlements
hereunder to designate persons to fill such directorship shall thereafter be
exercised by the holders of a majority of the Investor Equity held by the
Investor Members and their respective Affiliates.
(k) In accordance with Section 9.02(b) hereof, if upon any Capital Call
Notice (as defined in the LLC Agreement), any holder or Class A Units or Class B
Units refuses or otherwise fails to make the capital contributions required by
such Capital Call Notice under the LLC Agreement with respect to the Class A
Units and Class B Units held by such Unitholder, then all securities held by
such Unitholder shall, for purposes of this Section 5.03, thereupon immediately
cease to constitute any of MSCP Equity, Fleet Equity, Waller-Sutton Equity,
Investor Equity, or Management Equity.
Section 5.4. Director Expenses; Directors' and Officers' Insurance;
Indemnity and Exculpation. The Corporation shall pay all of the reasonable out-
of-pocket expenses incurred by each director in connection with attending the
meetings of the Board, any Sub Board and any committee thereof. So long as any
director designated under this Agreement serves on the Board and for five years
thereafter, the Corporation shall maintain directors and officers indemnity
insurance coverage satisfactory to the Board at the time such insurance is first
obtained and not thereafter reduced in amount or coverage, and the Corporation's
certificate of incorporation and bylaws shall provide for indemnification and
exculpation of directors to the fullest extent permitted under applicable law.
Section 5.5. Termination. The rights and requirements under Sections 5.01
through 5.03 shall terminate upon the earlier to occur of (i) consummation of
the initial Public Offering approved under Section 5.02 of the LLC Agreement and
(ii) the closing of a Sale of the Corporation. The provisions of Section 5.04
shall survive the termination of the other provisions of this Article 5.
Section 5.6. Voting Rights. Any Common Stock distributed in respect of
(i) any Class C Unit or Class D Unit or (ii) any Management Equity owned
beneficially by any Person who has been terminated with Cause (as defined in the
relevant Executive Purchase Agreement) or who has committed a Vesting
Termination Breach (as defined in the relevant Executive Purchase Agreement)
28
<PAGE>
shall in each case not have any voting rights whatsoever except for purposes of
Section 9.04 hereof or of Section 14.02 of the LLC Agreement.
ARTICLE 6
Restrictions on Transfers of Securities
Section 6.1. General Securities Laws Restrictions. (a) In addition to the
other restrictions on Transfer set forth in this Article 6, in the Executive
Purchase Agreements, the LLC Agreement and the Registration Rights Agreement,
Restricted Securities may not be Transferred except pursuant to (i) a public
offering registered under the Securities Act that has been approved by the LLC
(prior to its dissolution) and that complies with the Registration Rights
Agreement, (ii) subject to Section 6.01(b) below, Rule 144 if such rule is
available, or (iii) subject to Section 6.01(b) below, any other legally
available means of transfer.
(b) Opinion Delivery. In connection with the transfer of any Restricted
Securities (other than a transfer described in Section 6.01(a)(i) above), the
holder thereof shall deliver written notice to the Corporation describing in
reasonable detail the transfer or proposed transfer, together with an opinion of
Davis Polk & Wardwell or other counsel which (to the Corporation's reasonable
satisfaction) is knowledgeable in securities law matters to the effect that such
transfer of Restricted Securities may be effected without registration of such
Restricted Securities under the Securities Act. In addition, if the holder of
the Restricted Securities delivers to the Corporation an opinion of Davis Polk &
Wardwell or such other counsel that no subsequent transfer of such Restricted
Securities shall require registration under the Securities Act, the Corporation
shall promptly upon such contemplated transfer deliver new certificates for such
Restricted Securities which do not bear the Securities Act legend set forth in
Section 9.03 below. If the Corporation is not required to deliver new
certificates for such Restricted Securities not bearing such legend, the holder
thereof shall not transfer the same until the prospective transferee has
confirmed to the Corporation in writing its agreement to be bound by the
conditions contained in Section 9.03.
(c) Legend Removal Upon Availability of Rule 144(k). If any Restricted
Securities become eligible for sale pursuant to Rule 144(k) and pursuant to this
Agreement, the Corporation shall, upon the request of the holder of such
Restricted Securities and delivery of the opinion described in Section 6.01(b),
29
<PAGE>
promptly remove the legend set forth in Section 9.03 from the certificates for
such Restricted Securities.
Section 6.2. Restrictions on Transfer of Management Equity. In addition
to the provisions of this Article 6, each holder of Management Equity shall be
subject to the restrictions on Transfer of such Management Equity set forth in
such holder's Executive Purchase Agreement, the LLC Agreement and the
Registration Rights Agreement.
Section 6.3. Transfer of Investor Equity. (a) Investor Equity will not be
subject to Transfer restrictions or obligations except as follows:
(i) any Transfer of Investor Equity must be made in compliance with
Section 6.01;
(ii) any Transfer of Investor Equity in or after a Public Offering
will be subject to the provisions of the Registration Rights Agreement;
(iii) holders of Investor Equity will be subject to the "drag
along" restrictions and obligations contained in Section 6.06;
(iv) any Transfer of Investor Equity to a third party in a Private
Tag Transaction (as defined below) must (x) be effected in compliance with
Section 6.05 and (y) prior to dissolution of the LLC, be approved by the
LLC;
(v) no Distribution-In-Kind may be made prior to the dissolution of
the LLC except (x) with the approval of the LLC or (y) in connection with
the winding up and dissolution of any Investor Member that is a partnership
or an investment fund; and
(vi) unless after giving effect to the applicable Transfer the
Investor Equity ceases to be such in accordance with its definition, the
applicable transferee or transferees of the Investor Equity must, as a
condition to the valid Transfer thereof, execute and deliver to the
Corporation an instrument (acceptable to the LLC prior to its dissolution,
and thereafter, to the Corporation) agreeing to be bound by the provisions
of this Article 6 and such provisions of this Agreement, the LLC Agreement
and the other agreements contemplated hereby and thereby as shall be
reasonably required by the LLC (or by the Corporation after the LLC's
dissolution); provided that, in the case of an Exempt Transferee holding
Investor Equity, such agreement to be bound shall be only as to
30
<PAGE>
the Registration Rights Agreement and as to Sections 6.03(a)(i) and
6.03(a)(ii) hereof and such Exempt Transferee shall not be subject to
Section 6.03(a)(iii), 6.03(a)(iv) or 6.03(a)(v) hereof or to any of the
other provisions of this Agreement or the LLC Agreement.
(b) Each certificate evidencing Investor Equity and each certificate
issued in exchange for or upon the transfer of any Investor Equity (if such
securities remain Investor Equity after such transfer) shall be stamped or
otherwise imprinted with a legend in substantially the following form:
31
<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER CONTAINED IN A TRANSACTION AGREEMENT DATED AS OF JULY
8, 1998, AMONG THE ISSUER OF SUCH SECURITIES (THE "ISSUER") AND CERTAIN OF THE
ISSUER'S SECURITYHOLDERS, AS AMENDED AND MODIFIED FROM TIME TO TIME. A COPY OF
SUCH TRANSACTION AGREEMENT SHALL BE FURNISHED PROMPTLY WITHOUT CHARGE BY THE
ISSUER TO THE HOLDER HEREOF UPON WRITTEN REQUEST."
The legend set forth above shall be removed from the certificates evidencing any
shares which cease to be Investor Equity in accordance with the definition of
such term herein.
Section 6.4. Transfers in Violation of Agreement. Any Transfer or
attempted Transfer of any Investor Equity or Management Equity in violation of
this Article 6 shall be void, and none of the LLC, the Corporation, or any
Subsidiary shall record such purported Transfer on its books or treat any
purported transferee as the owner of such Investor Equity or Management Equity.
Section 6.5. Right to Participate in Certain Sales. (a) If any holder of
Investor Equity (such holder a "Selling Person") proposes to Transfer any
Investor Equity in a Private Tag Transaction pursuant to an offer made by a
third party (each a "Tag-Along Sale"), the Selling Person must provide each
other holder of Investor Equity (each such other holder, a "Tagging Person")
with
32
<PAGE>
written notice of the terms and conditions of such proposed Transfer (the "Tag-
Along Notice"). If the Selling Person proposes to make a Transfer in a Private
Tag Transaction that, if consummated on the terms set forth in the Tag-Along
Notice, would constitute a Sale of the Corporation, (i) the Selling Person must
also provide each holder of Management Equity with a Tag-Along Notice and (ii)
each holder of Management Equity shall also be a Tagging Person.
(b) The Tag-Along Notice must identify the number and type of securities
subject to the offer (the "Tag-Along Offer"), the name and address of the
proposed third party purchaser, the name and address of any party holding 25% or
more of the ownership interests in such third party purchaser, the proposed
consideration per unit or share, and all other material terms and conditions of
the Tag-Along Offer. Any Transfer by a Selling Person of Investor Equity that
occurs within six months of any other Transfer by such Selling Person of the
same securities shall be conclusively deemed to be related to such previous
Transfer.
(c) Each Tagging Person shall have the right (a "Tag-Along Right"), at
its option, exercisable by written notice given to the Selling Person within 20
days after receipt of the Tag-Along Notice (the "Tag-Along Notice Period"), to
request the Selling Person to include in the proposed Transfer any amount of
then held by such Tagging Person; provided that if the aggregate amount of
Equity (as defined below) proposed to be Transferred by the Selling Person and
all Tagging Persons in such transaction exceeds the maximum amount that can be
Transferred on the terms and conditions set forth in the Tag-Along Notice, then
such maximum amount of Equity shall be allocated among the Selling Person and
the Tagging Persons based on their respective pro rata portion of the aggregate
amount of Equity held by the Selling Person and the Tagging Persons at such
time. "Equity" means (i) Investor Equity or (ii) in the case of the application
of the last sentence of Section 6.05(a), the total of Investor Equity and
Management Equity.
(d) Any Tagging Person that exercises its Tag-Along Rights hereunder
must deliver to the Selling Person the certificate or certificates (if any)
representing the Equity of such Tagging Person to be included in the Transfer,
together with a limited power-of-attorney authorizing the Selling Person to
Transfer such Equity on the terms set forth in the Tag-Along Notice. Delivery
by a Tagging Person of such certificate or certificates (if any) and limited
power-of-attorney shall constitute an irrevocable acceptance of the Tag-Along
Offer by such Tagging Person. If, at the end of a 60-day period after such
delivery, the Selling Person has not completed the Transfer of all such Equity
of the Selling Person and all of the Tagging Persons on substantially the same
terms
33
<PAGE>
and conditions as set forth in the Tag-Along Notice (for purposes of which a
change of up to 5% in price per share or unit, up or down, from that shown in
the Tag-Along Notice will be deemed substantially the same), the Selling Person
shall promptly return to each Tagging Person the certificate or certificates (if
any) and limited power-of-attorney (and all copies thereof) delivered by such
Tagging Person for Transfer pursuant to this Section 6.05.
(e) Promptly after the consummation of the Tag-Along Sale, the Selling
Person shall give written notice thereof to the Tagging Persons, shall promptly
remit (by bank or certified check) to each Tagging Person who has surrendered
its certificate or certificates (if any) or otherwise participated in such Tag-
Along Sale the consideration for the Equity Transferred by such Tagging Persons
in such Tag-Along Sale, and shall furnish such other evidence of the completion
and time of completion of such Transfer and the terms thereof as may be
reasonably requested by the Tagging Persons.
(f) If at the termination of the Tag-Along Notice Period any Tagging
Person shall not have elected to participate in the Tag-Along Sale, such Tagging
Person will be deemed to have waived its rights under this Section to Transfer
any Equity pursuant to such Tag-Along Sale.
(g) The rights and obligations of the Selling Person and the Tagging
Persons under this Section 6.05 shall be subject to the following conditions:
(i) upon the consummation of any Tag-Along Sale, each of the
Selling Person and the Tagging Persons participating therein will receive
the same form and amount of consideration per unit or share, as the case
may be, or if the Selling Person or any Tagging Person is given an option
as to the form and amount of consideration to be received, the Selling
Person and all Tagging Persons participating therein will be given the same
option;
(ii) no Selling Person nor Tagging Person shall be obligated to pay
more than its pro rata share (based on the aggregate consideration to be
received in respect of its Equity in the Tag-Along Sale) of costs, fees and
expenses incurred in connection with the Tag-Along Sale to the extent such
costs, fees and expenses are incurred for the benefit of all such Tagging
Persons and the Selling Person and are not otherwise paid by the
Corporation or the acquiring party;
(iii) if the Selling Person and the Tagging Persons are required
to provide any representations or indemnities in connection with such Tag-
Along Sale (other than representations and indemnities concerning the
34
<PAGE>
Selling Person's and each Tagging Persons' title to the Equity and
authority, power and right to enter into and consummate the transfer
without contravention of any law or agreement), then liability for
misrepresentation or indemnity shall be expressly stated to be several but
not joint and the Selling Person and each Tagging Person shall not be
liable for more than its pro rata share (based on the aggregate
consideration to be received in respect of its Equity in the Tag-Along
Sale) of any liability for misrepresentation or indemnity; and
(iv) in the case of any Tag-Along Sale, the Selling Person will use
commercially reasonable efforts to limit the liability of any Tagging
Person for misrepresentation or indemnity to its pro rata share (based on
the aggregate consideration to be received in respect of its Equity in the
Tag-Along Sale) of the aggregate purchase price.
(h) This Section 6.05 will terminate when (i) the Public Offering
authorized by Section 5.02 of the LLC Agreement has been consummated and (ii)
the holders of Investor Equity and Management Equity immediately prior to the
initial Public Offering cease to hold in the aggregate at least 30% of the
aggregate Common Stock (on a fully diluted basis).
Section 6.6. All Holders Required to Participate in Certain Sales. (a) In
connection with any Sale of the Corporation (other than through a Public
Offering) approved by the LLC (a "Drag-Along Sale"), each holder of Investor
Equity and Management Equity (each a "Securityholder") shall vote for, consent
to and raise no objections against such Drag-Along Sale. The LLC, the Board,
each Director, Representative and each Securityholder shall take all reasonable,
necessary or desirable actions in connection with the consummation of such Drag-
Along Sale as requested by the LLC. Such actions shall include, in a stock
transaction, (i) the transfer of all Investor Equity or Management Equity held
by each Securityholder (or, if less than all such equity is being acquired by
the acquiror, then a pro rata share of each Securityholder's equity based on the
aggregate Investor Equity and Management Equity held by each Securityholder
after taking into account clause (ii) below) and (ii) subject to and at the
closing of the Drag-Along Sale, the exercise of all (or an appropriate pro rata
share) of the options awarded by the Corporation to any officer of the
Corporation and the sale of all (or an appropriate pro rata share) of the
Management Equity received upon such exercise, in each case for the
consideration per unit or share and otherwise on the same terms and conditions
as approved by the LLC; provided that any Securityholder who holds options with
an exercise price per unit or share that is greater than the price per unit or
share at which the Management Equity is to be sold in the Drag-Along Sale may,
if required by the Corporation to exercise such
35
<PAGE>
options, in lieu of such exercise, agree to the irrevocable cancellation thereof
without any liability for payment of any exercise price with respect thereto.
(b) The LLC must provide written notice of any Drag-Along Sale to each
Securityholder (a "Drag-Along Notice") not later than the 20th day prior to the
proposed Drag-Along Sale. The Drag-Along Notice must identify (i) the name and
the address of the transferee (the "Transferee") and of any party holding 25% or
more of the ownership interests in the Transferee, (ii) the actions the LLC
requests be taken by the recipient, (iii) in the case of a stock sale, the
number and type of securities subject to the Drag-Along Sale and the proposed
consideration per unit or share and (iv) all other material terms and conditions
of the Drag-Along Sale. Each such Securityholder shall be required to
participate in the Drag-Along Sale on the terms and conditions set forth in the
Drag-Along Notice and, in the case of a stock sale, to tender all (or such pro
rata share) of its Investor Equity or Management Equity as set forth below.
(c) Within 10 days following the date of the Drag-Along Notice (the
"Drag-Along Notice Period"), each Securityholder must deliver to a
representative of the Corporation designated in the Drag-Along Notice (i) a
certificate verifying that such Securityholder has taken all requested actions
in the Drag-Along Notice, (ii) in the case of a stock sale, the certificate or
certificates, if any, representing all (or such pro rata share) Investor Equity
or Management Equity held by such Securityholder, duly endorsed (or, if such
delivery is not permitted by applicable law, an unconditional agreement to
deliver such Investor Equity or Management Equity pursuant to this Section
6.06(c) at the closing of such Drag-Along Sale against delivery to such
Securityholder of the consideration per unit or share therefor) and (iii) all
other documents required to be executed in connection with such Drag-Along Sale.
If any such Securityholder fails to deliver any certificate referred to in
clause (ii) above to the Corporation, the LLC and the Corporation shall (subject
to reversal under Section 6.06(d) below) cause their books and records to show
that such Investor Equity or Management Equity is bound by the provisions of
this Section 6.06 and that such Investor Equity or Management Equity shall be
transferred to the acquiring party immediately upon surrender for transfer by
the Securityholder thereof.
(d) If, within 120 days after the date on which the Corporation gives
the Drag-Along Notice to the Securityholders, the Drag-Along Sale has not been
completed on substantially the same terms and conditions set forth in the Drag-
Along Notice, the Securityholders shall no longer be obligated to sell their
Investor Equity or Management Equity pursuant to such Drag-Along Notice and the
LLC and the Corporation shall promptly return to each Securityholder all (i)
certificates representing Investor Equity and Management Equity that such
36
<PAGE>
Securityholder delivered for transfer pursuant hereto and (ii) any documents in
the possession of the LLC or the Corporation executed by the Securityholder in
connection with such proposed transfer, and all of the restrictions on transfer
contained in this Agreement or otherwise applicable at such time with respect to
such Investor Equity or Management Equity shall remain in effect.
(e) Promptly after the consummation of the Drag-Along Sale, the
Corporation shall give written notice thereof to each Securityholder, shall
remit to each such Securityholder who has complied with Section 6.06(c), its pro
rata share of the aggregate consideration received in such Drag-Along Sale, and
shall furnish such other evidence of the completion and time of completion of
such transfer and the terms thereof as may be reasonably requested by such
Securityholders.
(f) The rights and obligations of the Securityholders under this Section
6.06 shall be subject to the following conditions:
(i) upon the consummation of any Drag-Along Sale, all of the
Securityholders participating therein will receive the same form and amount
of consideration per unit or share, as the case may be, or if any
Securityholder is given an option as to the form and amount of
consideration to be received, all Securityholders participating therein
will be given the same option;
(ii) no Securityholder shall be obligated to pay more than its pro
rata share (based on the aggregate consideration to be received in respect
of its Investor Equity or Management Equity in the Drag-Along Sale) of the
costs, fees and expenses incurred in connection with the Drag-Along Sale to
the extent such costs, fees and expenses are incurred for the benefit of
all such Securityholders and are not otherwise paid by the Corporation or
the acquiring party;
(iii) if the Securityholders are required to provide any
representations or indemnities in connection with such Drag-Along Sale
(other than representations and indemnities concerning each
Securityholder's title to the Investor Equity or Management Equity and
authority, power and right to enter into and consummate the transfer
without contravention of any law or agreement), then liability for
misrepresentation or indemnity shall be expressly stated to be several but
not joint and each Securityholder shall not be liable for more than its pro
rata share (based on the aggregate consideration to be received in respect
37
<PAGE>
of its Investor Equity or Management Equity in the Drag-Along Sale) of any
liability for misrepresentation or indemnity; and
(iv) in the case of any Drag-Along Sale, the Corporation will use
commercially reasonable efforts to limit the liability of any
Securityholder for misrepresentation or indemnity to its pro rata share
(based on the aggregate consideration to be received in respect of its
Investor Equity or Management Equity in the Drag-Along Sale) of the
aggregate purchase price.
(g) The rights and obligations of the LLC in this Section 6.06 shall,
after dissolution of the LLC, be binding on and inure to the benefit of the
Corporation, and references to the LLC or the LLC's Board of Representatives
shall thereafter mean the Board.
(h) This Section 6.06 will terminate when (i) the Public Offering
authorized by Section 5.02 of the LLC Agreement has been consummated and (ii)
the holders of Investor Equity and Management Equity immediately prior to the
initial Public Offering cease to hold in the aggregate at least 30% of the
aggregate Common Stock (on a fully diluted basis).
ARTICLE 7
Representations and Warranties of the Corporation
As a material inducement to the LLC to enter into this Agreement and
purchase the Common Stock hereunder, the Corporation hereby represents and
warrants that:
Section 7.1. Organization, Corporate Power and Licenses. The Corporation
is a corporation duly organized, validly existing and in good standing under the
laws of Delaware and is qualified to do business in every jurisdiction in which
its ownership of property or conduct of business requires it to qualify. The
Corporation possesses all requisite corporate power and authority and, except as
set forth in the "Licenses Schedule" attached hereto, all material licenses,
permits and authorizations necessary to own and operate its properties, to carry
on its businesses as presently proposed to be conducted and to carry out the
transactions contemplated by this Agreement. The copies of the Corporation's
charter documents and Bylaws which have been furnished to the LLC's special
counsel
38
<PAGE>
reflect all amendments made thereto at any time prior to the date of this
Agreement and are correct and complete.
Section 7.2. Capital Stock and Related Matters. (a) As of the Initial
Closing and immediately thereafter, the authorized capital stock of the
Corporation shall consist of (i) 63,000 shares of Common Stock, of which 60,000
shares shall be issued and outstanding and 3,000 shares shall be reserved for
issuance upon exercise of options issued pursuant to the Permitted Stock Option
Plan. Except as set forth on the attached "Capitalization Schedule," as of the
Initial Closing, the Corporation shall not have outstanding any stock or
securities, nor any options, warrants or other rights to acquire capital stock
or securities of the Corporation. As of the Initial Closing, all of the
outstanding shares of the Corporation's capital stock listed on the
Capitalization Schedule shall be validly issued, fully paid and nonassessable.
(b) The Corporation has not violated any applicable federal or state
securities laws in connection with the offer, sale or issuance of any of its
capital stock, and the offer, sale and issuance of the Common Stock hereunder do
not require registration under the Securities Act or any applicable state
securities laws. To the best of the Corporation's knowledge, there are no
agreements between the Corporation's stockholders with respect to the voting or
transfer of the Corporation's capital stock or with respect to any other aspect
of the Corporation's affairs, except for this Agreement and the agreements
contemplated hereby.
Section 7.3. Authorization; No Breach. The execution, delivery and
performance of this Agreement, the Registration Rights Agreement, the Executive
Purchase Agreements, and all other agreements contemplated hereby to which the
Corporation is a party, the filing of the Corporation's amended and restated
Certificate of Incorporation referred to in Section 2.02 above, and the adoption
of the Corporation's Bylaws referred to in Section 2.03 above have been duly
authorized by the Corporation. Each of this Agreement, the Registration Rights
Agreement, the Executive Purchase Agreements and each other agreement
contemplated hereby to which the Corporation is a party constitutes a legal,
valid and binding obligation of the Corporation, enforceable against the
Corporation in accordance with its terms. The execution and delivery by the
Corporation of this Agreement, the Registration Rights Agreement, the Executive
Purchase Agreements and all other agreements contemplated hereby to which the
Corporation is a party and the consummation of the transactions contemplated
hereby and thereby, do not and will not (i) conflict with or result in a default
under or breach of, (ii) result in the creation of any Lien upon the
Corporation's or any Subsidiary's capital stock or assets pursuant to, (iii)
give any third party the
39
<PAGE>
right to modify, terminate or accelerate any obligation under, or (iv) require
any authorization, consent, approval, exemption or other action by or notice to,
or filing with, any court or administrative or governmental body or agency
pursuant to, the Certificate of Incorporation or Bylaws of the Corporation, or
any law, statute, rule or regulation to which the Corporation or any Subsidiary
or any executive officer of the Corporation is subject, or any agreement,
instrument, order, judgment or decree to which the Corporation or any Subsidiary
or any executive officer of the Corporation is subject.
Section 7.4. Conduct of Business; Absence of Liabilities. Prior to the
Initial Closing, except as set forth on the attached "Liabilities Schedule," and
except for the Corporation's obligations to pay expenses under Section 9.01
hereof, the Corporation has not conducted any business, activities or
operations, and the Corporation does not have any expenses, obligations or
liabilities (whether accrued, absolute, contingent, unliquidated or otherwise,
whether or not known to the Corporation and whether due or to become due and
regardless of when asserted).
Section 7.5. No Subsidiaries. The Corporation does not own or hold, and
has never owned or held, any shares of stock or any other securities or
interests in or any rights to acquire any shares of stock or any other security
or interest in any other Person.
Section 7.6. Brokerage. There are no claims for brokerage commissions,
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement binding
upon the Corporation. The Corporation shall pay, and hold the LLC and its
Unitholders harmless against, any liability, loss or expense (including, without
limitation, reasonable attorneys' fees and out-of-pocket expenses) arising in
connection with any such claim.
Section 7.7. Government Consent, Etc. Except as set forth on the attached
"Consents Schedule," no permit, consent, approval or authorization of, or
declaration to or filing with, any governmental authority is required in
connection with the execution, delivery and performance by the Corporation of
this Agreement, the Registration Rights Agreement, the Executive Purchase
Agreements or the other agreements contemplated hereby or thereby, the
consummation by the Corporation of any of the transactions contemplated hereby
or thereby, or the conduct or operation of the business of the Corporation and
its Subsidiaries.
40
<PAGE>
Section 7.8. Compliance with Laws. Neither the Corporation nor any
Subsidiary has violated any law or any governmental regulation or requirement in
any material respect.
Section 7.9. Disclosure. Neither this Agreement nor any of the exhibits,
schedules, attachments, written statements, documents, certificates or other
written items supplied to the LLC or any holder of Investor Equity by or on
behalf of the Corporation with respect to the transactions contemplated hereby
contain any untrue statement of a material fact or omit a material fact
necessary to make each statement contained herein or therein not misleading.
There is no fact which the Corporation has not disclosed to the LLC and the
holders of Investor Equity in writing and of which any of its officers,
directors or executive employees is aware and which would reasonably be expected
to have a Material Adverse Effect.
Section 7.10. Litigation. There is no claim, suit, litigation,
investigation, arbitration or other proceeding (whether by a private party or
governmental agency) pending or threatened against the Corporation or any of its
executive officers.
Section 7.11. Executive Officers. Each of the executive officers of the
Corporation that holds Management Equity is ready, willing and able to commence
and continue employment with the Corporation in the office to which such
individual was appointed by the Board and such employment and activities
(including recruiting activities) on behalf of the Corporation do not and will
not breach any noncompete, nonsolicitation or other contractual restriction or
arrangement to which such executive officer is subject.
Section 7.12. Taxes. Each of the Corporation and its Subsidiaries have
duly filed all federal, state and other tax returns required by law to be filed
by it and have paid all federal, state and other taxes, assessments and other
governmental charges or levies which are due and payable by the Corporation or
any of its Subsidiaries except any such taxes, assessments or other governmental
charges or levies (i) the payment of which is being contested in good faith by
appropriate proceedings, (ii) for which adequate reserves have been provided on
the books of the Corporation or its Subsidiaries, as applicable, and (iii) as to
which no lien has attached and no foreclosure, distraint, sale or similar
proceedings have been commenced.
ARTICLE 8
Definitions
41
<PAGE>
Section 8.1. Definitions. For the purposes of this Agreement, the
following terms have the meanings set forth below:
"Affiliate" of any particular Person means any other Person controlling,
controlled by or under common control with such particular Person, where
"control" means the possession, directly or indirectly, of the power to direct
the management and policies of a Person whether through the ownership of voting
securities, by contract or otherwise.
"Board" means the board of directors of the Corporation.
"Class A Units" has the meaning ascribed to such term in the LLC Agreement.
"Class B Units" has the meaning ascribed to such term in the LLC Agreement.
"Class C Units" has the meaning ascribed to such term in the LLC Agreement.
"Class D Units" has the meaning ascribed to such term in the LLC Agreement.
"Director" means any individual who has been elected to the Board.
"Distribution-In-Kind" means a Transfer (including a distribution-in-kind)
of Investor Equity, pro rata to partners of or investors in any Investor Member
that is a partnership or investment fund.
"Executive Manager" means each of (i) initially, Mae Squier-Dow, Kevin
Dickens and Phillip Yawman, (ii) the officer of the Corporation who is appointed
after the date hereof as the chief financial officer at the recommendation of
the Founder and with the prior written approval of the LLC's Board of
Representatives and (iii) any other officer of the Corporation who is at any
time designated by the LLC's Board of Representatives to be an Executive Manager
and who executes an Executive Purchase Agreement, this Agreement, the LLC
Agreement and the Registration Rights Agreement.
"Executive Purchase Agreement" shall mean (i) the applicable separate
executive purchase agreement substantially similar to that set forth in Exhibits
3 and 4 attached hereto entered into on or after the date hereof by and among
the LLC, the Corporation and any of Founder, Squier-Dow, Dickens and Yawman (or
any newly hired member of the Corporation's management that becomes a holder
42
<PAGE>
of Management Equity and executes a counterpart hereof and of the LLC Agreement
and the Registration Rights Agreement) and (ii) the applicable separate
executive purchase agreement substantially similar to that set forth in Exhibit
5 attached hereto entered into after the date hereof by the LLC and the
Corporation with each newly hired member of the Corporation's management (other
than Founder, Squier-Dow, Dickens or Yawman) that becomes a holder of Management
Equity and executes a counterpart hereof and of the LLC Agreement and the
Registration Rights Agreement.
"Exempt Transferee" means a purchaser or transferee of Investor Equity (i)
in a Public Offering, (ii) in a sale pursuant to Rule 144 effected after the
initial Public Offering and not in a block trade nor in reliance on Rule 144(k),
(iii) pursuant to a Distribution-In-Kind permitted under Section 6.03(a)(v) (but
a transferee pursuant to 6.03(a)(v)(y) will not be an Exempt Transferee), (iv)
in a Drag-Along Sale pursuant to Section 6.06 or (v) in a Private Tag
Transaction once Sections 6.05 and 6.06 cease to be effective.
"Fleet" means, collectively, Chisholm Partners III, L.P., Kennedy Plaza
Partners, Fleet Venture Resources, Inc. and Fleet Equity Partners VI, L.P.
"Fleet Equity" means (i) the Class A Units initially issued to Fleet
pursuant to the Investor Purchase Agreement (but not including any Class D Units
issued by the LLC in exchange for such Class A Units), (ii) upon and after the
dissolution of the LLC, the Common Stock distributed in respect of the Class A
Units referred to in clause (i) above pursuant to such dissolution, and (iii)
any securities issued directly or indirectly with respect to the foregoing
securities by way of a split, dividend, or other division of securities, or in
connection with a combination of securities, recapitalization, merger,
consolidation, or other reorganization (but not including any Class D Units
issued by the LLC in exchange for any of the foregoing securities). As to any
particular securities constituting Fleet Equity, such securities shall cease to
be Fleet Equity when they have been (a) effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, (b) distributed to the public after a Public Offering through a
broker, dealer or market maker pursuant to Rule 144 in compliance with Article 6
in a transaction that is neither a block trade nor in reliance on Rule 144(k) or
(c) repurchased by the LLC (including in exchange for Class D Units of the LLC),
the Corporation or any Subsidiary.
"Founder" means Steve Dubnik so long as he is actively employed as the
Chief Executive Officer of the Corporation. It is understood that as soon as
Steve Dubnik ceases to be actively employed as the chief executive officer of
the
43
<PAGE>
Corporation for any reason, his rights as Founder will terminate as provided in
Section 5.02(e) of the LLC Agreement.
"Indebtedness" means at a particular time, without duplication, (i) any
indebtedness for borrowed money or issued in substitution for or exchange of
indebtedness for borrowed money, (ii) any indebtedness evidenced by any note,
bond, debenture or other debt security, (iii) any indebtedness for the deferred
purchase price of property or services with respect to which a Person is liable,
contingently or otherwise, as obligor or otherwise (other than trade payables
and other current liabilities incurred in the ordinary course of business which
are not more than six months past due), (iv) any commitment by which a Person
assures a creditor against loss (including, without limitation, contingent
reimbursement obligations with respect to letters of credit), (v) any
indebtedness guaranteed in any manner by a Person (including, without
limitation, guarantees in the form of an agreement to repurchase or reimburse),
(vi) any obligations under capitalized leases with respect to which a Person is
liable, contingently or otherwise, as obligor, guarantor or otherwise, or with
respect to which obligations a Person assures a creditor against loss, (vii) any
indebtedness secured by a Lien on a Person's assets and (viii) any unsatisfied
obligation for "withdrawal liability" to a "multiemployer plan" as such terms
are defined under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
"Intellectual Property Rights" means all (i) patents, patent applications,
patent disclosures and inventions, (ii) trademarks, service marks, trade dress,
trade names, logos and corporate names and registrations and applications for
registration thereof together with all of the goodwill associated therewith,
(iii) copyrights (registered or unregistered) and copyrightable works and
registrations and applications for registration thereof, (iv) mask works and
registrations and applications for registration thereof, (v) computer software,
data, data bases and documentation thereof, (vi) trade secrets and other
confidential information (including, without limitation, ideas, formulas,
compositions, inventions (whether patentable or unpatentable and whether or not
reduced to practice), know-how, manufacturing and production processes and
techniques, research and development information, drawings, specifications,
designs, plans, proposals, technical data, copyrightable works, financial and
marketing plans and customer and supplier lists and information), (vii) other
intellectual property rights and (viii) copies and tangible embodiments thereof
(in whatever form or medium).
"Investment" as applied to any Person means (i) any direct or indirect
purchase or other acquisition by such Person of any notes, obligations,
instruments, stock, securities or ownership interest (including partnership
interests
44
<PAGE>
and joint venture interests) of any other Person and (ii) any capital
contribution by such Person to any other Person.
"Investor Equity" means (i) the Class A Units issued pursuant to the
Investor Purchase Agreement or Transferred in compliance with Article 6 prior to
dissolution of the LLC (but not including any Class D Units issued by the LLC in
exchange for such Class A Units), (ii) upon and after the dissolution of the
LLC, the Common Stock distributed in respect of the Class A Units referred to in
clause (i) above pursuant to such dissolution, and (iii) any securities issued
directly or indirectly with respect to the foregoing securities by way of a
split, dividend, or other division of securities, or in connection with a
combination of securities, recapitalization, merger, consolidation, or other
reorganization (but not including any Class D Units issued by the LLC in
exchange for any of the foregoing securities). For purposes of this Agreement
and the Registration Rights Agreement, all holdings of Class A Units and Common
Stock by Persons who are Affiliates shall be aggregated for purposes of meeting
any threshold tests under this Agreement or the Registration Rights Agreement.
As to any particular securities constituting Investor Equity, such securities
shall cease to be Investor Equity when they have been (a) effectively registered
under the Securities Act and disposed of in accordance with the registration
statement covering them, (b) distributed to the public after a Public Offering
through a broker, dealer or market maker pursuant to Rule 144 in compliance with
Article 6 in a transaction that is neither a block trade nor in reliance on Rule
144(k) or (c) repurchased by the LLC (including in exchange for Class D Units of
the LLC), the Corporation or any Subsidiary.
"Investor Members" means (i) MSCP, Fleet, Waller-Sutton and Royce J.
Holland, each of which shall, on the date hereof, be admitted as Members
pursuant to Section 3.01(b) of the LLC Agreement and (ii) any transferee of
Investor Equity prior to dissolution of the LLC in compliance with Article 6 of
the Transaction Agreement that is admitted to the LLC as a Substituted Member
(as defined in the LLC Agreement) pursuant to Section 10.01 of the LLC Agreement
but only so long as such person is shown on the LLC's books and records as the
owner of one or more Units.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof), any sale of
receivables with recourse against the Corporation, any of its Subsidiaries or
any Affiliate, any filing or agreement to file a financing statement as debtor
under the Uniform Commercial Code or any similar statute other than to reflect
ownership by a third party of property leased to the Corporation or any of its
Subsidiaries under a lease
45
<PAGE>
which is not in the nature of a conditional sale or title retention agreement,
or any subordination arrangement in favor of another Person (other than any
subordination arising in the ordinary course of business).
"Management Equity" means (i) the Class B Units issued pursuant to any
Executive Purchase Agreement (but not including any Class C Units or Class D
Units issued by the LLC in exchange for such Class B Units), (ii) upon and after
the dissolution of the LLC, the Common Stock distributed in respect of the Class
B Units referred to in clause (i) above pursuant to such dissolution, and (iii)
any securities issued directly or indirectly with respect to the foregoing
securities by way of a split, dividend, or other division of securities, or in
connection with a combination of securities, recapitalization, merger,
consolidation, or other reorganization (but not including any Class C Units or
Class D Units issued in exchange for any of the foregoing securities). As to
any particular securities constituting Management Equity, such securities shall
cease to be Management Equity when they have been (a) effectively registered
under the Securities Act and disposed of in accordance with the registration
statement covering them, (b) distributed to the public through a broker, dealer
or market maker pursuant to Rule 144 or (c) repurchased by the LLC (including in
exchange for Class C Units or Class D Units of the LLC), the Corporation or any
Subsidiary.
"Management Members" means the Founder, Squier-Dow, Dickens, and Yawman who
are admitted as Members pursuant to Section 3.01(c) of the LLC Agreement and any
other officer of the Corporation that enters into an Executive Purchase
Agreement on or after the date hereof pursuant to Section 3.02(c) of the LLC
Agreement and is admitted as a Substituted Member (as defined in the LLC
Agreement) pursuant to Section 10.01 of the LLC Agreement or as an Additional
Member pursuant to Section 10.02 of the LLC Agreement, but in each case only so
long as such Person is shown on the LLC's books and records as the owner of one
or more Units.
"Material Adverse Effect" shall mean any effect, change, event, matter or
occurrence that is materially adverse to the business, operations, properties
(including intangible properties), financial condition or business prospects of
the Corporation and its Subsidiaries, taken as a whole, except to the extent
solely attributable to changes in general economic or market conditions, and
other than an effect, change, event, matter or occurrence that is specifically
and expressly contemplated in one or more Approved Business Plans or Approved
Budgets approved (and not revoked) prior to the applicable Drawdown Date.
Without limiting the generality of the foregoing, a "Material Adverse Effect"
shall be deemed to have occurred if the applicable effect, change, event, matter
or occurrence, individually or in the aggregate with all other effects, changes,
events,
46
<PAGE>
matters or occurrences would be reasonably likely to result in (i) liability to
the Corporation or its Subsidiaries or diminution in the value of the business
(the "Business") of the Corporation and its Subsidiaries, of $500,000 or more in
the aggregate; (ii) any material impediment to or restriction on the operation
or conduct of the Business that is not capable of being cured within a
reasonable period; or (iii) any material adverse effect on the ability of the
Corporation or any of its executive officers to consummate the transactions
contemplated by this Agreement and the other agreements referred to herein.
"Maximum Commitment" means, at any time, $1 times the aggregate number of
Class A Units and Class B Units outstanding at such time. The maximum
commitment, as of the date hereof, for each Member is listed on the Schedule of
Unitholders attached to the LLC Agreement.
"Member" means each of the Investor Members, the Management Members and any
Person admitted to the LLC as a Substituted Member pursuant to Section 10.01 of
the LLC Agreement or as an Additional Member pursuant to Section 10.02 of the
LLC Agreement, but in each case only so long as such Person is shown on the
LLC's books and records as the owner of one or more Units.
"MSCP" means, collectively, Morgan Stanley Capital Partners III, L.P.,
Morgan Stanley Capital Investors, L.P., and MSCP III 892 Investors, L.P.
"MSCP Equity" means (i) the Class A Units initially issued to MSCP pursuant
to the Investor Purchase Agreement (but not including any Class D Units issued
by the LLC in exchange for such Class A Units), (ii) upon and after the
dissolution of the LLC, the Common Stock distributed in respect of the Class A
Units referred to in clause (i) above pursuant to such dissolution, and (iii)
any securities issued directly or indirectly with respect to the foregoing
securities by way of a split, dividend, or other division of securities, or in
connection with a combination of securities, recapitalization, merger,
consolidation, or other reorganization (but not including any Class D Units
issued by the LLC in exchange for any of the foregoing securities). As to any
particular securities constituting MSCP Equity, such securities shall cease to
be MSCP Equity when they have been (a) effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, (b) distributed to the public after a Public Offering through a
broker, dealer or market maker pursuant to Rule 144 in compliance with Article 6
in a transaction that is neither a block trade nor in reliance on Rule 144(k) or
(c) repurchased by the LLC (including in exchange for Class D Units of the LLC),
the Corporation or any Subsidiary.
47
<PAGE>
"Officer's Certificate" means a certificate signed by the Corporation's
president or its chief financial officer, stating that (i) the officer signing
such certificate has made or has caused to be made such investigations as are
reasonably necessary in order to permit him to verify the accuracy of the
information set forth in such certificate and (ii) such certificate does not
misstate any material fact and does not omit to state any fact necessary to make
the certificate not misleading.
"Permitted Lien" means:
(a) tax liens with respect to taxes not yet due and payable or which are
being contested in good faith by appropriate proceedings and for which
appropriate reserves have been established in accordance with generally accepted
accounting principles, consistently applied;
(b) deposits or pledges made in connection with, or to secure payment of,
utilities or similar services, workers' compensation, unemployment insurance,
old age pensions or other social security obligations;
(c) purchase money security interests in any property acquired by the
Corporation or any Subsidiary to the extent permitted by this Agreement;
(d) interests or title of a lessor under any lease permitted by this
Agreement;
(e) mechanics', materialmen's or contractors' liens or encumbrances or
any similar lien or restriction for amounts not yet due and payable; and
(f) easements, rights-of-way, restrictions and other similar charges and
encumbrances not interfering with the ordinary conduct of the business of the
Corporation and its Subsidiaries or detracting from the value of the assets of
the Corporation and its Subsidiaries.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Private Tag Transaction" means a sale, transfer or other disposition of
Investor Equity by a holder thereof to a third party, in one transaction or a
series of related transactions, including pursuant to Rule 144 but excluding a
sale or transfer (i) to an Affiliate of such holder, (ii) in a Public Offering,
(iii) pursuant to
48
<PAGE>
Rule 144 effected after the initial Public Offering that is neither a block
trade nor in reliance on Rule 144(k), (iv) in a Distribution-In-Kind permitted
under Section 6.03(a)(v), or (v) in a Drag-Along Sale pursuant to Section 6.06.
"Public Offering" means any underwritten sale of the Corporation's common
stock pursuant to an effective registration statement under the Securities Act
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 or financing for a merger or acquisition, and (ii) any
issuance of common stock or rights to acquire common stock to employees of the
Corporation or its Subsidiaries as part of an incentive or compensation plan.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the date hereof, by and between the Corporation and the holders of
Investor Equity and Management Equity, as amended from time to time in
accordance with the terms thereof.
"Remaining Commitment" means, on any particular date, the difference of the
Maximum Commitment then in effect minus the sum of the Initial Contribution and
the aggregate Subsequent Contributions made on or prior to such date.
"Representatives" means the representatives on the LLC's Board of
Representatives.
"Restricted Securities" means (i) the Common Stock issued hereunder, and
(ii) any securities issued directly or indirectly with respect to the securities
referred to in clause (i) above by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. As to any particular Restricted Securities, such
securities shall cease to be Restricted Securities when they have (a) been
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering them, (b) become eligible for sale
pursuant to Rule 144 (without any volume limitations) or (c) been otherwise
transferred and new certificates for them not bearing the Securities Act legend
set forth in Section 9.03 have been delivered by the Corporation in accordance
with Section 6.01(b). Whenever any particular securities cease to be Restricted
Securities, the holder thereof shall be entitled to receive promptly from the
Corporation, without expense, new securities of like tenor not bearing a
Securities Act legend of the character set forth in Section 9.03.
49
<PAGE>
"Rule 144" means Rule 144 promulgated under the Securities Act (or any
similar provision then in force).
"Sale of the Corporation" means either (i) the sale, lease, transfer,
conveyance or other disposition, in one or a series of related transactions, of
all or substantially all of the assets of the Corporation and its Subsidiaries,
taken as a whole, or (ii) a transaction or series of transactions (including by
way of merger, consolidation, or sale of stock) the result of which is that the
holders of the Corporation's outstanding voting stock immediately prior to such
transaction are after giving effect to such transaction no longer, in the
aggregate, the "beneficial owners" (as such term is defined in Rule 13d-3 and
Rule 13d-5 promulgated under the Securities Exchange Act), directly or
indirectly through one or more intermediaries, of more than 50% of the voting
power of the outstanding voting stock of the Corporation.
"Securities Act" means the Securities Act of 1933, as amended, and
applicable rules and regulations thereunder.
"Securities and Exchange Commission" includes any governmental body or
agency succeeding to the functions thereof.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, and applicable rules and regulations thereunder.
"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, partnership, association or other business entity of which
(i) if a corporation, a majority of the total voting power of shares of stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by that Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or losses or
shall be or control any managing director, managing member, manager or general
partner of such limited liability company, partnership, association or other
business entity. For purposes of this Agreement, if the context does not
otherwise indicate to which Person the term "Subsidiary"
50
<PAGE>
is used in respect of, the term "Subsidiary" shall refer to any Subsidiary of
the Corporation.
"Transfer" shall include any direct or indirect sale, transfer, assignment,
pledge or other disposition (whether with or without consideration and whether
voluntary or involuntary or by operation of law) of any interest in any Investor
Equity or Management Equity.
"Unitholder" means any Member or Assignee who owns one or more Units as
reflected on the LLC's books and records.
"Units" has the meaning ascribed to such term in the LLC Agreement.
"Waller-Sutton" means Waller-Sutton Media Partners, L.P., a Delaware
limited partnership.
"Waller-Sutton Equity" means (i) the Class A Units initially issued to
Waller-Sutton pursuant to the Investor Purchase Agreement (but not including any
Class D Units issued by the LLC in exchange for such Class A Units), (ii) upon
and after the dissolution of the LLC, the Common Stock distributed in respect of
the Class A Units referred to in clause (i) above pursuant to such dissolution,
and (iii) any securities issued directly or indirectly with respect to the
foregoing securities by way of a split, dividend, or other division of
securities, or in connection with a combination of securities, recapitalization,
merger, consolidation, or other reorganization (but not including any Class D
Units issued by the LLC in exchange for any of the foregoing securities). As to
any particular securities constituting Waller-Sutton Equity, such securities
shall cease to be Waller-Sutton Equity when they have been (a) effectively
registered under the Securities Act and disposed of in accordance with the
registration statement covering them, (b) distributed to the public after a
Public Offering through a broker, dealer or market maker pursuant to Rule 144 in
compliance with Article 6 in a transaction that is neither a block trade nor in
reliance on Rule 144(k) or (c) repurchased by the LLC (including in exchange for
Class D Units of the LLC), the Corporation or any Subsidiary.
"Wholly-Owned Subsidiary" means, with respect to any Person, a Subsidiary
of which all of the outstanding capital stock or other ownership interests are
owned by such Person or another Wholly-Owned Subsidiary of such Person.
Section 8.2. Knowledge. As used in Article 7, the terms "knowledge" or
"aware" in respect of the Corporation shall mean and include (i) the actual
knowledge or awareness of the Founder, Squier-Dow, Dickens or Yawman (and
51
<PAGE>
any Person hired to serve as a replacement for any of the foregoing), or any of
the Executive Managers and (ii) with respect to the Persons identified in clause
(i) above, the knowledge or awareness which a prudent business person would have
obtained in the conduct of his business after making reasonable inquiry and
reasonable diligence with respect to the particular matter in question.
ARTICLE 9
Miscellaneous Provisions
Section 9.1. Expenses. The Corporation shall pay, and hold the LLC and
each of its Unitholders harmless against liability for the payment of, all of
the out-of-pocket costs, fees and expenses of the LLC and its Unitholders
(including the reasonable costs, fees and expenses of Davis Polk & Wardwell and
Nixon, Hargrave, Devans & Doyle LLP and any other special counsel (an "Other
Counsel") retained by an Investor Member; provided that the fees and expenses of
such Other Counsels shall not exceed $15,000 for any one Other Counsel nor
$30,000 in the aggregate for all such Other Counsels) arising in connection with
the performance of due diligence investigations concerning the Corporation and
its operations and management, the negotiation and execution of this Agreement,
the LLC Agreement, the Registration Rights Agreement, the Executive Purchase
Agreements and the agreements contemplated hereby and thereby, and the
consummation of the transactions to occur at the Initial Closing as contemplated
hereby. In addition, the Corporation shall pay, and hold the LLC and each of
the holders of Investor Equity harmless against liability for the payment of,
all of the out-of-pocket costs, fees and expenses of the LLC and the holders of
Investor Equity and their respective employees and representatives (including
the reasonable fees and expenses of Davis Polk & Wardwell) arising in connection
with (i) any amendments or waivers (whether or not the same become effective)
under or in respect of this Agreement, any of the agreements contemplated hereby
or the Certificate of Incorporation, (ii) the enforcement of the rights granted
under this Agreement, any of the agreements contemplated hereby and the
Certificate of Incorporation, (iii) any filing with any governmental agency with
respect to the LLC's investment in the Corporation or any holder of Investor
Equity's investment in the LLC, or any other filing with any governmental agency
with respect to the Corporation or the LLC which mentions any holder of Investor
Equity, (iv) stamp and other taxes which may be payable in respect of the
execution and delivery of this Agreement or the issuance, delivery or
acquisition of any shares of Common Stock or (v) their investment in the LLC or
the Corporation and their monitoring of the affairs of the Corporation
(including all reasonable travel and related expenses).
52
<PAGE>
Section 9.2. Remedies.
(a) Each holder of Common Stock and each party hereto shall have all
rights and remedies set forth in this Agreement and the Certificate of
Incorporation and all rights and remedies which such parties have been granted
at any time under any other agreement or contract and all of the rights which
such parties have under any law or at equity. Any Person having any rights
under any provision of this Agreement shall be entitled to enforce (upon
demonstration of irreparable harm) such rights specifically (without posting a
bond or other security), to recover damages by reason of any breach of any
provision of this Agreement and to exercise all other rights granted by law.
(b) If upon any Capital Call Notice (as defined in the LLC Agreement),
any holder of Class A Units or Class B Units refuses or otherwise fails to make
the capital contributions required by such Capital Call Notice under the LLC
Agreement with respect to the Class A Units and Class B Units held by such
Unitholder, such holder shall forfeit and thereafter cease to possess all rights
hereunder to designate any representatives to the Board or to any Board
committee.
Section 9.3. LLC's Investment Representations. The LLC hereby represents
that it is acquiring the Restricted Securities purchased hereunder or acquired
pursuant hereto for its own account with the present intention of holding such
securities for purposes of investment, and that it has no intention of selling
such securities in a public distribution in violation of the federal securities
laws or any applicable state securities laws; provided that nothing contained
herein shall prevent the LLC or any subsequent holders of Restricted Securities
from transferring such securities in compliance with the provisions of Article 6
hereof. Each certificate or instrument representing Restricted Securities shall
be imprinted with a legend in substantially the following form:
53
<PAGE>
"The securities represented by this certificate were originally issued on July
8, 1998, and have not been registered under the Securities Act of 1933, as
amended. The transfer of the securities represented by this certificate is
subject to the restrictions specified in Article 6 of the Transaction Agreement
dated as of July 8, 1998, as amended and modified from time to time, between the
issuer (the "Corporation"), the initial holder of these securities and the other
parties thereto. The Corporation reserves the right to refuse the transfer of
such securities until such conditions have been fulfilled with respect to such
transfer. A copy of such Agreement shall be furnished by the Corporation to the
holder hereof upon written request and without charge."
Section 9.4. Consent to Amendments. Except as otherwise expressly
provided herein, the provisions of this Agreement may only be amended, modified,
or waived with the prior written consent of the holders of at least 80% of the
outstanding Investor Equity and Management Equity voting together as a single
class. Notwithstanding the foregoing, (x) any such amendment, modification or
waiver (except pursuant to Section 3.05(b)(iv)) of (or having the effect of
amending or waiving) Section 3.05, 5.03(b), 5.03(c), 5.03(e), 5.03(f), 6.03(v),
6.05, 6.06 or this Section 9.04 shall also require the prior written consent of
each of Fleet, Waller-Sutton and MSCP (but only for so long as the applicable
holder of Investor Equity holds at least 1% of the aggregate Investor Equity)
and (y) any such amendment, modification or waiver adverse to the rights of any
holder of Management Equity under this Agreement (including for purposes of this
proviso holders forfeiting their voting rights under Section 9.02(b) or 5.06))
shall also require the prior written consent of the chief executive officer of
the Corporation. No course of dealing between the Corporation and the LLC or
any other holder of Investor Equity or Management Equity or any delay by such
holder in exercising any rights hereunder or under the Certificate of
Incorporation shall operate as a waiver of any rights of such holder.
Section 9.5. Survival of Representations and Warranties. All
representations and warranties contained herein or made in writing by any party
in connection herewith shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby,
regardless of any investigation made by the LLC or on its or any Investor
Member's behalf.
Section 9.6. Successors and Assigns. (a) Except as otherwise expressly
provided herein (including, without limitation, in Article 5 hereof), all
covenants and agreements contained in this Agreement by or on behalf of any of
the parties hereto shall bind and inure to the benefit of the respective
successors and permitted assigns of the parties hereto whether so expressed or
not.
(b) Notwithstanding anything else contained herein, the Corporation, the
LLC, the Unitholders, and each subsequent holder of Common Stock hereby accept,
acknowledge and agree that upon and after the dissolution of the LLC:
(i) proposed business plans and Proposed Budgets of the
Corporation will continue to be submitted for Board approval in compliance
with Section 3.02(e);
(ii) the Corporation shall continue to be bound by all of the
covenants in Article 4;
54
<PAGE>
(iii) the provisions of Article 6 shall continue in effect in
accordance with their terms;
(iv) all rights of the LLC to rely upon the representations and
warranties set forth in Article 7 hereof shall thereafter inure to the
benefit of and be enforceable by all holders of Common Stock;
(v) the provisions of Article 9 except Sections 9.02(b) and 9.03
shall continue to apply; and
(vi) all rights and powers expressly and specifically granted to
the LLC in Section 9.04 (Consent to Amendments) hereof shall thereafter
operate as provided therein.
Section 9.7. Capital and Surplus; Special Reserves. The Corporation
agrees that the capital of the Corporation (as such term is used in Section 154
of the General Corporation Law of Delaware) in respect of the Common Stock
issued pursuant to this Agreement shall be equal to the aggregate par value of
such shares and that it shall not increase the capital of the Corporation with
respect to any shares of the Corporation's capital stock at any time on or after
the date of this Agreement. The Corporation also agrees that it shall not
create any special reserves under Section 171 of the General Corporation Law of
Delaware without the prior written consent of the LLC.
Section 9.8. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
Section 9.9. Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
Section 9.10. Descriptive Headings; Interpretation; No Strict
Construction. The descriptive headings of this Agreement are inserted for
convenience only and do not constitute a substantive part of this Agreement.
Whenever required by the context, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
forms of nouns, pronouns, and verbs shall include the plural and vice versa.
Reference to any agreement, document, or instrument means such agreement,
55
<PAGE>
document, or instrument as amended or otherwise modified from time to time in
accordance with the terms thereof, and if applicable hereof. The use of the
words "include" or "including" in this Agreement shall be by way of example
rather than by limitation. The use of the words "or," "either" or "any" shall
not be exclusive. The parties hereto have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, it is the intent of the parties
that 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 the authorship of any of the provisions of
this Agreement. It is the intent of the parties that prior drafts of this
Agreement shall be deemed not to provide any evidence as to the meaning of any
provision hereof or the intent of the parties hereto with respect hereto.
Section 9.11. Governing Law. This Agreement shall be governed by, and
construed under, the laws of the State of Delaware, all rights and remedies
being governed by said laws, without regard to conflict of laws principles.
Each of the parties hereto agrees (a) that this Agreement involves at least
$100,000 and (b) that this Agreement has been entered into by the parties hereto
in express reliance upon 6 Del.C. (S) 2708.
Section 9.12. Submission to Jurisdiction. Each party hereby irrevocably
and unconditionally agrees (a) to be subject to the jurisdiction of the courts
of the State of Delaware and the federal courts sitting in the State of Delaware
or in the County of New York in the State of New York and (b) to the extent such
party is not otherwise subject to service of process in the State of Delaware,
to appoint and maintain an agent in the State of Delaware as such party's agent
for acceptance of legal process, and that service made pursuant to (b) above
shall have the same legal force and effect as if served upon said party
personally within the State of Delaware. For purposes of implementing the
parties' agreement to appoint and maintain an agent for service of process in
the State of Delaware, each such party that has not as of the date hereof
already duly appointed such an agent does hereby appoint RL&F Service Corp., One
Rodney Square, 10th Floor, Wilmington, New Castle County, Delaware 19801, as
such agent.
Section 9.13. Notices. All notices, requests or other communications to
any party hereunder shall be in writing (including facsimile transmission) and
shall be given,
56
<PAGE>
if to the LLC, to:
c/o Morgan Stanley Capital Partners III, L.P.
1221 Avenue of the Americas
33rd Floor
New York, New York 10020
Attention: John B.Ehrenkranz
Facsimile: (212) 762-7951
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Louis L. Goldberg
Facsimile: (212) 450-4800
57
<PAGE>
and to:
Fleet Equity Partners VI, L.P.
50 Kennedy Plaza
12th Floor
Providence, Rhode Island 02903
Attention: Robert M. Van Degna
Facsimile: (401) 278-6387
with a copy to:
Paul, Hastings, Janofsky & Walker, LLP
399 Park Avenue
New York, New York 10022
Attention: Neil A. Torpey
Facsimile: (212) 319-4090
and to:
Waller-Sutton Media Partners, L.P.
555 North Lane
Suite 6150
Conshohocken, PA 19428
Attention: Mr. Bruce Hernandez
Facsimile: (610) 397-1014
with a copy to:
Rubin, Baum, Levin, Constant & Friedman
30 Rockefeller Plaza
29th floor
New York, New York 10112
Attention: Jonathan D. Drucker
Facsimile: (212) 698-7825
58
<PAGE>
if to the Corporation, to:
Choice One Communications Inc.
333 West Commercial Street
Suite 3300
East Rochester, New York 14445
Attention: Steve Dubnik
Facsimile: (716) 385-0609
with a copy to:
Nixon, Hargrave, Devans & Doyle LLP
Clinton Square
P.O. Box 1051
Rochester, New York 14603-1051
Attention: James A. Locke, III
Facsimile: (716) 263-1600
and if to any Unitholder or to any other holder of Common Stock, to the address
or facsimile set forth on the books of the LLC or the Corporation or any other
address or facsimile number as a party may hereafter specify for such purpose to
the Corporation. Notwithstanding the foregoing, no Investor Member or its
counsel shall be entitled to notice if such Investor Member holds less than 3%
in aggregate of all Investor Equity held by all Investor Members.
All such notices, requests and other communications shall be deemed
received on the date of receipt by the recipient thereof if received prior to 5
p.m. in the place of receipt and such day is a business day in the place of
receipt. Otherwise, any such notice, request or communication shall be deemed
not to have been received until the next succeeding business day in the place of
receipt.
59
<PAGE>
Otherwise, any such notice, request or communication shall be deemed not to
have been received until the next succeeding business day in the place of
receipt
* * * * *
60
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
CHOICE ONE COMMUNICATIONS INC.
By: /s/ Steve M. Dubnik
---------------------------------------
Its: President and Chief Executive Officer
---------------------------------------
CHOICE ONE COMMUNICATIONS L.L.C.
By: /s/ Steve M. Dubnik
--------------------------------------
Its: Authorized Person
--------------------------------------
BY: (EACH OF THE FOLLOWING INVESTOR MEMBERS AND
MANAGEMENT MEMBERS SIGNING BOTH INDIVIDUALLY AND
IN THEIR CAPACITIES AS UNITHOLDERS BINDING THE
LLC)
/s/ Steve M. Dubnik
--------------------------------------
Steve M. Dubnik
/s/ Mae Squier-Dow
--------------------------------------
Mae Squier-Dow
/s/ Kevin Dickens
--------------------------------------
Kevin Dickens
/s/ Phillip Yawman
--------------------------------------
Phillip Yawman
<PAGE>
MORGAN STANLEY CAPITAL PARTNERS III, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III, Inc., its
general partner
By /s/ Michael M. Jansen
-----------------------------------------------
Its Managing Director
-----------------------------------------------
By /s/ John Ehren Kranz
-----------------------------------------------
Its Principal
-----------------------------------------------
MSCP III 892 INVESTORS, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III, Inc., its
general partner
By /s/ Michael M. Jansen
-----------------------------------------------
Its Managing Director
-----------------------------------------------
By /s/ John Ehren Kranz
-----------------------------------------------
Its Principal
-----------------------------------------------
MORGAN STANLEY CAPITAL INVESTORS, L.P.
<PAGE>
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III, Inc., its
general partner
By /s/ Michael M. Jansen
-----------------------------------------------
Its Managing Director
-----------------------------------------------
By /s/ John Ehren Kranz
-----------------------------------------------
Its Principal
-----------------------------------------------
<PAGE>
CHISHOLM PARTNERS III, L.P.
By Silverado III, L.P., its General Partner
By Silverado III Corp., its General Partner
By /s/ Robert M. Van Degna
--------------------------------------------
Robert M. Van Degna
Chairman & CEO
KENNEDY PLAZA PARTNERS
By /s/ Robert M. Van Degna
--------------------------------------------
Robert M. Van Degna
Managing General Partner
FLEET VENTURE RESOURCES, INC.
By /s/ Robert M. Van Degna
--------------------------------------------
Robert M. Van Degna
Chairman & CEO
FLEET EQUITY PARTNERS VI, L.P.
By Fleet Growth Resources II, Inc., its
General Partner
By /s/ Robert M. Van Degna
--------------------------------------------
Robert M. Van Degna
Chairman & CEO
<PAGE>
WALLER-SUTTON MEDIA PARTNERS, L.P.
By Waller Sutton Media, L.L.C., its general partner
By /s/ Bruce M. Herdandez
---------------------------------------------
Its Chief Executive Officer
--------------------------------------------
By /s/ Royce J. Holland
---------------------------------------------
<PAGE>
Execution of Counterpart Agreeing to be Bound by
Holder of Management Equity Acquired After the Initial
Closing
Name of Individual:
-------------------------------
Signature:
----------------------------------------
Date:
Execution of Counterpart Agreeing to be Bound by
Holder of Investor Equity Acquired After the Initial
Closing
Name of Individual:
-------------------------------
Signature:
----------------------------------------
Date:
<PAGE>
EXHIBIT 10.4
Amendment No. 1
to
Transaction Agreement
This Amendment No. 1 ("Amendment") to the Transaction Agreement dated as of
July 8, 1998 (the "Original Agreement") is made as of December __, 1998, among
Choice One Communications Inc. (the "Corporation"), Choice One Communications
L.L.C. (the "LLC") and the persons listed on the signature pages hereto that
have executed a counterpart hereof.
WHEREAS, the initial holders of Investor Equity and Management Equity
entered into the Original Agreement on July 8, 1998 in connection with their
investments in the Corporation to be held initially through their ownership of
Units in the LLC;
WHEREAS, certain additional persons have become holders of Management
Equity pursuant to the terms of the Original Agreement subsequent to July 8,
1998; and
WHEREAS, First Union Investors, Inc., as Administrative Agent, the
Corporation, as Guarantor, its subsidiaries, as Borrowers, and the Lenders party
thereto have entered into a Credit Agreement dated as of October 14, 1998, as
amended as of _____, 1998;
WHEREAS, the parties hereto desire to effect an amendment to the Original
Agreement to avoid an inconsistency with said Credit Agreement;
WHEREAS, this Amendment requires the prior written consent of the holders
of at least 80% of the Investor Equity and Management Equity, consenting as a
single class;
NOW, THEREFORE, the parties hereto hereby agree as follows:
Section 1. Amendments to Original Agreement. The Original Agreement is
hereby amended as follows:
(a) Amendments to Section 8.01. (i) The following new definition is hereby
inserted in the appropriate alphabetical place in Section 8.01 of the Original
Agreement:
"'Credit Agreement' means the Credit Agreement executed by the
Corporation, as Guarantor, its subsidiaries, as Borrowers, First Union
Investors, Inc., as Administrative Agent, and the Lenders party thereto
<PAGE>
dated as of October 14, 1998, as the same may be amended from time to time
in accordance with the terms thereof and hereof."
(ii) The second sentence of the definition of "Material Adverse Effect" in
Section 8.01 of the Original Agreement is hereby amended and restated as
follows:
"Without limiting the generality of the foregoing, a
"Material Adverse Effect" shall be deemed to have occurred if the
applicable effect, change, event, matter or occurrence,
individually or in the aggregate with all other effects, changes,
events, matters or occurrences would be reasonably likely to
result in (i) any material impediment to or restriction on the
operation or conduct of the business (the "Business") of the
Corporation and its Subsidiaries that is not capable of being
cured within a reasonable period or (ii) any material adverse
effect on the ability of the Corporation or any of its executive
officers to consummate the transactions contemplated by this
Agreement and the other agreements referred to herein."
(b) Amendment to Section 5.02. Section 5.02(j) of the Original
Agreement is hereby amended by inserting after "(j)" and before "become subject
to..." the following phrase: "except for the Credit Agreement,".
Section 2. Other Defined Terms. Capitalized terms used in this Amendment
and not otherwise defined have the meanings ascribed to them in the Original
Agreement.
Section 3. Effect of Amendment; Governing Law. Except as amended hereby,
the Original Agreement shall remain unchanged. The Original Agreement, as
amended hereby, shall remain in full force and effect. This Amendment shall be
governed by, and construed under, the laws of the State of Delaware, all rights
and remedies being governed by said laws, without regard to conflict of laws
principles.
Section 4. Counterparts. This Amendment may be executed simultaneously in
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
CHOICE ONE COMMUNICATIONS INC.
By: /s/ Steve M. Dubnik
---------------------------
Its: President and Chief Executive Officer
--------------------------------------
CHOICE ONE COMMUNICATIONS
L.L.C.
By: /s/ Steve M. Dubnik
--------------------------------------
Its: Authorized Person
-------------------------------------
MANAGEMENT MEMBERS
/s/ Steve M. Dubnik
------------------------------
Steve M. Dubnik, as a Management
Member and as Chief Executive Officer
/s/ Mae Squier-Dow
------------------------------
Mae Squier-Dow
/s/ Kevin Dickens
------------------------------
Kevin Dickens
/s/ Philip Yawman
------------------------------
3
<PAGE>
Philip Yawman
/s/ Joseph Schaal
------------------------------
Joseph Schaal
/s/ Elizabeth Ellis
------------------------------
Elizabeth Ellis
/s/ Joseph Calzone
------------------------------
Joseph Calzone
/s/ Michelle Paroda
------------------------------
Michelle Paroda
/s/ Linda Chapman
------------------------------
Linda Chapman
/s/ John Zimmer
------------------------------
John Zimmer
/s/ David Fitts
------------------------------
David Fitts
/s/ Kenneth Okolowicz
------------------------------
Kenneth Okolowicz
/s/ Daniel K. Iles
------------------------------
Daniel K. Iles
/s/ Michael D'Angelo
------------------------------
Michael D'Angelo
4
<PAGE>
/s/ Robert Merrill
------------------------------
Robert Merrill
5
<PAGE>
INVESTOR MEMBERS
MORGAN STANLEY CAPITAL
PARTNERS III, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc., its general partner
By /s/ Michael M. Jansen
-----------------------------------------------
Its Managing Director
-----------------------------------------------
By /s/ John Ehren Kranz
-----------------------------------------------
Its Principal
-----------------------------------------------
MSCP III 892 INVESTORS, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc., its general partner
By /s/ Michael M. Jansen
-----------------------------------------------
Its Managing Director
-----------------------------------------------
By /s/ John Ehren Kranz
-----------------------------------------------
Its Principal
-----------------------------------------------
MORGAN STANLEY CAPITAL
INVESTORS, L.P.
6
<PAGE>
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc., its general partner
By /s/ Michael M. Jansen
-----------------------------------------------
Its Managing Director
-----------------------------------------------
By /s/ John Ehren Kranz
-----------------------------------------------
Its Principal
-----------------------------------------------
7
<PAGE>
CHISHOLM PARTNERS III, L.P.
By Silverado III, L.P., its General Partner
By Silverado III Corp., its General Partner
By /s/ Robert M. Van Degna
-----------------------------------
Robert M. Van Degna
Chairman & CEO
KENNEDY PLAZA PARTNERS
By /s/ Robert M. Van Degna
-----------------------------------
Robert M. Van Degna
Managing General Partner
FLEET VENTURE RESOURCES, INC.
By /s/ Robert M. Van Degna
-----------------------------------
Robert M. Van Degna
Chairman & CEO
FLEET EQUITY PARTNERS VI, L.P.
By Fleet Growth Resources II, Inc., its
General Partner
By /s/ Robert M. Van Degna
-----------------------------------
Robert M. Van Degna
Chairman & CEO
8
<PAGE>
WALLER-SUTTON MEDIA PARTNERS, L.P.
By Waller Sutton Media, L.L.C. its general
partner
By /s/ Bruce M. Hernandez
-----------------------------------
Its Chief Executive Officer
-----------------------------------
/s/ ROYCE J. HOLLAND
----------------------------
ROYCE J. HOLLAND
Royce J. Holland
9
<PAGE>
EXHIBIT 10.5
Amendment No. 2
to
Transaction Agreement
This Amendment No. 2 ("Amendment") to the Transaction Agreement dated
as of July 8, 1998 (the "Original Agreement"), as amended by Amendment No. 1
dated as of December 18, 1998, is made as of February 18, 1999, among Choice One
Communications Inc. (the "Corporation"), Choice One Communications L.L.C. (the
"LLC") and the persons listed on the signature pages hereto.
WHEREAS, the initial holders of Investor Equity and Management Equity
entered into the Original Agreement on July 8, 1998 in connection with their
investments in the Corporation to be held initially through their ownership of
Units in the LLC;
WHEREAS, certain additional persons have become holders of Management
Equity pursuant to the terms of the Original Agreement subsequent to July 8,
1998;
WHEREAS, First Union Capital Partners, Inc. ("First Union") desires to
become a holder of Investor Equity and to become a party to the Original
Agreement and certain related agreements relating to its investment in the LLC;
and
WHEREAS, the parties hereto desire that First Union become a party to
the Original Agreement;
NOW, THEREFORE, the parties hereto hereby agree as follows:
SECTION 1. Amendment to Definitions. (a) The Original Agreement is
hereby amended by inserting the following definition of "Subsequent Investor
Purchase Agreement" before the definition of "Subsidiary" in Section 8.01:
"Subsequent Investor Purchase Agreement" means the investor purchase
agreement, dated as of February 18, 1999, between the LLC and First Union
Capital Partners, Inc., as amended from time to time in accordance with its
terms, pursuant to which First Union Capital Partners, Inc. has subscribed for
1,000,000 Class A Units and in connection therewith made an initial Capital
Contribution of $300,000.
(b) The definition of "Investor Equity" in Section 8.01 of the Original
Agreement is hereby amended by adding "or pursuant to any Subsequent Investor
<PAGE>
Purchase Agreement" after "Agreement" and before "or Transferred" in clause (i)
thereof.
(c) The definition of "Investor Members" in Section 8.01 of the
Original Agreement is hereby amended by deleting it in its entirety and
replacing it with the following:
"Investor Members" means (i) MSCP, Fleet, Waller-Sutton and Royce J.
Holland, each of which was, on July 8, 1998, admitted as a Member pursuant to
Section 3.01(b) of the LLC Agreement, (ii) First Union Capital Partners, Inc.,
which shall be admitted on February18, 1999 as a Member pursuant to Section
3.01(d) of the LLC Agreement and (iii) any transferee of any Investor Equity
prior to dissolution of the LLC in compliance with Article 6 hereof that is
admitted to the LLC as a Substituted Member (as defined in the LLC Agreement)
pursuant to Section 10.01 of the LLC Agreement, but in each case only so long as
such Person is shown on the LLC's books and records as the owner of one or more
Units.
(d) The definition of "Maximum Commitment" in Section 8.01 of the
Original Agreement is hereby amended by deleting the second sentence in its
entirety and replacing it with the following:
"The maximum commitment, as of February 18, 1999, for each Member is
listed on the Schedule of Unitholders attached to the LLC Agreement."
SECTION 2. Amendment to Section 9.04. Section 9.04 of the Original
Agreement is hereby amended by inserting "and if such amendment to Section 6.05,
6.06 or this Section 9.04 would have an adverse economic impact (which is
disproportionate to First Union Capital Partners, Inc. as compared to the other
Investor Members) on First Union Capital Partners, Inc.'s investment in the LLC
then such amendment shall also require the prior written consent of First Union
Capital Partners, Inc." after "and MSCP" and before "(but".
SECTION 3. Amendment to Section 9.13. Section 9.13 is hereby amended by
adding the following after "Nixon, Hargrave, Devans & Doyle LLP... (716)
263-1600" and before "and if" in such Section:
"if to First Union Capital Partners, Inc., to:
First Union Capital Partners, Inc.
One First Union Center
301 South College Street -- TW-5
Charlotte, North Carolina 28288-0732
Attention: Pearce Landry
2
<PAGE>
Facsimile: (704) 374-6711
SECTION 4. Agreement to Be Bound. First Union hereby adopts, executes
and delivers, and agrees to bound by, the Original Agreement as amended hereby.
SECTION 5. Other Defined Terms. Capitalized terms used in this
Amendment and not otherwise defined have the meanings ascribed to them in the
Original Agreement.
SECTION 6. Effect of Amendment; Governing Law. Except as amended
hereby, the Original Agreement shall remain unchanged. The Original Agreement,
as amended hereby, shall remain in full force and effect. This Amendment shall
be governed by, and construed under, the laws of the State of Delaware, all
rights and remedies being governed by said laws, without regard to conflict of
laws principles.
SECTION 7. Counterparts. This Amendment may be executed simultaneously
in two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same agreement.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first written above.
CHOICE ONE COMMUNICATIONS INC.
By: /s/ Steve M. Dubnik
________________________________
Its: President and Chief Executive Officer
_______________________________
CHOICE ONE COMMUNICATIONS
L.L.C.
By: /s/ Steve M. Dubnik
_______________________________
Its: Authorized Person
______________________________
FIRST UNION CAPITAL PARTNERS, INC.
By: /s/ Ted A. Gardner
_______________________________
Its: Managing Partner
______________________________
4
<PAGE>
MANAGEMENT MEMBERS
/s/ Steve M. Dubnik
_________________________________________
Steve M. Dubnik, as a Management
Member and as Chief Executive Officer
of Choice One Communications, Inc.
/s/ Mae Squier-Dow
_________________________________________
Mae Squier-Dow
/s/ Kevin Dickens
_________________________________________
Kevin Dicken
/s/ Phillip Yawman
_________________________________________
Phillip Yawman
/s/ Joseph Schaal
_________________________________________
Joseph Schaal
/s/ Elizabeth Ellis
_________________________________________
Elizabeth Ellis
/s/ Joseph Calzone
_________________________________________
Joseph Calzone
/s/ Michelle Paroda
_________________________________________
Michelle Paroda
/s/ Linda Chapman
_________________________________________
Linda Chapman
/s/ John Zimmer
_________________________________________
John Zimmer
5
<PAGE>
/s/ David Fitts
_________________________________________
David Fitts
/s/ Kenneth Okolowicz
_________________________________________
Kenneth Okolowicz
/s/ Daniel K. Iles
_________________________________________
Daniel K. Iles
/s/ Michael D'Angelo
_________________________________________
Michael D'Angelo
/s/ Robert Merrill
_________________________________________
Robert Merrill
/s/ Kim Scovill
_________________________________________
Kim Scovill
6
<PAGE>
INVESTOR MEMBERS
MORGAN STANLEY CAPITAL
PARTNERS III, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc., its general partner
By /s/ Michael Jansen
______________________________________
Its Managing Director
______________________________________
By /s/ John Ehrenkranz
______________________________________
Its Principal
______________________________________
MSCP III 892 INVESTORS, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc., its general partner
By /s/ Michael Jansen
______________________________________
Its Managing Director
______________________________________
By /s/ John Ehrenkranz
______________________________________
Its Principal
______________________________________
MORGAN STANLEY CAPITAL
INVESTORS, L.P.
7
<PAGE>
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc., its general partner
By /s/ Michael Jansen
______________________________________
Its Managing Director
______________________________________
By /s/ John Ehrenkranz
______________________________________
Its Principal
______________________________________
8
<PAGE>
CHISHOLM PARTNERS III, L.P.
By Silverado III, L.P., its General Partner
By Silverado III Corp., its General Partner
By /s/ Robert M. Van Degna
________________________________________
Robert M. Van Degna
Chairman & CEO
KENNEDY PLAZA PARTNERS
By /s/ Robert M. Van Degna
________________________________________
Robert M. Van Degna
Managing General Partner
FLEET VENTURE RESOURCES, INC.
By /s/ Robert M. Van Degna
________________________________________
Robert M. Van Degna
Chairman & CEO
FLEET EQUITY PARTNERS VI, L.P.
By Fleet Growth Resources II, Inc.,
its General Partner
By /s/ Robert M. Van Degna
________________________________________
Robert M. Van Degna
Chairman & CEO
9
<PAGE>
WALLER-SUTTON MEDIA PARTNERS, L.P.
By Waller Sutton Media, L.L.C.
its general partner
By /s/ Bruce Hernandez
________________________________________
Bruce Hernandez
Chief Executive Officer
ROYCE J. HOLLAND
/s/ Royce J. Holland
______________________________________________
Royce J. Holland
10
<PAGE>
EXHIBIT 10.6
[executed]
Amendment No. 3
to
Transaction Agreement
This Amendment No. 3 ("Amendment") to the Transaction Agreement dated
as of July 8, 1998, as amended by Amendment No. 1 dated as of December 18, 1998
and Amendment No. 2 dated as of February 18, 1999, (the "Original Agreement") is
made as of May 14, 1999, among Choice One Communications Inc. (the
"Corporation"), Choice One Communications L.L.C. (the "LLC") and the persons
listed on the signature pages hereto that have executed a counterpart hereof.
WHEREAS, the initial holders of Investor Equity and Management Equity
entered into the Original Agreement on July 8, 1998 in connection with their
investments in the Corporation to be held initially through their ownership of
Units in the LLC;
WHEREAS, certain additional persons have become holders of Management
Equity pursuant to the terms of the Original Agreement subsequent to July 8,
1998; and
WHEREAS, the parties hereto desire to effect an amendment to the
Original Agreement to change the quorum requirement for action by the Board of
Directors of the Corporation;
WHEREAS, this Amendment requires the prior written consent of the
holders of at least 80% of the Investor Equity and Management Equity, consenting
as a single class (as well as the consent of each of Fleet, Waller-Sutton and
MSCP);
NOW, THEREFORE, the parties hereto hereby agree as follows:
SECTION 1. Amendment to Original Agreement. Section 5.03(c) of the
Original Agreement is hereby amended by deleting it in its entirety and
replacing it with the following:
"The required quorum for Board action shall be the presence at
a Board meeting of at least four directors; provided that (i) so long
as MSCP has the right to designate a director on the Board, a quorum
<PAGE>
must include at least one director designated by MSCP and (ii) so long
as either Fleet or Waller-Sutton has the right to designate a director
on the Board, a quorum must include at least one director designated by
either Fleet or Waller-Sutton."
SECTION 2. Other Defined Terms. Capitalized terms used in this
Amendment and not otherwise defined have the meanings ascribed to them in the
Original Agreement.
SECTION 3. Effect of Amendment; Governing Law. Except as amended
hereby, the Original Agreement shall remain unchanged. The Original Agreement,
as amended hereby, shall remain in full force and effect. This Amendment shall
be governed by, and construed under, the laws of the State of Delaware, all
rights and remedies being governed by said laws, without regard to conflict of
laws principles.
SECTION 4. Counterparts. This Amendment may be executed simultaneously
in two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Amendment.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first written above.
CHOICE ONE COMMUNICATIONS INC.
/s/ Steve M. Dubnik
By:----------------------------
President and Chief Executive Officer
Its:---------------------------
CHOICE ONE COMMUNICATIONS
L.L.C.
/s/ Steve M. Dubnik
By: ---------------------------
Authorized Person
Its:---------------------------
MANAGEMENT MEMBERS
/s/ Steve M. Dubnik
--------------------------------
Steve M. Dubnik, as a Management
Member and as Chief Executive Officer
/s/ Mae Squier-Dow
--------------------------------
Mae Squier-Dow
/s/ Kevin Dickens
--------------------------------
Kevin Dickens
/s/ Phillip Yawman
--------------------------------
Phillip Yawman
/s/ Joseph Schaal
--------------------------------
Joseph Schaal
3
<PAGE>
/s/ Elizabeth Ellis
--------------------------------
Elizabeth Ellis
/s/ Joseph Calzone
--------------------------------
Joseph Calzone
/s/ Michelle Paroda
--------------------------------
Michelle Paroda
/s/ Linda Chapman
--------------------------------
Linda Chapman
/s/ John Zimmer
--------------------------------
John Zimmer
/s/ David Fitts
--------------------------------
David Fitts
/s/ Kenneth Okolowicz
--------------------------------
Kenneth Okolowicz
/s/ Daniel K. Iles
--------------------------------
Daniel K. Iles
/s/ Michael D'Angelo
--------------------------------
Michael D'Angelo
/s/ Robert Merrill
--------------------------------
Robert Merrill
/s/ Kim Scovill
--------------------------------
Kim Scovill
4
<PAGE>
INVESTOR MEMBERS
MORGAN STANLEY CAPITAL PARTNERS III, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc., its general partner
/s/ Michael Jansen
By ------------------------------
Managing Director
Its ------------------------------
/s/ John Ehrenkranz
By ------------------------------
Principal
Its ------------------------------
MSCP III 892 INVESTORS, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc., its general partner
/s/ Michael Jansen
By ------------------------------
Managing Director
Its ------------------------------
/s/ John Ehrenkranz
By ------------------------------
Principal
Its ------------------------------
MORGAN STANLEY CAPITAL
INVESTORS, L.P.
5
<PAGE>
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc., its general partner
/s/ Michael Jansen
By ------------------------------
Managing Director
Its ------------------------------
/s/ John Ehrenkranz
By ------------------------------
Principal
Its ------------------------------
6
<PAGE>
CHISHOLM PARTNERS III, L.P.
By Silverado III, L.P., its General Partner
By Silverado III Corp., its General Partner
/s/ Robert M. Van Degna
By ------------------------------
Robert M. Van Degna
Chairman & CEO
KENNEDY PLAZA PARTNERS
/s/ Robert M. Van Degna
By ------------------------------
Robert M. Van Degna
Managing General Partner
FLEET VENTURE RESOURCES, INC.
/s/ Robert M. Van Degna
By ------------------------------
Robert M. Van Degna
Chairman & CEO
FLEET EQUITY PARTNERS VI, L.P.
By Fleet Growth Resources II, Inc., its
General Partner
/s/ Robert M. Van Degna
By ------------------------------
Robert M. Van Degna
Chairman & CEO
7
<PAGE>
WALLER-SUTTON MEDIA PARTNERS, L.P.
By Waller Sutton Media, L.L.C. its general
partner
/s/ Bruce Hernandez
By ------------------------------
Chief Executive Officer
Its ------------------------------
FIRST UNION CAPITAL PARTNERS,
INC.
/s/ Pearce Kandry
By ------------------------------
Managing Partner
Its ------------------------------
ROYCE J. HOLLAND
/s/ Royce J. Holland
------------------------------
Royce J. Holland
8
<PAGE>
EXHIBIT 10.7
Amendment No. 4
to
Transaction Agreement
This Amendment No. 4 ("Amendment") to the Transaction Agreement dated
as of July 8, 1998 (the "Original Agreement"), as amended by Amendment No. 1
dated as of December 18, 1998, by Amendment No. 2 dated as of February 18, 1999
and by Amendment No. 3 dated as of May 14, 1999 is made as of June 30, 1999,
among Choice One Communications Inc. (the "Corporation"), Choice One
Communications L.L.C. (the "LLC") and the persons listed on the signature pages
hereto.
WHEREAS, the initial holders of Investor Equity and Management Equity
entered into the Original Agreement on July 8, 1998 in connection with their
investments in the Corporation to be held initially through their ownership of
Units in the LLC;
WHEREAS, certain additional persons have become holders of Management
Equity pursuant to the terms of the Original Agreement subsequent to July 8,
1998;
WHEREAS, First Union Capital Partners, Inc. became a holder of Investor
Equity on February 18, 1999;
WHEREAS, General Electric Capital Corporation ("General Electric")
desires to become a holder of Investor Equity and to become a party to the
Original Agreement and certain related agreements relating to its investment in
the LLC; and
WHEREAS, the parties hereto desire that General Electric become a party
to the Original Agreement;
NOW, THEREFORE, the parties hereto hereby agree as follows:
SECTION 1. Amendment to Definitions. (a) The Original Agreement is
hereby amended by inserting the following definition of "Subsequent Investor
Purchase Agreement" before the definition of "Subsidiary" in Section 8.01:
"Subsequent Investor Purchase Agreement" means (a) the investor
purchase agreement, dated as of February 18, 1999, between the LLC and First
Union Capital Partners, Inc., as amended from time to time in accordance with
its terms, pursuant to which First Union Capital Partners, Inc. has subscribed
for 1,000,000 Class A Units and in connection therewith made an initial Capital
<PAGE>
Contribution of $300,000 and (b) the investor purchase agreement, dated as of
June 30, 1999, between the LLC and General Electric Capital Corporation, as
amended from time to time in accordance with its terms, pursuant to which
General Electric Capital Corporation has subscribed for 1,000,000 Class A Units
and in connection therewith made an initial Capital Contribution of $500,000.
(b) The definition of "Investor Members" in Section 8.01 of the
Original Agreement is hereby amended by deleting it in its entirety and
replacing it with the following:
"Investor Members" means (i) MSCP, Fleet, Waller-Sutton and Royce J.
Holland, each of which was, on July 8, 1998, admitted as a Member pursuant to
Section 3.01(b) of the LLC Agreement, (ii) First Union Capital Partners, Inc.,
which was admitted on February18, 1999 as a Member pursuant to Section 3.01(d)
of the LLC Agreement, (iii) General Electric Capital Corporation, which shall be
admitted on June 30, 1999 as a Member pursuant to Section 3.01(e) of the LLC
Agreement and (iv) any transferee of any Investor Equity prior to dissolution of
the LLC in compliance with Article 6 hereof that is admitted to the LLC as a
Substituted Member (as defined in the LLC Agreement) pursuant to Section 10.01
of the LLC Agreement, but in each case only so long as such Person is shown on
the LLC's books and records as the owner of one or more Units.
(c) The definition of "Maximum Commitment" in Section 8.01 of the
Original Agreement is hereby amended by deleting the second sentence in its
entirety and replacing it with the following:
"The maximum commitment, as of June 30, 1999, for each Member is listed
on the Schedule of Unitholders attached to the LLC Agreement."
SECTION 2. Amendment to Section 9.04. Section 9.04 of the Original
Agreement is hereby amended by inserting "and if such amendment to Section 6.05,
6.06 or this Section 9.04 would have an adverse economic impact (which is
disproportionate to First Union Capital Partners, Inc. or General Electric
Capital Corporation, as applicable, as compared to the other Investor Members)
on First Union Capital Partners, Inc.'s or General Electric Capital
Corporation's investment in the LLC then such amendment shall also require the
prior written consent of First Union Capital Partners, Inc. or General Electric
Capital Corporation, as applicable," after "and MSCP" and before "(but".
SECTION 3. Amendment to Section 9.13. Section 9.13 is hereby amended by
adding the following after "Nixon, Hargrave, Devans & Doyle LLP... (716)
263-1600" and before "and if" in such Section:
"if to General Electric to:
2
<PAGE>
General Electric Capital Corporation
c/o G.E. Capital Services
Structured Finance Group, Inc.
120 Long Ridge Road
Stamford, CT 06927
Facsimile: 203-961-2017
SECTION 4. Agreement to Be Bound. General Electric hereby adopts,
executes and delivers, and agrees to bound by, the Original Agreement as amended
hereby.
SECTION 5. Other Defined Terms. Capitalized terms used in this
Amendment and not otherwise defined have the meanings ascribed to them in the
Original Agreement.
SECTION 6. Effect of Amendment; Governing Law. Except as amended
hereby, the Original Agreement shall remain unchanged. The Original Agreement,
as amended hereby, shall remain in full force and effect. This Amendment shall
be governed by, and construed under, the laws of the State of Delaware, all
rights and remedies being governed by said laws, without regard to conflict of
laws principles.
SECTION 7. Counterparts. This Amendment may be executed simultaneously
in two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same agreement.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first written above.
CHOICE ONE COMMUNICATIONS INC.
By: /s/ Steve M. Dubnik
---------------------------------------
Its: President and Chief Executive Officer
---------------------------------------
CHOICE ONE COMMUNICATIONS
L.L.C.
By: /s/ Steve M. Dubnik
---------------------------------------
Its: Authorized Person
---------------------------------------
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ Molly S. Fergusson
---------------------------------------
Its: Manager of Operations
---------------------------------------
4
<PAGE>
MANAGEMENT MEMBERS
/s/ Steve M. Dubnik,
---------------------------
as a Management Member and as Chief
Executive Officer of Choice One
Communications, Inc.
/s/ Mae Squier-Dow
---------------------------
/s/ Kevin Dickens
---------------------------
/s/ Phillip Yawman
---------------------------
/s/ Joseph Schaal
---------------------------
/s/ Elizabeth Ellis
---------------------------
/s/ Joseph Calzone
---------------------------
/s/ Michelle Paroda
---------------------------
/s/ Linda Chapman
---------------------------
/s/ John Zimmer
---------------------------
5
<PAGE>
/s/ David Fitts
---------------------------
/s/ Kenneth Okolowicz
---------------------------
/s/ Daniel K. Iles
---------------------------
/s/ Michael D'Angelo
---------------------------
/s/ Robert Merrill
---------------------------
/s/ Kim Scovill
---------------------------
6
<PAGE>
INVESTOR MEMBERS
MORGAN STANLEY CAPITAL
PARTNERS III, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital
Partners III,
Inc., its general partner
By /s/ Michael Jansen
---------------------------
Its Managing Director
---------------------------
By /s/ John Ehrenkranz
---------------------------
Its Principal
---------------------------
MSCP III 892 INVESTORS, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc., its general partner
By /s/ Michael Jansen
---------------------------
Its Managing Director
---------------------------
By /s/ John Ehrenhranz
---------------------------
Its Principal
---------------------------
MORGAN STANLEY CAPITAL
INVESTORS, L.P.
7
<PAGE>
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc., its general partner
By /s/ Michael Jansen
---------------------------
Its Managing Director
---------------------------
By /s/ John Ehrenkranz
---------------------------
Its Principal
---------------------------
8
<PAGE>
CHISHOLM PARTNERS III, L.P.
By Silverado III, L.P., its General Partner
By Silverado III Corp., its General Partner
By /s/ Robert M. Van Degna
---------------------------
Chairman & CEO
KENNEDY PLAZA PARTNERS
By /s/ Robert M. Van Degna
---------------------------
Managing General Partner
FLEET VENTURE RESOURCES, INC.
By /s/ Robert M. Van Degna
---------------------------
Chairman & CEO
FLEET EQUITY PARTNERS VI, L.P.
By Fleet Growth Resources II, Inc., its
General Partner
By /s/ Robert M. Van Degna
---------------------------
Chairman & CEO
9
<PAGE>
WALLER-SUTTON MEDIA PARTNERS,
L.P.
By Waller Sutton Media, L.L.C. its general
partner
By /s/ Bruce Hernandez
---------------------------
Chief Executive Officer
FIRST UNION CAPITAL PARTNERS,
INC.
By: /s/ Pearce Landry
---------------------------
Its: Managing Partner
---------------------------
ROYCE J. HOLLAND
/s/ Royce J. Holland
---------------------------
10
<PAGE>
EXHIBIT 10.8
Amendment No. 5
to
Transaction Agreement
This Amendment No. 5 ("Amendment") to the Transaction Agreement dated
as of July 8, 1998, as amended by Amendment No. 1 dated as of December 18, 1998,
by Amendment No. 2 dated as of February 18, 1999, by Amendment No. 3 dated as of
May 14, 1999 and by Amendment No. 4 dated as of June 30, 1999 (the "Original
Agreement"), is made as of June 30, 1999, among Choice One Communications Inc.
(the "Corporation"), Choice One Communications L.L.C. (the "LLC") and the
persons listed on the signature pages hereto.
WHEREAS, the initial holders of Investor Equity and Management Equity
entered into the Transaction Agreement on July 8, 1998 in connection with their
investments in the Corporation to be held initially through their ownership of
Units in the LLC;
WHEREAS, certain additional persons have become holders of Management
Equity pursuant to the terms of the Original Agreement subsequent to July 8,
1998;
WHEREAS, First Union Capital Partners, Inc. became a holder of Investor
Equity on February 18, 1999 and General Electric Capital Corporation became a
holder of Investor Equity on the date hereof;
WHEREAS, Morgan Stanley Dean Witter Capital Partners IV, L.P., Morgan
Stanley Dean Witter Capital Investors IV, L.P. and MSDW IV 892 Investors, L.P.
(collectively, "MSDWCP IV"), R. Philip Silver and Caravelle Investment Fund,
L.L.C. ("Caravelle") desire to become holders of Investor Equity and to become
party to the Original Agreement and certain related agreements relating to their
investment in the LLC;
WHEREAS, certain of the Investor Members, MSDWCP IV, R. Philip Silver
and Caravelle desire to commit to provide an aggregate of an additional $71.25
million in equity capital to the LLC on the terms and conditions set forth in
the LLC Agreement and the Transaction Agreement;
WHEREAS, the parties hereto desire that MSDWCP IV, R. Philip Silver and
Caravelle become parties to the Original Agreement; and
WHEREAS, the parties desire to amend the Original Agreement to provide
for the additional equity commitment as described above;
<PAGE>
NOW, THEREFORE, the parties hereto hereby agree as follows:
SECTION 1. Amendment to Original Agreement. Section 1.01 of the
Original Agreement is hereby amended by inserting as the last sentence thereof
the following:
"On June 30, 1999 each Tranche 2 Investor Member (as defined
below) subscribed for additional Class A Units in the LLC pursuant to
the Tranche 2 Investor Purchase Agreement (as defined below)."
SECTION 2. Amendment to Section 3.01. Section 3.01 of the Original
Agreement is hereby amended by inserting as the last sentence thereof the
following:
"Nothing in this Agreement will be construed to limit the powers of the
LLC or the Board to determine the appropriate capital structure of, or sources
or amounts of financing for, the Corporation. It is understood that (1)
Subsequent Contributions shall first be drawn down from Tranche 1 Equity, which
the parties hereto, including the chief executive officer, agree shall be drawn
down in full (at such times and in such amounts as the LLC directs), and only
after Tranche 1 Equity has been exhausted shall Subsequent Contributions of
Tranche 2 Equity be made; and (2) if the Tranche 2 Expiration Date has not
occurred prior to January 1, 2001, the equity portion of the Corporation's
capital requirements under all then Approved Business Plans which have not been
funded as of January 1, 2001 shall, subject to the conditions in Section 3.04,
be funded by the LLC out of Tranche 2 Equity on such date."
SECTION 3. Amendment to Section 3.02. Section 3.02(a)(y) is hereby
amended by inserting "Tranche 1" after "50% of the" and before "Maximum
Commitment".
SECTION 4. Amendment to Section 3.04. (a) Section 3.04(a) is hereby
amended by adding the following sentence at the end thereof: "Notwithstanding
the foregoing, if the Tranche 2 Expiration Date has not occurred prior to
January 1, 2001, then on such date, Subsequent Contributions shall be expressly
contemplated and authorized as the equity portion of the Corporation's capital
requirements under all then Approved Business Plans, and the 6-month period
limitation referred to above will be disregarded."
(b) Section 3.04(g) is hereby amended by inserting the following
sentence at the end thereof.
"No Member shall be required to fund a capital contribution in respect
of a Subsequent Contribution that, when aggregated with all previously funded
capital
2
<PAGE>
contributions by such Member, would exceed such Member's share of the Maximum
Commitment."
(c) Section 3.04 is hereby amended by inserting as the last clauses
thereof the following:
"(l) Expiration of Commitment. The Drawdown Date shall be on or prior
to the Tranche 2 Expiration Date.
(m) Issuances of Shares. Simultaneously with any Subsequent
Contribution drawn down from Tranche 2 Equity, the Corporation shall issue to
the LLC a number of shares of Common Stock equal to the amount of such
Subsequent Contribution divided by $1,200. The Board shall have approved the
foregoing issuance."
SECTION 5. Amendment to Section 3.05. (a) Section 3.05(b)(iii) is
hereby amended by deleting it in its entirety and replacing it with the
following:
"(iii) The aggregate amount of Capital Contributions made by an Opt-Out
Investor to the LLC prior to the Opt-Out Election plus the amount required to be
subsequently contributed by it to the LLC pursuant to Section 3.05(b)(i) is
referred to as such Opt-Out Investor's "Opt-Out Commitment." The number of Units
held by such Opt-Out Investor immediately prior to the Opt-Out Election (the
"Initial Unit Amount") will be automatically reduced to the number of Class A
Units in respect of Tranche 1 Equity (based on a per Unit commitment of $1.00)
and in respect of Tranche 2 Equity (based on a per Unit commitment of $1.20)
representing such remaining Opt-Out Commitment (the "Adjusted Unit Amount"). The
number of Units in each Tranche by which such Opt-Out Investor's Initial Unit
Amount exceeds its Adjusted Unit Amount will be offered (the "Opt-Out Units
Offer"), by written notice, for reissuance to each other Investor Member that is
not an Opt-Out Investor based on each such Investor Member's pro rata ownership,
determined immediately prior to such reissuance, of the aggregate amount of
Units in each Tranche held by all the Investor Members offered such Units. If
any such Investor Member subscribes for less than its full pro rata share of
offered Units pursuant to the Opt-Out Units Offer, such unsubscribed portion
shall be offered to the other Investor Members (that are not Opt-Out Investors)
in a similar manner. Such Opt-Out Units Offer will be deemed rejected by an
Investor Member if not accepted by written notice to the LLC within five
business days of such Opt-Out Units Offer. The maximum commitment of each
Investor Member who subscribes for such Units shall be increased by the number
of Units so subscribed for times the price per Unit in each Tranche (as set
forth in Section 3.01 of the LLC Agreement). To the extent the Units so offered
are not accepted by any of such other Investor Members, they
3
<PAGE>
will be deemed canceled and the Maximum Commitment and, as applicable, Tranche 1
Maximum Commitment and Tranche 2 Maximum Commitment will be reduced accordingly.
(b) Section 3.05(b)(vi) is hereby amended by deleting "corresponding
to the aggregate dollar amount of its Opt-Out Commitment" and replacing it with
"representing its Opt-Out Commitment as described in clause (iii) above" after
"Class A Units" and before "(which Units will".
SECTION 6. Amendment to Section 5.02. Section 5.02(q) is hereby amended
by (i) deleting "$100,000" and replacing it with "$200,000" and (ii) inserting
"(other than leases or other rental agreements expressly specified in any
Approved Business Plan or Approved Budget then applicable)" at the end of such
Section.
SECTION 7. Amendment to Section 5.03. (a) Section 5.03(b)(i) is hereby
amended by (i) deleting "the holders of a majority of the MSCP Equity held by
MSCP and its Affiliates" and replacing it with "MSCP" and (ii) by inserting at
the end of such clause "with respect to the foregoing representatives so
entitled to be designated, so long as more than one representative is entitled
to be designated by MSCP, Morgan Stanley Capital Partners III, L.P. may
designate one representative (as long as it owns Outstanding Voting Units), and
Morgan Stanley Dean Witter Capital Partners IV, L.P. may designate one
representative (as long as it owns Outstanding Voting Units); all other
designations of such representatives will be by the general partner of either
Morgan Stanley Capital Partners III, L.P. or Morgan Stanley Dean Witter Capital
Partners IV, L.P.;".
(b) Section 5.03(b)(ii) is hereby amended by deleting "the holders of
a majority of the Fleet Equity held by Fleet and its Affiliates" and replacing
it with "Chisholm Partners III, L.P."
SECTION 8. Amendment to Definitions. (a) The Original Agreement is
hereby amended by inserting the following definition before the definition of
"Class A Units":
"Caravelle" means Caravelle Investment Fund, L.L.C., a Delaware limited
liability company.
(b) The Original Agreement is hereby amended by inserting the
following definitions before the definition of "Transfer" in Section 8.01:
"Tranche 1 Class A Units" has the meaning ascribed to such term in the
LLC Agreement.
4
<PAGE>
"Tranche 2 Class A Units" has the meaning ascribed to such term in the
LLC Agreement.
"Tranche 1 Equity" has the meaning ascribed to such term in the LLC
Agreement.
"Tranche 2 Equity" has the meaning ascribed to such term in the LLC
Agreement.
"Tranche 2 Expiration Date" means the earliest of (a) January 1, 2001,
(b) the date designated as such by the chief executive officer, provided that
such date so designated pursuant to this clause (b) shall not be prior to the
closing of a high yield financing by the Corporation raising at least $100
million, and (c) the date of consummation of the initial Public Offering.
"Tranche 2 Investor Members" has the meaning ascribed to such term in
the LLC Agreement.
"Tranche 2 Investor Purchase Agreement" means the Tranche 2 investor
purchase agreement, dated as of June 30, 1999, between the LLC and the Tranche 2
Investor Members, as amended from time to time in accordance with its terms,
pursuant to which each Tranche 2 Investor Member subscribed for a number of
Class A Units set forth therein.
"Tranche 1 Maximum Commitment" means, at any time, $1 times the
aggregate number of Tranche 1 Class A Units and Class B Units outstanding at
such time. The maximum commitment with respect to Tranche 1 Equity, as of June
30, 1999, for each Member is listed on the Schedule of Unitholders attached to
the LLC Agreement."
"Tranche 2 Maximum Commitment" means, at any time, $1.20 times the
aggregate number of Tranche 2 Class A Units outstanding at such time. The
maximum commitment with respect to Tranche 2 Equity, as of June 30, 1999, for
each Member is listed on the Schedule of Unitholders attached to the LLC
Agreement. The foregoing will be construed after giving effect to Section
3.01(g) of the LLC Agreement."
(c) The definition of "Investor Equity" in Section 8.01 of the Original
Agreement is hereby amended by inserting "or to the Tranche 2 Investor Purchase
Agreement" after "Agreement" and before "or Transferred" in the second line
thereof.
5
<PAGE>
(d) The definition of "Investor Members" in Section 8.01of the Original
Agreement is hereby amended by deleting it in its entirety and replacing it with
the following:
"Investor Members" means (i) MSCP III, Fleet, Waller-Sutton and Royce
J. Holland, each of which was, on July 8, 1998, admitted as a Member pursuant to
Section 3.01(b) of the LLC Agreement, (ii) First Union, which was admitted on
February 18, 1999 as a Member pursuant to Section 3.01(d) of the LLC Agreement,
(iii) General Electric which was admitted on June 30, 1999 as a Member pursuant
to Section 3.01(e) of the LLC Agreement, (iv) Caravelle, which may be admitted
as a Member pursuant and subject to Section 3.01(f) of the LLC Agreement, (v)
MSDWCP IV, which entities shall be admitted on June 30, 1999 as Members pursuant
to Section 3.01(f) of the LLC Agreement, (vi) R. Philip Silver who shall be
admitted as a Member on June 30, 1999 pursuant to Section 3.01(f) of the LLC
Agreement and (vii) any transferee of any Investor Equity prior to dissolution
of the LLC in compliance with Article 6 of the Transaction Agreement that is
admitted to the LLC as a Substituted Member pursuant to Section 10.01 of the LLC
Agreement, but in each case only so long as such Person is shown on the LLC's
books and records as the owner of one or more Units.
(e) The definition of "MSCP" in Section 8.01 of the Original Agreement
is hereby amended by deleting in its entirety and replacing it with the
following:
"MSCP" means collectively MSCP III and MSDWCP IV.
(f) The Original Agreement is hereby amended by inserting the
following definitions of "MSCP III" and "MSDWCP IV" before the definition of
"Officer's Certificate" in Article 1:
"MSCP III" means, collectively, Morgan Stanley Capital Partners III,
L.P., Morgan Stanley Capital Investors, L.P., and MSCP III 892 Investors, L.P.
"MSDWCP IV" means, collectively, Morgan Stanley Dean Witter Capital
Partners IV, L.P., Morgan Stanley Dean Witter Capital Investors IV, L.P., and
MSDW IV 892 Investors, L.P.
(g) The definition of "MSCP Equity" in Section 8.01 of the Original
Agreement is hereby amended by inserting "or to the Tranche 2 Investor Purchase
Agreement" after "Investor Purchase Agreement" in the second line thereof.
(h) The definition of "Maximum Commitment" in Section 8.01 of the
Original Agreement is hereby amended by deleting it in its entirety and
replacing it with the following:
6
<PAGE>
"Maximum Commitment" means the sum of the Tranche 1 Maximum Commitment
plus the Tranche 2 Maximum Commitment. The maximum commitment, as of June 30,
1999, for each Member (and each Member's share of the Tranche 1 Maximum
Commitment and Tranche 2 Maximum Commitment) is listed on the Schedule of
Unitholders attached to the LLC Agreement. The foregoing will be construed after
giving effect to Section 3.01(g) of the LLC Agreement."
SECTION 9. Amendment to Section 9.04. Section 9.04 of the Original
Agreement is hereby amended by inserting "and if such amendment to Section 6.05,
6.06 or this Section 9.04 would have an adverse economic impact (which is
disproportionate to First Union Capital Partners, Inc., General Electric Capital
Corporation or Caravelle, as applicable, as compared to the other Investor
Members) on First Union Capital Partners, Inc.'s, General Electric Capital
Corporation's or Caravelle's investment in the LLC then such amendment shall
also require the prior written consent of First Union Capital Partners, Inc.,
General Electric Capital Corporation or Caravelle, as applicable," after "and
MSCP" and before "(but".
This amendment to Section 9.04 shall not be effective until
effectiveness of Caravelle's admission as a Member pursuant to Section 3.01(f)
of the LLC Agreement.
SECTION 10. Amendment to Section 9.13. Section 9.13 is hereby amended
by adding the following after "Nixon, Hargrave, Devans & Doyle LLP... (716)
263-1600" and before "if" in such Section:
"if to Caravelle to:
Caravelle Advisors, L.L.C.
c/o Jason Block
2nd Floor
425 Lexington Avenue
New York, NY 10017
Facsimile: (212) 885-4520
SECTION 11. Agreement to Be Bound. Each of Morgan Stanley Dean Witter
Capital Partners IV, L.P., Morgan Stanley Dean Witter Capital Investors IV,
L.P., MSDW IV 892 Investors, L.P., R. Philip Silver and Caravelle hereby adopts,
executes and delivers, and agrees to bound by, the Original Agreement as amended
hereby.
7
<PAGE>
SECTION 12. Other Defined Terms. Capitalized terms used in this
Amendment and not otherwise defined have the meanings ascribed to them in the
Original Agreement.
SECTION 13. Effect of Amendment; Governing Law. Except as amended
hereby, the Original Agreement shall remain unchanged. The Original Agreement,
as amended hereby, shall remain in full force and effect. This Amendment shall
be governed by, and construed under, the laws of the State of Delaware, all
rights and remedies being governed by said laws, without regard to conflict of
laws principles.
SECTION 14. Counterparts. This Amendment may be executed simultaneously
in two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same agreement.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first written above.
CHOICE ONE COMMUNICATIONS INC.
By: /s/ Steve M. Dubnik
______________________________________
Its: President and Chief Executive Officer
______________________________________
CHOICE ONE COMMUNICATIONS
L.L.C.
By: /s/ Steve M. Dubnik
______________________________________
Its: Authorized Person
______________________________________
MANAGEMENT MEMBERS
/s/ Steve M. Dubnik
______________________________________
as a Management Member and as Chief
Executive Officer of Choice One
Communications, Inc.
/s/ Mae Squier-Dow
______________________________________
/s/ Kevin Dickens
______________________________________
9
<PAGE>
/s/ Phillip Yawman
_____________________________________
/s/ Joseph Schaal
_____________________________________
/s/ Elizabeth Ellis
_____________________________________
/s/ Joseph Calzone
_____________________________________
/s/ Michelle Paroda
_____________________________________
/s/ Linda Chapman
_____________________________________
/s/ John Zimmer
_____________________________________
/s/ David Fitts
_____________________________________
/s/ Kenneth Okolowicz
_____________________________________
/s/ Daniel K. Iles
_____________________________________
/s/ Michael D'Angelo
_____________________________________
10
<PAGE>
/s/ Robert Merrill
_____________________________________
Robert Merrill
/s/ Kim Scovill
_____________________________________
Kim Scovill
11
<PAGE>
INVESTOR MEMBERS
MORGAN STANLEY CAPITAL
PARTNERS III, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc., its general partner
/s/ Michael M. Jansen
By ____________________________________
Managing Director
Its ____________________________________
/s/ John Ehrenkranz
By ____________________________________
Principal
Its ____________________________________
MSCP III 892 INVESTORS, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc., its general partner
/s/ Michael M. Jansen
By ____________________________________
Managing Director
Its ____________________________________
/s/ John Ehrenkranz
By ____________________________________
Principal
Its ____________________________________
MORGAN STANLEY CAPITAL
INVESTORS, L.P.
12
<PAGE>
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc., its general partner
/s/ Michael M. Jansen
By ____________________________________
Managing Director
Its ____________________________________
/s/ John Ehrenkranz
By ____________________________________
Principal
Its ____________________________________
MORGAN STANLEY DEAN WITTER
CAPITAL PARTNERS IV, L.P.
By MSDW Capital Partners IV, LLC, its
general partner
By MSDW Capital Partners IV, Inc., its
general partner
/s/ Michael M. Jansen
By ____________________________________
Managing Director
Its ____________________________________
/s/ John Ehrenkranz
By ____________________________________
Principal
Its ____________________________________
MSDW IV 892 INVESTORS, L.P.
13
<PAGE>
By MSDW Capital Partners IV, LLC, its
general partner
By Morgan Stanley Capital Partners IV,
Inc., its general partner
/s/ Michael M. Jansen
By ____________________________________
Managing Director
Its ____________________________________
/s/ John Ehrenkranz
By ____________________________________
Principal
Its ____________________________________
MORGAN STANLEY DEAN WITTER
CAPITAL INVESTORS IV, L.P.
By MSDW Capital Partners IV LLC, its
general partner
By Morgan Stanley Capital Partners IV,
Inc., its general partner
/s/ Michael M. Jansen
By ____________________________________
Managing Director
Its ____________________________________
/s/ John Ehrenkranz
By ____________________________________
Principal
Its ____________________________________
14
<PAGE>
CHISHOLM PARTNERS III, L.P.
By Silverado III, L.P., its General Partner
By Silverado III Corp., its General Partner
/s/ Robert M. Van Degna
By ________________________________________
Robert M. Van Degna
Chairman & CEO
KENNEDY PLAZA PARTNERS
/s/ Robert M. Van Degna
By _________________________________________
Robert M. Van Degna
Managing General Partner
FLEET VENTURE RESOURCES, INC.
/s/ Robert M. Van Degna
By _________________________________________
Robert M. Van Degna
Chairman & CEO
FLEET EQUITY PARTNERS VI, L.P.
By Fleet Growth Resources II, Inc., its
General Partner
/s/ Robert M. Van Degna
By __________________________________________
Robert M. Van Degna
Chairman & CEO
15
<PAGE>
WALLER-SUTTON MEDIA PARTNERS, L.P.
By Waller Sutton Media, L.L.C. its general
partner
/s/ Bruce Hernandez
By __________________________________________
Bruce Hernandez
Chief Executive Officer
FIRST UNION CAPITAL PARTNERS, INC.
/s/ Pearce Landry
By: __________________________________________
Managing Director
Its: __________________________________________
GENERAL ELECTRIC CAPITAL
CORPORATION
Molly S. Fergusson
By: ___________________________________________
Manager Operations
Its: ___________________________________________
CARAVELLE INVESTMENT FUND, L.L.C.
By Caravelle Advisors, L.L.C.,
as Investment Manager and
Attorney In Fact
/s/
By: ___________________________________________
Portfolio Manager
Its: ___________________________________________
16
<PAGE>
ROYCE J. HOLLAND
/s/ Royce J. Holland
By: ___________________________________________
Royce J. Holland
R. PHILIP SILVER
/s/ R. Philip Silver
By: ___________________________________________
R. Philip Silver
17
<PAGE>
EXHIBIT 10.9
Amendment No. 6
to
Transaction Agreement
This Amendment No. 6 ("Amendment") to the Transaction Agreement dated as of
July 8, 1998, as amended by Amendment No. 1 dated as of December 18, 1998, by
Amendment No. 2 dated as of February 18, 1999, by Amendment No. 3 dated as of
May 14, 1999, by Amendment No. 4 dated as of June 30, 1999 and by Amendment No.
5 dated as of June 30, 1999 (the "Original Agreement"), is made as of November
18, 1999, among Choice One Communications Inc. (the "Corporation"), Choice One
Communications L.L.C. (the "LLC") and the persons listed on the signature pages
hereto.
WHEREAS, the parties desire to amend the Original Agreement to provide for
certain governance arrangements to be effective in connection with the initial
Public Offering;
NOW, THEREFORE, the parties hereto hereby agree as follows:
Section 1. Amendment to Section 5.03 of the Original Agreement .
Effective upon the consummation of the initial Public Offering, Section 5.03 of
the Original Agreement shall hereby be amended and restated as follows:
"SECTION 5.03. Corporate Governance. (a) Board Size. The initial size of
the Board shall be [number] directors. The Board size may be changed by action
of the Board but will not at any time be less than the total number of directors
designated (or entitled to be designated) pursuant to Section 5.03(b) at such
time.
(b) Composition of the Board. The following will be designated as
directors to the Board:
(i) MSCP may designate (w) a majority of the Board so long as MSCP and
its Affiliates hold at least 75% of the MSCP Equity, (x) [1/3] of the Board
so long as MSCP and its Affiliates hold less than 75% but at least 50% of
the MSCP Equity; (y) 2 directors so long as MSCP and its Affiliates hold
less than 50% but at least 25% of the MSCP Equity and (z) one
representative so long as MSCP and its Affiliates hold less than 25% but at
least 10% of the MSCP Equity; with respect to the foregoing representatives
so entitled to be designated, so long as more than one representative is
entitled to be designated by MSCP, Morgan Stanley Capital Partners III,
L.P. may designate one representative (as long as it owns outstanding
Common Stock), and Morgan Stanley Dean Witter Capital Partners IV, L.P.
may designate one representative (as long as it
<PAGE>
owns outstanding Common Stock); all other designations of such
representatives will be by the general partner of either Morgan Stanley
Capital Partners III, L.P. or Morgan Stanley Dean Witter Capital Partners
IV, L.P.;
(ii) Chisholm Partners III, L.P. may designate one director so long as
Fleet and its Affiliates hold at least 50% of the Fleet Equity;
(iii) Waller-Sutton may designate one director so long as Waller-
Sutton and its Affiliates hold at least 75% of the Waller-Sutton Equity;
and
(iv) the Corporation's chief executive officer shall be designated as
a director.
Each of MSCP, Fleet and Waller-Sutton is referred to as an "Investor".
(c) Outside Directors. Within three months after the consummation of the
initial Public Offering, the Board shall fill at least one of the vacancies on
the Board with an individual who is neither an officer or employee of the
Corporation nor an "Affiliate" or an "Associate" (as those terms are used within
the meaning of Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act) of such an officer or employee or of any Investor (such
an individual, an "Outside Director"). There will at all times be at least one
Outside Director, who will be designated by the Board.
(d) Quorum; Board Action. The required quorum for Board action shall be the
presence at a Board meeting of at least four directors; provided that (i) so
long as MSCP has the right to designate a director on the Board, a quorum must
include at least one director designated by MSCP and (ii) so long as either
Fleet or Waller-Sutton has the right to designate a director on the Board, a
quorum must include at least one director designated by either Fleet or Waller-
Sutton.
All action of the Board shall require the affirmative vote of at least a
majority of the directors at a duly convened meeting of the Board at which a
quorum is present or the unanimous written consent of the Board; provided that,
in the event there is a vacancy on the Board and an individual has been
nominated to fill such vacancy, the first order of business shall be to fill
such vacancy
2
<PAGE>
(e) Subsidiary Boards. The composition of the board of directors of each
of the Corporation's Subsidiaries (a "Sub Board") shall be the same as that of
the Board.
(f) Executive Committee. The Board shall create and maintain an executive
committee (the "Executive Committee"), membership of which will be constituted
as follows: (i) one Director may be designated by MSCP, (ii) the Corporation's
chief executive officer will be a member, (iii) Fleet may designate the Director
designated by Fleet pursuant to 5.03(b)(ii), and (iv) Waller-Sutton may
designate the Director designated by Waller-Sutton pursuant to 5.03(b)(iii);
provided that an Investor will lose its right to have its designee on the
Executive Committee as soon as it is not entitled to any designee on the Board.
Executive Committee membership will otherwise be as designated by the Board.
The Executive Committee shall (x) act as a liaison between the Board, on the one
hand, and executive management, on the other hand, and (y) exercise such powers
as shall be delegated to it from time to time by the Board. Each member of the
Executive Committee shall have one vote.
(g) Pricing Committee. The Board shall create and maintain a committee
(the "Pricing Committee"), membership of which will be constituted as follows:
(i) one Director may be designated by MSCP, (ii) the Corporation's chief
executive officer will be a member, (iii) Fleet may designate the Director
designated by Fleet pursuant to 5.03(b)(ii), and (iv) Waller-Sutton may
designate the Director designated by Waller-Sutton pursuant to 5.03(b)(iii);
provided that an Investor will lose its right to have its designee on the
Pricing Committee as soon as it is not entitled to any designee on the Board.
Pricing Committee membership will otherwise be as designated by the Board. The
Pricing Committee (A) shall negotiate the pricing and other terms applicable to
the engagement of an Affiliate of MSCP as a financial advisor to the Corporation
or as lead manager or lead arranger for any underwritten offering or capital
markets activities (x) for the account of the Corporation or (y) in which MSCP
does not participate, which terms will be customary for a transaction of that
nature, (B) will have the authority in all such cases to select and engage one
or more co-managers or co-arrangers for any such underwritten offering or
capital markets activities and may negotiate the terms of such engagement and
(C) shall exercise such others powers as shall be delegated to it from time to
time by the Board. Notwithstanding the foregoing, MSCP's designee shall abstain
from voting on matters referred to in clause (A) of the previous sentence (but
will be entitled to participate in discussions and deliberations, and will be
consulted in good faith, thereon). Each member of the Pricing Committee shall
have one vote.
(h) Other Committees. Committees of the Board or a Sub Board (other than
the Executive Committee and the Pricing Committee) shall be created only upon
the approval of a majority of the members of the entire Board or the
3
<PAGE>
applicable entire Sub Board, in each case assuming there were no vacancies and
provided that action is taken at a meeting at which a quorum exists, and the
composition of each such committee (if any) shall be proportionately equivalent
to that of the Board to the extent practicable. It is understood and agreed,
however, that no Director who is an officer of the Corporation may serve on the
audit committee or any compensation committee or other similar committee
established by the Board.
(i) Removal. Any director may be removed from the Board or a Sub Board or
committee, (i) with or without cause, at the written request of the holder or
holders entitled to designate such person to be a director, (ii) at the Board's
request, as soon as the director in question is no longer entitled to be
designated pursuant to Section 5.03(b) (but if the applicable holder is entitled
to more than one designee, such holder may select the designee(s) to be
removed); or (iii) with cause at the request of any Investor, and, subject to
Section 141(k) of the Delaware General Corporation Law, under no other
circumstances; provided that if any Director who is an officer of the
Corporation ceases to be an employee of the Corporation and its Subsidiaries for
any reason, the individual shall be removed as a member of the Board and each
Sub Board and committee promptly after his employment ceases.
(j) Vacancies. In the event any director ceases to serve as a member of
the Board or a Sub Board during his or her term of office, whether pursuant to
Section 5.03(i) above or otherwise, or for any other reason there are at any
time fewer representatives serving on the Board than are entitled to be
designated by an Investor, the resulting vacancy on the Board or the Sub Board
may be filled at any time (i) by a representative designated by the holder or
holders entitled to designate such vacant Board seats or (ii) if no holder is
entitled to designate a representative to fill such vacancy at such time, then
by the Board as constituted immediately prior to such time.
(k) Agreement to Implement the Foregoing. Each party hereto agrees that it
will vote its shares or execute consents, as the case may be, and each party
hereto (including the Corporation) shall take all other necessary action
(including nominating such designees, calling an annual or special meeting of
shareholders, or causing its designee(s) to resign, as applicable) in order to
ensure that the composition of the Board is as set forth in this Section 5.03
and otherwise to give effect to the provisions of this Section 5.03. Each party
shall vote its shares, and shall take all other actions necessary, to ensure
that the Corporation's Certificate of Incorporation and Bylaws facilitate and do
not at any time conflict with any provision of this Agreement. The obligations
imposed on any Investor to give effect to the provisions set forth in this
Section 5.03 shall terminate as to such Investor when such Investor's right to
designate a director is terminated, after
4
<PAGE>
which time such Investor's consent shall not be needed to any amendment or
waiver of this Section 5.03."
SECTION 2. Amendment to Section 5.05. Section 5.05 of the Original
Agreement is hereby amended and restated as follows:
"Section 5.05. Termination. The rights and requirements under Sections
5.01 and 5.02 shall terminate upon the earlier to occur of (i) consummation of
the initial Public Offering approved under Section 5.02 of the LLC Agreement and
(ii) the closing of a Sale of the Corporation. The provisions of Section 5.03
shall terminate upon the closing of a Sale of the Corporation. The provisions of
Section 5.04 shall survive the termination of the other provisions of this
Article 5."
SECTION 3. Other Defined Terms. Capitalized terms used in this Amendment
and not otherwise defined have the meanings ascribed to them in the Original
Agreement.
SECTION 4. Effect of Amendment; Governing Law. The amendment to Section
5.03 of the Original Agreement effected by Section 1 hereof shall be not
effective until consummation of the initial Public Offering. Except as amended
hereby, the Original Agreement shall remain unchanged. The Original Agreement,
as amended hereby, shall remain in full force and effect. This Amendment shall
be governed by, and construed under, the laws of the State of Delaware, all
rights and remedies being governed by said laws, without regard to conflict of
laws principles.
SECTION 5. Counterparts. This Amendment may be executed simultaneously in
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same agreement.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
CHOICE ONE COMMUNICATIONS INC.
By: /s/ Steve M. Dubnik
-----------------------------
Its: President and Chief Executive Officer
-----------------------------
CHOICE ONE COMMUNICATIONS L.L.C.
By: /s/ Steve M. Dubnik
-----------------------------
Its: Authorized Person
----------------------------
MANAGEMENT MEMBERS
/s/ Steve M. Dubnik
-----------------------------
Steve M. Dubnik, as a Management
Member and as Chief Executive Officer
of Choice One Communications, Inc.
/s/ Mae Squier-Dow
-----------------------------
Mae Squier-Dow
/s/ Kevin Dickens
-----------------------------
Kevin Dickens
/s/ Philip Yawman
-----------------------------
Philip Yawman
6
<PAGE>
/s/ Joseph Schaal
-----------------------------
Joseph Schaal
-----------------------------
Elizabeth Ellis
/s/ Joseph Calzone
-----------------------------
Joseph Calzone
/s/ Michelle Paroda
-----------------------------
Michelle Paroda
/s/ Linda Chapman
-----------------------------
Linda Chapman
-----------------------------
John Zimmer
/s/ David Fitts
-----------------------------
David Fitts
/s/ Kenneth Okolowicz
-----------------------------
Kenneth Okolowicz
/s/ Daniel K. Iles
-----------------------------
Daniel K. Iles
7
<PAGE>
/s/ Michael D'Angelo
-----------------------------
Michael D'Angelo
/s/ Robert Merrill
-----------------------------
Robert Merrill
/s/ Kim Scovill
-----------------------------
Kim Scovill
INVESTOR MEMBERS
MORGAN STANLEY CAPITAL PARTNERS III, L.P.
By: MSCP III, L.P., its general partner
By: Morgan Stanley Capital Partners III, Inc.,
its general partner
By: /s/ John Ehrenkranz
-----------------------------
Its: Principal
----------------------------
By: /s/ Michael Jansen
-----------------------------
Its: Managing Director
----------------------------
8
<PAGE>
MSCP III 892 INVESTORS, L.P.
By: MSCP III, L.P., its general partner
By: Morgan Stanley Capital Partners III, Inc.,
its general partner
By: /s/ John Ehrenkranz
-----------------------------
Its: Principal
----------------------------
By: /s/ Michael Jansen
-----------------------------
Its: Managing Director
----------------------------
MORGAN STANLEY CAPITAL INVESTORS, L.P.
By: MSCP III, L.P., its general partner
By: Morgan Stanley Capital Partners III, Inc.,
its general partner
By: /s/ John Ehrenkranz
-----------------------------
Its: Principal
----------------------------
By: /s/ Michael Jansen
-----------------------------
Its: Managing Director
----------------------------
9
<PAGE>
MORGAN STANLEY DEAN WITTER
CAPITAL PARTNERS IV, L.P.
By: MSDW Capital Partners IV, LLC, its
general partner
By: MSDW Capital Partners IV, Inc., its
general partner
By: /s/ John Ehrenkranz
-----------------------------
Its: Principal
----------------------------
By: /s/ Michael Jansen
-----------------------------
Its: Managing Director
----------------------------
MSDW IV 892 INVESTORS, L.P.
By: MSDW Capital Partners IV, LLC, its general partner
By: Morgan Stanley Capital Partners IV, Inc.,
its general partner
By: /s/ John Ehrenkranz
-----------------------------
Its: Principal
----------------------------
By: /s/ Michael Jansen
-----------------------------
Its: Managing Director
----------------------------
10
<PAGE>
CHISHOLM PARTNERS III, L.0.
By: Silverado III, L.P., its General Partner
By: Silverado III, Corp., its General Partner
By: /s/ Robert M. Van Degna
--------------------------------
Robert M. Van Degna
Chairman & CEO
KENNEDY PLAZA PARTNERS
By: /s/ Robert M. Van Degna
--------------------------------
Robert M. Van Degna
Managing General Partner
FLEET VENTURE RESOURCES, INC.
By: /s/ Robert M. Van Degna
--------------------------------
Robert M. Van Degna
Chairman & CEO
FLEET EQUITY PARTNERS VI, L.P.
By: /s/ Robert M. Van Degna
--------------------------------
Fleet Growth Resources II, Inc.,
its General Partner
By: /s/ Robert M. Van Degna
--------------------------------
Robert M. Van Degna
Chairman & CEO
11
<PAGE>
WALLER-SUTTON MEDIA PARTNERS, L.P.
By: Waller-Sutton Media, L.L.C. its general partner
By: /s/ Bruce Hernandez
------------------------------------
Bruce Hernandez
Chief Executive Officer
FIRST UNION CAPITAL PARTNERS, INC.
By:
----------------------------------
Its:
----------------------------------
GENERAL ELECTRIC CAPITAL CORPORATION
By:
----------------------------------
Its:
----------------------------------
CARAVELLE INVESTMENT FUND, L.L.C.
By: Caravelle Advisors, L.L.C., as
Investment Manager
By:
----------------------------------
Its:
----------------------------------
12
<PAGE>
ROYCE J. HOLLAND
By:
----------------------------------
Royce J. Holland
R. PHILIP SILVER
By:
----------------------------------
R. Philip Silver
13
<PAGE>
EXHIBIT 10.10
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (the "Agreement") is made as of July 8,
1998, among Choice One Communications Inc., a Delaware corporation (the
"Corporation"), the Investor Holders and the Management Holders.
WHEREAS, the parties hereto and Choice One Communications LLC (the "LLC")
have entered into the Transaction Agreement, dated as of the date hereof, and
certain related agreements relating to the investment by the Investor Holders
and the Management Holders in the Corporation;
WHEREAS, this Agreement provides for certain rights and obligations of the
Corporation and the Holders with respect to registration of the Common Stock
under the Securities Act;
NOW, THEREFORE, in consideration of the mutual promises made herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and the parties hereto, intending to be legally bound agree
as follows:
ARTICLE 1
Definitions
Section 1.1. Definitions. The following terms used herein but not
otherwise defined will have the following meanings, applicable both to the
singular and the plural forms of the terms described:
"Affiliate" of any particular Person means any other Person controlling,
controlled by or under common control with such particular Person, where
"control" means the possession, directly or indirectly, of the power to direct
the management and policies of a Person whether through the ownership of voting
securities, by contract or otherwise
"Board" means the board of directors of the Corporation.
"Common Stock" means the common stock, par value $0.01 per share, of the
Corporation.
"Corporation Securities" has the meaning ascribed thereto in Section
2.02(b).
<PAGE>
"Disadvantageous Condition" has the meaning ascribed thereto in Section
2.01(a)(i).
"Executive Purchase Agreements" has the meaning ascribed to such term in
the Transaction Agreement.
"Fleet" means, collectively, Chisholm Partners III, L.P., Kennedy Plaza
Partners, Fleet Venture Resources, Inc. and Fleet Equity Partners VI, L.P.
"Holder" means each of the Investor Holders, the Management Holders and,
subject to Section 2.08, any Transferee.
"Initial Public Offering Date" means the date of completion of the initial
sale of Common Stock in the initial Public Offering.
"Investor Holders" means MSCP, Fleet, Waller-Sutton and Royce J. Holland
and any Transferee that becomes an Investor Holder pursuant to Section 2.08.
"LLC Agreement" means the limited liability company agreement dated as of
the date hereof, entered into by and among the members of the LLC, as amended
from time to time in accordance with its terms.
"Majority Holders" means the Holders holding a majority in aggregate of the
Registrable Securities held by all Holders.
"Majority Investor Holders" means the Investor Holders holding a majority
in aggregate of the Registrable Securities held by all Investor Holders.
"Majority Management Holders" means Management Holders holding a majority
in aggregate of the Registrable Securities held by all Management Holders.
"Management Holder" means (i) each individual that has purchased Management
Equity pursuant to an Executive Purchase Agreement, so long as such individual
remains employed by the Corporation and (ii) any Transferee that becomes a
Management Holder pursuant to Section 2.08.
"MSCP" means, collectively, Morgan Stanley Capital Partners III, L.P.,
Morgan Stanley Capital Investors, L.P., and MSCP III 892 Investors, L.P.
"Other Securities" has the meaning ascribed thereto in Section 2.02.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture,
2
<PAGE>
an unincorporated organization and a governmental entity or any department,
agency or political subdivision thereof.
"Public Offering" means any underwritten sale of the Common Stock pursuant
to an effective registration statement under the Securities Act 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 or financing for a merger or acquisition, and (ii) any issuance of
common stock or rights to acquire common stock to employees of the Corporation
or its Subsidiaries as part of an incentive or compensation plan.
"Registrable Securities" means Common Stock and any securities issued
directly or indirectly with respect to such Common Stock by way of a split,
dividend, or other division of securities, or in connection with a combination
of securities, recapitalization, merger, consolidation, or other reorganization.
As to any particular Registrable Securities, such Registrable Securities shall
cease to be Registrable Securities when they (i) have been effectively
registered under the Securities Act and disposed of in accordance with the
registration statement covering them or (ii) repurchased by the Corporation or
otherwise have ceased to be outstanding.
"Registration Expenses" means any and all expenses incident to performance
of or compliance with any registration or marketing of securities pursuant to
Article 2, including, without limitation, (i) the fees, disbursements and
expenses of the Corporation's counsel and accountants in connection with this
Agreement and the performance of the Corporation's obligations hereunder
(including the expenses of any annual audit letters and "cold comfort" letters
required or incidental to the performance of such obligations); (ii) all
expenses, including filing fees, in connection with the preparation, printing
and filing of the registration statement, any preliminary prospectus or final
prospectus, any other offering document and amendments and supplements thereto
and the mailing and delivering of copies thereof to any underwriters and
dealers; (iii) the cost of printing or producing any agreements among
underwriters, underwriting agreements, and blue sky or legal investment
memoranda, any selling agreements and any other documents in connection with the
offering, sale or delivery of the securities to be disposed of; (iv) all
expenses in connection with the qualification of the securities to be disposed
of for offering and sale under state securities laws, including the fees and
disbursements of counsel for the underwriters or the Holders of securities in
connection with such qualification and in connection with any blue sky and legal
investment surveys; (v) the filing fees incident to securing any required review
by the National Association of Securities Dealers, Inc. of the terms of the sale
of the securities to be disposed of; (vi) transfer agents' and
3
<PAGE>
registrars' fees and expenses and the fees and expenses of any other agent or
trustee appointed in connection with such offering; (vii) all security engraving
and security printing expenses; (viii) all fees and expenses payable in
connection with the listing of the securities on any securities exchange or
automated interdealer quotation system or the rating of such securities; (ix)
any other fees and disbursements of underwriters customarily paid by the issuers
of securities, but excluding underwriting discounts and commissions and transfer
taxes, if any; (x) the costs and expenses of the Corporation and its officers
relating to rating agency, analyst or investor presentations or any "road show"
undertaken in connection with the registration and/or marketing of any
Registrable Securities and (xi) other reasonable out-of-pocket costs, fees and
expenses of the Holders including the counsel to the Holders selected pursuant
to Section 2.01(d), provided that the Corporation will not be liable for the
fees and expenses of more than one legal counsel representing the Holders in
connection with any registration hereunder.
"Rule 144" means Rule 144 (or any successor rule to similar effect)
promulgated under the Securities Act.
"Rule 415 Offering" means an offering on a delayed or continuous basis
pursuant to Rule 415 (or any successor rule to similar effect) promulgated under
the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended, and
applicable rules and regulations thereunder.
"Securities and Exchange Commission" includes any governmental body or
agency succeeding to the functions thereof.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, and applicable rules and regulations thereunder.
"Selling Holder" means a Holder of Registrable Securities included in the
relevant registration statement.
"Transaction Agreement" means the Transaction Agreement dated as of the
date hereof by and between the Corporation, the LLC, the Investor Holders and
the Management Holders.
"Transfer" shall include any direct or indirect sale, transfer, assignment,
pledge or other disposition (whether with or without consideration and whether
voluntary or involuntary or by operation of law) of any interest in Common
Stock.
"Transferee" has the meaning ascribed thereto in Section 2.08.
4
<PAGE>
"Triggering Investor Holders" means (i) Investor Holders holding at least
20% in the aggregate of the Registrable Securities held by all Investor Holders
or (ii) any two out of three of MSCP, Fleet and Waller-Sutton.
"Units" has the meaning ascribed to such term in the LLC Agreement.
"Waller-Sutton" means, Waller-Sutton Media Partners, L.P., a Delaware
limited partnership.
ARTICLE 2
Registration Rights
Section 2.1. Demand Registration--Registrable Securities--. (a) After the
Initial Public Offering Date, or if prior to the Initial Public Offering Date
then with approval of the LLC, (i) the Majority Investor Holders, (ii) or, after
one registration has been effected (within the meaning of Section 2.01(c))
pursuant to this Section 2.01, the Triggering Investor Holders or the Majority
Management Holders, in either case may request in writing that the Corporation
effect the registration under the Securities Act of any or all of the
Registrable Securities held by such requesting Holders. Upon receipt of such
written notice specifying the intended method or methods of disposition of such
Registrable Securities, the Corporation shall promptly give written notice of
such requested registration to all other Holders of Registrable Securities. The
other Holders may by written notice to the Corporation, within 15 days of the
Corporation's notice, request the inclusion in such registration of any or all
of the Registrable Securities held by each such other Holder. The Corporation
shall promptly after the expiration of such 15-day period notify each Holder of
Registrable Securities to be included in the registration of the other Holders
requesting Registrable Securities to be included therein and the number of
Registrable Securities requested to be included therein by each. The
Corporation shall prepare and (within 90 days after the original request has
been given) file with the Securities and Exchange Commission a registration
statement with respect to all such Registrable Securities and thereafter use its
best efforts to effect the registration under the Securities Act and applicable
state securities laws of such Registrable Securities for disposition in
accordance with the intended method or methods of disposition stated in such
request (which requested method of disposition may be a Rule 415 Offering);
provided that, notwithstanding the foregoing:
(i) with respect to any registration statement filed, or to be
filed, pursuant to this Section 2.01, if the Corporation shall furnish to
the Holders of Registrable Securities that have made such request a
certified
5
<PAGE>
resolution of the Board stating that in the Board's good faith judgment it
would (because of the existence of, or in anticipation of, any acquisition
or other material event or transaction the public disclosure of which at
the time would be materially prejudicial to the Corporation) be
significantly disadvantageous (a "Disadvantageous Condition") to the
Corporation for such a registration statement to be maintained effective,
or to be filed and become effective, and setting forth in reasonable detail
the general reasons for such judgment, the Corporation shall be entitled to
cause such registration statement to be withdrawn and the effectiveness of
such registration statement terminated, or, in the event no registration
statement has yet been filed, shall be entitled not to file any such
registration statement, until such Disadvantageous Condition no longer
exists (written notice of which the Corporation shall promptly deliver to
such Holders). Upon receipt of any such certification of a Disadvantageous
Condition, such Holders shall forthwith discontinue use of the prospectus
contained in such registration statement and, if so directed by the
Corporation, each such Holder will deliver to the Corporation all copies,
other than permanent file copies then in such Holder's possession, of the
prospectus then covering such Registrable Securities current at the time of
receipt of such notice; provided that, notwithstanding anything else
contained in this Agreement, (1) neither the filing nor the effectiveness
of any such registration statement may be delayed for a period in excess of
90 days due to the occurrence of any particular Disadvantageous Condition
and (2) the Corporation may exercise its delay rights under this clause (i)
on only one occasion (and then for not more than 90 days) in connection
with any registration request under Section 2.01 or in any 1-year period.
If so requested by the requesting Holder(s), the Corporation shall, if any
registration statement shall have been withdrawn, at such time as it is
possible or, if earlier, at the end of the 90-day period following such
withdrawal, file a new registration statement covering the Registrable
Securities that were covered by such withdrawn registration and maintain
the effectiveness thereof for such time as is required under this
Agreement;
(ii) the Investor Holders may collectively exercise their rights
under this Section 2.01 (1) on an unlimited number of occasions with
respect to registration statements on Form S-3 and (2) on not more than
three occasions with respect to registration statements on Form S-1;
(iii) after one registration has been effected pursuant to this
Section 2.01 at the request of the Majority Investor Holders, the Majority
Management Holders may collectively exercise their rights under this
6
<PAGE>
Section 2.01 with respect to a registration statement on Form S-1 on one
occasion;
(iv) no registration or sale of any securities which are
Registrable Securities shall be permitted hereunder at any time unless the
Transfer of such securities is then permitted under the Transaction
Agreement and the applicable Executive Purchase Agreement; and
(v) the Holders of Registrable Securities shall not have the right
to require the filing of a registration statement pursuant to this Section
2.01 within six months following the registration and sale of Registrable
Securities effected pursuant to a prior exercise of the registration rights
provided for in this Section 2.01.
(b) The requesting Holders may, at any time prior to the effective date
of the registration statement relating to any requested registration, revoke
such request (which request will then not count as the exercise of a request for
purposes of Section 2.01(a)(ii) or 2.01(a)(iii) ), without liability to any
other Selling Holder requesting to have Registrable Securities included in such
registration pursuant to Section 2.01(a), by providing a written notice to the
Corporation revoking such request.
(c) Notwithstanding any other provision of this Agreement to the
contrary, a registration requested by a Holder of Registrable Securities
pursuant to this Section 2.01 shall not be deemed to have been effected (and,
therefore, not requested (and rights of a Holder shall be deemed not to have
been exercised) for purposes of paragraph (a) above), (i) unless it has become
effective, (ii) if after it has become effective such registration is interfered
with by any stop order, injunction or other order or requirement of the
Securities and Exchange Commission or other governmental agency or court for any
reason other than a misrepresentation or an omission by such Holder and, as a
result thereof, the Registrable Securities requested to be registered cannot be
completely distributed in accordance with the plan of distribution set forth in
the related registration statement or (iii) if the conditions to closing
specified in the purchase agreement or underwriting agreement entered into in
connection with such registration are not satisfied or waived other than solely
by reason of some act or omission by such Holder of Registrable Securities.
(d) In the event that any registration pursuant to this Section 2.01
shall involve, in whole or in part, an underwritten offering, so long as MSCP
participates in the offering, MSCP will have the right to select the
Corporation's lead underwriter (which may be an Affiliate of MSCP) of such
underwritten offering. In connection with each registration pursuant to this
Section 2.01, so
7
<PAGE>
long as MSCP participates in the offering, MSCP may select one counsel to
represent all of the Holders. In the event that MSCP does not participate in the
offering, the Holders of a majority of the Registrable Securities to be
registered shall select the lead underwriter, as well as counsel for the
Holders, with respect to such registration. If any registration hereunder
involves an underwritten offering and securities are to be sold therein for the
account of the Corporation, then Section 5.03(f) of the Transaction Agreement
shall apply with respect to such underwriting.
(e) Subject to Section 2.10, the Corporation shall have the right to
cause the registration of additional equity securities for sale for the account
of any Person that is not a Holder (including, without limitation, the
Corporation and any directors, officers or employees of the Corporation) in any
registration of Registrable Securities requested by the Holders pursuant to
paragraph (a) above; provided that if such Holders are advised in writing (with
a copy to the Corporation) by a nationally recognized investment banking firm
selected by MSCP, or, if MSCP does not participate in such registration selected
by the Holders of a majority of the Registrable Securities to be registered
(which shall be the lead underwriter in the case of an underwritten offering)
that, in such firm's good faith view, all or a part of such additional equity
securities cannot be sold and the inclusion of such additional equity securities
or part thereof in such registration would be likely to have an adverse effect
on the price, timing or distribution of the offering and sale of the Registrable
Securities then contemplated by any Holder, the registration of such additional
equity securities or part thereof shall not be permitted. The Holders of the
Registrable Securities to be offered pursuant to paragraph (a) above may require
that any such additional equity securities be included in the offering proposed
by such Holders on the same terms and conditions as the Registrable Securities
that are included therein. In the event that the number of Registrable
Securities requested to be included in a registration statement by the Holders
thereof exceeds the number which, in the good faith view of such investment
banking firm, can be sold without adversely affecting the price, timing,
distribution or sale of securities in the offering, the number shall be
allocated pro rata among all of the requesting Holders on the basis of the
relative number of Registrable Securities then held by each such Holder
(provided that any number in excess of a Holder's request may be reallocated
among the remaining requesting Holders in a like manner).
Section 2.2. Piggyback Registration. Subject to Section 2.10, in the
event that the Corporation proposes to register any of its Common Stock, any
other of its equity securities or securities convertible into or exchangeable
for its equity securities (collectively, including Common Stock, "Other
Securities") under the Securities Act, whether or not for sale for its own
account, in a manner that would permit registration of Registrable Securities
for sale for cash to the
8
<PAGE>
public under the Securities Act, it shall prior to such time as all Holders in
the aggregate beneficially own less than 5% of the outstanding Common Stock,
give prompt written notice to each Holder of Registrable Securities of its
intention to do so and of the rights of such Holder under this Section 2.02.
Subject to the terms and conditions hereof, such notice shall offer each such
Holder the opportunity to include in such registration statement such number of
Registrable Securities as such Holder may request. Upon the written request of
any such Holder made within 15 days after the receipt of the Corporation's
notice (which request shall specify the number of Registrable Securities
intended to be disposed of and the intended method of disposition thereof), the
Corporation shall use its best efforts to effect, in connection with the
registration of the Other Securities, the registration under the Securities Act
of all Registrable Securities which the Corporation has been so requested to
register, to the extent required to permit the disposition (in accordance with
such intended methods thereof) of the Registrable Securities so requested to be
registered; provided, that:
(a) if, at any time after giving such written notice of its intention to
register any Other 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 the Other Securities,
the Corporation may, at its election, give written notice of such determination
to such Holders and thereupon the Corporation shall be relieved of its
obligation to register such Registrable Securities in connection with the
registration of such Other Securities, without prejudice, however, to the rights
of the Holders of Registrable Securities immediately to request that such
registration be effected as a registration under Section 2.01 to the extent
permitted thereunder;
(b) if the registration referred to in the first sentence of this
Section 2.02 is to be an underwritten registration on behalf of the Corporation,
and a nationally recognized investment banking firm selected by the Corporation
(in accordance with Section 4.08 of the Transaction Agreement) advises the
Corporation in writing that, in such firm's good faith view, the inclusion of
all or a part of such Registrable Securities in such registration would be
likely to have an adverse effect upon the price, timing or distribution of the
offering and sale of the Other Securities then contemplated, the Corporation
shall include in such registration: (i) first, all Other Securities the
Corporation proposes to sell for its own account ("Corporation Securities"),
(ii) second, up to the full number of Registrable Securities held by Holders of
Registrable Securities that are requested to be included in such registration in
excess of the number of Corporation Securities to be sold in such offering
which, in the good faith view of such investment banking firm, can be so sold
without so adversely affecting such offering (and (x) if such number is less
than the full number of such Registrable Securities, such number shall be
allocated pro rata among such Holders on the basis of the relative number
9
<PAGE>
of Registrable Securities then held by each such Holder (provided that any
number in excess of a Holder's request may be reallocated among the requesting
Holders in a like manner) and (y) in the event that such investment banking firm
advises the Corporation in writing pursuant to this subclause (b) that less than
all of such Registrable Securities should be included in such offering, such
Holders may withdraw their request for registration of their Registrable
Securities under this Section 2.02 and request that 90 days subsequent to the
effective date of the registration statement for the registration of such Other
Securities such registration of Registrable Securities be effected as a
registration under Section 2.01 to the extent permitted thereunder), and (iii)
third, up to the full number of the Other Securities (other than Corporation
Securities), if any, in excess of the number of Corporation Securities and
Registrable Securities to be sold in such offering which, in the good faith view
of such investment banking firm, can be so sold without so adversely affecting
such offering (and, if such number is less than the full number of such Other
Securities, such number shall be allocated pro rata among the holders of such
Other Securities (other than Corporation Securities) on the basis of the number
of securities requested to be included therein by each such holder);
(c) the Corporation shall not be required to effect any registration of
Registrable Securities under this Section 2.02 incidental to the registration of
any of its securities in connection with mergers, acquisitions, exchange offers,
subscription offers, dividend reinvestment plans or stock option or other
executive or employee benefit or compensation plans; and
(d) no registration of Registrable Securities effected under this
Section 2.02 shall relieve the Corporation of its obligation to effect a
registration of Registrable Securities pursuant to Section 2.01.
Section 2.3. Expenses. Except as provided herein, the Corporation shall
pay all Registration Expenses (exclusive of underwriting discounts and
commissions, if any) with respect to a particular offering (or proposed
offering). Each Holder shall bear the fees and expenses of its own counsel,
except that fees and expenses of one counsel representing all Holders (selected
pursuant to Section 2.01(d)) will constitute Registration Expenses.
Section 2.4. Registration and Qualification. If and whenever the
Corporation is required to effect the registration of any Registrable Securities
under the Securities Act as provided in Sections 2.01 or 2.02, the Corporation
shall as promptly as practicable:
(a) prepare, file and use its reasonable best efforts to cause to become
effective a registration statement under the Securities Act relating to the
10
<PAGE>
Registrable Securities to be offered in accordance with the intended method of
disposition thereof;
(b) prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act with
respect to the disposition of all Registrable Securities until such time as all
of such Registrable Securities have been disposed of in accordance with the
intended methods of disposition set forth in such registration statement;
provided that the Corporation will, at least 5 business days prior to filing a
registration statement or prospectus or any amendment or supplement thereto,
furnish to each Selling Holder copies of such registration statement or
prospectus (or amendment or supplement) as proposed to be filed (including, upon
the request of such Holder, documents to be incorporated by reference therein)
which documents will be subject to the reasonable review and comments of such
Holder (and its attorneys) during such 5-business-day period and the Corporation
will not file any registration statement, any prospectus or any amendment or
supplement thereto (or any such documents incorporated by reference) containing
any statements with respect to such Holder to which such Holder shall reasonably
object in writing;
(c) furnish to the Holders of Registrable Securities and to any
underwriter of such Registrable Securities 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
included in such registration statement (including each preliminary prospectus
and any summary prospectus), in conformity with the requirements of the
Securities Act, such documents incorporated by reference in such registration
statement or prospectus, and such other documents, as the Selling Holders or
such underwriter may reasonably request, and a copy of any and all transmittal
letters or other correspondence to or received from, the Securities and Exchange
Commission or any other governmental agency or self-regulatory body or other
body having jurisdiction (including any domestic or foreign securities exchange)
relating to such offering;
(d) after the filing of the registration statement, promptly notify each
Selling Holder in writing of the effectiveness thereof and of any stop order
issued or threatened by the Securities and Exchange Commission and take all
reasonable actions required to prevent the entry of such stop order or to
promptly remove it if entered and promptly notify such Selling Holder of such
lifting or withdrawal of such order;
11
<PAGE>
(e) use its reasonable best efforts to cause all Registrable Securities
covered by such registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to enable the
Selling Holders to consummate the disposition of such Registrable Securities;
(f) use its best efforts to register or qualify all Registrable
Securities covered by such registration statement under the securities or blue
sky laws of such jurisdictions as the Holders of such Registrable Securities or
any underwriter of such Registrable Securities shall request, and use its best
efforts to obtain all appropriate registrations, permits and consents in
connection therewith, and do any and all other acts and things which may be
necessary or advisable to enable the Holders of Registrable Securities or any
such underwriter to consummate the disposition in such jurisdictions of its
Registrable Securities covered by such registration statement; provided, that
the Corporation shall not for any such purpose be required to qualify generally
to do business as a foreign corporation in any such jurisdiction wherein it is
not so qualified or to consent to general service of process in any such
jurisdiction;
(g) (i) use its best efforts to furnish to each Selling Holder and to
any underwriter of such Registrable Securities an opinion of counsel for the
Corporation addressed to each Selling Holder and dated the date of the closing
under the underwriting agreement (if any) (or if such offering is not
underwritten, dated the effective date of the registration statement), and (ii)
use its best efforts to furnish to each Selling Holder a "cold comfort" letter
addressed to each Selling Holder and signed by the independent public
accountants who have audited the financial statements of the Corporation
included in such registration statement, in each such case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) as are customarily covered in opinions of
issuer's counsel and in accountants' letters delivered to underwriters in
connection with the consummation of underwritten public offerings of securities
and such other matters as the Selling Holders may reasonably request and, in the
case of such accountants' letter, with respect to events subsequent to the date
of such financial statements;
(h) as promptly as practicable, notify the Selling Holders in writing
(i) at any time when a prospectus relating to a registration pursuant to Section
2.01 or 2.02 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, in light of the circumstances under
which they were made, not misleading, and (ii) of any request by the Securities
and Exchange Commission or any other regulatory body or other body having
jurisdiction for any amendment of
12
<PAGE>
or supplement to any registration statement or other document relating to such
offering, and in either such case, at the request of the Selling Holders prepare
and furnish to the Selling Holders 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 Registrable 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, in light of the circumstances under which they are made, not
misleading;
(i) if requested by the lead or managing underwriters, use its best
efforts to list all such Registrable Securities covered by such registration on
each securities exchange and automated inter-dealer quotation system on which a
class of common equity securities of the Corporation is then listed;
(j) send appropriate officers of the Corporation to attend any "road
shows" and rating agency, analyst and investor presentations scheduled in
connection with any such registration and use its reasonable best efforts to
cooperate as reasonably requested by the Holders in the marketing of the
Registrable Securities, and all reasonable out-of-pocket costs and expenses
incurred by the Corporation or such officers in connection with such attendance
or co-operation shall be paid by the Corporation; and
(k) furnish for delivery in connection with the closing of any offering
of Registrable Securities pursuant to a registration effected pursuant to
Section 2.01 or 2.02 unlegended certificates representing ownership of the
Registrable Securities being sold in such denominations as shall be requested by
the Selling Holders or the underwriters.
Section 2.5. Underwriting; Due Diligence. (a) If requested by the
underwriters for any underwritten offering of Registrable Securities pursuant to
a registration requested under this Article 2, the Corporation shall enter into
an underwriting agreement with such underwriters for such offering, which
agreement will contain such representations and warranties and covenants by the
Corporation and such other terms and provisions as are customarily contained in
underwriting agreements with respect to secondary distributions, including,
without limitation, indemnification and contribution provisions substantially to
the effect and to the extent provided in Section 2.06, and agreements as to the
provision of opinions of counsel and accountants' letters to the effect and to
the extent provided in Section 2.04(g). The Selling Holders on whose behalf the
Registrable Securities are to be distributed by such underwriters shall be
parties to any such underwriting agreement and the representations and
warranties by, and the other agreements on the part of, the Corporation to and
for the benefit of such underwriters, shall also be made to and for the benefit
of such Selling Holders.
13
<PAGE>
Such underwriting agreement shall also contain such representations and
warranties by such Selling Holders and such other terms and provisions as are
customarily contained in underwriting agreements with respect to secondary
distributions on the part of selling shareholders, including, without
limitation, indemnification and contribution provisions substantially to the
effect and to the extent provided in Section 2.06.
(b) In connection with the preparation and filing of each registration
statement registering Registrable Securities under the Securities Act pursuant
to this Article 2, the Corporation shall give the Holders of such Registrable
Securities and the underwriters, if any, and their respective counsel and
accountants, such reasonable and customary access to its books, records and
properties and such opportunities to discuss the business and affairs of the
Corporation with its officers and the independent public accountants who have
certified the financial statements of the Corporation as shall be necessary, in
the opinion of such Holders and such underwriters or their respective counsel,
to conduct a reasonable investigation within the meaning of the Securities Act;
provided, that such Holders and the underwriters and their respective counsel
and accountants shall use their reasonable best efforts to coordinate any such
investigation of the books, records and properties of the Corporation and any
such discussions with the Corporation's officers and accountants so that all
such investigations occur at the same time and all such discussions occur at the
same time.
Section 2.6. Indemnification and Contribution. (a) The Corporation agrees
to indemnify and hold harmless each Selling Holder and each person, if any, who
controls each Selling Holder within the meaning of either Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act from and against any
and all losses, claims, damages and liabilities (including, without limitation,
any legal or other costs, fees and expenses reasonably incurred in connection
with defending or investigating any such action or claim) insofar as such
losses, claims, damages or liabilities are caused by any untrue statement or
alleged untrue statement of a material fact contained in any registration
statement or any amendment thereof, any preliminary prospectus or prospectus (as
amended or supplemented if the Corporation shall have furnished any amendments
or supplements thereto) relating to the Registrable Securities, or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages or liabilities are caused by any
such untrue statement or omission or alleged untrue statement or omission which
is based upon information relating to a Selling Holder which is furnished to the
Corporation in writing by a Selling Holder expressly for use therein. The
Corporation also agrees to indemnify any underwriter of the Registrable
Securities
14
<PAGE>
so offered and each person, if any, who controls such underwriter on
substantially the same basis as that of the indemnification by the Corporation
of each Selling Holder provided in this Section 2.06(a).
(b) Each Selling Holder agrees to indemnify and hold harmless the
Corporation, its directors, the officers who sign the Registration Statement and
each person, if any who controls the Corporation within the meaning of either
Section 15 of the Securities Act or Section 20 of the Securities Exchange Act,
from and against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other costs, fees and expenses reasonably
incurred in connection with defending or investigating any such action or claim)
insofar as such losses, claims, damages or liabilities are caused by any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or any amendment thereof, any preliminary prospectus or
prospectus (as amended or supplemented if the Corporation shall have furnished
any amendments or supplements thereto) relating to the Registrable Securities,
or caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, but only with reference to information relating to a Selling Holder
furnished in writing by or on behalf of a Selling Holder expressly for use in a
registration statement, any preliminary prospectus, prospectus or any amendments
or supplements thereto. Each Selling Holder also agrees to indemnify any
underwriter of the Registrable Securities so offered and each person, if any,
who controls such underwriter on substantially the same basis as that of the
indemnification by such Selling Holder of the Corporation provided in this
Section 2.06(b). Notwithstanding any other provision of this Section 2.06, no
Selling Holder's obligations to indemnify pursuant to this Section 2.06 shall
exceed the amount of net proceeds received by such Selling Holder in connection
with any offering of its Registrable Securities. Each Selling Holder's
obligations to indemnify pursuant to this Section are several in the proportion
that the net proceeds of the offering received by such Selling Holder bear to
the total net proceeds of the offering received by all Selling Holders and not
joint.
(c) Each party indemnified under paragraph (a) or (b) above shall,
promptly after receipt of notice of a claim or action against such indemnified
party in respect of which indemnity may be sought hereunder, notify the
indemnifying party in writing of the claim or action and the indemnifying party
shall assume the defense thereof, including the employment of counsel reasonably
satisfactory to such indemnified party, and shall assume the payment of all fees
and expenses; provided that the failure of any indemnified party so to notify
the indemnifying party shall not relieve the indemnifying party of its
obligations hereunder except to the extent that the indemnifying party is
materially prejudiced by such failure to notify. In any such action, any
indemnified party shall have the
15
<PAGE>
right to retain its own counsel, but the fees and expenses of such counsel shall
be at the sole expense of such indemnified party unless (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel or (ii) in the reasonable judgment of such indemnified party
representation of both parties by the same counsel would be inappropriate due to
actual or potential differing interests between them, in which case the fees and
expenses of such counsel shall be at the sole expense of the indemnifying party.
It is understood that the indemnifying party shall not, in connection with any
claim or action or related proceeding in the same jurisdiction, be liable for
the reasonable fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) at any time for all such indemnified parties, and
that all such fees and expenses shall be reimbursed as they are incurred. In the
case of any such separate firm for the Holders as indemnified parties, such firm
shall be designated in writing by the indemnified party that had the largest
number of Registrable Securities included in such registration. The indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent, which consent shall not be unreasonably withheld or
delayed, but if settled with such consent, or if there be a final judgment for
the plaintiff, the indemnifying party shall indemnify and hold harmless such
indemnified parties from and against any loss or liability (to the extent stated
above) by reason of such settlement or judgment. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened claim or action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability arising out
of such proceeding.
(d) If the indemnification provided for in this Section 2.06 shall for
any reason be unavailable (other than in accordance with its terms) to an
indemnified party in respect of any loss, liability, cost, claim or damage
referred to therein, then each indemnifying party shall, in lieu of indemnifying
such indemnified party, contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, cost, claim or damage (A)
as between the Corporation and the underwriters, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Corporation on the
one hand and the underwriters on the other hand from the offering of the
Registrable Securities or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the indemnifying party or parties on the one hand and of the
indemnified party or parties on the other hand in connection with the statements
or omissions that resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations, and
16
<PAGE>
(B) as between (x) the Corporation and the Selling Holders, or (y) the Selling
Holders and the underwriters, in such proportion as is appropriate to reflect
the relative fault of the indemnifying party or parties on the one hand and of
the indemnified party or parties on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Corporation on the one hand and the
underwriters on the other hand in connection with the offering of the
Registrable Securities shall be deemed to be in the same respective proportions
as the net proceeds from the offering of the Registrable Securities (before
deducting expenses) (as if, for purposes of this clause (d), the Corporation had
received the proceeds of any secondary offering) and the total underwriting
discounts and commissions received by the underwriters, in each case as set
forth in the table on the cover of a prospectus, bear to the aggregate public
offering price of the Registrable Securities. The relative fault of the
Corporation, the Selling Holders and the underwriters 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 Corporation, by a Selling Holder or by
the underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by an indemnified party as a result of the loss,
cost, claim, damage or liability, or action in respect thereof, referred to
above in this paragraph (d) shall be deemed to include, for purposes of this
paragraph (d), any legal or other costs, fees and expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. The Corporation and the Selling Holders agree that it would not
be just and equitable if contribution pursuant to this Section 2.06 were
determined by pro rata allocation (even if the underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this paragraph.
Notwithstanding any other provision of this Section 2.06, no Selling Holder
shall be required to contribute any amount in excess of the amount by which the
net proceeds of the offering received by such Selling Holder exceed the amount
of any damages which such Selling Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. Each Selling Holder's obligations to contribute pursuant to this
Section are several in the proportion that the net proceeds of the offering
received by such Selling Holder bears to the total net proceeds of the offering
received by all the Selling Holders and not joint. 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.
17
<PAGE>
(e) Indemnification and contribution similar to that specified in the
preceding paragraphs of this Section 2.06 (with appropriate modifications) shall
be given by the Corporation, the Selling Holders and the underwriters with
respect to any required registration or other qualification of securities under
any state law or regulation or governmental authority.
(f) The obligations of the parties under this Section 2.06 shall be in
addition to any liability which any party may otherwise have to any other party.
Section 2.7. Rule 144 and Form S-3. Commencing as soon as practicable
after the Initial Public Offering Date, the Corporation shall use its best
efforts to ensure that the conditions to the availability of Rule 144 set forth
in paragraph (c) thereof shall be satisfied. Upon the request of any Holder of
Registrable Securities, the Corporation will deliver to such Holder a written
statement as to whether it has complied with such requirements. The Corporation
further agrees to use its reasonable best efforts to cause all conditions to the
availability of Form S-3 (or any successor form) under the Securities Act for
the filing of registration statements under this Agreement to be met as soon as
practicable after the Initial Public Offering Date.
Section 2.8. Rights of Transferee of Registrable Securities. So long as
the Transfer complies with the Transaction Agreement and the applicable
Executive Purchase Agreement, any transferee of Units or Registrable Securities
(a "Transferee") will be deemed a Holder hereunder as soon as the Corporation
receives (i) written notice stating the name and address of the Transferee and
identifying the number of Units or Registrable Securities Transferred and (ii) a
written agreement, in form and substance acceptable to the Majority Holders,
from such Transferee whereby such Transferee agrees to be bound by the terms of
this Agreement. Upon becoming a Holder, a Transferee from an Investor Holder
will immediately be deemed an Investor Holder, and a Transferee from a
Management Holder will immediately be deemed a Management Holder.
Section 2.9. Holdback Agreement. If any registration pursuant to this
Article 2 shall be in connection with an underwritten public offering of
Registrable Securities, each Holder agrees not to effect any sale or
distribution, including any sale under Rule 144, of any equity security of the
Corporation (otherwise than through the registered public offering then being
made), within 7 days prior to or 90 days (or such lesser period as the lead or
managing underwriters may permit) after the effective date of the registration
statement (or the commencement of the offering to the public of such Registrable
Securities in the case of a Rule 415 Offering); provided that the foregoing
shall not apply to a Holder that (i) together with its Affiliates, beneficially
owns (within the meaning of Rule 13d-3 and Rule 13d-5 promulgated under the
Securities Exchange Act) in
18
<PAGE>
the aggregate less than 5% of the aggregate amount of outstanding Common Stock
and (ii) does not have a director on the Board designated or nominated by it or
its Affiliate. The Corporation hereby also so agrees and agrees to use its
reasonable best efforts to cause each other holder of equity securities or
securities convertible into or exchangeable or exercisable for such securities
(other than in the case of equity securities issued under dividend reinvestment
plans or employee stock plans) purchased from the Corporation otherwise than in
a public offering to so agree.
Section 2.10. Restrictions on Other Registration Rights. Notwithstanding
anything else contained in this Agreement, the Transaction Agreement or the
Executive Purchase Agreements, the Corporation shall not, without the prior
written consent of the Holders holding a majority in aggregate of the
Registrable Securities held by all Investor Holders grant or issue to any Person
any right, or enter into any agreement with any Person entitling such Person, to
request or require that the Corporation effect, prior to the date on which all
Investor Holders in the aggregate beneficially own Registrable Securities
representing less than 5% of the outstanding Common Stock, the registration
under the Securities Act of any security of the Corporation for the account of
any Person (other than the rights granted to the Holders hereunder; provided
that the terms of any such right granted or issued shall not be more favorable
to such Persons than the terms of this Agreement.
ARTICLE 3
Miscellaneous
Section 3.1. No Inconsistent Agreements. The Corporation shall not
hereafter enter into any agreement with respect to its securities which is
inconsistent with or violates the rights granted to the holders of Registrable
Securities in this Agreement.
Section 3.2. Remedies. Each Holder and each party hereto shall have all
rights and remedies set forth in this Agreement and all rights and remedies
which such parties have been granted at any time under any other agreement or
contract and all of the rights which such parties have under any law or at
equity. Any Person having rights under any provision of this Agreement shall be
entitled to enforce such rights specifically, to recover damages caused by
reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law. The parties hereto agree and acknowledge that
money damages may not be an adequate remedy for any breach of the provisions of
this Agreement and that any party may in its sole discretion apply to any court
of law or equity of
19
<PAGE>
competent jurisdiction (without posting any bond or other security) for specific
performance and for other injunctive relief in order to enforce or prevent
violation of the provisions of this Agreement.
Section 3.3. Consents to Amendments. The provisions of this Agreement may
be amended, modified or waived only upon the prior written consent of the
holders of at least 80% of the Registrable Securities held by all Holders.
Notwithstanding the foregoing, (x) any such amendment, modification or waiver of
the definition of "Triggering Investor Holder" or of Section 2.01(a), 2.02 or
2.10 that would adversely affect an Investor Holder in a manner different from
the effect thereof on the Investor Member(s) that have approved such amendment
or waiver shall also require the prior written consent of such affected Investor
Holder and (y) any such amendment, modification or waiver adverse to the rights
of any Management Holder hereunder shall also require the prior written consent
of the chief executive officer of the Corporation. No course of dealing between
the Corporation and any other Holder or any delay by such Holder in exercising
any rights hereunder shall operate as a waiver of any rights of such holder.
Section 3.4. Successors and Assigns. All covenants and agreements
contained in this Agreement by or on behalf of any of the parties hereto shall
bind and inure to the benefit of the respective successors and permitted assigns
of the parties hereto whether so expressed or not.
Section 3.5. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
Section 3.6. Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement. Any Person who becomes a Management Member (pursuant
to the LLC Agreement) may at any time after the date hereof, with the prior
written approval of the Board, become a party to this Agreement by executing a
counterpart to this Agreement agreeing to be bound by the provisions hereof as
if such Person were an original signatory hereto (which joinder shall not
constitute a modification, amendment, or waiver hereof).
Section 3.7. Descriptive Headings; Interpretation; No Strict Construction.
The descriptive headings of this Agreement are inserted for convenience only and
do not constitute a substantive part of this Agreement. Whenever required by
the context, any pronoun used in this Agreement shall
20
<PAGE>
include the corresponding masculine, feminine or neuter forms, and the singular
form of nouns, pronouns and verbs shall include the plural and vice versa. The
use of the word "including" in this Agreement shall be by way of example rather
than by limitation. Reference to any agreement, document or instrument means
such agreement, document or instrument as amended or otherwise modified from
time to time in accordance with the terms thereof, and if applicable hereof.
Wherever required by the context, references to a Fiscal Year shall refer to a
portion thereof. The use of the words "or," "either" and "any" shall not be
exclusive. The parties hereto have participated jointly in the negotiation and
drafting of this Agreement. In the event an ambiguity or question of intent or
interpretation arises, it is the intent of the parties that 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 the
authorship of any of the provisions of this Agreement.
Section 3.8. Governing Law; Submission to Jurisdiction. This Agreement
shall be governed by, and construed under, the laws of the State of Delaware,
all rights and remedies being governed by said laws, without regard to conflict
of laws principles. Each of the parties hereto agrees (a) that this Agreement
involves at least $100,000 and (b) that this Agreement has been entered into by
the parties hereto in express reliance upon 6 Del.C. (S) 2708. Each party
hereby irrevocably and unconditionally agrees (x) to be subject to the
jurisdiction of the courts of the State of Delaware and the federal courts
sitting in the State of Delaware or in the County of New York in the State of
New York and (y) to the extent such party is not otherwise subject to service of
process in the State of Delaware, to appoint and maintain an agent in the State
of Delaware as such party's agent for acceptance of legal process, and that
service made pursuant to (y) above shall have the same legal force and effect as
if served upon said party personally within the State of Delaware. For purposes
of implementing the parties' agreement to appoint and maintain an agent for
service of process in the State of Delaware, each such party that has not as of
the date hereof already duly appointed such an agent does hereby appoint RL&F
Service Corp., One Rodney Square, 10th Floor, Wilmington, New Castle County,
Delaware 19801, as such agent.
Section 3.9. Addresses and Notices. All notices, requests or other
communications to any party hereunder shall be in writing (including facsimile
transmission) and shall be given,
21
<PAGE>
if to MSCP, to:
c/o Morgan Stanley Capital Partners III, L.P.
1221 Avenue of the Americas
33rd Floor
New York, New York 10020
Attention: John B. Ehrenkranz
Facsimile: (212) 762-7951
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Louis L. Goldberg
Facsimile: (212) 450-4800
if to Fleet, to:
Fleet Equity Partners VI, L.P.
50 Kennedy Plaza
12th Floor
Providence, Rhode Island 02903
Attention: Robert M. Van Degna
Facsimile: (401) 278-6387
with a copy to:
Paul, Hastings, Janofsky & Walker, LLP
399 Park Avenue
New York, New York 10022
Attention: Neil A. Torpey
Facsimile: (212) 319-4090
if to Waller-Sutton, to:
Waller-Sutton Media Partners, L.P.
555 North Lane
Suite 6150
Conshohocken, PA 19428
Attention: Mr. Bruce Hernandez
Facsimile: (610) 397-1034
22
<PAGE>
with a copy to:
Robin Baum Levin Constant & Friedman
30 Rockefeller Plaza
29th Floor
New York, New York 10112
Attention: Jonathan D. Drucker
Facsimile: (212) 698-7825
if to the Corporation, to:
Choice One Communications Inc.
333 West Commercial Street
Suite 3300
East Rochester, New York 14445
Attention: Steve Dubnik
Facsimile: (716) 385-0609
with a copy to:
Nixon, Hargrave, Devans & Doyle LLP
Clinton Square
P.O. Box 1051
Rochester, New York 14603-1051
Attention: James A. Locke, III
Facsimile: (716) 263-1600
and if to any Holder or to any other holder of Common Stock, to the address or
facsimile set forth on the books of the Corporation or any other address or
facsimile number as a party may hereafter specify for such purpose to the
Corporation. Notwithstanding the foregoing, no Investor Holder or its counsel
shall be entitled to notice if such Investor Holder holds less than 3% in the
aggregate of the Registrable Securities held by all Investor Holders.
All such notices, requests and other communications shall be deemed
received on the date of receipt by the recipient thereof if received prior to 5
p.m. in the place of receipt and such day is a business day in the place of
receipt. Otherwise, any such notice, request or communication shall be deemed
not to have been received until the next succeeding business day in the place of
receipt.
23
<PAGE>
Section 3.10. Business Days. If any time period for giving notice or
taking action hereunder expires on a day which is a Saturday, Sunday or legal
holiday in the state in which the Corporation's chief executive office is
located, the time period shall automatically be extended to the business day
immediately following such Saturday, Sunday or legal holiday.
* * *
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
CHOICE ONE COMMUNICATIONS INC.
By: /s/ Steve M. Dubnik
--------------------------------------
Its: President and Chief Executive Officer
--------------------------------------
/s/ Steve M. Dubnik
--------------------------------------
Steve M. Dubnik
/s/ Mae Squier-Dow
--------------------------------------
Mae Squier-Dow
/s/ Kevin Dickens
--------------------------------------
Kevin Dickens
/s/ Phillip Yawman
--------------------------------------
Phillip Yawman
<PAGE>
MORGAN STANLEY CAPITAL PARTNERS III, L.P.
By MSCP III, L.P., its general partner
Morgan Stanley Capital Partners III, Inc., its
general partner
By /s/ Michael Jansen
----------------------------------------
Its Managing Director
----------------------------------------
By /s/ John Ehrenkranz
----------------------------------------
Its Principal
----------------------------------------
MSCP III 892 INVESTORS, L.P.
By MSCP III, L.P., its general partner
Morgan Stanley Capital Partners III, Inc., its
general partner
By /s/ Michael Jansen
----------------------------------------
Its Managing Director
----------------------------------------
By /s/ John Ehrenkranz
----------------------------------------
Its Principal
----------------------------------------
MORGAN STANLEY CAPITAL INVESTORS, L.P.
<PAGE>
By MSCP III, L.P., its general partner
Morgan Stanley Capital Partners III, Inc., its
general partner
By /s/ Michael Jansen
----------------------------------------
Its Managing Director
----------------------------------------
By /s/ John Ehrenkranz
----------------------------------------
Its Principal
----------------------------------------
<PAGE>
CHISHOLM PARTNERS III, L.P.
By Silverado III, L.P., its General Partner
By Silverado III Corp., its General Partner
By /s/ Robert M. Van Degna
---------------------------------------
Chairman & CEO
KENNEDY PLAZA PARTNER
By /s/ Robert M. Van Degna
---------------------------------------
Managing General Partner
FLEET VENTURE RESOURCES, INC.
By /s/ Robert M. Van Degna
---------------------------------------
Chairman & CEO
FLEET EQUITY PARTNERS VI, L.P.
By Fleet Growth Resources II, Inc., its
General Partners
By /s/ Robert M. Van Degna
---------------------------------------
Chairman & CEO
<PAGE>
WALLER-SUTTON MEDIA PARTNERS, L.P.
By Waller Sutton Media, L.L.C. its general partner
By /s/ Bruce Hernandez
---------------------------------------
Its Chief Executive Officer
---------------------------------------
/s/ Royce J. Holland
--------------------------------------------
Royce J. Holland
<PAGE>
Execution of Counterpart Agreeing to be bound by
Management Holder pursuant to Section 3.07
Name: ________________________
Signature: _____________________
Date: ________________________
Execution of Counterpart by Transferee Agreeing to
be bound
Name: ________________________
Signature: _____________________
Date: ________________________
<PAGE>
EXHIBIT 10.11
Amendment No. 1
to
Registration Rights Agreement
This Amendment No. 1 ("Amendment") to the Registration Rights Agreement
dated as of July 8, 1998 (the "Original Agreement") is made as of February 18,
1999, among Choice One Communications Inc., a Delaware corporation (the
"Corporation"), and the Holders listed on the signature pages hereto.
WHEREAS, the Corporation and the initial Investor Holders and Management
Holders entered into the Original Agreement on July 8, 1998 which provides for
certain rights and obligations of the Corporation and such Holders with respect
to registration of the Common Stock under the Securities Act;
WHEREAS, certain additional persons have become Management Holders pursuant
to the terms of the Original Agreement subsequent to July 8, 1998;
WHEREAS, First Union Capital Partners, Inc. ("First Union") has entered
into the Transaction Agreement and certain related agreements relating to its
investment (through the LLC) in the Corporation; and
WHEREAS, the Corporation and the Holders desire to amend the Original
Agreement to include First Union as an Investor Holder thereunder;
NOW, THEREFORE, the parties hereto hereby amend the Original Agreement as
follows:
Section 1. Amendment to Definitions. The definition of "Investor Holders"
in Section 1.01 of the Original Agreement is deleted in its entirety and
replaced with the following:
"Investor Holders" means MSCP, Fleet, Waller-Sutton, Royce J. Holland and
First Union Capital Partners, Inc. and any Transferee that becomes an Investor
Holder pursuant to Section 2.08.
Section 2. Agreement to be Bound. First Union hereby adopts, executes and
delivers, and agrees to be bound by, the Original Agreement as amended hereby.
Section 3. Other Defined Terms. Capitalized terms used in this Amendment
and not otherwise defined have the meanings ascribed to them in the Original
Agreement.
<PAGE>
Section 4. Effect of Amendment; Governing Law. Except as amended hereby,
the Original Agreement shall remain unchanged. The Original Agreement, as
amended hereby, shall remain in full force and effect. This Amendment shall be
governed by, and construed under, the laws of the State of Delaware, all rights
and remedies being governed by said laws, without regard to conflict of laws
principles.
Section 5. Counterparts. This Amendment may be executed simultaneously in
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same agreement.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
CHOICE ONE COMMUNICATIONS INC.
By: /s/ Steve M. Dubnik
-----------------------------------
Its: President and Chief Executive Officer
-----------------------------------
FIRST UNION CAPITAL PARTNERS, INC.
By: Pearce Landry
-----------------------------------
Its: Managing Partner
-----------------------------------
MANAGEMENT HOLDERS
/s/ Steve M. Dubnik
--------------------------------------
Steve M. Dubnik, as a Management
Member and as Chief Executive Officer
of Choice One Communications, Inc.
/s/ Mae Squier-Dow
--------------------------------------
Mae Squier-Dow
/s/ Kevin Dickens
--------------------------------------
Kevin Dickens
/s/ Phillip Yawman
--------------------------------------
Phillip Yawman
3
<PAGE>
/s/ Joseph Schaal
--------------------------------------
Joseph Schaal
/s/ Elizabeth Ellis
--------------------------------------
Elizabeth Ellis
/s/ Joseph Calzone
--------------------------------------
Joseph Calzone
/s/ Michelle Paroda
--------------------------------------
Michelle Paroda
/s/ Linda Chapman
--------------------------------------
Linda Chapman
/s/ John Zimmer
--------------------------------------
John Zimmer
/s/ David Fitts
--------------------------------------
David Fitts
/s/ Kenneth Okolowicz
--------------------------------------
Kenneth Okolowicz
/s/ Daniel K. Iles
--------------------------------------
Daniel K. Iles
/s/ Michael D'Angelo
--------------------------------------
Michael D'Angelo
/s/ Robert Merrill
--------------------------------------
Robert Merrill
4
<PAGE>
/s/ Kim Scovill
--------------------------------------
Kim Scovill
5
<PAGE>
INVESTOR HOLDERS
MORGAN STANLEY CAPITAL PARTNERS III, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III, Inc., its
general partner
By /s/ Michael Jansen
-------------------------------------
Its Managing Director
-------------------------------------
By John Ehrenkranz
-------------------------------------
Its Principal
-------------------------------------
MSCP III 892 INVESTORS, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III, Inc., its
general partner
By /s/ Michael Jansen
-------------------------------------
Its Managing Director
-------------------------------------
By John Ehrenkranz
-------------------------------------
Its Principal
-------------------------------------
MORGAN STANLEY CAPITAL INVESTORS, L.P.
6
<PAGE>
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III, Inc., its
general partner
By /s Michael Jansen
-------------------------------------
Its Managing Director
-------------------------------------
By /s/ John Ehrenkranz
-------------------------------------
Its Principal
-------------------------------------
7
<PAGE>
CHISHOLM PARTNERS III, L.P.
By Silverado III, L.P., its General Partner
By Silverado III Corp., its General Partner
By /s/ Robert M. Van Degna
-------------------------------------
Chairman & CEO
KENNEDY PLAZA PARTNERS
By /s/ Robert M. Van Degna
-------------------------------------
Managing General Partner
FLEET VENTURE RESOURCES, INC.
By /s/ Robert M. Van Degna
-------------------------------------
Chairman & CEO
FLEET EQUITY PARTNERS VI, L.P.
By Fleet Growth Resources II, Inc., its
General Partner
By /s/ Robert M. Van Degna
-------------------------------------
Chairman & CEO
8
<PAGE>
WALLER-SUTTON MEDIA PARTNERS, L.P.
By Waller Sutton Media, L.L.C. its general partner
By /s/ Bruce Hernandez
-------------------------------------
Chief Executive Officer
ROYCE J. HOLLAND
/s/ Royce J. Holland
-----------------------------------------
Royce J. Holland
9
<PAGE>
EXHIBIT 10.12
Amendment No. 2
to
Registration Rights Agreement
This Amendment No. 2 ("Amendment") to the Registration Rights Agreement
dated as of July 8, 1998 (the "Original Agreement"), as amended by Amendment No.
1 dated as of February 18, 1999, is made as of June 30, 1999, among Choice One
Communications Inc., a Delaware corporation (the "Corporation"), and the Holders
listed on the signature pages hereto.
WHEREAS, the Corporation and the initial Investor Holders and Management
Holders entered into the Original Agreement on July 8, 1998 which provides for
certain rights and obligations of the Corporation and such Holders with respect
to registration of the Common Stock under the Securities Act;
WHEREAS, certain additional persons have become Management Holders pursuant
to the terms of the Original Agreement subsequent to July 8, 1998;
WHEREAS, First Union Capital Partners, Inc. became an Investor Holder on
February 18, 1999;
WHEREAS, General Electric Capital Corporation ("General Electric") has
entered into the Transaction Agreement and certain related agreements relating
to its investment (through the LLC) in the Corporation;
WHEREAS, the Corporation and the Holders desire to amend the Original
Agreement to include General Electric as an Investor Holder thereunder;
NOW, THEREFORE, the parties hereto hereby amend the Original Agreement as
follows:
Section 1. Amendment to Definitions. The definition of "Investor Holders"
in Section 1.01 of the Original Agreement is deleted in its entirety and
replaced with the following:
"Investor Holders" means MSCP, Fleet, Waller-Sutton, Royce J. Holland,
First Union Capital Partners, Inc. and General Electric Capital Corporation and
any Transferee that becomes an Investor Holder pursuant to Section 2.08.
Section 2. Agreement to be Bound. General Electric hereby adopts,
executes and delivers, and agrees to be bound by, the Original Agreement as
amended hereby.
<PAGE>
Section 3. Other Defined Terms. Capitalized terms used in this Amendment
and not otherwise defined have the meanings ascribed to them in the Original
Agreement.
Section 4. Effect of Amendment; Governing Law. Except as amended hereby,
the Original Agreement shall remain unchanged. The Original Agreement, as
amended hereby, shall remain in full force and effect. This Amendment shall be
governed by, and construed under, the laws of the State of Delaware, all rights
and remedies being governed by said laws, without regard to conflict of laws
principles.
Section 5. Counterparts. This Amendment may be executed simultaneously in
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same agreement.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
CHOICE ONE COMMUNICATIONS INC.
By: /s/ Steve M. Dubnik
----------------------------------
Its: President and Chief Executive Officer
----------------------------------
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ Steve M. Dubnik
----------------------------------
Its: Authorized Person
----------------------------------
MANAGEMENT HOLDERS
/s/ Steve M. Dubnik
------------------------------------
Steve M. Dubnik, as a Management
Member and as Chief Executive Officer
of Choice One Communications, Inc.
/s/ Mae Squier-Dow
------------------------------------
Mae Squier-Dow
/s/ Kevin Dickens
------------------------------------
Kevin Dickens
/s/ Phillip Yawman
------------------------------------
Phillip Yawman
/s/ Joseph Schaal
------------------------------------
Joseph Schaal
3
<PAGE>
/s/ Elizabeth Ellis
------------------------------------
Elizabeth Ellis
/s/ Joseph Calzone
------------------------------------
Joseph Calzone
/s/ Michelle Paroda
------------------------------------
Michelle Paroda
/s/ Linda Chapman
------------------------------------
Linda Chapman
/s/ John Zimmer
------------------------------------
John Zimmer
/s/ David Fitts
------------------------------------
David Fitts
/s/ Kenneth Okolowicz
------------------------------------
Kenneth Okolowicz
/s/ Daniel K. Iles
------------------------------------
Daniel K. Iles
/s/ Michael D'Angelo
------------------------------------
Michael D'Angelo
/s/ Robert Merrill
------------------------------------
Robert Merrill
/s/ Kim Scovill
------------------------------------
Kim Scovill
4
<PAGE>
INVESTOR HOLDERS
MORGAN STANLEY CAPITAL PARTNERS III, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III, Inc., its
general partner
By /s/ Michael Jansen
----------------------------------
Its Managing Director
----------------------------------
By /s/ John Ehrenkranz
----------------------------------
Its Managing Director
----------------------------------
MSCP III 892 INVESTORS, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III, Inc., its
general partner
By /s/ Michael Jansen
----------------------------------
Its Mananging Director
----------------------------------
By /s/ John Ehrenkranz
----------------------------------
Its Principal
----------------------------------
MORGAN STANLEY CAPITAL INVESTORS, L.P.
5
<PAGE>
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III, Inc., its
general partner
By /s/ Michael Jansen
----------------------------------
Its Managing Director
----------------------------------
By /s/ John Ehrenkranz
----------------------------------
Its Principal
----------------------------------
CHISHOLM PARTNERS III, L.P.
By Silverado III, L.P., its General Partner
By Silverado III Corp., its General Partner
By /s/ Robert M. Van Degna
----------------------------------
Robert M. Van Degna
Chairman & CEO
KENNEDY PLAZA PARTNERS
By /s/ Robert M. Van Degna
----------------------------------
Robert M. Van Degna
Managing General Partner
6
<PAGE>
FLEET VENTURE RESOURCES, INC.
By /s/ Robert M. Van Degna
----------------------------------
Robert M. Van Degna
Chairman & CEO
FLEET EQUITY PARTNERS VI, L.P.
By Fleet Growth Resources II, Inc., its
General Partner
By /s/ Robert M. Van Degna
----------------------------------
Robert M. Van Degna
Chairman & CEO
7
<PAGE>
WALLER-SUTTON MEDIA PARTNERS, L.P.
By Waller Sutton Media, L.L.C. its general
partner
By /s/ Bruce Hernandez
----------------------------------
Bruce Hernandez
Chief Executive Officer
FIRST UNION CAPITAL PARTNERS, INC.
By: /s/ Pearce Landry
----------------------------------
Its: Managing Partner
----------------------------------
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ Molly S. Fergusson
----------------------------------
Its: Manager Operations
----------------------------------
ROYCE J. HOLLAND
/s/ Royce J. Holland
---------------------------------------
8
<PAGE>
EXHIBIT 10.13
Amendment No. 3
to
Registration Rights Agreement
This Amendment No. 3 ("Amendment") to the Registration Rights Agreement
dated as of July 8, 1998, as amended by Amendment No. 1 dated as of February 18,
1999, and by Amendment No. 2 dated as of June 30, 1999 (the "Original
Agreement"), is made as of June 30, 1999, among Choice One Communications Inc.,
a Delaware corporation (the "Corporation"), and the Holders listed on the
signature pages hereto.
WHEREAS, the Corporation and the initial Investor Holders and Management
Holders entered into the Registration Rights Agreement on July 8, 1998 which
provides for certain rights and obligations of the Corporation and such Holders
with respect to registration of the Common Stock under the Securities Act;
WHEREAS, certain additional persons have become Management Holders pursuant
to the terms of the Original Agreement subsequent to July 8, 1998;
WHEREAS, First Union Capital Partners, Inc. became an Investor Holder on
February 18, 1999 and General Electric Capital Corporation became an Investor
Holder on the date hereof;
WHEREAS, Morgan Stanley Dean Witter Capital Partners IV, L.P., Morgan
Stanley Dean Witter Capital Investors IV, L.P. and MSDW IV 892 Investors, L.P.
(collectively, "MSDWCP IV"), R. Philip Silver and (as soon as it becomes a
Tranche 2 Investor Member pursuant to Section 3.01(g) of the LLC Agreement)
Caravelle Investment Fund, L.L.C. ("Caravelle") have become members of the LLC
and party to the Original Agreement and certain related agreements relating to
their investment in the LLC, including without limitation the Transaction
Agreement;
WHEREAS, the Corporation and the Holders desire to amend the Original
Agreement to include MSDWCP IV, R. Philip Silver and Caravelle as Investor
Holders thereunder;
NOW, THEREFORE, the parties hereto hereby amend the Original Agreement as
follows:
Section 1. Amendment to Definitions. (a) The definition of "Investor
Holders" in Section 1.01 of the Original Agreement is deleted in its entirety
and replaced with the following:
<PAGE>
"Investor Holders" means MSCP, Fleet, Waller-Sutton, Royce J. Holland, R.
Philip Silver, First Union Capital Partners, Inc., General Electric Capital
Corporation and (as soon as it becomes a Tranche 2 Investor Member pursuant to
Section 3.01(g) of the LLC Agreement) Caravelle, and any Transferee that becomes
an Investor Holder pursuant to Section 2.08.
(b) The definition of "MSCP" in Section 1.01 of the Original Agreement
is deleted in its entirety and replaced with the following:
"MSCP" means, collectively, Morgan Stanley Capital Partners III, L.P.,
Morgan Stanley Capital Investors, L.P., MSCP III 892 Investors, L.P., Morgan
Stanley Dean Witter Capital Partners IV, L.P., Morgan Stanley Dean Witter
Capital Investors IV, L.P., and MSDW IV 892 Investors, L.P.
Section 2. Amendment to Section 2.01. Clause (ii)(2) of the proviso to
Section 2.01(a) thereof is hereby amended by deleting "three" and replacing it
with "four".
Section 3. Agreement to be Bound. Each of Morgan Stanley Dean Witter
Capital Partners IV, L.P., Morgan Stanley Dean Witter Capital Investors IV,
L.P., MSDW IV 892 Investors, L.P., R. Philip Silver and Caravelle hereby adopts,
executes and delivers, and agrees to be bound by, the Original Agreement as
amended hereby.
Section 4. Other Defined Terms. Capitalized terms used in this Amendment
and not otherwise defined have the meanings ascribed to them in the Original
Agreement.
Section 5. Effect of Amendment; Governing Law. Except as amended hereby,
the Original Agreement shall remain unchanged. The Original Agreement, as
amended hereby, shall remain in full force and effect. This Amendment shall be
governed by, and construed under, the laws of the State of Delaware, all rights
and remedies being governed by said laws, without regard to conflict of laws
principles.
Section 6. Counterparts. This Amendment may be executed simultaneously in
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same agreement.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
CHOICE ONE COMMUNICATIONS INC.
By: /s/ Steve M. Dubnik
---------------------------------
Its: President and Chief Executive Officer
---------------------------------
MANAGEMENT HOLDERS
/s/ Steve M. Dubnik
-----------------------------------
Steve M. Dubnik, as a Management
Member and as Chief Executive Officer
of Choice One Communications, Inc.
/s/ Mae Squier-Dow
-----------------------------------
Mae Squier-Dow
/s/ Kevin Dickens
-----------------------------------
Kevin Dickens
/s/ Phillip Yawman
-----------------------------------
Phillip Yawman
/s/ Joseph Schaal
-----------------------------------
Joseph Schaal
/s/ Elizabeth Ellis
-----------------------------------
Elizabeth Ellis
/s/ Joseph Calzone
-----------------------------------
Joseph Calzone
3
<PAGE>
/s/ Michelle Paroda
-----------------------------------
Michelle Paroda
/s/ Linda Chapman
-----------------------------------
Linda Chapman
/s/ John Zimmer
-----------------------------------
John Zimmer
/s/ David Fitts
-----------------------------------
David Fitts
/s/ Kenneth Okolowicz
-----------------------------------
Kenneth Okolowicz
/s/ Daniel K. Iles
-----------------------------------
Daniel K. Iles
/s/ Michael D'Angelo
-----------------------------------
Michael D'Angelo
/s/ Robert Merrill
-----------------------------------
Robert Merrill
/s/ Kim Scovill
-----------------------------------
Kim Scovill
4
<PAGE>
INVESTOR HOLDERS
MORGAN STANLEY CAPITAL PARTNERS III, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III, Inc., its
general partner
By /s/ Michael Jensen
-----------------------------------
Its Managing Director
-----------------------------------
By /s/ John Ehrenkranz
-----------------------------------
Its Principal
-----------------------------------
MSCP III 892 INVESTORS, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III, Inc., its
general partner
By /s/ Michael Jansen
-----------------------------------
Its Managing Dirctor
-----------------------------------
By /s/ John Ehrenkranz
-----------------------------------
Its Principal
-----------------------------------
MORGAN STANLEY CAPITAL INVESTORS, L.P.
5
<PAGE>
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III, Inc., its
general partner
By /s/ Michael Jansen
-----------------------------------
Its Managing Director
-----------------------------------
By /s/ John Ehrenkranz
-----------------------------------
Its Principal
-----------------------------------
MORGAN STANLEY DEAN WITTER CAPITAL PARTNERS IV, L.P.
By MSDW Capital Partners IV, LLC, its
general partner
By MSDW Capital Partners IV, Inc., its
general partner
By Michael Jansen
-----------------------------------
Its Managing Director
-----------------------------------
By /s/ John Ehrenkranz
-----------------------------------
Its Principal
-----------------------------------
MSDW IV 892 INVESTORS, L.P.
6
<PAGE>
By MSDW Capital Partners IV, LLC, its
general partner
By MSDW Capital Partners IV, Inc., its general partner
By /s/ Michael Jansen
-----------------------------------
Its Managing Director
-----------------------------------
By /s/ Hohn Ehrenkranz
-----------------------------------
Its Principal
-----------------------------------
MORGAN STANLEY DEAN WITTER CAPITAL INVESTORS IV, L.P.
By MSDW Capital Partners IV, LLC, its
general partner
By MSDW Capital Partners IV, Inc., its general partner
By /s/ Michael Jansen
-----------------------------------
Its Managing Director
-----------------------------------
By /s/ John Ehrenkranz
-----------------------------------
Its Principal
-----------------------------------
7
<PAGE>
CHISHOLM PARTNERS III, L.P.
By Silverado III, L.P., its General Partner
By Silverado III Corp., its General Partner
By /s/ Robert M. Van Degna
-----------------------------------
Robert M. Van Degna
Chairman & CEO
KENNEDY PLAZA PARTNERS
By /s/ Robert M. Van Degna
-----------------------------------
Robert M. Van Degna
Managing General Partner
FLEET VENTURE RESOURCES, INC.
By /s/ Robert M. Van Degna
-----------------------------------
Robert M. Van Degna
Chairman & CEO
FLEET EQUITY PARTNERS VI, L.P.
By Fleet Growth Resources II, Inc., its
General Partner
By /s/ Robert M. Van Degna
-----------------------------------
Robert M. Van Degna
Chairman & CEO
8
<PAGE>
WALLER-SUTTON MEDIA PARTNERS, L.P.
By Waller Sutton Media, L.L.C. its general partner
By /s/ Bruce Hernandez
-----------------------------------
Bruce Hernandez
Chief Executive Officer
FIRST UNION CAPITAL PARTNERS, INC.
By: /s/ Pearce Landry
-----------------------------------
Its: Managing Partner
-----------------------------------
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ Molly S. Fergusson
-----------------------------------
Its: Manager Operations
-----------------------------------
CARAVELLE INVESTMENT
FUND, L.L.C.
By Caravelle Advisors, L.L.C., as
Investment Manager and Attorney in Fact
By:
-----------------------------------
Its:
-----------------------------------
9
<PAGE>
ROYCE J. HOLLAND
/s/ Royce J. Holland
---------------------------------------
Royce J. Holland
R. PHILIP SILVER
/s/ R. Philip Silver
---------------------------------------
R. Philip Silver
10
<PAGE>
EXHIBIT 10.14
EXECUTIVE PURCHASE AGREEMENT
THIS EXECUTIVE PURCHASE AGREEMENT (this "Agreement") is made as of July 8,
1998, by and between Choice One Communications L.L.C., a Delaware limited
liability company (the "LLC"), Choice One Communications Inc., a Delaware
corporation (the "Corporation"), and Steve M. Dubnik ("Executive"). Capitalized
terms used but not otherwise defined herein have the meanings ascribed to such
terms in Section 7 hereof.
WHEREAS, Executive desires to make an investment in the Corporation to be
held initially through an interest in the LLC, and the LLC, the Corporation and
the Executive desire to provide for certain rights and obligations relating to
such investment and to Executive's employment with the Corporation;
NOW, THEREFORE, in consideration of the mutual promises made herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
Section 1. Purchase and Sale of Executive Securities.
(a) Initial Capital Contribution and Issuance of Executive Securities.
Upon execution of this Agreement, Executive shall make a capital contribution
to the LLC in the amount of $90,009 (Executive's "Initial Capital Contribution")
in exchange for, and the LLC shall issue to Executive, 900,090 Class B Units
having the rights, obligations, and preferences set forth with respect thereto
in the LLC Agreement. The Executive shall make such Initial Capital
Contribution to the LLC by delivery to the LLC of a cashier's or certified
check, or wire transfer of immediately available funds to an account designated
by the LLC, in the aggregate amount equal to such Executive's Initial Capital
Contribution. The aggregate amount of the Initial Capital Contribution made
with respect to each Class B Unit issued hereunder shall be considered a Basic
Contribution made with respect to such Class B Unit. Subsequent Contributions
to the LLC shall be made by the Executive in respect of such Class B Units on
the terms and conditions set forth in the LLC Agreement.
(b) Representations and Warranties of Executive. In connection with the
Executive's Initial Capital Contribution and the issuance of the Executive
Securities hereunder, the Executive Purchaser represents and warrants to each of
the LLC and the Corporation that:
<PAGE>
(i) The Executive Securities to be acquired by the Executive
Purchaser pursuant to this Agreement shall be acquired for the Executive
Purchaser's own account and not with a view to, or the intention of,
distribution thereof in violation of the Securities Act or any applicable
state securities laws, and the Executive Securities shall not be disposed
of in contravention of the Securities Act or any applicable state
securities laws.
(ii) Executive is a management employee of the Corporation, and the
Executive Purchaser is sophisticated in financial matters and is able to
evaluate the risks and benefits of the investment in the Executive
Securities.
(iii) Executive Purchaser is able to bear the economic risk of his
investment in the Executive Securities for an indefinite period of time and
is aware that transfer of the Executive Securities may not be possible
because (A) such transfer is subject to contractual restrictions on
transfer set forth herein and in the Transaction Agreement, and (B) the
Executive Securities have not been registered under the Securities Act or
any applicable state securities laws and, therefore, cannot be sold unless
subsequently registered under the Securities Act and such applicable state
securities laws or an exemption from such registration is available.
(iv) Executive has had an opportunity to ask questions and receive
answers concerning the terms and conditions of the offering of the
Executive Securities issued hereunder and has had full access to such other
information concerning the Corporation and this investment opportunity as
he has requested.
(v) Each of this Agreement, the LLC Agreement, the Transaction
Agreement, and the other agreements contemplated thereby of even date
therewith to which Executive Purchaser is a party, constitute the legal,
valid and binding obligations of the Executive Purchaser, enforceable
against the Executive Purchaser in accordance with its terms; Executive is
ready, willing and able as of the date hereof to commence and to continue
employment with the Corporation in the office to which Executive was
appointed by the Board; and the execution, delivery and performance of such
agreements by Executive, and Executive's employment with the Corporation
and activities (including recruiting activities) on behalf of the
Corporation, do not and will not conflict with, violate or breach any
agreement, contract or instrument (including, without limitation, any
noncompete agreement or restrictive covenant instrument) to which
2
<PAGE>
Executive is a party or by which Executive is bound or any judgment, order
or decree to which Executive is subject.
(c) Acknowledgment of At-Will Employment. As an inducement to the LLC
and the Corporation to enter into this Agreement, and as a condition thereto,
the Executive acknowledges and agrees that no agreement or arrangement between
the Executive and the Corporation or the LLC (including, without limitation, the
issuance of the Executive Securities to the Executive and the execution and
delivery of this Agreement) shall entitle Executive to remain in the employment
of the Corporation and its Subsidiaries or affect the right of the Corporation
or its Subsidiaries to terminate Executive's employment at any time or for any
reason.
Section 2. Vesting of Executive Securities.
(a) Vesting Schedule. All Executive Securities shall initially be
Unvested Securities (as defined below). Except as otherwise provided herein, an
amount of Unvested Securities shall vest on the date hereof and on each of the
first four anniversaries of the date hereof, such that the Executive Securities
shall be vested on each such date in accordance with the following schedule:
<TABLE>
<CAPTION>
---- ------------------------
Date Cumulative Percentage of
Executive Securities
Vested
<S> <C>
The date hereof 20%
The first anniversary of the date hereof 40%
The second anniversary of the date hereof 60%
The third anniversary of the date hereof 80%
The fourth anniversary of the date hereof 100%
</TABLE>
Notwithstanding the foregoing sentence, and except as otherwise provided in
clauses (b)-(e) below or in the next sentence (in the case of termination
without Cause or for Good Reason), the above vesting schedule shall cease and no
Unvested Securities shall vest after the date on which Executive's employment
with the Corporation and its Subsidiaries terminates for any reason. If
Executive's employment is terminated by the Corporation without Cause or if
Executive terminates his employment for Good Reason, the Executive Securities
shall thereafter, if necessary, continue to vest so long as Executive has not
committed a Vesting Termination Breach (upon which breach the vesting schedule
shall immediately cease, and no Unvested Securities shall vest on or
3
<PAGE>
after the date of the first such breach). In the event the LLC or the
Corporation has alleged that Executive has committed a Vesting Termination
Breach, Executive disputes such allegation, and the matter is subject to the
dispute resolution provisions set forth in Section 6, vesting shall be tolled
upon the date of the allegation of such breach; provided that (i) if it is
ultimately resolved under Section 6 that Executive has committed a Vesting
Termination Breach, the tolling shall become a permanent cessation such that
vesting shall have forever ceased upon the date of such allegation, and (ii) if
it is ultimately resolved under Section 6 that Executive did not commit a
Vesting Termination Breach, the number of Vested Securities shall be as though
there had never been such alleged breach or any tolling of vesting. Executive
Securities which have become vested pursuant to this Agreement are referred to
herein as "Vested Securities," and all other Executive Securities are referred
to herein as "Unvested Securities."
(b) Acceleration upon a Qualified Sale of the Corporation. Unvested
Securities subject to vesting pursuant to Section 2(a) shall become Vested
Securities upon the consummation of a Qualified Sale of the Corporation (as
defined below) so long as Executive is employed by the Corporation or any of its
Subsidiaries on the date of such sale (or, if Executive's employment was
terminated by the Corporation without Cause or by Executive for Good Reason, so
long as Executive has not committed a Vesting Termination Breach prior to the
date of such sale). A "Qualified Sale of the Corporation" means either (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of the
Corporation and its Subsidiaries, taken as a whole, or (ii) a transaction or
series of transactions (including by way of merger, consolidation, or sale of
stock, but not including a Public Offering) the result of which is that the
holders of the Corporation's outstanding voting stock immediately prior to such
transaction are after giving effect to such transaction no longer, in the
aggregate, the "beneficial owners" (as such term is defined in Rule 13d-3 and
Rule 13d-5 promulgated under the Securities Exchange Act), directly or
indirectly through one or more intermediaries, of more than 50% of the voting
power of the outstanding voting stock of the Corporation, in each case where the
consideration for such assets or stock in such sale or transfer consists of cash
and/or publicly traded equity securities for such assets or for at least 50% of
the outstanding stock of the Corporation (e.g., 100% of such consideration would
have to consist of cash and/or publicly traded equity securities if only 50.01%
of such stock were sold in such transaction).
(c) Acceleration upon a Public Offering. Upon the consummation of the
Corporation's initial Public Offering, and so long as Executive is employed by
the Corporation or any of its Subsidiaries on the closing date of such offering
(or, if Executive's employment was terminated by the Corporation without Cause
or by
4
<PAGE>
the Executive for Good Reason, so long as Executive has not committed a Vesting
Termination Breach prior to such closing date), there will vest the amount of
Unvested Securities which were scheduled to vest within the 365 days following
such closing date (and the remaining Unvested Securities subject to vesting
pursuant to Section 2(a), if any, shall continue to vest 20% on each anniversary
of the date hereof in accordance with clause (a) above, such that the vesting
schedule set forth in Section 2(a) above shall have been effectively accelerated
by one year).
(d) Acceleration upon Death or Disability. All Unvested Securities
shall become Vested Securities if Executive's employment with the Corporation or
any of its Subsidiaries terminates by reason of Executive's death or Disability.
(e) Other Acceleration. Any Unvested Securities which the LLC (or its
assignees) has not elected to repurchase in the Repurchase Notice (as defined
below) (including Unvested Securities originally included in the Repurchase
Notice, but for which the election to repurchase was rescinded, pursuant to the
terms of Section 3, by the LLC and/or its assignees having made such election)
shall thereafter be deemed Vested Securities, but shall continue to be subject
to Section 4.
Section 3. LLC's Repurchase Option.
(a) The Repurchase Option. The LLC will be entitled to repurchase at
the LLC's election pursuant to the terms and conditions set forth in this
Section 3 (the "Repurchase Option"), upon (x) the termination of Executive's
employment with the Corporation and its Subsidiaries for any reason other than a
termination by the Corporation without Cause or by the Executive for Good
Reason, or (y) if Executive's employment is terminated by the Corporation
without Cause or by the Executive for Good Reason, upon Executive's commission
of a Vesting Termination Breach, all the Executive Securities then in existence
whether held by Executive or one or more of the other Executive Purchasers (any
such circumstance permitting repurchase, a "Repurchase Event"). In the event
that the LLC or the Corporation has alleged that Executive has committed a
Vesting Termination Breach, Executive disputes such allegation, and the matter
is subject to the dispute resolution provisions set forth in Section 6, the
closing of the repurchase of Executive Securities permitted to be repurchased
only upon such breach under this Section 3 shall not occur unless and until it
is ultimately determined that Executive committed a Vesting Termination Breach;
provided that during the pendency of such proceeding, such Executive Securities
specified in the Repurchase Notice (as defined below) shall not be transferred
by any holder thereof to any other Person.
5
<PAGE>
(b) Repurchase Price. The repurchase price (the "Repurchase Price") for
50% of the Vested Securities to be repurchased shall be the Fair Market Value of
such securities. The Repurchase Price of the remaining 50% of the Vested
Securities and of all of the Unvested Securities to be repurchased shall be the
lesser of (x) the Fair Market Value of such Securities, and (y) the Original
Cost of such Securities (with securities having the lowest Original Cost subject
to repurchase prior to securities with a higher Original Cost).
(c) Exercise of Repurchase Option. The LLC (by action of the Board) may
elect to purchase all or any portion of the Executive Securities permitted to be
repurchased by delivering written notice (the "Repurchase Notice") to the holder
or holders of the Executive Securities within 90 days after the occurrence of
the applicable Repurchase Event. The Repurchase Notice shall set forth the
amount, type, and class of Executive Securities (including, if applicable, the
amount of Unvested Securities and/or Vested Securities) to be acquired from each
such holder (which need not be pro rata among type of security or among Vested
Securities and Unvested Securities). The Executive Securities to be repurchased
by the LLC shall first be satisfied to the extent possible from the Executive
Securities held by Executive at the time of delivery of the Repurchase Notice.
If the amount of Executive Securities then held by Executive is less than the
total amount of Executive Securities that the LLC has elected to purchase, the
LLC shall purchase the remaining securities elected to be purchased from the
other holder(s) of Executive Securities (to whom Executive has transferred
Executive Securities pursuant to Section 4(c)(i)), pro rata according to the
amount of Executive Securities held of record by each such other holder at the
time of delivery of the Repurchase Notice. The amount of Unvested Securities
and Vested Securities to be repurchased hereunder shall be deemed to be
allocated among Executive and the other holders of repurchased Executive
Securities (to whom Executive has transferred Executive Securities pursuant to
Section 4(c)(i)), if any, pro rata according to the amount of Executive
Securities to be purchased from such persons.
(d) Assignment by the LLC. The LLC, by action of the Board, will have
the right to assign all or any portion of its repurchase rights hereunder to the
holders of Investor Equity (which assignment, if made to the holders of Investor
Equity, would be pro rata on the basis of the Investor Equity held by each such
holder) and/or to any executive employee of the Corporation or any of its
Subsidiaries. Notwithstanding the foregoing, the LLC may not assign to any
Person its right to pay a portion of the Repurchase Price for Executive
Securities repurchased hereunder in the form of Class C Units (or, after the
dissolution of the LLC, a promissory note).
6
<PAGE>
(e) Fair Market Value of Repurchased Securities. The "Fair Market
Value" of Executive Securities subject to repurchase hereunder shall be
determined in accordance with this paragraph (e) as follows:
(i) The Board of the LLC and the holders of a majority of the
Executive Securities to be repurchased shall attempt in good faith to agree
on the Fair Market Value of the Executive Securities. Any agreement
reached by such Persons shall be final and binding on all parties hereto.
(ii) If such Persons are unable to reach such agreement within 20
days after the giving of a Repurchase Notice, the Fair Market Value of any
Executive Securities that are publicly traded shall be the average, over a
period of 21 days consisting of the date of the applicable Repurchase Event
and the 20 consecutive business days prior to that date, of the average of
the closing prices of the sales of such securities on all securities
exchanges on which such securities may at that time be listed, or, if there
have been no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of
such day, or, if on any day such securities are not so listed, the average
of the representative bid and asked prices quoted in the Nasdaq System as
of 4:00 P.M., New York time, or, if on any day such securities are not
quoted in the Nasdaq System, the average of the highest bid and lowest
asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau Incorporated, or any similar
successor organization.
(iii) If such Persons are unable to reach agreement pursuant to
paragraph (ii) within 20 days after the giving of a Repurchase Notice, and
to the extent any Executive Securities are not publicly traded:
(A) The Board of the LLC and the holders of a majority of the
Executive Securities shall each, at the same time, within 10 days
thereafter, choose one investment banker or other appraiser with
experience in analyzing and making determinations concerning matters
in the telecommunications industry and in valuing entities like the
LLC (including the distribution arrangements of the type described in
the LLC Agreement), and, within 15 days of their selection, the two
investment bankers/appraisers so selected shall together select a
third investment banker/appraiser similarly qualified.
(B) The three investment bankers/appraisers shall first
appraise the fair market value of the Corporation (based on the
7
<PAGE>
assumption of an orderly, arm's length sale to a willing unaffiliated
buyer). Each of the three investment bankers/appraisers shall then
independently appraise the fair market value of such non-publicly-
traded Executive Securities as follows:
(1) the fair market value of each share of Common Stock
shall be equal to the fair market value of the Corporation
divided by the total number of shares of Common Stock outstanding
on the date of the applicable Repurchase Event (determined on a
fully diluted basis (x) with respect to all outstanding
securities convertible into the Corporation's Common Stock,
assuming the conversion of such convertible securities (without
regard to any conditions or other restrictions on such
conversion), and (y) with respect to all outstanding options,
warrants and other rights or securities exercisable or
exchangeable for shares of the Corporation's Common Stock, in
accordance with the Treasury Stock Method under generally
accepted accounting principles for determination of fully diluted
earnings per share);
(2) the fair market value of each Class B Unit shall be
equal to the fair market value of the assets (as determined in
accordance with paragraphs (B)(1) and (B)(3)) that would be
distributed according to the terms of the LLC Agreement with
respect to such Class B Unit if the LLC were dissolved on the
date of the applicable Repurchase Event; and
(3) the fair market value of any other non-publicly-
traded Executive Securities (or, for purposes of paragraph (B)(2)
above, any other assets) shall be the fair market value of such
securities (or other assets), determined on the basis of an
orderly, arm's length sale to a willing, unaffiliated buyer,
taking into account all relevant factors determinative of value.
8
<PAGE>
The three investment bankers/appraisers shall, within thirty days of
their retention, provide the written results of such appraisals to the
LLC and/or its assignees and to each of the holders of Executive
Securities.
(C) The "Fair Market Value" of the non-publicly-traded
Executive Securities to be repurchased shall be the average of the two
appraisals closest to each other, and such amount shall be final and
binding on all parties hereto; provided that the LLC (and/or
9
<PAGE>
any assignee) may at any time within ten days after receiving written
notice of such determination rescind its prior exercise of the
Repurchase Option by giving written notice of such revocation to all
of the holders of the Executive Securities to be repurchased, and upon
such revocation the revoking party will be treated as if it had never
exercised such Repurchase Option (it being understood that such
revoking parties shall thereafter have no right to re-exercise such
Repurchase Option).
(D) The costs of such appraisal shall be allocated between
the parties based on the percentage which the portion of the Contested
Amount not awarded to each party bears to the amount actually
contested by such party; provided that if any parties revoke their
exercise of the Repurchase Option pursuant to paragraph (C) above,
such revoking parties shall bear (pro rata among such revoking parties
based on the number of Executive Securities with respect to which each
such revoking party had initially exercised its Repurchase Option) any
appraisal costs that would be allocated to the holder(s) of Executive
Securities under this paragraph (D). "Contested Amount" means the
difference between the valuations of the disputing parties.
(f) Closing of the Repurchase. Within 10 business days after the Repurchase
Price for the Executive Securities to be repurchased has been determined, the
LLC shall send a notice to each holder of Executive Securities setting forth the
consideration to be paid for such securities and the time and place for the
closing of the transaction, which date shall not be more than 30 days nor less
than five days after the delivery of such notice. At such closing, the holders
of Executive Securities shall deliver all certificates (if any exist) evidencing
the Executive Securities to be repurchased to the LLC (and/or any assignees of
the LLC's repurchase right), and the LLC (and/or any assignees) shall pay for
the Executive Securities to be purchased pursuant to the Repurchase Option by
delivery of a check or wire transfer of immediately available funds in the
aggregate amount of the Repurchase Price for such securities; provided that in
the event the Board determines in its good faith discretion that the LLC is not
in a position to pay in cash any or all of the Repurchase Price for Executive
Securities to be repurchased by it:
(i) prior to the dissolution of the LLC, the LLC may pay a portion
of the Repurchase Price for such securities equal to (x) the aggregate
Repurchase Price for the Executive Securities to be repurchased by the LLC
minus (y) the Original Cost of such securities, by issuing in exchange for
such securities an equal number of the LLC's Class C Units
10
<PAGE>
(having the rights and preferences set forth in the LLC Agreement), and for
purposes of the LLC Agreement each such Class C Unit shall as of its
issuance be deemed to have Basic Contributions made with respect to such
Class C Unit equal to (A) the aggregate portion of the Repurchase Price
paid by the issuance of Class C Units divided by (B) the number of Class C
Units so issued in such repurchase; or
(ii) after the dissolution of the LLC, the Corporation (as
successor to the rights of the LLC under Section 8(f)(ii) below) may pay,
in the form of a promissory note, a portion of the Repurchase Price for
such securities equal to (x) the aggregate Repurchase Price for the
Executive Securities to be repurchased by the LLC minus (y) the Original
Cost of such securities. Such a promissory note shall be subordinated to
all of the Corporation's senior debt obligations either then or thereafter
incurred, shall earn simple annual interest at the Base Rate, shall have
all principal and accrued interest due and payable upon maturity, and shall
mature upon the earliest to occur of the Corporation's initial Public
Offering (if such initial Public Offering has not occurred prior to the
issuance of such promissory note), a Qualified Sale of the Corporation, or
the fifth anniversary of the issuance of such promissory note.
The purchasers of Executive Securities under this Section 3 shall be
entitled to receive customary representations and warranties from the sellers
regarding good title to such securities, free and clear of any liens or
encumbrances.
(g) Restrictions. Notwithstanding anything to the contrary contained in
this Agreement, all repurchases of Executive Securities by the LLC shall be
subject to applicable restrictions contained in the Delaware General Corporation
Law, the Delaware Limited Liability Company Act or in the LLC's or its
Subsidiaries' debt and equity financing agreements or imposed by applicable law
(such as the Hart-Scott-Rodino Antitrust Improvements Act of 1976). If any such
restrictions prohibit the repurchase of Executive Securities which are otherwise
permitted or required hereunder, the time periods provided in this Section 3
shall be suspended, and the LLC may make such repurchases as soon as it is
permitted to do so under such restrictions, unless by such time such Repurchase
Option has terminated pursuant to Section 3(h); provided that notwithstanding
the foregoing, in no event shall the time periods provided in this Section 3 be
suspended for more than 6 months.
(h) Termination of Repurchase Option. The rights under this Section 3
of the LLC and/or its assignees to repurchase Vested Securities (but not
Unvested Securities) shall terminate upon the consummation of a Public Offering.
All rights under this Section 3 of the LLC and/or its assignees to repurchase
11
<PAGE>
Executive Securities (including both Vested Securities and Unvested Securities)
shall terminate upon a Qualified Sale of the Corporation.
Section 4. Restrictions on Transfer.
(a) Opinion of Valid Transfer. In addition to any other restrictions on
transfer imposed by this Agreement, the Transaction Agreement, the LLC Agreement
or the Registration Rights Agreement, no holder of Executive Securities may
sell, transfer or dispose of any Executive Securities (except pursuant to an
effective registration statement under the Securities Act) without first
delivering to the LLC an opinion of counsel (reasonably acceptable in form and
substance to the LLC) that neither registration nor qualification under the
Securities Act or applicable state securities laws is required in connection
with such sale, transfer, or other disposition.
(b) Restrictive Legend. The certificates representing Executive
Securities shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON JULY
8, 1998, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND SUCH SECURITIES MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED
BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AND
REPURCHASE OPTIONS SET FORTH IN AN EXECUTIVE PURCHASE AGREEMENT BETWEEN THE
ISSUER OF SUCH SECURITIES (THE "ISSUER") AND THE INITIAL HOLDER OF SUCH
SECURITIES. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE
ISSUER'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
12
<PAGE>
The legend set forth above shall be removed from the certificates
evidencing any shares or units which cease to be Executive Securities.
(c) Retention of Executive Securities. Executive Purchaser shall not at
any time directly or indirectly sell, transfer, assign, pledge or otherwise
dispose of (whether with or without consideration and whether voluntarily or
involuntarily or by operation of law) any interest in any Executive Securities
(a "Transfer"), except (w) pursuant to the repurchase provisions of Section 3
hereof or of Section 3.04 of the LLC Agreement, (x) pursuant to a Drag-Along
Sale (as defined in the Transaction Agreement) under Section 6.06 of the
Transaction Agreement, (y) after an initial Public Offering, as permitted in
Section 4(c)(ii) below or (z) pursuant to Section 4(c)(iii) below (each of (w),
(x), (y) and (z) above, an "Exempt Transfer"). The restrictions on the Transfer
of Executive Securities set forth in this paragraph (c) shall continue in effect
(1) with respect to each Executive Security following any permitted Transfer
thereof pursuant to Section 4(c)(i), but shall cease upon any Exempt Transfer
thereof and (2) following termination of Executive's employment for any reason.
Notwithstanding the foregoing provisions of this clause (c):
(i) the Executive will be permitted to transfer, with or without
consideration, Executive Securities (A) pursuant to applicable laws of
descent and distribution or (B) among Executive's Family Group; provided
that the restrictions contained in this Section shall continue to be
applicable to, and bind the transferee of, the Executive Securities after
any such transfer, the transferees of such Executive Securities shall have
agreed in writing in an instrument satisfactory in form and substance to
the Board to be bound by the provisions of this Agreement, the LLC
Agreement, the Registration Rights Agreement and the Transaction Agreement
with respect to the Executive Securities so transferred, and
13
<PAGE>
(prior to the death of Executive) each such transferee of Executive
Securities shall have entered into proxies and other agreements
satisfactory to the Board pursuant to which Executive shall have the sole
right to vote such Executive Securities for all purposes. For purposes of
this Agreement, "Family Group" means Executive's spouse and descendants
(whether natural or adopted), any trust which at the time of such transfer
and at all times thereafter is and remains solely for the benefit of
Executive and/or Executive's spouse and/or descendants and any family
partnership the partners of which consist solely of Executive, such spouse,
such descendants or such trusts.
(ii) After the initial Public Offering, (x) all Transfer
restrictions on Unvested Securities shall continue in effect and (y)
Transfer restrictions on Vested Securities will terminate upon the fourth
anniversary of closing (the "IPO Closing") of the initial Public Offering.
Transfers of Vested Securities prior to the fourth anniversary of the IPO
Closing will only be permitted to the following extent:
(A) At any time prior to the fourth anniversary of the IPO
Closing, Executive will be permitted to Transfer a number of Vested
Securities that (together with Vested Securities previously
Transferred in an Exempt Transfer) in the aggregate as a percentage of
Executive Securities held by Executive as of the IPO Closing (the
"Initial CS Holdings") does not exceed the percentage of MSCP's
Investor Equity held as of the IPO Closing that has since been sold.
(B) During the two year period ending on the second
anniversary of the IPO Closing, Executive will be permitted (1) to
pledge (but not otherwise Transfer) a number of Vested Securities that
(together with Vested Securities previously Transferred in an Exempt
Transfer) in the aggregate does not exceed 25% of the Initial CS
Holdings or (2) if greater, to Transfer the number of Vested
Securities permitted to be Transferred pursuant to clause (c)(ii)(A)
above.
(C) At any time after such second anniversary of the IPO
Closing and before such fourth anniversary of the IPO Closing,
Executive will be permitted to Transfer the greater of (1) a number of
Vested Securities that (together with Vested Securities previously
Transferred in an Exempt Transfer) in the aggregate does not exceed
33.33% of the Initial CS Holdings and (2) the
14
<PAGE>
number of Vested Securities permitted to be Transferred pursuant to
clause (c)(ii)(A) above.
(iii) In addition to the foregoing permitted Transfers, the Board
may, in its discretion, permit Transfers by the Executive at any time in
the case of personal hardship (such as personal or family illness).
Section 5. Issuance of Tier I and Tier II Options.
(a) In the event of a dissolution of the LLC upon the consummation of a
Public Offering (a "Public Offering Liquidation"), if the Management Percentage
for such Public Offering Liquidation is less than 33.33% the Corporation shall
contemporaneously with such liquidation issue to each holder of Class B Units:
(i) options (the "Tier I Options") entitling the holder to acquire,
at an exercise price per share equal to the IPO Price, a number of shares
of the Corporation's Common Stock equal to the lesser of (x) the number of
shares of Common Stock that such holder would have received under the LLC
Agreement in connection with such Public Offering Liquidation if the
Management Percentage had been 10%, and (y) the difference of (A) the
number of shares of Common Stock that such holder would have received in
connection with such Public Offering Liquidation if the Management
Percentage had been 33.33%, minus (B) the number of shares of Common Stock
that such holder actually received in such liquidation; and
(ii) if the Management Percentage for such Public Offering
Liquidation is less than 23.33%, in addition to any Tier I Options, options
(the "Tier II Options") entitling the holder to acquire, at an exercise
price per share equal to the Tier II Price, a number of shares of the
Corporation's Common Stock equal to the lesser of (x) the number of shares
of Common Stock calculated pursuant to clause (i)(x) above, and (y) the
difference of (A) the number of shares of Common Stock calculated pursuant
to clause (i)(y) above, minus (B) the number of shares of Common Stock into
which the Tier I Options issued to such holder pursuant to clause (i) above
are initially exercisable.
The Tier I Options and Tier II Options shall expire on the seventh
anniversary of their issuance.
(b) For purposes of performing the calculations in Sections 5(a)(i) and
5(a)(ii) above, a distribution of any property other than Common Stock in a
Public
15
<PAGE>
Offering Liquidation shall be considered to have been a distribution of a number
of shares of Common Stock equal to the quotient of (A) the aggregate fair market
value of such distributed property on the date of such liquidation, as
determined in good faith by the Board, divided by (B) the fair market value of
one share of Common Stock on the date of such liquidation, as determined in good
faith by the Board.
(c) For purposes of this section, the following terms shall have the
meanings set forth below:
"IPO Price" means the gross price per share at which shares of the
Corporation's Common Stock are initially offered and sold to the public in
connection with a Public Offering.
"Liquidation FMV" has the meaning ascribed to such term in the LLC
Agreement.
"Management Percentage" has the meaning ascribed to such term in Section
4.01(c) of the LLC Agreement.
"Return Multiple" has the meaning ascribed to such term in Section 4.01(c)
of the LLC Agreement.
"Tier II Price" means, with respect to a particular Public Offering
Liquidation, the quotient of (x) the amount that would result in a Return
Multiple of 3.5 if the Liquidation FMV for such liquidation were equal to such
amount, divided by (y) the number of shares of Common Stock held by the LLC
immediately prior to such liquidation.
Section 6. Confidentiality, Noncompete, and Nonsolicitation.
(a) Nondisclosure and Nonuse of Confidential Information. Executive
shall not willfully disclose or use at any time, either during his employment
with the Corporation or thereafter, any Confidential Information (as defined
below) of which Executive is or becomes aware, whether or not such information
is developed by him, except to the extent that such disclosure or use is
directly related to and required by Executive's performance of duties assigned
to Executive by the LLC or the Corporation. Executive shall take all
appropriate steps to safeguard Confidential Information and to protect it
against disclosure, misuse, espionage, loss and theft. As used in this
Agreement, the term "Confidential Information" means information that is not
generally known to the public and that is used, developed or obtained by the
LLC, the Corporation, or its Subsidiaries in connection with their business,
including but not limited to (i) products or services, (ii) fees, costs and
pricing structures, (iii) designs, (iv)
16
<PAGE>
analysis, (v) drawings, photographs and reports, (vi) computer software,
including operating systems, applications and program listings, (vii) flow
charts, manuals and documentation, (viii) data bases, (ix) accounting and
business methods, (x) inventions, devices, new developments, methods and
processes, whether patentable or unpatentable and whether or not reduced to
practice, (xi) customers and clients and customer or client lists, (xii)
copyrightable works, (xiii) all technology and trade secrets, (xiv) strategic
plans, business plans, budgets and financial models, and (xv) all similar and
related information in whatever form. Notwithstanding the foregoing,
"Confidential Information" shall not include any information (A) of which
Executive became aware prior to his affiliation with the Corporation and the
LLC, (B) of which Executive learns from sources other than the LLC, the
Corporation or its Subsidiaries or (C) which is disclosed in a prospectus or
other documents for dissemination to the public or published in a form generally
available to the public prior to the date Executive proposes to disclose or use
such information. Information shall not be deemed to have been published merely
because individual portions of the information have been separately published,
but only if all material portions thereof have been published.
(b) The Corporation's Ownership of Intellectual Property.
(i) Acknowledgment of Corporation Ownership. In the event that
Executive as part of his activities on behalf of the Corporation generates,
creates, authors or contributes to any invention, design, new development,
device, product, method or process (whether or not patentable or reduced to
practice or constituting Confidential Information), any copyrightable work
(whether or not constituting Confidential Information) or any other form of
Confidential Information relating directly or indirectly to the
Corporation's business as now or hereafter conducted (collectively,
"Intellectual Property"), Executive acknowledges that such Intellectual
Property is the exclusive property of the Corporation and hereby assigns
all right, title and interest in and to such Intellectual Property to the
Corporation. Any copyrightable work prepared in whole or in part by
Executive will be deemed "a work made for hire" under Section 201(b) of the
1976 Copyright Act, and the Corporation shall own all of the rights
comprised by the copyright therein. Executive shall promptly and fully
disclose all Intellectual Property to the Corporation and shall cooperate
with the Corporation to protect the Corporation's interests in and rights
to such Intellectual Property (including, without limitation, providing
reasonable assistance in securing patent protection and copyright
registrations and executing all documents as reasonably requested by the
Corporation, whether such requests occur
17
<PAGE>
prior to or after termination of Executive's employment with the
Corporation).
(ii) Executive Invention. Executive understands that Section
6(b)(i) of this Agreement regarding the Corporation's ownership of
Intellectual Property does not apply to any invention for which no
equipment, supplies, facilities or trade secret information of the
Corporation were used and which was developed entirely on Executive's own
time, unless (A) the invention relates to the business of the Corporation
or to the Corporation's actual or demonstrably anticipated research or
development or (B) the invention results from any work performed by
Executive for the Corporation.
(c) Delivery of Materials upon Termination of Employment. As requested
by the Corporation from time to time and upon the termination of Executive's
employment with the Corporation for any reason, Executive shall promptly deliver
to the Corporation all copies and embodiments, in whatever form, of all
Confidential Information and Intellectual Property in Executive's possession or
within his control (including, but not limited to, written records, notes,
photographs, manuals, notebooks, documentation, program listings, flow charts,
magnetic media, disks, diskettes, tapes and all other materials containing any
Confidential Information or Intellectual Property) irrespective of the location
or form of such material and, if requested by the Corporation, shall provide the
Corporation with written confirmation that all such materials have been
delivered to the Corporation.
(d) Noncompete. Executive acknowledges and agrees with the Corporation
and the LLC that in the course of his employment with the Corporation he shall
become familiar with the Corporation's trade secrets and with other Confidential
Information concerning the Corporation and the LLC and their respective
affiliates, that Executive's services to the Corporation and the LLC are unique
in nature and of an extraordinary value to the Corporation and the LLC, and that
the Corporation and the LLC would be irreparably damaged if Executive were to
provide similar services to any person or entity competing with the LLC or the
Corporation or engaged in a similar business. In connection with the issuance
to Executive of the Executive Securities hereunder, in consideration of and as
an inducement to the LLC's and the Corporation's entering into this Agreement
and the Corporation's agreeing to issue the Tier I and Tier II Options to
Executive and to assume the obligations of the LLC upon dissolution thereof, and
in further consideration of the Noncompete Compensation (as defined below),
Executive accordingly covenants and agrees with the Corporation and the LLC that
during the Noncompete Period (as defined below), Executive shall not, directly
or indirectly, either for himself or for or through any other individual,
18
<PAGE>
corporation, partnership, joint venture or other entity, participate in any
business or enterprise conducting or proposing to conduct business in any
Covered State which engages or proposes to engage in the provision of
telecommunications services or in any other business similar to or competitive
with any business engaged in by the Corporation during the period of time in
which Executive is employed by the Corporation.
For purposes of this Agreement, (i) the term "participate in" shall
include, without limitation, having any direct or indirect interest in any
corporation, partnership, joint venture or other entity, whether as a sole
proprietor, owner, stockholder, partner, joint venturer, creditor or otherwise,
or rendering any direct or indirect service or assistance to any individual,
corporation, partnership, joint venture or other business entity (whether as a
director, officer, manager, representative, supervisor, employee, agent,
consultant or otherwise), other than ownership of up to 2% of the outstanding
stock of any class which is publicly traded and (ii) the term "Covered State"
means (A) Connecticut, Delaware, Illinois, Indiana, Maine, Massachusetts,
Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island
and Vermont, (B) any State in which the Corporation is engaged in business or as
to which the Corporation has at any time had an Approved Business Plan to engage
in business as of the date of termination of Executive's employment with the
Corporation and (C) any other State for which a business plan has been submitted
to the Board pursuant to the Transaction Agreement as of or prior to the
termination of Executive's employment or for which Corporation personnel have
taken substantial steps towards completing with a view to so submitting,
provided, that any such State under this clause (C) shall cease to be a Covered
State if such business plan does not become an Approved Business Plan within the
earlier of (x) 180 days after such submission and (y) 180 days after the
termination of Executive's Employment, and, in each case, the Corporation's
management and the LLC have attempted in good faith during such period to reach
agreements that would enable such plan to become an Approved Business Plan.
Executive agrees that this covenant is reasonable with respect to its duration,
geographical area and scope and is fully enforceable.
(e) Nonsolicitation. During the Noncompete Period, Executive shall not
(i) induce or attempt to induce any employee, officer or consultant of the
Corporation or any Subsidiary to leave the employ of the Corporation or any
Subsidiary, or in any way interfere with the relationship between the
Corporation or any Subsidiary and any employee, officer or consultant thereof,
(ii) hire directly or through another entity any person who was an employee of
the Corporation or any Subsidiary at any time during the twelve months prior to
the date such person is to be so hired, or (iii) induce or attempt to induce any
customer, supplier, licensee or other business relation of the LLC, the
Corporation
19
<PAGE>
or any Subsidiary to cease doing business with the LLC, the Corporation or any
Subsidiary, or in any way interfere with the relationship between any such
customer, supplier, licensee or business relation and the LLC, the Corporation
and its Subsidiaries (including, without limitation, making any negative
statements or communications concerning the LLC, the Corporation or any
Subsidiary).
(f) Noncompete Period; Noncompete Compensation. The "Noncompete Period"
shall commence on the date hereof and shall continue until the later of (A) the
fourth anniversary of the date hereof and (B) the second anniversary of the date
of termination of employment; provided that the Noncompete Period shall
terminate if at any time after the date of termination the Corporation ceases to
pay Executive his Noncompete Compensation (unless Executive violates any
covenant set forth in this Section 6, in which case the Noncompete Period shall
continue even absent payment of the Noncompete Compensation). The Corporation
will notify the Executive within 30 days after termination of employment whether
the Corporation intends to enforce this non-compete covenant. In the event of
termination of Executive's employment without Cause, if the Corporation so
notifies the Executive in writing that this covenant will be enforced against
the Executive, then the Corporation must give the Executive 60 days' notice of
the date on which this covenant will cease to be enforced and on which the
related Noncompete Compensation will cease to be paid (provided that if
Executive violates any covenant set forth in this Section 6, the Noncompete
Period shall continue without the need for any further Noncompete Compensation).
"Noncompete Compensation" shall consist of 100% of the base salary that
Executive received as compensation from the Corporation and its Subsidiaries
immediately prior to termination (Executive's "Previous Salary") together with
the continuation of the medical benefits that the Corporation provided to
Executive immediately prior to termination (Executive's "Previous Benefits");
provided that if at any time during the Noncompete Period Executive obtains
other employment elsewhere, Executive shall immediately notify the Corporation
to such effect, and Executive's Noncompete Compensation shall during the period
of such employment (i) be reduced (but not below zero) by Executive's
compensation for such employment and (ii) not include the continued provision of
medical benefits if such employment provides medical benefits comparable to the
Previous Benefits. The Noncompete Compensation shall not constitute an
obligation to pay any severance to such Executive but simply means that so long
as the Corporation pays the Noncompete Compensation up to the time the Executive
first violates any covenant set forth in this Section 6, the Noncompete Period
will remain in full force and effect for its full term. Payment of Noncompete
Compensation, if any, will be paid in accordance with the Corporation's normal
payroll practices.
20
<PAGE>
(g) Judicial Modification. Executive acknowledges that the terms of
this Section 6 were negotiated in good faith by the parties hereto, are
reasonable and necessary in light of Executive's unique position, responsibility
and knowledge of the operations of the Corporation and the unfair advantage that
Executive's knowledge and expertise concerning Corporation's business would
afford a competitor of the Corporation and are not more restrictive than
necessary to protect the legitimate interests of the parties hereto. If the
final judgment of a court of competent jurisdiction, or any final non-appealable
decision of an arbitrator in connection with a mandatory arbitration, declares
that any term or provision of this Section 6 is invalid or unenforceable, the
parties agree that the court making the determination of invalidity or
unenforceability shall have the power to reduce the scope, duration, or
geographic area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and this Agreement
shall be enforceable as so modified after the expiration of the time within
which the judgment or decision may be appealed.
(h) Dispute Resolution. Arbitration. All claims, disputes,
controversies and other matters in question arising out of or relating to this
Agreement, or to the alleged breach hereof, shall be settled by preliminary
negotiation between the Board and the Executive (the "parties") or, if such
preliminary negotiation is unsuccessful for any reason (but in any event not
later than 10 days after commencement of such negotiation), by binding
arbitration in accordance with the procedures set forth in this Section 6(h).
Without limiting the mandatory arbitration provision set forth in this Section
6(h), each of the parties hereto (i) waives the right to bring an action in any
court of competent jurisdiction with respect to any such claims, controversies
and disputes (other than any such action to enforce the award or other remedy
resulting from any arbitration pursuant to this Section 6(h) or to prevent any
arbitrator from exceeding the authority granted to the arbitrators hereunder)
and (ii) waives the right to trial by jury in any suit, action or other
proceeding brought on, with respect to or in connection with this Agreement.
(i) Binding Arbitration. Upon service of a notice of demand for
binding arbitration by any party hereto, arbitration shall be commenced and
conducted as follows:
(A) Arbitrators. All claims, disputes, controversies and
other matters (collectively "matters") in question shall be referred
to and decided and settled by a panel of three arbitrators with
experience in analyzing, understanding, and making determinations
concerning matters in the telecommunications
21
<PAGE>
industry, one selected by each of the parties within 15 days after
such notice of demand (with the parties to notify each other of their
respective selections at the same time) and the third to be selected
by the two arbitrators so selected within 15 days of their selection
pursuant to this subclause (A),
(B) Cost of Arbitration. The cost of each arbitration
proceeding, including without limitation the arbitrators' compensation
and expenses, hearing room charges, court reporter transcript charges,
etc., shall be allocated among the parties based upon the percentage
which the portion of the Contested Amount not awarded to each party
bears to the amount actually contested by such party. The arbitrators
shall also award the party that prevails substantially in its pre-
hearing position its reasonable attorneys' fees and costs incurred in
connection with the arbitration. The arbitrators are specifically
instructed to award attorneys' fees and expenses for instances of
abuse of the discovery process. All costs of arbitration shall be paid
initially 50% by the LLC (or after the dissolution of the LLC, the
Corporation) and 50% by the Executive pending the determination of the
arbitrators pursuant to the previous sentences.
(C) Situs of Proceedings. The situs of the arbitration
shall be in New York, New York, or such other place as is mutually
agreeable to the parties.
(ii) Pre-hearing Discovery. The parties shall have the right to
conduct and enforce pre-hearing discovery in accordance with the then
current Federal Rules of Civil Procedure, subject to the following
limitations: (A) each party may serve no more than one set of
interrogatories which set shall ask no more than twenty questions; (B) each
party may depose the other party's expert witnesses who will be called to
testify at the hearing, plus up to six fact witnesses without regard to
whether they will be called to testify (each party will be entitled to a
total of not more than 24 hours of depositions of the other party's
witnesses, and not more than 6 hours with respect to any single witness);
and (C) document discovery and other discovery shall be under the control
of and enforceable by the arbitrators, and all disputes relating thereto
shall be decided by the arbitrators. Notwithstanding any contrary
foregoing provisions, the arbitrators shall have the power and authority
to, and to the fullest extent practicable shall, abbreviate arbitration
discovery in a manner which is fair to all parties in order to expedite the
conclusion of each alternative dispute resolution proceeding.
22
<PAGE>
(iii) Pre-hearing Conference. Within thirty (30) days after
filing of notice of demand for binding arbitration, the arbitrators shall
hold a pre-hearing conference to establish schedules for completion of
discovery, for exchange of exhibit and witness lists, for arbitration
briefs, for the hearing, and to decide procedural matters and all other
questions that may be presented.
(iv) Hearing Procedures. The hearing shall be conducted to
preserve its privacy and to allow reasonable procedural due process. Rules
of evidence need not be strictly followed, and the hearing shall be
streamlined as follows: (A) documents shall be self-authenticating, subject
to valid objection by the opposing party; (B) expert reports, witness
biographies, depositions and affidavits may be utilized, subject to the
opponent's right of a live cross-examination of the witness in person; (C)
charts, graphs and summaries shall be utilized to present voluminous data,
provided (1) that the underlying data was made available to the opposing
party thirty (30) days prior to the hearing, and (2) that the preparer of
each chart, graph or summary is available for explanation and live cross-
examination in person; (D) the hearing should be held on consecutive
business days without interruption to the maximum extent practicable; and
(E) the arbitrators shall establish all other procedural rules for the
conduct of the arbitration in accordance with the rules of arbitration of
the American Arbitration Association.
(v) Governing Law. This arbitration provision shall be governed
by, and all rights and obligations specifically enforceable under and
pursuant to, the Federal Arbitration Act (9 U.S.C. (S) 1, et seq.) (the
"FAA"). Notwithstanding the foregoing, this Section 6(h) shall be
construed to the maximum extent possible to comply with the laws of the
State of Delaware, including the Uniform Arbitration Act (10 Del.C. (S)
5701, et seq.) (the "Delaware Arbitration Act"). If, nevertheless, it
shall be determined by a court of competent jurisdiction that any provision
or wording of this Section 6(h), including any rules of the FAA or the
American Arbitration Association referred to therein, shall be invalid or
unenforceable under said Delaware Arbitration Act or other applicable law,
such invalidity or unenforceability should not invalidate the entire
Section 6(h). In that case, this Section 6(h) shall be construed so as to
limit any term or provision so as to make it valid or enforceable within
the requirements of the Delaware Arbitration Act or other applicable law,
and, in the event such term or provision cannot be so limited, this Section
6(h) shall be construed to omit such invalid or unenforceable term or
provision.
23
<PAGE>
(vi Consolidation. No arbitration shall include, by
consolidation, joinder or in any other manner, any additional person not a
party to this Agreement (other than affiliates of any such party, which
affiliates may be included in the arbitration), except by written consent
of the parties hereto containing a specific reference to this Agreement.
(vii Award; Time Limit. The arbitrators are empowered to render
an award of general compensatory damages and equitable relief (including,
without limitation, injunctive relief), but are not empowered to award
punitive damages. The award rendered by the arbitrators (A) shall be
final; (B) shall, except as required by law, not constitute a basis for
collateral estoppel as to any issue; and (C) shall, except as required by
law, not be subject to vacation or modification. The arbitrators shall
render any award or otherwise conclude the arbitration no later than 120
days after the date notice of demand for binding arbitration is given
pursuant to this Section 6(h).
(viii Confidentiality. The parties hereto will maintain the
substance of any proceedings hereunder in confidence and the arbitrators,
prior to any proceedings hereunder, will sign an agreement whereby the
arbitrator agrees to keep the substance of any proceedings hereunder in
confidence.
Section 7. Definitions.
"Approved Business Plan" has the meaning ascribed to such term in the
Transaction Agreement.
"Base Rate" means, on any date, a variable rate per annum equal to the rate
of interest most recently published by The Wall Street Journal as the "prime
rate" at The Chase Manhattan Bank.
"Basic Contributions" has the meaning ascribed to such term in the LLC
Agreement.
"Board" means the board of representatives of the LLC (or, after the
dissolution of the LLC, the board of directors of the Corporation).
"Cause" means (i) Executive's theft or embezzlement, or attempted theft or
embezzlement, of money or property of the Corporation or the LLC, Executive's
perpetration or attempted perpetration of fraud, or Executive's participation in
a fraud or attempted fraud, on the Corporation or the LLC, or Executive's
unauthorized appropriation of, or attempt to misappropriate, any tangible or
intangible assets or property of the Corporation or the LLC, (ii) any act
24
<PAGE>
or acts of disloyalty, misconduct or moral turpitude by Executive which the
Board determines in good faith has been or is likely to be demonstrably
injurious to the interest, property, operations, business or reputation of the
Corporation or the LLC, or Executive's conviction of a crime other than minor
traffic violations or other similar minor offenses, (iii) Executive's repeated
intentional refusal or willful failure (other than by reason of Disability) to
carry out reasonable instructions by his superiors or the Board or the
Corporation's Board of Directors or (iv) Executive's breach of any provision of
Section 6.
"Class A Units" has the meaning ascribed to such term in the LLC Agreement.
"Class B Units" has the meaning ascribed to such term in the LLC Agreement.
"Class C Units" has the meaning ascribed to such term in the LLC Agreement.
"Class D Units" has the meaning ascribed to such term in the LLC Agreement.
"Common Stock" means the Corporation's common stock, par value $0.01 per
share.
"Disability" means (i) any permanent physical or mental incapacity or
disability rendering the Executive unable or unfit to perform effectively the
duties and obligations of his employment or to participate effectively and
actively in the management of the Corporation, or (ii) any illness, accident,
injury, physical or mental incapacity or other disability, where such condition
has rendered the Executive unable or unfit to perform effectively the duties and
obligations of his employment or to participate effectively and actively in the
management of the Corporation for a period of at least 90 consecutive days or
four months in any twelve-month period (in either case, as determined in the
good faith judgment of the Board).
"Executive Purchaser" means Executive and any Person who acquires Executive
Securities pursuant to Section 4(c)(i) and has executed a counterpart of this
Agreement, the LLC Agreement and the Transaction Agreement, agreeing to be bound
by the terms of each such agreement.
"Executive Securities" means (i) the Class B Units issued to the Executive
hereunder (but not including any Class C Units or Class D Units issued
25
<PAGE>
by the LLC in exchange for such Class B Units), (ii) upon dissolution of the
LLC, any securities of the Corporation distributed in respect of the securities
referred to in clause (i) above pursuant to such dissolution, (iii) any Tier I
Options or Tier II Options issued to any holder of Executive Securities
hereunder, (iv) any other securities of the LLC or the Corporation hereafter
acquired by Executive, and (v) any securities issued directly or indirectly with
respect to the foregoing securities by way of a split, dividend, or other
division of securities, or in connection with a combination of securities,
recapitalization, merger, consolidation, or other reorganization, or upon
conversion or exercise of any of the foregoing securities. Executive Securities
for purposes of this Agreement shall not include any securities issued to any
other executive of the Corporation under any other agreement. As to any
particular securities constituting Executive Securities, such securities shall
cease to be Executive Securities when they have been (a) effectively registered
under the Securities Act and disposed of in accordance with the registration
statement covering them, (b) distributed to the public through a broker, dealer
or market maker pursuant to Rule 144 under the Securities Act (or any similar
provision then in force), (c) repurchased by any holder of Class A Units, or by
the LLC (including in exchange for Class C Units or Class D Units), the
Corporation or any Subsidiary thereof or (d) Transferred pursuant to an Exempt
Transfer under Section 4.
"Good Reason" means (i) a substantial permanent reduction in the scope of
Executive's authority or level of responsibility from that in effect as of the
date hereof for any reason unrelated to Executive's Disability, which has not
been revised by the Corporation within 90 days after timely written notice to
the Corporation containing a reasonably detailed description of such reduction;
or (ii) a relocation of Executive's principal place of employment from its then
existing location to a site which is more than 100 miles from such location.
"Investor Equity" has the meaning ascribed such term in the Transaction
Agreement.
"LLC Agreement" means the limited liability company agreement dated as of
the date hereof, entered into by and among the members of the LLC, as amended
from time to time in accordance with its terms.
"Management Equity" has the meaning ascribed to such term in the
Transaction Agreement.
"MSCP" has the meaning ascribed such term in the LLC Agreement.
26
<PAGE>
"Original Cost" means, at any given time, (i) with respect to any Class B
Units, the total Basic Contributions made with respect to such Class B Units
pursuant to the LLC Agreement prior to such time, (ii) with respect to any
Common Stock, the Basic Contribution attributable to such Common Stock based on
the number of shares of Common Stock received by Executive upon the dissolution
of the LLC, and (iii) with respect to any other securities, the original price
paid upon issuance of such securities.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Public Offering" means any underwritten sale of the Corporation's common
stock pursuant to an effective registration statement under the Securities Act
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 or financing for a merger or acquisition, and (ii) any
issuance of common stock or rights to acquire common stock to employees of the
Corporation or its Subsidiaries as part of an incentive or compensation plan.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the date hereof, by and between the Corporation, the holders of
Investor Equity and the holders of Management Equity, as amended from time to
time in accordance with the terms thereof.
"Securities Act" means the Securities Act of 1933, as amended, and
applicable rules and regulations thereunder.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, and applicable rules and regulations thereunder.
"Subsequent Contributions" has the meaning ascribed to such term in the
Transaction Agreement.
"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, partnership, association or other business entity of which
(i) if a corporation, a majority of the total voting power of shares of stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that
27
<PAGE>
Person or a combination thereof, or (ii) if a limited liability company,
partnership, association or other business entity, a majority of the partnership
or other similar ownership interest thereof is at the time owned or controlled,
directly or indirectly, by any Person or one or more Subsidiaries of that Person
or a combination thereof. For purposes hereof, a Person or Persons shall be
deemed to have a majority ownership interest in a limited liability company,
partnership, association or other business entity if such Person or Persons
shall be allocated a majority of limited liability company, partnership,
association or other business entity gains or losses or shall be or control any
managing director, managing member, manager or general partner of such limited
liability company, partnership, association or other business entity.
"Transaction Agreement" means the Transaction Agreement dated as of the
date hereof, by and between the Corporation and the LLC and the holders of
interests in the LLC, as amended from time to time in accordance with the terms
thereof.
"Vesting Termination Breach" means (i) any breach by Executive of Section
6(a), Section 6(d) or Section 6(e) or (ii) any breach by Executive of any other
provision of Section 6 which is material or is intentionally and knowingly
committed by Executive.
Section 8. Miscellaneous Provisions.
(a Further Assurances; Voting Proxy. As a condition to the LLC's and
the Corporation's entering into this Agreement and the LLC's issuance of
Executive Securities to the Executive Purchasers, and as further consideration
therefor:
(i Executive hereby unconditionally guarantees the full and
prompt performance of each Executive Purchaser's obligations under this
Agreement and under each of the agreements contemplated hereby to which
such Executive Purchaser is a party, and Executive agrees that he will take
all necessary or desirable actions to ensure such performance as are
reasonably requested by the LLC or the Corporation. Executive further
agrees that he will not provide any directions to an Executive Purchaser
that are contrary to any obligation imposed on such Executive Purchaser
under this Agreement or under such other agreements, and that Executive
will not fail to provide any directions to an Executive Purchaser if such
failure would cause an Executive Purchaser not to satisfy its obligations
hereunder or thereunder. This guarantee shall be irrevocable with respect
to each Executive Security held by an Executive Purchaser
28
<PAGE>
(and shall survive any transfer thereof, or the death, disability,
incompetency, or bankruptcy of such Executive Purchaser) until such time as
such Executive Security is transferred in accordance with the terms hereof
to a Person other than a member of Executive's Family Group, at which time
this guarantee shall be deemed revoked with respect to such transferred
security (but not with respect to any other Executive Securities). No
invalidity, irregularity or unenforceability of this Agreement or such
other agreements by reason of an Executive Purchaser's incapacity, minor
status, incompetency, bankruptcy, insolvency, or other similar occurrence
shall impair, affect or be a defense to the obligations of Executive under
this guarantee.
(ii Each Executive Purchaser (other than Executive) hereby
appoints Executive as his true and lawful proxy and attorney-in-fact, with
full power of substitution, to vote all of such Executive Purchaser's
Executive Securities on all matters to be voted on by the holders of such
securities (whether as a member vote, a shareholder vote, an approval right
under this Agreement or the other agreements contemplated hereby, or
otherwise). These proxies and powers granted by each Executive Purchaser
pursuant to this Section 8 are coupled with an interest, and are given to
secure such Executive Purchasers' obligations under this Agreement and the
other agreements contemplated hereby to which the Executive Purchasers are
parties. Such proxies and powers shall be irrevocable with respect to each
Executive Security held by an Executive Purchaser (and shall survive and
not be affected by any transfer thereof, or the death, disability,
incompetency, or bankruptcy of such Executive Purchaser) until such time as
such Executive Security is transferred in accordance with the terms hereof
to a Person other than a member of Executive's Family Group, at which time
such proxy shall be deemed revoked with respect to such transferred
security (but not with respect to any other Executive Securities).
(b Transfers in Violation of Agreement. Any Transfer or attempted
Transfer of any Executive Securities in violation of any provision of this
Agreement shall be void, and none of the LLC, the Corporation, or any Subsidiary
thereof shall record such purported Transfer on its books or treat any purported
transferee of such Executive Securities as the owner of such securities for any
purpose.
(c Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable
29
<PAGE>
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(d Complete Agreement. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt 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.
(e Counterparts. This Agreement may be executed in separate
counterparts, none of which need contain the signature of more than one party
hereto but each of which shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(f Successors and Assigns. (i) Except as otherwise provided herein,
this Agreement shall bind the parties hereto and their respective successors and
permitted assigns and shall inure to the benefit of and be enforceable by the
parties hereto and their respective successors and permitted assigns whether so
expressed or not.
(ii Each of the Corporation, the LLC, the Executive Purchaser, and
each holder of Executive Securities hereby acknowledges that immediately upon
and after the dissolution of the LLC, (A) all contractual obligations and duties
of the LLC hereunder shall thereafter bind and be enforceable against the
Corporation, (B0 all rights and powers granted to the LLC hereunder (including,
without limitation, the repurchase rights set forth in Section 3) shall inure to
the benefit of and be enforceable by the Corporation, (C) all references to the
LLC shall thereafter be deemed to be references to the Corporation, and (D)
except if the context clearly otherwise requires, this Agreement shall
thereafter operate and be construed as if the word "Corporation" were
substituted for the word "LLC" in each such instance.
(g Governing Law; Submission to Jurisdiction. This Agreement shall be
governed by, and construed under, the laws of the State of Delaware, all rights
and remedies being governed by said laws, without regard to conflict of law
principles. Each of the parties hereto agrees (i) that this Agreement involves
at
30
<PAGE>
least $100,000 and (ii) that this Agreement has been entered into by the parties
hereto in express reliance upon 6 Del.C. (S) 2708. Each party hereby irrevocably
and unconditionally agrees (a) to be subject to the jurisdiction of the courts
of the State of Delaware and the federal courts sitting in the State of Delaware
or in the County of New York in the State of New York and (b) to the extent such
party is not otherwise subject to service of process in the State of Delaware,
to appoint and maintain an agent in the State of Delaware as such party's agent
for acceptance of legal process, and that service made pursuant to (b) above
shall have the same legal force and effect as if served upon said party
personally within the State of Delaware. For purposes of implementing the
parties' agreement to appoint and maintain an agent for service of process in
the State of Delaware, each such party that has not as of the date hereof
already duly appointed such an agent does hereby appoint RL&F Service Corp., One
Rodney Square, 10th Floor, Wilmington, New Castle County, Delaware 19801, as
such agent.
(h Remedies. Each of the parties to this Agreement (including any
holder of Investor Equity or employee of the Corporation to which the LLC
assigns any of its repurchase rights under Section 3 hereof) shall be entitled
to enforce its rights under this Agreement specifically, to recover damages and
costs (including reasonable attorney's fees and expenses) caused by any breach
of any provision of this Agreement and to exercise all other rights existing in
its favor. The parties hereto agree and acknowledge that money damages would
not be an adequate remedy for any breach of the provisions of this Agreement and
that any party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or deposit) for specific
performance and/or other injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement.
(i Amendment, Modification, or Waiver. The provisions of this
Agreement may be amended, modified, or waived only with the prior written
consent of the LLC and the Executive.
(j Third-Party Beneficiaries. The parties hereto acknowledge and
agree that certain provisions of this Agreement are intended for the benefit of
certain holders of Investor Equity or employees of the Corporation to which the
LLC assigns any of its repurchase rights under Section 3 hereof, that such
Persons are third-party beneficiaries of this Agreement and that the provisions
of this Agreement shall be enforceable by such Persons as provided herein.
31
<PAGE>
(k Business Days. If any time period for giving notice or taking
action hereunder expires on a day which is a Saturday, Sunday or legal holiday
in the State of New York, the time period shall be automatically extended to the
business day immediately following such Saturday, Sunday or holiday.
(l Descriptive Headings; Interpretation; No Strict Construction. The
descriptive headings of this Agreement are inserted for convenience only and do
not constitute a substantive part of this Agreement. Whenever required by the
context, any pronoun used in this Agreement shall include the corresponding
masculine, feminine or neuter forms, and the singular forms of nouns, pronouns,
and verbs shall include the plural and vice versa. Reference to any agreement,
document, or instrument means such agreement, document, or instrument as amended
or otherwise modified from time to time in accordance with the terms thereof,
and if applicable hereof. The use of the words "include" or "including" in this
Agreement shall be by way of example rather than by limitation. The use of the
words "or," "either" or "any" shall not be exclusive. The parties hereto have
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, it is the
intent of the parties that 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 the authorship of any of the
provisions of this Agreement.
(m Notices. All notices, requests or other communications to any
party hereunder shall be in writing (including facsimile transmission) and shall
be given,
if to Executive, to:
Choice One Communications Inc.
333 West Commercial Street
Suite 2500
East Rochester, New York 14455
32
<PAGE>
if to the LLC, to:
c/o Morgan Stanley Capital Partners III, L.P.
1221 Avenue of the Americas
33rd Floor
New York, New York 10020
Attention: John B. Ehrenkranz
Facsimile: (212) 762-7951
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Louis L. Goldberg
Facsimile: (212) 450-4800
and to:
Fleet Equity Partners VI, L.P.
50 Kennedy Plaza
12th Floor
Providence, Rhode Island 02903
Attention: Robert M. Van Degna
Facsimile: (401) 278-6387
with a copy to:
Paul, Hastings, Janofsky & Walker, LLP
399 Park Avenue
New York, New York 10022-4697
Attention: Neil A. Torpey
Facsimile: (212) 319-4090
33
<PAGE>
and to:
Waller-Sutton Media Partners, L.P.
555 North Lane
Suite 6150
Conshohocken, PA 19428
Attention: Mr. Bruce Hernandez
Facsimile: (610) 397-1014
with a copy to:
Rubin Baum Levin Constant & Friedman
30 Rockefeller Plaza
New York, New York 10112
Attention: Jonathan D. Drucker
Facsimile: (212) 698-7825
if to the Corporation, to:
Choice One Communications Inc.
333 West Commercial Street
Suite 2500
East Rochester, New York 14445
Attention: Steve Dubnik
Facsimile: (716) 385-0609
with a copy to:
Nixon, Hargrave, Devans & Doyle LLP
Clinton Square
P.O. Box 1051
Rochester, New York 14603-1051
Attention: James A. Locke, III
Facsimile: (716) 263-1600
and if to any member of the LLC or to any other holder of Common Stock, to the
address or facsimile set forth on the books of the LLC or the Corporation or any
other address or facsimile number as a party may hereafter specify for such
purpose to the LLC. Notwithstanding the foregoing, no holder of Investor Equity
or its counsel shall be entitled to notice if such holder holds less than 3% in
aggregate of all Investor Equity then outstanding.
34
<PAGE>
All such notices, requests and other communications shall be deemed
received on the date of receipt by the recipient thereof if received prior to 5
p.m. in the place of receipt and such day is a business day in the place of
receipt. Otherwise, any such notice, request or communication shall be deemed
not to have been received until the next succeeding business day in the place of
receipt.
* * * *
35
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
CHOICE ONE COMMUNICATIONS L.L.C.
By:
------------------------------------------
Its:
------------------------------------------
CHOICE ONE COMMUNICATIONS INC.
By:
------------------------------------------
Its:
-----------------------------------------
EXECUTIVE
---------------------------------------------
36
<PAGE>
Execution of Counterpart Agreeing to be Bound to
Executive Purchase Agreement by Executive Purchaser
Name of Individual:
------------------------------
Signature:
---------------------------------------
Date:
37
<PAGE>
EXHIBIT 10.15
EXECUTIVE PURCHASE AGREEMENT
THIS EXECUTIVE PURCHASE AGREEMENT (this "Agreement") is made as of July 8,
1998, by and between Choice One Communications L.L.C., a Delaware limited
liability company (the "LLC"), Choice One Communications Inc., a Delaware
corporation (the "Corporation"), and Steve M. Dubnik ("Executive"). Capitalized
terms used but not otherwise defined herein have the meanings ascribed to such
terms in Section 7 hereof.
WHEREAS, Executive desires to make an investment in the Corporation to be
held initially through an interest in the LLC, and the LLC, the Corporation and
the Executive desire to provide for certain rights and obligations relating to
such investment and to Executive's employment with the Corporation;
NOW, THEREFORE, in consideration of the mutual promises made herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
Section 1. Purchase and Sale of Executive Securities.
(a) Initial Capital Contribution and Issuance of Executive Securities.
Upon execution of this Agreement, Executive shall make a capital contribution
to the LLC in the amount of $90,009 (Executive's "Initial Capital Contribution")
in exchange for, and the LLC shall issue to Executive, 900,090 Class B Units
having the rights, obligations, and preferences set forth with respect thereto
in the LLC Agreement. The Executive shall make such Initial Capital
Contribution to the LLC by delivery to the LLC of a cashier's or certified
check, or wire transfer of immediately available funds to an account designated
by the LLC, in the aggregate amount equal to such Executive's Initial Capital
Contribution. The aggregate amount of the Initial Capital Contribution made
with respect to each Class B Unit issued hereunder shall be considered a Basic
Contribution made with respect to such Class B Unit. Subsequent Contributions
to the LLC shall be made by the Executive in respect of such Class B Units on
the terms and conditions set forth in the LLC Agreement.
(b) Representations and Warranties of Executive. In connection with the
Executive's Initial Capital Contribution and the issuance of the Executive
Securities hereunder, the Executive Purchaser represents and warrants to each of
the LLC and the Corporation that:
<PAGE>
(i) The Executive Securities to be acquired by the Executive
Purchaser pursuant to this Agreement shall be acquired for the Executive
Purchaser's own account and not with a view to, or the intention of,
distribution thereof in violation of the Securities Act or any applicable
state securities laws, and the Executive Securities shall not be disposed
of in contravention of the Securities Act or any applicable state
securities laws.
(ii) Executive is a management employee of the Corporation, and the
Executive Purchaser is sophisticated in financial matters and is able to
evaluate the risks and benefits of the investment in the Executive
Securities.
(iii) Executive Purchaser is able to bear the economic risk of his
investment in the Executive Securities for an indefinite period of time and
is aware that transfer of the Executive Securities may not be possible
because (A) such transfer is subject to contractual restrictions on
transfer set forth herein and in the Transaction Agreement, and (B) the
Executive Securities have not been registered under the Securities Act or
any applicable state securities laws and, therefore, cannot be sold unless
subsequently registered under the Securities Act and such applicable state
securities laws or an exemption from such registration is available.
(iv) Executive has had an opportunity to ask questions and receive
answers concerning the terms and conditions of the offering of the
Executive Securities issued hereunder and has had full access to such other
information concerning the Corporation and this investment opportunity as
he has requested.
(v) Each of this Agreement, the LLC Agreement, the Transaction
Agreement, and the other agreements contemplated thereby of even date
therewith to which Executive Purchaser is a party, constitute the legal,
valid and binding obligations of the Executive Purchaser, enforceable
against the Executive Purchaser in accordance with its terms; Executive is
ready, willing and able as of the date hereof to commence and to continue
employment with the Corporation in the office to which Executive was
appointed by the Board; and the execution, delivery and performance of such
agreements by Executive, and Executive's employment with the Corporation
and activities (including recruiting activities) on behalf of the
Corporation, do not and will not conflict with, violate or breach any
agreement, contract or instrument (including, without limitation, any
noncompete agreement or restrictive covenant instrument) to which
2
<PAGE>
Executive is a party or by which Executive is bound or any judgment, order
or decree to which Executive is subject.
(c) Acknowledgment of At-Will Employment. As an inducement to the LLC
and the Corporation to enter into this Agreement, and as a condition thereto,
the Executive acknowledges and agrees that no agreement or arrangement between
the Executive and the Corporation or the LLC (including, without limitation, the
issuance of the Executive Securities to the Executive and the execution and
delivery of this Agreement) shall entitle Executive to remain in the employment
of the Corporation and its Subsidiaries or affect the right of the Corporation
or its Subsidiaries to terminate Executive's employment at any time or for any
reason.
Section 2. Vesting of Executive Securities.
(a) Vesting Schedule. All Executive Securities shall initially be
Unvested Securities (as defined below). Except as otherwise provided herein, an
amount of Unvested Securities shall vest on the date hereof and on each of the
first four anniversaries of the date hereof, such that the Executive Securities
shall be vested on each such date in accordance with the following schedule:
<TABLE>
<CAPTION>
---- ------------------------
Date Cumulative Percentage of
Executive Securities
Vested
<S> <C>
The date hereof 20%
The first anniversary of the date hereof 40%
The second anniversary of the date hereof 60%
The third anniversary of the date hereof 80%
The fourth anniversary of the date hereof 100%
</TABLE>
Notwithstanding the foregoing sentence, and except as otherwise provided in
clauses (b)-(e) below or in the next sentence (in the case of termination
without Cause or for Good Reason), the above vesting schedule shall cease and no
Unvested Securities shall vest after the date on which Executive's employment
with the Corporation and its Subsidiaries terminates for any reason. If
Executive's employment is terminated by the Corporation without Cause or if
Executive terminates his employment for Good Reason, the Executive Securities
shall thereafter, if necessary, continue to vest so long as Executive has not
committed a Vesting Termination Breach (upon which breach the vesting schedule
shall immediately cease, and no Unvested Securities shall vest on or
3
<PAGE>
after the date of the first such breach). In the event the LLC or the
Corporation has alleged that Executive has committed a Vesting Termination
Breach, Executive disputes such allegation, and the matter is subject to the
dispute resolution provisions set forth in Section 6, vesting shall be tolled
upon the date of the allegation of such breach; provided that (i) if it is
ultimately resolved under Section 6 that Executive has committed a Vesting
Termination Breach, the tolling shall become a permanent cessation such that
vesting shall have forever ceased upon the date of such allegation, and (ii) if
it is ultimately resolved under Section 6 that Executive did not commit a
Vesting Termination Breach, the number of Vested Securities shall be as though
there had never been such alleged breach or any tolling of vesting. Executive
Securities which have become vested pursuant to this Agreement are referred to
herein as "Vested Securities," and all other Executive Securities are referred
to herein as "Unvested Securities."
(b) Acceleration upon a Qualified Sale of the Corporation. Unvested
Securities subject to vesting pursuant to Section 2(a) shall become Vested
Securities upon the consummation of a Qualified Sale of the Corporation (as
defined below) so long as Executive is employed by the Corporation or any of its
Subsidiaries on the date of such sale (or, if Executive's employment was
terminated by the Corporation without Cause or by Executive for Good Reason, so
long as Executive has not committed a Vesting Termination Breach prior to the
date of such sale). A "Qualified Sale of the Corporation" means either (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of the
Corporation and its Subsidiaries, taken as a whole, or (ii) a transaction or
series of transactions (including by way of merger, consolidation, or sale of
stock, but not including a Public Offering) the result of which is that the
holders of the Corporation's outstanding voting stock immediately prior to such
transaction are after giving effect to such transaction no longer, in the
aggregate, the "beneficial owners" (as such term is defined in Rule 13d-3 and
Rule 13d-5 promulgated under the Securities Exchange Act), directly or
indirectly through one or more intermediaries, of more than 50% of the voting
power of the outstanding voting stock of the Corporation, in each case where the
consideration for such assets or stock in such sale or transfer consists of cash
and/or publicly traded equity securities for such assets or for at least 50% of
the outstanding stock of the Corporation (e.g., 100% of such consideration would
have to consist of cash and/or publicly traded equity securities if only 50.01%
of such stock were sold in such transaction).
(c) Acceleration upon a Public Offering. Upon the consummation of the
Corporation's initial Public Offering, and so long as Executive is employed by
the Corporation or any of its Subsidiaries on the closing date of such offering
(or, if Executive's employment was terminated by the Corporation without Cause
or by
4
<PAGE>
the Executive for Good Reason, so long as Executive has not committed a Vesting
Termination Breach prior to such closing date), there will vest the amount of
Unvested Securities which were scheduled to vest within the 365 days following
such closing date (and the remaining Unvested Securities subject to vesting
pursuant to Section 2(a), if any, shall continue to vest 20% on each anniversary
of the date hereof in accordance with clause (a) above, such that the vesting
schedule set forth in Section 2(a) above shall have been effectively accelerated
by one year).
(d) Acceleration upon Death or Disability. All Unvested Securities
shall become Vested Securities if Executive's employment with the Corporation or
any of its Subsidiaries terminates by reason of Executive's death or Disability.
(e) Other Acceleration. Any Unvested Securities which the LLC (or its
assignees) has not elected to repurchase in the Repurchase Notice (as defined
below) (including Unvested Securities originally included in the Repurchase
Notice, but for which the election to repurchase was rescinded, pursuant to the
terms of Section 3, by the LLC and/or its assignees having made such election)
shall thereafter be deemed Vested Securities, but shall continue to be subject
to Section 4.
Section 3. LLC's Repurchase Option.
(a) The Repurchase Option. The LLC will be entitled to repurchase at
the LLC's election pursuant to the terms and conditions set forth in this
Section 3 (the "Repurchase Option"), upon (x) the termination of Executive's
employment with the Corporation and its Subsidiaries for any reason other than a
termination by the Corporation without Cause or by the Executive for Good
Reason, or (y) if Executive's employment is terminated by the Corporation
without Cause or by the Executive for Good Reason, upon Executive's commission
of a Vesting Termination Breach, all the Executive Securities then in existence
whether held by Executive or one or more of the other Executive Purchasers (any
such circumstance permitting repurchase, a "Repurchase Event"). In the event
that the LLC or the Corporation has alleged that Executive has committed a
Vesting Termination Breach, Executive disputes such allegation, and the matter
is subject to the dispute resolution provisions set forth in Section 6, the
closing of the repurchase of Executive Securities permitted to be repurchased
only upon such breach under this Section 3 shall not occur unless and until it
is ultimately determined that Executive committed a Vesting Termination Breach;
provided that during the pendency of such proceeding, such Executive Securities
specified in the Repurchase Notice (as defined below) shall not be transferred
by any holder thereof to any other Person.
5
<PAGE>
(b) Repurchase Price. The repurchase price (the "Repurchase Price") for
50% of the Vested Securities to be repurchased shall be the Fair Market Value of
such securities. The Repurchase Price of the remaining 50% of the Vested
Securities and of all of the Unvested Securities to be repurchased shall be the
lesser of (x) the Fair Market Value of such Securities, and (y) the Original
Cost of such Securities (with securities having the lowest Original Cost subject
to repurchase prior to securities with a higher Original Cost).
(c) Exercise of Repurchase Option. The LLC (by action of the Board) may
elect to purchase all or any portion of the Executive Securities permitted to be
repurchased by delivering written notice (the "Repurchase Notice") to the holder
or holders of the Executive Securities within 90 days after the occurrence of
the applicable Repurchase Event. The Repurchase Notice shall set forth the
amount, type, and class of Executive Securities (including, if applicable, the
amount of Unvested Securities and/or Vested Securities) to be acquired from each
such holder (which need not be pro rata among type of security or among Vested
Securities and Unvested Securities). The Executive Securities to be repurchased
by the LLC shall first be satisfied to the extent possible from the Executive
Securities held by Executive at the time of delivery of the Repurchase Notice.
If the amount of Executive Securities then held by Executive is less than the
total amount of Executive Securities that the LLC has elected to purchase, the
LLC shall purchase the remaining securities elected to be purchased from the
other holder(s) of Executive Securities (to whom Executive has transferred
Executive Securities pursuant to Section 4(c)(i)), pro rata according to the
amount of Executive Securities held of record by each such other holder at the
time of delivery of the Repurchase Notice. The amount of Unvested Securities
and Vested Securities to be repurchased hereunder shall be deemed to be
allocated among Executive and the other holders of repurchased Executive
Securities (to whom Executive has transferred Executive Securities pursuant to
Section 4(c)(i)), if any, pro rata according to the amount of Executive
Securities to be purchased from such persons.
(d) Assignment by the LLC. The LLC, by action of the Board, will have
the right to assign all or any portion of its repurchase rights hereunder to the
holders of Investor Equity (which assignment, if made to the holders of Investor
Equity, would be pro rata on the basis of the Investor Equity held by each such
holder) and/or to any executive employee of the Corporation or any of its
Subsidiaries. Notwithstanding the foregoing, the LLC may not assign to any
Person its right to pay a portion of the Repurchase Price for Executive
Securities repurchased hereunder in the form of Class C Units (or, after the
dissolution of the LLC, a promissory note).
6
<PAGE>
(e) Fair Market Value of Repurchased Securities. The "Fair Market
Value" of Executive Securities subject to repurchase hereunder shall be
determined in accordance with this paragraph (e) as follows:
(i) The Board of the LLC and the holders of a majority of the
Executive Securities to be repurchased shall attempt in good faith to agree
on the Fair Market Value of the Executive Securities. Any agreement
reached by such Persons shall be final and binding on all parties hereto.
(ii) If such Persons are unable to reach such agreement within 20
days after the giving of a Repurchase Notice, the Fair Market Value of any
Executive Securities that are publicly traded shall be the average, over a
period of 21 days consisting of the date of the applicable Repurchase Event
and the 20 consecutive business days prior to that date, of the average of
the closing prices of the sales of such securities on all securities
exchanges on which such securities may at that time be listed, or, if there
have been no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of
such day, or, if on any day such securities are not so listed, the average
of the representative bid and asked prices quoted in the Nasdaq System as
of 4:00 P.M., New York time, or, if on any day such securities are not
quoted in the Nasdaq System, the average of the highest bid and lowest
asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau Incorporated, or any similar
successor organization.
(iii) If such Persons are unable to reach agreement pursuant to
paragraph (ii) within 20 days after the giving of a Repurchase Notice, and
to the extent any Executive Securities are not publicly traded:
(A) The Board of the LLC and the holders of a majority of the
Executive Securities shall each, at the same time, within 10 days
thereafter, choose one investment banker or other appraiser with
experience in analyzing and making determinations concerning matters
in the telecommunications industry and in valuing entities like the
LLC (including the distribution arrangements of the type described in
the LLC Agreement), and, within 15 days of their selection, the two
investment bankers/appraisers so selected shall together select a
third investment banker/appraiser similarly qualified.
(B) The three investment bankers/appraisers shall first
appraise the fair market value of the Corporation (based on the
7
<PAGE>
assumption of an orderly, arm's length sale to a willing unaffiliated
buyer). Each of the three investment bankers/appraisers shall then
independently appraise the fair market value of such non-publicly-
traded Executive Securities as follows:
(1) the fair market value of each share of Common Stock
shall be equal to the fair market value of the Corporation
divided by the total number of shares of Common Stock outstanding
on the date of the applicable Repurchase Event (determined on a
fully diluted basis (x) with respect to all outstanding
securities convertible into the Corporation's Common Stock,
assuming the conversion of such convertible securities (without
regard to any conditions or other restrictions on such
conversion), and (y) with respect to all outstanding options,
warrants and other rights or securities exercisable or
exchangeable for shares of the Corporation's Common Stock, in
accordance with the Treasury Stock Method under generally
accepted accounting principles for determination of fully diluted
earnings per share);
(2) the fair market value of each Class B Unit shall be
equal to the fair market value of the assets (as determined in
accordance with paragraphs (B)(1) and (B)(3)) that would be
distributed according to the terms of the LLC Agreement with
respect to such Class B Unit if the LLC were dissolved on the
date of the applicable Repurchase Event; and
(3) the fair market value of any other non-publicly-
traded Executive Securities (or, for purposes of paragraph (B)(2)
above, any other assets) shall be the fair market value of such
securities (or other assets), determined on the basis of an
orderly, arm's length sale to a willing, unaffiliated buyer,
taking into account all relevant factors determinative of value.
8
<PAGE>
The three investment bankers/appraisers shall, within thirty days of
their retention, provide the written results of such appraisals to the
LLC and/or its assignees and to each of the holders of Executive
Securities.
(C) The "Fair Market Value" of the non-publicly-traded
Executive Securities to be repurchased shall be the average of the two
appraisals closest to each other, and such amount shall be final and
binding on all parties hereto; provided that the LLC (and/or
9
<PAGE>
any assignee) may at any time within ten days after receiving written
notice of such determination rescind its prior exercise of the
Repurchase Option by giving written notice of such revocation to all
of the holders of the Executive Securities to be repurchased, and upon
such revocation the revoking party will be treated as if it had never
exercised such Repurchase Option (it being understood that such
revoking parties shall thereafter have no right to re-exercise such
Repurchase Option).
(D) The costs of such appraisal shall be allocated between
the parties based on the percentage which the portion of the Contested
Amount not awarded to each party bears to the amount actually
contested by such party; provided that if any parties revoke their
exercise of the Repurchase Option pursuant to paragraph (C) above,
such revoking parties shall bear (pro rata among such revoking parties
based on the number of Executive Securities with respect to which each
such revoking party had initially exercised its Repurchase Option) any
appraisal costs that would be allocated to the holder(s) of Executive
Securities under this paragraph (D). "Contested Amount" means the
difference between the valuations of the disputing parties.
(f) Closing of the Repurchase. Within 10 business days after the Repurchase
Price for the Executive Securities to be repurchased has been determined, the
LLC shall send a notice to each holder of Executive Securities setting forth the
consideration to be paid for such securities and the time and place for the
closing of the transaction, which date shall not be more than 30 days nor less
than five days after the delivery of such notice. At such closing, the holders
of Executive Securities shall deliver all certificates (if any exist) evidencing
the Executive Securities to be repurchased to the LLC (and/or any assignees of
the LLC's repurchase right), and the LLC (and/or any assignees) shall pay for
the Executive Securities to be purchased pursuant to the Repurchase Option by
delivery of a check or wire transfer of immediately available funds in the
aggregate amount of the Repurchase Price for such securities; provided that in
the event the Board determines in its good faith discretion that the LLC is not
in a position to pay in cash any or all of the Repurchase Price for Executive
Securities to be repurchased by it:
(i) prior to the dissolution of the LLC, the LLC may pay a portion
of the Repurchase Price for such securities equal to (x) the aggregate
Repurchase Price for the Executive Securities to be repurchased by the LLC
minus (y) the Original Cost of such securities, by issuing in exchange for
such securities an equal number of the LLC's Class C Units
10
<PAGE>
(having the rights and preferences set forth in the LLC Agreement), and for
purposes of the LLC Agreement each such Class C Unit shall as of its
issuance be deemed to have Basic Contributions made with respect to such
Class C Unit equal to (A) the aggregate portion of the Repurchase Price
paid by the issuance of Class C Units divided by (B) the number of Class C
Units so issued in such repurchase; or
(ii) after the dissolution of the LLC, the Corporation (as
successor to the rights of the LLC under Section 8(f)(ii) below) may pay,
in the form of a promissory note, a portion of the Repurchase Price for
such securities equal to (x) the aggregate Repurchase Price for the
Executive Securities to be repurchased by the LLC minus (y) the Original
Cost of such securities. Such a promissory note shall be subordinated to
all of the Corporation's senior debt obligations either then or thereafter
incurred, shall earn simple annual interest at the Base Rate, shall have
all principal and accrued interest due and payable upon maturity, and shall
mature upon the earliest to occur of the Corporation's initial Public
Offering (if such initial Public Offering has not occurred prior to the
issuance of such promissory note), a Qualified Sale of the Corporation, or
the fifth anniversary of the issuance of such promissory note.
The purchasers of Executive Securities under this Section 3 shall be
entitled to receive customary representations and warranties from the sellers
regarding good title to such securities, free and clear of any liens or
encumbrances.
(g) Restrictions. Notwithstanding anything to the contrary contained in
this Agreement, all repurchases of Executive Securities by the LLC shall be
subject to applicable restrictions contained in the Delaware General Corporation
Law, the Delaware Limited Liability Company Act or in the LLC's or its
Subsidiaries' debt and equity financing agreements or imposed by applicable law
(such as the Hart-Scott-Rodino Antitrust Improvements Act of 1976). If any such
restrictions prohibit the repurchase of Executive Securities which are otherwise
permitted or required hereunder, the time periods provided in this Section 3
shall be suspended, and the LLC may make such repurchases as soon as it is
permitted to do so under such restrictions, unless by such time such Repurchase
Option has terminated pursuant to Section 3(h); provided that notwithstanding
the foregoing, in no event shall the time periods provided in this Section 3 be
suspended for more than 6 months.
(h) Termination of Repurchase Option. The rights under this Section 3
of the LLC and/or its assignees to repurchase Vested Securities (but not
Unvested Securities) shall terminate upon the consummation of a Public Offering.
All rights under this Section 3 of the LLC and/or its assignees to repurchase
11
<PAGE>
Executive Securities (including both Vested Securities and Unvested Securities)
shall terminate upon a Qualified Sale of the Corporation.
Section 4. Restrictions on Transfer.
(a) Opinion of Valid Transfer. In addition to any other restrictions on
transfer imposed by this Agreement, the Transaction Agreement, the LLC Agreement
or the Registration Rights Agreement, no holder of Executive Securities may
sell, transfer or dispose of any Executive Securities (except pursuant to an
effective registration statement under the Securities Act) without first
delivering to the LLC an opinion of counsel (reasonably acceptable in form and
substance to the LLC) that neither registration nor qualification under the
Securities Act or applicable state securities laws is required in connection
with such sale, transfer, or other disposition.
(b) Restrictive Legend. The certificates representing Executive
Securities shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON JULY
8, 1998, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND SUCH SECURITIES MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED
BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AND
REPURCHASE OPTIONS SET FORTH IN AN EXECUTIVE PURCHASE AGREEMENT BETWEEN THE
ISSUER OF SUCH SECURITIES (THE "ISSUER") AND THE INITIAL HOLDER OF SUCH
SECURITIES. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE
ISSUER'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
12
<PAGE>
The legend set forth above shall be removed from the certificates
evidencing any shares or units which cease to be Executive Securities.
(c) Retention of Executive Securities. Executive Purchaser shall not at
any time directly or indirectly sell, transfer, assign, pledge or otherwise
dispose of (whether with or without consideration and whether voluntarily or
involuntarily or by operation of law) any interest in any Executive Securities
(a "Transfer"), except (w) pursuant to the repurchase provisions of Section 3
hereof or of Section 3.04 of the LLC Agreement, (x) pursuant to a Drag-Along
Sale (as defined in the Transaction Agreement) under Section 6.06 of the
Transaction Agreement, (y) after an initial Public Offering, as permitted in
Section 4(c)(ii) below or (z) pursuant to Section 4(c)(iii) below (each of (w),
(x), (y) and (z) above, an "Exempt Transfer"). The restrictions on the Transfer
of Executive Securities set forth in this paragraph (c) shall continue in effect
(1) with respect to each Executive Security following any permitted Transfer
thereof pursuant to Section 4(c)(i), but shall cease upon any Exempt Transfer
thereof and (2) following termination of Executive's employment for any reason.
Notwithstanding the foregoing provisions of this clause (c):
(i) the Executive will be permitted to transfer, with or without
consideration, Executive Securities (A) pursuant to applicable laws of
descent and distribution or (B) among Executive's Family Group; provided
that the restrictions contained in this Section shall continue to be
applicable to, and bind the transferee of, the Executive Securities after
any such transfer, the transferees of such Executive Securities shall have
agreed in writing in an instrument satisfactory in form and substance to
the Board to be bound by the provisions of this Agreement, the LLC
Agreement, the Registration Rights Agreement and the Transaction Agreement
with respect to the Executive Securities so transferred, and
13
<PAGE>
(prior to the death of Executive) each such transferee of Executive
Securities shall have entered into proxies and other agreements
satisfactory to the Board pursuant to which Executive shall have the sole
right to vote such Executive Securities for all purposes. For purposes of
this Agreement, "Family Group" means Executive's spouse and descendants
(whether natural or adopted), any trust which at the time of such transfer
and at all times thereafter is and remains solely for the benefit of
Executive and/or Executive's spouse and/or descendants and any family
partnership the partners of which consist solely of Executive, such spouse,
such descendants or such trusts.
(ii) After the initial Public Offering, (x) all Transfer
restrictions on Unvested Securities shall continue in effect and (y)
Transfer restrictions on Vested Securities will terminate upon the fourth
anniversary of closing (the "IPO Closing") of the initial Public Offering.
Transfers of Vested Securities prior to the fourth anniversary of the IPO
Closing will only be permitted to the following extent:
(A) At any time prior to the fourth anniversary of the IPO
Closing, Executive will be permitted to Transfer a number of Vested
Securities that (together with Vested Securities previously
Transferred in an Exempt Transfer) in the aggregate as a percentage of
Executive Securities held by Executive as of the IPO Closing (the
"Initial CS Holdings") does not exceed the percentage of MSCP's
Investor Equity held as of the IPO Closing that has since been sold.
(B) During the two year period ending on the second
anniversary of the IPO Closing, Executive will be permitted (1) to
pledge (but not otherwise Transfer) a number of Vested Securities that
(together with Vested Securities previously Transferred in an Exempt
Transfer) in the aggregate does not exceed 25% of the Initial CS
Holdings or (2) if greater, to Transfer the number of Vested
Securities permitted to be Transferred pursuant to clause (c)(ii)(A)
above.
(C) At any time after such second anniversary of the IPO
Closing and before such fourth anniversary of the IPO Closing,
Executive will be permitted to Transfer the greater of (1) a number of
Vested Securities that (together with Vested Securities previously
Transferred in an Exempt Transfer) in the aggregate does not exceed
33.33% of the Initial CS Holdings and (2) the
14
<PAGE>
number of Vested Securities permitted to be Transferred pursuant to
clause (c)(ii)(A) above.
(iii) In addition to the foregoing permitted Transfers, the Board
may, in its discretion, permit Transfers by the Executive at any time in
the case of personal hardship (such as personal or family illness).
Section 5. Issuance of Tier I and Tier II Options.
(a) In the event of a dissolution of the LLC upon the consummation of a
Public Offering (a "Public Offering Liquidation"), if the Management Percentage
for such Public Offering Liquidation is less than 33.33% the Corporation shall
contemporaneously with such liquidation issue to each holder of Class B Units:
(i) options (the "Tier I Options") entitling the holder to acquire,
at an exercise price per share equal to the IPO Price, a number of shares
of the Corporation's Common Stock equal to the lesser of (x) the number of
shares of Common Stock that such holder would have received under the LLC
Agreement in connection with such Public Offering Liquidation if the
Management Percentage had been 10%, and (y) the difference of (A) the
number of shares of Common Stock that such holder would have received in
connection with such Public Offering Liquidation if the Management
Percentage had been 33.33%, minus (B) the number of shares of Common Stock
that such holder actually received in such liquidation; and
(ii) if the Management Percentage for such Public Offering
Liquidation is less than 23.33%, in addition to any Tier I Options, options
(the "Tier II Options") entitling the holder to acquire, at an exercise
price per share equal to the Tier II Price, a number of shares of the
Corporation's Common Stock equal to the lesser of (x) the number of shares
of Common Stock calculated pursuant to clause (i)(x) above, and (y) the
difference of (A) the number of shares of Common Stock calculated pursuant
to clause (i)(y) above, minus (B) the number of shares of Common Stock into
which the Tier I Options issued to such holder pursuant to clause (i) above
are initially exercisable.
The Tier I Options and Tier II Options shall expire on the seventh
anniversary of their issuance.
(b) For purposes of performing the calculations in Sections 5(a)(i) and
5(a)(ii) above, a distribution of any property other than Common Stock in a
Public
15
<PAGE>
Offering Liquidation shall be considered to have been a distribution of a number
of shares of Common Stock equal to the quotient of (A) the aggregate fair market
value of such distributed property on the date of such liquidation, as
determined in good faith by the Board, divided by (B) the fair market value of
one share of Common Stock on the date of such liquidation, as determined in good
faith by the Board.
(c) For purposes of this section, the following terms shall have the
meanings set forth below:
"IPO Price" means the gross price per share at which shares of the
Corporation's Common Stock are initially offered and sold to the public in
connection with a Public Offering.
"Liquidation FMV" has the meaning ascribed to such term in the LLC
Agreement.
"Management Percentage" has the meaning ascribed to such term in Section
4.01(c) of the LLC Agreement.
"Return Multiple" has the meaning ascribed to such term in Section 4.01(c)
of the LLC Agreement.
"Tier II Price" means, with respect to a particular Public Offering
Liquidation, the quotient of (x) the amount that would result in a Return
Multiple of 3.5 if the Liquidation FMV for such liquidation were equal to such
amount, divided by (y) the number of shares of Common Stock held by the LLC
immediately prior to such liquidation.
Section 6. Confidentiality, Noncompete, and Nonsolicitation.
(a) Nondisclosure and Nonuse of Confidential Information. Executive
shall not willfully disclose or use at any time, either during his employment
with the Corporation or thereafter, any Confidential Information (as defined
below) of which Executive is or becomes aware, whether or not such information
is developed by him, except to the extent that such disclosure or use is
directly related to and required by Executive's performance of duties assigned
to Executive by the LLC or the Corporation. Executive shall take all
appropriate steps to safeguard Confidential Information and to protect it
against disclosure, misuse, espionage, loss and theft. As used in this
Agreement, the term "Confidential Information" means information that is not
generally known to the public and that is used, developed or obtained by the
LLC, the Corporation, or its Subsidiaries in connection with their business,
including but not limited to (i) products or services, (ii) fees, costs and
pricing structures, (iii) designs, (iv)
16
<PAGE>
analysis, (v) drawings, photographs and reports, (vi) computer software,
including operating systems, applications and program listings, (vii) flow
charts, manuals and documentation, (viii) data bases, (ix) accounting and
business methods, (x) inventions, devices, new developments, methods and
processes, whether patentable or unpatentable and whether or not reduced to
practice, (xi) customers and clients and customer or client lists, (xii)
copyrightable works, (xiii) all technology and trade secrets, (xiv) strategic
plans, business plans, budgets and financial models, and (xv) all similar and
related information in whatever form. Notwithstanding the foregoing,
"Confidential Information" shall not include any information (A) of which
Executive became aware prior to his affiliation with the Corporation and the
LLC, (B) of which Executive learns from sources other than the LLC, the
Corporation or its Subsidiaries or (C) which is disclosed in a prospectus or
other documents for dissemination to the public or published in a form generally
available to the public prior to the date Executive proposes to disclose or use
such information. Information shall not be deemed to have been published merely
because individual portions of the information have been separately published,
but only if all material portions thereof have been published.
(b) The Corporation's Ownership of Intellectual Property.
(i) Acknowledgment of Corporation Ownership. In the event that
Executive as part of his activities on behalf of the Corporation generates,
creates, authors or contributes to any invention, design, new development,
device, product, method or process (whether or not patentable or reduced to
practice or constituting Confidential Information), any copyrightable work
(whether or not constituting Confidential Information) or any other form of
Confidential Information relating directly or indirectly to the
Corporation's business as now or hereafter conducted (collectively,
"Intellectual Property"), Executive acknowledges that such Intellectual
Property is the exclusive property of the Corporation and hereby assigns
all right, title and interest in and to such Intellectual Property to the
Corporation. Any copyrightable work prepared in whole or in part by
Executive will be deemed "a work made for hire" under Section 201(b) of the
1976 Copyright Act, and the Corporation shall own all of the rights
comprised by the copyright therein. Executive shall promptly and fully
disclose all Intellectual Property to the Corporation and shall cooperate
with the Corporation to protect the Corporation's interests in and rights
to such Intellectual Property (including, without limitation, providing
reasonable assistance in securing patent protection and copyright
registrations and executing all documents as reasonably requested by the
Corporation, whether such requests occur
17
<PAGE>
prior to or after termination of Executive's employment with the
Corporation).
(ii) Executive Invention. Executive understands that Section
6(b)(i) of this Agreement regarding the Corporation's ownership of
Intellectual Property does not apply to any invention for which no
equipment, supplies, facilities or trade secret information of the
Corporation were used and which was developed entirely on Executive's own
time, unless (A) the invention relates to the business of the Corporation
or to the Corporation's actual or demonstrably anticipated research or
development or (B) the invention results from any work performed by
Executive for the Corporation.
(c) Delivery of Materials upon Termination of Employment. As requested
by the Corporation from time to time and upon the termination of Executive's
employment with the Corporation for any reason, Executive shall promptly deliver
to the Corporation all copies and embodiments, in whatever form, of all
Confidential Information and Intellectual Property in Executive's possession or
within his control (including, but not limited to, written records, notes,
photographs, manuals, notebooks, documentation, program listings, flow charts,
magnetic media, disks, diskettes, tapes and all other materials containing any
Confidential Information or Intellectual Property) irrespective of the location
or form of such material and, if requested by the Corporation, shall provide the
Corporation with written confirmation that all such materials have been
delivered to the Corporation.
(d) Noncompete. Executive acknowledges and agrees with the Corporation
and the LLC that in the course of his employment with the Corporation he shall
become familiar with the Corporation's trade secrets and with other Confidential
Information concerning the Corporation and the LLC and their respective
affiliates, that Executive's services to the Corporation and the LLC are unique
in nature and of an extraordinary value to the Corporation and the LLC, and that
the Corporation and the LLC would be irreparably damaged if Executive were to
provide similar services to any person or entity competing with the LLC or the
Corporation or engaged in a similar business. In connection with the issuance
to Executive of the Executive Securities hereunder, in consideration of and as
an inducement to the LLC's and the Corporation's entering into this Agreement
and the Corporation's agreeing to issue the Tier I and Tier II Options to
Executive and to assume the obligations of the LLC upon dissolution thereof, and
in further consideration of the Noncompete Compensation (as defined below),
Executive accordingly covenants and agrees with the Corporation and the LLC that
during the Noncompete Period (as defined below), Executive shall not, directly
or indirectly, either for himself or for or through any other individual,
18
<PAGE>
corporation, partnership, joint venture or other entity, participate in any
business or enterprise conducting or proposing to conduct business in any
Covered State which engages or proposes to engage in the provision of
telecommunications services or in any other business similar to or competitive
with any business engaged in by the Corporation during the period of time in
which Executive is employed by the Corporation.
For purposes of this Agreement, (i) the term "participate in" shall
include, without limitation, having any direct or indirect interest in any
corporation, partnership, joint venture or other entity, whether as a sole
proprietor, owner, stockholder, partner, joint venturer, creditor or otherwise,
or rendering any direct or indirect service or assistance to any individual,
corporation, partnership, joint venture or other business entity (whether as a
director, officer, manager, representative, supervisor, employee, agent,
consultant or otherwise), other than ownership of up to 2% of the outstanding
stock of any class which is publicly traded and (ii) the term "Covered State"
means (A) Connecticut, Delaware, Illinois, Indiana, Maine, Massachusetts,
Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island
and Vermont, (B) any State in which the Corporation is engaged in business or as
to which the Corporation has at any time had an Approved Business Plan to engage
in business as of the date of termination of Executive's employment with the
Corporation and (C) any other State for which a business plan has been submitted
to the Board pursuant to the Transaction Agreement as of or prior to the
termination of Executive's employment or for which Corporation personnel have
taken substantial steps towards completing with a view to so submitting,
provided, that any such State under this clause (C) shall cease to be a Covered
State if such business plan does not become an Approved Business Plan within the
earlier of (x) 180 days after such submission and (y) 180 days after the
termination of Executive's Employment, and, in each case, the Corporation's
management and the LLC have attempted in good faith during such period to reach
agreements that would enable such plan to become an Approved Business Plan.
Executive agrees that this covenant is reasonable with respect to its duration,
geographical area and scope and is fully enforceable.
(e) Nonsolicitation. During the Noncompete Period, Executive shall not
(i) induce or attempt to induce any employee, officer or consultant of the
Corporation or any Subsidiary to leave the employ of the Corporation or any
Subsidiary, or in any way interfere with the relationship between the
Corporation or any Subsidiary and any employee, officer or consultant thereof,
(ii) hire directly or through another entity any person who was an employee of
the Corporation or any Subsidiary at any time during the twelve months prior to
the date such person is to be so hired, or (iii) induce or attempt to induce any
customer, supplier, licensee or other business relation of the LLC, the
Corporation
19
<PAGE>
or any Subsidiary to cease doing business with the LLC, the Corporation or any
Subsidiary, or in any way interfere with the relationship between any such
customer, supplier, licensee or business relation and the LLC, the Corporation
and its Subsidiaries (including, without limitation, making any negative
statements or communications concerning the LLC, the Corporation or any
Subsidiary).
(f) Noncompete Period; Noncompete Compensation. The "Noncompete Period"
shall commence on the date hereof and shall continue until the later of (A) the
fourth anniversary of the date hereof and (B) the second anniversary of the date
of termination of employment; provided that the Noncompete Period shall
terminate if at any time after the date of termination the Corporation ceases to
pay Executive his Noncompete Compensation (unless Executive violates any
covenant set forth in this Section 6, in which case the Noncompete Period shall
continue even absent payment of the Noncompete Compensation). The Corporation
will notify the Executive within 30 days after termination of employment whether
the Corporation intends to enforce this non-compete covenant. In the event of
termination of Executive's employment without Cause, if the Corporation so
notifies the Executive in writing that this covenant will be enforced against
the Executive, then the Corporation must give the Executive 60 days' notice of
the date on which this covenant will cease to be enforced and on which the
related Noncompete Compensation will cease to be paid (provided that if
Executive violates any covenant set forth in this Section 6, the Noncompete
Period shall continue without the need for any further Noncompete Compensation).
"Noncompete Compensation" shall consist of 100% of the base salary that
Executive received as compensation from the Corporation and its Subsidiaries
immediately prior to termination (Executive's "Previous Salary") together with
the continuation of the medical benefits that the Corporation provided to
Executive immediately prior to termination (Executive's "Previous Benefits");
provided that if at any time during the Noncompete Period Executive obtains
other employment elsewhere, Executive shall immediately notify the Corporation
to such effect, and Executive's Noncompete Compensation shall during the period
of such employment (i) be reduced (but not below zero) by Executive's
compensation for such employment and (ii) not include the continued provision of
medical benefits if such employment provides medical benefits comparable to the
Previous Benefits. The Noncompete Compensation shall not constitute an
obligation to pay any severance to such Executive but simply means that so long
as the Corporation pays the Noncompete Compensation up to the time the Executive
first violates any covenant set forth in this Section 6, the Noncompete Period
will remain in full force and effect for its full term. Payment of Noncompete
Compensation, if any, will be paid in accordance with the Corporation's normal
payroll practices.
20
<PAGE>
(g) Judicial Modification. Executive acknowledges that the terms of
this Section 6 were negotiated in good faith by the parties hereto, are
reasonable and necessary in light of Executive's unique position, responsibility
and knowledge of the operations of the Corporation and the unfair advantage that
Executive's knowledge and expertise concerning Corporation's business would
afford a competitor of the Corporation and are not more restrictive than
necessary to protect the legitimate interests of the parties hereto. If the
final judgment of a court of competent jurisdiction, or any final non-appealable
decision of an arbitrator in connection with a mandatory arbitration, declares
that any term or provision of this Section 6 is invalid or unenforceable, the
parties agree that the court making the determination of invalidity or
unenforceability shall have the power to reduce the scope, duration, or
geographic area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and this Agreement
shall be enforceable as so modified after the expiration of the time within
which the judgment or decision may be appealed.
(h) Dispute Resolution. Arbitration. All claims, disputes,
controversies and other matters in question arising out of or relating to this
Agreement, or to the alleged breach hereof, shall be settled by preliminary
negotiation between the Board and the Executive (the "parties") or, if such
preliminary negotiation is unsuccessful for any reason (but in any event not
later than 10 days after commencement of such negotiation), by binding
arbitration in accordance with the procedures set forth in this Section 6(h).
Without limiting the mandatory arbitration provision set forth in this Section
6(h), each of the parties hereto (i) waives the right to bring an action in any
court of competent jurisdiction with respect to any such claims, controversies
and disputes (other than any such action to enforce the award or other remedy
resulting from any arbitration pursuant to this Section 6(h) or to prevent any
arbitrator from exceeding the authority granted to the arbitrators hereunder)
and (ii) waives the right to trial by jury in any suit, action or other
proceeding brought on, with respect to or in connection with this Agreement.
(i) Binding Arbitration. Upon service of a notice of demand for
binding arbitration by any party hereto, arbitration shall be commenced and
conducted as follows:
(A) Arbitrators. All claims, disputes, controversies and
other matters (collectively "matters") in question shall be referred
to and decided and settled by a panel of three arbitrators with
experience in analyzing, understanding, and making determinations
concerning matters in the telecommunications
21
<PAGE>
industry, one selected by each of the parties within 15 days after
such notice of demand (with the parties to notify each other of their
respective selections at the same time) and the third to be selected
by the two arbitrators so selected within 15 days of their selection
pursuant to this subclause (A),
(B) Cost of Arbitration. The cost of each arbitration
proceeding, including without limitation the arbitrators' compensation
and expenses, hearing room charges, court reporter transcript charges,
etc., shall be allocated among the parties based upon the percentage
which the portion of the Contested Amount not awarded to each party
bears to the amount actually contested by such party. The arbitrators
shall also award the party that prevails substantially in its pre-
hearing position its reasonable attorneys' fees and costs incurred in
connection with the arbitration. The arbitrators are specifically
instructed to award attorneys' fees and expenses for instances of
abuse of the discovery process. All costs of arbitration shall be paid
initially 50% by the LLC (or after the dissolution of the LLC, the
Corporation) and 50% by the Executive pending the determination of the
arbitrators pursuant to the previous sentences.
(C) Situs of Proceedings. The situs of the arbitration
shall be in New York, New York, or such other place as is mutually
agreeable to the parties.
(ii) Pre-hearing Discovery. The parties shall have the right to
conduct and enforce pre-hearing discovery in accordance with the then
current Federal Rules of Civil Procedure, subject to the following
limitations: (A) each party may serve no more than one set of
interrogatories which set shall ask no more than twenty questions; (B) each
party may depose the other party's expert witnesses who will be called to
testify at the hearing, plus up to six fact witnesses without regard to
whether they will be called to testify (each party will be entitled to a
total of not more than 24 hours of depositions of the other party's
witnesses, and not more than 6 hours with respect to any single witness);
and (C) document discovery and other discovery shall be under the control
of and enforceable by the arbitrators, and all disputes relating thereto
shall be decided by the arbitrators. Notwithstanding any contrary
foregoing provisions, the arbitrators shall have the power and authority
to, and to the fullest extent practicable shall, abbreviate arbitration
discovery in a manner which is fair to all parties in order to expedite the
conclusion of each alternative dispute resolution proceeding.
22
<PAGE>
(iii) Pre-hearing Conference. Within thirty (30) days after
filing of notice of demand for binding arbitration, the arbitrators shall
hold a pre-hearing conference to establish schedules for completion of
discovery, for exchange of exhibit and witness lists, for arbitration
briefs, for the hearing, and to decide procedural matters and all other
questions that may be presented.
(iv) Hearing Procedures. The hearing shall be conducted to
preserve its privacy and to allow reasonable procedural due process. Rules
of evidence need not be strictly followed, and the hearing shall be
streamlined as follows: (A) documents shall be self-authenticating, subject
to valid objection by the opposing party; (B) expert reports, witness
biographies, depositions and affidavits may be utilized, subject to the
opponent's right of a live cross-examination of the witness in person; (C)
charts, graphs and summaries shall be utilized to present voluminous data,
provided (1) that the underlying data was made available to the opposing
party thirty (30) days prior to the hearing, and (2) that the preparer of
each chart, graph or summary is available for explanation and live cross-
examination in person; (D) the hearing should be held on consecutive
business days without interruption to the maximum extent practicable; and
(E) the arbitrators shall establish all other procedural rules for the
conduct of the arbitration in accordance with the rules of arbitration of
the American Arbitration Association.
(v) Governing Law. This arbitration provision shall be governed
by, and all rights and obligations specifically enforceable under and
pursuant to, the Federal Arbitration Act (9 U.S.C. (S) 1, et seq.) (the
"FAA"). Notwithstanding the foregoing, this Section 6(h) shall be
construed to the maximum extent possible to comply with the laws of the
State of Delaware, including the Uniform Arbitration Act (10 Del.C. (S)
5701, et seq.) (the "Delaware Arbitration Act"). If, nevertheless, it
shall be determined by a court of competent jurisdiction that any provision
or wording of this Section 6(h), including any rules of the FAA or the
American Arbitration Association referred to therein, shall be invalid or
unenforceable under said Delaware Arbitration Act or other applicable law,
such invalidity or unenforceability should not invalidate the entire
Section 6(h). In that case, this Section 6(h) shall be construed so as to
limit any term or provision so as to make it valid or enforceable within
the requirements of the Delaware Arbitration Act or other applicable law,
and, in the event such term or provision cannot be so limited, this Section
6(h) shall be construed to omit such invalid or unenforceable term or
provision.
23
<PAGE>
(vi Consolidation. No arbitration shall include, by
consolidation, joinder or in any other manner, any additional person not a
party to this Agreement (other than affiliates of any such party, which
affiliates may be included in the arbitration), except by written consent
of the parties hereto containing a specific reference to this Agreement.
(vii Award; Time Limit. The arbitrators are empowered to render
an award of general compensatory damages and equitable relief (including,
without limitation, injunctive relief), but are not empowered to award
punitive damages. The award rendered by the arbitrators (A) shall be
final; (B) shall, except as required by law, not constitute a basis for
collateral estoppel as to any issue; and (C) shall, except as required by
law, not be subject to vacation or modification. The arbitrators shall
render any award or otherwise conclude the arbitration no later than 120
days after the date notice of demand for binding arbitration is given
pursuant to this Section 6(h).
(viii Confidentiality. The parties hereto will maintain the
substance of any proceedings hereunder in confidence and the arbitrators,
prior to any proceedings hereunder, will sign an agreement whereby the
arbitrator agrees to keep the substance of any proceedings hereunder in
confidence.
Section 7. Definitions.
"Approved Business Plan" has the meaning ascribed to such term in the
Transaction Agreement.
"Base Rate" means, on any date, a variable rate per annum equal to the rate
of interest most recently published by The Wall Street Journal as the "prime
rate" at The Chase Manhattan Bank.
"Basic Contributions" has the meaning ascribed to such term in the LLC
Agreement.
"Board" means the board of representatives of the LLC (or, after the
dissolution of the LLC, the board of directors of the Corporation).
"Cause" means (i) Executive's theft or embezzlement, or attempted theft or
embezzlement, of money or property of the Corporation or the LLC, Executive's
perpetration or attempted perpetration of fraud, or Executive's participation in
a fraud or attempted fraud, on the Corporation or the LLC, or Executive's
unauthorized appropriation of, or attempt to misappropriate, any tangible or
intangible assets or property of the Corporation or the LLC, (ii) any act
24
<PAGE>
or acts of disloyalty, misconduct or moral turpitude by Executive which the
Board determines in good faith has been or is likely to be demonstrably
injurious to the interest, property, operations, business or reputation of the
Corporation or the LLC, or Executive's conviction of a crime other than minor
traffic violations or other similar minor offenses, (iii) Executive's repeated
intentional refusal or willful failure (other than by reason of Disability) to
carry out reasonable instructions by his superiors or the Board or the
Corporation's Board of Directors or (iv) Executive's breach of any provision of
Section 6.
"Class A Units" has the meaning ascribed to such term in the LLC Agreement.
"Class B Units" has the meaning ascribed to such term in the LLC Agreement.
"Class C Units" has the meaning ascribed to such term in the LLC Agreement.
"Class D Units" has the meaning ascribed to such term in the LLC Agreement.
"Common Stock" means the Corporation's common stock, par value $0.01 per
share.
"Disability" means (i) any permanent physical or mental incapacity or
disability rendering the Executive unable or unfit to perform effectively the
duties and obligations of his employment or to participate effectively and
actively in the management of the Corporation, or (ii) any illness, accident,
injury, physical or mental incapacity or other disability, where such condition
has rendered the Executive unable or unfit to perform effectively the duties and
obligations of his employment or to participate effectively and actively in the
management of the Corporation for a period of at least 90 consecutive days or
four months in any twelve-month period (in either case, as determined in the
good faith judgment of the Board).
"Executive Purchaser" means Executive and any Person who acquires Executive
Securities pursuant to Section 4(c)(i) and has executed a counterpart of this
Agreement, the LLC Agreement and the Transaction Agreement, agreeing to be bound
by the terms of each such agreement.
"Executive Securities" means (i) the Class B Units issued to the Executive
hereunder (but not including any Class C Units or Class D Units issued
25
<PAGE>
by the LLC in exchange for such Class B Units), (ii) upon dissolution of the
LLC, any securities of the Corporation distributed in respect of the securities
referred to in clause (i) above pursuant to such dissolution, (iii) any Tier I
Options or Tier II Options issued to any holder of Executive Securities
hereunder, (iv) any other securities of the LLC or the Corporation hereafter
acquired by Executive, and (v) any securities issued directly or indirectly with
respect to the foregoing securities by way of a split, dividend, or other
division of securities, or in connection with a combination of securities,
recapitalization, merger, consolidation, or other reorganization, or upon
conversion or exercise of any of the foregoing securities. Executive Securities
for purposes of this Agreement shall not include any securities issued to any
other executive of the Corporation under any other agreement. As to any
particular securities constituting Executive Securities, such securities shall
cease to be Executive Securities when they have been (a) effectively registered
under the Securities Act and disposed of in accordance with the registration
statement covering them, (b) distributed to the public through a broker, dealer
or market maker pursuant to Rule 144 under the Securities Act (or any similar
provision then in force), (c) repurchased by any holder of Class A Units, or by
the LLC (including in exchange for Class C Units or Class D Units), the
Corporation or any Subsidiary thereof or (d) Transferred pursuant to an Exempt
Transfer under Section 4.
"Good Reason" means (i) a substantial permanent reduction in the scope of
Executive's authority or level of responsibility from that in effect as of the
date hereof for any reason unrelated to Executive's Disability, which has not
been revised by the Corporation within 90 days after timely written notice to
the Corporation containing a reasonably detailed description of such reduction;
or (ii) a relocation of Executive's principal place of employment from its then
existing location to a site which is more than 100 miles from such location.
"Investor Equity" has the meaning ascribed such term in the Transaction
Agreement.
"LLC Agreement" means the limited liability company agreement dated as of
the date hereof, entered into by and among the members of the LLC, as amended
from time to time in accordance with its terms.
"Management Equity" has the meaning ascribed to such term in the
Transaction Agreement.
"MSCP" has the meaning ascribed such term in the LLC Agreement.
26
<PAGE>
"Original Cost" means, at any given time, (i) with respect to any Class B
Units, the total Basic Contributions made with respect to such Class B Units
pursuant to the LLC Agreement prior to such time, (ii) with respect to any
Common Stock, the Basic Contribution attributable to such Common Stock based on
the number of shares of Common Stock received by Executive upon the dissolution
of the LLC, and (iii) with respect to any other securities, the original price
paid upon issuance of such securities.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Public Offering" means any underwritten sale of the Corporation's common
stock pursuant to an effective registration statement under the Securities Act
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 or financing for a merger or acquisition, and (ii) any
issuance of common stock or rights to acquire common stock to employees of the
Corporation or its Subsidiaries as part of an incentive or compensation plan.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the date hereof, by and between the Corporation, the holders of
Investor Equity and the holders of Management Equity, as amended from time to
time in accordance with the terms thereof.
"Securities Act" means the Securities Act of 1933, as amended, and
applicable rules and regulations thereunder.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, and applicable rules and regulations thereunder.
"Subsequent Contributions" has the meaning ascribed to such term in the
Transaction Agreement.
"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, partnership, association or other business entity of which
(i) if a corporation, a majority of the total voting power of shares of stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that
27
<PAGE>
Person or a combination thereof, or (ii) if a limited liability company,
partnership, association or other business entity, a majority of the partnership
or other similar ownership interest thereof is at the time owned or controlled,
directly or indirectly, by any Person or one or more Subsidiaries of that Person
or a combination thereof. For purposes hereof, a Person or Persons shall be
deemed to have a majority ownership interest in a limited liability company,
partnership, association or other business entity if such Person or Persons
shall be allocated a majority of limited liability company, partnership,
association or other business entity gains or losses or shall be or control any
managing director, managing member, manager or general partner of such limited
liability company, partnership, association or other business entity.
"Transaction Agreement" means the Transaction Agreement dated as of the
date hereof, by and between the Corporation and the LLC and the holders of
interests in the LLC, as amended from time to time in accordance with the terms
thereof.
"Vesting Termination Breach" means (i) any breach by Executive of Section
6(a), Section 6(d) or Section 6(e) or (ii) any breach by Executive of any other
provision of Section 6 which is material or is intentionally and knowingly
committed by Executive.
Section 8. Miscellaneous Provisions.
(a Further Assurances; Voting Proxy. As a condition to the LLC's and
the Corporation's entering into this Agreement and the LLC's issuance of
Executive Securities to the Executive Purchasers, and as further consideration
therefor:
(i Executive hereby unconditionally guarantees the full and
prompt performance of each Executive Purchaser's obligations under this
Agreement and under each of the agreements contemplated hereby to which
such Executive Purchaser is a party, and Executive agrees that he will take
all necessary or desirable actions to ensure such performance as are
reasonably requested by the LLC or the Corporation. Executive further
agrees that he will not provide any directions to an Executive Purchaser
that are contrary to any obligation imposed on such Executive Purchaser
under this Agreement or under such other agreements, and that Executive
will not fail to provide any directions to an Executive Purchaser if such
failure would cause an Executive Purchaser not to satisfy its obligations
hereunder or thereunder. This guarantee shall be irrevocable with respect
to each Executive Security held by an Executive Purchaser
28
<PAGE>
(and shall survive any transfer thereof, or the death, disability,
incompetency, or bankruptcy of such Executive Purchaser) until such time as
such Executive Security is transferred in accordance with the terms hereof
to a Person other than a member of Executive's Family Group, at which time
this guarantee shall be deemed revoked with respect to such transferred
security (but not with respect to any other Executive Securities). No
invalidity, irregularity or unenforceability of this Agreement or such
other agreements by reason of an Executive Purchaser's incapacity, minor
status, incompetency, bankruptcy, insolvency, or other similar occurrence
shall impair, affect or be a defense to the obligations of Executive under
this guarantee.
(ii Each Executive Purchaser (other than Executive) hereby
appoints Executive as his true and lawful proxy and attorney-in-fact, with
full power of substitution, to vote all of such Executive Purchaser's
Executive Securities on all matters to be voted on by the holders of such
securities (whether as a member vote, a shareholder vote, an approval right
under this Agreement or the other agreements contemplated hereby, or
otherwise). These proxies and powers granted by each Executive Purchaser
pursuant to this Section 8 are coupled with an interest, and are given to
secure such Executive Purchasers' obligations under this Agreement and the
other agreements contemplated hereby to which the Executive Purchasers are
parties. Such proxies and powers shall be irrevocable with respect to each
Executive Security held by an Executive Purchaser (and shall survive and
not be affected by any transfer thereof, or the death, disability,
incompetency, or bankruptcy of such Executive Purchaser) until such time as
such Executive Security is transferred in accordance with the terms hereof
to a Person other than a member of Executive's Family Group, at which time
such proxy shall be deemed revoked with respect to such transferred
security (but not with respect to any other Executive Securities).
(b Transfers in Violation of Agreement. Any Transfer or attempted
Transfer of any Executive Securities in violation of any provision of this
Agreement shall be void, and none of the LLC, the Corporation, or any Subsidiary
thereof shall record such purported Transfer on its books or treat any purported
transferee of such Executive Securities as the owner of such securities for any
purpose.
(c Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable
29
<PAGE>
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(d Complete Agreement. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt 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.
(e Counterparts. This Agreement may be executed in separate
counterparts, none of which need contain the signature of more than one party
hereto but each of which shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(f Successors and Assigns. (i) Except as otherwise provided herein,
this Agreement shall bind the parties hereto and their respective successors and
permitted assigns and shall inure to the benefit of and be enforceable by the
parties hereto and their respective successors and permitted assigns whether so
expressed or not.
(ii Each of the Corporation, the LLC, the Executive Purchaser, and
each holder of Executive Securities hereby acknowledges that immediately upon
and after the dissolution of the LLC, (A) all contractual obligations and duties
of the LLC hereunder shall thereafter bind and be enforceable against the
Corporation, (B0 all rights and powers granted to the LLC hereunder (including,
without limitation, the repurchase rights set forth in Section 3) shall inure to
the benefit of and be enforceable by the Corporation, (C) all references to the
LLC shall thereafter be deemed to be references to the Corporation, and (D)
except if the context clearly otherwise requires, this Agreement shall
thereafter operate and be construed as if the word "Corporation" were
substituted for the word "LLC" in each such instance.
(g Governing Law; Submission to Jurisdiction. This Agreement shall be
governed by, and construed under, the laws of the State of Delaware, all rights
and remedies being governed by said laws, without regard to conflict of law
principles. Each of the parties hereto agrees (i) that this Agreement involves
at
30
<PAGE>
least $100,000 and (ii) that this Agreement has been entered into by the parties
hereto in express reliance upon 6 Del.C. (S) 2708. Each party hereby irrevocably
and unconditionally agrees (a) to be subject to the jurisdiction of the courts
of the State of Delaware and the federal courts sitting in the State of Delaware
or in the County of New York in the State of New York and (b) to the extent such
party is not otherwise subject to service of process in the State of Delaware,
to appoint and maintain an agent in the State of Delaware as such party's agent
for acceptance of legal process, and that service made pursuant to (b) above
shall have the same legal force and effect as if served upon said party
personally within the State of Delaware. For purposes of implementing the
parties' agreement to appoint and maintain an agent for service of process in
the State of Delaware, each such party that has not as of the date hereof
already duly appointed such an agent does hereby appoint RL&F Service Corp., One
Rodney Square, 10th Floor, Wilmington, New Castle County, Delaware 19801, as
such agent.
(h Remedies. Each of the parties to this Agreement (including any
holder of Investor Equity or employee of the Corporation to which the LLC
assigns any of its repurchase rights under Section 3 hereof) shall be entitled
to enforce its rights under this Agreement specifically, to recover damages and
costs (including reasonable attorney's fees and expenses) caused by any breach
of any provision of this Agreement and to exercise all other rights existing in
its favor. The parties hereto agree and acknowledge that money damages would
not be an adequate remedy for any breach of the provisions of this Agreement and
that any party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or deposit) for specific
performance and/or other injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement.
(i Amendment, Modification, or Waiver. The provisions of this
Agreement may be amended, modified, or waived only with the prior written
consent of the LLC and the Executive.
(j Third-Party Beneficiaries. The parties hereto acknowledge and
agree that certain provisions of this Agreement are intended for the benefit of
certain holders of Investor Equity or employees of the Corporation to which the
LLC assigns any of its repurchase rights under Section 3 hereof, that such
Persons are third-party beneficiaries of this Agreement and that the provisions
of this Agreement shall be enforceable by such Persons as provided herein.
31
<PAGE>
(k Business Days. If any time period for giving notice or taking
action hereunder expires on a day which is a Saturday, Sunday or legal holiday
in the State of New York, the time period shall be automatically extended to the
business day immediately following such Saturday, Sunday or holiday.
(l Descriptive Headings; Interpretation; No Strict Construction. The
descriptive headings of this Agreement are inserted for convenience only and do
not constitute a substantive part of this Agreement. Whenever required by the
context, any pronoun used in this Agreement shall include the corresponding
masculine, feminine or neuter forms, and the singular forms of nouns, pronouns,
and verbs shall include the plural and vice versa. Reference to any agreement,
document, or instrument means such agreement, document, or instrument as amended
or otherwise modified from time to time in accordance with the terms thereof,
and if applicable hereof. The use of the words "include" or "including" in this
Agreement shall be by way of example rather than by limitation. The use of the
words "or," "either" or "any" shall not be exclusive. The parties hereto have
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, it is the
intent of the parties that 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 the authorship of any of the
provisions of this Agreement.
(m Notices. All notices, requests or other communications to any
party hereunder shall be in writing (including facsimile transmission) and shall
be given,
if to Executive, to:
Choice One Communications Inc.
333 West Commercial Street
Suite 2500
East Rochester, New York 14455
32
<PAGE>
if to the LLC, to:
c/o Morgan Stanley Capital Partners III, L.P.
1221 Avenue of the Americas
33rd Floor
New York, New York 10020
Attention: John B. Ehrenkranz
Facsimile: (212) 762-7951
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Louis L. Goldberg
Facsimile: (212) 450-4800
and to:
Fleet Equity Partners VI, L.P.
50 Kennedy Plaza
12th Floor
Providence, Rhode Island 02903
Attention: Robert M. Van Degna
Facsimile: (401) 278-6387
with a copy to:
Paul, Hastings, Janofsky & Walker, LLP
399 Park Avenue
New York, New York 10022-4697
Attention: Neil A. Torpey
Facsimile: (212) 319-4090
33
<PAGE>
and to:
Waller-Sutton Media Partners, L.P.
555 North Lane
Suite 6150
Conshohocken, PA 19428
Attention: Mr. Bruce Hernandez
Facsimile: (610) 397-1014
with a copy to:
Rubin Baum Levin Constant & Friedman
30 Rockefeller Plaza
New York, New York 10112
Attention: Jonathan D. Drucker
Facsimile: (212) 698-7825
if to the Corporation, to:
Choice One Communications Inc.
333 West Commercial Street
Suite 2500
East Rochester, New York 14445
Attention: Steve Dubnik
Facsimile: (716) 385-0609
with a copy to:
Nixon, Hargrave, Devans & Doyle LLP
Clinton Square
P.O. Box 1051
Rochester, New York 14603-1051
Attention: James A. Locke, III
Facsimile: (716) 263-1600
and if to any member of the LLC or to any other holder of Common Stock, to the
address or facsimile set forth on the books of the LLC or the Corporation or any
other address or facsimile number as a party may hereafter specify for such
purpose to the LLC. Notwithstanding the foregoing, no holder of Investor Equity
or its counsel shall be entitled to notice if such holder holds less than 3% in
aggregate of all Investor Equity then outstanding.
34
<PAGE>
All such notices, requests and other communications shall be deemed
received on the date of receipt by the recipient thereof if received prior to 5
p.m. in the place of receipt and such day is a business day in the place of
receipt. Otherwise, any such notice, request or communication shall be deemed
not to have been received until the next succeeding business day in the place of
receipt.
* * * *
35
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
CHOICE ONE COMMUNICATIONS L.L.C.
By: /s/ Steve M. Dubnik
------------------------------------------
Its: Authorized Person
------------------------------------------
CHOICE ONE COMMUNICATIONS INC.
By: /s/ Mae Squier-Dow
------------------------------------------
Its: Senior Vice President
-----------------------------------------
EXECUTIVE
/s/ Steve M. Dubnik
---------------------------------------------
36
<PAGE>
Execution of Counterpart Agreeing to be Bound to
Executive Purchase Agreement by Executive Purchaser
Name of Individual:
------------------------------
Signature:
---------------------------------------
Date:
37
<PAGE>
EXHIBIT 10.16
EXECUTIVE PURCHASE AGREEMENT
THIS EXECUTIVE PURCHASE AGREEMENT (this "Agreement") is made as of July 8,
1998, by and between Choice One Communications L.L.C., a Delaware limited
liability company (the "LLC"), Choice One Communications Inc., a Delaware
corporation (the "Corporation"), and Mae Squier-Dow ("Executive"). Capitalized
terms used but not otherwise defined herein have the meanings ascribed to such
terms in Section 7 hereof.
WHEREAS, Executive desires to make an investment in the Corporation to be
held initially through an interest in the LLC, and the LLC, the Corporation and
the Executive desire to provide for certain rights and obligations relating to
such investment and to Executive's employment with the Corporation;
NOW, THEREFORE, in consideration of the mutual promises made herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
Section 1. Purchase and Sale of Executive Securities.
(a) Initial Capital Contribution and Issuance of Executive Securities.
Upon execution of this Agreement, Executive shall make a capital contribution
to the LLC in the amount of $45,004.50 (Executive's "Initial Capital
Contribution") in exchange for, and the LLC shall issue to Executive, 450,045
Class B Units having the rights, obligations, and preferences set forth with
respect thereto in the LLC Agreement. The Executive shall make such Initial
Capital Contribution to the LLC by delivery to the LLC of a cashier's or
certified check, or wire transfer of immediately available funds to an account
designated by the LLC, in the aggregate amount equal to such Executive's Initial
Capital Contribution. The aggregate amount of the Initial Capital Contribution
made with respect to each Class B Unit issued hereunder shall be considered a
Basic Contribution made with respect to such Class B Unit. Subsequent
Contributions to the LLC shall be made by the Executive in respect of such Class
B Units on the terms and conditions set forth in the LLC Agreement.
(b) Representations and Warranties of Executive. In connection with the
Executive's Initial Capital Contribution and the issuance of the Executive
Securities hereunder, the Executive Purchaser represents and warrants to each of
the LLC and the Corporation that:
<PAGE>
(i) The Executive Securities to be acquired by the Executive
Purchaser pursuant to this Agreement shall be acquired for the Executive
Purchaser's own account and not with a view to, or the intention of,
distribution thereof in violation of the Securities Act or any applicable
state securities laws, and the Executive Securities shall not be disposed
of in contravention of the Securities Act or any applicable state
securities laws.
(ii) Executive is a management employee of the Corporation, and the
Executive Purchaser is sophisticated in financial matters and is able to
evaluate the risks and benefits of the investment in the Executive
Securities.
(iii) Executive Purchaser is able to bear the economic risk of his
investment in the Executive Securities for an indefinite period of time and
is aware that transfer of the Executive Securities may not be possible
because (A) such transfer is subject to contractual restrictions on
transfer set forth herein and in the Transaction Agreement, and (B) the
Executive Securities have not been registered under the Securities Act or
any applicable state securities laws and, therefore, cannot be sold unless
subsequently registered under the Securities Act and such applicable state
securities laws or an exemption from such registration is available.
(iv) Executive has had an opportunity to ask questions and receive
answers concerning the terms and conditions of the offering of the
Executive Securities issued hereunder and has had full access to such other
information concerning the Corporation and this investment opportunity as
he has requested.
(v) Each of this Agreement, the LLC Agreement, the Transaction
Agreement, and the other agreements contemplated thereby of even date
therewith to which Executive Purchaser is a party, constitute the legal,
valid and binding obligations of the Executive Purchaser, enforceable
against the Executive Purchaser in accordance with its terms; Executive is
ready, willing and able as of the date hereof to commence and to continue
employment with the Corporation in the office to which Executive was
appointed by the Board; and the execution, delivery and performance of such
agreements by Executive, and Executive's employment with the Corporation
and activities (including recruiting activities) on behalf of the
Corporation, do not and will not conflict with, violate or breach any
agreement, contract or instrument (including, without limitation, any
noncompete agreement or restrictive covenant instrument) to which
2
<PAGE>
Executive is a party or by which Executive is bound or any judgment, order
or decree to which Executive is subject.
(c) Acknowledgment of At-Will Employment. As an inducement to the LLC
and the Corporation to enter into this Agreement, and as a condition thereto,
the Executive acknowledges and agrees that no agreement or arrangement between
the Executive and the Corporation or the LLC (including, without limitation, the
issuance of the Executive Securities to the Executive and the execution and
delivery of this Agreement) shall entitle Executive to remain in the employment
of the Corporation and its Subsidiaries or affect the right of the Corporation
or its Subsidiaries to terminate Executive's employment at any time or for any
reason.
Section 2. Vesting of Executive Securities.
(a) Vesting Schedule. All Executive Securities shall initially be
Unvested Securities (as defined below). Except as otherwise provided herein, an
amount of Unvested Securities shall vest on the date hereof and on each of the
first four anniversaries of the date hereof, such that the Executive Securities
shall be vested on each such date in accordance with the following schedule:
---- ------------------------
Date Cumulative Percentage of
Executive Securities
Vested
The date hereof 20%
The first anniversary of the date hereof 40%
The second anniversary of the date hereof 60%
The third anniversary of the date hereof 80%
The fourth anniversary of the date hereof 100%
Notwithstanding the foregoing sentence, and except as otherwise provided in
clauses (b)-(e) below or in the next sentence (in the case of termination
without Cause or for Good Reason), the above vesting schedule shall cease and no
Unvested Securities shall vest after the date on which Executive's employment
with the Corporation and its Subsidiaries terminates for any reason. If
Executive's employment is terminated by the Corporation without Cause or if
Executive terminates his employment for Good Reason, the Executive Securities
shall thereafter, if necessary, continue to vest until the next anniversary of
the date hereof next succeeding such termination (such that the Executive will
be vested in 20% more of the Executive Securities than at the time of such
termination) and if
3
<PAGE>
at least 50% of the Executive Securities have not been vested as of such next
anniversary, then vesting will continue to the extent necessary that at least
50% of the Executive Securities become vested, so long as Executive has not
committed a Vesting Termination Breach (upon which breach the vesting schedule
shall immediately cease, and no Unvested Securities shall vest on or after the
date of the first such breach). In the event the LLC or the Corporation has
alleged that Executive has committed a Vesting Termination Breach, Executive
disputes such allegation, and the matter is subject to the dispute resolution
provisions set forth in Section 6, vesting shall be tolled upon the date of the
allegation of such breach; provided that (i) if it is ultimately resolved under
Section 6 that Executive has committed a Vesting Termination Breach, the tolling
shall become a permanent cessation such that vesting shall have forever ceased
upon the date of such allegation, and (ii) if it is ultimately resolved under
Section 6 that Executive did not commit a Vesting Termination Breach, the number
of Vested Securities shall be as though there had never been such alleged breach
or any tolling of vesting. Executive Securities which have become vested
pursuant to this Agreement are referred to herein as "Vested Securities," and
all other Executive Securities are referred to herein as "Unvested Securities."
(b) Acceleration upon a Qualified Sale of the Corporation. Unvested
Securities subject to vesting pursuant to Section 2(a) shall become Vested
Securities upon the consummation of a Qualified Sale of the Corporation (as
defined below) so long as Executive is employed by the Corporation or any of its
Subsidiaries on the date of such sale (or, if Executive's employment was
terminated by the Corporation without Cause or by Executive for Good Reason, so
long as Executive has not committed a Vesting Termination Breach prior to the
date of such sale). A "Qualified Sale of the Corporation" means either (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of the
Corporation and its Subsidiaries, taken as a whole, or (ii) a transaction or
series of transactions (including by way of merger, consolidation, or sale of
stock, but not including a Public Offering) the result of which is that the
holders of the Corporation's outstanding voting stock immediately prior to such
transaction are after giving effect to such transaction no longer, in the
aggregate, the "beneficial owners" (as such term is defined in Rule 13d-3 and
Rule 13d-5 promulgated under the Securities Exchange Act), directly or
indirectly through one or more intermediaries, of more than 50% of the voting
power of the outstanding voting stock of the Corporation, in each case where the
consideration for such assets or stock in such sale or transfer consists of cash
and/or publicly traded equity securities for such assets or for at least 50% of
the outstanding stock of the Corporation (e.g., 100% of such consideration would
have to consist of cash and/or publicly traded equity securities if only 50.01%
of such stock were sold in such transaction).
4
<PAGE>
(c) Acceleration upon a Public Offering. Upon the consummation of the
Corporation's initial Public Offering, and so long as Executive is employed by
the Corporation or any of its Subsidiaries on the closing date of such offering
(or, if Executive's employment was terminated by the Corporation without Cause
or by the Executive for Good Reason, so long as Executive has not committed a
Vesting Termination Breach prior to such closing date), there will vest the
amount of Unvested Securities which were scheduled to vest within the 365 days
following such closing date (and the remaining Unvested Securities subject to
vesting pursuant to Section 2(a), if any, shall continue to vest 20% on each
anniversary of the date hereof in accordance with clause (a) above, such that
the vesting schedule set forth in Section 2(a) above shall have been effectively
accelerated by one year).
(d) Acceleration upon Death or Disability. All Unvested Securities
shall become Vested Securities if Executive's employment with the Corporation or
any of its Subsidiaries terminates by reason of Executive's death or Disability.
(e) Other Acceleration. Any Unvested Securities which the LLC (or its
assignees) has not elected to repurchase in the Repurchase Notice (as defined
below) (including Unvested Securities originally included in the Repurchase
Notice, but for which the election to repurchase was rescinded, pursuant to the
terms of Section 3, by the LLC and/or its assignees having made such election)
shall thereafter be deemed Vested Securities, but shall continue to be subject
to Section 4.
Section 3. LLC's Repurchase Option.
5
<PAGE>
(a) The Repurchase Option. The LLC will be entitled to repurchase at
the LLC's election pursuant to the terms and conditions set forth in this
Section 3 (the "Repurchase Option"), (i) upon (x) the termination of Executive's
employment with the Corporation and its Subsidiaries for any reason other than a
termination by the Corporation without Cause or by the Executive for Good
Reason, or (y) if Executive's employment is terminated by the Corporation
without Cause or by the Executive for Good Reason, upon Executive's commission
of a Vesting Termination Breach, all the Executive Securities then in existence
(whether held by Executive or one or more of the other Executive Purchasers)
and/or (ii) in the event of a termination without Cause or for Good Reason and
prior to commission of a Vesting Termination Breach, such of the Unvested
Securities as are not subject to continued vesting pursuant to Section 2(a) (any
such circumstance permitting repurchase, a "Repurchase Event"). In the event
that the LLC or the Corporation has alleged that Executive has committed a
Vesting Termination Breach, Executive disputes such allegation, and the matter
is subject to the dispute resolution provisions set forth in Section 6, the
closing of the repurchase of Executive Securities permitted to be repurchased
only upon such breach under this Section 3 shall not occur unless and until it
is ultimately determined that Executive committed a Vesting Termination Breach;
provided that during the pendency of such proceeding, such Executive Securities
specified in the Repurchase Notice (as defined below) shall not be transferred
by any holder thereof to any other Person.
(b) Repurchase Price. The repurchase price (the "Repurchase Price") for
50% of the Vested Securities to be repurchased shall be the Fair Market Value of
such securities. The Repurchase Price of the remaining 50% of the Vested
Securities and of all of the Unvested Securities to be repurchased shall be the
lesser of (x) the Fair Market Value of such Securities, and (y) the Original
Cost of such Securities (with securities having the lowest Original Cost subject
to repurchase prior to securities with a higher Original Cost).
(c) Exercise of Repurchase Option. The LLC (by action of the Board) may
elect to purchase all or any portion of the Executive Securities permitted to be
repurchased by delivering written notice (the "Repurchase Notice") to the holder
or holders of the Executive Securities within 90 days after the occurrence of
the applicable Repurchase Event. The Repurchase Notice shall set forth the
amount, type, and class of Executive Securities (including, if applicable, the
amount of Unvested Securities and/or Vested Securities) to be acquired from each
such holder (which need not be pro rata among type of security or among Vested
Securities and Unvested Securities). The Executive Securities to be repurchased
by the LLC shall first be satisfied to the extent possible from the Executive
Securities held by Executive at the time of delivery of the Repurchase Notice.
If the amount of Executive Securities then held by Executive is less than the
total
6
<PAGE>
amount of Executive Securities that the LLC has elected to purchase, the LLC
shall purchase the remaining securities elected to be purchased from the other
holder(s) of Executive Securities (to whom Executive has transferred Executive
Securities pursuant to Section 4(c)(i)), pro rata according to the amount of
Executive Securities held of record by each such other holder at the time of
delivery of the Repurchase Notice. The amount of Unvested Securities and Vested
Securities to be repurchased hereunder shall be deemed to be allocated among
Executive and the other holders of repurchased Executive Securities (to whom
Executive has transferred Executive Securities pursuant to Section 4(c)(i)), if
any, pro rata according to the amount of Executive Securities to be purchased
from such persons.
(d) Assignment by the LLC. The LLC, by action of the Board, will have
the right to assign all or any portion of its repurchase rights hereunder to the
holders of Investor Equity (which assignment, if made to the holders of Investor
Equity, would be pro rata on the basis of the Investor Equity held by each such
holder) and/or to any executive employee of the Corporation or any of its
Subsidiaries. Notwithstanding the foregoing, the LLC may not assign to any
Person its right to pay a portion of the Repurchase Price for Executive
Securities repurchased hereunder in the form of Class C Units (or, after the
dissolution of the LLC, a promissory note).
(e) Fair Market Value of Repurchased Securities. The "Fair Market
Value" of Executive Securities subject to repurchase hereunder shall be
determined in accordance with this paragraph (e) as follows:
(i) The Board of the LLC and the holders of a majority of the
Executive Securities to be repurchased shall attempt in good faith to agree
on the Fair Market Value of the Executive Securities. Any agreement
reached by such Persons shall be final and binding on all parties hereto.
(ii) If such Persons are unable to reach such agreement within 20
days after the giving of a Repurchase Notice, the Fair Market Value of any
Executive Securities that are publicly traded shall be the average, over a
period of 21 days consisting of the date of the applicable Repurchase Event
and the 20 consecutive business days prior to that date, of the average of
the closing prices of the sales of such securities on all securities
exchanges on which such securities may at that time be listed, or, if there
have been no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of
such day, or, if on any day such securities are not so listed, the average
of the representative bid and asked prices quoted in the Nasdaq System as
of 4:00 P.M., New York time, or, if on any day such securities are not
quoted
7
<PAGE>
in the Nasdaq System, the average of the highest bid and lowest asked
prices on such day in the domestic over-the-counter market as reported by
the National Quotation Bureau Incorporated, or any similar successor
organization.
(iii) If such Persons are unable to reach agreement pursuant to
paragraph (ii) within 20 days after the giving of a Repurchase Notice, and
to the extent any Executive Securities are not publicly traded:
(A) The Board of the LLC and the holders of a majority of the
Executive Securities shall each, at the same time, within 10 days
thereafter, choose one investment banker or other appraiser with
experience in analyzing and making determinations concerning matters
in the telecommunications industry and in valuing entities like the
LLC (including the distribution arrangements of the type described in
the LLC Agreement), and, within 15 days of their selection, the two
investment bankers/appraisers so selected shall together select a
third investment banker/appraiser similarly qualified.
(B) The three investment bankers/appraisers shall first
appraise the fair market value of the Corporation (based on the
assumption of an orderly, arm's length sale to a willing unaffiliated
buyer). Each of the three investment bankers/appraisers shall then
independently appraise the fair market value of such non-publicly-
traded Executive Securities as follows:
(1) the fair market value of each share of Common Stock
shall be equal to the fair market value of the Corporation
divided by the total number of shares of Common Stock outstanding
on the date of the applicable Repurchase Event (determined on a
fully diluted basis (x) with respect to all outstanding
securities convertible into the Corporation's Common Stock,
assuming the conversion of such convertible securities (without
regard to any conditions or other restrictions on such
conversion), and (y) with respect to all outstanding options,
warrants and other rights or securities exercisable or
exchangeable for shares of the Corporation's Common Stock, in
accordance with the Treasury Stock Method under generally
accepted accounting principles for determination of fully diluted
earnings per share);
8
<PAGE>
(2) the fair market value of each Class B Unit shall be
equal to the fair market value of the assets (as determined in
accordance with paragraphs (B)(1) and (B)(3)) that would be
distributed according to the terms of the LLC Agreement with
respect to such Class B Unit if the LLC were dissolved on the
date of the applicable Repurchase Event; and
(3) the fair market value of any other non-publicly-
traded Executive Securities (or, for purposes of paragraph (B)(2)
above, any other assets) shall be the fair market value of such
securities (or other assets), determined on the basis of an
orderly, arm's length sale to a willing, unaffiliated buyer,
taking into account all relevant factors determinative of value.
The three investment bankers/appraisers shall, within thirty days
of their retention, provide the written results of such
appraisals to the LLC and/or its assignees and to each of the
holders of Executive Securities.
9
<PAGE>
(C) The "Fair Market Value" of the non-publicly-traded
Executive Securities to be repurchased shall be the average of the two
appraisals closest to each other, and such amount shall be final and
binding on all parties hereto; provided that the LLC (and/or any
assignee) may at any time within ten days after receiving written
notice of such determination rescind its prior exercise of the
Repurchase Option by giving written notice of such revocation to all
of the holders of the Executive Securities to be repurchased, and upon
such revocation the revoking party will be treated as if it had never
exercised such Repurchase Option (it being understood that such
revoking parties shall thereafter have no right to re-exercise such
Repurchase Option).
(D) The costs of such appraisal shall be allocated between
the parties based on the percentage which the portion of the Contested
Amount not awarded to each party bears to the amount actually
contested by such party; provided that if any parties revoke their
exercise of the Repurchase Option pursuant to paragraph (C) above,
such revoking parties shall bear (pro rata among such revoking parties
based on the number of Executive Securities with respect to which each
such revoking party had initially exercised its Repurchase Option) any
appraisal costs that would be allocated to the holder(s) of Executive
Securities under this paragraph (D). "Contested Amount" means the
difference between the valuations of the disputing parties.
10
<PAGE>
(f) Closing of the Repurchase. Within 10 business days after the
Repurchase Price for the Executive Securities to be repurchased has been
determined, the LLC shall send a notice to each holder of Executive Securities
setting forth the consideration to be paid for such securities and the time and
place for the closing of the transaction, which date shall not be more than 30
days nor less than five days after the delivery of such notice. At such
closing, the holders of Executive Securities shall deliver all certificates (if
any exist) evidencing the Executive Securities to be repurchased to the LLC
(and/or any assignees of the LLC's repurchase right), and the LLC (and/or any
assignees) shall pay for the Executive Securities to be purchased pursuant to
the Repurchase Option by delivery of a check or wire transfer of immediately
available funds in the aggregate amount of the Repurchase Price for such
securities; provided that in the event the Board determines in its good faith
discretion that the LLC is not in a position to pay in cash any or all of the
Repurchase Price for Executive Securities to be repurchased by it:
(i) prior to the dissolution of the LLC, the LLC may pay a portion
of the Repurchase Price for such securities equal to (x) the aggregate
Repurchase Price for the Executive Securities to be repurchased by the LLC
minus (y) the Original Cost of such securities, by issuing in exchange for
such securities an equal number of the LLC's Class C Units (having the
rights and preferences set forth in the LLC Agreement), and for purposes of
the LLC Agreement each such Class C Unit shall as of its issuance be deemed
to have Basic Contributions made with respect to such Class C Unit equal to
(A) the aggregate portion of the Repurchase Price paid by the issuance of
Class C Units divided by (B) the number of Class C Units so issued in such
repurchase; or
(ii) after the dissolution of the LLC, the Corporation (as
successor to the rights of the LLC under Section 8(f)(ii) below) may pay,
in the form of a promissory note, a portion of the Repurchase Price for
such securities equal to (x) the aggregate Repurchase Price for the
Executive Securities to be repurchased by the LLC minus (y) the Original
Cost of such securities. Such a promissory note shall be subordinated to
all of the Corporation's senior debt obligations either then or thereafter
incurred, shall earn simple annual interest at the Base Rate, shall have
all principal and accrued interest due and payable upon maturity, and shall
mature upon the earliest to occur of the Corporation's initial Public
Offering (if such initial Public Offering has not occurred prior to the
issuance of such promissory note), a Qualified Sale of the Corporation, or
the fifth anniversary of the issuance of such promissory note.
11
<PAGE>
The purchasers of Executive Securities under this Section 3 shall be
entitled to receive customary representations and warranties from the sellers
regarding good title to such securities, free and clear of any liens or
encumbrances.
(g) Restrictions. Notwithstanding anything to the contrary contained in
this Agreement, all repurchases of Executive Securities by the LLC shall be
subject to applicable restrictions contained in the Delaware General Corporation
Law, the Delaware Limited Liability Company Act or in the LLC's or its
Subsidiaries' debt and equity financing agreements or imposed by applicable law
(such as the Hart-Scott-Rodino Antitrust Improvements Act of 1976). If any such
restrictions prohibit the repurchase of Executive Securities which are otherwise
permitted or required hereunder, the time periods provided in this Section 3
shall be suspended, and the LLC may make such repurchases as soon as it is
permitted to do so under such restrictions, unless by such time such Repurchase
Option has terminated pursuant to Section 3(h); provided that notwithstanding
the foregoing, in no event shall the time periods provided in this Section 3 be
suspended for more than 6 months.
(h) Termination of Repurchase Option. The rights under this Section 3
of the LLC and/or its assignees to repurchase Vested Securities (but not
Unvested Securities) shall terminate upon the consummation of a Public Offering.
All rights under this Section 3 of the LLC and/or its assignees to repurchase
Executive Securities (including both Vested Securities and Unvested Securities)
shall terminate upon a Qualified Sale of the Corporation.
Section 4. Restrictions on Transfer.
(a) Opinion of Valid Transfer. In addition to any other restrictions on
transfer imposed by this Agreement, the Transaction Agreement, the LLC Agreement
or the Registration Rights Agreement, no holder of Executive Securities may
sell, transfer or dispose of any Executive Securities (except pursuant to an
effective registration statement under the Securities Act) without first
delivering to the LLC an opinion of counsel (reasonably acceptable in form and
substance to the LLC) that neither registration nor qualification under the
Securities Act or applicable state securities laws is required in connection
with such sale, transfer, or other disposition.
(b) Restrictive Legend. The certificates representing Executive
Securities shall bear the following legend:
12
<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON JULY
8, 1998, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND SUCH SECURITIES MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED
BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AND
REPURCHASE OPTIONS SET FORTH IN AN EXECUTIVE PURCHASE AGREEMENT BETWEEN THE
ISSUER OF SUCH SECURITIES (THE "ISSUER") AND THE INITIAL HOLDER OF SUCH
SECURITIES. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE
ISSUER'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
The legend set forth above shall be removed from the certificates
evidencing any shares or units which cease to be Executive Securities.
(c) Retention of Executive Securities. Executive Purchaser shall not at
any time directly or indirectly sell, transfer, assign, pledge or otherwise
dispose of (whether with or without consideration and whether voluntarily or
involuntarily or by operation of law) any interest in any Executive Securities
(a "Transfer"),
13
<PAGE>
except (w) pursuant to the repurchase provisions of Section 3 hereof or of
Section 3.04 of the LLC Agreement, (x) pursuant to a Drag-Along Sale (as defined
in the Transaction Agreement) under Section 6.06 of the Transaction Agreement,
(y) after an initial Public Offering, as permitted in Section 4(c)(ii) below or
(z) pursuant to Section 4(c)(iii) below (each of (w), (x), (y) and (z) above, an
"Exempt Transfer"). The restrictions on the Transfer of Executive Securities set
forth in this paragraph (c) shall continue in effect (1) with respect to each
Executive Security following any permitted Transfer thereof pursuant to Section
4(c)(i), but shall cease upon any Exempt Transfer thereof and (2) following
termination of Executive's employment for any reason.
Notwithstanding the foregoing provisions of this clause (c):
(i) the Executive will be permitted to transfer, with or without
consideration, Executive Securities (A) pursuant to applicable laws of
descent and distribution or (B) among Executive's Family Group; provided
that the restrictions contained in this Section shall continue to be
applicable to, and bind the transferee of, the Executive Securities after
any such transfer, the transferees of such Executive Securities shall have
agreed in writing in an instrument satisfactory in form and substance to
the Board to be bound by the provisions of this Agreement, the LLC
Agreement, the Registration Rights Agreement and the Transaction Agreement
with respect to the Executive Securities so transferred, and (prior to the
death of Executive) each such transferee of Executive Securities shall have
entered into proxies and other agreements satisfactory to the Board
pursuant to which Executive shall have the sole right to vote such
Executive Securities for all purposes. For purposes of this Agreement,
"Family Group" means Executive's spouse and descendants (whether natural or
adopted), any trust which at the time of such transfer and at all times
thereafter is and remains solely for the benefit of Executive and/or
Executive's spouse and/or descendants and any family partnership the
partners of which consist solely of Executive, such spouse, such
descendants or such trusts.
(ii) After the initial Public Offering, (x) all Transfer
restrictions on Unvested Securities shall continue in effect and (y)
Transfer restrictions on Vested Securities will terminate upon the fourth
anniversary of closing (the "IPO Closing") of the initial Public Offering.
Transfers of Vested Securities prior to the fourth anniversary of the IPO
Closing will only be permitted to the following extent:
(A) At any time prior to the fourth anniversary of the IPO
Closing, Executive will be permitted to Transfer a number of
14
<PAGE>
Vested Securities that (together with Vested Securities previously
Transferred in an Exempt Transfer) in the aggregate as a percentage of
Executive Securities held by Executive as of the IPO Closing (the
"Initial CS Holdings") does not exceed the percentage of MSCP's
Investor Equity held as of the IPO Closing that has since been sold.
(B) During the two year period ending on the second
anniversary of the IPO Closing, Executive will be permitted (1) (a) to
pledge (but not otherwise Transfer) a number of Vested Securities that
(together with Vested Securities previously Transferred in an Exempt
Transfer) in the aggregate does not exceed 25% of the Initial CS
Holdings and (b) to Transfer a number of Vested Securities that does
not exceed 5% of the Initial CS Holdings in any one year period and
that does not exceed 10% of the Initial CS Holdings in such two year
period (such 5% and 10% shall be reduced by any amount previously
Transferred in an Exempt Transfer) or (2) if greater, to Transfer the
number of Vested Securities permitted to be Transferred pursuant to
clause (c)(ii)(A) above.
(C) At any time after such second anniversary of the IPO
Closing and before such fourth anniversary of the IPO Closing,
Executive will be permitted to Transfer the greater of (1) a number of
Vested Securities that (together with Vested Securities previously
Transferred in an Exempt Transfer) in the aggregate does not exceed
50% of the Initial CS Holdings and (2) the number of Vested Securities
permitted to be Transferred pursuant to clause (c)(ii)(A) above.
(iii) In addition to the foregoing permitted Transfers, the Board
may, in its discretion, permit Transfers by the Executive at any time in
the case of personal hardship (such as personal or family illness).
Section 5. Issuance of Tier I and Tier II Options.
(a) In the event of a dissolution of the LLC upon the consummation of a
Public Offering (a "Public Offering Liquidation"), if the Management Percentage
for such Public Offering Liquidation is less than 33.33% the Corporation shall
contemporaneously with such liquidation issue to each holder of Class B Units:
15
<PAGE>
(i) options (the "Tier I Options") entitling the holder to acquire,
at an exercise price per share equal to the IPO Price, a number of shares
of the Corporation's Common Stock equal to the lesser of (x) the number of
shares of Common Stock that such holder would have received under the LLC
Agreement in connection with such Public Offering Liquidation if the
Management Percentage had been 10%, and (y) the difference of (A) the
number of shares of Common Stock that such holder would have received in
connection with such Public Offering Liquidation if the Management
Percentage had been 33.33%, minus (B) the number of shares of Common Stock
that such holder actually received in such liquidation; and
(ii) if the Management Percentage for such Public Offering
Liquidation is less than 23.33%, in addition to any Tier I Options, options
(the "Tier II Options") entitling the holder to acquire, at an exercise
price per share equal to the Tier II Price, a number of shares of the
Corporation's Common Stock equal to the lesser of (x) the number of shares
of Common Stock calculated pursuant to clause (i)(x) above, and (y) the
difference of (A) the number of shares of Common Stock calculated pursuant
to clause (i)(y) above, minus (B) the number of shares of Common Stock into
which the Tier I Options issued to such holder pursuant to clause (i) above
are initially exercisable.
The Tier I Options and Tier II Options shall expire on the seventh
anniversary of their issuance.
(b) For purposes of performing the calculations in Sections 5(a)(i) and
5(a)(ii) above, a distribution of any property other than Common Stock in a
Public Offering Liquidation shall be considered to have been a distribution of a
number of shares of Common Stock equal to the quotient of (A) the aggregate fair
market value of such distributed property on the date of such liquidation, as
determined in good faith by the Board, divided by (B) the fair market value of
one share of Common Stock on the date of such liquidation, as determined in good
faith by the Board.
(c) For purposes of this section, the following terms shall have the
meanings set forth below:
"IPO Price" means the gross price per share at which shares of the
Corporation's Common Stock are initially offered and sold to the public in
connection with a Public Offering.
16
<PAGE>
"Liquidation FMV" has the meaning ascribed to such term in the LLC
Agreement.
"Management Percentage" has the meaning ascribed to such term in Section
4.01(c) of the LLC Agreement.
"Return Multiple" has the meaning ascribed to such term in Section 4.01(c)
of the LLC Agreement.
"Tier II Price" means, with respect to a particular Public Offering
Liquidation, the quotient of (x) the amount that would result in a Return
Multiple of 3.5 if the Liquidation FMV for such liquidation were equal to such
amount, divided by (y) the number of shares of Common Stock held by the LLC
immediately prior to such liquidation.
Section 6. Confidentiality, Noncompete, and Nonsolicitation.
(a) Nondisclosure and Nonuse of Confidential Information. Executive
shall not willfully disclose or use at any time, either during his employment
with the Corporation or thereafter, any Confidential Information (as defined
below) of which Executive is or becomes aware, whether or not such information
is developed by him, except to the extent that such disclosure or use is
directly related to and required by Executive's performance of duties assigned
to Executive by the LLC or the Corporation. Executive shall take all
appropriate steps to safeguard Confidential Information and to protect it
against disclosure, misuse, espionage, loss and theft. As used in this
Agreement, the term "Confidential Information" means information that is not
generally known to the public and that is used, developed or obtained by the
LLC, the Corporation, or its Subsidiaries in connection with their business,
including but not limited to (i) products or services, (ii) fees, costs and
pricing structures, (iii) designs, (iv) analysis, (v) drawings, photographs and
reports, (vi) computer software, including operating systems, applications and
program listings, (vii) flow charts, manuals and documentation, (viii) data
bases, (ix) accounting and business methods, (x) inventions, devices, new
developments, methods and processes, whether patentable or unpatentable and
whether or not reduced to practice, (xi) customers and clients and customer or
client lists, (xii) copyrightable works, (xiii) all technology and trade
secrets, (xiv) strategic plans, business plans, budgets and financial models,
and (xv) all similar and related information in whatever form. Notwithstanding
the foregoing, "Confidential Information" shall not include any information (A)
of which Executive became aware prior to his affiliation with the Corporation
and the LLC, (B) of which Executive learns from sources other than the LLC, the
Corporation or its Subsidiaries or (C) which is disclosed in a prospectus or
other documents for dissemination to the public or published in a form generally
available to the public prior to the date Executive proposes to
17
<PAGE>
disclose or use such information. Information shall not be deemed to have been
published merely because individual portions of the information have been
separately published, but only if all material portions thereof have been
published.
(b) The Corporation's Ownership of Intellectual Property.
(i) Acknowledgment of Corporation Ownership. In the event that
Executive as part of his activities on behalf of the Corporation generates,
creates, authors or contributes to any invention, design, new development,
device, product, method or process (whether or not patentable or reduced to
practice or constituting Confidential Information), any copyrightable work
(whether or not constituting Confidential Information) or any other form of
Confidential Information relating directly or indirectly to the
Corporation's business as now or hereafter conducted (collectively,
"Intellectual Property"), Executive acknowledges that such Intellectual
Property is the exclusive property of the Corporation and hereby assigns
all right, title and interest in and to such Intellectual Property to the
Corporation. Any copyrightable work prepared in whole or in part by
Executive will be deemed "a work made for hire" under Section 201(b) of the
1976 Copyright Act, and the Corporation shall own all of the rights
comprised by the copyright therein. Executive shall promptly and fully
disclose all Intellectual Property to the Corporation and shall cooperate
with the Corporation to protect the Corporation's interests in and rights
to such Intellectual Property (including, without limitation, providing
reasonable assistance in securing patent protection and copyright
registrations and executing all documents as reasonably requested by the
Corporation, whether such requests occur prior to or after termination of
Executive's employment with the Corporation).
(ii) Executive Invention. Executive understands that Section
6(b)(i) of this Agreement regarding the Corporation's ownership of
Intellectual Property does not apply to any invention for which no
equipment, supplies, facilities or trade secret information of the
Corporation were used and which was developed entirely on Executive's own
time, unless (A) the invention relates to the business of the Corporation
or to the Corporation's actual or demonstrably anticipated research or
development or (B) the invention results from any work performed by
Executive for the Corporation.
(c) Delivery of Materials upon Termination of Employment. As requested
by the Corporation from time to time and upon the termination of
18
<PAGE>
Executive's employment with the Corporation for any reason, Executive shall
promptly deliver to the Corporation all copies and embodiments, in whatever
form, of all Confidential Information and Intellectual Property in Executive's
possession or within his control (including, but not limited to, written
records, notes, photographs, manuals, notebooks, documentation, program
listings, flow charts, magnetic media, disks, diskettes, tapes and all other
materials containing any Confidential Information or Intellectual Property)
irrespective of the location or form of such material and, if requested by the
Corporation, shall provide the Corporation with written confirmation that all
such materials have been delivered to the Corporation.
(d) Noncompete. Executive acknowledges and agrees with the Corporation
and the LLC that in the course of his employment with the Corporation he shall
become familiar with the Corporation's trade secrets and with other Confidential
Information concerning the Corporation and the LLC and their respective
affiliates, that Executive's services to the Corporation and the LLC are unique
in nature and of an extraordinary value to the Corporation and the LLC, and that
the Corporation and the LLC would be irreparably damaged if Executive were to
provide similar services to any person or entity competing with the LLC or the
Corporation or engaged in a similar business. In connection with the issuance
to Executive of the Executive Securities hereunder, in consideration of and as
an inducement to the LLC's and the Corporation's entering into this Agreement
and the Corporation's agreeing to issue the Tier I and Tier II Options to
Executive and to assume the obligations of the LLC upon dissolution thereof, and
in further consideration of the Noncompete Compensation (as defined below),
Executive accordingly covenants and agrees with the Corporation and the LLC that
during the Noncompete Period (as defined below), Executive shall not, directly
or indirectly, either for himself or for or through any other individual,
corporation, partnership, joint venture or other entity, participate in any
business or enterprise conducting or proposing to conduct business in any
Covered State which engages or proposes to engage in the provision of
telecommunications services or in any other business similar to or competitive
with any business engaged in by the Corporation during the period of time in
which Executive is employed by the Corporation.
For purposes of this Agreement, (i) the term "participate in" shall
include, without limitation, having any direct or indirect interest in any
corporation, partnership, joint venture or other entity, whether as a sole
proprietor, owner, stockholder, partner, joint venturer, creditor or otherwise,
or rendering any direct or indirect service or assistance to any individual,
corporation, partnership, joint venture or other business entity (whether as a
director, officer, manager, representative, supervisor, employee, agent,
consultant or otherwise), other than ownership of up to 2% of the outstanding
stock of any class which is publicly
19
<PAGE>
traded and (ii) the term "Covered State" means (A) Connecticut, Delaware,
Illinois, Indiana, Maine, Massachusetts, Michigan, New Hampshire, New Jersey,
New York, Ohio, Pennsylvania, Rhode Island and Vermont, (B) any State in which
the Corporation is engaged in business or as to which the Corporation has at any
time had an Approved Business Plan to engage in business as of the date of
termination of Executive's employment with the Corporation and (C) any other
State for which a business plan has been submitted to the Board pursuant to the
Transaction Agreement as of or prior to the termination of Executive's
employment or for which Corporation personnel have taken substantial steps
towards completing with a view to so submitting, provided, that any such State
under this clause (C) shall cease to be a Covered State if such business plan
does not become an Approved Business Plan within the earlier of (x) 180 days
after such submission and (y) 180 days after the termination of Executive's
Employment, and, in each case, the Corporation's management and the LLC have
attempted in good faith during such period to reach agreements that would enable
such plan to become an Approved Business Plan. Executive agrees that this
covenant is reasonable with respect to its duration, geographical area and scope
and is fully enforceable.
(e) Nonsolicitation. During the Noncompete Period, Executive shall not
(i) induce or attempt to induce any employee, officer or consultant of the
Corporation or any Subsidiary to leave the employ of the Corporation or any
Subsidiary, or in any way interfere with the relationship between the
Corporation or any Subsidiary and any employee, officer or consultant thereof,
(ii) hire directly or through another entity any person who was an employee of
the Corporation or any Subsidiary at any time during the twelve months prior to
the date such person is to be so hired, or (iii) induce or attempt to induce any
customer, supplier, licensee or other business relation of the LLC, the
Corporation or any Subsidiary to cease doing business with the LLC, the
Corporation or any Subsidiary, or in any way interfere with the relationship
between any such customer, supplier, licensee or business relation and the LLC,
the Corporation and its Subsidiaries (including, without limitation, making any
negative statements or communications concerning the LLC, the Corporation or any
Subsidiary).
(f) Noncompete Period; Noncompete Compensation. The "Noncompete Period"
shall commence on the date hereof and shall continue until the later of (A) the
fourth anniversary of the date hereof and (B) the second anniversary of the date
of termination of employment; provided that the Noncompete Period shall
terminate if at any time after the date of termination the Corporation ceases to
pay Executive his Noncompete Compensation (unless Executive violates any
covenant set forth in this Section 6, in which case the Noncompete Period shall
continue even absent payment of the Noncompete Compensation). The Corporation
will notify the Executive within 30 days after
20
<PAGE>
termination of employment whether the Corporation intends to enforce this non-
compete covenant. In the event of termination of Executive's employment without
Cause, if the Corporation so notifies the Executive in writing that this
covenant will be enforced against the Executive, then the Corporation must give
the Executive 60 days' notice of the date on which this covenant will cease to
be enforced and on which the related Noncompete Compensation will cease to be
paid (provided that if Executive violates any covenant set forth in this Section
6, the Noncompete Period shall continue without the need for any further
Noncompete Compensation). "Noncompete Compensation" shall consist of 100% (or in
the case of termination with Cause, 50%) of the base salary that Executive
received as compensation from the Corporation and its Subsidiaries immediately
prior to termination (Executive's "Previous Salary") together with the
continuation of the medical benefits that the Corporation provided to Executive
immediately prior to termination (Executive's "Previous Benefits"); provided
that if at any time during the Noncompete Period Executive obtains other
employment elsewhere, Executive shall immediately notify the Corporation to such
effect, and Executive's Noncompete Compensation shall during the period of such
employment (i) be reduced (but not below zero) by Executive's compensation for
such employment (but where the Corporation pays only 50% of the Previous Salary,
as aforesaid, only reduced by the amount of compensation from such other
employment in excess of such 50% of the Previous Salary) and (ii) not include
the continued provision of medical benefits if such employment provides medical
benefits comparable to the Previous Benefits. The Noncompete Compensation shall
not constitute an obligation to pay any severance to such Executive but simply
means that so long as the Corporation pays the Noncompete Compensation up to the
time the Executive first violates any covenant set forth in this Section 6, the
Noncompete Period will remain in full force and effect for its full term.
Payment of Noncompete Compensation, if any, will be paid in accordance with the
Corporation's normal payroll practices.
(g) Judicial Modification. Executive acknowledges that the terms of
this Section 6 were negotiated in good faith by the parties hereto, are
reasonable and necessary in light of Executive's unique position, responsibility
and knowledge of the operations of the Corporation and the unfair advantage that
Executive's knowledge and expertise concerning Corporation's business would
afford a competitor of the Corporation and are not more restrictive than
necessary to protect the legitimate interests of the parties hereto. If the
final judgment of a court of competent jurisdiction, or any final non-appealable
decision of an arbitrator in connection with a mandatory arbitration, declares
that any term or provision of this Section 6 is invalid or unenforceable, the
parties agree that the court making the determination of invalidity or
unenforceability shall have the power to reduce the scope, duration, or
geographic area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable
21
<PAGE>
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment or decision may be
appealed.
(h) Dispute Resolution. Arbitration. All claims, disputes,
controversies and other matters in question arising out of or relating to this
Agreement, or to the alleged breach hereof, shall be settled by preliminary
negotiation between the Board and the Executive (the "parties") or, if such
preliminary negotiation is unsuccessful for any reason (but in any event not
later than 10 days after commencement of such negotiation), by binding
arbitration in accordance with the procedures set forth in this Section 6(h).
Without limiting the mandatory arbitration provision set forth in this Section
6(h), each of the parties hereto (i) waives the right to bring an action in any
court of competent jurisdiction with respect to any such claims, controversies
and disputes (other than any such action to enforce the award or other remedy
resulting from any arbitration pursuant to this Section 6(h) or to prevent any
arbitrator from exceeding the authority granted to the arbitrators hereunder)
and (ii) waives the right to trial by jury in any suit, action or other
proceeding brought on, with respect to or in connection with this Agreement.
(i) Binding Arbitration. Upon service of a notice of demand for
binding arbitration by any party hereto, arbitration shall be commenced and
conducted as follows:
(A) Arbitrators. All claims, disputes, controversies and
other matters (collectively "matters") in question shall be referred
to and decided and settled by a panel of three arbitrators with
experience in analyzing, understanding, and making determinations
concerning matters in the telecommunications industry, one selected by
each of the parties within 15 days after such notice of demand (with
the parties to notify each other of their respective selections at the
same time) and the third to be selected by the two arbitrators so
selected within 15 days of their selection pursuant to this subclause
(A),
(B) Cost of Arbitration. The cost of each arbitration
proceeding, including without limitation the arbitrators' compensation
and expenses, hearing room charges, court reporter transcript charges,
etc., shall be allocated among the parties based upon the percentage
which the portion of the Contested Amount not awarded to each party
bears to the amount actually contested by such party. The arbitrators
shall also award the party that
22
<PAGE>
prevails substantially in its pre-hearing position its reasonable
attorneys' fees and costs incurred in connection with the arbitration.
The arbitrators are specifically instructed to award attorneys' fees
and expenses for instances of abuse of the discovery process. All
costs of arbitration shall be paid initially 50% by the LLC (or after
the dissolution of the LLC, the Corporation) and 50% by the Executive
pending the determination of the arbitrators pursuant to the previous
sentences.
(C) Situs of Proceedings. The situs of the arbitration
shall be in New York, New York, or such other place as is mutually
agreeable to the parties.
(ii) Pre-hearing Discovery. The parties shall have the right to
conduct and enforce pre-hearing discovery in accordance with the then
current Federal Rules of Civil Procedure, subject to the following
limitations: (A) each party may serve no more than one set of
interrogatories which set shall ask no more than twenty questions; (B) each
party may depose the other party's expert witnesses who will be called to
testify at the hearing, plus up to six fact witnesses without regard to
whether they will be called to testify (each party will be entitled to a
total of not more than 24 hours of depositions of the other party's
witnesses, and not more than 6 hours with respect to any single witness);
and (C) document discovery and other discovery shall be under the control
of and enforceable by the arbitrators, and all disputes relating thereto
shall be decided by the arbitrators. Notwithstanding any contrary
foregoing provisions, the arbitrators shall have the power and authority
to, and to the fullest extent practicable shall, abbreviate arbitration
discovery in a manner which is fair to all parties in order to expedite the
conclusion of each alternative dispute resolution proceeding.
(iii) Pre-hearing Conference. Within thirty (30) days after
filing of notice of demand for binding arbitration, the arbitrators shall
hold a pre-hearing conference to establish schedules for completion of
discovery, for exchange of exhibit and witness lists, for arbitration
briefs, for the hearing, and to decide procedural matters and all other
questions that may be presented.
(iv) Hearing Procedures. The hearing shall be conducted to
preserve its privacy and to allow reasonable procedural due process. Rules
of evidence need not be strictly followed, and the hearing shall be
streamlined as follows: (A) documents shall be self-authenticating, subject
to valid objection by the opposing party; (B) expert reports, witness
23
<PAGE>
biographies, depositions and affidavits may be utilized, subject to the
opponent's right of a live cross-examination of the witness in person; (C)
charts, graphs and summaries shall be utilized to present voluminous data,
provided (1) that the underlying data was made available to the opposing
party thirty (30) days prior to the hearing, and (2) that the preparer of
each chart, graph or summary is available for explanation and live cross-
examination in person; (D) the hearing should be held on consecutive
business days without interruption to the maximum extent practicable; and
(E) the arbitrators shall establish all other procedural rules for the
conduct of the arbitration in accordance with the rules of arbitration of
the American Arbitration Association.
(v) Governing Law. This arbitration provision shall be governed
by, and all rights and obligations specifically enforceable under and
pursuant to, the Federal Arbitration Act (9 U.S.C. (S) 1, et seq.) (the
"FAA"). Notwithstanding the foregoing, this Section 6(h) shall be
construed to the maximum extent possible to comply with the laws of the
State of Delaware, including the Uniform Arbitration Act (10 Del.C. (S)
5701, et seq.) (the "Delaware Arbitration Act"). If, nevertheless, it
shall be determined by a court of competent jurisdiction that any provision
or wording of this Section 6(h), including any rules of the FAA or the
American Arbitration Association referred to therein, shall be invalid or
unenforceable under said Delaware Arbitration Act or other applicable law,
such invalidity or unenforceability should not invalidate the entire
Section 6(h). In that case, this Section 6(h) shall be construed so as to
limit any term or provision so as to make it valid or enforceable within
the requirements of the Delaware Arbitration Act or other applicable law,
and, in the event such term or provision cannot be so limited, this Section
6(h) shall be construed to omit such invalid or unenforceable term or
provision.
(vi Consolidation. No arbitration shall include, by
consolidation, joinder or in any other manner, any additional person not a
party to this Agreement (other than affiliates of any such party, which
affiliates may be included in the arbitration), except by written consent
of the parties hereto containing a specific reference to this Agreement.
(vii Award; Time Limit. The arbitrators are empowered to render
an award of general compensatory damages and equitable relief (including,
without limitation, injunctive relief), but are not empowered to award
punitive damages. The award rendered by the arbitrators (A) shall be
final; (B) shall, except as required by law, not constitute a basis for
collateral estoppel as to any issue; and (C) shall, except as required by
law, not be subject to vacation or modification. The arbitrators shall
render
24
<PAGE>
any award or otherwise conclude the arbitration no later than 120 days
after the date notice of demand for binding arbitration is given pursuant
to this Section 6(h).
(viii Confidentiality. The parties hereto will maintain the
substance of any proceedings hereunder in confidence and the arbitrators,
prior to any proceedings hereunder, will sign an agreement whereby the
arbitrator agrees to keep the substance of any proceedings hereunder in
confidence.
Section 7. Definitions.
"Approved Business Plan" has the meaning ascribed to such term in the
Transaction Agreement.
"Base Rate" means, on any date, a variable rate per annum equal to the rate
of interest most recently published by The Wall Street Journal as the "prime
rate" at The Chase Manhattan Bank.
"Basic Contributions" has the meaning ascribed to such term in the LLC
Agreement.
"Board" means the board of representatives of the LLC (or, after the
dissolution of the LLC, the board of directors of the Corporation).
"Cause" means (i) Executive's theft or embezzlement, or attempted theft or
embezzlement, of money or property of the Corporation or the LLC, Executive's
perpetration or attempted perpetration of fraud, or Executive's participation in
a fraud or attempted fraud, on the Corporation or the LLC, or Executive's
unauthorized appropriation of, or attempt to misappropriate, any tangible or
intangible assets or property of the Corporation or the LLC, (ii) any act or
acts of disloyalty, misconduct or moral turpitude by Executive which the Board
determines in good faith has been or is likely to be demonstrably injurious to
the interest, property, operations, business or reputation of the Corporation or
the LLC, or Executive's conviction of a crime other than minor traffic
violations or other similar minor offenses, (iii) Executive's repeated
intentional refusal or willful failure (other than by reason of Disability) to
carry out reasonable instructions by his superiors or the Board or the
Corporation's Board of Directors or (iv) Executive's breach of any provision of
Section 6.
"Class A Units" has the meaning ascribed to such term in the LLC Agreement.
25
<PAGE>
"Class B Units" has the meaning ascribed to such term in the LLC Agreement.
"Class C Units" has the meaning ascribed to such term in the LLC Agreement.
"Class D Units" has the meaning ascribed to such term in the LLC Agreement.
"Common Stock" means the Corporation's common stock, par value $0.01 per
share.
"Disability" means (i) any permanent physical or mental incapacity or
disability rendering the Executive unable or unfit to perform effectively the
duties and obligations of his employment or to participate effectively and
actively in the management of the Corporation, or (ii) any illness, accident,
injury, physical or mental incapacity or other disability, where such condition
has rendered the Executive unable or unfit to perform effectively the duties and
obligations of his employment or to participate effectively and actively in the
management of the Corporation for a period of at least 90 consecutive days or
four months in any twelve-month period (in either case, as determined in the
good faith judgment of the Board).
"Executive Purchaser" means Executive and any Person who acquires Executive
Securities pursuant to Section 4(c)(i) and has executed a counterpart of this
Agreement, the LLC Agreement and the Transaction Agreement, agreeing to be bound
by the terms of each such agreement.
"Executive Securities" means (i) the Class B Units issued to the Executive
hereunder (but not including any Class C Units or Class D Units issued by the
LLC in exchange for such Class B Units), (ii) upon dissolution of the LLC, any
securities of the Corporation distributed in respect of the securities referred
to in clause (i) above pursuant to such dissolution, (iii) any Tier I Options or
Tier II Options issued to any holder of Executive Securities hereunder, (iv) any
other securities of the LLC or the Corporation hereafter acquired by Executive,
and (v) any securities issued directly or indirectly with respect to the
foregoing securities by way of a split, dividend, or other division of
securities, or in connection with a combination of securities, recapitalization,
merger, consolidation, or other reorganization, or upon conversion or exercise
of any of the foregoing securities. Executive Securities for purposes of this
Agreement shall not include any securities issued to any other executive of the
Corporation under any other agreement. As to any particular securities
constituting Executive Securities, such
26
<PAGE>
securities shall cease to be Executive Securities when they have been (a)
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering them, (b) distributed to the public
through a broker, dealer or market maker pursuant to Rule 144 under the
Securities Act (or any similar provision then in force), (c) repurchased by any
holder of Class A Units, or by the LLC (including in exchange for Class C Units
or Class D Units), the Corporation or any Subsidiary thereof or (d) Transferred
pursuant to an Exempt Transfer under Section 4.
"Good Reason" means (i) a substantial permanent reduction in the scope of
Executive's authority or level of responsibility from that in effect as of the
date hereof for any reason unrelated to Executive's Disability, which has not
been revised by the Corporation within 90 days after timely written notice to
the Corporation containing a reasonably detailed description of such reduction;
or (ii) a relocation of Executive's principal place of employment from its then
existing location to a site which is more than 100 miles from such location.
"Investor Equity" has the meaning ascribed such term in the Transaction
Agreement.
"LLC Agreement" means the limited liability company agreement dated as of
the date hereof, entered into by and among the members of the LLC, as amended
from time to time in accordance with its terms.
"Management Equity" has the meaning ascribed to such term in the
Transaction Agreement.
"MSCP" has the meaning ascribed such term in the LLC Agreement.
"Original Cost" means, at any given time, (i) with respect to any Class B
Units, the total Basic Contributions made with respect to such Class B Units
pursuant to the LLC Agreement prior to such time, (ii) with respect to any
Common Stock, the Basic Contribution attributable to such Common Stock based on
the number of shares of Common Stock received by Executive upon the dissolution
of the LLC, and (iii) with respect to any other securities, the original price
paid upon issuance of such securities.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
27
<PAGE>
"Public Offering" means any underwritten sale of the Corporation's common
stock pursuant to an effective registration statement under the Securities Act
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 or financing for a merger or acquisition, and (ii) any
issuance of common stock or rights to acquire common stock to employees of the
Corporation or its Subsidiaries as part of an incentive or compensation plan.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the date hereof, by and between the Corporation, the holders of
Investor Equity and the holders of Management Equity, as amended from time to
time in accordance with the terms thereof.
"Securities Act" means the Securities Act of 1933, as amended, and
applicable rules and regulations thereunder.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, and applicable rules and regulations thereunder.
"Subsequent Contributions" has the meaning ascribed to such term in the
Transaction Agreement.
"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, partnership, association or other business entity of which
(i) if a corporation, a majority of the total voting power of shares of stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or losses or
shall be or control any managing director, managing member, manager or general
partner of such limited liability company, partnership, association or other
business entity.
28
<PAGE>
"Transaction Agreement" means the Transaction Agreement dated as of the
date hereof, by and between the Corporation and the LLC and the holders of
interests in the LLC, as amended from time to time in accordance with the terms
thereof.
"Vesting Termination Breach" means (i) any breach by Executive of Section
6(a), Section 6(d) or Section 6(e) or (ii) any breach by Executive of any other
provision of Section 6 which is material or is intentionally and knowingly
committed by Executive.
Section 8. Miscellaneous Provisions.
(a Further Assurances; Voting Proxy. As a condition to the LLC's and
the Corporation's entering into this Agreement and the LLC's issuance of
Executive Securities to the Executive Purchasers, and as further consideration
therefor:
(i Executive hereby unconditionally guarantees the full and
prompt performance of each Executive Purchaser's obligations under this
Agreement and under each of the agreements contemplated hereby to which
such Executive Purchaser is a party, and Executive agrees that he will take
all necessary or desirable actions to ensure such performance as are
reasonably requested by the LLC or the Corporation. Executive further
agrees that he will not provide any directions to an Executive Purchaser
that are contrary to any obligation imposed on such Executive Purchaser
under this Agreement or under such other agreements, and that Executive
will not fail to provide any directions to an Executive Purchaser if such
failure would cause an Executive Purchaser not to satisfy its obligations
hereunder or thereunder. This guarantee shall be irrevocable with respect
to each Executive Security held by an Executive Purchaser (and shall
survive any transfer thereof, or the death, disability, incompetency, or
bankruptcy of such Executive Purchaser) until such time as such Executive
Security is transferred in accordance with the terms hereof to a Person
other than a member of Executive's Family Group, at which time this
guarantee shall be deemed revoked with respect to such transferred security
(but not with respect to any other Executive Securities). No invalidity,
irregularity or unenforceability of this Agreement or such other agreements
by reason of an Executive Purchaser's incapacity, minor status,
incompetency, bankruptcy, insolvency, or other similar occurrence shall
impair, affect or be a defense to the obligations of Executive under this
guarantee.
29
<PAGE>
(ii Each Executive Purchaser (other than Executive) hereby
appoints Executive as his true and lawful proxy and attorney-in-fact, with
full power of substitution, to vote all of such Executive Purchaser's
Executive Securities on all matters to be voted on by the holders of such
securities (whether as a member vote, a shareholder vote, an approval right
under this Agreement or the other agreements contemplated hereby, or
otherwise). These proxies and powers granted by each Executive Purchaser
pursuant to this Section 8 are coupled with an interest, and are given to
secure such Executive Purchasers' obligations under this Agreement and the
other agreements contemplated hereby to which the Executive Purchasers are
parties. Such proxies and powers shall be irrevocable with respect to each
Executive Security held by an Executive Purchaser (and shall survive and
not be affected by any transfer thereof, or the death, disability,
incompetency, or bankruptcy of such Executive Purchaser) until such time as
such Executive Security is transferred in accordance with the terms hereof
to a Person other than a member of Executive's Family Group, at which time
such proxy shall be deemed revoked with respect to such transferred
security (but not with respect to any other Executive Securities).
(b Transfers in Violation of Agreement. Any Transfer or attempted
Transfer of any Executive Securities in violation of any provision of this
Agreement shall be void, and none of the LLC, the Corporation, or any Subsidiary
thereof shall record such purported Transfer on its books or treat any purported
transferee of such Executive Securities as the owner of such securities for any
purpose.
(c Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(d Complete Agreement. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the
30
<PAGE>
parties, written or oral, which may have related to the subject matter hereof in
any way.
(e Counterparts. This Agreement may be executed in separate
counterparts, none of which need contain the signature of more than one party
hereto but each of which shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(f Successors and Assigns. (i) Except as otherwise provided herein,
this Agreement shall bind the parties hereto and their respective successors and
permitted assigns and shall inure to the benefit of and be enforceable by the
parties hereto and their respective successors and permitted assigns whether so
expressed or not.
(ii Each of the Corporation, the LLC, the Executive Purchaser, and
each holder of Executive Securities hereby acknowledges that immediately upon
and after the dissolution of the LLC, (A) all contractual obligations and duties
of the LLC hereunder shall thereafter bind and be enforceable against the
Corporation, (B0 all rights and powers granted to the LLC hereunder (including,
without limitation, the repurchase rights set forth in Section 3) shall inure to
the benefit of and be enforceable by the Corporation, (C) all references to the
LLC shall thereafter be deemed to be references to the Corporation, and (D)
except if the context clearly otherwise requires, this Agreement shall
thereafter operate and be construed as if the word "Corporation" were
substituted for the word "LLC" in each such instance.
(g Governing Law; Submission to Jurisdiction. This Agreement shall be
governed by, and construed under, the laws of the State of Delaware, all rights
and remedies being governed by said laws, without regard to conflict of law
principles. Each of the parties hereto agrees (i) that this Agreement involves
at least $100,000 and (ii) that this Agreement has been entered into by the
parties hereto in express reliance upon 6 Del.C. (S) 2708. Each party hereby
irrevocably and unconditionally agrees (a) to be subject to the jurisdiction of
the courts of the State of Delaware and the federal courts sitting in the State
of Delaware or in the County of New York in the State of New York and (b) to the
extent such party is not otherwise subject to service of process in the State of
31
<PAGE>
Delaware, to appoint and maintain an agent in the State of Delaware as such
party's agent for acceptance of legal process, and that service made pursuant to
(b) above shall have the same legal force and effect as if served upon said
party personally within the State of Delaware. For purposes of implementing the
parties' agreement to appoint and maintain an agent for service of process in
the State of Delaware, each such party that has not as of the date hereof
already duly appointed such an agent does hereby appoint RL&F Service Corp., One
Rodney Square, 10th Floor, Wilmington, New Castle County, Delaware 19801, as
such agent.
(h Remedies. Each of the parties to this Agreement (including any
holder of Investor Equity or employee of the Corporation to which the LLC
assigns any of its repurchase rights under Section 3 hereof) shall be entitled
to enforce its rights under this Agreement specifically, to recover damages and
costs (including reasonable attorney's fees and expenses) caused by any breach
of any provision of this Agreement and to exercise all other rights existing in
its favor. The parties hereto agree and acknowledge that money damages would
not be an adequate remedy for any breach of the provisions of this Agreement and
that any party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or deposit) for specific
performance and/or other injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement.
(i Amendment, Modification, or Waiver. The provisions of this
Agreement may be amended, modified, or waived only with the prior written
consent of the LLC and the Executive.
(j Third-Party Beneficiaries. The parties hereto acknowledge and
agree that certain provisions of this Agreement are intended for the benefit of
certain holders of Investor Equity or employees of the Corporation to which the
LLC assigns any of its repurchase rights under Section 3 hereof, that such
Persons are third-party beneficiaries of this Agreement and that the provisions
of this Agreement shall be enforceable by such Persons as provided herein.
(k Business Days. If any time period for giving notice or taking
action hereunder expires on a day which is a Saturday, Sunday or legal holiday
in the State of New York, the time period shall be automatically extended to the
business day immediately following such Saturday, Sunday or holiday.
(l Descriptive Headings; Interpretation; No Strict Construction. The
descriptive headings of this Agreement are inserted for convenience only and do
not constitute a substantive part of this Agreement. Whenever required by the
context, any pronoun used in this Agreement shall include the corresponding
masculine, feminine or neuter forms, and the singular forms of nouns, pronouns,
and verbs shall include the plural and vice versa. Reference to any agreement,
document, or instrument means such agreement, document, or instrument as
32
<PAGE>
amended or otherwise modified from time to time in accordance with the terms
thereof, and if applicable hereof. The use of the words "include" or "including"
in this Agreement shall be by way of example rather than by limitation. The use
of the words "or," "either" or "any" shall not be exclusive. The parties hereto
have participated jointly in the negotiation and drafting of this Agreement. In
the event an ambiguity or question of intent or interpretation arises, it is the
intent of the parties that 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 the authorship of any of the
provisions of this Agreement.
(m Notices. All notices, requests or other communications to any
party hereunder shall be in writing (including facsimile transmission) and shall
be given,
if to Executive, to:
Choice One Communications Inc.
333 West Commercial Street
Suite 2500
East Rochester, New York 14455
if to the LLC, to:
c/o Morgan Stanley Capital Partners III, L.P.
1221 Avenue of the Americas
33rd Floor
New York, New York 10020
Attention: John B. Ehrenkranz
Facsimile: (212) 762-7951
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Louis L. Goldberg
Facsimile: (212) 450-4800
33
<PAGE>
and to:
Fleet Equity Partners VI, L.P.
50 Kennedy Plaza
12th Floor
Providence, Rhode Island 02903
Attention: Robert M. Van Degna
Facsimile: (401) 278-6387
with a copy to:
Paul, Hastings, Janofsky & Walker, LLP
399 Park Avenue
New York, New York 10022-4697
Attention: Neil A. Torpey
Facsimile: (212) 319-4090
and to:
Waller-Sutton Media Partners, L.P.
555 North Lane
Suite 6150
Conshohocken, PA 19428
Attention: Mr. Bruce Hernandez
Facsimile: (610) 397-1014
with a copy to:
Rubin Baum Levin Constant & Friedman
30 Rockefeller Plaza
New York, New York 10112
Attention: Jonathan D. Drucker
Facsimile: (212) 698-7825
34
<PAGE>
if to the Corporation, to:
Choice One Communications Inc.
333 West Commercial Street
Suite 2500
East Rochester, New York 14445
Attention: Steve Dubnik
Facsimile: (716) 385-0609
with a copy to:
Nixon, Hargrave, Devans & Doyle LLP
Clinton Square
P.O. Box 1051
Rochester, New York 14603-1051
Attention: James A. Locke, III
Facsimile: (716) 263-1600
and if to any member of the LLC or to any other holder of Common Stock, to the
address or facsimile set forth on the books of the LLC or the Corporation or any
other address or facsimile number as a party may hereafter specify for such
purpose to the LLC. Notwithstanding the foregoing, no holder of Investor Equity
or its counsel shall be entitled to notice if such holder holds less than 3% in
aggregate of all Investor Equity then outstanding.
All such notices, requests and other communications shall be deemed
received on the date of receipt by the recipient thereof if received prior to 5
p.m. in the place of receipt and such day is a business day in the place of
receipt. Otherwise, any such notice, request or communication shall be deemed
not to have been received until the next succeeding business day in the place of
receipt.
* * * *
35
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
CHOICE ONE COMMUNICATIONS L.L.C.
By: /s/ Steve M. Dubnik
------------------------------------------
Its: Authorized Person
-----------------------------------------
CHOICE ONE COMMUNICATIONS INC.
By: /s/ Steve M. Dubnik
------------------------------------------
Its: President and Chief Executive Officer
-----------------------------------------
EXECUTIVE
By: /s/ Mae Squier-Dow
---------------------------------------------
36
<PAGE>
Execution of Counterpart Agreeing to be Bound to
Executive Purchase Agreement by Executive Purchaser
Name of Individual:
-----------------------------
Signature:
--------------------------------------
Date:
37
<PAGE>
EXHIBIT 10.17
EXECUTIVE PURCHASE AGREEMENT
THIS EXECUTIVE PURCHASE AGREEMENT (this "Agreement") is made as of July 8,
1998, by and between Choice One Communications L.L.C., a Delaware limited
liability company (the "LLC"), Choice One Communications Inc., a Delaware
corporation (the "Corporation"), and Phillip Yawman ("Executive"). Capitalized
terms used but not otherwise defined herein have the meanings ascribed to such
terms in Section 7 hereof.
WHEREAS, Executive desires to make an investment in the Corporation to be
held initially through an interest in the LLC, and the LLC, the Corporation and
the Executive desire to provide for certain rights and obligations relating to
such investment and to Executive's employment with the Corporation;
NOW, THEREFORE, in consideration of the mutual promises made herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
Section 1. Purchase and Sale of Executive Securities.
(a) Initial Capital Contribution and Issuance of Executive Securities.
Upon execution of this Agreement, Executive shall make a capital contribution
to the LLC in the amount of $27,002.70 (Executive's "Initial Capital
Contribution") in exchange for, and the LLC shall issue to Executive, 270,027
Class B Units having the rights, obligations, and preferences set forth with
respect thereto in the LLC Agreement. The Executive shall make such Initial
Capital Contribution to the LLC by delivery to the LLC of a cashier's or
certified check, or wire transfer of immediately available funds to an account
designated by the LLC, in the aggregate amount equal to such Executive's Initial
Capital Contribution. The aggregate amount of the Initial Capital Contribution
made with respect to each Class B Unit issued hereunder shall be considered a
Basic Contribution made with respect to such Class B Unit. Subsequent
Contributions to the LLC shall be made by the Executive in respect of such Class
B Units on the terms and conditions set forth in the LLC Agreement.
(b) Representations and Warranties of Executive. In connection with the
Executive's Initial Capital Contribution and the issuance of the Executive
Securities hereunder, the Executive Purchaser represents and warrants to each of
the LLC and the Corporation that:
(i) The Executive Securities to be acquired by the Executive
Purchaser pursuant to this Agreement shall be acquired for the Executive
Purchaser's own account and not with a view to, or the intention of,
<PAGE>
-2-
distribution thereof in violation of the Securities Act or any applicable
state securities laws, and the Executive Securities shall not be disposed
of in contravention of the Securities Act or any applicable state
securities laws.
(ii) Executive is a management employee of the Corporation, and
the Executive Purchaser is sophisticated in financial matters and is able
to evaluate the risks and benefits of the investment in the Executive
Securities.
(iii) Executive Purchaser is able to bear the economic risk of his
investment in the Executive Securities for an indefinite period of time and
is aware that transfer of the Executive Securities may not be possible
because (A) such transfer is subject to contractual restrictions on
transfer set forth herein and in the Transaction Agreement, and (B) the
Executive Securities have not been registered under the Securities Act or
any applicable state securities laws and, therefore, cannot be sold unless
subsequently registered under the Securities Act and such applicable state
securities laws or an exemption from such registration is available.
(iv) Executive has had an opportunity to ask questions and receive
answers concerning the terms and conditions of the offering of the
Executive Securities issued hereunder and has had full access to such other
information concerning the Corporation and this investment opportunity as
he has requested.
(v) Each of this Agreement, the LLC Agreement, the Transaction
Agreement, and the other agreements contemplated thereby of even date
therewith to which Executive Purchaser is a party, constitute the legal,
valid and binding obligations of the Executive Purchaser, enforceable
against the Executive Purchaser in accordance with its terms; Executive is
ready, willing and able as of the date hereof to commence and to continue
employment with the Corporation in the office to which Executive was
appointed by the Board; and the execution, delivery and performance of such
agreements by Executive, and Executive's employment with the Corporation
and activities (including recruiting activities) on behalf of the
Corporation, do not and will not conflict with, violate or breach any
agreement, contract or instrument (including, without limitation, any
noncompete agreement or restrictive covenant instrument) to which Executive
is a party or by which Executive is bound or any judgment, order or decree
to which Executive is subject.
(c) Acknowledgment of At-Will Employment. As an inducement to the LLC
and the Corporation to enter into this Agreement, and as a condition thereto,
<PAGE>
-3-
the Executive acknowledges and agrees that no agreement or arrangement between
the Executive and the Corporation or the LLC (including, without limitation, the
issuance of the Executive Securities to the Executive and the execution and
delivery of this Agreement) shall entitle Executive to remain in the employment
of the Corporation and its Subsidiaries or affect the right of the Corporation
or its Subsidiaries to terminate Executive's employment at any time or for any
reason.
Section 2. Vesting of Executive Securities.
(a) Vesting Schedule. All Executive Securities shall initially be
Unvested Securities (as defined below). Except as otherwise provided herein, an
amount of Unvested Securities shall vest on the date hereof and on each of the
first four anniversaries of the date hereof, such that the Executive Securities
shall be vested on each such date in accordance with the following schedule:
----- --------------------------
Date
Cumulative Percentage of
Executive Securities
Vested
The date hereof 20%
The first anniversary of the date hereof 40%
The second anniversary of the date hereof 60%
The third anniversary of the date hereof 80%
The fourth anniversary of the date hereof 100%
Notwithstanding the foregoing sentence, and except as otherwise provided in
clauses (b)-(e) below or in the next sentence (in the case of termination
without Cause or for Good Reason), the above vesting schedule shall cease and no
Unvested Securities shall vest after the date on which Executive's employment
with the Corporation and its Subsidiaries terminates for any reason. If
Executive's employment is terminated by the Corporation without Cause or if
Executive terminates his employment for Good Reason, the Executive Securities
shall thereafter, if necessary, continue to vest until the next anniversary of
the date hereof next succeeding such termination (such that the Executive will
be vested in 20% more of the Executive Securities than at the time of such
termination) and if at least 50% of the Executive Securities have not been
vested as of such next anniversary, then vesting will continue to the extent
necessary that at least 50% of the Executive Securities become vested, so long
as Executive has not committed a Vesting Termination Breach (upon which breach
the vesting schedule shall
<PAGE>
-4-
immediately cease, and no Unvested Securities shall vest on or after the date of
the first such breach). In the event the LLC or the Corporation has alleged that
Executive has committed a Vesting Termination Breach, Executive disputes such
allegation, and the matter is subject to the dispute resolution provisions set
forth in Section 6, vesting shall be tolled upon the date of the allegation of
such breach; provided that (i) if it is ultimately resolved under Section 6 that
Executive has committed a Vesting Termination Breach, the tolling shall become a
permanent cessation such that vesting shall have forever ceased upon the date of
such allegation, and (ii) if it is ultimately resolved under Section 6 that
Executive did not commit a Vesting Termination Breach, the number of Vested
Securities shall be as though there had never been such alleged breach or any
tolling of vesting. Executive Securities which have become vested pursuant to
this Agreement are referred to herein as "Vested Securities," and all other
Executive Securities are referred to herein as "Unvested Securities."
(b) Acceleration upon a Qualified Sale of the Corporation. Unvested
Securities subject to vesting pursuant to Section 2(a) shall become Vested
Securities upon the consummation of a Qualified Sale of the Corporation (as
defined below) so long as Executive is employed by the Corporation or any of its
Subsidiaries on the date of such sale (or, if Executive's employment was
terminated by the Corporation without Cause or by Executive for Good Reason, so
long as Executive has not committed a Vesting Termination Breach prior to the
date of such sale). A "Qualified Sale of the Corporation" means either (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of the
Corporation and its Subsidiaries, taken as a whole, or (ii) a transaction or
series of transactions (including by way of merger, consolidation, or sale of
stock, but not including a Public Offering) the result of which is that the
holders of the Corporation's outstanding voting stock immediately prior to such
transaction are after giving effect to such transaction no longer, in the
aggregate, the "beneficial owners" (as such term is defined in Rule 13d-3 and
Rule 13d-5 promulgated under the Securities Exchange Act), directly or
indirectly through one or more intermediaries, of more than 50% of the voting
power of the outstanding voting stock of the Corporation, in each case where the
consideration for such assets or stock in such sale or transfer consists of cash
and/or publicly traded equity securities for such assets or for at least 50% of
the outstanding stock of the Corporation (e.g., 100% of such consideration would
have to consist of cash and/or publicly traded equity securities if only 50.01%
of such stock were sold in such transaction).
(c) Acceleration upon a Public Offering. Upon the consummation of the
Corporation's initial Public Offering, and so long as Executive is employed by
the Corporation or any of its Subsidiaries on the closing date of such offering
(or, if Executive's employment was terminated by the Corporation without Cause
or by
<PAGE>
-5-
the Executive for Good Reason, so long as Executive has not committed a
Vesting Termination Breach prior to such closing date), there will vest the
amount of Unvested Securities which were scheduled to vest within the 365 days
following such closing date (and the remaining Unvested Securities subject to
vesting pursuant to Section 2(a), if any, shall continue to vest 20% on each
anniversary of the date hereof in accordance with clause (a) above, such that
the vesting schedule set forth in Section 2(a) above shall have been effectively
accelerated by one year).
(d) Acceleration upon Death or Disability. All Unvested Securities
shall become Vested Securities if Executive's employment with the Corporation or
any of its Subsidiaries terminates by reason of Executive's death or Disability.
(e) Other Acceleration. Any Unvested Securities which the LLC (or its
assignees) has not elected to repurchase in the Repurchase Notice (as defined
below) (including Unvested Securities originally included in the Repurchase
Notice, but for which the election to repurchase was rescinded, pursuant to the
terms of Section 3, by the LLC and/or its assignees having made such election)
shall thereafter be deemed Vested Securities, but shall continue to be subject
to Section 4.
Section 3. LLC's Repurchase Option.
<PAGE>
-6-
(a) The Repurchase Option. The LLC will be entitled to repurchase at
the LLC's election pursuant to the terms and conditions set forth in this
Section 3 (the "Repurchase Option"), (i) upon (x) the termination of Executive's
employment with the Corporation and its Subsidiaries for any reason other than a
termination by the Corporation without Cause or by the Executive for Good
Reason, or (y) if Executive's employment is terminated by the Corporation
without Cause or by the Executive for Good Reason, upon Executive's commission
of a Vesting Termination Breach, all the Executive Securities then in existence
(whether held by Executive or one or more of the other Executive Purchasers)
and/or (ii) in the event of a termination without Cause or for Good Reason and
prior to commission of a Vesting Termination Breach, such of the Unvested
Securities as are not subject to continued vesting pursuant to Section 2(a) (any
such circumstance permitting repurchase, a "Repurchase Event"). In the event
that the LLC or the Corporation has alleged that Executive has committed a
Vesting Termination Breach, Executive disputes such allegation, and the matter
is subject to the dispute resolution provisions set forth in Section 6, the
closing of the repurchase of Executive Securities permitted to be repurchased
only upon such breach under this Section 3 shall not occur unless and until it
is ultimately determined that Executive committed a Vesting Termination Breach;
provided that during the pendency of such proceeding, such Executive Securities
specified in the Repurchase Notice (as defined below) shall not be transferred
by any holder thereof to any other Person.
(b) Repurchase Price. The repurchase price (the "Repurchase Price") for
50% of the Vested Securities to be repurchased shall be the Fair Market Value of
such securities. The Repurchase Price of the remaining 50% of the Vested
Securities and of all of the Unvested Securities to be repurchased shall be the
lesser of (x) the Fair Market Value of such Securities, and (y) the Original
Cost of such Securities (with securities having the lowest Original Cost subject
to repurchase prior to securities with a higher Original Cost).
(c) Exercise of Repurchase Option. The LLC (by action of the Board) may
elect to purchase all or any portion of the Executive Securities permitted to be
repurchased by delivering written notice (the "Repurchase Notice") to the holder
or holders of the Executive Securities within 90 days after the occurrence of
the applicable Repurchase Event. The Repurchase Notice shall set forth the
amount, type, and class of Executive Securities (including, if applicable, the
amount of Unvested Securities and/or Vested Securities) to be acquired from each
such holder (which need not be pro rata among type of security or among Vested
Securities and Unvested Securities). The Executive Securities to be repurchased
by the LLC shall first be satisfied to the extent possible from the Executive
Securities held by Executive at the time of delivery of the Repurchase Notice.
If the amount of Executive Securities then held by Executive is less than the
total
<PAGE>
-7-
amount of Executive Securities that the LLC has elected to purchase, the LLC
shall purchase the remaining securities elected to be purchased from the other
holder(s) of Executive Securities (to whom Executive has transferred Executive
Securities pursuant to Section 4(c)(i)), pro rata according to the amount of
Executive Securities held of record by each such other holder at the time of
delivery of the Repurchase Notice. The amount of Unvested Securities and Vested
Securities to be repurchased hereunder shall be deemed to be allocated among
Executive and the other holders of repurchased Executive Securities (to whom
Executive has transferred Executive Securities pursuant to Section 4(c)(i)), if
any, pro rata according to the amount of Executive Securities to be purchased
from such persons.
(d) Assignment by the LLC. The LLC, by action of the Board, will have
the right to assign all or any portion of its repurchase rights hereunder to the
holders of Investor Equity (which assignment, if made to the holders of Investor
Equity, would be pro rata on the basis of the Investor Equity held by each such
holder) and/or to any executive employee of the Corporation or any of its
Subsidiaries. Notwithstanding the foregoing, the LLC may not assign to any
Person its right to pay a portion of the Repurchase Price for Executive
Securities repurchased hereunder in the form of Class C Units (or, after the
dissolution of the LLC, a promissory note).
(e) Fair Market Value of Repurchased Securities. The "Fair Market
Value" of Executive Securities subject to repurchase hereunder shall be
determined in accordance with this paragraph (e) as follows:
(i) The Board of the LLC and the holders of a majority of the
Executive Securities to be repurchased shall attempt in good faith to agree
on the Fair Market Value of the Executive Securities. Any agreement
reached by such Persons shall be final and binding on all parties hereto.
(ii) If such Persons are unable to reach such agreement within 20
days after the giving of a Repurchase Notice, the Fair Market Value of any
Executive Securities that are publicly traded shall be the average, over a
period of 21 days consisting of the date of the applicable Repurchase Event
and the 20 consecutive business days prior to that date, of the average of
the closing prices of the sales of such securities on all securities
exchanges on which such securities may at that time be listed, or, if there
have been no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of
such day, or, if on any day such securities are not so listed, the average
of the representative bid and asked prices quoted in the Nasdaq System as
of 4:00 P.M., New York time, or, if on any day such securities are not
quoted
<PAGE>
-8-
in the Nasdaq System, the average of the highest bid and lowest asked
prices on such day in the domestic over-the-counter market as reported by
the National Quotation Bureau Incorporated, or any similar successor
organization.
(iii) If such Persons are unable to reach agreement pursuant to
paragraph (ii) within 20 days after the giving of a Repurchase Notice, and
to the extent any Executive Securities are not publicly traded:
(A) The Board of the LLC and the holders of a majority of the
Executive Securities shall each, at the same time, within 10 days
thereafter, choose one investment banker or other appraiser with
experience in analyzing and making determinations concerning matters
in the telecommunications industry and in valuing entities like the
LLC (including the distribution arrangements of the type described in
the LLC Agreement), and, within 15 days of their selection, the two
investment bankers/appraisers so selected shall together select a
third investment banker/appraiser similarly qualified.
(B) The three investment bankers/appraisers shall first
appraise the fair market value of the Corporation (based on the
assumption of an orderly, arm's length sale to a willing unaffiliated
buyer). Each of the three investment bankers/appraisers shall then
independently appraise the fair market value of such non-publicly-
traded Executive Securities as follows:
(1) the fair market value of each share of Common Stock
shall be equal to the fair market value of the Corporation
divided by the total number of shares of Common Stock outstanding
on the date of the applicable Repurchase Event (determined on a
fully diluted basis (x) with respect to all outstanding
securities convertible into the Corporation's Common Stock,
assuming the conversion of such convertible securities (without
regard to any conditions or other restrictions on such
conversion), and (y) with respect to all outstanding options,
warrants and other rights or securities exercisable or
exchangeable for shares of the Corporation's Common Stock, in
accordance with the Treasury Stock Method under generally
accepted accounting principles for determination of fully diluted
earnings per share);
<PAGE>
-9-
(2) the fair market value of each Class B Unit shall be
equal to the fair market value of the assets (as determined in
accordance with paragraphs (B)(1) and (B)(3)) that would be
distributed according to the terms of the LLC Agreement with
respect to such Class B Unit if the LLC were dissolved on the
date of the applicable Repurchase Event; and
(3) the fair market value of any other non-publicly-
traded Executive Securities (or, for purposes of paragraph (B)(2)
above, any other assets) shall be the fair market value of such
securities (or other assets), determined on the basis of an
orderly, arm's length sale to a willing, unaffiliated buyer,
taking into account all relevant factors determinative of value.
<PAGE>
-10-
The three investment bankers/appraisers shall, within thirty days
of their retention, provide the written results of such
appraisals to the LLC and/or its assignees and to each of the
holders of Executive Securities.
(C) The "Fair Market Value" of the non-publicly-traded
Executive Securities to be repurchased shall be the average of the two
appraisals closest to each other, and such amount shall be final and
binding on all parties hereto; provided that the LLC (and/or any
assignee) may at any time within ten days after receiving written
notice of such determination rescind its prior exercise of the
Repurchase Option by giving written notice of such revocation to all
of the holders of the Executive Securities to be repurchased, and upon
such revocation the revoking party will be treated as if it had never
exercised such Repurchase Option (it being understood that such
revoking parties shall thereafter have no right to re-exercise such
Repurchase Option).
(D) The costs of such appraisal shall be allocated between
the parties based on the percentage which the portion of the Contested
Amount not awarded to each party bears to the amount actually
contested by such party; provided that if any parties revoke their
exercise of the Repurchase Option pursuant to paragraph (C) above,
such revoking parties shall bear (pro rata among such revoking parties
based on the number of Executive Securities with respect to which each
such revoking party had initially exercised its Repurchase Option) any
appraisal costs that would be allocated to the holder(s) of Executive
Securities under this paragraph (D). "Contested Amount" means the
difference between the valuations of the disputing parties.
<PAGE>
-11-
(f) Closing of the Repurchase. Within 10 business days after the
Repurchase Price for the Executive Securities to be repurchased has been
determined, the LLC shall send a notice to each holder of Executive Securities
setting forth the consideration to be paid for such securities and the time and
place for the closing of the transaction, which date shall not be more than 30
days nor less than five days after the delivery of such notice. At such
closing, the holders of Executive Securities shall deliver all certificates (if
any exist) evidencing the Executive Securities to be repurchased to the LLC
(and/or any assignees of the LLC's repurchase right), and the LLC (and/or any
assignees) shall pay for the Executive Securities to be purchased pursuant to
the Repurchase Option by delivery of a check or wire transfer of immediately
available funds in the aggregate amount of the Repurchase Price for such
securities; provided that in the event the Board determines in its good faith
discretion that the LLC is not in a position to pay in cash any or all of the
Repurchase Price for Executive Securities to be repurchased by it:
(i) prior to the dissolution of the LLC, the LLC may pay a portion
of the Repurchase Price for such securities equal to (x) the aggregate
Repurchase Price for the Executive Securities to be repurchased by the LLC
minus (y) the Original Cost of such securities, by issuing in exchange for
such securities an equal number of the LLC's Class C Units (having the
rights and preferences set forth in the LLC Agreement), and for purposes of
the LLC Agreement each such Class C Unit shall as of its issuance be deemed
to have Basic Contributions made with respect to such Class C Unit equal to
(A) the aggregate portion of the Repurchase Price paid by the issuance of
Class C Units divided by (B) the number of Class C Units so issued in such
repurchase; or
(ii) after the dissolution of the LLC, the Corporation (as
successor to the rights of the LLC under Section 8(f)(ii) below) may pay,
in the form of a promissory note, a portion of the Repurchase Price for
such securities equal to (x) the aggregate Repurchase Price for the
Executive Securities to be repurchased by the LLC minus (y) the Original
Cost of such securities. Such a promissory note shall be subordinated to
all of the Corporation's senior debt obligations either then or thereafter
incurred, shall earn simple annual interest at the Base Rate, shall have
all principal and accrued interest due and payable upon maturity, and shall
mature upon the earliest to occur of the Corporation's initial Public
Offering (if such initial Public Offering has not occurred prior to the
issuance of such promissory note), a Qualified Sale of the Corporation, or
the fifth anniversary of the issuance of such promissory note.
<PAGE>
-12-
The purchasers of Executive Securities under this Section 3 shall be
entitled to receive customary representations and warranties from the sellers
regarding good title to such securities, free and clear of any liens or
encumbrances.
(g) Restrictions. Notwithstanding anything to the contrary contained in
this Agreement, all repurchases of Executive Securities by the LLC shall be
subject to applicable restrictions contained in the Delaware General Corporation
Law, the Delaware Limited Liability Company Act or in the LLC's or its
Subsidiaries' debt and equity financing agreements or imposed by applicable law
(such as the Hart-Scott-Rodino Antitrust Improvements Act of 1976). If any such
restrictions prohibit the repurchase of Executive Securities which are otherwise
permitted or required hereunder, the time periods provided in this Section 3
shall be suspended, and the LLC may make such repurchases as soon as it is
permitted to do so under such restrictions, unless by such time such Repurchase
Option has terminated pursuant to Section 3(h); provided that notwithstanding
the foregoing, in no event shall the time periods provided in this Section 3 be
suspended for more than 6 months.
(h) Termination of Repurchase Option. The rights under this Section 3
of the LLC and/or its assignees to repurchase Vested Securities (but not
Unvested Securities) shall terminate upon the consummation of a Public Offering.
All rights under this Section 3 of the LLC and/or its assignees to repurchase
Executive Securities (including both Vested Securities and Unvested Securities)
shall terminate upon a Qualified Sale of the Corporation.
Section 4. Restrictions on Transfer.
(a) Opinion of Valid Transfer. In addition to any other restrictions on
transfer imposed by this Agreement, the Transaction Agreement, the LLC Agreement
or the Registration Rights Agreement, no holder of Executive Securities may
sell, transfer or dispose of any Executive Securities (except pursuant to an
effective registration statement under the Securities Act) without first
delivering to the LLC an opinion of counsel (reasonably acceptable in form and
substance to the LLC) that neither registration nor qualification under the
Securities Act or applicable state securities laws is required in connection
with such sale, transfer, or other disposition.
(b) Restrictive Legend. The certificates representing Executive
Securities shall bear the following legend:
<PAGE>
-13-
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON JULY
8, 1998, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND SUCH SECURITIES MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED
BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AND
REPURCHASE OPTIONS SET FORTH IN AN EXECUTIVE PURCHASE AGREEMENT BETWEEN THE
ISSUER OF SUCH SECURITIES (THE "ISSUER") AND THE INITIAL HOLDER OF SUCH
SECURITIES. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE
ISSUER'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
The legend set forth above shall be removed from the certificates
evidencing any shares or units which cease to be Executive Securities.
(c) Retention of Executive Securities. Executive Purchaser shall not at
any time directly or indirectly sell, transfer, assign, pledge or otherwise
dispose of (whether with or without consideration and whether voluntarily or
involuntarily or by operation of law) any interest in any Executive Securities
(a "Transfer"),
<PAGE>
-14-
except (w) pursuant to the repurchase provisions of Section 3 hereof or of
Section 3.04 of the LLC Agreement, (x) pursuant to a Drag-Along Sale (as defined
in the Transaction Agreement) under Section 6.06 of the Transaction Agreement,
(y) after an initial Public Offering, as permitted in Section 4(c)(ii) below or
(z) pursuant to Section 4(c)(iii) below (each of (w), (x), (y) and (z) above, an
"Exempt Transfer"). The restrictions on the Transfer of Executive Securities set
forth in this paragraph (c) shall continue in effect (1) with respect to each
Executive Security following any permitted Transfer thereof pursuant to Section
4(c)(i), but shall cease upon any Exempt Transfer thereof and (2) following
termination of Executive's employment for any reason.
Notwithstanding the foregoing provisions of this clause (c):
(i) the Executive will be permitted to transfer, with or without
consideration, Executive Securities (A) pursuant to applicable laws of
descent and distribution or (B) among Executive's Family Group; provided
that the restrictions contained in this Section shall continue to be
applicable to, and bind the transferee of, the Executive Securities after
any such transfer, the transferees of such Executive Securities shall have
agreed in writing in an instrument satisfactory in form and substance to
the Board to be bound by the provisions of this Agreement, the LLC
Agreement, the Registration Rights Agreement and the Transaction Agreement
with respect to the Executive Securities so transferred, and (prior to the
death of Executive) each such transferee of Executive Securities shall have
entered into proxies and other agreements satisfactory to the Board
pursuant to which Executive shall have the sole right to vote such
Executive Securities for all purposes. For purposes of this Agreement,
"Family Group" means Executive's spouse and descendants (whether natural or
adopted), any trust which at the time of such transfer and at all times
thereafter is and remains solely for the benefit of Executive and/or
Executive's spouse and/or descendants and any family partnership the
partners of which consist solely of Executive, such spouse, such
descendants or such trusts.
(ii) After the initial Public Offering, (x) all Transfer
restrictions on Unvested Securities shall continue in effect and (y)
Transfer restrictions on Vested Securities will terminate upon the fourth
anniversary of closing (the "IPO Closing") of the initial Public Offering.
Transfers of Vested Securities prior to the fourth anniversary of the IPO
Closing will only be permitted to the following extent:
(A) At any time prior to the fourth anniversary of the IPO
Closing, Executive will be permitted to Transfer a number of
<PAGE>
-15-
Vested Securities that (together with Vested Securities previously
Transferred in an Exempt Transfer) in the aggregate as a percentage of
Executive Securities held by Executive as of the IPO Closing (the
"Initial CS Holdings") does not exceed the percentage of MSCP's
Investor Equity held as of the IPO Closing that has since been sold.
(B) During the two year period ending on the second
anniversary of the IPO Closing, Executive will be permitted (1) (a) to
pledge (but not otherwise Transfer) a number of Vested Securities that
(together with Vested Securities previously Transferred in an Exempt
Transfer) in the aggregate does not exceed 25% of the Initial CS
Holdings and (b) to Transfer a number of Vested Securities that does
not exceed 5% of the Initial CS Holdings in any one year period and
that does not exceed 10% of the Initial CS Holdings in such two year
period (such 5% and 10% shall be reduced by any amount previously
Transferred in an Exempt Transfer) or (2) if greater, to Transfer the
number of Vested Securities permitted to be Transferred pursuant to
clause (c)(ii)(A) above.
(C) At any time after such second anniversary of the IPO
Closing and before such fourth anniversary of the IPO Closing,
Executive will be permitted to Transfer the greater of (1) a number of
Vested Securities that (together with Vested Securities previously
Transferred in an Exempt Transfer) in the aggregate does not exceed
50% of the Initial CS Holdings and (2) the number of Vested Securities
permitted to be Transferred pursuant to clause (c)(ii)(A) above.
(iii) In addition to the foregoing permitted Transfers, the Board
may, in its discretion, permit Transfers by the Executive at any time in
the case of personal hardship (such as personal or family illness).
Section 5. Issuance of Tier I and Tier II Options.
(a) In the event of a dissolution of the LLC upon the consummation of a
Public Offering (a "Public Offering Liquidation"), if the Management Percentage
for such Public Offering Liquidation is less than 33.33% the Corporation shall
contemporaneously with such liquidation issue to each holder of Class B Units:
<PAGE>
-16-
(i) options (the "Tier I Options") entitling the holder to acquire,
at an exercise price per share equal to the IPO Price, a number of shares
of the Corporation's Common Stock equal to the lesser of (x) the number of
shares of Common Stock that such holder would have received under the LLC
Agreement in connection with such Public Offering Liquidation if the
Management Percentage had been 10%, and (y) the difference of (A) the
number of shares of Common Stock that such holder would have received in
connection with such Public Offering Liquidation if the Management
Percentage had been 33.33%, minus (B) the number of shares of Common Stock
that such holder actually received in such liquidation; and
(ii) if the Management Percentage for such Public Offering
Liquidation is less than 23.33%, in addition to any Tier I Options, options
(the "Tier II Options") entitling the holder to acquire, at an exercise
price per share equal to the Tier II Price, a number of shares of the
Corporation's Common Stock equal to the lesser of (x) the number of shares
of Common Stock calculated pursuant to clause (i)(x) above, and (y) the
difference of (A) the number of shares of Common Stock calculated pursuant
to clause (i)(y) above, minus (B) the number of shares of Common Stock into
which the Tier I Options issued to such holder pursuant to clause (i) above
are initially exercisable.
The Tier I Options and Tier II Options shall expire on the seventh
anniversary of their issuance.
(b) For purposes of performing the calculations in Sections 5(a)(i) and
5(a)(ii) above, a distribution of any property other than Common Stock in a
Public Offering Liquidation shall be considered to have been a distribution of a
number of shares of Common Stock equal to the quotient of (A) the aggregate fair
market value of such distributed property on the date of such liquidation, as
determined in good faith by the Board, divided by (B) the fair market value of
one share of Common Stock on the date of such liquidation, as determined in good
faith by the Board.
(c) For purposes of this section, the following terms shall have the
meanings set forth below:
"IPO Price" means the gross price per share at which shares of the
Corporation's Common Stock are initially offered and sold to the public in
connection with a Public Offering.
<PAGE>
-17-
"Liquidation FMV" has the meaning ascribed to such term in the LLC
Agreement.
"Management Percentage" has the meaning ascribed to such term in Section
4.01(c) of the LLC Agreement.
"Return Multiple" has the meaning ascribed to such term in Section 4.01(c)
of the LLC Agreement.
"Tier II Price" means, with respect to a particular Public Offering
Liquidation, the quotient of (x) the amount that would result in a Return
Multiple of 3.5 if the Liquidation FMV for such liquidation were equal to such
amount, divided by (y) the number of shares of Common Stock held by the LLC
immediately prior to such liquidation.
Section 6. Confidentiality, Noncompete, and Nonsolicitation.
(a) Nondisclosure and Nonuse of Confidential Information. Executive
shall not willfully disclose or use at any time, either during his employment
with the Corporation or thereafter, any Confidential Information (as defined
below) of which Executive is or becomes aware, whether or not such information
is developed by him, except to the extent that such disclosure or use is
directly related to and required by Executive's performance of duties assigned
to Executive by the LLC or the Corporation. Executive shall take all
appropriate steps to safeguard Confidential Information and to protect it
against disclosure, misuse, espionage, loss and theft. As used in this
Agreement, the term "Confidential Information" means information that is not
generally known to the public and that is used, developed or obtained by the
LLC, the Corporation, or its Subsidiaries in connection with their business,
including but not limited to (i) products or services, (ii) fees, costs and
pricing structures, (iii) designs, (iv) analysis, (v) drawings, photographs and
reports, (vi) computer software, including operating systems, applications and
program listings, (vii) flow charts, manuals and documentation, (viii) data
bases, (ix) accounting and business methods, (x) inventions, devices, new
developments, methods and processes, whether patentable or unpatentable and
whether or not reduced to practice, (xi) customers and clients and customer or
client lists, (xii) copyrightable works, (xiii) all technology and trade
secrets, (xiv) strategic plans, business plans, budgets and financial models,
and (xv) all similar and related information in whatever form. Notwithstanding
the foregoing, "Confidential Information" shall not include any information (A)
of which Executive became aware prior to his affiliation with the Corporation
and the LLC, (B) of which Executive learns from sources other than the LLC, the
Corporation or its Subsidiaries or (C) which is disclosed in a prospectus or
other documents for dissemination to the public or published in a form generally
available to the public prior to the date Executive proposes to
<PAGE>
-18-
disclose or use such information. Information shall not be deemed to have been
published merely because individual portions of the information have been
separately published, but only if all material portions thereof have been
published.
(b) The Corporation's Ownership of Intellectual Property.
(i) Acknowledgment of Corporation Ownership. In the event that
Executive as part of his activities on behalf of the Corporation generates,
creates, authors or contributes to any invention, design, new development,
device, product, method or process (whether or not patentable or reduced to
practice or constituting Confidential Information), any copyrightable work
(whether or not constituting Confidential Information) or any other form of
Confidential Information relating directly or indirectly to the
Corporation's business as now or hereafter conducted (collectively,
"Intellectual Property"), Executive acknowledges that such Intellectual
Property is the exclusive property of the Corporation and hereby assigns
all right, title and interest in and to such Intellectual Property to the
Corporation. Any copyrightable work prepared in whole or in part by
Executive will be deemed "a work made for hire" under Section 201(b) of the
1976 Copyright Act, and the Corporation shall own all of the rights
comprised by the copyright therein. Executive shall promptly and fully
disclose all Intellectual Property to the Corporation and shall cooperate
with the Corporation to protect the Corporation's interests in and rights
to such Intellectual Property (including, without limitation, providing
reasonable assistance in securing patent protection and copyright
registrations and executing all documents as reasonably requested by the
Corporation, whether such requests occur prior to or after termination of
Executive's employment with the Corporation).
(ii) Executive Invention. Executive understands that Section
6(b)(i) of this Agreement regarding the Corporation's ownership of
Intellectual Property does not apply to any invention for which no
equipment, supplies, facilities or trade secret information of the
Corporation were used and which was developed entirely on Executive's own
time, unless (A) the invention relates to the business of the Corporation
or to the Corporation's actual or demonstrably anticipated research or
development or (B) the invention results from any work performed by
Executive for the Corporation.
(c) Delivery of Materials upon Termination of Employment. As requested
by the Corporation from time to time and upon the termination of
<PAGE>
-19-
Executive's employment with the Corporation for any reason, Executive shall
promptly deliver to the Corporation all copies and embodiments, in whatever
form, of all Confidential Information and Intellectual Property in Executive's
possession or within his control (including, but not limited to, written
records, notes, photographs, manuals, notebooks, documentation, program
listings, flow charts, magnetic media, disks, diskettes, tapes and all other
materials containing any Confidential Information or Intellectual Property)
irrespective of the location or form of such material and, if requested by the
Corporation, shall provide the Corporation with written confirmation that all
such materials have been delivered to the Corporation.
(d) Noncompete. Executive acknowledges and agrees with the Corporation
and the LLC that in the course of his employment with the Corporation he shall
become familiar with the Corporation's trade secrets and with other Confidential
Information concerning the Corporation and the LLC and their respective
affiliates, that Executive's services to the Corporation and the LLC are unique
in nature and of an extraordinary value to the Corporation and the LLC, and that
the Corporation and the LLC would be irreparably damaged if Executive were to
provide similar services to any person or entity competing with the LLC or the
Corporation or engaged in a similar business. In connection with the issuance
to Executive of the Executive Securities hereunder, in consideration of and as
an inducement to the LLC's and the Corporation's entering into this Agreement
and the Corporation's agreeing to issue the Tier I and Tier II Options to
Executive and to assume the obligations of the LLC upon dissolution thereof, and
in further consideration of the Noncompete Compensation (as defined below),
Executive accordingly covenants and agrees with the Corporation and the LLC that
during the Noncompete Period (as defined below), Executive shall not, directly
or indirectly, either for himself or for or through any other individual,
corporation, partnership, joint venture or other entity, participate in any
business or enterprise conducting or proposing to conduct business in any
Covered State which engages or proposes to engage in the provision of
telecommunications services or in any other business similar to or competitive
with any business engaged in by the Corporation during the period of time in
which Executive is employed by the Corporation.
For purposes of this Agreement, (i) the term "participate in" shall
include, without limitation, having any direct or indirect interest in any
corporation, partnership, joint venture or other entity, whether as a sole
proprietor, owner, stockholder, partner, joint venturer, creditor or otherwise,
or rendering any direct or indirect service or assistance to any individual,
corporation, partnership, joint venture or other business entity (whether as a
director, officer, manager, representative, supervisor, employee, agent,
consultant or otherwise), other than ownership of up to 2% of the outstanding
stock of any class which is publicly
<PAGE>
-20-
traded and (ii) the term "Covered State" means (A) Connecticut, Delaware,
Illinois, Indiana, Maine, Massachusetts, Michigan, New Hampshire, New Jersey,
New York, Ohio, Pennsylvania, Rhode Island and Vermont, (B) any State in which
the Corporation is engaged in business or as to which the Corporation has at any
time had an Approved Business Plan to engage in business as of the date of
termination of Executive's employment with the Corporation and (C) any other
State for which a business plan has been submitted to the Board pursuant to the
Transaction Agreement as of or prior to the termination of Executive's
employment or for which Corporation personnel have taken substantial steps
towards completing with a view to so submitting, provided, that any such State
under this clause (C) shall cease to be a Covered State if such business plan
does not become an Approved Business Plan within the earlier of (x) 180 days
after such submission and (y) 180 days after the termination of Executive's
Employment, and, in each case, the Corporation's management and the LLC have
attempted in good faith during such period to reach agreements that would enable
such plan to become an Approved Business Plan. Executive agrees that this
covenant is reasonable with respect to its duration, geographical area and scope
and is fully enforceable.
(e) Nonsolicitation. During the Noncompete Period, Executive shall not
(i) induce or attempt to induce any employee, officer or consultant of the
Corporation or any Subsidiary to leave the employ of the Corporation or any
Subsidiary, or in any way interfere with the relationship between the
Corporation or any Subsidiary and any employee, officer or consultant thereof,
(ii) hire directly or through another entity any person who was an employee of
the Corporation or any Subsidiary at any time during the twelve months prior to
the date such person is to be so hired, or (iii) induce or attempt to induce any
customer, supplier, licensee or other business relation of the LLC, the
Corporation or any Subsidiary to cease doing business with the LLC, the
Corporation or any Subsidiary, or in any way interfere with the relationship
between any such customer, supplier, licensee or business relation and the LLC,
the Corporation and its Subsidiaries (including, without limitation, making any
negative statements or communications concerning the LLC, the Corporation or any
Subsidiary).
(f) Noncompete Period; Noncompete Compensation. The "Noncompete Period"
shall commence on the date hereof and shall continue until the later of (A) the
fourth anniversary of the date hereof and (B) the second anniversary of the date
of termination of employment; provided that the Noncompete Period shall
terminate if at any time after the date of termination the Corporation ceases to
pay Executive his Noncompete Compensation (unless Executive violates any
covenant set forth in this Section 6, in which case the Noncompete Period shall
continue even absent payment of the Noncompete Compensation). The Corporation
will notify the Executive within 30 days after
<PAGE>
-21-
termination of employment whether the Corporation intends to enforce this non-
compete covenant. In the event of termination of Executive's employment without
Cause, if the Corporation so notifies the Executive in writing that this
covenant will be enforced against the Executive, then the Corporation must give
the Executive 60 days' notice of the date on which this covenant will cease to
be enforced and on which the related Noncompete Compensation will cease to be
paid (provided that if Executive violates any covenant set forth in this Section
6, the Noncompete Period shall continue without the need for any further
Noncompete Compensation). "Noncompete Compensation" shall consist of 100% (or in
the case of termination with Cause, 50%) of the base salary that Executive
received as compensation from the Corporation and its Subsidiaries immediately
prior to termination (Executive's "Previous Salary") together with the
continuation of the medical benefits that the Corporation provided to Executive
immediately prior to termination (Executive's "Previous Benefits"); provided
that if at any time during the Noncompete Period Executive obtains other
employment elsewhere, Executive shall immediately notify the Corporation to such
effect, and Executive's Noncompete Compensation shall during the period of such
employment (i) be reduced (but not below zero) by Executive's compensation for
such employment (but where the Corporation pays only 50% of the Previous Salary,
as aforesaid, only reduced by the amount of compensation from such other
employment in excess of such 50% of the Previous Salary) and (ii) not include
the continued provision of medical benefits if such employment provides medical
benefits comparable to the Previous Benefits. The Noncompete Compensation shall
not constitute an obligation to pay any severance to such Executive but simply
means that so long as the Corporation pays the Noncompete Compensation up to the
time the Executive first violates any covenant set forth in this Section 6, the
Noncompete Period will remain in full force and effect for its full term.
Payment of Noncompete Compensation, if any, will be paid in accordance with the
Corporation's normal payroll practices.
(g) Judicial Modification. Executive acknowledges that the terms of
this Section 6 were negotiated in good faith by the parties hereto, are
reasonable and necessary in light of Executive's unique position, responsibility
and knowledge of the operations of the Corporation and the unfair advantage that
Executive's knowledge and expertise concerning Corporation's business would
afford a competitor of the Corporation and are not more restrictive than
necessary to protect the legitimate interests of the parties hereto. If the
final judgment of a court of competent jurisdiction, or any final non-appealable
decision of an arbitrator in connection with a mandatory arbitration, declares
that any term or provision of this Section 6 is invalid or unenforceable, the
parties agree that the court making the determination of invalidity or
unenforceability shall have the power to reduce the scope, duration, or
geographic area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable
<PAGE>
-22-
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment or decision may be
appealed.
(h) Dispute Resolution. Arbitration. All claims, disputes,
controversies and other matters in question arising out of or relating to this
Agreement, or to the alleged breach hereof, shall be settled by preliminary
negotiation between the Board and the Executive (the "parties") or, if such
preliminary negotiation is unsuccessful for any reason (but in any event not
later than 10 days after commencement of such negotiation), by binding
arbitration in accordance with the procedures set forth in this Section 6(h).
Without limiting the mandatory arbitration provision set forth in this Section
6(h), each of the parties hereto (i) waives the right to bring an action in any
court of competent jurisdiction with respect to any such claims, controversies
and disputes (other than any such action to enforce the award or other remedy
resulting from any arbitration pursuant to this Section 6(h) or to prevent any
arbitrator from exceeding the authority granted to the arbitrators hereunder)
and (ii) waives the right to trial by jury in any suit, action or other
proceeding brought on, with respect to or in connection with this Agreement.
(i) Binding Arbitration. Upon service of a notice of demand for
binding arbitration by any party hereto, arbitration shall be commenced and
conducted as follows:
(A) Arbitrators. All claims, disputes, controversies and
other matters (collectively "matters") in question shall be referred
to and decided and settled by a panel of three arbitrators with
experience in analyzing, understanding, and making determinations
concerning matters in the telecommunications industry, one selected by
each of the parties within 15 days after such notice of demand (with
the parties to notify each other of their respective selections at the
same time) and the third to be selected by the two arbitrators so
selected within 15 days of their selection pursuant to this subclause
(A),
(B) Cost of Arbitration. The cost of each arbitration
proceeding, including without limitation the arbitrators' compensation
and expenses, hearing room charges, court reporter transcript charges,
etc., shall be allocated among the parties based upon the percentage
which the portion of the Contested Amount not awarded to each party
bears to the amount actually contested by such party. The arbitrators
shall also award the party that
<PAGE>
-23-
prevails substantially in its pre-hearing position its reasonable
attorneys' fees and costs incurred in connection with the arbitration.
The arbitrators are specifically instructed to award attorneys' fees
and expenses for instances of abuse of the discovery process. All
costs of arbitration shall be paid initially 50% by the LLC (or after
the dissolution of the LLC, the Corporation) and 50% by the Executive
pending the determination of the arbitrators pursuant to the previous
sentences.
(C) Situs of Proceedings. The situs of the arbitration
shall be in New York, New York, or such other place as is mutually
agreeable to the parties.
(ii) Pre-hearing Discovery. The parties shall have the right to
conduct and enforce pre-hearing discovery in accordance with the then
current Federal Rules of Civil Procedure, subject to the following
limitations: (A) each party may serve no more than one set of
interrogatories which set shall ask no more than twenty questions; (B) each
party may depose the other party's expert witnesses who will be called to
testify at the hearing, plus up to six fact witnesses without regard to
whether they will be called to testify (each party will be entitled to a
total of not more than 24 hours of depositions of the other party's
witnesses, and not more than 6 hours with respect to any single witness);
and (C) document discovery and other discovery shall be under the control
of and enforceable by the arbitrators, and all disputes relating thereto
shall be decided by the arbitrators. Notwithstanding any contrary
foregoing provisions, the arbitrators shall have the power and authority
to, and to the fullest extent practicable shall, abbreviate arbitration
discovery in a manner which is fair to all parties in order to expedite the
conclusion of each alternative dispute resolution proceeding.
(iii) Pre-hearing Conference. Within thirty (30) days after
filing of notice of demand for binding arbitration, the arbitrators shall
hold a pre-hearing conference to establish schedules for completion of
discovery, for exchange of exhibit and witness lists, for arbitration
briefs, for the hearing, and to decide procedural matters and all other
questions that may be presented.
(iv) Hearing Procedures. The hearing shall be conducted to
preserve its privacy and to allow reasonable procedural due process. Rules
of evidence need not be strictly followed, and the hearing shall be
streamlined as follows: (A) documents shall be self-authenticating, subject
to valid objection by the opposing party; (B) expert reports, witness
<PAGE>
-24-
biographies, depositions and affidavits may be utilized, subject to the
opponent's right of a live cross-examination of the witness in person; (C)
charts, graphs and summaries shall be utilized to present voluminous data,
provided (1) that the underlying data was made available to the opposing
party thirty (30) days prior to the hearing, and (2) that the preparer of
each chart, graph or summary is available for explanation and live cross-
examination in person; (D) the hearing should be held on consecutive
business days without interruption to the maximum extent practicable; and
(E) the arbitrators shall establish all other procedural rules for the
conduct of the arbitration in accordance with the rules of arbitration of
the American Arbitration Association.
(v) Governing Law. This arbitration provision shall be governed
by, and all rights and obligations specifically enforceable under and
pursuant to, the Federal Arbitration Act (9 U.S.C. (S) 1, et seq.) (the
"FAA"). Notwithstanding the foregoing, this Section 6(h) shall be
construed to the maximum extent possible to comply with the laws of the
State of Delaware, including the Uniform Arbitration Act (10 Del.C. (S)
5701, et seq.) (the "Delaware Arbitration Act"). If, nevertheless, it
shall be determined by a court of competent jurisdiction that any provision
or wording of this Section 6(h), including any rules of the FAA or the
American Arbitration Association referred to therein, shall be invalid or
unenforceable under said Delaware Arbitration Act or other applicable law,
such invalidity or unenforceability should not invalidate the entire
Section 6(h). In that case, this Section 6(h) shall be construed so as to
limit any term or provision so as to make it valid or enforceable within
the requirements of the Delaware Arbitration Act or other applicable law,
and, in the event such term or provision cannot be so limited, this Section
6(h) shall be construed to omit such invalid or unenforceable term or
provision.
(vi Consolidation. No arbitration shall include, by
consolidation, joinder or in any other manner, any additional person not a
party to this Agreement (other than affiliates of any such party, which
affiliates may be included in the arbitration), except by written consent
of the parties hereto containing a specific reference to this Agreement.
(vii Award; Time Limit. The arbitrators are empowered to render
an award of general compensatory damages and equitable relief (including,
without limitation, injunctive relief), but are not empowered to award
punitive damages. The award rendered by the arbitrators (A) shall be
final; (B) shall, except as required by law, not constitute a basis for
collateral estoppel as to any issue; and (C) shall, except as required by
law, not be subject to vacation or modification. The arbitrators shall
render
<PAGE>
-25-
any award or otherwise conclude the arbitration no later than 120 days
after the date notice of demand for binding arbitration is given pursuant
to this Section 6(h).
(viii Confidentiality. The parties hereto will maintain the
substance of any proceedings hereunder in confidence and the arbitrators,
prior to any proceedings hereunder, will sign an agreement whereby the
arbitrator agrees to keep the substance of any proceedings hereunder in
confidence.
Section 7. Definitions.
"Approved Business Plan" has the meaning ascribed to such term in the
Transaction Agreement.
"Base Rate" means, on any date, a variable rate per annum equal to the rate
of interest most recently published by The Wall Street Journal as the "prime
rate" at The Chase Manhattan Bank.
"Basic Contributions" has the meaning ascribed to such term in the LLC
Agreement.
"Board" means the board of representatives of the LLC (or, after the
dissolution of the LLC, the board of directors of the Corporation).
"Cause" means (i) Executive's theft or embezzlement, or attempted theft or
embezzlement, of money or property of the Corporation or the LLC, Executive's
perpetration or attempted perpetration of fraud, or Executive's participation in
a fraud or attempted fraud, on the Corporation or the LLC, or Executive's
unauthorized appropriation of, or attempt to misappropriate, any tangible or
intangible assets or property of the Corporation or the LLC, (ii) any act or
acts of disloyalty, misconduct or moral turpitude by Executive which the Board
determines in good faith has been or is likely to be demonstrably injurious to
the interest, property, operations, business or reputation of the Corporation or
the LLC, or Executive's conviction of a crime other than minor traffic
violations or other similar minor offenses, (iii) Executive's repeated
intentional refusal or willful failure (other than by reason of Disability) to
carry out reasonable instructions by his superiors or the Board or the
Corporation's Board of Directors or (iv) Executive's breach of any provision of
Section 6.
<PAGE>
-26-
"Class A Units" has the meaning ascribed to such term in the LLC Agreement.
"Class B Units" has the meaning ascribed to such term in the LLC Agreement.
"Class C Units" has the meaning ascribed to such term in the LLC Agreement.
"Class D Units" has the meaning ascribed to such term in the LLC Agreement.
"Common Stock" means the Corporation's common stock, par value $0.01 per
share.
"Disability" means (i) any permanent physical or mental incapacity or
disability rendering the Executive unable or unfit to perform effectively the
duties and obligations of his employment or to participate effectively and
actively in the management of the Corporation, or (ii) any illness, accident,
injury, physical or mental incapacity or other disability, where such condition
has rendered the Executive unable or unfit to perform effectively the duties and
obligations of his employment or to participate effectively and actively in the
management of the Corporation for a period of at least 90 consecutive days or
four months in any twelve-month period (in either case, as determined in the
good faith judgment of the Board).
"Executive Purchaser" means Executive and any Person who acquires Executive
Securities pursuant to Section 4(c)(i) and has executed a counterpart of this
Agreement, the LLC Agreement and the Transaction Agreement, agreeing to be bound
by the terms of each such agreement.
"Executive Securities" means (i) the Class B Units issued to the Executive
hereunder (but not including any Class C Units or Class D Units issued by the
LLC in exchange for such Class B Units), (ii) upon dissolution of the LLC, any
securities of the Corporation distributed in respect of the securities referred
to in clause (i) above pursuant to such dissolution, (iii) any Tier I Options or
Tier II Options issued to any holder of Executive Securities hereunder, (iv) any
other securities of the LLC or the Corporation hereafter acquired by Executive,
and (v) any securities issued directly or indirectly with respect to the
foregoing securities by way of a split, dividend, or other division of
securities, or in connection with a
<PAGE>
-27-
combination of securities, recapitalization, merger, consolidation, or other
reorganization, or upon conversion or exercise of any of the foregoing
securities. Executive Securities for purposes of this Agreement shall not
include any securities issued to any other executive of the Corporation under
any other agreement. As to any particular securities constituting Executive
Securities, such securities shall cease to be Executive Securities when they
have been (a) effectively registered under the Securities Act and disposed of in
accordance with the registration statement covering them, (b) distributed to the
public through a broker, dealer or market maker pursuant to Rule 144 under the
Securities Act (or any similar provision then in force), (c) repurchased by any
holder of Class A Units, or by the LLC (including in exchange for Class C Units
or Class D Units), the Corporation or any Subsidiary thereof or (d) Transferred
pursuant to an Exempt Transfer under Section 4.
"Good Reason" means (i) a substantial permanent reduction in the scope of
Executive's authority or level of responsibility from that in effect as of the
date hereof for any reason unrelated to Executive's Disability, which has not
been revised by the Corporation within 90 days after timely written notice to
the Corporation containing a reasonably detailed description of such reduction;
or (ii) a relocation of Executive's principal place of employment from its then
existing location to a site which is more than 100 miles from such location.
"Investor Equity" has the meaning ascribed such term in the Transaction
Agreement.
"LLC Agreement" means the limited liability company agreement dated as of
the date hereof, entered into by and among the members of the LLC, as amended
from time to time in accordance with its terms.
"Management Equity" has the meaning ascribed to such term in the
Transaction Agreement.
"MSCP" has the meaning ascribed such term in the LLC Agreement.
"Original Cost" means, at any given time, (i) with respect to any Class B
Units, the total Basic Contributions made with respect to such Class B Units
pursuant to the LLC Agreement prior to such time, (ii) with respect to any
Common Stock, the Basic Contribution attributable to such Common Stock based on
the number of shares of Common Stock received by Executive upon the
<PAGE>
-28-
dissolution of the LLC, and (iii) with respect to any other securities, the
original price paid upon issuance of such securities.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Public Offering" means any underwritten sale of the Corporation's common
stock pursuant to an effective registration statement under the Securities Act
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 or financing for a merger or acquisition, and (ii) any
issuance of common stock or rights to acquire common stock to employees of the
Corporation or its Subsidiaries as part of an incentive or compensation plan.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the date hereof, by and between the Corporation, the holders of
Investor Equity and the holders of Management Equity, as amended from time to
time in accordance with the terms thereof.
"Securities Act" means the Securities Act of 1933, as amended, and
applicable rules and regulations thereunder.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, and applicable rules and regulations thereunder.
"Subsequent Contributions" has the meaning ascribed to such term in the
Transaction Agreement.
"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, partnership, association or other business entity of which
(i) if a corporation, a majority of the total voting power of shares of stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or
<PAGE>
-29-
indirectly, by any Person or one or more Subsidiaries of that Person or a
combination thereof. For purposes hereof, a Person or Persons shall be deemed to
have a majority ownership interest in a limited liability company, partnership,
association or other business entity if such Person or Persons shall be
allocated a majority of limited liability company, partnership, association or
other business entity gains or losses or shall be or control any managing
director, managing member, manager or general partner of such limited liability
company, partnership, association or other business entity.
"Transaction Agreement" means the Transaction Agreement dated as of the
date hereof, by and between the Corporation and the LLC and the holders of
interests in the LLC, as amended from time to time in accordance with the terms
thereof.
"Vesting Termination Breach" means (i) any breach by Executive of Section
6(a), Section 6(d) or Section 6(e) or (ii) any breach by Executive of any other
provision of Section 6 which is material or is intentionally and knowingly
committed by Executive.
Section 8. Miscellaneous Provisions.
(a Further Assurances; Voting Proxy. As a condition to the LLC's and
the Corporation's entering into this Agreement and the LLC's issuance of
Executive Securities to the Executive Purchasers, and as further consideration
therefor:
(i Executive hereby unconditionally guarantees the full and
prompt performance of each Executive Purchaser's obligations under this
Agreement and under each of the agreements contemplated hereby to which
such Executive Purchaser is a party, and Executive agrees that he will take
all necessary or desirable actions to ensure such performance as are
reasonably requested by the LLC or the Corporation. Executive further
agrees that he will not provide any directions to an Executive Purchaser
that are contrary to any obligation imposed on such Executive Purchaser
under this Agreement or under such other agreements, and that Executive
will not fail to provide any directions to an Executive Purchaser if such
failure would cause an Executive Purchaser not to satisfy its obligations
hereunder or thereunder. This guarantee shall be irrevocable with respect
to each Executive Security held by an Executive Purchaser (and shall
survive any transfer thereof, or the death, disability,
<PAGE>
-30-
incompetency, or bankruptcy of such Executive Purchaser) until such time as
such Executive Security is transferred in accordance with the terms hereof
to a Person other than a member of Executive's Family Group, at which time
this guarantee shall be deemed revoked with respect to such transferred
security (but not with respect to any other Executive Securities). No
invalidity, irregularity or unenforceability of this Agreement or such
other agreements by reason of an Executive Purchaser's incapacity, minor
status, incompetency, bankruptcy, insolvency, or other similar occurrence
shall impair, affect or be a defense to the obligations of Executive under
this guarantee.
(ii Each Executive Purchaser (other than Executive) hereby
appoints Executive as his true and lawful proxy and attorney-in-fact, with
full power of substitution, to vote all of such Executive Purchaser's
Executive Securities on all matters to be voted on by the holders of such
securities (whether as a member vote, a shareholder vote, an approval right
under this Agreement or the other agreements contemplated hereby, or
otherwise). These proxies and powers granted by each Executive Purchaser
pursuant to this Section 8 are coupled with an interest, and are given to
secure such Executive Purchasers' obligations under this Agreement and the
other agreements contemplated hereby to which the Executive Purchasers are
parties. Such proxies and powers shall be irrevocable with respect to each
Executive Security held by an Executive Purchaser (and shall survive and
not be affected by any transfer thereof, or the death, disability,
incompetency, or bankruptcy of such Executive Purchaser) until such time as
such Executive Security is transferred in accordance with the terms hereof
to a Person other than a member of Executive's Family Group, at which time
such proxy shall be deemed revoked with respect to such transferred
security (but not with respect to any other Executive Securities).
(b Transfers in Violation of Agreement. Any Transfer or attempted
Transfer of any Executive Securities in violation of any provision of this
Agreement shall be void, and none of the LLC, the Corporation, or any Subsidiary
thereof shall record such purported Transfer on its books or treat any purported
transferee of such Executive Securities as the owner of such securities for any
purpose.
<PAGE>
-31-
(c Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(d Complete Agreement. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt 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.
(e Counterparts. This Agreement may be executed in separate
counterparts, none of which need contain the signature of more than one party
hereto but each of which shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(f Successors and Assigns. (i) Except as otherwise provided herein,
this Agreement shall bind the parties hereto and their respective successors and
permitted assigns and shall inure to the benefit of and be enforceable by the
parties hereto and their respective successors and permitted assigns whether so
expressed or not.
(ii Each of the Corporation, the LLC, the Executive Purchaser, and
each holder of Executive Securities hereby acknowledges that immediately upon
and after the dissolution of the LLC, (A) all contractual obligations and duties
of the LLC hereunder shall thereafter bind and be enforceable against the
Corporation, (B0 all rights and powers granted to the LLC hereunder (including,
without limitation, the repurchase rights set forth in Section 3) shall inure to
the benefit of and be enforceable by the Corporation, (C) all references to the
LLC shall thereafter be deemed to be references to the Corporation, and (D)
except if the context clearly otherwise requires, this Agreement shall
thereafter operate and be construed as if the word "Corporation" were
substituted for the word "LLC" in each such instance.
<PAGE>
-32-
(g Governing Law; Submission to Jurisdiction. This Agreement shall be
governed by, and construed under, the laws of the State of Delaware, all rights
and remedies being governed by said laws, without regard to conflict of law
principles. Each of the parties hereto agrees (i) that this Agreement involves
at least $100,000 and (ii) that this Agreement has been entered into by the
parties hereto in express reliance upon 6 Del.C. (S) 2708. Each party hereby
irrevocably and unconditionally agrees (a) to be subject to the jurisdiction of
the courts of the State of Delaware and the federal courts sitting in the State
of Delaware or in the County of New York in the State of New York and (b) to the
extent such party is not otherwise subject to service of process in the State of
Delaware, to appoint and maintain an agent in the State of Delaware as such
party's agent for acceptance of legal process, and that service made pursuant to
(b) above shall have the same legal force and effect as if served upon said
party personally within the State of Delaware. For purposes of implementing the
parties' agreement to appoint and maintain an agent for service of process in
the State of Delaware, each such party that has not as of the date hereof
already duly appointed such an agent does hereby appoint RL&F Service Corp., One
Rodney Square, 10th Floor, Wilmington, New Castle County, Delaware 19801, as
such agent.
(h Remedies. Each of the parties to this Agreement (including any
holder of Investor Equity or employee of the Corporation to which the LLC
assigns any of its repurchase rights under Section 3 hereof) shall be entitled
to enforce its rights under this Agreement specifically, to recover damages and
costs (including reasonable attorney's fees and expenses) caused by any breach
of any provision of this Agreement and to exercise all other rights existing in
its favor. The parties hereto agree and acknowledge that money damages would
not be an adequate remedy for any breach of the provisions of this Agreement and
that any party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or deposit) for specific
performance and/or other injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement.
(i Amendment, Modification, or Waiver. The provisions of this
Agreement may be amended, modified, or waived only with the prior written
consent of the LLC and the Executive.
(j Third-Party Beneficiaries. The parties hereto acknowledge and
agree that certain provisions of this Agreement are intended for the benefit of
<PAGE>
-33-
certain holders of Investor Equity or employees of the Corporation to which the
LLC assigns any of its repurchase rights under Section 3 hereof, that such
Persons are third-party beneficiaries of this Agreement and that the provisions
of this Agreement shall be enforceable by such Persons as provided herein.
(k Business Days. If any time period for giving notice or taking
action hereunder expires on a day which is a Saturday, Sunday or legal holiday
in the State of New York, the time period shall be automatically extended to the
business day immediately following such Saturday, Sunday or holiday.
(l Descriptive Headings; Interpretation; No Strict Construction. The
descriptive headings of this Agreement are inserted for convenience only and do
not constitute a substantive part of this Agreement. Whenever required by the
context, any pronoun used in this Agreement shall include the corresponding
masculine, feminine or neuter forms, and the singular forms of nouns, pronouns,
and verbs shall include the plural and vice versa. Reference to any agreement,
document, or instrument means such agreement, document, or instrument as amended
or otherwise modified from time to time in accordance with the terms thereof,
and if applicable hereof. The use of the words "include" or "including" in this
Agreement shall be by way of example rather than by limitation. The use of the
words "or," "either" or "any" shall not be exclusive. The parties hereto have
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, it is the
intent of the parties that 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 the authorship of any of the
provisions of this Agreement.
(m Notices. All notices, requests or other communications to any
party hereunder shall be in writing (including facsimile transmission) and shall
be given,
if to Executive, to:
Choice One Communications Inc.
333 West Commercial Street
Suite 2500
East Rochester, New York 14455
<PAGE>
-34-
if to the LLC, to:
c/o Morgan Stanley Capital Partners III, L.P.
1221 Avenue of the Americas
33rd Floor
New York, New York 10020
Attention: John B. Ehrenkranz
Facsimile: (212) 762-7951
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Louis L. Goldberg
Facsimile: (212) 450-4800
and to:
Fleet Equity Partners VI, L.P.
50 Kennedy Plaza
12th Floor
Providence, Rhode Island 02903
Attention: Robert M. Van Degna
Facsimile: (401) 278-6387
with a copy to:
Paul, Hastings, Janofsky & Walker, LLP
399 Park Avenue
New York, New York 10022-4697
Attention: Neil A. Torpey
Facsimile: (212) 319-4090
<PAGE>
-35-
and to:
Waller-Sutton Media Partners, L.P.
555 North Lane
Suite 6150
Conshohocken, PA 19428
Attention: Mr. Bruce Hernandez
Facsimile: (610) 397-1014
with a copy to:
Rubin Baum Levin Constant & Friedman
30 Rockefeller Plaza
New York, New York 10112
Attention: Jonathan D. Drucker
Facsimile: (212) 698-7825
if to the Corporation, to:
Choice One Communications Inc.
333 West Commercial Street
Suite 2500
East Rochester, New York 14445
Attention: Steve Dubnik
Facsimile: (716) 385-0609
with a copy to:
Nixon, Hargrave, Devans & Doyle LLP
Clinton Square
P.O. Box 1051
Rochester, New York 14603-1051
Attention: James A. Locke, III
Facsimile: (716) 263-1600
and if to any member of the LLC or to any other holder of Common Stock, to the
address or facsimile set forth on the books of the LLC or the Corporation or any
other address or facsimile number as a party may hereafter specify for such
<PAGE>
-36-
purpose to the LLC. Notwithstanding the foregoing, no holder of Investor Equity
or its counsel shall be entitled to notice if such holder holds less than 3% in
aggregate of all Investor Equity then outstanding.
All such notices, requests and other communications shall be deemed
received on the date of receipt by the recipient thereof if received prior to 5
p.m. in the place of receipt and such day is a business day in the place of
receipt. Otherwise, any such notice, request or communication shall be deemed
not to have been received until the next succeeding business day in the place of
receipt.
<PAGE>
-37-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
CHOICE ONE COMMUNICATIONS L.L.C.
By: /s/ Steve M. Dubnik
------------------------------------------
Its: Authorized Person
-----------------------------------------
CHOICE ONE COMMUNICATIONS INC.
By: /s/ Steve M. Dubnik
------------------------------------------
Its: President and Chief Executive Officer
-----------------------------------------
EXECUTIVE
/s/ Philip Yawman
---------------------------------------------
<PAGE>
-38-
Execution of Counterpart Agreeing to be Bound to
Executive Purchase Agreement by Executive Purchaser
Name of Individual:
------------------
Signature:
---------------------------
Date:
<PAGE>
EXHIBIT 10.18
EXECUTIVE PURCHASE AGREEMENT
THIS EXECUTIVE PURCHASE AGREEMENT (this "Agreement") is made as of July 8,
1998, by and between Choice One Communications L.L.C., a Delaware limited
liability company (the "LLC"), Choice One Communications Inc., a Delaware
corporation (the "Corporation"), and Kevin S. Dickens ("Executive"). Capitalized
terms used but not otherwise defined herein have the meanings ascribed to such
terms in Section 7 hereof.
WHEREAS, Executive desires to make an investment in the Corporation to be
held initially through an interest in the LLC, and the LLC, the Corporation and
the Executive desire to provide for certain rights and obligations relating to
such investment and to Executive's employment with the Corporation;
NOW, THEREFORE, in consideration of the mutual promises made herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
Section 1. Purchase and Sale of Executive Securities.
(a) Initial Capital Contribution and Issuance of Executive Securities.
Upon execution of this Agreement, Executive shall make a capital contribution
to the LLC in the amount of $45,004.50 (Executive's "Initial Capital
Contribution") in exchange for, and the LLC shall issue to Executive, 450,045
Class B Units having the rights, obligations, and preferences set forth with
respect thereto in the LLC Agreement. The Executive shall make such Initial
Capital Contribution to the LLC by delivery to the LLC of a cashier's or
certified check, or wire transfer of immediately available funds to an account
designated by the LLC, in the aggregate amount equal to such Executive's Initial
Capital Contribution. The aggregate amount of the Initial Capital Contribution
made with respect to each Class B Unit issued hereunder shall be considered a
Basic Contribution made with respect to such Class B Unit. Subsequent
Contributions to the LLC shall be made by the Executive in respect of such Class
B Units on the terms and conditions set forth in the LLC Agreement.
(b) Representations and Warranties of Executive. In connection with the
Executive's Initial Capital Contribution and the issuance of the Executive
Securities hereunder, the Executive Purchaser represents and warrants to each of
the LLC and the Corporation that:
(i) The Executive Securities to be acquired by the Executive
Purchaser pursuant to this Agreement shall be acquired for the Executive
Purchaser's own account and not with a view to, or the intention of,
<PAGE>
distribution thereof in violation of the Securities Act or any applicable
state securities laws, and the Executive Securities shall not be disposed
of in contravention of the Securities Act or any applicable state
securities laws.
(ii) Executive is a management employee of the Corporation, and the
Executive Purchaser is sophisticated in financial matters and is able to
evaluate the risks and benefits of the investment in the Executive
Securities.
(iii) Executive Purchaser is able to bear the economic risk of his
investment in the Executive Securities for an indefinite period of time and
is aware that transfer of the Executive Securities may not be possible
because (A) such transfer is subject to contractual restrictions on
transfer set forth herein and in the Transaction Agreement, and (B) the
Executive Securities have not been registered under the Securities Act or
any applicable state securities laws and, therefore, cannot be sold unless
subsequently registered under the Securities Act and such applicable state
securities laws or an exemption from such registration is available.
(iv) Executive has had an opportunity to ask questions and receive
answers concerning the terms and conditions of the offering of the
Executive Securities issued hereunder and has had full access to such other
information concerning the Corporation and this investment opportunity as
he has requested.
(v) Each of this Agreement, the LLC Agreement, the Transaction
Agreement, and the other agreements contemplated thereby of even date
therewith to which Executive Purchaser is a party, constitute the legal,
valid and binding obligations of the Executive Purchaser, enforceable
against the Executive Purchaser in accordance with its terms; Executive is
ready, willing and able as of the date hereof to commence and to continue
employment with the Corporation in the office to which Executive was
appointed by the Board; and the execution, delivery and performance of such
agreements by Executive, and Executive's employment with the Corporation
and activities (including recruiting activities) on behalf of the
Corporation, do not and will not conflict with, violate or breach any
agreement, contract or instrument (including, without limitation, any
noncompete agreement or restrictive covenant instrument) to which Executive
is a party or by which Executive is bound or any judgment, order or decree
to which Executive is subject.
(c) Acknowledgment of At-Will Employment. As an inducement to the LLC
and the Corporation to enter into this Agreement, and as a condition thereto,
-2-
<PAGE>
the Executive acknowledges and agrees that no agreement or arrangement between
the Executive and the Corporation or the LLC (including, without limitation, the
issuance of the Executive Securities to the Executive and the execution and
delivery of this Agreement) shall entitle Executive to remain in the employment
of the Corporation and its Subsidiaries or affect the right of the Corporation
or its Subsidiaries to terminate Executive's employment at any time or for any
reason.
Section 2. Vesting of Executive Securities.
(a) Vesting Schedule. All Executive Securities shall initially be
Unvested Securities (as defined below). Except as otherwise provided herein, an
amount of Unvested Securities shall vest on the date hereof and on each of the
first four anniversaries of the date hereof, such that the Executive Securities
shall be vested on each such date in accordance with the following schedule:
-------------------------
Cumulative Percentage of
Date Executive Securities
Vested
The date hereof 20%
The first anniversary of the date hereof 40%
The second anniversary of the date hereof 60%
The third anniversary of the date hereof 80%
The fourth anniversary of the date hereof 100%
Notwithstanding the foregoing sentence, and except as otherwise provided in
clauses (b)-(e) below or in the next sentence (in the case of termination
without Cause or for Good Reason), the above vesting schedule shall cease and no
Unvested Securities shall vest after the date on which Executive's employment
with the Corporation and its Subsidiaries terminates for any reason. If
Executive's employment is terminated by the Corporation without Cause or if
Executive terminates his employment for Good Reason, the Executive Securities
shall thereafter, if necessary, continue to vest until the next anniversary of
the date hereof next succeeding such termination (such that the Executive will
be vested in 20% more of the Executive Securities than at the time of such
termination) and if at least 50% of the Executive Securities have not been
vested as of such next anniversary, then vesting will continue to the extent
necessary that at least 50% of the Executive Securities become vested, so long
as Executive has not committed a Vesting Termination Breach (upon which breach
the vesting schedule shall
-3-
<PAGE>
immediately cease, and no Unvested Securities shall vest on or after the date of
the first such breach). In the event the LLC or the Corporation has alleged that
Executive has committed a Vesting Termination Breach, Executive disputes such
allegation, and the matter is subject to the dispute resolution provisions set
forth in Section 6, vesting shall be tolled upon the date of the allegation of
such breach; provided that (i) if it is ultimately resolved under Section 6 that
Executive has committed a Vesting Termination Breach, the tolling shall become a
permanent cessation such that vesting shall have forever ceased upon the date of
such allegation, and (ii) if it is ultimately resolved under Section 6 that
Executive did not commit a Vesting Termination Breach, the number of Vested
Securities shall be as though there had never been such alleged breach or any
tolling of vesting. Executive Securities which have become vested pursuant to
this Agreement are referred to herein as "Vested Securities," and all other
Executive Securities are referred to herein as "Unvested Securities."
(b) Acceleration upon a Qualified Sale of the Corporation. Unvested
Securities subject to vesting pursuant to Section 2(a) shall become Vested
Securities upon the consummation of a Qualified Sale of the Corporation (as
defined below) so long as Executive is employed by the Corporation or any of its
Subsidiaries on the date of such sale (or, if Executive's employment was
terminated by the Corporation without Cause or by Executive for Good Reason, so
long as Executive has not committed a Vesting Termination Breach prior to the
date of such sale). A "Qualified Sale of the Corporation" means either (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of the
Corporation and its Subsidiaries, taken as a whole, or (ii) a transaction or
series of transactions (including by way of merger, consolidation, or sale of
stock, but not including a Public Offering) the result of which is that the
holders of the Corporation's outstanding voting stock immediately prior to such
transaction are after giving effect to such transaction no longer, in the
aggregate, the "beneficial owners" (as such term is defined in Rule 13d-3 and
Rule 13d-5 promulgated under the Securities Exchange Act), directly or
indirectly through one or more intermediaries, of more than 50% of the voting
power of the outstanding voting stock of the Corporation, in each case where the
consideration for such assets or stock in such sale or transfer consists of cash
and/or publicly traded equity securities for such assets or for at least 50% of
the outstanding stock of the Corporation (e.g., 100% of such consideration would
have to consist of cash and/or publicly traded equity securities if only 50.01%
of such stock were sold in such transaction).
(c) Acceleration upon a Public Offering. Upon the consummation of the
Corporation's initial Public Offering, and so long as Executive is employed by
the Corporation or any of its Subsidiaries on the closing date of such offering
(or, if Executive's employment was terminated by the Corporation without Cause
or by
-4-
<PAGE>
the Executive for Good Reason, so long as Executive has not committed a Vesting
Termination Breach prior to such closing date), there will vest the amount of
Unvested Securities which were scheduled to vest within the 365 days following
such closing date (and the remaining Unvested Securities subject to vesting
pursuant to Section 2(a), if any, shall continue to vest 20% on each anniversary
of the date hereof in accordance with clause (a) above, such that the vesting
schedule set forth in Section 2(a) above shall have been effectively accelerated
by one year).
(d) Acceleration upon Death or Disability. All Unvested Securities
shall become Vested Securities if Executive's employment with the Corporation or
any of its Subsidiaries terminates by reason of Executive's death or Disability.
(e) Other Acceleration. Any Unvested Securities which the LLC (or its
assignees) has not elected to repurchase in the Repurchase Notice (as defined
below) (including Unvested Securities originally included in the Repurchase
Notice, but for which the election to repurchase was rescinded, pursuant to the
terms of Section 3, by the LLC and/or its assignees having made such election)
shall thereafter be deemed Vested Securities, but shall continue to be subject
to Section 4.
Section 3. LLC's Repurchase Option.
-5-
<PAGE>
(a) The Repurchase Option. The LLC will be entitled to repurchase at
the LLC's election pursuant to the terms and conditions set forth in this
Section 3 (the "Repurchase Option"), (i) upon (x) the termination of Executive's
employment with the Corporation and its Subsidiaries for any reason other than a
termination by the Corporation without Cause or by the Executive for Good
Reason, or (y) if Executive's employment is terminated by the Corporation
without Cause or by the Executive for Good Reason, upon Executive's commission
of a Vesting Termination Breach, all the Executive Securities then in existence
(whether held by Executive or one or more of the other Executive Purchasers)
and/or (ii) in the event of a termination without Cause or for Good Reason and
prior to commission of a Vesting Termination Breach, such of the Unvested
Securities as are not subject to continued vesting pursuant to Section 2(a) (any
such circumstance permitting repurchase, a "Repurchase Event"). In the event
that the LLC or the Corporation has alleged that Executive has committed a
Vesting Termination Breach, Executive disputes such allegation, and the matter
is subject to the dispute resolution provisions set forth in Section 6, the
closing of the repurchase of Executive Securities permitted to be repurchased
only upon such breach under this Section 3 shall not occur unless and until it
is ultimately determined that Executive committed a Vesting Termination Breach;
provided that during the pendency of such proceeding, such Executive Securities
specified in the Repurchase Notice (as defined below) shall not be transferred
by any holder thereof to any other Person.
(b) Repurchase Price. The repurchase price (the "Repurchase Price") for
50% of the Vested Securities to be repurchased shall be the Fair Market Value of
such securities. The Repurchase Price of the remaining 50% of the Vested
Securities and of all of the Unvested Securities to be repurchased shall be the
lesser of (x) the Fair Market Value of such Securities, and (y) the Original
Cost of such Securities (with securities having the lowest Original Cost subject
to repurchase prior to securities with a higher Original Cost).
(c) Exercise of Repurchase Option. The LLC (by action of the Board) may
elect to purchase all or any portion of the Executive Securities permitted to be
repurchased by delivering written notice (the "Repurchase Notice") to the holder
or holders of the Executive Securities within 90 days after the occurrence of
the applicable Repurchase Event. The Repurchase Notice shall set forth the
amount, type, and class of Executive Securities (including, if applicable, the
amount of Unvested Securities and/or Vested Securities) to be acquired from each
such holder (which need not be pro rata among type of security or among Vested
Securities and Unvested Securities). The Executive Securities to be repurchased
by the LLC shall first be satisfied to the extent possible from the Executive
Securities held by Executive at the time of delivery of the Repurchase Notice.
If the amount of Executive Securities then held by Executive is less than the
total
-6-
<PAGE>
amount of Executive Securities that the LLC has elected to purchase, the LLC
shall purchase the remaining securities elected to be purchased from the other
holder(s) of Executive Securities (to whom Executive has transferred Executive
Securities pursuant to Section 4(c)(i)), pro rata according to the amount of
Executive Securities held of record by each such other holder at the time of
delivery of the Repurchase Notice. The amount of Unvested Securities and Vested
Securities to be repurchased hereunder shall be deemed to be allocated among
Executive and the other holders of repurchased Executive Securities (to whom
Executive has transferred Executive Securities pursuant to Section 4(c)(i)), if
any, pro rata according to the amount of Executive Securities to be purchased
from such persons.
(d) Assignment by the LLC. The LLC, by action of the Board, will have
the right to assign all or any portion of its repurchase rights hereunder to the
holders of Investor Equity (which assignment, if made to the holders of Investor
Equity, would be pro rata on the basis of the Investor Equity held by each such
holder) and/or to any executive employee of the Corporation or any of its
Subsidiaries. Notwithstanding the foregoing, the LLC may not assign to any
Person its right to pay a portion of the Repurchase Price for Executive
Securities repurchased hereunder in the form of Class C Units (or, after the
dissolution of the LLC, a promissory note).
(e) Fair Market Value of Repurchased Securities. The "Fair Market
Value" of Executive Securities subject to repurchase hereunder shall be
determined in accordance with this paragraph (e) as follows:
(i) The Board of the LLC and the holders of a majority of the
Executive Securities to be repurchased shall attempt in good faith to agree
on the Fair Market Value of the Executive Securities. Any agreement
reached by such Persons shall be final and binding on all parties hereto.
(ii) If such Persons are unable to reach such agreement within 20
days after the giving of a Repurchase Notice, the Fair Market Value of any
Executive Securities that are publicly traded shall be the average, over a
period of 21 days consisting of the date of the applicable Repurchase Event
and the 20 consecutive business days prior to that date, of the average of
the closing prices of the sales of such securities on all securities
exchanges on which such securities may at that time be listed, or, if there
have been no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of
such day, or, if on any day such securities are not so listed, the average
of the representative bid and asked prices quoted in the Nasdaq System as
of 4:00 P.M., New York time, or, if on any day such securities are not
quoted
-7-
<PAGE>
in the Nasdaq System, the average of the highest bid and lowest
asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau Incorporated, or any similar
successor organization.
(iii) If such Persons are unable to reach agreement pursuant to
paragraph (ii) within 20 days after the giving of a Repurchase Notice, and
to the extent any Executive Securities are not publicly traded:
(A) The Board of the LLC and the holders of a majority of the
Executive Securities shall each, at the same time, within 10 days
thereafter, choose one investment banker or other appraiser with
experience in analyzing and making determinations concerning matters
in the telecommunications industry and in valuing entities like the
LLC (including the distribution arrangements of the type described in
the LLC Agreement), and, within 15 days of their selection, the two
investment bankers/appraisers so selected shall together select a
third investment banker/appraiser similarly qualified.
(B) The three investment bankers/appraisers shall first
appraise the fair market value of the Corporation (based on the
assumption of an orderly, arm's length sale to a willing unaffiliated
buyer). Each of the three investment bankers/appraisers shall then
independently appraise the fair market value of such non-publicly-
traded Executive Securities as follows:
(1) the fair market value of each share of Common Stock
shall be equal to the fair market value of the Corporation
divided by the total number of shares of Common Stock outstanding
on the date of the applicable Repurchase Event (determined on a
fully diluted basis (x) with respect to all outstanding
securities convertible into the Corporation's Common Stock,
assuming the conversion of such convertible securities (without
regard to any conditions or other restrictions on such
conversion), and (y) with respect to all outstanding options,
warrants and other rights or securities exercisable or
exchangeable for shares of the Corporation's Common Stock, in
accordance with the Treasury Stock Method under generally
accepted accounting principles for determination of fully diluted
earnings per share);
-8-
<PAGE>
(2) the fair market value of each Class B Unit shall be
equal to the fair market value of the assets (as determined in
accordance with paragraphs (B)(1) and (B)(3)) that would be
distributed according to the terms of the LLC Agreement with
respect to such Class B Unit if the LLC were dissolved on the
date of the applicable Repurchase Event; and
(3) the fair market value of any other non-publicly-
traded Executive Securities (or, for purposes of paragraph (B)(2)
above, any other assets) shall be the fair market value of such
securities (or other assets), determined on the basis of an
orderly, arm's length sale to a willing, unaffiliated buyer,
taking into account all relevant factors determinative of value.
-9-
<PAGE>
The three investment bankers/appraisers shall, within thirty days
of their retention, provide the written results of such
appraisals to the LLC and/or its assignees and to each of the
holders of Executive Securities.
(C) The "Fair Market Value" of the non-publicly-traded
Executive Securities to be repurchased shall be the average of the two
appraisals closest to each other, and such amount shall be final and
binding on all parties hereto; provided that the LLC (and/or any
assignee) may at any time within ten days after receiving written
notice of such determination rescind its prior exercise of the
Repurchase Option by giving written notice of such revocation to all
of the holders of the Executive Securities to be repurchased, and upon
such revocation the revoking party will be treated as if it had never
exercised such Repurchase Option (it being understood that such
revoking parties shall thereafter have no right to re-exercise such
Repurchase Option).
(D) The costs of such appraisal shall be allocated between
the parties based on the percentage which the portion of the Contested
Amount not awarded to each party bears to the amount actually
contested by such party; provided that if any parties revoke their
exercise of the Repurchase Option pursuant to paragraph (C) above,
such revoking parties shall bear (pro rata among such revoking parties
based on the number of Executive Securities with respect to which each
such revoking party had initially exercised its Repurchase Option) any
appraisal costs that would be allocated to the holder(s) of Executive
Securities under this paragraph (D). "Contested Amount" means the
difference between the valuations of the disputing parties.
-10-
<PAGE>
(f) Closing of the Repurchase. Within 10 business days after the
Repurchase Price for the Executive Securities to be repurchased has been
determined, the LLC shall send a notice to each holder of Executive Securities
setting forth the consideration to be paid for such securities and the time and
place for the closing of the transaction, which date shall not be more than 30
days nor less than five days after the delivery of such notice. At such
closing, the holders of Executive Securities shall deliver all certificates (if
any exist) evidencing the Executive Securities to be repurchased to the LLC
(and/or any assignees of the LLC's repurchase right), and the LLC (and/or any
assignees) shall pay for the Executive Securities to be purchased pursuant to
the Repurchase Option by delivery of a check or wire transfer of immediately
available funds in the aggregate amount of the Repurchase Price for such
securities; provided that in the event the Board determines in its good faith
discretion that the LLC is not in a position to pay in cash any or all of the
Repurchase Price for Executive Securities to be repurchased by it:
(i) prior to the dissolution of the LLC, the LLC may pay a portion
of the Repurchase Price for such securities equal to (x) the aggregate
Repurchase Price for the Executive Securities to be repurchased by the LLC
minus (y) the Original Cost of such securities, by issuing in exchange for
such securities an equal number of the LLC's Class C Units (having the
rights and preferences set forth in the LLC Agreement), and for purposes of
the LLC Agreement each such Class C Unit shall as of its issuance be deemed
to have Basic Contributions made with respect to such Class C Unit equal to
(A) the aggregate portion of the Repurchase Price paid by the issuance of
Class C Units divided by (B) the number of Class C Units so issued in such
repurchase; or
(ii) after the dissolution of the LLC, the Corporation (as
successor to the rights of the LLC under Section 8(f)(ii) below) may pay,
in the form of a promissory note, a portion of the Repurchase Price for
such securities equal to (x) the aggregate Repurchase Price for the
Executive Securities to be repurchased by the LLC minus (y) the Original
Cost of such securities. Such a promissory note shall be subordinated to
all of the Corporation's senior debt obligations either then or thereafter
incurred, shall earn simple annual interest at the Base Rate, shall have
all principal and accrued interest due and payable upon maturity, and shall
mature upon the earliest to occur of the Corporation's initial Public
Offering (if such initial Public Offering has not occurred prior to the
issuance of such promissory note), a Qualified Sale of the Corporation, or
the fifth anniversary of the issuance of such promissory note.
-11-
<PAGE>
The purchasers of Executive Securities under this Section 3 shall be
entitled to receive customary representations and warranties from the sellers
regarding good title to such securities, free and clear of any liens or
encumbrances.
(g) Restrictions. Notwithstanding anything to the contrary contained in
this Agreement, all repurchases of Executive Securities by the LLC shall be
subject to applicable restrictions contained in the Delaware General Corporation
Law, the Delaware Limited Liability Company Act or in the LLC's or its
Subsidiaries' debt and equity financing agreements or imposed by applicable law
(such as the Hart-Scott-Rodino Antitrust Improvements Act of 1976). If any such
restrictions prohibit the repurchase of Executive Securities which are otherwise
permitted or required hereunder, the time periods provided in this Section 3
shall be suspended, and the LLC may make such repurchases as soon as it is
permitted to do so under such restrictions, unless by such time such Repurchase
Option has terminated pursuant to Section 3(h); provided that notwithstanding
the foregoing, in no event shall the time periods provided in this Section 3 be
suspended for more than 6 months.
(h) Termination of Repurchase Option. The rights under this Section 3
of the LLC and/or its assignees to repurchase Vested Securities (but not
Unvested Securities) shall terminate upon the consummation of a Public Offering.
All rights under this Section 3 of the LLC and/or its assignees to repurchase
Executive Securities (including both Vested Securities and Unvested Securities)
shall terminate upon a Qualified Sale of the Corporation.
Section 4. Restrictions on Transfer.
(a) Opinion of Valid Transfer. In addition to any other restrictions on
transfer imposed by this Agreement, the Transaction Agreement, the LLC Agreement
or the Registration Rights Agreement, no holder of Executive Securities may
sell, transfer or dispose of any Executive Securities (except pursuant to an
effective registration statement under the Securities Act) without first
delivering to the LLC an opinion of counsel (reasonably acceptable in form and
substance to the LLC) that neither registration nor qualification under the
Securities Act or applicable state securities laws is required in connection
with such sale, transfer, or other disposition.
(b) Restrictive Legend. The certificates representing Executive
Securities shall bear the following legend:
-12-
<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON JULY
8, 1998, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND SUCH SECURITIES MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED
BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AND
REPURCHASE OPTIONS SET FORTH IN AN EXECUTIVE PURCHASE AGREEMENT BETWEEN THE
ISSUER OF SUCH SECURITIES (THE "ISSUER") AND THE INITIAL HOLDER OF SUCH
SECURITIES. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE
ISSUER'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
The legend set forth above shall be removed from the certificates
evidencing any shares or units which cease to be Executive Securities.
(c) Retention of Executive Securities. Executive Purchaser shall not at
any time directly or indirectly sell, transfer, assign, pledge or otherwise
dispose of (whether with or without consideration and whether voluntarily or
involuntarily or by operation of law) any interest in any Executive Securities
(a "Transfer"),
-13-
<PAGE>
except (w) pursuant to the repurchase provisions of Section 3 hereof or of
Section 3.04 of the LLC Agreement, (x) pursuant to a Drag-Along Sale (as defined
in the Transaction Agreement) under Section 6.06 of the Transaction Agreement,
(y) after an initial Public Offering, as permitted in Section 4(c)(ii) below or
(z) pursuant to Section 4(c)(iii) below (each of (w), (x), (y) and (z) above, an
"Exempt Transfer"). The restrictions on the Transfer of Executive Securities set
forth in this paragraph (c) shall continue in effect (1) with respect to each
Executive Security following any permitted Transfer thereof pursuant to Section
4(c)(i), but shall cease upon any Exempt Transfer thereof and (2) following
termination of Executive's employment for any reason.
Notwithstanding the foregoing provisions of this clause (c):
(i) the Executive will be permitted to transfer, with or without
consideration, Executive Securities (A) pursuant to applicable laws of
descent and distribution or (B) among Executive's Family Group; provided
that the restrictions contained in this Section shall continue to be
applicable to, and bind the transferee of, the Executive Securities after
any such transfer, the transferees of such Executive Securities shall have
agreed in writing in an instrument satisfactory in form and substance to
the Board to be bound by the provisions of this Agreement, the LLC
Agreement, the Registration Rights Agreement and the Transaction Agreement
with respect to the Executive Securities so transferred, and (prior to the
death of Executive) each such transferee of Executive Securities shall have
entered into proxies and other agreements satisfactory to the Board
pursuant to which Executive shall have the sole right to vote such
Executive Securities for all purposes. For purposes of this Agreement,
"Family Group" means Executive's spouse and descendants (whether natural or
adopted), any trust which at the time of such transfer and at all times
thereafter is and remains solely for the benefit of Executive and/or
Executive's spouse and/or descendants and any family partnership the
partners of which consist solely of Executive, such spouse, such
descendants or such trusts.
(ii) After the initial Public Offering, (x) all Transfer
restrictions on Unvested Securities shall continue in effect and (y)
Transfer restrictions on Vested Securities will terminate upon the fourth
anniversary of closing (the "IPO Closing") of the initial Public Offering.
Transfers of Vested Securities prior to the fourth anniversary of the IPO
Closing will only be permitted to the following extent:
(A) At any time prior to the fourth anniversary of the IPO
Closing, Executive will be permitted to Transfer a number of
-14-
<PAGE>
Vested Securities that (together with Vested Securities previously
Transferred in an Exempt Transfer) in the aggregate as a percentage of
Executive Securities held by Executive as of the IPO Closing (the
"Initial CS Holdings") does not exceed the percentage of MSCP's
Investor Equity held as of the IPO Closing that has since been sold.
(B) During the two year period ending on the second
anniversary of the IPO Closing, Executive will be permitted (1) (a) to
pledge (but not otherwise Transfer) a number of Vested Securities that
(together with Vested Securities previously Transferred in an Exempt
Transfer) in the aggregate does not exceed 25% of the Initial CS
Holdings and (b) to Transfer a number of Vested Securities that does
not exceed 5% of the Initial CS Holdings in any one year period and
that does not exceed 10% of the Initial CS Holdings in such two year
period (such 5% and 10% shall be reduced by any amount previously
Transferred in an Exempt Transfer) or (2) if greater, to Transfer the
number of Vested Securities permitted to be Transferred pursuant to
clause (c)(ii)(A) above.
(C) At any time after such second anniversary of the IPO
Closing and before such fourth anniversary of the IPO Closing,
Executive will be permitted to Transfer the greater of (1) a number of
Vested Securities that (together with Vested Securities previously
Transferred in an Exempt Transfer) in the aggregate does not exceed
50% of the Initial CS Holdings and (2) the number of Vested Securities
permitted to be Transferred pursuant to clause (c)(ii)(A) above.
(iii) In addition to the foregoing permitted Transfers, the Board
may, in its discretion, permit Transfers by the Executive at any time in
the case of personal hardship (such as personal or family illness).
Section 5. Issuance of Tier I and Tier II Options.
(a) In the event of a dissolution of the LLC upon the consummation of a
Public Offering (a "Public Offering Liquidation"), if the Management Percentage
for such Public Offering Liquidation is less than 33.33% the Corporation shall
contemporaneously with such liquidation issue to each holder of Class B Units:
-15-
<PAGE>
(i) options (the "Tier I Options") entitling the holder to acquire,
at an exercise price per share equal to the IPO Price, a number of shares
of the Corporation's Common Stock equal to the lesser of (x) the number of
shares of Common Stock that such holder would have received under the LLC
Agreement in connection with such Public Offering Liquidation if the
Management Percentage had been 10%, and (y) the difference of (A) the
number of shares of Common Stock that such holder would have received in
connection with such Public Offering Liquidation if the Management
Percentage had been 33.33%, minus (B) the number of shares of Common Stock
that such holder actually received in such liquidation; and
(ii) if the Management Percentage for such Public Offering
Liquidation is less than 23.33%, in addition to any Tier I Options, options
(the "Tier II Options") entitling the holder to acquire, at an exercise
price per share equal to the Tier II Price, a number of shares of the
Corporation's Common Stock equal to the lesser of (x) the number of shares
of Common Stock calculated pursuant to clause (i)(x) above, and (y) the
difference of (A) the number of shares of Common Stock calculated pursuant
to clause (i)(y) above, minus (B) the number of shares of Common Stock into
which the Tier I Options issued to such holder pursuant to clause (i) above
are initially exercisable.
The Tier I Options and Tier II Options shall expire on the seventh
anniversary of their issuance.
(b) For purposes of performing the calculations in Sections 5(a)(i) and
5(a)(ii) above, a distribution of any property other than Common Stock in a
Public Offering Liquidation shall be considered to have been a distribution of a
number of shares of Common Stock equal to the quotient of (A) the aggregate fair
market value of such distributed property on the date of such liquidation, as
determined in good faith by the Board, divided by (B) the fair market value of
one share of Common Stock on the date of such liquidation, as determined in good
faith by the Board.
(c) For purposes of this section, the following terms shall have the
meanings set forth below:
"IPO Price" means the gross price per share at which shares of the
Corporation's Common Stock are initially offered and sold to the public in
connection with a Public Offering.
-16-
<PAGE>
"Liquidation FMV" has the meaning ascribed to such term in the LLC
Agreement.
"Management Percentage" has the meaning ascribed to such term in Section
4.01(c) of the LLC Agreement.
"Return Multiple" has the meaning ascribed to such term in Section 4.01(c)
of the LLC Agreement.
"Tier II Price" means, with respect to a particular Public Offering
Liquidation, the quotient of (x) the amount that would result in a Return
Multiple of 3.5 if the Liquidation FMV for such liquidation were equal to such
amount, divided by (y) the number of shares of Common Stock held by the LLC
immediately prior to such liquidation.
Section 6. Confidentiality, Noncompete, and Nonsolicitation.
(a) Nondisclosure and Nonuse of Confidential Information. Executive
shall not willfully disclose or use at any time, either during his employment
with the Corporation or thereafter, any Confidential Information (as defined
below) of which Executive is or becomes aware, whether or not such information
is developed by him, except to the extent that such disclosure or use is
directly related to and required by Executive's performance of duties assigned
to Executive by the LLC or the Corporation. Executive shall take all
appropriate steps to safeguard Confidential Information and to protect it
against disclosure, misuse, espionage, loss and theft. As used in this
Agreement, the term "Confidential Information" means information that is not
generally known to the public and that is used, developed or obtained by the
LLC, the Corporation, or its Subsidiaries in connection with their business,
including but not limited to (i) products or services, (ii) fees, costs and
pricing structures, (iii) designs, (iv) analysis, (v) drawings, photographs and
reports, (vi) computer software, including operating systems, applications and
program listings, (vii) flow charts, manuals and documentation, (viii) data
bases, (ix) accounting and business methods, (x) inventions, devices, new
developments, methods and processes, whether patentable or unpatentable and
whether or not reduced to practice, (xi) customers and clients and customer or
client lists, (xii) copyrightable works, (xiii) all technology and trade
secrets, (xiv) strategic plans, business plans, budgets and financial models,
and (xv) all similar and related information in whatever form. Notwithstanding
the foregoing, "Confidential Information" shall not include any information (A)
of which Executive became aware prior to his affiliation with the Corporation
and the LLC, (B) of which Executive learns from sources other than the LLC, the
Corporation or its Subsidiaries or (C) which is disclosed in a prospectus or
other documents for dissemination to the public or published in a form generally
available to the public prior to the date Executive proposes to
-17-
<PAGE>
disclose or use such information. Information shall not be deemed to have been
published merely because individual portions of the information have been
separately published, but only if all material portions thereof have been
published.
(b) The Corporation's Ownership of Intellectual Property.
(i) Acknowledgment of Corporation Ownership. In the event that
Executive as part of his activities on behalf of the Corporation generates,
creates, authors or contributes to any invention, design, new development,
device, product, method or process (whether or not patentable or reduced to
practice or constituting Confidential Information), any copyrightable work
(whether or not constituting Confidential Information) or any other form of
Confidential Information relating directly or indirectly to the
Corporation's business as now or hereafter conducted (collectively,
"Intellectual Property"), Executive acknowledges that such Intellectual
Property is the exclusive property of the Corporation and hereby assigns
all right, title and interest in and to such Intellectual Property to the
Corporation. Any copyrightable work prepared in whole or in part by
Executive will be deemed "a work made for hire" under Section 201(b) of the
1976 Copyright Act, and the Corporation shall own all of the rights
comprised by the copyright therein. Executive shall promptly and fully
disclose all Intellectual Property to the Corporation and shall cooperate
with the Corporation to protect the Corporation's interests in and rights
to such Intellectual Property (including, without limitation, providing
reasonable assistance in securing patent protection and copyright
registrations and executing all documents as reasonably requested by the
Corporation, whether such requests occur prior to or after termination of
Executive's employment with the Corporation).
(ii) Executive Invention. Executive understands that Section
6(b)(i) of this Agreement regarding the Corporation's ownership of
Intellectual Property does not apply to any invention for which no
equipment, supplies, facilities or trade secret information of the
Corporation were used and which was developed entirely on Executive's own
time, unless (A) the invention relates to the business of the Corporation
or to the Corporation's actual or demonstrably anticipated research or
development or (B) the invention results from any work performed by
Executive for the Corporation.
(c) Delivery of Materials upon Termination of Employment. As requested
by the Corporation from time to time and upon the termination of
-18-
<PAGE>
Executive's employment with the Corporation for any reason, Executive shall
promptly deliver to the Corporation all copies and embodiments, in whatever
form, of all Confidential Information and Intellectual Property in Executive's
possession or within his control (including, but not limited to, written
records, notes, photographs, manuals, notebooks, documentation, program
listings, flow charts, magnetic media, disks, diskettes, tapes and all other
materials containing any Confidential Information or Intellectual Property)
irrespective of the location or form of such material and, if requested by the
Corporation, shall provide the Corporation with written confirmation that all
such materials have been delivered to the Corporation.
(d) Noncompete. Executive acknowledges and agrees with the Corporation
and the LLC that in the course of his employment with the Corporation he shall
become familiar with the Corporation's trade secrets and with other Confidential
Information concerning the Corporation and the LLC and their respective
affiliates, that Executive's services to the Corporation and the LLC are unique
in nature and of an extraordinary value to the Corporation and the LLC, and that
the Corporation and the LLC would be irreparably damaged if Executive were to
provide similar services to any person or entity competing with the LLC or the
Corporation or engaged in a similar business. In connection with the issuance
to Executive of the Executive Securities hereunder, in consideration of and as
an inducement to the LLC's and the Corporation's entering into this Agreement
and the Corporation's agreeing to issue the Tier I and Tier II Options to
Executive and to assume the obligations of the LLC upon dissolution thereof, and
in further consideration of the Noncompete Compensation (as defined below),
Executive accordingly covenants and agrees with the Corporation and the LLC that
during the Noncompete Period (as defined below), Executive shall not, directly
or indirectly, either for himself or for or through any other individual,
corporation, partnership, joint venture or other entity, participate in any
business or enterprise conducting or proposing to conduct business in any
Covered State which engages or proposes to engage in the provision of
telecommunications services or in any other business similar to or competitive
with any business engaged in by the Corporation during the period of time in
which Executive is employed by the Corporation.
For purposes of this Agreement, (i) the term "participate in" shall
include, without limitation, having any direct or indirect interest in any
corporation, partnership, joint venture or other entity, whether as a sole
proprietor, owner, stockholder, partner, joint venturer, creditor or otherwise,
or rendering any direct or indirect service or assistance to any individual,
corporation, partnership, joint venture or other business entity (whether as a
director, officer, manager, representative, supervisor, employee, agent,
consultant or otherwise), other than ownership of up to 2% of the outstanding
stock of any class which is publicly
-19-
<PAGE>
traded and (ii) the term "Covered State" means (A) Connecticut, Delaware,
Illinois, Indiana, Maine, Massachusetts, Michigan, New Hampshire, New Jersey,
New York, Ohio, Pennsylvania, Rhode Island and Vermont, (B) any State in which
the Corporation is engaged in business or as to which the Corporation has at any
time had an Approved Business Plan to engage in business as of the date of
termination of Executive's employment with the Corporation and (C) any other
State for which a business plan has been submitted to the Board pursuant to the
Transaction Agreement as of or prior to the termination of Executive's
employment or for which Corporation personnel have taken substantial steps
towards completing with a view to so submitting, provided, that any such State
under this clause (C) shall cease to be a Covered State if such business plan
does not become an Approved Business Plan within the earlier of (x) 180 days
after such submission and (y) 180 days after the termination of Executive's
Employment, and, in each case, the Corporation's management and the LLC have
attempted in good faith during such period to reach agreements that would enable
such plan to become an Approved Business Plan. Executive agrees that this
covenant is reasonable with respect to its duration, geographical area and scope
and is fully enforceable.
(e) Nonsolicitation. During the Noncompete Period, Executive shall not
(i) induce or attempt to induce any employee, officer or consultant of the
Corporation or any Subsidiary to leave the employ of the Corporation or any
Subsidiary, or in any way interfere with the relationship between the
Corporation or any Subsidiary and any employee, officer or consultant thereof,
(ii) hire directly or through another entity any person who was an employee of
the Corporation or any Subsidiary at any time during the twelve months prior to
the date such person is to be so hired, or (iii) induce or attempt to induce any
customer, supplier, licensee or other business relation of the LLC, the
Corporation or any Subsidiary to cease doing business with the LLC, the
Corporation or any Subsidiary, or in any way interfere with the relationship
between any such customer, supplier, licensee or business relation and the LLC,
the Corporation and its Subsidiaries (including, without limitation, making any
negative statements or communications concerning the LLC, the Corporation or any
Subsidiary).
(f) Noncompete Period; Noncompete Compensation. The "Noncompete Period"
shall commence on the date hereof and shall continue until the later of (A) the
fourth anniversary of the date hereof and (B) the second anniversary of the date
of termination of employment; provided that the Noncompete Period shall
terminate if at any time after the date of termination the Corporation ceases to
pay Executive his Noncompete Compensation (unless Executive violates any
covenant set forth in this Section 6, in which case the Noncompete Period shall
continue even absent payment of the Noncompete Compensation). The Corporation
will notify the Executive within 30 days after
-20-
<PAGE>
termination of employment whether the Corporation intends to enforce this non-
compete covenant. In the event of termination of Executive's employment without
Cause, if the Corporation so notifies the Executive in writing that this
covenant will be enforced against the Executive, then the Corporation must give
the Executive 60 days' notice of the date on which this covenant will cease to
be enforced and on which the related Noncompete Compensation will cease to be
paid (provided that if Executive violates any covenant set forth in this Section
6, the Noncompete Period shall continue without the need for any further
Noncompete Compensation). "Noncompete Compensation" shall consist of 100% (or in
the case of termination with Cause, 50%) of the base salary that Executive
received as compensation from the Corporation and its Subsidiaries immediately
prior to termination (Executive's "Previous Salary") together with the
continuation of the medical benefits that the Corporation provided to Executive
immediately prior to termination (Executive's "Previous Benefits"); provided
that if at any time during the Noncompete Period Executive obtains other
employment elsewhere, Executive shall immediately notify the Corporation to such
effect, and Executive's Noncompete Compensation shall during the period of such
employment (i) be reduced (but not below zero) by Executive's compensation for
such employment (but where the Corporation pays only 50% of the Previous Salary,
as aforesaid, only reduced by the amount of compensation from such other
employment in excess of such 50% of the Previous Salary) and (ii) not include
the continued provision of medical benefits if such employment provides medical
benefits comparable to the Previous Benefits. The Noncompete Compensation shall
not constitute an obligation to pay any severance to such Executive but simply
means that so long as the Corporation pays the Noncompete Compensation up to the
time the Executive first violates any covenant set forth in this Section 6, the
Noncompete Period will remain in full force and effect for its full term.
Payment of Noncompete Compensation, if any, will be paid in accordance with the
Corporation's normal payroll practices.
(g) Judicial Modification. Executive acknowledges that the terms of
this Section 6 were negotiated in good faith by the parties hereto, are
reasonable and necessary in light of Executive's unique position, responsibility
and knowledge of the operations of the Corporation and the unfair advantage that
Executive's knowledge and expertise concerning Corporation's business would
afford a competitor of the Corporation and are not more restrictive than
necessary to protect the legitimate interests of the parties hereto. If the
final judgment of a court of competent jurisdiction, or any final non-appealable
decision of an arbitrator in connection with a mandatory arbitration, declares
that any term or provision of this Section 6 is invalid or unenforceable, the
parties agree that the court making the determination of invalidity or
unenforceability shall have the power to reduce the scope, duration, or
geographic area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable
-21-
<PAGE>
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment or decision may be
appealed.
(h) Dispute Resolution. Arbitration. All claims, disputes,
controversies and other matters in question arising out of or relating to this
Agreement, or to the alleged breach hereof, shall be settled by preliminary
negotiation between the Board and the Executive (the "parties") or, if such
preliminary negotiation is unsuccessful for any reason (but in any event not
later than 10 days after commencement of such negotiation), by binding
arbitration in accordance with the procedures set forth in this Section 6(h).
Without limiting the mandatory arbitration provision set forth in this Section
6(h), each of the parties hereto (i) waives the right to bring an action in any
court of competent jurisdiction with respect to any such claims, controversies
and disputes (other than any such action to enforce the award or other remedy
resulting from any arbitration pursuant to this Section 6(h) or to prevent any
arbitrator from exceeding the authority granted to the arbitrators hereunder)
and (ii) waives the right to trial by jury in any suit, action or other
proceeding brought on, with respect to or in connection with this Agreement.
(i) Binding Arbitration. Upon service of a notice of demand for
binding arbitration by any party hereto, arbitration shall be commenced and
conducted as follows:
(A) Arbitrators. All claims, disputes, controversies and
other matters (collectively "matters") in question shall be referred
to and decided and settled by a panel of three arbitrators with
experience in analyzing, understanding, and making determinations
concerning matters in the telecommunications industry, one selected by
each of the parties within 15 days after such notice of demand (with
the parties to notify each other of their respective selections at the
same time) and the third to be selected by the two arbitrators so
selected within 15 days of their selection pursuant to this subclause
(A),
(B) Cost of Arbitration. The cost of each arbitration
proceeding, including without limitation the arbitrators' compensation
and expenses, hearing room charges, court reporter transcript charges,
etc., shall be allocated among the parties based upon the percentage
which the portion of the Contested Amount not awarded to each party
bears to the amount actually contested by such party. The arbitrators
shall also award the party that
-22-
<PAGE>
prevails substantially in its pre-hearing position its reasonable
attorneys' fees and costs incurred in connection with the arbitration.
The arbitrators are specifically instructed to award attorneys' fees
and expenses for instances of abuse of the discovery process. All
costs of arbitration shall be paid initially 50% by the LLC (or after
the dissolution of the LLC, the Corporation) and 50% by the Executive
pending the determination of the arbitrators pursuant to the previous
sentences.
(C) Situs of Proceedings. The situs of the arbitration
shall be in New York, New York, or such other place as is mutually
agreeable to the parties.
(ii) Pre-hearing Discovery. The parties shall have the right to
conduct and enforce pre-hearing discovery in accordance with the then
current Federal Rules of Civil Procedure, subject to the following
limitations: (A) each party may serve no more than one set of
interrogatories which set shall ask no more than twenty questions; (B) each
party may depose the other party's expert witnesses who will be called to
testify at the hearing, plus up to six fact witnesses without regard to
whether they will be called to testify (each party will be entitled to a
total of not more than 24 hours of depositions of the other party's
witnesses, and not more than 6 hours with respect to any single witness);
and (C) document discovery and other discovery shall be under the control
of and enforceable by the arbitrators, and all disputes relating thereto
shall be decided by the arbitrators. Notwithstanding any contrary
foregoing provisions, the arbitrators shall have the power and authority
to, and to the fullest extent practicable shall, abbreviate arbitration
discovery in a manner which is fair to all parties in order to expedite the
conclusion of each alternative dispute resolution proceeding.
(iii) Pre-hearing Conference. Within thirty (30) days after
filing of notice of demand for binding arbitration, the arbitrators shall
hold a pre-hearing conference to establish schedules for completion of
discovery, for exchange of exhibit and witness lists, for arbitration
briefs, for the hearing, and to decide procedural matters and all other
questions that may be presented.
(iv) Hearing Procedures. The hearing shall be conducted to
preserve its privacy and to allow reasonable procedural due process. Rules
of evidence need not be strictly followed, and the hearing shall be
streamlined as follows: (A) documents shall be self-authenticating, subject
to valid objection by the opposing party; (B) expert reports, witness
biographies, depositions and affidavits may be utilized, subject to the
opponent's right of a live cross-examination of the witness in person; (C)
charts, graphs and summaries shall be utilized to present voluminous data,
provided (1) that the underlying data was made available to the opposing
party thirty (30) days prior to the hearing, and (2) that the preparer of
each chart, graph or summary is available for explanation and live cross-
examination in person; (D) the hearing should be held on consecutive
business days without interruption to the maximum extent practicable; and
(E) the arbitrators shall establish all other procedural rules for the
conduct of the arbitration in accordance with the rules of arbitration of
the American Arbitration Association.
(v) Governing Law. This arbitration provision shall be governed
by, and all rights and obligations specifically enforceable under and
pursuant to, the Federal Arbitration Act (9 U.S.C. (S) 1, et seq.) (the
"FAA"). Notwithstanding the foregoing, this Section 6(h) shall be
construed to the maximum extent possible to comply with the laws of the
State of Delaware, including the Uniform Arbitration Act (10 Del.C. (S)
5701, et seq.) (the "Delaware Arbitration Act"). If, nevertheless, it
shall be determined by a court of competent jurisdiction that any provision
or wording of this Section 6(h), including any rules of the FAA or the
American Arbitration Association referred to therein, shall be invalid or
unenforceable under said Delaware Arbitration Act or other applicable law,
such invalidity or unenforceability should not invalidate the entire
Section 6(h). In that case, this Section 6(h) shall be construed so as to
limit any term or provision so as to make it valid or enforceable within
the requirements of the Delaware Arbitration Act or other applicable law,
and, in the event such term or provision cannot be so limited, this Section
6(h) shall be construed to omit such invalid or unenforceable term or
provision.
(vi Consolidation. No arbitration shall include, by
consolidation, joinder or in any other manner, any additional person not a
party to this Agreement (other than affiliates of any such party, which
affiliates may be included in the arbitration), except by written consent
of the parties hereto containing a specific reference to this Agreement.
(vii Award; Time Limit. The arbitrators are empowered to render
an award of general compensatory damages and equitable relief (including,
without limitation, injunctive relief), but are not empowered to award
punitive damages. The award rendered by the arbitrators (A) shall be
final; (B) shall, except as required by law, not constitute a basis for
collateral estoppel as to any issue; and (C) shall, except as required by
law, not be subject to vacation or modification. The arbitrators shall
render
-23-
<PAGE>
any award or otherwise conclude the arbitration no later than 120
days after the date notice of demand for binding arbitration is given
pursuant to this Section 6(h).
(viii Confidentiality. The parties hereto will maintain the
substance of any proceedings hereunder in confidence and the arbitrators,
prior to any proceedings hereunder, will sign an agreement whereby the
arbitrator agrees to keep the substance of any proceedings hereunder in
confidence.
Section 7. Definitions.
"Approved Business Plan" has the meaning ascribed to such term in the
Transaction Agreement.
"Base Rate" means, on any date, a variable rate per annum equal to the rate
of interest most recently published by The Wall Street Journal as the "prime
rate" at The Chase Manhattan Bank.
"Basic Contributions" has the meaning ascribed to such term in the LLC
Agreement.
"Board" means the board of representatives of the LLC (or, after the
dissolution of the LLC, the board of directors of the Corporation).
"Cause" means (i) Executive's theft or embezzlement, or attempted theft or
embezzlement, of money or property of the Corporation or the LLC, Executive's
perpetration or attempted perpetration of fraud, or Executive's participation in
a fraud or attempted fraud, on the Corporation or the LLC, or Executive's
unauthorized appropriation of, or attempt to misappropriate, any tangible or
intangible assets or property of the Corporation or the LLC, (ii) any act or
acts of disloyalty, misconduct or moral turpitude by Executive which the Board
determines in good faith has been or is likely to be demonstrably injurious to
the interest, property, operations, business or reputation of the Corporation or
the LLC, or Executive's conviction of a crime other than minor traffic
violations or other similar minor offenses, (iii) Executive's repeated
intentional refusal or willful failure (other than by reason of Disability) to
carry out reasonable instructions by his superiors or the Board or the
Corporation's Board of Directors or (iv) Executive's breach of any provision of
Section 6.
-24-
<PAGE>
"Class A Units" has the meaning ascribed to such term in the LLC Agreement.
"Class B Units" has the meaning ascribed to such term in the LLC Agreement.
"Class C Units" has the meaning ascribed to such term in the LLC Agreement.
"Class D Units" has the meaning ascribed to such term in the LLC Agreement.
"Common Stock" means the Corporation's common stock, par value $0.01 per
share.
"Disability" means (i) any permanent physical or mental incapacity or
disability rendering the Executive unable or unfit to perform effectively the
duties and obligations of his employment or to participate effectively and
actively in the management of the Corporation, or (ii) any illness, accident,
injury, physical or mental incapacity or other disability, where such condition
has rendered the Executive unable or unfit to perform effectively the duties and
obligations of his employment or to participate effectively and actively in the
management of the Corporation for a period of at least 90 consecutive days or
four months in any twelve-month period (in either case, as determined in the
good faith judgment of the Board).
"Executive Purchaser" means Executive and any Person who acquires Executive
Securities pursuant to Section 4(c)(i) and has executed a counterpart of this
Agreement, the LLC Agreement and the Transaction Agreement, agreeing to be bound
by the terms of each such agreement.
"Executive Securities" means (i) the Class B Units issued to the Executive
hereunder (but not including any Class C Units or Class D Units issued by the
LLC in exchange for such Class B Units), (ii) upon dissolution of the LLC, any
securities of the Corporation distributed in respect of the securities referred
to in clause (i) above pursuant to such dissolution, (iii) any Tier I Options or
Tier II Options issued to any holder of Executive Securities hereunder, (iv) any
other securities of the LLC or the Corporation hereafter acquired by Executive,
and (v) any securities issued directly or indirectly with respect to the
foregoing securities by way of a split, dividend, or other division of
securities, or in connection with a
-25-
<PAGE>
combination of securities, recapitalization, merger, consolidation, or other
reorganization, or upon conversion or exercise of any of the foregoing
securities. Executive Securities for purposes of this Agreement shall not
include any securities issued to any other executive of the Corporation under
any other agreement. As to any particular securities constituting Executive
Securities, such securities shall cease to be Executive Securities when they
have been (a) effectively registered under the Securities Act and disposed of in
accordance with the registration statement covering them, (b) distributed to the
public through a broker, dealer or market maker pursuant to Rule 144 under the
Securities Act (or any similar provision then in force), (c) repurchased by any
holder of Class A Units, or by the LLC (including in exchange for Class C Units
or Class D Units), the Corporation or any Subsidiary thereof or (d) Transferred
pursuant to an Exempt Transfer under Section 4.
"Good Reason" means (i) a substantial permanent reduction in the scope of
Executive's authority or level of responsibility from that in effect as of the
date hereof for any reason unrelated to Executive's Disability, which has not
been revised by the Corporation within 90 days after timely written notice to
the Corporation containing a reasonably detailed description of such reduction;
or (ii) a relocation of Executive's principal place of employment from its then
existing location to a site which is more than 100 miles from such location.
"Investor Equity" has the meaning ascribed such term in the Transaction
Agreement.
"LLC Agreement" means the limited liability company agreement dated as of
the date hereof, entered into by and among the members of the LLC, as amended
from time to time in accordance with its terms.
"Management Equity" has the meaning ascribed to such term in the
Transaction Agreement.
"MSCP" has the meaning ascribed such term in the LLC Agreement.
"Original Cost" means, at any given time, (i) with respect to any Class B
Units, the total Basic Contributions made with respect to such Class B Units
pursuant to the LLC Agreement prior to such time, (ii) with respect to any
Common Stock, the Basic Contribution attributable to such Common Stock based on
the number of shares of Common Stock received by Executive upon the
-26-
<PAGE>
dissolution of the LLC, and (iii) with respect to any other securities, the
original price paid upon issuance of such securities.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Public Offering" means any underwritten sale of the Corporation's common
stock pursuant to an effective registration statement under the Securities Act
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 or financing for a merger or acquisition, and (ii) any
issuance of common stock or rights to acquire common stock to employees of the
Corporation or its Subsidiaries as part of an incentive or compensation plan.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the date hereof, by and between the Corporation, the holders of
Investor Equity and the holders of Management Equity, as amended from time to
time in accordance with the terms thereof.
"Securities Act" means the Securities Act of 1933, as amended, and
applicable rules and regulations thereunder.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, and applicable rules and regulations thereunder.
"Subsequent Contributions" has the meaning ascribed to such term in the
Transaction Agreement.
"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, partnership, association or other business entity of which
(i) if a corporation, a majority of the total voting power of shares of stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or
-27-
<PAGE>
indirectly, by any Person or one or more Subsidiaries of that Person or a
combination thereof. For purposes hereof, a Person or Persons shall be deemed to
have a majority ownership interest in a limited liability company, partnership,
association or other business entity if such Person or Persons shall be
allocated a majority of limited liability company, partnership, association or
other business entity gains or losses or shall be or control any managing
director, managing member, manager or general partner of such limited liability
company, partnership, association or other business entity.
"Transaction Agreement" means the Transaction Agreement dated as of the
date hereof, by and between the Corporation and the LLC and the holders of
interests in the LLC, as amended from time to time in accordance with the terms
thereof.
"Vesting Termination Breach" means (i) any breach by Executive of Section
6(a), Section 6(d) or Section 6(e) or (ii) any breach by Executive of any other
provision of Section 6 which is material or is intentionally and knowingly
committed by Executive.
Section 8. Miscellaneous Provisions.
(a Further Assurances; Voting Proxy. As a condition to the LLC's and
the Corporation's entering into this Agreement and the LLC's issuance of
Executive Securities to the Executive Purchasers, and as further consideration
therefor:
(i Executive hereby unconditionally guarantees the full and
prompt performance of each Executive Purchaser's obligations under this
Agreement and under each of the agreements contemplated hereby to which
such Executive Purchaser is a party, and Executive agrees that he will take
all necessary or desirable actions to ensure such performance as are
reasonably requested by the LLC or the Corporation. Executive further
agrees that he will not provide any directions to an Executive Purchaser
that are contrary to any obligation imposed on such Executive Purchaser
under this Agreement or under such other agreements, and that Executive
will not fail to provide any directions to an Executive Purchaser if such
failure would cause an Executive Purchaser not to satisfy its obligations
hereunder or thereunder. This guarantee shall be irrevocable with respect
to each Executive Security held by an Executive Purchaser (and shall
survive any transfer thereof, or the death, disability,
-28-
<PAGE>
incompetency, or bankruptcy of such Executive Purchaser) until such time as
such Executive Security is transferred in accordance with the terms hereof
to a Person other than a member of Executive's Family Group, at which time
this guarantee shall be deemed revoked with respect to such transferred
security (but not with respect to any other Executive Securities). No
invalidity, irregularity or unenforceability of this Agreement or such
other agreements by reason of an Executive Purchaser's incapacity, minor
status, incompetency, bankruptcy, insolvency, or other similar occurrence
shall impair, affect or be a defense to the obligations of Executive under
this guarantee.
(ii Each Executive Purchaser (other than Executive) hereby
appoints Executive as his true and lawful proxy and attorney-in-fact, with
full power of substitution, to vote all of such Executive Purchaser's
Executive Securities on all matters to be voted on by the holders of such
securities (whether as a member vote, a shareholder vote, an approval right
under this Agreement or the other agreements contemplated hereby, or
otherwise). These proxies and powers granted by each Executive Purchaser
pursuant to this Section 8 are coupled with an interest, and are given to
secure such Executive Purchasers' obligations under this Agreement and the
other agreements contemplated hereby to which the Executive Purchasers are
parties. Such proxies and powers shall be irrevocable with respect to each
Executive Security held by an Executive Purchaser (and shall survive and
not be affected by any transfer thereof, or the death, disability,
incompetency, or bankruptcy of such Executive Purchaser) until such time as
such Executive Security is transferred in accordance with the terms hereof
to a Person other than a member of Executive's Family Group, at which time
such proxy shall be deemed revoked with respect to such transferred
security (but not with respect to any other Executive Securities).
(b Transfers in Violation of Agreement. Any Transfer or attempted
Transfer of any Executive Securities in violation of any provision of this
Agreement shall be void, and none of the LLC, the Corporation, or any Subsidiary
thereof shall record such purported Transfer on its books or treat any purported
transferee of such Executive Securities as the owner of such securities for any
purpose.
-29-
<PAGE>
(c Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(d Complete Agreement. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt 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.
(e Counterparts. This Agreement may be executed in separate
counterparts, none of which need contain the signature of more than one party
hereto but each of which shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(f Successors and Assigns. (i) Except as otherwise provided herein,
this Agreement shall bind the parties hereto and their respective successors and
permitted assigns and shall inure to the benefit of and be enforceable by the
parties hereto and their respective successors and permitted assigns whether so
expressed or not.
(ii Each of the Corporation, the LLC, the Executive Purchaser, and
each holder of Executive Securities hereby acknowledges that immediately upon
and after the dissolution of the LLC, (A) all contractual obligations and duties
of the LLC hereunder shall thereafter bind and be enforceable against the
Corporation, (B0 all rights and powers granted to the LLC hereunder (including,
without limitation, the repurchase rights set forth in Section 3) shall inure to
the benefit of and be enforceable by the Corporation, (C) all references to the
LLC shall thereafter be deemed to be references to the Corporation, and (D)
except if the context clearly otherwise requires, this Agreement shall
thereafter operate and be construed as if the word "Corporation" were
substituted for the word "LLC" in each such instance.
-30-
<PAGE>
(g Governing Law; Submission to Jurisdiction. This Agreement shall be
governed by, and construed under, the laws of the State of Delaware, all rights
and remedies being governed by said laws, without regard to conflict of law
principles. Each of the parties hereto agrees (i) that this Agreement involves
at least $100,000 and (ii) that this Agreement has been entered into by the
parties hereto in express reliance upon 6 Del.C. (S) 2708. Each party hereby
irrevocably and unconditionally agrees (a) to be subject to the jurisdiction of
the courts of the State of Delaware and the federal courts sitting in the State
of Delaware or in the County of New York in the State of New York and (b) to the
extent such party is not otherwise subject to service of process in the State of
Delaware, to appoint and maintain an agent in the State of Delaware as such
party's agent for acceptance of legal process, and that service made pursuant to
(b) above shall have the same legal force and effect as if served upon said
party personally within the State of Delaware. For purposes of implementing the
parties' agreement to appoint and maintain an agent for service of process in
the State of Delaware, each such party that has not as of the date hereof
already duly appointed such an agent does hereby appoint RL&F Service Corp., One
Rodney Square, 10th Floor, Wilmington, New Castle County, Delaware 19801, as
such agent.
(h Remedies. Each of the parties to this Agreement (including any
holder of Investor Equity or employee of the Corporation to which the LLC
assigns any of its repurchase rights under Section 3 hereof) shall be entitled
to enforce its rights under this Agreement specifically, to recover damages and
costs (including reasonable attorney's fees and expenses) caused by any breach
of any provision of this Agreement and to exercise all other rights existing in
its favor. The parties hereto agree and acknowledge that money damages would
not be an adequate remedy for any breach of the provisions of this Agreement and
that any party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or deposit) for specific
performance and/or other injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement.
(i Amendment, Modification, or Waiver. The provisions of this
Agreement may be amended, modified, or waived only with the prior written
consent of the LLC and the Executive.
(j Third-Party Beneficiaries. The parties hereto acknowledge and
agree that certain provisions of this Agreement are intended for the benefit of
-31-
<PAGE>
certain holders of Investor Equity or employees of the Corporation to which the
LLC assigns any of its repurchase rights under Section 3 hereof, that such
Persons are third-party beneficiaries of this Agreement and that the provisions
of this Agreement shall be enforceable by such Persons as provided herein.
(k Business Days. If any time period for giving notice or taking
action hereunder expires on a day which is a Saturday, Sunday or legal holiday
in the State of New York, the time period shall be automatically extended to the
business day immediately following such Saturday, Sunday or holiday.
(l Descriptive Headings; Interpretation; No Strict Construction. The
descriptive headings of this Agreement are inserted for convenience only and do
not constitute a substantive part of this Agreement. Whenever required by the
context, any pronoun used in this Agreement shall include the corresponding
masculine, feminine or neuter forms, and the singular forms of nouns, pronouns,
and verbs shall include the plural and vice versa. Reference to any agreement,
document, or instrument means such agreement, document, or instrument as amended
or otherwise modified from time to time in accordance with the terms thereof,
and if applicable hereof. The use of the words "include" or "including" in this
Agreement shall be by way of example rather than by limitation. The use of the
words "or," "either" or "any" shall not be exclusive. The parties hereto have
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, it is the
intent of the parties that 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 the authorship of any of the
provisions of this Agreement.
(m Notices. All notices, requests or other communications to any
party hereunder shall be in writing (including facsimile transmission) and shall
be given,
if to Executive, to:
Choice One Communications Inc.
333 West Commercial Street
Suite 2500
East Rochester, New York 14455
-32-
<PAGE>
if to the LLC, to:
c/o Morgan Stanley Capital Partners III, L.P.
1221 Avenue of the Americas
33rd Floor
New York, New York 10020
Attention: John B. Ehrenkranz
Facsimile: (212) 762-7951
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Louis L. Goldberg
Facsimile: (212) 450-4800
and to:
Fleet Equity Partners VI, L.P.
50 Kennedy Plaza
12th Floor
Providence, Rhode Island 02903
Attention: Robert M. Van Degna
Facsimile: (401) 278-6387
with a copy to:
Paul, Hastings, Janofsky & Walker, LLP
399 Park Avenue
New York, New York 10022-4697
Attention: Neil A. Torpey
Facsimile: (212) 319-4090
-33-
<PAGE>
and to:
Waller-Sutton Media Partners, L.P.
555 North Lane
Suite 6150
Conshohocken, PA 19428
Attention: Mr. Bruce Hernandez
Facsimile: (610) 397-1014
with a copy to:
Rubin Baum Levin Constant & Friedman
30 Rockefeller Plaza
New York, New York 10112
Attention: Jonathan D. Drucker
Facsimile: (212) 698-7825
if to the Corporation, to:
Choice One Communications Inc.
333 West Commercial Street
Suite 2500
East Rochester, New York 14445
Attention: Steve Dubnik
Facsimile: (716) 385-0609
with a copy to:
Nixon, Hargrave, Devans & Doyle LLP
Clinton Square
P.O. Box 1051
Rochester, New York 14603-1051
Attention: James A. Locke, III
Facsimile: (716) 263-1600
and if to any member of the LLC or to any other holder of Common Stock, to the
address or facsimile set forth on the books of the LLC or the Corporation or any
other address or facsimile number as a party may hereafter specify for such
-34-
<PAGE>
purpose to the LLC. Notwithstanding the foregoing, no holder of Investor Equity
or its counsel shall be entitled to notice if such holder holds less than 3% in
aggregate of all Investor Equity then outstanding.
All such notices, requests and other communications shall be deemed
received on the date of receipt by the recipient thereof if received prior to 5
p.m. in the place of receipt and such day is a business day in the place of
receipt. Otherwise, any such notice, request or communication shall be deemed
not to have been received until the next succeeding business day in the place of
receipt.
* * * *
-35-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
CHOICE ONE COMMUNICATIONS L.L.C.
By: /s/ Steven M. Dubnik
------------------------------------------
Its: Authorized Person
-----------------------------------------
CHOICE ONE COMMUNICATIONS INC.
By: /s/ Steven M. Dubnik
------------------------------------------
Its: President and Chief Executive Officer
-----------------------------------------
EXECUTIVE
/s/ Kevin S. Dickens
---------------------------------------------
-36-
<PAGE>
Execution of Counterpart Agreeing to be Bound to
Executive Purchase Agreement by Executive Purchaser
Name of Individual:
-----------------------------
Signature:
-----------------------------------------
Date:
-37-
<PAGE>
EXHIBIT 10.19
EXECUTIVE PURCHASE AGREEMENT
THIS EXECUTIVE PURCHASE AGREEMENT (this "Agreement") is made as of August
19, 1999, by and between Choice One Communications L.L.C., a Delaware limited
liability company (the "LLC"), Choice One Communications Inc., a Delaware
corporation (the "Corporation"), and Ajay Sabherwal ("Executive"). Capitalized
terms used but not otherwise defined herein have the meanings ascribed to such
terms in Section 7 hereof.
WHEREAS, Executive desires to make an investment in the Corporation to be
held initially through an interest in the LLC, and the LLC, the Corporation and
the Executive desire to provide for certain rights and obligations relating to
such investment and to Executive's employment with the Corporation;
NOW, THEREFORE, in consideration of the mutual promises made herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
Section 1. Purchase and Sale of Executive Securities.
(a) Initial Capital Contribution and Issuance of Executive Securities.
Upon execution of this Agreement, Executive shall make a capital contribution to
the LLC in the amount of $186,336.00 (Executive's "Initial Capital
Contribution") in exchange for, and the LLC shall issue to Executive, 186,336
Class B Units having the rights, obligations, and preferences set forth with
respect thereto in the LLC Agreement. The Executive shall make such Initial
Capital Contribution to the LLC by delivery to the LLC of a cashier's or
certified check, or wire transfer of immediately available funds to an account
designated by the LLC, in the aggregate amount equal to such Executive's Initial
Capital Contribution. The aggregate amount of the Initial Capital Contribution
made with respect to each Class B Unit issued hereunder shall be considered a
Basic Contribution made with respect to such Class B Unit. Subsequent
Contributions to the LLC shall be made by the Executive in respect of such Class
B Units on the terms and conditions set forth in the LLC Agreement.
(b) Representations and Warranties of Executive. In connection with the
Executive's Initial Capital Contribution and the issuance of the Executive
Securities hereunder, the Executive Purchaser represents and warrants to each of
the LLC and the Corporation that:
(i) The Executive Securities to be acquired by the Executive
Purchaser pursuant to this Agreement shall be acquired for the Executive
Purchaser's own account and not with a view to, or the intention of,
<PAGE>
distribution thereof in violation of the Securities Act or any applicable
state securities laws, and the Executive Securities shall not be disposed
of in contravention of the Securities Act or any applicable state
securities laws.
(ii) Executive is a management employee of the Corporation, and the
Executive Purchaser is sophisticated in financial matters and is able to
evaluate the risks and benefits of the investment in the Executive
Securities.
(iii) Executive Purchaser is able to bear the economic risk of his
investment in the Executive Securities for an indefinite period of time and
is aware that transfer of the Executive Securities may not be possible
because (A) such transfer is subject to contractual restrictions on
transfer set forth herein and in the Transaction Agreement, and (B) the
Executive Securities have not been registered under the Securities Act or
any applicable state securities laws and, therefore, cannot be sold unless
subsequently registered under the Securities Act and such applicable state
securities laws or an exemption from such registration is available.
(iv) Executive has had an opportunity to ask questions and receive
answers concerning the terms and conditions of the offering of the
Executive Securities issued hereunder and has had full access to such other
information concerning the Corporation and this investment opportunity as
he has requested.
(v) Each of this Agreement, the LLC Agreement, the Transaction
Agreement, and the other agreements contemplated thereby of even date
therewith to which Executive Purchaser is a party, constitute the legal,
valid and binding obligations of the Executive Purchaser, enforceable
against the Executive Purchaser in accordance with its terms; Executive is
ready, willing and able as of the date hereof to commence and to continue
employment with the Corporation in the office to which Executive was
appointed by the Board; and the execution, delivery and performance of such
agreements by Executive, and Executive's employment with the Corporation
and activities (including recruiting activities) on behalf of the
Corporation, do not and will not conflict with, violate or breach any
agreement, contract or instrument (including, without limitation, any
noncompete agreement or restrictive covenant instrument) to which Executive
is a party or by which Executive is bound or any judgment, order or decree
to which Executive is subject.
(c) Acknowledgment of At-Will Employment. As an inducement to the LLC
and the Corporation to enter into this Agreement, and as a condition thereto,
-2-
<PAGE>
the Executive acknowledges and agrees that no agreement or arrangement between
the Executive and the Corporation or the LLC (including, without limitation, the
issuance of the Executive Securities to the Executive and the execution and
delivery of this Agreement) shall entitle Executive to remain in the employment
of the Corporation and its Subsidiaries or affect the right of the Corporation
or its Subsidiaries to terminate Executive's employment at any time or for any
reason.
Section 2. Vesting of Executive Securities.
(a) Vesting Schedule. All Executive Securities shall initially be
Unvested Securities (as defined below). Except as otherwise provided herein, an
amount of Unvested Securities shall vest on the date hereof and on each of the
first four anniversaries of the date hereof, such that the Executive Securities
shall be vested on each such date in accordance with the following schedule:
-------------------------
Cumulative Percentage of
Date Executive Securities
Vested
The date hereof 20%
The first anniversary of the date hereof 40%
The second anniversary of the date hereof 60%
The third anniversary of the date hereof 80%
The fourth anniversary of the date hereof 100%
Notwithstanding the foregoing sentence, and except as otherwise provided in
clauses (b)-(e) below or in the next sentence (in the case of termination
without Cause or for Good Reason), the above vesting schedule shall cease and no
Unvested Securities shall vest after the date on which Executive's employment
with the Corporation and its Subsidiaries terminates for any reason. If
Executive's employment is terminated by the Corporation without Cause or if
Executive terminates his employment for Good Reason, the Executive Securities
shall thereafter, if necessary, continue to vest until the next anniversary of
the date hereof next succeeding such termination (such that the Executive will
be vested in 20% more of the Executive Securities than at the time of such
termination) and if at least 50% of the Executive Securities have not been
vested as of such next anniversary, then vesting will continue to the extent
necessary that at least 50% of the Executive Securities become vested, so long
as Executive has not committed a Vesting Termination Breach (upon which breach
the vesting schedule shall
-3-
<PAGE>
immediately cease, and no Unvested Securities shall vest on or after the date of
the first such breach). In the event the LLC or the Corporation has alleged that
Executive has committed a Vesting Termination Breach, Executive disputes such
allegation, and the matter is subject to the dispute resolution provisions set
forth in Section 6, vesting shall be tolled upon the date of the allegation of
such breach; provided that (i) if it is ultimately resolved under Section 6 that
Executive has committed a Vesting Termination Breach, the tolling shall become a
permanent cessation such that vesting shall have forever ceased upon the date of
such allegation, and (ii) if it is ultimately resolved under Section 6 that
Executive did not commit a Vesting Termination Breach, the number of Vested
Securities shall be as though there had never been such alleged breach or any
tolling of vesting. Executive Securities which have become vested pursuant to
this Agreement are referred to herein as "Vested Securities," and all other
Executive Securities are referred to herein as "Unvested Securities."
(b) Acceleration upon a Qualified Sale of the Corporation. Unvested
Securities subject to vesting pursuant to Section 2(a) shall become Vested
Securities upon the consummation of a Qualified Sale of the Corporation (as
defined below) so long as Executive is employed by the Corporation or any of its
Subsidiaries on the date of such sale (or, if Executive's employment was
terminated by the Corporation without Cause or by Executive for Good Reason, so
long as Executive has not committed a Vesting Termination Breach prior to the
date of such sale). A "Qualified Sale of the Corporation" means either (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of the
Corporation and its Subsidiaries, taken as a whole, or (ii) a transaction or
series of transactions (including by way of merger, consolidation, or sale of
stock, but not including a Public Offering) the result of which is that the
holders of the Corporation's outstanding voting stock immediately prior to such
transaction are after giving effect to such transaction no longer, in the
aggregate, the "beneficial owners" (as such term is defined in Rule 13d-3 and
Rule 13d-5 promulgated under the Securities Exchange Act), directly or
indirectly through one or more intermediaries, of more than 50% of the voting
power of the outstanding voting stock of the Corporation, in each case where the
consideration for such assets or stock in such sale or transfer consists of cash
and/or publicly traded equity securities for such assets or for at least 50% of
the outstanding stock of the Corporation (e.g., 100% of such consideration would
have to consist of cash and/or publicly traded equity securities if only 50.01%
of such stock were sold in such transaction).
(c) Acceleration upon a Public Offering. Upon the consummation of the
Corporation's initial Public Offering, and so long as Executive is employed by
the Corporation or any of its Subsidiaries on the closing date of such offering
(or, if Executive's employment was terminated by the Corporation without Cause
or by
-4-
<PAGE>
the Executive for Good Reason, so long as Executive has not committed a Vesting
Termination Breach prior to such closing date), there will vest the amount of
Unvested Securities which were scheduled to vest within the 365 days following
such closing date (and the remaining Unvested Securities subject to vesting
pursuant to Section 2(a), if any, shall continue to vest 20% on each anniversary
of the date hereof in accordance with clause (a) above, such that the vesting
schedule set forth in Section 2(a) above shall have been effectively accelerated
by one year).
(d) Acceleration upon Death or Disability. All Unvested Securities
shall become Vested Securities if Executive's employment with the Corporation or
any of its Subsidiaries terminates by reason of Executive's death or Disability.
(e) Other Acceleration. Any Unvested Securities which the LLC (or its
assignees) has not elected to repurchase in the Repurchase Notice (as defined
below) (including Unvested Securities originally included in the Repurchase
Notice, but for which the election to repurchase was rescinded, pursuant to the
terms of Section 3, by the LLC and/or its assignees having made such election)
shall thereafter be deemed Vested Securities, but shall continue to be subject
to Section 4.
Section 3. LLC's Repurchase Option.
-5-
<PAGE>
(a) The Repurchase Option. The LLC will be entitled to repurchase at
the LLC's election pursuant to the terms and conditions set forth in this
Section 3 (the "Repurchase Option"), (i) upon (x) the termination of Executive's
employment with the Corporation and its Subsidiaries for any reason other than a
termination by the Corporation without Cause or by the Executive for Good
Reason, or (y) if Executive's employment is terminated by the Corporation
without Cause or by the Executive for Good Reason, upon Executive's commission
of a Vesting Termination Breach, all the Executive Securities then in existence
(whether held by Executive or one or more of the other Executive Purchasers)
and/or (ii) in the event of a termination without Cause or for Good Reason and
prior to commission of a Vesting Termination Breach, such of the Unvested
Securities as are not subject to continued vesting pursuant to Section 2(a) (any
such circumstance permitting repurchase, a "Repurchase Event"). In the event
that the LLC or the Corporation has alleged that Executive has committed a
Vesting Termination Breach, Executive disputes such allegation, and the matter
is subject to the dispute resolution provisions set forth in Section 6, the
closing of the repurchase of Executive Securities permitted to be repurchased
only upon such breach under this Section 3 shall not occur unless and until it
is ultimately determined that Executive committed a Vesting Termination Breach;
provided that during the pendency of such proceeding, such Executive Securities
specified in the Repurchase Notice (as defined below) shall not be transferred
by any holder thereof to any other Person.
(b) Repurchase Price. The repurchase price (the "Repurchase Price") for
50% of the Vested Securities to be repurchased shall be the Fair Market Value of
such securities. The Repurchase Price of the remaining 50% of the Vested
Securities and of all of the Unvested Securities to be repurchased shall be the
lesser of (x) the Fair Market Value of such Securities, and (y) the Original
Cost of such Securities (with securities having the lowest Original Cost subject
to repurchase prior to securities with a higher Original Cost).
(c) Exercise of Repurchase Option. The LLC (by action of the Board) may
elect to purchase all or any portion of the Executive Securities permitted to be
repurchased by delivering written notice (the "Repurchase Notice") to the holder
or holders of the Executive Securities within 90 days after the occurrence of
the applicable Repurchase Event. The Repurchase Notice shall set forth the
amount, type, and class of Executive Securities (including, if applicable, the
amount of Unvested Securities and/or Vested Securities) to be acquired from each
such holder (which need not be pro rata among type of security or among Vested
Securities and Unvested Securities). The Executive Securities to be repurchased
by the LLC shall first be satisfied to the extent possible from the Executive
Securities held by Executive at the time of delivery of the Repurchase Notice.
If the amount of Executive Securities then held by Executive is less than the
total
-6-
<PAGE>
amount of Executive Securities that the LLC has elected to purchase, the LLC
shall purchase the remaining securities elected to be purchased from the other
holder(s) of Executive Securities (to whom Executive has transferred Executive
Securities pursuant to Section 4(c)(i)), pro rata according to the amount of
Executive Securities held of record by each such other holder at the time of
delivery of the Repurchase Notice. The amount of Unvested Securities and Vested
Securities to be repurchased hereunder shall be deemed to be allocated among
Executive and the other holders of repurchased Executive Securities (to whom
Executive has transferred Executive Securities pursuant to Section 4(c)(i)), if
any, pro rata according to the amount of Executive Securities to be purchased
from such persons.
(d) Assignment by the LLC. The LLC, by action of the Board, will have
the right to assign all or any portion of its repurchase rights hereunder to the
holders of Investor Equity (which assignment, if made to the holders of Investor
Equity, would be pro rata on the basis of the Investor Equity held by each such
holder) and/or to any executive employee of the Corporation or any of its
Subsidiaries. Notwithstanding the foregoing, the LLC may not assign to any
Person its right to pay a portion of the Repurchase Price for Executive
Securities repurchased hereunder in the form of Class C Units (or, after the
dissolution of the LLC, a promissory note).
(e) Fair Market Value of Repurchased Securities. The "Fair Market
Value" of Executive Securities subject to repurchase hereunder shall be
determined in accordance with this paragraph (e) as follows:
(i) The Board of the LLC and the holders of a majority of the
Executive Securities to be repurchased shall attempt in good faith to agree
on the Fair Market Value of the Executive Securities. Any agreement
reached by such Persons shall be final and binding on all parties hereto.
(ii) If such Persons are unable to reach such agreement within 20
days after the giving of a Repurchase Notice, the Fair Market Value of any
Executive Securities that are publicly traded shall be the average, over a
period of 21 days consisting of the date of the applicable Repurchase Event
and the 20 consecutive business days prior to that date, of the average of
the closing prices of the sales of such securities on all securities
exchanges on which such securities may at that time be listed, or, if there
have been no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of
such day, or, if on any day such securities are not so listed, the average
of the representative bid and asked prices quoted in the Nasdaq System as
of 4:00 P.M., New York time, or, if on any day such securities are not
quoted
-7-
<PAGE>
in the Nasdaq System, the average of the highest bid and lowest
asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau Incorporated, or any similar
successor organization.
(iii) If such Persons are unable to reach agreement pursuant to
paragraph (ii) within 20 days after the giving of a Repurchase Notice, and
to the extent any Executive Securities are not publicly traded:
(A) The Board of the LLC and the holders of a majority of the
Executive Securities shall each, at the same time, within 10 days
thereafter, choose one investment banker or other appraiser with
experience in analyzing and making determinations concerning matters
in the telecommunications industry and in valuing entities like the
LLC (including the distribution arrangements of the type described in
the LLC Agreement), and, within 15 days of their selection, the two
investment bankers/appraisers so selected shall together select a
third investment banker/appraiser similarly qualified.
(B) The three investment bankers/appraisers shall first
appraise the fair market value of the Corporation (based on the
assumption of an orderly, arm's length sale to a willing unaffiliated
buyer). Each of the three investment bankers/appraisers shall then
independently appraise the fair market value of such non-publicly-
traded Executive Securities as follows:
(1) the fair market value of each share of Common Stock
shall be equal to the fair market value of the Corporation
divided by the total number of shares of Common Stock outstanding
on the date of the applicable Repurchase Event (determined on a
fully diluted basis (x) with respect to all outstanding
securities convertible into the Corporation's Common Stock,
assuming the conversion of such convertible securities (without
regard to any conditions or other restrictions on such
conversion), and (y) with respect to all outstanding options,
warrants and other rights or securities exercisable or
exchangeable for shares of the Corporation's Common Stock, in
accordance with the Treasury Stock Method under generally
accepted accounting principles for determination of fully diluted
earnings per share);
-8-
<PAGE>
(2) the fair market value of each Class B Unit shall be
equal to the fair market value of the assets (as determined in
accordance with paragraphs (B)(1) and (B)(3)) that would be
distributed according to the terms of the LLC Agreement with
respect to such Class B Unit if the LLC were dissolved on the
date of the applicable Repurchase Event; and
(3) the fair market value of any other non-publicly-
traded Executive Securities (or, for purposes of paragraph (B)(2)
above, any other assets) shall be the fair market value of such
securities (or other assets), determined on the basis of an
orderly, arm's length sale to a willing, unaffiliated buyer,
taking into account all relevant factors determinative of value.
-9-
<PAGE>
The three investment bankers/appraisers shall, within thirty days
of their retention, provide the written results of such
appraisals to the LLC and/or its assignees and to each of the
holders of Executive Securities.
(C) The "Fair Market Value" of the non-publicly-traded
Executive Securities to be repurchased shall be the average of the two
appraisals closest to each other, and such amount shall be final and
binding on all parties hereto; provided that the LLC (and/or any
assignee) may at any time within ten days after receiving written
notice of such determination rescind its prior exercise of the
Repurchase Option by giving written notice of such revocation to all
of the holders of the Executive Securities to be repurchased, and upon
such revocation the revoking party will be treated as if it had never
exercised such Repurchase Option (it being understood that such
revoking parties shall thereafter have no right to re-exercise such
Repurchase Option).
(D) The costs of such appraisal shall be allocated between
the parties based on the percentage which the portion of the Contested
Amount not awarded to each party bears to the amount actually
contested by such party; provided that if any parties revoke their
exercise of the Repurchase Option pursuant to paragraph (C) above,
such revoking parties shall bear (pro rata among such revoking parties
based on the number of Executive Securities with respect to which each
such revoking party had initially exercised its Repurchase Option) any
appraisal costs that would be allocated to the holder(s) of Executive
Securities under this paragraph (D). "Contested Amount" means the
difference between the valuations of the disputing parties.
-10-
<PAGE>
(f) Closing of the Repurchase. Within 10 business days after the
Repurchase Price for the Executive Securities to be repurchased has been
determined, the LLC shall send a notice to each holder of Executive Securities
setting forth the consideration to be paid for such securities and the time and
place for the closing of the transaction, which date shall not be more than 30
days nor less than five days after the delivery of such notice. At such
closing, the holders of Executive Securities shall deliver all certificates (if
any exist) evidencing the Executive Securities to be repurchased to the LLC
(and/or any assignees of the LLC's repurchase right), and the LLC (and/or any
assignees) shall pay for the Executive Securities to be purchased pursuant to
the Repurchase Option by delivery of a check or wire transfer of immediately
available funds in the aggregate amount of the Repurchase Price for such
securities; provided that in the event the Board determines in its good faith
discretion that the LLC is not in a position to pay in cash any or all of the
Repurchase Price for Executive Securities to be repurchased by it:
(i) prior to the dissolution of the LLC, the LLC may pay a portion
of the Repurchase Price for such securities equal to (x) the aggregate
Repurchase Price for the Executive Securities to be repurchased by the LLC
minus (y) the Original Cost of such securities, by issuing in exchange for
such securities an equal number of the LLC's Class C Units (having the
rights and preferences set forth in the LLC Agreement), and for purposes of
the LLC Agreement each such Class C Unit shall as of its issuance be deemed
to have Basic Contributions made with respect to such Class C Unit equal to
(A) the aggregate portion of the Repurchase Price paid by the issuance of
Class C Units divided by (B) the number of Class C Units so issued in such
repurchase; or
(ii) after the dissolution of the LLC, the Corporation (as
successor to the rights of the LLC under Section 8(f)(ii) below) may pay,
in the form of a promissory note, a portion of the Repurchase Price for
such securities equal to (x) the aggregate Repurchase Price for the
Executive Securities to be repurchased by the LLC minus (y) the Original
Cost of such securities. Such a promissory note shall be subordinated to
all of the Corporation's senior debt obligations either then or thereafter
incurred, shall earn simple annual interest at the Base Rate, shall have
all principal and accrued interest due and payable upon maturity, and shall
mature upon the earliest to occur of the Corporation's initial Public
Offering (if such initial Public Offering has not occurred prior to the
issuance of such promissory note), a Qualified Sale of the Corporation, or
the fifth anniversary of the issuance of such promissory note.
-11-
<PAGE>
The purchasers of Executive Securities under this Section 3 shall be
entitled to receive customary representations and warranties from the sellers
regarding good title to such securities, free and clear of any liens or
encumbrances.
(g) Restrictions. Notwithstanding anything to the contrary contained in
this Agreement, all repurchases of Executive Securities by the LLC shall be
subject to applicable restrictions contained in the Delaware General Corporation
Law, the Delaware Limited Liability Company Act or in the LLC's or its
Subsidiaries' debt and equity financing agreements or imposed by applicable law
(such as the Hart-Scott-Rodino Antitrust Improvements Act of 1976). If any such
restrictions prohibit the repurchase of Executive Securities which are otherwise
permitted or required hereunder, the time periods provided in this Section 3
shall be suspended, and the LLC may make such repurchases as soon as it is
permitted to do so under such restrictions, unless by such time such Repurchase
Option has terminated pursuant to Section 3(h); provided that notwithstanding
the foregoing, in no event shall the time periods provided in this Section 3 be
suspended for more than 6 months.
(h) Termination of Repurchase Option. The rights under this Section 3
of the LLC and/or its assignees to repurchase Vested Securities (but not
Unvested Securities) shall terminate upon the consummation of a Public Offering.
All rights under this Section 3 of the LLC and/or its assignees to repurchase
Executive Securities (including both Vested Securities and Unvested Securities)
shall terminate upon a Qualified Sale of the Corporation.
Section 4. Restrictions on Transfer.
(a) Opinion of Valid Transfer. In addition to any other restrictions on
transfer imposed by this Agreement, the Transaction Agreement, the LLC Agreement
or the Registration Rights Agreement, no holder of Executive Securities may
sell, transfer or dispose of any Executive Securities (except pursuant to an
effective registration statement under the Securities Act) without first
delivering to the LLC an opinion of counsel (reasonably acceptable in form and
substance to the LLC) that neither registration nor qualification under the
Securities Act or applicable state securities laws is required in connection
with such sale, transfer, or other disposition.
(b) Restrictive Legend. The certificates representing Executive
Securities shall bear the following legend:
-12-
<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON JULY
8, 1998, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND SUCH SECURITIES MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED
BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AND
REPURCHASE OPTIONS SET FORTH IN AN EXECUTIVE PURCHASE AGREEMENT BETWEEN THE
ISSUER OF SUCH SECURITIES (THE "ISSUER") AND THE INITIAL HOLDER OF SUCH
SECURITIES. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE
ISSUER'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
The legend set forth above shall be removed from the certificates
evidencing any shares or units which cease to be Executive Securities.
(c) Retention of Executive Securities. Executive Purchaser shall not at
any time directly or indirectly sell, transfer, assign, pledge or otherwise
dispose of (whether with or without consideration and whether voluntarily or
involuntarily or by operation of law) any interest in any Executive Securities
(a "Transfer"),
-13-
<PAGE>
except (w) pursuant to the repurchase provisions of Section 3 hereof or of
Section 3.04 of the LLC Agreement, (x) pursuant to a Drag-Along Sale (as defined
in the Transaction Agreement) under Section 6.06 of the Transaction Agreement,
(y) after an initial Public Offering, as permitted in Section 4(c)(ii) below or
(z) pursuant to Section 4(c)(iii) below (each of (w), (x), (y) and (z) above, an
"Exempt Transfer"). The restrictions on the Transfer of Executive Securities set
forth in this paragraph (c) shall continue in effect (1) with respect to each
Executive Security following any permitted Transfer thereof pursuant to Section
4(c)(i), but shall cease upon any Exempt Transfer thereof and (2) following
termination of Executive's employment for any reason.
Notwithstanding the foregoing provisions of this clause (c):
(i) the Executive will be permitted to transfer, with or without
consideration, Executive Securities (A) pursuant to applicable laws of
descent and distribution or (B) among Executive's Family Group; provided
that the restrictions contained in this Section shall continue to be
applicable to, and bind the transferee of, the Executive Securities after
any such transfer, the transferees of such Executive Securities shall have
agreed in writing in an instrument satisfactory in form and substance to
the Board to be bound by the provisions of this Agreement, the LLC
Agreement, the Registration Rights Agreement and the Transaction Agreement
with respect to the Executive Securities so transferred, and (prior to the
death of Executive) each such transferee of Executive Securities shall have
entered into proxies and other agreements satisfactory to the Board
pursuant to which Executive shall have the sole right to vote such
Executive Securities for all purposes. For purposes of this Agreement,
"Family Group" means Executive's spouse and descendants (whether natural or
adopted), any trust which at the time of such transfer and at all times
thereafter is and remains solely for the benefit of Executive and/or
Executive's spouse and/or descendants and any family partnership the
partners of which consist solely of Executive, such spouse, such
descendants or such trusts.
(ii) After the initial Public Offering, (x) all Transfer
restrictions on Unvested Securities shall continue in effect and (y)
Transfer restrictions on Vested Securities will terminate upon the fourth
anniversary of closing (the "IPO Closing") of the initial Public Offering.
Transfers of Vested Securities prior to the fourth anniversary of the IPO
Closing will only be permitted to the following extent:
(A) At any time prior to the fourth anniversary of the IPO
Closing, Executive will be permitted to Transfer a number of
-14-
<PAGE>
Vested Securities that (together with Vested Securities previously
Transferred in an Exempt Transfer) in the aggregate as a percentage of
Executive Securities held by Executive as of the IPO Closing (the
"Initial CS Holdings") does not exceed the percentage of MSCP's
Investor Equity held as of the IPO Closing that has since been sold.
(B) During the two year period ending on the second
anniversary of the IPO Closing, Executive will be permitted (1) (a) to
pledge (but not otherwise Transfer) a number of Vested Securities that
(together with Vested Securities previously Transferred in an Exempt
Transfer) in the aggregate does not exceed 25% of the Initial CS
Holdings and (b) to Transfer a number of Vested Securities that does
not exceed 5% of the Initial CS Holdings in any one year period and
that does not exceed 10% of the Initial CS Holdings in such two year
period (such 5% and 10% shall be reduced by any amount previously
Transferred in an Exempt Transfer) or (2) if greater, to Transfer the
number of Vested Securities permitted to be Transferred pursuant to
clause (c)(ii)(A) above.
(C) At any time after such second anniversary of the IPO
Closing and before such fourth anniversary of the IPO Closing,
Executive will be permitted to Transfer the greater of (1) a number of
Vested Securities that (together with Vested Securities previously
Transferred in an Exempt Transfer) in the aggregate does not exceed
50% of the Initial CS Holdings and (2) the number of Vested Securities
permitted to be Transferred pursuant to clause (c)(ii)(A) above.
(iii) In addition to the foregoing permitted Transfers, the Board
may, in its discretion, permit Transfers by the Executive at any time in
the case of personal hardship (such as personal or family illness).
Section 5. Issuance of Tier I and Tier II Options.
(a) In the event of a dissolution of the LLC upon the consummation of a
Public Offering (a "Public Offering Liquidation"), if the Management Percentage
for such Public Offering Liquidation is less than 33.33% the Corporation shall
contemporaneously with such liquidation issue to each holder of Class B Units:
-15-
<PAGE>
(i) options (the "Tier I Options") entitling the holder to acquire,
at an exercise price per share equal to the IPO Price, a number of shares
of the Corporation's Common Stock equal to the lesser of (x) the number of
shares of Common Stock that such holder would have received under the LLC
Agreement in connection with such Public Offering Liquidation if the
Management Percentage had been 10%, and (y) the difference of (A) the
number of shares of Common Stock that such holder would have received in
connection with such Public Offering Liquidation if the Management
Percentage had been 33.33%, minus (B) the number of shares of Common Stock
that such holder actually received in such liquidation; and
(ii) if the Management Percentage for such Public Offering
Liquidation is less than 23.33%, in addition to any Tier I Options, options
(the "Tier II Options") entitling the holder to acquire, at an exercise
price per share equal to the Tier II Price, a number of shares of the
Corporation's Common Stock equal to the lesser of (x) the number of shares
of Common Stock calculated pursuant to clause (i)(x) above, and (y) the
difference of (A) the number of shares of Common Stock calculated pursuant
to clause (i)(y) above, minus (B) the number of shares of Common Stock into
which the Tier I Options issued to such holder pursuant to clause (i) above
are initially exercisable.
The Tier I Options and Tier II Options shall expire on the seventh
anniversary of their issuance.
(b) For purposes of performing the calculations in Sections 5(a)(i) and
5(a)(ii) above, a distribution of any property other than Common Stock in a
Public Offering Liquidation shall be considered to have been a distribution of a
number of shares of Common Stock equal to the quotient of (A) the aggregate fair
market value of such distributed property on the date of such liquidation, as
determined in good faith by the Board, divided by (B) the fair market value of
one share of Common Stock on the date of such liquidation, as determined in good
faith by the Board.
(c) For purposes of this section, the following terms shall have the
meanings set forth below:
"IPO Price" means the gross price per share at which shares of the
Corporation's Common Stock are initially offered and sold to the public in
connection with a Public Offering.
-16-
<PAGE>
"Liquidation FMV" has the meaning ascribed to such term in the LLC
Agreement.
"Management Percentage" has the meaning ascribed to such term in Section
4.01(c) of the LLC Agreement.
"Return Multiple" has the meaning ascribed to such term in Section 4.01(c)
of the LLC Agreement.
"Tier II Price" means, with respect to a particular Public Offering
Liquidation, the quotient of (x) the amount that would result in a Return
Multiple of 3.5 if the Liquidation FMV for such liquidation were equal to such
amount, divided by (y) the number of shares of Common Stock held by the LLC
immediately prior to such liquidation.
Section 6. Confidentiality, Noncompete, and Nonsolicitation.
(a) Nondisclosure and Nonuse of Confidential Information. Executive
shall not willfully disclose or use at any time, either during his employment
with the Corporation or thereafter, any Confidential Information (as defined
below) of which Executive is or becomes aware, whether or not such information
is developed by him, except to the extent that such disclosure or use is
directly related to and required by Executive's performance of duties assigned
to Executive by the LLC or the Corporation. Executive shall take all
appropriate steps to safeguard Confidential Information and to protect it
against disclosure, misuse, espionage, loss and theft. As used in this
Agreement, the term "Confidential Information" means information that is not
generally known to the public and that is used, developed or obtained by the
LLC, the Corporation, or its Subsidiaries in connection with their business,
including but not limited to (i) products or services, (ii) fees, costs and
pricing structures, (iii) designs, (iv) analysis, (v) drawings, photographs and
reports, (vi) computer software, including operating systems, applications and
program listings, (vii) flow charts, manuals and documentation, (viii) data
bases, (ix) accounting and business methods, (x) inventions, devices, new
developments, methods and processes, whether patentable or unpatentable and
whether or not reduced to practice, (xi) customers and clients and customer or
client lists, (xii) copyrightable works, (xiii) all technology and trade
secrets, (xiv) strategic plans, business plans, budgets and financial models,
and (xv) all similar and related information in whatever form. Notwithstanding
the foregoing, "Confidential Information" shall not include any information (A)
of which Executive became aware prior to his affiliation with the Corporation
and the LLC, (B) of which Executive learns from sources other than the LLC, the
Corporation or its Subsidiaries or (C) which is disclosed in a prospectus or
other documents for dissemination to the public or published in a form generally
available to the public prior to the date Executive proposes to
-17-
<PAGE>
disclose or use such information. Information shall not be deemed to have been
published merely because individual portions of the information have been
separately published, but only if all material portions thereof have been
published.
(b) The Corporation's Ownership of Intellectual Property.
(i) Acknowledgment of Corporation Ownership. In the event that
Executive as part of his activities on behalf of the Corporation generates,
creates, authors or contributes to any invention, design, new development,
device, product, method or process (whether or not patentable or reduced to
practice or constituting Confidential Information), any copyrightable work
(whether or not constituting Confidential Information) or any other form of
Confidential Information relating directly or indirectly to the
Corporation's business as now or hereafter conducted (collectively,
"Intellectual Property"), Executive acknowledges that such Intellectual
Property is the exclusive property of the Corporation and hereby assigns
all right, title and interest in and to such Intellectual Property to the
Corporation. Any copyrightable work prepared in whole or in part by
Executive will be deemed "a work made for hire" under Section 201(b) of the
1976 Copyright Act, and the Corporation shall own all of the rights
comprised by the copyright therein. Executive shall promptly and fully
disclose all Intellectual Property to the Corporation and shall cooperate
with the Corporation to protect the Corporation's interests in and rights
to such Intellectual Property (including, without limitation, providing
reasonable assistance in securing patent protection and copyright
registrations and executing all documents as reasonably requested by the
Corporation, whether such requests occur prior to or after termination of
Executive's employment with the Corporation).
(ii) Executive Invention. Executive understands that Section
6(b)(i) of this Agreement regarding the Corporation's ownership of
Intellectual Property does not apply to any invention for which no
equipment, supplies, facilities or trade secret information of the
Corporation were used and which was developed entirely on Executive's own
time, unless (A) the invention relates to the business of the Corporation
or to the Corporation's actual or demonstrably anticipated research or
development or (B) the invention results from any work performed by
Executive for the Corporation.
(c) Delivery of Materials upon Termination of Employment. As requested
by the Corporation from time to time and upon the termination of
-18-
<PAGE>
Executive's employment with the Corporation for any reason, Executive shall
promptly deliver to the Corporation all copies and embodiments, in whatever
form, of all Confidential Information and Intellectual Property in Executive's
possession or within his control (including, but not limited to, written
records, notes, photographs, manuals, notebooks, documentation, program
listings, flow charts, magnetic media, disks, diskettes, tapes and all other
materials containing any Confidential Information or Intellectual Property)
irrespective of the location or form of such material and, if requested by the
Corporation, shall provide the Corporation with written confirmation that all
such materials have been delivered to the Corporation.
(d) Noncompete. Executive acknowledges and agrees with the Corporation
and the LLC that in the course of his employment with the Corporation he shall
become familiar with the Corporation's trade secrets and with other Confidential
Information concerning the Corporation and the LLC and their respective
affiliates, that Executive's services to the Corporation and the LLC are unique
in nature and of an extraordinary value to the Corporation and the LLC, and that
the Corporation and the LLC would be irreparably damaged if Executive were to
provide similar services to any person or entity competing with the LLC or the
Corporation or engaged in a similar business. In connection with the issuance
to Executive of the Executive Securities hereunder, in consideration of and as
an inducement to the LLC's and the Corporation's entering into this Agreement
and the Corporation's agreeing to issue the Tier I and Tier II Options to
Executive and to assume the obligations of the LLC upon dissolution thereof, and
in further consideration of the Noncompete Compensation (as defined below),
Executive accordingly covenants and agrees with the Corporation and the LLC that
during the Noncompete Period (as defined below), Executive shall not, directly
or indirectly, either for himself or for or through any other individual,
corporation, partnership, joint venture or other entity, participate in any
business or enterprise conducting or proposing to conduct business in any
Covered State which engages or proposes to engage in the provision of
telecommunications services or in any other business similar to or competitive
with any business engaged in by the Corporation during the period of time in
which Executive is employed by the Corporation.
For purposes of this Agreement, (i) the term "participate in" shall
include, without limitation, having any direct or indirect interest in any
corporation, partnership, joint venture or other entity, whether as a sole
proprietor, owner, stockholder, partner, joint venturer, creditor or otherwise,
or rendering any direct or indirect service or assistance to any individual,
corporation, partnership, joint venture or other business entity (whether as a
director, officer, manager, representative, supervisor, employee, agent,
consultant or otherwise), other than ownership of up to 2% of the outstanding
stock of any class which is publicly
-19-
<PAGE>
traded and (ii) the term "Covered State" means (A) Connecticut, Delaware,
Illinois, Indiana, Maine, Massachusetts, Michigan, New Hampshire, New Jersey,
New York, Ohio, Pennsylvania, Rhode Island and Vermont, (B) any State in which
the Corporation is engaged in business or as to which the Corporation has at any
time had an Approved Business Plan to engage in business as of the date of
termination of Executive's employment with the Corporation and (C) any other
State for which a business plan has been submitted to the Board pursuant to the
Transaction Agreement as of or prior to the termination of Executive's
employment or for which Corporation personnel have taken substantial steps
towards completing with a view to so submitting, provided, that any such State
under this clause (C) shall cease to be a Covered State if such business plan
does not become an Approved Business Plan within the earlier of (x) 180 days
after such submission and (y) 180 days after the termination of Executive's
Employment, and, in each case, the Corporation's management and the LLC have
attempted in good faith during such period to reach agreements that would enable
such plan to become an Approved Business Plan. Executive agrees that this
covenant is reasonable with respect to its duration, geographical area and scope
and is fully enforceable.
(e) Nonsolicitation. During the Noncompete Period, Executive shall not
(i) induce or attempt to induce any employee, officer or consultant of the
Corporation or any Subsidiary to leave the employ of the Corporation or any
Subsidiary, or in any way interfere with the relationship between the
Corporation or any Subsidiary and any employee, officer or consultant thereof,
(ii) hire directly or through another entity any person who was an employee of
the Corporation or any Subsidiary at any time during the twelve months prior to
the date such person is to be so hired, or (iii) induce or attempt to induce any
customer, supplier, licensee or other business relation of the LLC, the
Corporation or any Subsidiary to cease doing business with the LLC, the
Corporation or any Subsidiary, or in any way interfere with the relationship
between any such customer, supplier, licensee or business relation and the LLC,
the Corporation and its Subsidiaries (including, without limitation, making any
negative statements or communications concerning the LLC, the Corporation or any
Subsidiary).
(f) Noncompete Period; Noncompete Compensation. The "Noncompete Period"
shall commence on the date hereof and shall continue until the later of (A) the
fourth anniversary of the date hereof and (B) the second anniversary of the date
of termination of employment; provided that the Noncompete Period shall
terminate if at any time after the date of termination the Corporation ceases to
pay Executive his Noncompete Compensation (unless Executive violates any
covenant set forth in this Section 6, in which case the Noncompete Period shall
continue even absent payment of the Noncompete Compensation). The Corporation
will notify the Executive within 30 days after
-20-
<PAGE>
termination of employment whether the Corporation intends to enforce this non-
compete covenant. In the event of termination of Executive's employment without
Cause, if the Corporation so notifies the Executive in writing that this
covenant will be enforced against the Executive, then the Corporation must give
the Executive 60 days' notice of the date on which this covenant will cease to
be enforced and on which the related Noncompete Compensation will cease to be
paid (provided that if Executive violates any covenant set forth in this Section
6, the Noncompete Period shall continue without the need for any further
Noncompete Compensation). "Noncompete Compensation" shall consist of 100% (or in
the case of termination with Cause, 50%) of the base salary that Executive
received as compensation from the Corporation and its Subsidiaries immediately
prior to termination (Executive's "Previous Salary") together with the
continuation of the medical benefits that the Corporation provided to Executive
immediately prior to termination (Executive's "Previous Benefits"); provided
that if at any time during the Noncompete Period Executive obtains other
employment elsewhere, Executive shall immediately notify the Corporation to such
effect, and Executive's Noncompete Compensation shall during the period of such
employment (i) be reduced (but not below zero) by Executive's compensation for
such employment (but where the Corporation pays only 50% of the Previous Salary,
as aforesaid, only reduced by the amount of compensation from such other
employment in excess of such 50% of the Previous Salary) and (ii) not include
the continued provision of medical benefits if such employment provides medical
benefits comparable to the Previous Benefits. The Noncompete Compensation shall
not constitute an obligation to pay any severance to such Executive but simply
means that so long as the Corporation pays the Noncompete Compensation up to the
time the Executive first violates any covenant set forth in this Section 6, the
Noncompete Period will remain in full force and effect for its full term.
Payment of Noncompete Compensation, if any, will be paid in accordance with the
Corporation's normal payroll practices.
(g) Judicial Modification. Executive acknowledges that the terms of
this Section 6 were negotiated in good faith by the parties hereto, are
reasonable and necessary in light of Executive's unique position, responsibility
and knowledge of the operations of the Corporation and the unfair advantage that
Executive's knowledge and expertise concerning Corporation's business would
afford a competitor of the Corporation and are not more restrictive than
necessary to protect the legitimate interests of the parties hereto. If the
final judgment of a court of competent jurisdiction, or any final non-appealable
decision of an arbitrator in connection with a mandatory arbitration, declares
that any term or provision of this Section 6 is invalid or unenforceable, the
parties agree that the court making the determination of invalidity or
unenforceability shall have the power to reduce the scope, duration, or
geographic area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable
-21-
<PAGE>
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment or decision may be
appealed.
(h) Dispute Resolution. Arbitration. All claims, disputes,
controversies and other matters in question arising out of or relating to this
Agreement, or to the alleged breach hereof, shall be settled by preliminary
negotiation between the Board and the Executive (the "parties") or, if such
preliminary negotiation is unsuccessful for any reason (but in any event not
later than 10 days after commencement of such negotiation), by binding
arbitration in accordance with the procedures set forth in this Section 6(h).
Without limiting the mandatory arbitration provision set forth in this Section
6(h), each of the parties hereto (i) waives the right to bring an action in any
court of competent jurisdiction with respect to any such claims, controversies
and disputes (other than any such action to enforce the award or other remedy
resulting from any arbitration pursuant to this Section 6(h) or to prevent any
arbitrator from exceeding the authority granted to the arbitrators hereunder)
and (ii) waives the right to trial by jury in any suit, action or other
proceeding brought on, with respect to or in connection with this Agreement.
(i) Binding Arbitration. Upon service of a notice of demand for
binding arbitration by any party hereto, arbitration shall be commenced and
conducted as follows:
(A) Arbitrators. All claims, disputes, controversies and
other matters (collectively "matters") in question shall be referred
to and decided and settled by a panel of three arbitrators with
experience in analyzing, understanding, and making determinations
concerning matters in the telecommunications industry, one selected by
each of the parties within 15 days after such notice of demand (with
the parties to notify each other of their respective selections at the
same time) and the third to be selected by the two arbitrators so
selected within 15 days of their selection pursuant to this subclause
(A),
(B) Cost of Arbitration. The cost of each arbitration
proceeding, including without limitation the arbitrators' compensation
and expenses, hearing room charges, court reporter transcript charges,
etc., shall be allocated among the parties based upon the percentage
which the portion of the Contested Amount not awarded to each party
bears to the amount actually contested by such party. The arbitrators
shall also award the party that
-22-
<PAGE>
prevails substantially in its pre-hearing position its reasonable
attorneys' fees and costs incurred in connection with the arbitration.
The arbitrators are specifically instructed to award attorneys' fees
and expenses for instances of abuse of the discovery process. All
costs of arbitration shall be paid initially 50% by the LLC (or after
the dissolution of the LLC, the Corporation) and 50% by the Executive
pending the determination of the arbitrators pursuant to the previous
sentences.
(C) Situs of Proceedings. The situs of the arbitration
shall be in New York, New York, or such other place as is mutually
agreeable to the parties.
(ii) Pre-hearing Discovery. The parties shall have the right to
conduct and enforce pre-hearing discovery in accordance with the then
current Federal Rules of Civil Procedure, subject to the following
limitations: (A) each party may serve no more than one set of
interrogatories which set shall ask no more than twenty questions; (B) each
party may depose the other party's expert witnesses who will be called to
testify at the hearing, plus up to six fact witnesses without regard to
whether they will be called to testify (each party will be entitled to a
total of not more than 24 hours of depositions of the other party's
witnesses, and not more than 6 hours with respect to any single witness);
and (C) document discovery and other discovery shall be under the control
of and enforceable by the arbitrators, and all disputes relating thereto
shall be decided by the arbitrators. Notwithstanding any contrary
foregoing provisions, the arbitrators shall have the power and authority
to, and to the fullest extent practicable shall, abbreviate arbitration
discovery in a manner which is fair to all parties in order to expedite the
conclusion of each alternative dispute resolution proceeding.
(iii) Pre-hearing Conference. Within thirty (30) days after
filing of notice of demand for binding arbitration, the arbitrators shall
hold a pre-hearing conference to establish schedules for completion of
discovery, for exchange of exhibit and witness lists, for arbitration
briefs, for the hearing, and to decide procedural matters and all other
questions that may be presented.
(iv) Hearing Procedures. The hearing shall be conducted to
preserve its privacy and to allow reasonable procedural due process. Rules
of evidence need not be strictly followed, and the hearing shall be
streamlined as follows: (A) documents shall be self-authenticating, subject
to valid objection by the opposing party; (B) expert reports, witness
biographies, depositions and affidavits may be utilized, subject to the
opponent's right of a live cross-examination of the witness in person; (C)
charts, graphs and summaries shall be utilized to present voluminous data,
provided (1) that the underlying data was made available to the opposing
party thirty (30) days prior to the hearing, and (2) that the preparer of
each chart, graph or summary is available for explanation and live cross-
examination in person; (D) the hearing should be held on consecutive
business days without interruption to the maximum extent practicable; and
(E) the arbitrators shall establish all other procedural rules for the
conduct of the arbitration in accordance with the rules of arbitration of
the American Arbitration Association.
(v) Governing Law. This arbitration provision shall be governed
by, and all rights and obligations specifically enforceable under and
pursuant to, the Federal Arbitration Act (9 U.S.C. (S) 1, et seq.) (the
"FAA"). Notwithstanding the foregoing, this Section 6(h) shall be
construed to the maximum extent possible to comply with the laws of the
State of Delaware, including the Uniform Arbitration Act (10 Del.C. (S)
5701, et seq.) (the "Delaware Arbitration Act"). If, nevertheless, it
shall be determined by a court of competent jurisdiction that any provision
or wording of this Section 6(h), including any rules of the FAA or the
American Arbitration Association referred to therein, shall be invalid or
unenforceable under said Delaware Arbitration Act or other applicable law,
such invalidity or unenforceability should not invalidate the entire
Section 6(h). In that case, this Section 6(h) shall be construed so as to
limit any term or provision so as to make it valid or enforceable within
the requirements of the Delaware Arbitration Act or other applicable law,
and, in the event such term or provision cannot be so limited, this Section
6(h) shall be construed to omit such invalid or unenforceable term or
provision.
(vi Consolidation. No arbitration shall include, by
consolidation, joinder or in any other manner, any additional person not a
party to this Agreement (other than affiliates of any such party, which
affiliates may be included in the arbitration), except by written consent
of the parties hereto containing a specific reference to this Agreement.
(vii Award; Time Limit. The arbitrators are empowered to render
an award of general compensatory damages and equitable relief (including,
without limitation, injunctive relief), but are not empowered to award
punitive damages. The award rendered by the arbitrators (A) shall be
final; (B) shall, except as required by law, not constitute a basis for
collateral estoppel as to any issue; and (C) shall, except as required by
law, not be subject to vacation or modification. The arbitrators shall
render
-23-
<PAGE>
any award or otherwise conclude the arbitration no later than 120
days after the date notice of demand for binding arbitration is given
pursuant to this Section 6(h).
(viii Confidentiality. The parties hereto will maintain the
substance of any proceedings hereunder in confidence and the arbitrators,
prior to any proceedings hereunder, will sign an agreement whereby the
arbitrator agrees to keep the substance of any proceedings hereunder in
confidence.
Section 7. Definitions.
"Approved Business Plan" has the meaning ascribed to such term in the
Transaction Agreement.
"Base Rate" means, on any date, a variable rate per annum equal to the rate
of interest most recently published by The Wall Street Journal as the "prime
rate" at The Chase Manhattan Bank.
"Basic Contributions" has the meaning ascribed to such term in the LLC
Agreement.
"Board" means the board of representatives of the LLC (or, after the
dissolution of the LLC, the board of directors of the Corporation).
"Cause" means (i) Executive's theft or embezzlement, or attempted theft or
embezzlement, of money or property of the Corporation or the LLC, Executive's
perpetration or attempted perpetration of fraud, or Executive's participation in
a fraud or attempted fraud, on the Corporation or the LLC, or Executive's
unauthorized appropriation of, or attempt to misappropriate, any tangible or
intangible assets or property of the Corporation or the LLC, (ii) any act or
acts of disloyalty, misconduct or moral turpitude by Executive which the Board
determines in good faith has been or is likely to be demonstrably injurious to
the interest, property, operations, business or reputation of the Corporation or
the LLC, or Executive's conviction of a crime other than minor traffic
violations or other similar minor offenses, (iii) Executive's repeated
intentional refusal or willful failure (other than by reason of Disability) to
carry out reasonable instructions by his superiors or the Board or the
Corporation's Board of Directors or (iv) Executive's breach of any provision of
Section 6.
-24-
<PAGE>
"Class A Units" has the meaning ascribed to such term in the LLC Agreement.
"Class B Units" has the meaning ascribed to such term in the LLC Agreement.
"Class C Units" has the meaning ascribed to such term in the LLC Agreement.
"Class D Units" has the meaning ascribed to such term in the LLC Agreement.
"Common Stock" means the Corporation's common stock, par value $0.01 per
share.
"Disability" means (i) any permanent physical or mental incapacity or
disability rendering the Executive unable or unfit to perform effectively the
duties and obligations of his employment or to participate effectively and
actively in the management of the Corporation, or (ii) any illness, accident,
injury, physical or mental incapacity or other disability, where such condition
has rendered the Executive unable or unfit to perform effectively the duties and
obligations of his employment or to participate effectively and actively in the
management of the Corporation for a period of at least 90 consecutive days or
four months in any twelve-month period (in either case, as determined in the
good faith judgment of the Board).
"Executive Purchaser" means Executive and any Person who acquires Executive
Securities pursuant to Section 4(c)(i) and has executed a counterpart of this
Agreement, the LLC Agreement and the Transaction Agreement, agreeing to be bound
by the terms of each such agreement.
"Executive Securities" means (i) the Class B Units issued to the Executive
hereunder (but not including any Class C Units or Class D Units issued by the
LLC in exchange for such Class B Units), (ii) upon dissolution of the LLC, any
securities of the Corporation distributed in respect of the securities referred
to in clause (i) above pursuant to such dissolution, (iii) any Tier I Options or
Tier II Options issued to any holder of Executive Securities hereunder, (iv) any
other securities of the LLC or the Corporation hereafter acquired by Executive,
and (v) any securities issued directly or indirectly with respect to the
foregoing securities by way of a split, dividend, or other division of
securities, or in connection with a
-25-
<PAGE>
combination of securities, recapitalization, merger, consolidation, or other
reorganization, or upon conversion or exercise of any of the foregoing
securities. Executive Securities for purposes of this Agreement shall not
include any securities issued to any other executive of the Corporation under
any other agreement. As to any particular securities constituting Executive
Securities, such securities shall cease to be Executive Securities when they
have been (a) effectively registered under the Securities Act and disposed of in
accordance with the registration statement covering them, (b) distributed to the
public through a broker, dealer or market maker pursuant to Rule 144 under the
Securities Act (or any similar provision then in force), (c) repurchased by any
holder of Class A Units, or by the LLC (including in exchange for Class C Units
or Class D Units), the Corporation or any Subsidiary thereof or (d) Transferred
pursuant to an Exempt Transfer under Section 4.
"Good Reason" means (i) a substantial permanent reduction in the scope of
Executive's authority or level of responsibility from that in effect as of the
date hereof for any reason unrelated to Executive's Disability, which has not
been revised by the Corporation within 90 days after timely written notice to
the Corporation containing a reasonably detailed description of such reduction;
or (ii) a relocation of Executive's principal place of employment from its then
existing location to a site which is more than 100 miles from such location.
"Investor Equity" has the meaning ascribed such term in the Transaction
Agreement.
"LLC Agreement" means the limited liability company agreement dated as of
the date hereof, entered into by and among the members of the LLC, as amended
from time to time in accordance with its terms.
"Management Equity" has the meaning ascribed to such term in the
Transaction Agreement.
"MSCP" has the meaning ascribed such term in the LLC Agreement.
"Original Cost" means, at any given time, (i) with respect to any Class B
Units, the total Basic Contributions made with respect to such Class B Units
pursuant to the LLC Agreement prior to such time, (ii) with respect to any
Common Stock, the Basic Contribution attributable to such Common Stock based on
the number of shares of Common Stock received by Executive upon the
-26-
<PAGE>
dissolution of the LLC, and (iii) with respect to any other securities, the
original price paid upon issuance of such securities.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Public Offering" means any underwritten sale of the Corporation's common
stock pursuant to an effective registration statement under the Securities Act
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 or financing for a merger or acquisition, and (ii) any
issuance of common stock or rights to acquire common stock to employees of the
Corporation or its Subsidiaries as part of an incentive or compensation plan.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the date hereof, by and between the Corporation, the holders of
Investor Equity and the holders of Management Equity, as amended from time to
time in accordance with the terms thereof.
"Securities Act" means the Securities Act of 1933, as amended, and
applicable rules and regulations thereunder.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, and applicable rules and regulations thereunder.
"Subsequent Contributions" has the meaning ascribed to such term in the
Transaction Agreement.
"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, partnership, association or other business entity of which
(i) if a corporation, a majority of the total voting power of shares of stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or
-27-
<PAGE>
indirectly, by any Person or one or more Subsidiaries of that Person or a
combination thereof. For purposes hereof, a Person or Persons shall be deemed to
have a majority ownership interest in a limited liability company, partnership,
association or other business entity if such Person or Persons shall be
allocated a majority of limited liability company, partnership, association or
other business entity gains or losses or shall be or control any managing
director, managing member, manager or general partner of such limited liability
company, partnership, association or other business entity.
"Transaction Agreement" means the Transaction Agreement dated as of the
date hereof, by and between the Corporation and the LLC and the holders of
interests in the LLC, as amended from time to time in accordance with the terms
thereof.
"Vesting Termination Breach" means (i) any breach by Executive of Section
6(a), Section 6(d) or Section 6(e) or (ii) any breach by Executive of any other
provision of Section 6 which is material or is intentionally and knowingly
committed by Executive.
Section 8. Miscellaneous Provisions.
(a Further Assurances; Voting Proxy. As a condition to the LLC's and
the Corporation's entering into this Agreement and the LLC's issuance of
Executive Securities to the Executive Purchasers, and as further consideration
therefor:
(i Executive hereby unconditionally guarantees the full and
prompt performance of each Executive Purchaser's obligations under this
Agreement and under each of the agreements contemplated hereby to which
such Executive Purchaser is a party, and Executive agrees that he will take
all necessary or desirable actions to ensure such performance as are
reasonably requested by the LLC or the Corporation. Executive further
agrees that he will not provide any directions to an Executive Purchaser
that are contrary to any obligation imposed on such Executive Purchaser
under this Agreement or under such other agreements, and that Executive
will not fail to provide any directions to an Executive Purchaser if such
failure would cause an Executive Purchaser not to satisfy its obligations
hereunder or thereunder. This guarantee shall be irrevocable with respect
to each Executive Security held by an Executive Purchaser (and shall
survive any transfer thereof, or the death, disability,
-28-
<PAGE>
incompetency, or bankruptcy of such Executive Purchaser) until such time as
such Executive Security is transferred in accordance with the terms hereof
to a Person other than a member of Executive's Family Group, at which time
this guarantee shall be deemed revoked with respect to such transferred
security (but not with respect to any other Executive Securities). No
invalidity, irregularity or unenforceability of this Agreement or such
other agreements by reason of an Executive Purchaser's incapacity, minor
status, incompetency, bankruptcy, insolvency, or other similar occurrence
shall impair, affect or be a defense to the obligations of Executive under
this guarantee.
(ii Each Executive Purchaser (other than Executive) hereby
appoints Executive as his true and lawful proxy and attorney-in-fact, with
full power of substitution, to vote all of such Executive Purchaser's
Executive Securities on all matters to be voted on by the holders of such
securities (whether as a member vote, a shareholder vote, an approval right
under this Agreement or the other agreements contemplated hereby, or
otherwise). These proxies and powers granted by each Executive Purchaser
pursuant to this Section 8 are coupled with an interest, and are given to
secure such Executive Purchasers' obligations under this Agreement and the
other agreements contemplated hereby to which the Executive Purchasers are
parties. Such proxies and powers shall be irrevocable with respect to each
Executive Security held by an Executive Purchaser (and shall survive and
not be affected by any transfer thereof, or the death, disability,
incompetency, or bankruptcy of such Executive Purchaser) until such time as
such Executive Security is transferred in accordance with the terms hereof
to a Person other than a member of Executive's Family Group, at which time
such proxy shall be deemed revoked with respect to such transferred
security (but not with respect to any other Executive Securities).
(b Transfers in Violation of Agreement. Any Transfer or attempted
Transfer of any Executive Securities in violation of any provision of this
Agreement shall be void, and none of the LLC, the Corporation, or any Subsidiary
thereof shall record such purported Transfer on its books or treat any purported
transferee of such Executive Securities as the owner of such securities for any
purpose.
-29-
<PAGE>
(c Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(d Complete Agreement. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt 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.
(e Counterparts. This Agreement may be executed in separate
counterparts, none of which need contain the signature of more than one party
hereto but each of which shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(f Successors and Assigns. (i) Except as otherwise provided herein,
this Agreement shall bind the parties hereto and their respective successors and
permitted assigns and shall inure to the benefit of and be enforceable by the
parties hereto and their respective successors and permitted assigns whether so
expressed or not.
(ii Each of the Corporation, the LLC, the Executive Purchaser, and
each holder of Executive Securities hereby acknowledges that immediately upon
and after the dissolution of the LLC, (A) all contractual obligations and duties
of the LLC hereunder shall thereafter bind and be enforceable against the
Corporation, (B0 all rights and powers granted to the LLC hereunder (including,
without limitation, the repurchase rights set forth in Section 3) shall inure to
the benefit of and be enforceable by the Corporation, (C) all references to the
LLC shall thereafter be deemed to be references to the Corporation, and (D)
except if the context clearly otherwise requires, this Agreement shall
thereafter operate and be construed as if the word "Corporation" were
substituted for the word "LLC" in each such instance.
-30-
<PAGE>
(g Governing Law; Submission to Jurisdiction. This Agreement shall be
governed by, and construed under, the laws of the State of Delaware, all rights
and remedies being governed by said laws, without regard to conflict of law
principles. Each of the parties hereto agrees (i) that this Agreement involves
at least $100,000 and (ii) that this Agreement has been entered into by the
parties hereto in express reliance upon 6 Del.C. (S) 2708. Each party hereby
irrevocably and unconditionally agrees (a) to be subject to the jurisdiction of
the courts of the State of Delaware and the federal courts sitting in the State
of Delaware or in the County of New York in the State of New York and (b) to the
extent such party is not otherwise subject to service of process in the State of
Delaware, to appoint and maintain an agent in the State of Delaware as such
party's agent for acceptance of legal process, and that service made pursuant to
(b) above shall have the same legal force and effect as if served upon said
party personally within the State of Delaware. For purposes of implementing the
parties' agreement to appoint and maintain an agent for service of process in
the State of Delaware, each such party that has not as of the date hereof
already duly appointed such an agent does hereby appoint RL&F Service Corp., One
Rodney Square, 10th Floor, Wilmington, New Castle County, Delaware 19801, as
such agent.
(h Remedies. Each of the parties to this Agreement (including any
holder of Investor Equity or employee of the Corporation to which the LLC
assigns any of its repurchase rights under Section 3 hereof) shall be entitled
to enforce its rights under this Agreement specifically, to recover damages and
costs (including reasonable attorney's fees and expenses) caused by any breach
of any provision of this Agreement and to exercise all other rights existing in
its favor. The parties hereto agree and acknowledge that money damages would
not be an adequate remedy for any breach of the provisions of this Agreement and
that any party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or deposit) for specific
performance and/or other injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement.
(i Amendment, Modification, or Waiver. The provisions of this
Agreement may be amended, modified, or waived only with the prior written
consent of the LLC and the Executive.
(j Third-Party Beneficiaries. The parties hereto acknowledge and
agree that certain provisions of this Agreement are intended for the benefit of
-31-
<PAGE>
certain holders of Investor Equity or employees of the Corporation to which the
LLC assigns any of its repurchase rights under Section 3 hereof, that such
Persons are third-party beneficiaries of this Agreement and that the provisions
of this Agreement shall be enforceable by such Persons as provided herein.
(k Business Days. If any time period for giving notice or taking
action hereunder expires on a day which is a Saturday, Sunday or legal holiday
in the State of New York, the time period shall be automatically extended to the
business day immediately following such Saturday, Sunday or holiday.
(l Descriptive Headings; Interpretation; No Strict Construction. The
descriptive headings of this Agreement are inserted for convenience only and do
not constitute a substantive part of this Agreement. Whenever required by the
context, any pronoun used in this Agreement shall include the corresponding
masculine, feminine or neuter forms, and the singular forms of nouns, pronouns,
and verbs shall include the plural and vice versa. Reference to any agreement,
document, or instrument means such agreement, document, or instrument as amended
or otherwise modified from time to time in accordance with the terms thereof,
and if applicable hereof. The use of the words "include" or "including" in this
Agreement shall be by way of example rather than by limitation. The use of the
words "or," "either" or "any" shall not be exclusive. The parties hereto have
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, it is the
intent of the parties that 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 the authorship of any of the
provisions of this Agreement.
(m Notices. All notices, requests or other communications to any
party hereunder shall be in writing (including facsimile transmission) and shall
be given,
if to Executive, to:
Choice One Communications Inc.
333 West Commercial Street
Suite 2500
East Rochester, New York 14455
-32-
<PAGE>
if to the LLC, to:
c/o Morgan Stanley Capital Partners III, L.P.
1221 Avenue of the Americas
33rd Floor
New York, New York 10020
Attention: John B. Ehrenkranz
Facsimile: (212) 762-7951
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Louis L. Goldberg
Facsimile: (212) 450-4800
and to:
Fleet Equity Partners VI, L.P.
50 Kennedy Plaza
12th Floor
Providence, Rhode Island 02903
Attention: Robert M. Van Degna
Facsimile: (401) 278-6387
with a copy to:
Paul, Hastings, Janofsky & Walker, LLP
399 Park Avenue
New York, New York 10022-4697
Attention: Neil A. Torpey
Facsimile: (212) 319-4090
-33-
<PAGE>
and to:
Waller-Sutton Media Partners, L.P.
555 North Lane
Suite 6150
Conshohocken, PA 19428
Attention: Mr. Bruce Hernandez
Facsimile: (610) 397-1014
with a copy to:
Rubin Baum Levin Constant & Friedman
30 Rockefeller Plaza
New York, New York 10112
Attention: Jonathan D. Drucker
Facsimile: (212) 698-7825
if to the Corporation, to:
Choice One Communications Inc.
333 West Commercial Street
Suite 2500
East Rochester, New York 14445
Attention: Steve Dubnik
Facsimile: (716) 385-0609
with a copy to:
Nixon, Hargrave, Devans & Doyle LLP
Clinton Square
P.O. Box 1051
Rochester, New York 14603-1051
Attention: James A. Locke, III
Facsimile: (716) 263-1600
and if to any member of the LLC or to any other holder of Common Stock, to the
address or facsimile set forth on the books of the LLC or the Corporation or any
other address or facsimile number as a party may hereafter specify for such
-34-
<PAGE>
purpose to the LLC. Notwithstanding the foregoing, no holder of Investor Equity
or its counsel shall be entitled to notice if such holder holds less than 3% in
aggregate of all Investor Equity then outstanding.
All such notices, requests and other communications shall be deemed
received on the date of receipt by the recipient thereof if received prior to 5
p.m. in the place of receipt and such day is a business day in the place of
receipt. Otherwise, any such notice, request or communication shall be deemed
not to have been received until the next succeeding business day in the place of
receipt.
* * * *
-35-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
CHOICE ONE COMMUNICATIONS L.L.C.
By: /s/ Steve M. Dubnik
--------------------------------------
Its: Authorized Person
--------------------------------------
CHOICE ONE COMMUNICATIONS INC.
By: /s/ Steve M. Dubnik
--------------------------------------
Its: President and Chief Executive Officer
--------------------------------------
EXECUTIVE
/s/ Ajay Sabherwal
---------------------------------
-36-
<PAGE>
Execution of Counterpart Agreeing to be Bound to
Executive Purchase Agreement by Executive Purchaser
Name of Individual:
-----------------------------
Signature:
-----------------------------------------
Date:
-37-
<PAGE>
Exhibit 10.20
================================================================================
AMENDED AND RESTATED
CREDIT AGREEMENT
dated as of November 3, 1999
by and among
CHOICE ONE COMMUNICATIONS INC.,
as Guarantor,
the Subsidiaries thereof listed on the signature pages hereto, as Borrowers,
the Lenders referred to herein,
FIRST UNION INVESTORS, INC.,
as Administrative Agent,
GENERAL ELECTRIC CAPITAL
CORPORATION, as Syndication Agent
and
CIBC INC., as Documentation Agent,
FIRST UNION SECURITIES, INC.
acted as Sole Lead Arranger
==============================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I DEFINITIONS..................................................................... 1
- -----------------------------------------------------------------------------------------------
SECTION 1.1 Definitions........................................................... 1
-----------
SECTION 1.2 General............................................................... 20
-------
SECTION 1.3 Other Definitions and Provisions...................................... 21
--------------------------------
ARTICLE II REVOLVING CREDIT FACILITY...................................................... 21
- -----------------------------------------------------------------------------------------------
SECTION 2.1 Revolving Credit Loans................................................ 21
----------------------
SECTION 2.2 Swingline Loans....................................................... 21
---------------
SECTION 2.3 Procedure for Advances of Revolving Credit and Swingline Loans........ 23
--------------------------------------------------------------
SECTION 2.4 Repayment of Revolving Credit Loans................................... 24
-----------------------------------
SECTION 2.5 Notes................................................................. 25
-----
SECTION 2.6 Permanent Reduction of the Revolving Credit Commitment................ 25
------------------------------------------------------
SECTION 2.7 Termination of Revolving Credit Facility.............................. 26
----------------------------------------
ARTICLE III LETTER OF CREDIT FACILITY..................................................... 26
- -----------------------------------------------------------------------------------------------
SECTION 3.1 L/C Commitment........................................................ 26
--------------
SECTION 3.2 Procedure for Issuance of Letters of Credit........................... 27
-------------------------------------------
SECTION 3.3 Commissions and Other Charges......................................... 27
-----------------------------
SECTION 3.4 L/C Participations.................................................... 28
------------------
SECTION 3.5 Reimbursement Obligation of the Borrower.............................. 29
----------------------------------------
SECTION 3.6 Obligations Absolute.................................................. 29
--------------------
SECTION 3.7 Effect of Application................................................. 30
---------------------
ARTICLE IV TERM LOAN FACILITY............................................................. 30
- -----------------------------------------------------------------------------------------------
SECTION 4.1 Term Loans............................................................ 30
----------
SECTION 4.2 Procedure for Advances of Term Loans.................................. 30
------------------------------------
SECTION 4.3 Scheduled Repayment of Term Loans; Excess Term Loans.................. 31
----------------------------------------------------
SECTION 4.4 Commitment Reduction; Prepayments of Term Loans....................... 31
-----------------------------------------------
SECTION 4.5 Term Notes............................................................ 33
----------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE V GENERAL LOAN PROVISIONS......................................................... 33
- -----------------------------------------------------------------------------------------------
SECTION 5.1 Interest.............................................................. 33
--------
SECTION 5.2 Notice and Manner of Conversion or Continuation of Loans.............. 36
--------------------------------------------------------
SECTION 5.3 Fees.................................................................. 37
----
SECTION 5.4 Manner of Payment..................................................... 37
-----------------
SECTION 5.5 Crediting of Payments and Proceeds.................................... 38
----------------------------------
SECTION 5.6 Adjustments........................................................... 38
-----------
SECTION 5.7 Nature of Obligations of Lenders Regarding Extensions of Credit;
----------------------------------------------------------------
Assumption by the Administrative Agent................................ 39
--------------------------------------
SECTION 5.8 Changed Circumstances................................................. 39
---------------------
SECTION 5.9 Indemnity............................................................. 41
---------
SECTION 5.10 Capital Requirements.................................................. 41
--------------------
SECTION 5.11 Taxes................................................................. 42
-----
SECTION 5.12 Security.............................................................. 43
--------
ARTICLE VI CLOSING; CONDITIONS OF CLOSING AND BORROWING................................... 44
- -----------------------------------------------------------------------------------------------
SECTION 6.1 Closing............................................................... 44
-------
SECTION 6.2 Conditions to Closing................................................. 44
---------------------
SECTION 6.3 Conditions to All Extensions of Credit................................ 48
--------------------------------------
ARTICLE VII REPRESENTATIONS AND WARRANTIES................................................ 49
- -----------------------------------------------------------------------------------------------
SECTION 7.1 Representations and Warranties........................................ 49
------------------------------
SECTION 7.2 Survival of Representations and Warranties, Etc....................... 56
-----------------------------------------------
ARTICLE VIII FINANCIAL INFORMATION AND NOTICES............................................ 56
- -----------------------------------------------------------------------------------------------
SECTION 8.1 Financial Statements and Projections.................................. 56
------------------------------------
SECTION 8.2 Officer's Compliance Certificate...................................... 58
--------------------------------
SECTION 8.3 Accountants' Certificate.............................................. 58
------------------------
SECTION 8.4 Other Reports......................................................... 58
-------------
SECTION 8.5 Notice of Litigation and Other Matters................................ 59
--------------------------------------
SECTION 8.6 Accuracy of Information............................................... 60
-----------------------
ARTICLE IX AFFIRMATIVE COVENANTS.......................................................... 60
- ----------------------------------------------------------------------------------------------
SECTION 9.1 Preservation of Corporate Existence and Related Matters............... 60
-------------------------------------------------------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 9.2 Maintenance of Property............................................... 60
-----------------------
SECTION 9.3 Insurance............................................................. 61
---------
SECTION 9.4 Accounting Methods and Financial Records.............................. 61
----------------------------------------
SECTION 9.5 Payment and Performance of Obligations................................ 61
--------------------------------------
SECTION 9.6 Compliance With Laws and Approvals.................................... 61
----------------------------------
SECTION 9.7 Environmental Laws.................................................... 61
------------------
SECTION 9.8 Compliance with ERISA................................................. 62
---------------------
SECTION 9.9 Compliance With Agreements............................................ 62
--------------------------
SECTION 9.10 Conduct of Business................................................... 62
-------------------
SECTION 9.11 Visits and Inspections................................................ 62
----------------------
SECTION 9.12 Additional Subsidiaries and Collateral................................ 63
--------------------------------------
SECTION 9.13 Year 2000 Compatibility............................................... 64
-----------------------
SECTION 9.14 Transfer of Capital Contributions..................................... 64
---------------------------------
SECTION 9.15 Hedging Agreements.................................................... 64
------------------
SECTION 9.16 Further Assurances.................................................... 64
------------------
SECTION 9.17 Use of Proceeds....................................................... 64
---------------
ARTICLE X FINANCIAL COVENANTS............................................................. 64
- -----------------------------------------------------------------------------------------------
SECTION 10.1 Stage 1 Covenants..................................................... 64
-----------------
SECTION 10.2 Stage 2 Covenants..................................................... 67
-----------------
SECTION 10.3 Guarantor Covenant.................................................... 69
------------------
ARTICLE XI NEGATIVE COVENANTS............................................................. 69
- -----------------------------------------------------------------------------------------------
SECTION 11.1 Limitations on Debt................................................... 70
-------------------
SECTION 11.2 Limitations on Guaranty Obligations................................... 71
-----------------------------------
SECTION 11.3 Limitations on Liens.................................................. 71
--------------------
SECTION 11.4 Limitations on Loans, Advances, Investments and Acquisitions.......... 72
------------------------------------------------------------
SECTION 11.5 Limitations on Mergers and Liquidation................................ 73
--------------------------------------
SECTION 11.6 Limitations on Sale of Assets......................................... 74
-----------------------------
SECTION 11.7 Limitations on Dividends and Distributions............................ 74
------------------------------------------
SECTION 11.8 Limitations on Exchange and Issuance of Capital Stock................. 75
-----------------------------------------------------
SECTION 11.9 Transactions with Affiliates.......................................... 75
----------------------------
SECTION 11.10 Certain Accounting Changes............................................ 75
--------------------------
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
SECTION 11.11 Amendments; Payments and Prepayments of Subordinated Debt............. 75
---------------------------------------------------------
SECTION 11.12 Charter Documents..................................................... 75
-----------------
SECTION 11.13 Restrictive Agreements................................................ 76
----------------------
ARTICLE XII DEFAULT AND REMEDIES.......................................................... 76
- -----------------------------------------------------------------------------------------------
SECTION 12.1 Events of Default..................................................... 76
-----------------
SECTION 12.2 Remedies.............................................................. 79
--------
SECTION 12.3 Rights and Remedies Cumulative; Non-Waiver; etc....................... 80
-----------------------------------------------
ARTICLE XIII THE ADMINISTRATIVE AGENT..................................................... 80
- -----------------------------------------------------------------------------------------------
SECTION 13.1 Appointment........................................................... 80
-----------
SECTION 13.2 Delegation of Duties.................................................. 81
--------------------
SECTION 13.3 Exculpatory Provisions................................................ 81
----------------------
SECTION 13.4 Reliance by the Administrative Agent.................................. 81
------------------------------------
SECTION 13.5 Notice of Default..................................................... 82
-----------------
SECTION 13.6 Non-Reliance on the Administrative Agent and Other Lenders............ 82
----------------------------------------------------------
SECTION 13.7 Indemnification....................................................... 83
---------------
SECTION 13.8 The Administrative Agent in Its Individual Capacity................... 83
---------------------------------------------------
SECTION 13.9 Resignation of the Administrative Agent; Successor Administrative
-----------------------------------------------------------------
Agent................................................................. 83
-----
ARTICLE XIV UNCONDITIONAL GUARANTY........................................................ 84
- -----------------------------------------------------------------------------------------------
SECTION 14.1 Guaranty of Obligations............................................... 84
-----------------------
SECTION 14.2 Nature of Guaranty.................................................... 84
------------------
SECTION 14.3 Demand by the Administrative Agent.................................... 85
----------------------------------
SECTION 14.4 Waivers............................................................... 85
-------
SECTION 14.5 Modification of Loan Documents etc.................................... 86
----------------------------------
SECTION 14.6 Reinstatement......................................................... 86
-------------
SECTION 14.7 No Subrogation........................................................ 87
--------------
SECTION 14.8 Agents................................................................ 87
------
ARTICLE XV MISCELLANEOUS.................................................................. 87
- -----------------------------------------------------------------------------------------------
SECTION 15.1 Notices............................................................... 87
-------
SECTION 15.2 Expenses; Indemnity................................................... 88
-------------------
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
SECTION 15.3 Set-off............................................................ 89
-------
SECTION 15.4 Governing Law...................................................... 89
-------------
SECTION 15.5 Consent to Jurisdiction............................................ 89
-----------------------
SECTION 15.6 Binding Arbitration; Waiver of Jury Trial.......................... 90
-----------------------------------------
SECTION 15.7 Reversal of Payments............................................... 91
--------------------
SECTION 15.8 Injunctive Relief; Punitive Damages................................ 91
-----------------------------------
SECTION 15.9 Accounting Matters................................................. 91
------------------
SECTION 15.10 Successors and Assigns; Participations............................. 92
--------------------------------------
SECTION 15.11 Amendments, Waivers and Consents................................... 95
--------------------------------
SECTION 15.12 Performance of Duties.............................................. 95
---------------------
SECTION 15.13 All Powers Coupled with Interest................................... 96
--------------------------------
SECTION 15.14 Survival of Indemnities............................................ 96
-----------------------
SECTION 15.15 Titles and Captions................................................ 96
-------------------
SECTION 15.16 Severability of Provisions......................................... 96
--------------------------
SECTION 15.17 Counterparts....................................................... 96
------------
SECTION 15.18 Term of Agreement.................................................. 96
-----------------
SECTION 15.19 Inconsistencies with Other Documents; Independent Effect of
-----------------------------------------------------------
Covenants.......................................................... 96
---------
SECTION 15.20 Company as Agent for Borrowers; Obligations Joint and Several...... 97
-------------------------------------------------------------
</TABLE>
v
<PAGE>
EXHIBITS
- --------
Exhibit A-1 - Form of Revolving Credit Note
Exhibit A-2 - Form of Swingline Note
Exhibit A-3 - Form of Term Note
Exhibit B - Form of Notice of Borrowing
Exhibit C - Form of Notice of Account Designation
Exhibit D - Form of Notice of Prepayment
Exhibit E - Form of Notice of Conversion/Continuation
Exhibit F - Form of Officer's Compliance Certificate
Exhibit G - Form of Assignment and Acceptance
Exhibit H - Form of Security Agreement
Exhibit I - Form of Pledge Agreement
Exhibit J - Form of Joinder Agreement
SCHEDULES
- ---------
Schedule 1 - Lenders and Commitments
Schedule 7.1(a) - Jurisdictions of Organization and Qualification
Schedule 7.1(b) - Subsidiaries and Capitalization
Schedule 7.1(i) - ERISA Plans
Schedule 7.1(l) - Material Contracts
Schedule 7.1(m) - Labor and Collective Bargaining Agreements
Schedule 7.1(r) - List of Real Property
Schedule 7.1(t) - Debt and Guaranty Obligations
Schedule 7.1(u) - Litigation
Schedule 7.1(w) - Communications Licenses
Schedule 9.3 - Insurance Coverage
Schedule 11.3 - Existing Liens
Schedule 11.4 - Existing Loans, Advances and Investments
vi
<PAGE>
This AMENDED AND RESTATED CREDIT AGREEMENT, dated as of the 3rd day of
November, 1999, by and among CHOICE ONE COMMUNICATIONS INC., a Delaware
corporation, as Guarantor, its Subsidiaries listed on the signature pages hereto
and any additional Subsidiaries joined hereto, as Borrowers, the Lenders who are
or may become a party to this Agreement, FIRST UNION INVESTORS, INC., as
Administrative Agent, GENERAL ELECTRIC CAPITAL CORPORATION, as Syndication Agent
and CIBC Inc., as Documentation Agent.
STATEMENT OF PURPOSE
--------------------
Pursuant to the Credit Agreement dated as of October 14, 1998 (as
previously amended, restated, supplemented or otherwise modified from time to
time, the "Initial Credit Agreement"), by and among the Subsidiaries of the
Company party thereto as borrowers (the "Initial Borrowers"), the lenders party
thereto (the "Initial Lenders"), and the Agents listed therein, the Initial
Lenders have extended certain credit facilities to the Initial Borrowers
pursuant to the terms thereof.
The Borrowers have requested, and, subject to the terms and conditions
hereof, the Administrative Agent, the Syndication Agent, the Documentation Agent
and the Lenders have agreed, to amend and restate the Initial Credit Agreement
to provide for, among other things, (i) the increase of the Aggregate Commitment
from $60,000,000 to $150,000,000, (ii) the addition of a term loan facility,
(iii) the addition of a swingline facility, (iv) the addition of certain of the
Lenders and (v) the modification of certain other terms and conditions, all as
set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, such parties
hereby agree as follows:
ARTICLE I
DEFINITIONS
-----------
SECTION 1.1 Definitions. The following terms when used in this
-----------
Agreement shall have the meanings assigned to them below:
"AC Acquisition" means the acquisition by the Company of all of the
--------------
membership interests of Atlantic Connections, L.L.C. in a transaction and
pursuant to documentation reasonably satisfactory to the Administrative Agent.
"Administrative Agent" means First Union in its capacity as Administrative
--------------------
Agent hereunder, and any successor thereto appointed pursuant to Section 13.9.
"Administrative Agent's Office" means the office of the Administrative
-----------------------------
Agent specified in or determined in accordance with the provisions of Section
15.1(c).
<PAGE>
"Affiliate" means, with respect to any Person, any other Person (other
---------
than, with respect to the Company, any of its Subsidiaries) which directly or
indirectly through one or more intermediaries, controls, or is controlled by, or
is under common control with, such first Person or any of its Subsidiaries. For
the purposes of the preceding sentence, the term "control" means (a) the power
to vote five percent (5%) or more of the securities or other equity interests of
a Person having ordinary voting power, or (b) the possession, directly or
indirectly, of any other power to direct or cause the direction of the
management and policies of a Person, whether through ownership of voting
securities, by contract or otherwise.
"Agents" means the collective reference to the Administrative Agent,
------
Documentation Agent and Syndication Agent.
"Aggregate Commitment" means the aggregate amount of the Lenders'
--------------------
Commitments hereunder, as such amount may be reduced or modified at any time or
from time to time pursuant to the terms hereof. On the Closing Date, the
Aggregate Commitment shall be One Hundred Fifty Million Dollars ($150,000,000).
"Agreement" means this Amended and Restated Credit Agreement, as further
---------
amended, restated, supplemented or otherwise modified from time to time.
"Applicable Law" means all applicable provisions of constitutions, laws,
--------------
statutes, ordinances, rules, treaties, regulations, permits, licenses,
approvals, interpretations and orders of courts or Governmental Authorities and
all orders and decrees of all courts and arbitrators.
"Applicable Margin" shall have the meaning assigned thereto in Section
-----------------
5.1(c).
"Application" means an application, in the form specified by the Issuing
-----------
Lender from time to time, requesting the Issuing Lender to issue a Letter of
Credit.
"Approved Budget" means an Approved Budget as defined in the Transaction
---------------
Agreement.
"Approved Business Plan" means an Approved Business Plan as defined in the
----------------------
Transaction Agreement.
"Arbitration Rules" shall have the meaning assigned thereto in Section
-----------------
15.6.
"Assignment and Acceptance" shall have the meaning assigned thereto in
-------------------------
Section 15.10.
"Available Commitment" means, as to any Lender at any time, an amount equal
--------------------
to (a) such Lender's Commitment less (b) such Lender's Extensions of Credit.
----
"Base Rate" means, at any time, the higher of (a) the Prime Rate and (b)
---------
the sum of (i) the Federal Funds Rate plus (ii) 1/2 of 1%; each change in the
----
Base Rate shall take effect simultaneously with the corresponding change or
changes in the Prime Rate or the Federal Funds Rate.
2
<PAGE>
"Base Rate Loan" means any Loan bearing interest at a rate based upon the
--------------
Base Rate as provided in Section 5.1(a).
"Benefited Lender" shall have the meaning assigned thereto in Section 5.6.
----------------
"Borrower Fixed Charges" means, for any period, the sum of the following
----------------------
determined on a Consolidated basis, without duplication, for the Borrowers and
their Subsidiaries in accordance with GAAP: (a) scheduled principal and interest
payments, (b) Capital Expenditures, (c) cash taxes and (d) cash dividends.
"Borrower Leverage Ratio" means with respect to the Borrowers and their
-----------------------
Subsidiaries on a Consolidated basis as of the last day of any fiscal quarter,
the ratio of (a) Total Debt thereof as of such date to (b) EBITDA thereof for
the six-month period ending on such date times two (2).
-----
"Borrowers" means Choice One Communications of New York Inc., a Delaware
---------
corporation; Choice One Communications of Pennsylvania Inc., a Delaware
corporation; Choice One Communications of Massachusetts Inc., a Delaware
corporation; Choice One of New Hampshire Inc., a Delaware corporation, Choice
One Communications of Ohio Inc., a Delaware Corporation, Choice One
Communications of Maine Inc., a Delaware corporation, Choice One Communications
of Vermont Inc., a Delaware corporation, Choice One Communications of Rhode
Island Inc., a Delaware corporation, Choice One Communications of Connecticut
Inc., a Delaware corporation, Choice One Communications International Inc., a
Delaware corporation; and any additional Subsidiary that becomes a Borrower
hereunder pursuant to Section 9.12, each in its capacity as borrower hereunder.
"Borrowing Base" means (a) during any Stage 1 Covenant Period, an amount
--------------
equal to, with respect to Completed Cities, one hundred percent (100%) of
Telecommunications Equipment and, with respect to any Non-Completed Cities,
seventy percent (70%) of Telecommunications Equipment, in each case, owned by
the Borrowers and their Subsidiaries as of the most recent calendar month end
for which financial information has been delivered pursuant to Section 8.1(a),
and (b) during any Stage 2 Covenant Period, an amount equal to the Aggregate
Commitment then in effect. The Administrative Agent, with the written consent
of the Required Lenders, shall have the right based on any field audit completed
pursuant to Section 9.11 to adjust the items or value of Telecommunications
Equipment included in the Borrowing Base from time to time by written notice to
the Borrowers and Lenders upon completing any such audit.
"Business Day" means (a) for all purposes other than as set forth in clause
------------
(b) below, any day other than a Saturday, Sunday or legal holiday on which banks
in Charlotte, North Carolina and New York, New York, are open for the conduct of
their commercial banking business, and (b) with respect to all notices and
determinations in connection with, and payments of principal and interest on,
any LIBOR Rate Loan, any day that is a Business Day described in clause (a) and
that is also a day for trading by and between banks in Dollar deposits in the
London interbank market.
3
<PAGE>
"Cash Equivalents" shall have the meaning assigned thereto in Section
----------------
11.4(b).
"Capital Asset" means, with respect to the Borrowers and their
-------------
Subsidiaries, any asset that should, in accordance with GAAP, be classified and
accounted for as a capital asset on a Consolidated balance sheet of the
Borrowers and their Subsidiaries.
"Capital Expenditures" means, with respect to the Borrowers and their
--------------------
Subsidiaries for any period, the aggregate cost of all Capital Assets acquired
by the Borrowers and/or their Subsidiaries during such period, less capitalized
----
labor, each as determined in accordance with GAAP.
"Capital Lease" means, with respect to the Company and its Subsidiaries, or
-------------
the Borrowers and their Subsidiaries, as applicable, any lease of any property
that should, in accordance with GAAP, be classified and accounted for as a
capital lease on a Consolidated balance sheet thereof.
"Change in Control" shall have the meaning assigned thereto in Section
-----------------
12.1(i).
"CLEC" means a competitive local exchange carrier under applicable
----
Communications Law.
"Closing Date" means the date of this Agreement or such later Business Day
------------
upon which each condition described in Section 6.2 shall be satisfied or waived
in all respects in a manner acceptable to the Administrative Agent in its
reasonable discretion.
"Code" means the Internal Revenue Code of 1986, and the rules and
----
regulations thereunder, each as amended, supplemented or otherwise modified.
"Commitment" means, as to any Lender, the sum of such Lender's Revolving
----------
Credit Commitment and Term Loan Commitment as set forth opposite such Lender's
name on Schedule 1 hereto, as the same may be reduced or modified at any time or
----------
from time to time pursuant to the terms hereof.
"Commitment Percentage" means, as to any Lender at any time, the ratio of
---------------------
(a) the amount of the Commitment of such Lender to (b) the Aggregate Commitment
of all of the Lenders.
"Communications Law" means the Communications Act of 1934, as amended, and
------------------
all rules and regulations thereunder, or any successor statute or statutes
thereto (including, without limitation, the Telecommunications Act of 1996) and
all rules and regulations thereunder, and all rules and regulations of the FCC,
any applicable PUC or any other applicable Governmental Authority related to the
provision of telecommunication or broadcast services, each as amended or
supplemented from time to time.
4
<PAGE>
"Communications License" means any license for the provision of CLEC
----------------------
telephony service, and any other license, permit, consent, certificate of
compliance, franchise, approval, waiver or authorization granted or issued by
FCC or other applicable Governmental Authority, including, without limitation,
any PUC, each of the foregoing authorizing or permitting the acquisition,
construction or operation of Network Facilities or any other system for the
provision of CLEC telephony service.
"Company" means Choice One Communications Inc., a Delaware corporation, and
-------
its successors and permitted assigns.
"Company Fixed Charges" means, for any period, the sum of the following
---------------------
determined on a Consolidated basis, without duplication, for the Company and its
Subsidiaries in accordance with GAAP: (a) scheduled principal and interest
payments, (b) Capital Expenditures, (c) cash taxes and (d) cash dividends.
"Company Notes" means the Company Senior Notes or the Company Subordinated
-------------
Notes, as applicable.
"Company Senior Notes" shall have the meaning assigned thereto in Section
--------------------
11.1(c).
"Company Subordinated Notes" shall have the meaning assigned thereto in
--------------------------
Section 11.1(c).
"Company Leverage Ratio" means with respect to the Company and its
----------------------
Subsidiaries on a Consolidated basis as of the last day of any fiscal quarter,
the ratio of (a) Total Debt thereof as of such date to (b) EBITDA of the
Borrowers for the six-month period ending on such date times two (2).
-----
"Completed City" means any city in a Permitted Market with respect to which
--------------
the Borrowers (i) are switching paid traffic on their own Network Facilities
through a Switch owned by the Company or any Subsidiary, (ii) have obtained all
necessary Governmental Approvals, and (iii) have operational sales, customer
service and billing systems to the reasonable satisfaction of the Administrative
Agent.
"Consolidated" means, when used with reference to financial statements or
------------
financial statement items of the Company and its Subsidiaries, or the Borrowers
and their Subsidiaries, as applicable, such statements or items on a
consolidated basis in accordance with applicable principles of consolidation
under GAAP.
"Contributed Capital" means, with respect to the Borrowers and their
-------------------
Subsidiaries at any date of determination, all consideration paid on and prior
to such date for the common and preferred stock thereof, determined on a
Consolidated basis in accordance with GAAP.
"Credit Facility" means, collectively, the Revolving Credit Facility, the
---------------
Term Loan Facility and the L/C Facility.
5
<PAGE>
"DSL" means technology which permits broadband transmission over copper
---
telephone lines, allowing for the provision of high speed data services.
"Debt" means, with respect to the Company and its Subsidiaries or the
----
Borrowers and their Subsidiaries, as applicable, at any date and without
duplication, the sum of the following calculated in accordance with GAAP: (a)
all liabilities, obligations and indebtedness for borrowed money including but
not limited to obligations evidenced by bonds, debentures, notes or other
similar instruments of any such Person, (b) all obligations to pay the deferred
purchase price of property or services of any such Person (including, without
limitation, all obligations under non-competition agreements), except trade
payables arising in the ordinary course of business not more than ninety (90)
days past due, (c) all obligations of any such Person as lessee under Capital
Leases, (d) all Debt of any other Person secured by a Lien on any asset of any
of the Company and its Subsidiaries or the Borrowers and their Subsidiaries, as
applicable, (e) all Guaranty Obligations of any such Person, except as permitted
by Section 11.2(c), (f) all obligations, contingent or otherwise, of any such
Person relative to the face amount of letters of credit, whether or not drawn,
including without limitation any Reimbursement Obligation, and banker's
acceptances issued for the account of any such Person, (g) all obligations of
any such Person to redeem, repurchase, exchange, defease or otherwise make
payments in respect of capital stock or other securities of such Person and (h)
all net termination payments (or other net obligations) owed by any such Person
pursuant to Hedging Agreements.
"Default" means any of the events specified in Section 12.1 which with the
-------
passage of time, the giving of notice or any other condition, would constitute
an Event of Default.
"Disputes" shall have the meaning set forth in Section 15.6.
--------
"Documentation Agent" means CIBC Inc. in its capacity as Documentation
-------------------
Agent.
"Dollars" or "$" means, unless otherwise qualified, dollars in lawful
--------------
currency of the United States.
"EBITDA" means, with respect to the Company and its Subsidiaries or the
------
Borrowers and their Subsidiaries, as applicable, for any period, the sum of the
following determined on a Consolidated basis, without duplication, for the
Borrowers and their Subsidiaries in accordance with GAAP: (a) Net Income for
such period plus (b) the sum of the following to the extent deducted in
----
determining Net Income: (i) income and franchise taxes, (ii) Interest Expense,
(iii) amortization, depreciation and other non-cash charges less (c) (i)
----
capitalized labor, (ii) interest income and (iii) any extraordinary gains.
EBITDA shall be adjusted in a manner reasonably satisfactory to the
Administrative Agent to include, on a pro forma basis, as of the first day of
any calculation period any acquisition consummated during such period in
accordance with this Agreement and exclude, on a pro forma basis, as of the
first day of any calculation period any Subsidiary or assets sold in accordance
with this Agreement during such period.
"Eligible Assignee" means, with respect to any assignment of the rights,
-----------------
interest and obligations of a Lender hereunder, a Person that is at the time of
such assignment (a) a commercial bank organized under the laws of the United
States or any state thereof, having
6
<PAGE>
combined capital and surplus in excess of $500,000,000, (b) a commercial bank
organized under the laws of any other country that is a member of the
Organization of Economic Cooperation and Development, or a political subdivision
of any such country, having combined capital and surplus in excess of
$500,000,000, (c) a finance company, insurance company or other financial
institution which in the ordinary course of business extends credit of the type
extended hereunder and that has total assets in excess of $1,000,000,000, (d)
already a Lender hereunder (whether as an original party to this Agreement or as
the assignee of another Lender), (e) the successor (whether by transfer of
assets, merger or otherwise) to all or substantially all of the commercial
lending business of the assigning Lender, or (f) any other Person that has been
approved in writing as an Eligible Assignee by the Company and the
Administrative Agent.
"Employee Benefit Plan" means any employee benefit plan within the meaning
---------------------
of Section 3(3) of ERISA which (a) is maintained for employees of the Borrowers
or any ERISA Affiliate or (b) has at any time within the preceding six years
been maintained for the employees of the Borrowers or any current or former
ERISA Affiliate.
"Environmental Laws" means any and all federal, state and local laws,
------------------
statutes, ordinances, rules, regulations, permits, licenses, approvals,
interpretations and orders of courts or Governmental Authorities, relating to
the protection of human health or the environment, including, but not limited
to, requirements pertaining to the manufacture, processing, distribution, use,
treatment, storage, disposal, transportation, handling, reporting, licensing,
permitting, investigation or remediation of Hazardous Materials.
"Equity Documents" means the LLC Agreement and the Transaction Agreement.
----------------
"ERISA" means the Employee Retirement Income Security Act of 1974, and the
-----
rules and regulations thereunder, each as amended, supplemented or otherwise
modified.
"ERISA Affiliate" means any Person who together with the Company is treated
---------------
as a single employer within the meaning of Section 414(b), (c), (m) or (o) of
the Code or Section 4001(b) of ERISA.
"Eurodollar Reserve Percentage" means, for any day, the percentage
-----------------------------
(expressed as a decimal and rounded upwards, if necessary, to the next higher
1/100th of 1%) which is in effect for such day as prescribed by the Federal
Reserve Board (or any successor) for determining the maximum reserve requirement
(including without limitation any basic, supplemental or emergency reserves) in
respect of eurocurrency liabilities or any similar category of liabilities for a
member bank of the Federal Reserve System in New York City.
"Event of Default" means any of the events specified in Section 12.1;
----------------
provided, that any requirement for passage of time, giving of notice, or any
- --------
other condition, has been satisfied.
"Excess Cash Flow" means, with respect to the Company and its Subsidiaries
----------------
for any period, the sum of the following for such period (a) EBITDA minus (b)
-----
the sum of (i) Company Fixed Charges, plus (ii) to the extent not already
----
included in Company Fixed Charges, all
7
<PAGE>
optional prepayments of the Term Loans and any other Debt which does not permit
the reborrowing of amounts prepaid, plus (minus) (iii) decrease (increase) in
Working Capital.
"Excess Proceeds" shall have the meaning assigned thereto in Section
---------------
4.4(c)(vi).
"Expanded Business Plan" means any Approved Business Plan with respect to
----------------------
the buildout of markets other than those included in the definition of Permitted
Markets which expanded business plan has been approved by the Required Lenders
(such approval not to be unreasonably withheld or delayed).
"Extensions of Credit" means, as to any Lender at any time, (a) an amount
--------------------
equal to the sum of (i) the aggregate principal amount of all Revolving Credit
Loans made by such Lender then outstanding, (ii) such Lender's Revolving Credit
Commitment Percentage of the L/C Obligations then outstanding, (iii) such
Lender's Revolving Credit Commitment Percentage of the Swingline Loans then
outstanding and (iv) the aggregate principal amount of all Term Loans made by
such Lender then outstanding, or (b) the making of any Loan or participation in
any Letter of Credit by such Lender, as the context requires.
"FCC" means the Federal Communications Commission or any successor
---
Governmental Authority.
"FDIC" means the Federal Deposit Insurance Corporation, or any successor
----
thereto.
"Federal Funds Rate" means, the rate per annum (rounded upwards, if
------------------
necessary, to the next higher 1/100th of 1%) representing the daily effective
federal funds rate as quoted by the Administrative Agent and confirmed in
Federal Reserve Board Statistical Release H.15 (519) or any successor or
substitute publication selected by the Administrative Agent. If, for any
reason, such rate is not available, then "Federal Funds Rate" shall mean a daily
rate which is determined, in the opinion of the Administrative Agent, to be the
rate at which federal funds are being offered for sale in the national federal
funds market at 9:00 a.m. (Charlotte time). Rates for weekends or holidays
shall be the same as the rate for the most immediate preceding Business Day.
"Final Maturity Date" means the later to occur of the Revolving Credit
-------------------
Termination Date and the Term Loan Maturity Date.
"First Union" means First Union Investors, Inc. and its successors.
-----------
"Fiscal Year" means the fiscal year of the Borrowers and their Subsidiaries
-----------
ending on December 31.
"GAAP" means generally accepted accounting principles, as recognized by the
----
American Institute of Certified Public Accountants and the Financial Accounting
Standards Board, consistently applied and maintained on a consistent basis for
the Company and its Subsidiaries and the Borrowers and their Subsidiaries, as
applicable, throughout the period indicated.
8
<PAGE>
"Governmental Approvals" means all authorizations, consents, approvals,
----------------------
licenses and exemptions of, registrations and filings with, and reports to, all
Governmental Authorities.
"Governmental Authority" means any nation, province, state or political
----------------------
subdivision thereof, and any government or any Person exercising executive,
legislative, regulatory or administrative functions of or pertaining to
government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing.
"Guarantor" means the Company in its capacity as guarantor under the
---------
Guaranty.
"Guaranty" means the unconditional guaranty of the Obligations by the
--------
Company under Article XIV hereof.
"Guaranteed Obligations" shall have the meaning assigned thereto in Section
----------------------
14.1.
"Guaranty Obligation" means, with respect to the Company and its
-------------------
Subsidiaries, or the Borrowers and their Subsidiaries, as applicable, at any
date and without duplication, any obligation, contingent or otherwise, of any
such Person pursuant to which such Person has directly or indirectly guaranteed
any Debt or other obligation of any other Person and, without limiting the
generality of the foregoing, any obligation, direct or indirect, contingent or
otherwise, of any such Person (a) to purchase or pay (or advance or supply funds
for the purchase or payment of) such Debt or other obligation (whether arising
by virtue of partnership arrangements, by agreement to keep well, to purchase
assets, goods, securities or services, to take-or-pay, or to maintain financial
statement condition or otherwise) or (b) entered into for the purpose of
assuring in any other manner the obligee of such Debt or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided, that the term Guaranty Obligation shall not include
--------
endorsements for collection or deposit in the ordinary course of business.
"Hazardous Materials" means any substances or materials (a) which are or
-------------------
become defined as hazardous wastes, hazardous substances, pollutants,
contaminants, chemical substances or mixtures or toxic substances under any
Applicable Law, (b) which are toxic, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic, mutagenic or otherwise harmful to human
health or the environment and are or become regulated by any Governmental
Authority, (c) the presence of which require investigation or remediation under
any Applicable Law, (d) the discharge or emission or release of which requires a
permit or license under any Applicable Law or other Governmental Approval, (e)
which are deemed to constitute a nuisance, a trespass or pose a health or safety
hazard to persons or neighboring properties, (f) which consist of underground or
aboveground storage tanks, whether empty, filled or partially filled with any
substance, or (g) which contain, without limitation, asbestos, polychlorinated
biphenyls, urea formaldehyde foam insulation, petroleum hydrocarbons, petroleum
derived substances or waste, crude oil, nuclear fuel, natural gas or synthetic
gas.
"Hedging Agreement" means any agreement with respect to an interest rate
-----------------
swap, collar, cap, floor or a forward rate agreement or other agreement
regarding the hedging of interest rate risk exposure executed in connection with
hedging the interest rate exposure of the Borrowers,
9
<PAGE>
and any confirming letter executed pursuant to such hedging agreement, all as
amended, restated or otherwise modified.
"IPO Dissolution" shall have the meaning assigned thereto in Section
---------------
12.1(i).
"Interconnection Agreement" means any interconnection agreement entered
-------------------------
into by any Borrower, and any other agreement entered into thereby with respect
to collocation of Telecommunications Equipment, in each case with another
telecommunications provider.
"Interest Expense" means, for any period, total interest expense
----------------
(including, without limitation, interest expense attributable to Capital Leases
and plus all net payment obligations pursuant to Hedging Agreements) determined
on a consolidated basis, without duplication, for the Borrowers and their
Subsidiaries in accordance with GAAP.
"Interest Period" shall have the meaning assigned thereto in Section
---------------
5.1(b).
"Investor Equity" means any strategic equity investment in the Company by
---------------
any Person (other than Sponsor Equity) on or prior to the Term Loan Commitment
Termination Date which investment shall be on terms and conditions and from an
investor reasonably satisfactory to the Required Lenders.
"ISPA98" means the International Standby Practices (1998 Revision,
------
effective January 1, 1999), International Chamber of Commerce Publication No.
590.
"Issuing Lender" means First Union (or applicable affiliate thereof
--------------
designated by First Union), in its capacity as issuer of any Letter of Credit,
or any successor thereto.
"Joinder Agreement" means, collectively, each joinder agreement executed in
-----------------
favor of the Administrative Agent for the ratable benefit of itself and the
Lenders, substantially in the form of Exhibit J.
---------
"L/C Commitment" means the lesser of (a) $2,000,000 and (b) the Revolving
--------------
Credit Commitment.
"L/C Facility" means the letter of credit facility established pursuant to
------------
Article III hereof.
"L/C Obligations" means at any time, an amount equal to the sum of (a) the
---------------
aggregate undrawn and unexpired amount of the then outstanding Letters of Credit
and (b) the aggregate amount of drawings under Letters of Credit which have not
then been reimbursed pursuant to Section 3.5.
"L/C Participants" means the collective reference to all the Lenders other
----------------
than the Issuing Lender.
"Lender" means each Person executing this Agreement as a Lender (including,
------
without limitation, the Issuing Lender and the Swingline Lender unless the
context otherwise requires)
10
<PAGE>
set forth on the signature pages hereto and each Person that hereafter becomes a
party to this Agreement as a Lender pursuant to Section 15.10.
"Lending Office" means, with respect to any Lender, the office of such
--------------
Lender maintaining such Lender's Commitment Percentage of the Extensions of
Credit.
"Letters of Credit" shall have the meaning assigned thereto in Section 3.1.
-----------------
"Level 1 Equity/Market EBITDA Period" means the period commencing on the
-----------------------------------
Closing Date and ending on the earlier of (a) the day immediately prior to the
first day of the Level 2 Equity/Market EBITDA Period or (b) the day immediately
prior to the first day of the Stage 2 Covenant Period.
"Level 2 Equity/Market EBITDA Period" means the period commencing on the
-----------------------------------
first day after the Borrowers have (a) received Contributed Capital of at least
$100,000,000 and (b) achieved positive Market EBITDA in any five (5) Permitted
Markets for a period of two (2) consecutive fiscal quarters and ending on the
day immediately prior to the first day of the Stage 2 Covenant Period.
"LIBOR" means the rate of interest per annum determined on the basis of the
-----
rate for deposits in Dollars in minimum amounts of at least $5,000,000 for a
period equal to the applicable Interest Period which appears on the Dow Jones
Market Screen 3750 at approximately 11:00 a.m. (London time) two (2) Business
Days prior to the first day of the applicable Interest Period. If, for any
reason, such rate does not appear on the Dow Jones Market Screen 3750, then
"LIBOR" shall be determined by the Administrative Agent to be the arithmetic
average of the rate per annum at which deposits in Dollars would be offered by
first class banks in the London interbank market to the Administrative Agent at
approximately 11:00 a.m. (London time) two (2) Business Days prior to the first
day of the applicable Interest Period for a period equal to such Interest Period
and in an amount substantially equal to the amount of the applicable Loan.
"LIBOR Rate" means a rate per annum (rounded upwards, if necessary, to the
----------
next higher 1/100th of 1%) determined by the Administrative Agent pursuant to
the following formula.
LIBOR Rate = LIBOR
----------------------------------------
1.00-Eurodollar Reserve Percentage
"LIBOR Rate Loan" means any Loan bearing interest at a rate based upon the
---------------
LIBOR Rate as provided in Section 5.1(a).
"Lien" means, with respect to any asset, any mortgage, lien pledge,
----
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, a Person shall be deemed to own subject to a
Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, Capital Lease or other
title retention agreement relating to such asset.
11
<PAGE>
"LLC" means Choice One Communications LLC, a Delaware limited liability
---
company, and it successors and permitted assigns.
"LLC Agreement" means the Limited Liability Company Agreement of the LLC
-------------
dated as of July 8, 1998 by and among the members party thereto, as modified
prior to the date hereof, and as may be further amended, restated or otherwise
modified subject to the terms hereof.
"Loans" means the collective reference to the Revolving Credit Loans, the
-----
Term Loans and the Swingline Loans and "Loan" means any of such Loans.
"Loan Documents" means, collectively, this Agreement, the Notes, the
--------------
Applications, any Hedging Agreement with any Lender (which such Hedging
Agreement is permitted or required hereunder), the Security Documents, the
Syndication Letter, each Joinder Agreement and each other document, instrument,
certificate and agreement executed and delivered by the Company or any of its
Subsidiaries or their counsel in connection with this Agreement, all as may be
amended, restated or otherwise modified.
"Lucent Agreement" means the General Agreement Number LNM980612RMCO,
----------------
effective as of July 17, 1998, by and between Choice One and Lucent Technologies
Inc.
"Market EBITDA" means, for any period, the sum of the following, without
-------------
duplication for the Borrowers and their Subsidiaries with respect to a given
Permitted Market in accordance with GAAP: (a) Net Income for such period for
such Permitted Market plus (b) the sum of the following to the extent deducted
----
in determining such Net Income: (i) income and franchise taxes, (ii) Interest
Expense, (iii) amortization, depreciation and other non-cash charges and (iv)
corporate overhead costs and/or allocation to such Permitted Market less (c)
----
interest income and any extraordinary gains with respect to such Permitted
Market.
"Material Adverse Effect" means, with respect to the Company and its
-----------------------
Subsidiaries, a material adverse effect on (a) the properties, business,
prospects, operations or condition (financial or otherwise) of such Persons
taken as a whole or (b) the ability of any such Person to perform its
obligations under the Loan Documents to which it is a party or (c) during the
Stage 1 Covenant period, any liability to the Company or its Subsidiaries (other
than liabilities incurred thereby which are permitted hereunder) in excess of
$1,000,000.
"Material Contract" means (a) any contract or other agreement, written or
-----------------
oral, of the Borrowers or any of their Subsidiaries involving monetary liability
of or to any such Person in an amount in excess of $1,000,000 per annum, (b) the
Lucent Agreement, any Interconnection Agreement or any other Network Agreement
or (c) any other contract or agreement, of the Borrowers or any of their
Subsidiaries the failure to comply with which could reasonably be expected to
have a Material Adverse Effect.
"Mortgage" means each fee or leasehold mortgage, deed of trust, or
--------
collateral assignment of lease, executed by a Borrower or Subsidiary in favor of
the Administrative Agent (and in form and substance reasonably satisfactory
thereto) for the ratable benefit of itself and the Lenders, as each such
agreement may be amended, restated or otherwise modified.
12
<PAGE>
"MSCP" means, collectively, Morgan Stanley Capital Partners III, L.P.,
----
Morgan Stanley Capital Investors, L.P., and MSCP III 892 Investors, L.P.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
------------------
4001(a)(3) of ERISA to which any Borrower or any ERISA Affiliate is making, or
is accruing an obligation to make, contributions within the preceding six years.
"Net Cash Proceeds" means, as applicable, (a) with respect to any sale or
-----------------
other disposition of assets, the gross cash proceeds received by the Company or
any of its Subsidiaries from such sale less the sum of (i) all income taxes and
----
other taxes assessed or estimated by the Company (with such amount approved by
the Administrative Agent) to be assessed by a Governmental Authority as a result
of such sale and any other fees and expenses incurred in connection therewith
and (ii) the principal amount of, premium, if any, and interest on any Debt
secured by a Lien on the asset (or a portion thereof) sold, which Debt is
required to be repaid in connection with such sale, (b) with respect to any
offering of capital stock or issuance of Debt, the gross cash proceeds received
by the Company or any of its Subsidiaries therefrom less all legal, underwriting
----
and other fees and expenses incurred in connection therewith and (c) with
respect to any payment under an insurance policy or in connection with a
condemnation proceeding, the amount of cash proceeds received by the Company or
its Subsidiaries from an insurance company or Governmental Authority, as
applicable, net of all expenses of collection; provided that, notwithstanding
clause (b) to the contrary, Net Cash Proceeds shall not include the proceeds
from the issuance of (x) capital stock by any Subsidiary to the Company or any
other Subsidiary, (y) stock options or warrants by the Company or any of its
Subsidiaries to any director, officer or employee thereof in connection with
such Person's employment or hire after the Closing Date, or (z), capital stock
by the Company or any other Subsidiary in connection with exercise of stock
options or warrants held by any director, officer or employee of the Company or
any of its Subsidiaries; so long as, in the case of clauses (y) and (z), such
stock options or warrants are granted or issued pursuant to a plan or other
employment agreement duly approved by the board of directors of the applicable
entity.
"Net Income" means, with respect to the Borrowers and their Subsidiaries
----------
for any period, the net income (or loss) of such Persons for such period
calculated on a Consolidated basis in accordance with GAAP; provided, that there
--------
shall be excluded from net income (or loss): (a) the income (or loss) of any
Person (other than a Wholly-Owned Subsidiary of a Borrower) in which a Borrower
or Subsidiary has an ownership interest unless received by such Borrower or
Subsidiary in a cash distribution and (b) the income (or loss) of any Person
accrued prior to the date it became a Subsidiary or is merged into or
consolidated with a Borrower or Subsidiary.
"Network Agreement" means any Interconnection Agreement or other document
-----------------
or agreement entered into by any Borrower or any of its Subsidiaries regarding
the use, operation or maintenance of, or otherwise concerning, any of the
Network Facilities.
"Network Facility" means the Switches and network of digital and analog
----------------
facilities owned or leased by any Borrower or any of its Subsidiaries for use in
the provision of CLEC telephony service or other voice or data transmission
services.
13
<PAGE>
"Non-Completed City" means any city in a Permitted Market that, as of any
------------------
date of determination, does not constitute a Completed City.
"Notice of Account Designation" shall have the meaning assigned thereto in
-----------------------------
Section 2.3(b).
"Notice of Borrowing" shall have the meaning assigned thereto in Section
-------------------
2.3(a).
"Notice of Conversion/Continuation" shall have the meaning assigned thereto
---------------------------------
in Section 5.2.
"Notice of Prepayment" shall have the meaning assigned thereto in Section
--------------------
2.4(d).
"Obligations" means, in each case, whether now in existence or hereafter
-----------
arising: (a) the principal of and interest on (including interest accruing after
the filing of any bankruptcy or similar petition) the Loans, (b) the L/C
Obligations, (c) all payment and other obligations owing by any Borrower to any
Lender or the Administrative Agent under any Hedging Agreement related to the
Obligations with any Lender (which such Hedging Agreement is permitted or
required hereunder), and (d) all other fees and commissions (including
attorney's fees), charges, indebtedness, loans, liabilities, financial
accommodations, obligations, covenants and duties owing by the Company or any
Borrower to the Lenders or the Administrative Agent, of every kind, nature and
description, direct or indirect, absolute or contingent, due or to become due,
contractual or tortious, liquidated or unliquidated, and whether or not
evidenced by any note, in each case under or in respect of this Agreement, any
Note, any Letter of Credit or any of the other Loan Documents.
"Officer's Compliance Certificate" shall have the meaning assigned thereto
--------------------------------
in Section 8.2.
"Other Taxes" shall have the meaning assigned thereto in Section 5.11(b).
-----------
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
----
agency.
"Pension Plan" means any Employee Benefit Plan, other than a Multiemployer
------------
Plan, which is subject to the provisions of Title IV of ERISA or Section 412 of
the Code and which (a) is maintained for employees of the Company or any ERISA
Affiliates or (b) has at any time within the preceding six years been maintained
for the employees of the Company or any of their current or former ERISA
Affiliates.
"Person" means an individual, corporation, limited liability company,
------
partnership, association, trust, business trust, joint venture, joint stock
company, pool, syndicate, sole proprietorship, unincorporated organization,
Governmental Authority or any other form of entity or group thereof.
14
<PAGE>
"Permitted Markets" means the collective reference to (i) voice and DSL
-----------------
network buildout in Hartford, CT; New Haven, CT; Syracuse, NY; Albany, NY;
Buffalo, NY; Pittsburgh, PA; Providence, RI; Springfield, MA; Worcester, MA;
Manchester, NH and Rochester, NY; (ii) DSL network buildout only Harrisburg, PA;
Allentown, PA and Scranton, PA; (iii) voice network buildout only in Harrisburg,
PA; Allentown, PA and Scranton, PA in each case to the extent approved by the
board of directors of the Company and the Required Lenders; (iv) and voice
and/or DSL network buildout in one (1) other city to the extent approved by the
board of directors of the Company and the Required Lenders; and (v) any
additional market approved in writing by the Required Lenders.
"Pledge Agreement" means the amended and restated pledge agreement of even
----------------
date executed by the Company and the Borrowers in favor of the Administrative
Agent for the ratable benefit of itself and the Lenders, substantially in the
form of Exhibit I, as amended, restated or otherwise modified.
---------
"PP&E" means with respect to the Borrowers and their Subsidiaries as of any
----
date of determination, the gross property, plant and equipment (including
capitalized labor) thereof as of such date determined on a Consolidated basis in
accordance with GAAP.
"Prime Rate" means, at any time, the rate of interest per annum publicly
----------
announced from time to time by First Union National Bank as its prime rate.
Each change in the Prime Rate shall be effective as of the opening of business
on the day such change in the Prime Rate occurs. The parties hereto acknowledge
that the rate announced publicly by First Union National Bank as its Prime Rate
is an index or base rate and shall not necessarily be its lowest or best rate
charged to its customers or other banks.
"PUC" means any state, provincial or other local regulatory agency or body
---
that exercises jurisdiction over the rates or services or the ownership,
construction or operation of any Network Facility or CLEC telephony system or
over Persons who own, construct or operate a Network Facility or any such
system, in each case by reason of the nature or type of the business subject to
regulation and not pursuant to laws and regulations of general applicability to
Persons conducting business in any such jurisdiction.
"Public Offering" shall have the meaning given thereto in the Transaction
---------------
Agreement.
"PUC Authorizations" means all applications, filings, reports, documents,
------------------
recordings and registrations with, and all validations, exemptions, franchises,
waivers, approvals, orders or authorizations, consents, licenses, certificates
and permits from, any PUC.
"Register" shall have the meaning assigned thereto in Section 15.10(d).
--------
"Reimbursement Obligation" means the obligation of the Borrowers to
------------------------
reimburse the Issuing Lender pursuant to Section 3.5 for amounts drawn under
Letters of Credit.
"Required Lenders" means, at any date, any combination of Lenders whose
----------------
Commitment Percentages aggregate at least sixty-six and two-thirds percent
(66-2/3%) of the Aggregate
15
<PAGE>
Commitment, or, if the Credit Facility has been terminated pursuant to Section
12.2, any combination of Lenders holding at least sixty-six and two-thirds
percent (66-2/3%) of the aggregate Extensions of Credit.
"Responsible Officer" means any of the following: the chief executive
-------------------
officer, chief financial officer or vice president of finance of the Company or
any Borrower, as applicable, or any other officer thereof reasonably acceptable
to the Administrative Agent.
"Revolving Credit Commitment" means (a) as to any Lender, the obligation of
---------------------------
such Lender to make Revolving Credit Loans for the account of the Borrowers
hereunder in an aggregate principal amount at any time outstanding not to exceed
the amount set forth opposite such Lender's name on Schedule 1 hereto as such
----------
amount may be reduced or modified at any time or from time to time pursuant to
the terms hereof and (b) as to all Lenders, the aggregate commitment of all
Lenders to make Revolving Credit Loans, as such amount may be reduced at any
time or from time to time pursuant to the terms hereof. The Revolving Credit
Commitment of all Lenders on the Closing Date shall be $100,000,000.
"Revolving Credit Commitment Percentage" means, as to any Lender at any
--------------------------------------
time, the ratio of (a) the amount of the Revolving Credit Commitment of such
Lender to (b) the Revolving Credit Commitments of all Lenders.
"Revolving Credit Facility" means the revolving credit facility established
-------------------------
pursuant to Article II hereof.
"Revolving Credit Loans" means any revolving loan made to the Borrowers
----------------------
pursuant to Section 2.1, and all such revolving loans collectively as the
context requires.
"Revolving Credit Notes" means the collective reference to the Revolving
----------------------
Credit Notes made by the Borrowers payable to the order of each Lender,
substantially in the form of Exhibit A-1 hereto, evidencing the Revolving Credit
-----------
Facility, and any amendments and modifications thereto, any substitutes
therefor, and any replacements, restatements, renewals or extension thereof, in
whole or in part; "Revolving Credit Note" means any of such Revolving Credit
Notes.
"Revolving Credit Termination Date" means the earliest of the dates
---------------------------------
referred to in Section 2.7.
"Security Agreement" means the amended and restated security agreement of
------------------
even date executed by the Company and the Borrowers in favor of the
Administrative Agent for the ratable benefit of itself and the Lenders,
substantially in the form of Exhibit H, as amended, restated or otherwise
---------
modified.
"Security Documents" means the collective reference to the Security
------------------
Agreement, the Pledge Agreement, each Mortgage, and each other agreement or
writing pursuant to which any Borrower or any Subsidiary thereof purports to
pledge or grant a security interest in any property or assets securing the
Obligations or any such Person purports to guaranty the payment and/or
performance of the Obligations.
16
<PAGE>
"Solvent" means, with respect to the Company, each Borrower and its
-------
Subsidiaries on a particular date, that any such Person (a) has capital (or
access to immediately available capital, including, if applicable, under the
Credit Facility), sufficient to carry on its business and transactions and all
business and transactions in which it is about to engage and is able to pay its
debts as they mature, (b) owns property having a value, both at fair valuation
and at present fair saleable value, greater than the amount required to pay its
probable liabilities (including contingencies), and (c) does not believe that it
will incur debts or liabilities beyond its ability to pay such debts or
liabilities as they mature.
"Sponsor Equity" means any equity investment in the Company by the LLC with
--------------
the proceeds of the equity commitments set forth in the LLC Agreement and the
Transaction Agreement.
"Stage 1 Covenant Period" means the period commencing on the Closing Date
-----------------------
and ending on the day immediately prior to the first day of the Stage 2 Covenant
Period.
"Stage 2 Covenant Period" means the period commencing on the first day
-----------------------
following the fiscal quarter in respect of which the Company has delivered
financial information pursuant to Section 8.1(b) and the accompanying Officer's
Compliance Certificate in each case evidencing that (a) the Company Leverage
Ratio (as at the last day of such quarter) is less than 10.0 to 1.0 (but greater
than zero), (b) the Borrower Leverage Ratio (as at the last day of such quarter)
is less than 6.0 to 1.0 (but greater than zero) and (c) EBITDA for the Borrowers
for the two fiscal quarters then ended was a positive number.
"Stage 2 Effective Date" means the first day of the Stage 2 Covenant
----------------------
Period.
"Subordinated Debt" means the Company Subordinated Notes and any other Debt
-----------------
of the Borrowers or any Subsidiary thereof subordinated to the Obligations on
terms reasonably satisfactory to the Administrative Agent and the Required
Lenders.
"Subsidiary" means as to any Person, any corporation, partnership, limited
----------
liability company or other entity of which more than fifty percent (50%) of the
outstanding capital stock or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other managers of such
corporation, partnership, limited liability company or other entity is at the
time, directly or indirectly, owned by or the management is otherwise controlled
by such Person (irrespective of whether, at the time, capital stock or other
ownership interests of any other class or classes of such corporation,
partnership, limited liability company or other entity shall have or might have
voting power by reason of the happening of any contingency). Unless otherwise
qualified references to "Subsidiary" or "Subsidiaries" herein shall refer to
those of the Company (and such references shall include any such Subsidiary
which is also a Borrower).
"Swingline Commitment" means the lesser of (a) $2,000,000 and (b) the
--------------------
Revolving Credit Commitment.
17
<PAGE>
"Swingline Facility" means the swingline facility established pursuant to
------------------
Section 2.2.
"Swingline Lender" means First Union in its capacity as swingline lender
----------------
hereunder.
"Swingline Loan" means any swingline loan made by the Swingline Lender to
--------------
the Borrowers pursuant to Section 2.2, and all such swingline loans collectively
as the context requires.
"Swingline Note" means the Swingline Note made by the Borrowers payable to
--------------
the order of the Swingline Lender, substantially in the form of Exhibit A-2
-----------
hereto, evidencing the Swingline Loans, and any amendments, modifications or
supplements thereto, any substitutes therefor, and any replacements,
restatements, renewals or extensions thereof, in whole or in part.
"Swingline Termination Date" means the first to occur of (a) the
--------------------------
resignation of First Union as Administrative Agent in accordance with Section
13.9 and (b) the Revolving Credit Termination Date.
"Switch" means any Lucent 5-ESS Switch or other comparable switch for the
------
provision of CLEC telephony service or a packet-based switch for the provision
of DSL and/or voice services.
"Syndication Agent" means General Electric Capital Corporation in its
-----------------
capacity as Syndication Agent.
"Syndication Letter" means that certain letter agreement dated as of even
------------------
date herewith among the Company, the Agents and certain affiliates thereof
regarding the syndication of the Credit Facility.
"Taxes" shall have the meaning assigned thereto in Section 5.11(a).
-----
"Telecommunications Equipment" means fiber optic cable, Switches,
----------------------------
transmission equipment and other ancillary hardware necessary for the
installation and operation of a switch room or central office and collocation
with other telecommunications providers which will enable the Borrowers to offer
CLEC telephony and DSL. Telecommunications Equipment shall also include
software associated with the Network Facility and back office systems (including
without limitation billing systems, operations systems and support, customer
service and DSL services) and other related software and hardware products
integral to developing a viable CLEC telephony and DSL business. For purposes
of determining the Borrowing Base, Telecommunications Equipment shall equal the
cost thereof as reflected in the invoices delivered with the financial
information pursuant to Section 8.1(a) and each applicable accompanying
Officer's Compliance Certificate.
"Term Loans" means the term loans to be made to the Borrowers by the
----------
Lenders pursuant to Section 4.1.
18
<PAGE>
"Term Loan Commitment" means (a) as to any Lender, the obligation of such
--------------------
Lender to make the Term Loans to the account of the Borrowers hereunder in an
aggregate principal amount not to exceed the amount set forth opposite such
Lender's name on Schedule 1 hereto, as such amount may be reduced or modified at
----------
any time or from time to time pursuant to the terms hereof and (b) as to all
Lenders, the aggregate commitment to make Term Loans. The Term Loan Commitment
of all Lenders as of the Closing Date shall be $50,000,000.
"Term Loan Commitment Termination Date" means the first to occur of (a) the
-------------------------------------
first anniversary of the Closing Date, (b) the date of termination by the
Borrowers pursuant to Section 4.4(a), or (c) the date of termination by the
Administrative Agent on behalf of the Lenders pursuant to Section 12.2(a).
"Term Loan Percentage" means, as to any Lender, (a) on or prior to the Term
--------------------
Loan Commitment Termination Date, the ratio of (i) the Term Loan Commitment of
such Lender to (ii) the Term Loan Commitments of all Lenders and (b) after the
Term Loans Commitment Termination Date are made, the ratio of (i) the
outstanding principal balance of the Term Loans of such Lender to (ii) the
aggregate outstanding balance of the Term Loans of all Lenders.
"Term Loan Facility" means the term loan facility established pursuant to
------------------
Article IV.
"Term Loan Maturity Date" means the first to occur of (a) November 2, 2007,
-----------------------
(b) the date of termination by the Borrowers pursuant to Section 4.4(a), or (c)
the date of termination by the Administrative Agent on behalf of the Lenders
pursuant to Section 12.2(a).
"Term Notes" means the Term Notes made by the Borrowers payable to the
----------
order of each of the Lenders, substantially in the form of Exhibit A-3 hereto,
-----------
evidencing the Debt incurred by the Borrowers pursuant to the Term Loan
Facility, and any amendments, modifications and supplements thereto, any
substitutes therefor, and any replacements, restatements, renewals or extensions
thereof, in whole or in part.
"Termination Event" means: (a) a "Reportable Event" described in Section
-----------------
4043 of ERISA, or (b) the withdrawal of the Company or any ERISA Affiliate from
a Pension Plan during a plan year in which it was a "substantial employer" as
defined in Section 4001(a)(2) of ERISA, or (c) the termination of a Pension
Plan, the filing of a notice of intent to terminate a Pension Plan or the
treatment of a Pension Plan amendment as a termination under Section 4041 of
ERISA, or (d) the institution of proceedings to terminate, or the appointment of
a trustee with respect to, any Pension Plan by the PBGC, or (e) any other event
or condition which would constitute grounds under Section 4042(a) of ERISA for
the termination of, or the appointment of a trustee to administer, any Pension
Plan, or (f) the partial or complete withdrawal of the Company or any ERISA
Affiliate from a Multiemployer Plan, or (g) the imposition of a Lien pursuant to
Section 412 of the Code or Section 302 of ERISA, or (h) any event or condition
which results in the reorganization or insolvency of a Multiemployer Plan under
Sections 4241 or 4245 of ERISA, or (i) any event or condition which results in
the termination of a Multiemployer Plan under Section 4041A of ERISA or the
institution by PBGC of proceedings to terminate a Multiemployer Plan under
Section 4042 of ERISA.
19
<PAGE>
"Total Debt" means, without duplication, all Debt of the Borrowers and
----------
their Subsidiaries or of the Company and its Subsidiaries, as applicable,
determined on a Consolidated basis at any date of determination.
"Total Debt/Contributed Capital Ratio" shall have the meaning assigned
------------------------------------
thereto in Section 10.1(a).
"Total Revenue" means, with respect to the Borrowers and their Subsidiaries
-------------
for any period, total revenue thereof for such period determined on a
Consolidated basis in accordance with GAAP.
"Tranche 2 Equity" shall have the meaning given thereto in the Transaction
----------------
Agreement.
"Transaction Agreement" means the Transaction Agreement dated as of July 8,
---------------------
1998 by and among the Company, the LLC, and the investors party thereto, as
modified prior to the date hereof, and as further may be amended, restated or
modified subject to the terms hereof.
"Uniform Customs" means the Uniform Customs and Practice for Documentary
---------------
Credits (1993 Revision), International Chamber of Commerce Publication No. 500.
"UCC" means the Uniform Commercial Code as in effect in the State of North
---
Carolina, as amended, restated or otherwise modified.
"United States" means the United States of America.
-------------
"Wholly-Owned" means, with respect to a Subsidiary, that all of the shares
------------
of capital stock or other ownership interests of such Subsidiary are, directly
or indirectly, owned or controlled by a Borrower or the Company, as applicable,
and/or one or more of its Wholly-Owned Subsidiaries.
"Working Capital" means, as of any date of determination with respect to
---------------
the Borrowers and their Subsidiaries on a Consolidated basis without
duplication, the sum of the following determined utilizing financial statements
prepared in accordance with GAAP (i) current assets (excluding cash and
unrestricted Cash Equivalents) minus (ii) current liabilities (excluding any
-----
current portion of Debt included therein) in each case as of such date of
determination.
SECTION 1.2 General. Unless otherwise specified, a reference in this
-------
Agreement to a particular article, section, subsection, Schedule or Exhibit is a
reference to that article, section, subsection, Schedule or Exhibit of this
Agreement. Wherever from the context it appears appropriate, each term stated in
either the singular or plural shall include the singular and plural, and
pronouns stated in the masculine, feminine or neuter gender shall include the
masculine, the feminine and the neuter. Any reference herein to "Charlotte time"
shall refer to the applicable time of day in Charlotte, North Carolina.
20
<PAGE>
SECTION 1.3 Other Definitions and Provisions.
--------------------------------
(a) Use of Capitalized Terms. Unless otherwise defined therein, all
------------------------
capitalized terms defined in this Agreement shall have the defined meanings when
used in this Agreement, the Notes and the other Loan Documents or any
certificate, report or other document made or delivered pursuant to this
Agreement.
(b) Miscellaneous. The words "hereof", "herein" and "hereunder" and words
-------------
of similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement.
ARTICLE II
REVOLVING CREDIT FACILITY
-------------------------
SECTION 2.1 Revolving Credit Loans. Subject to the terms and conditions
----------------------
of this Agreement, each Lender severally agrees to make Revolving Credit Loans
to the Borrowers from time to time from the Closing Date through the Revolving
Credit Termination Date as requested by the Borrowers in accordance with the
terms of Section 2.3; provided, that (a) the aggregate principal amount of all
--------
outstanding Revolving Credit Loans (after giving effect to any amount requested)
shall not exceed the lesser of (i) the Borrowing Base less the sum of all L/C
----
Obligations, all outstanding Swingline Loans and all outstanding Term Loans and
(ii) the Revolving Credit Commitment less the sum of all L/C Obligations, all
----
outstanding Swingline Loans and (b) the principal amount of outstanding
Revolving Credit Loans from any Lender to the Borrowers shall not at any time
exceed such Lender's Revolving Credit Commitment less such Lender's Revolving
----
Credit Commitment Percentage of the sum of all outstanding L/C Obligations and
all outstanding Swingline Loans. Each Revolving Credit Loan by a Lender shall be
in a principal amount equal to such Lender's Revolving Credit Commitment
Percentage of the aggregate principal amount of Revolving Credit Loans requested
on such occasion. Subject to the terms and conditions hereof, the Borrowers may
borrow, repay and reborrow Revolving Credit Loans hereunder until the Revolving
Credit Termination Date.
SECTION 2.2 Swingline Loans.
---------------
(a) Availability. Subject to the terms and conditions of this Agreement,
------------
the Swingline Lender agrees to make Swingline Loans to the Borrowers from time
to time from the Closing Date to, but not including, the Swingline Termination
Date; provided, that the aggregate principal amount of all outstanding Swingline
--------
Loans (after giving effect to any amount requested), shall not exceed the lesser
of (i) the Revolving Credit Commitment less the sum of all outstanding Revolving
Credit Loans and L/C Obligations and (ii) the Swingline Commitment.
(b) Refunding.
---------
(i) Swingline Loans shall be refunded by the Lenders on demand by the
Swingline Lender. Such refundings shall be made by the Lenders in accordance
with their respective Revolving Credit Commitment Percentages and shall
thereafter be reflected as
21
<PAGE>
Revolving Credit Loans of the Lenders on the books and records of the
Administrative Agent. Each Lender shall fund its respective Revolving Credit
Commitment Percentage of Revolving Credit Loans as required to repay Swingline
Loans outstanding to the Swingline Lender upon demand by the Swingline Lender
but in no event later than 2:00 p.m. (Charlotte time) on the next succeeding
Business Day after such demand is made. No Lender's obligation to fund its
respective Revolving Credit Commitment Percentage of a Swingline Loan shall be
affected by any other Lender's failure to fund its Revolving Credit Commitment
Percentage of a Swingline Loan, nor shall any Lender's Revolving Credit
Commitment Percentage be increased as a result of any such failure of any other
Lender to fund its Revolving Credit Commitment Percentage of a Swingline Loan.
(ii) The Borrowers shall pay to the Swingline Lender on demand the
amount of such Swingline Loans to the extent amounts received from the Lenders
are not sufficient to repay in full the outstanding Swingline Loans requested or
required to be refunded. In addition, the Borrowers hereby authorize the
Administrative Agent to charge any account maintained by the Borrowers with the
Swingline Lender (up to the amount available therein) in order to immediately
pay the Swingline Lender the amount of such Swingline Loans to the extent
amounts received from the Lenders are not sufficient to repay in full the
outstanding Swingline Loans requested or required to be refunded. If any portion
of any such amount paid to the Swingline Lender shall be recovered by or on
behalf of the Borrowers from the Swingline Lender in bankruptcy or otherwise,
the loss of the amount so recovered shall be ratably shared among all the
Lenders in accordance with their respective Revolving Credit Commitment
Percentages (unless the amounts so recovered by or on behalf of the Borrowers
pertain to a Swingline Loan extended after the occurrence and during the
continuance of an Event of Default of which the Administrative Agent has
received notice in the manner required pursuant to Section 13.5 and which such
Event of Default has not been waived by the Required Lenders or the Lenders, as
applicable).
(iii) Each Lender acknowledges and agrees that its obligation to
refund Swingline Loans in accordance with the terms of this Section 2.2 is
absolute and unconditional and shall not be affected by any circumstance
whatsoever, including, without limitation, non-satisfaction of the conditions
set forth in Article VI. Further, each Lender agrees and acknowledges that if
prior to the refunding of any outstanding Swingline Loans pursuant to this
Section 2.2, one of the events described in Section 12.1(j) or (k) shall have
occurred, each Lender will, on the date the applicable Revolving Credit Loan
would have been made, purchase an undivided participating interest in the
Swingline Loan to be refunded in an amount equal to its Revolving Credit
Commitment Percentage of the aggregate amount of such Swingline Loan. Each
Lender will immediately transfer to the Swingline Lender, in immediately
available funds, the amount of its participation and upon receipt thereof the
Swingline Lender will deliver to such Lender a certificate evidencing such
participation dated the date of receipt of such funds and for such amount.
Whenever, at any time after the Swingline Lender has received from any Lender
such Lender's participating interest in a Swingline Loan, the Swingline Lender
receives any payment on account thereof, the Swingline Lender will distribute to
such Lender its participating interest in such amount (appropriately adjusted,
in the case of interest payments, to reflect the period of time during which
such Lender's participating interest was outstanding and funded).
22
<PAGE>
SECTION 2.3 Procedure for Advances of Revolving Credit and Swingline
--------------------------------------------------------
Loans.
- -----
(a) Requests for Borrowing. The Borrowers shall give the Administrative
----------------------
Agent irrevocable prior written notice in the form attached hereto as Exhibit B
---------
(a "Notice of Borrowing") not later than 11:00 a.m. (Charlotte time) (i) on the
same Business Day as each Base Rate Loan and each Swingline Loan and (ii) at
least three (3) Business Days before each LIBOR Rate Loan, of its intention to
borrow, specifying (A) the date of such borrowing, which shall be a Business
Day, (B) the amount of such borrowing, which shall be in an amount equal to the
maximum amount of the Revolving Credit Commitment then available to the
Borrowers, or if less, (x) with respect to Base Rate Loans in an aggregate
principal amount of $500,000 or a whole multiple of $250,000 in excess thereof,
(y) with respect to LIBOR Rate Loans in an aggregate principal amount of
$2,000,000 or a whole multiple of $500,000 in excess thereof and (z) with
respect to Swingline Loans in an aggregate principal amount of $100,000 or any
amount in excess thereof, (C) whether such Loan is to be a Revolving Credit Loan
or a Swingline Loan, (D) in the case of a Revolving Credit Loan, whether the
Loans are to be LIBOR Rate Loans or Base Rate Loans, and (E) in the case of a
LIBOR Rate Loan, the duration of the Interest Period applicable thereto. A
Notice of Borrowing received after 11:00 a.m. (Charlotte time) shall be deemed
received on the next Business Day. The Administrative Agent shall promptly
notify the Lenders of each such Notice of Borrowing.
(b) Disbursement of Revolving Credit and Swingline Loans. Not later than
----------------------------------------------------
2:00 p.m. (Charlotte time) on the proposed borrowing date, (i) each Lender will
make available to the Administrative Agent, for the account of the Borrowers, at
the office of the Administrative Agent in funds immediately available to the
Administrative Agent, such Lender's Revolving Credit Commitment Percentage of
the Revolving Credit Loans to be made on such borrowing date and (ii) the
Swingline Lender will make available to the Administrative Agent, for the
account of the Borrowers, at the office of the Administrative Agent in funds
immediately available to the Administrative Agent, the Swingline Loans to be
made on such borrowing date. The Borrowers hereby irrevocably authorize the
Administrative Agent to disburse the proceeds of each borrowing requested
pursuant to this Section 2.3 in immediately available funds by crediting or
wiring such proceeds to the deposit account of the Borrowers identified in the
most recent notice substantially in the form of Exhibit C hereto (a "Notice of
---------
Account Designation") delivered by the Borrowers to the Administrative Agent or
may be otherwise agreed upon by the Borrowers and the Administrative Agent from
time to time. Subject to Section 5.7 hereof, the Administrative Agent shall not
be obligated to disburse the portion of the proceeds of any Revolving Credit
Loan requested pursuant to this Section 2.3 to the extent that any Lender has
not made available to the Administrative Agent its Revolving Credit Commitment
Percentage of such Loan. Revolving Credit Loans to be made for the purpose of
refunding Swingline Loans shall be made by the Lenders as provided in Section
2.2(b).
SECTION 2.4 Repayment of Revolving Credit Loans.
-----------------------------------
(a) Repayment on Termination Date. The Borrowers shall repay the
-----------------------------
outstanding principal amount of (i) all Revolving Credit Loans in full on the
Revolving Credit Termination Date and (ii) all Swingline Loans in accordance
with Section 2.2(b), together, in each case, with all accrued but unpaid
interest thereon, and any other amounts payable with respect thereto.
23
<PAGE>
(b) Mandatory Repayment of Excess Revolving Credit Loans. If at any time
----------------------------------------------------
the outstanding principal amount of all Revolving Credit Loans exceeds the
maximum permitted outstanding amount pursuant to Section 2.1(a), the Borrowers
shall repay immediately upon notice from the Administrative Agent, by payment to
the Administrative Agent for the account of the Lenders, Extensions of Credit
(other than Term Loans) in an amount equal to such excess, with each such
repayment applied first to the principal amount of outstanding Swingline Loans,
-----
second to the principal amount of outstanding Revolving Credit Loans and third,
- ------ -----
with respect to any Letters of Credit then outstanding, a payment of cash
collateral into a cash collateral account opened by the Administrative Agent,
for the benefit of the Lenders in an amount equal to the aggregate then undrawn
and unexpired amount of such Letters of Credit (such cash collateral to be
applied in accordance with Section 12.2(b)).
(c) Repayment with Excess Proceeds. The Borrowers shall repay the
------------------------------
outstanding principal balance of the Revolving Credit Loans with any Excess
Proceeds to the extent required by Sections 4.4(c)(i) and 4.4(c)(ii) and in
connection with any mandatory commitment reduction as required by Section
2.6(c).
(d) Optional Repayments. The Borrowers may at any time and from time to
-------------------
time repay the Loans, in whole or in part, upon at least three (3) Business
Days' irrevocable notice to the Administrative Agent with respect to LIBOR Rate
Loans and one (1) Business Day irrevocable notice with respect to Base Rate
Loans and Swingline Loans, in the form attached hereto as Exhibit D (a "Notice
---------
of Prepayment") specifying the date and amount of repayment and whether the
repayment is of LIBOR Rate Loans, Base Rate Loans, Swingline Loans or a
combination thereof, and, if of a combination thereof, the amount allocable to
each. Upon receipt of such notice, the Administrative Agent shall promptly
notify each Lender. If any such notice is given, the amount specified in such
notice shall be due and payable on the date set forth in such notice. Partial
repayments shall be in an aggregate amount of $500,000 or a whole multiple of
$250,000 in excess thereof with respect to Base Rate Loans, $2,000,000 or a
whole multiple of $500,000 in excess thereof with respect to LIBOR Rate Loans
and $100,000 or any amount in excess thereof with respect to Swingline Loans.
(e) Limitation on Repayment of LIBOR Rate Loans. The Borrowers may not
-------------------------------------------
repay any LIBOR Rate Loan (or an optional or mandatory basis) on any day other
than on the last day of the Interest Period applicable thereto unless such
repayment is accompanied by any amount required to be paid pursuant to Section
5.9 hereof.
SECTION 2.5 Notes.
-----
(a) Revolving Credit Notes. Each Lender's Revolving Credit Loans and the
----------------------
obligation of the Borrowers to repay such Revolving Credit Loans shall be
evidenced by a separate Revolving Credit Note executed by the Borrowers payable
to the order of such Lender. Each Revolving Credit Note shall be dated the date
hereof and shall bear interest on the unpaid principal amount thereof at the
applicable interest rate per annum specified in Section 5.1.
24
<PAGE>
(b) Swingline Notes. The Swingline Loans and the obligation of the
---------------
Borrowers to repay such Swingline Loans shall be evidenced by a separate
Swingline Note executed by the Borrowers payable to the order of the Swingline
Lender. The Swingline Note shall be dated the date hereof and shall bear
interest on the unpaid principal amount thereof at the applicable interest rate
per annum specified in Section 5.1.
SECTION 2.6 Permanent Reduction of the Revolving Credit Commitment.
------------------------------------------------------
(a) Voluntary Reduction. The Borrowers shall have the right at any time
-------------------
and from time to time, upon at least five (5) Business Days prior written notice
to the Administrative Agent, to permanently reduce, without premium or penalty,
(i) the entire Revolving Credit Commitment at any time or (ii) portions of the
Revolving Credit Commitment, from time to time, in an aggregate principal amount
not less than $2,000,000 or any whole multiple of $500,000 in excess thereof.
The amount of each partial permanent reduction shall be applied pro rata to
--- ----
reduce the remaining mandatory reduction amounts required under Section 2.6(b).
(b) Scheduled Reductions. The Revolving Credit Commitment shall be
--------------------
permanently reduced on the last Business Day of each of December, March, June
and September, on the Revolving Credit Termination Date, by multiplying the
corresponding quarterly percentage times the Revolving Credit Commitment in
-----
effect on September 30, 2002 in accordance with the following table:
- --------------------------------------------------------------------------------
Percentage Annual
Reduction Percentage
Quarters Ending Per Quarter Reduction
- --------------------------------------------------------------------------------
12/31/02 through 9/30/03 1.25% 5.0%
12/31/03 through 9/30/04 2.50% 10.0%
12/31/04 through 9/30/05 6.25% 25.0%
12/31/05 through 9/30/06 7.50% 30.0%
12/31/06 through 11/03/07 7.50% 30.0%
100.0%
- --------------------------------------------------------------------------------
Any reductions pursuant to Section 2.6(a) or 2.6(c) shall be applied pro rata to
--------
reduce the remaining scheduled reduction amounts required by this paragraph (b).
(c) Mandatory Reductions. If at any time Excess Proceeds remain after the
--------------------
prepayment of Term Loans pursuant to Section 4.4(c), the Revolving Credit
Commitment shall be permanently reduced on the date of the required prepayment
under Section 4.4(c) by an amount equal to the amount of such Excess Proceeds;
provided, that Excess Proceeds from any prepayment required by Sections
- --------
4.4(c)(i) and 4.4(c)(ii) shall reduce the Revolving Credit Commitment only in
the event that a Default or an Event of Default has occurred and is continuing
on the date of the required prepayment under Section 4.4(c).
(d) Corresponding Prepayment. Each permanent reduction permitted or
------------------------
required pursuant to this Section 2.6 shall be accompanied by a payment of
principal sufficient to reduce
25
<PAGE>
the aggregate outstanding Revolving Credit Loans, Swingline Loans and L/C
Obligations, as applicable, after such reduction to the Revolving Credit
Commitment as so reduced and if the Revolving Credit Commitment as so reduced is
less than the aggregate amount of all outstanding Letters of Credit, the
Borrowers shall be required to deposit in a cash collateral account opened by
the Administrative Agent an amount equal to the aggregate then undrawn and
unexpired amount of such Letters of Credit. Any reduction of the Revolving
Credit Commitment to zero shall be accompanied by payment of all outstanding
Obligations (and furnishing of such cash collateral for all L/C Obligations) and
shall result in the termination of the Revolving Credit Commitments and
Revolving Credit Facility. Any such cash collateral shall be applied in
accordance with Section 12.2(b). If the reduction of the Revolving Credit
Commitment requires the repayment of any LIBOR Rate Loan, such repayment shall
be accompanied by any amount required to be paid pursuant to Section 5.9 hereof.
SECTION 2.7 Termination of Revolving Credit Facility. The Revolving
----------------------------------------
Credit Facility shall terminate on the first to occur of (a) November 2, 2007
(b) the date of termination by the Borrowers pursuant to Section 2.6(a), and (c)
the date of termination by the Administrative Agent on behalf of the Lenders
pursuant to Section 12.2(a) (any such date, the "Revolving Credit Termination
Date").
ARTICLE III
LETTER OF CREDIT FACILITY
-------------------------
SECTION 3.1 L/C Commitment. Subject to the terms and conditions hereof,
--------------
the Issuing Lender, in reliance on the agreements of the other Lenders set forth
in Section 3.4(a), agrees to issue standby letters of credit ("Letters of
Credit") for the account of any Borrower (as specified by the Company) on any
Business Day from the Closing Date through but not including the Revolving
Credit Termination Date in such form as may be approved from time to time by the
Issuing Lender; provided, that the Borrowers shall be jointly and severally
--------
liable for all L/C obligations and that the Issuing Lender shall have no
obligation to issue any Letter of Credit if, after giving effect to such
issuance, (a) the L/C Obligations would exceed the L/C Commitment or (b) the sum
of all outstanding Revolving Credit Loans, plus all outstanding Swingline Loans,
----
plus all outstanding L/C Obligations would exceed the lesser of (i) Revolving
- ----
Credit Commitment and (ii) the Borrowing Base. Each Letter of Credit shall (i)
be denominated in Dollars in a minimum amount of $100,000, (ii) be a standby
letter of credit issued to support obligations of any Borrower or any of its
Subsidiaries, contingent or otherwise, incurred in the ordinary course of
business, (iii) expire on a date satisfactory to the Issuing Lender, which date
shall be no later than the earlier of one year after the date of issuance and
the Revolving Credit Termination Date and (iv) be subject to the Uniform Customs
and/or ISPA98, as set forth in the Application or as determined by the Issuing
Lender and, to the extent not inconsistent therewith, the laws of the State of
North Carolina. The Issuing Lender shall not at any time be obligated to issue
any Letter of Credit hereunder if such issuance would conflict with, or cause
the Issuing Lender or any L/C Participant to exceed any limits imposed by, any
Applicable Law. References herein to "issue" and derivations thereof with
respect to Letters of Credit shall also include extensions or modifications of
any existing Letters of Credit, unless the context otherwise requires.
26
<PAGE>
SECTION 3.2 Procedure for Issuance of Letters of Credit. The Company, on
-------------------------------------------
behalf of any Borrower, may from time to time request that the Issuing Lender
issue a Letter of Credit by delivering to the Issuing Lender at the
Administrative Agent's Office an Application therefor, completed to the
satisfaction of the Issuing Lender, and such other certificates, documents and
other papers and information as the Issuing Lender may request. Upon receipt of
any Application, the Issuing Lender shall process such Application and the
certificates, documents and other papers and information delivered to it in
connection therewith in accordance with its customary procedures and shall,
subject to Section 3.1 and Article V hereof, promptly issue the Letter of Credit
requested thereby (but in no event shall the Issuing Lender be required to issue
any Letter of Credit earlier than three (3) Business Days after its receipt of
the Application therefor and all such other certificates, documents and other
papers and information relating thereto) by issuing the original of such Letter
of Credit to the beneficiary thereof or as otherwise may be agreed by the
Issuing Lender and the Company, on behalf of such Borrower. The Issuing Lender
shall promptly furnish to the Company, on behalf of such Borrower, a copy of
such Letter of Credit and promptly notify each Lender of the issuance and upon
request by any Lender, furnish to such Lender a copy of such Letter of Credit
and the amount of such Lender's L/C Participation therein.
SECTION 3.3 Commissions and Other Charges.
-----------------------------
(a) The Borrowers shall pay to the Administrative Agent, for the account
of the Issuing Lender and the L/C Participants, a letter of credit commission
with respect to each Letter of Credit in an amount equal to the Applicable
Margin then in effect for LIBOR Rate Loans on a per annum basis on the face
amount of such Letter of Credit. Such commission shall be payable quarterly in
arrears on the last Business Day of each calendar quarter and on the Revolving
Credit Termination Date.
(b) In addition to the foregoing commission, the Borrowers shall pay the
Issuing Lender an issuance fee of one-eighth of one percent (0.125%) per annum
on the face amount of each Letter of Credit, payable quarterly in arrears on the
last Business Day of each calendar quarter and on the Revolving Credit
Termination Date.
(c) The Administrative Agent shall, promptly following its receipt
thereof, distribute to the Issuing Lender and the L/C Participants each Letter
of Credit commission received by the Administrative Agent in accordance with
their respective Revolving Credit Commitment Percentages.
SECTION 3.4 L/C Participations.
------------------
(a) The Issuing Lender irrevocably agrees to grant and hereby grants to
each L/C Participant, and, to induce the Issuing Lender to issue Letters of
Credit hereunder, each L/C Participant irrevocably agrees to accept and purchase
and hereby accepts and purchases from the Issuing Lender, on the terms and
conditions hereinafter stated, for such L/C Participant's own account and risk
an undivided interest equal to such L/C Participant's Revolving Credit
Commitment Percentage in the Issuing Lender's obligations and rights under each
Letter of
27
<PAGE>
Credit issued hereunder and the amount of each draft paid by the Issuing Lender
thereunder. Each L/C Participant unconditionally and irrevocably agrees with the
Issuing Lender that, if a draft is paid under any Letter of Credit for which the
Issuing Lender is not reimbursed in full by the Borrowers through a Revolving
Credit Loan or otherwise in accordance with the terms of this Agreement, such
L/C Participant shall pay to the Issuing Lender upon demand at the Issuing
Lender's address for notices specified herein an amount equal to such L/C
Participant's Revolving Credit Commitment Percentage of the amount of such
draft, or any part thereof, which is not so reimbursed.
(b) Upon becoming aware of any amount required to be paid by any L/C
Participant to the Issuing Lender pursuant to Section 3.4(a) in respect of any
unreimbursed portion of any payment made by the Issuing Lender under any Letter
of Credit, the Issuing Lender shall notify each L/C Participant of the amount
and due date of such required payment and such L/C Participant shall pay to the
Issuing Lender the amount specified on the applicable due date. If any such
amount is paid to the Issuing Lender after the date such payment is due, such
L/C Participant shall pay to the Issuing Lender on demand, in addition to such
amount, the product of (i) such amount, times (ii) the daily average Federal
-----
Funds Rate as determined by the Administrative Agent during the period from and
including the date such payment is due to the date on which such payment is
immediately available to the Issuing Lender, times (iii) a fraction the
-----
numerator of which is the number of days that elapse during such period and the
denominator of which is 360. A certificate of the Issuing Lender with respect
to any amounts owing under this Section 3.4(b) shall be conclusive in the
absence of manifest error. With respect to payment to the Issuing Lender of the
unreimbursed amounts described in this Section 3.4(b), if the L/C Participants
receive notice that any such payment is due (A) prior to 1:00 p.m. (Charlotte
time) on any Business Day, such payment shall be due that Business Day, and (B)
after 1:00 p.m. (Charlotte time) on any Business Day, such payment shall be due
on the following Business Day.
(c) Whenever, at any time after the Issuing Lender has made payment under
any Letter of Credit and has received from any L/C Participant its Revolving
Credit Commitment Percentage of such payment in accordance with this Section
3.4, the Issuing Lender receives any payment related to such Letter of Credit
(whether directly from the Borrowers or otherwise, or any payment of interest on
account thereof, the Issuing Lender will distribute to such L/C Participant its
pro rata share thereof; provided, that in the event that any such payment
- --- ---- --------
received by the Issuing Lender shall be required to be returned by the Issuing
Lender, such L/C Participant shall return to the Issuing Lender the portion
thereof previously distributed by the Issuing Lender to it.
SECTION 3.5 Reimbursement Obligation of the Borrower. The Borrowers
----------------------------------------
agree to reimburse the Issuing Lender on each date on which the Issuing Lender
notifies the Borrowers of the date and amount of a draft paid under any Letter
of Credit for the amount of (a) such draft so paid and (b) any taxes, fees,
charges or other costs or expenses incurred by the Issuing Lender in connection
with such payment. Each such payment shall be made to the Issuing Lender at its
address for notices specified herein in lawful money of the United States and in
immediately available funds. Interest shall be payable on any and all amounts
remaining unpaid by the Borrowers under this Article III from the date such
amounts become payable (whether at stated maturity, by acceleration or
otherwise) until payment in full at the rate which would be payable
28
<PAGE>
on any outstanding Base Rate Loans which were then overdue. If the Borrowers
fail to timely reimburse the Issuing Lender on the date the Borrowers receive
the notice referred to in this Section 3.5, the Borrowers shall be deemed to
have timely given a Notice of Revolving Credit/Swingline Borrowing hereunder to
the Administrative Agent requesting the Lenders to make a Base Rate Loan on such
date in an amount equal to the amount of such drawing and, regardless of whether
or not the conditions precedent specified in Article VI have been satisfied, the
Lenders shall make Base Rate Loans in such amount, the proceeds of which shall
be applied to reimburse the Issuing Lender for the amount of the related drawing
and costs and expenses.
SECTION 3.6 Obligations Absolute. The Borrowers' obligations under this
--------------------
Article III (including without limitation the Reimbursement Obligation) shall be
absolute and unconditional under any and all circumstances and irrespective of
any set-off, counterclaim or defense to payment which the Borrowers may have or
have had against the Issuing Lender or any beneficiary of a Letter of Credit.
The Borrowers also agree with the Issuing Lender that the Issuing Lender shall
not be responsible for, and the Borrowers' Reimbursement Obligation under
Section 3.5 shall not be affected by, among other things, the validity or
genuineness of documents or of any endorsements thereon, even though such
documents shall in fact prove to be invalid, fraudulent or forged, or any
dispute between or among the Borrowers and any beneficiary of any Letter of
Credit or any other party to which such Letter of Credit may be transferred or
any claims whatsoever of a Borrower against any beneficiary of such Letter of
Credit or any such transferee. The Issuing Lender shall not be liable for any
error, omission, interruption or delay in transmission, dispatch or delivery of
any message or advice, however transmitted, in connection with any Letter of
Credit, except for errors or omissions caused by the Issuing Lender's gross
negligence or willful misconduct. The Borrowers agree that any action taken or
omitted by the Issuing Lender under or in connection with any Letter of Credit
or the related drafts or documents, if done in the absence of gross negligence
or willful misconduct and in accordance with the standards of care specified in
the Uniform Customs and, to the extent not inconsistent therewith, the UCC shall
be binding on the Borrowers and shall not result in any liability of the Issuing
Lender to the Borrowers. The responsibility of the Issuing Lender to the
Borrowers in connection with any draft presented for payment under any Letter of
Credit shall, in addition to any payment obligation expressly provided for in
such Letter of Credit, be limited to determining that the documents (including
each draft) delivered under such Letter of Credit in connection with such
presentment are in conformity with such Letter of Credit.
SECTION 3.7 Effect of Application. To the extent that any provision of
---------------------
any Application related to any Letter of Credit is inconsistent with the
provisions of this Article III, the provisions of this Article III shall apply.
ARTICLE IV
TERM LOAN FACILITY
------------------
SECTION 4.1 Term Loans. Subject to the terms and conditions of this
----------
Agreement, each Lender severally agrees to make Term Loans to the Borrowers from
time to time from the Closing Date through the Term Loan Commitment Termination
Date. The Term Loans shall be funded by each Lender in a principal amount equal
to such Lender's Term Loan
29
<PAGE>
Percentage of the aggregate principal amount of the Term Loans made on the
applicable borrowing date. The aggregate principal amount of the Term Loans
shall not exceed the lesser of (a) the Borrowing Base less the sum of all
outstanding Revolving Credit Loans, all outstanding Swingline Loans and all L/C
Obligations and (b) the total Term Loan Commitment. Each Term Loan borrowing
pursuant to this Article IV will constitute a permanent reduction in the Term
Loan Commitment and once prepaid or repaid (in each case for any reason), Term
Loans may not be reborrowed. Any portion of the Term Loan Commitment not funded
on or prior to the Term Loan Commitment Termination Date shall expire on such
date.
SECTION 4.2 Procedure for Advances of Term Loans.
------------------------------------
(a) Requests for Borrowing. The Borrowers shall give the Administrative
----------------------
Agent irrevocable prior written notice in the form of a Notice of Borrowing not
later than 11:00 a.m. (Charlotte time) (i) on the same Business Day as each Base
Rate Loan and (ii) at least three (3) Business Days before each LIBOR Rate Loan,
of its intention to borrow, specifying (A) the date of such borrowing, which
shall be a Business Day, (B) the amount of such borrowing, which shall be in an
amount equal to the maximum amount of the Term Loan Commitment then available to
the Borrowers, or if less, (x) with respect to Base Rate Loans in an aggregate
principal amount of $500,000 or a whole multiple of $250,000 in excess thereof,
(y) with respect to LIBOR Rate Loans in an aggregate principal amount of
$2,000,000 or a whole multiple of $500,000 in excess thereof and (C) whether the
Loans are to be LIBOR Rate Loans or Base Rate Loans, and (E) in the case of a
LIBOR Rate Loan, the duration of the Interest Period applicable thereto. A
Notice of Borrowing received after 11:00 a.m. (Charlotte time) shall be deemed
received on the next Business Day. The Administrative Agent shall promptly
notify the Lenders of each such Notice of Borrowing.
(b) Disbursement of Term Loans. Not later than 2:00 p.m. (Charlotte time)
---------------------------
on the applicable borrowing date, each Lender will make available to the
Administrative Agent, for the account of the Borrowers, at the office of the
Administrative Agent in funds immediately available to the Administrative Agent,
such Lender's Term Loan Percentage of the Term Loans to be made on such
borrowing date. The Borrowers hereby irrevocably authorize the Administrative
Agent to disburse the proceeds of each borrowing requested pursuant to this
Section 4.2 in immediately available funds by crediting or wiring such proceeds
to the deposit account of the Borrowers identified in the most recent Notice of
Account Designation delivered by the Borrowers to the Administrative Agent or as
may be otherwise agreed upon by the Borrowers and the Administrative Agent from
time to time. Subject to Section 5.7 hereof, the Administrative Agent shall not
be obligated to disburse the portion of the proceeds of any Term Loan requested
pursuant to this Section 4.2 to the extent that any Lender has not made
available to the Administrative Agent its Term Loan Percentage of such Loan.
SECTION 4.3 Scheduled Repayment of Term Loans; Excess Term Loans.
----------------------------------------------------
(a) The Borrowers shall repay the aggregate outstanding principal amount
of the Term Loans in consecutive quarterly installments on the last Business Day
of each of December, March, June and September and on the Term Loan Maturity
Date, by multiplying the
30
<PAGE>
corresponding quarterly percentage times the aggregate principal amount of the
-----
Term Loans outstanding on September 30, 2002 in accordance with the following
table:
- ----------------------------------------------------------------------------
Amount of Total
Reduction Annual
Quarters Ending Per Quarter Reduction
- ----------------------------------------------------------------------------
12/31/02 through 9/30/03 1.25% 5.0%
12/31/03 through 9/30/04 2.50% 10.0%
12/31/04 through 9/30/05 6.25% 25.0%
12/31/05 through 9/30/06 7.50% 30.0%
12/31/06 through 11/03/07 7.50% 30.0%
-----
100.0%
- ----------------------------------------------------------------------------
If not sooner paid, the Term Loans shall be paid in full, together with accrued
interest thereon and any other amounts payable with respect thereto, on the Term
Loan Maturity Date.
(b) Excess Term Loans. If at any time the outstanding principal amount of
-----------------
all Term Loans exceeds the maximum permitted outstanding amount pursuant to
Section 4.1, the Borrowers shall immediately repay upon notice from the
Administrative Agent, by payment to the Administrative Agent for the account the
Lenders, Term Loans in an amount equal to such excess, provided, that if any
--------
simultaneous repayment of excess Revolving Credit Loans is required pursuant to
Section 2.4(b), such repayment shall be made prior to any repayment required by
this Section 4.3(b) (to the extent any repayment under this Section 4.3(b) is
still required after any such repayment pursuant to Section 2.4(b)).
SECTION 4.4 Commitment Reduction; Prepayments of Term Loans
-----------------------------------------------
(a) Voluntary Commitment Reduction. The Borrowers shall have the right at
------------------------------
any time and from time to time, upon at least five (5) Business Days prior
written notice to the Administrative Agent, to permanently reduce, without
premium or penalty any unused portion of the Term Loan Commitment, from time to
time, in an aggregate principal amount not less than $2,000,000 or any whole
multiple of $500,000 in excess thereof.
(b) Optional Repayment of Term Loans. The Borrowers shall have the right
--------------------------------
at any time and from time to time, upon delivery to the Administrative Agent of
a Notice of Prepayment at least three (3) Business Days prior to any repayment,
to prepay the Term Loans in whole or in part. Each optional prepayment of the
Term Loans hereunder shall be in an aggregate principal amount of at least
$2,000,000 or any whole multiple of $500,000 in excess thereof and shall be
applied (i) to outstanding Term Loans with respect to each prepayment made prior
to or on the Term Loan Commitment Termination Date, and (ii) pro rata to the
outstanding principal installments of the Term Loans with respect to each
prepayment made after the Term Loan Commitment Termination Date. Each repayment
shall be accompanied by any amount required to be paid pursuant to Section 5.9
hereof.
31
<PAGE>
(c) Mandatory Prepayment of Term Loan.
---------------------------------
(i) Debt Proceeds. The Borrowers shall make mandatory principal
-------------
prepayments of the Term Loans in the manner set forth in Section 4.4(c)(vi) in
amounts equal to one hundred percent (100%) of the aggregate Net Cash Proceeds
from any issuance of Debt permitted by Section 11.1(c) (other than the Net Cash
Proceeds from Debt issued and utilized to finance an Expanded Business Plan or
issued and utilized to replace Tranche 2 Equity) by the Company, any Borrower or
any of their respective Subsidiaries. Such prepayment shall be made within three
(3) Business Days after the date of issuance of any such Debt.
(ii) Equity Proceeds. The Borrowers shall make mandatory prepayments
---------------
of the Term Loans in the manner set forth in Section 4.4(c)(vi) in amounts equal
to one hundred percent (100%) of the aggregate Net Cash Proceeds from any
offering of equity securities permitted hereunder (other than the Net Cash
Proceeds from Sponsor Equity, Investor Equity and equity issued and utilized to
finance an Expanded Business Plan or issued and utilized to replace Tranche 2
Equity) by the Company, any Borrower or any of their respective Subsidiaries.
Such prepayment shall be made within three (3) Business Days after the date of
consummation of any such equity offering.
(iii) Asset Sale Proceeds. The Borrowers shall make mandatory
-------------------
principal prepayments of the Term Loans in the manner set forth in Section
4.4(c)(vi) in amounts equal to one hundred percent (100%) of the aggregate Net
Cash Proceeds (as long as such Net Cash Proceeds exceed $250,000 in the
aggregate in any Fiscal Year and then only such excess) from the sale or other
disposition of assets by the Company, any Borrower or any of their respective
Subsidiaries in each case pursuant to Section 11.6(e) which proceeds have not
been utilized by the applicable seller within 180 days of such sale to purchase
replacement assets. Such reduction shall be made on the earlier of 180 days
after the date of consummation of any such transaction or the date the Borrowers
notify the Administrative Agent of the applicable seller's intention not to so
utilize such Net Cash Proceeds.
(iv) Insurance and Condemnation Proceeds. The Borrowers shall make
-----------------------------------
mandatory principal prepayments of the Term Loans in the manner set forth in
Section 4.4(c)(vi) in amounts equal to one hundred percent (100%) of the
aggregate Net Cash Proceeds (as long as such Net Cash Proceeds exceed $250,000
in the aggregate in any Fiscal Year and then only such excess) received by the
Company, any Borrower or any of their respecting Subsidiaries (or by the
Administrative Agent as loss payee) under any property or casualty insurance
policy thereof or from any condemnation proceeding which proceeds have not been
utilized within 180 days of receipt by such Person to purchase replacement
assets. Such reduction shall be made on the earlier of 180 days after any such
receipt or the date the Borrowers notify the Administrative Agent of such
Person's intention not to so utilize such Net Cash Proceeds.
(v) Excess Cash Flow. Commencing with the Fiscal Year ending
----------------
December 31, 2002, the Borrowers shall make mandatory principal prepayments of
the Term Loans in the manner set forth in Section 4.4(c)(vi) in amounts equal to
fifty percent (50%) of Excess Cash Flow, if any, for each Fiscal Year. Such
prepayment shall be made within ninety (90) days of the corresponding Fiscal
Year end.
32
<PAGE>
(vi) Notice; Manner of Payment. Upon the occurrence of any event
-------------------------
triggering the prepayment requirement under Sections 4.4(c)(i) through and
including 4.4(c)(v), the Borrowers shall promptly deliver a Notice of Prepayment
to the Administrative Agent and upon receipt of such notice, the Administrative
Agent shall promptly so notify the Lenders. Each prepayment under this Section
4.4(c) shall be applied as follows: first, (A) to outstanding Term Loans with
-----
respect to each prepayment made prior to or on the Term Loan Commitment
Termination Date, and (B) pro rata to the outstanding principal installments of
the Term Loans with respect to each prepayment made after the Term Loan
Commitment Termination Date and second, to the extent of any excess (such
------
excess, the "Excess Proceeds"), to reduce permanently the Revolving Credit
Commitment pursuant to Section 2.6(c) (but subject to the proviso therein)
and/or repay Revolving Credit Loans pursuant to Section 2.4(c), as applicable.
Each prepayment shall be accompanied by any amount required to be paid pursuant
to Section 5.9 hereof.
SECTION 4.5 Term Notes. Each Lender's Term Loan and the obligation of
----------
the Borrowers to repay such Term Loan shall be evidenced by a separate Term Note
executed by the Borrowers payable to the order of such Lender. Each Term Loan
Note shall be dated the date hereof and shall bear interest on the unpaid
principal amount thereof at the applicable interest rate per annum specified in
Section 5.1.
ARTICLE V
GENERAL LOAN PROVISIONS
-----------------------
SECTION 5.1 Interest.
--------
(a) Interest Rate Options. Subject to the provisions of this Section 5.1,
---------------------
(i) at the election of the Borrowers, the Revolving Credit Loans and Term Loans
shall bear interest at (A) the Base Rate plus the Applicable Margin as set forth
in Section 5.1(c) or (B) the LIBOR Rate plus the Applicable Margin as set forth
----
in Section 5.1(c); provided, that the LIBOR Rate shall not be available until
--------
three (3) Business Days after the Closing Date, and (ii) any Swingline Loan
shall bear interest at the Base Rate plus the Applicable Margin as set forth in
Section 5.1(c). The Borrowers shall select the rate of interest and Interest
Period, if any, applicable to any Loan at the time a Notice of Borrowing is
given pursuant to Section 2.3 or at the time a Notice of Conversion/Continuation
is given pursuant to Section 5.2. Each Loan or portion thereof bearing interest
based on the Base Rate shall be a "Base Rate Loan", each Loan or portion thereof
bearing interest based on the LIBOR Rate shall be a "LIBOR Rate Loan." Any Loan
or any portion thereof as to which the Borrowers have not duly specified an
interest rate as provided herein shall be deemed a Base Rate Loan.
(b) Interest Periods. In connection with each LIBOR Rate Loan, the
----------------
Borrowers, by giving notice at the times described in Section 5.1(a), shall
elect an interest period (each, an "Interest Period") to be applicable to such
Loan, which Interest Period shall be a period of one (1), two (2), three (3), or
six (6) months with respect to each LIBOR Rate Loan; provided, that:
--------
33
<PAGE>
(i) the Interest Period shall commence on the date of advance
of or conversion to any LIBOR Rate Loan and, in the case of immediately
successive Interest Periods, each successive Interest Period shall commence on
the date on which the next preceding Interest Period expires;
(ii) if any Interest Period would otherwise expire on a day that
is not a Business Day, such Interest Period shall expire on the next succeeding
Business Day; provided, that if any Interest Period with respect to a LIBOR Rate
--------
Loan would otherwise expire on a day that is not a Business Day but is a day of
the month after which no further Business Day occurs in such month, such
Interest Period shall expire on the next preceding Business Day;
(iii) any Interest Period with respect to a LIBOR Rate Loan that
begins on the last Business Day of a calendar month (or on a day for which there
is no numerically corresponding day in the calendar month at the end of such
Interest Period) shall end on the last Business Day of the relevant calendar
month at the end of such Interest Period;
(iv) no Interest Period shall extend beyond the Revolving Credit
Termination Date or the Term Loan Maturity Date, as applicable to the respective
LIBOR Rate Loan, and Interest Periods shall be selected by the Borrowers so as
to permit the Borrowers to make mandatory reductions of the Revolving Credit
Commitment pursuant to Section 2.6(b) and the Term Loan Commitment pursuant to
Section 4.3(a) without payment of any amounts pursuant to Section 5.9; and
(v) there shall be no more than six (6) Interest Periods
outstanding at any time.
(c) Applicable Margin. The Applicable Margin provided for in Section
-----------------
5.1(a) with respect to the Loans (the "Applicable Margin") shall (i) during the
Stage 1 Covenant Period be determined by reference to Completed Cities as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Applicable Margin Applicable Margin
Completed Cities LIBOR Rate Base Rate
--------------------------------------------------------------------------
<S> <C> <C>
From Closing Date until nine 4.250% 3.250%
(9) Completed Cities
From nine (9) Completed Cities 4.000% 3.000%
--------------------------------------------------------------------------
</TABLE>
and (ii) during the Stage 2 Covenant Period be determined by reference to the
Total Consolidated Debt/EBITDA as of the end of the fiscal quarter immediately
preceding the delivery of the applicable Officer's Compliance Certificate as
follows:
34
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Total Consolidated Debt/ Applicable Margin Applicable Margin
EBITDA LIBOR Rate Base Rate
---------------------------------------------------------------------------------
<S> <C> <C>
*10.0x 3.750% 2.750%
*9.0x but **10.0x 3.500% 2.500%
*8.0x but ** 9.0x 3.250% 2.250%
*7.0x but ** 8.0x 3.000% 2.000%
*6.0x but ** 7.0x 2.750% 1.750%
*5.0x but ** 6.0x 2.500% 1.500%
*4.0x but ** 5.0x 2.250% 1.250%
**4.0x 2.000% 1.000%
---------------------------------------------------------------------------------
</TABLE>
Adjustments, if any, in the Applicable Margin shall be made by the
Administrative Agent on the fifth (5th) Business Day after receipt by the
Administrative Agent of (i) with respect to any adjustment during the Stage 1
Covenant Period, a certificate of a Responsible Officer of the Company that the
Borrowers have achieved nine (9) Completed Cities, and (ii) with respect to any
adjustment during the Stage 2 Covenant Period, quarterly financial statements
for the Company and its Subsidiaries and the accompanying Officer's Compliance
Certificate setting forth the Company Leverage Ratio as of the most recent
fiscal quarter end. Subject to Section 5.1(d), in the event the Company fails to
deliver such financial statements and certificate within the time required by
Sections 8.1(b) and 8.2 hereof, the Applicable Margin shall be the highest
Applicable Margin set forth above for the Stage 2 Covenant Period until the
delivery of such financial statements and certificate.
(d) Default Rate. Subject to Section 12.3, if notified by the
------------
Administrative Agent at the direction of the Required Lenders, upon the
occurrence and during the continuance of an Event of Default, (i) the Borrowers
shall no longer have the option to request LIBOR Rate Loans or Swingline Loans,
(ii) all outstanding LIBOR Rate Loans shall bear interest at a rate per annum of
two percent (2%) in excess of the highest possible rate (for the Stage 1 or
Stage 2 Covenant Period, as applicable) set forth in Section 5.1(c) applicable
to LIBOR Rate Loans until the end of the applicable Interest Period and
thereafter at a rate equal to two percent (2%) in excess of the highest possible
rate (for the Stage 1 or Stage 2 Covenant Period, as applicable) set forth in
Section 5.1(c) applicable to Base Rate Loans, and (iii) all outstanding Base
Rate Loans and other Obligations shall bear interest at a rate per annum equal
to two percent (2%) in excess of the highest possible rate (for the Stage 1 or
Stage 2 Covenant Period, as applicable) set forth in Section 5.1(c) applicable
to Base Rate Loans or such other Obligations. Interest shall continue to accrue
on the Notes after the filing by or against the Borrowers of any petition
seeking any relief in bankruptcy or under any act or law pertaining to
insolvency or debtor relief, whether state, federal or foreign.
(e) Interest Payment and Computation. Interest on each Base Rate Loan
--------------------------------
shall be payable in arrears on the last Business Day of each calendar quarter
commencing December 31, 1999; and interest on each LIBOR Rate Loan shall be
payable on the last day of each Interest Period applicable thereto, and if such
Interest Period extends over three (3) months, at the end of each three (3)
month interval during such Interest Period. Interest on LIBOR Rate Loans and all
fees payable hereunder shall be computed on the basis of a 360-day year and
assessed for the actual number of days elapsed and interest on Base Rate Loans
shall be computed on the basis of a 365/66-day year and assessed for the actual
number of days elapsed.
* = greater than or equal to
** = less than
35
<PAGE>
(f) Maximum Rate. In no contingency or event whatsoever shall the
------------
aggregate of all amounts deemed interest hereunder or under any of the Notes
charged or collected pursuant to the terms of this Agreement or pursuant to any
of the Notes exceed the highest rate permissible under any Applicable Law which
a court of competent jurisdiction or an arbitration panel shall, in a final
determination, deem applicable hereto. In the event that such a court or
arbitration panel determines that the Lenders have charged or received interest
hereunder in excess of the highest applicable rate, the rate in effect hereunder
shall automatically be reduced to the maximum rate permitted by Applicable Law
and the Lenders shall at the Administrative Agent's option (i) promptly refund
to the Borrowers any interest received by Lenders in excess of the maximum
lawful rate or (ii) shall apply such excess to the principal balance of the
Obligations. It is the intent hereof that the Borrowers not pay or contract to
pay, and that neither the Administrative Agent nor any Lender receive or
contract to receive, directly or indirectly in any manner whatsoever, interest
in excess of that which may be paid by the Borrowers under Applicable Law.
SECTION 5.2 Notice and Manner of Conversion or Continuation of Loans.
--------------------------------------------------------
Provided that no Event of Default has occurred and is then continuing, the
Borrowers shall have the option to (a) convert at any time following the third
Business Day after the Closing Date all or any portion of its outstanding Base
Rate Loans (other than Swingline Loans) in a principal amount equal to $500,000
or any whole multiple of $250,000 in excess thereof into one or more LIBOR Rate
Loans and (b) upon the expiration of any Interest Period, (i) convert all or any
part of its outstanding LIBOR Rate Loans in a principal amount equal to
$2,000,000 or a whole multiple of $500,000 in excess thereof into Base Rate
Loans (other than Swingline Loans) or (ii) continue such LIBOR Rate Loans as
LIBOR Rate Loans. Whenever the Borrowers desire to convert or continue Loans as
provided above, the Borrowers shall give the Administrative Agent irrevocable
prior written notice in the form attached as Exhibit E (a "Notice of
---------
Conversion/Continuation") not later than 11:00 a.m. (Charlotte time) three (3)
Business Days before the day on which a proposed conversion or continuation of
such Loan is to be effective specifying (A) the Loans to be converted or
continued, and, in the case of any LIBOR Rate Loan to be converted or continued,
the last day of the Interest Period therefor, (B) the effective date of such
conversion or continuation (which shall be a Business Day), (C) the principal
amount of such Loans to be converted or continued, and (D) the Interest Period
to be applicable to such converted or continued LIBOR Rate Loan. The
Administrative Agent shall promptly notify the Lenders of such Notice of
Conversion/Continuation.
SECTION 5.3 Fees.
----
(a) Commitment Fee. Commencing on the Closing Date, the Borrowers shall
--------------
pay to the Administrative Agent, for the account of the Lenders, a non-
refundable commitment fee accrued on the unused portion of the Aggregate
Commitment (less any L/C Obligations) which commitment fee shall fluctuate based
on the daily utilization of the Credit Facility (measured as of 5:00 p.m. on
such day) for each calendar quarter at a rate per annum determined in accordance
with the following table:
36
<PAGE>
---------------------------------------------------
Average Percent of Commitment
Facility Utilization Fee
---------------------------------------------------
**33% 1.500%
* 33% and **67% 1.125%
* 67% 0.750%
---------------------------------------------------
The commitment fee shall accrue on the applicable Commitment so long as it
remains in effect (and shall not have expired or terminated) shall be payable in
arrears on the last Business Day of each calendar quarter during the term of
this Agreement commencing December 31, 1999, and on the Final Maturity Date.
Such commitment fee shall be distributed by the Administrative Agent to the
Lenders pro rata in accordance with the Lenders' respective Commitment
--- ----
Percentages.
(b) Agents' and Other Fees. In order to compensate the Agents with respect
----------------------
to the Credit Facility, the Borrowers agree to pay to the Agents the fees set
forth in the separate fee letter agreement executed by the Company and the
Agents dated July 21, 1999.
SECTION 5.4 Manner of Payment. Each payment by the Borrowers on account
-----------------
of the principal of or interest on the Loans or of any fee, commission or other
amounts (including the Reimbursement Obligation) payable to the Lenders under
this Agreement or any Note shall be made not later than 1:00 p.m. (Charlotte
time) on the date specified for payment under this Agreement to the
Administrative Agent at the Administrative Agent's Office for the account of the
Lenders pro rata in accordance with their respective Commitment Percentages
--- ----
(except as specified below), in Dollars, in immediately available funds and
shall be made without any set-off, counterclaim or deduction whatsoever. Any
payment received after such time but before 2:00 p.m. (Charlotte time) on such
day shall be deemed a payment on such date for the purposes of Section 12.1, but
for all other purposes shall be deemed to have been made on the next succeeding
Business Day. Any payment received after 2:00 p.m. (Charlotte time) shall be
deemed to have been made on the next succeeding Business Day for all purposes.
Upon receipt by the Administrative Agent of each such payment, the
Administrative Agent shall distribute to each Lender at its address for notices
set forth herein its pro rata share of such payment in accordance with such
--- ----
Lender's Commitment Percentages, as applicable (except as specified below), and
shall wire advice of the amount of such credit to each Lender. Each payment to
the Administrative Agent of the Issuing Lender's fees or L/C Participants'
commissions shall be made in like manner, but for the account of the Issuing
Lender or the L/C Participants, as the case may be. Each payment to the
Administrative Agent of Administrative Agent's fees or expenses shall be made
for the account of the Administrative Agent and any amount payable to any Lender
under Sections 5.8, 5.9, 5.10, 5.11 or 15.2 shall be paid to the Administrative
Agent for the account of the applicable Lender. Subject to Section 5.1(b)(ii),
if any payment under this Agreement or any Note shall be specified to be made
upon a day which is not a Business Day, it shall be made on the next succeeding
day which is a Business Day and such extension of time shall in such case be
included in computing any interest if payable along with such payment.
SECTION 5.5 Crediting of Payments and Proceeds. In the event that the
----------------------------------
Borrowers shall fail to pay any of the Obligations when due and the Obligations
have been
* = greater than or equal to
** = less than
37
<PAGE>
accelerated pursuant to Section 12.2, all payments received by the Lenders upon
the Notes and the other Obligations and all net proceeds from the enforcement of
the Obligations shall be applied first to all expenses then due and payable by
the Borrowers hereunder, then to all indemnity obligations then due and payable
by the Borrowers hereunder, then to all Administrative Agent's and Issuing
Lender's fees then due and payable, then to all commitment and other fees and
commissions then due and payable, then to accrued and unpaid interest hereunder
on the Swingline Notes to the Swingline Lender, then to the principal amount
outstanding under the Swingline Notes to the Swingline Lender, then to accrued
but unpaid interest on the other Notes, the Reimbursement Obligation and any
termination payments due in respect of a Hedging Agreement related to the
Obligations with any Lender (which such Hedging Agreement is permitted or
required hereunder) (pro rata in accordance with all such amounts due), then to
--- ----
the principal amount of the other Notes and Reimbursement Obligation (pro rata
--- ----
in accordance with all such amounts due) and then to the cash collateral account
described in Section 12.2(b) hereof to the extent of any L/C Obligations then
outstanding, in that order.
SECTION 5.6 Adjustments. If any Lender (a "Benefited Lender") shall at
-----------
any time receive any payment of all or part of the Obligations owing to it, or
interest thereon, or if any Lender shall at any time receive any collateral in
respect to the Obligations owing to it (whether voluntarily or involuntarily, by
set-off or otherwise) in a greater proportion than any such payment to and
collateral received by any other Lender, if any, in respect of the Obligations
owing to such other Lender, or interest thereon, such Benefited Lender shall
purchase for cash from the other Lenders such portion of each such other
Lender's Extensions of Credit, or shall provide such other Lenders with the
benefits of any such collateral, or the proceeds thereof, as shall be necessary
to cause such Benefited Lender to share the excess payment or benefits of such
collateral or proceeds ratably with each of the Lenders; provided, that if all
--------
or any portion of such excess payment or benefits is thereafter recovered from
such Benefited Lender, such purchase shall be rescinded, and the purchase price
and benefits returned to the extent of such recovery, but without interest. The
Borrowers agree that each Lender so purchasing a portion of another Lender's
Extensions of Credit may exercise all rights of payment (including, without
limitation, rights of set-off) with respect to such portion as fully as if such
Lender were the direct holder of such portion.
SECTION 5.7 Nature of Obligations of Lenders Regarding Extensions of
--------------------------------------------------------
Credit; Assumption by the Administrative Agent. The obligations of the Lenders
- ----------------------------------------------
under this Agreement to make the Loans and issue or participate in Letters of
Credit are several and are not joint or joint and several. Unless the
Administrative Agent shall have received notice from a Lender prior to a
proposed borrowing date that such Lender will not make available to the
Administrative Agent such Lender's ratable portion of the amount to be borrowed
on such date (which notice shall not release such Lender of its obligations
hereunder), the Administrative Agent may assume that such Lender has made such
portion available to the Administrative Agent on the proposed borrowing date in
accordance with Section 2.3(b) and/or Section 4.2(b), and the Administrative
Agent may, in reliance upon such assumption, make available to the Borrowers on
such date a corresponding amount. If such amount is made available to the
Administrative Agent on a date after such borrowing date, such Lender shall pay
to the Administrative Agent on demand an amount, until paid, equal to the
product of (a) the amount not made available by such Lender in accordance with
the terms hereof, times (b) the daily
-----
38
<PAGE>
average Federal Funds Rate during such period as determined by the
Administrative Agent, times (c) a fraction the numerator of which is the number
-----
of days that elapse from and including such borrowing date to the date on which
such amount not made available by such Lender in accordance with the terms
hereof shall have become immediately available to the Administrative Agent and
the denominator of which is 360. A certificate of the Administrative Agent with
respect to any amounts owing under this Section 5.7 shall be conclusive, absent
manifest error. If such Lender's Revolving Credit Commitment Percentage or Term
Loan Percentage, as applicable, of such borrowing is not made available to the
Administrative Agent by such Lender within three (3) Business Days after such
borrowing date, the Administrative Agent shall be entitled to recover such
amount made available by the Administrative Agent with interest thereon at the
rate per annum applicable to Base Rate Loans hereunder, on demand, from the
Borrowers. The failure of any Lender to make available its Revolving Credit
Commitment Percentage or Term Loan Percentage, as applicable, of any Loan
requested by the Borrowers shall not relieve it or any other Lender of its
obligation, if any, hereunder to make its Revolving Credit Commitment Percentage
or Term Loan Percentage, as applicable, of such Loan available on the borrowing
date, but no Lender shall be responsible for the failure of any other Lender to
make its Revolving Credit Commitment Percentage or Term Loan Percentage, as
applicable, of such Loan available on the borrowing date.
SECTION 5.8 Changed Circumstances.
---------------------
(a) Circumstances Affecting LIBOR Rate Availability. If with respect to
-----------------------------------------------
any Interest Period the Administrative Agent or any Lender (after consultation
with the Administrative Agent) shall determine that, by reason of circumstances
affecting the foreign exchange and interbank markets generally, deposits in
eurodollars, in the applicable amounts are not being quoted via the Dow Jones
Market Screen 3750 or offered to the Administrative Agent or such Lender for
such Interest Period, then the Administrative Agent shall forthwith give notice
thereof to the Borrowers. Thereafter, until the Administrative Agent notifies
the Borrowers that such circumstances no longer exist, the obligation of the
Lenders to make LIBOR Rate Loans and the right of the Borrowers to convert any
Loan to or continue any Loan as a LIBOR Rate Loan shall be suspended, and the
Borrowers shall repay in full (or cause to be repaid in full) the then
outstanding principal amount of each such LIBOR Rate Loans together with accrued
interest thereon, on the last day of the then current Interest Period applicable
to such LIBOR Rate Loan or convert the then outstanding principal amount of each
such LIBOR Rate Loan to a Base Rate Loan as of the last day of such Interest
Period.
(b) Laws Affecting LIBOR Rate Availability. If, after the date hereof,
--------------------------------------
the introduction of, or any change in, any Applicable Law or any change in the
interpretation or administration thereof by any Governmental Authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Lender (or any of their respective Lending
Offices) with any request or directive (whether or not having the force of law)
of any such Authority, central bank or comparable agency, shall make it unlawful
or impossible for any of the Lenders (or any of their respective Lending
Offices) to honor its obligations hereunder to make or maintain any LIBOR Rate
Loan, such Lender shall promptly give notice thereof to the Administrative Agent
and the Administrative Agent shall promptly give notice to the Borrowers and the
other Lenders. Thereafter, until the Administrative Agent
39
<PAGE>
notifies the Borrowers that such circumstances no longer exist, (i) the
obligations of the Lenders to make LIBOR Rate Loans and the right of the
Borrowers to convert any Loan or continue any Loan as a LIBOR Rate Loan shall be
suspended and thereafter the Borrowers may select only Base Rate Loans
hereunder, and (ii) if any of the Lenders may not lawfully continue to maintain
a LIBOR Rate Loan to the end of the then current Interest Period applicable
thereto as a LIBOR Rate Loan, the applicable LIBOR Rate Loan shall immediately
be converted to a Base Rate Loan for the remainder of such Interest Period.
(c) Increased Costs. If, after the date hereof, the introduction of, or
---------------
any change in, any Applicable Law, or in the interpretation or administration
thereof by any Governmental Authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by any of the
Lenders (or any of their respective Lending Offices) with any request or
directive (whether or not having the force of law) of such Authority, central
bank or comparable agency:
(i) shall subject any of the Lenders (or any of their respective
Lending Offices) to any tax, duty or other charge with respect to any Note,
Letter of Credit or Application or shall change the basis of taxation of
payments to any of the Lenders (or any of their respective Lending Offices) of
the principal of or interest on any Note, Letter of Credit or Application or any
other amounts due under this Agreement in respect thereof (except for changes in
the rate of tax on the overall net income of any of the Lenders or any of their
respective Lending Offices imposed by the jurisdiction in which such Lender is
organized or is or should be qualified to do business or such Lending Office is
located); or
(ii) shall impose, modify or deem applicable any reserve
(including, without limitation, any imposed by the Board of Governors of the
Federal Reserve System), special deposit, insurance or capital or similar
requirement against assets of, deposits with or for the account of, or credit
extended by any of the Lenders (or any of their respective Lending Offices) or
shall impose on any of the Lenders (or any of their respective Lending Offices)
or the foreign exchange and interbank markets any other condition affecting any
Note;
and the result of any of the foregoing is to increase the costs to any of the
Lenders of maintaining any LIBOR Rate Loan or issuing or participating in
Letters of Credit or to reduce the yield or amount of any sum received or
receivable by any of the Lenders under this Agreement or under the Notes in
respect of a LIBOR Rate Loan or Letter of Credit or Application, then such
Lender shall promptly notify the Administrative Agent, and the Administrative
Agent shall promptly notify the Borrowers of such fact and demand compensation
therefor and, within fifteen (15) days after such notice by the Administrative
Agent, the Borrowers shall pay to such Lender such additional amount or amounts
as will compensate such Lender or Lenders for such increased cost or reduction.
The Administrative Agent will promptly notify the Borrowers of any event of
which it has knowledge which will entitle such Lender to compensation pursuant
to this Section 5.8(c); provided, that the Administrative Agent shall incur no
--------
liability whatsoever to the Lenders or the Borrowers in the event it fails to do
so. The amount of such compensation shall be determined by such Lender in its
reasonable discretion based upon the assumption that such Lender funded its
Revolving Credit Commitment Percentage or Term Loan Percentage, as applicable,
of the LIBOR Rate Loans in the London interbank market and using any reasonable
40
<PAGE>
attribution or averaging methods which such Lender deems reasonably appropriate
and practical. A certificate of such Lender setting forth the basis for
determining such amount or amounts necessary to compensate such Lender shall be
forwarded to the Borrowers through the Administrative Agent and shall be
conclusively presumed to be correct save for manifest error.
SECTION 5.9 Indemnity. The Borrowers hereby indemnify each of the
---------
Lenders against any loss or expense which may arise or be attributable to each
Lender's obtaining, liquidating or employing deposits or other funds acquired to
effect, fund or maintain any Loan (a) as a consequence of any failure by the
Borrowers to make any payment when due of any amount due hereunder in connection
with a LIBOR Rate Loan, (b) due to any failure of the Borrowers to borrow or
convert on a date specified therefor in a Notice of Borrowing or Notice of
Continuation/Conversion, as applicable or (c) due to any payment, prepayment or
conversion of any LIBOR Rate Loan on a date other than the last day of the
Interest Period therefor. The amount of such loss or expense shall be determined
by such Lender in its reasonable discretion based upon the assumption that such
Lender funded its Revolving Credit Commitment Percentage or Term Loan
Percentage, as applicable, of the LIBOR Rate Loans in the London interbank
market and using any reasonable attribution or averaging methods which such
Lender deems reasonably appropriate and practical. A certificate of such Lender
setting forth the basis for determining such amount or amounts necessary to
compensate such Lender shall be forwarded to the Borrowers through the
Administrative Agent and shall be conclusively presumed to be correct save for
manifest error.
SECTION 5.10 Capital Requirements. If either (a) the introduction of, or
--------------------
any change in, or in the interpretation of, any Applicable Law or (b) compliance
with any guideline or request from any central bank or comparable agency or
other Governmental Authority (whether or not having the force of law), has or
would have the effect of reducing the rate of return on the capital of, or has
affected or would affect the amount of capital required to be maintained by, any
Lender or any corporation controlling such Lender as a consequence of, or with
reference to the Commitments and other commitments of this type, below the rate
which such Lender or such other corporation could have achieved but for such
introduction, change or compliance, then within five (5) Business Days after
written demand by any such Lender, the Borrowers shall pay to such Lender from
time to time as specified by such Lender additional amounts sufficient to
compensate such Lender or other corporation for such reduction. A certificate as
to such amounts submitted to the Borrowers and the Administrative Agent by such
Lender, shall, in the absence of manifest error, be presumed to be correct and
binding for all purposes.
SECTION 5.11 Taxes.
-----
(a) Payments Free and Clear. Any and all payments by the Borrowers
-----------------------
hereunder or under the Notes or the Letters of Credit shall be made free and
clear of and without deduction for any and all present or future taxes, levies,
imposts, deductions, charges or withholding, and all liabilities with respect
thereto excluding, (i) in the case of each Lender and the Administrative Agent,
income and franchise taxes imposed by the jurisdiction under the laws of which
such Lender or the Administrative Agent (as the case may be) is organized or is
or should be qualified to do business or any political subdivision thereof and
(ii) in the case of each Lender, income and
41
<PAGE>
franchise taxes imposed by the jurisdiction of such Lender's Lending Office or
any political subdivision thereof (all such non-excluded taxes, levies, imposts,
deductions, charges, withholdings and liabilities being hereinafter referred to
as "Taxes"). If the Borrowers shall be required by law to deduct or withhold any
Taxes from or in respect of any sum payable hereunder or under any Note or in
respect of any Letter of Credit to any Lender or the Administrative Agent, (A)
the sum payable shall be increased as may be necessary so that after making all
required deductions or withholdings (including deductions or withholdings
applicable to additional sums payable under this Section 5.11) such Lender or
the Administrative Agent (as the case may be) receives an amount equal to the
amount such party would have received had no such deductions been made, (B) the
Borrowers shall make such deductions, (C) the Borrowers shall pay the full
amount deducted to the relevant taxing authority or other authority in
accordance with Applicable Law, and (D) the Borrowers shall deliver to the
Administrative Agent evidence of such payment to the relevant taxing authority
or other Governmental Authority in the manner provided in Section 5.11(d).
(b) Stamp and Other Taxes. In addition, the Borrowers shall pay any
---------------------
present or future stamp, registration, recordation or documentary taxes or any
other similar fees or charges or excise or property taxes, levies of the United
States or any state or political subdivision thereof or any applicable foreign
jurisdiction which arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this Agreement, the
Loans, the Letters of Credit, the other Loan Documents, or the perfection of any
rights or security interest in respect thereof (hereinafter referred to as
"Other Taxes").
(c) Indemnity. The Borrowers shall indemnify each Lender and the
---------
Administrative Agent for the full amount of Taxes and Other Taxes (including,
without limitation, any Taxes and Other Taxes imposed by any jurisdiction on
amounts payable under this Section 5.11) paid by such Lender or the
Administrative Agent (as the case may be) and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto,
whether or not such Taxes or Other Taxes were correctly or legally asserted,
except for any such penalties, interest and expenses assessed against or
incurred by the Administrative Agent or such Lender as a result of its own gross
negligence or willful misconduct as determined (in a formal determination) by a
court of competent jurisdiction or an arbitration panel. Such indemnification
shall be made within thirty (30) days from the date such Lender or the
Administrative Agent (as the case may be) makes written demand therefor.
(d) Evidence of Payment. Within thirty (30) days after the date of any
-------------------
payment of Taxes or Other Taxes, the Borrowers shall furnish to the
Administrative Agent, at its address referred to in Section 15.1, the original
or a certified copy of a receipt evidencing payment thereof or other evidence of
payment satisfactory to the Administrative Agent.
(e) Delivery of Tax Forms. Each Lender organized under the laws of a
---------------------
jurisdiction other than the United States or any state thereof shall deliver to
the Borrowers, with a copy to the Administrative Agent, on the Closing Date or
concurrently with the delivery of the relevant Assignment and Acceptance, as
applicable, (i) two United States Internal Revenue Service Forms W-8ECI or Forms
W-8BEN, as applicable (or successor forms) properly completed and certifying in
each case that such Lender is entitled to a complete exemption from withholding
or
42
<PAGE>
deduction for or on account of any United States federal income taxes, and (ii)
an Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the
case may be, to establish an exemption from United States backup withholding
taxes. Each such Lender further agrees to deliver to the Borrowers, with a copy
to the Administrative Agent, a Form W-8BEN or W-8ECI and Form W-8 or W-9, or
successor applicable forms or manner of certification, as the case may be, on or
before the date that any such form expires or becomes obsolete or after the
occurrence of any event requiring a change in the most recent form previously
delivered by it to the Borrowers, certifying in the case of a Form W-8BEN or W-
8ECI that such Lender is entitled to receive payments under this Agreement
without deduction or withholding of any United States federal income taxes
(unless in any such case an event (including without limitation any change in
treaty, law or regulation) has occurred prior to the date on which any such
delivery would otherwise be required which renders such forms inapplicable or
the exemption to which such forms relate unavailable and such Lender notifies
the Borrowers and the Administrative Agent that it is not entitled to receive
payments without deduction or withholding of United States federal income taxes)
and, in the case of a Form W-8 or W-9, establishing an exemption from United
States backup withholding tax.
(f) Survival. Without prejudice to the survival of any other agreement of
--------
the Borrowers hereunder, the agreements and obligations of the Borrowers
contained in this Section 5.11 shall survive the payment in full of the
Obligations and the termination of the Commitments.
SECTION 5.12 Security. The Obligations of the Company and the Borrowers
--------
shall be secured as provided in the Security Documents.
ARTICLE VI
CLOSING; CONDITIONS OF CLOSING AND BORROWING
--------------------------------------------
SECTION 6.1 Closing. The closing shall take place at the offices of
-------
Kennedy, Covington, Lobdell & Hickman, L.L.P. at 10:00 a.m. on November 3, 1999
or on such other date as the parties hereto shall mutually agree.
SECTION 6.2 Conditions to Closing. The obligation of the Lenders to
---------------------
close this Agreement is subject to the satisfaction or waiver of each of the
following conditions:
(a) Executed Loan Documents. This Agreement, the Revolving Credit Notes,
-----------------------
the Term Notes, the Swingline Note, the Security Agreement, the Pledge
Agreement, and each Mortgage required hereunder shall have been duly authorized,
executed and delivered to the Administrative Agent by the parties thereto, shall
be in full force and effect and no default or event of default shall exist
thereunder, and the Borrowers shall have delivered original counterparts thereof
to the Administrative Agent.
43
<PAGE>
(b) Closing Certificates; etc.
--------------------------
(i) Officer's Certificate of the Company. The Administrative
------------------------------------
Agent shall have received a certificate from a Responsible Officer, in form and
substance satisfactory to the Administrative Agent, to the effect that all
representations and warranties of the Company and the Borrowers contained in
this Agreement and the other Loan Documents are true, correct and complete; that
the Company and the Borrowers are not in violation of any of the covenants
contained in this Agreement and the other Loan Documents; that, after giving
effect to the transactions contemplated by this Agreement, no Default or Event
of Default has occurred and is continuing; that attached thereto are copies of
the Equity Documents as in effect at the Closing Date; and that the Company and
the Borrowers have satisfied each of the closing conditions.
(ii) Certificate of Secretary of the Company and Each Borrower.
---------------------------------------------------------
The Administrative Agent shall have received a certificate of the secretary or
assistant secretary of the Company and each Borrower certifying as to the
incumbency and genuineness of the signature of each officer thereof executing
Loan Documents to which it is a party and certifying that attached thereto is a
true, correct and complete copy of (A) the articles of incorporation of the
Company or the corresponding Borrower, as applicable, and all amendments
thereto, certified as of a recent date by the appropriate Governmental Authority
in its jurisdiction of incorporation (or containing a certification that such
document as delivered to the Administrative Agent pursuant to the closing of the
Initial Credit Agreement remains true, correct and complete), (B) the bylaws of
the Company or the corresponding Borrower, as applicable, as in effect on the
date of such certifications (or containing a certification that such document as
delivered to the Administrative Agent pursuant to the closing of the Initial
Credit Agreement remains true, correct and complete), and (C) resolutions duly
adopted by the board of directors of the Company or the corresponding Borrower,
as applicable, authorizing the execution, delivery and performance of this
Agreement and the other Loan Documents to which it is a party.
(iii) Certificates of Good Standing. To the extent requested by
-----------------------------
the Administrative Agent, the Administrative Agent shall have received
certificates as of a recent date of the good standing of the Company and each
Borrower under the laws of its jurisdiction of organization each other
jurisdiction where such Person is qualified to do business and to the extent so
requested a certificate of the relevant taxing authorities of such jurisdictions
certifying that such Person has filed required tax returns and owes no
delinquent taxes.
(iv) Opinions of Counsel. The Administrative Agent shall have
-------------------
received favorable opinions of counsel (including corporate and communications
law regulatory counsel) to the Company addressed to the Administrative Agent and
the Lenders with respect to the Company, the Borrowers, the Loan Documents and
such other matters as the Lenders shall request.
(v) Tax Forms. The Administrative Agent shall have received
---------
copies of the United States Internal Revenue Service forms required by Section
5.11(e) hereof.
44
<PAGE>
(c) Collateral.
----------
(i) Filings and Recordings. All filings or recordations
----------------------
that are necessary to perfect the Liens of the Lenders in the collateral
described in the Security Documents shall have been either filed or recorded or
forwarded for filing or recording in all appropriate locations and the
Administrative Agent shall have received evidence satisfactory to the
Administrative Agent that such Liens constitute or upon such filings and
recordations such Liens shall constitute valid and perfected first priority
Liens therein.
(ii) Pledged Collateral. The Administrative Agent shall
------------------
have received (A) original stock certificates or other certificates evidencing
the capital stock or other ownership interests pledged pursuant to the Pledge
Agreement, together with an undated stock power for each such certificate duly
executed in blank by the registered owner thereof and (B) each original
promissory note pledged pursuant to the Pledge Agreement.
(iii) Lien Searches. To the extent requested thereby, the
-------------
Administrative Agent shall have received the results of a Lien search (including
a search as to judgments, pending litigation and tax matters) made against the
Company and the Borrowers under the Uniform Commercial Code (or applicable
judicial docket) as in effect in the state in which each of them is incorporated
and any state in which any of their respective assets are located, indicating
among other things that such assets are free and clear of any Lien except for
Liens permitted hereunder.
(iv) Hazard and Liability Insurance. The Administrative
------------------------------
Agent shall have received certificates of insurance, evidence of payment of all
insurance premiums for the current policy year of each, and, if requested by the
Administrative Agent, copies (certified by a Responsible Officer) of insurance
policies in the form required under the Security Documents and otherwise in form
and substance reasonably satisfactory to the Administrative Agent.
(v) Real Property Security and Information. The
--------------------------------------
Administrative Agent shall have received (A) with respect to each Mortgage in
existence on the Closing Date, duly executed counterparts of modifications to
such Mortgage in form and substance satisfactory thereto (the originals of which
shall have been forwarded on the Closing Date for recordation in the appropriate
jurisdiction); (B) with respect to each landlord consent and mortgagee estoppel
letter in existence on the Closing Date, letters notifying each party to such
agreement of this Agreement and the transactions contemplated thereby (the
originals of which shall have been forwarded on the Closing Date to such
parties); (C) with respect to any additional real property owned or leased by
the Company or any Borrower, such Mortgages, landlord consents, mortgagee
estoppel letters, title insurance, flood hazard certification, surveys,
environmental assessments, in each case as are reasonably requested by the
Lenders and (D) such other certificates, documents, opinions of counsel and
information related thereto, in each case as are reasonably requested by the
Lenders, in form and substance satisfactory to the Administrative Agent.
45
<PAGE>
(d) Consents; Defaults.
------------------
(i) No Injunction, Etc. No action, proceeding, investigation,
-------------------
regulation or legislation shall have been instituted, threatened or proposed
before any Governmental Authority to enjoin, restrain, or prohibit, or to obtain
substantial damages in respect of this Agreement or the other Loan Documents or
the consummation of the transactions contemplated hereby or thereby.
(ii) No Event of Default. No Default or Event of Default shall
-------------------
have occurred and be continuing.
(e) Financial Matters.
-----------------
(i) Financial Statements. The Administrative Agent shall have
--------------------
received the most recent Consolidated financial statements of the Company and
its Subsidiaries, all in form and substance satisfactory to the Administrative
Agent.
(ii) Financial Condition Certificate. The Company shall have
-------------------------------
delivered to the Administrative Agent a certificate, in form and substance
satisfactory to the Administrative Agent, and certified as accurate by a
Responsible Officer, that (A) the Company and each Borrower are Solvent, (B) the
Borrowers' payables are current and not past due (except for those the validity
or amount of which are being contested in good faith by any Borrower by
reasonably appropriate means), (C) the financial projections previously
delivered to the Administrative Agent represent the good faith estimates of the
Borrowers and senior management thereof as to the projected results contained
therein, (D) attached thereto are calculations evidencing compliance with the
covenants contained in Article X hereof and (E) the Borrowers have made the
equity investment required by Section 6.2(f)(vi) and attached thereto is
evidence thereof.
(iii) Payment at Closing; Fee Letters. The Company or Borrowers
-------------------------------
shall have paid the fees set forth or referenced in Section 5.3 and any other
accrued and unpaid fees or commissions due hereunder (including, without
limitation, legal fees and expenses) to the Administrative Agent and Lenders,
and to any other Person such amount as may be due thereto in connection with the
transactions contemplated hereby, including all taxes, fees and other charges in
connection with the execution, delivery, recording, filing and registration of
any of the Loan Documents. The Administrative Agent shall have received duly
authorized and executed copies of the fee letter agreement referred to in
Section 5.3(b).
(f) Miscellaneous.
-------------
(i) Proceedings and Documents. All opinions, certificates and
-------------------------
other instruments and all proceedings in connection with the transactions
contemplated by this Agreement shall be reasonably satisfactory in form and
substance to the Lenders. The Administrative Agent shall have received copies of
the LLC Agreement and the Transaction Agreement (certified as true, correct and
complete by a Responsible Officer), and all other instruments and other evidence
as the Lender may reasonably request, in form and substance
46
<PAGE>
reasonably satisfactory to the Lenders, with respect to the transactions
contemplated by this Agreement and the taking of all actions in connection
therewith.
(ii) Business Plans. The Lenders shall have received copies of
--------------
the Approved Business Plans and any Approved Budgets currently in effect with
respect to the Permitted Markets in form and substance reasonably satisfactory
to the Lenders.
(iii) Lucent Subordination and Consent Agreement. A fully
------------------------------------------
executed copy of the subordination and consent agreement (with respect to the
Lucent Agreement) dated as of October 14, 1998 by and among Lucent Technologies
Inc., the Company and the Administrative Agent shall have been received by the
Administrative Agent.
(iv) Due Diligence and Other Documents. The Lenders and their
---------------------------------
counsel shall have concluded their business and legal due diligence review of
the Company, the Borrowers and their Subsidiaries. The Company and the Borrowers
shall have delivered to the Lenders such other documents, certificates and
opinions as the Lenders have reasonably requested.
(v) Refinancing of the Initial Loans. On the Closing Date, (i)
--------------------------------
all loans under the Initial Credit Agreement (the "Initial Loans") made by any
Initial Lender who is not a Lender hereunder shall be repaid in full, and the
commitments and other obligations and rights (except as expressly set forth in
the Initial Credit Agreement) of such Initial Lender shall be terminated, (ii)
all outstanding Initial Loans shall be deemed Revolving Credit Loans hereunder
and the Administrative Agent shall make such transfers of funds as are necessary
in order that the outstanding balance of such Revolving Credit Loans, together
with any Revolving Credit Loans funded on the Closing Date, reflect the
Revolving Credit Commitments of the Lenders hereunder, (iii) there shall have
been paid in cash in full all accrued but unpaid interest due on the Initial
Loans to the Closing Date, (iv) there shall have been paid in cash in full all
accrued but unpaid fees under the Initial Credit Agreement due to the Closing
Date and all other amounts, costs and expenses then owing to any of the Initial
Lenders and/or First Union, as administrative agent under the Initial Credit
Agreement, and (v) all outstanding promissory notes issued by the Borrowers to
the Initial Lenders under the Initial Credit Agreement shall be deemed canceled
and the originally executed copies thereof shall be promptly returned to the
Administrative Agent who shall forward such notes to the Company, on behalf of
the Borrowers.
(vi) Equity Investment and Conversion. The Company shall have
--------------------------------
received commitments for a minimum of $132,800,000 in Net Cash Proceeds of
equity investments therein in accordance with the terms and conditions of the
Equity Documents. The Company shall have received approximately $61,500,000 in
Net Cash Proceeds of equity investments therein from such equity commitment and
transferred such funds to the Borrowers as an equity contribution thereto in
each case on terms and conditions reasonably satisfactory to the Lenders.
(vii) Governmental and Third Party Approvals. The Company and
--------------------------------------
the Borrowers shall have obtained all necessary approvals, authorizations and
consents of any
47
<PAGE>
Person and of all Governmental Authorities and courts having jurisdiction with
respect to the transactions contemplated by this Agreement and the other Loan
Documents.
SECTION 6.3 Conditions to All Extensions of Credit. The obligations of
--------------------------------------
the Lenders to make any Extensions of Credit are subject to the satisfaction of
the following conditions precedent on the relevant borrowing or issue date, as
applicable:
(a) Notice of Borrowing and Notice of Account Designation. The
-----------------------------------------------------
Administrative Agent shall have received a Notice of Borrowing in accordance
with Section 2.3(a) and 4.2(a), as applicable, and a Notice of Account
Designation specifying the account or accounts to which the proceeds of any
Loans made on and after the Closing Date are to be disbursed.
(b) Continuation of Representations and Warranties. The representations
----------------------------------------------
and warranties contained in Article VII shall be true and correct in all
material respects on and as of such borrowing or issuance date with the same
effect as if made on and as of such date; except for any representation and
warranty made as of an earlier date, which representation and warranty shall
remain true and correct as of such earlier date.
(c) No Existing Default. No Default or Event of Default shall have
-------------------
occurred and be continuing hereunder (i) on the borrowing date with respect to
such Loan or after giving effect to the Loans to be made on such date or (ii) or
the issue date with respect to such Letter of Credit or after giving affect to
such Letters of Credit on such date.
(d) Officer's Compliance Certificate; Additional Documents. The
------------------------------------------------------
Administrative Agent shall have received the current Officer's Compliance
Certificate and each additional document, instrument, or other item of
information reasonably requested by it.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
------------------------------
SECTION 7.1 Representations and Warranties. To induce the Administrative
------------------------------
Agent and Lenders to enter into this Agreement and to induce the Lenders to make
Extensions of Credit, the Company and the Borrowers hereby represent and warrant
to the Administrative Agent and Lenders that:
(a) Organization; Power; Qualification. Each of the Company and its
----------------------------------
Subsidiaries is duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or formation, has the power and
authority to own its properties and to carry on its business as now being and
hereafter proposed to be conducted, and is duly qualified and authorized to do
business in each jurisdiction in which the character of its properties or the
nature of its business requires such qualification and authorization, except to
the extent that the failure to be so qualified and in good standing could not,
in the aggregate, reasonably be expected to have a Material Adverse Effect. The
jurisdictions in which the Company and its Subsidiaries are organized and
qualified to do business as of the Closing Date are described on Schedule
7.1(a).
48
<PAGE>
(b) Ownership. Each Subsidiary of the Company as of the Closing Date is
---------
listed on Schedule 7.1(b). As of the Closing Date, the capitalization of the
---------------
Company and its Subsidiaries consists of the number of shares, authorized,
issued and outstanding, of such classes and series, with or without par value,
described on Schedule 7.1(b). All outstanding shares have been duly authorized
---------------
and validly issued and are fully paid and nonassessable. The shareholders of
the Subsidiaries of the Company and the number of shares owned by each as of the
Closing Date are described on Schedule 7.1(b). As of the Closing Date, there
---------------
are no outstanding stock purchase warrants, subscriptions, options, securities,
instruments or other rights of any type or nature whatsoever, which are
convertible into, exchangeable for or otherwise provide for or permit the
issuance of capital stock of the Company or its Subsidiaries, except as
described on Schedule 7.1(b).
---------------
(c) Authorization of Agreement, Loan Documents and Borrowing. Each of the
--------------------------------------------------------
Company and its Subsidiaries has the right, power and authority and has taken
all necessary corporate and other action to authorize the execution, delivery
and performance of this Agreement and each of the other Loan Documents to which
it is a party in accordance with their respective terms. This Agreement and
each of the other Loan Documents have been duly executed and delivered by the
duly authorized officers of the Company and each of its Subsidiaries party
thereto, and each such document constitutes the legal, valid and binding
obligation of the Company or its Subsidiary party thereto, enforceable in
accordance with its terms, except as such enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar state or federal
debtor relief laws from time to time in effect which affect the enforcement of
creditors' rights in general and the availability of equitable remedies.
(d) Compliance of Agreement, Loan Documents and Borrowing with Laws, Etc.
--------------------------------------------------------------------
The execution, delivery and performance by the Company and its Subsidiaries of
the Loan Documents to which each such Person is a party, in accordance with
their respective terms, the borrowings hereunder and the transactions
contemplated hereby do not and will not, by the passage of time, the giving of
notice or otherwise, (i) require any Governmental Approval or violate any
Applicable Law relating to the Company or any of its Subsidiaries, (ii) conflict
with, result in a breach of or constitute a default under the articles of
incorporation, bylaws or other organizational documents of the Company or any of
its Subsidiaries or any indenture, agreement or other instrument to which such
Person is a party or by which any of its properties may be bound or any
Governmental Approval relating to such Person, or (iii) result in or require the
creation or imposition of any Lien upon or with respect to any property now
owned or hereafter acquired by such Person other than Liens arising under the
Loan Documents, except with respect to clauses (i) and (iii), except where the
failure of any of the foregoing to be correct in all respects could not, in the
aggregate, reasonably be expected to have a Material Adverse Effect.
(e) Compliance with Law; Governmental Approvals. Each of the Company and
-------------------------------------------
its Subsidiaries (i) has all Governmental Approvals required by any Applicable
Law for it to conduct its business, each of which is in full force and effect,
is final and not subject to review on appeal and is not the subject of any
pending or, to the best of its knowledge, threatened attack by direct or
collateral proceeding, and (ii) is in compliance with each Governmental Approval
applicable to it and in compliance with all other Applicable Laws relating to it
or any of its
49
<PAGE>
respective properties, except where the failure of any of the foregoing to be
correct in all respects could not, in the aggregate, reasonably be expected to
have a Material Adverse Effect.
(f) Tax Returns and Payments. Each of the Company and its Subsidiaries has
------------------------
duly filed or caused to be filed all federal, state, local and other tax returns
required by Applicable Law to be filed, and has paid, or made adequate provision
for the payment of, all federal, state, local and other taxes, assessments and
governmental charges or levies upon it and its property, income, profits and
assets which are due and payable (except for those taxes, assessments and
governmental charges or levies which are contested by the Company or any
Subsidiary in good faith and as to which adequate reserves are maintained with
respect thereto in accordance with GAAP). No Governmental Authority has asserted
any Lien or other claim against the Company or Subsidiary thereof with respect
to unpaid taxes which has not been discharged or resolved. The charges, accruals
and reserves on the books of the Company and any of its Subsidiaries in respect
of federal, state, local and other taxes for all Fiscal Years and portions
thereof since the organization of the Company and any of its Subsidiaries are in
the judgment of the Company adequate, and the Company does not anticipate any
additional taxes or assessments for any of such years.
(g) Intellectual Property Matters. Each of the Company and its
-----------------------------
Subsidiaries owns or possesses rights to use all material franchises, licenses,
copyrights, copyright applications, patents, patent rights or licenses, patent
applications, trademarks, trademark rights, trade names, trade name rights,
copyrights and rights with respect to the foregoing which are required to
conduct its business. No event has occurred which permits, or after notice or
lapse of time or both would permit, the revocation or termination of any such
rights, and neither the Company nor any Subsidiary thereof is liable to any
Person for infringement under Applicable Law with respect to any such rights as
a result of its business operations.
(h) Environmental Matters. Except where the failure of any of the
---------------------
following representations to be correct in all respects could not reasonably be
expected to have a Material Adverse Effect:
(i) The properties of the Company and its Subsidiaries do not
contain, and to their knowledge have not previously contained, any Hazardous
Materials in amounts or concentrations which (A) constitute or constituted a
violation of applicable Environmental Laws or (B) could give rise to liability
under applicable Environmental Laws;
(ii) Such properties and all operations conducted in connection
therewith are in compliance, and have been in compliance, with all applicable
Environmental Laws, and there is no contamination at, under or about such
properties or such operations which could interfere with the continued operation
of such properties or impair the fair saleable value thereof;
(iii) Neither the Company nor any Subsidiary thereof has
received any notice of violation, alleged violation, non-compliance, liability
or potential liability regarding environmental matters or compliance with
Environmental Laws with regard to any of their properties or the operations
conducted in connection therewith, nor does the Company or any
50
<PAGE>
Subsidiary thereof have knowledge or reason to believe that any such notice will
be received or is being threatened;
(iv) Hazardous Materials have not been transported or disposed
of from the properties of the Company and its Subsidiaries in violation of, or
in a manner or to a location which could give rise to liability under,
Environmental Laws, nor have any Hazardous Materials been generated, treated,
stored or disposed of at, on or under any of such properties in violation of, or
in a manner that could give rise to liability under, any applicable
Environmental Laws;
(v) No judicial proceedings or governmental or administrative
action is pending, or, to the knowledge of the Company, threatened, under any
Environmental Law to which the Company or any Subsidiary thereof is or will be
named as a party with respect to such properties or operations conducted in
connection therewith, nor are there any consent decrees or other decrees,
consent orders, administrative orders or other orders, or other administrative
or judicial requirements outstanding under any Environmental Law with respect to
such properties or such operations; and
(vi) There has been no release, or to the best of the Company's
knowledge, the threat of release, of Hazardous Materials at or from such
properties, in violation of or in amounts or in a manner that could give rise to
liability under Environmental Laws.
(i) ERISA.
-----
(i) As of the Closing Date, neither the Company nor any ERISA
Affiliate maintains or contributes to, or has any obligation under, any Employee
Benefit Plans other than those identified on Schedule 7.1(i);
---------------
(ii) the Company and each ERISA Affiliate is in compliance with
all applicable provisions of ERISA and the regulations and published
interpretations thereunder with respect to all Employee Benefit Plans except for
any required amendments for which the remedial amendment period as defined in
Section 401(b) of the Code has not yet expired. Each Employee Benefit Plan that
is intended to be qualified under Section 401(a) of the Code has been determined
by the Internal Revenue Service to be so qualified, and each trust related to
such plan has been determined to be exempt under Section 501(a) of the Code. No
liability has been incurred by the Company or any ERISA Affiliate which remains
unsatisfied for any taxes or penalties with respect to any Employee Benefit Plan
or any Multiemployer Plan;
(iii) No Pension Plan has been terminated, nor has any
accumulated funding deficiency (as defined in Section 412 of the Code) been
incurred (without regard to any waiver granted under Section 412 of the Code),
nor has any funding waiver from the Internal Revenue Service been received or
requested with respect to any Pension Plan, nor has the Company or any ERISA
Affiliate failed to make any contributions or to pay any amounts due and owing
as required by Section 412 of the Code, Section 302 of ERISA or the terms of any
Pension Plan prior to the due dates of such contributions under Section 412 of
the Code or Section 302 of ERISA, nor has there been any event requiring any
disclosure under Section 4041(c)(3)(C) or 4063(a) of ERISA with respect to any
Pension Plan;
51
<PAGE>
(iv) Neither the Company nor any ERISA Affiliate has: (A)
engaged in a nonexempt prohibited transaction described in Section 406 of the
ERISA or Section 4975 of the Code, (B) incurred any liability to the PBGC which
remains outstanding other than the payment of premiums and there are no premium
payments which are due and unpaid, (C) failed to make a required contribution or
payment to a Multiemployer Plan, or (D) failed to make a required installment or
other required payment under Section 412 of the Code;
(v) No Termination Event has occurred or is reasonably expected
to occur; and
(vi) No proceeding, claim, lawsuit and/or investigation is
existing or, to the best knowledge of the Company after due inquiry, threatened
concerning or involving any (A) employee welfare benefit plan (as defined in
Section 3(1) of ERISA) currently maintained or contributed to by the Company or
any ERISA Affiliate, (B) Pension Plan or (C) Multiemployer Plan.
(j) Margin Stock. Neither the Company nor any Subsidiary thereof is
------------
engaged principally or as one of its activities in the business of extending
credit for the purpose of "purchasing" or "carrying" any "margin stock" (as each
such term is defined or used in Regulation U of the Board of Governors of the
Federal Reserve System). No part of the proceeds of any of the Loans or Letters
of Credit will be used for purchasing or carrying margin stock or for any
purpose which violates, or which would be inconsistent with, the provisions of
Regulation T, U or X of such Board of Governors.
(k) Government Regulation. Neither the Company nor any Subsidiary thereof
---------------------
is an "investment company" or a company "controlled" by an "investment company"
(as each such term is defined or used in the Investment Company Act of 1940, as
amended) and neither the Company nor any Subsidiary thereof is, or after giving
effect to any Extension of Credit will be, subject to regulation under the
Public Utility Holding Company Act of 1935 or the Interstate Commerce Act, each
as amended, or any other Applicable Law which limits its ability to incur or
consummate the transactions contemplated hereby.
(l) Material Contracts. Schedule 7.1(l) sets forth a complete and accurate
------------------ ---------------
list of all Material Contracts of the Company and its Subsidiaries in effect as
of the Closing Date not listed on any other Schedule hereto; other than as set
forth in Schedule 7.1(l), each such Material Contract is, and after giving
---------------
effect to the consummation of the transactions contemplated by the Loan
Documents will be, in full force and effect on the Closing Date in accordance
with the terms thereof. The Company and its Subsidiaries have delivered to the
Administrative Agent a true and complete copy of each Material Contract required
to be listed on Schedule 7.1(l) or any other Schedule hereto as of the Closing
---------------
Date.
(m) Employee Relations. Each of the Company and its Subsidiaries has a
------------------
stable work force in place and is not, as of the Closing Date, party to any
collective bargaining agreement nor has any labor union been recognized as the
representative of its employees except as set forth on
52
<PAGE>
Schedule 7.1(m). The Company knows of no pending, threatened or contemplated
- ---------------
strikes, work stoppage or other collective labor disputes involving its
employees or those of its Subsidiaries.
(n) Burdensome Provisions. Neither the Company nor any Subsidiary thereof
---------------------
is a party to any indenture, agreement, lease or other instrument, or subject to
any corporate or partnership restriction, Governmental Approval or Applicable
Law which is so unusual or burdensome as in the foreseeable future could be
reasonably expected to have a Material Adverse Effect. The Company and its
Subsidiaries do not presently anticipate that future expenditures needed to meet
the provisions of any statutes, orders, rules or regulations of a Governmental
Authority will be so burdensome as to have a Material Adverse Effect.
(o) Financial Statements. The Consolidated balance sheets of the Company
--------------------
and its Subsidiaries as of July 31, 1999 and the related statements of income
and cash flows for the seven (7) calendar months then ended, copies of which
have been furnished to the Administrative Agent and each Lender, are complete
and correct, in all material respects, and fairly present, in all material
respects, the assets, liabilities and financial position of the Company and its
Subsidiaries as at such dates, and the results of the operations and changes of
financial position for the periods then ended (subject to normal year-end audit
adjustments). All such financial statements, including the related schedules
and notes thereto, have been prepared in accordance with GAAP, except for the
absence of footnote disclosures. The Company and its Subsidiaries have no Debt,
obligation or other unusual forward or long-term commitment which is not fairly
reflected in the foregoing financial statements.
(p) No Material Adverse Change. Since June 30, 1999, there has been no
--------------------------
material adverse change in the properties, business, operations, prospects, or
condition (financial or otherwise) of the Company and its Subsidiaries and no
event has occurred or condition arisen that could reasonably be expected to have
a Material Adverse Effect.
(q) Solvency. As of the Closing Date and after giving effect to each
--------
Extension of Credit made hereunder, the Company and each of its Subsidiaries
will be Solvent.
(r) Titles to Properties. Each of the Company and its Subsidiaries has
--------------------
such title to the real property owned or leased by it as is necessary or
desirable to the conduct of its business and valid and legal title to all of its
personal property and assets, including, but not limited to, those reflected on
the balance sheets of the Company and its Subsidiaries delivered pursuant to
Section 7.1(o), except those which have been disposed of by the Company or its
Subsidiaries subsequent to such date which dispositions have been in the
ordinary course of business or as otherwise expressly permitted hereunder.
Schedule 7.1(r) sets forth as of the Closing Date the address of each parcel of
- ---------------
real property owned or leased by the Company or any Subsidiary hereof, and with
respect to all leasehold interest, a summary of the relevant lease terms.
(s) Liens. None of the properties and assets of the Company or any
-----
Subsidiary thereof is subject to any Lien, except Liens permitted pursuant to
Section 11.3. No financing statement under the Uniform Commercial Code of any
state which names the Company or any Subsidiary thereof or any of their
respective trade names or divisions as debtor and which has not been terminated,
has been filed in any state or other jurisdiction and neither the Company nor
53
<PAGE>
any Subsidiary thereof has signed any such financing statement or any security
agreement authorizing any secured party thereunder to file any such financing
statement, except to perfect those Liens permitted by Section 11.3 hereof.
(t) Debt and Guaranty Obligations. Schedule 7.1(t) is a complete and
----------------------------- ---------------
correct listing of all Debt and Guaranty Obligations of the Company and its
Subsidiaries as of the Closing Date in excess of $1,000,000. The Company and
its Subsidiaries have performed and are in material compliance with all of the
terms of such Debt and Guaranty Obligations and all instruments and agreements
relating thereto, and, to the Company's knowledge, no default or event of
default, or event or condition which with notice or lapse of time or both would
constitute such a default or event of default on the part of the Company or its
Subsidiaries exists with respect to any such Debt or Guaranty Obligation.
(u) Litigation. Except for matters existing on the Closing Date and set
----------
forth on Schedule 7.1(u), there are no actions, suits or proceedings pending
---------------
nor, to the knowledge of the Company, threatened against or in any other way
relating adversely to or affecting the Company or any Subsidiary thereof or any
of their respective properties in any court or before any arbitrator of any kind
or before or by any Governmental Authority that could, in the aggregate,
reasonably be expected to have a Material Adverse Effect.
(v) Absence of Defaults. No event has occurred or is continuing which
-------------------
constitutes a Default or an Event of Default, or which constitutes, or which
with the passage of time or giving of notice or both would constitute, a default
or event of default by the Company or any Subsidiary thereof under any Material
Contract or judgment, decree or order to which the Company or its Subsidiaries
is a party or by which the Company or its Subsidiaries or any of their
respective properties may be bound or which would require the Company or its
Subsidiaries to make any payment thereunder prior to the scheduled maturity date
therefor.
(w) Communications Regulatory Matters.
---------------------------------
(i) Each Network Agreement has been duly executed and delivered by
the respective parties thereto, is in full force and effect and neither the
Company, any Subsidiary thereof nor, to the best knowledge of the Company, any
of the other parties thereto, is in default of any of the provisions thereof in
any material respect.
(ii) Schedule 7.1(w) hereto sets forth, as of the date hereof, a true
---------------
and complete list of the following information for each Communications License
issued to the Company or any its Subsidiaries: (A) for all Communications
Licenses, the name of the licensee, the type of service and the expiration
dates; and (B) for each PUC Authorization only, the geographic area covered by
such PUC Authorization, the services that may be provided thereunder and the
expiration date, if any.
(iii) Neither the Company nor any Subsidiary is in material violation
of any Communications Law applicable thereto that could reasonably be expected
to have a Material Adverse Effect. The Communications Licenses specified on
Schedule 7.1(w) hereto are valid and in full force and effect without conditions
- ---------------
except for such conditions as are generally
54
<PAGE>
applicable to holders of such Communications Licenses and except as set forth on
such Schedule. No event has occurred and is continuing which could reasonably be
expected to (A) result in the imposition of a material forfeiture or the
revocation, termination or adverse modification of any such Communications
License or (B) materially and adversely affect any rights of the Company or any
of its Subsidiaries thereunder. The Company has no reason to believe and has no
knowledge that Communications Licenses will not be approved or renewed, as
applicable, in the ordinary course.
(iv) All of the Network Facilities and other material properties,
equipment and systems owned, leased or managed by the Company and its
Subsidiaries are, and (to the best knowledge of the Company) all such property,
equipment and systems to be acquired or added in connection with any
contemplated system expansion or construction will be, in good repair, working
order and condition (reasonable wear and tear excepted) and are and will be in
material compliance with all terms and conditions of the Communications Licenses
and all material standards or rules imposed by applicable Communications Law and
any Governmental Authority or as imposed under any agreements with telephone
companies and customers.
(v) The Company and each of its Subsidiaries have paid all material
franchise, license or other fees and charges which have become due pursuant to
any Governmental Approval in respect of their business and have made appropriate
provision as is required by GAAP for any such fees and charges which have
accrued.
(x) Accuracy and Completeness of Information. All written information,
----------------------------------------
reports and other papers and data produced by or on behalf of the Company or any
Subsidiary thereof and furnished to the Lenders were, at the time the same were
so furnished, complete and correct in all respects to the extent necessary to
give the recipient a true and accurate knowledge of the subject matter; provided
that all projection and financial forecasts shall represent the good faith
estimates of the Borrowers and senior management thereof as to the projected
results contained therein. No document furnished or written statement made to
the Administrative Agent or the Lenders by the Company or any Subsidiary thereof
in connection with the negotiation, preparation or execution of this Agreement
or any of the Loan Documents contains or will contain any untrue statement of a
fact material to the creditworthiness of the Company or its Subsidiaries or
omits or will omit to state a fact necessary in order to make the statements
contained therein not misleading in any material respect. The Company is not
aware of any facts which it has not disclosed in writing to the Administrative
Agent having a Material Adverse Effect, or insofar as the Company can now
foresee, could reasonably be expected to have a Material Adverse Effect.
(y) Year 2000 Compatibility. The Company and its Subsidiaries have taken
-----------------------
all actions reasonably necessary to assure that the Borrowers' computer based
systems are able to operate and effectively process data which includes dates on
and after January 1, 2000.
SECTION 7.2 Survival of Representations and Warranties, Etc. All and
-----------------------------------------------
warranties set forth in this Article VII and all representations and warranties
contained in any certificate, or any of the Loan Documents (including but not
limited to any such representation or warranty made in or in connection with any
amendment thereto) shall
55
<PAGE>
constitute representations and warranties made under this Agreement. All
representations and warranties made under this Agreement shall be made or deemed
to be made at and as of the Closing Date, shall survive the Closing Date and
shall not be waived by the execution and delivery of this Agreement, any
investigation made by or on behalf of the Lenders or any borrowing hereunder.
ARTICLE VIII
FINANCIAL INFORMATION AND NOTICES
---------------------------------
Until all the Obligations have been paid and satisfied in full and the
Commitments terminated, unless consent has been obtained in the manner set forth
in Section 15.11 hereof, the Company will furnish or cause to be furnished to
the Administrative Agent and to the Lenders at their respective addresses as set
forth on Schedule 1, or such other office as may be designated by the
----------
Administrative Agent and Lenders from time to time:
SECTION 8.1 Financial Statements and Projections.
------------------------------------
(a) Monthly Financial Statements. As soon as available but in any event
----------------------------
within 30 days after the end of each monthly accounting period in each fiscal
year: (i) unaudited and Consolidated and consolidating statements of income and
cash flows of the Company and its Subsidiaries for such monthly period and for
the period from the beginning of the fiscal year to the end of such month, and
unaudited balance sheets of the Company and its Subsidiaries as of the end of
such monthly period, setting forth in each case comparisons to the Company's
annual budget and the corresponding period in the preceding fiscal year. All
such statements shall be prepared in accordance with GAAP, consistently applied
(subject to the absence of footnote disclosures and to changes resulting from
normal year-end adjustments for recurring accruals), and shall be certified by a
Responsible Officer, and (ii) a status report prepared by a Responsible Officer,
reporting the number of access lines then maintained by the Company and its
Subsidiaries and indicating whether the Company has met its budgeted financial
goals (including, without limitation, those specified in any Approved Business
Plan or Approved Budget) discussing in reasonable detail the reasons for any
variation from such goals, and describing what actions the Company and its
Subsidiaries have taken and propose to take in order to meet budgeted financial
targets in the future.
(b) Quarterly Financial Statements. As soon as practicable and in any
------------------------------
event within forty-five (45) days after the end of each fiscal quarter of each
Fiscal Year, an unaudited Consolidated and consolidating balance sheet of the
Company and its Subsidiaries as of the close of such fiscal quarter and
unaudited Consolidated and consolidating statements of income, retained earnings
and cash flows for the fiscal quarter then ended and that portion of the Fiscal
Year then ended, all in reasonable detail setting forth in comparative form the
corresponding figures for the preceding Fiscal Year and prepared by the Company
in accordance with GAAP and, if applicable, containing disclosure of the effect
on the financial position or results of operations of any change in the
application of accounting principles and practices during the period, and
certified by a Responsible Officer to present fairly in all material respects
the financial condition of the Company and its Subsidiaries as of their
respective dates and the
56
<PAGE>
results of operations of the Company and its Subsidiaries for the respective
periods then ended, subject to normal year end adjustments.
(c) Annual Financial Statements. As soon as practicable and in any event
---------------------------
within ninety (90) days after the end of each Fiscal Year, an audited
Consolidated balance sheet of the Company and its Subsidiaries as of the close
of such Fiscal Year and audited Consolidated statements of income, retained
earnings and cash flows for the Fiscal Year then ended, including the notes
thereto, all in reasonable detail setting forth in comparative form the
corresponding figures for the preceding Fiscal Year and prepared by Arthur
Andersen LLP or other independent certified public accounting firm reasonably
acceptable to the Administrative Agent in accordance with GAAP and, if
applicable, containing disclosure of the effect on the financial position or
results of operation of any change in the application of accounting principles
and practices during the year, and accompanied by a report thereon by such
certified public accountants that is not qualified with respect to scope
limitations imposed by the Company or any of its Subsidiaries or with respect to
accounting principles followed by the Company or any of its Subsidiaries not in
accordance with GAAP.
(d) Budgets and Business Plans. As soon as practicable and in any event
--------------------------
within five (5) Business Days after its approval by the LLC, (i) each Approved
Business Plan and (ii) each Approved Budget, in each case accompanied by a
certificate from a Responsible Officer to the effect that, to the best of such
officer's knowledge, such projections are good faith estimates of the financial
condition and operations of the Company and its Subsidiaries for such period;
provided, that in the event that there is no Approved Budget for any given
- --------
Fiscal Year, an annual budget shall be provided no later than February 1 of such
Fiscal Year prepared on a monthly basis and displaying anticipated statements of
income and cash flows and balance sheets and budgeted Capital Expenditures in
form and substance satisfactory to the Required Lenders. The Borrowers and
Administrative Agent agree to convene semi-annually to review the Business Plans
in connection with the addition of new cities.
SECTION 8.2 Officer's Compliance Certificate. At each time financial
--------------------------------
statements are delivered pursuant to Sections 8.1(a) and 8.1(b) and at such
other times as the Administrative Agent shall reasonably request, a certificate
of a Responsible Officer or the treasurer of the Company including (a) for each
certificate a calculation of the Borrowing Base and a determination of the
number of Completed Cities and (b) for the quarterly certificate calculations
evidencing compliance with Article X hereof, which certificate shall be in the
form of Exhibit F attached hereto (an "Officer's Compliance Certificate") and in
---------
detail reasonably satisfactory to the Administrative Agent.
SECTION 8.3 Accountants' Certificate. At each time financial statements
------------------------
are delivered pursuant to Section 8.1(c), a certificate of the independent
public accountants certifying such financial statements addressed to the
Administrative Agent for the benefit of the Lenders:
(a) stating that in making the examination necessary for the certification
of such financial statements, they obtained no knowledge of any Default or Event
of Default or, if such is
57
<PAGE>
not the case, specifying such Default or Event of Default and its nature and
period of existence; and
(b) including the calculations prepared by such accountants required to
establish whether or not the Company and its Subsidiaries are in compliance with
the financial covenants set forth in Article X hereof as at the end of each
respective period.
SECTION 8.4 Other Reports.
-------------
(a) Promptly upon receipt thereof, copies of all reports, if any,
submitted to the Company, any Borrower or their respective board of directors by
its independent public accountants in connection with their auditing function,
including, without limitation, any management report and any management
responses thereto;
(b) Within ten (10) Business Days after the receipt by the Company or any
of its Subsidiaries of notice that any Communications License has been lost or
canceled, copies of any such notice accompanied by a report describing the
measures undertaken by the Company or any of its Subsidiaries to prevent such
loss or cancellation (and the anticipated impact, if any, that such loss or
cancellation will have upon the business of the Company and its Subsidiaries);
(c) Promptly but in any event within ten (10) Business Days after the
filing thereof, a copy of (i) each report or other filing made by the Company or
any of its Subsidiaries with the Securities and Exchange Commission and required
by the SEC to be delivered to the shareholders of the Company or any of its
Subsidiaries, (ii) each report made by the Company or any of its Subsidiaries to
the SEC on Form 8-K and (iii) each final registration statement of the Company
or any of its Subsidiaries filed with the SEC; and
(d) Such other information regarding the operations, business affairs and
financial condition of the Company, any Borrower or any of its Subsidiaries as
the Administrative Agent or any Lender may reasonably request.
SECTION 8.5 Notice of Litigation and Other Matters. Prompt (but in no
--------------------------------------
event later than five (5) days after an officer of the Company or any Borrower
obtains knowledge thereof) telephonic and written notice of:
(a) the commencement of all proceedings and investigations by or before
any Governmental Authority and all actions and proceedings in any court or
before any arbitrator against or involving the Company, any Borrower or any
Subsidiary thereof or any of their respective properties, assets or businesses
unless the action or proceeding could not reasonably be expected to result in a
liability of the Company or any Borrower in an amount greater than $1,000,000;
(b) any notice of any violation received by the Company, any Borrower or
any Subsidiary thereof from any Governmental Authority including, without
limitation, any notice of violation of Environmental Laws which in any such case
could reasonably be expected to have a Material Adverse Effect;
58
<PAGE>
(c) any labor controversy that has resulted in, or threatens to result in,
a strike or other work action against the Company, any Borrower or any
Subsidiary thereof;
(d) any attachment, judgment, lien, levy or order exceeding $1,000,000
that may be assessed against or threatened against the Company, any Borrower or
any Subsidiary thereof;
(e) (i) the execution of any Material Contract by the Company, any
Borrower or any Subsidiary, along with a copy thereof, (ii) any Default or Event
of Default, or any event which constitutes or which with the passage of time or
giving of notice or both would constitute a material default or material event
of default, or in any case a default in payment of any amounts due (after
expiration of applicable grace and cure periods), under any Material Contract to
which the Company, any Borrower or any of its Subsidiaries is a party or by
which the Company, any Borrower or any Subsidiary thereof or any of their
respective properties may be bound;
(f) (i) any unfavorable determination letter from the Internal Revenue
Service regarding the qualification of an Employee Benefit Plan under Section
401(a) of the Code (along with a copy thereof), (ii) all notices received by the
Company, any Borrower or any ERISA Affiliate of the PBGC's intent to terminate
any Pension Plan or to have a trustee appointed to administer any Pension Plan,
(iii) all notices received by the Company, any Borrower or any ERISA Affiliate
from a Multiemployer Plan sponsor concerning the imposition or amount of
withdrawal liability pursuant to Section 4202 of ERISA and (iv) the Company, any
Borrower obtaining knowledge or reason to know that the Company, any Borrower or
any ERISA Affiliate has filed or intends to file a notice of intent to terminate
any Pension Plan under a distress termination within the meaning of Section
4041(c) of ERISA;
(g) the enactment or promulgation after the date hereof of any federal,
state, provincial or local statute, regulation or ordinance or judicial or
administrative decision or order (or, to the extent that the Company or any
Borrower has knowledge thereof, any such proposed statute, regulation,
ordinance, decision or order, whether by the introduction of legislation or the
commencement of rulemaking or similar proceedings or otherwise) having a
material effect or relating to the operation of the Network Facilities by the
Company or any of its Subsidiaries (including, without limitation, any statutes,
decisions or orders affecting long distance telecommunication resellers
generally and not directed against the Company or any of its Subsidiaries
specifically) which have been issued or adopted (or which have been proposed)
and which could reasonably be expected to have a Material Adverse Effect; and
(h) any event which makes any of the representations set forth in Section
7.1 inaccurate in any respect.
SECTION 8.6 Accuracy of Information. All written information, reports,
-----------------------
statements and other papers and data furnished by or on behalf of the Company or
any Borrower to the Administrative Agent or any Lender whether pursuant to this
Article VIII or any other provision of this Agreement, or any of the Security
Documents, shall, at the time the same is so furnished comply with Section
7.1(x).
59
<PAGE>
ARTICLE IX
AFFIRMATIVE COVENANTS
---------------------
Until all of the Obligations have been paid and satisfied in full and the
Commitments terminated, unless consent has been obtained in the manner provided
for in Section 15.11, the Company will, and will cause each of its Subsidiaries
to:
SECTION 9.1 Preservation of Corporate Existence and Related Matters.
-------------------------------------------------------
Except as permitted by Section 11.5, (a) preserve and maintain its separate
corporate existence and (b) except where the failure to do so could not
reasonably be expected to have a Material Adverse Effect, preserve and maintain
all rights, franchises, licenses and privileges necessary to the conduct of its
business and qualify and remain qualified as a foreign corporation and
authorized to do business in each jurisdiction where the nature and scope of its
activities require it to so qualify under Applicable Law.
SECTION 9.2 Maintenance of Property. In addition to the requirements of
-----------------------
any of the Security Documents, protect and preserve all properties useful in and
material to its business, including copyrights, patents, trade names and
trademarks; maintain in good working order and condition all buildings,
equipment and other tangible real and personal property; and from time to time
make or cause to be made all renewals, replacements and additions to such
property necessary for the conduct of its business, so that the business carried
on in connection therewith may be properly and advantageously conducted at all
times in each case except where the failure of any of the foregoing to be
correct in all respects could not, in the aggregate, reasonably be expected to
have a Material Adverse Effect.
SECTION 9.3 Insurance. Maintain with insurance companies that have an
---------
A.M. Best rating of A:X or better, insurance against such risks and in such
minimum amounts as are set forth on Schedule 9.3 and any additional insurance
------------
customarily maintained by similar businesses and as may be required by
Applicable Law and the Security Documents, and on the Closing Date and from time
to time thereafter deliver to the Administrative Agent upon its request (a) a
detailed list of the insurance then in effect, stating the names of the
insurance companies, the amounts and rates of the insurance, the dates of the
expiration thereof and the properties and risks covered thereby and (b)
annually, a report from an independent insurance broker as to the insurance then
in effect.
SECTION 9.4 Accounting Methods and Financial Records. Maintain a system
----------------------------------------
of accounting, and keep such books, records and accounts (which shall be true
and complete in all material respects) as may be required or as may be necessary
to permit the preparation of financial statements in accordance with GAAP and in
compliance with the regulations of any Governmental Authority having
jurisdiction over it or any of its properties.
SECTION 9.5 Payment and Performance of Obligations. Pay and perform all
--------------------------------------
Obligations under this Agreement and the other Loan Documents, and pay or
perform (a) all taxes, assessments and other governmental charges that may be
levied or assessed upon it or any of its property, and (b) all other
indebtedness, obligations and liabilities in accordance with
60
<PAGE>
customary trade practices; provided, that the Company or such Subsidiary may
--------
contest any item described in clauses (a) or (b) of this Section 9.5 in good
faith so long as adequate reserves are maintained with respect thereto in
accordance with GAAP.
SECTION 9.6 Compliance With Laws and Approvals. Observe and remain in
----------------------------------
compliance with all material Applicable Laws and maintain in full force and
effect all material Governmental Approvals, in each case applicable to the
conduct of its business.
SECTION 9.7 Environmental Laws. In addition to and without limiting the
------------------
generality of Section 9.6, (a) comply with, and use reasonable efforts to ensure
such compliance by all tenants and subtenants with all applicable Environmental
Laws and obtain and comply with and maintain, and use reasonable efforts to
ensure that all tenants and subtenants obtain and comply with and maintain, any
and all licenses, approvals, notifications, registrations or permits required by
applicable Environmental Laws, (b) conduct and complete all investigations,
studies, sampling and testing, and all remedial, removal and other actions
required under Environmental Laws, and promptly comply with all lawful orders
and directives of any Governmental Authority regarding Environmental Laws, and
(c) defend, indemnify and hold harmless the Administrative Agent and the
Lenders, and their respective parents, Subsidiaries, Affiliates, employees,
agents, officers and directors, from and against any claims, demands, penalties,
fines, liabilities, settlements, damages, costs and expenses of whatever kind or
nature known or unknown, contingent or otherwise, arising out of, or in any way
relating to the violation of, noncompliance with or liability under any
Environmental Laws applicable to the operations of the Company or such
Subsidiary, or any orders, requirements or demands of Governmental Authorities
related thereto, including, without limitation, reasonable attorney's and
consultant's fees, investigation and laboratory fees, response costs, court
costs and litigation expenses, except to the extent that any of the foregoing
directly result from the gross negligence or willful misconduct of the party
seeking indemnification therefor.
SECTION 9.8 Compliance with ERISA. In addition to and without limiting
---------------------
the generality of Section 9.6, (a) comply with all applicable provisions of
ERISA and the regulations and published interpretations thereunder with respect
to all Employee Benefit Plans, (b) not take any action or fail to take action
the result of which could be a liability to the PBGC or to a Multiemployer Plan,
(c) not participate in any prohibited transaction that could result in any civil
penalty under ERISA or tax under the Code, (d) operate each Employee Benefit
Plan in such a manner that will not incur any tax liability under Section 4980B
of the Code or any liability to any qualified beneficiary as defined in Section
4980B of the Code and (e) furnish to the Administrative Agent upon the
Administrative Agent's request such additional information about any Employee
Benefit Plan as may be reasonably requested by the Administrative Agent.
SECTION 9.9 Compliance With Agreements. Comply in all respects with each
--------------------------
term, condition and provision of any Material Contract and, except where the
failure to so comply could not, in the aggregate, reasonably be expected to have
a Material Adverse Effect, with each term, condition and provision of all other
contracts and agreements entered into in the conduct of its business; provided,
--------
that the Company or such Subsidiary may contest any Material Contract or other
contract or agreement in good faith through applicable proceedings so long as
adequate reserves are maintained in accordance with GAAP.
61
<PAGE>
SECTION 9.10 Conduct of Business. Engage only in the provision of voice
-------------------
and data wireline telecommunications services and in lines of business directly
related thereto; provided, that such service and related business shall be
conducted solely by the Borrowers, and the Company shall act as a holding
company for the capital stock of the Borrowers and engage only in business
operations incidental thereto and incidental to the creation and capitalization
of the Borrowers and to making other investments therein.
SECTION 9.11 Visits and Inspections. Permit the Administrative Agent, or
----------------------
any Lender (or any consultant retained thereby), from time to time upon at least
2 Business Days, prior notice and at the Borrowers' expense, to visit and
inspect its properties; conduct periodic field audits and otherwise inspect,
audit and make extracts from its books, records and files, including, but not
limited to, management letters prepared by independent accountants; once during
each fiscal year of the Company (or, if a Default or an Event of Default shall
have occurred and for so long as it shall be continuing, at any time) conduct
periodic field audits; and discuss with its principal officers, and its
independent accountants, its business, assets, liabilities, financial condition,
results of operations and business prospects.
SECTION 9.12 Additional Subsidiaries and Collateral.
--------------------------------------
(a) (i) At such time as any Subsidiary of the Company is created or
acquired after the Closing Date, cause to be executed and delivered to the
Administrative Agent (A) a Joinder Agreement such that such Subsidiary shall
become a Borrower hereunder, a grantor under the Security Agreement and an
issuer under the Pledge Agreement (and, if applicable, the parent of such
Subsidiary shall become a pledgor under the Pledge Agreement), (B) subject to
clause (ii) below, such other applicable Security Documents in form and
substance reasonably satisfactory to the Administrative Agent such that the
assets of such Subsidiary shall become Collateral for the Obligations, (C)
favorable legal opinions addressed to the Administrative Agent and Lenders in
form and substance satisfactory thereto with respect to such supplements and
agreements and (D) such other documents and closing certificates as consistent
with Article VI as may be requested by the Administrative Agent and (ii) within
sixty (60) days after the joinder of such Subsidiary, a Mortgage for each parcel
of real property owned or leased thereby.
(b) Within sixty (60) days of the consummation by the Company or any
Subsidiary of any lease (including without limitation in connection with any
assignment or assumption of an existing lease to or by a new landlord) with
respect to real property at which any Switch or any material Telecommunications
Equipment is or is to be located, cause to be executed and delivered to the
Administrative Agent (i) a copy of the lease and all related documents, (ii) a
Mortgage with respect to such property, (iii) a landlord consent and, if
applicable, a mortgagee estoppel letter (and, in addition, within sixty (60)
days of any refinancing of any Mortgage with a new lender, an additional
mortgagee estoppel letter) with respect to such property, (iv) a legal
description of the premises, (v) any filings or recordings necessary to perfect
the security interests of the Lenders in all Collateral related to such
premises, (vi) UCC-1 Financing Statements in form and substance satisfactory to
the Administrative Agent with respect to such premises and (vii) favorable
opinions of counsel to the Company addressed to the Administrative Agent and the
Lenders in form and substance satisfactory thereto with respect to such security
62
<PAGE>
interests and each additional document, instrument or other item of information
reasonably requested by the Administrative Agent.
(c) In connection with the execution by the Company or any Subsidiary of
any Interconnection Agreement, use their reasonable best efforts to cause to be
executed and delivered to the Administrative Agent at the time such
Interconnection Agreement is entered into (or as soon as reasonably practicable
thereafter, or with respect to any such agreement that is in effect on the
Closing Date, as soon as reasonably practicable after such date), a consent
agreement regarding the Lien of the Administrative Agent in form and substance
reasonably satisfactory thereto and each additional document, instrument or
other item of information reasonably requested by the Administrative Agent.
(d) Promptly deliver from time to time such additional Security Documents
to the Administrative Agent upon the request of the Required Lenders with
respect to any assets of any such Person not subject to an existing Lien in
favor of the Administrative Agent for the ratable benefit of itself and the
Lenders.
SECTION 9.13 Year 2000 Compatibility. Take all actions reasonably
-----------------------
necessary to assure that the Borrowers' computer based systems are able to
operate and effectively process data which includes dates on and after January
1, 2000. At the request of the Administrative Agent or any Lender, the Borrowers
shall provide reasonable assurances satisfactory to the Administrative Agent of
the Borrowers' Year 2000 compatibility.
SECTION 9.14 Transfer of Capital Contributions. With respect to any
---------------------------------
equity contributions received by the Company by way of Sponsor Equity, Investor
Equity, Net Cash Proceeds from a Public Offering or Net Cash proceeds from any
issuance of Company Notes transfer the amount thereof to the Borrowers in the
form of capital contributions reasonably satisfactory to the Administrative
Agent and the Required Lenders.
SECTION 9.15 Hedging Agreements. Maintain during the term of the Credit
------------------
Facility (commencing on the date the Borrowers utilize fifty percent (50%) or
more of the Aggregate Commitment), a Hedging Agreement with minimum notional
amount at any date of determination equal to fifty percent (50%) of the
outstanding principal balance on the Loans at an interest rate and upon other
terms and conditions reasonably satisfactory to the Administrative Agent.
SECTION 9.16 Further Assurances. Make, execute and deliver all such
------------------
additional and further acts, things, deeds and instruments as the Administrative
Agent or any Lender may reasonably require to document and consummate the
transactions contemplated hereby and to vest completely in and insure the
Administrative Agent and the Lenders their respective rights under this
Agreement, the Notes, the Letters of Credit and the other Loan Documents.
SECTION 9.17 Use of Proceeds. The Borrowers shall use the proceeds of the
---------------
Extensions of Credit (a) to finance the purchase price of the AC Acquisition,
(b) to finance the direct cost of multiple Switches and other ancillary
Telecommunications Equipment and services comprising direct construction costs
and other related Capital Expenditures, in each case in the
63
<PAGE>
Permitted Markets and (c) for working capital and general corporate requirements
of the Borrowers, including the payment of certain fees and expenses incurred in
connection with the transactions.
ARTICLE X
FINANCIAL COVENANTS
-------------------
SECTION 10.1 Stage 1 Covenants. Until all of the Obligations have been
-----------------
paid and satisfied in full and the Commitments terminated, unless consent has
been obtained in the manner set forth in Section 15.11 hereof, during the Stage
1 Covenant Period the Borrowers on a Consolidated basis will not:
(a) Debt to Capital Ratio: As of any date of determination, (i) during the
---------------------
Level 1 Equity/Market EBITDA Period, permit the ratio of (A) Total Debt of the
Borrowers and their Subsidiaries on such date to (B) Contributed Capital on such
date (the "Total Debt/Contributed Capital Ratio") to be greater than 1.00 to
1.00 and (ii) during the Level 2 Equity/Market EBITDA Period, permit (A) the
ratio of (1) Total Debt of the Borrowers and their Subsidiaries on such date in
excess of $100,000,000 to (2) Contributed Capital on such date in excess of
$100,000,000 to be greater than 1.50 to 1.00 and (B) the Total Debt/Contributed
Capital Ratio on any such date to be greater than 1.15 to 1.00.
(b) Minimum Revenue: As of any fiscal quarter end during the applicable
---------------
period set forth below, permit Total Revenue for the fiscal quarter ending on
such date to be less than the corresponding amount set forth below:
----------------------------------------------------
Period Ending Minimum Revenue
----------------------------------------------------
12/31/99 $ 2,450,000
3/31/00 4,900,000
6/30/00 7,650,000
9/30/00 10,900,000
12/31/00 14,650,000
3/31/01 18,650,000
6/30/01 22,850,000
9/30/01 27,400,000
12/31/01 32,450,000
03/31/02 36,000,000
06/30/02 39,500,000
09/30/02 43,100,000
12/31/02 46,600,000
03/31/03 49,400,000
06/30/03 52,200,000
09/30/03 55,100,000
12/31/03 57,900,000
03/31/04 60,400,000
06/30/04 62,900,000
64
<PAGE>
09/30/04 65,500,000
12/31/04 68,000,000
03/31/05 70,300,000
06/30/05 72,600,000
09/30/05 74,900,000
12/31/05 77,200,000
03/31/06 79,200,000
06/30/06 81,200,000
09/30/06 83,200,000
12/31/06 85,200,000
03/31/07 86,800,000
06/30/07 88,400,000
09/30/07 90,100,000
12/31/07 91,700,000
----------------------------------------------------
(c) Maximum EBITDA Losses/Minimum EBITDA: As of any fiscal quarter end
------------------------------------
during the applicable period set forth below, permit (i) EBITDA losses for the
fiscal quarter ending on such date to exceed the corresponding negative amount
set forth below; provided, that for each fiscal quarter ending during 1999 and
--------
2000, either (A) the EBITDA losses for such fiscal quarter shall not exceed the
corresponding negative amount set forth below or (B) the cumulative EBITDA loss
from October 1, 1999 to such fiscal quarter end shall not exceed the cumulative
negative amounts set forth below for such period or (ii) permit EBITDA to be
less than the corresponding positive amount set forth below:
----------------------------------------------------
Period Max EBITDA Losses/
Min EBITDA
----------------------------------------------------
12/31/99 (9,700,000)
3/31/00 (11,000,000)
6/30/00 (13,750,000)
9/30/00 (11,000,000
12/31/00 (6,150,000)
3/31/01 (3,500,000)
6/30/01 (1,500,000)
9/30/01 1,000,000
12/31/01 3,500,000
03/31/02 6,300,000
06/30/02 8,000,000
09/30/02 9,800,000
12/31/02 11,500,000
03/31/03 12,900,000
06/30/03 14,400,000
09/30/03 15,900,000
12/31/03 17,400,000
03/31/04 18,500,000
06/30/04 19,600,000
09/30/04 20,700,000
65
<PAGE>
----------------------------------------------------
12/31/04 21,800,000
03/31/05 23,000,000
06/30/05 24,200,000
09/30/05 25,400,000
12/31/05 26,500,000
03/31/06 27,400,000
06/30/06 28,300,000
09/30/06 29,200,000
12/31/06 30,100,000
03/31/07 30,900,000
06/30/07 31,700,000
09/30/07 32,500,000
12/31/07 33,300,000
----------------------------------------------------
(d) Maximum Capital Expenditures: As of the end of any Fiscal Year, permit
----------------------------
Capital Expenditures for such Fiscal Year to exceed the corresponding amount set
forth below:
-------------------------------------------------
Fiscal Year Maximum Capital
Ending Expenditures
-------------------------------------------------
12/31/99 $56,000,000
12/31/00 61,000,000
12/31/01 26,000,000
12/31/02 38,000,000
12/31/03 32,500,000
12/31/04 26,500,000
12/31/05 22,500,000
12/31/06 20,000,000
12/31/07 17,500,000
-------------------------------------------------
; provided that if the Borrowers make Capital Expenditures in any Fiscal Year in
an amount less than the amount set forth above for such Fiscal Year (such unused
portion, the "Stage 1 Carryover Amount"), the Borrowers may make Capital
Expenditures in the immediately succeeding fiscal year in an amount not to
exceed the sum of (i) the amount set forth above for such fiscal year and (ii)
the Stage 1 Carryover Amount.
(e) Minimum Asset Coverage: As of any fiscal quarter end, permit the ratio
----------------------
of (i) PP&E of the Borrowers and their Subsidiaries as of such date to (ii) the
Total Debt thereof as of such date to be less than 1.0 to 1.0.
SECTION 10.2 Stage 2 Covenants. Until all of the Obligations have been
-----------------
paid and satisfied in full and the Commitments terminated, unless consent has
been obtained in the manner set forth in Section 15.11 hereof, during the Stage
2 Covenant Period the Borrowers on a Consolidated basis will not:
66
<PAGE>
(a) Borrower Leverage Ratio: As of any fiscal quarter end during the
-----------------------
applicable period set forth below, permit the Borrower Leverage Ratio to exceed
the corresponding ratio set forth below:
-------------------------------------------------
Period Ratio
-------------------------------------------------
Stage 2 Effective
Date through 6.00x
6/29/2003
6/30/2003 through 5.00x
12/30/2003
12/31/2003 through 4.00x
6/29/2004
6/30/2004 and 3.00x
thereafter
-------------------------------------------------
(b) Borrower Fixed Charge Coverage Ratio: As of any fiscal quarter end
------------------------------------
during the applicable period set forth below, permit the ratio of (i) EBITDA for
the six-month period ending on such fiscal quarter end times two (2) to (ii)
-----
Borrower Fixed Charges for the period of four (4) consecutive fiscal quarters
ending on such fiscal quarter end to be less than the corresponding ratio set
forth below:
-------------------------------------------------
Period Ratio
-------------------------------------------------
Stage 2 Effective
Date through
6/29/2003 N/A
6/30/2003 through 0.85x
12/30/2003
12/31/2003 and 1.10x
thereafter
-------------------------------------------------
(c) Interest Coverage Ratio: As of any fiscal quarter end during the
-----------------------
applicable period set forth below, permit the ratio of (i) EBITDA for the six-
month period ending on such fiscal quarter end to (ii) cash Interest Expense for
the six-month period ending on such fiscal quarter end, to be less than the
corresponding ratio set forth below:
-------------------------------------------------
Period Ratio
-------------------------------------------------
Stage 2 Effective
Date through
6/29/2003 1.50x
-------------------------------------------------
67
<PAGE>
-------------------------------------------------
6/30/2003 through
12/30/2003 1.75x
12/31/2003 and
thereafter 2.00x
-------------------------------------------------
(d) Maximum Capital Expenditures: As of the end of any Fiscal Year, permit
----------------------------
Capital Expenditures for such Fiscal Year to exceed the corresponding amount set
forth below:
-------------------------------------------------
Fiscal Year Maximum Capital
Ending Expenditures
-------------------------------------------------
12/31/99 $56,000,000
12/31/00 61,000,000
12/31/01 26,000,000
12/31/02 38,000,000
12/31/03 32,500,000
12/31/04 26,500,000
12/31/05 22,500,000
12/31/06 20,000,000
12/31/07 17,500,000
-------------------------------------------------
; provided that if the Borrowers make Capital Expenditures in any Fiscal Year in
an amount less than the amount set forth above for such fiscal year (such unused
portion, the "Stage 2 Carryover Amount"), the Borrowers may make Capital
Expenditures in the immediately succeeding Fiscal Year in an amount not to
exceed the sum of (i) the amount set forth above for such fiscal year and (ii)
the Stage 2 Carryover Amount.
SECTION 10.3 Guarantor Covenant. Until all of the Obligations have been
------------------
paid and satisfied in full and the Commitments terminated, unless consent has
been obtained in the manner set forth in Section 15.11 hereof, during the Stage
2 Covenant Period the Company on a Consolidated basis will not, as of any fiscal
quarter end during the applicable period set forth below, permit the Company
Leverage Ratio to be greater than the corresponding ratio set forth below:
-------------------------------------------------
Period Ratio
-------------------------------------------------
Stage 2 Effective
Date through
6/29/2003
10.00x
6/30/2003 through
12/30/2003 9.00x
12/31/2003 through
6/30/2004 8.00x
-------------------------------------------------
68
<PAGE>
-------------------------------------------------
6/29/2004 through
12/30/2004 7.00x
12/31/2004 and
thereafter 6.00x
-------------------------------------------------
ARTICLE XI
NEGATIVE COVENANTS
------------------
Until all of the Obligations have been paid and satisfied in full and the
Commitments terminated, unless consent has been obtained in the manner set forth
in Section 15.11 hereof, the Company shall not and shall not permit any of its
Subsidiaries to:
SECTION 11.1 Limitations on Debt. Create, incur, assume or suffer to
-------------------
exist any Debt except:
(a) the Obligations;
(b) Debt of the Borrowers incurred in connection with a Hedging Agreement
(i) required by Section 9.15 or (ii) otherwise executed to hedge against
interest rate fluctuation with a counterparty and upon terms and conditions
(including interest rate) reasonably satisfactory to the Administrative Agent;
(c) Debt arising under or in connection with publicly or privately placed
notes, debentures, bonds or debt securities or related indentures or other
agreements (including without limitation Debt convertible into capital stock of
the Company) with aggregate Net Cash Proceeds not to exceed $200,000,000, so
long as (i) no Default or Event of Default exists on the date any such Debt is
created or arises as a result of any borrowing thereunder, (ii) the provisions
of the documents evidencing such Debt are not materially more restrictive (as
reasonably determined by the Administrative Agent) than the covenants in the
Loan Documents, including without limitation any "change in control" provision,
(iii) such Debt provides for no scheduled payment of principal on or prior to
the date that is six (6) months after the eighth anniversary of the Closing
Date, (iv) such Debt is either (A) unsecured subordinated Debt issued by the
Company and the terms of such subordination are reasonably satisfactory to the
Administrative Agent and the Required Lenders (any such notes issued pursuant to
this Section 11.1(c)(iv)(A), the "Company Subordinated Notes") or (B) unsecured
Debt issued by the Company (any such notes issued pursuant to this Section
11.1(c)(iv)(B), the "Company Senior Notes") and (v) the documents and other
terms pursuant to which such Debt is issued are reasonably satisfactory to the
Administrative Agent and the Required Lenders;
(d) Debt existing on the Closing Date and not otherwise permitted under or
referred to in this Section 11.1, as set forth on Schedule 7.1(t), and the
---------------
renewal and refinancing (but not the increase of the aggregate principal amount)
thereof;
69
<PAGE>
(e) Debt of the Borrowers not to exceed $5,000,000 in the aggregate on any
date of determination which may be used for (i) Capital Leases, (ii) short-term
debt in the ordinary course of business, (iii) Subordinated Debt of a Borrower
issued to the Company that is non-transferable to any third party except in the
event of a merger or sale of such Borrower permitted by Section 11.5, (iv)
temporary overdrafts or (v) any other use previously approved in writing by the
Required Lenders; and
(f) Debt consisting of Guaranty Obligations permitted by Section 11.2;
provided, that none of the Debt permitted to be incurred by this Section 11.1
- --------
shall restrict, limit or otherwise encumber (by covenant or otherwise) the
ability of any Subsidiary of the Company to make any payment to the Company or
any Subsidiary thereof (in the form of dividends, intercompany advances or
otherwise) for the purpose of enabling the Borrowers to pay the Obligations and
the Company to pay the Guaranteed Obligations.
SECTION 11.2 Limitations on Guaranty Obligations. Create, incur, assume
-----------------------------------
or suffer to exist any Guaranty Obligations except:
(a) Guaranty Obligations in favor of the Administrative Agent for the
benefit of the Administrative Agent and the Lenders;
(b) Guaranty Obligations of the Borrowers with respect to the Company
Subordinated Notes as long as such Guaranty Obligations (i) are unsecured
subordinated Debt of the Borrowers and the terms of such subordination are
reasonably satisfactory to the Administrative Agent and the Required Lenders and
(ii) the documents and other terms pursuant to which such Guaranty Obligations
are entered into are reasonably satisfactory to the Administrative Agent and the
Required Lenders;
(c) Guaranty Obligations in an amount not to exceed $500,000 to secure
payment or performance of customer service contracts incurred in the ordinary
course of business;
(d) Guaranty Obligations of the Company with respect to any real or
personal property lease to which any Borrower is a party and entered into in the
ordinary course of business; provided, that no Default or Event of Default
--------
exists on the date any such Guaranty Obligation is created, incurred or assumed
or arises as a result thereof and provided further, that upon entering into any
----------------
such Guaranty Obligation with respect to any lease subject to Section 9.12, the
Borrowers shall be in compliance with Section 9.12 with respect to such lease;
(e) Guaranty Obligations of the Company of any Debt of the Borrowers which
is permitted by Section 11.1(e); and
(f) Guaranty Obligations of the Company and its Subsidiaries which consist
of customary indemnification and purchase price adjustment obligations incurred
in connection with the purchase of assets or capital stock in each case
permitted hereunder; and
70
<PAGE>
SECTION 11.3 Limitations on Liens. Create, incur, assume or suffer to
--------------------
exist, any Lien on or with respect to any of its assets or properties (including
without limitation shares of capital stock or other ownership interests), real
or personal, whether now owned or hereafter acquired, except:
(a) Liens for taxes, assessments and other governmental charges or levies
(excluding any Lien imposed pursuant to any of the provisions of ERISA or
Environmental Laws) not yet due or as to which the period of grace (not to
exceed thirty (30) days), if any, related thereto has not expired or which are
being contested in good faith and by appropriate proceedings if adequate
reserves are maintained to the extent required by GAAP;
(b) the claims of materialmen, mechanics, carriers, warehousemen,
processors or landlords for labor, materials, supplies or rentals incurred in
the ordinary course of business, (i) which are not overdue for a period of more
than thirty (30) days or (ii) which are being contested in good faith and by
appropriate proceedings;
(c) Liens consisting of deposits or pledges made in the ordinary course of
business in connection with, or to secure payment of, obligations under workers'
compensation, unemployment insurance or similar legislation or obligations (not
to exceed $500,000) under customer service contracts;
(d) Liens constituting encumbrances in the nature of zoning restrictions,
easements and rights or restrictions of record on the use of real property,
which in the aggregate are not substantial in amount and which do not, in any
case, materially detract from the value of such property or impair the use
thereof in the ordinary conduct of business;
(e) Liens of the Administrative Agent for the benefit of the
Administrative Agent and the Lenders;
(f) Liens created under the Lucent Agreement and any other Liens not
otherwise permitted by or referred to in this Section 11.3 and in existence on
the Closing Date, in each case as described on Schedule 11.3;
-------------
(g) Liens evidencing the interest of lessors under Capital Leases
permitted by Section 11.1(e) and Liens securing any purchase money Debt
permitted under Section 11.1(e); provided, that with respect to any such
--------
purchase money Liens, (i) such Liens shall be created substantially
simultaneously with the acquisition of the related asset, (ii) such Liens do not
at any time encumber any property other than the property financed by such Debt,
(iii) the amount of Debt secured thereby is not increased and (iv) the principal
amount of Debt secured by any such Lien shall at no time exceed one hundred
percent (100%) of the original purchase price of such property at the time it
was acquired; and
(h) Liens against any account consisting of a portion of the Net Cash
Proceeds of Company Notes escrowed or set aside in a restricted account for the
purpose of paying interest accrued on such Company Notes which Liens are granted
for the benefit of holders of such notes.
71
<PAGE>
SECTION 11.4 Limitations on Loans, Advances, Investments and Acquisitions.
------------------------------------------------------------
Purchase, own, invest in or otherwise acquire, directly or indirectly, any
capital stock, interests in any partnership or joint venture (including without
limitation the creation or capitalization of any Subsidiary), evidence of Debt
or other obligation or security, substantially all or a substantial portion of
the business or assets of any other Person or any other investment or interest
whatsoever in any other Person, or make or permit to exist, directly or
indirectly, any loans, advances or extensions of credit to, or any investment in
cash or by delivery of property in, any Person except:
(a) existing loans, advances and investments not otherwise permitted by
this Section 11.4 described on Schedule 11.4;
-------------
(b) investments by any Borrower in (i) marketable direct obligations
issued or unconditionally guaranteed by the United States or any agency thereof
maturing within 120 days from the date of acquisition thereof, (ii) commercial
paper maturing no more than 120 days from the date of creation thereof and
currently having the highest rating obtainable from either Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc. or Moody's
Investors Service, Inc., (iii) certificates of deposit maturing no more than 120
days from the date of creation thereof issued by commercial banks incorporated
under the laws of the United States, each having combined capital, surplus and
undivided profits of not less than $500,000,000 and having a rating of "A" or
better by a nationally recognized rating agency; provided, that the aggregate
--------
amount invested in such certificates of deposit shall not at any time exceed
$5,000,000 for any one such certificate of deposit and $10,000,000 for any one
such bank, or (iv) time deposits maturing no more than 30 days from the date of
creation thereof with commercial banks or savings banks or savings and loan
associations each having membership either in the FDIC or the deposits of which
are insured by the FDIC and in amounts not exceeding the maximum amounts of
insurance thereunder (any such investment referred to in this Section 11.4(b), a
"Cash Equivalent");
(c) investments by the Borrowers or any Subsidiary thereof in the form of
acquisitions of all or substantially all of the business or a line of business
(whether by the acquisition of capital stock, assets or any combination thereof)
of any other Person if such acquisition has been previously approved in writing
by the Required Lenders; provided that (i) if the aggregate consideration
(including cash, debt, capital stock and any earn-out) for any such acquisition
does not exceed $5,000,000, then no such consent shall be required so long as no
Default or Event of Default shall be in existence or would occur after giving
effect thereto and (ii) subject to compliance with the other applicable
provisions of the Loan Documents, no such approval shall be required with
respect to the AC Acquisition;
(d) any investment by the Company in any Borrower or by any Borrower in
another Borrower or any loan by a Borrower to the Company permitted by Section
11.1(e)(iii);
(e) loans and advances to directors, officers and employees of the Company
and its Subsidiaries in the ordinary course of business (provided that the
aggregate outstanding amount of all investments under this clause (e) shall not
exceed $500,000 at any one time); and
72
<PAGE>
(f) any investment consisting of the funds deposited in any escrow account
or restricted account (and interest thereon) permitted by Section 11.3(h).
SECTION 11.5 Limitations on Mergers and Liquidation. Merge, consolidate or
--------------------------------------
enter into any similar combination with any other Person or liquidate, wind-up
or dissolve itself (or suffer any liquidation or dissolution) except:
(a) any Wholly-Owned Subsidiary of the Company may merge with any other
Wholly-Owned Subsidiary of the Company;
(b) any Wholly-Owned Subsidiary may merge into the Person such Wholly-
Owned Subsidiary was formed to acquire in connection with an acquisition
permitted by Section 11.4(c); and
(c) any Wholly-Owned Subsidiary of any Borrower may wind-up into such
Borrower or any other Wholly-Owned Subsidiary of such Borrower.
SECTION 11.6 Limitations on Sale of Assets. Convey, sell, lease, assign,
-----------------------------
transfer or otherwise dispose of any of its property, business or assets
(including, without limitation, the sale of any receivables and leasehold
interests and any sale-leaseback or similar transaction), whether now owned or
hereafter acquired except:
(a) the sale or lease by any Borrower in the ordinary course of business
of any portion of the Network Facility not then in use by such Borrower and not
contemplated to be used thereby;
(b) the sale by any Borrower of assets no longer used or usable in the
business of the Borrowers or any of their Subsidiaries;
(c) the transfer of assets to any Borrower or any Wholly-Owned Subsidiary
of any Borrower pursuant to Section 11.5(c);
(d) the sale or discount without recourse by any Borrower of accounts
receivable arising in the ordinary course of business in connection with the
compromise or collection thereof; and
(e) any asset sale not referenced above under Section 11.6 as long as such
sale is in the ordinary course of business and the Net Cash Proceeds thereof
are, if applicable, applied in accordance with Section 4.4 and/or Section 2.6,
as applicable; provided that the aggregate Net Cash Proceeds from such sales
--------
shall not exceed $6,000,000 during any period of four consecutive fiscal
quarters.
SECTION 11.7 Limitations on Dividends and Distributions. Declare or pay
------------------------------------------
any dividends upon any of its capital stock or other equity interests; purchase,
redeem, retire or otherwise acquire, directly or indirectly, any shares of its
capital stock or other equity interests;
73
<PAGE>
return capital of the Borrowers to the Company or of the Company to the LLC; or
make any distribution of cash, property or assets among the holders of shares of
its capital stock or make other payments or distributions to any Affiliate of
the Company or any of its Subsidiaries; provided, that, if no Default or Event
--------
of Default has occurred and is continuing nor would occur as a result of the
following action the Borrowers may:
(a) make payments to Affiliates of fees or compensation for services which
are in the nature of management, corporate overhead or administrative services
to the extent such payments are reflected in the then effective Approved Budget
or Approved Business Plan and do not exceed arms'-length pricing;
(b) pay cash dividends to the Company on each interest payment date with
respect to the Company Notes in an amount equal to the interest payment payable
on such date; provided, that each such dividend shall be used by the Company for
--------
payment of interest with respect to the Company Notes; and
(c) the Company may pay dividends in shares of its capital stock in order
to give effect to Section 4.01 of the LLC Agreement in connection with the
dissolution of the LLC as a result of a Public Offering by the Company or sale
of the Company referred to in Sections 12.01(b) or (c) of the LLC Agreement.
SECTION 11.8 Limitations on Exchange and Issuance of Capital Stock. Issue,
-----------------------------------------------------
sell or otherwise dispose of any class or series of capital stock that, by its
terms or by the terms of any security into which it is convertible or
exchangeable, is, or upon the happening of an event or passage of time would be,
(a) convertible or exchangeable into Debt or (b) required to be redeemed or
repurchased, including at the option of the holder, in whole or in part, or has,
or upon the happening of an event or passage of time would have, a redemption or
similar payment due, in each such case before the date that is six (6) months
after the Term Loan Maturity Date.
SECTION 11.9 Transactions with Affiliates. Directly or indirectly (a) make
----------------------------
any loan or advance to, or purchase or assume any note or other obligation to or
from, any of its officers, directors, shareholders or other Affiliates, or to or
from any member of the immediate family of any of its officers, directors,
shareholders or other Affiliates, or subcontract any operations to any of its
Affiliates (other than as disclosed on Schedule 11.4 and other than advances to
-------------
employees of the Company or any of its Subsidiaries for travel expenses in the
ordinary course of business not to exceed $100,000 in the aggregate at any time)
or (b) enter into, or be a party to, any other transaction with any of its
Affiliates (other than transactions expressly contemplated by the Equity
Documents), except, in each case, pursuant to the reasonable requirements of its
business and upon fair and reasonable terms that are fully disclosed to and, if
the aggregate payments thereunder are likely to exceed $250,000 in any fiscal
year, approved in writing by the Required Lenders prior to the consummation
thereof and are no less favorable to it than it would obtain in a comparable
arm's length transaction with a Person not its Affiliate.
SECTION 11.10 Certain Accounting Changes. Change its Fiscal Year end, or
--------------------------
make any change in its accounting treatment and reporting practices except as
required by GAAP.
74
<PAGE>
SECTION 11.11 Amendments; Payments and Prepayments of Subordinated Debt.
---------------------------------------------------------
Amend or modify (or permit the modification or amendment of) any of the terms or
provisions of any Subordinated Debt or any Company Senior Notes, or cancel or
forgive, make any voluntary or optional payment or prepayment on, or redeem or
acquire for value (including without limitation by way of depositing with any
trustee with respect thereto money or securities before due for the purpose of
paying when due) any Subordinated Debt or the Company Senior Notes.
SECTION 11.12 Charter Documents. Amend or modify the LLC Agreement,
-----------------
Transaction Agreement or certificate of incorporation of the Company or any
Borrower (the "Organization Documents"), including, without limitation, the
replacement of the Organization Documents in connection with an IPO Dissolution
(the "Replacement Organization Documents") or amend or modify the Replacement
Organization Documents in each case, in any respect that could reasonably be
expected to materially adversely effect the Lenders (as reasonably determined by
the Administrative Agent).
SECTION 11.13 Restrictive Agreements. Enter into any Debt which contains
----------------------
any negative pledge on assets or which restricts, limits or otherwise encumbers
its ability to incur Liens on or with respect to any of its assets or properties
other than the assets or properties securing such Debt, in each such case other
than such restrictions, limitations or encumbrances imposed by any agreement or
instrument evidencing the Company Notes, or enter into any Debt which contains
any covenants more restrictive than the provisions of Articles IX, X and XI
hereof,.
ARTICLE XII
DEFAULT AND REMEDIES
--------------------
SECTION 12.1 Events of Default. Each of the following shall constitute an
-----------------
Event of Default, whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment or order of any court or any order, rule or regulation of any
Governmental Authority or otherwise:
(a) Default in Payment of Principal of Loans and Reimbursement
----------------------------------------------------------
Obligations. The Borrowers shall default in any payment of principal of any
- -----------
Loan, Note or Reimbursement Obligation when and as due (whether at maturity, by
reason of acceleration or otherwise).
(b) Other Payment Default. The Borrowers shall default in the payment when
---------------------
and as due (whether at maturity, by reason of acceleration or otherwise) of
interest on any Loan, Note or Reimbursement Obligation or the payment of any
other Obligation, and such default shall continue unremedied for three (3)
Business Days.
(c) Misrepresentation. Any representation or warranty made or deemed to be
-----------------
made by the Company or any of its Subsidiaries under this Agreement, any Loan
Document or any amendment hereto or thereto, shall at any time prove to have
been incorrect or misleading in any material respect when made or deemed made.
75
<PAGE>
(d) Default in Performance of Certain Covenants. The Company or Borrowers,
-------------------------------------------
as applicable, shall default in the performance or observance of any covenant or
agreement contained in Section 8.5(e) or Articles X or XI of this Agreement and
such default shall continue unremedied for three (3) Business Days.
(e) Default in Performance of Other Covenants and Conditions. The Company
--------------------------------------------------------
or any Subsidiary thereof shall default in the performance or observance of any
term, covenant, condition or agreement contained in this Agreement (other than
as specifically provided for otherwise in this Section 12.1) or any other Loan
Document and such default shall continue for a period of thirty (30) days after
written notice thereof has been given to the Company by the Administrative
Agent.
(f) Hedging Agreement. Any termination payment shall be due by a Borrower
-----------------
under any Hedging Agreement and such amount is not paid within thirty (30)
Business Days of the due date thereof.
(g) Debt Cross-Default. The Company or any of its Subsidiaries shall (i)
------------------
default in the payment of any Debt (other than the Notes or any Reimbursement
Obligation) the aggregate outstanding amount of which Debt is in excess of
$1,000,000 beyond the period of grace if any, provided in the instrument or
agreement under which such Debt was created, or (ii) default in the observance
or performance of any other agreement or condition relating to any Debt (other
than the Notes or any Reimbursement Obligation) the aggregate outstanding amount
of which Debt is in excess of $1,000,000 or contained in any instrument or
agreement evidencing, securing or relating thereto or any other event shall
occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders of such Debt (or a
trustee or agent on behalf of such holder or holders) to cause, with the giving
of notice if required, any such Debt to become due prior to its stated maturity
(any applicable grace period having expired).
(h) Other Cross-Defaults. The Company or any of its Subsidiaries shall
--------------------
default in the payment when due, or in the performance or observance, of any
obligation or condition of any Material Contract unless, but only as long as,
the existence of any such default is being contested by the Company or such
Subsidiary in good faith by appropriate proceedings and adequate reserves in
respect thereof have been established on the books of the Company or such
Subsidiary to the extent required by GAAP and, with respect to contracts
described in clause (a) of the definition of Material Contracts, such default
could not reasonably be expected to have a Material Adverse Effect.
(i) Change in Control. (a) MSCP together with the Management Members (as
-----------------
defined in the Transaction Agreement) shall cease to own or control (i) fifty-
one percent (51%) of the Outstanding Voting Units (as defined in the Transaction
Agreement) of the LLC or other successor entity to the LLC upon the dissolution
of the LLC pursuant to the LLC Agreement upon a Public Offering by the Company
(such dissolution, an "IPO Dissolution") or (ii) fifty-one percent (51%) of the
common stock or other voting securities of the Company or the majority of the
board of representatives of the LLC (or the Company or other successor entity to
the LLC in
76
<PAGE>
the event of an IPO Dissolution) shall be different from that on the Closing
Date or (b) any person or group of persons (within the meaning of Section 13(d)
of the Securities Exchange Act of 1934, as amended) other than MSCP or the
Management Members shall obtain ownership or control in one or more series of
transactions of more than twenty-five percent (25%) of the Outstanding Voting
Units (as so defined) or common stock or other voting securities or control of
the board of representatives of the LLC (or the Company or other successor
entity to the LLC in the event of an IPO Dissolution) or (c) Steve Dubnik shall
cease to be Chief Executive Officer of the Company and a replacement
satisfactory to the Required Lenders shall not have been hired within one
hundred eighty (180) days or (d) the Company shall no longer be a Wholly-Owned
Subsidiary of the LLC (except in the case of an IPO Dissolution) or, except as
otherwise permitted herein, any Borrower shall no longer be a Wholly-Owned
Subsidiary of the Company or any such Person shall be party to any agreement
which contemplates that it shall not be such a Wholly-Owned Subsidiary or (e)
there shall have occurred any event requiring dissolution of the LLC under
Section 12.01 of the LLC Agreement as in effect on the Closing Date (except for
Section 12.01(b), regarding the consummation of a Public Offering, as defined in
the Transaction Agreement) or (f) the members of the board of directors of the
LLC shall differ in any respect from the members of the board of directors of
the Company (prior to any IPO Dissolution) or (g) there shall have occurred
under any indenture or other instrument evidencing any Debt in excess of
$1,000,000 any "change in control" (as defined in such indenture or other
evidence of Debt) obligating the Borrowers to repurchase, redeem or repay all or
any part of the Debt or capital stock provided for therein (any such event, a
"Change in Control").
(j) Voluntary Bankruptcy Proceeding. The Company or any Subsidiary thereof
-------------------------------
shall (i) commence a voluntary case under the federal bankruptcy laws (as now or
hereafter in effect), (ii) file a petition seeking to take advantage of any
other laws, domestic or foreign, relating to bankruptcy, insolvency,
reorganization, winding up or composition for adjustment of debts, (iii) consent
to or fail to contest in a timely and appropriate manner any petition filed
against it in an involuntary case under such bankruptcy laws or other laws, (iv)
apply for or consent to, or fail to contest in a timely and appropriate manner,
the appointment of, or the taking of possession by, a receiver, custodian,
trustee, or liquidator of itself or of a substantial part of its property,
domestic or foreign, (v) admit in writing its inability to pay its debts as they
become due, (vi) make a general assignment for the benefit of creditors, or
(vii) take any corporate action for the purpose of authorizing any of the
foregoing.
(k) Involuntary Bankruptcy Proceeding. A case or other proceeding shall be
---------------------------------
commenced against the Company or any Subsidiary thereof in any court of
competent jurisdiction seeking (i) relief under the federal bankruptcy laws (as
now or hereafter in effect) or under any other laws, domestic or foreign,
relating to bankruptcy, insolvency, reorganization, winding up or adjustment of
debts, or (ii) the appointment of a trustee, receiver, custodian, liquidator or
the like for the Company or any Subsidiary thereof or for all or any substantial
part of their respective assets, domestic or foreign, and such case or
proceeding shall continue without dismissal or stay for a period of sixty (60)
consecutive days, or an order granting the relief requested in such case or
proceeding (including, but not limited to, an order for relief under such
federal bankruptcy laws) shall be entered.
77
<PAGE>
(l) Failure of Agreements. Any provision of this Agreement or of any other
---------------------
Loan Document shall for any reason cease to be valid and binding on the Company
or Subsidiary party thereto or any such Person shall so state in writing, or
this Agreement or any other Loan Document shall for any reason cease to create a
valid and perfected first priority Lien on, or security interest in, any of the
collateral purported to be covered thereby, in each case other than in
accordance with the express terms hereof or thereof and excluding any such
collateral with a fair market value of less than $500,000 in the aggregate.
(m) Termination Event. The occurrence of any of the following events: (i)
-----------------
the Company or any ERISA Affiliate fails to make full payment when due of all
amounts which, under the provisions of any Pension Plan or Section 412 of the
Code, the Company or any ERISA Affiliate is required to pay as contributions
thereto, (ii) an accumulated funding deficiency in excess of $500,000 occurs or
exists, whether or not waived, with respect to any Pension Plan, (iii) a
Termination Event or (iv) the Company or any ERISA Affiliate as employers under
one or more Multiemployer Plan makes a complete or partial withdrawal from any
such Multiemployer Plan and the plan sponsor of such Multiemployer Plans
notifies such withdrawing employer that such employer has incurred a withdrawal
liability requiring payments in an amount exceeding $1,000,000.
(n) Judgment. A judgment or order for the payment of money which causes
--------
the aggregate amount of all such judgments which are not covered by insurance to
exceed $1,000,000 in any Fiscal Year shall be entered against the Company or any
of its Subsidiaries by any court and such judgment or order shall continue
without discharge or stay for a period of thirty (30) days.
(o) Loss of License. Any Communications License of the Company or any
---------------
Subsidiary thereof shall expire, terminate, be canceled or otherwise lost or any
application therefor be rejected, which event could reasonably be expected to
have a Material Adverse Effect.
(p) Equity Documents. (i) Failure of any member of the LLC to make any
----------------
contribution required pursuant to any Capital Call Notice (as defined in the LLC
Agreement) received thereby pursuant to the LLC Agreement (unless such
contribution shall have been made by other members) or failure of the LLC to
make any capital contribution in the Company required or contemplated by any
Approved Business Plan or Approved Budget (or any provision in the applicable
Equity Document relating to any such contribution shall for any reason cease to
be valid and binding on any party thereto and such party shall so state in
writing, in each case other than as expressly permitted pursuant to the express
terms hereof or thereof), or (ii) any default or event of default shall occur
under the LLC Agreement or the Transaction Agreement which default or event of
default shall continue unremedied for a period of thirty (30) days after written
notice thereof has been given to the Company by the Administrative Agent.
SECTION 12.2 Remedies. Upon the occurrence of an Event of Default, with
--------
the consent of the Required Lenders, the Administrative Agent may, or upon the
request of the Required Lenders, the Administrative Agent shall, by notice to
any Borrower:
78
<PAGE>
(a) Acceleration; Termination of Credit Facility. Declare the principal of
--------------------------------------------
and interest on the Loans, the Notes and the Reimbursement Obligations at the
time outstanding, and all other amounts owed to the Lenders and to the
Administrative Agent under this Agreement or any of the other Loan Documents
(other than any Hedging Agreement) (including, without limitation, all L/C
Obligations, whether or not the beneficiaries of the then outstanding Letters of
Credit shall have presented the documents required thereunder) and all other
Obligations (other than obligations owing under any Hedging Agreement), to be
forthwith due and payable, whereupon the same shall immediately become due and
payable without presentment, demand, protest or other notice of any kind, all of
which are expressly waived, anything in this Agreement or the other Loan
Documents to the contrary notwithstanding, and terminate the Credit Facility and
any right of the Borrowers to request borrowings or Letters of Credit
thereunder; provided, that upon the occurrence of an Event of Default specified
--------
in Section 12.1(j) or (k), the Credit Facility shall be automatically terminated
and all Obligations (other than obligations owing under any Hedging Agreement)
shall automatically become due and payable.
(b) Letters of Credit. With respect to all Letters of Credit with respect
-----------------
to which presentment for honor shall not have occurred at the time of an
acceleration pursuant to the preceding paragraph, require the Borrowers at such
time to deposit in a cash collateral account opened by the Administrative Agent
an amount equal to the aggregate then undrawn and unexpired amount of such
Letters of Credit. Amounts held in such cash collateral account shall be applied
by the Administrative Agent to the payment of drafts drawn under such Letters of
Credit, and the unused portion thereof after all such Letters of Credit shall
have expired or been fully drawn upon, if any, shall be applied to repay the
other Obligations. After all such Letters of Credit shall have expired or been
fully drawn upon, the Reimbursement Obligation shall have been satisfied and all
other Obligations shall have been paid in full, the balance, if any, in such
cash collateral account shall be returned to the Borrowers.
(c) Rights of Collection. Exercise on behalf of the Lenders all of its
--------------------
other rights and remedies under this Agreement, the other Loan Documents and
Applicable Law, in order to satisfy all of the Obligations. In connection
therewith, the Company and its Subsidiaries hereby consent to the appointment of
a trustee, receiver, custodian, liquidator or the like for the Company or any
Subsidiary thereof or for all or any substantial part of their respective
assets.
SECTION 12.3 Rights and Remedies Cumulative; Non-Waiver; etc. The
-----------------------------------------------
enumeration of the rights and remedies of the Administrative Agent and the
Lenders set forth in this Agreement is not intended to be exhaustive and the
exercise by the Administrative Agent and the Lenders of any right or remedy
shall not preclude the exercise of any other rights or remedies, all of which
shall be cumulative, and shall be in addition to any other right or remedy given
hereunder or under the Loan Documents or that may now or hereafter exist in law
or in equity or by suit or otherwise. No delay or failure to take action on the
part of the Administrative Agent or any Lender in exercising any right, power or
privilege shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, power or privilege preclude other or further
exercise thereof or the exercise of any other right, power or privilege or shall
be construed to be a waiver of any Event of Default. No course of dealing
between the Company, any Borrower, the Administrative Agent and the Lenders or
their respective agents or
79
<PAGE>
employees shall be effective to change, modify or discharge any provision of
this Agreement or any of the other Loan Documents or to constitute a waiver of
any Event of Default.
ARTICLE XIII
THE ADMINISTRATIVE AGENT
------------------------
SECTION 13.1 Appointment. Each of the Lenders hereby irrevocably
-----------
designates and appoints First Union as Administrative Agent of such Lender under
this Agreement and the other Loan Documents for the term hereof and each such
Lender irrevocably authorizes First Union as Administrative Agent for such
Lender, to take such action on its behalf under the provisions of this Agreement
and the other Loan Documents and to exercise such powers and perform such duties
as are expressly delegated to the Administrative Agent by the terms of this
Agreement and such other Loan Documents, together with such other powers as are
reasonably incidental thereto. Notwithstanding any provision to the contrary
elsewhere in this Agreement or such other Loan Documents, the Administrative
Agent shall not have any duties or responsibilities, except those expressly set
forth herein and therein, or any fiduciary relationship with any Lender, and no
implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or the other Loan Documents or
otherwise exist against the Administrative Agent. Any reference to the
Administrative Agent in this Article XIII shall be deemed to refer to the
Administrative Agent solely in its capacity as Administrative Agent and not in
its capacity as a Lender.
SECTION 13.2 Delegation of Duties. (a) The Administrative Agent may
--------------------
execute any of its respective duties under this Agreement and the other Loan
Documents by or through agents or attorneys-in-fact and shall be entitled to
advice of counsel concerning all matters pertaining to such duties. The
Administrative Agent shall not be responsible for the negligence or misconduct
of any agents or attorneys-in-fact selected by the Administrative Agent with
reasonable care.
(b) First Union may delegate any or all of its powers and duties as
Administrative Agent hereunder and under the other Loan Documents to First Union
National Bank as agreed to by such Persons.
SECTION 13.3 Exculpatory Provisions. Neither the Administrative Agent nor
----------------------
any of its officers, directors, employees, agents, attorneys-in-fact,
Subsidiaries or Affiliates shall be (a) liable for any action lawfully taken or
omitted to be taken by it or such Person under or in connection with this
Agreement or the other Loan Documents (except for actions occasioned solely by
its or such Person's own gross negligence or willful misconduct), or (b)
responsible in any manner to any of the Lenders for any recitals, statements,
representations or warranties made by the Company or its Subsidiaries or any
officer thereof contained in this Agreement or the other Loan Documents or in
any certificate, report, statement or other document referred to or provided for
in, or received by the Administrative Agent under or in connection with, this
Agreement or the other Loan Documents or for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement or the other Loan
Documents or for any failure of the Company or any Subsidiary thereof to perform
its obligations hereunder or thereunder. The
80
<PAGE>
Administrative Agent shall not be under any obligation to any Lender to
ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement, or to inspect the
properties, books or records of the Company or any of its Subsidiaries.
SECTION 13.4 Reliance by the Administrative Agent. The Administrative
------------------------------------
Agent shall be entitled to rely, and shall be fully protected in relying, upon
any note, writing, resolution, notice, consent, certificate, affidavit, letter,
cablegram, telegram, telecopy, telex or teletype message, statement, order or
other document or conversation believed by it to be genuine and correct and to
have been signed, sent or made by the proper Person or Persons and upon advice
and statements of legal counsel (including, without limitation, counsel to the
Company and the Borrowers), independent accountants and other experts selected
by the Administrative Agent. The Administrative Agent may deem and treat the
payee of any Note as the owner thereof for all purposes unless such Note shall
have been transferred in accordance with Section 15.10 hereof. The
Administrative Agent shall be fully justified in failing or refusing to take any
action under this Agreement and the other Loan Documents unless it shall first
receive such advice or concurrence of the Required Lenders (or, when expressly
required hereby or by the relevant other Loan Document, all the Lenders) as it
deems appropriate or it shall first be indemnified to its satisfaction by the
Lenders against any and all liability and expense which may be incurred by it by
reason of taking or continuing to take any such action except for its own gross
negligence or willful misconduct. The Administrative Agent shall in all cases be
fully protected in acting, or in refraining from acting, under this Agreement
and the Notes in accordance with a request of the Required Lenders (or, when
expressly required hereby, all the Lenders), and such request and any action
taken or failure to act pursuant thereto shall be binding upon all the Lenders
and all future holders of the Notes.
SECTION 13.5 Notice of Default. The Administrative Agent shall not be
-----------------
deemed to have knowledge or notice of the occurrence of any Default or Event of
Default hereunder unless it has received notice from a Lender, the Company or
any Borrower referring to this Agreement, describing such Default or Event of
Default and stating that such notice is a "notice of default". In the event that
the Administrative Agent receives such a notice, it shall promptly give notice
thereof to the Lenders. The Administrative Agent shall take such action with
respect to such Default or Event of Default as shall be reasonably directed by
the Required Lenders; provided, that unless and until the Administrative Agent
--------
shall have received such directions, the Administrative Agent may (but shall not
be obligated to) take such action, or refrain from taking such action, with
respect to such Default or Event of Default as it shall deem advisable in the
best interests of the Lenders, except to the extent that other provisions of
------
this Agreement expressly require that any such action be taken or not be taken
only with the consent and authorization or the request of the Lenders or
Required Lenders, as applicable.
SECTION 13.6 Non-Reliance on the Administrative Agent and Other Lenders.
----------------------------------------------------------
Each Lender expressly acknowledges that neither the Administrative Agent nor any
of its respective officers, directors, employees, agents, attorneys-in-fact,
Subsidiaries or Affiliates has made any representations or warranties to it and
that no act by the Administrative Agent hereinafter taken, including any review
of the affairs of the Company or any of its Subsidiaries, shall be deemed to
constitute any representation or warranty by the Administrative Agent to any
81
<PAGE>
Lender. Each Lender represents to the Administrative Agent that it has,
independently and without reliance upon the Administrative Agent or any other
Lender, and based on such documents and information as it has deemed
appropriate, made its own appraisal of and investigation into the business,
operations, property, financial and other condition and creditworthiness of the
Company and its Subsidiaries and made its own decision to make its Loans and
issue or participate in Letter of Credit hereunder and enter into this
Agreement. Each Lender also represents 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 analysis, appraisals and decisions in taking or not taking
action under this Agreement and the other Loan Documents, and to make such
investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition and creditworthiness of the
Company and its Subsidiaries. Except for notices, reports and other documents
expressly required to be furnished to the Lenders by the Administrative Agent
hereunder or by the other Loan Documents, the Administrative Agent shall not
have any duty or responsibility to provide any Lender with any credit or other
information concerning the business, operations, property, financial and other
condition or creditworthiness of the Company or any of its Subsidiaries which
may come into the possession of the Administrative Agent or any of its
respective officers, directors, employees, agents, attorneys-in-fact,
Subsidiaries or Affiliates.
SECTION 13.7 Indemnification. The Lenders agree to indemnify the
---------------
Administrative Agent in its capacity as such and (to the extent not reimbursed
by the Borrowers and without limiting the obligation of the Borrowers to do so),
ratably according to the respective amounts of their Commitment Percentages,
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind whatsoever which may at any time (including, without limitation, at any
time following the payment of the Notes or any Reimbursement Obligation) be
imposed on, incurred by or asserted against the Administrative Agent in any way
relating to or arising out of this Agreement or the other Loan Documents, or any
documents contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by the
Administrative Agent under or in connection with any of the foregoing; provided,
--------
that no Lender shall be liable for the payment of any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting solely from the Administrative
Agent's bad faith, gross negligence or willful misconduct. The agreements in
this Section 13.7 shall survive the payment of the Notes, any Reimbursement
Obligation and all other amounts payable hereunder and the termination of this
Agreement.
SECTION 13.8 The Administrative Agent in Its Individual Capacity. The
---------------------------------------------------
Administrative Agent and its respective Subsidiaries and Affiliates may make
loans to, accept deposits from and generally engage in any kind of business with
the Company and its Subsidiaries as though the Administrative Agent were not an
Administrative Agent hereunder. With respect to any Loans made or renewed by it
and any Note issued to it and with respect to any Letter of Credit issued by it
or participated in by it, the Administrative Agent shall have the same rights
and powers under this Agreement and the other Loan Documents as any Lender and
may exercise the same as though it were not an Administrative Agent, and the
terms "Lender" and "Lenders" shall include the Administrative Agent in its
individual capacity.
82
<PAGE>
SECTION 13.9 Resignation of the Administrative Agent; Successor
--------------------------------------------------
Administrative Agent. Subject to the appointment and acceptance of a successor
- --------------------
as provided below, the Administrative Agent may resign at any time by giving
thirty (30) days prior notice thereof to the Lenders and the Borrowers. Upon any
such resignation, the Required Lenders shall have the right to appoint a
successor Administrative Agent, which successor shall have minimum capital and
surplus of at least $500,000,000. If no successor Administrative Agent shall
have been so appointed by the Required Lenders and shall have accepted such
appointment within thirty (30) days after the Administrative Agent's giving of
notice of resignation, then the Administrative Agent may, on behalf of the
Lenders, appoint a successor Administrative Agent, which successor shall have
minimum capital and surplus of at least $500,000,000. Upon the acceptance of any
appointment as Administrative Agent hereunder by a successor Administrative
Agent, such successor Administrative Agent shall thereupon succeed to and become
vested with all rights, powers, privileges and duties of the retiring
Administrative Agent, and the retiring Administrative Agent shall be discharged
from its duties and obligations hereunder. After any retiring Administrative
Agent's resignation hereunder as Administrative Agent, the provisions of this
Section 13.9 shall continue in effect for its benefit in respect of any actions
taken or omitted to be taken by it while it was acting as Administrative Agent.
ARTICLE XIV
UNCONDITIONAL GUARANTY
SECTION 14.1 Guaranty of Obligations. The Company hereby unconditionally
-----------------------
guarantees to the Administrative Agent for the ratable benefit of the Agents and
the Lenders, and their respective successors, endorsees, transferees and
assigns, the prompt payment and performance of all Obligations of the Borrowers,
whether primary or secondary (whether by way of endorsement or otherwise),
whether now existing or hereafter arising, whether or not from time to time
reduced or extinguished (except by payment thereof) or hereafter increased or
incurred, whether or not recovery may be or hereafter become barred by the
statute of limitations, whether enforceable or unenforceable as against any such
Borrower, whether or not discharged, stayed or otherwise affected by any
bankruptcy, insolvency or other similar law or proceeding, whether created
directly with any Agent or Lender or acquired by any Agent or Lender through
assignment, endorsement or otherwise, whether matured or unmatured, whether
joint or several, as and when the same become due and payable (whether at
maturity or earlier, by reason of acceleration, mandatory repayment or
otherwise), in accordance with the terms of any such instruments evidencing any
such obligations, including all renewals, extensions or modifications thereof
(all Obligations of each such Borrower to any Agent or Lender, including all of
the foregoing, being hereinafter collectively referred to as the "Guaranteed
Obligations").
SECTION 14.2 Nature of Guaranty. The Company agrees that this Guaranty is
------------------
a continuing, unconditional guaranty of payment and performance and not of
collection, and that its obligations under this Guaranty shall be primary,
absolute and unconditional, irrespective of, and unaffected by (a) the
genuineness, validity, regularity, enforceability or any future amendment of, or
change in, this Agreement or any other Loan Document or any other
83
<PAGE>
agreement, document or instrument to which any such Borrower is or may become a
party, (b) the absence of any action to enforce this Guaranty, this Agreement or
any other Loan Document or the waiver or consent by the Administrative Agent or
any Lender with respect to any of the provisions of this Guaranty, this
Agreement or any other Loan Document, (c) the existence, value or condition of,
or failure to perfect its Lien against, any security for or other guaranty of
the Guaranteed Obligations or any action, or the absence of any action, by the
Administrative Agent or any Lender in respect of such security or guaranty
(including, without limitation, the release of any such security or guaranty) or
(d) any other action or circumstances which might otherwise constitute a legal
or equitable discharge or defense of a surety or guarantor; it being agreed by
the Company that its obligations under this Guaranty shall not be discharged
until the final and indefeasible payment and performance, in full, of the
Guaranteed Obligations and the termination of the Commitments. The Company
expressly waives all rights it may now or in the future have under any statute
(including without limitation North Carolina General Statutes Section 26-7, et
seq. or similar law), or at law or in equity, or otherwise, to compel the
Administrative Agent or any Lender to proceed in respect of the Guaranteed
Obligations against any such Borrower or any other party or against any security
for or other guaranty of the payment and performance of the Guaranteed
Obligations before proceeding against, or as a condition to proceeding against,
the Company. The Company further expressly waives and agrees not to assert or
take advantage of any defense based upon the failure of the Administrative Agent
or any Lender to commence an action in respect of the Guaranteed Obligations
against any such Borrower, the Company or any other party or any security for
the payment and performance of the Guaranteed Obligations. The Company agrees
that any notice or directive given at any time to the Administrative Agent or
any Lender which is inconsistent with the waivers in the preceding two sentences
shall be null and void and may be ignored by the Administrative Agent or Lender,
and, in addition, may not be pleaded or introduced as evidence in any litigation
relating to this Guaranty for the reason that such pleading or introduction
would be at variance with the written terms of this Guaranty, unless the
Administrative Agent and the Required Lenders have specifically agreed otherwise
in writing. The foregoing waivers are of the essence of the transaction
contemplated by the Loan Documents and, but for this Guaranty and such waivers,
the Agents and Lenders would decline to enter into this Agreement.
SECTION 14.3 Demand by the Administrative Agent. In addition to the terms
----------------------------------
set forth in Section 14.2, and in no manner imposing any limitation on such
terms, if all or any portion of the then outstanding Guaranteed Obligations
under this Agreement are declared to be immediately due and payable, then the
Company shall, upon demand in writing therefor by the Administrative Agent to
the Company, pay all or such portion of the outstanding Guaranteed Obligations
then declared due and payable. Payment by the Company shall be made to the
Administrative Agent, to be credited and applied upon the Guaranteed
Obligations, in immediately available funds to an account designated by the
Administrative Agent or at the Administrative Agent's office or at any other
address that may be specified in writing from time to time by the Administrative
Agent.
SECTION 14.4 Waivers. In addition to the waivers contained in Section
-------
14.2, the Company waives, and agrees that it shall not at any time insist upon,
plead or in any manner whatever claim or take the benefit or advantage of, any
appraisal, valuation, stay, extension, marshalling of assets or redemption laws,
or exemption, whether now or at any time hereafter in
84
<PAGE>
force, which may delay, prevent or otherwise affect the performance by the
Company of its obligations under, or the enforcement by the Administrative Agent
or the Lenders of, this Guaranty. The Company further hereby waives diligence,
presentment, demand, protest and notice of whatever kind or nature with respect
to any of the Guaranteed Obligations and waives the benefit of all provisions of
law which are or might be in conflict with the terms of this Guaranty. The
Company represents, warrants and agrees that its obligations under this Guaranty
are not and shall not be subject to any counterclaims, offsets or defenses of
any kind against the Administrative Agent, the Lenders or any such Borrower
whether now existing or which may arise in the future.
SECTION 14.5 Modification of Loan Documents etc. If the Administrative
----------------------------------
Agent or the Lenders shall at any time or from time to time, with or without the
consent of, or notice to, the Company (a) change or extend the manner, place or
terms of payment of, or renew or alter all or any portion of, the Guaranteed
Obligations, (b) take any action under or in respect of the Loan Documents in
the exercise of any remedy, power or privilege contained therein or available to
it at law, in equity or otherwise, or waive or refrain from exercising any such
remedies, powers or privileges, (c) amend or modify, in any manner whatsoever,
the Loan Documents, (d) extend or waive the time for performance by the Company,
any such Borrower or any other Person of, or compliance with, any term, covenant
or agreement on its part to be performed or observed under a Loan Document
(other than this Guaranty), or waive such performance or compliance or consent
to a failure of, or departure from, such performance or compliance, (e) take and
hold security or collateral for the payment of the Guaranteed Obligations or
sell, exchange, release, dispose of, or otherwise deal with, any property
pledged, mortgaged or conveyed, or in which the Administrative Agent or the
Lenders have been granted a Lien, to secure any Debt of the Company or any such
Borrower to any Agent or the Lenders, (f) release anyone who may be liable in
any manner for the payment of any amounts owed by the Company or any such
Borrower to any Agent or Lender, (g) modify or terminate the terms of any
intercreditor or subordination agreement pursuant to which claims of other
creditors of the Company or any such Borrower are subordinated to the claims of
any Agent or Lender or (h) apply any sums by whomever paid or however realized
to any amounts owing by the Company or any such Borrower to any Agent or Lender
on account of the Obligations in such manner as the Administrative Agent or any
Lender shall determine in its reasonable discretion; then neither the
Administrative Agent nor any Lender shall incur any liability to the Company as
a result thereof, and no such action shall impair or release the obligations of
the Company under this Guaranty.
SECTION 14.6 Reinstatement. The Company agrees that, if any payment made
-------------
by any such Borrower or any other Person applied to the Obligations is at any
time annulled, set aside, rescinded, invalidated, declared to be fraudulent or
preferential or otherwise required to be refunded or repaid, or the proceeds of
Collateral are required to be returned by any Agent or Lender to any such
Borrower, its estate, trustee, receiver or any other party, including, without
limitation, the Company, under any Applicable Law or equitable cause, then, to
the extent of such payment or repayment, the Company's liability hereunder (and
any Lien or Collateral securing such liability) shall be and remain in full
force and effect, as fully as if such payment had never been made, and, if prior
thereto, this Guaranty shall have been canceled or surrendered (and if any Lien
or Collateral securing the Company's liability hereunder shall have been
released or terminated by virtue of such cancellation or surrender), this
Guaranty (and such Lien
85
<PAGE>
or Collateral) shall be reinstated in full force and effect, and such
prior cancellation or surrender shall not diminish, release, discharge, impair
or otherwise affect the obligations of the Company in respect of the amount of
such payment (or any Lien or Collateral securing such obligation).
SECTION 14.7 No Subrogation. Until all amounts owing to the Agents and
--------------
Lenders on account of the Obligations are paid in full and the Commitments are
terminated, the Company hereby waives any claims or other rights which it may
now or hereafter acquire against any such Borrower that arise from the existence
or performance of the Company's obligations under this Guaranty, including,
without limitation, any right of subrogation, reimbursement, exoneration,
indemnification, any right to participate in any claim or remedy of the
Administrative Agent or the Lenders against any such Borrower or any Collateral
which the Administrative Agent or the Lenders now have or may hereafter acquire,
whether or not such claim, remedy or right arises in equity or under contract,
statute or common law, by any payment made hereunder or otherwise, including
without limitation, the right to take or receive from any such Borrower,
directly or indirectly, in cash or other property or by set-off or in any other
manner, payment or security on account of such claim or other rights. If any
amount shall be paid to the Company on account of such rights at any time when
all of the Obligations shall not have been paid in full, such amount shall be
held by the Company in trust for the Administrative Agent, segregated from other
funds of the Company, and shall, forthwith upon receipt by the Company, be
turned over to the Administrative Agent in the exact form received by the
Company (duly indorsed by the Company to the Administrative Agent, if required)
to be applied against the Obligations, whether matured or unmatured, in such
order as set forth herein.
SECTION 14.8 Agents. The Syndication Agent and the Documentation Agent,
------
each in its capacity as such, shall have no duties or responsibilities and no
liabilities under this Agreement or any other Loan Document.
ARTICLE XV
MISCELLANEOUS
-------------
SECTION 15.1 Notices.
-------
(a) Method of Communication. Except as otherwise provided in this
-----------------------
Agreement, all notices and communications hereunder shall be in writing, or by
telephone subsequently confirmed in writing. Any notice shall be effective if
delivered by hand delivery or sent via telecopy, recognized overnight courier
service or certified mail, return receipt requested, and shall be presumed to be
received by a party hereto (i) on the date of delivery if delivered by hand or
sent by telecopy, (ii) on the next Business Day if sent by recognized overnight
courier service and (iii) on the third Business Day following the date sent by
certified mail, return receipt requested. A telephonic notice to the
Administrative Agent as understood by the Administrative Agent will be deemed to
be the controlling and proper notice in the event of a discrepancy with or
failure to receive a confirming written notice.
(b) Addresses for Notices. Notices to any party shall be sent to it at the
---------------------
following addresses, or any other address as to which all the other parties are
notified in writing.
86
<PAGE>
If to the Company or
Borrowers: Choice One Communications Inc.
1 HSBC Plaza
100 Chestnut Street, Suite 700
Rochester, New York 14604
Attention: John Zimmer
Telephone No.: (716) 530-2619
Telecopy No.: (716) 530-2733
If to First Union as First Union Investors, Inc.
Administrative Agent: Charlotte Plaza CP-23
201 South College Street
Charlotte, North Carolina 28288-0680
Attention: Arion Skenderi
Syndication Agency Services
Telephone No.: (704) 383-3790
Telecopy No.: (704) 383-0835
If to any Lender: To the Address set forth on Schedule 1 hereto
----------
(c) Administrative Agent's Office. The Administrative Agent hereby
-----------------------------
designates its office located at the address set forth above, or any subsequent
office which shall have been specified for such purpose by written notice to the
Borrowers and Lenders, as the Administrative Agent's Office referred to herein,
to which payments due are to be made and at which Loans will be disbursed and
Letters of Credit issued.
SECTION 15.2 Expenses; Indemnity. The Borrowers on a joint and several
-------------------
basis will (a) pay all out-of-pocket expenses of the Agents in connection with
(i) the preparation, execution and delivery of this Agreement and each other
Loan Document, whenever the same shall be executed and delivered, including
without limitation all out-of-pocket syndication and due diligence expenses and
reasonable fees and disbursements of counsel for the Administrative Agent and
(ii) the preparation, execution and delivery of any waiver, amendment or consent
by the Administrative Agent or the Lenders relating to this Agreement or any
other Loan Document, including without limitation reasonable fees and
disbursements of counsel for the Administrative Agent, (b) pay all reasonable
out-of-pocket expenses of the Administrative Agent and each Lender actually
incurred in connection with the administration and enforcement of any rights and
remedies of the Administrative Agent and Lenders under the Credit Facility,
including consulting with appraisers, accountants, engineers, attorneys and
other Persons concerning the nature, scope or value of any right or remedy of
the Administrative Agent or any Lender hereunder or under any other Loan
Document or any factual matters in connection therewith, which expenses shall
include without limitation the reasonable fees and disbursements of such
Persons, and (c) defend, indemnify and hold harmless the Administrative Agent
and the Lenders, and their respective parents, Subsidiaries, Affiliates,
employees, Administrative Agents, officers and directors, from and against any
losses, penalties, fines, liabilities, settlements, damages, costs
87
<PAGE>
and expenses, suffered by any such Person in connection with any claim,
investigation, litigation or other proceeding (whether or not the Administrative
Agent or any Lender is a party thereto) and the prosecution and defense thereof,
arising out of or in any way connected with the Agreement, any other Loan
Document or the Loans, including without limitation reasonable attorney's and
consultant's fees, except to the extent that any of the foregoing directly
result from the gross negligence or willful misconduct of the party seeking
indemnification therefor.
SECTION 15.3 Set-off. In addition to any rights now or hereafter granted
-------
under Applicable Law and not by way of limitation of any such rights, upon and
after the occurrence of any Event of Default and during the continuance thereof,
the Lenders and any assignee or participant of a Lender in accordance with
Section 15.10 are hereby authorized by the Borrowers at any time or from time to
time, without notice to the Borrowers or to any other Person, any such notice
being hereby expressly waived, to set off and to appropriate and to apply any
and all deposits (general or special, time or demand, including, but not limited
to, indebtedness evidenced by certificates of deposit, whether matured or
unmatured) and any other indebtedness at any time held or owing by the Lenders,
or any such assignee or participant to or for the credit or the account of the
Borrowers against and on account of the Obligations irrespective of whether or
not (a) the Lenders shall have made any demand under this Agreement or any of
the other Loan Documents or (b) the Administrative Agent shall have declared any
or all of the Obligations to be due and payable as permitted by Section 11.2 and
although such Obligations shall be contingent or unmatured.
SECTION 15.4 Governing Law. This Agreement, the Notes and the other Loan
-------------
Documents, unless otherwise expressly set forth therein, shall be governed by,
construed and enforced in accordance with the laws of the State of North
Carolina, without reference to the conflicts or choice of law principles
thereof.
SECTION 15.5 Consent to Jurisdiction. The Company and each Borrower
-----------------------
hereby irrevocably consents to the personal jurisdiction of the state and
federal courts located in Mecklenburg County, North Carolina, in any action,
claim or other proceeding arising out of any dispute in connection with this
Agreement, the Notes and the other Loan Documents, any rights or obligations
hereunder or thereunder, or the performance of such rights and obligations. The
Company and each Borrower hereby irrevocably consents to the service of a
summons and complaint and other process in any action, claim or proceeding
brought by the Administrative Agent or any Lender in connection with this
Agreement, the Notes or the other Loan Documents, any rights or obligations
hereunder or thereunder, or the performance of such rights and obligations, on
behalf of itself or its property, in the manner specified in Section 15.1.
Nothing in this Section 15.5 shall affect the right of the Administrative Agent
or any Lender to serve legal process in any other manner permitted by Applicable
Law or affect the right of the Administrative Agent or any Lender to bring any
action or proceeding against the Company and each Borrower or its properties in
the courts of any other jurisdictions.
SECTION 15.6 Binding Arbitration; Waiver of Jury Trial.
-----------------------------------------
(a) Binding Arbitration. Upon demand of any party, whether made before
-------------------
or after institution of any judicial proceeding, any dispute, claim or
controversy arising out of, connected
88
<PAGE>
with or relating to this Agreement or any other Loan Documents ("Disputes"),
between or among parties hereto or any other Loan Document shall be resolved by
binding arbitration as provided herein. Institution of a judicial proceeding by
a party does not waive the right of that party to demand arbitration hereunder.
Disputes may include, without limitation, tort claims, counterclaims, claims
brought as class actions, claims arising from Loan Documents executed in the
future, disputes as to whether a matter is subject to arbitration, or claims
concerning any aspect of the past, present or future relationships arising out
of or connected with the Loan Documents. Arbitration shall be conducted under
and governed by the Commercial Financial Disputes Arbitration Rules (the
"Arbitration Rules") of the American Arbitration Association ("AAA") and the
Federal Arbitration Act. All arbitration hearings shall be conducted in
Charlotte, North Carolina. The expedited procedures set forth in Rule 51, et
--
seq. of the Arbitration Rules shall be applicable to claims of less than
- ---
$1,000,000. All applicable statutes of limitation shall apply to any Dispute. A
judgment upon the award may be entered in any court having jurisdiction.
Notwithstanding anything foregoing to the contrary, any arbitration proceeding
demanded hereunder shall begin within ninety (90) days after such demand thereof
and shall be concluded within one-hundred and twenty (120) days after such
demand. These time limitations may not be extended unless a party hereto shows
cause for extension and then such extension shall not exceed a total of sixty
(60) days. The panel from which all arbitrators are selected shall be comprised
of licensed attorneys selected from the Commercial Financial Dispute Arbitration
Panel of the AAA. The single arbitrator selected for expedited procedure shall
be a retired judge from the highest court of general jurisdiction, state or
federal, of the state where the hearing will be conducted. The parties hereto do
not waive any applicable Federal or state substantive law except as provided
herein. Notwithstanding the foregoing, this paragraph shall not apply to any
Hedging Agreement that is a Loan Document.
(b) Jury Trial. THE ADMINISTRATIVE AGENT, EACH LENDER, THE COMPANY AND
----------
EACH BORROWER HEREBY ACKNOWLEDGE THAT BY AGREEING TO BINDING ARBITRATION THEY
HAVE IRREVOCABLY WAIVED THEIR RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO
ANY ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF ANY DISPUTE IN CONNECTION
WITH THIS AGREEMENT, THE NOTES OR THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR
OBLIGATIONS HEREUNDER OR THEREUNDER, OR THE PERFORMANCE OF SUCH RIGHTS AND
OBLIGATIONS.
(c) Preservation of Certain Remedies. Notwithstanding the preceding
--------------------------------
binding arbitration provisions, the parties hereto and the other Loan Documents
preserve, without diminution, certain remedies that such Persons may employ or
exercise freely, either alone, in conjunction with or during a Dispute. Each
such Person shall have and hereby reserves the right to proceed in any court of
proper jurisdiction or by self help to exercise or prosecute the following
remedies: (i) all rights to foreclose against any real or personal property or
other security by exercising a power of sale granted in the Loan Documents or
under applicable law or by judicial foreclosure and sale, (ii) all rights of
self help including peaceful occupation of property and collection of rents, set
off, and peaceful possession of property, (iii) obtaining provisional or
ancillary remedies including injunctive relief, sequestration, garnishment,
attachment, appointment of receiver and in filing an involuntary bankruptcy
proceeding, and (iv) when applicable, a judgment by confession of judgment.
Preservation of these remedies does not
89
<PAGE>
limit the power of an arbitrator to grant similar remedies that may be requested
by a party in a Dispute.
SECTION 15.7 Reversal of Payments. To the extent the Company or any
--------------------
Borrower makes a payment or payments to the Administrative Agent for the ratable
benefit of the Lenders or the Administrative Agent receives any payment or
proceeds of the collateral which payments or proceeds 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 payment or proceeds repaid, the Obligations or part thereof
intended to be satisfied shall be revived and continued in full force and effect
as if such payment or proceeds had not been received by the Administrative
Agent.
SECTION 15.8 Injunctive Relief; Punitive Damages.
-----------------------------------
(a) The Company and each Borrower recognize that, in the event any such
Person fails to perform, observe or discharge any of its obligations or
liabilities under this Agreement, any remedy of law may prove to be inadequate
relief to the Lenders. Therefore, the Company and each Borrower agree that the
Lenders, at the Lenders' option, shall be entitled to temporary and permanent
injunctive relief in any such case without the necessity of proving actual
damages.
(b) The Administrative Agent, Lenders and the Company and each Borrower
(on behalf of itself and its Subsidiaries) hereby agree that no such Person
shall have a remedy of punitive or exemplary damages against any other party to
a Loan Document and each such Person hereby waives any right or claim to
punitive or exemplary damages that they may now have or may arise in the future
in connection with any Dispute, whether such Dispute is resolved through
arbitration or judicially.
(c) The parties agree that they shall not have a remedy of punitive or
exemplary damages against any other party in any Dispute and hereby waive any
right or claim to punitive or exemplary damages they have now or which may arise
in the future in connection with any Dispute whether the Dispute is resolved by
arbitration or judicially.
SECTION 15.9 Accounting Matters. All financial and accounting
------------------
calculations, measurements and computations made for any purpose relating to
this Agreement, including, without limitation, all computations utilized by the
Company or any Subsidiary thereof to determine compliance with any covenant
contained herein, shall, except as otherwise expressly contemplated hereby or
unless there is an express written direction by the Administrative Agent to the
contrary agreed to by the Company, be performed in accordance with GAAP as in
effect on the Closing Date. In the event that changes in GAAP shall be mandated
by the Financial Accounting Standards Board, or any similar accounting body of
comparable standing, or shall be recommended by the Company's certified public
accountants, to the extent that such changes would modify such accounting terms
or the interpretation or computation thereof, such changes shall be followed in
defining such accounting terms only from and after the date the Company or
90
<PAGE>
Borrowers and the Lenders shall have amended this Agreement to the extent
necessary to reflect any such changes in the financial covenants and other terms
and conditions of this Agreement.
SECTION 15.10 Successors and Assigns; Participations.
--------------------------------------
(a) Benefit of Agreement. This Agreement shall be binding upon and
--------------------
inure to the benefit of the Company, the Borrowers, the Administrative Agent and
the Lenders, all future holders of the Notes, and their respective successors
and assigns, except that the Company and each Borrower shall not assign or
transfer any of its rights or obligations under this Agreement without the prior
written consent of each Lender.
(b) Assignment by Lenders. Each Lender may, with the consent of the
---------------------
Borrowers (so long as no Default or Event of Default has occurred and is
continuing) and the consent of the Administrative Agent, which consents shall
not be unreasonably withheld, assign to one or more Eligible Assignees all or a
portion of its interests, rights and obligations under this Agreement
(including, without limitation, all or a portion of the Extensions of Credit at
the time owing to it and the Notes held by it); provided, that:
--------
(i) no consent of the Administrative Agent or Borrowers shall
be required of any such assignment to an Affiliate of the assigning Lender, so
long as the assignment otherwise complies with the terms hereof;
(ii) with respect to its Revolving Credit Commitment, Term
Loan Commitment and Loans thereunder, each such assignment shall be of a
constant, and not a varying, percentage of all the assigning Lender's rights and
obligations under this Agreement;
(iii) if less than all of the assigning Lender's Revolving
Credit Commitment or Term Loan Commitment, as applicable, is to be assigned, the
Commitment so assigned shall not be less than $5,000,000;
(iv) the parties to each such assignment shall execute and
deliver to the Administrative Agent, for its acceptance and recording in the
Register, an Assignment and Acceptance in the form of Exhibit G attached hereto
---------
(an "Assignment and Acceptance"), together with any Note or Notes subject to
such assignment;
(v) such assignment shall not, without the consent of the
Borrowers, require the Borrowers to file a registration statement with the
Securities and Exchange Commission or apply to or qualify the Loans or the Notes
under the blue sky laws of any state; and
(vii) the assigning Lender shall pay to the Administrative
Agent an assignment fee of $3,500 upon the execution by such Lender of the
Assignment and Acceptance; provided, that no such fee shall be payable upon any
--------
assignment by a Lender to an Affiliate thereof.
91
<PAGE>
Upon such execution, delivery, acceptance and recording, from and after the
effective date specified in each Assignment and Acceptance, which effective date
shall be at least five (5) Business Days after the execution thereof, (A) the
assignee thereunder shall be a party hereto and, to the extent provided in such
Assignment and Acceptance, have the rights and obligations of a Lender hereby
and (B) the Lender thereunder shall, to the extent provided in such assignment,
be released from its obligations under this Agreement.
(c) Rights and Duties Upon Assignment. By executing and delivering an
---------------------------------
Assignment and Acceptance, the assigning Lender thereunder and the assignee
thereunder confirm to and agree with each other and the other parties hereto as
set forth in such Assignment and Acceptance.
(d) Register. The Administrative Agent shall maintain a copy of each
--------
Assignment and Acceptance delivered to it and a register for the recordation of
the names and addresses of the Lenders and the amount of the Extensions of
Credit with respect to each Lender from time to time (the "Register"). The
entries in the Register shall be conclusive, in the absence of 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 Lender at any reasonable time and from time to time upon
reasonable prior notice.
(e) Issuance of New Notes. Upon its receipt of an Assignment and
---------------------
Acceptance executed by an assigning Lender and an Eligible Assignee together
with any Note or Notes subject to such assignment and the written consent to
such assignment, the Administrative Agent shall, if such Assignment and
Acceptance has been completed and is substantially in the form of Exhibit G:
---------
(i) accept such Assignment and Acceptance;
(ii) record the information contained therein in the Register;
(iii) give prompt notice thereof to the Lenders and the
Borrowers; and
(iv) promptly deliver a copy of such Assignment and Acceptance
to the Borrowers.
Within five (5) Business Days after receipt of notice, the Borrowers shall
execute and deliver to the Administrative Agent, in exchange for the surrendered
Note or Notes, a new Note or Notes to the order of such Eligible Assignee in
amounts equal to the Commitment assumed by it pursuant to such Assignment and
Acceptance and a new Note or Notes to the order of the assigning Lender in an
amount equal to the Commitment retained by it hereunder. Such new Note or Notes
shall be in an aggregate principal amount equal to the aggregate principal
amount of such surrendered Note or Notes, shall be dated the effective date of
such Assignment and Acceptance and shall otherwise be in substantially the form
of the assigned Notes delivered to the assigning Lender. Each surrendered Note
or Notes shall be canceled and returned to the Borrowers.
92
<PAGE>
(f) Participations. Each Lender may sell participations to one or more
--------------
banks or other entities in all or a portion of its rights and obligations under
this Agreement (including, without limitation, all or a portion of its
Extensions of Credit and the Notes held by it); provided, that:
--------
(i) each such participation shall be in an amount not less
than $5,000,000;
(ii) such Lender's obligations under this Agreement
(including, without limitation, its Revolving Credit Commitment or Term Loan
Commitment, as applicable) shall remain unchanged;
(iii) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations;
(iv) such Lender shall remain the holder of the Notes held by
it for all purposes of this Agreement;
(v) the Company, the Borrowers, the Administrative Agent and
the other Lenders shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this Agreement;
(vi) such Lender shall not permit such participant the right
to approve any waivers, amendments or other modifications to this Agreement or
any other Loan Document other than waivers, amendments or modifications which
would reduce the principal of or the interest rate on any Loan or Reimbursement
Obligation, extend the term or increase the amount of the Commitment, reduce the
amount of any fees to which such participant is entitled, extend any scheduled
payment date for principal of any Loan or, except as expressly contemplated
hereby or thereby, release substantially all of the Collateral; and
(vii) any such disposition shall not, without the consent of
the Borrowers, require the Borrowers to file a registration statement with the
Securities and Exchange Commission to apply to qualify the Loans or the Notes
under the blue sky law of any state.
(g) Disclosure of Information; Confidentiality. The Administrative Agent
------------------------------------------
and the Lenders shall hold all non-public information with respect to the
Company and the Borrowers obtained pursuant to the Loan Documents in accordance
with their customary procedures for handling confidential information; provided,
--------
that the Administrative Agent may disclose information relating to this
Agreement to Gold Sheets and other similar bank trade publications, such
-----------
information to consist of deal terms and other information customarily found in
such publications and provided further, that the Administrative Agent and
-------- -------
Lenders may disclose any such information to the extent such disclosure is
required by law or requested by any regulatory authority. Any Lender may, in
connection with any assignment, proposed assignment, participation or proposed
participation pursuant to this Section 15.10, disclose to the assignee,
participant, proposed assignee or proposed participant, any information relating
to the Company and the Borrowers furnished to such Lender by or on behalf of the
Borrowers; provided, that
--------
93
<PAGE>
prior to any such disclosure, each such assignee, proposed assignee, participant
or proposed participant shall agree with the Borrowers or such Lender to
preserve the confidentiality of any confidential information relating to the
Borrowers received from such Lender.
(h) Certain Pledges or Assignments. Nothing herein shall prohibit any
------------------------------
Lender from pledging or assigning any Note to any Federal Reserve Bank in
accordance with Applicable Law.
SECTION 15.11 Amendments, Waivers and Consents. Except as set forth below,
--------------------------------
any term, covenant, agreement or condition of this Agreement or any of the other
Loan Documents (other than any Hedging Agreement, the terms and conditions of
which may be amended, modified or waived by the parties thereto) may be amended
or waived by the Lenders, and any consent given by the Lenders, if, but only if,
such amendment, waiver or consent is in writing signed by the Required Lenders
(or by the Administrative Agent with the consent of the Required Lenders) and
delivered to the Administrative Agent and, in the case of an amendment, signed
by the Borrowers; provided, that no amendment, waiver or consent shall (a)
--------
increase the amount or extend the time of the obligation of the Lenders to make
Loans or issue or participate in Letters of Credit, (b) extend the originally
scheduled time or times of payment of the principal of any Loan or Reimbursement
Obligation or the time or times of payment of interest on any Loan or
Reimbursement Obligation, (c) reduce the rate of interest or fees payable on any
Loan or Reimbursement Obligation, (d) reduce the principal amount of any Loan or
Reimbursement Obligation, (e) permit any subordination of the principal or
interest on any Loan or Reimbursement Obligation, (f) permit any assignment
(other than as specifically permitted or contemplated in this Agreement) of any
of the Company's or Borrowers' rights and obligations hereunder, (g) release any
material portion of the Collateral or release any Security Document or any
Guarantor (other than as specifically permitted or contemplated in this
Agreement or the applicable Security Document) or (h) amend the provisions of
this Section 15.11, Section 9.14, the definition of Required Lenders or the
definition of Borrowing Base, without the prior written consent of each Lender.
In addition, no amendment, waiver or consent to the provisions of (a) Article
XIII shall be made without the written consent of the Administrative Agent and
(b) Article III without the written consent of the Issuing Lender.
SECTION 15.12 Performance of Duties. The Company's and the Borrowers'
---------------------
obligations under this Agreement and each of the Loan Documents shall be
performed thereby at their sole cost and expense.
SECTION 15.13 All Powers Coupled with Interest. All powers of attorney and
--------------------------------
other authorizations granted to the Lenders, the Administrative Agent and any
Persons designated by the Administrative Agent or any Lender pursuant to any
provisions of this Agreement or any of the other Loan Documents shall be deemed
coupled with an interest and shall be irrevocable so long as any of the
Obligations remain unpaid or unsatisfied or the Credit Facility has not been
terminated.
SECTION 15.14 Survival of Indemnities. Notwithstanding any termination of
-----------------------
this Agreement, the indemnities to which the Administrative Agent and the
Lenders are entitled under the provisions of this Article XV and any other
provision of this Agreement and the Loan
94
<PAGE>
Documents shall continue in full force and effect and shall protect the
Administrative Agent and the Lenders against events arising after such
termination as well as before.
SECTION 15.15 Titles and Captions. Titles and captions of Articles,
-------------------
Sections and subsections in this Agreement are for convenience only, and neither
limit nor amplify the provisions of this Agreement.
SECTION 15.16 Severability of Provisions. Any provision of this Agreement
--------------------------
or any other Loan Document which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective only to the extent
of such prohibition or unenforceability without invalidating the remainder of
such provision or the remaining provisions hereof or thereof or affecting the
validity or enforceability of such provision in any other jurisdiction.
SECTION 15.17 Counterparts. This Agreement 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 shall be binding
upon all parties, their successors and assigns, and all of which taken together
shall constitute one and the same agreement.
SECTION 15.18 Term of Agreement. This Agreement shall remain in effect
-----------------
from the Closing Date through and including the date upon which all Obligations
shall have been indefeasibly and irrevocably paid and satisfied in full. The
Administrative Agent is hereby permitted to release all Liens on the Collateral
in favor of the Administrative Agent, for the ratable benefit of itself and the
Lenders, upon repayment of the outstanding principal of and all accrued interest
on the Loans, payment of all outstanding fees and expenses hereunder and the
termination of the Lender's Commitments. No termination of this Agreement shall
affect the rights and obligations of the parties hereto arising prior to such
termination.
SECTION 15.19 Inconsistencies with Other Documents; Independent Effect
--------------------------------------------------------
of Covenants.
- ------------
(a) In the event there is a conflict or inconsistency between this
Agreement and any other Loan Document, the terms of this Agreement shall
control; provided, that any provision of the Security Documents which imposes
--------
additional burdens on the Company or its Subsidiaries or further restricts the
rights of the Company or its Subsidiaries or gives the Administrative Agent or
Lenders additional rights shall not be deemed to be in conflict or inconsistent
with this Agreement and shall be given full force and effect.
(b) The Company and the Borrowers expressly acknowledge and agree that
each covenant contained in Articles IX, X or XI hereof shall be given
independent effect. Accordingly, neither the Company nor any Borrower shall not
engage in any transaction or other act otherwise permitted under any covenant
contained in Articles IX, X or XI if, before or after giving effect to such
transaction or act, the Company or such Borrower shall or would be in breach of
any other covenant contained in Articles IX, X or XI.
SECTION 15.20 Company as Agent for Borrowers; Obligations Joint and
-----------------------------------------------------
Several; Agreements for Contribution.
- ------------------------------------
95
<PAGE>
(a) The Borrowers hereby irrevocably appoint and authorize the Company (i)
to provide the Administrative Agent with all notices with respect to Extensions
of Credit obtained for the benefit of any Borrower and all other notices and
instructions under this Agreement and (ii) to take such action on behalf of the
Borrowers as it deems appropriate to obtain Extensions of Credit and to exercise
such other powers as are reasonably incidental thereto to carry out the purposes
of this Agreement.
(b) All of the Borrowers shall be jointly and severally liable for the
Obligations, however incurred. References to the Borrowers with respect to the
Obligations or any portion thereof shall mean each Borrower on a joint and
several basis.
(c) To the extent any Borrower is required, by reason of its Obligations
hereunder, to pay to the Administrative Agent and the Lenders an amount greater
than the amount of Extensions of Credit actually made available to or for the
account of such Borrower, such Borrower shall have an enforceable right of
contribution against the remaining Borrowers, and the remaining Borrowers shall
be jointly and severally liable, for repayment of the full amount of such excess
payment. Subject only to the subordination provided in the following subsection
(f), such Borrower further shall be subrogated to any and all rights of the
Administrative Agent and the Lenders against the remaining Borrowers to the
extent of such excess payment.
(d) To the extent that any Borrower would, but for the operation of this
Section 15.20 and by reason of its Obligations hereunder or its obligations to
other Subsidiaries under this Section 15.20, be rendered insolvent for any
purpose under Applicable Law, each of the Borrowers hereby agrees to indemnify
such Borrower in an amount at least equal to the amount necessary to prevent
such Borrower from having been rendered insolvent by reason of the incurring of
any such obligations.
(e) To the extent that any Borrower would, but for the operation of this
Section 15.20, be rendered insolvent under any Applicable Law by reason of its
incurring of obligations to any other Borrower under the foregoing subsections
(c) and (d) above, such Borrower shall, in turn, have rights of contribution and
indemnity, to the full extent provided in the foregoing subsections (c) and (d)
above, against the remaining Borrowers, such that all Obligations of all of the
Borrowers hereunder and under this Section 15.20 shall be allocated in a manner
such that no Borrower shall be rendered insolvent for any purpose under
Applicable Law by reason of its incurring of such obligations.
(f) The rights of any Borrower to contribution, subrogation and indemnity
under this Section 15.20 or under Applicable Law shall in all events and all
respects be subject and subordinate to the rights of the Agent and the Lenders
under this Agreement and subject to the prior full, final and indefeasible
payment to the Agent and the Lenders of all Obligations and no such right may be
exercised until all of such Obligations have been fully, finally and
indefeasibly aid and such payments are in no event subject to avoidance under
title 11 of the United States code or any other Applicable Law.
[Signature pages to follow]
96
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal by their duly authorized officers, all as of the day and
year first written above.
[CORPORATE SEAL] CHOICE ONE COMMUNICATIONS OF NEW
YORK INC., as Borrower
By: /s/John J. Zimmer
__________________________________
Name: John J. Zimmer
Title: Vice President - Finance
[CORPORATE SEAL] CHOICE ONE COMMUNICATIONS OF
PENNSYLVANIA INC., as Borrower
By: /s/John J. Zimmer
__________________________________
Name: John J. Zimmer
Title: Vice President - Finance
[CORPORATE SEAL] CHOICE ONE COMMUNICATIONS OF
MASSACHUSETTS INC., as Borrower
By: /s/John J. Zimmer
__________________________________
Name: John J. Zimmer
Title: Vice President - Finance
[CORPORATE SEAL] CHOICE ONE OF NEW HAMPSHIRE INC.,
as Borrower
By: /s/John J. Zimmer
___________________________________
Name: John J. Zimmer
Title: Vice President - Finance
[CORPORATE SEAL] CHOICE ONE COMMUNICATIONS OF
OHIO INC., as Borrower
By: /s/John J. Zimmer
___________________________________
Name: John J. Zimmer
Title: Vice President - Finance
[CORPORATE SEAL] CHOICE ONE COMMUNICATIONS OF
MAINE INC., as Borrower
By: /s/John J. Zimmer
___________________________________
Name: John J. Zimmer
Title: Vice President - Finance
[Signature pages continue]
<PAGE>
[CORPORATE SEAL] CHOICE ONE COMMUNICATIONS OF
VERMONT INC., as Borrower
By: /s/John J. Zimmer
___________________________________
Name: John J. Zimmer
Title: Vice President - Finance
[CORPORATE SEAL] CHOICE ONE COMMUNICATIONS OF
RHODE ISLAND INC., as Borrower
By: /s/John J. Zimmer
___________________________________
Name: John J. Zimmer
Title: Vice President - Finance
[CORPORATE SEAL] CHOICE ONE COMMUNICATIONS OF
CONNECTICUT INC., as Borrower
By: /s/John J. Zimmer
___________________________________
Name: John J. Zimmer
Title: Vice President - Finance
[CORPORATE SEAL] CHOICE ONE COMMUNICATIONS
INTERNATIONAL INC., as Borrower
By: /s/John J. Zimmer
___________________________________
Name: John J. Zimmer
Title: Vice President - Finance
ATLANTIC CONNECTIONS, L.L.C., as Borrower
By: /s/John J. Zimmer [SEAL]
___________________________________
Name: John J. Zimmer
Title: Vice President - Finance
[CORPORATE SEAL] ACL TELECOMMUNICATIONS, LTD.,
as Borrower
By: /s/John J. Zimmer
___________________________________
Name: John J. Zimmer
Title: Vice President - Finance
[CORPORATE SEAL] CHOICE ONE COMMUNICATIONS INC.,
as Guarantor
By: /s/John J. Zimmer
___________________________________
Name: John J. Zimmer
Title: Vice President - Finance
[Signature pages continue]
<PAGE>
FIRST UNION INVESTORS, INC.,
as Administrative Agent and Lender
By: /s/ Jim Redman
------------------------------------
Name: Jim Redman
------------------------------
Title: Senior Vice President
-----------------------------
[Signature pages continue]
<PAGE>
GENERAL ELECTRIC CAPITAL CORPORATION,
as Syndication Agent
By: /s/ Molly S. Fergusson
------------------------------------
Name: Molly S. Fergusson
------------------------------
Title: Manager, Operations
-----------------------------
[Signature pages continue]
<PAGE>
CIBC INC., as Documentation Agent
By: /s/ Tefta Ghilaga
----------------------------------
Name: Tefta Ghilaga
----------------------------
Title: Executive Director, CIBC World
-------------------------------
Markets Corp., as Agent
-------------------------------
[Signature pages continue]
<PAGE>
KEY CORPORATE CAPITAL, INC.
By: /s/ Tim Willard
---------------------------------
Name: Tim Willard
---------------------------
Title: Vice President
--------------------------
[Signature pages continue]
<PAGE>
THE BANK OF NEW YORK
By: /s/ Brendan T. Wedzi
------------------------------
Name: Brendan T. Wedzi
------------------------
Title: Senior Vice President
-----------------------
[Signature pages continue]
<PAGE>
BANK OF MONTREAL
By: /s/ Ola Anderssen
------------------------------
Name: Ola Anderssen
------------------------
Title: Director
-----------------------
[Signature pages continue]
<PAGE>
CITIZENS BANK OF MASSACHUSETTS
By: /s/ Edward C. Thaute
------------------------------
Name: Edward C. Thaute
------------------------
Title: Vice President
-----------------------
<PAGE>
EXHIBIT 10.21
THIS AGREEMENT, made this 14th day of October, 1998, between BENDERSON-
ROCHESTER ASSOCIATES, LLC ("Lessor"), having offices at 570 Delaware Avenue,
Buffalo, New York 14202, and CHOICE ONE COMMUNICATIONS INC. ("Lessee"), having
offices at 333 W. Commercial Street, E. Rochester, New York 14445.
WITNESSETH:
That the Lessor hereby lets to the Lessee and the Lessee hereby hires from the
Lessor the following premises:
approximately 32,200 square feet of space ("Demised Premises") located on the
seventh and eighth floors at One Marine Midland Plaza, Chestnut Street,
Rochester, New York, for a term of approximately eleven (11) years
to commence on January 15, 1999, and to expire on the last day of the month
which is ten (10) years following the date the entire Demised Premises is made
available for Lessee's occupancy. Within a reasonable time thereafter, Lessor
and Lessee shall enter into a supplemental agreement prepared by Lessor which
confirms the Commencement Date and expiration date. Notwithstanding that the
term shall commence January 15, 1999, Lessee and its employees and agents may
enter the Demised Premises prior thereto provided that Lessee shall have
delivered the insurance certificates required by Paragraph 19 herein and further
provided that Lessee's early entry does not interfere with the completion of
Lessor's work.
LESSEE COVENANTS TO PAY RENT AS FOLLOWS:
A base annual rent of fifteen dollars ($15.00) per square foot, payable in equal
monthly installments, pursuant to the following schedule:
beginning January 15, 1999 Lessee shall pay $241,500.00 payable in equal monthly
installments of $20,125.00 each since Lessee will occupy only 16,100 square feet
(being one entire floor of the two floors which comprise the Demised Premises);
beginning June 15, 1999, Lessee shall pay an annual base rental of $362,250.00
payable in equal monthly installments of $30,187.50 each;
from January 15, 2000 or the date Lessee occupies the remainder of the eighth
floor (whichever is sooner) to end of term Lessee shall pay an annual base
rental of $483,000.00 payable in equal monthly installments of $40,250.00 each.
Such rents are payable in advance on the first day of each month without offset
or deduction at the office of the Lessor at 570 Delaware Avenue, Buffalo, New
York 14202 or such other address as may be designated by the Lessor in writing.
In the event that the Commencement Date is other than on the first of the month,
then the rental for the balance of the month shall be pro-rated accordingly and
the full term of the Lease shall commence on the first day of the following
month.
Lessee agrees to pay all rents and other charges under the terms of this Lease
when they are due and payable. Any rents remaining unpaid ten (10) days after
due date or any other charges
<PAGE>
-2-
remaining unpaid ten (10) days after receipt of invoice shall be subject to a
two percent (2%) monthly late charge.
EVERY COVENANT OF THIS LEASE SHALL BE DEEMED A CONDITION THEREOF WHICH SHALL
INCLUDE:
COVENANT TO PAY RENT
1. The Lessee shall pay the above specified rent at the times and place
hereinbefore mentioned.
USE
2. Lessee covenants and agrees to use the Demised Premises for the following
purpose: corporate headquarters including main customer service and sales
office for Lessee's telecommunications business.
SIGNS, BUILDING ALTERATIONS AND CHANGES
3. The Lessee shall not use the premises for any other purpose than as above
stated, nor erect or display any signs on the Demised Premises, nor make any
alterations, additions or improvements to or upon the Demised Premises without
the prior written consent of the Lessor, nor make or permit any defacement,
injury or waste in, to or about the Demised Premises.
SUB-LETTING ASSIGNMENT
4. A. Consent by the Lessor to any assignment or sub-lease shall not be
deemed consent to further or additional assignments and sublettings. In each
case written consent of the Lessor must be obtained.
B. The Lessee may, without the approval of the Lessor but upon prior
written notice, assign this Lease, or sublease the whole of the Demised
Premises, to (a) any corporation, a majority of whose voting stock is owned by
Lessee, or (b) any corporation in which or with which Lessee, its corporate
successors or assigns, is merged or consolidated in accordance with applicable
statutory provisions for merger or consolidation of corporations so long as the
assets and liabilities of the corporations participating in such merger or
consolidation are transferred and assumed by the corporation surviving such
merger or created by such consolidation, provided in any such event that the use
and operation of the Demised Premises remains the same. Lessee agrees that in
any assignment Lessee shall remain liable for all of the terms and conditions of
this Lease during the original term and any options or renewals of this Lease.
SUBORDINATION OF MORTGAGES
5. This Lease shall be subject and subordinate to the lien of any mortgage or
mortgages or deed or deeds of trust, which at any time may be placed upon the
Lessor's interest in the Demised Premises, provided that as a condition to such
subordination Lessee receives a written non-disturbance agreement from the
holder of such mortgage or deed of trust.
<PAGE>
-3-
EXAMINATION OF PREMISES
6. The Lessor shall at all reasonable times have access to the aforesaid
Demised Premises for the purposes of examining the same, making repairs required
to be made by Lessor, or for the purpose of showing the Demised Premises to
prospective purchasers or lessees.
LAW AND RULE COMPLIANCE
7. Lessee agrees to observe and comply with all laws, ordinances, rules and
regulations of the Federal, State, County, Municipal authorities and regulations
of the Board of Fire Underwriters applicable to the Demised Premises and to the
business to be conducted by Lessee in the Demised Premises.
INCREASE IN INSURANCE RISK
8. In the event that Lessee's occupancy increases the total insurance premium
on the premises of which the Demised Premises are a part, Lessee shall pay said
increase in insurance premium as additional rental. Lessee agrees not to do or
permit anything to be done in said premises or keep anything therein, which will
increase the rate of fire insurance premiums on the improvements or any part
thereof, or on property kept therein or which will obstruct or interfere with
the rights of other tenants or conflict with the regulations of any pertinent
authority or public or quasi-public department or with any insurance policy upon
said improvements or any part thereof. In the event of any increase in
insurance premiums resulting from Lessee's violation of the foregoing, or from
any act or omission on the part of Lessee, Lessee agrees to pay said increase in
insurance premiums on the premises of which the Demised Premises are a part.
Lessee shall, in any event, hold the Lessor harmless from the effect of any said
violation, act or omission. In any action or proceedings wherein the Lessor and
Lessee are parties, a schedule or "make up" of rate for the building on the
Demised Premises, purporting to have been issued by the Insurance Service
Organization in the state in which the Demised Premises is located, or other
body making fire insurance rates for the Demised Premises, shall be prima-facie
evidence of the facts therein stated and of the several items and charges
included in the fire insurance rate then applicable to the Demised Premises.
SERVICES
9. A. If, under the terms of this Lease, Lessor is required to furnish heat,
water, air conditioning, gas, electricity, janitorial or elevator service, any
such service shall be given as long as Lessee is not in default under any of the
covenants of this Lease, subject to strikes, accidents, breakdowns, and
conditions beyond the control of Lessor, and upon such happening no claim for
failure to furnish any such service shall be made by Lessee.
B. Lessor shall not be liable for any failure of water supply or electric
current, sprinkler damage, or failure of sprinkler service, nor shall Lessor be
liable for any loss of property by theft or otherwise or for any damage to
property or injury to persons occurring in or about the Demised Premises and
caused by water, snow, steam, gas, ice, electricity, wires, sewage, heating,
lighting or plumbing equipment, appliances, falling plaster, dampness, vermin,
rodents, insects, or any latent defect in the building or any equipment thereof,
or caused by or resulting from the carelessness, negligence or improper conduct
on the part of Lessee or of any
<PAGE>
-4-
other tenant or of any visitors, servants, agents or employees of Lessee or of
any other tenant or other persons, or the breakage, leakage or obstruction of
the water or sewer pipes, appliances or plumbing works or other leakage in or
about the Demised Premises, or from the street, subsurface or any other cause
whatsoever, except as liability may be imposed on Lessor by any law, the
provisions of which Lessee cannot legally waiver, and except for acts due to the
negligence of Lessor, its employees or agents.
C. Lessor shall not be liable for any interference with the light or air
caused by the erection of other buildings or structures on adjoining or
neighboring premises, or caused by operations by or for the city in construction
of any public or quasi-public work. In the event Lessor engages in the
reconstruction of the building, or the construction of any repair, alteration or
addition thereto, Lessor covenants that its work will not materially interfere
with Lessee's business operation or Lessee's ability to use its space.
D. Lessor shall construct, install, operate, manage, equip, light, repair
and maintain the building and common areas in a serviceable, neat and sightly
condition for the benefit of Lessee and Lessee's customers, employees, licensees
and invitees. Lessor's obligation shall include, but not be limited to,
equipping, lighting, snow and ice removal, elevator services, cleaning the
vestibule, cleaning, gardening, landscaping, public liability and property
damage insurance, repairs, replacements, sanitary control, and attending and
maintaining the parking areas; and to the extent necessary in Lessor's
reasonable judgment security arrangements including private police and similar
services and functions.
E. Lessor shall furnish regular building services (i.e. heating, cooling,
lighting, security, elevator and other building services) Monday through Friday
8:00 am to 6:00 pm and Saturday 8:00 am to 1:00 pm, Sundays and legal holidays
excepted. Lessor acknowledges that Lessee shall utilize the Demised Premises
twenty four hours per day and Lessor covenants that all building services,
exclusive of heating and cooling, shall be available to Lessee on a 24 hour
basis without additional charge therefore. In the event Lessee requires heating
or cooling beyond regular building hours then Lessee shall reimburse Lessor,
within twenty days of demand, the additional costs therefore and Lessor also
reserves the right to have the Demised Premises submetered, at Lessee's cost.
F. Lessor shall clean the Demised Premises in accordance with the
specifications attached hereto as Exhibit A. Though it is agreed that such
cleaning services are included in the base rent for the first lease year and
that Lessee shall pay increases above the base year pursuant to Paragraph 22
herein, it is further agreed that for the period of January 15, 1999 to June 15,
1999 Lessee shall pay to Lessor Lessor's actual cleaning costs for the fifty
percent (50%) of the seventh floor space constructed and delivered to Lessee.
TERMINATION ON DEFAULT AND RIGHTS OF LESSOR
10. A. In the event that Lessee shall violate any condition, covenant or
agreement contained in this Lease, or any part thereof, then Lessor shall have
the right at Lessor's election to terminate this Lease on first giving to Lessee
ten (10) days' notice to cure such default, if such default is the failure to
pay past due rent, or twenty (20) days' notice if such default is the breach or
non-observance of any other covenant or condition, provided, however, that if
the nature of
<PAGE>
-5-
Lessee's default is such that it cannot be cured solely by payment of money and
more than twenty (20) days may be reasonably required for such cure, then Lessee
shall not be deemed to be in default if Lessee shall commence such cure within
said twenty (20) day period and shall thereafter diligently prosecute such to
completion; such election shall be served by registered or certified mail in a
postpaid envelope addressed to Lessee at the address first above given. The
above mentioned term shall cease upon the expiration of said ten (10) or twenty
(20) days, as the case may be, in the same manner and to the same effect as if
that were the expiration of the original term of this Lease; it being further
understood and agreed that such election shall be solely in the discretion of
Lessor, and, if exercised, shall be conclusive upon Lessee.
B. Notwithstanding the foregoing provision, it is agreed that if Lessee
shall be adjudicated a bankrupt, or a receiver is appointed for the business and
property of Lessee, or if Lessee shall make an assignment for the benefit of
creditors, then at the option of Lessor, this Lease may be canceled upon written
notice by Lessor to Lessee, but Lessor shall not be required to give the notice
as required in Subparagraph `A.'
C. If the Lessee shall be deemed in default of any one or all of the
events contained in subparagraphs A and B above beyond the applicable notice and
cure periods, the Lessor may:
(1) at its option, without terminating this Lease, change the locks on
the doors to said premises and exclude the Lessee therefrom until all of such
defaults shall have been completely cured;
(2) at its option, at once, without notice to Lessee or to any other
person, terminate this Lease;
(3) upon the termination of this Lease either at the option of the
Lessor as aforesaid, or at the expiration by lapse of time of the term hereof,
the Lessee will at once surrender possession of said premises to the Lessor and
remove all effects therefrom and if such possession be not immediately
surrendered, the Lessor may forthwith re-enter said premises and repossess
itself thereof as in its former estate and remove all persons and effects
therefrom, using such force as may be necessary, without being deemed guilty of
any trespass or forcible entry;
(4) if the Lessee shall not remove all effects from said premises as
above provided, Lessor may, at its option, remove any or all of said effects in
any manner that Lessor shall choose and store the same without liability for
loss thereof, and Lessee will pay the Lessor, on demand, any and all expenses
incurred in such removal and also storage on said effects for any length of time
during which the same shall be in Lessor's possession or in storage, or Lessor
may at its option, without notice, sell any or all of said effects in such
manner and for such price as the Lessor may deem best and apply the proceeds of
such sale upon any amounts due under this Lease from the Lessee to the Lessor,
including the expenses of removal and sale;
(5) relet the Demised Premises or any part or parts thereof either in
the name of Lessor or Lessee for a term or terms which may at Lessor's option
extend beyond the balance of the term of this Lease, and Lessee shall pay Lessor
any deficiency between the rent hereby reserved and covenanted to be paid in
such reletting, including, but not limited to, attorneys' fees, brokers' fees
and expenses of remodeling and putting the Demised Premises in good order
<PAGE>
-6-
and preparing the same for re-rental. Such deficiency shall be paid in monthly
installments, upon statements rendered by Lessor to Lessee. 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;
(6) collect from Lessee any other loss or damage Lessor may sustain by
reason of any breach;
(7) in the event of a breach or threatened breach by Lessee of any of
the covenants or provisions of this Lease, Lessor shall have the right to enjoin
any such breach or threatened breach;
(8) declare the entire rental for the balance of the term, immediately
due and payable at once.
D. No receipt of monies by the Lessor from the Lessee, after the
termination in any way of this Lease or after giving of any notice, shall
reinstate, continue or extend the term of this Lease, or affect any notice given
to the Lessee prior to the receipt of such money, it being agreed that after the
service of notice or the commencement of a suit, or after final judgment for
possession of said premises, the Lessor may receive and collect any rent due,
and the payment of said rent shall not waive or affect said notice, said suit or
said judgment.
E. Any and all rights and remedies which Lessor may have under this Lease
and any rider hereto attached and made a part hereof 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 such rights and remedies may be exercised at the same
time. In the event of default by Lessee, Lessor shall have the option to
terminate, without additional notice, any lease agreement between Lessor or any
of its affiliates and Lessee.
HOLDING OVER
11. In the event that Lessee shall remain in the Demised Premises after the
expiration of the term of this Lease without having executed a new written Lease
with Lessor, such holding over shall not constitute a renewal or extension of
this Lease. Lessor may, at its option, elect to treat Lessee as one who has not
removed at the end of his term, and thereupon be entitled to all the remedies
against Lessee provided by law in that situation, or Lessor may elect, at its
option, to construe such holding over as a tenancy from month to month, subject
to all the terms and conditions of this Lease except as to duration and rental.
CONDITION OF PREMISES
12. The Lessee shall at all times keep the interior of the Demised Premises in
first class condition. The Lessee shall, at the expiration of the term, or any
renewal or extensions thereof, surrender the Demised Premises in as good
condition as the same are at the time possession thereof is delivered to the
Lessee except for ordinary wear and tear. Lessee shall be responsible for
properly using the water, heating, air conditioning, and plumbing fixtures and
shall pay, as additional rent, for the repair of damage to same, if damage is
done by Lessee, its agents, employees, customers, invitees, licensees or
permitees.
<PAGE>
-7-
MECHANIC'S LIEN
13. In the event that any mechanic's lien is filed against the premises as a
result of alterations, additions or improvements made by Lessee, Lessee shall
cause such lien to be bonded or removed and if Lessee fails to remove same
within thirty (30) days from Lessor's written notice then Lessor, at its option,
may pay the said lien without inquiring into the validity thereof, and Lessee
shall forthwith reimburse Lessor the total expense incurred by Lessor in
discharging or bonding the said lien, as additional rent hereunder.
EMINENT DOMAIN
14. If the property or any part thereof wherein the Demised Premises are
located shall be taken by public or quasi-public authority under any power of
eminent domain or condemnation, this Lease, at the option of Lessor, shall
forthwith terminate. Lessee in no event shall have any claim or interest in or
to any award of damages for such taking, except that Lessee may make a separate
claim for loss of its personal property and moving expenses.
ACCELERATION
15. It is hereby mutually agreed that notwithstanding anything to the contrary
herein contained, the said premises are demised for the rental for the entire
said term, payable at the time of making of this Lease and that the provisions
herein contained for the payment of said rent in installments are for the
convenience of Lessee only and that upon default in payment of the rent
installments as herein allowed, then the whole of the rent hereby reserved for
the whole of said term and then remaining unpaid shall at once become due and
payable without any notice or demand.
DESTRUCTION OF PROPERTY
16. In the event of the destruction of the Demised Premises or the building
containing the said premises by fire, explosion, the elements or otherwise,
during the terms hereby created or previous thereto, or such partial destruction
thereof as to render the premises wholly untenantable or unfit for occupancy,
then the Lessor shall have a period of forty-five (45) days from the date of
such destruction or partial destruction of Demised Premises to determine, at its
election whether the Demised Premises shall be rebuilt, and Lessor thereafter
shall have a period of one hundred twenty (120) days from the date of
commencement of substantial repairs or reconstruction of Demised Premises to
make such premises ready for occupancy. Notwithstanding the foregoing, the term
hereby created, at the option of the Lessor, shall cease and become null and
void from the date of such damage or destruction; and if such option is
exercised the Lessee shall immediately surrender Demised Premise and all
Lessee's interest therein to Lessor and shall pay rent only to the time of such
surrender. However, should the Demised Premises be rendered untenantable and
unfit for occupancy but yet be repairable, at the Lessor's election the Lessor
shall repair the same with reasonable promptness, and in that case the rent
accrued and accruing shall not cease and determine. Lessee shall immediately
notify Lessor in case of fire or other damage to the premises. No claim shall
be made by the Lessee in any case for compensation or damages by reason of
interruption of its business through any such destruction and damage to the
Demised Premises or arising from the necessity of repairing any
<PAGE>
-8-
portion of the entire premises of which the Demised Premises are a part.
Notwithstanding anything contained herein to the contrary, in the event the
Demised Premises are not restored within the aforesaid one hundred twenty (120)
day period then Lessee may terminate this Lease on written notice given to
Lessee anytime within fifteen (15) days following such one hundred twenty (120)
day period.
BUILDING RULES
17. The rules and regulations of Lessor regarding the Demised Premises affixed
to this Lease, if any, as well as those reasonable rules and regulations which
shall hereafter apply to said premises, shall be observed by Lessee and by
Lessee's guests, invitees, licensees, employees, agents and customers.
GLASS
18. Lessee agrees to replace at Lessee's expense any and all glass and molding
which may become broken or in need of repair in and on the Demised Premises.
LIABILITY
19. A. The Lessee further covenants and agrees with the Lessor that during the
term of this Lease and for such other times as the Lessee shall hold or have
access to the Demised Premises, that, except for Lessor's negligence or willful
misconduct (a) the Lessor shall not be liable to the Lessee or to any other
person for any claim, injury, loss or damage to any person or property on or
about the Demised Premises or the sidewalks adjacent thereto, if any, and (b)
the Lessee will save the Lessor harmless and indemnified from and against such
claim, injury, loss or damage. Lessee agrees to provide liability insurance
with $1,000,000.00 combined single limits for bodily injury and property damage.
Insurance policies will be written in the name of the Lessee with the Lessor
named as an additional insured, and Lessee shall provide Lessor with
certificates evidencing such policies upon execution of this Lease.
B. The Lessor further covenants and agrees with the Lessee that during the
term of this Lease and for such other times as the Lessee shall hold or have
access to the Demised Premises, that, except for claims arising out of the
negligence of Lessee, the Lessee shall not be liable to the Lessor or to any
other person for any claim, injury, loss or damage to any person or property on
or about common areas of the building.
CARE OF PREMISES
20. Lessee further agrees as follows: (a) to pay all separately metered
utility charges promptly, (b) to make all repairs and replacements, which Lessee
is obligated to make, in a workmanlike manner, (c) subject to Lessor's
obligation pursuant to Paragraph 9 herein, to keep the Demised Premises and each
part thereof in good, healthful and clean condition, (d) to prevent said
premises from being destroyed or damaged by fire, the elements or otherwise, and
(e) not to overload the floors.
<PAGE>
-9-
REDEMPTION
21. The Lessee expressly waives, forfeits, surrenders and releases the Lessor
from the operation of any provision of law now in force or which may be
hereafter enacted, giving the Lessee the right under any conditions after
default, to the redemption and repossession of the Demised Premises or any part
thereof.
OPERATING EXPENSES
22. A. As further additional rent, in the event that the operating expenses,
hereinafter defined, incurred by Lessor during any year (or partial year)
following the Base Year, hereinafter defined, shall exceed the operating
expenses incurred by Lessor during the Base Year, Lessee shall pay to Lessor for
such year (or partial year) an amount equal to the percentage, hereinafter
defined, of the excess. Within ninety (90) days following the Base Year, and
each year thereafter, Lessor shall furnish to Lessee a statement of the
operating expenses for the preceding period and a statement of the operating
expenses for the Base Year. If the operating expenses for such period exceed
the operating expenses during the Base Year, the additional rent for such
preceding period in an amount equal to the percentage of the excess shall be due
from Lessee to Lessor, and such additional rent shall be payable by Lessee to
Lessor within ten (10) days after receipt of the aforesaid statement. The
statements thus furnished to Lessee constitute a final determination as between
Lessor and Lessee for the operating expenses for the period represented thereby.
B. Upon the date of any expiration or termination of this Lease, whether
the same be the date hereinabove set forth for the expiration of the term or any
prior or subsequent date, the entire additional rent for the preceding period,
if not already paid, and a proportionate share of the additional rent until such
expiration or termination occurs shall immediately become due and payable by
Lessee to Lessor. Promptly after said expiration or termination Lessor shall
compute the additional rent due from Lessee as aforesaid, and within ten (10)
days of Lessee's receipt of Lessor's computation Lessee shall make such payment.
Lessee's obligation to pay any and all additional rent under this Lease and
Lessor's and Lessee's obligation to make the aforesaid adjustments shall survive
any expiration or termination of this Lease.
C. For the purposes of the foregoing provisions the following definitions
shall apply:
(1) The term "operating expenses" shall mean any and all reasonable
and customary costs and expenses paid, incurred or charged by Lessor in
connection with the operation, servicing, maintenance and insurance of the
premises of which the Demised Premises forms a part. If Lessor shall eliminate
the payment of any wages or other costs as a result of the installation of labor
saving devices or by any other means, then in computing the additional rent
payable the corresponding item or items of such wages or other costs shall be
deducted from the operating expenses for the Base Year. In the determining of
operating expenses proper consideration shall be given to those items which are
separately metered, directly billed or otherwise provided for.
(2) The term "Base Year" shall mean the 1999 calendar year.
<PAGE>
-10-
(3) The term "the percentage" shall mean a fraction, the numerator of
which is 32,200 square feet and the denominator of which is the occupied area of
the building of which the Demised Premises forms a part.
ILLEGAL ENTRY
23. Lessee shall be responsible for damage to the Demised Premises as a result
of illegal entry therein or trespass thereupon.
FINANCIAL DATA
24. Lessee shall cooperate with Lessor in every reasonable respect to assist
Lessor in securing financing on the Demised Premises, including, but not by way
of limitation, supplying to Lessor detailed certified financial statements and
factual background of Lessee.
LESSOR'S RIGHT TO RECAPTURE
25. Lessor shall have the right of recapture to take over the space occupied by
the Lessee should the Lessee wish to assign, sublet or vacate the Demised
Premises or any part thereof before the expiration of said Lease, at the rental
the Lessee is paying. The foregoing shall not apply to those transactions
permitted without Lessor's consent pursuant to Paragraph 4(B) herein.
INCREASE IN TAXES
26. Lessee agrees to pay as additional rent its proportionate share of all
increases in real estate taxes and assessments above the Tax Base Year, whether
caused by increase in tax rate or increase of assessment. Lessee's
proportionate share shall be that fractional portion of such increase, the
numerator of which shall be 32,200 square feet and the denominator of which
shall be the square foot area of the occupied office area of which the Demised
Premises forms a part. The increase in tax rate shall include any increase in
the present tax rate subsequent to the execution of this instrument. The
increase of assessment heretofore referred to shall include any assessment
increase after the date of this Lease or if the building is not yet complete,
any assessment increase after the first year of full assessment on the completed
building. As used herein, the term "Tax Base Year" shall mean 1999 County Taxes
and July 1998-June 1999 City/School Taxes.
COVENANT AGAINST WITHHOLDING OF RENTAL
27. Notwithstanding any other provisions contained in this Lease or any
extensions, modifications or renewals thereof, it is understood and agreed that
in the event of default in performance of any agreement, condition, or other
provisions to be performed by Lessor, or if for any other reason Lessee might be
entitled to any reimbursement from Lessor, in no event shall Lessee deduct or
withhold any such amount from rental payments due Lessor pursuant to the rental
provision of this Lease, but upon written notice to Lessor Lessee may pay such
sum to a mutually agreeable escrow agent to be held pending resolution (with
interest accruing to the party entitled to such funds upon release from escrow).
<PAGE>
-11-
MONTHLY RENTAL STATEMENTS
28. Lessor shall not be required to send to Lessee monthly statements for
rentals due or to become due under the terms and conditions of this Lease.
However, it is expressly agreed that monthly past due reminders shall constitute
notice of default.
ALTERATIONS TO DEMISED PREMISES
29. In the event that any governmental authority directs any modification or
alteration to the Demised Premises as the result of Lessee's occupancy, Lessee
shall pay for the cost of such modification or alteration.
CONTINUED RENTAL OBLIGATION
30. If, for any reason, Lessee discontinues the use of the Demised Premises for
the purposes rented or any purpose, Lessee shall still remain liable for the
performance of the terms of this Lease and the payment of the rental thereunder.
INVALIDITY OF PARTICULAR PROVISION
31. If any term or provision of this Lease or the application thereof to any
party or circumstance shall, to any extent, be invalid or unenforceable, the
remainder of this Lease, or the application of such term or provision to parties
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 enforceable to the fullest extent permitted by
law.
PROTEST OF REAL ESTATE TAXES
32. In the event Lessor elects to protest the real estate taxes assessed
against the Demised Premises and such protest shall result in a reduction of
such assessment, Lessee agrees to pay its reasonable pro-rata share of the legal
fees incurred thereby, provided in no event shall Lessee's pro-rata share of
legal fees exceed its savings in taxes.
WATER DAMAGE
33. Lessor shall have no responsibility for any loss sustained by Lessee as the
result of damage to Lessee's merchandise and equipment caused by flood waters or
any other water damage, unless due to Lessor's negligence or willful misconduct.
CARPETING
34. This paragraph is intentionally omitted.
RETURNED CHECKS
35. For a check sent in full or partial payment of any amounts owed pursuant to
this Lease, or any rider thereto or modification thereof, which is not honored
because of insufficient funds,
<PAGE>
-12-
uncollected funds or any other reason, there will be assessed a charge of $50.00
and all subsequent payments shall be made by cash, bank draft, certified check
or money order.
INCREASE IN TAXES
36. Any increases in taxes resulting from construction or improvements made by
or for the benefit of Lessee shall be paid solely by Lessee.
LESSOR'S WORK
37. Lessor shall remodel the Demised Premises pursuant to plans to be prepared
by Lessee and approved by Lessor, provided that the cost does not exceed
Lessee's allowance of $15.00 per square foot. Lessee agrees that if Lessor's
cost for such work exceeds $15.00 per square foot of leasable space then Lessee
shall pay such costs over $15 per foot to Lessor within twenty (20) days of
written demand thereafter.
SECURITY
38. This paragraph is intentionally omitted.
COLLECTION COSTS
39. All costs charged to or incurred by Lessor in the collection of any amounts
owed pursuant to this Lease shall be paid by Lessee; and, at the option of
Lessor, shall be deemed to be additional rent hereunder and shall be due from
Lessee to Lessor on the first day of the following month.
TELEPHONE LINES
40. Lessor warrants that telephone service is available to the Demised
Premises. Lessee shall be responsible for the installation and maintenance of
any telephone lines which service the Demised Premises. All telephone lines
shall be installed in a good, workmanlike manner at Lessee's cost and expense.
41. This paragraph is intentionally omitted.
HAZARDOUS SUBSTANCES
42. Lessee shall not conduct any activities with respect to the Demised
Premises or the building which result in the generation, storage or release of
any toxic, hazardous or similar substances (as those terms may be defined from
time to time in any federal, state or local law, rule or regulation). Lessee
shall bear all liability for any claim, injury, loss or damage to any person or
the environment as a result of any such toxic, hazardous or similar substances
and Lessee will save Lessor harmless and indemnify Lessor against any such loss,
claim, injury or damage, unless caused by Lessor's negligence or willful
misconduct. Notwithstanding the foregoing, Lessee may use incidental cleaning
supplies and other "hazardous" materials in connection with the use permitted
hereunder provided that such usage is in compliance with applicable law.
<PAGE>
-13-
CONTINUED OCCUPANCY
43. This paragraph is intentionally omitted.
PERSONAL PROPERTY
44. Lessee assumes all risk or damage to or destruction, loss or pilferage of
fixtures, personal property or any improvements Lessee has made within the
Demised Premises or any loss suffered by Lessee's business resulting from any
cause whatsoever and shall save and hold Lessor harmless from all claims
resulting therefrom.
ESTOPPEL CERTIFICATES
45. Within ten (10) days after Lessor's written request therefore, Lessee shall
deliver to Lessor or to any prospective purchaser or mortgagee of the Demised
Premises a written statement certifying (if such is the case) that this Lease is
in full force and effect and has not been assigned, modified, supplemented or
amended; that all covenants, conditions and agreements on the part of Lessor
hereunder have been performed; and that there are no defenses or offsets to the
enforcement of this Lease by Lessor, or stating those claimed by Lessee.
CAPTIONS AND DEFINITIONS
46. Marginal captions of this Lease are solely for convenience of reference and
shall not in any way limit or amplify the terms and provisions thereof. The
necessary grammatical changes which shall be required to make the provisions of
this Lease apply, (a) in the plural sense if there shall be more than one
Lessor, and (b) to any Lessor which shall be either a corporation, an
association, a partnership or individual, male or female, shall in all instances
be assumed as though in each case fully expressed. Unless otherwise provided,
upon the termination of this Lease under any of the Articles hereof, the parties
hereto shall be relieved of any further liability hereunder except as to acts,
omissions or defaults occurring prior to such termination.
WAIVER OF COVENANT OR CONDITION
47. The failure of Lessor to insist upon strict performance of any of the
covenants or conditions of this Lease or to exercise any option herein conferred
in any one or more instances shall not be construed as a waiver or
relinquishment for the future of any such covenants, conditions or options, but
the same be and remain in full force and effect.
GOVERNING LAW
48. Lessor and Lessee agree that in the event of litigation arising from or in
connection with this Lease, the governing law shall be the laws of the state in
which the Demised Premises are located. Lessor and Lessee hereby waive any
right either may have to a jury trial.
NEGOTIATION AND EXECUTION
49. The furnishing of this Lease to the Lessee by the Lessor shall not be
considered an offer to lease, even though completed in every respect, until and
unless the document has been
<PAGE>
-14-
executed by the appropriate officers of Lessor. No deposit of proposed rent or
security deposit and no correspondence or other communication respecting this
Lease shall create any obligation to go forward with this Lease until the Lease
document is fully completed and executed by both the Lessor and Lessee.
PARKING
50. A. At no cost to Lessee and provided Lessee is operating its business at
the Demised Premises and is not in default beyond applicable cure period, Lessor
shall provide Lessee with fifty (50) parking spaces in the surface parking lots
adjacent to the building of which the Demised Premises forms a part.
B. Lessor shall also make forty (40) underground parking spaces available
to Lessee for Lessee to purchase at market rates. If upon the Commencement
Date, Lessee elects to purchase fewer than the forty spaces so reserved, then
Lessee's ability to later purchase such spaces shall be subject to their
availability.
C. Between the hours of 6:00 p.m. and 7:00 a.m. and on weekends and
federal holidays Lessee may use, at no cost to Lessee, up to thirty (30)
additional parking spaces in the underground garage provided that Lessee is
operating its business at the Demised Premises and is not in default beyond
applicable cure periods.
BUILDING NAME
51. A. Lessor agrees that during the term of this Lease and provided Choice
One Communications Inc. is operating its business from the Demised Premises
Lessor shall not name the building after any of Lessee's competitors. As used
herein, Lessee's competitors shall mean any company selling telecommunications
services (including local long-distance, telephone and data and internet
provider) or any equipment manufacturer or equipment provider to such service
companies.
B. Lessee acknowledges that so long as the Marine Midland Lease is in
effect that Lessor cannot change the name of the building. If anytime during
the term of this Lease Lessor is able to change the building name then it shall
notify Choice One Communications Inc. and Choice One Communications Inc. shall
have the first right to the building name provided at the time said renaming
occurs Choice One Communications Inc. is occupying at least 100,000 square feet
of space and has a then remaining Lease term of not less than ten (10) years.
SOLICITATION
52. Lessor acknowledges that Lessee may solicit other tenants in the building
for Lessee's products and services.
STORAGE
53. Lessor acknowledges that since Lessee will occupy only a portion of the
Demised Premises upon commencement of the term of this Lease the remaining
Demised Premises space
<PAGE>
-15-
may be used by Lessee for temporary storage until such time as Lessor begins
construction in such area.
EARLY TERMINATION
54. Notwithstanding anything contained herein to the contrary, if after the
fifth lease year Lessee needs additional space Lessee may notify Lessor in
writing of the amount of additional space so required. Within seventy-five days
from receipt of Lessee's notice Lessor shall inform Lessee in writing of the
location and date of availability for the expansion space and as soon as
practicable thereafter Lessor and Lessee shall enter into a modification
agreement whereby the size of the Demised Premises and the rent payable
hereunder is increased accordingly. Such additional space shall be rented at
the same rate per square foot and Lessee's allowance for construction shall be
$15.00 per square foot. Lessee shall then prepare and deliver drawings and
specifications to Lessor and Lessor shall deliver the expansion space to Lessee
no later than one-hundred twenty days from receipt of Lessee's plans. In the
event Lessor cannot deliver Lessee the additional space it shall notify Lessee
in writing ("Lessor's Rejection Notice"), and Lessee may terminate this Lease on
not less than one hundred twenty (120) day notice given within thirty (30) days
from Lessee's receipt of Lessor's Rejection Notice provided that at the time of
giving such termination notice Lessee pays to Lessor the unamortized cost of
Lessor's improvements to the original Demised Premises (amortized over 10 years
at 10% interest).
DELIVERY DATES
55. A. Provided that Lessor receives Lessee's final plans on or before
November 1, 1998 then Lessor shall deliver the initial 16,100 square feet of
space on the eighth floor and fifty percent (50%) of the seventh floor to Lessee
on or before January 15, 1999.
B. Lessor shall deliver the remainder of the seventh floor space to
Lessee within seventy-five (75) days from receipt of Lessee's final plans for
such space (but not before April 1, 1999).
NEITHER PARTY HAS MADE ANY REPRESENTATIONS OR PROMISES EXCEPT AS HEREIN
CONTAINED, AND NO MODIFICATION OF ANY PROVISION HEREOF SHALL BE VALID UNLESS IN
WRITING AND SIGNED BY THE PARTIES HERETO.
IN WITNESS WHEREOF, the Parties have hereunto set their hands and seals, the
corporate parties by their proper officers thereunto duly authorized, as of the
day and year first above written.
LESSOR: HENDERSON-ROCHESTER ASSOCIATES, LLC
Date: October 23, 1998 By: /s/ Ronald Henderson
------------------------------
Ronald Henderson, Manager
Date: October 23, 1998 By: /s/ David Baldauf
------------------------------
David H. Baldauf, Manager
<PAGE>
-16-
LESSEE: CHOICE ONE COMMUNICATIONS, INC.
Date: By: /s/ Steve M. Dubnik
---------------- ------------------------------
Name Steve M. Dubnik
Its: Chairman and Chief Executive Officer
Tax ID#: 16-1550742
<PAGE>
-17-
GENERAL RULES AND REGULATIONS
1. The sidewalk, entrances, passages, courts, vestibules, corridors and halls
shall not be obstructed or encumbered by any tenant or used for any purpose
other than ingress and egress to and from the premises without prior written
consent of Lessor.
2. No awnings or other projections shall be attached to the outside walls of
the buildings without the prior written consent of Lessor.
3. No sign, signal, advertisement, notice or other lettering shall be
exhibited, inscribed, painted, or affixed by any tenant on any part of the
outside of the respective premises without the prior written consent of the
Landlord (except that Lessee may use signage in accordance with the Lease). In
the event of the violation of the foregoing by any tenant, Landlord may remove
same without any liability and may charge any reasonable expense incurred in
such removal to the tenants violating this rule.
4. The sashes, sash doors, skylights, windows, and doors that reflect or admit
light and air into the halls, passageways or other public places in the building
shall not be covered or obstructed by any tenant.
5. No show cases, sales tables, merchandise displays, or other articles shall
be put in front of or affixed to any part of the exterior of the building, nor
placed in the halls, common passageways, corridors or vestibules without the
prior written consent of Lessor.
6. The water and wash closets and other plumbing fixtures shall not be used for
any purpose other than those for which they were constructed and no sweepings,
rubbish, rags, or other substances shall be thrown therein. All damages
resulting from any misuse of the fixtures shall be borne by the tenant who, or
whose servants, employees, agents, visitors, or licenses shall have caused the
same.
7. No tenant shall cause or permit any unusual or objectionable odors which
would constitute a common law nuisance to be produced upon or released from the
respective premises.
8. No space in the common area of the shopping center portion shall be used for
the sale of merchandise, goods, or property of any kind at auction without prior
written consent of Lessor.
9. No tenant shall make, or permit to be made, any disturbing noises or disturb
or interfere with occupants of the building or those having business within
them, whether by the use of any musical instrument, amplified sound, whistling,
or signing, or in any other way. No tenant shall throw anything out of the
doors, windows or skylights down the passageways.
10. No Lessee, nor any of Lessee's servants, employees, agents, visitors or
licensees, shall at any time bring or keep in the respective premises any
flammable, combustible or explosive fluid, chemical or substance.
11. Lessee will, upon the termination of its tenancy, use reasonable efforts to
restore to Lessor all keys of stores and offices, either furnished to, or
otherwise procured by Lessee, and in the event closets or other lockable
permanent fixtures are installed in the respective premises, give all keys or
combinations thereto to Lessor at the termination of the Lease.
<PAGE>
-18-
12. The respective premises shall not be used for lodging or sleeping or for
any immoral or illegal purpose.
13. Lessor's employees shall not perform any work or do anything outside of
their regular duties, unless under special instructions from the office of
Lessor.
14. Canvassing, soliciting and distribution of hand bills is prohibited and
each tenant shall cooperate to prevent the same.
15. There shall not be used in any space, or in the public halls of the
building, either by any tenant or others, in the delivery or receipt of
merchandise, any hand trucks, except those equipped with rubber tires.
<PAGE>
EXHIBIT A
CLEANING SCHEDULE
Nightly
(between the hours of 7:00 p.m. and 6:00 a.m., Monday through Friday, Legal
Holidays excepted).
1. Clean lavatories as follows:
(a) Sweep and wash floors, using an odorless disinfectant in wash water.
(b) Wash and polish all mirrors, powder shelves, bright work, and enamel
surfaces.
(c) Thoroughly scour, wash and disinfect all basins, bowls, and urinals.
(d) Wash and disinfect all toilet seats, both sides.
(e) Wash all partitions, tile walls, towel, paper, and sanitary napkin
dispensers, and receptacles, as required.
(f) Empty and clean paper towel and sanitary disposal receptacles.
(g) Fill toilet tissue holders, soap dispensers and towel dispensers,
materials to be furnished by Landlord.
2. Empty and clean all waste receptacles, ashtrays and sand urns. Utilize
plastic bag liners in all waste receptacles.
3. Wash, clean and disinfect all water fountains and water coolers.
4. Hand dust all office furniture and fixtures, shelves, sills and other dust
collecting surfaces.
5. Remove all rubbish and trash from premises
6. Vacuum all rugs and carpeting and remove any spots or stains.
7. Dust mop all uncarpeted areas, using treated mops and damp mop, as
necessary to remove any stains or spills.
8. Damp mop floors in entrance foyers, elevator lobbies, and public corridors,
if applicable.
9. Wet sponge wipe table tops in employee lounge, including cleaning of any
spills, if applicable.
10. During nightly tour, close all windows and blinds, extinguish lights, lock
doors and report any malfunctions.
11. Keep locker, storage and slop sink rooms in a clean and orderly manner.
12. Keep sidewalks and parking areas clean and rubbish free.
Weekly
1. Damp mop and buff polish all uncarpeted areas.
2. Keep lawn and landscaping properly maintained, if applicable.
3. Wash all directory board, display, entry door, and side light glass, as
necessary.
Bi-Monthly
1. All uncarpeted floor areas to be washed, waxed and machine polished.
2. Clean air conditioning grilles and filters as required.
3. High dusting:
(a) Dust in place all pictures, frames, charts, graphs and similar wall
hangings.
(b) Dust clean all vertical surfaces, such as walls, partitions, doors,
books and other surfaces not reached in nightly cleaning.
(c) Dust clean all exposed pipes, air conditioning louvers, ducts and
other areas not reached in nightly cleaning.
<PAGE>
-2-
(d) Dust clean all lighting fixtures.
(e) Vacuum all mini blinds.
4. Remove all finger marks and smudges from doors, partitions, woodwork,
window ledges and window mullions.
5. Wash, clean, and disinfect all lavatory vinyl.
Semi-Annually
1. Wash all windows inside and out.
2. Clean all rugs and carpeting using a process in accordance with
manufacturer's recommended specifications.
Annually
1. Damp wipe all light fixtures, including lenses and fluorescent tubes.
2. Clean all vinyl.
<PAGE>
EXHIBIT 10.22
UNIT PURCHASE AGREEMENT
DATED AS OF OCTOBER 21, 1999
AMONG
CHOICE ONE COMMUNICATIONS INC.,
ATLANTIC CONNECTIONS, L.L.C.,
ACL TELECOMMUNICATIONS, LTD.,
PAUL CISSEL,
ANTONIO LOPEZ, JR.
AND
NORTH ATLANTIC VENTURE FUND II, L.P.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1.1. Definitions. 1
2. Purchase and Sale of the Units, the Warrant and the Convertible Debenture;
Payment of Debt....................................................................... 5
2.1. Purchase and Sale of the Units.................................................... 5
2.2. Purchase Price.................................................................... 6
2.3. Preliminary Payment of the Purchase Price......................................... 6
2.4. Escrow of the Holdback Amount..................................................... 6
2.5. Payment Regarding Consulting Revenues............................................. 6
2.6. Determination of the Purchase Price............................................... 7
2.7. Closing Payment Adjustment........................................................ 8
2.8. Additional Consideration.......................................................... 9
2.9. Minority Unit Holders Representative.............................................. 11
3. Closing............................................................................... 11
4. Documents To Be Delivered at the Closing.............................................. 11
4.1. Documents To Be Delivered to the Buyer by the Company and the Sellers............. 11
4.2. Documents To Be Delivered to the Company and the Sellers by the Buyer............. 13
5. Representations and Warranties by the Company, the Subsidiary and the Founders........ 14
5.1. Ownership; Transfer of the Units.................................................. 14
5.2. Authority......................................................................... 14
5.3. Approvals......................................................................... 15
5.4. Transaction Costs and Expenses.................................................... 15
5.5. Organization, Etc................................................................. 15
5.6. Units............................................................................. 16
5.7. No Subsidiaries, Etc.............................................................. 16
5.8. Financial Statements.............................................................. 17
5.9. Absence of Certain Changes........................................................ 17
5.10. Tax Returns, Taxes................................................................ 18
5.11. Non-Contravention................................................................. 19
5.12. Title to and Condition of the Assets of the Company............................... 19
5.13. Litigation........................................................................ 20
5.14. Employee Benefit Plans and Other Arrangements..................................... 21
5.15. Contracts......................................................................... 22
5.16. Insurance......................................................................... 23
5.17. Trademarks, Etc................................................................... 23
5.18. Transactions with Interested Persons.............................................. 24
5.19. Compliance with Laws, Etc......................................................... 24
5.20. No Undisclosed Liabilities, Etc................................................... 24
5.21. Environmental Matters............................................................. 25
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
5.22. Governmental Authorizations and Regulations....................................... 26
5.23. Accounting Practices.............................................................. 26
5.24. Minute Books...................................................................... 26
5.25. Employee Matters.................................................................. 26
5.26. Year 2000 Compliance.............................................................. 27
5.27. Banks; Powers of Attorney......................................................... 27
5.28. Accuracy of Information Furnished................................................. 27
5.29. Representations and Warranties by NAV............................................. 27
6. Representations and Warranties of the Buyer to the Company and the Seller............. 28
6.1. Authority for Agreements.......................................................... 28
6.2. Buyer's Non-Contravention......................................................... 29
6.3. Buyer's Approvals................................................................. 29
6.4. Transaction Costs and Expenses.................................................... 29
6.5. Investment Purpose; Experience.................................................... 29
6.6. Litigation........................................................................ 30
6.7. Organization, Etc................................................................. 30
6.8. Accuracy of Information Furnished................................................. 30
7. Covenants of the Company and the Sellers.............................................. 30
7.1. Access, Information and Documents................................................. 30
7.2. Conduct of Business Pending Closing............................................... 31
7.3. Consents and Approvals............................................................ 32
7.4. Confidential Material............................................................. 32
7.5. Employment Contracts.............................................................. 33
7.6. Liability for Federal, State and Local Taxes...................................... 33
7.7. Allocation of Purchase Price and Earned Amount; Final Company Tax Returns......... 33
7.8. Claims Experience................................................................. 34
7.9. Employment and Employee Benefits.................................................. 34
7.10. Further Assurances................................................................ 34
8. Covenants of the Buyer................................................................ 34
8.1. Confidential Information.......................................................... 35
8.2. Consents and Approvals............................................................ 35
8.3. Employment and Employee Benefits.................................................. 35
8.4. Further Assurances................................................................ 36
8.5. Purchase Price and Earned Amount Allocation Schedule; Final Company Tax Returns... 36
9. Conditions Precedent to the Sellers' Obligations...................................... 36
9.1. The Buyer's Performance........................................................... 36
9.2. Consents and Approvals............................................................ 37
9.3. No Legal Impediment............................................................... 37
9.4. Unit Holders Consent.............................................................. 37
10. Conditions Precedent to the Buyer's Obligations...................................... 37
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
10.1. The Company's, the Subsidiary's and the Sellers' Performance...................... 37
10.2. Consents and Approvals............................................................ 37
10.3. Physical Properties............................................................... 38
10.4. Bank Consent...................................................................... 38
10.5. No Legal Impediment............................................................... 38
10.6. Consent of Sellers' Accountants Regarding Registration Statement.................. 38
10.7. Minority Unit Holders Representative Agreement.................................... 38
10.8. Termination of Prior Employment Agreements........................................ 38
11. Termination........................................................................... 38
11.1. Termination by the Buyer.......................................................... 38
11.2. Termination by the Company or the Seller.......................................... 39
11.3. Effect of Termination............................................................. 39
12. Indemnification....................................................................... 39
12.1. Indemnification of the Buyer and the Company...................................... 39
12.2. Indemnification of the Sellers.................................................... 40
12.3. Limitation on Indemnification..................................................... 40
12.4. Set-Off Right of Buyer............................................................ 41
12.5. Indemnification Claims Procedure.................................................. 41
12.6. Survival of Representations, Warranties, Covenants and Indemnification............ 42
12.7. Sellers' Waiver of Subrogation and Indemnification Claims......................... 42
12.8. General Waiver of Claims by Sellers............................................... 42
12.9. Exclusive Remedy.................................................................. 42
13. Miscellaneous......................................................................... 43
13.1. Entire Agreement; Amendments; Waivers............................................. 43
13.2. Counterparts...................................................................... 43
13.3. Successors and Assigns............................................................ 43
13.4. Governing Law; Consent to Jurisdiction of Venue................................... 43
13.5. Notices........................................................................... 44
13.6. Expenses.......................................................................... 45
13.7. Headings; Form of Words........................................................... 45
13.8. Severability...................................................................... 45
</TABLE>
EXHIBITS
- --------
Exhibit A Escrow Agreement
Exhibit B Customer Retention Guidelines
Exhibit C Retained Employees List
Exhibit D Employment Agreement
Exhibit E Non-competition Agreement
Exhibit F-1 Opinion of Counsel for the Company and the Subsidiary
Exhibit F-2 Opinion of Counsel for NAV
Exhibit G Unit Holders Representative Agreement
-iii-
<PAGE>
SCHEDULES
- ---------
Schedule 1.1(r) Debt
Schedule 2.3(a) List of Sellers, Units and Warrant Owned, and Percentage
Interest
In Payment Amounts
Schedule 2.5 Consulting Services Customers
Schedule 2.5A Bell Atlantic and Other Disputed Accounts
Schedule 5.3 Approvals
Schedule 5.4 Transaction Fees
Schedule 5.5 Organization
Schedule 5.9 Absence of Certain Changes
Schedule 5.10 Tax Returns Taxes
Schedule 5.11 Non-Contravention
Schedule 5.12 Title to and Condition of the Assets of the Company
Schedule 5.13 Litigation
Schedule 5.14 Employee Benefit Plans and Other Arrangements
Schedule 5.15 Contracts
Schedule 5.16 Insurance
Schedule 5.17 Trademarks, etc.
Schedule 5.18 Transactions with Interested Persons'
Schedule 5.19 Compliance with Laws, Etc.
Schedule 5.20 No Undisclosed Liabilities, Etc.
Schedule 5.22 Government Authority
Schedule 5.25 Employees
Schedule 5.26 Year 2000
Schedule 5.27 Powers of Attorney
Schedule 6.2 Purchaser's Non-Contravention
Schedule 6.3 Purchaser's Approvals and Regulations
Schedule 6.4 Transaction Costs and Expenses
-iv-
<PAGE>
UNIT PURCHASE AGREEMENT
-----------------------
THIS UNIT PURCHASE AGREEMENT (this "Agreement") is dated as of the 21st day
of October, 1999 by and among Choice One Communications Inc., a Delaware
corporation ("Choice One"), Atlantic Connections, L.L.C., a Massachusetts
limited liability company (the "Company"), ACL Telecommunications, Ltd., a New
Hampshire corporation (the "Subsidiary"), Paul Cissel ("Cissel"), an individual
residing at 212 Chestnut Street, North Andover, MA 01848, Antonio Lopez, Jr.
("Lopez"), an individual residing at 51 Ayer Street, Methuen, MA 01844, and
North Atlantic Venture Fund II, L.P. ("NAV"), a Delaware limited partnership.
Cissel and Lopez are hereafter referred to collectively as the "Founders."
WHEREAS, the Founders and other holders of units and options to purchase
units of the Company listed on Schedule 2.3(a) hereto (the "Minority Unit
Holders"; and collectively with the Founders and NAV, the "Sellers") are members
of the Company who own an aggregate of 100% of the units of the Company and all
outstanding options to purchase units of the Company;
WHEREAS, NAV is the holder of a certain Warrant Certificate dated September
8, 1998 (the "Warrant") to purchase 10,000 units of the Company and a 12%
Convertible Subordinated Debenture dated September 8, 1998 in the principal
amount of $100,000 (the "Convertible Debenture") which is convertible into units
of the Company representing up to 15% of the fully diluted ownership of the
Company, each as more particularly described on Schedule 2.3(a) hereto;
WHEREAS, the Subsidiary is a wholly-owned subsidiary of the Company; and
WHEREAS, Choice One, directly or through its designees (the "Buyer"),
desires to purchase, and the Sellers desire to sell and cause to be sold to the
Buyer, 100% of the membership units of the Company, outstanding options, the
Warrant and the Convertible Debenture, all upon the terms and subject to the
conditions hereinafter set forth; and
WHEREAS, as a condition to the purchase of the units of the Company,
outstanding options, the Warrant and the Convertible Debenture, the Buyer will
pay and discharge the obligations of the Company under the 12% Amortizing
Subordinated Debenture in the face amount of $1,400,000 issued by the Company to
NAV on September 8, 1998 (the "Amortizing Debenture") and other outstanding
indebtedness of the Company and the Subsidiary, all upon the terms and subject
to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises, the respective covenants,
agreements, representations, and warranties of the parties herein contained, and
other good and valuable consideration, the receipt and legal sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally
bound, hereby agree as follows:
1.1. Definitions. As used in this Agreement, terms defined in the
-----------
preamble of this Agreement shall have the meanings set forth therein and the
following terms shall have the meanings set forth below.
<PAGE>
(a) "Accounts Receivable" means the accounts receivable of the
-------------------
Company and the-Subsidiary on a consolidated basis aged less than ninety (90)
days resulting from sales of telecommunications services or equipment in the
ordinary course of business, net of bad debt reserves determined in accordance
with GAAP.
(b) "Accounts Payable" means the accounts payable (exclusive of Debt)
----------------
of the Company and the Subsidiary on a consolidated basis determined in
accordance with generally accepted accounting principles consistently applied.
(c) "Adjustment Amount" means the difference between (i) the sum of
-----------------
Cash plus Accounts Receivable, minus (ii) the Accounts Payable .
(d) "Applicable Consulting Period" shall have the meaning set forth
----------------------------
in Section 2.5 hereof.
(e) "Buyer's Accountants" means Arthur Anderson or any other "big
-------------------
five" accounting firm designated by the Buyer.
(f) "Cash" means the cash and cash equivalents of the Company and the
----
Subsidiary on a consolidated basis determined in accordance with GAAP
consistently applied.
(g) "Charter Documents" means the Operating Agreement of the Company
-----------------
and the Certificate of Incorporation and Bylaws of the Subsidiary.
(h) "Claims Certificate" means the certificate required under
------------------
Section 7.8 hereof.
(i) "Closing" means the closing of the purchase and sale of the
-------
Units and the Warrant, and the payment and discharge of the Debenture.
(j) "Closing Date" means the date and time of the Closing.
------------
(k) "Closing Date Balance Sheet" shall have the meaning set forth
--------------------------
in Section 2.6 hereof.
(l) "Closing Statement" shall have the meaning set forth in Section
-----------------
2.6 hereof.
(m) "Code" means the Internal Revenue Code of 1986, as amended.
----
(n) "Confidential Material" shall have the meaning set forth in
---------------------
Section 7.4 hereof.
(o) "Consulting Customers" shall have the meaning set forth in
--------------------
Section 2.5 hereof.
-2-
<PAGE>
(p) "Consulting Fee Amount" shall have the meaning set forth in
---------------------
Section 2.5 hereof.
(q) "Contracts" shall have the meaning set forth in Section 5.15
---------
hereof.
(r) "Debt" means all debts, short term and long term obligations,
----
and other amounts payable by the Company and the Subsidiary except trade
payables, determined in accordance with generally accepted accounting principles
consistently applied, as set forth on Schedule 1.1(r) hereto, including without
limitation, the amounts payable to NAV under the Amortizing Debenture.
(s) "Debt Amount" means the aggregate amount of the Debt as of the
-----------
date hereof as set forth on Schedule 1.1(n) hereto, plus additional interest
thereon accruing from and after the date hereof to the Closing Date, minus
payments thereof made after the date hereof to the Closing Date.
(t) "Damages" shall have the meaning set forth in Section 6.1
-------
hereof.
(u) "Earned Amount" shall have the meaning set forth in Section 2.8
-------------
hereof.
(v) "Earned Amount Date" shall have the meaning set forth in Section
------------------
2.8 hereof.
(w) "Earned Amount Notice" shall have the meaning set forth in
--------------------
Section 2.8 hereof.
(x) "Employment Contract" shall have the meaning set forth in
-------------------
Section 4.1(j) hereof.
(y) "ERISA" means the Employee Retirement Income Security Act of
-----
1974, as amended.
(z) "ERISA Plan" shall have the meaning set forth in Section 4.14(a).
----------
(aa) "Escrow Agent" shall have the meaning set forth in Section 2.4.
------------
(bb) "Escrow Agreement" means the escrow agreement described in
----------------
Section 2.4 substantially in the form attached hereto as Exhibit A to be
executed by each party.
(cc) "Financial Statement Date" means June 30, 1999.
------------------------
(dd) "GAAP" means generally accepted accounting principles.
----
(ee) "Governmental Entity" means any court, administrative agency,
-------------------
commission, regulatory authority or other governmental authority or
instrumentality, whether domestic or foreign.
-3-
<PAGE>
(ff) "Holdback Amount" means an amount equal to Ten Percent (10%) of
---------------
the sum of (i) the Preliminary Purchase Price plus (ii) the Debt Amount.
(gg) "Intellectual Property" shall have the meaning set forth in
---------------------
Section 5.17.
(hh) "Knowledge of the Company" and "Knowledge of the Subsidiary"
----------------------------------------------------------
shall mean the actual knowledge of Cissel and Lopez.
(ii) "Liens" means any liens, pledges, charges, claims, restrictions
-----
on transfer, mortgages, security interests or other encumbrances of any sort.
(jj) "Unit Holders Representative Agreement" shall have the meaning
-------------------------------------
set forth in Section 2.9 hereof.
(kk) "Minority Unit Holders Representative" shall have the meaning
------------------------------------
set forth in Section 2.9 hereof.
(ll) "NAV Documents" shall have the meaning set forth in Section 5.29
-------------
hereof.
(mm) "Non-Competition Agreements" shall have the meaning set forth in
--------------------------
Section 4.1(g).
(nn) "Objections to Earned Amount" shall have the meaning set forth
---------------------------
in Section 2.8 hereof.
(oo) "Option Termination Agreements" shall have the meaning set forth
-----------------------------
in Section 4.1 hereof.
(pp) "Preliminary Purchase Price" shall have the meaning set forth in
--------------------------
Section 2.3 hereof .
(qq) "Purchase Price and Earned Amount Allocation Schedule" shall
----------------------------------------------------
have the meaning set forth in Section 8.5 hereof.
(rr) "Purchase Price" shall have the meaning set forth in Section 2.2.
--------------
(ss) "Qualified Consulting Customers" shall have the meaning set
------------------------------
forth in Section 2.5 hereof.
(tt) "Qualified Shares" means fully paid and non-assessable shares
----------------
of common stock of Choice One which have been registered under the Securities
Act and are freely tradable without restriction on resale under state or federal
securities laws, or under any document or instrument binding on Choice One.
(uu) "Revenues" shall mean the billed revenues of the Company and the
--------
Subsidiary determined in accordance with generally accepted accounting
principles
-4-
<PAGE>
consistently applied, but excluding amounts billed or collected by the Company
with respect to federal excise taxes, non-recurring items, extraordinary items,
deposits by users, excise taxes, late fees, consulting fees, intercompany
revenue and items similar to the foregoing exclusions.
(vv) "Securities Act" means the Securities Act of 1933, as amended.
------------------------------------------------
(ww) "Sellers' Accountants" shall have the meaning set forth in
--------------------
Section 2.6.
(xx) "Sellers' Transaction Costs" means the costs of Sellers incurred
--------------------------
in connection with the transactions contemplated by this Agreement, including
attorneys' and accountants' fees and the fees of Gagan Bennett & Co., brokers
for the Sellers, as certified to the Buyer by the Founders on the Closing Date.
(yy) "Statement of Objections" shall have the meaning set forth in
-----------------------
Section 26 hereof.
(zz) "Taxes" shall have the meaning set forth in Section 5.10.
-----
(aaa)"Transferring Employees" shall have the meaning set forth in
----------------------
Section 7.8.
(bbb)"Units" shall have the meaning set forth in Section 2.1.
-----
2. Purchase and Sale of the Units, the Warrant and the Convertible
---------------------------------------------------------------
Debenture; Payment of Debt.
- --------------------------
2.1. Purchase and Sale of the Units
------------------------------
(a) The Buyer will purchase and accept delivery from the Founders and the
Minority Unit Holders at the Closing, and the Founders will sell, assign,
transfer, and deliver and cause the Minority Unit Holders to sell, assign,
transfer and deliver to the Buyer 75,000 units of the Company, (including all
outstanding options to purchase units of the Company on an as converted basis)
constituting 100% of the ownership interests and rights (except as provided in
the Warrant and the Convertible Debenture) to acquire ownership interests in the
Company, on a fully diluted basis (collectively, the "Units"), free and clear of
all liens, claims, charges, restrictions, equities, rights, options, adverse
interests, litigation, and encumbrances of any kind.
(b) The Buyer will purchase and accept delivery from NAV, and NAV will
sell, assign, transfer and deliver to the Buyer, the Warrant and the Convertible
Debenture, free and clear of all liens, claims, charges, restrictions, equities,
rights, Warrant, options, adverse interest, litigation, and encumbrances of any
kind.
(c) The Buyer will pay and discharge the Debt. Upon payment of amounts due
thereunder in accordance with its terms, NAV will deliver the Amortizing
Debenture to the Buyer marked "paid in full," free and clear of all liens,
claims, charges, restrictions, equities, rights, options, adverse interests,
litigation and encumbrances of any kind.
-5-
<PAGE>
2.2. Purchase Price. The purchase price for the Units, the Warrant and
--------------
the Convertible Debenture shall be an amount (the "Purchase Price") equal to the
Revenues for the period from August 1, 1999 through October 31, 1999 multiplied
by four (4), minus the amount of the Debt as of the Closing Date and either (i)
plus the Adjustment Amount as of the Closing Date if it is a positive amount or
(ii) minus the Adjustment Amount as of the Closing Date if it is a negative
amount. The Purchase Price shall be allocated among the Sellers in accordance
with their respective interests in the Company as set forth on Schedule 2.3(a)
hereto, which with respect to the Warrant and the Convertible Debenture shall be
determined on an as converted basis.
2.3. Preliminary Payment of the Purchase Price. At the Closing, the
-----------------------------------------
Buyer will pay the Sellers by wire transfer or cashier's checks, as determined
by the Buyer in its discretion, an aggregate amount (the "Closing Payment
Amount") equal to the Preliminary Purchase Price (as hereinafter defined) minus
the Holdback Amount, minus the Sellers' Transaction Costs. The Buyer shall pay
each Seller a percentage of the Closing Payment Amount equal to the percentage
interest of each Seller therein as set forth in Schedule 2.3(a) hereto; provided
that the amount paid to any option holder set forth on Schedule 2.3(a) hereto
shall be reduced by the amount of any option exercise price not paid to the
Company by such option holder (the "Unpaid Option Exercise Price"). The
aggregate amount of the Unpaid Option Exercise Price shall be paid to all the
Sellers in accordance with their respective percentage interests in the Company
as set forth in Schedule 2.3(a) hereto. The Buyer shall also pay, on behalf of
the Sellers, the Sellers' Transaction Costs.
(b) The term "Preliminary Purchase Price" means an amount equal to the
Revenues for the period from August 1, 1999 through September 30, 1999
multiplied by six (6), minus the amount of the Debt as of the Closing Date and
-----
either (i) plus the Adjustment Amount as of the Closing Date if it is a positive
----
amount or (ii) minus the Adjustment Amount as of the Closing Date if it is a
-----
negative amount, as agreed upon prior to the Closing by Cissel and Steve Dubnik,
Chief Executive Officer of Choice One.
2.4. Escrow of the Holdback Amount. On the Closing Date, the Buyer
-----------------------------
shall pay the Holdback Amount to Key Bank as escrow agent or other escrow agent
agreed upon by Choice One and the Founders (together with any successors in such
capacity, the "Escrow Agent"), which amount shall be held and disbursed by the
Escrow Agent in accordance with the terms of the Escrow Agreement in the form of
Exhibit A hereto (the "Escrow Agreement").
- ---------
2.5. Payment Regarding Consulting Revenues. During the period from
-------------------------------------
August 1, 1999 through October 31, 1999 (the "Applicable Consulting Period"),
the Company and the Subsidiary have rendered or will render consulting services
to Bright Horizons and those customers identified on Schedule 2.5 hereto (the
"Consulting Customers"). The Buyer shall pay the Sellers, pro rata in accordance
with their percentage interests in the Company as set forth on Schedule 2.3(a)
hereto, an amount (the "Consulting Fee Amount") equal to the consulting fees
billed to all Qualified Consulting Customers (as hereinafter defined) by the
Company and the Subsidiary during the Applicable Consulting Period, multiplied
----------
by four (4). The term "Qualified
-6-
<PAGE>
Consulting Customers" means Bright Horizons and those other Consulting Customers
that enter into service contracts with Choice One on or before December 31, 1999
providing for (i) services for a minimum period of one (1) year and (ii) fees in
an amount for the first year that are greater than or equal to the consulting
fees paid by that Consulting Customer to the Company and the Subsidiary during
the Applicable Consulting Period, multiplied by four (4).
----------
The Consulting Fee Amount shall be determined as provided in Section
2.6 hereof and payable as provided in Section 2.7 hereof.
2.5A. Disputed Accounts. Schedule 2.5A hereto sets forth the name
-----------------
and estimated amount of disputed payments made by and amounts billed to the
Company and the Subsidiary by Bell Atlantic and other vendors listed thereon
(the "Applicable Vendors"). All amounts received during the one (1) year period
from and after the Closing Date from the Applicable Vendors with respect to
disputed payments made and amounts billed to the Company and the Subsidiary for
periods prior to the Closing Date shall be divided equally between (i) the Buyer
and (ii) the Sellers. The Buyer shall pay the Sellers the amount to which they
are entitled under this Section 2.5A, pro-rata in accordance with their
percentage interests in the Company as set forth on Schedule 2.3(a) hereto,
within thirty (30) days after the first anniversary of the Closing Date.
2.6. Determination of the Purchase Price. The Sellers (at their sole
-----------------------------------
cost and expense) shall, within sixty (60) days after the Closing Date, cause
Ernst & Young LLP or other independent "big 5" accounting firm acceptable to the
Buyer (the "Sellers' Accountants") to perform an audit as of the Closing Date of
the balance sheet of the Company and the Subsidiary on a consolidated basis in
accordance with GAAP, and within such period deliver to the Buyer (i) the
resulting audited balance sheet (the "Closing Date Balance Sheet") together with
the unqualified opinion of Sellers' Accountants and (ii) a statement (the
"Closing Statement") setting forth, in reasonable detail, the calculation of the
Purchase Price and the Consulting Fee Amount and stating that the Purchase Price
and the Consulting Fee Amount have been determined in accordance with this
Agreement. If, in the determination of the Purchase Price, there is any conflict
between GAAP and consistency with the past practices of the Company and the
Subsidiary, it is understood and agreed by the parties hereto that GAAP shall be
applied and shall control all determinations. The costs and expenses of Seller's
Accountants shall be paid by the Buyer.
Within thirty (30) days after receiving the Closing Date Balance Sheet
and the Closing Statement, the Buyer shall deliver to the Sellers a statement
(the "Statement of Objections") describing their objections thereto, if any, and
setting forth in reasonable detail each amount objected to, the amount proposed
as an adjustment thereto and the basis for such adjustments. If the Buyer does
not deliver a Statement of Objections as provided above, it shall be deemed to
have accepted the Closing Statement and the calculation of the Purchase Price
and the Consulting Fee Amount therein, which shall be final and binding on the
parties hereto and the Minority Unit Holders. If the Buyer delivers a Statement
of Objections as provided above, the Buyer and the Sellers together shall use
reasonable efforts to resolve any such objections, but if they do not reach a
final resolution within twenty (20) days after the date of delivery of the
-7-
<PAGE>
Statement of Objections as to all amounts in dispute, any remaining objections
shall be resolved by arbitration in accordance with the rules then in effect of
the American Arbitration Association by three arbitrators, all of whom shall be
certified public accountants with any of the "big five" public accounting firms
which are not currently engaged by any of the parties hereto, appointed pursuant
to such rules. The arbitration shall be held in Boston, Massachusetts and shall
involve a reasonable amount of discovery according to limits to be established
by the arbitrators. The determination of such arbitrators shall be final and
binding upon the parties.
During the preparation of the Closing Date Balance Sheet and the
Closing Statement and the efforts to resolve any disputes related thereto, the
Buyer shall cause the Company to provide the Sellers' Accountants and the
arbitrators full access to all work papers, schedules and relevant books and
records of the Company. All fees and expenses of the arbitrators and of the
American Arbitration Association shall be divided between the Buyer and the
Sellers in proportion to the decision of the arbitrators with respect to the
amount in dispute. For example, if the amount in dispute under the Statement of
Objections involves an assertion by the Buyer that the Purchase Price is
$100,000 too high, and the arbitrators determine that the Purchase Price is
$25,000 too high, then the Sellers, pro rata in accordance with their respective
percentage interests in the Company as set forth in Schedule 2.3(a) hereto,
shall be responsible for paying 25% of such fees and expenses and the Buyer
shall be responsible for paying 75% of such fees and expenses.
2.7. Closing Payment Adjustment. If the Purchase Price determined in
--------------------------
accordance with Section 2.6 is greater than the Closing Payment Amount, then (i)
the Escrow Agent shall pay to the Sellers, in accordance with the Escrow
Agreement, the amount of such difference up to the Holdback Amount and (ii) if
the amount of such difference is in excess of the Holdback Amount, the Buyer
shall pay to the Sellers, in accordance with their percentage interests as set
forth on Schedule 2.3(a) hereto, such excess amount.
If the Purchase Price determined in accordance with Section 2.6 is
less than or equal to the Closing Payment Amount, (i) the Escrow Agent shall pay
the Holdback Amount to the Buyer and (ii) if the difference between the Purchase
Price and the Closing Payment Amount exceeds the Holdback Amount, the Buyer
shall be entitled to deduct the amount of such excess from payments of the
Consulting Fee Amount, and the Earned Amount which would otherwise be payable to
the Sellers in accordance with Section 2.8 below.
The Consulting Fee Amount, if any, and all other amounts payable by
either the Escrow Agent or the Buyer pursuant to this Section 2.7 shall be paid
to the Seller in accordance with their percentage interests as set forth on
Schedule 2.3(a) hereto within five (5) business days after the final
determination of the Purchase Price pursuant to Section 2.6 hereof.
2.8. Additional Consideration. In addition to the Purchase Price, an
------------------------
amount of up to an additional twenty-five percent (25%) of the sum of (i) the
Purchase Price plus (ii) the amount of the Debt as of the Closing Date shall be
paid by the Buyer to the Sellers in proportion to their percentage interests in
the Company as set forth on Schedule 2.3(a) hereto, pursuant to the sliding
scale shown on the table below upon the satisfaction of the obligations set
forth in the
-8-
<PAGE>
table below (the "Earned Amount"). The Buyer will determine whether all or any
portion of the Earned Amount will be paid in the form of cash or Qualified
Shares. The obligations which must be met prior to the payment of the Earned
Amount shall be the satisfaction of five performance criteria, each of which
will make up 20% of the Earned Amount. The determinations of percent payout for
each category will be made as of the date which is twelve (12) months after the
Closing Date (the "Earned Amount Date"). The five performance criteria are:
(a) Retention of existing customers of the Company and the Subsidiary
as provided in the table below, computed using the methodology
set forth on Exhibit B;
---------
(b) Conversion of existing resold local lines of the Company and the
Subsidiary to the Choice One network as provided in the table
below;
(c) The sale by the Company and the Subsidiary on net facilities
based lines, excluding total service resale lines, to existing
customers of the Company and the Subsidiary which are sold,
installed, and billing at the Earned Amount Date as provided in
the table below;
(d) The continuous employment of Paul Cissel in the role of the
regional Vice President for the New England region in accordance
with the Employment Contract through the Earned Amount Date
except in the event of termination of his employment by Choice
One without "Cause" (as such term is defined in the Employment
Contract) or in the event of his death; and
(e) The continuous employment through the Earned Amount Date as
provided in the table below of those management and other
employees and consultants of the Company whose names are set
forth on Exhibit C hereto (unless terminated by the Buyer without
---------
cause).
-9-
<PAGE>
<TABLE>
<CAPTION>
CATEGORY
- -------------------------------------------------------------------------------------------------------------------
Employees
Retention Conversions/1/ New Lines/2/ Cissel Departures
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
100% *91.00% *1800 *2000 Stay 3
Completion 80% **91% but* **1800 but* **2000 but* Stay 4
of Percent 88.25% 1687 1875
Payout for 60% **88.25% but **1687 but* **1875 but* Stay 5
Each *85.50% 1575 1750
Category
40% **85.50% but **1575 but* **1750 but* Stay 6
*82.75% 1462 1625
20% **82.75% but **1462 but* **1625 but* Stay Not applicable
*80.00% 1350 1500
Total of 25% 5% 5% 5% 5% 5%
Earned
Amount
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* = greater than or equal to
** = less than
Within twenty (20) days after the Earned Amount Date, the Buyer shall give
a notice (the "Earned Amount Notice") to the Sellers, in reasonable detail,
setting forth the calculation of the Earned Amount and stating the manner in
which it intends to pay the Earned Amount.
Within twenty (20) days after receiving the Earned Amount Notice, the
Sellers shall deliver to the Buyer a statement (the "Objections to Earned
Amount") describing their objections thereto and setting forth in reasonable
detail each amount objected to, the amount proposed as an adjustment thereto and
the basis for such adjustments. If the Sellers do not deliver the Objections to
Earned Amount as provided above, they shall be deemed to have accepted the
Earned Amount as set forth in the Earned Amount Notice, which shall be final and
binding on them. If the Sellers deliver the Objections to Earned Amount as
provided above, the Buyer and the Sellers together shall use reasonable efforts
to resolve any such objections, but if they do not reach a final resolution
within twenty (20) days after the date of delivery of the Objections to Earned
Amount as to all amounts in dispute, any remaining objections shall be resolved
by arbitration in accordance with the rules then in effect of the American
Arbitration Association by three arbitrators, all of whom shall be certified
public accountants with any of the "big five" public accounting firms which are
not currently engaged by any of the parties hereto, appointed pursuant to such
rules. The arbitration shall be held in Boston, Massachusetts and shall involve
a reasonable amount of discovery according to limits to be established by the
arbitrators. The determination of such arbitrators shall be final and binding
upon the parties.
__________________________
1 If the aggregate number of conversions plus new lines is 4,500 or more,
then the entire Earned Amount with respect to "Conversions" and "New Lines"
shall be deemed earned.
2 Expressed as a percentage of the sum of the Purchase Price plus the amount
of the Debt as of the Closing Date.
-10-
<PAGE>
During the review by the Sellers of the Earned Amount Notice and the
efforts to resolve any disputes related thereto, the Buyer shall cause the
Company to provide the Sellers and their representatives, and the arbitrators
with reasonable access to all relevant information of the Company. All fees and
expenses of the arbitrators and of the American Arbitration Association shall be
divided between the Buyers and the Sellers in proportion to the decision of the
arbitrators with respect to the amount in dispute. For example, if the amount
in dispute under the Objections to Earned Amount involves an assertion by the
Sellers that the Earned Amount is $100,000 too low, and the arbitrators
determine that the appropriate adjustment is a $25,000 increase in the Earned
Amount, then the Sellers, pro rata in accordance with their respective
percentage interests in the Company as set forth in Schedule 2.3(a) hereto,
shall be responsible for paying 75% of such fees and expenses and the Buyer
shall be responsible for paying 25% of such fees and expenses.
The Earned Amount shall be paid by the Buyer to the Sellers in accordance
with to their percentage interests in the Company as set forth on Schedule
2.3(a) hereto within five (5) business days after the final determination of the
Earned Amount. If payment is to be made in both cash and stock, then the cash
and stock shall be allocated among the Sellers pro rata in accordance with their
percentage interests in the Company as set forth on schedule 2.3(a) hereto.
2.9. Minority Unit Holders Representative. The Founders will use their
-------------------------------------
best efforts to cause the Minority Unit Holders to execute and deliver prior to
the Closing a Unit Holders Representative Agreement in substantially the form of
Exhibit G hereto (the "Unit Holders Representative Agreement"), providing, among
other things, for the designation of the Founders, and each of them, as the
representatives of the Minority Unit Holders thereunder (the "Minority Unit
Holders Representatives").
3. Closing. The closing of the purchase and sale of the Units, the Warrant
--------
and the Convertible Debenture (the "Closing") is expected to take place at the
offices of Nixon Peabody LLP, 101 Federal, Boston, MA 02110 (or at such other
place as the parties may mutually agree) at 10:00 a.m. on November 1, 1999, but
no later than December 30, 1999 or at such other time and on such date as the
parties may mutually agree. The date and time of the Closing are referred to
herein as the "Closing Date."
4. Documents To Be Delivered at the Closing.
-----------------------------------------
4.1. Documents To Be Delivered to the Buyer by the Company and the
-------------------------------------------------------------
Sellers. At the Closing, the Company and the Sellers will
--------
deliver to the Buyer:
(a) Against receipt of the payment of the Closing Payment Amount, (i)
the Founders will deliver and cause to be delivered to the Buyer certificates or
assignments for 100% of the Units and (ii) NAV will deliver to the Buyer
certificates or assignments for the Warrant and the Convertible Debenture, all
in accordance with the requirements of Section 2.1 hereof, which certificates or
assignments will be duly endorsed in blank or accompanied by unit or other
transfer powers duly executed in blank, in proper form for transfer;
-11-
<PAGE>
(b) Against receipt from the Buyer of payment of the principal amount
and accrued interest thereunder, NAV will deliver to the Buyer the Amortizing
Debenture as provided in Section 2.1 hereof, which shall be marked "paid in
full" and otherwise in proper form for cancellation;
(c) A Unit Holders Representative Agreement duly executed by each of
the Minority Unit Holders;
(d) A certificate, in form and substance reasonably acceptable to the
Buyer, executed by the President of the Company, and attested to by the
Secretary of the Company, dated the Closing Date, and certifying that: (i)
attached thereto is a true and complete copy of the Charter Documents of the
Company and the Subsidiary, as in effect on the Closing Date; (ii) attached
thereto is a true and complete copy of resolutions duly adopted by the Board of
Managers of the Company and the Board of Directors of the Subsidiary authorizing
the execution, delivery, and performance of this Agreement; and (iii) such
resolutions have not been modified, rescinded, or amended and are in full force
and effect;
(e) A certificate, in form and substance reasonably acceptable to the
Buyer, executed by the President of the Company and the Subsidiary, dated the
Closing Date, certifying as to the accuracy of the representations and
warranties of the Company and the Subsidiary at and as of the Closing and the
performance by the Company and the Subsidiary of their respective covenants and
agreements to be performed prior to the Closing Date;
(f) A certificate, in form and substance reasonably acceptable to the
Buyer, executed by each of the Founders, by the Minority Unit Holders or on
behalf of them by the Minority Unit Holders Representative, and by the general
partner of NAV, dated the Closing Date, certifying as to the accuracy of their
respective representations and warranties at and as of the Closing and the
performance of their respective agreements to be performed prior to the Closing
Date;
(g) Resignations of all of managers, directors and officers of the
Company provided, however, that such resignation shall not terminate the
existing employment agreement with Craig Tefft;
(h) All contracts, books, records, and other data of the Company and
the Subsidiary relating to their operations, including the Company's minute and
unit books and the Subsidiary's minute and stock record books;
(i) An Employment Agreement substantially in the form attached hereto
as Exhibit D executed by Cissel (the "Employment Contract");
---------
(j) A Non-Solicitation and Non-Competition Agreement substantially in
the form attached hereto as Exhibit E (the "Non-Competition Agreement") executed
---------
by Lopez.
(k) A certificate of good standing of the Company and the Subsidiary
from the Secretary of State of the state of organization of the Company and the
Subsidiary, and a
-12-
<PAGE>
certificate from the Secretary of each jurisdiction in which the Company and the
Subsidiary owns or leases real property or otherwise does business evidencing
the authorization of the Company and the Subsidiary to conduct business as a
foreign entity in such State, dated not earlier than ten (10) days prior to the
Closing Date;
(l) Executed agreements in form and substance satisfactory to the
Buyer and the holders of all unexercised Company options, signed by the holders
of all unexercised Company options, rights or other interests to purchase or
otherwise acquire units of the Company terminating such options, rights or other
interests, or other evidence satisfactory to the Buyer of the exercise of such
options, rights or other interests;
(m) The Escrow Agreement executed by the Sellers;
(n) The opinion of counsel for the Company and the Subsidiary in
substantially the form attached hereto as Exhibit F-1;
-----------
(o) The opinion of counsel for NAV in substantially the form attached
hereto as Exhibit F-2;
(p) The list of employees and employee remuneration referred to in
Section 5.25 of this Agreement;
(q) The description of material claims experience of the Company and
the Subsidiary as provided in Section 7.8 of this Agreement;
(r) An estoppel certificate from the Company's and the Subsidiary's
current landlords with respect to property leased in Massachusetts in the form
approved by the Buyer's counsel (it being understood and agreed that the Company
and Subsidiary shall be required to use reasonable efforts to obtain an estoppel
certificate with respect to the lease for New Hampshire;
(s) Counsel shall have an agreement executed by Cissel in form and
substance satisfactory to the Buyer by which Cissel terminates all existing
employment agreements and arrangements between Cissel and the Company and
between Cissel and the Subsidiary; and
(t) Such other certificates and documents as the Buyer or its counsel
may reasonably request.
4.2. Documents To Be Delivered to the Company and the Sellers by the
---------------------------------------------------------------
Buyer. At the Closing, the Buyer will deliver to the Company and
------
the Sellers the following:
(a) Against receipt of certificates for the Units, the Warrant and the
Convertible Debenture in accordance with Section 4.1(a) above, payment of the
Closing Payment Amount to the Sellers in accordance with Section 2.3 hereof;
(b) A certificate, in form and substance reasonably acceptable to the
Sellers, executed by the President of the Buyer, and attested to by the
Secretary of the Buyer, dated the
-13-
<PAGE>
Closing Date, certifying as to the accuracy of the Buyer's representations and
warranties at and as of the Closing;
(c) The Escrow Agreement executed by the Buyer;
(d) The Employment Contract executed by Choice One;
(e) Release or termination of the personal guarantee by Cissel of Debt
to Citizens Bank; and
(f) Such other certificates and documents as the Founders, NAV, the
Minority Unit Holders Representative, or their counsel may reasonably request.
5. Representations and Warranties by the Company, the Subsidiary and
-----------------------------------------------------------------
the Founders. Each of the Company, the Subsidiary and the Founders, jointly and
- -------------
severally, represent and warrant to the Buyer that, as of the date of this
Agreement and (except as otherwise stated herein) as of the Closing Date:
5.1. Ownership; Transfer of the Units. The Units, the Warrant, the
---------------------------------
Convertible Debenture and the Amortizing Debenture have been duly authorized and
validly issued and are fully paid and non-assessable. The Founders own the Units
set forth after their names on Schedule 2.3(a) hereto free and clear of all
liens, claims, charges, restrictions, equities, encumbrances, pledges, charges,
security interests, rights, options, or other adverse interests of any kind. The
Founders have the right, power, and authority to sell all of the Units as
provided herein, and upon such sale, the Buyer will receive good and valid title
to all of the Units, subject to no liens, claims, charges, restrictions,
equities, encumbrances, pledges, charges, security interests, rights, options,
or other adverse interests of any kind. The certificates or assignments for the
Units will be, when delivered to the Buyer, duly endorsed in blank or
accompanied by unit powers duly executed in blank, in proper form for transfer.
5.2. Authority. Each of the Company, the Subsidiary and the Founders
----------
has the power and authority to execute and deliver this Agreement and the other
agreements and documents to be executed and delivered by each of them as
contemplated by this Agreement (all such agreements and documents, together with
the agreements and documents to be executed and delivered by NAV and the
Minority Unit Holders, are hereinafter referred to as the "Transaction
Documents" regardless of which party is required to execute or deliver any such
agreement or document) to which it or he is a party and to carry out its or his
obligations hereunder and thereunder, as the case may be. The execution,
delivery, and performance of this Agreement and each of the Transaction
Documents to which the Company, the Subsidiary or the Founders are a party and
the consummation of the transactions contemplated hereby and thereby have been
duly authorized by the Board Managers of the Company, and the Board of Directors
of the Subsidiary and no other proceeding on the part of the Company, the
Subsidiary or any of the Founders is necessary to authorize the execution and
delivery of this Agreement or any of the Transaction Documents to which the
Company, the Subsidiary or the Founders are a party or the performance by the
Company, the Subsidiary or the Founders of any of the transactions contemplated
hereby or thereby. This Agreement and each of the Transaction Documents to which
the Company, the
-14-
<PAGE>
Subsidiary or the Founders are a party, have been duly executed and delivered on
behalf of the Company, the Subsidiary and the Founders and when executed and
delivered by all required parties thereto, will be a legal, valid, and binding
obligation of the Company, the Subsidiary and the Founders enforceable against
the Company, the Subsidiary and the Founders in accordance with their respective
terms.
5.3. Approvals. No consent, approval, order, or authorization of, or
----------
registration, declaration, or filing with, any governmental authority is
required in connection with the execution and delivery of this Agreement and the
Transaction Documents, by the Company, the Subsidiary or the Founders, or the
consummation of the transactions contemplated hereby or thereby. Except as set
forth in Schedule 5.3 hereto, no consent of any third party is necessary to
------------
permit the consummation of the transactions contemplated hereby or thereby.
5.4. Transaction Costs and Expenses. Except as set forth in Schedule
------------------------------- --------
5.4 hereto, all negotiations relating to this Agreement and the Transaction
- ---
Documents, and the transactions contemplated hereby and thereby, have been
carried on by the Company and the Sellers without the of any person or firm in
such manner as to give rise to any valid claim against any of the parties hereto
for a brokerage commission, finder's fees or agency fees. The Sellers, and not
the Company or the Subsidiary, shall be responsible for the payment of all of
their respective costs and expenses incurred in connection with the transactions
contemplated in this Agreement including, without limitation, attorneys fees.
The Sellers, pro-rata in accordance with their percentage interests in the
Company as set forth on Schedule 2.3(a) hereto, shall be responsible for the
payment of all costs and expenses incurred by the Company and the Subsidiary in
connection with the transactions contemplated by this Agreement including,
without limitation, attorneys fees, fees of the Seller's Accountants (except as
otherwise specifically provided in Section 2.6 hereof) and amounts payable to
Gagan Bennett & Co. All such costs and expenses paid or payable by the Company
or the Subsidiary at the Closing shall reduce the Closing Payment Amount.
5.5. Organization, Etc.
------------------
(a) The Company is a limited liability company duly organized,
validly existing, and in good standing under the laws of the Commonwealth of
Massachusetts, and has all requisite power and authority to own or lease and to
operate its properties and to carry on its business as now being conducted. The
Company has delivered to the Buyer complete and correct copies of the Company's
Charter Documents and all amendments thereto. The Company is duly qualified or
licensed to do business and is in good standing as a foreign limited liability
company in the jurisdictions set forth in Schedule 5.5 hereto. The Company is
------------
not required to be qualified or licensed to do business as a foreign limited
liability company in any other jurisdiction except such jurisdictions, if any,
in which the failure to be so qualified or licensed will not have a material
adverse effect on its financial condition, the conduct of its business or the
ownership, lease or use of any of its properties or assets.
(b) The Subsidiary is a corporation duly organized, validly
existing, and in good standing under the laws of the State of New Hampshire, and
has all requisite power and
-15-
<PAGE>
authority to own or lease and to operate its properties and to carry on its
business as now being conducted. The Subsidiary has delivered to the Buyer
complete and correct copies of the Subsidiary's Charter Documents and all
amendments thereto. The Subsidiary is duly qualified or licensed to do business
and is in good standing as a foreign corporation in the jurisdictions set forth
in Schedule 5.5 hereto. The Subsidiary is not required to be qualified or
------------
licensed to do business as a foreign corporation in any other jurisdiction
except such jurisdictions, if any, in which the failure to be so qualified or
licensed will not have a material adverse effect on its financial condition, the
conduct of its business or the ownership, lease or use of any of its properties
or assets.
5.6. Units. (a) The Company's authorized units consists of 100,000
------
units; (b) the only issued and outstanding units as of the date hereof of the
Company are 71,000 units which are owned beneficially and of record by the
Founders and certain other persons listed on Schedule 2.3(a) hereto; (c) there
are no outstanding subscriptions, options, conversion rights, Warrant or other
agreements or commitments of any nature whatsoever (either firm or conditional)
obligating the Company to issue, deliver, sell, or cause to be issued, delivered
or sold, any additional units of the Company or any other ownership interests
therein, or obligating the Company to grant, extend, or enter into any such
agreement or commitment except (i) options of the Minority Unit Holders to
purchase 4,000 units, (ii) the Warrant of NAV to purchase 10,000 units and (iii)
the Convertible Debenture of NAV convertible into 15,000 units of the Company;
and (d) there are no rights of first refusal, preemptive rights, or other
similar agreements obligating the Company to offer any units or any other
ownership interests therein to any person, except as set forth in the Operating
Agreement of the Company (which rights the Sellers hereby waive).
5.7. No Subsidiaries, Etc. (a) Except for the Subsidiary, the Company
---------------------
does not own, directly or indirectly, shares of units or other ownership
interests of any other corporation or other entity and is not a partner in any
partnership or a participant in any joint venture. The Company does not own,
directly or indirectly, any equity interest in any corporation, limited
liability company, partnership, joint venture, or other person; (b) the
Subsidiary's authorized shares of Common Stock consist of 300 shares of Common
Stock; (c) the only issued and outstanding shares of the Subsidiary are 300
shares of Common Stock, all of which are owned beneficially and of record by the
Company; (d) there are no outstanding subscriptions, options, conversion rights,
Warrant, or other agreements or commitments of any nature whatsoever (either
firm or conditional) obligating the Subsidiary to issue, deliver, sell, or cause
to be issued, delivered, or sold, any additional stock of the Subsidiary or any
other ownership interests therein, or obligating the Subsidiary to grant,
extend, or enter into any such agreement or commitment; and (e) there are no
rights of first refusal, preemptive rights, or other similar agreements
obligating the Subsidiary to offer any units or any other ownership interests
therein to any person.
5.8. Financial Statements. The Company (a) has delivered to the Buyer
---------------------
complete and correct copies of the unaudited financial statements of the Company
and the Subsidiary on a consolidated basis for the fiscal year ended December
31, 1998, and (b) has delivered to the Buyer the unaudited financial statements
of the Company and the Subsidiary on a consolidated
-16-
<PAGE>
basis for the six (6) month period ended June 30, 1999. All such financial
statements have been and will be prepared in accordance with GAAP consistently
applied throughout the periods indicated and present fairly the financial
condition of the Company and the Subsidiary on a consolidated basis at the dates
indicated and the results of operations for the periods indicated.
5.9. Absence of Certain Changes. Except to the extent specifically
---------------------------
set forth in reasonable detail on Schedule 5.9 hereto, since the Financial
------------
Statement Date, there has been no material adverse change in the assets,
liabilities, properties, business, or prospects of the Company or the
Subsidiary, and neither the Company nor the Subsidiary have:
(a) issued or sold any units, shares, notes, bonds, or other
securities, or any rights or options to purchase the same, or entered into any
agreement with respect thereto;
(b) declared, set aside, or made any dividend or other
distribution on units or shares, or redeemed, purchased, or acquired any units
or shares thereof, or entered into any agreement in respect of the foregoing;
(c) amended its Charter Documents;
(d) (i) purchased, sold, assigned, or transferred any material
tangible or intangible assets or property (including cash and cash equivalents)
other than in the ordinary course of business; (ii) mortgaged, pledged, granted,
or suffered to exist any lien or other encumbrance or charge on any material
tangible or intangible assets or properties, except for liens for taxes not yet
due; or (iii) waived any rights of material value or canceled any material debts
or claims;
(e) incurred any material obligation or liability (absolute or
contingent), except current liabilities and obligations incurred in the ordinary
course of business, or paid any material liability or obligation (absolute or
contingent) other than current liabilities and obligations incurred in the
ordinary course of business;
(f) granted any increase in compensation or benefits to any
employee, agent or consultant of the Company or the Subsidiary which exceeds ten
percent (10%) of the current annual compensation and benefits of such employee,
agent or consultant or exceeds $5,000, whichever is less;
(g) incurred any damage, destruction, or similar loss, whether or
not covered by insurance, materially affecting the businesses or properties of
the Company or Subsidiary;
(h) entered into any transaction other than in the ordinary course
of business;
(i) suffered any strike or other labor trouble materially and
adversely affecting its business, operations, or prospects;
(j) made or permitted any material amendment or termination of any
material contract, agreement, or license to which it is a party other than in
the ordinary course of business;
-17-
<PAGE>
(k) made any change in its accounting methods or practices with
respect to its condition, operations, business, properties, assets, or
liabilities;
(l) abandoned or disposed of any material trade secret, trademark,
tradename, trademark application, tradename application, or any other
intellectual property; or
(m) suffered any loss of employees or customers that materially and
adversely affects its business, operations, or prospects.
5.10. Tax Returns, Taxes. The Company and the Subsidiary have filed
-------------------
with the appropriate governmental agencies all tax returns and reports,
including but not limited to reports of income taxes, withholding and employment
taxes, sales and use taxes, property, payroll, ad valorem and other taxes,
assessments, fees, levies or governmental charges (collectively, "Taxes"),
required to be filed in connection with or affecting the Company or the
Subsidiary or the operation of the Company or the Subsidiary and their business,
and has paid the Taxes shown on their returns or otherwise assessed, levied and
due and payable by the Company or the Subsidiary, including related penalties
and or interest, to the extent that such Taxes, penalties and/or interest have
become due. There is no question to the Knowledge of the Company, the Subsidiary
or the Founders relating to any such return or report that, if determined
adversely to the Company or the Subsidiary, would result in the assertion of any
deficiency for any tax or interest or penalties in connection therewith. Except
to the extent specifically set forth in reasonable detail on Schedule 5.10,
-------------
neither the Internal Revenue Service nor any other taxing authority or agency is
now asserting or, to the Knowledge of the Company, the Subsidiary and the
Founders, is threatening to assert, against the Company or the Subsidiary any
deficiency or claim for additional Taxes or interest thereon or penalties in
connection therewith. Neither the Company nor the Subsidiary has been granted
any waiver of any statute of limitation with respect to, or been granted any
extension of a period for the assessment of, any federal, state, county,
municipal or foreign income tax. The liabilities for Taxes reflected in the
balance sheet of the Company and the Subsidiary as of December 31, 1998 and June
30, 1999 (and on any balance sheet furnished by the Company, the Subsidiary or
the Founders (if any) delivered prior to the Closing, for periods subsequent to
June 30, 1999), are adequate to cover all Taxes due and payable or accruable
(including interest and penalties, if any, thereon), except for de minimis
exceptions only. True copies of all federal, state, county, local and foreign
income tax returns of the Company and the Subsidiary for the year ended December
31, 1998 have been delivered by the Company, the Subsidiary and the Founders to
the Buyer. The Company has duly elected to be treated as a partnership for tax
purposes. The Subsidiary is treated as a "C" corporation for tax purposes.
5.11. Non-Contravention. Except as set forth in Schedule 5.11 hereto,
------------------ -------------
the execution and delivery of this Agreement and the Transaction Documents and
the consummation of the transactions contemplated hereby and thereby will not
(a) violate any provision of the Charter Documents of the Company or the
Subsidiary; (b) violate any material provision of, or result in the breach or
the acceleration of, or entitle any party to accelerate (whether after the
giving of notice or lapse of time or both), any material obligation under, any
mortgage, lien, lease, agreement, license, instrument, order, arbitration award,
judgment, or decree to which the
-18-
<PAGE>
Company or the Subsidiary is a party or by which it is bound; (c) result in the
creation or imposition of any material lien, charge, pledge, security interest,
or other encumbrance upon any property of the Company or the Subsidiary; or (d)
to the Knowledge of the Company, the Subsidiary or the Founders, violate or
conflict with any other material restriction or any law, ordinance, or rule to
which any of the Company, the Subsidiary or the Founders or any property of the
Company or the Subsidiary is subject.
5.12. Title to and Condition of the Assets of the Company.
----------------------------------------------------
(a) The Company and the Subsidiary have good and marketable title to
all assets owned by each of them free and clear of all mortgages, liens,
charges, encumbrances, easements, security interests, or title imperfections,
(i) except to the extent specifically set forth in reasonable detail on
Schedule 5.12 hereto, and (ii) except mechanics', carriers', workmen's, and
- -------------
other similar liens, rights of way, encumbrances, conditions, building or use
restrictions, and other limitations of any kind that are not substantial in
amount and do not and could not reasonably be expected to materially detract
from the value of, or materially interfere with the use of, any of the property
subject thereto. The assets reflected in the financial statements of the
Company and the Subsidiary as of the Financial Statement Date referred to in
Section 5.8 hereof constitute all of the tangible assets and properties that the
Company and the Subsidiary own, use, or hold in connection with their business,
and the conduct of such business as a going concern and, except for additions or
dispositions in the ordinary course of business, include all tangible properties
and assets used in such business as being conducted. The facilities, machinery,
furniture, office, and other equipment of the Company and the Subsidiary that
are used in its business are in good operating condition and repair, subject
only to the ordinary wear and tear of that business, and to the Knowledge of the
Company, the Subsidiary and the Founders neither the Company nor the Subsidiary
nor any property or asset owned or leased by either of them is in violation of
any applicable ordinance, regulation, or building, zoning, environmental or
other law in respect thereof, the violation of which will have a material
adverse effect on the financial condition, the conduct of the business or the
ownership or use of any of the properties or assets of the Company or the
Subsidiary.
(b) Schedule 5.12 hereto sets forth all personal property leased by
-------------
the Company and the Subsidiary and all real estate leased by the Company or the
Subsidiary and specifies, in the case of real estate, the location of each
property, the name of the owner or the names of the lessor and the lessee.
Neither the Company nor the Subsidiary owns real property. The Company has
delivered to the Buyer a copy of each lease by which the Company and the
Subsidiary acquired its interest in the personal property and real estate
described in Schedule 5.12 hereto, all of which documents are true and complete
-------------
copies thereof as in effect on the date hereof. Neither the Company nor the
Subsidiary has received any written notice from any governmental agency, board,
bureau, body, department, or authority of any United States or foreign
jurisdiction, which materially restricts the use of any of the real estate
described in Schedule 5.12 hereto. Except as set forth in Schedule 5.12 hereto,
------------- -------------
there is no easement, right-of-way agreement, license, sublease, occupancy
agreement, or like instrument with respect to any of the real estate described
in Schedule 5.12 hereto which would have a material adverse effect on the
-------------
Company's or the Subsidiary's use of such real estate. Each lease pursuant to
which the
-19-
<PAGE>
Company or the Subsidiary leases any real or personal property is in full force
and effect and is valid and enforceable in accordance with its terms. There is
not under any such lease any material default by the Company or the Subsidiary,
or any event that with notice or lapse of time or both would constitute such a
material default by the Company or the Subsidiary. To the Knowledge of the
Company, the Subsidiary and the Founders, there is not under any such lease any
material default by any other party thereto or any event that with notice or
lapse of time or both would constitute such a material default thereunder by
such party.
5.13. Litigation.
-----------
(a) Except as set forth in reasonable detail on Schedule 5.13
-------------
hereto, there are no actions, suits, proceedings, investigations, or inquiries
pending or, to the Knowledge of the Company, the Subsidiary and the Founders,
threatened against or affecting the business, operations, financial condition,
or prospects of the Company or the Subsidiary at law or in equity in any court
or before any federal, state, municipal, or other governmental department,
commission, board, bureau, agency, or instrumentality.
(b) There are no actions, suits, proceedings, investigations, or
inquiries pending or, to the Founders' knowledge, threatened against the Sellers
at law or in equity in any court or before any federal, state, municipal, or
other governmental department, commission, board, bureau, agency, or
instrumentality that reasonably could be expected to have an adverse effect on
the Sellers' right or ability to execute and deliver this Agreement and the
Transaction Documents or consummate the transactions contemplated hereby or
thereby.
(c) Neither the Company nor the Subsidiary is in default in respect
of any judgment, order, writ, injunction, or decree of any court or any federal,
state, municipal, or other governmental department, commission, board, bureau,
agency, or instrumentality.
(d) Except as set forth in reasonable detail on Schedule 5.13
-------------
hereto, there are no actions, suits, proceedings, investigations, or inquiries
pending or, to the Knowledge of the Company, the Subsidiary and the Founders,
threatened against the Company, the Subsidiary or the Sellers at law or in
equity in any court or before any federal, state, municipal, or other
governmental department, commission, board, bureau, agency, or instrumentality
that reasonably could be expected to have an adverse effect on the Company's,
the Subsidiary's or the Sellers' right or ability to execute and deliver this
Agreement or the Transaction Documents or consummate the transactions
contemplated hereby or thereby.
5.14. Employee Benefit Plans and Other Arrangements
---------------------------------------------
(a) Employee Plans Generally. Except as set forth in Schedule 5.14
------------------------ -------------
hereto, neither the Company nor the Subsidiary maintains, makes any
contributions to, nor has it been obligated by law or agreement to establish,
maintain, sponsor, or make any contributions to (i) any employee pension benefit
plan as described in Section 3(2) of the Employee Retirement Income Security Act
of 1974, as amended, and regulations thereunder ("ERISA"); (ii) any employee
welfare benefit plan as described in Section 3(1) of ERISA, including, without
limitation, any arrangement providing for the payment of health benefits to
former employees or
-20-
<PAGE>
their beneficiaries; (iii) any formal or informal severance plan or arrangement,
including, without limitation, any arrangement providing for payments to be made
to any person contingent upon a change of ownership or effective control of the
Company or the Subsidiary or ownership of a substantial portion of the assets of
the Company or the Subsidiary; or (iv) any other deferred compensation, bonus,
stock or unit option, purchase, insurance, or other employee benefit plan,
agreement, fund, or arrangement, whether or not set forth in writing, providing
benefits of economic value to any employee, former employee, or present or
former beneficiary, dependent, or assignee, other than regular salary, wages, or
commissions paid substantially concurrently with the performance of the services
for which paid (individually or together referred to as "ERISA Plan" or "ERISA
Plans").
(b) Plan Documents. Prior to the Closing, the Company will have
--------------
delivered to the Buyer a copy of each instrument constituting each ERISA Plan or
a part of each ERISA Plan, as applicable, including without limitation, any
informal policy statements or guidelines setting forth provisions of any ERISA
Plan. Neither the Company nor the Subsidiary has promised or negotiated any
benefit changes which are not reflected in such instruments.
(c) Compliance with COBRA. With respect to any Plan that is a group
---------------------
health plan within the meaning of the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended, and regulations thereunder ("COBRA"), neither the
Company nor the Subsidiary has taken (or failed to take) any action, and, to the
knowledge of the Company the Subsidiary and the Founders, no action or event or
omission has occurred, that could cause the Company or the Subsidiary to incur
any material liability under applicable law on account of a failure to comply
with the continuation coverage requirements of COBRA or any applicable state
law.
(d) Contributions and Funding. Each of the Company and the Subsidiary
-------------------------
has made (or will make) on a timely basis all contributions or payments required
(if any) in respect of each ERISA Plan prior to the Closing Date. Contributions
and payments which have accrued under each ERISA Plan, but are not yet due, are
fully reflected on the balance sheet of the Company dated as of September 30,
1999 referred to in Section 5.8 hereof.
(e) Post-Retirement Benefits. Except to the extent required under
------------------------
COBRA, neither the Company nor the Subsidiary has incurred any current or future
obligation to provide health or life insurance benefits to employees or former
employees with respect to any period which extends beyond retirement or other
termination of employment.
(f) ERISA Title IV Considerations. Neither the Company nor the
-----------------------------
Subsidiary, nor any member of the Company's controlled group (within the meaning
of Section 4001 of ERISA) has incurred (or reasonably expects to incur) any
material liability to the Pension Benefit Guaranty Corporation or any material
liability under Title IV of ERISA, and there are no circumstances that might
result in the imposition of a lien on any of the assets of the Company or the
Subsidiary pursuant to ERISA Sections 302 or 4068 or Section 412 of the Internal
Revenue Code of 1986, as amended.
(g) Multi-employer Plans. Neither the Company nor the Subsidiary, nor
--------------------
any member of the Company's controlled group (within the meaning of Section 4001
of ERISA)
-21-
<PAGE>
does now have, or during the last five years has had, any obligation to
contribute to, or any other liability or potential liability with respect to, a
"multi-employer plan" as that term is defined in Section 3(37) of ERISA or a
multiple controlled group plan as described in Sections 4063 and 4064 of ERISA
(including, without limitation, any withdrawal liability or plan termination
obligations).
(h) Filings. The Company and the Subsidiary have filed in a timely
-------
manner all forms, returns and other documents required to be filed with any
governmental authority with respect to all ERISA Plans including, without
limitation, all Forms 5500.
5.15. Contracts.
---------
(a) Schedule 5.15 hereto contains a complete and correct list of
-------------
all (i) agreements, contracts, and commitments of every type to which the
Company or the Subsidiary is a party or by which it or any of its assets is
bound as of the date hereof, the terms of which involve payments, receipts or
potential liabilities by or of the Company or the Subsidiary of more than
$25,000 per year, such agreements include, without limitation, indentures,
security agreements, leases of real property, agreements and instruments
relating to the borrowing of money or evidencing credit or relating to the
purchase or sale of units or other securities, agreements, orders, commitments
for capital expenditures, and leases of machinery and equipment and (ii)
employment agreements, consulting agreements, license agreements,
interconnection agreements, distribution agreements, reseller agreements,
contracts with any governmental authority and contracts not made in the ordinary
course of business (the "Contracts") .
(b) The Buyer has been given access to complete and correct copies of
all written agreements, contracts, and commitments to which the Company or the
Subsidiary is a party or by which it or any of its assets is bound, together
with all amendments thereto. Such agreements, contracts, and commitments are in
full force and effect, and all parties to such agreements, contracts, and
commitments have, in all material respects, performed all obligations required
to be performed by them to date, and neither the Company nor the Subsidiary is,
and no other party is, in material default thereunder.
(c) No agreement, contract, or commitment to which the Company or the
Subsidiary is a party or by which it or any of its assets is bound purports to
limit its freedom to compete in any line of business or with any person or
entity. Neither the Company nor the Subsidiary has any outstanding power of
attorney, except routine powers of attorney relating to representation before
governmental agencies or given in connection with qualification to conduct
business in another jurisdiction.
(d) Neither the Company nor the Subsidiary is a party to any material
contract with any governmental authority. Neither the Company nor the
Subsidiary is a party to any contract that to the Knowledge of the Company might
reasonably be expected to materially and adversely affect its condition
(financial or otherwise), operations (present or prospective), business (present
or prospective), properties, assets, or liabilities. Neither the Company nor
the
-22-
<PAGE>
Subsidiary knows of any bid or contract proposal made by the Company that, if
accepted or entered into, might reasonably be expected to result in a loss to
the Company.
5.16. Insurance. The Company and the Subsidiary maintain insurance
---------
against risks for any business in which it is engaged, including, without
limitation, workers' compensation and comprehensive liability insurance. All of
the Company's and the Subsidiary's insurance policies covering such risks are
listed on Schedule 5.16 hereto, are in full force and effect, all premiums due
-------------
thereon have been paid, and to the Knowledge of the Company, the Subsidiary and
the Founders, the Company and the Subsidiary have complied in all material
respects with the provisions of such policies.
5.17. Trademarks, Etc. Schedule 5.17 hereto contains a complete and
--------------- -------------
accurate list (including registration numbers and dates of filing, renewal, and
termination) of all trademarks, patents, tradenames, material trade secrets,
material copyrights, service marks, licenses, all registrations and applications
for any of the foregoing, and other intellectual property owned by the Company
and the Subsidiary or in which the Company or the Subsidiary has an interest
(collectively, the "Intellectual Property"). Except as set forth in Schedule
--------
5.17 hereto, to the Knowledge of the Company, the Subsidiary and the Founders:
- ----
(a) all of the Intellectual Property is valid and is owned by the Company or the
Subsidiary free and clear of all liens, encumbrances, or claims whatsoever; none
of the Company's or the Subsidiary's rights in or use of such Intellectual
Property infringes on the rights of others or has been, or is currently being,
or threatened to be, challenged; (b) all of the Intellectual Property
registrations have been duly issued and have not been canceled, abandoned, or
otherwise terminated; (c) all of the Intellectual Property applications have
been duly filed with the appropriate authorities; and (d) no consents or
approvals of any person are necessary to sell, convey, transfer, assign, and
deliver any of the Intellectual Property to the Buyer. Except as set forth in
Schedule 5.17 hereto, to the Knowledge of the Company, the Subsidiary and the
- -------------
Founders, the Company and the Subsidiary own or have the right to use all of the
Intellectual Property necessary to conduct their operations and business and to
the Knowledge of the Company, the Subsidiary and the Founders there is no claim,
or any basis of any claim, that the Company or the Subsidiary has infringed any
intellectual property of any other person or that any other person has infringed
any of the Intellectual Property. Except as set forth in Schedule 5.17 hereto,
-------------
no third party has been permitted or licensed to use any of the Intellectual
Property and no royalties or other fees are payable to any third party with
respect to any of the Intellectual Property.
5.18. Transactions with Interested Persons. Except to the extent
------------------------------------
specifically set forth in reasonable detail on Schedule 5.18 hereto and the
-------------
financial statements delivered to the Buyer pursuant to Section 5.8 hereof,
neither the Company, the Subsidiary, nor, to the Knowledge of the Company, the
Subsidiary, and the Founders, any employee (or family member thereof) of the
Company or the Subsidiary, owns, directly or indirectly, on an individual or
joint basis, an interest of 5% or more in, or serves as an officer, director,
employee, consultant, contractor, or agent, of or to, any competitor or supplier
of the Company or the Subsidiary or any person or entity who or that has a
contract or arrangement with the Company or the Subsidiary.
-23-
<PAGE>
5.19. Compliance with Laws, Etc. Except as set forth in Schedule 5.19,
-------------------------
the Company and the Subsidiary have complied with and are in compliance with all
federal, state, local, and foreign statutes, laws, ordinances, regulations,
rules, permits, judgments, orders, or decrees applicable to them or any of their
properties, assets, operations, and business the failure of which to so comply
would have a material adverse effect on the properties, operations, business,
financial condition, or prospects of the Company or the Subsidiary, and there
does not exist any basis for any claim of default under or violation of any such
statute, law, ordinance, regulation, rule, permit, judgment, order, or decree
except such defaults or violations, if any, that in the aggregate do not and
will not materially and adversely affect the properties, operations, business,
financial condition, or prospects of the Company or the Subsidiary.
5.20. No Undisclosed Liabilities, Etc. Except for the transactions
-------------------------------
contemplated by this Agreement and as set forth in Schedule 5.20 hereto or the
-------------
balance sheet of the Company as at the Financial Statement Date referred to in
Section 5.8 hereof:
(a) Neither the Company nor the Subsidiary has incurred any material
liability or obligation (absolute, accrued, contingent, or otherwise) of any
nature (other than liabilities and obligations incurred in the ordinary course
of business) that would properly be reflected or reserved against in a balance
sheet prepared in conformity with generally accepted accounting principles
applied on a basis consistent with that used in the preparation of the balance
sheet of the Company as at the Financial Statement Date referred to in Section
5.8 hereof; and
(b) Neither the Company nor the Subsidiary has acquired any material
amount of accounts receivable that are uncollectible, and the frequency and
amounts of payments received by the Company with respect to the accounts
receivable reflected on the balance sheet of the Company as at the Financial
Statement Date referred to in Section 5.8 hereof do not, in retrospect, render
inadequate the reserve for uncollectible accounts set forth on such balance
sheet.
5.21. Environmental Matters.
---------------------
(a) To the Knowledge of the Company, the Subsidiary and the
Founders, no releases or threat of releases of hazardous substances have
occurred at, from, in or on any real property owned, leased or operated by the
Company or the Subsidiary ("Site"), nor are there any hazardous substances in,
on, about or migrating to any Site;
(b) To the Knowledge of the Company, the Subsidiary and the
Founders, no releases or threat of releases of hazardous substances have
occurred at, from or in any site at which a hazardous substance generated by or
from the Company or the Subsidiary has been disposed of;
(c) To the Knowledge of the Company, the Subsidiary and the
Founders, there are no past or pending environmental claims against the Company
or the Subsidiary related to any Site or off-site locations to which the Company
or the Subsidiary has shipped hazardous substances. To the Knowledge of the
Company, the Subsidiary and the Founders, there has been no violation of or
non-compliance with any environmental law or environmental permit by the
-24-
<PAGE>
Company or the Subsidiary relating to operations of the Company or the
Subsidiary or other uses of any Site;
(d) To the Knowledge of the Company, the Subsidiary and the
Founders, there are no facts, circumstances, or conditions that could reasonably
be expected to restrict, encumber, or result in the imposition of special
conditions under any environmental law or environmental permits with respect to
the ownership, occupancy, development, use, or transferability of any Site;
(e) To the Knowledge of the Company, the Subsidiary and the
Founders, there are no underground storage tanks, polychlorinated
biphenyl-containing materials, or asbestos-containing materials located at any
Site;
(f) To the Knowledge of the Company, the Subsidiary and the
Founders, there are not any and there have not been any environmental conditions
at any Site resulting from or arising out of any past activities at such Site
created prior to or existing at the Closing Date; and
(g) To the Knowledge of the Company, the Subsidiary and the
Founders, all necessary environmental permits and other permits for all
activities related to the past operations and current operations at any Site
were obtained. To the Knowledge of the Company, the Subsidiary and the Founders,
the Company and the Subsidiary have fully complied and are in full compliance
with all environmental laws and environmental permits with respect to activities
relating to any Site.
5.22. Governmental Authorizations and Regulations. Schedule 5.22
------------------------------------------- -------------
hereto lists all licenses, franchises, permits, and other governmental
authorizations held by the Company and the Subsidiary material to the conduct of
their business. Such licenses, franchises, permits, and other governmental
authorizations are valid, and neither the Company nor the Subsidiary has
received any notice that any governmental authority intends to cancel,
terminate, or not renew any such license, franchise, permit, or other
governmental authorization. To the Knowledge of the Company, the Subsidiary and
the Founders, the Company and the Subsidiary hold all licenses, franchises,
permits, and other governmental authorizations the absence of any of which could
have a material adverse effect on their business.
5.23. Accounting Practices. The Company and the Subsidiary make and
--------------------
keep accurate books and records reflecting their assets and maintain internal
accounting controls that provide reasonable assurance that (a) transactions are
executed with management's authorization and (b) transactions are recorded as
necessary to permit preparation of the Company's and the Subsidiary's financial
statements and to maintain accountability for the assets of the Company and the
Subsidiary.
5.24. Minute Books. The Company's and the Subsidiary's minute books
------------
contain complete and accurate records of all meetings and other actions of their
members, stockholders, Board of Directors, Board of Managers and committees
thereof, as the case may be, for periods from and after September 8, 1998.
-25-
<PAGE>
5.25. Employee Matters. Schedule 5.25 sets forth a list of the name,
---------------- -------------
title and current annual base salary or hourly rate of each person employed by,
or who acts as a consultant for, the Company or the Subsidiary on the date
hereof, together with a statement of the full amount and nature of any other
remuneration, whether in cash or kind, paid to each such person during the
current fiscal year of the Company or the Subsidiary. The Company will furnish
an updated copy of such list at the Closing which will reflect any changes in
such information occurring between the date hereof and the Closing Date. Neither
the Company nor the Subsidiary is in material violation, nor has it been alleged
to be in violation, of any of the various provisions of Title VII of the Federal
Civil Rights Act, the Age Discrimination in Employment Act, the Americans with
Disabilities Act, or any other federal or state law dealing with employment
discrimination, federal or state wage and hour laws, federal or state income or
unemployment and social security tax withholding laws, or occupational safety
and health laws and applicable standards and regulations thereunder. Neither the
Company nor the Subsidiary is liable for any unpaid wages, vacation pay,
bonuses, or commissions, or for any material tax, penalty, assessment, or
forfeiture for failure to comply with any employer/employee matter. There are no
strikes, lockouts, work stoppages, slowdowns, jurisdictional disputes, material
grievances, material arbitration, or organizing activities occurring or
threatened with respect to the Company or the Subsidiary. Neither the Company
nor the Subsidiary is a party to any collective bargaining agreement, no such
agreement determines the terms and conditions of employment of any employee of
the Company or the Subsidiary, no collective bargaining agent has been certified
as a representative of any of the employees of the Company or the Subsidiary,
and no representation campaign or election is now in progress with respect to
any of the Company's or the Subsidiary's employees.
5.26. Year 2000 Compliance. Schedule 5.26 sets forth the Company's
-------------------- -------------
plan (including an itemized budget and timeline for completion and the status of
tasks completed to date as compared against the budget and timeline) to cause
the hardware, software, firmware, middleware and other information technology
owned or used by the Company and the Subsidiary in their business to accurately
receive, provide and process date/time data (including, but not limited to,
calculating, comparing and sequencing) from, into and between the twentieth and
twenty-first centuries, including the years 1999 and 2000, and leap year
calculations ("Year 2000 Compliant"). To the Knowledge of the Company and the
Subsidiary there is no information which causes either of them to believe that
the Company and the Subsidiary will not be Year 2000 Compliant in all material
respects.
5.27. Banks; Powers of Attorney. Schedule 5.27 hereto contains a
------------------------- -------------
correct and complete list setting forth the name of each bank in which the
Company or the Subsidiary has an account or safe deposit box, the account
numbers, the names of all persons authorized to draw thereon or to have access
thereto, and the names of any person holding a power of attorney from the
Company or the Subsidiary.
5.28. Accuracy of Information Furnished. This Agreement, the
---------------------------------
Transaction Documents, and the schedules and exhibits hereto and thereto do not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements
-26-
<PAGE>
(excluding statements concerning solely the Buyer) herein or therein, in light
of the circumstances under which they were made, not misleading.
5.29. Representations and Warranties by NAV. NAV represents and
-------------------------------------
warrants to the Buyer that, as of the date of this Agreement and as of the
Closing Date:
(a) NAV owns the Warrant and the Convertible Debenture and holds the
Amortizing Debenture free and clear of all liens, claims, charges, restrictions,
equities, encumbrances, pledges, charges, security interests, rights, options,
or other adverse interests of any kind. NAV has the right, power and authority
to sell and transfer the Warrant, the Convertible Debenture and the Amortizing
Debenture as provided herein, and upon such sale, and transfer the Buyer will
receive good and valid title to the Warrant, the Convertible Debenture and
Amortizing Debenture, subject to no liens, claims, charges, restrictions,
equities, encumbrances, pledges, charges, security interests, rights, options,
or other adverse interests of any kind. The certificates or assignments for the
Warrant, the Convertible Debenture and the Amortizing Debenture will be, when
delivered to the Buyer, duly endorsed in blank or accompanied by powers duly
executed in blank, in proper form for transfer.
(b) NAV has the power and authority to execute and deliver this Agreement
and the other agreements and documents contemplated by this Agreement to be
executed and delivered by it (the "NAV Documents") and to carry out its
obligations hereunder and thereunder, as the case may be. The execution,
delivery, and performance of this Agreement and each of the NAV Documents and
the consummation of the transactions contemplated hereby and thereby have been
duly authorized by the general partner of NAV and no other proceeding on the
part of NAV is necessary to authorize the execution and delivery of this
Agreement or any of the NAV Documents, or the performance by NAV of any of the
transactions contemplated hereby or thereby. This Agreement and each of the NAV
Documents has been or will be duly executed and delivered on behalf of NAV, and
when executed and delivered by all required parties thereto, will be a legal,
valid, and binding obligation of NAV, enforceable against it in accordance with
its terms.
(c) No consent, approval, order, or authorization of, or registration,
declaration, or filing with, any governmental authority is required in
connection with the execution and delivery by NAV of this Agreement and the NAV
Documents, or the consummation of the transactions contemplated hereby or
thereby.
6. Representations and Warranties of the Buyer to the Company and the
------------------------------------------------------------------
Seller. The Buyer represents and warrants to the Company and the Sellers that,
- ------
as of the date of this Agreement and (except as otherwise stated herein) as of
the Closing Date:
6.1. Authority for Agreements. The Buyer has the power and authority
------------------------
to execute this Agreement and all of the agreements attached hereto as Exhibits
and to carry out its obligations hereunder. The execution, delivery, and
performance of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by the Board of Directors of the
Buyer, and no other proceeding on the part of the Buyer is necessary to
authorize the execution and delivery of this Agreement or the performance by the
Buyer of any
-27-
<PAGE>
of the transactions contemplated hereby. When executed and delivered by the
Buyer, this Agreement will be binding upon and enforceable against the Buyer in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, reorganization, insolvency, moratorium, or other similar
laws, from time to time in effect, affecting creditors' rights generally, and
general principles of equity (whether asserted in an action at law or in
equity).
6.2. Buyer's Non-Contravention. Except as set forth in Schedule 6.2
------------------------- ------------
hereto, the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not, (a) violate any provision of the
Articles of Incorporation or By-laws of the Buyer; (b) violate any material
provision of, or result in the breach or the acceleration of, or entitle any
party to accelerate (whether after the giving of notice or lapse of time or
both), any material obligation under, any mortgage, lien, lease, agreement,
license, instrument, order, arbitration award, judgment, or decree to which the
Buyer is a party or by which it is bound; (c) result in the creation or
imposition of any material lien, charge, pledge, security interest, or other
encumbrance upon any property of the Buyer; (d) violate or conflict with any
other material restriction or any law, ordinance, or rule to which the Buyer or
its property is subject; or (e) result in the default by the Buyer under any
material contract to which it is a party.
6.3. Buyer's Approvals. Except as set forth on Schedule 6.3 hereto,
----------------- ------------
no consent, approval, order, or authorization of, or registration, declaration,
or filing with, any governmental authority is required in connection with the
execution and delivery of this Agreement and the Transaction Documents by the
Buyer or the consummation of the transactions contemplated hereby.
6.4. Transaction Costs and Expenses. Except as set forth in Schedule
------------------------------ --------
6.4 hereto, all negotiations relating to this Agreement and the transactions
- ---
contemplated hereby have been carried on by the Buyer without the intervention
of any person or firm in such manner as to give rise to any valid claim against
any of the parties hereto for a brokerage commission, finder's fees or agency
fees. The Buyer shall be responsible for and shall pay all costs and expenses
including, without limitation, attorneys fees incurred by the Buyer in
connection with the transactions contemplated by this Agreement.
6.5. Investment Purpose; Experience. The Buyer is buying the Units
------------------------------
and the Warrant for investment only and not with a view to resale in connection
with any distribution of the Units or any other units in the Company. The Buyer
will not sell or otherwise dispose of the Units or the Warrant (or any
underlying units) except in compliance with the Securities Act and all other
applicable federal and state securities laws. The Buyer has sufficient knowledge
and experience in investing and financial matters so as to be able to evaluate
the risks of its investment in the Company. The Buyer is able to bear the risks
thereof, including a complete loss of its investment in the Units and the
Warrant.
6.6. Litigation. There are no actions, suits, proceedings,
----------
investigations, or inquiries pending or, to the Buyer's knowledge after due
inquiry, threatened against the Buyer at law or in equity in any court or before
any federal, state, municipal, or other governmental
-28-
<PAGE>
department, commission, board, bureau, agency, or instrumentality that
reasonably could be expected to have an adverse effect on the Buyer's right or
ability to execute and deliver this Agreement or consummate the transactions
contemplated hereby or to satisfy its ongoing obligations under this Agreement.
6.7. Organization, Etc. Choice One is a corporation duly organized,
-----------------
validly existing, and in good standing under the laws of the State of Delaware,
and has all requisite corporate power and authority to own or lease and to
operate its properties and to carry on its business as now being conducted.
6.8. Accuracy of Information Furnished. This Agreement and the
---------------------------------
schedules and exhibits hereto do not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
(excluding statements concerning solely the Company, the Subsidiary or the
Sellers) herein or therein, in light of the circumstances under which they were
made, not misleading.
7. Covenants of the Company and the Sellers. The Company and the
----------------------------------------
Founders, jointly and severally, with respect to all matters set forth below,
and NAV, severally, only with respect to those covenants and agreements
applicable to NAV, covenant and agree that:
7.1. Access, Information and Documents. Pending the Closing, the
---------------------------------
Buyer and to its agents and representatives (including, but not limited to,
accountants, lawyers, and appraisers) shall have full and complete access during
and after normal working hours to any and all of the properties, assets, books,
records, and other documents of the Company and the Subsidiary to enable the
Buyer to make such examination of the business, properties, assets, books,
records, and other documents of the Company and the Subsidiary as the Buyer may
determine, and the Company, the Subsidiary and the Founders may furnish to the
Buyer such information and copies of such documents and records as the Buyer may
reasonably request. As part of such examination, the Buyer may make such
inquiries of such persons having business relationships with the Company or the
Subsidiary as the Buyer may determine and the Company, the Subsidiary and the
Founders will cooperate fully with the Buyer in connection therewith, provided
that the Company is given reasonable prior notice of all such persons to which
the Buyer intends to make inquiries and the Company consents to such inquiries.
7.2. Conduct of Business Pending Closing. From the date hereof until
-----------------------------------
the Closing, except as consented to by the Buyer in writing or as contemplated
by this Agreement:
(a) Each of the Company and the Subsidiary will maintain itself at
all times as a limited liability company and corporation, respectively, duly
organized, validly existing, and in good standing, under the laws of the
jurisdictions under which it is organized and in which it is doing business as a
foreign entity;
(b) The Company and the Subsidiary will carry on their business and
operations substantially in the manner carried on as of the date hereof and
neither the Company nor the Subsidiary will engage in any activity or
transaction or make any commitment to purchase or spend, other than in the
ordinary course of its business as heretofore conducted, or
-29-
<PAGE>
repay any indebtedness (including, but not limited to, operating or capital
lease obligations) except in accordance with the scheduled payment terms under
the Contracts or as otherwise provided in this Agreement, or enter into any new
indebtedness for borrowed money or the deferred purchase of assets or services
or any operating or capital lease arrangements;
(c) The Company will not declare, authorize, or pay any distribution
or dividend to its members and neither the Company nor the Subsidiary will
redeem, purchase, or otherwise acquire, or agree to redeem, purchase, or
otherwise acquire, any units or other securities of the Company or the
Subsidiary;
(d) The Company will not pay or obligate itself to pay any
compensation, commission, or bonus to any manager, director, officer, employee,
or independent contractor as such, except for the regular compensation and
commissions payable to such manager, director, officer, employee, or independent
contractor at the rate in effect on the date of this Agreement or otherwise in
the ordinary course of business, subject to increases in compensation or
benefits made in accordance with Section 5.9(f) of this Agreement;
(e) The Company and the Subsidiary will continue to carry all of
their existing insurance;
(f) The Company and the Subsidiary will use their best efforts to
preserve their business organization intact, to keep available to the Buyer the
services of their employees and independent contractors and to preserve for the
Buyer their relationships with suppliers, licensees, distributors, and customers
and others having business relationships with them;
(g) The Company and the Subsidiary will not, and will not obligate
themselves to, sell or otherwise dispose of or pledge or otherwise encumber any
of their properties or assets except in the ordinary course of business, and the
Company and the Subsidiary will maintain their facilities, machinery, and
equipment in good operating condition and repair, subject only to ordinary wear
and tear;
(h) The Company and the Subsidiary will not enter into any agreement
or understanding with any employee, officer, director, manager or member of the
Company or the Subsidiary, or any affiliate of any of the foregoing;
(i) The Company and the Subsidiary shall promptly notify the Buyer of
hiring or engaging any new employee, consultant or agent;
(j) The Company and the Subsidiary will not engage in any activity or
transaction other than in the ordinary course of their business as heretofore
conducted; and
(k) Without limiting the foregoing, the Company and the Subsidiary
will consult with the Buyer regarding all significant developments,
transactions, and proposals relating to their business prior to taking any
action.
-30-
<PAGE>
7.3. Consents and Approvals. Each of the Company, the Subsidiary and
----------------------
the Sellers will use its or his best efforts to obtain prior to the Closing all
consents, authorizations, and approvals under all statutes, laws, ordinances,
regulations, rules, judgments, decrees, and orders of any court or governmental
agency, board, bureau, body, department, or authority or of any other person
required to be obtained by the Company, the Subsidiary or the Sellers in
connection with the execution, delivery, and performance of this Agreement, the
Transaction Documents to which it or he is a party, and the consummation of the
transactions contemplated hereby and thereby.
7.4. Confidential Material. The Company, the Subsidiary and the
---------------------
Founders will, and will instruct all of the other Sellers (including NAV) and
their respective employees, representatives, agents, and affiliates to, treat
all Confidential Material confidentially and not disclose it or use it for any
other purposes except in connection with the transaction contemplated by this
Agreement in accordance with its terms; provided, that (a) any Confidential
Material may be disclosed to the Company's, the Subsidiary's or the Sellers'
agents who (i) need to have access to such information and (ii) are directed by
the Company, the Subsidiary or the Sellers to treat such Confidential Material
confidentially; (b) any disclosure of Confidential Material may be made with the
prior written consent of the Buyer; and (c) Confidential Material may be
disclosed without liability hereunder to the extent required by law or by the
order or decree of any court or other governmental authority; provided, however,
that the party legally compelled to disclose the Confidential Material will
provide the Buyer with prompt notice of that fact so that the Buyer may attempt
to obtain a protective order or other appropriate remedy. For purposes of this
section, the term "Confidential Material" will be defined to mean all
information furnished by the Buyer or any of its agents to the Company, the
Subsidiary or the Sellers or any of their agents; provided, however, that the
term "Confidential Material" will not include information that (x) becomes
generally available to the public other than as a result of a disclosure by the
Company, the Subsidiary or the Sellers or any of their employees,
representatives, agents, or affiliates, or (y) was made available to the
Company, the Subsidiary or the Sellers on a non-confidential basis from a source
other than the Buyer or any of its agents, provided, that such source is not
bound by a confidentiality agreement with the Buyer or any of its agents.
7.5. Employment Contracts. At the Closing, Cissel shall execute and
--------------------
deliver the Employment Contract.
7.6. Liability for Federal, State and Local Taxes. The Sellers
--------------------------------------------
(including NAV) will be liable for all federal, state, and local taxes resulting
from the transactions contemplated by this Agreement, including, but not limited
to, all sales, use, and transfer taxes, if any, resulting from this transaction.
In addition, the Sellers (including NAV) will be responsible for all federal,
state, and local taxes and any interest, penalty, or expenses incurred thereon
for all tax years ending prior to the Closing Date and for all business
conducted prior to the Closing Date to the extent adequate reserves therefor are
not reflected in the applicable financial statements of the Company and the
Subsidiary referred to in Section 5.8 hereof. Taxes against which the Buyer and
the Company shall be held harmless under the preceding sentence shall include,
without limitation, any Taxes the liability for which arises as a result of an
audit or other inquiry by any governmental authority prior to or following the
Closing Date, and any liability relating to the
-31-
<PAGE>
failure of the Company on or prior to the Closing Date to collect or withhold
and pay when due Taxes. The rights of the Buyer under this Section 7.6 shall be
in no way diminished by disclosure on any disclosure schedule and shall in no
way limit any representation or warranty of the Company , the Subsidiary or any
of the Sellers hereunder. For purposes of this Section 7.6, any Taxes with
respect to any taxable year or any tax period beginning before the Closing Date
and ending after the Closing Date shall be apportioned between the portion of
the period ending on the Closing Date and the portion of such period beginning
on the date following the Closing Date, on a per diem basis in the case of real
and personal property taxes and on the basis of the actual operations of the
Company in the case of other Taxes. The foregoing apportionment shall be
performed by the Buyer's Accountants (in accordance with the principles of
Section 1.1502-76(b)(4) of the United States Treasury Regulations) and such
apportionment shall be approved (which approval shall not be unreasonably
withheld) by the Sellers.
7.7. Allocation of Purchase Price and Earned Amount; Final Company Tax
-----------------------------------------------------------------
Returns. The Sellers (including NAV) agree that the Purchase Price Allocation
- -------
Schedule shall be binding upon them for federal, state and local tax purposes
and that such Seller covenants to report all gain or loss and file all tax
returns required to filed by such Seller in a manner consistent with Internal
Revenue Service Form 8594. The Sellers (including NAV) agree that the Buyer
shall be responsible for the preparation and filing of all final tax returns of
the Company, and that the Sellers will not file any returns which conflict with
the final Company returns filed by the Buyer.
7.8. Claims Experience. At or prior to the Closing, the Company and
-----------------
the Founders will prepare and deliver to the Buyer a certificate setting forth
in reasonable detail a description of material claims experience of the Company
and the Subsidiary during the past three years under all of the insurance
policies listed on Schedule 5.16 hereto, including settled and outstanding
-------------
claims under all such policies in respect of general liability and workers'
compensation claims.
7.9. Employment and Employee Benefits. The Company has delivered to
--------------------------------
the Buyer a list of the name, title, and current annual base salary or hourly
rate of each person employed by or engaged to render consulting services to the
Company or the Subsidiary on September 30, 1999 together with a statement of the
full amount and nature of any other remuneration, whether in cash or kind, paid
to each such person during the 1999 calendar year. The Company will furnish an
updated copy of such list at the Closing which will reflect any changes in such
information occurring between the date hereof and the Closing Date. The Company
agrees with the Buyer that all individuals who were employees of the Company on
the Closing Date will be offered continued employment with the Company,
effective immediately after the Closing. Any individuals who accept this offer
of employment with the Company will be referred to herein as "Transferring
Employees." Except as may be otherwise specifically provided in the Employment
Contract, the employment of Transferring Employees will be "at will" and nothing
herein expressed or implied confers upon any such Transferring Employee any
rights or remedies of any nature or kind whatsoever under or by reason of this
Agreement, including, without limitation, any rights to employment for a
specific period. After the Closing, the Buyer will make available to
Transferring Employees such wages and benefits as the Buyer,
-32-
<PAGE>
in its sole business judgment, deems appropriate, subject only to the covenants
set forth in Section 8.3 hereof. The Buyer will be under no obligation to credit
Transferring Employees with past service credit for any purpose (including,
without limitation, vacation, severance, or pension purposes for which adequate
reserves have not been made in the financial statements of the Company and the
Subsidiary set forth in Section 5.8 hereof); provided, however, that the Buyer
specifically agrees that it will be responsible for up to $10,000 of accrued
vacation obligations of the Company and the Subsidiary and any accrued vacation
pay obligations to Craig Tefft for which reserves have not been made in such
financial statements.
7.10. Further Assurances. The Company, the Subsidiary, and the Sellers
------------------
(including NAV) agree to do or cause to be done such further acts and things and
deliver or cause to be delivered to the Buyer such additional assignments,
agreements, powers, and instruments as the Buyer may reasonably request to carry
into effect the purposes of this Agreement and the Transaction Documents or to
better assure and confirm unto the Buyer its rights, powers, and remedies
hereunder and thereunder.
8. Covenants of the Buyer. The Buyer covenants and agrees that:
----------------------
8.1. Confidential Information. The Buyer will, and will instruct all
------------------------
of its employees, representatives, agents, and affiliates to, treat all
Confidential Information confidentially and not disclose or use it except in
accordance herewith; provided, that (a) any Confidential Information may be
disclosed to the Buyer's agents who (i) need to have access to such information
and (ii) are directed by the Buyer to treat such Confidential Information
confidentially; (b) any disclosure of Confidential Information may be made with
the prior written consent of the Company or the Founders; and (c) Confidential
Information may be disclosed without liability hereunder to the extent required
by law or by the order or decree of any court or other governmental authority;
provided, however, that the party legally compelled to disclose the Confidential
Information will provide the Company or the Founders, as appropriate, with
prompt notice of that fact so that the Company or the Founders may attempt to
obtain a protective order or other appropriate remedy. For purposes of this
section, the term "Confidential Information" will be defined to mean all
information furnished by the Company, the Subsidiary or the Sellers or any of
their agents to the Buyer or any of its agents; provided, however, that the term
"Confidential Information" will not include information that (x) becomes
generally available to the publ ic other than as a result of a disclosure by the
Buyer or any of its employees, representatives, agents, or affiliates, or (y)
was made available to the Buyer on a non-confidential basis from a source other
than the Company, the Subsidiary or the Sellers or any of their agents, provided
that such source is not bound by a confidentiality agreement with the Company,
the Subsidiary or any of their agents. The provisions contained in this Section
8.1 will not survive the Closing.
8.2. Consents and Approvals. The Buyer will use its best efforts to
----------------------
obtain prior to the Closing all consents, authorizations, and approvals under
all statutes, laws, ordinances, regulations, rules, judgments, decrees, and
orders of any court or governmental agency, board, bureau, body, department, or
authority or of any other person required to be obtained by the Buyer in
connection with the execution, delivery, and performance of this Agreement, the
-33-
<PAGE>
Transaction Documents to which it is a party and the consummation of the
transactions contemplated hereby and thereby.
8.3. Employment and Employee Benefits. After the Closing, the Buyer to
--------------------------------
offer continued employment with the Company or the Subsidiary to all individuals
who are employees of the Company or the Subsidiary on the Closing Date. Except
as otherwise specifically provided in the Employment Contracts, this employment
of Transferring Employees will be "at will" and nothing herein expressed or
implied confers upon any such Transferring Employee any rights or remedies of
any nature or kind whatsoever under or by reason of this Agreement, including,
without limitation, any rights to employment for a specific period. The Buyer
will make available to Transferring Employees such wages and benefits as the
Buyer, in its sole business judgment, deems appropriate; provided, however, that
it will use its reasonable efforts to provide Transferring Employees with
substantially similar working terms and working conditions as they had as
employees of the Company or the Subsidiary prior to the Closing. The Buyer will
be under no obligation to credit Transferring Employees with past service credit
for any purpose (including, without limitation, vacation, severance, or pension
purposes for which adequate reserves have not been made in the financial
statements of the Company and the Subsidiary set forth in Section 5.8 hereof);
provided, however, that the Buyer specifically agrees that it will be
responsible for up to $10,000 of accrued vacation obligations of the Company and
the Subsidiary and any accrued vacation pay obligations to Craig Tefft for which
reserves have not been made in such financial statements.
8.4. Further Assurances. The Buyer will, at the request of the Sellers
------------------
and The Buyer covenants and agrees that: at the Buyer's sole expense, do or
cause to be done such further acts and things and deliver to the Sellers such
additional instruments and documents and take all such further action as the
Sellers may reasonably request in order to carry into effect the purposes of
this Agreement and the Transaction Documents or to better assure and confirm
unto the Sellers their rights, powers and remedies hereunder and thereunder.
8.5. Purchase Price and Earned Amount Allocation Schedule; Final
------------------------------------------------------------
Company Tax Returns. On or before January 20, 2000, the Buyer will provide the
- -------------------
Sellers with a schedule (the "Purchase Price and Earned Amount Allocation
Schedule") setting forth the Buyer's allocation of the Purchase Price among the
assets of the Company and the Subsidiary. The Buyer will prepare and file all
final tax returns for the Company which returns shall require the Minority Unit
Holders' Representative's review and approval and such approval shall not be
unreasonably withheld by the Minority Unit Holders Representative.
9. Conditions Precedent to the Sellers' Obligations. The obligations
------------------------------------------------
of the Founders and the Minority Unit Holders to sell the Units and of NAV to
transfer the Warrant are subject to the fulfillment prior to or at the Closing
of the following conditions:
9.1. The Buyer's Performance. There will not be any material error,
-----------------------
The Buyer covenants and agrees that: misstatement, or omission in the
representations and warranties made by the Buyer in this Agreement; all
representations and warranties by the Buyer contained in this Agreement or in
any written statement delivered by the Buyer to the Company, the Subsidiary or
the Sellers
-34-
<PAGE>
pursuant to this Agreement will be true in all material respects at and as of
the Closing as though such representations and warranties were made at and as of
said time (except (a) as contemplated by this Agreement and (b) to the extent,
if any, the Company and the Sellers waive the same); and the Buyer will have
performed and complied in all material respects with all the terms, provisions
and conditions of this Agreement to be performed and complied with by the Buyer
at or before the Closing.
9.2. Consents and Approvals. The Company, the Subsidiary and the Buyer
----------------------
(and to the extent required, the Sellers) will have obtained all consents,
authorizations, and approvals under all statutes, laws, ordinances, regulations,
rules, judgments, decrees, and orders of any court or governmental agency,
board, bureau, body, department, or authority or of any other person required to
be obtained by the Company, the Subsidiary, the Buyer, or the Sellers, as the
case may be, in connection with the execution, delivery, and performance of this
Agreement, the Transaction Documents and the consummation of the transactions
contemplated hereby and thereby.
9.3. No Legal Impediment. There will be in effect no injunction, writ,
-------------------
temporary restraining order, or any order of any nature issued by any court or
governmental agency directing that the transactions contemplated by this
Agreement not be consummated.
9.4. Unit Holders Consent. The Founders shall have received a Unit
--------------------
Holders Agreement executed by each of the Minority Unit Holders.
10. Conditions Precedent to the Buyer's Obligations. The obligation
-----------------------------------------------
of the Buyer to purchase the Units and the Warrant is subject to the fulfillment
prior to or at the Closing of the following conditions:
10.1. The Company's, the Subsidiary's and the Sellers' Performance.
------------------------------------------------------------
There will not be any material error, misstatement, or omission in the
representations and warranties made by the Company, the Subsidiary, the
Founders, NAV or the Sellers in this Agreement or any other agreement executed
and delivered by any of them in accordance with the terms hereof; all
representations and warranties by the Company, the Subsidiary, the Founders, NAV
and the Sellers contained in this Agreement or in any written statement
delivered by the Company, the Subsidiary, the Founders, NAV or the Sellers to
the Buyer pursuant to this Agreement will be true in all material respects at
and as of the Closing as though such representations and warranties were made at
and as of said time (except (a) as contemplated by this Agreement and (b) to the
extent, if any, the Buyer may waive the same); and the Company, the Subsidiary,
the Founders, NAV and the Sellers will have performed and complied in all
material respects with all the terms, provisions, and conditions of this
Agreement to be performed and complied with by the Company, the Subsidiary, the
Founders, NAV and the Sellers at or before the Closing.
10.2. Consents and Approvals. The Company, the Subsidiary and the
----------------------
Buyer (and to the extent required, the Sellers) will have obtained all consents,
authorizations, and approvals under all statutes, laws, ordinances, regulations,
rules, judgments, decrees, and orders of any court or governmental agency,
board, bureau, body, department, or authority or of any
-35-
<PAGE>
other person required to be obtained by the Company, the Subsidiary, the
Sellers, or the Buyer, as the case may be, in connection with the execution,
delivery and performance of this Agreement and the Transaction Documents, and
the consummation of the transactions contemplated hereby and thereby.
10.3. Physical Properties. There will have occurred no material damage
-------------------
to or destruction or loss of (whether or not covered by insurance) any of the
Company's facilities, equipment, or other assets.
10.4. Bank Consent. Choice One shall have received all necessary
------------
consents of First Union Bank and other lenders under applicable credit
agreements and related financing documents among Choice One, First Union Bank
and such lenders, to consummate the transactions contemplated by this
Agreement.
10.5. No Legal Impediment. There will be in effect no injunction,
-------------------
writ, temporary restraining order, or any order of any nature issued by any
court or governmental agency directing that the transactions contemplated by
this Agreement not be consummated.
10.6. Consent of Sellers' Accountants Regarding Registration
------------------------------------------------------
Statement. The Seller's Accountants shall have executed and delivered to the
- ---------
Buyer an agreement in form and substance satisfactory to the Buyer in which the
Seller's Accountants consent to the use of the Closing Date Financial Statements
and the use of their name in connection therewith in any registration statement
filed by the Buyer under the Securities Act.
10.7. Minority Unit Holders Representative Agreement. The Buyer shall
----------------------------------------------
have received a Minority Unit Holders Representative Agreement duly executed by
each Minority Unit Holder.
10.8. Termination of Prior Employment Agreements. The Sellers shall
------------------------------------------
have terminated any prior employment agreement between the Company and Cissel.
11. Termination. This Agreement may be terminated as follows:
-----------
11.1. Termination by the Buyer. The Buyer may, without liability to
------------------------
the Company, the Subsidiary or the Sellers, terminate this Agreement by notice
to the Company and the Sellers (a) at any time prior to the Closing if there is
any material default by the Company, the Subsidiary, the Founders, NAV or the
Sellers in the observance or in the due and timely performance of any of the
terms hereof to be performed by the Company, the Subsidiary, the Founders, NAV
or the Sellers that cannot be cured at or prior to the Closing, (b) at the
Closing if any of the conditions precedent to the performance of the Buyer's
obligations at the Closing will not have been fulfilled or (c) on or after
December 31, 1999 if the Closing has not occurred by that date.
11.2. Termination by the Company or the Seller. The Company and the
----------------------------------------
Sellers may, without liability to the Buyer, terminate this Agreement by notice
to the Buyer (a) at any time prior to the Closing if there is any material
default by the Buyer in the observance or in the
-36-
<PAGE>
due and timely performance of any of the terms hereof to be performed by the
Buyer that cannot be cured at or prior to the Closing, (b) at the Closing if any
of the conditions precedent to the performance of the Company's or the Sellers'
obligations at the Closing will not have been fulfilled or (c) on or after
December 31, 1999 if the Closing has not occurred by that date.
11.3. Effect of Termination. If this Agreement is terminated, then
---------------------
this Agreement, except for Sections 7.4 and 8.1, will no longer be of any force
or effect and there will be no liability on the part of any party or its
respective directors, officers, or members except, in the case of termination
pursuant to Section 11.1(a) or (b) or 11.2(a) or (b) of this Agreement, the
aggrieved party or parties may recover from the defaulting party (which in the
case of any default by any of the Sellers shall be deemed to be the Company) the
amount of legal and other transaction expenses reasonably incurred by such
aggrieved party or parties in connection with this Agreement and the
transactions contemplated hereby, which amount shall be limited to $125,000 in
the aggregate, which the aggrieved party or parties would otherwise have to bear
pursuant to Section 13.6 of this Agreement. If this Agreement is terminated,
Sections 7.4 and 8.1 will remain in full force and effect, and any party, or its
respective directors, officers, agents or representatives, breaching Section 7.4
or Section 8.1 may be held liable for any such breach.
12. Indemnification.
---------------
12.1. Indemnification of the Buyer and the Company. From and after the
--------------------------------------------
Closing Date, the Sellers, jointly and severally, will indemnify, defend, and
hold harmless the Buyer and the Company and their respective officers,
directors, members, representatives, agents, and affiliates from, against, and
in respect of all claims, liabilities, actions, suits, proceedings, assessments,
judgments, losses, damages, costs, and expenses (including interest, penalties,
and reasonable accountants', experts', and attorneys' fees and disbursements)
(collectively, "Damages"), arising out of, relating to, or resulting from (a)
any inaccuracy or breach of any of the written representations or warranties of
the Company, the Subsidiary or any of the Sellers made in or pursuant to this
Agreement or the Transaction Documents; (b) the breach of any covenant,
obligation, or agreement of any of the Sellers to be performed, fulfilled, or
complied with pursuant to this Agreement or the Transaction Documents; (c) any
misrepresentation, or the omission of any material fact (including without
limitation those facts required to make the facts otherwise set forth not be
misleading), in this Agreement or the Transaction Documents (including all
exhibits and schedules hereto and thereto); or (d) the acts or omissions of any
of the Company's or the Subsidiary's officers, directors, members, agents,
employees or representatives prior to the Closing in connection with the
operation of the Company's or the Subsidiary's business other than in the
ordinary course of business or in accordance with normal industry practices;
provided, that no indemnification will be owed hereunder in any case where it is
determined that Damages result solely from the gross negligence, willful
misconduct, or bad faith of the party to be indemnified; provided, further, that
the Sellers will not be liable for indemnification hereunder in respect of any
breach of any warranty, representation, covenant, obligation, or agreement, or
any misrepresentation or omission, that is not made or is not to be performed by
the Company, the Subsidiary or the Sellers.
-37-
<PAGE>
12.2. Indemnification of the Sellers. From and after the Closing Date,
------------------------------
the Buyer will indemnify, defend, and hold harmless the Sellers and their
respective representatives, agents, and affiliates from, against, and in respect
of all claims, liabilities, actions, suits, proceedings, assessments, judgments,
losses, damages, costs, and expenses (including interest, penalties, and
reasonable accountants', experts', and attorneys' fees and disbursements)
(collectively, "Damages") arising out of, relating to, or resulting from (a) any
material inaccuracy or material breach of any of the written representations or
warranties of the Buyer made in or pursuant to this Agreement or the Transaction
Documents; (b) the material breach of any covenant, obligation, or agreement of
the Buyer to be performed, fulfilled, or complied with pursuant to this
Agreement or the Transaction Documents; (c) any material misrepresentation or
the omission of any material fact (including without limitation those facts
required to make the facts otherwise set forth not be misleading) in this
Agreement or the Transaction Documents (including all exhibits and schedules
hereto and thereto); or (d) the operation of the business of the Company, the
Subsidiary and the Buyer after the Closing, or the acts or omissions of any of
the Buyer's officers, directors, members, agents, or representatives after the
Closing in connection with the operation of the Company's, the Subsidiary's and
the Buyer's business; provided, that no indemnification will be owed hereunder
in any case where it is determined that Damages result solely from the gross
negligence, willful misconduct, or bad faith of the Sellers or the Company or
the Subsidiary (pre-Closing); provided, further, that the Buyer will not be
liable for indemnification hereunder in respect of any breach of any warranty,
representation, covenant, obligation, or agreement, or any material
misrepresentation or omission, that is not made or is not to be performed by the
Buyer.
12.3. Limitation on Indemnification. Notwithstanding anything
-----------------------------
contained herein to the contrary, no indemnifying party (the "Indemnifying
Party") will be obligated to indemnify any other party hereunder pursuant to the
terms hereof (the "Indemnified Party") until the amount of Damages suffered by
the Indemnified Party exceeds $50,000 in the aggregate (the "Indemnification
Threshold"). Once Damages suffered by the Indemnified Party exceed the
Indemnification Threshold, however, the Indemnifying Party will be obligated to
indemnify the Indemnified Party for all amounts of Damages suffered by such
Indemnified Party from dollar one (such that the Indemnification Threshold will
not be considered a deductible). The aggregate amount of Damages for which
indemnification may be had hereunder shall be limited to the sum of (i) the
Holdback Amount, plus (ii) the Earned Amount,plus (iii) the portion of the
---- ----
Purchase Price paid to Cissel and Lopez. The sole remedy and recourse of the
Buyer against the Sellers other than Cissel and Lopez for Damages of the Buyer
shall be limited to the Holdback Amount and the Earned Amount and the Buyer's
rights of set-off as provided in Section 12.4. Any recourse against Cissel and
Lopez will be divided pro rata between them on the basis of their respective
percentage interests in the Company as set forth on Schedule 2.3(a) hereto. The
liability of each of Cissel and Lopez shall be limited to the amount of the
Purchase Price paid to him.
12.4. Set-Off Right of Buyer. The Buyer shall have the right to
----------------------
set-off against the Holdback Amount, the Consulting Fee Amount and the Earned
Amount up to the entire amount of Damages suffered by the Buyer for which the
Buyer determines in good faith that it is entitled to indemnification from the
Company and/or the Sellers pursuant to this Section 12. The
-38-
<PAGE>
Buyer will not pursue remedies against Cissel or Lopez for the portion of the
Purchase Price paid to each of them until it has exhausted its rights of set-off
against the Holdback Amount, the Consulting Fee Amount and the Earned Amount.
12.5. Indemnification Claims Procedure. If an Indemnified Party
--------------------------------
believes that it is entitled to indemnification hereunder in an amount in excess
of the Indemnification Threshold, the Indemnified Party shall give notice
thereof (an "Indemnification Notice") to each Indemnifying Party specifying, in
reasonable detail the basis for its claim for indemnification. Within fifteen
(15) days after receiving an Indemnification Notice, an Indemnifying Party shall
deliver to the Indemnified Party a statement (an "Indemnification Response"),
specifying any objections and setting forth in reasonable detail each amount
objected to, which such Indemnifying Party has to the claim of the Indemnified
Party set forth in the Indemnification Notice. If any Indemnifying Party does
not deliver an Indemnification Response as provided above, such Indemnifying
Party shall be deemed to have accepted its obligation to indemnify as set forth
in the Indemnification Notice. If an Indemnifying Party delivers an
Indemnification Response as provided above, such Indemnifying Party and the
Indemnified Party shall use reasonable efforts to resolve the dispute, but if
they do not reach a final resolution within twenty (20) days after the date of
delivery of the Indemnification Response as to all amounts or obligations in
dispute, any remaining amounts and obligations in dispute shall be resolved by
arbitration in accordance with the rules then in effect of the American
Arbitration Association by three arbitrators, appointed pursuant to such rules.
The arbitration shall be held in Boston, Massachusetts and shall involve a
reasonable amount of discovery according to limits to be established by the
arbitrators. The determination of such arbitrators shall be final and binding
upon the parties. All fees and expenses of the arbitrators and of the American
Arbitration Association shall be divided between the Indemnifying Party and the
Indemnified Party in proportion to the decision of the arbitrators with respect
to the amount in dispute. For example, if the amount in dispute under the
Indemnification Response involves an assertion by the Indemnifying Party that
the claim by the Indemnified Party is $100,000 too high, and the arbitrators
determine that the appropriate adjustment is a $25,000 decrease in the claim of
the Indemnified Party, then the Indemnifying Party shall be responsible for
paying 75% of such fees and expenses and the Indemnified Party shall be
responsible for paying 25% of such fees and expenses.
12.6. Survival of Representations, Warranties, Covenants and
------------------------------------------------------
Indemnification. The representations and warranties set forth in the this
- ---------------
agreement will survive the Closing and any investigation at any time made by or
on behalf of the Buyer, the Company, or the Sellers, as applicable, for a period
of twelve (12) months after the Closing except that all representations and
warranties as to (i) ownership and the right to transfer the Units, the Warrant,
the Convertible Debenture and the Amortizing Debenture to the Buyer in the
manner provided herein shall survive forever and (ii) Taxes shall survive until
the date sixty (60) days after the last date on which any claim could be brought
by or on behalf of any federal, state or local governmental authority, as
applicable, with respect to any Taxes. The covenants set forth herein will
survive the Closing. Any claim for indemnification based upon representations or
warranties which survive the Closing for a period of twelve (12) months must be
made by an Indemnified Party within sixty (60) days after the first anniversary
of the Closing Date.
-39-
<PAGE>
12.7. Sellers' Waiver of Subrogation and Indemnification Claims.
---------------------------------------------------------
Effective at the Closing, each of the Sellers hereby irrevocably waives and
releases the Company and the Subsidiary from (a) any claim to or right of
subrogation or contribution against the Company or the Subsidiary in respect of
any claim for breach of a representation, warranty or covenant made by the
Company or the Subsidiary hereunder; and (b) any claim to or right of
indemnification against the Company and the Subsidiary arising under their
respective Charter Documents or applicable law.
12.8. General Waiver of Claims by Sellers. If any Seller (or any
-----------------------------------
family member or other affiliate of any Seller) has any claims, whether known or
unknown, against the Company or the Subsidiary arising out of any event
occurring or state of facts existing on or prior to the Closing Date, all such
claims, whether or not assigned to any third party, are hereby released,
discharged and waived, except for (a) if the Seller is an employee or former
employee of the Company or the Subsidiary, any amounts payable as compensation
or benefits to such employee Seller, as an employee of the Company or the
Subsidiary in the ordinary course of business with respect to the current year
or as disclosed on the Company's December 31, 1998 balance sheet; and (b) any
claims or amounts payable to any Seller by the Company or the Subsidiary
pursuant to any of the Transaction Documents.
12.9. Exclusive Remedy. Buyer's exclusive remedy for any breach of
----------------
this Agreement, or claim arising from this Agreement, except for causes of
action alleging fraud on the part of any of the Sellers or a breach of Section
7.4, shall be the indemnity provisions of this Section 12.
13. Miscellaneous.
--------------
13.1. Entire Agreement; Amendments; Waivers. This Agreement,
-------------------------------------
together with the exhibits and schedules hereto, contains the entire agreement
of the parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral or written, with respect thereto. This
Agreement may be amended only by a written instrument signed by the parties
hereto. No provision of this Agreement may be waived without a written
instrument signed by the waiving party. The failure of any party to insist, in
any one or more instances, on performance of any of the terms or conditions of
this Agreement will not be construed as a waiver or relinquishment of any rights
granted hereunder or of the future performance of any such term, covenant, or
condition, but the obligations of the parties with respect thereto will continue
in full force and effect.
13.2. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
13.3. Successors and Assigns. This Agreement will inure to
----------------------
the benefit of, and be binding upon, the parties hereto and their respective
executors, heirs, and permissible assigns. Neither this Agreement nor any of the
rights or obligations hereunder (or under any document delivered pursuant
hereto) may be assigned by a party hereto without the prior written consent of
-40-
<PAGE>
the other parties, except that Choice One may assign this Agreement or any of
its obligations hereunder to any direct or indirect subsidiary of Choice One.
13.4. Governing Law; Consent to Jurisdiction of Venue. This
-----------------------------------------------
Agreement will be construed and enforced in accordance with the laws of the
State of New York without giving effect to conflicts of laws principles. Each of
the parties hereto irrevocably submits to the jurisdiction of the courts of the
State of New York and the Federal Courts of the United States of America located
in the State of New York, for the purposes of any suit, action or other
proceeding arising out of this Agreement or any transaction contemplated hereby.
Each of the parties hereto further agrees that service of any process, summons,
notice or document by U.S. registered mail to such party's respective address as
provided in Section 13.5 shall be effective service of process for any action,
suit or proceeding in New York with respect to any matters to which it has
submitted to jurisdiction as set forth in the immediately preceding sentence.
Each of the parties hereto irrevocably and unconditionally waives any objection
to the laying of venue of any action, suit or proceeding arising out of this
Agreement or the transactions contemplated hereby in the courts of the State of
New York and the Federal Courts of the United States of America located in the
State of New York, and hereby further irrevocably and unconditionally waives and
agrees not to plead or claim in any such court that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient forum.
13.5. Notices. All notices, claims, requests, demands, and
-------
other communications hereunder will be in writing and will be duly given if: (a)
personally delivered or sent via telecopy or (b) sent by Federal Express or
other reputable overnight courier (for next business day delivery), shipping
prepaid as follows:
If to the Buyer, to:
Choice One Communications Inc.
100 Chestnut Street
Rochester, New York 14604
Telefax: 716.530.2734
Attention: Chairman and Chief Executive Officer
with a copy to:
James A. Locke, III, Esq.
Nixon Peabody LLP
1300 Clinton Square
Rochester, New York 14604
Telefax: 716.263.1600
-41-
<PAGE>
If to the Company or the Subsidiary to:
Atlantic Connections, L.L.C.
212 Chestnut Street
Andover, Massachusetts 01848
Attention: Paul Cissel, President
Telefax: 978.805.3120
with a copy to:
Theodore F. Hanselman, Esq.
Holland & Knight LLP
One Beacon Street
Boston, Massachusetts 02108
Telefax: 617.523.6850
If to NAV to:
North Atlantic Venture Fund II, L.P.
70 Center Street
Portland, Maine 04101
Attention: David M. Coit
Telefax: 207.772.3257
If to the Sellers, to their respective addresses set forth on Schedule
--------
2.3(a) hereto:
- ------
or such other address or addresses as the person to whom notice is to be given
may have previously furnished to the others in writing in the manner set forth
above. Notices will be deemed given at the time of personal delivery or
completed telecopy, or, if sent by Federal Express or other reputable overnight
courier one business days after such sending.
13.6. Expenses. Except as otherwise expressly provided in this
--------
Agreement, each party hereto will bear its own expenses.
13.7. Headings; Form of Words. The headings contained in this
-----------------------
Agreement (including but not limited to the titles of the schedules and exhibits
hereto) have been inserted for the convenience of reference only, and neither
such headings nor the placement of any term hereof under any particular heading
will in any way restrict or modify any of the terms or provisions hereof. Terms
used in the singular will be read in the plural, and vice versa, and terms used
in the masculine gender will be read in the feminine or neuter gender when the
context so requires, and vice versa.
13.8. Severability. The provisions of this Agreement will be deemed
------------
severable, and if any part of any provision is held to be illegal, void,
voidable, invalid, nonbinding, or
-42-
<PAGE>
unenforceable in its entirety or partially or as to any party, for any reason,
such provision may be changed, consistent with the intent of the parties hereto,
to the extent reasonably necessary to make the provision, as so changed, legal,
valid, binding, and enforceable. If any provision of this Agreement is held to
be illegal, void, voidable, invalid, nonbinding, or unenforceable in its
entirety or partially or as to any party, for any reason, and if such provision
cannot be changed consistent with the intent of the parties hereto to make it
fully legal, valid, binding, and enforceable, then such provisions will be
stricken from this Agreement, and the remaining provisions of this Agreement
will not in any way be affected or impaired, but will remain in full force and
effect.
-43-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
BUYER:
CHOICE ONE COMMUNICATIONS INC.
By: /s/Steve M. Dubnik
______________________________________________________
Name: Steve M. Dubnik
Title: Chairman and Chief Executive Officer
THE COMPANY:
ATLANTIC CONNECTIONS, L.L.C.
By: /s/Paul Cissel
______________________________________________________
Name: Paul Cissel
Title: President
THE SUBSIDIARY:
ACL TELECOMMUNICATIONS, LTD.
By: /s/Paul Cissel
______________________________________________________
Name: Paul Cissel
Title:
FOUNDERS:
/s/Paul Cissel
_________________________________________________________
Paul Cissel
/s/Antonio Lopez, Jr.
_________________________________________________________
Antonio Lopez, Jr.
NORTH ATLANTIC VENTURE FUND II, L.P.
By: North Atlantic Investors, L.P., its general partner
By: /s/David Coit
______________________________________________________
Name: David Coit
Title: General Partner
-44-
<PAGE>
EXHIBIT 21.1
TYPE: EX-21.1
SEQUENCE: 15
DESCRIPTION: SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21.1
Subsidiaries of the Company
Choice One Communications International Inc.
Choice One Communications of Maine Inc.
Choice One Communications of Connecticut Inc.
Choice One Communications of Vermont Inc.
Choice One Communications of Ohio Inc.
Choice One Communications of Rhode Island Inc.
Choice One Communications of Massachusetts Inc.
Choice One Communications of New York Inc.
Choice One Communications of Pennsylvania Inc.
Choice One of New Hampshire Inc.
Atlantic Connections, L.L.C.
ACL Telecommunications, LTD.
<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 this
registration statement.
/s/ ARHTUR ANDERSEN LLP
Rochester, New York,
November 19,1999
<PAGE>
Exhibit 23.3
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated November 10, 1999, with respect to the financial
statements of Atlantic Connections, Inc. and Atlantic Connections, Ltd.,
respectively, and our report dated June 4, 1999 (except for Note 9, as to which
the date is November 3, 1999) with respect to the consolidated financial
statements of Atlantic Connections, LLC included in the Registration Statement
(Form S-1 No. 33-00000) and related Prospectus of Choice One Communications,
Inc. for the registration of shares of its common stock.
/s/ERNST & YOUNG LLP
Boston, Massachusetts
November 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 AND FROM THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3
<SECURITIES> 0
<RECEIVABLES> 685
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,178
<PP&E> 54,189
<DEPRECIATION> 3,409
<TOTAL-ASSETS> 54,180
<CURRENT-LIABILITIES> 10,760
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 38,419
<TOTAL-LIABILITY-AND-EQUITY> 54,180
<SALES> 947
<TOTAL-REVENUES> 947
<CGS> 0
<TOTAL-COSTS> 2,577
<OTHER-EXPENSES> 4,369
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 898
<INCOME-PRETAX> (19,657)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,657)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,657)
<EPS-BASIC> (316.51)
<EPS-DILUTED> (316.51)
</TABLE>
